LPL closes Commonwealth deal while shares tumble; and warns that moving FAs from Fidelity's clearing will take two extra quarters, and the deal triggered mass due-diligence on RIA model

LPL Financial closed its acquisition of Commonwealth – a coup for the books – but shares tumbled, LPL missed earnings estimates and some Wall Street analysts voiced concern about RIA breakaways.

President and Chief Financial Officer Matt Audette says Commonwealth EBITDA (earnings before interest, taxes, depreciation, and amortization) could leap by $295 million but that the timeline has already slipped by two quarters to the fourth quarter of 2026. See: LPL nabs 'prize' 'anti-LPL' Commonwealth for $2.7 billion.

“At close, we continue to expect [Commonwealth] run rate EBITDA to be roughly $120 million and approximately $415 million once fully integrated," he said. 

Commonwealth currently has its platform sit atop Fidelity's platform and once that middle layer is removed, profits are expected to soar.

The Commonwealth acquisition brings in a further $305 billion of AUM, and around 3,000 advisors in addition to the 29,000 already at LPL, according to an Aug. 1 release.

“This was the last great IBD acquisition. What's in front of us is the exciting part,” says Philip Waxelbaum, principal of Masada Consulting.

Speed is essential, Waxelbaum adds by email.

“Watch for speed of accretive gross earnings and normalizing of margin. It is not how fast you eat. It is how well you digest!”

Breakaways next

Also, unknown is just how many Commonwealth advisors will stick around. LPL CEO Rich Steinmeier was forthright that the process remains in flux. 

“Even at 90% [retention], what you are going to see is announcements of folks who are going to leave," he says.

“With any transaction or competitive recruiting events, some advisers will prioritize differently… That exact dynamic is contemplated in our retention target ... We continue to feel confident about our ability to capture 90%."

Steinmeier also warned Commonwealth advisors still considering leaving the firm to go independent as an RIA that the grass is not always greener. 

Potential changes to the threshold for RIA registration at the Securities and Exchange Commission (SEC)  – perhaps a shift from the current $100 million mark to $1 billion – should give advisors pause. It would require smaller practices to register with every state in which they operate.

RIA caution

“Many of them were moving down the pathway ... [but] as we've begun doing one-on-one conversations, webinars etc., we've begun to help them realize ... they may have underestimated the operational lift and the regulatory complexity that comes with running your own RIA,” Steinmeier said.

“What advisors have realized is to keep the Commonwealth experience, community culture, service environment, brand, etc. ... they can still do that … inside of that shared [corporate] ADV model with LPL.

As a result, "more [assets are also] flowing into our corporate RIA… This is maybe that moment in time where you're seeing a little slowdown in the movement into independent RIAs because of the ambiguity in the regulatory environment,” Steinmeier added.

Audette also notes that modest recruitment to LPL’s independent RIA platform of $3 billion is largely a result of advisors tucking-in under the firm's corporate RIA, rather than going fully independent.

“It's the corporate RIA net-new-assets that really is the key driver [in the RIA channel],” he said.

Commonwealth CEO, Wayne Bloom will stay on at the firm in his current role, and has also just joined LPL's management committee as a managing director. See: Commonwealth and LPL CEOs are determined to share bright future

"Today, Commonwealth begins its next chapter ... while retaining our brand and elevating our respected service," he said, in the linked release.

Lofty target

Yet analysts questioned what assets and practices will LPL net from the Commonwealth acquisition and when post-integration efficiencies will kick in.

Morningstar Analyst Kevin Brown expressed some skepticism about the hoped-for retention rate. 

“Management is estimating 90% retention for Commonwealth advisors, compared with 80% in the Atria deal,” he writes in a report today. “LPL has improved its advisor retention from deals over time, but we think this could be a lofty target at this stage.”

Pressed by analysts, Steinmeier said that the acquisition opened a bit of a can of worms – or at least a wave of introspection and questions from long-time reps.

“This is a time of enhanced due diligence for Commonwealth advisers,” he said. "You have to keep in mind, those advisers were likely not doing diligence before the announcement of the sale of Commonwealth. 

“As they've gone through their evaluation process, which we've been really supportive of, they've explored all kinds of different options. One of those options would be forming their own RIA,” he added.  

“And it shouldn't be too surprising given the makeup of the Commonwealth advisers, where they skew more towards advisory, and many of them were moving down the pathway to already dropping their [brokerage] licenses.”

He adds: “On balance, we think that center of gravity sits around 10% in spite of the fact that really, it seems like each and every one of those stories are being amplified by the trades.”

"We have had four months of fever-pitched engagement ... the Commonwealth team has built something truly special ... [and] we’re committed to preserving that unique culture, the adviser experience, the brand,” Steinmeier told analysts.

Stock hit

LPL's assets under management (AUM) grew 5% to $1.9 trillion,  but recruitment dropped off; just $18 billion of net new advisory assets were onboarded in the second quarter, versus an average of $48 billion in the three preceding quarters. See: After merger shock, LPL staff apologized to Ralph Angelo for blindside.

This is not an alarming side effect, Waxelbaum says.

"This most recent Q2 also experienced the highest volatility factor since the banking crisis, making it functionally a Black Swan Quarter… Focus on the forward run rates. I see no reason it won’t recover to prior norms."

LPL shares (LPLA) soared 3%, to a record $408 in after-hours trading, following its July 31 second-quarter earnings call, which included confirmation of the Aug. 1 closure of its $2.7 billion deal to buy Commonwealth Financial.

Second-quarter earnings, reported July 31, missed Wall Street estimates on expenses growing faster than expected, outpacing revenue growth, according to Barron's.

Yet, when markets opened today (Aug. 1), LPL shares tanked, falling 6.52%, or $25.82, to $369.91 at the close. The stock has ranged from $187.19 to $403.58 over the past 52-weeks.

Other brokerage and wealth management companies also tumbled after the monthly jobs report added to investors’ concerns about economic growth. At one point early Friday morning, shares of LPL and Robinhood (HOOD) were both down more than 9.5%.