WHEN RAYMOND RIVAS first walked into the LPL offices, where he was being courted to join the firm, he was greeted by a handsome, well-dressed man about 15 years his junior. “I said hello and then asked to see his dad,” Rivas recalls. “I wanted to meet with the real guy in charge. But he said, ‘I own the company. Come in, I think you'll enjoy working with us.’”

That was in 1989. And the young man was Todd Robinson, then 32 years old, who had established LPL that year by merging brokerage firm (Linsco) with another firm (Private Ledger), which Linsco had just bought. Back then, LPL's main office encompassed one floor in a building on a La Jolla, Calf., mountain top. LPL employed about 400 reps and approximately five traders.

The ensuing 18 years have been good to LPL. While still located in the San Diego suburb of La Jolla, the firm's headquarters now occupy four six-story office buildings in a large, palm tree-lined campus; its neighbors — Sun Microsystems and Qualcomm — lend an air of corporate gravitas to its office park. The San Diego headquarters is home to 1,400 employees, who serve nearly 8,000 independent contractor advisors, making it by far the largest independent broker/dealer in the country. (Next on the list is H.D Vest Financial Services with about 5,500 affiliated reps.) By year-end, the number will likely jump to over 10,000, says Bill Dwyer, president of LPL advisory services. As for Robinson, in 2005 he stepped down from the chairman's role after selling 60 percent of the firm to two private equity firms. The transaction raised $2.8 billion; an IPO is on the horizon. (One industry observer we know says the price paid by the private equity firms, Texas Pacific and Hellman & Friedman — 2.5 times LPL's 2004 revenue — is way too high; he slyly posits that perhaps the private equity firms' analysts don't know the broker/dealer business as deeply as they would have you believe.)

A nice reward and exit strategy for Robinson, after having built a behemoth. (He retains a majority stake in Global Protfolio Advisors, a privately held clearing firm for banks and b/ds in Europe and Japan that LPL started.) The question — and it's a high-class one — now becomes: What is the price of success? Put another way: How to manage such impressive growth? How to maintain the firm's high-touch, personal service with advisor head count set to swell 72 percent, to 10,000 from the 5,800 reps it had in late 2005. Of course, the upside of advisor growth is increasing revenue. The firm says it's on track to do $2.4 billion in 2007, up from $1.7 billion in 2006 (in 2001, revenues came in at $732 million). By comparison, LPL's Massachusetts-based rival, Commonwealth Financial Network, has just over 1,000 reps and, in 2006, grossed $392 million in revenue.

The Growth Effect

But, again, will such growth have a negative effect on affiliated advisors' satisfaction with the firm? With an initial public offering in the cards, will LPL's way of treating its advisors change once there are shareholders clammering for ever-higher profitability? That's anyone's guess, of course, though it should be said that big doesn't automatically mean bad. Then again, financial advisors are a finicky lot, and they demand perfection from their b/ds. Not surprisingly, LPL management says one of its main priorities is maintaining Robinson's strategy of staying focused on advisors and their needs. Even in the midst of rapid growth, LPL CEO Mark Casady, and President Bill Dwyer, say they are committed to preserving the corporate culture that puts advisors first.

That may be true, but every b/d executive on earth says that. And other skeptics sniff that it is easier to make advisors feel special when there are not thousands of them being handled by a sterile call center. Jack Mulcahy, founder of recruiting and consulting firm, jackmulcahy.net, says, “As LPL grows, it's going to be hard to maintain the culture its reps are accustomed to. If you have 10,000 reps, you don't want them all calling and talking to your analysts. But at a smaller firm, you can do that.”

If any company could, LPL might. There is very little about LPL that indicates a casual atmosphere. Its neatly dressed, home-office employees are usually glued to their desks — especially in the service center, where nearly 200 young professionals man the phone lines (white shirts and red ties reign). It's on this floor of LPL's Plaza Two where large plasma screens indicate how many rings it took to answer the phone, how long callers have been put on hold, their average wait time and daily volume (averages about 4,000 calls each day). Whether you're standing in the firm's fixed-income and trading department, compliance department or even the service center, there is an aura of quiet efficiency. Phones silently ring for employees sitting in a giant open floor.

The downside is that many veteran LPL advisors who spoke with Registered Rep. say they no longer can call the service desk and recognize the voice on the other end. “I knew everyone in the service department at one point, now I don't know most of them and I feel more separated from the [home office] in that respect,” one advisor says.

LPL's competitors say there is a growing corporate culture-problem at firm. “Many of the reps we recruit from [LPL] say management no longer knows the names of million-dollar producers. It's getting too bureaucratic for them,” says one CEO of an independent b/d. (But then LPL's rivals would say that.)

And this might be just the beginning of a new corporate “feel” for LPL. The sale to the private equity firms means LPL will one day become a public company — likely in late 2008, Dwyer reckons. (We'll bet sooner, given the way the stock market is behaving.) So far, the firm hasn't filed with the SEC, nor has it partnered with an investment bank, but Dwyer says the firm has “been approached by many, and we've gotten very friendly with a few.” But the deal, which valued LPL at $2.5 billion, or 2.5 times its 2004 revenue, has some advisors weary of working with a firm that has shareholders whose interests may not be similar to their own. The multiple paid is the highest ever for an independent b/d, according to Mark Harris, president and CEO of Fort Lauderdale, Fla.-based Broker Dealer Market, a financial services acquisitions intermediary.

One advisor, who joined LPL in 1993 with $450 million in assets under management, says he is concerned about what the IPO might mean for advisors. “How will LPL behave when it goes public? When we have shareholders demanding increased profits, will it prevent management from investing in technology like it used to? Those are the questions that loom over us and cause some anxiety,” he says.

Like many of the reps who expressed concern about the rapid growth at LPL, as well as a potential IPO, he says he'll have no qualms about leaving the firm if he senses a change for the worse. One of the firm's top advisors who joined LPL over a decade ago from a wirehouse firm says, “Let's suppose something goes wrong because of the IPO. I'm not bound to LPL. I can leave. I left six figures behind at Smith Barney [in deferred compensation].”

Another advisor, who joined LPL in 2004 from Merrill Lynch, says he understands LPL's need to grow. “At some point LPL will mature and turn into a corporate giant. They have to; otherwise they've failed.” But, he adds, if the core value of putting advisors' needs first is lost, then “I wouldn't hesitate to leave.”

And therein lies the challenge for LPL. The firm must manage its growth without losing touch with its advisors — all 9,900 of them. Otherwise, industry observers say, LPL's rapid growth and eventual IPO will turn into a field day for both recruiters and competing independent b/ds. Mark Tibergien, a consultant at Moss Adams, says, “Growth is a silent killer in most organizations in that your span of control changes dramatically.”

Management at the firm says it's aware of the challenge. But it says such growth is unavoidable in order to remain profitable in the independent sector. Many independent b/ds operate on profit margins of about 2 percent. “The big driver of profit is when you achieve levels of scale,” says Dwyer. For example, LPL built its own independent research department free of proprietary products with 26 analysts. “Now that it's built and in place, whether you have 100 reps or 10,000 reps, your cost to operate the department does not go up, so it's scalable.” And just how important is that research department? Well, 60 cents on every dollar of the $52 billion on the advisory platform tracks a recommendation by the department.

The Tech Bet

LPL executives say they are confident in their ability to give advisors new tools and services that allow them to run their practices more efficiently. “No matter how big our branches get, they'll never get to the scale to be able to spend what we can spend on technology,” says Dwyer. In 2006, the firm spent $17 million developmental technology. This year, that budget has been upped to $35 million. The less time advisors spend in the processing aspect of business, LPL executives say, the more time they have to spend in the client relationship business which is where the money is generated.

That strategy is evident in each of the major advisor offerings at the firm, firm executives say. For example, the San Diego service center employs 174 individuals and centralizes any questions reps might have about their clients' brokerage, advisory and retirement accounts. Some 92 percent of calls are resolved on first contact, LPL says. The technology department has a document-imaging program that was set up to allow reps to scan in all paperwork LPL requires them to keep on file, such as new account forms. And now it's been upgraded to allow advisors to electronically store any client paperwork. Essentially, clients' entire accounts could be uploaded onto LPL's Web-based platform. “It frees up time for advisors, and it may even mean lowering expenses since the cost of storing, filing and retrieving files can now be alleviated,” he says.

And just last year, LPL launched a new department dedicated to improving the efficiency and productivity of its top advisors. The 19-person Business Development Unit, lead by Brad Fryer, focuses on individual LPL branches to help them improve. “We are there to make sure the branch is taking advantage of the tools and services LPL is offering. At the same time, we are going in and taking a look at their revenue and expenses and comparing them with other branches on their level. The end product is a list of ideas to increase top-line revenue as well as bottom-line growth,” Fryer says.

In 2006, the firm paid out $13 million in production bonuses. This year, Dwyer says reps will receive $27 million in bonuses. “That's an extra $14 million into the branch systems, which allows them to take on extra staff, rent out more office space or somehow re-invest in their business.” Then, of course there's that new 98 percent payout the firm started offering last year — though that payout rate will apply to only a handful of LPL reps. According to a J.D. Power survey, LPL is the firm most advisors across all channels would switch to if operations at their current firms were to cease. (For more on this, see page 15.)

So far, the offerings are keeping reps on board. LPL has a 98 percent retention rate, Dwyer says. And in June, LPL will welcome aboard about 2,200 additional advisors from its acquisition of three Pacific-Life b/ds. Already, feedback from those advisors, who are being allowed to keep their clearing relationships with Pershing instead of clearing through LPL, seems positive. Some newly acquired reps at Mutual Service Corporation say they are looking forward to becoming part of the LPL family. “If I were to go to any other firm, I would choose LPL,” says one MSC advisor.

Though Dwyer says LPL advisors who have been with the firm for more than two years will be the main driver of future growth, more acquisitions are likely. “In the consolidating independent market, you either have to be a seller or a buyer. I think it's clear which one LPL has decided to be,” Casady says.

Do advisors mind? Not yet at least. “As all b/ds grow, their reps have this realization that they can't have a one-on-one relationship with the CEO or president,” says Philip Palaveev, a Moss Adams Consultant. “Reps that join LPL at this point know what they are getting into.”

GROWING PAINS? WHAT GROWING PAINS

LPL's steady growth has help make the firm the biggest independent broker/dealer in the country.

2002 2003 2004 2005 2006
# of Reps 4,369 5,036 5,854 6,481 7,006
AUM (billions) $45.7 $65.2 $83.9 $105.4 $126
Average Payout % 86.2 86.2 86 85.9 86.1
Average Production $125,771 $124,633 $136,617 $150,477 $172,224
Total Revenue (thousands) $780,150 $890,887 $1,136,744 $1,391,870 $1,723,763
(commissions) $448,038 $521,937 $637,804 $742,940 $889,312
(fee based) $185,221 $202,802 $293,963 $391,204 $512,069
Full-Time Staff 852 885 958 1097 1371
Source: LPL Financial Services