Gettin' A Piece

Cleves Delp, an LPL Financial-affiliated advisor in Maumee, Mo., with $1.5 billion in assets under management, says he's been looking into starting his own RIA. “When you cross the billion dollar mark, you kind of have to consider the RIA option,” he says. By far one of LPL's largest advisors, Delp says the economics of working under LPL's corporate RIA were starting to make less sense as his firm grew to such a size. But LPL did something that would keep Delp, and others in his position, from heading out the door and into the arms of Schwab Institutional, or any other RIA custodian: LPL Financial announced it would allow its dually registered reps to ditch the firm's corporate RIA and start their own independent RIAs. It's also welcoming new fee-only investment advisors who want to use LPL as an RIA custodian. That move is likely to make big waves in the industry, since LPL will continue to compete with other top independent b/ds like Commonwealth and Raymond James Financial Services, and will now go head-to-head with the RIA custodian behemoths: Schwab Institutional, Fidelity Institutional Wealth Services, TD Ameritrade and Pershing Advisor Solutions.

But exactly how big of a wave LPL's RIA services — which will serve both hybrid and independent RIA advisors — will make is yet to be determined. Some industry analysts and LPL, of course, say the move will reshape the landscape of the independent industry. “It's the first time a really large broker/dealer is declaring that it's okay to have a hybrid registration,” says Philip Palaveev, president of Fusion Advisor Network, a practice management service provider. “In other words, they're allowing reps to have their own RIAs and manage assets there, and, at the same time, be affiliated with the broker/dealer.” But firms like Schwab, Cambridge Investment Research and Fidelity — who are already serving RIAs — say LPL's announcement merely validates the way they've been doing business all along. Not surprisingly, they argue that LPL is late to the game, and likely won't attract the same type of asset-heavy advisor that Schwab and Pershing are able to serve. LPL responds, simply, “Just wait and see — we'll show you what we can do.”

THE GROWING EMPIRE

LPL's growth over the past few years is no secret. Since 2005, LPL's rep count has increased nearly 90 percent to over 11,000 advisors. Revenue in 2007 was over $2.7 billion, up from $1.7 billion in 2006. In 2005, the firm raised $2.8 billion when it sold 60 percent of itself to two private equity firms — a transaction that was worth 2.5 times the firm's revenue at the time. Mark Casady, Chairman and CEO of the firm, says, “Our job is to stay focused. We continue to make sure our advisors get what they need. The more we do of that, the more our company grows.”

That's exactly what the company did in 2007. Last March, it acquired three of Pacific Life Insurance Company's broker/dealers, including Mutual Service Corporation, Associated Financial Group and Waterstone Financial Group. The b/ds — which brought about 2,200 reps and $353 million in revenue with them — operate independently, and are overseen by former National Sales Manager for TD Ameritrade Institutional, Derek Bruton, who now serves as CEO of LPL's Affiliated Broker/Dealers.

In fact, LPL hired several key executives in the last year to help maintain its growth. Since the fall, at least five executives have joined LPL, including former Managing Director of Smith Barney's Private Wealth Management unit, Christopher Poch, and former executives from Schwab, Wachovia Securities and Thompson Financial's wealth management units.

The latest effort in the RIA space seems like a natural (though rivals would say forced) progression for a firm that's nearly doubled its rep count in less than three years. “LPL has a large amount of advisors, and is therefore at risk of losing a larger percentage of those who want to become fee-only advisors. But now, not only can LPL deter those reps from leaving, but it can continue to serve them and develop relationships with them as an RIA custodian,” says Bing Waldert, associate director at Cerulli Associates. Or as Palaveev put it: “It simply gives LPL access to the fastest growing market — the [independent] RIAs.”

About 8,000 of LPL's own advisors are dually licensed as investment advisors, holding the 65 or 66 in addition to holding a Series 7. (This is an industry-wide trend, even at wirehouses.) Currently, the $75 billion in advisory assets these dually registered reps manage must be custodied under LPL's corporate RIA. But that will change this fall when the firm officially launches the new service that will allow investment advisors to register an RIA in their own name, and custody those assets wherever they please. Gary Gallagher, who was hired from Fidelity Institutional Wealth Services, is now executive vice president and head of LPL's RIA services. He would not say how many of the dually registered advisors are expected to start their own RIAs, but he says the service gives advisors the freedom and scalability to build their businesses how they want.

Advisors who choose to leave the firm's corporate RIA and start their own will have increased flexibility in areas like pricing and products. Dennis Gallant, principal and founder of Gallant Distribution Consulting, says many advisors file their own Forms ADV (used to register as an investment advisor with the SEC) so they can charge clients how they see fit. “Working under a corporate ADV may limit advisors in how much they charge in retainer, asset management or planning fees,” Gallant says. There's also the benefit of having an investment policy statement that's customized to the advisor's practice. “Having your own ADV also provides home office leverage. The advisor can say, ‘Hey, I've got my own RIA. I can leave and set up shop with Schwab, Pershing or any of those guys tomorrow if I want,’” Gallant adds.

LPL advisors who spoke with Registered Rep. say the incentive to start their own RIAs is tied directly to pricing. One advisor with 40 percent of his assets on the fee-based side says, “It's been really important to us to be able to control pricing. Now that LPL is coming out and allowing us to do that, it's easier for us to stay here instead of breaking away from them.”

Beyond pricing, Gallant says advisors with their own RIAs have access to a greater number of products. While LPL expects the majority of the advisory assets to stay with the firm, the firm does acknowledge that some RIAs may choose to custody assets with competing custodians, such as Fidelity and Schwab. “If I'm a fiduciary, I need to make sure I have access to everything that's out there that may be best for my clients. I'm going to have my client assets custodied at Schwab, LPL, Fidelity and Pershing,” says Gallant. He adds, “Once advisors get the fiduciary bug, they want to tailor their business how they see fit, and the corporate RIA doesn't really allow them to do that.”

JUMPING ON THE RIA BANDWAGON

Most of the major players in the RIA custodian game say they've been in the business too long to feel threatened by LPL entering the space. Mark Tibergien, CEO of Pershing Advisor Solutions, says, “It's just further acknowledgement of something that Pershing and other leading RIA custodians have already come to recognize, and that's that the RIA segment of the industry is going to be the fastest growing going forward.” Barnaby Grist, managing director of strategic business development at Schwab Institutional, says, “LPL is recognizing that their advisors need access to more sophisticated platforms, services and products.”

Schwab adds, further, that LPL advisors who choose to start their own RIAs are potential Schwab clients — especially “high-end” LPL advisors looking for sophisticated products. “The average RIA at Schwab Institutional has over $100 million in assets, while the average LPL advisor has closer to $20 million,” Grist says. (LPL doesn't disclose average AUM per advisor, but says it's significantly higher than $20 million.) Schwab currently serves over 1,500 hybrid advisors, and is confident LPL's RIA offerings will bring the firm more. Schwab says its more than 13,000 mutual funds, 800 separate account managers, an alternative investment platform for advisors and more than 2,400 separate account strategies will likely appeal to some LPL hybrid reps.

Indeed, the competition for assets is intense. Over at Fidelity this month, National Financial (Fido's b/d clearing house) and Institutional Wealth Services (the fee-only RIA platform) announced a new service that allows hybrid advisors to access the products and services from both platforms more seamlessly. The service, which has been in the works for nearly two years, is designed to unify the services of the brokerage and RIA businesses of dually registered reps. Institutional Wealth Services serves 3,100 RIAs (nearly 25 percent are dually registered), which manage about $350 billion in client assets. National Financial serves as the clearing house for 330 b/ds (or about 85,000 reps) with total assets at $670 billion. “It's interesting to us that while our competitors have experienced growth in either the RIA or the b/d market, we've enjoyed dominant leadership in both spaces,” says Scott Dell'Orfano, executive vice president of Institutional Wealth Services.

Cambridge Investment Research, an independent b/d based in Fairfield, Iowa, already allows its reps to have their own RIAs. “Cambridge was the catalyst for LPL's move. They've been allowing their reps to have their own RIAs for awhile now,” Gallant says. Sure enough, Eric Schwartz, founder and CEO of Cambridge, says, “LPL is basically announcing that Cambridge has had the right model for the last 20 years.”

Cambridge and Schwab teamed up last March to create an integrated solution for dually registered reps that choose to custody some fee-based assets with the RIA custodian. Schwartz says, “Both organizations are now trained to one another's needs. Representatives of Schwab and Cambridge are working with advisors together. It's a coordinated effort, which sounds simple, but it helps advisors — who would usually have to deal with the firms separately — a great deal.” Today, Cambridge advisors custody about $5 billion in fee-based assets (of a total of $14 billion) with Schwab Institutional. “LPL has been successful at what it does,” he says. But, “They were being too narrow and not giving reps much choice, so it's a good move for them. We've been doing it for years. It's nice to be validated by a successful broker/dealer.”

Raymond James says it has offered advisors the option of being dually registered with their own RIA for almost a decade. Advisors, they say, can use the firm's corporate RIA, or have their own and custody assets with other custodians. “While some may claim LPL's news is ‘industry changing,’ we would point out that, as a firm, Raymond James has, for years, been providing advisors a range of choices in how they run their businesses and operate their practices,” the firm said in a statement.

SETTING THE TONE

LPL's RIA custodian competitors say the firm should be careful not to underestimate the enormity of the challenge it has set for itself: serving independent RIA advisors, a very demanding group. “This is not a simple business to get into. RIAs are a highly demanding set of advisors, and as a custodian you need to be flexible, and be able to customize to their needs,” Grist says. Tibergien adds that LPL should perhaps beware of spreading its efforts across many industry segments. “The key for them is to be able to define which segment of the marketplace they want to focus on,” he says.

But many industry consultants think the firm will do just fine, and even further, set the tone for the financial services industry in allowing more choices for advisors. “The genie is out of the bottle. Once one [giant] firm allows this kind of choice, every firm needs to,” Gallant says. A move towards a greater choice of affiliation models is just one more step in the evolution of the industry, he says. “First there was the choice between proprietary and non-proprietary products, then there was the commission and fee-based choice and now advisors will get to choose how they affiliate with their firm.”

Chances are, many firms — both wirehouse and independent — are looking at the multi-affiliation model these days. “LPL's move gives b/ds a big task. They have to match this offering and deliver something similar to their own reps. It will be a challenge, and they are probably discussing how they will respond to this,” Palaveev says.

In fact, one analyst says a large brokerage firm has already asked for his help in looking into a multi-affiliation platform for its advisors. “Every firm is grappling with the idea. Many high-end reps are becoming RIAs. The number of reps who choose to start an RIA is not huge, but those who do become investment advisors are huge producers,” he says. The intense recruiting situation in the industry is a driver for multi-affiliation. “Multi-affiliation opens up the number of advisors that can join your firm,” he adds.

That's what LPL seems to have already figured out. “We are an independent broker/dealer, we are self-clearing and now we are an RIA custodian. We're telling our advisors, ‘Pick whatever model you want,’” Casady says.

THE CONTENDERS

LPL is joining the already heated battle over RIA and hybrid assets.