July 16, 2013
by Bruce Kelly, Investment News
One-adviser shops forced to pay more due to B-D’s changes in rules governing OSJ; ‘rock and a hard place’
Bowing to coming industry regulation, LPL Financial LLC is eliminating independent reps’ ability to act as their own supervisors and hitting those 2,200 one-person shops with a fee increase.
It’s the latest restructuring of compliance and oversight at LPL Financial, the largest independent-contractor broker-dealer with more than 13,000 registered representatives and registered investment advisers. The move — particularly a $4,800 fee increase in 2015 for reps who choose to be supervised by LPL’s home office — will likely rankle LPL advisers, who have seen fee increases over the past two years, industry observers said.
Under the new plan, reps who run one-adviser shops can also decide to be supervised by an existing, qualified OSJ — industry shorthand for office of supervisory jurisdiction. Those reps will pay between 4% to 30% of gross fees and commissions. Reps who pay the most will get the most in terms of services.
Industry regulators historically have been very suspicious of such one-person offices of supervisory jurisdiction, citing an immediate lack of oversight in reps’ investment product recommendations to clients. But those concerns likely will not matter a lot to reps looking at a sizable hike in expenses.“The stand-alone reps will be between a rock and hard place with the choice of a $4,800 fee or to work under a multirep OSJ that will likely take an additional 5% haircut on their production to supervise them,” said Jon Henschen, an industry recruiter. “Either way the stand-alone reps will have a new expense they did not have before.”
A coming rule revision by the Financial Industry Regulatory Authority Inc. is one of the factors pushing LPL to make this change, said Betsy Weinberger, an LPL spokeswoman.
“A major factor has been Finra’s soon-to-be-enacted consolidated supervision Rule 3110 that will require firms, among other things, to adopt a new on-site supervisory structure for single-person OSJs, using designated senior principals,” Ms. Weinberger said.
“This transition is the latest in a series of steps taken by LPL Financial to strengthen compliance oversight across the organization, and ensure the company is well-positioned for sustainable growth and success,” she said. “The company has been working on this for some time, underscoring how LPL Financial has been proactively looking for continuous improvement opportunities while also being responsive to new regulatory rules related to practice management.”
2013 has been a difficult year for compliance and oversight at LPL Financial.
In February, LPL agreed to a $500,000 fine and to pay $2.2 million in restitution for failing to properly supervise brokers selling nontraded REITs. The amount was later increased to $4.8 million because the original amount was based on REIT sales only from 2005 through 2009. The adjusted number covers REIT sales through February.
And in May, Finra fined LPL $7.5 million for e-mail violations, the largest ever fine meted out by the regulator over e-mail compliance.