Is LPL’s Purchase of NPH Savvy or Reckless?

LPL Financial announced the much-anticipated purchase of National Planning Holdings, an affiliate of Jackson National Life, and its four broker-dealers late Tuesday.

Early Wednesday, CEO and President Dan Arnold and CFO Matt Audette spoke with equity analysts about the news and highlighted details of what could be a profitable but also highly complex merger.

Here are some of the issues raised during the discussion, with input from some analysts on the call and insights from outside industry sources, pointing to potential benefits and pitfalls of the transaction.

The Price Tag

At $325 million initially and with a possible contingency payment of up to $123 million, Arnold says the independent broker-dealer is paying “a price that is attractive to us.”

Plus, the deal was structured “as an asset purchase,” Arnold said, rather than a traditional M&A that might typically include operations.

Industry observers agree.

“The price seems both reasonable and tied to success in moving the financial advisors, their assets and their revenues,” said Chip Roame, head of Tiburon Strategic Advisors, in an interview.

“Somewhere between $325 million and $448 million seems very reasonable. I doubt that there were many other legitimate bidders,” Roame explained.

William Blair analysts Chris Shutler and Andrew Nicholas said in a note: “It is hard not to like the financial implications of this deal, given [the] reasonable purchase price of about five times post-synergy EBITDA, and up to 16% EPS accretion on top of our existing 2018 estimate of $3.36, excluding amortization of acquired intangibles.”

And Steven Chubak of Nomura Instinet explained in a report, “The purchase price … was much lower than we (and most investors) expected and was arguably the biggest surprise from the announcement.”

The Transition

The NPH advisors will be moved onto LPL’s platform in “two onboarding waves” by March 30, 2018.

According to LPL executives, that will entail costs of between $40 million and $60 million in account-transfer fees, clearing expenses, technology expenses and the like.

The company also has budgeted about $100 million for forgivable loans, with three- to five-year time horizons for this “onboarding assistance.”

These costs — along with the contingency payment of up to $123 million if more than 72% of advisors’ fees and commissions move over — depend on how many productive reps transition to LPL, of course.

“Some reps may balk at the size of LPL but others are more likely to resist having to move accounts to LPL’s clearing platform,” Roame said.“The option for NPH reps is to move to other IBDs that clear through Pershing, and that is many of them … And you can be sure those firms will aggressively recruit NPH reps now,” the consultant explained.

Recruiter Jon Henschen, who recently helped Securities America recruit a group from one of the NPH BDs, says there are a good number of prospective recruits “in the pipeline.”

“Some of these prospects want to go hybrid but not with LPL,” Henschen explained. “And … there’s word that LPL is dropping … some payouts, which could especially could hurt certain large groups.”

Roame, though, says LPL has most likely gone over all these issues while it crunched the numbers for the deal. “I assume LPL did extensive due diligence on this [transition] issue and has either secured some contracts or [was] at least basing its offer price on solid conversations with some of the largest-revenue NPH advisors.”

He points out that LPL, which is self-clearing, did work with Pershing in the past. “It also converted the PacLife IBDs from Pershing previously,” the consultant said.

But as Henschen says, LPL likely lost at least 30% of the PacLife advisors over issues including custodial and clearing matters.

On the conference call, Arnold said: “Historically, we see 70% … as a solid number for transitions. We have spectrum from past deals … and 70% is a good average retention level.”

At least one concern raised by an industry observer on Tuesday, though, may not work against advisor transitions.

“Many of the NPH financial advisors have over 10 years of historical client information on the Albridge platform, which is critical for them to seamlessly serve their investors, wherever they may transition,” said Marc Butler, COO of BNY Mellon’s Albridge.

While some advisors could move to LPL, go to a broker-dealers that use Albridge or decide to go independent with an RIA custodian, Albridge expects they “will be able to take their historical client data with them. We’re prepared to work with the nearly 3,200 financial advisors that are affiliated with one of the NPH broker-dealers to ensure a smooth transition,” Butler explained.