LPL Financial Pays to Bring Assets Over
June 2015 issue of Rep Magazine
By Megan Leonhardt
The independent broker/dealer is taking steps to boost its fee-based and advisory business.
LPL Financial is offering its hybrid advisors up to $100,000 to shift their assets held elsewhere to LPL’s advisory platforms, according to an internal communication.
The firm is rolling out a new Off Platform Asset Conversion Program, which aims to assist dually registered, or hybrid, advisors—defined as those that operate an independent RIA and use the broker/dealer–in transitioning their assets held at other custodians and third-party investment advisor, such as AssetMark and Envestnet, to the firm’s advisory platforms.
“We feel LPL has the best custody platform in the industry, and we are proud that our advisors custody the majority of their client assets with LPL,” the firm said in a statement. “Many RIA firms are in the process of consolidating their business to better serve their clients, and we help them make that transition when it’s best for them.”
Under the program, LPL is planning to pay hybrid RIAs 10 basis points on assets under management, up to $100,000, for successfully transferring the assets, according to an internal email sent to advisors. Advisors would transfer assets every three months over the course of a year. The program is approved only through the end of this year, according to the internal email.
LPL has more than 320 independent RIA practices with over 2,700 advisors who run their advisory business through their own RIAs, rather than the firm’s corporate RIA, according to the company’s annual report.
“Platform assets are the arms race of our time,” says one LPL advisor, who declined to be named. But he noted that the initiative provided little more than offsetting costs involved in the transition, such as transfer costs, mailing and support staff needed to move the assets.
“The money is helpful, but it’s incidental to transferring assets generally,” he said. “In other words, the program would not change my decision to transfer or not transfer.” He doesn’t expect there to be much interest in the transition program.
While the financial incentive may not be huge, firms like Schwab or TD Ameritrade may offer substantially less to transfer assets than LPL, says Jonathan Henschen, president of the recruiting and consulting firm Henschen & Associates in Marine on St. Croix, Minn.
But what’s the upside for the b/ds in having these assets on their platforms? Firms like LPL make money on assets held in their custody platforms in the form of administrative fees. It may not be as much as the firm earns on the commission side, but its something, Henschen says.
One reason firms aren’t as open to the hybrid model is because they may make money off the payout grid on the commission side, but they’re not making money on ticket charges and administrative charges on the fee-based side. It’s much less profitable for them,” Henschen says.
“LPL is aggressively trying to move to advisory assets as much as possible,’ he says. Many firms have asset growth goals to meet, and if normal efforts don’t yield the desired results, they may offer more to hit their goals.
Currently, LPL has several fee-based advisory platforms with about $175.8 billion in assets as of Dec. 31, 2014, according to the firm’s annual report. Specifically, assets within LPL’s independent RIA platform totaled $50.7 billion at the end of last year.
Within the independent RIA platform, LPL custodies assets, but does not earn advisory revenues for managing those assets. The firm does, however, charge administrative fees to advisors—including custody and clearing fees—based on the value of assets. The firm noted in its annual report that the administrative fees collected on LPL’s independent RIA platform vary, but can reach a maximum of 0.6 percent of underlying assets.
Additionally, LPL reported $4.37 billion in revenue last year, 31 percent of which was generated from its advisory business. According to the firm, advisory revenues primarily represent fees charged on the corporate RIA platform provided through LPL Financial. On average, the advisory revenues collected on LPL’s corporate RIA platform range from 0.50 percent to 3 percent of the underlying assets.
“Advisory is the most profitable model for the broker/dealer, and is the least cyclical in fluctuation between bear and bull markets,” Henschen says. In other words, it’s sticky.
An advisory business also carries less regulatory rick. Henschen says, “REITs, alternative investments and variable annuities account for most of their compliance issues besides their supervision incompetence.”
The Financial Industry Regulatory Authority censured and fined LPL $10 million for the firm’s broad supervisory failures, particularly around sales of non-traditional exchange traded funds, variable annuity contracts, and non-traded REITs.
“Not that advisory is immune to problems (i.e. reverse churning), but the incidence of arbitrations and FINRA fines is far less than the above commissioned products,” Henschen says.