For the second straight year, LPL Financial LLC is raising fees on its 13,000 brokers and will also take away incentives from branch managers recruiting lower-producing reps.
LPL informed its brokers this week that it would raise its errors and omissions insurance fee for each rep by $250 annually, to $3,000. At this time last year, LPL also said it was raising its E&O charge by $250 a year.
Bill Dwyer, a managing director and president of national sales and marketing at LPL Financial, said the cost of E&O insurance for brokers will only continue to rise.
LPL can “hold this cost down because of our scale and the fact we don't manufacture product,” he said in an interview.
“We think our policy will be competitive. Some firms self-insure, which could be dangerous,” he said. “We're sorry the price is going up, but five years from now it's not going to be less. There's no doubt upward pressure industry wide” on E&O insurance.
The firm is also erasing differences in its monthly “resource” or “affiliation” fee, raising that to $175 per month per broker, regardless of the size of the office the rep worked in. Over the past year, the monthly fee was based on a scale. Reps in offices of one to four brokers paid $175 each; those in offices of five to 11 reps paid $125 each and reps in offices of a dozen or more paid $100 each.
The change in the resource fee will affect about 25% to 30% of the firm's reps, Mr. Dwyer said. “Last year we went up in that fee for first time in 20 years,” he said. “All advisers will pay the same fee across the firm. It levels it for all advisers, regardless of the size of office.”
Emphasis on smaller reps diminishing
While any increase stings registered reps and advisers, the potential change in how branch managers running offices of supervisory jurisdiction — OSJ, in the independent-broker-dealer nomenclature — are paid to recruit lower-producing brokers signals the most important shift. LPL has built the largest network of independent registered reps and investment advisers over the past 10 years by aggressively recruiting brokers, many of them producing $150,000 or less in annual fees and commissions. An emphasis on smaller reps appears to be diminishing, if not disappearing, executives inside and outside LPL said.
Under the potential plan, branch managers would no longer receive bonuses for recruiting brokers until they produce $250,000 in fees and commission, those sources said.
“I have less incentive for recruiting a guy at $125,000 per year,” one LPL manager said. “It doesn't mean I don't want that guy, but I'm getting less compensation.”
Cutting the production bonus for managers does not mean that LPL does not want smaller brokers, Mr. Dwyer said, pointing out that he firm provides them one of the highest payouts in the industry.
“We don't see reduction of the production bonus hampering recruiting here,” he said. “We're starting with a payout at 90%. Other firms are starting lower. [LPL] still offers the best value in the business for anyone less than $300,000.”
Fees, commissions lag
The change in bonuses for branch managers comes as LPL continues its intense recruiting of large branches. Since August, LPL has made several announcements of notable advisers and groups' joining the firm. For example, Mark Cortazzo and his firm, Macro Consulting Group LLC, moved its affiliation to LPL Financial this month.
While it's the largest network of independent contractor reps in terms of sheer numbers, LPL Financial lags competitors in the average fees and commissions those reps and advisers produce each year.
According to the latest annual survey of independent broker-dealers by InvestmentNews, LPL Financial ranked first in total revenue last year, with $3.34 billion, but was No. 21 in average annual payout to advisers, at $186,000.
Large competitors such as Commonwealth Financial Network and Raymond James Financial Services Inc. ranked first and eighth, respectively, in average payout to advisers last year. The average Commonwealth adviser had a payout of $378,000, while independent advisers with Raymond James saw average payout of $285,000.
According to a transcript of an Oct. 31 conference call with investors to discuss third-quarter earnings, LPL chairman and CEO Mark Casady clearly signaled that a change was in the works on managers' recruiting bonuses.
“We have already discussed with all the practices that are affected changes to the way that the production bonus works,” Mr. Casady said. “But effectively, what we're able to do is work with them on the way that new recruits come into the practice, the way that [the] production bonus is paid based on [the] production level of advisers in the practice, and really help them with their business planning and support, so they're growing, but doing so in profitable areas along with us.”
The move would cut costs, Mr. Casady said. The changes would “effectively slow the rate of growth of [the] production bonus by about half going into next year,” he said. “So, we're pleased with that and very thankful to our [advisers] for working with us on this issue.”
On the conference call, LPL CFO Dan Arnold reiterated the revision.
“Over the past 12 months, the production bonus has increased 34 basis points year-over-year,” he said. “Looking forward to 2013, we expect the total production bonus to continue to rise based on the growth of our advisors practices. Because of our efforts with large enterprises and all else being equal, the trajectory of the bonus payout rate will be approximately half the rate of growth incurred the last two years.”