LPL raising fees, cutting incentives

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 representatives.

LPL informed its brokers last week that it will raise its fee for errors-and-omissions insurance for each rep by $250 annually to $3,000. At this time last year, LPL also said that it was raising its E&O charge by $250 a year.

The cost of E&O insurance for brokers will only continue to rise, said Bill Dwyer, a managing director and president of national sales and marketing at LPL. But in the future, the company 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,” Mr. Dwyer said.

“We’re sorry the price is going up, but five years from now, it’s not going to be less,” he said. “There’s no doubt [there’s] upward pressure industrywide” on E&O insurance.

The firm is also erasing differences in its monthly “resource” or “affiliation” fee, raising it to $175 per month per broker, regardless of the size of the office in which the rep worked.

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.

IMPORTANT SHIFT

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.”

Although any increase stings reps and financial advisers, the potential change in how branch managers running offices of supervisory jurisdiction are paid to recruit lower-producing brokers signals the most important shift. LPL has built the largest network of independent 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.

The emphasis on smaller reps appears to be diminishing, if not disappearing, executives inside and outside LPL said.

Under the potential plan, branch managers no longer would receive bonuses for recruiting brokers until they produced $250,000 in fees and commission, those sources said.

“I have less incentive for recruiting a guy at $125,000 per year,” said one LPL manager, who asked not to be identified. “It doesn’t mean I don’t want that guy, but I’m getting less compensation.”

Cutting the production bonus for managers doesn’t mean that LPL doesn’t want smaller brokers, Mr. Dwyer said, pointing out that the firm provides 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%.”

LAGS IN AVERAGE FEES

Although it is the largest network of independent-contractor reps in terms of sheer numbers, LPL lags competitors in the average fees and commissions that those reps and advisers produce each year.

According to the latest annual survey of independent broker-dealers by InvestmentNews, LPL 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.

The average Commonwealth adviser had a payout of $378,000, while independent advisers with Raymond James saw average payout of $285,000.

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