LPL putting pressure on affiliates to recruit advisers to its corporate RIA

Internal memo details policies that discourage new advisers from using outside registered investment advisers

Sep 1, 2017 @ 1:21 pm

By Jeff Benjamin

LPL Financial, the nation's largest independent broker dealer, is instituting new policies to make sure more new advisers joining the firm will use its corporate registered investment adviser.

In a memo sent to LPL advisers this week, Andy Kalbaugh, LPL divisional president for national sales and consulting, outlined the changes affecting advisers that want to use an outside RIA instead of the corporate RIA.

The memo states that effective Nov. 20, any adviser joining LPL will be required to have at least $50 million of LPL-custodied advisory assets in order to affiliate with an outside RIA.

And, effective immediately, an adviser already affiliated with LPL's corporate RIA will need at least $50 million under management to affiliate with an outside RIA.

There are exceptions to these rules, related to retirement plan advisers, acquisitions and W-2 employees. And existing advisers already using outside RIAs are unaffected by the rule changes.

LPL also announced it is reinstating branch bonuses for new advisers with less that $250,000 in revenue who join a branch after Jan. 1. And it will continue to provide capital for transition assistance for new advisers who utilize the corporate RIA platform.

"We must constantly reevaluate our efforts to ensure that we are encouraging sustainable growth," the memo states in part. "This fuels our ability to continue to reinvest in the service, technology, and innovation that are important to your experience working with us, and to the advisers and investors who work with you."

"We are making an attempt to emphasize the corporate RIA, because the hybrid model is not as economical and not as advantageous to us," said LPL spokesman Jeffrey Mochal.

He cited the Department of Labor's fiduciary rule as one of the driving forces behind the changes.

"On the corporate RIA, there is a better ability for us to provide oversight and compliance," he said.

Mr. Mochal also clarified a published report that inaccurately stated LPL is changing its payout policies.

"There are no plans to change the payout structure," he said. "LPL's payout rate is about 90% for brokerage and corporate advisory assets, and 100% for hybrid advisory assets."

LPL doesn't break down how many of its reps are on the corporate RIA compared with outside RIAs.

But, according to the most recent earnings report, the corporate RIA has $375.6 billion under management, while assets at outside RIAs totaled $166.4 billion.

"LPL is trying to say 'We want to disincentive RIAs from using outside RIAs,'" said Mindy Diamond, president of the recruiting firm Diamond Consultants Inc.

"They want advisers to use the corporate RIA, because the economics are more attractive to LPL," she added. "The real message is, people join firms like LPL because they're looking to get away from bureaucracy, and a memo like this makes these guys feel much less independent and more like an employee of a larger firm."

Ms. Diamond noted the timing of the memo less than two weeks after the Aug. 15 announcement of LPL's $395 million acquisition of National Planning Holdings Inc., a holding company for four independent broker-dealers with more than 3,200 reps.

"We're hearing from a whole lot of LPL advisers, both large and small, who are saying that LPL is getting bigger, and now they're adding another 3,200 advisers to the mix," Ms. Diamond said. "This memo will make people under the LPL umbrella look to explore other options."

That's not the perspective of Jim O'Shaughnessy, president and managing partner at Sheridan Road Financial, a $12 billion firm that uses a non-corporate RIA through Independent Financial Partners, and is affiliated with LPL as an office of supervisory jurisdiction, OSJ.

"We're not on the corporate RIA, and we don't feel the pressure to switch," he said. "The state of the financial services industry, in the age of the DOL regs, is in the midst of change, and the model of offering a lot of flexibility through hybrid structures is going to change dramatically."

Mr. O'Shaughnessy added that while he hasn't heard anything from LPL regarding his firm's ability to continue to operate as a hybrid, he does appreciate the position broker-dealers are in.

"Broker-dealers have been put into a difficult spot and they have to figure out a way to right-size their businesses when it comes to assets that are not on their platform," he said. "I fully expect them to make changes when it comes to recruiting new advisers."

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