How a public LPL will be tested

Maintaining growth rate and retaining reps top to-do list

Nov 21, 2010 @ 12:01 am

By Bruce Kelly

Now that the nation's largest independent broker-dealer is accountable to the investing public, it remains to be seen whether it is a fast-growing teen or a young adult.

“Looking backwards, you have a fantastic growth story,” said Bill Buhr, a specialist in initial public offerings for Morningstar Inc.

“But right now, I see a lot of competition,” he added, noting that the slowdown in recruiting representatives and advisers to LPL Investment Holdings Inc. “should be a concern for an investor.”

An LPL spokeswoman, Ruth Pachman, wrote in an e-mail that as a newly listed company, LPL remains in a quiet period for a month and no executives will comment on questions regarding the company's growth strategy.

LPL sold itself to Wall Street, in large part, as a growth company. And there is unequivocal evidence of the broker-dealer's growth — to 12,026 advisers at the end of March, from 3,569 advisers at the end of 2000 — a compounded annual growth rate of more than 14%, according to company filings. (Click here to read 'LPL star reps about to pocket millions'.)

The company, the parent of LPL Financial and Uvest, posted revenue of $2.8 billion in 2009, according to InvestmentNews' 2010 B-D rankings.

But the pace of growth has slowed substantially. Representative and adviser head count had increased to 12,017 by the end of September, from 11,000 at the end of 2007. That translates into a compounded annual growth rate of 3.3% over that time period.

That dropoff raises questions about the company's growth prospects, said some industry observers and analysts.

Another challenge will be keeping the current force of reps and advisers in their seats, said Mr. Buhr.

“In the next year, broker retention comes to light,” he said. “Attrition picks up.”

The firms largest-producing and longest-tenured advisers “have gotten paid once” by selling their shares in the IPO, Mr. Buhr said, noting that “LPL needs to keep an eye on” brokers' moving to other firms.

LPL, which achieved its fantastic growth through a combination of recruiting and acquisitions, may find it very tough to continue on that course, said John Rooney, a managing principal with Commonwealth Financial Network.

“It's difficult to maintain an organic growth rate” at this level, he said. “And attractive acquisition candidates have dwindled.”

What's more, the IPO is unlikely to provide fuel to fund major acquisitions, given that none of the proceeds from the sale went to the company.

When LPL went public last Wednesday, 5,657,482 shares of common stock were sold at an opening price of $30 a share, netting stockholders who sold at that price $470 million.

The shares then began trading the next day under the symbol LPLA after Mark Casady, the company's chairman and chief executive, rang the opening Nasdaq bell.

The shares closed Friday at $32.60, posting a gain of 8.7% over the two days of trading.

While the private-equity firms that control a majority stake in the company, TPG Capital and Hellman & Friedman LLC, did not sell their shares (the firms bought into the company in 2005 and still own 64%), hundreds of LPL brokers and dozens of current and former LPL executives sold their shares last week. Mr. Casady, for one, sold stock worth $58 million, according to company filings.

Underwriters, lead by The Goldman Sachs Group Inc. and Morgan Stanley, have a 30-day option to purchase up to an additional 1,565,748 shares from the company and a selling stockholder at the initial public offering price, the company said in a statement.

Goldman also raked in $58 million by selling shares in the offering. (See the five biggest winners from the LPL IPO.)

This story was supplemented with reporting from Bloomberg News.

E-mail Bruce Kelly at bkelly@investmentnews.com.

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