LPL Financial push for employee model attempt to tap into $11 trillion market

Advisers working for wirehouses and regional firms control vast amounts of assets that LPL would like to bring under its umbrella

Jun 25, 2019 @ 2:35 pm

By Bruce Kelly

At a time when broker-dealers are increasingly trying to come up with business models for advisers who want to act as registered investment advisers, recent moves by LPL Financial left some wondering if the firm was taking a step back in time.

LPL Financial, the largest broker-dealer with an independent contractor model, raised some eyebrows in May when it said it was adding an employe channel for advisers who want to work directly for the firm.

To that end, LPL Financial's parent company, LPL Financial Holdings Inc., last month said it was buying a small employee model broker-dealer in Florida, Allen & Co., with 30 advisers and about $3 billion in assets. As part of the deal, LPL will keep the firm's operations and brand. Terms of the deal, which is expected to close by the end of the year, were not revealed.

LPL's move is an effort to broaden its platform and appeal to brokers and advisers who do not want to start their own business or work as independent contractors.

"Over the last 30 years LPL has focused on advisers who are independent small business owners," said Rich Steinmeier, managing director and head of business development for LPL, in an interview. "As we explore the market, we see tremendous advisers who are independent-minded and want to build the business, but moving to the independent side can be a step too far for them. They don't want to find benefit programs, do HR or find an office space."

Mr. Steinmeier, who is in charge of the new effort, noted that advisers controlling $11 trillion work in the employee segment of the industry, most of them for wirehouses. "Increasingly we see advisers who want independence but with a model of employee services" as support, he said.

He added that the payout rate for the employee advisers was still being formulated.

LPL Financial, which has 16,000 advisers under its roof, generated $5.2 billion in revenue last year and has recently reported strong recruiting numbers.

The contrast between an adviser who is an independent contractor and a brokerage firm employee is stark. Independent contractors keep a larger percentage of the revenue they produce — typically 80 cents on the dollar — from fees and commissions but foot the cost of running their own practice.

A traditional employee broker or adviser takes home less revenue, usually 40 cents to 50 cents on the dollar, but the firm pays for the adviser's office, assistants and other support services.

Reaction from the industry has been mixed. Some observers noted that it is extremely difficult for any broker-dealer to operate three business channels: independent contractor brokers and hybrid advisers, which LPL currently has, and an employee broker-dealer, which it is adding to its platform.

"I don't see [the employee channel] gaining a lot of traction, but it could be more of a niche play for reps who want group benefits," said Jon Henschen, president of Henschen & Associates, a recruiting firm.

"It strikes me that this is a contrarian position for LPL, but sometimes that's where the opportunities lie," said Brian Hamburger, president and CEO of MarketCounsel, which advises breakaway brokers. "When I heard about this, the first thing I thought was that LPL saw an opportunity among similar firms who are not in this part of the market. It already has the infrastructure."

"I don't think wirehouses would be the target but perhaps regional broker-dealers and other independent broker-dealers that have employee channels," he said.

LPL competitors Raymond James and Ameriprise both have indepedent and employee models, as does Wells Fargo Advisors, which is a wirehouse.

One LPL adviser was more sanguine. "There is a segment of the adviser market that will always be more comfortable in the employee ... space," said John Hyland, managing director of Private Advisor Group, which is affiliated with LPL and has more than 600 advisers. "It's simply another platform for LPL to attract advisers. It's true that the majority of employee advisers is moving to the independent hybrid or RIA space, but that is not going to be everybody."

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