Think of custodians and what names come to mind? Schwab, Fidelity, TD Ameritrade.
What about LPL Financial? Sure, it is the country's largest independent broker-dealer, with more than 16,000 advisers, but it's not known as a custodian. And given that its share of the registered investment advisory custodial market is just 2%, chances are it will never have the huge assets of those bigger players.
And yet LPL sees an opportunity, especially among its own affiliates and advisers, to attract more assets. Over the past two years, the independent broker-dealer has made a series of moves to convince its advisers that they should be using LPL's registered investment advisory platform to custody their clients' assets rather than those of the industry's biggest players.
LPL has 430 affiliate firms with 5,000 advisers who custody at least some client assets on its RIA platform. In comparison, Schwab Advisor Services has 7,600 RIA clients and TD Ameritrade Institutional has 6,000, although their services are typically marketed to pure registered investment advisers and not the so-called hybrid advisers (firms that combine both brokerage and RIA services under one roof) that LPL is targeting.
During a presentation to investors in May, LPL executives said they wanted to expand the firm's presence in the RIA marketplace, specifically among advisers who have 75% of their assets in fee-based advisory accounts.
"We think we can have the ability to introduce a new offering in this segment, a premium RIA offering," said Rich Steinmeier, managing director and head of business development. Mr. Steinmeier, one of the LPL executives behind the RIA push, was hired in June 2018 to lead recruiting at the firm.
Mr. Steinmeier went on to explain that to compete in the custody market, LPL would have to assist advisers with a suite of services, including helping them rent office space and set up benefits, payroll and employee services.
Technology is also important, and LPL has pointed out that it is spending $150 million this year on improvements.
At the end of 2018, LPL bought AdvisoryWorld for $28 million. AdvisoryWorld produces a suite of digital tools for investment analytics, portfolio construction and proposal generation. More than 30,000 advisers use AdvisoryWorld's products and services, including as many as 3,000 of LPL's advisers.
"We intend to grow the custody business; it's an important area for us," Mr. Steinmeier said in a later interview.
For their part, LPL advisers seem to be taking a wait-and-see attitude as to whether LPL can compete in the RIA custody arena.
"I think LPL has a great RIA program now and it's better than it has ever been," said one LPL adviser, who did not want to be identified. "But it really comes down to whether the technology works for the type of practice the adviser has."
Cutting prices, but is it enough?
Another key area — if not the most important one — where LPL will have to compete is on pricing. After it introduced its premium RIA push in May, LPL said it was cutting prices for certain ETFs on two of its RIA custody platforms from $9.00 per trade to $4.95. But Schwab, Fidelity and TD offer scores of ETFs to RIAs at lower costs and in some cases, at zero cost.
"The LPL custodian is typically more expensive than the big ones," said another LPL adviser, who also asked not to be named. "The pricing is not in line with other custodians, and Schwab, TD and [Fidelity] have a lot more cachet with clients."
One advantage for LPL is its recruiting package for advisers with RIA assets. For more than a year, LPL has been selectively offering a bonus in the form of a three-year or five-year forgivable loan that pays an adviser 50 basis points on assets transferred to LPL's corporate advisory platform, potentially a far more lucrative structure for the adviser than traditional recruiting deals among independent broker-dealers.
Like other independent broker-dealers, LPL traditionally has offered recruits a recruiting package of 25 basis points based on the prior year's production of fees and commissions. The two types of deals, one based on AUM and the other on the prior year's production, are markedly different. For example, a team with $200 million in assets would get a recruiting bonus of $1 million if all those assets moved to LPL's corporate advisory platform under the deal. The same team would receive a bonus of about $500,000 using the formula based on fees and commissions.
Move toward fee-based accounts
LPL's push for custodial assets is not surprising considering the trend in the brokerage industry away from commissions toward fee-based advisory accounts. Brokers can charge a client a commission only once, while fee-based accounts are charged annually, usually at a rate of at least 1%.
Like those at most other firms, LPL's advisers are increasing the percentage of assets in advisory accounts. At the end of June, the firm reported a total of $706 billion of brokerage and advisory assets, with 46% sitting in advisory accounts. A year earlier, LPL reported $659.1 billion in total assets, with 44% in advisory accounts. Five years ago, the firm had $475 billion in assets, with just 37% in advisory accounts.
Building traction among elite RIAs could be difficult for LPL, experts said.
"We believe market expansion will be tough. Unlike its core market — the independent broker channel — where LPL is the scale player with superior economics to peers, LPL would face stiff competition from larger, better resourced players," wrote Christian Bolu, an analyst at Autonomous Research who covers capital markets.
"That said, it's unclear how [LPL's] premium RIA model will be able to differentiate from or match the economics advisers get from current market leaders like Schwab, Fidelity and TD Ameritrade," Mr. Bolu noted.
"No one has ever questioned LPL's ability to recruit advisers," said Brian Hamburger, president and CEO of MarketCounsel, which advises breakaway brokers. "What's harder is whether it can compete with the likes of Fidelity, Schwab, TD and Pershing. Does LPL have the depth of offering of services, like specialized trading or collateralized lending, that the large custodians already have so it can compete for larger RIA offices?"
"It's not like LPL's a new player. There is something there and the firm has hundreds of RIAs as clients," Mr. Hamburger added. "The question is, how sophisticated can LPL get?"
Competitors see opportunities
LPL is not alone in trying to cash in on the trend toward fee-based advisory assets. Its competitors also see opportunities in the RIA market. For example, Commonwealth Financial Network said last year that it intended to broaden its line of businesses and set up a parallel channel for RIAs.
Wells Fargo Advisors is also building an RIA business, and at the start of this year broadened its platform to allow its reps to work as registered investment advisers.
"Increasingly, broker-dealers are trying to be more competitive, and, as an option, pushing to be known not just as a B-D but a place for advisers who want to be an RIA only or fee-based, advisory only," said Jodie Papike, president of Cross-Search, a recruiting firm.
"But it's going to take time for broker-dealers to get to that place," she said, adding that an RIA's selection and application of technology, from CRM to trading systems, is more complicated than a broker's, since broker-dealers bundle technology together.
"LPL has an integrated offering of services as custodian, broker-dealer and business partner, regardless if the advisers are a fee-only RIA business or also do some brokerage and charge some commissions," said Marc Cohen, head of LPL's RIA custody business.
"We are shifting our view to be a partner that supports the best advisers regardless of how they run their businesses," Mr. Steinmeier added.
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