Citigroup cuts LPL Financial's stock rating, citing recruiting competition

LPL Financial Holdings saw its stock rating take a hit on Monday morning, with Citi Research downgrading the company’s shares to neutral from buy, citing some short-term concerns, according to multiple online reports.

According to investing news website Seeking Alpha, LPL Financial’s cut in stock rating was due to limited near-term catalysts and increased competition potential, particularly in recruiting.

The price of company shares, with the ticker LPLA, also took a hit, with the stock dropping $15.10 in early trading - 3.9% - to $373.80 per share. On Tuesday morning, LPL shares were trading at $374.25.

LPL Financial, a broker-dealer acquisition machine, is in the middle of perhaps its most consequential deal yet, the $2.7 billion purchase of rival Commonwealth Financial Network, which was announced at the end of March.

LPL is setting its sights on retaining 90% of the $285 billion in assets controlled by Commonwealth’s advisors, yet some in the industry doubt if the company can reach that goal. In its note, Citi Research did not cite a direct competitor making inroads in hiring Commonwealth advisors.

The decision by Citi Research is surprising, especially in light of LPL Financial's "charm offensive," with its CEO Rich Steinmeier making a personal effort to reach out to advisors to meet its retention goals. Whether this Citi report is a canary in the coal mine or not remains to be seen. 

“The Commonwealth advisors intellectually understand the deal but they have an obligation to shop around,” said one senior industry executive who spoke privately about the matter to InvestmentNews.

Raymond James Financial and Ameriprise Financial, along with advisor aggregators backed by private equity money, are expected to make runs at Commonwealth advisors, but it’s not clear what kind of success they may have at LPL’s expense, the executive said. “It’s just my feeling at this stage, but the majority of those Commonwealth advisors will likely go to LPL, but it could fall short of the 90% target.”

When the investment bank cut its recommendation on the stock to neutral from buy, it also reiterated the price target of $400 per share.

"Over the long-term, we remain constructive on the growth outlook given strong recruiting trends, potential for further expansion among large enterprises and product manufacturers, and opportunities to drive operating leverage," noted analysts Christopher Allen and Alessandro Balbo, as reported by Seeking Alpha.

"But near-term we see more limited catalysts, particularly as LPLA works through the acquisition/integration of Commonwealth. And we see potential for increased competition for FA (financial advisor) recruiting from here," added the analysts in the note, according to Seeking Alpha. "While we remain constructive on the long-term story, at current levels we believe the positive elements of the story are priced in and see balanced risk/reward here; preferring to wait for a more attractive entry point," the analysts wrote.