Lincoln Investment Planning Inc., a fast-growing independent broker-dealer, is hitting those of its representatives and financial advisers who run their own RIAs with a new annual supervision and compliance fee of up to $20,000.
The fee hike, which is scheduled to take effect July 1, will affect about a dozen offices of Lincoln Investment Planning reps and advisers that Lincoln acquired in 2010 when it purchased Great American Advisors, according to Ed Forst, the firm's chief executive.
The supervisory fee will range from $5,000 to $20,000 and is based on the number of advisers at each practice, the assets managed and Lincoln Investment's opinion of the risk, he said.
Lincoln executives sent a letter last week to those reps and advisers to inform them of the new fee, which does not affect other reps and advisers affiliated with the firm.
“We felt that the supervision needed to change from what they had previously,” Mr. Forst said of the legacy Great American advisers and reps.
“We felt we needed to do things differently and institute different policies. One thing is a third-party audit that we are paying for,” Mr. Forst said.
“There was a lot of conversation with advisers” about the fee increase, he said.
Industry observers noted, however, that such a significant charge for supervision and compliance of a registered investment advisory firm is highly uncommon.
“If I was a rep with my own RIA and [the broker-dealer] imposed a $20,000 fee for supervision, that would be my signal to leave,” said Jonathan Henschen, an industry recruiter. “If this fee is in addition to some sort of payout grid [for the fee-based advisory business] of 90% or 95%, I'd say it is way out of balance with the rest of the industry.”
Some firms have pulled back recently on allowing their reps to run their own RIAs, due to regulators' concerns about outside business activity, Mr. Henschen said.
“I'm not surprised by [the] resistance of advisers,” Mr. Forst said, adding that he couldn't compare the firm's fees to another broker-dealer's program.
Jerry Roberts, a Lincoln Investment broker who runs his own RIA, said that the first he heard of the fee hike was last week, when he received a letter detailing the plan.
“I've never heard of a B-D charging you a flat $20,000” for supervision and compliance, said Mr. Roberts, whose practice is based in Huntsville, Texas.
“I felt it was pretty unfair to charge $20,000. It was really ridiculous,” Mr. Roberts said.
He said that his RIA, Navigator Retirement Plans and Investments, uses no-load mutual funds, and most of his clients work for universities.
According to the firm's disclosure filed with the Securities and Exchange Commission, it manages $38.6 million for 321 accounts.
Other broker-dealers have increased fees on reps and advisers recently to meet rising technology and compliance costs. The amounts, however, fall far short of Lincoln's new fee for running an individual RIA.
For example,
LPL Financial LLC said in the fall that it would increase its affiliation fee for offices of up to four brokers, with each broker paying an extra $50 a month or $600 a year. The fee hike was part of a $1,050 increase in charges that most of LPL's 13,000 reps were to see this year.
Lincoln has been particularly adept at picking up reps from broker-dealers with insurance company owners. Its head count increased to 686 producing reps at the end of last year, from 400 in 2009, when it acquired Great American Advisors' reps and advisers after the firm was shut down by insurer parent Great American Financial Resources Inc., according to the most recent survey of independent broker-dealers by
InvestmentNews.
And it is in the process of adding 280 reps and advisers affiliated with Capital Analysts Inc. Lincoln said last month that it had struck a deal with Capital Analysts' parent company, Western & Southern Financial Group, to acquire assets of the broker-dealer.
REASON FOR HIKE
In the letter sent out last week, Lincoln Investment Planning cited as a reason for the fee hike expectations by the Securities and Exchange Commission and the
Financial Industry Regulatory Authority Inc. that the broker-dealer would oversee all RIA-related business.
“During our audits in 2011, both Finra and the SEC provided us with extensive guidance along with the expectation that we are to manage all advisory business in which advisors of Lincoln Investment are engaged, regardless of the structure of that advisory business,” according to the letter.
“To help us cover a part of the cost of this required oversight and the maintenance of the required records on Lincoln's books and records, it is necessary that we implement an Annual Independent Investment Adviser Supervisory Fee of $20,000 per year (the cost of an independent audit alone can run more than $10,000),” according to the letter. “Another alternative for you may be to affiliate with Lincoln's RIA, or you may decide to terminate with your relationship with the independent RIA.”
There are two advantages to a rep having his or her own RIA, industry observers noted.
First, if the rep charges clients fees for financial plans, the broker-dealer doesn't take a percentage of that fee. Also, if the rep is looking to drop his securities license with Finra and do business solely as an investment adviser, having an RIA up and running makes that transition easier.
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