One on One: "We have no investment banking relationship to worry about"

Independent broker-dealers are not known for large or high-quality securities research departments. But with more investors than ever purchasing individual securities rather than mutual funds, Linnsco Private Ledger Financial Services, one of the nation’s largest independent broker-dealers, is making a greater push in that direction.

In 1998, the Boston company hired Lincoln F. Anderson, 49, as its chief investment officer to bolster its sleepy research department.

Mr. Anderson served as senior staff economist of the Council of Economic Advisors in the Reagan administration from 1982 through 1986. There he made predictions, bold at the time, that inflation would come down and that the economy would grow rapidly.

After serving as an economist at Bear Stearns & Co. in New York for four years, he ascended to Fidelity Investments in 1990, where he was director of economic and sector research until 1998.

Since coming to LPL Financial Services, Mr. Anderson has overseen the creation of a website for LPL’s 1,700 branch offices and 3,500 representatives who comprise the company’s sales force. Those representatives are independent contractors who pay 10% of their commissions to get back-office support, marketing and investment research.

The website is used to better compete with the Merrill Lynches of the world by providing daily market commentary and other timely research. The research offerings include a list of about 80 “buy” and “sell” recommendations for individual equities.

Mr. Anderson draws much of his research from 12 analysts who cover stocks, bonds and mutual funds. That team is also responsible for looking over the asset allocation of larger accounts.

Q Can you give your brokers the breadth and depth of research they need?

A Yes. Since we’re independent, I get no pressure from anybody in the company, and the reps are very attuned to the fact we can offer unbiased advice.

We have no investment banking relationship to worry about. We have no proprietary product that we’re promoting. That adds a lot.

Certainly, to cover a huge universe of stocks, you’ve got to have a really big department, and we can’t do that.

Q How do you stack up against others not associated with strong research teams in terms of providing research?

A I think we’re recognized as an industry leader, and we have a very comprehensive research product and process.

Q How committed is your firm to research, which generates huge expenses and no direct revenues?

A What Todd Robinson, our chairman and CEO, told me is that he wants a research department right at the center of LPL and that research is the key to maintaining our success in the industry – and providing reps with the best services. Research he views as the key product.

Q Have you seen any tangible results from conducting this research?

A We can provide a lot more investment products to our reps. And we can provide them in a cogent fashion so they can understand how to use them and how they would fit in client portfolios relative to their risk profiles.

Account size is going up, and individual equities – which is an industry trend – have gone from 8% of the average client’s portfolio a couple years ago to 23% to 24% currently.

Q Is there any benefit to LPL having the asset allocation mix change in that way?

A Financially, there’s no benefit at all except that it provides the reps the ability to attract more clients or greater sums from existing clients.

Q How have you built up your department since coming on board in 1998?

A We’ve added five analysts plus the seven part-time fixed-income analysts, and we’ve certainly bolstered our products.

We made recommendations before, but it was kind of a sleepy list. It was not a particularly dynamic effort there.

I hired Andrew Valerie to be our equity strategist, and he’s worked diligently to get our analysts to make good, solid “buy” and “sell” recommendations and keep our list dynamic. Now we’re in the same process of doing that with individual bonds.

Q Do your analysts take a top-down or bottom-up approach to investing?

A In my experience, both models work and both models can fail. So I am not rigid and doctrinaire on that issue.

I’ve watched analysts beat themselves analyzing balance sheets and income statements at companies. I’ve watched other analysts spend their time looking at developments in an industry and then interpreting what the relative impacts are on the performance of stocks in that industry.

We tell our analysts: “Go ahead, knock yourselves out and figure out what works for you.”

Q Your background with Fidelity and the Reagan administration is impressive. Can heading the research efforts at a leading independent broker-dealer be a fitting encore?

A I wouldn’t call it an encore, but I’d say it’s another step in that direction.

I really enjoy adding value to client portfolios. I love walking into work every day and thinking about investment issues. What I bring to the table is that I’ve seen and done it all in terms of smart and stupid asset allocation processes.

I’ve seen it all in terms of smart and stupid stock selection and how mutual funds can outperform on a sustained basis and underperform on a sustained basis, and signs to watch for.

I really enjoy looking around at the new investment products being made available, and seeing if and how they can be offered to the reps to offer to their clients. I love that whole process. Everything I’ve done fits right into that.

Q Is any of the mainstream thinking on investment allocation flawed?

A I guess I would say yes and no. The key is not to make big asset allocation decisions that expose the clients to major risk when you don’t really know what’s going on. I’ve seen too much of that in my career.

The asset allocation process we use is very, very much risk controlled, and we’re careful not to put on a big asset allocation bet unless we have a very firm conviction we’re on the right track.

In asset allocation, people have a tendency to swing for the fences with their eyes closed, and that can really get you into trouble.

On the other hand, we really work to add value by really looking at mutual funds that we think that will outperform.

Q What have you been doing with your asset allocation?

A We took some volatility out of the portfolio earlier in the year and added back Reits as an asset class, but it’s not tremendously different. We’re into long-term asset allocation, not tactical shifts.

Late least year, we lowered our exposure to foreign equities, and a year and a half ago we zeroed out our exposure to foreign bonds. That’s a perfect example of asset allocation. Interest rates in Japan were about 1%, and 4.5% in Germany, so there was no upside there.

We have been all along very bullish in technology, and we’ve been overweighted in that area, and it’s hurt us a little bit this year.

SNAP SHOT

Lincoln F. Anderson, 49, chief investment officer of Linnsco Private Ledger Financial Services

Career Highlights: senior staff economist of the Council of Economic Advisors in the Reagan administration from 1982-1986; economist at Bear Stearns & Co. from 1986-1990; director of economic and sector research from 1990-1998