The new fiduciary duty proposal by the Department of Labor could significantly slow down sales of high-commission alternative investments, including nontraded real estate investment trusts, when used in retirement accounts, according to top executives at
LPL Financial Holdings Inc.
In a conference call with investors Thursday morning to discuss
first quarter earnings, LPL CEO and chairman Mark Casady said that, in a worst case scenario, alternative investments would not be allowed in retirement accounts under the current version of the DOL proposal, which was released this month. Brokers typically earn a commission of 7% for selling a nontraded
REIT, which investors buy for their yields of 6% to 7%. Mutual fund commissions are typically closer to 3%, including trails.
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“As written, the current version of the proposal would not permit sales of certain alternative investments in brokerage retirement accounts," Mr. Casady said in his prepared statement to open the call. He added that such sales represent a minor contribution to LPL's overall financial performance.
With more than 14,000 registered reps and financial advisers, LPL Financial is one of the leading sellers of nontraded REITs. The firm reported $211.6 million in commission revenue from the sale of alternative investments in 2014, or roughly 10% of its total commission revenue. The overwhelming majority of alternative investment sales at LPL are nontraded REITs. Forty percent of LPL's alternative investment sales were in brokerage retirement accounts, according to the company.
If REIT sales in retirement accounts disappeared, the impact on LPL's bottom line would still be minimal, Mr. Casady noted.
“In 2014, sales of alternative investments in brokerage retirement accounts represented approximately 2% of gross asset sales and gross profit,” he said. “These figures include commissions, sponsor revenues and account fees. If alternative investments were not ultimately permitted in retirement accounts, we would expect retail investors to use our other offerings. The substitution of brokerage mutual funds or advisory accounts for alternative investment sales would lessen the potential profit impact.”
Throughout the call, Mr. Casady stressed that LPL had been a supporter of a unified industry standard to ensure financial advisers are working in the best interests of their clients.
The DOL released its newly minted “definition of fiduciary” proposal on April 14, adding to it a block of related regulation in the form of prohibited transaction exemptions. In all, the brand-new rule and its exemptions came out to more than 300 pages of text — now open for comments.
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“If the rule holds, and it's early on and there is lots of discussion yet, and assuming that REITs are outside the exemption, then we believe there would be some impact of the REIT sales,” said LPL Financial's president, Dan Arnold, in a separate interview. “One question is, does the adviser pivot and use other products or solutions to create that income for the client that REITs produce? Or do they convert REIT business to the brokerage side and reposition the brokerage and retirement account?”
LPL reported earnings per share of 52 cents for the first quarter, one cent above the same period in 2014. Its net revenue increased 2% for the three months ending in March, reaching $1.1 billion. Revenues from commissions were down 2.1% while the firm's advisory revenue increased 4.5%.
Also in the first quarter, the company said it had taken a charge of $11 million due to regulatory issues. Management said it expects that to come down in the coming quarters.
