One of the few flat lines in LPL Financial’s surging growth curve reflects a pivotal question facing wealth management about the relationship between independent broker-dealers and RIAs.
The number of independent hybrid RIAs using LPL’s BD stands out as the only area that hasn’t seen significant expansion. Since Dan Arnold became CEO in 2017, the company’s client assets have more than doubled above $1 trillion. LPL now works with more financial advisors than any other U.S. wealth manager. However, the firm has only added about 30 more hybrid RIAs since that year, according to disclosures in LPL’s annual reports. It’s one of the few occasions that any wealth manager engaging in the difficult task of working with hybrid RIAs publicly shares how many it serves.
Hybrid RIAs can be a touchy subject for advisors and firms alike. With everyone competing for the trillions of dollars in assets under management flowing to RIAs, LPL’s evolving relationship with hybrid RIAs navigates a delicate balance of basis points and client service with much at stake. In the 36th year of Financial Planning’s IBD Elite study, the dance between the perennial No. 1 firm and its hybrid RIAs illustrates a shift taking place throughout the entire sector.
LPL advisors and executives are pledging to remain engaged in their constant negotiation around revenue and conflicts of interest even as the number of hybrid RIAs has lagged behind the rest of the firm’s mushrooming business. LPL’s rivals are making some gains or, in other cases, not even bothering with hybrid RIAs. LPL won’t cede any hybrid practices as it seeks to maintain a lasting foothold among independent RIAs as the third-largest custodian and one of the biggest players in a challenging area of the wealth management business.
The hundreds of LPL hybrid RIAs and their several thousands of advisors are “critical clients of ours,” Rich Steinmeier, LPL’s divisional president of business development, said in an interview.
“It's great to have great clients like that who are very demanding — it makes you better,” Steinmeier says. “It's good, competitive dynamics that requires us to continually think about how we are improving our offerings and supporting their business.”
By the numbers
The relative stagnation in the number of hybrid RIAs in recent years also stems from LPL’s corporate RIA becoming more attractive to breakaway and existing advisors due to reduced prices and the increased compliance burden, Steinmeier says. The numbers show a notable shift in momentum.
Looking back from Dan Arnold’s first quarter as CEO in 2017 to
LPL first disclosed the number of hybrid RIAs in its 2012 annual report, when the firm had more than 190 hybrid RIAs with 1,900 advisors. Four years later, the firm had 420 hybrid RIAs with 4,700 advisors. Since then, the count has only ticked up to its current level of 450 hybrid RIAs with 5,000 advisors, even as the firm’s overall headcount jumped by around that many reps. The company remains committed to a model that it has embraced since at least 2009.
“Our hybrid RIA platform has been a key element in the firm’s success in attracting larger advisors in terms of assets under management,”
There are signs that some hybrid RIAs are finding less value in that approach, though LPL has won back at least one out of nine it lost at a time when
At the same time as the more conventional recruiting, LPL and rivals are facing different kinds of shifting around by their hybrid RIAs and offices of supervisory jurisdiction. Another major LPL hybrid RIA, Reading, Pennsylvania-based Good Life Companies, has embarked on a new setup enabling advisors
IBD Elite 2021:
Resort fees
Exits and changes to the business model are inevitable when RIAs examine the cost of administrative fees and other BD expenses on top of the traditional 90-10 revenue split or the 95% payouts offered by some firms, says Synergy Financial Group founder Palash Islam.
He considered launching a hybrid RIA but
Hybrid RIA advisors “go chasing the payout, they go chasing the forgivable note and then they don't realize how expensive years three through six are,” Islam says. “Broker-dealers are where I grew my business. There are a lot of really good people there to give you a lot of good infrastructure.… It's expensive if you look at it from a business perspective.”
The costs remind Brad Wales, a former Raymond James business development executive who launched a consulting firm for advisors called Transition to RIA last year, of the “resort fee” that some hotels charge, but don’t advertise. While he says IBDs are “going to be increasingly squeezed going forward” by the RIA movement, Wales credits LPL for serving hybrid RIAs even though in some ways they “cannibalize” the firm’s business.
The midsize hybrid-friendly firms such as Mutual Securities, Purshe Kaplan Sterling Investments, Private Client Services or others innovating around paying advisors a one-time fee to service their commission business won’t fit some practices, he says.
“LPL’s approach seems to be, ‘Hey, let's not fight the trends, let's accommodate the trends,’” Wales says. “You can go out and essentially construct a hybrid solution on your own. You're potentially not going to have everything on the same underlying custodial platform to the degree you feel that would be helpful.”
The question of whether to allow advisors to use external hybrid RIAs in the way that LPL does comes down to wealth managers’ strategies for driving their growth, according to Fadi Abdel Massih, a senior analyst with Moody’s Investors Service who covers LPL and its rivals. The amount of hybrid RIAs and advisors doesn’t have as much of an impact on LPL’s business as the fact that the firm is attracting and retaining them through multiple affiliation options, he says.
“The more important number to look at is the advisor assets and not the number of advisors,” Massih says. “I would pay more attention to the value of client assets that are coming on board and also the ability of these advisors that are joining to be asset gatherers and to be able to focus on attracting additional client balances.”
A special relationship
Many hybrid RIAs have been doing so in recent years under their arrangement with LPL. Advisor Marci Bair of San Diego-based Bair Financial Planning and her business partner Victor Orozco came to LPL from an insurer-owned BD in 2014 as part of a hybrid RIA and office of supervisory jurisdiction called the Wealth Consulting Group. The enterprise has spread to more than 100 advisors with $4 billion in client assets from only 30 with about $800 million upon affiliating with LPL.
OSJ support services like client onboarding, insurance analysis and building out financial plans take “hours and hours of work off our plates,” Bair says. The hybrid RIA also builds a sense of a smaller community within a firm of 19,000 advisors. Although she says any advisor would be in favor of lower fees from the BD and she always keeps her options open, she sees the current setup as offering the most options and value to the practice.
“I've been in the industry now for 30 years; I've definitely seen a huge change over that period of time,” Bair says. “The majority of our business is fee-based. It would not be a huge leap to be fee-only. We want to do what's best for the client.”
In addition to LPL, Las Vegas-based Wealth Consulting uses Charles Schwab and TD Ameritrade as external custodians and is considering adding Fidelity as well, according to Jimmy Lee, the hybrid RIA’s founder. The OSJ includes some advisors using LPL’s corporate RIA and some who have no FINRA registration at all. Hybrid RIAs are “ever-evolving,” but they still offer smaller practices a home with a culture and discounts based on volume, Lee says.
“There are some people who are very outspoken in the independent RIA marketplace,” he says. “They kind of talk the game of, ‘If you're not a big firm, you're going to get priced out.”
The enterprise pricing on various tools remains a key point of attraction for LPL’s hybrid RIAs, according to Robert “RJ” Moore, a former president of LPL who is now CEO of one of its largest hybrid RIAs, Private Advisor Group. The Morristown, New Jersey-based firm has more than 700 advisors with nearly $30 billion in client assets. Private Advisor added Interactive Brokers to its existing custodial relationships with LPL, Schwab, Fidelity and Pershing within the past two years, and, in October, it launched a limited-purpose BD of its own called PAG Financial.
Moore describes the launch of the BD as a technical step that “provides us with more efficiency around the way we run our business,” dismissing PAG as not especially noteworthy in the grand scheme of its relationship with LPL. A lot of those ties revolve around custody: When Private Advisor uses a different custodian, it pays LPL an “oversight fee” of 5% of the account’s investment advisory fee, its SEC Form ADV brochure states. That would work out to 5 basis points to LPL out of the industry’s traditional rate of 1% of AUM. Regardless, Private Advisor considers the fee in the context of the “totality” of the strategic partnership, Moore says.
“There's a lot of symbiotic things going on in the evolution of the hybrid RIA platform — LPL has been very innovative around looking that over and what could be done better,” he says. “That’s all been done very, very constructively around the challenges that we face and the opportunities that we share...There's some drama out there at times on a variety of different levels, but we really aren't interested in that.”
For LPL’s part, Steinmeier notes that regulations require the firm to provide surveillance over the assets. An openness to negotiations about the fee with the hybrid RIAs is only one way that the firm is “constantly evaluating how to be competitive in this segment,” he says.
As another example, he cites the firm’s rollback in 2018 of a requirement that incoming hybrid RIA advisors place a certain number of assets with the corporate RIA. LPL slashed the level to $25 million rather than its initial mandate of $50 million. A notable wave of hybrid RIAs left the firm during the first nine months of the policy, but the walkback stemmed the tide of exits.
“When your clients react strongly to changes that you make, you want to listen to them — that was a lot of feedback that came from really important clients of ours,” Steinmeier says. “Largely these clients said, ‘Hey, you're making it hard for us to drive growth,’ and that's the last thing we want to do.”
The rivals
Competitors are seeking to make that easier for the hybrid RIAs to do as well, albeit under different firms and, often, in alternative forms of technical affiliation than LPL’s setup. For starters, RIA consolidators and platforms
Raymond James Financial Services allows advisors to launch hybrid RIAs but requires the firms to use its custodian for the assets, unless they go to the firm’s multi-custodian RIA & Custody Services division by dropping their FINRA license, according to Jodi Perry, president of the firm’s Independent Contractors Division. Since a hybrid RIA isn’t right for everyone, the firm takes time to explain the range of affiliation options available to incoming advisors, she says.
“We've supported that business for a very long time — to do it well, it's definitely gotten more complicated,” Perry says, noting regulatory and technological requirements for carrying out service agreements and other operations. “I don't think this is a business you can necessarily dabble in. You're either in it or you're not.”
Ameriprise, the only other IBD besides LPL that generated more than $5 billion in revenue in 2020, is not in the hybrid RIA business. The company has no plans to add the option to the mix alongside its corporate RIA, says Manish Dave, Ameriprise’s senior vice president of business development.
“It's just a difference in strategy,” says Dave. “When you have a partner, it's different than having a relationship with a vendor.”
One former massive LPL hybrid RIA-OSJ that left the firm
“LPL is evolving in some of the things that they're letting people do, which is good because that's the nature of the beast right now,” Hamm says. “The whole industry's evolving. It’s not just LPL.”
Tapping into the changes rather than losing out to them remains the key for IBDs in working with hybrid RIAs, especially when it comes to LPL. Evolution is “a very natural state of the world in general,” says Private Advisor’s Moore, who calls LPL “one of the founding members” of wealth management’s ongoing shift to independence.
“We have a very distinctive way of affiliating both with LPL and with us,” Moore says. “We provide a very valuable role and a very valuable service in the marketplace.”
