$220M drop in IBD revenue? Ladenburg’s hybrid RIAs shouldn’t sweat it, firm says

After implementing a change to accounting standards that experts say is one of the most significant in a decade or more, revenue at Ladenburg Thalmann’s independent broker-dealers took a sizable hit.

Removing advisor compensation at hybrid RIAs from its IBD revenue and other shifts under the rule took a $220 million bite out of the segment's top line in 2018. The firm says it won’t be looking to take any chomps out of its hybrid RIAs as a result, though.

In a March 1 filing with the SEC, the Miami-based IBD network’s parent disclosed the impact of its first year using the new revenue recognition guidelines. Advisory fees came out much lower under the rule, though the experts say Ladenburg’s reported drops were typical of some large U.S. businesses last year.

The Financial Accounting Standards Board’s new rule on revenue from contracts with customers (ASC 606) has resulted in large firms spending several years and millions of dollars in preparation, according to Philip Santarelli, a partner emeritus at Baker Tilly, and Rob Peters, a senior director at Intelligize.

Adapting to ASC 606 led to shifts in the timing of revenue and costs on Ladenburg’s books and the gross and net reporting of advisory and commission revenue, the firm’s filing says. Ladenburg now counts advisory fees from hybrid RIAs after deducting advisors’ compensation rather than on a gross basis.

The hybrid RIA channel represents a major area of focus for IBDs like Ladenburg who are competing against platform providers and the full RIA sector. LPL Financial lost at least nine hybrid RIA practices last year after it put new corporate RIA requirements in place, only to walk the policies back later in 2018.

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Securities America and Triad Advisors — Ladenburg’s two largest IBD subsidiaries — reported a drop of a combined $191.6 million under ASC 606. The firm says neither the reduced IBD revenue nor the higher commission revenue in its insurance brokerage under ASC 606 will alter its business strategy, though.

Companies must now go through “five distinct steps” to count revenue in a process Santarelli describes as intense, noting software firms and government contractors are especially impacted. ASC 606 makes it easier to compare two firms in different industries — but harder initially within fields, he says.

“After the first go-round, the impacts will start to moderate over time,” Santarelli says, predicting the coming year will bring greater guidance from the SEC and other firms’ filings on how to approach specific timing and measurement questions. “The standard has so much judgment involved.”

ASC 606 went into effect last year for publicly traded firms like Ladenburg and at the beginning of 2019 for privately-held ones. The firm made the filing “to provide transparency and comparability to our 2017 and 2018 reported revenues,” Ladenburg spokesman Joseph Kuo said in an email.

The rule doesn’t change “Ladenburg’s longstanding focus on the hybrid RIA space, where our Triad Advisors and Securities America subsidiaries remain industry leaders in attracting, retaining and growing successful hybrid RIA businesses across the country,” Kuo says, adding there is no impact to the core metrics as net income or adjusted EBITDA, either.

Ladenburg is also using a modified retrospective method, which doesn’t require restatements. No other wealth management firms have disclosed an impact of this size, which Ladenburg says came from removing hybrid advisors’ compensation from the administrative fees it collects from their RIAs.

However, 90% of firms in the S&P 500 used the same modified method as Ladenburg in their interpretation of the standard, according to a white paper from November on adoption of the rule by Peters of Intelligize. Ladenburg’s filing does stand out for its specificity, he says.

Annual reports coming out this month and in the future should lead to more detailed guidelines from the SEC, but Peters doesn’t believe the standard will prompt firms to make major changes to their businesses. The LexisNexis-owned research firm will be tracking ASC 606 closely.

“The big question is, do we look at it as lost revenue or is it just the way that it's accounted for?” Peters says. “I don't think anything's changed form a cash standpoint, it's just the way it’s reported.”

ASC 606 took roughly a dozen years to take shape under FASB and its international counterpart, according to both Peters and Santarelli, who serves as the subject matter expert on the standard at the advisory tax and assurance firm. The SEC may order restatements from some firms, Santarelli says.

“We'll have to see what comes out of these annual filings,” he says. “It's massive. It was hard to do. For big companies, it was a really difficult exercise.”