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LPL’s hybrid RIA policy rollback a 'no-brainer,' CEO says

An abrupt policy shift by LPL Financial simply came down to numbers, CEO Dan Arnold says.

LPL cut back its advisory asset requirements on new recruits because it impeded the hybrid RIA channel while failing to steer more incoming advisors to the corporate RIA, Arnold told analysts after the No. 1 independent broker-dealer announced its third-quarter results.

“If it was acting as a governor on the overall growth of our hybrid platform, then it made it pretty much of a no-brainer to remove it,” he said. “We took that insight and made the adjustment going forward that we thought was best strategically.”

LPL recruited assets Q3 2018

His remarks on the pullback came in an unusually newsy call, which also included discussion of LPL’s rising head count, commentary on the upcoming exit of one of its largest practices, a forecast for the company’s growth investments and positive signs in sales of brokerage products.

LPL’s head count expanded by a net 125 new advisors in the third quarter, pushing its total force 13% higher than a year ago, at 16,174 advisors. Larger recruiting packages for prospective advisors, which it began rolling out earlier this year, appear to be paying off.

Arnold cited the more than $9 billion in client assets the firm added in recruiting moves during the third quarter, largely to the corporate RIA. He credited other factors in addition to the bulked-up transition assistance for signing on to the corporate RIA, such as recruiter compensation changes, pricing adjustments and new capabilities from technology.

The looming departure of Bill Hamm’s Independent Financial Partners also may turn out to be not as much of a loss for LPL as it looked when the 520-advisor hybrid RIA said it would launch its own IBD. About three-quarters of the IFP advisors who have made decisions are staying with LPL, Arnold said. Hamm later disputed LPL's figures.

LPL is on pace to spend more than $250 million this year on tech, recruiting and organic growth investments, CFO Matthew Audette said. The firm’s advisors raked in LPL’s highest organic inflows since 2015 and its best year-over-year jump in sales commissions in four years in the third quarter, he noted.

The company is trying to “create a greater appeal to a greater number of advisors,” Arnold said. “We turned a number of dials in order to try to experiment and explore what would work best in order to achieve the positioning that we were trying to.”

Planners ranging from sole practitioners to the largest OSJ enterprises welcomed the CEO’s comment that the firm's culture was not aligned with its strategy.
September 4

The firm’s net income soared by 84% year-over-year to $106.9 million, resulting in year-over-year profit gains above 70% in all three quarters of 2018. Brokerage and advisory assets jumped 22% to $681 billion across LPL’s brokerage, corporate advisory and hybrid RIA platforms.

Brokerage accounts had an outflow of $800 million, in at least the ninth straight quarter of outflows, after adjusting for the National Planning Holdings acquisition. Hybrid RIA assets also saw an outflow of $800 million, as LPL has lost at least nine hybrid RIAs this year.

LPL reduced the assets under management required to be held by incoming advisors on the corporate RIA this week, to $25 million from $50 million. At the same time, the inflow of $5.9 billion of advisory assets to the corporate RIA in the third quarter resulted in total net new assets of $4.4 billion.

Asked if LPL walked back the advisory AUM policy as a result of the hybrid RIA departures, spokesman Jeffrey Mochal referred to Arnold’s prepared remarks stating that the shift “better positions our hybrid platform for profitable growth, while maintaining our recruiting momentum on the corporate platform.”

In addition, major LPL offices of supervisory jurisdiction Private Advisor Group and Independent Advisor Alliance have been peeling off significant numbers of advisors from IFP ahead of its exit.

Only a third of IFP’s advisors have made a decision, and most of those advisors are choosing LPL, Arnold says. His figures would translate to LPL retaining some 130 advisors out of 173 who have made their choice, but Mochal said the exact numbers were not available.

In an interview following Arnold’s remarks, Hamm said only 68 of IFP’s advisors have actually decided to leave his enterprise despite “almost six months of constant contact by OSJs and LPL.” Hamm also cites potential outside pickups of hundreds of advisors he says are interested in joining the IBD.

“I’m not sure where Arnold’s getting his numbers,” Hamm says, noting 234 IFP advisors who have verbally committed to staying with IFP through the transition next April, bringing about 60% of the firm's production. At least seven other OSJs and hybrid RIAs within LPL have also reached out to express interest, he adds.

Meanwhile, LPL’s brokerage outflows fell below $1 billion for the first time since at least 2016. Sales-based commissions rose by 21% over the year-ago period to $193.5 million, owing mostly to the impact of former NPH advisors added in the acquisition of the IBD network’s assets, according to Audette.

Brokerage products look more attractive to advisors and clients alike, Arnold said later in the call, thanks to the fiduciary rule’s demise and “innovation” in annuity products. Notwithstanding some uncertainty about the SEC’s proposal, he sees “momentum building around brokerage products,” he told analysts.

“Being able to deploy them without some real fearful regulatory environment on the other side of that is helpful to the mindset of the advisors,” Arnold said. “I actually think advisors are now finding a new rhythm as to how to use them and effectively support their clients’ needs with them.”

The firm’s net revenue grew by 25% year-over-year to $1.33 billion, and its adjusted earnings per share of $1.32 beat analysts’ forecast by 8 cents. The revenue total amounted to $30 million more than the consensus estimate for the quarter as well.

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