Prudential's LPL move to test firms' advisor retention strategy and fit

A strategic relationship between Prudential Financial's retail wealth management business, Prudential Advisors, and LPL Financial represents a giant transition and a big recruiting win.

The firms unveiled their agreement last week for roughly 2,600 Prudential financial advisors managing $50 billion in client assets to move their brokerage, registered investment advisory and custodial business to LPL toward the end of next year. The firms are starting an advisor transition and training process that will run until their onboarding in the fourth quarter of 2024, according to an investor presentation. LPL expects to spend $125 million on the integration, plus another $200 million on technology over time. When Prudential is "fully ramped" with LPL, it will tack on $60 million per year to LPL's $2.03 billion in annual earnings before interest, taxes, depreciation and amortization, the document stated. That's a 3% bump from one new recruit. 

Many smaller firms in the industry can only dream of generating $60 million in profits across their whole company in a single year, so the benefits to the bottom line are obvious. The murkier questions concern whether the Prudential advisors will receive retention bonuses and find success with LPL as a group that's currently out of step with wealth management's predominant focus on advisory business on a fiduciary basis over commissionable brokerage services. Prudential's client assets are 25% advisory and 75% brokerage, compared with a ratio of 53% advisory and 47% brokerage at LPL among its existing group of 21,942 advisors.

"The premise is really putting together the best of both organizations and accelerating their business," Ken Hullings, LPL's executive vice president of enterprise business development, said in an interview. "What's been great about our engagement with Prudential is they are truly invested and committed to growing their wealth management business and they're looking at this partnership as a way to accelerate that."

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Retention assistance
Prudential didn't make any executives available for an interview or answer all of Financial Planning's questions about its brokerage, RIA and custodial transition to LPL. 

The FINRA BrokerCheck file of the Newark, New Jersey-based insurance, retirement and wealth management firm's primary brokerage, Pruco Securities, lists referral or introduction agreements with Cambridge Investment Research, The Leaders Group, Centaurus Financial and Equitable Advisors. Asked directly about them, representatives for Prudential didn't say whether the agreement with LPL will have any impact on those referral agreements. Prudential's brokerage also discloses a relationship with a clearing and custody subsidiary of Fidelity Investments, National Financial Services, to execute trades and carry customer accounts. The change in custodian means that Fidelity will be losing a massive block of business to LPL.

Representatives for Fidelity declined to comment on Prudential's move.

Prudential's director of communications, Marisa Amador, didn't answer an email query about the company's plans for its brokerage following the transition. On the topic of transition assistance or other retention bonuses for the thousands of advisors, Amador pointed out that they would remain W-2 or 1099 employees of Prudential under the agreement with LPL.

"Therefore, Prudential, not the advisors, will pay for the typical expenses incurred in a change of broker-dealer registration," Amador said in an email. "Prudential does not publicly discuss compensation or bonuses. We will have more information on the future state of existing Prudential Advisors agreements and our current broker-dealer as the transition is completed in the latter part of next year."

Hullings of LPL had referred questions about transition assistance or bonuses to Prudential. A footnote in the investor presentation about the agreement that stated, "There is no transition assistance with this strategic relationship," refers only to the fact that LPL won't pay any directly to Prudential, according to Hullings. For incoming advisors, LPL has many "different ways that we can help them with capital or economics" besides upfront transition bonuses, he said.

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Transition to LPL
Recruiting moves in which no equity ownership of the incoming group is changing hands usually don't come with offers of transition bonuses to the teams, according to independent advisor recruiter Jodie Papike, the CEO of Cross-Search. In any major recruiting poach, M&A deal or consolidation of several firms into one, a few advisors decide to go elsewhere rather than remaining through the migration to a new firm. In the case of Prudential and LPL, the custodial substitution of LPL for Fidelity will likely loom large for the advisors' decisions, Papike said.

"With a custody change, the advisors are really going to look at their own relationship with Fidelity and decide how important it is to them," she said, noting that Fidelity has "a great name" in the industry and relationships with "a lot of broker-dealers and a lot of RIAs" that could serve as potential landing spots for some teams. "If they feel really tied to that brand, then that is something that they'll consider."  

LPL and Prudential will seek to convince as many of the 2,600 advisors as possible to stay through the transition. The strategic partnership with LPL will "further Prudential's value proposition" through "LPL's best-in-class technology platform and services as broker-dealer and registered investment advisor," Amador said.

"Through this agreement, Prudential is further investing in our Prudential Advisors business, by expanding retail wealth management capabilities to drive growth," she said. " This strategic relationship is designed to enhance our already competitive value proposition that differentiates Prudential Advisors, including strong local advisor support, a robust leads program, trusted Prudential brand equity, and the flexibility for advisors to use the business model that works best for them."

The Prudential agreement followed several major recruiting victories for LPL that have brought more than a net 1,000 advisors with $60 billion in client assets to its ranks in the 12 months ending in June. The custodial switch from Fidelity will play out as an example of what's referred to in the industry as a "tape-to-tape" conversion, with Prudential's clients receiving notification messages called "negative consent" letters informing them of the change and asking any customers with questions or concerns to contact their advisor or branch office, according to Hullings. LPL is striving to "minimize the impact" to advisors of the move through 2024, he said.  

"LPL has experience working through very large conversions, especially over the recent past," Hullings said. "The big reasons for the longer time frame are really the size of the opportunity and making sure that we get it right and that we provide a great experience for all of the stakeholders, but especially the advisors and the clients."

The mix of brokerage and advisory assets "looks very similar to what we normally experience when we work with a bank or credit union" coming into LPL, Hullings noted. Another similarity of Prudential with prior incoming recruits stems from the fact that Prudential President of Retail Advice and Solutions Brad Hearn had spent nearly a decade with LPL as an executive before joining his current firm four years ago. Another former LPL executive, CUNA Brokerage Services President Rob Comfort, was at the firm for five years before leading the credit union-serving firm to LPL as part of a 2022 mega-move of $36 billion in client assets.

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Questions about conflicts
Prudential's life insurance and annuity products first appeared on the shelf available to LPL advisors 34 years ago, according to the firms' announcement. However, that relationship displays a contrast between the firms, since LPL has been a stalwart driver of the independent movement over the decades while Prudential and other insurers with wealth management arms disclose more conflicts of interest relating to their sales of proprietary products.

In the Form ADV brochure for the unit of Pruco Securities operating "under the marketing name Prudential Financial Planning Services," the firm lists nine different "material affiliations" with other Prudential units including asset management, insurance and annuity distribution subsidiaries under the umbrella of its "large, interconnected financial services organization." That means the firm's advisors get paid more for selling Prudential's products.

"When you implement your financial plan, your Planner [Prudential Financial Planning Services], and its affiliates have a greater financial interest in the sale of Prudential proprietary products than in non-proprietary products and services," according to the brochure. "A planner is more likely to sell to you an affiliated product when the percentage of affiliated products is higher in a given category of products."

In the interview, Hullings had noted that LPL is "on a multiyear journey to really expand beyond our leadership in the independent space and become a leader across the advisor-mediated marketplace." Asked how the insurance-affiliated firm would fit into LPL's independent culture, he said that Prudential displays synergies in the business "because insurance planning is such an important part of a financial plan."

"Their advisors are Prudential advisors, but they don't just sell Prudential products," Hullings said. "They actually do bring that financial planning culture to life everyday."