LPL Independent BrokerDealer Model Challenged


Despite the assortment of advances courtesy of fintech (financial technology) applications, the brokerdealer business model has long posed challenges for individuals determined to sell financial products and earn commissions and fees for assets under management. As evidenced by the travails of newer business models introduced by independent firms such as LPL Financial, which offer better payouts and a bigger slice of fees for AUM vs. the traditional ‘wirehouses’ such as Merrill Lynch or Wells Fargo or Prudential Securities, all is not necessarily rosy for those independent broker platforms, as evidenced by the share price of LPL, which has lost nearly 45% since the start of the year.


(WSJ)-March 26 The future of the brokerage business was supposed to be companies like  LPL Financial Holdings Inc., which works with the growing population of independent financial advisers. But a proliferation of competitors and a major regulatory overhaul are weighing on the company’s growth.

The company—whose brokers are independent contractors who own their own practices but pay LPL for various services—had been a growth juggernaut for years. It added hundreds of financial advisers and billions of dollars of client assets annually between 2010 and 2014. But LPL reported last month that growth slowed drastically last year, with the firm adding just 18 net new advisers and assets under management expanding just 0.1%.

Those numbers spooked shareholders and LPL’s stock tumbled 35% on Feb. 12, the day after it also reported an 8% year-on-year drop in quarterly revenue to $1.02 billion. Its shares are off 43% for the year so far.

Falling securities commissions were a big contributor to LPL’s revenue decline, as a volatile stock market and regulatory scrutiny of some of the alternative investment products sold by brokers weighed it down.

Revenue could be hit further by a coming Labor Department rule requiring advisers working with retirement savings to abide by tougher conflict-of-interest rules, analysts say.

“There’s a lot of uncertainty around the market backdrop right now, and then you layer on top of that regulatory uncertainty as well, that’s going to come together to create pressure” on the company and its stock, said JMP Securities analyst Devin Ryan.

LPL isn’t a household name like many of its rivals, despite the fact that it oversees the fourth-largest adviser force in the U.S. Its 14,054 advisers at the end of 2015 put it just behind Bank of America Corp.’s Merrill Lynch brokerage, which has 14,533 brokers, Wells Fargo & Co.’s brokerage arm, with 14,960, and Morgan Stanley’s 15,889 brokers.

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Finra Regs Force Sale of Small BrokerDealers


( Several factors currently at play, including Finra regs may contribute to a substantial sell-off of small broker-dealers in the near future, which in turn will drive down what advisors can command in signing bonuses, ThinkAdvisor writes.

Existing Finra regulation already makes it difficult to remain profitable without scaling up, according to the web publication, with brokers complaining about the resources they must commit to meet all the requirements for disclosure, record-keeping and reporting.

LPL Financial, which has been in the regulator’s crosshairs over the past few years, should be a warning story to smaller firms, according to ThinkAdvisor. Furthermore, the upcoming fiduciary rule implementation by the Department of Labor will dampen profitability still further by placing restrictions on product choices and imposing labor-intensive requirements on disclosure in retirement accounts, while increasing competition from robo-advisors will continue the downward push on fees, the publication writes.

The website suggests the “tipping point” for broker-dealers to stay profitable may soon move to those with $25 million in revenue and higher from the current $10 million in revenue.

The strong dollar is also making it attractive for foreign owners to sell off their broker-dealers, including AXA Advisors, Jackson National and Allianz, ThinkAdvisor writes. In addition, insurance companies such as ING, MetLife, Nationwide and Transamerica have been selling off independent units while favoring those that sell proprietary products, while wirehouses are seeking 15% returns on their broker-dealers. The only potential buyers out there are larger broker-dealers and private-equity firms, the web publication writes.

What this flood of broker-dealer sales means for advisors could be much lower sign-up packages: rather than the 200% trailing revenue witnessed earlier in 2015, bonuses are likely to come back down toward the 30% to 40% of trailing revenue seen earlier in the 2000s, according to ThinkAdvisor.

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BrokerDealer Behemoth LPL Financial Undervalued Says HF Activist blog update profiling activist fund manager Marcato Capital’s stake in LPL Financial, the financial industry’s behemoth collective of independent brokerdealers is courtesy of

An activist hedge fund investor on Tuesday afternoon said it had taken a 6.3% stake in LPL Financial Holdings Inc., sending the independent broker-dealer’s stock price higher as the rest of the market declined.

LPL’s shares are undervalued, Marcato Capital Management said in a filing with the Securities and Exchange Commission. Marcato acquired the LPL shares through various funds it controls “in the belief that the shares are undervalued and are an attractive investment.”

Marcato could enter into discussions with LPL’s board to discuss “strategic alternatives” for the company, including a potential for a merger or acquisition, according to the filing. hosts a global directory and database of brokerdealers in more than 35 countries worldwide.

“These discussions may review options for enhancing shareholder value through strategic alternatives or operational or management initiatives including, but not limited to, improving capital structure and/or capital allocation, M&A, asset allocation, and general corporate strategies,” the company wrote in the filing.

The company’s share price has lagged since it reached a peak of $55.37 in March 2014. Its recent low was $37.72. The stock surged almost 4% after the Marcato filing with the SEC; in early afternoon trading in New York, LPL shares were trading around $41.80. The S&P 500 was down about 1.6% on Tuesday.


“LPL Financial maintains an active and ongoing dialogue with its investors and values their input as we work toward the common goal of driving stockholder value,” an LPL spokesman, Brett Weinberg, said in an email.

When asked specifically about a potential merger for LPL, Mr. Weinberg declined to comment.

With close to 14,000 affiliated registered reps and investment advisers, LPL has had growing pains over the past few years. LPL has been in the spotlight recently due to its host of problems with the Financial Industry Regulatory Authority Inc., (FINRA) as well as state regulators. Two products that have caused LPL to pay fines or restitution to clients have been nontraded real estate investment trusts, a popular alternative investment, and variable annuities.

CEO Mark Casady said over the summer that LPL was near the finish line with fines and settlements stemming from securities regulators’ actions.

Alex Kramm, an analyst for UBS who follows LPL, said investment firms such as Marcato focus on why companies are undervalued.

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Industry’s Largest Firm, LPL Financial, Hit With Huge Fine

lplfinancial blog update profiles Finra hitting LPL Financial, the industry’s largest independent brokerdealer firm, with a huge fine. The firm reportedly failed to properly supervise sales of complex products, such as ETFs, variable annuities and non-traded REITs. In addition to paying a fine to Finra, LPL Financial will also have to pay a substantial amount of restitution to certain customers who purchased non-traditional ETFs, and may pay additional compensation to ETF purchasers following an additional review of its ETF systems and procedures. This update is courtesy of InvestmentNews’ article, “LPL Financial fined $11.7 million for ‘widespread supervisory failures‘”, with an excerpt from the article below.

The Financial Industry Regulatory Authority Inc. ordered LPL Financial to pay $11.7 million in fines and restitution for what it deemed “widespread supervisory failures” related to sales of complex products, according to a settlement letter released Wednesday.

From 2007 to as recently as April, LPL failed to properly supervise sales of certain investments, including certain exchange-traded funds, variable annuities and nontraded real estate investment trusts, and also failed to properly deliver more than 14 million trade confirmations to customers, according to Finra.

LPL, for example, did not have a system in place to monitor the length of time customers held securities in their accounts or to enforce limits on concentrations of those complex products in customer accounts, Finra said.

The systems that LPL had in place to review trading activity in customer accounts were plagued by “multiple deficiencies,” Finra said. The firm failed to generate proper anti-money laundering alerts, for instance, and did not deliver trade confirmations in 67,000 customer accounts, according to the settlement letter.

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BrokerDealers Bringing In The Bucks:

brokerdealer etf blog update profiles the revenue and profit performance of the US Broker-Dealer space as demonstrated by the pricing action in the iShares US Broker-Dealer ETF (NYSE:IAI) when compared to the returns of the S&P 500 (see chart). Below extract is courtesy of coverage from

Independent broker-dealers generated double-digit revenue growth in 2014, and a broker-dealer- related exchange traded fund is outperforming in the financial space so far this year. database is the global financial industry’s leading source of BrokerDealer information, with detailed information on thousands of BDs in upwards of 30 countries worldwide.

Over the past three months, the iShares US Broker-Dealers ETF (NYSEArca: IAI), which tracks U.S. investment banks, discount brokerages and stock exchanges, has increased 7.8%, compared to the 2.5% gain in the broader Financial Select Sector SPDR (NYSEArca: XLF). Year-to-date, IAI was up 0.7% while XLF dipped 1.5%.

The 25 largest independent broker-dealers generated a 10.3% year-over-year rise in revenue over 2014, reports Bruce Kelly for InvestmentNews.

Top independent broker-dealers include LPL Financial LLC (NYSE: LPLA), which garnered $4.3 billion in revenue, and Raymond James Financial Services (NYSE: RJF), which added $1.6 billion. IAI includes a 3.4% tilt toward LPLA and a 4.7% weight in RJF.

The industry is experiencing an increase in fees. Revenue from investment products and services that charge a fee instead of a commission rose 20% in 2014 among the top 25 independent broker-dealers, mirroring a growing trend in the services industry.

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