LPL Will Spend to Save, CFO Arnold Says

LPL’s highly publicized outsourcing effort will  cost the company between $70 million and $75 million over the next three years, but will result in annualized operational savings of $30 million to $35 million beginning in 2015, according to Dan Arnold, its chief financial officer.

LPL, the country’s largest independent- broker-dealer. will look for “better, faster and cheaper” ways to outsource back-office and non-customer facing jobs to “drive operational efficiencies,” Arnold said while delivering LPL’s presentation to the Citi 2013 U.S. Financial Services Conference in Boston Tuesday.

The 2013 outlook for net new advisors at LPL was “strong,” and the first quarter outlook for commissions per advisor, which was $140 in the fourth quarter, was “improving,” Arnold said. LPL’s payout rate, which was 87.7% in the fourth quarter, was expected to “normalize” in the first quarter, he said.

Arnold was upbeat about LPL’s long-term growth prospects. He cited favorable trends such as the continued migration of advisors to an independent model, aging baby boomers pouring money into retirement accounts and improved stock market conditions.

LPL’s strategy of adding advisors, acquiring companies serving both the high- and mass-market segments, and increasing retirement services has resulted in the company being able to reach 92% of the $27.4 trillion market in “addressable assets,” Arnold said.

LPL’s growth to over 13,000 advisors has made it “wirehouse scale,” said Alois Pirker, research director for Aite Group, a Boston research and consulting firm. 

“Their competition is now the wirehouses, not regional brokerage firms,” he said. “LPL was one of the big winners of the post-crisis period, bringing in as much talent and business as they did. But now they have to sort things out internally, and match themselves against the wirehouses, who have established size, scale, infrastructure and large budgets. That’s the new benchmark for LPL. They’re the new kids on the block and they have their work cut out for them.”

LPL is meeting that challenge by achieving scale through acquisitions and expanding its platform, Arnold said, as well as expanding its capabilities in market segments such as banking, trusts,  high-net worth and mass market. Simplifying customer interface and improving technology and automation were also critical, he added.

Those moves, Arnold, have propelled “fundamental growth drivers” for the company, including expanding the advisor base, increasing assets under management per advisor and improving operational efficiency.

LPL would accelerate the “Service Value Commitment” initiative it announced in last month’s fourth quarter earnings report, Arnold said, focusing on an “enhanced service experience” and “improved processes to achieve faster turnaround time for advisors,”  as well as operating efficiencies in the form of cost savings and technology investments.

LPL has proven to be a “good consistent generator of free cash flow,” Arnold noted, allowing the company to make strategic investments in the business and also return capital to shareholders in the form of increased dividends.