LPL CEO sees business opportunities in DOL rule proposal

Despite some industry opposition to the "retirement security rule" proposal, LPL Financial CEO Dan Arnold views it as a boon to business for the largest wealth management firms.

In an interview with an analyst Dec. 6 at a Goldman Sachs investor conference that also touched on the competitive threat of registered investment advisory firm aggregators and upcoming outsourced services for financial advisors set to roll out, Arnold discussed the Department of Labor's pending retirement advice rule. The potential new guidelines give an edge to LPL and other giant firms with the resources to comply with shifting regulations, he said.

Arnold cited three major "strategic implications" of the proposal and possible "other opportunities that sit underneath this." He predicted the rule would start "a wave of consolidation" due to larger players' being better equipped to handle the expenses of any new obligations, as well as "an ongoing acceleration of the shift from brokerage to advisory" accounts. Any firms that are able to "create a better solution to help me process the business within this new rule" will win over advisors facing new rules, he said. For example, LPL has set up systems to supervise and execute fixed annuity transactions "in a very similar way" to those involving other products that are already subject to the Securities and Exchange Commission's Regulation Best Interest rule, Arnold noted. The Labor proposal could require other firms to follow suit. In terms of the substantive policy, Arnold expressed a mixed stance on the merits of the proposal.

"From a principled standpoint, we think choice is in the best interest of the investor always. And it's really important, we believe to maintain the availability of both advisory and brokerage. We think some of the advocates of this rule are sort of missing or losing sight of that fundamental principle," Arnold said. "We also think a standard of care is really important for the reputation of this industry. But we think Reg BI got that right, and improved the standard of care. And we think that we should let that play out to see, ultimately, whether it truly achieves what it's intended to do. And then finally, we think the SEC is the best regulator to oversee this, not the DOL, because you then have inconsistency across qualified and unqualified assets. And so, from a principle standpoint, you can see where we would be advocating for a different outcome. But I do think strategically, there's opportunity for a larger play."

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In interviews after Arnold's appearance, a couple of recruiters agreed that the Labor proposal and new regulations in general provide the industry's largest firms with a leg up on the competition. Compliance support or lack thereof often figures in advisors' decisions to change firms, according to Samantha Sferas of the Terrana Group and Mark Elzweig of the Mark Elzweig Company.

"They know that they have to have that squared away," Sferas said. "Those advisors that have grown to good-size practices and want to continue to grow — a lot of the regulatory and compliance can make you or break you, especially if you don't do it right."

Whenever there are "regulatory bodies promulgating rules," the "larger organizations have the advantage," according to Elzweig. Compliance may not be "the first thing that an advisor asks for" when making a choice of a new brokerage or RIA, but regulatory services from the corporate office could help reel them in or turn them away, he said. Elzweig is currently working with an advisor who's poised to switch firms based largely on compliance reasons, he noted.

"The reason that he's going to be making a change is because his compliance department at his independent broker-dealer didn't give him good advice," Elzweig said. "They caused him a lot of unnecessary aggravation, and that's really what will prompt his move."

At the Goldman event, Arnold addressed other aspects of the industry's competitive landscape as well. The emergence of a growing group of RIA aggregators making major deals often financed by private equity investors represents "the most significant change over the last couple of years" in wealth management, he said. The "competitive threat" posed by the RIA consolidators acted as "the catalyst" for LPL to develop its own succession planning program in 2022 and open it to outside teams earlier this year, Arnold noted.

"When the aggregators come in, they will many times create a proposal that flips that independent model more to an employee-based model," he said. "We're actually able to create a model that maintains an independent model [and] creates a bridge for the original entrepreneur to sunset off — think over a three- to five-year period of time, when they're able to maintain an independent practice. They're able to continue to serve and support their clients like they're used to."

READ MORE: A new DOL fiduciary rule? 26 key excerpts from the proposal

Nearly 3,700 LPL advisors out of a record headcount of 22,404 have subscribed to one or more of the firm's 13 outsourced resources from the corporate Services Group unit, Arnold noted. The firm plans to roughly double the number of services it offers advisors over the next couple of years, with an emphasis on areas that are "a bit simpler for smaller practice at a lower price point" and issues that are "a moment-in-time need" for practices, he said. The firm may begin pitching the services to outside teams, too. 

"We ultimately have a portfolio that will help us ramp into that, you know, a solution that potentially could be relevant for any of the 22,000, 23,000 advisors and growing that we have today," Arnold said. "Our focus has just been internally because there's so much opportunity there that you would guess the 300,000 advisors that sit outside our platform have similar needs to the ones that are in the LPL platform today. So we know these solutions are relevant. Our liquidity and succession solution that I mentioned earlier, it's the first one that we've begun to experiment in the external market. So that creates a learning ground for us."