Despite lower profits, LPL’s record recruiting marches into new sectors

LPL Financial’s record recruiting is expanding beyond the firm’s traditional targets, even as lower interest rates and equity volatility cut its profits.

The No. 1 independent broker-dealer added a net 819 financial advisors in the past 12 months to reach a headcount of 17,168, according to LPL’s third-quarter earnings. The company disclosed the figures Oct. 29 before a call with analysts. In addition to the new high in the number of advisors, the firm’s recruited client assets for the past year were $40.8 billion.

In prepared remarks, CEO Dan Arnold noted that two more ex-wirehouse teams joined LPL’s Strategic Wealth Services in the third quarter, pushing the new affiliation model’s recruited assets above $1 billion since launching in April.

The continued strong recruiting also comes as the economic impact of the coronavirus reduces wealth management earnings tied to interest rates and stock values. LPL’s profit slipped 21% year-over-year to $103.8 million in the third quarter. Asset-based revenue linked to equity prices tumbled by nearly $39 million from the year-ago period, and the IBD’s interest income fell by nearly $5 million.

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Still, recruiting gains like the massive pending M&T Bank and BMO Harris moves plus three “accretive” M&A deals in 2020 make LPL’s stock a “strong buy,” according to equity analyst Pauline Bell of CFRA Research. CFRA maintained the rating after the third-quarter results.

"Solid asset gathering trends continued during seasonally slower months with the latest bank mandate win pointing to 4% in organic growth already cinched for '21, underscoring the attractiveness of [LPL’s] model," Bell wrote in a note.

Indeed, according to Arnold, LPL is on track to double its recruiting in the bank channel this year after adding $5 billion in client assets in 2019. In a sector of roughly $1 trillion overall, only about one-third of bank-based teams use outsourced investment programs through BDs, he said.

LPL is targeting more large institutions like M&T and BMO with “a differentiated client experience, which we know is important in their overall offering out in the marketplace and how they position themselves,” Arnold said. “That's the concept we've used to try to extend the market, if you will, in this channel.”

The CEO also sees further growth potential in Strategic Wealth Services, LPL’s employee affiliation model and the RIA-only channel. Earlier in the call, Arnold noted that most of the recruiting gains have come from fellow indie firms and large institutions. LPL anticipates the incoming advisors will start flowing into the new models in 2021 and beyond.

“We are an RIA custodian,” he said. “We're going in and investing in that model and evolving it.” Arnold added that he expects LPL’s RIA services will prove appealing “at a time where we expect to see some churn pick up in that part of the marketplace.”