LPL confronts recruiting challenge, hefty expenses

With LPL Financial working to add thousands of advisors and billions of dollars in client assets from its recent acquisition, CEO Dan Arnold dropped a hint that more roll ups could be coming soon.

LPL’s purchase of the assets of the four National Planning Holdings broker-dealers saddled it with hefty expenses and a difficult recruiting task, though. A National Planning super OSJ has confirmed it will switch, but LPL won’t reveal figures on its retention of NPH advisors until early November.

In the firm’s third quarter earnings call Thursday, Arnold acknowledged both competitors’ success in recruiting some NPH advisors and a “roughly flat” headcount at LPL. The company, which reported rising profits, sees the NPH purchase as a way of bulking up its efforts to add more advisors, Arnold said.

“The acquisition of NPH ultimately becomes a stimulus to increase recruiting, as it just expands our incremental capacity to invest,” Arnold said.

On top of the initial price tag of $325 million, the company may pay Jackson National Life Insurance as much as an additional $123 million for the Aug. 15 purchase. The extra payment depends on the amount of NPH’s roughly 3,200 advisors and $120 billion of assets LPL folds into its platform.

The company has estimated it will spend up to $160 million more for onboarding, transition assistance and upfront loans. A $400 million debt restructuring to help pay for the deal will also boost the company’s interest expenses by $3 million next quarter, CFO Matt Audette said.

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FUTURE M&A?
The nation’s largest IBD faces other headwinds. LPL’s headcount has declined by 124 advisors so far this year to 14,253, which Arnold attributed to the uncertainty surrounding the fiduciary rule. A change to the firm’s hybrid RIA platform slated for Jan. 1 may pose a further impact on recruiting.

However, the company’s net income rose 12% year-over-year to $58.1 million in the third quarter, while revenue increased 5% to $1.06 billion. Arnold sees M&A as part of the company’s strategy, alongside organic growth, he said in response to an analyst’s question.

“We approached the NPH transaction with very much a plan to make sure that we understand, that we learn, that we refine, that we are constantly working on how we improve that overall effort, all in the spirit of that it could potentially be an ongoing opportunity,” he said.

RECRUITING TIMELINE
A change announced to LPL advisors in August may also affect recruiting to the firm’s hybrid RIA platform. Starting next year, new advisors will need to place at least $50 million in advisory assets in LPL’s custody before placing any assets with outside custodians that may offer better payouts.

Arnold noted that the new policy will help LPL’s bottom line, but he argued that the shift will also help LPL’s long-term recruiting. Risk management services offered by LPL have become more valuable amid the changing regulatory landscape, he said.

“Some of the advisors that originally went hybrid back three and four years ago are now, because of the change in the risk management elements of their business, in the process of moving back to the corporate platform,” Arnold said.

The firm will provide an update on the first wave of NPH advisors and assets on Nov. 8 at the firm’s investor day event, Arnold said. Last week, National Planning super OSJ and hybrid RIA Trilogy Financial became the first NPH practice to confirm it’s making the transition to LPL with its $2 billion in client assets.

“There are a lot of great NPC advisors,” Trilogy CEO Jeff Motske said in an interview. “I don't know where they're going to end up, but if they end up at LPL it's going to be a win for LPL.”