From the January 2007 issue of Research Magazine • Subscribe!

January 1, 2007

Living in an LPL World

If there is a place worth flying to for lunch from New York City -- and on Election Day no less -- it is probably Locke-Ober in Boston. Already Beantown's leading French restaurant in 1883, it retains the Gilded Age grandeur you would associate not so much with old New England Brahmins as with the huge fortunes made by the captains of industry and Wall Street magnates in the late 19th century.

Lunching here feels like being an extra on a movie set. All that's missing is a cloud of cigar smoke. On the other hand, a private room tucked away upstairs is known as the Kennedy Room -- allegedly, a place for amorous assignations for the 35th President.

Gilded Age wealth may be the province of LPL's founders Todd Robinson, Dave Butterfield and Jim Putnam after last year's purchase of a 60 percent stake by private equity giants Hellman & Friedman and Texas Pacific Group. The deal allowed the founders to cash out and retire from active management, while also valuing LPL at a cool $2.5 billion. Casady, brought in four years ago, now combines the titles of chairman, CEO and president and runs the largest independent broker/dealer with a cast of 7,500 financial advisors -- including the recently purchased UVEST Financial Services.

But the headcount is not the point, says Casady. Nor is it average annual production per FA ($225,000, excluding the UVEST advisors).

"Advisors own their business and it is up to them to determine how they would want to grow it," says Casady. "A lot of times it is a lifestyle question, of how much they want to work and a balance they want to strike between work and family. It's a decision each independent contractor has to make."

In the independent advisor universe, there is a range of business models, each entailing a wide variety of decisions about this balance. LPL is as much a technology and outsourcing company as it is a broker/dealer, says Casady. It provides the tools, the services, the training and the investment research -- the four pillars, he calls them -- that allow advisors to make the best choices they can make not just in their business, but in life, as well.

The two go hand in hand, however. The company has invested hundreds of millions of dollars in technology, to create what Casady refers to as an "LPL world," which he claims is fundamentally different from other independents' world. As an example, he says that a typical advisor running a private practice spends 30 percent of his time on administrative tasks. LPL has brought it down to less than 10 percent, leaving the FA more time to talk with clients -- or to spend with family.

Casady prefers to define success by such parameters as the level of recommendation -- how often the firm is being recommended -- which LPL has been measuring for five years.

For a company its size, LPL has done relatively few acquisitions after the original merger between Linsco and Private Ledger. Last year's UVEST deal follows the acquisition of Phoenix Companies in 2004. The acquisitions beefed up the advisor force, but relative to organic growth they were small, claims Casady. In any given year, the bulk of revenue growth, as much as 95 percent, is defined by advisors who have been with the company for more than two years.

Over the past five years, success in the industry has been defined by decisions made during the downturn, in 2001-2003. Now that the business has rebounded, companies that invested heavily during the downturn are seeing a recovery in their profit margins. For LPL, profit margin improvements from this source have lasted through 2005 and even into 2006.

"The next few years will be defined by scale," says Casady. "Which broker/dealers are investing to attain scale for advisors and for their own business, and what they are doing with that scale."

LPL has deployed that scale to generate profits, for the firm and for advisors. Maximum payouts for 2007 were increased from 92 percent to 95 percent for advisors producing at least $1 million, and to 98 percent for those doing $4 million or better. A study by Moss Adams last year found a substantially higher level of profitability for LPL advisors than its competitors, as well as very high revenue per client compared to wirehouses and other independents.

This is what is going to drive further consolidation in the industry, according to Casady. Companies that didn't invest during the downturn lag behind in profit margin recovery and are unable to keep up with the technology investment needed to improve services and reduce costs for advisors.

"The world is getting more complex, not less," he says.

Compliance is a case in point. The situation has improved substantially in this area compared to two years ago. Once there was clarity as to what regulators wanted to be done, most processes could be automated. But tighter regulation from the SEC at the advisor level may now be coming, requiring additional capital investment on the part of broker/dealers.

Another trend Casady sees LPL well prepared for is a shift to the fee-based, advisory business model.

"We have the third-largest fee-based platform in the country," he says. "We have been at it since the early 1990s, the first independent to develop such a platform."

The firm expects to top $50 billion in its fee-based platform in 2006, with growth two-to-three times faster than in the commissions business. Independent FAs, who used to have 100 percent commission-based business several years ago, now have 20 percent to 30 percent of their business on the fee-based side. Total recurring revenues -- fee business plus 12b-1 fees and other trails and renewals -- are going to measure around 57 percent based on 2006 results.

In the end, size does matter. New advisors whom LPL is attracting are certainly a measure of its success. In particular, Casady notes that large group practices, which have traditionally been employee-based models, are starting to see the independent model as a more economic choice, especially since the cost of what LPL is doing is going down steadily.

Not surprisingly, Casady welcomes a shift toward greater freedom and greater independence across the industry -- away from being tied to specific products and services and more toward meeting the client's needs.

The trend is your friend, say traders, and industry trends seem to point to further success for LPL. Which, says Casady, is no reason to rest on its laurels. The company plans to continue investment to increase the gap with competitors. One on-going project is investment into a complete SEC-compliant imaging system for scanned documents -- a major step toward a paperless office at the advisor level.

"Market leaders in any industry have the responsibility of internally raising the bar higher," says Casady.

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Who: Mark Casady, Chairman, CEO and President, LPL Financial Services

Where: Locke-Ober, Boston, Nov. 7, 2006

On the Menu: Finnan haddie chowder with rum butter biscuits, broiled Boston scrod and organic growth

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