From the October 2007 issue of Research Magazine • Subscribe!

October 1, 2007

LPL's 2008 Plans: Options, Lower Fees & Health Care

LPL put on quite a show at its 30th-annual Boston conference this summer, introducing changes to its bonus plan, a stock option program, health insurance, lowers fees and more. Bill Dwyer, president of LPL's independent-advisor division shared some of these new programs, and more of what's up at the 10,000-plus FA firm in a discussion with Research.

Note: Shortly after the interview, LPL announced a deal to buy Sun Life Financial's Independent Financial Marketing Group, which includes 1,100 full-time employee financial advisors and some 1,500 branch staff. IFMG, a provider of investment and insurance services to banks and credit unions, is set to become part of LPL's Financial Institution Services channel.

What are the big changes for '07-'08?There's a tremendous amount of change due to the scale, the tremendous growth of LPL in the past few years. In 2001, we had about $730 million in revenue. This year we are tracking for $2.4 billion. That's incredible, over three-fold in six years or so. What that's done is to give us great scale to roll out more and more initiatives to create more value for our advisors.

Last year, we announced a production bonus that's taken place in 2007. That's on track to give our advisors $15 million more in production bonuses than in 2006. We like that; it's part of our core philosophy of investing in our advisors who can take that money and invest in their practices.

Our advisors have hugely successful businesses, and their growth rates are enormous. The greater their bonuses, the more effective they can be and more active they can be in their communities. And it's part of a virtuous cycle, since then we do more business.

And there's another area where we've achieved tremendous scale: our advisory platform. We were at $15 billion in assets in 2002. Today we are at $62 billion in these [fee-based] assets, out of total assets of $164 billion. That's four-fold growth. We've been able to get the benefits of scale, which can drive better pricing.

At our recent national conference, we announced two significant pricing changes and an administrative fee reimbursement program to start in January 2008 that should -- based on today's business -- put an additional $15 million back out into our advisors' businesses. Combining our pricing programs and bonuses, our advisors should benefit from an additional $30 million going to them and their branches. For administrative fees, advisors will get greater reimbursement with greater advisory revenue.

We currently have three different transaction charges for the SAM, or the Strategic Asset Management, program: For fully participating funds now with ticket charges of $5.50, the charge drops to zero in 2008. Ticket charges for partially participating funds with $13 ticket charges will go down to $4.50, and ticket charges on non-participating funds will remain at $26.50.

How about stock options?When the firm changed ownership in 2005, about 900 advisors participated in a stock-option plan in which they received awards. That was very well received, so we wanted to introduce an ongoing program. We will roll out a broader stock-option plan for employees and advisors in 2008.

Advisors and branch managers in the top 50 percent are eligible to participate in the program. That represents those advisors with about $375,000 in production and up, which is going pretty deep into the system. They will get stock options based on their commensurate production.

Sixty percent of the pool will be allocated based on total production. Thirty percent will be based on recurring revenues. And 10 percent will be based on their year-over-year growth rate, just to have a carrot.

This should deepen the partnership we have with our advisors. For the largest producers, it could represent a 0.75 percent of production impact and others, for example, a 0.25 percent impact. The options will have a five-year vesting period.

And you're rolling out more benefits? Two other programs have also been introduced. I've been with LPL for 15 years, and during that time we've worked on a group health benefit plan for advisors. We are always trying to drive their costs down and their top line up, which is why we've made changes to payouts. And now our advisors will be able to participate in a true group health plan.

That's an opportunity for advisors to get more cost-effective health benefits with no pre-existing condition limitations. We're very, very excited about that, and that will start in January 2008. It will cover advisors, their staff and the advisors' families. We aligned with Fiserv Health and Trustmark Life for the program.

We've also announced a deferred-compensation program for those with roughly $500,000 in production and up, arranged with the Newport Group of Florida.

In addition, we know that hiring good, qualified labor is a broad challenge for many firms. We now have about 1,000 openings at LPL and within advisor branches nationwide. So we've aligned with Aon Consulting of Chicago and have come out with a program to help advisors find and hire staff at their offices. This has been on the top of their wish list: the ability to help them find talented employees.

How are advisors doing in terms of sales? To help advisors grow their business and the rate of change in the industry, we introduced a business-development group a year ago. It is fully operational and has 20 employees working with advisors on a consulting basis, so all we offer is incorporated into their practices. It's proving to be very effective. We can assist in business and financial analysis, for instance. We look at their costs, time spent by staff working in the branch, client demographics and profitability per account, how advisors are managing their relationships, etc.

It's having a big impact on increased productivity. The 100 branches that worked with the business-development group from April 2006 to April 2007 grew their production 31 percent more than similar branches. We've got best-practice solutions that work for advisors and that they can incorporate as they see fit.

The average production at LPL in 2007 is up 21 percent over last year for those advisors who've been with the firm more than three years, or a bit over $280,000 in production. That's amazing.

It does differ from the levels of some wirehouses. We are serving Americans all across the county, not just in large urban locations. This production is from rural, suburban and urban locations nationwide in about 4,000 branch offices.

We feel that it's our obligation to help advisors of all levels become more productive. We actually lowered the bar a bit for when you participate in terms of the production-bonus program, and 2,100-plus of the 6,900-7,000 advisors on the LPL platform participate in the 2007 bonus program. If someone is doing $100,000 in production, for instance, they get 1 percent, and the bonuses go up from there.

What's the latest on the integration of the three broker-dealers recently acquired from Pacific Life?Our goal isn't to consolidate the operations onto one platform. These are three strong independent firms that will continue to operate on their own: Mutual Service Corp. of West Palm Beach, Fla.; Associated Financial Group in Los Angeles; and Waterstone Financial Group in Chicago. For these groups, we want to leverage our core competencies - such as back-office business processing.

Pershing will continue to handle the clearing for them, while we will handle the compliance, operations and technology. The individual firms will handle their own sales and marketing, along with relationship management and business consulting for the advisors, as well as with product-manufacturer selection and other services that come on the front end.

The first step is to get leadership in place at these organizations: Stephen F. Anderson is president & CEO of Waterstone, and that firm is doing very well.

We just hired Andy Kalbaugh who was the CEO of AIG's American General Securities and is now the CEO of Mutual Service Corp. He's a well-known figure in the industry, and it's a great opportunity to bring him here.

We took the former CEO of MSC, John Dixon, and he's taken over of Associated Securities to help grow that organization. We got all those components in place about three weeks ago [in early August].

We're also working feverishly behind the scenes to align all the services we have at LPL and prepare to overlay our advisor and staff workstation on the Pershing platform software [used by the three broker-dealers]. The full technology conversion will take place early next year. By the second quarter of 2008, we should have everybody up and running on the workstations we use at LPL.

The UVest advisors joining us [since that January 2007 acquisition began] are staying on the Pershing platform as well. They have their choice and can join our platform. Both platforms are growing handsomely.

What's going on with technology? Technology is a hallmark of the industry today and is the key to the profitability via efficiencies. Thus, we're constantly developing our platform. We were doing a routine systems upgrade that we do a few times a year, and we ran into some technical issues [in early August] that took our BranchNet platform - our core delivery system - down for a period of time.

Prior to '98, we weren't doing Internet-based trading. So with this situation in August, we went back to the old-fashioned way of doing business, and helped advisors minimize any distractions for their clients by adding staff to our service center and our trading desk.

All new accounts got opened, trading got done, and we were able to accomplish trading. It was just more laborious than all of us are accustomed to. And now the upgrades are in, which is nice. And the advisors are beginning to realize the benefits of increased performance from what we've installed.

We're taking the opportunity to expand capacity, which we've done in the neighborhood of about a 20 percent increase. That's very positive, and we're committed to delivering best-in-class technology for our advisors and their clients. We typically roll out 100 to 150 enhancements yearly to our system, and the upgrades are a part of that.

How is market volatility affecting your FAs? Our average advisor has been in the business 14 to 15 years. And they work with clients who are long-time investors. So, even with the market volatility - with the Dow going from 14,000 to 12,800 - we have seen incredible stability. And our research staff says this is a great buying opportunity.

How are recruiting and retention going? That feeds on itself. The more you rollout and make available, the more advisors see that they will get better compensation and operate with greater profitability. This all feeds the desire to be here, and recruiting is going swimmingly. From the middle of this year to the first quarter of this year, recruiting on the Street was tough in general with a bull-market sentiment going on. Advisors were focused on doing business, not moving. With the market flattening out a bit, there's more activity.

In a recent J.D. Power and Associates survey on advisor satisfaction, LPL was the No. 1 independent firm that advisors said they would look to join if they were switching firms. And that is playing out. Our recruiting in July was the biggest month of the year so far, and August looks to be bigger.

About 90.5 percent of trailing-12-months production at LPL has stayed here. That's our retention rate. Our advisors are long term ... and don't intend to go anywhere.

How about plans for an IPO?We would love to go public some day when there's the right opportunity, which is not yet upon us. We will be SOX-compliant this year and in a position to go public. There are still a lot of things we want to do, which are easier to do in a non-public environment. We would probably look to go public when the growth situation isn't quite as strong as it is today, say 2009 to 2010.

What about other developments? Next year will be the 40th year of Linsco Financial, the base of LPL. It's been a continuum of working with our advisors. As baby boomers started to age, they've looked to advisors for traditional and non-traditional investment advice. And that demand is expanding, and we're responding to it as well or better than anyone in the industry. We've done things like buy a trust company, a mortgage company and an insurance general agency. We've announced that we are going to expand our high-net-worth services.

As we do all these things, advisors have to focus on managing a holistic relationship with their clients. So, we've decided to align with a company called eMoney Advisor. The plan is for their software to be fully integrated into our BranchNet system and is called Wealth Vision.

This is a wealth-management and relationship-management tool. It has a strong financial-planning component to it and a data-aggregation piece, as well as the ability to scan and store documents, like wills, with easy, secure remote access. This will roll out in a couple weeks.

For non-LPL advisors, this eMoney tool costs about $200 per client account. That's expensive.

We worked with eMoney to bring that cost down to $300 per month per advisor, with one or 1,000 accounts on the system. We have about 600 advisors already signed up, and about 200 were using it as we've started to roll it out. These advisors are going to save a half a million dollars as we lower this cost.

One advisor who shared this system with his clients at a seminar had 100 clients sign up for it. These are folks who are 55 years old and want to centralize their financial services. This speaks to why we think we'll have continued growth - giving advisors the tools they need to satisfy consumers' desires. And now advisors can go easily from order entry to account data -- which is enormous.

And what about marketing? We now have the scale to attract, and afford, greater talent. And now that we're the sixth-largest firm on Wall Street, we tend to get more attention. Having a good public relations firm to work with Kevin Dinino, our vice president of public relations, will be great. Plus there's a new ad agency -- Carton Donofrio -- and Chief Marketing Officer Ruth Papazian, formerly of Ameriprise [and Morgan Stanley]. Kandis Bates is now head of marketing for our corporate side, investor relations and communications with our 2,200 staff members in San Diego, Boston and Charlotte. This is all very exciting.

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Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.

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