From the August 2008 issue of Investment Advisor • Subscribe!

August 1, 2008

Not Slowing Down

LPL Financial is pushing its already big envelope under the leadership of Mark Casady

As the biggest player in the independent broker/dealer space, LPL Financial would appear in the spotlight often enough for its sheer market share heft and number of reps. It also takes its fair share of criticism from those within and without the firm. But the pace of its growth has quickened over the past three years, including such high-profile moves as the acquisition of UVEST in 2006, and several Pacific Life broker/dealers, most notably Mutual Service Corp. in 2007. Its own detour toward going public grabbed headlines when in late 2005 it sold a 60% stake in itself to two private equity firms, Hellman & Friedman and Texas Pacific Group, that valued the company at $2.5 billion. Already self-clearing since 2002, the firm in late 2006 expanded its clearing operations through a deal to clear for AXA Advisors' 4,000 or so reps. This spring, however, LPL gave a sign that its innovative days were far from over when it announced plans to get into the RIA custody business not only for its own dually registered reps but for outside RIAs as well.

These developments have occurred during the watch of president and CEO Mark Casady, who joined LPL as chief operating officer in 2002, and assumed the chairman and CEO position permanently in 2005 upon founder Todd Robinson's departure following the close of the private equity deal. On June 23, Casady stopped by Investment Advisor's New York offices to provide an update on the custody initiative and the firm's overall strategy in a rocky market and economic time.

What is LPL up to these days?

We're trying to get the broader story of LPL out and about. We're trying to focus on the work we do as a partner with financial advisors and with institutions, and also with very large companies like AXA.

Everyone can and should think of us as the largest independent broker/dealer in the country...but we're also now the sixth largest B/D overall in the U.S. based on revenue, and No. 4 on the number of advisors. Part of what we're trying to do is broaden our reach to institutions--banks and credit unions and insurance companies.

So today the company gets probably 75% to 80% of revenues from independents, our historical place, and roughly 15% to 20% from those institutions and the clearing relationship we have with AXA. So the company has changed quite a bit.

That reflects the UVEST acquisition?

UVEST, and the IFMG acquisition [the Independent Financial Marketing Group, acquired last September from Sun Life Financial], and really strong organic growth. We built this wonderful technology called BranchNet, and all the supporting services that go with it, and we want to expand that to other organizations that need our kind of help. That allows us to gain size and scale, which we then can pass back to advisors in one form or another.

For the last three years we've been on a push to help diversify our earnings a bit, but also bring that technology capability to additional markets.

We were one of the first broker/dealers to launch an advisory platform back in 1991. We're now the third largest mutual fund wrap program in the country. We've seen tremendous growth in the use of advisory.

Your commitment to the advisory business is changing with this initiative to custody assets for RIAs, hybrid folks internally, and outside folks as well. Has that actually launched?

We announced that we're launching it; we've started with some of our existing advisors first, and we're talking to people who will bring their business to us either later this year or early next year. So it's in the market now.

This is another good example of how we want to be indifferent about business models. The old joke is that if you're a hammer salesman, everybody needs a hammer. Our observation of the market was that if you're a custodian in the business, you tend to sell RIA as the answer; if you're a clearing firm, you sell B/D.

Our view is that we don't know what the right answer is for your business. But whatever choice you make, we want to be your partner. We're the only firm that I know of where we can be the broker/dealer, for which we are more traditionally known, or you can use our corporate RIA, or you can transition and use your own RIA.

We're trying to make ourselves agnostic around business model. We've always been agnostic on product choice...but now we're agnostic on business model. That's a big change for us; no doubt about it.

Are you ahead of the curve there?

We're the only business that doesn't compete with our clients. Our clients are the advisors and the institutions they work for; everybody else we compete with has an employee arm or has a direct-to-the-consumer model along with it. We have a very good positioning: unbiased investment advice tied with no conflicts against the business model.

That seems to be resonating quite a bit, which doesn't surprise me. Many people told us, 'Wait, many people are doing custody for RIAs!" But the kind of custody they've done has been built around a certain business model, where people say, "I want to be a money manager at my own firm!"

What we thought some five years ago was that that model was evolving. We measured the marketplace then and we were wrong. Only about 2% [of the advisors surveyed] were acting like wealth managers. So we said, okay, the market's not really ready for us, because if you're an investment manager, the custodians already do a nice job . . .

But we went out to the market two years ago, and we found 27% said they're evolving into wealth managers. That's an entry point for us. Because a wealth manager has a complex practice, they deal with multiple product types, they deal with clients holistically. That sounds an awful lot like what an independent broker/dealer does!

We hired Gary Gallagher [formerly of Fidelity's custody unit] and launched our plans. We were waiting for the market to catch up to what we do well, which is managing complexity for financial advisory practices.

We're trying to make sure that LPL isn't put into a slot where people say "Oh, LPL is an independent broker/dealer. That's what you do." That's one of the things we do; and we've got a great heritage around it, and we think we're done it pretty well, but we really are in the business of enabling independence. Independence is broader than an RIA model or a broker/dealer model or any model for that matter; it's about how you make those things happen.

These hybrid models used to be a waystation, though, right? "I want to go fee, but I can't give up this revenue yet."

That's the buzz in the industry, but I think people missed a little turn in the road, which is this thing called risk. People have realized that there are a couple of organizations that do a great job of helping you manage risk; those are people who have big balance sheets, so they're the insurance companies and investment banks. We have seen an incredible resurgence among people who are heavily advisory based, saying that there are some pretty great income guarantees in VA form, there's some pretty wonderful floor protection around assets available in a structured note. You have to have a securities license to sell those.

So if you want to bring the latest product type and a good way of thinking holistically about your clients' needs, you're going to need a securities license. If your practice is evolving from asset management to wealth management you can't ignore it.

Does demographics play a role in this change as well--as clients get closer to retirement?

Yes, that's part of it. Our average advisor is in his late 40s, and the average client is usually five or ten years older.

Are you hearing different things from these different constituencies?

No, not really, because they're all asking, "Make my life easier." It's tangible things, like how do you create a paperless office, which we do using a product called iDoc. That's why we say business model isn't important. Independence isn't defined by business model that says you have to be FINRA, but by how you practice the art of financial planning to do a good job for the client.


Editorial Director Jamie Green can be reached at jgreen@investmentadvisor.com.

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