From the July 2010 issue of Research Magazine • Subscribe!

LPL Financial Shares IPO Plans; On Track to Rival Wirehouses

LPL Financial is planning an initial public offering.

LPL Financial filed statements with the SEC in early June 4 to go public with an estimated $600-million stock offering.

The independent broker-dealer has 12,026 independent advisors and headquarters in Boston, Charlotte and San Diego. According to its filing, the firm has had a 14 percent growth rate in its advisor headcount since 2000, when it included just 3,570 advisors.

At this pace, the independent broker-dealer is on track to have 13,710 by early 2011; 15,630 by early 2012; 17,820 by early 2013; and 20,315 by early 2014. Thus, LPL Financial could surpass all of the larger wirehouse firms by either 2013 or 2014, depending on how they grow or shrink over the next few years.

As Chip Roame of Tiburon Strategic Advisors and other experts see it, LPL Financial's IPO could easily shift its position in the brokerage industry: "This is a defining moment for the independent broker-dealers and for LPL," said Roame. "This announcement is another threat to the dominance of the wirehouses."

Growth Path

The broker-dealer has made a very successful transition from being an entrepreneurial firm to being a large corporate firm, Roame explains, "with excellent execution along the way."

Todd Robinson, Dave Butterfield and Jim Putnam led the firm early on and in 1989, when Linsco merged with Private Ledger. They then handed the baton to Mark Casady, now CEO and chairman, and the firm's other leaders several years later.

In late 2005, 60 percent of LPL Financial was sold to Hellman & Friedman of San Francisco and Texas Pacific Group of Fort Worth, a signal to many observers that the company's next financial move would be to go public. At the time, LPL Financial's advisor count was 6,800, and the firm was valued at $2.5 billion.

In 2007, it acquired three broker-dealers from Pacific Life.

"Access to the capital markets will help the firm obtain the needed funds to continue to upgrade technology and grow its business in the coming years," shared Mark Elzweig, head of Mark Elzweig Company, executive search consultants. "As a public company however, if the firm has a bad quarter, the whole world will know," said Elzweig.

In addition, "The ability to run the company changes," said John Rooney, managing principal of privately held Commonwealth Financial, which has about 1,300 advisors.

"As a public company, you are numbers driven, and that will mean that the decision-making process aligns accordingly."

For Commonwealth, "Our decisions don't have to be purely profit-maximizing and can incorporate the interests of our community. That's a big deal for us. In other words, they will have a fiduciary duty to shareholders in being a public company. For a private company, that duty is to your employees and advisors."

Other experts say that since its sale to the private-equity firms in 2005, LPL Financial has very much been run like a public company. For instance, it has been filing K and Q statements.

"They have been moving their business plan along during this time," said Tim Murphy, CEO and president of Investors Capital, a publicly traded independent broker-dealer with about 550 advisors. "They integrated operations and became fully self-clearing. They were smart in using this time to their advantage."

"This is a huge milestone for independent broker-dealers," said Roame. "Ten years ago, LPL only had 3,000-4,000 financial advisors and were looked down upon by many wirehouse financial advisors."

While some wirehouse advisors haven't completely changed their opinion of the firm, many are in the process of doing so. "More wirehouse brokers will respect the firm as a public company and that may boost LPL recruiting of larger teams," explained Roame.

The Financials

Beyond its core business as the broker-dealer for some 12,000 advisors nationwide, the firm provides support to 4,000-plus advisors, who are affiliated and licensed with insurance companies. This work, the company says, makes it one of the largest distributors of investment and insurance products in the U.S. "Since 2000, we have grown our net revenues at a 15 percent compound annual growth rate," the preliminary prospectus states.

LPL Financial's operations do not include investment banking or financial-product manufacturing. Its revenues come from "diverse sources, including commission and advisory fees as well as fees from product manufacturers, recordkeeping and cash sweep balances."

In 2009, close to 56 percent of the firm's revenues associated with product sales came from variable and fixed annuities.

The firm's debt is now roughly $1.4 billion, and its debt-to-asset ratio is 42 percent.

Recruiting Push

In addition to boosting its capital, "The LPL IPO will be an overall positive for their recruiting efforts," said Elzweig. "The IPO has been in the works for quite some time, now the uncertainty as to when it will take place has been removed. More importantly, advisors will welcome the opportunity to be part of a solid, public company."

"They are well positioned," said Murphy. "The independent channel is gaining ground, and they are the dominant player in the channel."

By going public, LPL Financial now has "a currency to pay employees and maybe even to pay financial advisors," said Roame. It's "a way to tie key people to the firm longer, and it also gives the firm a source of new funds if they determine that another acquisition is wise. Plus, I assume it lets the firm pay out some long-time employees."

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