More On Legal & Compliancefrom The Advisor's Professional Library
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
- Recent Changes in the Regulatory Landscape 2011 marked a major shift in the regulatory environment, as the SEC adopted rules for implementing the Dodd-Frank Act. Many changes to Investment Advisers Act were authorized by Title IV of the Dodd-Frank Act.
The parent company of the largest independent broker/dealer, LPL Financial, filed an S-1 statement with the SEC on June 4 to go public via an estimated $600 million stock offering, punctuating its rapid growth (notably its acquisition of three broker/dealers from Pacific Life in 2007), and its standout position within the independent broker/dealer universe nearly five years after the broker/dealer sold 60% of itself to two private equity firms.
At the time of that sale, which precipitated the departure of co-founder Todd Robinson and the ascendancy of current Chairman and CEO Mark Casady, LPL Financial's advisor count was 6,800; the B/D had 11,950 affiliated representatives as of April 1, 2010, a self-reported number gathered as part of Investment Advisor's annual independent broker/dealer survey (available at InvestmentAdvisor.com). According to its SEC filing, LPL has had a 14% growth rate in the number of reps since 2000, when it had just 3,570 advisors.
Philip Palaveev, president of Fusion Advisor Network and a leading authority on advisory practices, characterized the planned IPO as a major achievement for the entire independent broker/dealer business model. For one thing, he said, the IPO will put the largest indie B/D under the scrutiny of the public market. For another, it is a validation that an independent firm can grow to a size and market significance that allows them to go public. "To some degree, going public is recognition that you've grown large enough and your management practices are sound and solid enough to be scrutinized by the public market. I have to congratulate the management team that has built such a tremendous company. You have to admire the scope of the vision and how quickly they have been able to achieve that."
Chip Roame, head of the consulting firm Tiburon Strategic Advisors, agrees. "This is a huge milestone for independent broker/dealers," he said.
LPL's IPO: The Financial Angle
"They are well positioned," said Tim Murphy, CEO and President of Investors Capital, a publicly traded independent broker/dealer with about 550 advisors. "The independent channel is gaining ground, and they are the dominant player in the channel."
Experts say that since its sale to the two PE firms in 2007, 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," noted Murphy. "They integrated operations and became fully self clearing. They were smart in using this time to their advantage."
Nearly five years ago, when LPL monetized its owners' stakes by selling a majority interest to Hellman & Friedman LLC and TPG Capital, the deal valued the firm at $2.5 billion. Since then there have been a series of acquisitions and the aforementioned growth in reps to nearly 12,000. Plus the firm says it provides "support to over 4,000 additional financial advisors who are affiliated and licensed with insurance companies," making 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% compound annual growth rate (CAGR)," according to LPL's preliminary prospectus.
Like a wirehouse, the firm's distribution capability is immense, but unlike a wirehouse, the firm does no investment banking, "product manufacturing, underwriting or market making." LPL states in its prospectus accompanying the S-1 filing that "revenue stems from diverse sources, including commission and advisory fees as well as fees from product manufacturers, recordkeeping and cash sweep balances." With the kind of distribution the firm commands, revenues from manufacturers for product shelf space could be substantial.
In the filing, LPL lists debt at $1.4 billion. As of March 31 the firm's debt-to-asset ratio for the quarter was 42%.
The company has moved to secure and lengthen the term of some of its debt to bring down its overall cost of debt--retiring $550 million in unsecured 10.75% debt due in 2015, and replacing it with a lower, variable rate senior tranche of $550 million due in 2017.
LPL's IPO: The Recruiting Angle
One change that may occur with going public, says Roame, is that "more wirehouse brokers will respect the firm as a public company, and that may boost LPL recruiting of larger teams."
Recruiters agree. "The LPL IPO will be an overall positive for their recruiting efforts," said Mark Elzweig of his eponymous executive search firm. "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 important, advisors will welcome the opportunity to be part of a solid, public company."
Jonathan Henschen of Henschen & Associates in Marine on St. Croix, Minnesota, said it might lead to higher expenses and lower payouts. "In my view," he explains, "publicly traded broker/dealers are trying to get upwards of 15% out of the B/D to drive the stock, whereas privately owned B/Ds, if they can run the firm, pay advisors, and come out 3% to 4% ahead, are content. Do the math." Publicly traded companies, he says, also have more miscellaneous expenses, and while they can offset some of those expenses because of economies of scale, "they have higher expenses than many B/Ds I work with."
Mitch Vigeveno, of Turning Point, Inc., in Safety Harbor, Florida, points out that such might not be the case with LPL. While he says that running an independent B/D is "fundamentally a small-margin business...they do as a self-clearing organization pick up all the ancillary revenues that all the others have to give to Pershing and [others]. They make money on debit accounts, margin, and money market accounts."
A possible negative, Vigiveno says, is that the interests of the stockholders may be put ahead of those of advisors. Henschen agrees, saying that he's curious about what LPL's pricing will be like after it goes public. He also wonders how LPL advisors will be affected. "You have to satisfy stockholders. How will that affect [advisors]? Will it affect payouts or cutting commissions? Economies of scale and soft dollars from vendors aside, it gets to a point of being between a rock and a hard place. It may affect [LPL advisors] in expenses and payouts, and . . . administrative fees on advisory platforms."
LPL's IPO: The Markets Angle
From an overall market perspective, LPL Financial's IPO arrives during a period of volatility, with a boomlet of financial services IPOs in the first four months of 2010 followed by a steep fall-off in May.
"This financial offering is a big surprise. The ability to sell stock right now is uncertain, and IPOs are being pulled left and right. More IPOs were pulled in the month of May than in December 2008," said Richard Bove, a high-profile U.S. banking analyst now with Rochdale Securities in Stamford, Connecticut. To come with a financial offering now is "gutsy," Bove said, adding, "I do hope it's a major success because it will indicate there's money out there for money-instrument companies."
Through April 22, 2010, the financial services sector has seen 10 IPO pricings, according to data from Renaissance Capital. This compares to only 11 financial services pricings in all of 2009 and a mere three pricings during the worst of the recession in 2008. But the current state of the stock market may not cooperate with LPL's plans or, for that matter, investors' desire to put their money into IPOs.
Sam Stovall, S&P Equity Research's chief investment strategist, said that of the 10 sectors S&P covers, financials comprised the best-performing category at the market peak, rising more than 160% since the low of March 9, 2009. But, he added, because the group experienced the greatest loss in the 2007-2009 bear market, falling 83% as compared with the S&P 500's decline of 57%, it also had the most to give up due to such a sharp rally.
Year-to-date, financial-sector IPOs have included five real estate investment trusts and a Chinese real estate offering in addition to a $365 million Symetra Financial pricing on January 21, a $127 million Financial Engines pricing on March 15, a $320 million Primerica pricing on March 31, and a $100 million Envestnet offering announced May 21.
This story was reported and written by Janet Levaux, Joyce Hanson, Kathleen M. McBride, Marlene Y. Satter, Michael S. Fischer, and James J. Green. For additional reporting on the LPL Financial IPO, please see InvestmentAdvisor.com