November 18, 2010

LPL IPO: Brokerage-Firm IPOs and Recruiting: The Good, the Bad and the Ugly

Going public has both pros and cons for LPL Financial, says a top recruiting expert

The transformation of a privately held brokerage firm into a public company is very much a double-edged sword.

On one hand, the new organization’s access to the capital markets means that its advisors and clients alike can be confident the firm will have the resources to continue to upgrade its fee-based platform and technology. 

This is no small matter. LPL’ Financial's excellence in both these areas has been a critical factor in fueling its impressive growth.  LPL had 3,569 advisors in 2000 and now has slightly more than 12,00, giving it the industry’s fifth-largest retail sales force (after Morgan Stanley, Merrill Lynch, Wells Fargo and Ameriprise).

Along with the firm’s well-respected name, this combination has made LPL a very comfortable destination for many wirehouse advisors. 

Capital is also a prerequisite for innovation.  Most of the latest wrinkles in today’s fee-based business began at large, well- capitalized and public wirehouses. They had the means to dedicate resources to new product development.

Public companies have another important advantage. They are viewed by investors as solid, reliable places to trust with their assets. (Yes, even now, despite the shakiness of many big firms following the 2008-09 market meltdown.)

This confidence factor will surely help LPL’s successful advisor-recruiting machine grind on to new heights. 

The IPO also affords LPL the opportunity to take a page from the wirehouse playbook and establish a stock purchase plan for its productive advisors.

Nonetheless, there are downsides to the new structure --the most fundamental being that corporate officers and advisors suddenly

find themselves reporting to an additional group of bosses: the firm’s shareholders.

Shareholders are interested in a profitable return on their investment. As such, they can be overly focused on short-term earnings and less enthusiastic about expenditures most necessary to promote long-term growth.  

Even before the IPO, LPL blew out a lot of top-drawer people from its home-office staff. The goal was to boost revenues before the firm went public.

Brokers at the old Smith Barney used to quip that the tight-fisted nature of Sandy Weil made the firm’s stock a great investment to own, but made the firm itself a tough place to work.

Often, public companies feel pressured to grow beyond a manageable level in order to generate sufficient returns to satisfy shareholders. 

And sometimes in the broker-dealer arena, three can be a crowd, since maintaining an advisor- and client-centric culture becomes more of a challenge when shareholders’ interests are added to the mix.

Of course, public companies live in a fish bowl. An unprofitable quarter is no longer a private affair but becomes the shot heard round the world.

Brokerage firms with mega-salesforces are often predisposed to contracting a stubborn ailment known as “wirehouse-itis.” That is, despite the tangible benefits of a full-service investment platform and a household name, many advisors feel only a tenuous connection to their firm. 

Turnover spikes up, and a tonic of financial incentives (recruiting packages, deferred comp) is required  to engender loyalty. 

This is already starting to happen at LPL. As the firm has grown, many advisors no longer feel the same connection to senior management and home-office staff. 

Turnover has increased, and there are rumors of big defections to come after some of their top producers cash out through the IPO.

Private equity ownership is another murky area. 

LPL will be 63% owned by two private-equity firms after its IPO on Nov. 18, 2010. Some people view these types of firms as competent, fiscally prudent stewards, while others claim that they are draconian penny pinchers only interested in wringing maximum profits out of their holdings. 

It’s also not clear if , or when, the majority stakeholders will go for another big payday by selling more of the firm at some point.

Still, one thing is certain: LPL’s IPO represents a shift in the broker-dealer industry.

Whether or not the newly public firm will go on to forge an innovative path or follow the somewhat muddled path of its larger rivals is now in the hands of LPL management, and these hands are now tied to the fickleness of the markets and the impatience of its stockholders.

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