LPL Flirted With Acquiring Investors Capital, Source Says

One roadblock to the deal: the clearing firm issue

Earlier this year, LPL Financial executives briefly discussed the possibility of buying Investors Capital, but LPL Financial decided not to pursue such a move, according to one industry source familiar with the situation.

While Investors Capital Chairman Ted Charles (left) was in the process of publicly filing to sell his nearly 55% stake in the firm, conversations regarding LPL Financial's interest in a possible acquistion took place, the source told AdvisorOne. However, LPL Financial, the largest publicly traded independent broker-dealer, then said it did not intend to pursue an acquisition of the smaller broker-dealer.  

Industry experts suspect a key reason for the decision may be the fact that Investors Capital’s independent advisors clear through Pershing, and LPL Financial is a self-clearing firm.

“One critical issue in expected IBD mergers will be their clearing brokers,” said Chip Roame, of industry consultancy Tiburon Strategic Advisors, in an interview on Friday. "While it is relatively easy to convert accounts from one IBD to another when the accounts are on the same clearing platform, “transitions across clearing brokers will always bring more risk and cost,” Roame said.

At the present time, LPL Financial is moving some 500 UVest advisors, acquired in August 2006, onto its self-clearing platform. Thus, the company likely did not want to have to focus on “further integration issues” in 2011, said the industry insider, wishing to remain anonymous.

Charles (left) founded Investors Capital in 1992. It trades on the NYSE Amex under the ticker ICH.

On March 28, Investors Capital filed an amended S-3 registration statement with the SEC, disclosing that Charles, members of his immediately family and their trusts, plus a charitable foundation, plans to sell 3.6 million shares of the common stock of Investors Capital Holdings, Ltd. (ICH). At a proposed offering price of $5.75 per share, Charles' stake would be worth $19.03 million. ICH stock closed at $6.08 on Friday, April 1.

According to the 2010 Investment Advisor survey of independent broker-dealers, Investors Capital is the 34th largest IBD by revenue, with 2009 gross revenue of $76 million. Based in Lynnfield, Mass., and led by CEO Tim Murphy, Investors Capital was the 39th largest BD by number of independent contractor reps, with 565 representatives, but ranked 28th in average annual production per rep, at $132,000.

The Trouble With Clearing Firms and IBD Mergers

Though the S-3 filed by Charles has been declared effective, Investors Capital, which now has about 570 advisors, would not comment on the matter, according to Robert Foney, chief marketing officer.

In 2009, LPL Financial moved 1,700 representatives from three former Pacific Life broker-dealers -- Mutual Service Corp., Associated Securities and Waterstone Financial Group -- from the Pershing clearing platform onto LPL's own platform. (It purchased those broker-dealers from PacLife in early 2007; at the time the three BDs included about 2,200 advisors.)

“LPL Financial just went through the acquisition of the old Pacific Life BDs and eliminating Pershing,” said Roame, in a separate interview in early March. “That’s a lot of work. The obvious buyer of Investors Cap would be a larger Pershing-using IBD.”

LPL Financial’s acquisition of the Pacific Life broker-dealers involved the loss of many advisors, both before and after the advisors were moved onto its self-clearing platform, according to Jon Henschen of Henschen & Associates. “That is why they don’t want to acquire [another] Pershing BD,” the recruiter said on Monday. 

Likely suitors for Investors Capital include MetLife and Jackson National, as well as Lightstone Capital and Ladenburg Thalman, Henschen explains, though Ladenburg Thalman also own two firms (Triad and Investacorp) that clear through National Financial.

But some Investors Cap representatives, such as James Crosson of Fall River, Mass., hope that a group of advisors and executives can buy Charles’ stake in the IBD. “I would like to see a publicly traded IBD that is broker owned. That would be great to see, and it would do really well,” he said in an interview Friday

When asked about a possible deal with Investors Capital last month, LPL Financial said in a statement that, “As a matter of policy, we do not comment on speculation regarding potential acquisitions.”

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