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- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
While LPL Financial (LPLA) hosts its annual conference for about 3,000 advisors and 900 other guests this week in San Diego, financial analysts and industry experts are wondering how soon the independent broker-dealer and RIA custodian will take the initial steps of starting its own bank.
But in a statement shared with ThinkAdvisor on Monday, the IBD says it’s in no hurry to get such operations under way: “At this time, there has been no decision made or plan to either purchase or start a bank. It could be something we assess in the future. But like any significant initiative, we would explore such an idea in a comprehensive and diligent manner that would allow us to develop an informed view of the best approach. We are not at that stage yet.”
Speculation about such plans surfaced on Wednesday, when LPL said one of its two private-equity partners, Hellman & Friedman, was distributing its remaining 12.6 million shares of LPL common stock to its partners. Its other private-equity sponsor, TPG, distributed 4 million of its shares in LPL, leaving it with about a 17% stake in the IBD.
"The ongoing reduction of Hellman & Friedman and TPG's respective ownership stakes has been a natural and expected part of LPL Financial's maturation as a publicly traded corporation," said LPL Financial Chairman and CEO Mark Casady, in a press release. "These latest distributions underscore how far LPL Financial has come since their initial investment [in 2005]. We are well positioned going forward due to the strength of our business model and industry leadership position."
With these moves, Hellman & Friedman gave up two seats on LPL Financial’s board of directors occupied by Allen Thorpe and Jeffrey Goldstein. The IBD also became better positioned to begin setting up its bank operations.
By reducing the ownership percentage of the private equity holders to below 25%, “[W]e believe that LPLA could start a bank subsidiary which could generate higher returns on client cash than the firm's existing outsourced deposit program,” said Keefe, Bruyette & Woods equity analysts Joel Jeffrey and Michael Needham, CFA, in a report issued Wednesday.
The analysts estimate LPL’s bank could generate roughly $420 million of incremental pretax income in what they call a “normalized” 200-plus basis-point interest rate scenario vs. LPL estimated $200 million of incremental pretax income in such a scenario in its current cash program.
On a July 31 conference call with analysts, Casady said that “a bank is the new area for us to think about … It could be highly accretive and so forth.”
However, the CEO acknowledged that such operations “would bring us a new regulator and bring us some other activities that we want to understand better.”
Still, he said, having a bank would “certainly give us more capabilities for our advisors … so that could be very helpful to us in terms of growing the business and helping them."
Such a bank, Casady explained, would focus on handling deposits from cash sweeps “and then having a very safe and rather boring portfolio that would allow us to pick up the spread.”
LPL Financial has some $6 billion in deposits “that are in money funds today for retirement accounts that were precluded from [being put] into bank sweep programs. We know from our advisors, their clients would actually prefer to be in bank sweep programs for the FDIC coverage,” the executive noted.
Again, if LPL had such a bank, “an exemption that would allow you to basically move those sweep — those monies — into the bank. As you couldn’t do that overnight, it would take you several years to build the capital base and move those monies, but that would be a perfectly smart reason to think about why you would do it …”
The KBW analysts emphasize that although owning a bank “would change the structure of the company and increase its need for capital meaningfully, we believe the incremental earnings could be compelling.”
LPL and the experts that follow it, though, believe the IBD is in no rush to launch such operations.
Check out Going Mobile: LPL Announces Sweeping Tech Changes on ThinkAdvisor.