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- 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.
Not all of the LPL advisors roaming the halls of the San Diego Convention Center, where the firm is holding its three-day annual conference, are reporting to and seeking services from the same back offices in Boston, San Diego or Charlotte.
In fact, a large number are dealing with branches — OSJs, or offices of supervisory jurisdiction — that function under their own RIA, which may be based somewhere else entirely, such as Solon, Ohio.
That is the location of a network of advisors doing business as Stratos Wealth Management, and the more than 150 LPL advisors who are Stratos partners are getting a smaller payout than advisors serving under LPL’s corporate RIA. So the question is, why are they voluntarily taking a pay cut?
“We plug in resources and support mechanisms. Where the broker-dealer stops, we step in,” says Jeffrey Concepcion (left), Stratos’ president and CEO, in an interview with ThinkAdvisor.
“We create old-line partnerships like accounting and law firms have,” adds founding partner Charles Shapiro, who also sat in for the interview. That means not just the camaraderie of sharing ideas and expertise, but also a sharing of profits.
“We are structured as a partnership,” Shapiro says. “There’s an equity plan where we’re distributing 25% of the firm to the advisors. It definitely goes to strengthening the relationship.”
Concepcion adds that Stratos distributes 60% to 70% of net income to shareholders, based on members’ profit contributions, each year.
While the shared equity creates a sort of economic glue binding the partners, the two Stratos executives point to their service offering as the key added value.
Shapiro says Stratos does more to support advisors’ transition, maintenance and growth than is commonly found in the industry.
For example, he says, “processing transfer paperwork is not supported well in the world of independence. We have a team to prepare and process that business so that a transition that might take six months we bring down to three months.”
Once the advisor is on board, Stratos’ team not only helps with negotiating leases, telecom and the like, but has in place a chief investment officer, head of financial planning, IT, marketing, supervision and compliance.
“All of this infrastructure is there to help them with the support of their business, which is especially valuable for formerly wirehouse advisors used to having all that support,” Shapiro (left) says.
But again, getting back to the financial aspect of whether a paycut from LPL’s standard payout can be justified, it is in the area of business growth that Stratos believes its advisor partners most benefit.
“We’ve been given statistics from LPL that … Stratos advisors on board 24 months have grown at 5 times the rate of a normal advisor going independent,” Shapiro says.
Part of this may be the ability to delegate the “noise” of being independent to Stratos’ staff, but Concepcion illustrates how his executive team members roll up their sleeves to help their advisors secure new business.
“Not a week goes by when I’m not sitting with an advisor helping them form a strategic alliance,” he says.
Concepcion says that despite good intentions, strategic alliances between an advisor and, say, a CPA or insurance firm, typically yield poor results because the process is too passive.
The Stratos approach is to set a meeting on the calendar once each month where the advisor will come to the CPA partner for coffee and find four files on his desk. The CPA will not just give over names, but pick up the phone and call the client, tell her that he wants to make sure her investment needs are handled professionally, and invite the client for a no-obligation review.
“This has led to meaningful and consistent revenue for the advisors,” Concepcion says. The advisor hosts reciprocal meetings.
Stratos execs also help out with top prospect meetings. For example, Concepcion was in Columbia, S.C., last week, where an advisor had a meeting with a prospect whose advisor had just died.
It was a multigenerational account, where between the main prospect, his parents and children, assets totaled about $35 million. The advisor was supposed to get an agenda from the prospect, but he never delivered it until the meeting, at which time they were given a dense five pages. But because of their expertise, not only in asset management but particularly in areas related to dynasty trusts and such, the advisor landed the account.
“We’re willing to be in the trenches with our advisors day in and day out,” Concepcion says.
Stratos is one of the largest of about a dozen independent RIAs working within LPL, and these hybrid firms make up a disproportionate share of the firm’s revenue.
The firm offers two models—a full-service model that is especially suited to former wirehouse advisors that offers a payout in the 50% to 70% range, and an independent model with payouts in the 65% to 87% range. Stratos members are nearly equally divided among these two options, with slightly more on the indie side.
Those payouts imply a pay raise for wirehouse advisors, and a pay cut for indies. Still, Stratos notes that the recruiting trend of late has been fueled by indie advisors, with three out of its four top producers this year coming from that sector.
The firm is adding 30 to 40 advisors per year, with average trailing 12-month revenue of about $400,000. Per its agreement with LPL, the firm is recruiting advisors with at least $250,000 in gross dealer concessions.
Shapiro says Stratos looks for advisors with integrity and a sense of entrepreneurialism, noting that the more intimate nature of the firm’s partnership arrangement makes finding “a good fit” more of a priority. Concepcion says they’ve passed on some substantial producers who were either a bad fit or had compliance problems.
Concepcion says that the Stratos team, which does not recruit from existing LPL advisors per its agreement with the firm, is in San Diego like all the other LPL advisors — to learn about the firm’s new technology platforms.