LPL CEO Says No Way on Pure RIA

The IBD discusses strategy and the impact of recent departures during its Q4 earnings call

LPL Financial's San Diego headquarters. LPL Financial's San Diego headquarters.

LPL Financial shared good news and bad with stock analysts after it reported its fourth-quarter and year-end 2016 earnings late Thursday. And that put CEO Dan Arnold — leading his first call after taking the reins from Mark Casady — in the hot seat.

The company’s net income jumped 56% in the fourth quarter to $41.7 million from the year-ago period; it rose 14% in 2016 to nearly $192 million. But revenue dropped 1% in Q4’16 to about $1 billion, and it fell 5% for the full year to $4.05 billion.

These results, along with issues related to the new Department of Labor fiduciary rule, prompted analysts to pepper Arnold with questions about business growth in the face of departing advisor groups — like Ron Carson Wealth Management and Resources Investment Advisors.

When asked about a possible move into the pure RIA custodial business, which LPL executives apparently had discussed in an earlier meeting with equity analysts, Arnold gave a clear answer.

“We're still focused on our core markets,” he said, pointing to the traditional independent broker-dealer and hybrid-RIA businesses.

While some RIAs using its hybrid platform have decided to go pure RIA “as just a way of evolving their practice," LPL’s leadership is “not actively or currently positioning ourselves, or investing in differentiating relative to an entry into that market,” Arnold explained.

Assets, Revenue Shifts

While LPL Financial’s total assets grew 7% from a year ago to hit $509 billion in Q4’16, its major sales categories moved in the reverse directions.

Commission revenue for 2016 was down 12% to $1.74 billion. Advisory revenue declined 5% to $1.29 billion. Asset-based revenue, however, ticked up 13% to nearly $557 million.

The fourth quarter brought year-over-year declines in commission on alternative products (-42%), fixed annuities (-22%), variable annuities (-9%), variable annuities (-9%) an mutual funds (-4%).

Advisory assets represent about 42% of total assets.

Net new advisory assets in Q4’16 were $4.8 billion, while outflows of brokerage assets were $2.3 billion — giving LPL net new assets of $2.5 billion for the quarter. This is an improvement from the NNA totals of $1 billion in Q3’16 and $0.4 billion in Q4’15.

Advisor Flows, Departures

Arnold said the IBD's headcount expanded by 323 in 2016. “The fourth quarter was our strongest growth quarter of the year, with net new advisory assets of $4.8 billion and net new advisors of 192,” he explained.

LPL now has 14,377 affiliated financial advisors and 3,988 insurance reps (who use its clearing and related services.)

Average annual fees and commissions for FAs fell 6% year over year and ended 2016 at $210,000 vs. $224,000 a year ago. Average assets per rep, though, improved 5% to $35.4 million.

Numbers aside, the elephant in the room during LPL’s call with analysts was the exit of high-profile wealth manager Ron Carson, as well as Resources Investment Advisors.

Discussing departures in general, LPL has relationships that are, from time to time, “not a good fit strategically, operationally or economically,” Arnold said.

According to CFO Matthew Audette, the broker-dealer expects to lose about $2 billion and 140 advisors in first and second quarters from these high-profile departures. It should see another $3 billion and 70 advisors leave this quarter after one of its institutional clients was acquired by a bank that has its own broker-dealer. 

--- Check out How to Build a $1 Billion Business: Ron Carson's Recipe for Growth on ThinkAdvisor.

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