Over the course of two lengthy conversations with Mark Casady I came to understand more than a few things about the man who leads the nation’s largest independent broker-dealer. Many business leaders have a genuine passion for their work. Casady’s passion is palpable, and it is, in part, reflected in his efforts to maintain the tradition of innovation, technology-leadership and meritocracy introduced by LPL’s founder, Todd Robinson.
“Balanced” and “humble” are two additional adjectives I would say appropriately describe Casady. I came away from our conversations feeling that he is a man who, in a quiet, confident manner, clearly recognizes his strengths and talents, but is equally aware of his limits.
I also came away with the impressions that no one in LPL’s management structure takes success for granted, that there is a continuing process of re-invention in place, and that the best interests of the firm’s customers are always the top priority.
David Macchia: What do you define as the component parts of a great leader?Mark Casady: I think that the first part is to not confuse brains with a bull market, to be blunt. And that everything in life has a rhythm to it. Whether it’s sports or whether it’s a business situation or whether it’s a relationship, there’s a rhythm to these things. You can definitely change a rhythm to a business; you can change a rhythm to a cycle. But there are certain cycles you can’t change. We here at LPL cannot affect the American economy much. We can’t make the stock market go up and we can’t make it go down much. It is important for a leader is to understand when they’re in the right rhythm with the forces that are beyond their control.
And that implies, as you said, recognizing your limits.Yes, exactly. I think the second thing that’s really important in a great leader is humility. And I will say that I try every day to make sure that as a leader I guide with humility.
There must be many advantages with being No. 1. But I’m wondering, what are some of the disadvantages?One disadvantage is that you can believe that you’re No. 1, for some reason, beyond the day-to-day work you do. We’ve been No. 1 for, I think, 12 years now. When I arrived five years ago, what I said to the management team was, “Hey, you’ve been No. 1 for seven years. Pat yourself on the back and forget about it, because if you let yourself fall into the belief that that somehow gives you a privilege in the marketplace, you somehow fall into the belief that you don’t have to work as hard.”
And so the downside is that it tends to foster a lack of humility and…being No. 1 attracts a lot of attention and … therefore, a lot of imitators.
After setting a record price multiple in your recent private-equity buyout, do you feel that more firms are strategic takeover targets for LPL?Well, I don’t think it really has to do with our price. I think our price is quite appropriate by any measure. I’ve done probably 22 or 23 transactions corporately, taking companies public…And so I’ve gotten some deal experience.
If you can acquire a firm at 1X GDC and make them worth 2X GDC, that’s a pretty good business strategy. You don’t disagree, I presume.Actually, I do disagree. If your business strategy is to buy a business at 1X because your company gets a 2X multiple from the market, that’s not a good strategy at all because that’s just a roll-up strategy. You’ve got no value by that. What you have to do is you have to be able to say, I can take a property that’s for sale at one time, I can do something to it that changes its characteristics to look like the rest of my business that’s worth 2X. It’s a completely different way of saying it. And I’m rather sensitive about it because I see a lot of companies that have roll-up strategies. I’ve seen a lot of announcements in our business about people who are doing roll-up purchases of RIA practices or roll-up purchases of securities license professionals, and I think those strategies are ultimately doomed to strategic failure because they don’t change the value equation. They merely rely on inaccurate pricing from one level of the market to another.
Now, that’s not a strategy, that’s an arbitrage. And so when you look at the specific broker-dealers, we purchase them using this metaphor of 1X, whatever. And they will be worth 2X, whatever, they’re not worth that today because they need a significant investment in their technology and a significant investment in their capabilities for them to get to that point. And we think it’ll probably take us a good three years, maybe two years, to get them to the point in which we say, hey, we’ve done the blood, sweat and tears work to get them to have an environment in which their advisors can grow their businesses and be even more successful.
What made LPL conclude that technology was going to be so important in the future?I think we had a seminal vision by our founder and by his president, Dave Butterfield. Todd and Dave put every nickel back in this company up until they sold it in 2005. So they never took any kind of significant money out of the business until they did the transaction. And that’s why we’ve invested literally hundreds of millions of dollars in technology. And the logic that Todd and Dave used was that it would make the profits just that much more efficient, so that he would sometimes joke about it by saying, “Well, I’m just too cheap. I don’t want to hire 100 people to have to do the work that with technology we could do with 10 people.” And if you have 100 people, as good as they are, they’re going to have an error rate, whereas a straight-through process for processing a trade is going to be 100 percent accurate if it was entered accurately in the first place.
With all the talk we hear about explosive growth in RIAs, do you think there are challenges, going forward, of keeping a traditional BD relevant? The question we ask ourselves is what do we think is going to happen in the world that will make us irrelevant? If you were starting the business today, David, and you were in our space, what would your business look like? If we looked at pricing, an advisor who’s here who would look like a registered investment advisor but isn’t, they’re part of our corporate RIA; they were paying us a premium at high levels that might be as much as $200,000 a year more than they would pay a custodian for the same work. Because we’ve said to ourselves, “Well, that’s not going to last,” right, because those people are going to maximize their profits by finding ways to do this cheaper. So we announced in August at our national conference that starting January 1st of ’08, we’re completely changing our pricing for our advisory platform in two ways.
One is we’re reducing our ticket charges for mutual funds so that basically 60 percent of all mutual fund trades will be free and about 20 percent will be at $4.50, and then the last 20 percent will be at $26.50. And it’s an enormous group of funds, something like 7,000 different funds that you can trade there. And then secondly, we’re going to give you an advisory fee rebate, so we charge an administrative fee for an advisory count so that now if you’re that same advisor who was paying us $200,000 more, they’re only going to pay us about $15,000 more than they would a custodian. So we’ve really leveled pricing at that end. And why would they even pay $15,000 more? Well, because we do everything for them. We provide all their client statements, and we provide E&O coverage. We do all the privacy mailings, so they basically outsource their operational activity to us for a very slight cost over and above a custodian.
If they were at the custodian, they would have to do all that work themselves, and it would be much more expensive for them to go to a custodian model. So I think what happened is, our view was that basically there’s a space in the market where these distinctions between a brokerage firm and a custodian firm are really only a result of a historical accident and not a result of economics.
Your answer implies the question: Can a small broker-dealer reasonably compete and survive well today?
Well, I think in business, it doesn’t matter whether it’s broker-dealers or whether it’s steel- steel is probably a bad example- in most businesses, there comes a time in the maturity cycle for that sector in which something happens, and that is that the big get bigger and the small stay very focused in the world, and the middle-sized companies are the ones that get squeezed. And that’s the phase we’re in for broker-dealers today.
We were in that phase that money managers where in probably ten years ago, and that industry really consolidated. People say that the money management industry didn’t consolidate; I argue no, no, it consolidated. It created some mammoth giant players. The difference is it has a very vibrant small firm sector because it’s an easy business to get in to. And I’d argue broker-dealers are probably somewhat the same in that if you follow that logic that any industry is going to have the very large and then the very small, then the small broker-dealers can certainly do fine. And that might be defined as a broker-dealer with like five people in it, or a broker/dealer with 100 advisors in it, because there’s something about that relationship set or their physical location that makes it a unique offering for them, and that’s their distinction.
They won’t be able to distinguish themselves on technology or capabilities, because that will be too expensive. And so for people who say, “Hey, I want that relationship type of feel in that kind of setting,” or, “I’m with my buddies who I used to be an employee with somewhere, and that’s what’s most important to me,” then I’m sure that model will be fine. And particularly with technology and service companies, scale matters a lot. Therefore, scale allows you to do something we call the virtual circle.The virtual circle is the way we explained it to the private equity firms in ’05. For instance, if we create a technology like iDoc, which basically images all paper in your office as an advisor, then you kind of eliminate the paper. In every office, do you know what the most expensive space user is for them? It’s the paper file cabinets. And this is nerdy stuff, but this is the stuff we saw. Seriously, if you look at their footprint of their businesses, literally, the footprint of their physical space, and you look at their P&Ls, and if you look at dead space, which paper files are about as dead as they can go, it’s actually the biggest use of space in their office. It’s usually bigger than their conference rooms, it almost always equals to the size of an office that could be used for another investment professional or for a planner or whatever they want from there.
So we just simply set out to create a system that would allow them to eliminate that paper, make their life a lot easier because they can look at it online, and then you basically eliminate the need for the use of that space, which they can either take to their bottom line because they shrunk their space footprint, which is a real savings. Or B, they can put someone in that space who actually is productive and they can turn it into revenue. And that’s a simple example of making the investment through technology. The other thing that we do in the virtual circles is we say that by lowering prices, if you’re a believer in supply side economics, your volume goes up. And so the other explicit part of our virtual cycle is to give back to advisors lower prices. That allows them to be more competitive with their clients and with their prospective clients, and lo and behold, their business grows. And when their business grows, because we’ve made it more efficient through something like iDoc or through the lowering of prices, guess what happens to us? Our business grows, because we’re just reflecting of their success, and that new business grows and turns into profits, and therefore, that’s helping shareholders get paid . And then it all starts over again.
As employees, the fun we get to have is thinking about how we’re going to make that virtual circle happen. And really we’re excited by things like iDoc, and we’re excited by thinking about how pricing works and we’re excited by the growth of advisors and their success. So everybody gets a seat at the table there, whether you’re an employee, or a shareholder, or a client.
What certainly is not mechanized or technological is something that I get from you in large volumes right now, and that’s passion. How does passion get communicated through an organization?
I think first of all, you have to start with yourself. I think the first part is you have to ask yourself whether you have a passion about your clients and the business you’re in. And if you have that passion, then you’ve got to want to find a bunch of other passionate people that you can share it with. And that’s what struck me about LPL. I knew LPL as a client from my previous firm, and when you talked to people at LPL, they were very passionate about what they did, they were very passionate about their clients.
In fact, if you come here and you’re not passionate about those things, you tend to stand out, and you’re not very successful. We’re really very zealous leaders, and guard this passionate view of what we’re doing.
These changes that you mentioned are not the kinds that elicit protest from advisors, correct?
Last year when he did it, the production bonus changed. It went up to 98%. It got 17 rounds of applause. This year it only got 12, so they’re pretty happy.