Schwab, Fidelity, and Pershing have a new competitor, now that LPL Financial has taken what many consider to be the next logical step as the broker/dealer industry moves to the fee side of the business–becoming a custodian to non-affiliated RIAs as well as dually registered advisors already affiliated with LPL. “Industry leaders like Mark Tibergien have always been positive advocates of this hybrid model,” says Jonathan Henschen, president of Henschen & Associates, a recruiting firm in Marine on St. Croix, Minnesota. “We’ve seen more firms opening up to this level of flexibility and feel this will continue to expand.”
On May 5, LPL announced plans to roll out its new custodial venture in late 2008–an integrated custodial platform that will provide independent RIAs and hybrids with access to a range of investment products and services, service staff, and technology. “This is a big change for us and a big change for the industry,” notes LPL CEO Mark Casady. Philip Palaveev of Moss Adams agrees. “It’s a tremendous development for the industry,” he says. “It opens the floodgates with respect to finally getting the hybrid segment better acknowledged and better serviced by broker/dealers.”
“The beautiful part of what we’re providing is one integrated platform to provide the whole range of services an advisor needs to have a successful practice, regardless of what business model a person may have,” Casady explains. “It’s almost a holistic view of what can be done in the financial planning space, transcending independent B/D’s and the custodians that service the RIA channel.”
LPL Financial has appointed former Fidelity Institutional executive Gary Gallagher as executive VP and head of RIA Services. Based in Boston, Gallagher will report to Esther Stearns, president and COO. “My role is to work across the organization to build this RIA platform and address the nuances of the RIA marketplaces, specifically the hybrids, so that LPL can extend into this capability,” Gallagher notes.
While LPL would not disclose details on the type of outside RIA the firm hopes to attract to the platform, or how many LPL reps are transitioning to LPL’s new system, Gallagher and Casady do have a vision of what the new platform can do for advisors by providing, for example, consolidated reporting and billing as part of, says Gallagher, a “very efficient, scaleable, and flexible platform.”
Palaveev, who writes about this very topic (Cover story) of broker/dealers needing to change their business model because of the growth of the RIA model and the hybrid advisor, notes the impact that LPL’s new offering will have on other broker/dealers. “There’s a high number of hybrid RIAs out there, and about one fourth of them have disclosed on their ADV forms that they have a B/D affiliation as well. There’s also a very large population of advisors who have been thinking about becoming an RIA but have not because their B/D hasn’t allowed them,” he says. Although Cambridge Investment Research and other B/Ds have been servicing hybrids for quite sometime, Palaveev points out that they’re significantly smaller than LPL (see the annual list of the biggest independent broker/dealers on page 88). “So when LPL does something like this, it forces the entire industry to pay attention,” Palaveev explains. “Every single B/D has to explain to their advisors why they don’t allow hybrid RIAs and open custody.”
“Building relationships and exploring possibilities,” is how Mark Johannessen described his agenda as FPA president on a recent visit to the Investment Advisor offices in Hoboken, New Jersey. Accompanied by the association’s CEO, Marv Tuttle, Johannessen noted that he doesn’t expect much to happen on Capitol Hill until the next Congress is seated in January, but that in the interim he and association staffers have been attempting to build relationships with key Congressional aides, legislators, and representatives of other associations with common goals, such as AARP.
Johannessen cited the recent blueprint proposals from Treasury Secretary Paulson as an example of something that won’t see any real action for some time. “It may be the beginning of a framework for discussion, but whatever ultimately comes is going to be significantly different,” he predicted.
The other item that’s big for the FPA and was addressed by both executives is the establishment of a “standard of care” for financial professionals. There’s been a significant amount of discussion about the issue on www.fpanet.org, and on a recent conference call, 395 members dialed in to take part.
“It may sound idealistic, but if you could establish a standard of care that all of our members would be willing to live with, whether they were CFP certificants or somebody who espouses to be a financial planner and says ‘I will treat the customers under these five standards,’” Johannessen enthused. “I could ultimately see a day, if we do this right, where all financial services professionals might have to sign off on that standard of care. Wouldn’t it be cool if we could create that?”
Among the steps that FPA has taken toward establishing that goal is opening up its membership to more than just financial planners, although planner would always be the largest group. “We’ve been looking at the idea of including associated professionals, whether they’re estate attorneys, tax specialists, or even business coaches, which is a group we’ve seen become a lot more important to planners,” explained Tuttle. “We’re trying to represent within FPA the team that the financial planner might lead.”
Tuttle also talked about FPA’s outreach to broker/dealers and other large firms about bringing a culture of financial planning to their organizations. “What we’re shooting for is to meet demand with supply and I don’t think the independent market can totally deliver on that,” he said. “We need to have major firms involved and we need new approaches to deliver financial planning.”