LPL Financial headquarters in San Diego.

LPL Financial (LPLA) continues to decline comment on “rumors and speculation” regarding a sale of the firm, CFO Matt Audette said during a call with equity analysts earlier this week.

A possible suitor who stepped forward in mid-October – former registered rep Joseph Nodarse, head of Hudson, Riley Asset Counsel – told ThinkAdvisor that he and some of his business contacts have decided against a deal with the independent broker-dealer, citing regulatory and other issues.

However, the IBD may be in talks with potential private-equity buyers, according to a story posted Thursday by Dealreporter. (LPL became a publicly traded firm in 2010, five years after it sold a 60% stake to Hellman & Friedman of San Francisco and Texas Pacific Group of Fort Worth.)

Rather than looking for buyers, Audette says the IBD is focused on “creating long-term value for our shareholders and … won’t comment beyond that.”

LPL reported that its third-quarter net income rose 27% from last year to $52 million, or $0.58 per share, beating analysts’ estimates, late Wednesday. Sales, though, dipped 4% to about $1.02 billion, which were generally in line with what analysts expected.

The independent broker-dealer also said total brokerage and advisory assets grew 9% year over year and 3% sequentially to $502 billion. Net new advisory assets increased at an annualized rate of 8%, or $4.1 billion.

The independent broker-dealer remains upbeat about its strategy to keep commissions in retirement accounts and other moves it is making in response to the new DOL fiduciary rule. It has some $502 billion of client assets, $261 billion of which are retirement assets affected by the coming regulations.

“We believe we are leading the industry in innovating and adapting to the changing regulatory environment,” said Chairman and CEO Mark Casady in a statement. “Our efforts to be early in the market with solutions designed to help advisors meet a range of investor needs in the midst of regulatory changes are helping to create more opportunities for LPL and our advisors to grow.”

When asked directly on an earnings conference call on Thursday if higher-than-expected DOL expenses could result in changes to the advisor payout grid or shifts in charges for services, Casady replied: “While there is always that flexibility … we don’t really see the need to do that. And, in fact, what we’ve been trying to do is grow volume growth and asset gathering and also to change these policies related to things like [the] direct business that will be helpful … We think that’s the right strategy and feel very comfortable that that’s going to give us some lift that we are not experiencing today.”

(Earlier this year, the firm said it planned to end its mutual-fund direct business, which let LPL advisors hold brokerage mutual fund investments directly with sponsors, April 10, 2017; it also explained that its new fund-only accounts will not entail IRA custodial fees, trading (or ticket) charges, inactive account or confirm fees, and fees for “systematics.”)

(Related: LPL Details New Mutual Fund Only Accounts)

In the third quarter, commission revenues for the IBD were $432 million, down 10% from last year and 3% from the prior quarter. Advisory fees of $322 million fell 6% from a year ago and less than 1% from Q2’16.

Asset-based revenues, though, grew 12% from the prior year to $138 million; this includes sponsor and cash-sweep revenues. Transaction and fee revenues were $108 million, up 3% year over year and 6% sequentially.

More DOL Details

LPL executives believe DOL could act as a “catalyst” for banks, which may prefer to escape the regulatory burdens of owning a broker-dealer, and other shifts in the industry that should mean more business for the IBD.

“These are some of the examples of how the DOL Rule could create opportunities for us,” Casady said during a conference call. “While it is always difficult to predict the timing of recruiting, we like our current pipeline.”

In terms of lower commissions, which the new rule is expected to bring, the IBD’s CEO says it has “already felt the impact” of much of what is anticipated and adds that the firm sees the impact on gross profits as being “manageable” in the future.

“Most of our gross profit is recurring from advisory assets that are already managed to a fiduciary standard, and most of our brokerage commissions come from recurring trailing revenues that are grandfathered under the DOL rule,” he stated on Thursday.

Overall, the IBD’s business should continue to shift from brokerage to advisory accounts when “appropriate” for clients, and advisory accounts “are more profitable” to the firm.

Sales Commission Update

As for sales commissions, those tied to alternative investments sold by LPL-affiliated advisors are “already down more than 90% from three years ago,” Casady says

The IBD executive adds that sales commissions on brokerage variable annuities, for instance, have fallen about 40% in the past three years. In the most recent quarter, these commissions contributed some $25 million to annualized gross profit or less than 2% of a total annualized gross profit of $1.4 billion.

“We expect any further decline in variable annuity sales commissions would be manageable,” explained Casady.

The IBD is planning to move to standardized commission for brokerage mutual funds across all fund families. It does not expect the change to have a “meaningful impact” on its sales-commission rate, according to Casady.

And the firm expects its new mutual-fund-only IRA brokerage accounts to boost assets “and generate additional sponsor revenues,” he adds, while no-transaction-fee funds and other changes should bring in more assets to “the most profitable parts of our advisory platform.”

Overall, the CEO says, LPL’s fund world is “going to get more narrow,” shrinking from about 130 fund families in its brokerage business to “around 15.”

Assets should not be significantly affected, he notes, due to the large concentration of assets in and beyond the top 10 fund families. This narrowing should create “a better ecosystem for the investor, the end client for the advisor, for the money manager, and, of course, for LPL,” Casady explained.

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