When it comes to a possible bid by Charles Schwab for LPL Financial, industry consultants say they aren’t buying it.
“I’d say the odds are a million to one” against it, said Tim Welsh, president of the Nexus Strategy, in an interview with ThinkAdvisor. (Welsh worked for Schwab from about mid-1999 to late-2005.)
A report on StreetInsider.com on Thursday named Schwab as a potential acquirer of the independent broker-dealer. This news came about a month after Reuters said LPL was exploring its strategic options. The IBD had been contacted about a possible bid from some private-equity investors, who later decided not to pursue the deal.
“Culturally, all Schwab stands for is anti-broker-dealer, with no commission-based products and compensation … no sales of non-traded REITS …,” explained Welsh. In other words, LPL’s operations “are really the opposite of those at Schwab.”
Schwab’s ad campaigns – in which clients are urged to ask their advisors questions about charges and costs – “challenge the broker-dealer model,” said the consultant, whose office is in the San Francisco Bay Area, where Schwab is based.
(Related: Ron Carson Jumping to Cetera From LPL)
Thus, it doesn’t make sense that a firm that spent “the last 40 years on this [type of] branding would just throw it away and buy a … a broker-dealer with more of a … sales-focused culture and with all of the DOL baggage that comes with,” said Welsh, referring to the new fiduciary standard set to go into effect in April 2017.
What about using LPL as a means of getting into the hybrid-RIA business?
“Schwab already partners with some independent broker-dealers … through informal agreements,” he stated. “And they could start their own – which they would probably want to do anyway. They built their own businesses with their own bank and robo-advisor.”
Chip Roame, head of Tiburon Strategic Advisors, generally agrees that the acquisition is a long shot.
“Net-net I would be surprised if this happened, but yes it is possible,” explained the consultant, who worked for Schwab from 1995 to 1998 and is also based in the Bay Area.
The reasons that there’s “no way” for the deal to happen, Roame says, include Schwab’s other priorities.
The firm plans to use capital “for bank-sweep migration and bolt on acquisitions,” he points out, “and this [deal with LPL] would be a business shift away from its public stance to date.”
As Welsh argues, “Schwab has staked its ground on the fee-only fiduciary advisor market,” according to Roame.
Plus, Schwab’s technology is not set up to handle traditional commissions, and the firm does not like the negative headlines that can come from regulatory issues commission-based products and service can bring.
What might possibly push Schwab into a deal with LPL?
“Schwab must be well aware of the flow of independent advisors into the hybrid market,” where it lacks a robust offering, Roame points out.
The San Francisco-based firm also could be looking for new ways “to build more scale,” he says, after rival discount-brokers said they were gobbling up competitors: TD Ameritrade (AMTD) announced a few weeks ago that it was buying Scottrade Financial Services for $4 billion, and E*Trade (ETFC) said in July that it would acquire OptionsHouse for $725 million.
Could politics be playing a role?
“Schwab may have been banking on a Clinton presidency and the application of the fiduciary standard making LPL advisors into fiduciary advisors,” Roame explained.
But with Trump’s win, interest in going after LPL could “fade,” he adds, since the new president and his supporters are not fans of the new fiduciary standard.
Schwab has done big deals in the past, Welsh point out. It bought U.S. trust for $2.9 billion in 2000, selling it seven years later to Bank of America (BAC) for $3.3 billion.
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