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LPL Financial said Tuesday that it bought National Planning Holdings’ four broker-dealers — National Planning Corp., Invest Financial, Investment Centers of America and SII Investments — for $325 million.

The independent broker-dealer aims to pick up about 3,200 advisors with $120 billion of client assets—putting the combined group at 17,500 and $660 billion in assets. LPL says it will pay up to $123 million more in the first half of 2018 if 72% of NPH advisors’ production (fees & commissions revenue) joins the company.

It’s worth noting, that LPL reserves the right to “not transfer a small subset of representatives who do not meet certain affiliation criteria,” according to a memo sent to NPH advisors and obtained by ThinkAdvisor.

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Plus, LPL says the NPC and ICA reps will be moved in early December, while the Invest and SII advisors will be transferred in mid-February. Letters to clients will likely go out in October for the first group and January for the second.

NPH is an affiliate of Jackson National Life Insurance Company. (The BDs it has sold will meet for their national conference in Nashville from Aug. 20 to 23.)

How likely is it that such a bar, of 72% of production, will be reached?

“I think the bank channel [BDs] will have higher retention than the independent advisor channel — so SII and NPC will have more defections than Invest or Investment Centers of America,” said Jon Henschen of the recruiting firm Henschen & Associates, in an interview.

“In the late ‘90s, I was the Midwest recruiter for NPC, and the tagline at that time was ‘We have small-company culture with large-company financial backing.’ For NPC and SII advisors, the large corporate culture of LPL will be a difficult pill to swallow,” Henschen explained.

A Good Move? 

Equity analyst Steven Chubak of Nomura Instinet had expected a price of $750 million, more than twice what LPL paid on Tuesday, has been incorporating an advisor attrition rate of 15% into his financial models—which represents a potential movement of at least 2,700 NPH advisors.

Chubak is also bullish on what the addition of these reps could mean for LPL’s bottom line: a roughly 20% addition to its earnings in 2018.

“In our view, the acquisition of NPH could generate sufficiently compelling risk-adjusted returns for LPL given:

(1) significant revenue synergies as NPH is not self-clearing (i.e., LPL would better monetize client cash/generate higher attachment fees);

(2) expense synergies as LPL’s fixed cost base supports meaningful operating leverage; and

(3) excess liquidity/leverage capacity should enable LPL to complete a deal without issuing equity.

Self-clearing may be a plus for LPL as a corporation, but perhaps not for all advisors, says a veteran industry consultant wishing to remain anonymous.

“The transition process could be very challenging and difficult,” he said in an interview. 

(Three of the NPH BDs use Pershing for clearing and custodial service, while one relies on Fidelity’s National Financial.)

Having access to legacy client data is critical for advisors in terms of assessing asset levels, performance, holdings and other information, the M&A consultant says. “I have been hearing that there is not a close relationship between Pershing and LPL,” he explained.

Pershing, though, insists that whether the NPH advisors decide to move to LPL, go to one of the 200-plus BDs that use Albridge or go independent with an RIA custodian, it expects they “will be able to take their historical client data with them,” said Marc Butler, COO of BNY Mellon’s Albridge. 

“We’re prepared to work with the nearly 3,200 financial advisors that are affiliated with one of the NPH broker-dealers to ensure a smooth transition,” Butler explained, in a statement. 

LPL broker away from Pershing and began handling its own clearing and custodial tasks in 2000. It counts AXA Advisors as one of its clients for these services.

When the IBD acquired Mutual Service, Associated Securities Corp., and Waterstone Financial Group in 2007 for Pacific Life, the 1,700 reps involved in the deal expected to stay on the Pershing platform; LPL shuttered that option in 2009.

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In general, transition issues are never simple. “And the sheer number [of NPH] reps, at around 3,000 … I expect lots of frustrated advisors in the months and years ahead after the transition. Think about all the data involved.”

A group of 10 advisors with $340 million in client assets may have been anticipating such issues when it chose recently to leave NPC and affiliate with Securities America. According to Compass Financial Resources President Russ Lane, “From our standpoint in all this financial services chaos, Securities America is a steady anchor we can attach our line to, so we can continue to grow and work with clients in a stable environment.”

Departure Level 

In general, the M&A consultant says, the level of departing reps could be 20%.

“I heard from a broker-dealer recruiter talking with some NPH advisors [a few days ago]. One told him, ‘I am leaving regardless of whether the [LPL purchase] news is true or not.’ That tells me that some breakage is starting to happen,” he explained.

As for LPL, it was upbeat but practical in its memo to NPH advisors: “We expect most of the representatives to transfer to LPL through the mass transfer process. However, representatives may specifically opt out of the mass transfer, and instead transfer to another broker-dealer,” it said.

But if past deals are any indication, the latest purchase could prove tough for LPL. It’s recent acquisition of Financial Telelysis had an overall retention level of “only around 50%,” according to Henschen.

Two years after the IBD acquired three BDs from PacLife (and the possibility of working with Pershing had ended), “MSC had lost 30-35% of their advisors, Waterstone lost 50% and Associated lost 60-70%,” Henschen explained.

“From what LPL experienced with prior acquisitions, I don’t blame them for making a 72% threshold [for an extra payment to NPH of up to $132 million], but I have my doubts those retention numbers will materialize at NPC or SII while the bank channels may reach those goals,” he said.

— Related on ThinkAdvisor:

LPL Shares Q2 Recruiting Update, Sees Less DOL-Related Uncertainty

LPL Launching Robo-Advisor This Month

10 Best & Worst Broker-Dealers: Q2 Earnings, 2017