Commonwealth racks up a $100 million LPL team by using its broker-dealer's greater size against it

The Waltham, Mass.--based IBD believes this is LPL's soft underbelly because small-and -familial is why many advisors joined the old Linsco/Private Ledger from wirehouses in the first place

Wednesday 8.8.12 by Lisa Shidler

When advisor Bryan Chew joined LPL 18 years ago, he loved the company’s intimate feel. He knew all the top management. But as LPL grew into the nation’s largest independent broker-dealer with an army of more than 12,000 advisors, Chew felt he was just a number even though he managed more than $100 million in assets.

Chew, who is a professor in the personal financial planning program at the University of California, Davis cooperative extension, began looking at alternatives. He spoke with four former LPL advisors. all of whom had left for Commonwealth Financial Network seeking the firm’s cozier atmosphere. Commonwealth has 1,400 advisors. All told him that it was the best decision they had ever made, not least because Commonwealth reminded them of LPL in its early days. See: Why an 18-year LPL rep moved most of his firm’s $250 million of assets to Schwab.

As a result, Chew and his team — Paragon Financial Services — recently decamped for Commonwealth.

“I just felt like I’d been at LPL for 18 years and I didn’t feel like there was anyone I’ve built a close relationship with and could turn to. When I started at LPL 18 years ago, we were small and I got to see the decision makers on a regular basis. Today, they have no idea who I am, and I was in the top 8% of producers. Here at Commonwealth, I feel like they treat you like family as opposed to a number. I felt there wasn’t anyone I could turn to at LPL.”

LPL declined to comment for this article.

Chew, 51, an attorney and certified financial planner, has more than 23 years of industry experience working with high-net-worth individuals throughout California. He runs Sacramento-based Paragon with four other planners and five support staff members.

Alternatives hitch

Chew feels confident that he and his team can bring over 94% to 98% of client assets in the move. His average investor has about $500,000 in assets invested with him, and about 65% to 75% of his clients are retired. He says that many of his clients were government workers in Sacramento and have healthy pensions — and therefore don’t need the assets they’ve invested with him for monthly expenses.

Currently, about 40% of Chew’s clients are fee-based, with 60% on commission. He says he has been moving to more a more fee-based model over time, but the hitch has been alternatives, which are commission products.

At first, Paragon used fee-based alternatives but wasn’t happy with their performance and switched to commission-based alternatives.

“We’re leaning toward fees but, because of the environment, we feel alternatives provide us more stability.”

Culture can be a big snag

John Rooney, managing principal of Commonwealth, says that he has talked with many LPL advisors who feel that the culture has changed over time as LPL has experienced significant growth.

“These legacy guys are noticing that LPL has changed. I still have a high degree of respect for the company, but you’d be hard pressed to find a long-standing LPL rep that wouldn’t agree that the company has changed a lot over time.” See: J.D. Power and Associates hints strongly at wirehouse deficiencies as it puts Commonwealth Financial and Raymond James on a pedestal.

John Rooney: These legacy guys are noticing that LPL has changed.
John Rooney: These legacy guys are
noticing that LPL has changed.

Rooney says he feels that someone like Chew fits perfectly into his firm’s more intimate culture.

“We’re hearing from other LPL advisors that they want to get the relationship back with a smaller broker-dealer,” Rooney says. “It’s the classic example of someone who fits well wit the Commonwealth mode.”

Growing pains

Analysts point out that LPL isn’t alone in this challenge. and many large firms can offer scale that’s attractive for advisors but trying to get a giant firm to have a more intimate culture can be next to impossible.

“When you’re that big, it’s a net game,” says Ryan Shanks, Finetooth Consulting LLC founder and CEO. “you lose some advisors and gain some, and as long as you’re gaining more than you’re losing it is considered a successful business model. You see this a lot.” See: Three more major firms decamp from troubled Securities America to Commonwealth.

Alois Pirker: If you have chosen a small firm on purpose and you end up at a large firm, you feel like you're back at square one.
Alois Pirker: If you have chosen
a small firm on purpose and
you end up at a large
firm, you feel like you’re back
at square one.

The Company added 671 net new advisors during the twelve months ending June 30, 2012, excluding the attrition of 146 advisors from the UVEST conversion. During the second quarter of 2012, 223 net new advisors joined LPL Financial.

Alois Pirker, research director at Aite Group Inc., says that LPL has grown more rapidly than many other firms but still contains a group of advisors who fondly recall the smaller firm they joined in the 1990s.

“Very few firms have gone through such a transition,” Pirker says. “This firm has gone through such significant growth, and it can change your identity to some extent. You become very wirehouse-like and if you have chosen a small firm on purpose and you end up at a large firm, you feel like you’re back at square one.”

Size matters

But Pirker points out that a firm like LPL gains many advantages from its large size. For instance, he adds, advisors have access to better resources as well as pricing advantages and more capabilities. See: Amping up recruiting efforts, giant LPL firm grew its revenue by 300% in 2011.

Even though LPL has so many advisors, it makes the business seem more intimate by concentrating on the amount of small advisory offices rather than the sheer number of advisors, says Scott Smith, an analyst with Boston-based Cerulli Associates Inc.

“I think the way they address it is, they think of them as 4,000 small businesses, and it makes it more manageable,” Smith says.

Ryan Shanks: As long as you're gaining more than you're losing it is considered a successful business model.
Ryan Shanks: As long as you’re
gaining more than you’re losing it
is considered a successful business model.

Smith also points out that many advisors simply value culture over scale and despite LPL’s best efforts, they’ll go to a smaller firm. “There’s always part of this industry where people are looking for a more advisor-centric firm,” he says. “They’ll seek it out.”

To the rescue

In addition to the cultural issues, Chew feels Commonwealth takes a more hands-on-approach in helping its advisors with technology.

If Chew had a technology issue at LPL, he had to hire an outside technology consultant. A few years ago, LPL told him in an annual audit that he needed to spend $2,000 to upgrade his technology. Once he invested that money, he felt his firm was up to snuff and was disappointed to learn that at his most recent LPL audit, the firm wanted him to invest more money to bolster his encryption features.

Chew confesses he’s not a technology expert and felt like the analysts at LPL assumed he knew more about technology than he actually did.

“When they were talking about encryption, I didn’t know what they were saying,” he says. “They’re assuming I know all of this technology. But I grew up in an era before e-mail. “We always had to hire a computer person to come in.”

Chew says he feels that Commonwealth offers a more nurturing approach in the technology arena. For instance, Commonwealth performs a task dubbed, “Rescue Me,” in which the technician will take over the computer and help the advisor fix a problem.

In addition, Chew also likes Commonwealth’s technology offerings. He feels the firm produces better client statements and better performance reporting.

“The statements are easier for clients to read, and that’s a big thing and the performance reporting is easier to read,” he says.

Contrarian view

Rooney, not surprisingly, agrees that Commonwealth offers more technology solutions for advisors.

“We’ve taken a contrary view than others,” Rooney says. “We want to host all of the applications and we’ll take a best of breed and we’ll modify them and integrate all of them.”

He also thinks the support his firm gives advisors is a big benefit to them.

“We want to support our advisors. The independent advisors all have different infrastructure, and it can be incredibly challenging to do that,” Rooney says. “But we can tell advisors that if they use a good Internet browser and have a relatively good machine, you’re all set. All of the updates take place at once. We’re able to do testing and security from our location.

Bryan Chew | John Rooney | Alois Pirker | Ryan Shanks

LPL | Commonwealth | Paragon | Aite Group | Finetooth Consulting