Brooke’s Note: We have written a series of articles about LPL’s success with OSJs. Well, it turns out that part of that apparent success stemmed from bonuses that may have been unsustainable. LPL is doing something about it and it’ll be interesting whether the explosive success of this model can continue. LPL is hardly alone with the challenge of balancing revenue generation with bonuses. Look at the wirehouses. Look at some of the RIA custodians with their big upfront technology packages. And look at how much the roll-ups are paying to get RIAs or wirehouse teams into the fold. Until the dust settles on these signing bonuses, we won’t know exactly which models are winners.

LPL Financial has finished renegotiating deals with a bunch of its biggest affiliates in an effort to improve its own profitability. The changes will reduce the growth of, apparently, unsustainable bonuses to individuals in advisory firms.

The affiliates include a number of the big firms like Private Advisor Group, Washington Wealth Management and Independent Financial Partners that have proven to be a source of great revenue and asset growth. Known as offices of supervisory jurisdiction, these firms have essentially wedged themselves between the front-line advisor and LPL as broker-dealer.

From this niche position, they offer a level of compliance, local business knowledge and general business support that IBDs are ill-equipped to provide — but leverage LPL as the backbone of their businesses. The success of these firms has also been a real feather in the LPL cap because it has shown the San Diego and Boston-based IBD’s ability to handle sophisticated needs of progressive firms.

Helping them grow

With so much at stake for both the big broker-dealer and some of these biggest producers, talks between them stretched out months. The result is a new understanding about how LPL would support the business development and compliance needs of these super firms. The move will slow the “growth for the production bonus by about half,” said LPL Financial chairman and CEO Mark Casady who spoke Wednesday during the firm’s earnings conference call. He explained that his firm is on a mission to cut costs and, as part of that overall goal, the firm forged a deal with these giant firms to cut bonuses. See: LPL loses a mega-client — but not to a competitor.

Casady explained that LPL is working hard to help these firms grow.

“We really want to help them with their business planning and support,” he says. “They’re growing and they’ve been incredibly helpful. We feel good about being able to work with them.”

Still, Casady may also be concerned that LPL not give away the farm in creating a hospitable place for RIAs with an OSJ model to prosper.

“LPL is trying to unravel some of the unintended consequences that happened when they created the bonus structure,” says Scott Collins, a former LPL executive who is a partner, along with Scott Miller, of a La Jolla, Calif.-based recruiting firm, FirstPoint Partners, LLC. “Some of these large OSJs found the holes and exploited them.”

Blessing and a curse

Washington Wealth Management was the most recent firm to jump on the OSJ bandwagon with LPL. See: Seeing a clear path to $3 billion, Washington Wealth hitches its venture to LPL but quietly adds Schwab.

LPL’s old rules were mostly designed for single advisors, but over time a number of enterprising advisors created conglomerations of sub-reps. See: LPL Financial wins more breakaway brokers by sacrificing a revenue stream.

These massive hybrid RIAs became a blessing and a curse. LPL was happy for their rapidly growing revenues and asset gathering but the hefty bonuses the firm handed out to these offices of supervisory jurisdiction may have begun to erode profit margins.

John Hyland: We've had extensive discussions with LPL over the last few months.
John Hyland: We’ve had extensive discussions
with LPL over the last few
months.

A statement from LPL on Thursday added that the company is committed to helping advisors across the spectrum of size and business models to “profitably expand through individual revenue growth as well as the recruitment of advisors to their businesses.”

“As with all of the advisor businesses we support, we have always worked closely and collaboratively with our large enterprises across multiple areas, including business development and practice management,” the statement added.

Unintended consequences

Though existing OSJs may experience more modest changes to the bonuses they receive, LPL may also be hoping to prevent any additional giant firms with this kind of OSJ model from sprouting up in the future — or at least ones with sweetheart deals.

“For those considering building one of these super firms in the future, that party has ended,” Miller says. “LPL’s trying to draw a line in the sand and say this hasn’t worked out well because it’s affected their profit margins. They realize that if they didn’t make changes others will figure out this plan and exploit it.”

LPL declined to disclose terms of the deal but sources say that existing advisors will receive grandfathering of existing provisions. The changes will hit new advisors starting Jan. 1, 2013. Sources say new advisors with fewer assets who rely more on commission assets will see the most impact. The new bonus structure appears to be the same for all of the giant firms, but sources say the giant firms who recruit advisors with fewer assets may feel the biggest hit because these advisors will see a cut in their bonus.

Scott Miller: For those considering building one of these super firms in the future, that party has ended.
Scott Miller: For those considering building
one of these super firms in
the future, that party has ended.

A statement from LPL on Thursday added that the company is committed to helping advisors across the spectrum of size and business models to “profitably expand through individual revenue growth as well as the recruitment of advisors to their businesses.”

“As with all of the advisor businesses we support, we have always worked closely and collaboratively with our large enterprises across multiple areas, including business development and practice management,” the statement added.

Summation of fears

Advisor John Hyland, founder of Morristown, N.J.-based Private Advisor Group, is one of the advisors whose giant firm is having its bonuses curtailed but he says that he is satisfied with the outcome. His firm has more than $9 billion in assets. Of those assets about $3.5 billion are either in LPL’s RIA or the firm’s RIA. See: How LPL’s biggest branch office added $3.5 billion this year by beating LPL itself with a key service.

“We’ve had extensive discussions with LPL over the last few months and the primary focus is on the future and how we can continue to grow together,” Hyland says. “It was a very collaborative approach. We somewhat feared it wasn’t going to be, but we’re comfortable and pleased with the outcome.”

Hyland says he feels that the majority of advisors joining his firm in 2013 will see little or no impact to the changes.

Many of the advisors joining Private Advisor Group have $25 million to $150 million in assets and feature books of business that are largely built on fees as opposed to commissions. Sources have said that advisors with fewer assets and those who focus more on commission assets will face the biggest hit.

“It really does affect different firms in different ways,” Hyland says. “It’s not just putting us all in one bucket. Depending on a firm’s scale or business model these changes could make a pretty substantial difference to your business or have very little effect. Ultimately, PAG is still going to be positioned to remain the market leader in this space. It will have no impact to our pricing and will have no impact as it relates to our value proposition.”

John Hyland: It really does affect different firms in different ways.
John Hyland: It really does affect
different firms in different ways.

Hyland says that LPL will be offering more consulting services to his firm and other large enterprises to help them streamline their businesses and ultimately be more profitable. By the end of the year, PAG expects to have brought on a total of 150 new advisors this year. See: Eighteen months after the fight of his life, an advisor raises more money for a Leukemia cure.

Pretty happy, considering

William Hamm Jr., CEO of Tampa-based Independent Financial Partners, also feels the changes won’t have an adverse impact on his business. His firm has 478 advisors in the IFP network in more than 36 states. The firm has added 120 this year through Sept. 1. IFP is LPL’s largest branch office based solely on advisor count. The firm has $26.7 billion in assets under advisement as of March 31. Of that, the firm has about $3 billion in RIA assets.

Hamm says he’s excited about the new changes. “The changes on the financial side weren’t significant to us,” he says. “I’m pretty happy with what we’ve put together in terms of them helping us with recruiting and business development.”

Jennifer Tanck, president of IFP, also says she feels the decisions won’t have a huge impact on the firm’s profitability. See: Amping up recruiting efforts, giant LPL firm grew its revenue by 300% in 2011.

Jennifer Tanck: We still feel that we can be highly competitive in the market.
Jennifer Tanck: We still feel that
we can be highly competitive in
the market.

“We still feel that we can be highly competitive in the market as the producer group and independent RIA of choice for advisors looking to affiliate with LPL Financial through their hybrid model,” she added.

Hamm declined to delve into specifics of LPL’s efforts, but says he feels that LPL is committed to helping his firm grow.

“They are doing some things I’m excited about and are addressing some of the specific needs we have in terms of recruiting and compliance,” he adds.

Even though industry insiders hint that many of these LPL firms are competitive with one another, Hamm says there’s actually little competition among LPL firms.

“It’s such an expansive country we barely run into each other. There are times I’ve referred advisors to other LPL firms in the country where I thought it would be a better fit,” he adds. “I think it’ll be business as usual for us, but with some of the new programs that LPL is coming out with, I hope to accelerate the pace.”