Wall Street reacted well to the hype-free message about germinating recruits and serious cost-cutting plans
Brooke’s Note: When Robert Moore literally stood before investors in New York and virtually before listeners-in on Thursday, he had the unenviable task of explaining how his company is moving forward despite the fiscal cliff, the expensive reality of servicing 15,000 brokers and RIAs and the fact that new recruits are not exactly accretive to earnings right out of the onboarding box. In other words, his message was hold your horses and — by the way — we may have some big details to fill in come February. If there’s anyone who knows how to deliver such a message of temperance well, it’s a former CFO — and so Moore was equal to the task.
Robert Moore, LPL Financial’s president and chief operating officer, walked a thin tightrope last week, telling investors how his company intends to cut costs while at the same time positioning the company to operate more efficiently.
Moore speaking to investors at Keefe Bruyette & Woods Inc.'s ninth annual Securities Brokerage and Market Structure Conference, shared his firm’s strategies for dealing with the fiscal cliff and lackluster revenue because of continued low investor activity.
The Moore bump
Moore was cautious in his remarks Thursday morning at the Hilton in New York, but Wall Street still reacted positively. The company’s stock price jumped almost 4% — from about $27 a share at Wednesday’s close to $28 at the end of trading on Friday. That’s still down significantly from the stock’s 52-week high of $38.94. The 52-week low price is $23.17. See: LPL Financial wins more breakaway brokers by sacrificing a revenue stream.
When the Boston- and San Diego-based independent broker-dealer announced that third-quarter earnings dropped to $34.3 million, from $36.4 million in the year-earlier period, company officials said they had their sights set on trimming costs. See: LPL loses a mega-client — but not to a competitor.
The firm is clearly appealing to investors, giving regular updates about its cost-cutting strategies. LPL executives are also speaking at the Goldman Sachs Financial Services TK on Tuesday. Company officials have been open about programs such as outsourcing and also negotiating deals with its largest affiliate firms to lower expenses. See: LPL reaches hard-won agreement to rein in bonuses to big advisors that had proved to be overly generous.
h2. Top 5 takeaways from Moore’s talk
1 Expensive advisors. Recruiting needs to be understood as a double-edged sword that jacks up expenses short-term while laying the groundwork for greater revenue flows longer-term. Moore explained that his firm is on track to get 500 new advisors this year — an impressive feat. But he adds that bringing in new advisors is expensive in the short term because expenses associated with it are front-end loaded. See: Why Mindy Diamond is morphing her firm away from pure wirehouse recruiting.
“When you have a heightened level of recruiting, it has a drag on expenses in the short term,” he says. “It takes an advisor a year or two to ramp from zero to their prior production levels.”
Moore says his firm takes on added costs by providing transition assistance to new advisors. The firm often gives them the assistance they need to find office space, secure new equipment and even for small items like stationery.
“We believe that investors should endorse that kind of use of capital and understand and accept the consequences. These are long-term decisions,” he added.
*2. No big sell-offs — as yet. Investors aren’t yet, as some anticipated, making revenue-generating moves in response to concerns about the fiscal cliff. The speculation that many investors may sell significant chunks of their portfolio hasn’t materialized yet. Instead, most investors are reacting with paralysis – which means fewer transactions. See: Fiscal Cliff is ready for his close-up — whether we are or not.
Moore says that trading volumes this quarter still remain down because investors are cautious. He’s not surprised that investors aren’t making many moves.
“I think uncertainty is a huge factor,” he says. “People have lots to be worried about. That’s one of the reasons about why having an advisor relationship is so important. It’s the fact that no one knows what the outcome is going to be. The outcome is pretty murky. *Our advisors aren’t the type to engineer transactions. That’s why you’re not seeing an inordinate amount of tax volume. All of the people who are saying, 'I’m selling everything and starting over’ there’s been talk of that, but no actual evidence of it happening.”
3. Outsourcing to cut costs. Moore wants LPL to reduce its expenses while overhauling its operating model, but says that it isn’t prudent to simply slash costs. Company leaders plan to make broad changes to the operating model, which includes service. See: LPL loses a mega-client — but not to a competitor.
“Where we are distinctive is we want to really address things in a more structured and thoughtful way,” he says.
Moore didn’t offer specifics, but acknowledged that his company has been outsourcing some services. He also said that LPL wants to overhaul its servicing to make it both better and cheaper to provide. He said that by February his company will be prepared to outline specific ways it can reduce expenses and change its operations.
4. Pro SRO Moore maintained the company’s pro-FINRA-run SRO stance. He also said his firm is evaluating the fiduciary issues very closely. “We watch other aspects of the fiduciary standard as it relates to what the [Department of Labor] has been doing and wanting to do,” he said.
5. No Sandy in the gears. Moore says that Hurricane Sandy should not have an impact on his company’s fourth-quarter revenues. He told investors that about 10% of the company’s revenue stream hails from the Northeast, but that while there were disruptions in that area, it shouldn’t impact the company’s earnings. See: What we know about Sandy at RIABiz.