Brooke’s Note: LPL now has about 20 stunning clients that add hundreds of advisors and billions in assets on a continual basis. These OSJs are, in effect, mini-LPLs and that makes LPL a sort of broker-dealer to broker-dealers. What could possibly go wrong? Well, needless to say, it creates an enormous compliance challenge — making sure all those reps and sub-reps stay within increasingly complex and rigid guidelines. So far, mostly so good, but this incident shows how seriously even a minor coloring outside the lines needs to be — and seemingly does — get taken.

After the SEC came knocking on the doors of one of LPL’s largest advisory firms it set off quite a flurry of events.

Tampa, Fla.-based Independent Financial Partners has undergone an overhaul in the last few months after asking LPL to take over its compliance and has temporarily halted its recruitment of new advisors, according to a statement from LPL. In addition, the OSJ fired its former compliance officer and has hired a replacement as well as hiring a new general counsel, according to sources who asked not to be identified. Chief executive William Hamm Jr. has remained in charge and has been making these changes with a lot of hand-holding from LPL executives.

During a routine SEC examination of IFP last fall, one person affiliated with the firm didn’t complete documents in the manner the agency wanted, and now the firm is taking steps to ensure that it stays compliant going forward, according to multiple sources.

When the SEC completes its annual examination, it’s common for examiners to ask RIAs for more information or insight, and some give-and-take often occurs. Sometimes, RIAs will even make changes in their operations at the SEC’s request without receiving a violation from the SEC. This communication did not result in an enforcement action. The SEC declined to comment for this article.

But despite this wrinkle, LPL is standing by these types of giant offices of supervisory jurisdiction — and IFP in particular. How LPL reacts is being watched closely by the 20 or so other super-reps known as Offices of Supervisory Jurisdiction that have been growing like weeds during the past few years. They are able to create a cozier atmosphere than LPL and even provide a better payout.

LPL issued a statement to RIABIz in which it reiterated its full commitment to these firms and also said it provides them with a full spectrum of resources. LPL said that it wants to assist these large enterprises and RIAs with strategic planning and execution of business goals to ensure their long-term strength in the marketplace.

“We view our affiliated large enterprises and RIA businesses as critical partners to our company, and we seek to provide them with the services they need to support their growth, profitability and advisor recruiting,” the LPL statement said. “Additionally, we continue to actively attract sophisticated and successful large enterprises and RIA businesses to the LPL Financial platform, as we believe these firms are a strong fit with our company and its strategy.”

“IFP is a strong example of our commitment to our large enterprises and RIA businesses,” the company added in its statement. “Working in close partnership with top senior executives at LPL Financial, IFP has been implementing a range of enhancements to its policies, procedures and operations that we believe will significantly drive its long-term profitable growth and expansion.”

LPL has about 20 of these coveted enterprises — which each have more than 15 advisors and at least $5 million in annual revenues. Another popular firm is Private Advisor Group LLC. Like IFP, many of these firms operate their own RIAs as well. See: How LPL’s biggest branch office added $3.5 billion this year by beating LPL itself with a key service.

“LPL Is doing a lot of work to beef up our consulting business to support these enterprise firms,” says Sal Zambito, senior vice president at LPL. “That’s part of the reason we’re working so closely with Bill and other large enterprises. We want to supplement them and give them the resources they need going forward.”

Too much growth?

IFP is among the top 5% of LPL offices with about $100 million in annual revenue, and RIABiz wrote about its dramatic growth which took off when LPL bought National Retirement Partners Corp. in 2010. See: Amping up recruiting efforts, giant LPL firm grew its revenue by 300% in 2011. At that time, IFP increased its retirement services and ramped up its recruiting efforts, signing on 100 advisors from NRP. In 2011, IFP brought on 140 new advisors — thanks to its own recruiting efforts and LPL’s assistance.

It’s possible that the problem with the SEC arose because the firm’s compliance department couldn’t keep up with its rapid growth, and at least one person at IFP provided information that the SEC questioned, the anonymous sources said. See: LPL reaches hard-won agreement to rein in bonuses to big advisors that had proved to be overly generous.

Now, that IFP is no longer handling the compliance features, the firm will have to pay LPL to handle these duties. It is unclear whether advisors and in effect their clients will have steeper fees because LPL is now overseeing the compliance rather than IFP. Though, it appears the compliance offering from LPL is more comprehensive than before.

In its statement, LPL stated that fees determined are set up at the discretion of the leaders of the large enterprise.

Firms such as IFP have touted their compliance assistance to advisors. Even though it has handed over those duties to LPL, the firm will still provide advisory assistance to its advisors and will likely bolster its retirement efforts. Many of IFP’s advisors specialize in retirement plans.

Sal Zambito: LPL Is doing a
lot of work to beef up
our consulting business to support these
enterprise firms.

IFP’s Hamm Jr. declined to comment for this story.

Enterprises important

When RIAbiz spoke to IFP executives a year ago the firm had more than 400 advisors in its network and was on a roll. It is hard to know the firm’s exact asset size, since it has both commission and RIA assets. However, the firm’s most recent ADV form shows that it had about $2.8 billion RIA assets in the fall of 2012. A year ago the firm was advising close to $10 billion — counting commission and RIA assets.

In its statement, LPL said that IFP has chosen to temporarily close its recruiting to bolster its operational enhancements. It is possible the firm could began ramping up its recruiting efforts by the end of the month. “LPL Financial expects that IFP will commence its normal advisor recruiting efforts once more as it completes its operational enhancements, and we look forward to actively supporting their efforts in this regard,” the LPL statement said.

In addition, LPL also explained that IFP is using the Home Office Supervision program, a long-standing compliance supervision service the IBD offers to its advisory practices and large enterprises.

Confidence

Jim O’Shaughnessy: We still have the
ability to add new associates, but
use LPL in the interim for
supervision.

While LPL remains confident in the firm, it appears IFP advisors are also confident in their firm’s ability to rebound. Even though IFP shut down its recruiting arm for the time being, existing advisors for the most-part have stayed put.

Jim O’Shaughnessy, principal of Sheridan Road Financial LLC, an LPL firm that specializes in retirement plans, says he can’t offer that many specifics but there hasn’t been much impact on his firm. His firm joined IFP in 2010 when his previous firm, NRP was purchased by LPL. He also says the costs his firm is paying is quite similar to the costs it was paying before.

“There isn’t much I can say about IFP at the moment. IFP provides back-room functionality and supervisory services only for us. We feel the changes IFP is making with LPL’s assistance will only strengthen those core functions.”

O’Shaughnessy says the issues at IFP haven’t hurt his firm from a growth standpoint. Even though IFP has halted its recruiting efforts, O’Shaughnesy says his firm can still add staff and expand.

“We still have the ability to add new associates, but use LPL in the interim for supervision. We feel we have built a great foundation that is centered on delivering institutional retirement solutions to individuals and employer-sponsored retirement plans with a very high-touch and personal service model.” See: RIAs join move to right a 401(k) wrong: Lopsided plan expenses — a non-DOL issue.

“It hasn’t impacted our growth, because our team has worked with LPL and IFP to find solutions that are sensible and manageable. Our approach has been to take a leadership role within both organizations and be proactive as much as possible. We have found both organizations listen well to our needs and have been great partners in our growth,” O’Shaughnessy says. “The changes haven’t impacted us too much, outside of having to spend the time to get learn and know who our new contacts are.”

He still feels it is important to stay with IFP because it allows his firm to custody assets with companies such as Charles Schwab. “One of the main reasons we went to a hybrid model solution with IFP was to have the flexibility to use an outside custodian (Schwab) for our wealth management practice in addition to the solutions provided by LPL,” he added.