What's behind LPL's decision to slash its ticket charges for advisors

In an effort to sweeten the pot for existing advisors, LPL Financial announced today it will lower its transaction fees on equities and ETFs by 40% from $15 to $9 on Jan. 1.

The announcement that the firm was slashing fees was met by applause from the more than 5,000 attendees of LPL Financial's annual conference focus11 held in Chicago’s McCormick Place this week.

The company had received numerous requests from advisors to lower these fees, says Bill Dwyer, president of national sales and marketing.

Customer always right

“We decided you were right,” he told the 2,600 advisors who attended the conference at a general session meeting Monday morning.

On Monday, the company also announced that it will pay a one-year fee for all of its advisors to join the Financial Services Institute. This will grow the organization from 16,000 advisors to more than 28,000 advisors with the addition of LPL’s 12,600 advisors. See: Rick Ketchum reveals plan for advisor oversight at FSI conference.

In addition to Dwyer, chief executive Mark Casady and former Walt Disney CEO Mike Eisner headlined at the general session. Later this week, former Secretary of State Condoleezza Rice is slated to speak at the conference which features more than 200 sessions. See: LPL opens focus11 to reporters for first time – with provisos.

Pressure on fees

Industry leaders say LPL lowered fees because of competition from online brokerages. Fidelity, Schwab and TD Ameritrade all have lists of ETFs that can be acquired for free. See: 9 things RIAs need to know about Fidelity’s pricing moves on equities and ETFs.

The company is also slashing the fees on its Strategic Asset Management, or SAM program, LPL’s longtime fee-based platform. See: LPL has a new high-margin, high accolade advisory platform but SAM’s sticking around.

“The advisors will be thrilled by this,” says John Furey, principal of Advisor Growth Strategies. “It also makes LPL more competitive in recruiting. This is a move to make sure advisors stay with LPL and also helps them convert from commission to fees which is good for everyone.”

Indeed, one California LPL advisor explained, on the condition of anonymity, that he has about $30 million of assets in 150 accounts in the SAM program and about seven ETFs per account for a total of 1,050 holdings. He turns over about 20% of his holdings annually or about 210 buys and 210 sells. At $15 per trade, this costs him $6,300 per year. All things being equal, he will save $2,520 next year — an amount that is meaningful to him.

“This was pretty big,” he says.

Joseph Kuo, a spokesperson for the company, says that the savings to advisors is substantial foregone income or his company.

“Based on today’s trading volume in equities and ETFs, we are putting the equivalent of $6.5 million back into our advisors’ businesses. All advisors are eligible to benefit from this.”

The LPL advisor adds that the change will make little difference to the end client because he was already absorbing ticket charges for them. He also says that TD Ameritrade is the name that comes up in conversation at his LPL study group on the topic of ETF commissions. See: Relentless TD Ameritrade antes up a killer ETF platform.

Other IBDs previously slashed their commission rates. Commonwealth Financial Network cut its ticket charges from $16 to $7.95 in March. See: Commonwealth raises payouts for big advisors and slashes trading commissions.

LPL’s decision to slash fees was a wise one because of the steep competition its advisors face from online brokerages, says Sophie Schmitt, senior analyst with Boston’s Aite Group. In fact, in the last two years, online brokerages gained 3% market share – the most of any advisory group. See: RIAs and online brokers are winning the market-share game.

A bit of a gamble

Lowering the fees for LPL’s 12,600 advisors puts these advisors on a more level playing field against the online brokerage firms that have similarly low costs. LPL advisors often grab mass-affluent clients and online brokerages also target the same types of clients, Schmitt says. (Editor’s note: Most RIAs also pay low fees, too, because their assets are held at discount brokers where they get charged the same or lower rates.)

“They want to help advisors be more competitive out there,” she says. “They’re hoping this reduction will generate more clients and more assets and also obtain financial advisors and attract more clients.”

Schmitt adds that she believes LPL is making the decision because of its healthy profits but admits the company may be “gambling a bit.”

Sophie Schmitt: It’s possible the company
may need to increase other costs
to advisors to offset this reduction.

She also says it’s possible the company may need to increase other costs to advisors to offset this reduction.

Dwyer acknowledged that there are times the company has had to raise costs. Speaking to the media later, he discussed margin pressures impacting the entire industry but did not say that LPL intends to raise any other fees now.

More lobbying muscle

The announcement that all of LPL’s 12,600 advisors will gain a one year annual membership to The Financial Services Institute indicates an effort to bulk up its lobbying group. At the end of the first year, LPL advisors will get a discount and pay $99 a year for membership.

FSI is an industry lobbying group for financial industry firms and right now is battling a proposal by the Department of Labor which defines “fiduciary” and limits the type of advisors who can work with participants in their 401(k) plans. FSI opposes the current rule saying it would limit address to advice. See: Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’.

Keith Kelly, executive vice president and chief operating officer, says having his organization nearly double in size will give him more attention in Washington.

“It makes us more powerful,” he says. “The critical mass helps our voice in Washington.”

LPL urged its advisors to contact their representatives in Congress fighting the proposal. Kelly argues that participants would lose out on getting valuable advice from brokers. He says if the DOL’s proposal are adopted, many broker-dealers and advisors would be forced to withdraw from the market. See: IRA assets could be ripped from the grasp of brokers if DOL has its way.

Casady also urged advisors to e-mail their legislators on behalf of the organization. He says so far the company has gotten more than 1,600 letters from its advisors but encouraged advisors to send more.

“The DOL issue is very scary,” says Casady. “We’re quite upset about this issue.” See: DOL’s proposal puts the screws to legacy 401(k) providers.