LPL & Discretionary Equity Accs

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Aug 8, 2006 9:44 am

Is anyone out there managing 25 million or more in discretionary equity accounts with LPL?  The issue of ticket charges for this type of business is my interest here.


One trade across lets say 70 accounts at $15 per trade is $1050.  I'm not a buy and hold guy.  I am tactical.  Turnover is around 45%


This would add up to many many thousands of dollars in ticket charges per year.  Is there anyone else out there running this type of business at LPL?   


Aug 8, 2006 9:49 am

Another questions is would LPL even allow that kind of turnover.  It seems to be that their hands off style is inviting a "failure to supervise" nightmare.

Aug 8, 2006 10:22 am

If you run that on the SAM I platform, those ticket charges are passed to ther client.  If you're doing well for the client, what's $15/trade?  If you're on SAM II, eating all the ticket charges, I think it would be cost-prohibitive.


I don't know how LPL would view this kind of activity, but my guess is, it would receive more than normal attention/supervision.

Aug 8, 2006 11:01 am

Indyone is right about SAM II  versus SAM I.  I  run that sort of business, though not quite that level of assets.

I have not found any issues with compliance so far.  My turnover is running around that level.  There is no 'churning' issue because you are not being paid any portion of the ticket charges.

Hope that helps.

Aug 8, 2006 11:16 am

I just for the heck of it did a scan for global multicap growth mutual funds and some of the top performers. 


Here they are along with their turnover ratios:


Fidelity 41%


Marsico 118%


Phoenix 52%


Janus 57%


American Funds 35%


I looked at my average for the last three years and it came to 40.7%   Thanks for chiming in Joe and Indyone. 


So NASD, the top wirehouse I work at has no problem with it.  So why would LPL?  I use MATES and run a nice discretionary book of biz.  I kills me to think everytime I pushed a button to buy or sell across the board it would cost me over a $1000.   


Maybe that is one of many reasons I should stay with the flagship. 


Aug 8, 2006 11:41 am
joedabrkr:

Indyone is right about SAM II  versus SAM I.  I  run that sort of business, though not quite that level of assets.

I have not found any issues with compliance so far.  My turnover is running around that level.  There is no 'churning' issue because you are not being paid any portion of the ticket charges.

Hope that helps.


You can't be brought into arbitration on churning charges because you're not earning a portion of ticket charges?

Aug 8, 2006 11:49 am
Malcolm:

So NASD, the top wirehouse I work at has no problem with it.  So why would LPL?  I use MATES and run a nice discretionary book of biz.  I kills me to think everytime I pushed a button to buy or sell across the board it would cost me over a $1000.   


Maybe that is one of many reasons I should stay with the flagship. 



Actually your top wirehouse does have a "problem" with you but they can live with the problem because of their management structure.


There are computer programs watching your accounts on an hourly basis and if things get going outside of parameters it's easy enough to get you into your branch manager's office for a quick chat regarding what is going on.  The chain of command is in place.


In the LPL model your OSJ is not right there so they, LPL, would have difficulty demonstrating to an arbitration panel that they had an effective method to supervise brokers with relatively extraordinary activity.  That scares management types--especially the compliance guys.


That Joeboy is doing high turnover business at LPL would seem to indicate that they, LPL, will live with it.  Then there's the chance that LPL brought Joeboy on board without knowing the extent that he's an aggressive transaction oriented producer.

Aug 8, 2006 12:06 pm

You are right about questions from mgnt NASD.  But I do quarterly reports and when up/down capture, alpha, R-Squared, Sharpe Ratio, Sortino and standard deviation look better than any of our outside managers, people seem to be alright with what I am doing. 


I would agree agree however they would be happier not having me do what I do.  But it isn't just a sidleline thing for me and they know that.  This is almost all I do here and it is where I spend most all of my time everyday. 


Arbitration is a terrible thing.  I know of one very intelligent and experienced broker...over 20 years in the biz who was recently made to look like a fool by the plantiffs hired gun in arb so I do my best to keep a sharp eye on the ball and keep excellent records.   


It is interesting to see how you look at it from the compliance standpoint first and I understand why.  The manager who was in that meeting with the above broker told me all about it and it was as unpleasant for him as it was the broker. 

Aug 8, 2006 12:20 pm

The plaintiff's bar attacks the brokerage industry using forms of the RICO laws which are what is used against organized crime.


They portray the branch manager as a John Gotti type figure and the brokers who work for the manager as soldiers in the crime family--Goodfellas.


Arbitrators tend to listen and not pay much attention--but it sets the mood for the hearing.


The other thing that can bite you big time is how a perfectly capable client suddenly doesn't understand.


Years ago, back in the days of litigation rather than arbitration, our firm was sued in Illinois by the CFO of a Fortune 500 company who had lost a lot of money chasing Bills and Bond futures.


He sat in the witness stand and repeated again and again that he didn't understand the risks and barely realized that interest rates changed all that much.


The jury of his "peers" appeared to believe him and before the jury got the case a settlement was proposed and accepted.  I forget the details, but he lost something like $150,000 and settled for about half of it.


From a broker's point of view that is infuriating because the broker now has "Yes" answers on his U-4, but from the firm's point of view it's better to not run the risk of huge punitive damage awards.

Aug 8, 2006 12:35 pm
NASD Newbie:

[quote=joedabrkr]Indyone is right about SAM II  versus SAM I.  I  run that sort of business, though not quite that level of assets.

I have not found any issues with compliance so far.  My turnover is running around that level.  There is no 'churning' issue because you are not being paid any portion of the ticket charges.

Hope that helps.
[/quote]


You can't be brought into arbitration on churning charges because you're not earning a portion of ticket charges?



How can it be labeled as "churning" if you're not getting paid for the activity.

Aug 8, 2006 12:42 pm
joedabrkr:
NASD Newbie:
joedabrkr:

Indyone is right about SAM II  versus SAM I.  I  run that sort of business, though not quite that level of assets.

I have not found any issues with compliance so far.  My turnover is running around that level.  There is no 'churning' issue because you are not being paid any portion of the ticket charges.

Hope that helps.


You can't be brought into arbitration on churning charges because you're not earning a portion of ticket charges?




How can it be labeled as "churning" if you're not getting paid for the activity.
 


Churning is a noun used in lieu of excessive activity.


How?  By filing a demand for arbitration.


Will you be found guilty even though you did not benefit?  Of course--if the client lost money and the panel decides that they were being churned it doesn't matter if you got paid or not.


Fiduciary responsibility and all that.


How many of you are aware of a really weird one.  A guy using Schwab's on-line service churned himself.  Demanded arbitration and was awarded his money back because Schwab did not have a system in place to keep a client from destroying themselves.

Aug 8, 2006 12:46 pm
NASD Newbie:
Malcolm:

So NASD, the top wirehouse I work at has no problem with it.  So why would LPL?  I use MATES and run a nice discretionary book of biz.  I kills me to think everytime I pushed a button to buy or sell across the board it would cost me over a $1000.   


Maybe that is one of many reasons I should stay with the flagship. 


Actually your top wirehouse does have a "problem" with you but they can live with the problem because of their management structure.


There are computer programs watching your accounts on an hourly basis and if things get going outside of parameters it's easy enough to get you into your branch manager's office for a quick chat regarding what is going on.  The chain of command is in place.


In the LPL model your OSJ is not right there so they, LPL, would have difficulty demonstrating to an arbitration panel that they had an effective method to supervise brokers with relatively extraordinary activity.  That scares management types--especially the compliance guys.


That Joeboy is doing high turnover business at LPL would seem to indicate that they, LPL, will live with it.  Then there's the chance that LPL brought Joeboy on board without knowing the extent that he's an aggressive transaction oriented producer.



The problem with you Newbie is that you THINK you know everything, and thus have no idea when you stride outside your narrow circle of expertise.

First-at LPL the business model is that either you are ser 24 licensed and YOUR OWN OSJ with additional(required) supervision from home office, or you are an adviser working directly under the supervision of a ser-24 licensed branch manager/owner.  So the OSJ is "right there".

Second-LPL's technology is far superior to anything I've seen at any wirehouse.  They've been supervising people 'remotely' for years.  They've had plenty of experience and practice at it.  Too, indy firms compete heavily to have the best, fastest, most up to date and efficient technology.  They know that if they don't it is very easy for their advisors to pick up and leave to Brand X indy firm, since they own the book.  Tends to keep 'em honest.  I'd dare say that the technology at the major indy firms is most likely BETTER than at most of the wirehouses.   In your world that's blasphemous, I know.

Third-LPL knew exactly what they were getting when they brought me on.  I resent the implication, but expect nothing less from you.

Fourth- "Aggressive transaction-oriented broker".  Let's break that down-actually I manage my discretionary accounts with a particular focus on generating absolute return and AVOIDING market risk as best possible.  So much for the agressive part.  "Transaction oriented"?  Well currently 40% of my assets and 60% of my income is from discretionary (RIA platform) fee accounts.  It's the fastest growing part of my business by far.  I receive no commissions whatsoever from transactions in those accounts.  So how is that transaction-oriented?

Lastly-LPL's RIA platform and business model has been built around the idea of discretionary management right from the start.  It's baked into their culture and frankly they seem far more comfortable with it than any wire I've encountered. Most compliance guys in the wirehouse world FREAK when it comes to the idea of discretion.  Perhaps due to the long history of high pressure for production combined with prop products/investment banking deals and poor training plus a dash of questionable ethics on the part of branch managers leads to a pretty high incidence of compliance "problems" that cost them money.  Just a thought and really that's a topic for a whole 'nuther thread.

Aug 8, 2006 1:49 pm

Joeboy, the NASD does not recognize you as your own supervisor just because you have a Series 24 ticket.  Arbitration panels certainly don't.


I repeat the LPL model lends itself to becoming a "failure to supervise" nightmare.


This entire discussion started because you said you could not be charged with churning because you have not built in reason to make trades to generate commissions since you're paid a wrap fee.


How about the idea that you are motivated to trade in a frenzy to generate profits for your client--and that frenzy blew up in your face.


That's what happened to you in the tech implosion--right?


Why do you need discretionary authority anyway--isn't that an unnecessary exposure to fiduciary responsibility risks?

Aug 8, 2006 2:52 pm
NASD Newbie:

Joeboy, the NASD does not recognize you as your own supervisor just because you have a Series 24 ticket.  Arbitration panels certainly don't.


I repeat the LPL model lends itself to becoming a "failure to supervise" nightmare.


This entire discussion started because you said you could not be charged with churning because you have not built in reason to make trades to generate commissions since you're paid a wrap fee.


How about the idea that you are motivated to trade in a frenzy to generate profits for your client--and that frenzy blew up in your face.


That's what happened to you in the tech implosion--right?


Why do you need discretionary authority anyway--isn't that an unnecessary exposure to fiduciary responsibility risks?



Actually the "tech explosion" worked out just fine for me, as my clients know.

I prefer discretionary authority to manage an account in an objective logical fashion according to the clients clearly established goals, needs, and risk tolerance.

Far prefer that to debating a potential account change with a client, having them say yes/no, and then years later telling the arbitrators "Oh I never said that. I didn't understand."

Aug 8, 2006 3:28 pm
joedabrkr:



Actually the "tech explosion" worked out just fine for me, as my clients know.

I prefer discretionary authority to manage an account in an objective logical fashion according to the clients clearly established goals, needs, and risk tolerance.

Far prefer that to debating a potential account change with a client, having them say yes/no, and then years later telling the arbitrators "Oh I never said that. I didn't understand."
 


You're a fool if you think having a client's signature on a discretionary agreement is going to be more of a defense in the case where a client says they don't understand.


A basic thought process in this business is that the only reason you should have discretion is because you don't have the time to talk with a client--that you're whining that you don't want to talk to them is enough to get your license lifted.


Sure hope LPL is not monitoring this.

Aug 8, 2006 4:18 pm
NASD Newbie:
joedabrkr:
NASD Newbie:
joedabrkr:

Indyone is right about SAM II  versus SAM I.  I  run that sort of business, though not quite that level of assets.

I have not found any issues with compliance so far.  My turnover is running around that level.  There is no 'churning' issue because you are not being paid any portion of the ticket charges.

Hope that helps.


You can't be brought into arbitration on churning charges because you're not earning a portion of ticket charges?




How can it be labeled as "churning" if you're not getting paid for the activity.
 


Churning is a noun used in lieu of excessive activity.


How?  By filing a demand for arbitration.


Will you be found guilty even though you did not benefit?  Of course--if the client lost money and the panel decides that they were being churned it doesn't matter if you got paid or not.


Fiduciary responsibility and all that.


How many of you are aware of a really weird one.  A guy using Schwab's on-line service churned himself.  Demanded arbitration and was awarded his money back because Schwab did not have a system in place to keep a client from destroying themselves.



I actually heard that one when I was at Schwab.

Aug 8, 2006 4:24 pm

Newbie, don't tell any of us we're fools after the 30-year bond portfolio you set up for the widow.  You keep looking for holes in the independent business model, while ignoring the craters at your old firm, and you sound more like someone's shill every day.  I'd be happy to compare LPL's arbitration record to wherever you worked.  My guess is that LPL will compare just fine because of their business plan of hiring experienced advisors and insisting on series 24 licensing for the bulk of their reps.  You can sit there at your keyboard and scream the sky is falling 24 hours a day if you have nothing better to do, but you'll not convince me and thousands of other LPL reps that the firm has a bad business model.  I just went through a compliance exam and it was a heck of a lot more thorough than what I went through at brand X...I'm in the process of responding to a two-page findings letter that left virtually no stone unturned.  Yes, LPL tends to be reasonably hands off, as long as your record is clean and you're not setting off a bunch of surveillance alarms with your activity, but that does not mean that they don't take supervision and compliance seriously.  I know for a fact that some prospects never get past the gate because of the smell test.  Sure, if you have close to 7,000 reps, a few bad eggs may get through, but I think that overall, LPL's oversight and compliance record would compare just fine to whatever firm you toiled for.


Care to enlighten us with some specific metrics at your old firm?  If not, let's move on to something more constructive.

Aug 8, 2006 4:34 pm

I am not saying that LPL has a bad business model, what I am saying is that it invites the very difficult to defend "failure to supervise" claim that has been the nail in the coffin for the defense of a great many arbitrtion claims.


There are certain universal truths, and one of them is that having a Series 24 license yourself does not qualify as being proper supervision of yourself--your 24 qualfies you to supervise others.


Don't you remember studying things like an OSJ must be inspected at least annually by a principal not charged with managing that OSJ?


In an arbitration hearing, when you're being portrayed as a gangster out to screw little old people out of their money, it comes across as very bad when they get you to say that you don't have anybody looking over your shoulder every day.


Additonally, there has been very little arbitration because a monkey with a pencil could pick winning stocks since 1982--the true test for your relationship with your clients, and the impact of the failure to supervise argument, won't come until your clients look at statements that reflect half of what they had at one point.


Why do you bother to pay for E&O insurance?  What is a situation that you believe could develop where they would pay off for you?

Aug 8, 2006 5:19 pm

NASD - Out of curiosity, what's the point in having a fake name in your profile?  Not being nit-picky, just curious.

Aug 8, 2006 5:30 pm
BrokerRecruit:

NASD - Out of curiosity, what's the point in having a fake name in your profile?  Not being nit-picky, just curious.


Why do you think it's a fake name?