Ownership Value - Your Private Practice as an LPL Financial Advisor

Office Cost and Profitability Projections

Office characteristics: Revenue composition:

Advisor revenue $ 205,021 SAM I 0%

Annual new client asset growth rate goal 5% - 15% SAM II revenue 48%

# of advisors sharing office costs 1 Advisor Select revenue 0%

Full-time assistants in office 0 General securities revenue 14%

Part-time assistants in office 0 Mutual Fund, VA, and all other revenue 38%

Office location Metro suburban 100%

Annual

Performance % of revs

Gross revenues: $ 205,021

Costs of revenues:

LPL commissions and administrative fees 3 3,207 16.2%

Ticket charges 1 0,042 4.9%

Industry-wide advisor costs (NASD, SIPC, etc.) 1 ,116 0.5%

LPL contract/E&O/tech/costs 6 ,565 3.2%

Offsets:

Production bonuses ( 1,050) -0.5%

Total costs of revenues 4 9,879 24.3%

Net payout 1 55,142 75.7%

Cash operating expenses per advisor:

Total compensation and benefit costs (excluding owner comp) 1 4,000 6.8%

Total occupancy and facilities costs 1 6,650 8.1%

Total equipment & supplies costs 3 ,300 1.6%

Total marketing costs: 4 ,100 2.0%

Total printing, reproduction & postage costs: 2 ,460 1.2%

Total communications costs: 5 ,880 2.9%

Total miscellaneous costs: 3 ,700 1.8%

Total cash operating expenses per advisor 50,091 24.4%

Operating cash flow  105,051 51.2%

Your Projected LPL Office Model office assumption notes

Determined by product mix. Mutual fund and other non-individual securities revenues generally have the least associated

cost, followed by advisory revenues, SAM II revenues and, lastly, general securities revenues.

Determined by product mix. General securities, SAM II accounts, certain mutual funds, and some other transactions carry

ticket charges. Advisory accounts (other than SAM II), variable annuities, and certain other transactions carry no ticket

charge.

Assumes subscription to the following LPL technology platforms: BranchNet, Portfolio Manager, Portfolio Review Too

(PRT), Representative website.

Significant assumptions include: For each advisor: $8,000 for health insurance. For all personnel: payroll taxes of 8.0% of

wages including owner's salary estimated at $75,000.

Assumes 900 square feet leased at a total cost of $18.50/sq ft for office space. Pricing includes cost of utilities and repairs.

Assumes fixed costs of $800/office for miscellaneous equipment and repairs, and variable cost of $2,500/advisor for office

supplies, stationery, and software.

Assumes marketing costs of 1% of revenue for offices with <5% annual new client growth rate goal, 2% of revenues for 5-

15% new client growth goal, and 3% of revenues for >15% new client growth goal.

Assumes consistent variable costs of 1.2% of office revenues.

Assumptions include: 3 phone & fax lines costing $1,500/advisor for local and long distance calling, $600/advisor for cell

phones, Internet costs of$1,980/year for business-grade DSL and $1,800/year per advisor for stock quotes.

Assumes fixed costs of $3,700 per office as follows: $1,000 for accounting, $500 for IT consulting, $200 for bank service

charges, $750 for misc insurance, $750 for misc taxes, $500 for dues and subscriptions.

6

You’re forgetting  a couple key factors-

Presuming you’ll grow the business, your payout will increase substantially.

Remember, you OWN the business in addition to that net payout.

You have the freedom to do whatever you want, whenever you want, within the bounds of ethics and legality.  No more sales manager or Branch Manager looking over your shoulder.
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[quote=joedabrkr]You're forgetting  a couple key factors-

Presuming you'll grow the business, your payout will increase substantially.

Remember, you OWN the business in addition to that net payout.

You have the freedom to do whatever you want, whenever you want, within the bounds of ethics and legality.  No more sales manager or Branch Manager looking over your shoulder.
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//–>[/quote]

That is a theme of yours Joeboy--what problems did you have with working for a branch manager?

You're expenses will grow as well. i.e additional staff, benefits, LPL revenue costs. 41% is not that much higher than the 35% i'm currently getting. That to will grow as my gross grows.

It's a lot of risk for only an additional 6% payout. Again, one better be able to consistently gross 350k/yr or there are going to be some major challenges.

[quote=ezmoney]

You're expenses

[/quote]

Does that look correct to you?

The most logical question to be asked is why virtually no "big hitters" at the wirehouses leave the wirehouses?

It's the second tier and lower producers that run away for the accelerated payouts.

Why not just make a career out of moving from wirehouse to wirehouse every several years--accept a huge up front package--do business for a few years and then move on for another huge up front bonus?

newbie, one answer to moving about involves the headache of transferring accounts each time.  What do your clients think about a rep who jumps firms every so often?  I think most investors would prefer some sort of stability.

I know many independents (rjfs and lpl, for instance) as well as RIAs who were successful wirehouse brokers.  I think its simply personal preference and perhaps even the type of business that the rep builds that would determine the course of action to take. I think its faulty thinking to think to believe that reps who can't really hack the wirehouse setting are the only ones jumping ship. I've seen more CFAs/PhDs in finance on the RIA side than the wirehouse side.  I think these reps feel the wirehouses restrict their investment philosophy. For them, affiliating with a wirehouse creates a potential conflict of interest on many levels. So, I would make such general claims about who jumps ship and who stays.  To each his (or her) own.

[quote=NASD Newbie]

The most logical question to be asked is why virtually no "big hitters" at the wirehouses leave the wirehouses?

It's the second tier and lower producers that run away for the accelerated payouts.

Why not just make a career out of moving from wirehouse to wirehouse every several years--accept a huge up front package--do business for a few years and then move on for another huge up front bonus?

[/quote]

Incorrect, as usual Putsy.  Large-to-mega producers leave to go indy or form their own B/Ds regularly.  There aren't as many of these producers, so the number seem small to someone like you.  I'd hazard a guess that huge producers leave regionals and wires at the same percentage rate as producers at any other level. 

EZ, that's probably pretty accurate depending on your product mix and expenses, although I'm on pace to net in the high 60's because of my low expense profile (sharing space with a group of accountants and having a part-time assistant).  I agree that you should not move until you are at about $350K...that's pretty much where I left, and that's about the right level to really make a difference financially.  Bottom line is, all I cared about financially was making about the same money...what was really important to me was being free from bank management.

You're not there yet...bide your time and prepare, prepare, prepare.  Read Robert Fragasso's book on running an independent practice.Once you're five years out and around $300-$350K, you can revisit the move...

...and you're killing yourself by doing all SAM II instead of SAM I.  Less than 5% of my SAM accounts are SAM II.

[quote=Indyone]

EZ, that's probably pretty accurate depending on your product mix and expenses, although I'm on pace to net in the high 60's because of my low expense profile (sharing space with a group of accountants and having a part-time assistant).  I agree that you should not move until you are at about $350K...that's pretty much where I left, and that's about the right level to really make a difference financially.  Bottom line is, all I cared about financially was making about the same money...what was really important to me was being free from bank management.

You're not there yet...bide your time and prepare, prepare, prepare.  Read Robert Fragasso's book on running an independent practice.Once you're five years out and around $300-$350K, you can revisit the move...

[/quote]

Indyone-

I guess it depends where you came from.  I assume Bank Channel payout versus Wirehouse payout is much lower.  If the payout on  is approx. 35% in wirehouse around 350k gross production,  Why wouldn't everyone be jumping to Indy for 60% ish net payout? 

If you're at $150-$200K gross right now....in a wirehouse you'd be barely surviving at 35%.  Am i missing something?  Beyond the name recognition and office space (desk), that you need to factor in on top of that 35% payout at a wirehouse?

(i.e.-  Health Insurance; 401K, stock) etc.  I am asking about the big 3- ML, UBS, SB....

Thanks

I'm speaking from the outside as to the wirehouse, but my understanding is that the payout is generally a bit higher than banks, more like 40% with some bonuses for hitting certain production levels.  Banks justify paying a bit less by saying that prospecting is much easier (which it probably is), although in my bank experience, you have to weed through a lot of crappy referrals to find a few gems.  I felt like my own prospecting efforts were much more productive.  Incidentally, my old bank now pays 40% for $350K production level...too little too late for me.

On barely surviving at 35% of 150-200K, I know lots of people that live on less, so everything is relative, I guess.

As far as why not everyone jumps, the reasons are many.  Some don't want the hassle of having to run a business while they are trying to take care of their clients.  Some stay for the benefits that you referenced (healthcare, 401(K), etc.), some stay because, like EZ, they don't see much difference in payout for the hassle in their particular situation.  Some stay because they don't see competing platforms as compatible (or comparable) to/with their business.  Some simply fear the unknown and are unwilling to take the risk of stepping out without a net.

For me, the decision was made easy by my complete disgust with management and how reps in our system were being systematically screwed and forced to put the bank's interest ahead of the client's.  It was only after I and several others left that management made some positive changes for the reps, but for the most part, it's still the same sh*thole I left and if anything, the suckers that stayed are more miserable than ever.

[quote=NASD Newbie]

[quote=joedabrkr]You’re forgetting  a couple key factors-

Presuming you’ll grow the business, your payout will increase substantially.

Remember, you OWN the business in addition to that net payout.

You have the freedom to do whatever you want, whenever you want, within the bounds of ethics and legality.  No more sales manager or Branch Manager looking over your shoulder.
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//–>[/quote]

That is a theme of yours Joeboy--what problems did you have with working for a branch manager?

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ez, i was looking at your numbers (in between poker hands) and i think you made a miscalculation. based on the lpl numbers, if you increase the total compensation and benefit costs from 14,000 to 24,000 your net operating cash flow shrinks by 5% not 10%. so you would actually be netting 46.2%.

[quote=joedabrkr] [quote=NASD Newbie]

That is a theme of yours Joeboy--what problems did you have with working for a branch manager?

[/quote]


Hmmm...where should I start...how about how much it cost me for absolutely NOTHING useful in terms of help for my business!
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What would be an example of help that was requested, but denied?

Actually the 24k admin salary is on top of the stated 50k op expenses. If you look closely you'll notice that op expenses does not include pay for admin help. That changes op expenses to about 75k rounded up, and hence the 41% payout I had noted. Now if you could manage to keep op expenses at 50k including admin pay than I'm netting the 51%. Not as good a payout as I though I'd be making indy.

I'll note that my payout at the bank is a paultry 31%. I add back 4% fort the pension they pay me based on my ernings. I am on the grid so the more I gross the better the payout up to about 44%

[quote=doubleb]ez, i was looking at your numbers (in between poker hands) and i think you made a miscalculation. based on the lpl numbers, if you increase the total compensation and benefit costs from 14,000 to 24,000 your net operating cash flow shrinks by 5% not 10%. so you would actually be netting 46.2%. [/quote]

Does that appear to have been written by an individual with an IQ in excess of 85 or 90?

A question regarding what an indy broker pays his help.

Do you pick up the tab for matching FICA?  How about medical coverage?  Group life?  Other benefits?

When you're tossing around the number $24,000 is that the assistant's base salary, or the total cost?

How can you hire somebody with any degree of proficency at a wage like that?

Are you indy types saying that Susie the CA at the Merrill branch on Main Street is going to leave the safety of "Mother Merrill" for the unknown of "Acme Securities and Limousine Service----Offering Securities through LPL Financial Services" for the generous sum of $500 per week, before withholdings.

Why it sounds like a smart girl's dream job.

Well, there's a couple of ways you work around those problems.  (1) Share a good assistant or hire one part-time.  At 205K it's doubtful you need a full-time assistant. (2) Hire an assistant who can get healthcare coverage through a spouse's job.

The other issues such as retirement and FICA aren't a big deal to cover...just a cost of doing business.

I had no problem convincing my assistant to make the jump.