In the wake of a seismic few weeks when numerous discount brokers slashed trade commissions to zero, executives at LPL, the largest independent broker/dealer, said they too are constantly evaluating their pricing, but the part of the business that would be most affected by zero-fee commissions was "comparatively small."
However, CEO Dan Arnold and CFO Matt Audette said they are considering strategic cost reductions as they see fee pressure continuing across the wealth management landscape.
“I think we’ve seen this trend occurring in fits and starts over the past 25 years,” Arnold said. “If you look at the last couple of years, we’ve made pricing adjustments as a part of our strategy in order to help drive growth in areas like our advisory platforms and transaction costs, and that’s been roughly on an order of magnitude or an average of about $15 million investment a year.”
The executives covered numerous topics during the broker/dealer’s third quarter earnings call with analysts in addition to the moves by Charles Schwab, TD Ameritrade, E*Trade, Fidelity and others to slash fees on commissions.
Analysts questioned Arnold and Audette about UBS’s announcement this week that they’d slash additional management fees on separately managed accounts starting in January of next year.
Audette stressed that while it wasn’t yet clear exactly what UBS was planning with its fee adjustments, he hypothesized that the firm had eliminated its SMA manager fee for when UBS was the asset manager for a client as opposed to a third party. Audette said that LPL had previously eliminated management and/or strategist fees for when LPL helps construct portfolios.
“We did it because we felt it was a great advantage for our advisors, (who) should be able to use that lower cost structure as a way to create more value for their clients and differentiate themselves,” he said. “So, if that’s what they have done, I think perhaps it makes logical sense just where the marketplace is, and I don’t think it would have a lot of impact on us because I think we’ve already made that move.”
In the cusp of 2020, which promises to be a fraught political year with a presidential election at stake, Arnold said that the firm was planning for whatever regulatory environment they may face in the years to come, and expressed confidence that the work they’d done to comply with the since-vacated Department of Labor fiduciary rule, as well as the SEC’s Regulation Best Interest, had aptly prepared them for additional regulatory shifts, with limited additional expenses necessary.
Arnold said that the reappearance of a fiduciary standard could lead more direct brokerage assets to move onto LPL’s platform, along with a greater use of advisory solutions, as well as an increase in recruiting and M&A. But Arnold and Audette both stressed that economic volatility could be an opportunity for b/ds with scale. Challenging economic environments can be “some of the best environments to really invest and drive growth for the long-term,” Audette said.
“For things like recruiting and M&A opportunities, where advisors and smaller broker/dealers are going to seek a more stable place to be, the pricing of those in that environment, for both recruiting and M&A, could be more compelling for the buyer,” he said.
LPL reported a 32% year-over-year increase on earnings per share to $1.57, with a 27% increase year over year in net income to $132 million; additionally, total brokerage and advisory assets help by LPL increased 6% year over year to $719 billion. Advisory assets increased to 47% of total assets, the firm reported, driven by inflows of $8.2 billion, a 10% annualized growth rate.
This quarter, LPL completed the acquisition of Allen & Company—a new business model for LPL where the brokers and advisors work as employees, not independent reps—which will add $2.9 billion in total brokerage and advisory assets, while retaining all 36 advisors from the broker/dealer. Audette said LPL was continuing to "round out" the internal capabilities needed for the employee channel, and in 2020 will launch that initiative into the marketplace, using both the Allen & Company footprint in addition to other efforts to grow that business. "Our early research and surveying of the marketplace certainly, I think reinforces the concept and the hypothesis around the value," he said.
The total advisor count stood at 16,349, adding 188 total advisors this quarter. Arnold said the firm recruited some $33 billion in new assets over the past year, compared with $26 billion in the previous year, “so that just reinforces I think the trajectory and the momentum we have.”