While LPL Financial has custodied assets for registered investment advisors since 2008, it was largely to support the fledgling hybrid advisory business of its registered reps. But as it has across the industry, that advisory business has grown fast; according to Cerulli, LPL is now the third-largest RIA custodian in the marketplace.
So it makes some sense that since February 2019, LPL has been hinting at bringing a “more compelling and competitive offering” to fee-only RIAs, with no brokerage affiliation, signaling a profound evolution for the nation’s largest independent broker/dealer.
Now LPL is ready to take the more dedicated custody business to the marketplace, and WealthManagement.com got an exclusive on the details.
“The brokerage and regulatory construct that LPL grew up in over the course of 30-some-odd years doesn’t have the same impact and implications on those fee-only firms because it doesn’t have to,” said Marc Cohen, executive vice president of advisor business at LPL. With the new emphasis, “we really are purely serving as a custodian for them, as opposed to in the hybrid capacity we launched in ’08, where we were serving as both the custodian as well as a friendly broker/dealer, so to speak, in an integrated fashion.”
Behind the increased focus on RIA services is the fact that at LPL today, north of 75 cents of every $1 that comes onto its platform goes into advisory accounts, said Cohen.
Over 50% of total assets on the platform are in advisory accounts, versus 40% in 2016. Overall, the firm has a little over $500 billion in advisory assets on its custody platform, a number it wants to grow by appealing to fee-only advisors as a full-service custodian.
LPL’s pure-play custody strategy will rely on its size and scale in terms of efficiencies and operations, like larger rivals Schwab and Fidelity, while remaining nimble but with enough resources to outshine competitors when it comes to service and support. The idea is to offer RIAs a more high-touch, “white-glove approach,” Cohen said, bringing back what the custodian used to be a decade ago.
“The custodian served a role where no matter what the question was or the need was of that RIA, they called upon the custodian,” Cohen said. “Over time, based on cost cutting measures and other business decisions, a lot of the other custodians have made choices where they're no longer providing that level of value. Instead, they really are serving as the trust keeper of the assets, settling and executing trades, and sending out the governance documents necessary to clients.”
Cohen said custodians today are not providing the same level of service and support around technology, operations, practice management and “growth consulting” that they might have in the past.
“While you see some of the competitors moving towards a more digitized, self-service type of experience, we believe in the concierge white glove approach that allows us to be able to deliver a personalized, highly responsive experience to every one of our clients,” Cohen said.
There are no minimum asset thresholds to custody with LPL. There are no fees associated with being multicustodial on LPL’s fee-only platform. (LPL does charge a basis-point fee to hybrid RIAs that use LPL for brokerage business and still want to custody off platform.)
Rich Steinmeier, managing director, divisional president of business development at LPL, said the firm started looking more intentionally at serving fee-only RIAs after hearing from a number of LPL advisors who dropped their FINRA licenses.
“Their refrain was, ‘Man, we really love working with you, but some of the things that you do today are probably not aligned with the evolution of how a custodian should support us,’” he said.
There were small things that created friction in the ways advisors ran their businesses, such as access to systems being driven by registration numbers, something that, of course, has no relevance to folks who aren’t FINRA registered.
“There were some policies that we had for trade reviews that didn't necessarily fit in an unregistered environment,” he said.
It was important to recruit executives, like Cohen, steeped in the RIA channel to carve out how a custodial offering should work for fee-only advisors.
Over the past few years, the firm has brought in top talent from competing custodians, hiring sales, transitions, operations, relationship management and service folks out of Fidelity, Schwab, TD Ameritrade and Raymond James’ RIA & Custody Services Division.
“I think that was one of the larger findings for us, was across each of these affiliation models we bifurcated the service teams, we bifurcated the compliance and supervisory teams, so that you were dealing with people who are experts inside of your specific situation,” he said.
And for the first time, the firm will support advisors on LPL’s own corporate RIA who don’t have any brokerage affiliation, Cohen said. The firm opened that up to give advisors more flexibility in how they want to affiliate, and that option allows fee-only advisors to outsource their risk management and compliance to LPL.
In April 2020, LPL launched its premium affiliation model, Strategic Wealth Services, for advisors coming out of the wirehouse and regional firms, aimed at taking some of the more entrepreneurial tasks involved in starting and running a practice off advisors’ shoulders. That model was initially launched under the corporate RIA, but Steinmeier said he expects the firm to eventually make that model available to advisors who are running their own RIA.
Devin Ryan, an equity research analyst with JMP Securities who covers LPL, said the move toward widening affiliation options for fee-only advisors was a positive for the company and its investors.
“This is a continuation of the evolution of the business model, but it's where the puck is going,” Ryan said. “And they're going to make sure that they're in a position to not only retain their existing advisors as some explore all the options that exist, but also compete directly for advisors within the pure RIA channel, which is the fastest growing channel of the advisor market.”
Ryan said the firm has been very focused on improving its service model across the organization, “and I think that's gone a long way in support of advisor happiness and their desire to be on the platform,” he said.
LPL’s service model assigns each firm, regardless of size, a dedicated service pod, a relationship manager and a growth consultant.
“And that's complete with both frontline transactional service representatives as well as case management for more complex items, so that they actually have a person who takes the ownership of their request and tracks it through to completion,” Cohen said.
The growth consultant will help the advisor manage their book and find opportunities for expansion. That may include help with client segmentation, finding centers of influence and referrals, pulling in separate account managers or implementing model portfolios, or leveraging financial planning offers within the practice.
RIAs on the platform can also use resources that LPL offers on an enterprisewide level, including its Business Solutions, a suite of services that advisors can outsource to LPL for a monthly subscription fee, including consulting on business strategy. That also includes the firm’s CFO Solutions, which pairs advisors with an LPL finance and accounting consultant to “diagnose” the financial health of the business and set realistic goals for growth.
It also includes M&A Solutions, which aims to help advisors find and execute acquisitions, including capital funding.
On the technology front, for no extra charge, RIA firms can plug into the firm’s existing ClientWorks advisor desktop, an integrated platform that provides capabilities from proposal generation through to account management, trading and rebalancing, reporting, and financial planning.
Alternatively, RIAs can use third-party vendors; LPL has expanded its roster of integrations, Cohen said, including MoneyGuidePro, eMoney and RightCapital on the financial planning side; Orion and Black Diamond for portfolio management; and Salesforce, Redtail and Wealthbox CRM, to name a few.
Cohen said there are two reasons the firm might build an integration: either the tech provider is showing rapid growth and capturing market share, or they’ve got a unique capability that supports the needs of an advisor.
If an RIA is using a third-party tech stack, it can easily plug into LPL’s custody platform, just like it does any other custodian.
“We’re investing heavily, to the tune of a couple hundred million dollars a year, into our own integrated technology capabilities,” Cohen said.
And while there may be minor differences in the investment products LPL has access to, for the vast majority of RIAs the products are going to be the same as they get at Schwab, Fidelity and other custodians.
“Asset custody is the ultimate commodity now,” Cohen said. “Close to 100% of what we bring over from other custodians is able to map in-kind.”
The pricing of the custody offering is customized for each client, Cohen said. Advisors can pay a platform fee that would be all-encompassing of all the service and support, including all trading costs across all asset classes. That basis-point fee can range from the low- to mid-single digits, he said. Alternatively, RIAs can pay for services on an à la carte basis, depending on their needs.
Other broker/dealers have launched RIA custody offerings in recent years. In early 2019, Wells Fargo began providing custody services to fee-only RIAs under its First Clearing subsidiary.
In 2013, Commonwealth began helping advisors build out fee-only practices with a full-service consulting program. The firm made a splash in early 2020 when it hired Matthew Chisholm to lead its newly combined RIA services and practice management unit. He was formerly head of practice management and consulting at Fidelity Clearing and Custody.
Raymond James has been building out its services for fee-only RIAs, having recently combined its Investment Advisors Division and Custody & Clearing Divisions into the new RIA & Custody Services Division.
Karl Heckenberg, president and CEO of Emigrant Partners and its affiliated company Fiduciary Network, said it will be difficult for LPL to compete with Schwab and Fidelity for the pure RIA firm. LPL has an opportunity to go after hybrid advisors looking to make the shift to a fee-only business but attracting assets from existing fee-only RIAs will be more of a challenge.
“It’s so hard for RIAs to change custody. They may add custodians here or there around the fringes, but very few make bulk changes,” he said. “LPL—frankly I think it’s a wonderful IBD, but I think most advisors still think of it as a brokerage firm.”
Emigrant has a stake in Stratos Wealth Holdings, a hybrid RIA, which uses LPL for some of its brokerage and advisory business. Stratos added TD Ameritrade and Fidelity as custodians last year. But Heckenberg said that of the 18 advisory firms it has invested in, none has done a bulk custody change.
“I don’t think [LPL CEO Dan Arnold] is going to run after big RIAs,” he said. “They may try, but I don’t think they’ll succeed. Where the success will be is smaller players who have been disenfranchised by TD Ameritrade, people who are already dually registered who are thinking about going fully independent, and maybe the technology solution—maybe they liked something about Black Diamond or Addepar, something like that. I think they’ll have a better time if they can say, ‘Look, we can move your assets over, kind of tape-to-tape on the LPL side, and you can still leverage third-party tools.’”
Barbara Herman, senior vice president at Diamond Consultants, said she believes the merger of Schwab and TD Ameritrade has left a gap in the marketplace, one LPL has an opportunity to fill.
But she thinks the firm is more likely to appeal to hybrid advisors who like the simplicity of having LPL for brokerage clearing as well as RIA custody. She added that some large groups left LPL in the past due to service issues, so the firm’s proactive service approach here could be promising in retaining advisors who eventually want to drop their FINRA licenses.
“If they are looking to either attract to the platform or, I believe, equally retain advisors as they grow through the lifecycle of the business, a dedicated service team would be critical,” Herman said. “The needs and the requirements for a fee-only RIA business are different—from a compliance standpoint, from a sophistication standpoint. They need a different service team.”
“Thinking back to LPL 10 years ago following its IPO and then to its business today, the alternatives and options for advisors have expanded tremendously,” JMP Securities’ Ryan said. “Advisors continue to shift more toward the independent models, and they're shifting more toward the RIA model within that. LPL is now in a position to participate in all of the market’s growth, whereas years ago they were more siloed within the broader addressable market.”