Cracked Facade

I have had this InvestmentNews article opened in my browser for over a week.  The article is about LPL being ordered to pay restitution to Massachusetts' investors who bought non-traded REITs.  That story is not why I kept the article open.  Here is the part of the story that shocked me:

LPL Financial's parent company, LPL Financial Holdings Inc., reported record revenue in 2012 of $3.66 billion, an increase of 5.2% compared with a year earlier. That did not translate, however, into an increase in profit for the year. The company reported a year-over-year decrease in net income, to $151.9 million, a drop of 10.8%.

LPL is the largest independent broker / dealer, has its own clearing firm, and presumably gets the best arrangements from product sponsors, but only managed a profit margin of 4%.  The implication for smaller firms and the entire independent broker / dealer business model is scary.  Financial advisors that think they are such good deal makers negotiating payouts more than 90% are putting the independent broker / dealers in financial jeopardy.  Broker / dealers that agree to high payouts hoping to make up the lost revenue from other sources are enabling their own destruction.

More Way Back Machine

Here is a Bloomberg article that is part profile of B. Wayne Hughes, founder of Public Storage, and part article on large private investors buying single family homes as rentals.  Public Storage raised much of its initial capital in limited partnerships sold through independent broker / dealers.  Public Storage "rolled up" all its partnerships and listed the combined entities on the NYSE sometime in the late 1980s or early 1990s.  Most of the rollups of 1980's limited partnerships were disasters for investors - a combined portfolio of crap properties is still a portfolio of crap properties - but the Public Storage and Realty Income Corporation combinations worked out very well.  (Unfortunately, I think most advisors recommended that investors sell their rolledup units as soon as liquidity was available.)