Friday, February 15, 2013

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.


Anonymous said...

Can you elaborate on what a "payout of more than 90%" means? I know that these guys get big commissions on placing money into nontraded REITs, etc., but I just don't understand the language here. Pardon my naivete but I'm still new to the broker-dealer universe.

Rational Realist said...

Payout is the percentage sharing arrangement on commissions between broker / dealer and their reps. Commissions are paid on all types of securities, not just non-traded REITs. Big firms like Merrill Lynch keep most (60% to 70% or more) of each commission dollar, but provide office, staff, etc. Independent B/Ds are just the opposite, sharing in 10% or less of each commission dollar, "paying out" 90% or more to their financial advisors. Independent reps are required to pay many of their own costs, and are not employees of the broker / dealer.

Commission sharing is not unique to broker / dealers, as any sales commission based compensation will have sharing arrangements.

Anonymous said...

How about the 40% forgivable loans and bonuses to get advisors to join your bd? Lots of money grabs going on these days and bd's are dumb enough to pay for it. I don't feel sorry for them.

none said...

The problem with LPL is that they are still paying huge bonuses to "buy" practices instead of giving only enough money to offset the cost of a reps move. They are trying to push top line now that they are a publicly traded company. Obviously they are "hoping" profits rise from increased revenue but it is showing itself to be a flawed model.