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.
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:
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4 comments:
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.
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.
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.
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.
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