LPL Financial CEO Rich Steinmeier is confident his firm can absorb the much smaller Commonwealth Financial Network, in part because it has done something similar before.
One of the biggest questions to arise after Steinmeier and his fellow executives announced plans Monday to acquire Commonwealth in a deal valued at $2.7 billion is whether the 2,900 advisors at the boutiquey Commonwealth will feel at home at the sprawling LPL. Steinmeier said in an interview Tuesday that Commonwealth advisors in need of a little reassurance should look to LPL’s purchase in 2019 of Allen & Co.
LPL transferred over all 33 of Allen & Co.’s advisors — while retaining its brand name and leadership team. The goal now is to do the same with many of Commonwealth’s distinguishing features, including a system advisors can use to send complaints, praise or suggested improvements quickly up the food chain.
“We are using that model,” Steinmeier said. “And I think those advisors have been incredibly satisfied.”
READ MORE:LPL to ‘bend’ to become more like Commonwealth, Steinmeier saysLPL’s Steinmeier moves past CEO firing with eye on growthFueled by deals, LPL’s net new assets, headcount surge in Q4Commonwealth wins appeal of $93M SEC penalty ahead of LPL purchase
But Steinmeier and his colleagues clearly know they have some work to do if they’re to convince Commonwealth advisors that their practices will not simply be the same but actually better at LPL. Steinmeier said he is now “maniacally focused” on conveying that message.
Steinmeier said he spent the day the Commonwealth deal was announced doing two town-hall meetings with employees, three webinars and one dinner with a group of advisors. On Tuesday, he was planning another employee meeting, more webinars, another dinner and a hockey game with yet another set of advisors.
“I think there is some skepticism about our intention to retain and defend this community,” Steinmeier said. “And I am trying to make it as clear as possible that there shouldn’t be skepticism, because not only is this absolutely the right thing to do to maximize the experience for these advisors, it’s also the best thing for LPL and Commonwealth.”
Advisors like Commonwealth because it’s small
The biggest hindrance to LPL’s retention efforts, industry recruiters and other experts say, is the simple fact that many Commonwealth advisors choose their firm because it’s small. Andrew Evans, the CEO of the registered investment advisor Rossby Financial, said there’s no doubt Commonwealth advisors who move over to LPL will be in for some culture shock.
Commonwealth may be keeping its name and top executives. But some administrative functions will inevitably be absorbed into LPL’s much larger home office, he said.
If an advisor has a complaint, “I can now call Jim or I can call Mary, and we can talk about it and I can say, ‘Something was missed here,'” Evans said. “But LPL, at 29,000 advisors, it’s a bureaucracy. Now it’s going to be very hard to get any sort of sway or special consideration because the policies and procedures have to be so tight to keep this machine going.”
Evans said he knows what it’s like to work at a large firm and deliberately chose to work somewhere smaller. He left the independent broker-dealer Cambridge Investment Research to start his RIA in Melbourne, Florida, two years ago.
An acquisition without private equity
But he’s also quick to add that Commonwealth advisors should not overlook the advantages of LPL’s purchase deal. For one, it puts to an end recent speculation about who an ultimate buyer or investor might be.
Commonwealth was long known to be in search of an outside infusion of capital. LPL’s announcement should provide a sense of stability.
“Now you know what’s happening,” Evans said. “The company got sold to LPL. So you know who is going to be in senior management, and you know it’s not going to a private equity firm.”
Private equity owners have been making sizable inroads into the wealth management business in recent years, particularly by buying up RIA practices. Firms that work with private equity investors often benefit from generous infusions of capital.
The tradeoff, though, can be uncertainty about ownership. Many private equity firms operate under the assumption that they’ll be able to resell the companies they own within a set number of years.
Steinmeier said certainty about ownership is one of the many benefits LPL can bestow on advisors. Shares of LPL have been traded on public markets since 2010.
“What is the story that you want to tell your advisors? That they’re going to get traded again in five to six years?” Steinmeier said. “Or do you want to move to a firm which is stable, has a permanent capital structure and is not likely to be traded again in — you can count on one hand the number of years?”
How much will you pay me to stay?
Another consideration for Commonwealth advisors is the retention deals they’ll likely be offered to move over to LPL. Steinmeier said Tuesday individual advisors will be encouraged to move to LPL with offers that vary according to their experience and the size of their practice.
Phil Waxelbaum, the founder of the recruiting firm Masada Consulting, said he has no doubt LPL will open its pocketbook to retain advisors.
“Now, will the deals be worth 50% of an advisor’s trailing 12-months of revenue, or will it be 100%? I have no idea,” Waxelbaum said. “But they are going to write some very big checks on this one. And that tells you something about their retention mindset.”
LPL has said it expects to spend roughly $485 million to move over Commonwealth advisors, assets and clients. On top of that will be $155 million for technology improvements.
Adding those two expenses to the $2.7 billion purchase price, LPL has estimated it will ultimately be buying Commonwealth for roughly eight times its EBITDA — or earnings before interest, taxes, depreciation and amortization. But that figure relies on some assumptions, Devin Ryan, an analyst at the investment bank Citizens JMP, wrote in a research note Wednesday.
Most significantly, it depends on LPL being able to realize $200 million in additional revenue after moving assets Commonwealth now custodies at Fidelity into its own custody business. Without those additional revenues factored in, LPL is actually paying more than 20 times Commonwealth’s current EBITDA of roughly $120 million a year, Ryan wrote.
Ryan’s analysis expressed little doubt that LPL will achieve its goals. Among its many advantages as an acquirer, he noted, “LPL generates revenue and expense synergies from economies of scale, improved economics with self-custody, strong advisor retention history in M&A, increased attractiveness of the platform for advisors including those considering long-term succession.”
LPL’s success at moving assets, advisors
LPL has upped its retention game in recent years. After acquiring the wealth business of the asset manager Waddell & Reed in 2021 for $300 million, LPL boasted of retaining 95% of its assets. Four years earlier, it had kept just 70% of the assets from its acquisition of National Planning Holdings.
For the Commonwealth purchase, LPL has set itself a benchmark of 90% retention. Steinmeier said that mark isn’t necessarily meant to represent what he and his colleagues might consider “success” but is rather something “the financials that we have disclosed are predicated on.”
Steinmeier said Tuesday the deal to buy Commonwealth started coming together about three months ago. That means it wasn’t already in the works when he took over as CEO in October after his predecessor, Dan Arnold, was fired the same month for failing to maintain a respectful workplace.
LPL’s purchase of Commonwealth may not have been a prospect for Steinmeier and other executives when he took over as CEO, but it also wasn’t out of line with the growth path the firm has set itself on in recent years. As little as four years ago, LPL had fewer than 20,000 advisors and $1.13 trillion in client assets.
The firm’s upward trajectory toward a headcount of nearly 29,000 and roughly $1.7 trillion under management has been fueled largely by deals like its acquisition of Waddell & Reed. Other landmark transactions have included its purchase of Atria Wealth Solutions last year for upwards of $1 billion and agreements to provide RIA, brokerage and custody services to the wealth management units of both Prudential and Wintrust Financial.
Corey Kupfer, a lawyer specializing in merger and acquisition work for registered investment advisors, said he thinks the independent broker-dealers are entering a final phase of maturation for an industry likely to be dominated by a few large firms like LPL. The comparable wave of private equity-driven consolidation now happening among RIAs isn’t nearly as far along, he said.
“There once was all these smaller firms to buy out,” Kupfer said. “Now there are a lot fewer options, and you have the winners and losers. It will still be a little while on the RIA side before that happens. But it’s inevitable in my mind.”
The bigger, the better?
Steinmeier is quick to point out the advantages of size. Large firms can offer their advisors in-house specialists in financial, tax and estate planning; compliance experts for help staying on the right side of complex state and federal laws; the latest in artificial intelligence and other technologies; and ways to put clients in private markets and other alternatives to regular stocks and bonds.
Small players have a hard time matching those services.
“If your firm can’t invest at the highest levels, it’ll be challenged to keep pace, and I think its advisors will find that their firm is not able to be the partner that they expect to deliver the experiences that their clients need,” Steinmeier said. “That’s what’s driving it. It’s just, overall, the lowest common denominator is not nearly as low as it used to be.”
Not only is LPL good at bringing on advisors and assets from acquired firms, but it also has one of the best track records for retaining wealth managers.
In a podcast interview released a month ago by the recruiting firm Diamond Consultants, Steinmeier put LPL’s attrition rate for advisors — the share who leave in any given year — at 1.5%. That’s well below the industry standard of 5%, he said.
He attributed that feat in part to LPL’s ability to accommodate a large variety of practice types. LPL allows advisors to join as independent broker-dealers, as RIAs or through banks and credit unions. In 2019, it started its Linsco channel for wealth managers who wanted to become direct employees of the firm and hand over various administrative tasks while maintaining a good deal of control over their businesses.
Steinmeier: No tradeoff between size and independence
Throughout all of this, the watchword for Steinmeier and his colleagues has been “independence.” LPL got its start as a firm that could appeal to advisors at large wirehouses who were looking for more control over their businesses.
Steinmeier thinks his firm’s many affiliation options are a sign that it has outgrown the independent broker-dealer label. He instead likes to think of LPL as a direct competitor of Wall Street stalwarts like Merrill and Morgan Stanley. But as wirehouses steadily lose advisors to firms whose origins aren’t on Wall Street, Steinmeier thinks LPL stands out for being one of the few firms offering the benefits of both size and independence.
“There is a dominant model in the marketplace. It is unambiguously independence,” he said. “And so then the question becomes, are there independent firms who can step toe-to-toe with the leaders in the traditionally defined market, which would have been that wirehouse W-2 market? We intend to be that player.”
On the Diamond Consultants podcast, Steinmeier rejected the notion that advisors necessarily must choose between size and being independent. The real test of independence is whether advisors feel they can leave with little to no consequences.
“If you work at a firm that when you quit they try to destroy your business, you’re probably not independent,” Steinmeier said.
As Commonwealth advisors now contemplate their next steps, Steinmeier is at pains to tell them the least of their worries should be LPL’s size.
“We know that we can insulate smaller communities inside of LPL and give them the best of LPL while retaining that which they’ve come to love or building on it,” he told Financial Planning on Tuesday. “Commonwealth will be no different. We will keep Commonwealth intact. We will keep their service experience intact, keep their community intact. They have a very responsive culture to advisor input and feedback. We will keep all of that intact.”
