LPL dumping two branch offices with $20 billion in assets

LPL Financial Holdings on Thursday in its statement of second quarter earnings said it was cutting two branch offices - known as OSJs or offices of supervisory jurisdiction in the parlance of independent broker-dealers - with $20 billion in assets from its platform.

The company announced "a planned separation from two misaligned large OSJs on our platform that collectively have $20 billion of client assets, which began to off-board in July," according to LPL's earning release for the three months ending in June.

As of Friday afternoon, it was not clear who the "misaligned" branch offices were or how many financial advisors would be moving to another broker-dealer. An LPL spokesperson declined to comment when asked about the matter.

In response to LPL's decision to cut the two branch offices, market sources said they were waiting for the giant firm to make such a move. For years, LPL has been trying to figure out for years how to make a better return on its large OSJs, which use other custodians like Schwab and Pershing, along with LPL, to custody registered investment advisor assets.

Large branch offices, or OSJs, at many independent broker-dealers typically have their own separate registered investment advisors that custody assets at multiple firms.

All IBDs, not just LPL, have a love/hate relationship with OSJs, industry sources said. IBDs love the number of financial advisors an OSJ can bring into the firm at one time, but they hate the power OSJs have to negotiate fees to their advantage.

It's more profitable for an independent broker-dealer to work with smaller teams of financial advisors.

The $20 billion in assets represents 1.3% of LPL's total assets, which were $1.5 trillion at the end of June.

Dan Arnold, LPL's chief executive, did not name the OSJs it was cutting ties with Thursday afternoon during the firm's conference call with analysts to discuss second quarter earnings. He did add that OSJs making acquisitions sometimes pose a problem for LPL.

"We see in some cases where an OSJ may buy up their advisors' practices, turn them into more of an employee-based construct, and ultimately, because of that alignment, that approach, it's more of a captive type of model at that point, which again, is very different from the principles of independence and providing the flexibility for those advisors to move those assets where they want to or go where they want to," Arnold said

"As soon as they begin to lose the principles of independence within the model, we have a hard time with that sitting within our platform and within our ecosystem," he added.

LPL's financial advisor headcount at the end of June was 23,462, up 578 sequentially and 1,520 year-over-year. The firm's recruited assets for the quarter were $24 billion.

Meanwhile, Arnold downplayed the significance of competitors recently increasing yields on client cash. One analyst estimated recently that higher yields on cash could cost LPL up to $380 million.

"As for the firms that have made changes, they have different business models and monetization frameworks, so we can only speculate as to the issues they may be addressing," Arnold said.

"As it relates to LPL, we continuously strive to ensure advisors have choice in the tools and products they use to serve their clients in a comprehensive way and feel good about our position both competitively and regulatory," he said. "To that end, and specific to client cash, our broad-based offerings range from solutions for operational balances to cash-like alternatives when seeking yield or income."

The share price of LPL stock, with the ticker LPLA, has taken a beating in the wake of brokerage firms raising their yields on cash in various clients' advisory accounts. Shares of LPLA were trading slightly above $225 on Friday afternoon, down more than 5.5% for the day and 15% since July 15.