LPL offers new custody service

LPL Financial Corp. is dropping restrictive rules and fees on the custody of assets in an effort to appease its restless big brokers and to win the assets of prospective ones. The Boston-based broker-dealer would allow registered investment advisers to hold fee-based assets with outside custodians such as Fidelity Investments or The Charles Schwab Corp. The largest independent broker-dealer is also rolling out its own custody platform for registered investment advisers later this year. To make the new custody platform for RIAs look and feel more like that of Schwab or Fidelity, LPL in November hired Gary Gallagher away from Fidelity. Mr. Gallagher, who is executive vice president and head of RIA services at LPL, had been with Boston-based Fidelity for 13 years. Most recently, he served as senior vice president of Fidelity Institutional Wealth Services. While he did not design the Fidelity platform, he has been -credited with taking its offerings upmarket. Currently, the $75 billion of assets advised on a fee basis through LPL brokers is under Strategic Asset Management and smaller programs, in-cluding: Manager Select, Optimum Market Portfolios, Personal Wealth Portfolios and Model Wealth Portfolios. Those assets are in custody under LPL's own RIAs, and brokers pay fees on those assets for research, re-balancing and other administration. These custody-related charges are 0.11% on average and can range as high as 0.2%, according to LPL officials. Under the new custody structure, LPL advisers with their own RIA will avoid these charges unless they choose to invest through the established asset management programs. LPL advisers will, however, pay a fee of undisclosed amount on assets kept at other custodians. The fee covers compliance costs. The company's plans for a new custody service marks a fundamental shift, said Mark Casady, chairman and chief executive of LPL. "We're saying, 'If you want your own RIA, we will be able to support you,'" he said. "We're now saying, 'We're unbiased about the business model you choose.'" The support of Cambridge Investment Research Inc. and other broker-dealers for the RIA model is important because it is the market leader, said Philip Palaveev, partner with Moss Adams LLP in Seattle. "When LPL does it, it creates the standard of how we deal with RIAs" as an industry, he said. But one competitor said the move mostly shows that LPL is late to the game. "They're just seven years late," compared with Raymond James Investment Advisors Division's launch of similar custody services in 2001, said Michael DiGirolamo, managing director and senior vice president of that company, which is based in St. Petersburg, Fla. LPL, which has $284 billion in assets under management, held off on custody services because there wasn't demand for it, Mr. Casady said. The change toward a wealth management model made apparent the demand for a more complex advisory model about two years ago, he added. But LPL hastened to act this year after 50 of its top brokers expressed interest in becoming RIAs to do more fee-based business, according to Mr. Casady. About 10 of them are in the process of registering their practices directly with the Securities and Exchange Commission, he added. This contingent will constitute the de facto beta testers of LPL's new custody platform, Mr. Casady said. LPL expects all of these RIA-seeking brokers to retain their brokerage licenses in order to make commission sales on products such as annuities, he added. But other brokers with big practices would rather leave LPL than be its custody pioneers, said an executive at a competing broker-dealer, who requested anonymity. "In fact, I'm meeting with one [LPL broker], who said to me, 'I'm not going to be a guinea pig for them'" in their new RIA custody business, he said. Meanwhile, Mr. Casady gave an example of how better custody services will also help to win the accounts of big brokers defecting "from a broker [that was] recently acquired." The brokers from that unnamed broker-dealer told him that they want to evolve their business toward an RIA model in the next few years. They seek assurances that LPL's rules and fees will not impede that process, Mr. Casady said. "We found that [our policies surrounding asset custody] are limiting and not helpful with recruiting breakaway brokers," he said. LPL has analyzed broker attitudes correctly, according to Eric Schwartz, chief executive and chairman of Fairfield, Iowa-based Cambridge Investment Research, which also allows its brokers to keep assets with firms such as Fidelity and Schwab. "They're looking at big billions [of adviser assets] that they would be losing" if they stood pat, Mr. Schwartz said. But it's not just big brokers who seek to do fee business, considering that 8,000 LPL brokers already have some assets managed under LPL's corporate RIA, according to Mr. Casady. The elimination of custody restrictions could be good news for San Francisco-based Schwab, according to Barnaby Grist, managing director of strategic business development for Schwab Institutional. "A lot depends on the reality behind the words [from LPL] here, but we'd expect a fair proportion of their largest advisers to open a relationship with Schwab," he said. "The average LPL adviser has about $15 million, and Schwab advisers have $100 million," Mr. Grist added. "It's a different sweet spot. Their bigger advisers outgrew that model, and they're looking to Schwab for better technology, experience and product choice." Fidelity has the "most compelling and competitive" platform for hybrid advisers, said Scott Dell'Orfano, executive vice president of Fidelity Institutional Wealth Services. Pershing of Jersey City, N.J., continues to "develop and deliver" services for hybrid advisers, Richard Brueckner, its chairman and chief executive, wrote in an e-mailed statement. Yet there will be incentives for a hybrid broker to keep all assets at LPL, Mr. Casady said. There will be a single account number, and all the account information will be integrated so it can be viewed on one screen. These are all features already enjoyed by dually registered advisers who keep assets with Raymond James, Mr. DiGirolamo said. Email Brooke Southall at bsouthall@investmentnews.com.