LPL's paradox: Cut costs and outsource for growth

Two separate moves last week — one that involved shuttering a new business and the other job outsourcing — highlight the challenge facing LPL Financial LLC as it pushes to drive growth and contain costs. That seemingly paradoxical challenge is, of course, nothing new for big, established companies. But for LPL Financial, which has 13,400 affiliated independent advisers and 700 financial institutions, it represents a new stage in its life as a public company, industry observers said. “LPL is at the point where it's the product of many mergers,” said Alois Pirker, research director with Aite Group LLC. “It's reached a certain size, and they have to look at the operating model and ask, "How much do operations cost and how efficient are they?'” LPL, which in November 2010 became the first purely independent broker-dealer to go public, has long been known for breakneck growth — both in terms of advisers and other broker-dealers. This year, however, that growth is showing signs of tapering, thanks mainly to a difficult recruiting environment. Shares of LPL (LPLA), which are trading at about $37, have climbed about 15% since the company's public debut. Over the one-year period ended Aug. 29, however, LPL's shares are up more than 31%. The company has a market capitalization of nearly $4 billion. LPL last week pulled the plug on NestWise LLC, a new venture that promised to train young advisers and work with clients with less than $100,000 in assets. The unit employed 37 people. LPL launched NestWise in April 2012 with much fanfare. LPL chief executive Mark Casady said he expected banks and credit unions looking to expand their offerings of securities products as being potentially receptive to younger advisers, despite a relative lack of experience. LPL did not break out NestWise financial results in earnings. “LPL Financial has made a strategic decision to close its NestWise business unit, effective Sept. 1,” LPL spokeswoman Betsy Weinberger wrote in an e-mail to InvestmentNews. “LPL Financial believes financial resources earmarked for NestWise can be more effectively deployed in other areas of the business, and will be redeployed into our core business-consulting activities for both advisers and institutions for training development.” NestWise employees and advisers were told that they are welcome to apply for other positions at the company. For their part, LPL's advisers welcome the firm's efforts to reconcile its ambitions with reality. “I think they did the smart thing and cut their losses to refocus on areas where they can add the most value,” said Mark Cortazzo, senior partner at Macro Consulting Group LLC, an affiliate of LPL. “You can't be everything to everybody.” Mike Sharples, managing partner at MKS Wealth Management, another LPL affiliate, takes a similar view. “I like that they're trying to look forward,” he said. “Everybody was trying to really look at that online advising business. They gave it a good shot, but it didn't seem like it worked. They're being thoughtful about what's going to be profitable and what's going to be their area of expertise.” Last year, LPL shifted some key personnel to NestWise. Longtime LPL president Esther Stearns was moved to take over as chief executive of the subsidiary. Another longtime LPL executive, former head of marketing Kandis Bates, was NestWise's chief administrative officer. In an e-mail to InvestmentNews, Ms. Stearns wrote that she was disappointed in the decision to close NestWise, adding that she had no plans for the immediate future.

'Support middle class'

“The most important thing, I believe, is that our industry [should] continue to find ways to support the middle class with their increasingly challenging and complex financial decisions,” Ms. Stearns wrote. “I am sorry NestWise will not be part of addressing that need, but I am very supportive of the other firms out there who are working on this.” NestWise had only 120 clients and $130,000 in assets under management at the end of last year, according to the firm's Form ADV. The expense of training new advisers has sharply curtailed such programs on Wall Street in recent years. LPL's launch of NestWise appeared to buck that trend, but its closing underscores the difficulty large firms such as LPL have in finding the next wave of financial professionals. Despite putting the kibosh on NestWise, LPL “learned a lot” about working with new advisers and will put that education to work down the road, Ms. Weinberger wrote. Also last week, details of LPL's plan to outsource workers emerged as the firm told California officials it planned to lay off up to 130 employees in San Diego and move their jobs out of the company. LPL told the state of its plans in an Aug. 16 layoff notice, according to a report from the San Diego Union Tribune. An initial 31 workers are likely to be let go by mid-October, including risk management analysts, dividends operations specialists and senior accountants, according to the report. Other workers would be laid off through February. With 3,000 employees, the layoffs and outsourcing affect a little more than 4% of the company's full-time workers. LPL's major partner in the outsourcing effort is Accenture, an outsourcing company that has 266,000 employees and operations in 54 countries, including India and the Philippines. LPL expects its outsourcing efforts to result in $20 million in savings in 2014 and roughly $30 million in 2015.

Customers unaffected

“There will be no outsourcing of customer-facing functions,” Ms. Weinberger wrote. “We still anticipate growing in other areas of the business, so although much of this savings will come from transitioning responsibilities to outsourcing relationships, our head count will grow in our core areas as the business grows.” In fact, the company has about 200 job openings at its three locations in San Diego, Boston and Charlotte, N.C., she added. The latest round of cost cutting is a sign that LPL is as focused on costs as it is on growth, industry observers said. “LPL is publicly traded and that's probably why they're doing the cost cutting,” said Jonathan Henschen, an industry recruiter. “Shareholders are part of the equation.” Jason Kephart contributed to this story.