LPL looks for gold in DC market

Through its recently announced purchase of National Retirement Partners Inc., LPL Investment Holdings Inc. is set to enter the demanding and competitive market for smaller to midsize retirement plans. The addition of NRP's 350 financial advisers will place LPL — which will rename the business LPL Financial Retirement Partners — on a more competitive plane with CapTrust Financial Advisors, whose 53 advisers focus on plans in the $50 million to $500 million range, and Mid Atlantic Capital Group Inc., another middle-market player, with 144 producing advisers. It also will place the firm in a better competitive position with wirehouses for larger 401(k) plans. But LPL will have a lot of work to do. “Many of its competitors have been around a long time and have good infrastructure built out to handle 401(k) reps,” said Jonathan Henschen, who heads an eponymous recruiting firm. “LPL is going out and embracing it, but being an ERISA 3(38) fiduciary requires lots of support for advisers,” said Tom Modestino, an associate director at Cerulli Associates Inc., referring to the section of the Employee Retirement Income Security Act of 1974 that governs investment managers. LPL, which has filed for an initial public offering, is in its quiet period and declined to comment on its plans for the retirement market.

SMALLER-PLAN FOCUS

As is the case with other independent broker-dealers, few LPL brokers serve many 401(k) plans, and those who do tend to serve smaller plans. According to estimates for last year from Cerulli, there are a whopping 329,386 plans under $1 million in size, for a total of $128 billion in assets. Going up the asset scale, there are 135,712 plans in the $1 million to $10 million range, accounting for $371 billion in assets, and about 15,000 plans that have between $10 million and $50 million in assets, or $306 billion in total. There also are 2,368 plans in the $50 million to $100 million range, with $146 billion in total, and 2,440 plans with $100 million to $500 million in assets that hold a total of $419 billion. The NRP advisers with whom Mr. Henschen works have 401(k) plan assets ranging from about $500 million to $1 billion, he said. The plans advised by the majority of NRP advisers generally have less than $10 million in assets, said a person with knowledge of the firm's business. With its retirement unit in place, LPL may be able to lure wirehouse advisers who specialize in larger 401(k) plans, Mr. Henschen said. “There are many more reps with large 401(k) books in the wirehouse channel than there are in the independent channel,” he said. Mid Atlantic recruits heavily from wirehouses, attracting 80% of its new blood from large firms, and recently ramped up its recruiting efforts. “I think we're better-able to compete because of our size and emphasis,” said Timothy Friday, group chief executive at the firm. “When you're small and nimble, you can steer the ship easily. If you're a large organization, anytime you bring in products, services and compliance requirements, it becomes a large endeavor.” Brokerage firms specializing in 401(k) plans have been a step ahead of other broker-dealers in complying with Labor Department regulations governing retirement plans, including the recently released rules on plan fee disclosure. Since NRP's advisers work under sophisticated business models — such as exercising discretion on participant accounts or offering their own collective investment funds — LPL will likely have to integrate the smaller firm's compliance and supervision models. Labor Department compliance is difficult, as evidenced by broker-dealers that lately have been grappling with the new fee disclosure rules. Reporting revenue-sharing fees that many advisers receive from their 401(k) business is likely to be a challenge, said Sean Cunniff, re-search director for brokerage and wealth management at The Tower Group Inc. Those challenges aside, ob-servers noted that the biggest hurdle LPL will have to overcome is to ensure that it retains the NRP additions, particularly in the first two years of the merger. “There will be a honeymoon period, and they'll try not to rock the boat for the first six months or so,” said Mr. Henschen. He observed that LPL has had a “decent track record” in keeping its reps, despite losing some of them when it bought three firms from Pacific Life Insurance Co. and then moved the firms from Pershing LLC's clearing platform to its own. Rivals Mid Atlantic and United Planners' Financial Services of America have both reported receiving inquiries from NRP advisers; the former has heard from “several” reps, while the latter has heard from 12 groups of NRP advisers.

ADVISERS NERVOUS

“The main concern I'm hearing is "How soon does the rug get pulled?'” said Sheila Cuffari-Agasi, vice president, partner development, at United Planners', which has about 300 advisers. Advisers are nervous about what could happen to the clearing platform and the custodial options available to them and their 401(k) business, she added. Still, none of the reps calling either firm have committed to making a move. Some NRP advisers have said that recruiters and rival firms alike have come calling, too. Larry Deatherage, a partner with The Founders Group, has heard from smaller broker-dealers, as well as CapTrust. But he doesn't expect to go anywhere. “There's always an unknown with these mergers, but we assume we've done it right, and everyone will know in a few years,” Mr. Deatherage said. “LPL wants to be the biggest and best. They leap-frogged wirehouses by acquiring us, and they have become one of the biggest and best.” E-mail Darla Mercado at -dmercado@investmentnews.com.