5 Trends Impacting LPL’s Results & IBD Space

3. Compliance is complex – and costly.

LPL, which spent $36 million on regulatory charges in 2014, has added nearly 400 employees to its compliance, legal and control staff. As a result, the IBD "tracked several areas of exposure generally involving the thoroughness or completeness of our processes and systems of supervision and surveillance of several complex products," according to Casady.

He adds that the firm's regulatory charges "are unpredictable quarter to quarter," but that it believes it has incurred "the majority of the cost of these issues and have the compliance infrastructure to mitigate future exceptions, which should lead to meaningfully lower annual regulatory charges beginning in 2016."

As for the expected fiduciary standard being hammered out by the Department of Labor, LPL should have the "scale and flexibility" to adjust. Its assessment is that the current proposal's restriction on alternative investment sales, for instance, would have an impact "of 2% or less" on its pre-tax profit, Casady explains.

The company adds that it expects its 2015 regulatory to be lower than in 2014 and that its 2016 expenses in this area should "be meaningfully lower than the elevated levels seen in 2014 and 2015," according to interim CFO Tom Lux.

4. It's tough to balance technology investments and lower fees.

In 2016, LPL intends to "meaningfully lower" certain pricing on its largest platform, which it hopes will help advisors boost business in return and, thus, make up for lower revenues it collects from them (tied to the lower fees).

It's also working with a third-party on an automated-advice (i.e. robo) tool, so advisors can reach out in more ways to millennial, multi-generational families and clients with smaller amounts of funds to invest.

"We will also be waiving our IRA maintenance fee on two of our centrally managed advisory platforms," Casady said. This move should give it "additional flexibility" in implementing the pending DOL rule.

Funding these technology investments is coming from "new services and programs and a more efficient use of resources elsewhere," according to Lux.

The company says that, on a net basis, the new technology spending could have an annual pre-tax profit impact "of less than $5 million" next year.

5. As some firms fight headwinds, LPL will pick them up.

Curian Capital, for instance is shutting down its third-party asset manager. That means LPL-affiliated reps could move $1.3 billion to $1.5 billion of assets onto its platforms.

"If we were to capture just roughly 50% of those assets," said Casady, "that by itself would overwhelm any of the price changes at all. So it's an economically sound strategy for us to pass that scale along. It's also a better mix shift for us in terms of moving assets of a client's overall portfolio from brokerage to advisory, and within advisory, to the centrally balanced platforms, which are our highest profit margin platforms in advisory even after these changes."

And there could be movement from smaller financial firms shutting down their BDs and selling to LPL, the executive says. "Zions is actually a good example on the banking side; it is deciding to get out of the brokerage setup they had and transfer their advisors to us, using our broker-dealers. So we see lots of opportunity for that growth as a result of that increased complexity in managing these businesses."

 – See related ThinkAdvisor story: DOL Tackles Key Fiduciary Plan Proposals at Hearings.