LPL Expands Custodial Service for Fee-Only Advisors

Although LPL Financial has been in the RIA custody business since 2008, the company is now expanding that offering and will position it as a concierge, "white-glove"-type service, according to Marc Cohen, executive vice president of LPL's advisor business.

To help communicate what it is offering, "we're going to be expanding our marketing efforts," he told ThinkAdvisor in a phone interview on Tuesday. "It's imminent. We're in the midst of that launch right now" and will be "participating in more events [and] placing advertising" for the custodial offering as part of that push, he said.

Earlier this year, LPL hired a dedicated custodial sales team, he said.

Up until now, LPL's custodial business has been mainly focused on supporting the hybrid advisory business of its registered representatives. However, the RIA business has grown significantly for LPL and the industry overall, according to Cohen.

LPL now has "a bit over $500 billion in RIA assets and custody," he said. That makes it the third-largest RIA custodian, behind only Charles Schwab and Fidelity, Cohen said, citing Cerulli data. (Cerulli did not immediately respond to confirm that.)

"What we see here is … a reinvestment and an expansion of our investment into delivering services to independent RIAs as an independent custodian," Cohen explained.

The decision to expand LPL's custodial business, first reported by WealthManagement.com, didn't come as a huge surprise. After all, Dan Arnold, its CEO and president, said during an earnings call in February that the firm was planning to evolve its custodial platform and enhance service.

The decision was also based on a clear industry trend. "It's indisputable that the whole industry is moving much more towards [the] advisory fee-based business and away from [the] commissionable brokers' business," Cohen explained.

"If you look at LPL, just a couple of years ago, only about 40% of our assets were in advisory accounts," he told ThinkAdvisor. "Now we're at a spot where a bit over 50% is and we've moved that pretty quickly. We're seeing about 75 cents on every dollar coming into the firm's custody being placed into advisory accounts versus brokerage accounts. So it's very clear that there's been a massive shift into that direction."

That trend has been driven by the "pressures that financial advisors are feeling from their clients to deliver more holistic, comprehensive support and financial planning, as opposed to years ago where someone felt OK just calling someone up and asking them to place a trade on their behalf as a broker," he explained.

With the expanded custodial offering, however, "we can't simply deliver trade execution and settlements and reporting capabilities the way that a custodian is legally required to," he said. "We need to also be able to provide much more broader comprehensive solutions to our clients the same way that the advisors are delivering it to their clients."

Initial Reactions

LPL's initiative is "part of a broad-based industry recognition that the independent RIA model is gaining some real traction and that it's increasingly one to which many advisors aspire," according to executive recruiter Mark Elzweig.

But the "level of support that LPL is providing is unusual," he told ThinkAdvisor. "Smaller RIAs often find themselves calling 800 numbers to resolve their support issues at large custodians. Also, access to the additional resources of the LPL platform is a very attractive feature" of its offering, he said.

"This is a seminal moment in the history of LPL," according to Timothy Welsh, president, CEO and founder of Nexus Strategy. "For years they have been slowly acknowledging that the fully independent RIA model has some merit, to protect their commission-driven brokerage model and keep their reps in their seats, and really have just been playing defense against Schwab, Fidelity" and TD Ameritrade, among other rivals, he told ThinkAdvisor.

For LPL to now "fully launch a standalone RIA custody business makes a big statement that the future really is RIA (not brokerage) and is a big departure from their past strategy," Welsh explained. "Ultimately, the harder you hold onto something, the bigger the explosion, so good for LPL in making this decision."

But LPL "will have a massive internal messaging battle on their hands trying to convince their thousands of IBD reps that they aren't creating a new competitor for themselves," he warned.

LPL is "taking the Wayne Gretzky approach where they are going where the puck will be," according to recruiter Jon Henschen, president of Henschen & Associates, referring to the hockey star who famously said: "I skate to where the puck is going, not where it has been."

"Capturing assets in various models only makes sense, especially as advisor will increasingly gravitate to a fee-only model," Henschen predicted.

LPL has several advantages going for it, he said, noting it "brings advisors name branding, research, scale savings, and many practice management and marketing tools to help their practices better compete." He predicted that, "as time passes, they will see an increasing amount of RIAs join their ranks."

A 'Natural Evolution'

Now that LPL has "more than a half a trillion dollars in assets" on the RIA side, "there's also been an evolution and a bit of a change in the makeup of the clients that are looking for service and that are looking for help that LPL can provide," Cohen said.

Therefore, the firm "spent some time over the course of the last several years preparing ourselves and, in particular, accelerating that effort of late to be in a spot where we can be a meaningful partner to independent RIAs who operate both as hybrid, as well as those who operate in a fee-only capacity for their advisory business," he explained.

It has been a "natural evolution" for LPL and when it comes to the concierge service that it is now in position to offer, Cohen said: "We think we've got a differentiated value proposition on the technology side, as well as on the service front to be able to assist and support those advisors in running their practices and their businesses effectively."

At the same time, "we see some of the larger competitors in the space making some business decisions that we see in some ways abdicate a lot of their responsibilities that RIAs have over time come to expect of them," he told ThinkAdvisor.

But he was quick to add that LPL doesn't plan to entirely shift its focus to the fee-only RIA custody side of its business. For one thing, there are many independent RIAs who have shut down their own RIAs and shifted to join corporate RIAs for reasons that include the large regulatory issues they don't want to deal with on their own, he said.

To meet that demand, LPL "launched a new capability last year for those folks who are looking to shut down their own RIAs … where they can operate on the LPL corporate RIA today, without any brokerage licenses or brokerage business," he noted.

There is no minimum asset threshold for an RIA to custody with LPL, and there are no fees associated with being multi-custodial on LPL's fee-only platform. For any assets that are held elsewhere, however, "we do have a fee that we assess for the brokerage assets of the supervision that we have to do," Cohen said.

Explaining the reasoning behind its decision to not implement a minimum asset amount to join it, he said: "Just because you have a smaller book of business shouldn't prohibit you or restrict you from running your own RIA, if that's what's right for you and your clients." LPL as a custodian does not charge fees for any RIA regardless if they're fee-only or hybrid, he added.

The expanded custodial offering comes shortly after LPL announced its inclusion in the 2021 Fortune 500 ranking for the first time. That makes LPL the only independent broker-dealer in the Fortune 500. LPL was No. 466 on the list of the largest U.S. companies ranked by annual revenue. LPL reported record revenue of $5.9 billion in 2020, an increase of almost 37% over the last three years.