LPL Financial Nears Commonwealth Platform Conversion
LPL Financial closed on its acquisition of Commonwealth Financial Network last year, and it’s slated to convert the independent broker/dealer’s advisors to the LPL platform this weekend. For former Commonwealth advisors, that includes moving off Advisor360°, the technology workstation originally developed inside the firm, to LPL’s ClientWorks.
While some equity analysts revised their estimates downward in the wake of LPL’s third-quarter earnings, when the firm lowered expectations for how many Commonwealth advisors will stick with LPL, others say that is a short-sighted analysis and that the assimilation of Commonwealth will be an accelerant for LPL’s business and stock price.
Devin Ryan, a managing director at Citizens Bank, said LPL has spent considerable time ensuring a smooth transition for Commonwealth advisors and clients, and, once complete, he expects LPL to recruit aggressively and use the Commonwealth acquisition as a growth catalyst.
“This next phase, I think, really starts to open back up,” LPL going on “offense” in the marketplace, and “also for the Commonwealth group, where I think our view has been we probably wouldn’t see a lot of recruiting” prior to the conversion, he said.
Once LPL fully assimilates Commonwealth, there are opportunities to roll out some “best practices” across the enterprise, including tools such as account householding and Commonwealth’s service organization, which LPL will retain, Ryan added.
The firm will also have more resources to recruit aggressively. In July, LPL CEO Rich Steinmeier said the firm would have more capacity to engage directly with advisors and return to previous recruiting levels.
To be sure, competitors have been boosting their recruiting packages to lure Commonwealth advisors away.
“Commonwealth is obviously a prized platform; recruiting around those advisors has been intense,” Ryan said. “And our expectation is that you may see a bit of mean reversion. I don’t think it’s a blanket comment, but the pricing may start to come back down on the other side of the conversion as well.”
In 2017, LPL acquired National Planning Holdings, the network of broker/dealers affiliated with Jackson National Life Insurance Company, from Prudential for $325 million. But the firm had trouble keeping those advisors, resulting in a 59% retention rate among the 3,200 who were originally affiliated with NPH. It held onto a total $75 billion of NPH assets.
But Ryan said he expects this transition to go smoothly.
Wilma Burdis, director of equity research for life insurance and asset management at Raymond James & Associates, said LPL has a good reputation for integrating other broker/dealers.
“You can sort of look at some of these mid-sized firms like a Commonwealth and realize that their operating efficiency is just not what LPL’s is,” Burdis said. “So I think that there are definitely things that are going to be redundant.”
At the same time, “I think there’s going to be investments that they have to make. Presumably, they’ve budgeted for those as well, but you’ve got to have investments in servicing … to make sure … everybody is covered.”
Burdis wasn’t concerned about more advisor attrition after the conversion.
“It seems like people are a little bit less afraid of re-papering or conversions now than they used to be,” she said. “I think that people probably have been evaluating this decision for a pretty long time at this point. I think the ones who are making that conversion and staying on are probably pretty comfortable with it.”
In an analyst note, David Smith, equity research analyst for banks and capital markets at Truist, said the cash sweep and sponsor-agreement revenue synergies are expected to come earlier after conversion, while the expense benefits will phase in more gradually.
During the firm’s recent earnings call, some analysts expressed concern about the LPL’s net new asset growth. The firm reported organic net new assets of $29 billion during the third quarter, a 5% annualized growth rate, its best organic growth rate in over a year, excluding large institutional wins. But Steven Chubak, a managing director at Wolfe Research, said the firm’s NNA has struggled to break above that level on a sustainable basis.
Despite several concerns brought up by investors in LPL stock following its third-quarter earnings, “we believe the core tenets of the investment case remain intact,” Chubak said in his analyst note.
He said it’s the most mispriced stock in his coverage.
One concern for investors was the Commonwealth retention rate, which was reduced from 85% to 83%.
“We found it very discouraging how much attention this walk-back garnered in our client conversations, because the outcome has little bearing on the company’s fundamentals (and run-rate EBITDA is the same from the time of deal announcement),” Chubak wrote.
