March 6 Add LPL Financial Holdings to the list of U.S. companies and economists blaming a falling business metric this winter on the weather.
The fourth largest U.S. brokerage firm, as measured by the 13,673 financial advisers who use its services, said on Thursday that the pace of new advisers affiliating with the firm has slowed from the torrid levels of late 2013 "in part due to disruptive weather." Broker count is a key metric of revenue growth and profit at LPL, a company spokeswoman said.
In addition to unusually frigid weather that curbed one-on-one meetings with brokers considering joining from other firms, a bank with about 40 brokers has dropped LPL as its brokerage provider, LPL said in an update on its first-quarter 2014 operations.
Two reports from the Federal Reserve Board this week said severe weather in different parts of the United States have halted the economic recovery this winter as consumers stay away from shopping malls and other commercial centers. and.
LPL, which is jointly based in San Diego and Boston, disclosed the recruiting slowdown in a presentation to investors that was webcast from a Sanford Bernstein conference. The company, which went public in 2010, did not make a specific forecast about its first-quarter revenue or profit.
Known as an independent broker-dealer because it sells its investment capabilities to financial advisers who are not direct employees, LPL ended 2013 with a hiring spree. It recruited 110 net new advisers in last year's fourth quarter, up from just 25 in the first quarter of 2013. It typically attracts between 400 and 450 advisers annually, making it one of the most active recruiters in the retail securities industry.
LPL traditionally draws brokers from other independent firms whose clients tend to be less affluent than those with $250,000 of investable assets or higher that are the focus of more traditional big brokerage firms. But LPL Chief Financial Officer Dan Arnold said in the presentation that since the financial crisis of 2008, "we have been trying to go up-market and recruit larger advisers."
In spite of the weather-related slowdown, the recruiting "pipeline" of interested prospects remains healthy and its current brokers' productivity remained strong through the end of February because clients are actively engaged in the market, Arnold said. But he repeated LPL's warning in January that sales of profitable hedge funds and other alternative investments that reached unusually high levels in the second half of 2013 are falling.
Cash held in client accounts, a barometer of how confident investors feel about putting money into the market, began falling late last year and remains at end-of-2013 levels as clients put their money to work, LPL said. That contrasts with some other large brokerage firms. The head of sales at Wells Fargo Advisors last month told the firm's more than 11,000 brokers that client cash has reached near-record levels, probably because of volatile markets in January and early February.
Brokerage firms often book strong profits by investing client cash at higher returns than they pay for holding the cash. But as interest rates head into their seventh year at rock-bottom short-term and long-term levels, brokerage firms remain deprived of a core revenue source. LPL on Thursday repeated earlier guidance that it expects its return on client cash to fall further in 2014 as the Fed keeps rates low.
Independent brokerages such as LPL have thin profit margins because they allow brokers to keep much more of the fees and commissions they collect from clients than conventional firms where brokers are full-time employees. The average "payout" for an LPL broker in the fourth quarter of last year was 87.4 percent of the revenue they produced, up from 85.6 percent earlier in the year. The range is expected to be similar this year, LPL said.
Conventional broker-dealers such as Morgan Stanley, Bank of America's Merrill Lynch and Wells Fargo & Co's Wells Fargo Advisors, in contrast, generally let their top brokers keep 40 percent to 45 percent of the revenue they produce. The tradeoff is that those firms pay for brokers' overhead, marketing and other services. Independent firms such as LPL require their affiliated brokers to pay for most of their marketing, compliance and other business expenses.
Like most firms in the brokerage industry, LPL is encouraging advisers to put clients into fee-based accounts, rather than traditional accounts that charge commissions when trades are made. At the end of 2013, 34 percent of LPL client assets were in fee-based accounts, up from 26 percent at the end of 2007. Gross profit margin on fee-based assets is 1.4 times higher than in traditional brokerage accounts, Arnold said. For every 5 percent of brokerage assets that shift to an advisory account, LPL generates an extra $22 million, he said.
Shares of LPL fell almost 1 percent, or 54 cents, to $53.47 on the Nasdaq on Thursday.