When you hear about the wealth advisory business, your first thought is probably names like Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS).
One player that gets less attention is the country’s biggest independent broker-dealer, LPL Financial (NASDAQ: LPLA). You can think of it as a back office for financial advisors at independent wealth management firms. It offers brokerage & advisory services, clearing operations, compliance & risk management, and independent investment research.
The company appears to be firing on all cylinders. “Given its business model, it makes sense that LPL has emerged as a platform of choice for financial advisors,” writes Morningstar analyst Sean Dunlop, who rates LPL as his favorite wealth management stock.
He particularly likes the business model for its “deepening toolkit of auxiliary services, like tax loss harvesting, estate planning, and a modest but growing assortment of alternative assets.”
That allows advisers to fully serve wealthier customers.
With such an adviser-friendly system, “it is no coincidence that LPL has emerged as the premier asset gatherer in the U.S. wealth management space,” Dunlop said.
Bringing in the bacon
It has posted average net new asset growth of 10.8% annually over the past decade. That easily tops money-management moguls Charles Schwab (NYSE: SCHW), Morgan Stanley, and JPMorgan Chase (NYSE: JPM).
LPL’s advisory and brokerage assets surged 36% last year to $2.4 trillion. That gain came as the company bought Commonwealth Financial for $2.7 billion last August. Commonwealth was the largest independent wealth management firm in the country, with 2,900 financial advisors and $285 billion of brokerage and advisory assets. The deal “added substantial scale at a reasonably fair price,” Dunlop explained.
LPL has recruited new customers (financial advisors) efficiently. “it hasn’t been buying market share with transition assistance or forgivable loans,” he said.
“Rather, the firm’s commitment to providing advisers with compelling compensation rates, good service levels, and a competitive technology platform and product shelf has allowed LPL to gradually emerge as a top asset gatherer.” And once it gathers those assets, it gains leverage over relatively fixed costs for trading, compliance, risk management, and clearing.
LPL pays out almost 90% of adviser-generated revenue as wages, Dunlop notes, easily surpassing the 30%-50% payouts common in the employee-advisor model and making the company attractive to advisers. LPL continues to expect asset retention of about 90%.
Bounteous revenue, strong profit
It saw revenue jump 37% last year, to $17 billion, helped by the Commonwealth acquisition. Adjusted net income soared 28%. It posted a 32.6% adjusted operating profit margin in the fourth quarter. Dunlop expects that to hit 41% to 42% by next year and stay at that level through 2030.
In the stock market, LPL has dropped 18% year to date amid investor concern that artificial intelligence will displace financial advisors. However, “we have seen this story before with robo [automated] advice, which has made only limited inroads despite having been around for longer than a decade,” Dunlop said. AI won’t wipe advisers away, he said.
In any case, LPL stock has produced solid long-term performance, with a total annualized return of 16% for the last five years, far above the 10% return for the S&P 500 Financials index.
So LPL may have a bright future. “It has built a compelling value proposition around high adviser payouts, a competitive technology platform and product shelf, the provision of auxiliary services, and strong customer service levels,” Dunlop said.
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