LPL dumps Pershing to clear trades itself

LPL Financial Services, the largest company that caters exclusively to independent brokers, is betting tens of millions of dollars it can do a better job clearing its trades than Pershing, which has provided the service since the early 1980s.

By bringing back-office functions in-house this June, LPL is hoping to be more flexible in rolling out new services, reducing costs and allowing its representatives to tailor their client performance reports.

If it guesses wrong and the new systems break down, LPL risks losing some of its 3,000 representatives and their clients.

“It gives us an opportunity to be flexible, to have control over price, to have control over service, and we think it’s going to put us in an excellent position,” says national sales manager Jim Putnam, a 17-year veteran of LPL, which has headquarters in both Boston and San Diego.

“We’re going to have one of the best pricing and service paradigms in the independent broker business.”

Mr. Putnam says the firm will immediately cut prices. The aggregate savings: $12 million.

Taking on the task of clearing is a major move. The broker-dealer is spending $20 million on up-front costs, plus three buildings to accommodate the business and continuing operating costs. Mr. Putnam expects the investment will be paid back in five years.

Dennis Gallant, a consultant for Boston-based Cerulli & Associates, says the move “makes perfect sense” because LPL will get “more control, more differentiation and be able to change costs.”

More control means it will not have to depend on a third party when it wants to introduce a program or change prices.

“It gives us priority over what gets done and when,” Mr. Putnam says.

LPL planners appear to support the move and like the ability to tinker with the format and presentation of the performance reports for clients.

“I like that LPL will control the quality,” says Michael Botwinnick, an LPL planner in Woodcliff, N.J.

The move is a blow, though not a crippling one, for Pershing, which is a unit of Donaldson Lufkin & Jenrette Inc. and works with 550 financial institutions. Indeed, Pershing had ample warning as LPL had been candid about its goal, executives say.

LPL “is one of their biggest clients but they have pretty strong coverage” in the financial industry, says Mr. Gallant.

Pershing executives were not available for comment.

Few broker-dealers who use independent contractors handle their own clearing. As the industry consolidates, though, more firms may make the leap so they can set themselves apart from the competition, Mr. Gallant says.

There “may be more LPL situations,” he says.

The move is the latest step in the evolution of LPL, which posted 1999 revenues of $590 million, up 25% from the previous year. It has spent the past few years investing in new technology and is looking to go public in 2002 or 2003.

Adding the clearing function could make LPL more attractive to investors.

“It shows we have more control over our business and aren’t necessarily dependent on a third party,” Mr. Putnam says.

The move opens the door to new business, such as offering clearing services to other brokers. Nothing is in the works right now, however.

“We’ll start to look at other opportunities down the road,” says Mr. Putnam. “We don’t have any immediate plans. Something two or three years from now is not even on the drawing board at this point.”

While Mr. Putnam evinces optimism, major changes do tend to create confusion and snafus. Robert Rodermund, president of First Financial Planners Inc. in St. Louis, sees an opportunity to snare salespeople and clients if problems arise.

“It’s hard to invent something from scratch and have it be flawless,” says Mr. Rodermund, who oversees 742 planners. “Some of their reps who like Pershing may be looking for a change.”

Another competitor, a brokerage executive who requested anonymity, seconded Mr. Rodermund’s view: “They’re going from a very stable system at Pershing to a new system.”