Giant brokerage firm claims acquisition will be business as usual for overlay provider’s legacy clients. Analysts say at least some defections are likely. Competitors are already on the move.

When the parent company of independent brokerage firm LPL Financial announced last week that it is buying overlay technology vendor Concord Capital Partners, the brokerage community cheered.

But the mood in the banking channel was a lot more subdued.

Concord had built its business — about $10 billion under administration for 70 institutions, according to a company press release – on the proposition that its investment platform was completely free from any whiff of preference for one wealth manager over another.

(For an overview of how overlay UMA systems work, click here.)

Thankfully,  LPL has no proprietary product to push at Concord’s clients, but it has aggressively built out its clearing and custody business over the years.

Once the deal closes later this year, Concord will be formally tied into that platform at least on a corporate level. That’s enough to get some of its customers reviewing their options, competitors say.

“Some may have issues down the road with how the new parent company wants them to handle their trust assets,” says Joseph Mrak, CEO of overlay firm Folio Dynamix.

“It all depends on how LPL integrates the existing clients into its own platform,” he adds.

Custody is the key here

Independent custody has been one of the selling points of the overlay management approach, and Concord may have lost that, whether LPL has proprietary funds to sell or not.

“Concord’s big advantage is that they’ve been independent with no requirement to use their trading and custody providers in order to do business,” says Kelly Coughlin, CEO of competing overlay firm GlobalBridge.

“Now that LPL is on the scene in order for them to harvest true value from this acquisition, they’re likely going push trading and custody arrangements with LPL, perhaps as a condition of doing business,” he added.

“Those arrangements could in turn translate into higher costs for Concord’s customers, potentially denigration of service and possible conflicts of interest,” Coughlin remarked.

Clients are owed the duty of best execution. In this case, LPL may not offer the best performance at the best cost with a sea of trading and custody vendors able to offer a better deal.

With an overlay system, trust companies and other institutions can farm out the job of determining how the underlying assets in an account are invested, but while investment ideas flow into the portfolio, the assets themselves stay right where they are.

This is especially valuable for fiduciaries, which have a regulatory obligation to have their clients’ funds under their control at all times.

Initially at least, LPL says Concord and its clients will continue on exactly as they have.

But in practice, anything can happen, says Sophie Schmitt, a senior analyst at the Aite Group, which covers the financial industry.

“We just don’t know yet what they’re thinking at LPL, but it is clear that they are absolutely looking to take these outsourced solutions to new markets,” she says.

LPL CEO Mark Casady might have tipped his hand in his company’s recent quarterly earnings call by saying that he’s “very excited about the cross-selling potential” that Concord provides his broker-dealer network.

“It creates new expansion opportunities, giving us the ability to custody personal trust assets for banks throughout the country.”

For new clients, that “cross-selling” may be welcome as a way to get an integrated one-stop wealth management, brokerage and trust services solution.

Sophie Schmitt, for example, suspects that LPL is going to use Concord as a way to tap into the mid-tier banks that are too low on the industry feeding chain to do all their investment management in-house, but high enough up the industry feeding chain to benefit from an outsourced solution.

However, Concord’s existing clients may not take kindly to having LPL services pitched at them, much less taking a back seat if regional or national competitors — banks on the level of Compass, Synovus and Capital One — are induced to climb aboard.

Naturally, trust service providers who liked being bigger fish in a $10 billion pond will end up gravitating toward partners that give them a better fit, Schmitt says.

Joseph Mrak isn’t gearing up to actively hunt these trust companies because he says Folio Dynamix is already a much bigger pond — but he expects other vendors to start wooing Concord accounts.

“This opens up the market a little for vendors like Fortigent and GlobalBridge,” he says. “Maybe even for us too. Maybe we can pick up a bit of the business in the Concord space.”

The triumph of open architecture

We’ll have to wait for future LPL earnings reports to find out how much they paid for Concord.

In terms of size and strategic value, Mark Casady has compared the deal to the $27 million acquisition of National Retirement Partners last summer.

At the time, that deal — which valued NRP at 63% its annual revenue — was widely considered overly generous.

But it also got LPL a toehold in the potentially vast retirement plan services market, and getting a similar toehold in the trust business is what industry observers say probably attracted the brokerage firm to Concord now.

“We’ve seen a lot of guys try to go after the trust space because there’s literally trillions of dollars there,” says Joseph Mrak.

“But it’s important that you know these markets, and they are not easy markets to get into. When you sell to independent advisors, you’re looking at more retail-style reps with a totally different customer base. Those guys are not trust officers.”

As those trust officers embrace open architecture solutions like those Concord and its rivals provide, the race for those trillion-dollar markets may only be heating up.

Two weeks ago, most of the brokerage trade publications didn’t even know what overlay investment management was, beyond some vague sense that it involved “open architecture.”

Today, this approach to wealth management is making headlines, and as bigger and bigger banks sign up, it will likely only get richer from here.

Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the editing and research.

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