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LPL Is 'Trying to Create Buzz,' but Getting Stung

Friday, 22 Mar 2013 | 3:45 PM ET
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LPL Financial is trying to challenge some of the big fish on Wall Street but instead is finding itself in the crosshairs of regulators and market participants who aren't exactly welcoming the firm's ascendance with open arms.

The San Diego-based firm has cited numerous times just over the past year or so for infractions related to lax oversight of its sprawling brokerage operation, according to a report Friday in The New York Times that resonated with some strategists and money managers.

(Read the Times story here: Fast-Growing Brokerage Firm Often Tangles With Regulators)

The most common gripes against LPL from Wall Street players interviewed by CNBC.com focus on a lack of experience from many of the brokers with whom the firm contracts, a high fee structure and an inability to provide the expertise to handle large accounts.

While those same gripes could apply to many smaller brokerages, LPL's shortcomings have become amplified since the firm over the past decade has pushed expansion to the point of becoming the nation's fourth-largest broker.

The Times said the firm stands accused of deceiving and in some cases "outright stealing" from customers.

(Read More: 'Pain Point'? Wall Street Fed Up With Bad Bonuses)

"They're trying to create this buzz and it's a very hard thing to get right," said one market strategist at a New York firm who, like others interviewed, asked not to be identified due to concern of jeopardizing trading relationships. "It's hard to have people in these far-flung locations that are not being really supervised. You're just going to get yourself into trouble."

Indeed, the Times piece said the independent brokerage model LPL has constructed could be at the core of its troubles.

LPL enters a contractor agreement with its brokers who are allowed to keep a large percentage of their commissions. Trouble is, the arrangement with brokers leaves LPL without enough money to pay enough attention to compliance, which has led to numerous citations from the Financial Industry Regulatory Authority.

(Read More: JPMorgan Chase Secretly Downgraded by Bank Regulators)

LPL said it is addressing concerns raised by Finra.

"We support the work of our industry regulators to help maintain investor protection and believe in their mission and actions in this regard," the firm said in a statement to CNBC.com.

A money manager who had used LPL to clear trades said that the well-compensated brokers pass along stiff fees to their customers. The manager terminated the clearing agreement last summer and uses a different firm now.

"In some cases that could inspire somebody to do more trades," the manager said. "They are going to turn a blind eye as long as they can justify they know the client and the investing objective is correct.."

Other Wall Street pros say they worry the LPL model could start to gain popularity.

The Times piece pointed out that in Montana, where regulators have a contentious relationship with LPL, almost half of the firm's brokers are registered as their own supervisors.

"This self-supervision thing is dangerous, it really is," said one strategist. "The mindset of a broker is to churn, to make as much money off transactions as possible. The investors' interests are not aligned."

LPL maintained that it is committed to making sure its customers are well-served.

"LPL Financial views compliance as a mission critical function," the firm's statement said. "Our long-term track record demonstrates the emphasis we place on regulatory compliance and our history of maintaining the highest standards of protection for the investors our advisors serve."

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