By Andrew Welsch

LPL Financial's planned acquisition Commonwealth Financial Network marks a significant deal for the wealth management company. It also represents the potential loss of a big client for Fidelity.

That is because Commonwealth, which has 2,900 advisors and about $285 billion of brokerage and advisory assets, uses Fidelity's National Financial Services unit for clearing and custody of client assets. LPL executives have said they anticipate moving Commonwealth advisors, clients, and assets to LPL's platform sometime next year.

A Fidelity representative said the company remains focused on serving clients and investing in its technology and staff. "As the only industry leader in both custody and clearing services, Fidelity is well positioned to help advisors of any size navigate the wide range of options for best serving their clients, whether through a broker-dealer, RIA or hybrid firm," the representative said.

The acquisition, which was announced Monday morning, is expected to close in the second half of this year, and LPL expects the conversion of Commonwealth advisors and assets to be completed in mid-2026. That effort is a big undertaking in part because it requires advisors to ask clients to sign new contracts for the custodying of their assets, and some clients can have multiple accounts. It is a worthwhile effort, however. San Diego-based LPL has its own clearing and custody business, which means it executes trades and holds assets for clients of its advisors. Having that business in-house allows LPL to better control its economics.

On a Monday morning call with analysts, LPL CFO Matthew Audette highlighted that aspect of the acquisition as one of several benefits his company expects to gain, pointing to "revenue synergies [from] bringing Commonwealth from their current clearing firm onto our platform."

J.P. Morgan Securities analyst Michael Cho wrote in a March 31 research note that LPL could reap the benefits from cost savings due to its clearing capabilities. "We think a significant portion of Commonwealth synergies will come from clearing as LPL brings those functions and controls in-house," Cho wrote. "Commonwealth currently has a clearing relationship with Fidelity Institutional and has $6bn of client cash. While we would expect an uplift in cash monetization, we also think LPL is probably one of the few acquirers that can extract as much synergy value from integrating broader operations." Cho is Overweight LPL's stock.

Although large wealth management companies like LPL and Morgan Stanley have clearing and custody capabilities, many registered investment advisor firms rely on third parties for those services, and Fidelity is the No. 2 player in that business, behind Charles Schwab. Some independent broker-dealers also rely on third-parties for clearing and custody. Fidelity had $15.1 trillion in assets under administration at the end of last year, but that figure includes other businesses such as retirement plan administration.

In a filing with the Securities and Exchange Commission, Commonwealth said "a large percentage of Commonwealth's clients maintain accounts" with Fidelity's National Financial Services. The filing also said Commonwealth receives revenue-sharing payments from NFS from certain types of assets, including mutual funds, in client accounts. Commonwealth maintains a "a secondary clearing relationship" with Pershing, a unit of Bank of New York Mellon, according to the filing.

LPL has yet to lay out how it plans to move Commonwealth assets and advisors. But judging from recent large wealth management acquisitions, it might not happen all at once. For instance, when JPMorgan Chase acquired First Republic Bank in 2023, it chose to transition the advisors and their clients to JPMorgan's platform over time. That created several quarters of net asset outflows last year for Pershing, which provided custody and clearing for First Republic's wealth management business. Pershing has since rebounded. During the fourth quarter of 2024, the unit reported net new assets of $41 billion, a turnaround from $22 billion of outflows during the third quarter.

There has been ongoing consolidation and a frenzy of M&A activity in the broker-dealer and RIA sectors. Firms are seeking to gain greater scale to cope with rising technology and compliance costs. As more firms merge or acquire competitors, it's possible that other clearing and custody relationships may change hands. One firm's big win may be another's big loss.

Write to Andrew Welsch at andrew.welsch@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 02, 2025 12:51 ET (16:51 GMT)

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