LPL Financial’s agreement to acquire National Planning Holding’s (NPH) four independent broker-dealers from Jackson National includes a number of side deals designed to financially benefit both LPL and Jackson National over the long term.

Virtually all NPH reps have participated in what third-party recruiters describe as a fairly generous deferred compensation plan. Jackson reportedly is incentivizing NPH reps to transfer to LPL by allowing them to transfer deferred comp plans to LPL. If they decide to join another B-D, they will have to cash out these plans. Yhat becomes an immediate taxable event. LPL has already indicated it is willing to spend up to $100 million to induce them to transfer firms.

The same approach will apply to forgiveable loans, sometimes referred to broadly as transition assistance, that were given to many NPH reps when they joined the firm. Should NPH reps choose not to transfer to LPL, they will need to repay their loans in the near term.

For some NPH reps who have been with the network for a long time and are major producers, these sums could be substantial.

The initial payment of $325 million LPL shelled out for the four broker-dealers clearly was not the only consideration behind the transaction. LPL has said the deal could increase its EBITDA by $75 million to $100 million by the end of 2018.

These terms are considered highly advantageous to LPL. Senior merger and acquisition sources said the price LPL is paying is considered to be in the bottom quartile of what are normal valuations for B-Ds.

Even if LPL is able to onboard up to 93.5 percent of the estimated $900 million of NPH’s broker-dealer revenues, a highly optimistic projection, it would only have an additional contingent payment of $123 million, according to the company’s announcement of the deal.

Sources said even if LPL reaches this 93.5 percent revenue retention target, which recruiters consider highly optimistic, LPL would only pay $448 million, or less than 50 percent of NPH’s production. If less than 72 percent of NPH’s revenues transfer to LPL, there is no contingent payment.

According to several sources, Jackson National, a subsidiary of U.K.-based Prudential PLC, purposefully chose not to cast a wide net in its search for potential buyers. Instead, Jackson limited the acquisition process to LPL and the two other largest independent B-D’s, Ameriprise and Raymond James Financial, to the irritation of other brokerage firms backed by private equity firms with deep pockets. Several of these firms would have been seriously interested in exploring an acquisition.

After initial talks with the three firms, Jackson opted to engage in de facto exclusive talks with LPL, senior merger and acquisition sources said.

The three firms invited to bid are believed to be three of the largest distributors of Jackson National annuities. Prudential PLC is a public company and thus would normally be expected to seek the best price for its shareholders. But management at the parent firm and at Jackson National may have reasonably concluded that ensuring a strong long-term relationship with the nation’s largest independent brokerage would benefit Prudential shareholders far more than getting a big price for NPH. Coincidentally, insurance industry sources report that just last week a new Jackson National annuity product was approved on LPL’s platform.

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