Q3 2019 Earnings Call
In the call today, our President and Chief Executive Officer, Dan Arnold and Chief Financial Officer.
That does not will offer introductory remarks, and then the call will be open for question.
The company would appreciate it analysts would limit themselves to one question and one follow up.
The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website investors that LPL Dotcom. Today's call will include forward looking statements, including statements about LPL financial future financial and operating result outlets business strategies and plans.
As well as other opportunities and potential risk that management foresee.
Such forward looking statements reflect management's current estimates or beliefs and are subject to risks and uncertainties that may cause actual results to differ materially.
The company refers listeners to the safe Harbor disclosures contained under the caption forward looking statements and the earnings press release as well as the company's latest FCC filings.
Who appreciate those important factors that may cause actual financial or operating results or the timing of matters to differ from those contemplated in such forward looking statement.
During the call. The company will also discuss non-GAAP financial measures governed by FCC regulation G.
For a reconciliation of such non-GAAP measures to the comparable GAAP.
Yep figures. Please refer to the Companys earnings release, which can be found at investor that LPL dot com with that I will now turn the call over to Mr. Arnold.
Thank you sheree and thanks, everyone for joining our call.
As we discuss each quarter, we believe a thoughtful strategy combined with extraordinary execution and a mission driven culture will drive long term growth and value.
Working within this framework, we delivered another quarter of solid business and financial growth.
Let's start with a review of the drivers of our business, we continue to focus on delivering organic growth.
Encouraged by the progress in the third quarter.
Drinks in new store sales and advisor retention as well as solid same store sales drove organic net new assets of $7 billion, which translates to a 4% annualized growth rate.
We also closed on our acquisition of Allen and company, which added another 3 billion of assets that will transfer onto our platform later this year.
Yes, that's from organic growth and Alan and company combined with a higher equity markets drove total brokerage and advisory assets to 719 billion up 6% from year ago.
Turning to our financial results, we had another quarter of solid top line growth as gross profit increased 10% year over year.
We also continued to invest in the business, while staying disciplined on expenses to drive operating leverage.
The result third quarter E. P. S. Prior to intangibles was $1.71, which was up 30% from a year ago.
Looking more broadly at the marketplace, we continue to operate in a large and growing market.
Favorable secular trends towards independence and advisory solutions.
In terms of the economic backdrop, well, we see marketing sentiment driving volatility many of the core drivers of the economies such as unemployment in wages remain solid and supportive of economic growth and investor engagement.
So while we remain flexible in the event of changes in the macro environment, the strength of our balance sheet and of our business model positions us well to continue investing to drive organic growth.
With that and mine, we thought it would be helpful to use our strategic framework.
Add some color on where we are investing and the benefits we look to drive as a result.
Our first strategic play involves winning in our traditional independent and institutional markets well also expanding or affiliation models with respect to our traditional markets. Our business development team continues to innovate by reinvigorating recruiting partnerships with branches and third party recruiters and.
Hansen referral programs for our advisors, and finally, leveraging data and analytics to increased pipeline transparency as well as to improve execution in sales and transitions as a result, we're generating more leads winning at higher rates and onboarding assets more quickly.
We see this reflected in our recruited a U.S. as our trailing 12 month total exceeded 30 billion for the third straight quarter.
Looking ahead to Q4, we continue to be encouraged by our pipeline and expanding capabilities and efficacy of our business development team.
In addition to our business development efforts, adding differentiated capabilities is also one of the best ways to attract new advisors and to help existing advisors grow their business.
And that spirit.
As consumer expectations evolved to include Omnichannel, customize and personalized interactions we aim to deliver an enhanced digital Ics investor experience that will help our advisors when in the marketplace as a part of that effort. This quarter, we're rolling out a new mobile out for advisors clients.
This digital experience allows investors to customize and personalize the display of their account information to match their preferences.
It is also integrated with our client goals functionality. So investors can measure progress relative to their goals in real time.
Next year, we were rollout version to try though that provides a more comprehensive view of a client's well through the aggregation of outside assets and offers enhanced clients self service capabilities.
In the short run this overall effort will enhance investor experience with deeper connections and more frequent interactions longer term, we see the potential to create a competitively differentiated experience that is modeled after digital innovators from outside or industry and positions our advisors to increase client loyalty.
Attract new clients and increased share of wallet.
Let's now turn to our second strategic play, where we're working to create an industry leading service experience by continuing to invest in client works and transforming our service model into a client care model.
With respect to client works, we're focused on increasing the personalization and flexibility of the system to enhance our advisor service experience and help them gain efficiency in their practices.
As part of these efforts last quarter, we introduced a new library of applications.
Much like consumers use the iPhone App store advisors can now choose applications from the library add them to their client works pages in a range them in ways that align with held they run their practice for example, one of the new applications offers advisers are real time view of key practice data and analytics that provide.
Out of glance insights for managing and growing their practice.
More broadly advisors tell us the de additional ability to customize and personalize clientworks is enhancing their service experience and efficiency.
As we develop our new client care model one of the opportunities. We see is expanding or digital capabilities is part of these efforts over the past six months, we experimented with artificial intelligence and machine learning and our new accounts organization by launching our first set of robots into our invite.
We are seeing early benefits in the form streamlining the process and expediting the time it takes to activate and account once it's been open while our current process can take 24 hours to activate an account the bots are enabling straight through processing to activate accounts in minutes.
These initial experiments are triggering further exploration across the enterprise in an effort to more broadly apply the power of artificial intelligence and machine learning to enhance the client experience and the scalability of our model.
Our third strategic play leads us to Reimagine the support offered to advisors in the independent model.
And this play we are focused on helping advisors more efficiently and effectively operate and grow their businesses by providing outsourced business services digitized workflows advisor focus capital solutions and lead generation.
Let me highlight our progress on one of these areas outsource business services.
Through a series of experiments, we determined that areas of expertise such as admin and marketing CFO and technology services are valuable leverage points for our advisors and running their business.
We then piloted the services over the past year to ensure that we can deliver them with high quality at an affordable price. It makes it easy to use.
After completing the pilots in August we rebranded this portfolio of services as LPL business solutions and officially rolled them out to our advisors at our National sales conference.
Illustrate the power and potential of these solutions and want to share a story of one of our advisors Jim Miller.
His practice is based in Charlottesville, Virginia, with 100 million of assets and he is bars to grow as business without compromising his clients experience that let Jim to initially seek help through our CFO solution.
Through this partnership his CFO helped them develop a new pricing strategy build us a segmented client service model and identify better ways to manages expenses now Jim described to CFO is one of the best resources. He has ever had and thinks of her as a member of his management team.
As a result of his experience with the CFO , Jim is now using our admin and marketing solutions as well.
Looking more broadly across our business solutions portfolio. We currently have over 600 subscribers and we're excited to help many more advisors like Jim that our operate their practices increased their efficiency and drive their growth.
In summary, we were pleased to deliver another quarter of business and financial growth.
We remain focused on combining strategy execution and culture to serve our advisors to drive profitable growth and create long term shareholder value with that I'll turn the call over to Matt. Thank you, Dan and I'm glad to speak with everyone on today's call.
As we review our Q3 results we thought it would be held for the first walk through our framework for delivering long term shareholder value.
Which is comprised of four objectives going.
Growing assets organically and with complimentary M&A.
Increasing our gross profit return on assets by expanding our services.
Investing to drive organic growth, while staying disciplined on expenses in returning excess capital to shareholders.
Taking a step back and looking at our Q3 results through this lens, we made progress in all four areas, we delivered the highest quarter of organic growth in our history.
And closed on our acquisition of Allen and company, all while investing to drive growth and returning excess capital to shareholders.
We're pleased with this progress as we work to generate long term shareholder value.
Now, let's review, our Q3 results in greater depth, starting with EPS prior to intangibles, which was $1.71 cents up 30% from a year ago.
Turning to total brokerage and advisory assets, we finished the quarter at 719 billion up 2% sequentially.
This increase was primarily driven by organic growth as net new assets were 7 billion or a 4% annualized growth rate.
We also added another 2.9 billion a net new assets from our acquisition of down and company.
We continue to expect to transfer these assets onto our platform by the ended the year and add roughly 5 million of run rate EBITDA by early 2020.
As for recruiting we had another solid quarter with $8.7 billion recruited a lemon Q3, and 33 billion over the past year.
Looking at our business mix, we continued to see positive trends this quarter.
Advisory assets increased to 47% of total assets, primarily driven by advisory inflows of 8.2 billion or a 10% annualized growth rate.
Within our advisory platform centrally managed net new assets were $1.9 billion were 17% annualized growth rate.
This included greater use of our advisor sleeve capability, which we rolled out in Q2 and now has over 1 billion in assets.
Now, let's move to our Q3 financial results starting with gross profit.
It was 543 million up 7 million or 1% sequentially.
The increase was primarily driven by higher advisory sponsor and transaction and fee revenues, partially offset by the seasonal increase in production base path.
Year over year gross profit increased by 49 million or 10%, primarily from organic growth and higher client cash revenues.
These results contributed to our gross profit return on assets of 31.4 basis points over the last four quarters, which was up <unk> 0.3 basis points sequentially.
Looking at the components of gross profit Commission advisory fees net of pay out were 132 million in Q3 up 3 million from Q2.
The increase was primarily driven by higher advisory fees.
Mostly offset by seasonally higher production bonus expense.
Moving on to asset based revenues sponsor revenues were 130 million in Q3 up 3 million or 2% sequentially driven by the growth an average asset levels and greater usage of our no transaction fee mutual fund platforms.
Turning to client cash revenues, they were 163 million up slightly from Q2 as higher client cash balances more than offset the decline in short term interest rates.
Moving to client cash yields our Q3, I see a yield was 241 basis points down eight basis points sequentially.
The decline was primarily driven by lower average short term rates following the fed rate cuts in July and September .
Looking ahead to Q4, we will have the full quarter impact of the two fed rate cuts in Q3.
Additionally, it is widely expected that the fed will lower rates by another 25 basis points next week.
If this occurs we would expect or Q4, I see a yield to be in the low 220 basis point range.
This assumes our client deposit betas continue to be within our expectations of 25% to 50% and no further changes in interest rates or the mix of our fixed versus floating rate balances.
Let's now move on to Q3 transaction fee revenues, they were 121 million up 3 million sequentially.
The increase was primarily driven by our National sales conference in August .
Partially offset by seasonally lower transaction volumes and IRA fees.
Looking ahead to Q4, we do not have any large advisor conferences. So we expect a 5 million decline in conference revenue.
Moving to interest income and other revenues there were 14 million in Q3 down 2 million sequentially.
These revenues are primarily driven by the interest we earned on our corporate cash balances as well as client margin balances.
Looking forward to Q4, we anticipate there would decline by roughly 2 million, primarily driven by lower interest rates.
Now, let's turn to expenses, starting with core DNA.
It was 215 million in Q3 up 5 million sequentially as we continued our planned investments in technology and service to drive long term growth.
As we look ahead to Q4, we feel good about the balance of our investing plans and the related efficiencies we are delivering.
As a result, we are lowering the top end of our 2019 core DNA range by 5 million.
Bringing our outlook to a range of 860 to 870 million.
As we look forward to 2020 I wanted to share some context, and how we're thinking about investing for growth.
Over the last few years, we've increased our investments and we're seeing positive results, including increasing levels of organic growth.
Given this we plan to continue growing our investments in 2020 at a similar pace to our growth rate in 2019.
As we think about the mix of that growth, we will likely maintain our technology spend in the 150 million range, while slightly increasing our core gene a growth rate.
We will of course remain dynamic for changes in the macro environment.
But based on what we see today, we are excited about or opportunities to invest we look forward to sharing a more specific outlook with you. After we finalize our plans later this year.
Moving on to Q3 promotional expenses.
Were 62 million up 20 million sequentially.
Driven by our National sales conference as well as higher transition assistance in marketing expense.
Looking ahead to Q4, we anticipate promotional expense to decrease to the low 50 million range as we have no major conferences in Q4.
Moving on capital management, our balance sheet remains strong in Q3 cash available for corporate use was 227 million.
In our credit agreement net leverage ratio was 2.0 times.
Turning to capital deployment, our priorities remain investing for organic growth first and foremost.
Taking advantage of M&A opportunities when appropriate.
And returning capital to shareholders.
Looking at organic growth our investments are focused on recruiting new advisors, helping existing advisors grow and enhancing our technology.
In addition to our investments for growth, we returned excess capital to shareholders in Q3.
This included 130 million of share repurchases.
Roughly in line with our plan to complete our 1 billion authorization over two years.
We also return capital through 20 million of regular quarterly dividends in Q3.
In closing we are pleased to have delivered another quarter of strong business and financial results, we remain focused on growing assets.
Increasing our gross profit return on assets investing to drive organic growth, while staying disciplined on expenses and returning excess capital to shareholders with that operator. Please open the call for questions.
Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone.
Thank you please limit yourself to one question and one follow up question to withdraw your question press the pound.
Please standby, while we compile the Q and Eva.
My first question comes from Bill Katz with Citi.
Okay. Thank you very much for taking the questions achievement and maybe start off a Dan we will you saw it kicked off a net new asset growth and so nice to see that hitting some of that mid single digit.
Level, particularly given some of them mixed macro backdrop underneath that so I. Appreciate you also labor that's a two or three initiatives as you look out over the next 12 to 24 months, which of these probably had the most impacts in driving that new growth.
And then we'll underneath that is that still going to be more any advisory side.
Yes. Thanks Bill Good question, yes, so with respect to to look organic growth as I think we both reinforced in our remarks, it's a it's a it's a big priority for us and.
We're encouraged by the progress we've made over the last couple of years, but we absolutely have a focus in an aspiration to grow the results from here.
I think when we think about that approach, we kind of look at it over three fronts you've got.
New store sales same store sales and retention and with respect to new store sales.
We've got good momentum there I think as we mentioned if you look back over the past 12 months.
We've recruited roughly 33 billion of assets. If we went back to at this time last year and looked at the trailing 12 months.
And from that period.
You would have only seen about $26 billion have recruited assets. So that just reinforces I think the trajectory in the momentum we have I think going forward to build on those results I would think about primarily two to three things one.
We're focused on continuing with continuing to invest and enhance the efficacy of our own business development capabilities that way, we win at higher rates.
Two we continued to invest in capabilities that help our advisors differentiate and that helps us attract more advisors and then finally.
As we expand and add these new.
Affiliation models that helps us.
Broaden our market opportunities. So those are the kind of the drivers of what I would call New store sales I think second then if you if you move to retention.
It's been a an interesting positive trend over the last two years, where we've actually improved our retention about 1.5% its steadily improve throughout 2019 and in fact this past quarter. It's the best it's been over that period of time, and so again encouraged about with progress, we're making there and that strategic play.
Focused on delivering.
And industry leading.
Client experience. We think is is the key to continuing to improve retention and think we can continue to kind of enhance where we are today through investing in client works and developing this new service model that I've that I referenced.
And then finally same store sales I think thats been kind of steady in a narrow range over the last couple of years and.
We're really challenging ourselves to kind of rethink and innovate there and that's with our third strategic players all about which is really.
Plunging us to deliver some new capabilities think about helping advisors digitize their practice these business solutions that we've talked about.
Capital allocation programs for advisors uneven beginning to innovate around lead generation. All are meant to support same store sales more systemically. So those are the sort of the orders that we have in the water that are trying to.
Ultimately drive that that number.
Up from where it is today I hope that answers your question.
That's helpful. And then maybe one for Matt just a follow up little bit along with the questions I apologize so as I look at the supplement and I look at the de composition of the gross profit our away that strip out the impact of client cash.
Ratio has been about flat now for them of quarters. So on one hand I hear the good growth the pickup in some of the gross profit our way dynamics underneath that but that also hear a lot of spending going on so maybe a two part question what gets the gross profit far away to move up all else being equal and then how much flex do you have against that incremental spend as you look out to next year.
If the revenue backdrop turns out to be a little bit weaker than maybe what your budget calls for.
Sure Bill sitting on the gross profit I mean, I'd just emphasize when you when you when you look at the ROI overall it is growing right 31.4 basis points up from 31.1, and you're right that growth has been on the cash side, but I just keep in mind that cash growth is not doesn't come just from increases in short term interest rate.
When you look at a couple of things I would highlight when we think about the shift from brokerage to advisory.
We have higher returns on the advisory side a lot of that is from the cash balances where you tend to have higher cash on the advisory side.
I'd also highlight the fixed rate balances right. So we're getting to a lot more in a much stabler place from returns and that shows up in that cash line. So it's not subject to the short term rate movement. So I would I would just keep that in mind.
When you do look at that subtotal below cash as you highlighted.
I'd highlight a couple of things that is look at quarter over quarter was down 0.1 basis points and that was really from the transaction fees line, which is not an ATM baseline right transactions or base from activity and.
The fees are really based on advisor count so from our standpoint, you take a step back I mean, if we feel good about the results for the strategy is driving right and Dan just covered a lot of that while I'm answering your first question from things like the growth in advisory the the growth we saw the past few years and especially this quarter and centrally managed and then the early results were.
Being on the business solution side, I think just continued focus and success on those over time.
I think what really serves our advisor as well.
That helps them growing we serve them well and they grow we grow so I think thats, how we how we think about that and that's really what underpins the investment plans that I walk through in the prepared remarks for 2020.
And I think when we think about if the macros in a more challenging place to the second part of your question.
We've got a flexible cost structure right. We can we can adjust in different market environments, but that being said I think when you look at the investments we've been making they really are driving organic growth. So I think we would think long and hard before pulling that back.
And then when you think about how our business model would operate in a challenging macro which is.
Which could likely be driven by interest rates as well as or the equity markets and I know we've covered several times, we've got a lot of natural hedges in in our business model from things like when interest rates go down you typically see that the equity markets go up good proxy for us as the S&P 500 were 100 point improvement there.
Equals or even more than offsets the impact from a from an interest rate decrease then you add to that the strength of the balance sheet, where we are from a cash position, where we are from a leverage position at the low end of our range. We just feel like we're in a really good position to drive those investments and make those investments to drive growth and then maybe finally I'd just highlight an environment.
Like that those can be some of the best environments to really invest and drive growth from the long term from things like recruiting and M&A opportunities, where advisors and smaller broker dealers are going to seek a more stable place to be the pricing of those and that environmental to recruiting in M&A could be more compelling for the buyer and then finally that.
Just a competitive advantage of being able to invest and again focused on our advisors deliver capabilities and and service that helps them compete in an environment, where others would struggle to do so I.
I think you can get the overall picture here I think we feel passionate about the investments we're making at the same time, we've got the ability to slow down if we think it makes sense.
Thank you.
Thank you. Our next question comes from Steven Chubak with Wolfe Research.
So I wanted to start off with a question on cash balances certainly encouraging to see the uptick cash this quarter I was hoping you could speak to your outlook for cash growth and confidence that 4% cash for you cited in the past should continue to hold and whether we should expect to see any change in client behavior as if that continues to.
What interest rates as a potential hedge.
Yes, Steve animated so this is Matt I mean, I think the there's not a lot of rate sensitive sensitivity. There. So I think the customer behavior is not something we see changing I think it's more about just the natural amount of cash that you need and it's his operational cash to manage the account and you see that move in that the low into that Ray.
And as you referenced in your question around 4% and.
Even as we're growing we're in we're still at that low into the range at 4.3. So I think the the rate environment doesn't cause us to have or different view on kind of cash balances and they can ebb and flow, but I think where we're probably sitting towards the low end of a historical range. So we don't see a ton of pressure to the downside.
We're not seeing anything new that will give us concern there.
Got it and just as my follow up just wanted to ask a question on the regulatory outlook given the uncertainty ahead of the upcoming election, how does the senior leadership preparing for potential changes in regulations, such as the Dol and how do you foresee that impacting your business whether positively or negatively.
Yes, So let me take down one.
So maybe with respect specifically to.
The fiduciary rule and I'll use that as a proxy for how we think about it more broadly.
I think what you're asking is hey, with a change in leadership in the government.
You might have a different regulatory.
Environment that you have to deal with and in this case, perhaps the fiduciary rule or standard reemerges as something to think about or consider are utilized across all of our business and so.
Though we think Reg VI is a better outcome for investors.
With that scenario should emerge we tend to think about that across.
Two lynn's one.
We think about it.
More tactically, which is about how you prepare.
For something like that in the necessary investment to do that and then I think we think about it strategically so so again using the fiduciary standard as as an example, I think from a tactical standpoint, you would look at that and given the preparation that we went through for the.
Prior version of the fiduciary rule and them with Reg B.I. I think we've done the vast majority of what's needed to any remaining costs would be mostly contained in our run rate spent or in aren't sort of our planned approach to our capital allocation.
From a strategic standpoint.
I think we we believe that absolutely meaning to maintaining choice for advisors clients is in their best interest. So you would see us continue to offer both advisory and brokerage solutions.
And I think.
That leads to some interesting potential trends.
With that strategic posture in that approach I think one you would see more of our direct brokerage assets move onto our platform.
You would see a higher use of advisory solutions.
And ultimately I think it serves potentially for industry consolidation that would.
Likely be positive both from a recruiting at an M&A standpoint so.
When we step back sort of look at that I think it has some interesting possibilities of which would say how do you think about your capital allocation relative to the regulatory space and we always do that as a disciplined in our.
Our capital investments to it would probably reinforced the fact you continue to make investments in your advisory platforms, which we're doing.
And then finally I think it further reinforces what Matt was saying earlier is that there could be an opportunity to accelerate market share growth in a scenario like that and having a strong and flexible.
Balance sheet and business model to step into that would would certainly makes sense to explore so I think thats, how we think about that potentially changing in the future hope that answers your question.
Hi, guys. Thanks for the helpful color.
Thank you. Our next question comes from GE O'hara with Jefferies.
Great. Thanks for taking the question. This afternoon I know, it's still early but with the Allen and co deal now now close perhaps.
Perhaps then you could give a little context as to how you're thinking about further expansion said employee channel or early feedback or any kind of additional additional data points just to give us a sense of where that where that could trend.
Yeah happy to do that and I think with respect to Alan and company, we closed that.
In the third quarter as we referenced and we will be transitioning those assets onto our platform in the fourth quarter. So thats. The focus now is making that successful transition over and positioning them to six successfully operate on our on our core platform at the same time.
We've continued to.
Develop sort of and round out the capability set we need to.
Enter into.
This employees structured model.
We've also had.
Hired a leader for that business model to make sure that we continue to innovate around it that were packaging and pricing it in the right way and that we finalize our go to market strategy such that.
I think in 2020 as when we began to go to the marketplace with the new solution both leveraging.
The Allen and company acquisition and their footprint as well is bringing the model more broadly to the marketplace.
And we think that has some really interesting possibility our early research and surveying of the marketplace certainly I think reinforces the concept in the hypothesis around the value and in 2020, we'll we'll work on on taking that to the marketplace and executing on that so we're excited about the the opportunity set.
That's helpful. And then and then maybe one for Matt just with respect to the I see a fixed rate balances there I suppose the ratio of fixed to floating.
The sort of target range of 50% to 75% has been has been.
Straight for for next year, but kind of curious if you're.
Are you kind of set on getting into that midpoint of the range or are you sort of playing it kind of by year with the market backdrop, and then if you could maybe give us any sort of sense of how those maturities might be kind of pace throughout the throughout the course of the year that'd be helpful. Thank you.
Yes, sure I mean, I think when you look at our fixed rate balances now at about 40%. It's about $9 billion balances I think we look at our target right I think we feel good and comfortable that our target range of 50% to 75%.
And when forming that target I think we thought about it in a range of different interest rate environments. So I think we certainly contemplated to a lower interest rate environment and does that range makes sense in that environment as well and we think it does because you come back to kind of the core point, which is really just to reduce.
The volatility and increase the stability of our earnings.
So putting us in a place to even further focus on on our advisors and helping them start decline. So that's the concepts. So it's unchanged in this environment I think when you look at next year.
And just using in terms of dollar. So we've got about roughly 5 billion a balances that we'll have the opportunity to move into fixed if if we think that make sense next year, which kind of puts you in that low 60 or mid 60% range.
And I think I would think about the opportunity to do that is roughly evenly throughout the year I mean, there'll be a little bit of ups and downs each quarter, but I think a good way to think about it as is evenly over the year.
And we'll make judgments based on where we are at that time will it make sense to do but I would say, we're still focused on 50% to 75% even in this environment is the right range to get too.
Great. Thanks for taking my questions.
Sure.
Thank you. Our next question comes from Craig Siegenthaler with Credit Suisse.
Hey, Thanks, good evening everyone.
Correct.
So just given that your recruiting a new way bounce has been so strong now for six quarters can you just remind us how you've adjusted your transition assistance over the last couple of years and also how is the competitive environment evolve from other wealth managers as you compete for new financial advisors.
Yes, Matt you went to the first for gas share on the Ta Craig I mean, we haven't made any changes really recently I think the changes we made maybe if you go back a year or two though really just about aligning the transition assistance to returns.
And I think we've been doing that fairly consistently.
We haven't really seen really rates change and really any meaningful lay in the market. It's really just aligning to to the assets that are coming on onto our platform.
And I think one of the things that perhaps to handle that next as I think what we've seen in the recruiting success as a as many things on both our business development team and the capabilities in the service experience on our platform.
Yes, no well, we'll set not I don't know that have anything to add to that other than you ask about the competitive landscape and I don't think we've seen a material systemic shift in.
In the transition assistant rates across the board you see certain companies doing certain things are trying to experiment indoor making pivots because of some other business circumstance, but I think.
Systemically, we've seen a pretty stable over that period.
Got it and just as my follow up here I have another running gross profit ROI.
I think we all know the accretive migrations and you guys have covered them well, but can you just flesh out any uncertainty relating to pricing pressure just given what we're seeing from some other competitors in wealth management in the wealth management segment that are in different channels here.
Yes, let me start with at least how we think about.
Some of the pricing changes and then I think that we certainly can pull it back or tie it back to how you think about the gross profit or away.
So look I the pricing changes that are occurring in the marketplace.
We look at those as I think just more about.
The World we live in the industry's most industries go through some type of trends and changes in evolution in terms of pricing and in this case I.
I think we've seen this trend occurring.
In.
Fits and starts over the past 25 years you saw some in the late.
Part of the last century, you saw at reemerged prior to 2008.
We've seen and I think in the last four to five years, where some of that started out in passive investing and then you've seen others make some changes most recently.
I think if you take the.
Changes that occurred across all.
Your self directed players.
I think I think first and foremost does have a much bigger impact across that self directed marketplace and where perhaps the end client is much much more price sensitive there.
And that has.
A really small impact on our business theres more because we don't operate in that self directed market as you know it has more of a residual.
Impact on.
Serving or a ways that we custody their assets for.
So when we see something like that occur and I'll use. This as an example as to how we think about this pricing changes more going on.
Across the entire industry.
We look at pricing as a as a strategic lever and absolutely think about how to consider that across our theres three strategic plays and how to best position that to serve and support our advisor to help them differentiate.
And when.
And so if you look in the last couple of years, we've made pricing adjustments as a as a part of our strategy in order to help drive growth.
In areas like our advisory platforms and transaction costs and that's been roughly on an order of magnitude or an average about 15 million dollar investment.
A year.
So I think as we go forward and we think about our strategy as we as we move into 2020 I would just give you a little color to that we'll we'll likely approach. It in a very similar way I you were likely to focus in those areas of the advisory platform and transaction charges and secondarily it would be at.
At a similar magnitude or or impact and so.
That's kind of how we think about pricing is absolutely a strategic lever, we always considered as a part of of executing our strategy. It just gives you a little bit of the trend on how we've done it over the past three years and kind of how we're thinking about it as we move into 2020 I Hope that was helpful. Do you want to tie anything back to or away or Uh huh.
Now in place to your gross profit really nothing summarized it well the zone that we wouldn't be thinking about as the number that you said some nothing that well for that was helpful. Greg.
Thanks, guys very comprehensive.
Thank you. Our next question comes from Alex Blostein with Goldman Sachs.
Great Hey, guys. Good afternoon. So maybe just following up on the last question with respect to the brokers.
Question do cut pricing is your own commission.
As for equities, yes.
Anyway, we can think about the impact of ticket targets for you guys. If you could help the size that and is that one of the sort of investments you are contemplating as you're looking at it next year.
Yes, so I think come from a contract standpoint again, some the impact on us as more of a.
Around where we custody assets for alright days and I'm. So it's a smaller level of impact and we absolutely have taken those data points and put them into our overall strategic considerations around how we would use pricing.
The best support our advisors and as a part of that prioritization stack I think you'll likely see us.
I'm thinking about that and doing something to address that that fits well inside that framework that that I mentioned earlier.
Got it and then a follow up question from Matt I understand it's still early as you guys talked about 2020 on expenses, but.
Just talk a little bit about what kind of macro environment does that guide contemplate and when you talk about still obviously being nimble and aware of the apartment at if things get a little bit copper, you'll have the ability to pull back.
What's sort of the growth algorithm or you're solving for is that a EBITDA margin within a short range or improving EBITDA margin kind of how can we.
Some sort of framework around your thinking on how much you could pull back of department that star.
Yeah, I mean, I think the I just emphasize rubber given it a little early indication as to where our thinking is right. So we'll give you are finalized plans at a future date likely on the next call I think the environment. We're thinking through we always look in a range of environments. I think every time, we lay out our investing plans, we we stage them. So we have the ability to.
To pause if the environment deteriorates.
And we also just emphasize we look at the investments we're making we look at it from returns based perspective, so when you're when you've got in front of you investments that can drive value for our advisors and help them serve their clients and drive organic growth and choose between that and just maintaining an op margin at a certain amount right when you're looking at those two things.
And you look at the returns there usually pretty clear what makes sense to do versus what does it. So I think it's I'd put it in the bucket of a high class problem or we've got investments that are really driving value and we just think long and hard about pulling those back.
That being said the macro can be in a range of scenarios and I would just emphasize we've got the ability to adjust our spending plans under the same time, we're always focused on delivering efficiencies. So we're in a you've got scenarios like if you go back to 2016 as an example, where he kept expenses relatively flat we were still investing we were still growing on a tick.
Algae portfolio side, just emphasize that as well.
Great that's helpful context. Thanks.
Thank you. Your next question comes from Devin Ryan with JMP Securities.
Great. Thanks. Good afternoon. Most of my questions have been asked I just have one around.
Just consolidation in the space and it seems you hire markets and interest rates, maybe build out some of the inferior or subscale.
Broker models that you compete against I'm curious unit with rates turning here, whether you're seeing any early indications of.
More interest to sell the business or even.
We expect to see sellers picking up just as.
Obviously, there their businesses face more pressure than maybe they had anticipated and so a combination would make more sense.
And thats, how the backdrop.
Yes so.
With respect the M&A, we view it as a complement to our organic growth and we're in the marketplace exploring potential opportunities given that concept.
Certainly Alan company as an example of some of the opportunity where you see in that case, a very well run smaller companies, who saw opportunity of which two leverage some of our scale and capabilities, which to enrich just how they serve and support their client.
Yes.
Our hypothesis would be similar to yours that has the environment gets tougher.
You tease out probably some challenges of smaller organizations, who have a harder time with respect to driving earnings and cash flow and being able to reinvest in the business and hence our reason for being in the marketplace and exploring those possibilities. So.
We think the Allen and company concept as a great example of how we think about that.
We continue to be in the market exploring potential possibilities were also looking at M&A.
With respect to if we can accelerate our.
Abilities development and evolution than we also were looking for opportunities of which to enrich our value proposition.
Again advisory World was a great example of that so there's the two places I think were most interested in the marketplace.
Okay great.
And then just going back to some of the comments on your pricing evolution.
I guess, we didn't touch on it on this call yet but.
Yes, just made an announcement on their estimate pricing and I guess, it's not completely clear.
All the nuances of it but I'm curious.
Whether you're seeing any potential.
I guess change or pressure in that part of.
For the business as well.
Yes, as you said I don't know that we have exact clarity on on what's been done we have a hypothesis that they eliminated their SDMA manager fee, where they were the manager versus a third party.
To give you a little bit more color on that typically within Essent may you've got.
Visor refi that reflects the value that the advisors, providing and then sometimes you can have a separate fee for the asset manager in those.
Type vehicles, and and I think it looks to us they've just eliminated the manager fee, where they're the manager.
And haven't necessarily adjusted the advisor fee, perhaps that gives the advisor some more flexibility then is to as to how they price that to the to the and client that's what looks like occurred to us as I shared with you earlier, we've been investing.
Over the last several years from a pricing standpoint focused around our advisory platforms and transactions and.
It was roughly two maybe three years ago.
We eliminated the management fee and or strategists fee, where we were helping construct the portfolio with LPL was helping do that we went to zero on that.
Some of our third parties have followed on that as well, which again, we did it because we felt it was a great advantage for our advisors should be able to use that lower cost structure.
As a way to create more value for their clients and differentiate themselves. So if that's what they've done I think perhaps it makes logical sense, just where the marketplaces and I don't think it would have a lot of impact on us because I think we've already made that move that said I may have wrong with they've done I hope that helps.
Yes very helpful. Appreciate that.
Thank you. Our next question comes from Chris Harris with Wells Fargo.
Thanks, guys. Another question on pricing changes pricing pressures.
The 1% management fee rate roughly.
You guys earned.
On on fee based accounts.
Certainly not out of bounds with what other broker dealers charge.
But if you look at that rate and you think about.
That ray relative to other areas of financial services, and just given the broader pressure thats.
Pricing pressure and financial services more broadly.
How much longer do you think that rate can hold.
I guess is is the question I mean, it's been remarkably stable I think over the last call three four years it doesn't seem to be impacted by some of the pricing changes you've implemented. So if you can give us some your thoughts on that that would be appreciated.
Yes, sure let me pick a biggest avenue that if I don't get it all please follow up so.
Look I think with respect to that price as it exists today one place you do as you look across your competitive set in where the majority of our advisors operate in the massive fluid fluent segments of the marketplace.
It seems to be a very competitive offering and as you said has had good stability over the years I think for the most part if advisors that had to deal with them any pricing sensitivity, it's been more as a one off and they've used an adjustment to passive investments as a way to try to try to solve for that so I do think.
From a competitive standpoint in where things exist today.
It's a it's a competitive offering.
That said as we go forward I think it's always a fear wages to think about price and I think in the advice face.
Value drives price and what I mean by that is.
Yes, the sensitivity in the appeal around the value that you can deliver someone if you can help me set up a plan to help me achieve my life goals and dreams. If you can help me solve problems along life's journey.
If you can make sure that you execute my plan. So I don't make a misstep because I didnt do what needed to be done and you're there to make sure I execute well those are really valuable opportunities for our advisors to deliver and maintain really important value.
And some of that you might be able to automate some of that.
It's harder to automate, but we all ought to be saying how do we.
Make it more efficient and effective to deliver that and then at the same time I think you've got to comp to be looking for can expand my value proposition can I focused somewhere and solve unique problems that others can't.
And we actually believe advisers that do that we're trying to help as many advisors that have a desire and an appetite to do that we think that they will protect most of their pricing power.
And again at the end of the day advice space. We believe is driven by value. We believe that all segments in the marketplace up to this point have demonstrated they'd prefer to have a human that they can trust that is a professional to help and support them to do that on then if we wrapped technology around.
Them to help enrich their value proposition personalization easier access solving more complex problems and making them more efficient.
We think ultimately, it's a really compelling and interesting opportunity set they can preserve most of their pricing power and where they can we can drive efficiencies into their overall operations I hope that helps.
Yes. Thank you.
Thank you. Our next question comes from Michael Cypress with Morgan Stanley .
Paul.
Hey, Thanks for taking the question just wanted to follow up on some of the strength and the recruited assets. I know you guys had touched on that a little bit earlier, I'm, just hoping for a little bit more color in terms of which specific channels parts of the industry. You guys are seeing more success than others is it from the IB de space or more from the wires and any particular color you're able to share on the pipeline in terms.
Where that stands today versus say a year ago.
Yes. Good question. So look I think the the headline is there we see the recruiting environment for us.
Healthy and we feel good about our pipeline I think if I add some color to that for you. The we certainly see the continued trend towards independence remaining consistent and strong.
The advisor movement, or we call adviser churn has been stable, but slightly below average, but we've kind of stepped into that and challenged ourselves to just improve our win rates right and prove how we do things and if we're better at that then.
And that only makes it an opportunity is those is as churn rates may be returned to the norm and.
And then I think we see or see opportunities to continue to win in the independent space, where advisers, who were looking for more capabilities.
Or or attracted to our model and our solution.
We see the opportunity to continue to win from leaving the employee based model coming to the independent model and hits. The reason, we're we're rolling out our two new affiliation models to better position us there right those that are.
Kind of it advisory centric and those that are.
Kind of have that that feel of an employee based model.
So.
Summarize we feel good about both the performance of our business development team and their continued evolution as a as a as a.
Hi, performing team.
We like how we're positioned well and the independent space and we like with our new affiliation models will be able to have we believe compete for a full spectrum of advisors, leaving the employee model.
Right.
Okay. Just maybe a quick follow up question can you guys described from talked about the growth outlook.
Certainly interesting just given some of the structural trends benefiting the overall industry.
I guess, what key risk you seem to that outlook is it more about rates staying lower or political regulatory risk is it pricing. How are you thinking about that relative to the broader structural trends in growth opportunity.
Yes.
I think that we think about that in a couple of places certainly the regulatory environment is always a question as we covered earlier that you've got to pay attention to and and I think.
Not knowing exactly what that looks like.
It's it makes preparation a little tougher it doesn't mean that you just don't set up with several different sort of options and how do you consider and try to best prepare for that but we do believe it will require.
Continued investments to improve the efficiency and efficacy of which we manage risk we actually than flipped out on that side and say how do we turned that into an opportunity. If it's hard it doesn't mean, it's a problem that you can flip it on that side and you can use robotics or artificial intelligence to do that more effective than others at a lower priced and you can.
News that advantage and push that down through your model as an example, but that's certainly one of them I think another one is just the pace of change and having the agility and the nimbleness.
Two.
To execute well in a in a place where.
I believe you're only going to see change go faster and faster in the magnitude of that change is going to be bigger and bigger. So you have to be adept at filtering out that which is not important focus on what is and make sure. Your organization has the ability to make the pivots and focus on continuous improvement in always be pulling more and more.
Or technology automation and digital capabilities and to its environment, We think thats really important for scalability and I think that is what our cultural transformation is all about is trying to position our our our enterprise to do well in an environment like that but I think thats in the.
So we think.
We think thats, an important thing to think about and if you don't do that well I think that emerges as a risk to your point earlier, so I'll pause there, but those are a couple.
Okay, great. Thank you.
Thank you. Our next question comes from Chris Shutler with William Blair.
Hey, guys good afternoon.
Couple of quick ones. So first on the commentary around the outsource business services Dan.
Just give us a little more detail on how your pricing those services, how much revenue you're generating per advisor.
Yes. So those are some subscription based services and just as I as a again as a reminder for everyone. These are what we were calling the old virtual services that we've rebuilt branded as business solutions and this is where we found that if we can provide that expertise at.
At a at a affordable enough way than we can we can give access to that expertise to our advisors, where they here to four may not have been able to tap into that just think about having a CFO is a leverage point to help you think about your business as an example, and so our concept would be first and foremost we want to do that to say.
Let them up to improve and enhance their growth rates and.
That were successful at systemically doing that probably is the biggest return Chris on that effort that said what we have done is looked at these as Standalone business solutions and looked at the economics of them to say Hey can we can we can we.
It would generate.
A contribution for that incremental value and so one of the things that we've done as is our principle has been let's go in experiment, where the affordability levels or for those advisors wears are a great leverage point for them to get access to this solution in the service and then challenged ourselves to operate underneath that.
In a way that creates a profitable contribution so the the pricing around those on average you should think about is.
I think about that is like $1500 a month to $2000 a month for any of those services or an individual service. So if I can get access to a CFO for 20 to $24000 a year and I can get that expertise and I'm only paying for the portion of the CFO that I need I don't need a whole one that's the concept.
May cost me 100, plus thousand dollars to afford a CFO for my business and if I can get access to it for 20 to 24 that ends up being a really good trade for them and if we can operate that then profitably that creates some incremental earnings contribution for us from that incremental value, but the biggest gain comes from helping that adviser.
Other business I hope that helps.
Yes definitely helpful Dan.
On a separate topic.
Im just thinking about gross profit ROI here.
Did you see the advisors that you've been adding over the last year or so pulled a similar higher or lower amounts of cash on average than your core base of advisors just trying to understand if that is a.
A material part of when you talked about recruiting more profitable advisors, that's a key component of it or not.
I don't think we have the exact answer to that here's the way I would think about that and then that you add whatever I look what we do know is that our recruiting classes on average their mix of advisory business brokerage business mirrors, our average and if that's the case than that mix of this.
This has.
Determinant on on their cash balances. So I would think they would look more like.
What our average is today than necessarily a big big variance from there, but I don't know, Matt if you want to add some color. Yeah. I just had just emphasize the brokerage versus advisory is really the driver the difference in cash right. So the more as the higher percentage of advisory, though likely higher cash balances you're going to have do the nature, that's I think thats.
Probably the thing I would look at.
Chris as opposed to that that the timing of when the advisors came on board.
Alright, Thanks, a lot.
Thank you Sir I'm showing no further questions in the queue. At this time I will now, let's turn the call back over to Mr., Dan Arnold for any closing remarks.
Yeah, Hey, I just want to thank everyone for taking the time to joined US. This afternoon, we know you're busy and we appreciate it and we look forward to speaking with you again next quarter. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.