Q2 2020 LPL Financial Holdings Inc Earnings Call
A question and answer session.
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I'd now like they had a conference over to your speaker today to Mr., Dan Arnold President and CEO. Thank you. Please go ahead Sir.
Thank you Dylan.
Everyone for joining our call today.
Over the past quarters in the face of a challenging operating environment.
Our advisors have responded with resilient flexibility and ingenuity.
I want to acknowledge the central roles, they airplane by providing much needed financial advice to millions of Americans.
I'll, let the same time pivoting their own practices to work remotely.
I also want to thank our employees for their ongoing commitment and dedication to our mission of taking care of our advisors. So they can take care of their coin.
No well the environment, we are operating in has changed.
Principles remain the same we believe a good strategy matched with extraordinary execution and align that with a mission driven culture will drive long term growth and value.
Following those principles in the second quarter, we continued to focus on executing the components of our business priorities. While also moving forward on our strategic plan.
Today, I will share color on both of those areas.
Starting with our business result, organic growth remains solid second quarter net new assets totaled 13 billion, which translated to a 7.8% annualized growth rate.
It was our third quarter in a row at 7% or higher and was driven by continued screens across new store sales same store sales and retention.
In the second quarter recruited assets were a new high at 11.1 billion. These results against the backdrop in which industry advisor movement was down by over 30% from a year ago or a testament to the appeal of our model and the performance of our business development team.
Looking at the past year recruited assets were nearly 39 billion, which is also a new high for the team.
With respect to the advisor service experience, we were able to pull forward solid outcomes in a challenging operating environment as our net promoter scores remain consistent with the increased levels, we delivered in Q1.
Additionally, our retention was that a new hires over 98% for the first half the view as the flexibility of our affiliation models evolving capabilities and enhanced service experience continued to resonate with advisors.
These key business results also led to some solid financial outcomes with second quarter EPS prior to intangibles, if at all or 42.
No well, we remain focused on operating the business in the second quarter.
The influence of the remote work environment created new challenges and opportunities default.
As an example to help advisors effectively operate remotely we developed a bundle of new and enhanced capabilities, including an online calendaring solution for advisors and their clients to scheduled time to meet virtually intra office instant messaging for advisors to stay connected with their staff remotely anymore.
Digitized centrally managed platform experience with greater model flexibility.
We also continue to evolve how we engage with our advisors in the new and more virtual landscape.
Instead of canceling or National Advisor conference. This summer, we pivoted to a fully digital experience.
Similar to the format of our traditional in person meeting the three day program will include Livestream General sessions.
Nick a breakout meeting technology demos, a virtual sponsor exhibit hall and online networking.
With the that now online we could potentially reach all 17000 of our advisors and their staff rather than the 5000, who might normally attend in person.
As we look forward, we expect new virtual approaches like these will become another way that we can support our advisors and their Coleman overtime.
Let's now turn to our progress executing on our strategy.
As we look ahead, we continue to see growing demand for advice and believe we're better positioned than ever to serve our advisors and compete for additional market share.
In light of this we remained focus on executing the strategy. We've shared with you in the past and while that strategy has not changed we have evolved in three strategic plays to four which enhances our focus on how we innovate and execute on our strategic agenda, you can see our updated framework in our investor present.
Okay.
Now with that as context, let's let's walk through our progress on our strategic priorities, starting with our first strategic play.
This play involves meeting advisors, where they are in the evolution of their practices by winning in our traditional markets well also leveraging new affiliation models to expand our addressable markets from four trillion to 13 trillion.
With respect to our traditional markets. The appeal of our model continues to attract more advisors onto our platform and strengthen our pipeline.
In addition, the continued evolution of our digital capabilities within the sales process and for advisor Onboarding has proven to be an increasing source of competitive advantage. As a result interest from perspective advisors continues to grow and our pipeline is the largest and in our history.
Other opportunity to grow in our traditional markets is by increasing our market leadership in the third Party Bank channel yesterday, we announced that we reached an agreement with them in T. bank to trenches transition, it's wealth management business onto our platform.
In the two year the top 25, U.S. bank with approximately 20 billion in brokerage and advisory assets and a 170 financial advisors.
They will become our largest financial institution flat when they onboard next year.
We look forward to the opportunity to help them service support their clients expand their value proposition and contribute to growth in their business.
With respect to our new affiliation model in June we launched our independent employee offering we're seeing solid early interest from prospective advisors and we expect the model to contribute to or opportunities that pipeline and results going forward.
We're also using M&A of adviser own practices as an additional source of growth.
The two acquisitions, we announced over the past quarter, but she is securities and Nikkei Riley have approximately 55 advisors and 3.5 billion of assets combined.
Approximately 95% of advisors across those two firms has committed to June and both transactions are on track to close later this year.
Our second strategic play is focused on providing capabilities that help advisors differentiate and win in the marketplace.
This in turn helps existing advisors grow their practices and attracts new advisors to our platform.
Within this boy, we are focused on equipping advisers with digital capabilities that help increase their accessibility deepen their relationships attract new clients and lower their call.
And that spirit over the past quarter, we began the rollout of our new mobile while.
This solution goes beyond typical transactional information to create a new way for advisors to help their clients digitally engage in their personal financial journey.
The tool enables advisors to personalize the interface for their practice and individual clients, while also providing clients with enhanced views.
Progress towards their financial goals.
As we look ahead, we plan to continue to invest in this area to help advisors enhance the overall experience for their clients.
Lets next move to our third strategic play, which involves creating an industry leading experience to delight advisors and their clients, which in turn increases our ability to attract and retain advisors.
The main components of this strategic play are transforming or service model into a client care model and using robotics and artificial intelligence to deliver instantaneous process.
As part of our service model transformation I want to highlight two technology driven enhancements that we made over the past quarter.
First we scaled our omni channel capabilities from 3000 advisors to nearly 16000. This means nearly all of our advisors benefit from the combination of interactive voice recognition with skills based routing to a service professional who is trained and certified to answer there specific question.
Second we introduced new speech analytics capabilities to enhance our quality management.
We are now using artificial intelligence and machine learning to capture in score the sentiment of each service call. This positions us to quickly identify emerging service issues and more systemically and proactively addressing.
The same time, we can also use this data to enrich how we developed and manage our service professionals.
Our advisors continue to share positive feedback on our service model transformation and tell us that it is a key contributor to our increase net promoter scores and retention levels.
Our fourth strategic point is focused on helping advisors run the most successful businesses in the independent marketplace.
Using innovations such as outsource business solutions and advisor focus capital solutions.
With respect to business solutions in early June we introduced our newest offering the assurance plan as context across our industry, 70% of advisors don't have a succession solution in place.
The assures plan can help our advisors with this challenge by protecting the value of their businesses, India that have an unplanned exit.
With this plan, we provide an annual valuation and we facilitated commission freesail to another qualified LPL advisor at a guaranteed minimum purchase price.
This gives advisors the peace of mind that their family and clients will be taking care of and it strategically positions us to continue serving clients and assets through succession to that.
After launching into June we signed over 150 subscribers in the first two weeks.
We look forward to continuing to providing this solution along with our broader portfolio of offerings to help advisors, Ron and grow their businesses.
Before closing I also want to share that we have thought a lot about the growing need in our businesses.
And our country to address issues of inequality.
To to inform our learning the management committee and I have been talking with business leaders advisers and employees in the black community, while simultaneously engaging with all members of the LTL family and the spirit of understanding and building empathy.
Within LTL, there was a broad consensus around to desire to take action to make a difference in order to do that we're creating a strategy to promote racial equality and equity at LPL. There are definitely no easy or quick fixes to solve these challenges, but we are committed to making progress for our advisors and their cloud.
Our employees and future generations.
In summary in the second quarter, we continue supporting our advisors and their clients, while driving growth and increasing our market leadership.
As we look ahead, we see an opportunity to not just returned to business as usual, but rather create a future that is better than ever for advisors and their clients. We believe that continuing to execute on our strategy will achieve this goal and create long term shareholder value with that I'll turn the call over to Mike.
Thank you Dan Im glad to speak let everyone on today's call before I get into my prepared remarks, I just wanted to encourage everyone to take a look at page three of our press release, where described several non-GAAP measures that Dan and I used to discuss the business and as the name with state. They are non-GAAP measures and we provide reconciliations to each other.
The relevant GAAP measure in addition on page four that relief. We also described some forward looking statements that Dan and I will use to discuss our business results today and actual results could vary materially from those estimates. So please keep that in mind as well.
Now as we turn to the corner the macro environment remains uncertain.
But we've never been more certainty about the importance of the roll our advisors plate and helping their clients achieve their financial goals and dreams.
That is why we continue to invest to providing industry, leading value proposition for our advisors to serve their clients and win in the marketplace.
These investments in turn helps drive growth and in Q2, we generated the highest organic growth rate in our history.
So as we look ahead, we're excited about the opportunities we see to continue serving our advisors growing our business and creating long term shareholder value.
Now, let's turn to our second quarter results, starting with total brokerage and advisory assets.
Were 762 billion up 14% from Q1, driven by continued organic growth and higher equity markets.
Looking at organic growth total net new assets were 13 billion or a 7.8% annualized growth rate. This was the highest quarterly level. We have recorded in double our pace from a year ago.
Moving to recruiting and retention, which are two key drivers of organic growth both reached new highs in the second quarter.
Crude assets were 11.1 billion in retention was 98.6% year to date.
Looking at our business mix, we continued to see positive trends in Q2.
Advisory assets increased to over 49% of total assets, primarily driven by advisory net new assets of 10.2 billion or 13% annualized growth rate.
Within our advisory platforms centrally managed net new assets were 1.3 billion or an 11% annualized growth rate.
Now, let's turn to our Q2 financial results strong organic growth combined with continued expense discipline led to EPS prior to intangibles of one dollar and 42 cents.
Looking at Commission advisory season had a pay out there were 131 million down 31 million from Q1.
The decrease was primarily driven by seasonally higher production bonus expense lower advisory fees. Following the Q1 equity market decline and lower sales commissions.
Moving on to asset base revenues sponsor revenues were 131 million in Q2 down 3 million sequentially as average assets decreased in the quarter.
Turning to client cash revenues. They were 116 million down 35 million from Q1, primarily driven by lower short term interest rates.
Looking more closely at client cash balances there remained elevated throughout the quarter and finished Q2 at 45 billion.
I also want to give you an update on or I see a portfolio.
As a reminder, when I see balances increased rapidly in March we took action that same month to secure 5 billion of new variable rate capacity.
This allowed us to minimize the amount of overflow balances, which currently have a yield close to zero.
In Q2, we continue that work by adding another 5 billion of variable rate capacity, which allowed us to move the remaining overflow balances to higher yielding contracts.
We also continue to grow our fixed rate portfolio by adding another billion a fixed rate balances, bringing the total to over 13 billion.
I would note that given the flatness of the yield curve. We added these new balances at the one year point, which was about 60 basis points at the time.
As for client cash yields our Q2, I see a yield was 127 basis points.
Down 68 basis points from Q1.
The decrease was primarily driven by the full quarter impact of lower short term interest rates.
Partially offset by the benefit of the Q2 I see portfolio enhancements that I highlighted.
Looking ahead to Q3.
Yield will reflect the remaining impact of lower LIBOR rates as well as the maturity of half a billion of fixed rate balances.
Given these factors and where interest rates client rates and cash balances were at the end of Q2.
We expect our Q3 I see a yield to be around 115 basis points.
Moving on to Q2 transaction fee revenues, they were 119 million down 18 million sequentially.
The decrease was primarily driven by lower transaction volumes following the record Q1 activity levels.
Looking ahead to Q3 volumes have returned to more normalized levels, which on a run rate basis would result in a decline in transaction revenues of around 5 million from Q2.
Now, let's turn to expenses, starting with core DNA.
It was 222 million in Q2, roughly flat to Q1.
This brings our core DNA expense for the first half of the year to an annualized run rate of about 890 million, which is below the low end of our outlook range.
Looking ahead as our investments are resonating with advisors and driving record levels of growth, we feel confident in our spending plans for the second half of the year.
At the same time, the operating environment remains volatile so we plan to stay flexible and dynamic on expense management.
Given these factors we continue to manage to the lower half of our core gene a range of 915 to 940 million.
Moving on to promotional expenses, they were 45 million down 13 million sequentially as we had no major conferences in Q2.
Looking ahead to Q3, we will host our National Advisor conference and while we pivoted to a virtual format. We are still investing to create a meaningful in engaging conference experience for our advisors.
Putting a new digital platform.
Content over several days and outside speakers.
Even the conference as well as continued growth in transition assistance from our recruiting success, we expect our Q3 promotional expense to be around 60 million.
Moving on to capital allocation.
Our framework continues to be investing in organic growth first and foremost.
Pursuing M&A opportunities, where appropriate and returning excess capital to shareholders.
Looking at the components of our framework organic growth continues to provide the highest in most attractive returns on our capital.
Our investments here are working well so we plan to continue prioritizing organic growth as we deploy capital.
M&A can also provide compelling returns and while the timing is inherently difficult to predict we want to remain positioned to take advantage of opportunities should they arise.
As for capital returns to shareholders, given our focus on preserving capital for organic growth and M&A.
Combined with the continued uncertainty in the macro environment, we plan to remain pause on share repurchases for now.
We will stay flexible and dynamic as we move forward.
In closing we delivered another quarter of strong results in Q2, including the highest organic growth rate in our history.
And as we look forward, we remain excited about the opportunities we see to continue investing to serve our advisors grow our business and create long term shareholder value.
With that operator, please open the call for questions.
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Due to the essence of time, we ask that you. Please limit yourselves to one question and one follow up please standby, while we compiled acuity roster.
I show our first question comes from Craig Seigenthaler from Credit Suisse. Please go ahead.
Thanks, Good evening, everyone and hope you're all staying healthy.
We can see slide 16 that LTL now represent 15% the bank market. After the Mt partnership closes mid next year can you help us think about the size and timing of future partnerships with the remaining 85% the market that is not currently service by LTL.
Yes, hi, thanks for the question.
And look I think as we look at the bank marketplace. As you say, it's roughly one trillion, maybe the equipment down further.
About two thirds of the market today does not outsource to a third party provider like ourselves about roughly a third does and what we've been doing is exploring our opportunity set in that overall trillion dollar market one way to do that was to explore working on new access.
Banded solutions that would make outsourcing more appealing to larger banks.
And create that openness and willingness to explore strategic alternatives and so.
With respect to inventory, that's what we were able to do and.
They run their own BD today, or broker dealer today, and or a post that in transitioning to our platform.
The value that we would offer is will reduce the risk across this business line significant significantly we did help enhance their client experience in the solutions that are made available to them across this business line.
We will increase the financial contribution of this program to the overall enterprise.
And we can also work on custom integrations that helped create kind of unique offerings to their their clients and so we think thats.
An interesting compelling solution.
For larger banks that have historically not outsourced this business line and so we're using that solution to engage in some.
Other financial organizations that tend to be in larger in size and exploring whether or not it would be an interesting option or alternative for them. So that's where we are in that.
Process. So I hope that helps answer your question.
Thank you Dan very helpful. There.
And then we've been very impressed with the progression of your organic growth over the last few years now on 8% very high level.
In 2021, when you have both the employee in pure our eight channels open I wanted your thoughts to see if we could get another step up in the firms are getting across right.
Yes, so our strategy.
With respect to our overall organic growth is.
Absolutely to continue to work on increasing that growth rate.
You know Q2, we were able to achieve 7.8%.
Annualized growth rate, we had good momentum coming into the quarter.
Which was always helpful. As we had had seven plus percent growth rates in the prior two quarters.
We continue to see and invest in the appeal of the model. So it continues to evolve and and grow.
And that certainly is helpful. We've also seen.
The continued improvement enhancement of the overall efficacy of our business development team and their ability to.
To share our message and do it and really creative and effective digital and data driven ways.
And we think that those two are a big time structural drivers to the overall value of model and the ability to then continue to.
To achieve these types of growth rates.
At the same time, if we continue to improve the service experience that enhances our overall retention numbers.
You got a really good strong baseline.
Performance you add to that these new models like the independent employee model.
As an example, and that begins to be an additional catalyst or leg up to give us more.
Opportunities in the batters box to drive growth greater growth.
And so we continue to drive up growth rates in our traditional markets, we get more swings in the batters box with these new markets. We think those two things together will help us continue to.
Drive a growth you complement that with continuing to increase your retention levels and maintain good same store sales.
Levels, you end up driving up so that's what we're trying to do we feel good about our ability to do that.
Great. Thank you Dan.
Thank you.
Our next question comes from Bill Katz from Citigroup. Please go ahead.
Okay. Thanks, very much I was just sort of wondering given them moment exit momentum you've had to the quarter and thank you for the Multiday details you can maybe just sort of color out a frame out the July trends and I'm sort of curious around to a net new asset in mix dynamics, what's happening with cash and then underneath that Matt I think you.
Said, if you 630.
So the yield levels, but I didn't give us coming a little bit more since then has so think about that stress test on the I share yield.
Yeah sure Bill on the I think as when we look at July on on cash balances.
Remember I'm sure you do but just for everybody remember the first month of a quarter is when the largest bucket of advisory fees gets charged to clients. So that will naturally reduce cash.
So if you put that aside just look at the activities for cash balances in July.
Actually grown on two started to see not substantially but they've moved up a little bit.
I think on the yield to.
I think that the 115 basis point comment comment.
Where everything was at the end of the quarter I haven't seen anything so far in July that when that would meaningfully move that.
On the on the net new asset trends just keep in mind the shift in the tax deadline. This year from April to July I think on a month that personal income taxes or do.
I think you see across our industry, we're no different than that usually a net new asset months. That's relatively subdued as people are are using those investable assets to pay some taxes and and what you typically see subdued M&A through most of the month and then as you get towards the end of the month. When you are removed from that text that tax deadline, you start to see at an.
Come back to more normalized levels.
And that's exactly what we've seen in July as we kind of come in here towards the end of the month, we're starting to ramp back up at levels that are consistent with Q2.
So I think I got a I think that covers all three questions right. Yeah, well. That's my first question. Okay now that you've taken out in the second one just maybe a big picture question sort of appreciate sort of the added opportunity set with the assurance program is there any balance sheet recourse risk that we need to think through on this effort.
Yeah, I'll take that one to bill I mean, it's no I mean I think the key thing is to keep in mind, what the plan is and I think Dan described it well in his remarks, but it's really about helping advisors bridge the value of their business. If they do end up having an unfortunate event in untimely passing or or disability.
When they can't considered continue to serve their clients.
You can imagine as as a retail investor if all the sudden your your advisor is not there a quick transition is really really important to preserve the value that practice.
So I think thats. The primary thing that we do we provide that that peace of mind in that guarantee but also when you look across our practice with 17000 advisors I.
I think we've got a long list of folks that were are quickly and qualified to be buyers and those practices. So I really view it as thus providing a service to really bridge and in that instance, like this and really protect the value of the practice for the family I really in tick and also to get those retail investors to it to a new home where they can be serve well.
So I think thats the number one thing I keep in mind.
Okay. Thank you very much taking the questions.
Thank you. Our next question comes from the line as Steven Chubak from Wolfe Research. Please go ahead.
Hi, good evening.
So why this started the hey, guys. So I wanted to start off.
On the last earnings call. Dan you spoke of some of the challenge is potentially marketing business solutions during work from home.
We did see some nice acceleration in terms of every subscriber additions in Q2 I was hoping you can speak to some of the factors that contributed to that positive surprise and just with the addition of new solutions, including remote office in succession planning is business solutions still expected to be accretive to firm wide our away and are the.
Said differently or the fee dynamics still better than the blended our away from the firm.
Okay.
Yes, Stephen Thanks So.
With respect to the through the first part of that question I think if you look back credit business solutions over the quarter you saw a couple of things occurring a DSO advisors very much focused on serving supporting their existing clients.
And.
The sort of the extreme conditions. They were end of having to focus since been significant amount of time with their clients.
That created new opportunities as an example for our virtual CMO program, where the CMO shifted to helping their advisors manage those client relationships and those client communications with respect to the CFO offering the downside planning and helping them understand cash flows.
To think about how to transition through.
Any potential change within their their practice was was clearly and an important value to provide in the short run and then certainly having a virtual adnan made it much much easier to move to a remote environment. So.
The probably the most significant thing that occurred in the quarters that really reinforce the structural value associated with the business solutions and.
I think you you're now seeing as we come out of that volatile period.
That reinforcement of that value, we're very optimistic on the on the continued potential increase in subscriptions associated with those traditional solutions inside the quarter itself. It was it was hard for advisors that weren't using those practices to pull up and try to engage in them and start them a new inside the quarter.
Given the focus on their clients. So we didnt see as many new sales on those items.
Within the quarter, but again I think we're seeing that trend.
Changes were coming out of that period of volatility.
What we've also seen though is the ability to continue to innovate and add new capabilities in new solutions, whether it be the assurance plan.
Whether it be a remote office solution that helped advisers quickly pivot to operating remotely with this turn key technology solution. So we continue to create.
New services within the overall offering those new services drove.
A higher proportion of the overall sales in Q2 than the traditional Wednesday.
And if you look at the overall mix or the Aro way, we still expect that to have a higher contribution than the overall baseline business that said some of these services or more labor intensive and scale differently. So they would probably have higher revenue and higher cost. Some of these new solutions like the assurance plan.
I would have lower revenue, but much lower cost and so that would be a way to maybe think about the traditional solutions versus the.
Some of the newer ones that we've just come up within the quarter I hope that helps.
Yeah, Thanks, and Thats very helpful and just a follow up from that.
As hoping you could give some additional detail relating to the.
T transaction, how should we be thinking about the potential earnings accretion from this deal and maybe just any time. Thanks, you can you give around the blended our away that you typically earn on.
These banks mandates and the incremental costs associated with servicing those assets.
Yeah sure, Steve and I think when you when you look at a at institution like an empty.
Those firms usually more brokerage than advisory Sofia. If you look if we just start with the baseline of the.
Gross profit our lay on our brokerage business, which isn't the 15 to 20 basis point range.
In an institution of this size I think we'd be at the at the lower end of that rates of 15 basis points.
And then when you look at the cost to serve because of that same size and scale of the cost to serve would be also be a lot lower.
And then you add on top of that the transition assistance, which we are principle of underwriting for returns on would be matched up here.
You put all that together from a we'd look at it from a EBITDA margin lens it would be accretive to the two our EBITDA margins. If you just look at what we will we delivered this quarter.
So I think where as Dan said in his his remarks, we're excited about the opportunity to to serve MTN and help them help their clients.
Great. Thanks for taking my questions.
Thank you.
Next question comes from Alex Blostein from Goldman Sachs. Please go ahead.
Thanks, Good evening everyone.
So Matt first question I wanted to dig a little bit more on the promotional expense guidance.
Sure I appreciate the conference, but it's still a pretty meaningful step up sequentially and feels like the virtual conference should be somewhat cheaper than the actual conference. So maybe help bridge the delta from this quarter next quarter or whats the versus what's the conference and I guess, just a little bit bigger picture given the success you guys, having recruiting and a virtual for.
Matt should we be thinking about the promotional expense relative to the growth of the company.
Just being a little bit slower I guess, a smaller percentage.
Going forward once I once thanks or normalize.
Yeah, I think on the second question Alex the teams that are doing the recruiting.
Those costs show up in core DNA not promotional.
So I think that's just inherent in our core DNA guidance on the the cost in the efficiencies that we would get in doing that.
On the on your first question I think that probably the thing that that maybe see makes the swing be a little bit higher as we we didnt have any conferences in Q2, I think we typically have one of our larger conferences in Q1. Another large one in Q2 and then our largest in Q3, so with that I think you've got a trend that looks a little bit higher but I think as.
As a bolt and I talked about in the prepared remarks, I think while to state the obvious we're saving on hotels and travel and things of that nature.
Core point of the cost of the conference is really to to get our advisors together and provide them content and opportunities to.
Really focus on their businesses and how to grow so I think we're really focused on doing that.
I haven't done yet this will be our first one I think we'll learn and.
And at a rate based on how that goes but I think we I would say sitting here now and in our planning we feel really confident that what we are investing in the conference.
Going to have a great return and help those advisors growing in turn help us grow overtime.
Gotcha.
And then a quick follow up on the I see a dynamic so southern disclosure around a little over in the incremental extension this quarter a billion dollars.
It looks like you guys did it at a 60 basis point rate, which I don't recall seeing the one year at 60 basis points since this whole thing unfolded.
Maybe a little bit more color of kind of where are you able to lock in the rate like this and.
Opportunistically other more opportunities to do kind of above market looks similar to this.
Yeah. There was one day, Alex one day it was at 60.
[laughter].
Focus here on on the fixed rate balances there I think we've talked about in a lot on on the philosophy. It really minimizing the interest rate movements, allowing us to have a.
More stable earnings stream and focused on investing in organic growth and I think to the core of your question is there's not a lot of opportunities right now and I think the hopefully what you take away is that where we monitor the market's everyday we're talking a lot to banks everyday and Theres, a tactical opportunity to do something that can move us forward where appropriate.
Paired and ready to do that and and I think that's how I would read the billion at 60, Bips and just to.
State the obvious or 60 bed suspect the obvious that that's not where rates are today right. The curve is pretty much flat I think the tenure close today at an all time low at 53 point something.
So right now not a lot on opportunities, but if they do present themselves even for a short period of time, we'll we'll do our best to take advantage of.
All right that's great. Thanks.
Thank you I'm next question comes from the line of Chris Harris from Wells Fargo. Please go ahead.
Hey, guys.
Few follow up questions on on Kashi economics.
First.
Thanks to retrenching loan growth is way down so has there been any change in the appetite among banks to acquire your deposits. It doesn't sound like there has been but maybe you could frame up the risk for that and whether that potentially might reduce your spreads.
And then is there any more downside to any of your money market yields where they sit today.
Yeah, Chris I think on the on the cash appetite I think what we've seen is primarily appetite for floating balances and I think if you just look at Q1, where we added 5 billion a capacity on floating balances in the.
Fed funds plus 20 to 30 range and we added another 5 billion. This quarter I mean, those are leased for when you look at the the relative size of that on our balance sheet those are pretty substantial ads.
As I was just talking with Alex about there's not a lot of demand an appetite on the fixed right side for those.
On the money markets automate a couple of things I keep in mind the money market sweep is really running off so it's a product that's getting smaller and smaller.
Really where our money market product is on the purchase money market side and and from our economics, that's really a revenue share. It's not it's not directly tied to interest rates like the IC account would be so it's more of a revenue share.
You can see is in the in the 2020 basis point range higher into that right now so it wouldn't be directly tied to movements in interest rates.
Okay and related real quick if I can the for the M&A transaction, what do you guys can earn on those cash balances how does that work.
Yes, so for 70 in for for banks in General.
I think the state the obvious the they are their own bank. So a lot of times institutions, we'll just keep the cash balances and will serve their wealth management business and that's the case and empty. So there's cash balances will be staying on their bank.
Okay. Thank you.
Thank you.
Our next question comes from Michael Cypress from Morgan Stanley. Please go ahead.
Hey, good afternoon. Thanks for taking the question just wanted to circle back on the centrally managed platform about 54 billion of assets now I was hoping you could you share an update on somebody's your initiatives. There how you see that evolving in the next couple of quarters and maybe you can also give us a little bit a sense of the profile of advisors that are ticking up on that centrally managed platform what are the type.
Oh that are more likely or more active users at that and maybe what portion of those advisors have joined say in the past couple of years versus those that are have been on your platform for many years.
Yes so.
Let me take that one.
And first of all your centrally managed platforms. If you think about the the real structural value that.
You're providing.
Is compelling investment content right and then secondly, the ability to save the advisor valuable admin time, where they don't have to do a lot of the administrative work in trading work associated with portfolio management and so.
Thinking about those since two core characteristics.
Generally speaking your they're going to apply to any potential different personnels of advisors that stood out there today with the exception of the the advisor who creates most of their value through their very own portfolio construction.
Being harder and harder to do and getting paid less and less for that.
Lastly, you're seeing a move away from that most advisors, who have a broader value proposition and then would use the centrally managed platforms along with also in some cases using a rep directed platform and that's the nice thing is we give them the flexibility to.
Use whatever platform is best for whatever individual client and so.
That is a baseline in a foundation that opens us up to.
Centrally managed solution being applicable to 70 plus percent of the advisors and again they can use them. However, they want to with inside their practice so.
They are broad appeal, there and broad applicability there.
And I think what you're seeing is more and more advisors growing in this trend.
Of recognizing the value of their time and that trade to save that timeline to use it on what I might call higher margin activities and so.
We do expect the demand in the utilization for the centrally managed platforms to continue to trend up now we've got to keep investing in it and make sure that we give them that compelling investment content that we actually are able to give them.
Continued.
Expansion in the savings of time by adding new function now ready and new capabilities to the platform and a great example of that was the advisor sleeve solution that we rolled out we just enhanced in Q1 in Q2.
Basically gave the advisor more flexibility as to how they engage in a centrally managed platform, where they can load and trade there sorry load up their own models on the centrally managed platforms, but still get all the benefits of the client savings and the outsourcing of the trading and the operational work too.
So.
That's an example of where we continue to invest we continue to invest in the.
Estimate platform same concept in principle here centrally managed platform and you continue to expand the functionality and flexibility will drive more growth to the platform. We also is where we're investing from a pricing standpoint, as we shared with you we continue to use pricing.
As an option for an investment for the past five years and centrally managed platforms are a place that we continue to see opportunity to do that so I hope that answers your question, but that that some of the opportunity that we see.
Associated with both the structural benefits and growing demand as well as some of the investments that will make.
Great and much much appreciate it maybe just a quick follow up on that as well I guess, what would you say would be the top three things are so you'd like to add or expand or improve on that platform. As you look out over the next couple of years.
Yeah, I think the more we can give the flexibility for the the.
Advisor to move.
In and out of that platform the better.
What I mean by that is that there's certain times with advisor wants to take the wheel and control it to the extent that you could give them the ability to do that on a centrally managed framework. We believe this is a is a journey that we've been on and we've got a few more steps to take on that.
I think a second component is continuing to add certain securities to it so you'll see us working on adding equity to this centrally managed platforms historically its been limited to portfolios with mutual funds and Ts and so there's an example, and then you'll also see us pulling in.
Estimates to this to our MWP platform are sort of core centrally managed platform and integrating our Esa nave solutions into that platform. So those are three big things that will work.
Great. Thanks, so much.
Hi.
Thank you.
Your next question comes from the line of Devin Ryan from JMP Securities. Please go ahead.
Great Good afternoon guys.
Just wanted to have another follow up here on the business solutions and I appreciate all the color and obviously good to see the continuing progress.
Trying to think about just the growth trajectory and I. Appreciate it does take time to scale and its newer but you're also learning a lot as you go here and experiment as well so I'm curious for the advisors that aren't using any of the solutions yet there isn't an education thing or marketing dynamic.
Thing, where essentially advisors aren't aware of our capabilities you haven't seen just need to better educate them and make sure they're aware or is it playing around the pricing structures. Do you guys provide try also maybe a little bit of a sense of a backlog of what could calm I'm just trying to get a sense of the growth trajectory and just some of those dynamics.
Yes, it's a great question and I think there's there's a multitude of different places that we would look at.
In order to.
Accelerate if you will the growth for the growth trajectory of the solution.
I think one place that you look at is definitely on the value proposition side, the value proposition resonate or the other things that we can expand or do that make it even more valuable than more appealing. So we've we've been able to learn a lot about that over the past year and a half.
We continue to roll out new digital capabilities inside all of them.
Based on the feedback and the learnings we have from existing clients and so we see.
Those baseline business solutions, becoming more and more appealing as we make those investments which.
We'll create we think more and more demand I think at the same time, we are looking at different pricing structures can you create different versions visa simplified version that would have a lower price point.
Can you create a a different construct as you say to give someone a trial period to come in and really experienced the value and thats better understand how they value relative to their own.
Yes, and so we absolutely are exploring experimenting with different price points in pricing structures.
In order to do that and then we the third area would be continuing to innovate on new capabilities in new solutions. The nice thing about innovation is the gets innovation as you're working down solving real problems or challenges for advisors inside their practice and helping them operator business identifies new places to create and add value.
No that's what occurred as a great example, with the insurance plan the dialogue around that need.
Led to three other questions to ask which then created this idea concept of how to solve for it. So we do believe there's more things that we can do down inside the practice, where they either.
By those services somewhere else or don't even use them today, because they don't think they have access to them that we can continue to help them operate the practices. So that's the three oars in the water that would help drive.
Topline growth.
Well I appreciate the color Dan maybe just a quick one from add on the follow up on just transaction and other I heard the comments about kind of normalizing volumes what are the other kind of puts and takes as we think about just the current quarter. Sometimes there is elevated kind of conference related revenues, you're trying to think about other things that.
I don't there's seasonality as well to think about for that line, which is obviously bounced around a fair amount over the last few quarters.
Yeah, I think that the only additional thing I'd highlight Devon is on the just the a couple of things on on fees on the seasonality of IRA fees right. Those are typically at first half seasonal meeting Q1's, typically the highest quarter Q2 still a little bit elevated but then when you get into the second half of the year.
And specifically Q3, you start to see those come down.
And then the other side of this which is a great long term item is our retention rate retention is that all time highs and meeting attrition is that all time lows and when those accounts leave theres a theres a fee charged for them to leave so meaning that the fees associated with folks, leaving accounts, leaving LPL are also down right. So great from a value standpoint.
Long term, but an individual quarter.
Theres that puts a little bit pressure down on fees.
Okay, great. Thanks, Matt.
Thank you.
Your next question comes from Chris Shutler from William Blair. Please go ahead.
Hi, guys good afternoon.
[music] weeks ago, another large broker dealer announced they plan to become a bank.
Just given the rate environment likelihood that where we might be here for some time, what would cause you to take a more serious look at that option.
Hey, Chris is now I'll I'll take that I think for us it gets back to our value proposition and how we can serve and support our clients.
And I think when you when you think about that you don't need to be at bank to do that right. When you just think about the cash capabilities that we offer in sweep today.
And there is lots of folks out there that you can offer additional capabilities on that a bank off offers without being a bank specifically so I think we're focused on the value prop focused on.
How do we provide the services and solutions for our clients and their clients and I don't think becoming a bank as necessary to do that well.
Okay. Thanks for that Matt.
Then.
Secondly, can you give us a sense.
Ballpark, what percentage of assets at LPL are invested and.
Passive investment products and perhaps more specifically.
I know, it's Super Super early days here, but if actively manage DTF swear to take off in a more meaningful way how could that impact your economics.
Yeah.
So.
Obviously with passive investments as we discussed in the past it is.
Only on the advisory platform to the advisory business was it shows up as relevant.
In the brokerage cost structure obviously.
And advisor is not going to use them or they are they don't get paid guide so.
On the advisory platforms today in roughly a third of the overall assets are in passive type constructs think about mutual funds and or yes.
And we've seen an ongoing trend over the past couple of years of about.
1% a year, we've shared that with you before in terms of that mix shift.
Overtime.
You'll see some volatility from quarter to quarter, but on average it's been about 1%.
We see advisers using it.
Primarily inside of a rep driven platform, where they may use it for now.
Large cap growth of value type components of an overall portfolio.
We also have.
Passive options and alternatives on our centrally managed platforms as well it's an advisor.
Two needs to or desires to use it in that format. So we don't see a big shift relative to how passive is being used as we go forward no active VTS, we create a question around.
How they might be utilized instead of active mutual funds.
And I think.
It is that it has a strategy or a way to potentially lower the cost of active management, we're supportive of lowering the cost as the innovation around these products has occurred.
We've been in dialogue with a number of different products sponsors as to how they think about it and how we make sure that.
The overall ecosystem couldn't use those in effective way.
To help lower the cost of active management.
And enhance the overall then experience to the end investors. So it's early days now in terms of how those may be positioned and rolled out but we're optimistic that.
With the emergence and.
Evolution of active VTS that our sponsor program.
We'll and can be evolved and adjusted in pivoted such that it has more of a neutral impact on our overall sponsor relationships.
All right.
Thanks, a lot yes.
Thank you.
Showing no further questions in the queue at this time I'd like to turn the call back to Dan Arnold President and CEO for closing remarks.
Hey, Thank you operator, and thanks, everyone for taking the time to join US. This afternoon, and we look forward to speaking with you again next quarter. Please they say you know.
Ladies and gentlemen, this concludes todays conference call. Thank you for participate and you may now disconnect.
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