Q3 2020 LPL Financial Holdings Inc Earnings Call

Good afternoon. Thank you for joining <unk> third quarter 2020 earnings conference call for LPL Financial Holdings, Inc.

Joining the call today, our president and Chief Executive Officer, Dan Arnold Chief Financial Officer, Matt.

Dan and Matt will offer introductory remarks, and then the call will be open for questions.

The company would appreciate and always 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 Investor does LPL Dot com.

Today's call will include forward looking statements, including statements about LPL financial future financial and operating results outlook.

Outlook business strategies, and plans as well as our other opportunities and potential risk management foresees.

Such forward looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of it that's the differ material from those expressed or implied in such forward looking statements.

The company repurchased listeners to the disclosures set forth under the captions forward looking statements in the earnings press release.

Well in the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission for more information about such risks and uncertainties.

During the call. The company will also discuss certain non-GAAP financial measures.

A reconciliation of such non-GAAP financial measures to the comparable GAAP figures. Please refer to the company's earnings release, which can be found at investor does LPL Dot com.

With that I will now turn the call over to Mr.

Thank you, Chris and thanks, everyone for joining our call today.

Over the past quarter. Our focus has remained on our mission of taking care of our advisors. So they can take care of their clients.

As a credit to our employees, who have responded with agility and ingenuity to new working conditions and new opportunities to support our advisors. Their dedication is inspired by the unfailing commitment of our advisors, who continue to provide much needed financial advice to millions of Americans managing through a challenging.

Yeah.

We believe this environment is driving several years worth of change in just a matter of months. This pace of change is creating many new constraints and challenges to solve for throughout the industry. We see this change as an opportunity to create additional long term value by enhancing how we serve our advisors.

Our advisors take care of their clients and how we engage with and attract the best employee talent.

We entered this year with momentum and the work we've done to operate in this changed environment puts us in an even stronger position to serve our advisors and grow our business going forward.

Looking ahead, we will continue to focus on investing in our platform, which helps our advisors win in the marketplace attracts new advisors and in turn increases are scaling capacity to invest this will help us deliver a market leading platform that is the easiest place for the advisors to construct the perfect practice.

And run a thriving business doing this well gives us a sustainable path to higher levels of organic growth increased market leadership and long term shareholder value creation.

With that context in mind, let's now turn to the third quarter and discuss how we are executing the key components of our business priorities. While also moving forward on our strategic plan.

Well, let's start with how we're executing on our priorities is translating to business results.

In the third quarter, our assets reached a new high of over 800.

Driven by continued organic growth and equity market appreciation.

After consistently investing to deliver a leading advisory platform our advisory assets continue to grow up 20% from a year ago and now over 50% of our total assets.

Moving to organic growth net.

Net new assets remained solid at 11 day.

Which translated to nearly a 6% annualized growth rate. This brought net new assets to a new high of 51 billion over the last 12 months, which translates to a 7% annualized growth rate and was driven by continued strength across new store sales same store sales and retention.

Organic growth increased throughout the quarter as expected after the impact of client tax payments and summer seasonality in July and August respectively or.

Yeah. The growth was over 7% in September consistent with our growth rates in the first half of the year.

In the third quarter recruited assets were 10.7 billion and contributed to a new high of 41 billion over the past 12 months.

These results were primarily driven by the appeal of our model and continued solid execution of our business development team.

With respect to our advisor experience in the third quarter, we continued to develop solid service outcomes driven.

Driven by the flexibility of our affiliation model's evolving capabilities and technology.

Enhanced service experience.

As a result retention remained over 98% through the first three quarters of the year up nearly two percentage points from a year ago.

One of the true additional contributors to our advisor experience is our annual National Conference.

So to increase our growth rate over time.

With respect to our traditional markets. We continue to drive solid recruiting results, which include achieving higher when right and attracting larger practices. This dynamic is also benefiting our pipeline, which expanded the new highs throughout the quarter.

At the same time, we continue to increase our market leadership and the third Party Bank channel.

As a reminder, in July we signed an agreement with M. A T bank to move its retail brokerage an advisory business to our platform.

Earlier this month, we signed an agreement with another leading institution <unk> BMO Harrisburg, there a retail brokerage an advisory business female Harris financial advisors plans to transition approximately 14 billion in assets in 115 financial advisors onto our platform and the first half of next year.

We look forward to helping them serve and support their clients expand their value proposition and grow their business. Together. These two leading banks are representative of the work we are doing to serve more large institutions.

With respect to the expansion of our addressable markets are new affiliation models continue to gain traction.

After launching are independent employ modeled this summer we're seeing solid interest from prospective advisors in our pipeline is grove.

We also added two more strategic well services practices in the third quarter, which bring recruited assets on this model to approximately one day.

We are encouraged to see our new affiliation models building momentum and believe that they can help increase our organic growth rate overtime.

<unk> second strategic play.

Is focused on providing capabilities that help our existing advisors differentiate in the marketplace and attract new advisors to our platform.

Within this strategic play we're focused on internally developing new capabilities as well as opportunistically using M&A to accelerate the delivery of certain solutions and.

In that spirit.

Earlier this week, we acquired Blaze portfolio, an advisory trading platform based in Chicago.

Context trading as a foundational piece of the advisor workflow and increasing a strategic value, especially as more advisor shift two models based practices.

With the capabilities from Blase, we will provide a more flexible and dynamic trading in rebalancing solution that enables advisors to deliver more personalized and engaging experience too.

To their clients.

Let's move to our third strategic place, which involves creating an industry leading experience to delight advisors and their clients.

One of the key parts of this strategic play is transforming our service model into a client care model.

As a reminder, this model is designed to provide advisers with differentiated service.

At a time and in a <unk> manner that works best for them by bringing together on Omnichannel platform complex case management and self help help capabilities.

After we rolled out our Omnichannel in case management solutions across our service organization. They delivered a solid contribution to our advisor experience and M. P. S scores were now using speech analytics to monitor and learn from each service call to fine tune, our model and continue to increase performance and value overtime.

The next big category of work is self help capabilities within client works, which will provide online relevant and easy to navigate content that solves and advisers needs without ever having to make a call.

Our goal just to make set self help one of the easiest channels for advisors to access to navigate L. P L, helping drive convenience and efficiency for their practices, while contributing to the ongoing enhancement of our advisor experience and M. P. S scores.

Or for strategic play is focused on helping advisors run the most successful businesses and the independent marketplace.

One of the key components of this play is business solutions.

As we move through the changing environment. This year, we've seen expanded utility of our original add then marketing a C. F O solutions as advisors leverage these offerings and different ways to solve for new challenges.

The Covid related climate also proved to be a catalyst for innovation and developing new services like our insurance plan and remote office solution.

By continuing to learn and adapt or advisors changing needs. We now have a stronger and broader portfolio of solutions that are delivering more value or applicable to more advisors and are proven across a challenging environment.

As a result, our business solution subscriptions have double doubled over the past year to 1200 at the end of the third quarter.

In summary in the third quarter, we continued to invest in.

And the value proposition for advisers and their clients, while driving growth and increasing our market leadership as.

As we look ahead, we remain focused on executing on a strategy to help her advisers further differentiated when in the marketplace and to drive long term shareholder value.

With that I'll turn the call over to Matt. Thank you, Dan [noise] and I'm glad to speak with everyone on today's call and.

In the third quarter, we remain focused on serving our advisors growing our business and delivering shareholder value.

We continue to drive strong organic growth.

Recently signed another large bank and closed on three acquisitions.

And we did all of this while remaining disciplined on expenses.

As we look ahead, we're excited about our increasing opportunities to drive organic growth and long term shareholder value.

Now, let's turn into my third quarter results total advisory and brokerage assets increased to a new high of $810 billion up 6% from cute too driven by continued organic growth and higher equity markets.

Looking at organic growth total net new assets were 11.1 billion or a 5.8% annualized growth rate.

Our results increased throughout the quarter with September organic growth at 7.4%.

Which was up from July and August is those two months included the impact from client tax payments and summer seasonality.

Moving onto recruiting and retention, which are two key drivers of organic rough.

We continued to produce strong results in the third quarter.

[noise] crude assets were 10.7 billion in Q3, which brought our 12 months total to 48 billion.

At the same time retention remained over 98% year to date.

Looking at our business mix, we continue to see positive trends in Q3.

Advisory net new assets for 10.4 billion or an 11% annualized growth rate, which brought advisory assets to over 50% of our total.

Essentially managed platforms also continued to grow isn't that new assets were 1.9 billion or a 14% annualized growth rate.

Now, let's turn into a Q3 financial results strong organic growth combined with expense discipline led to EPS prior to intangibles of one dollar and 44 cents.

Looking at Commission advisory fees that a payout they were 142 million up 11 million from queue to primarily driven by higher advisory fees and commissions.

Moving on to asset base revenues sponsor revenues were 145 million in Q3.

Up 14 million sequentially as average assets increased driven by higher equity markets and organic growth.

Turning to client cash revenues, they were 109 million down $8 million from queue to primarily driven by lower short term interest rates.

Looking more closely at client cash balances. They remained elevated at 47 billion up 1 billion sequentially.

As for client cash yields are cute three I see a yield was 118 basis points down nine basis points from two two.

The decrease was primarily driven by lower LIBOR rates as well as half a billion a fixed rate contracts that mature during the quarter.

Looking ahead to queue for we will have the full quarter impact of the decline in LIBOR that occurred in two three as well as another half billion a fixed rate contracts maturing.

Given these factors and where interest rates client rates and cash balances. We're at the end of Q3, we expect our queue for ICA, you'll to decreased by about 10 basis points sequentially.

Moving onto Q3 transaction fee revenues, they were $120 million flat sequentially, driven by higher fee revenue and lower training.

Well July and August trading return to more normalised levels volumes increased in September along with market volatility.

Looking ahead to queue for I would highlight that are October volumes have returned to more normalised levels.

Turning to business solutions, they continue to scale with 1200 subscriptions at the end of Q3.

This is 250 from last quarter and double our total for me your ago.

These offerings generate roughly $15 million of annual recurring gross profit and more importantly, they help advisors free up additional time to serve their clients and grow their business.

Now, let's turn to expenses started with <unk>.

It was 227 million in Q3 5 million sequentially as we continue to invest to drive organic growth across our new affiliation models technology and service.

Looking ahead to queue for we remain on track to be in the lower half of our Twenty-twenty Gore G N a outlook range of $915 million to $940 million.

Moving on to promotional expenses, there were 58 million in Q3.

<unk> 13 million sequentially, primarily driven by our National Advisor Conference.

Looking ahead to queue for we anticipate lower conference expense, partially offset by seasonal marketing and continued growth in recruiting transition assistance.

As a result, we expect queue for promotional expense to decrease by about $5 million from two three.

Turning to our tax rate it was 23% in Q3.

This is below are expected range of 27% to 29% as we benefited from a positive decision on a prior expense that was considered non deductible.

Moving onto capital allocation, our balance sheet remained strong and two three with credit agreement net leverage at 2.15 times and cash available for corporate use of $252 million.

The strength of our balance sheet remains a key enabler of organic growth and positions us to deploy capital when opportunities arise.

As for capital deployment or framework remains focused on allocating capital aligned with the returns we generate.

Investing in organic growth first and foremost pursuing M&A opportunities, where appropriate and returning excess capital to shareholders.

As we look forward, we see increasing opportunities to allocate capital to organic growth and emanate, including transition assistance for M. N T N BMO next year.

Given these opportunities we are currently prioritizing capital deployment to organic growth and M&A.

That said, we will stay flexible and we'll adjust our plans as the opportunity set of balls, including allocating capital to share repurchases.

In closing we delivered another quarter of strong results in Q3.

And as we look forward, we remain excited about the opportunities we see to continue investing to serve our advisors.

Rowe, our business and create long term shareholder value.

With that operator, please open the call for questions.

Thank you.

And as a reminder, ladies and gentlemen, if you would like to ask a question. Please press started in the one key on your Touchtone telephone.

Oh Joy your question. Please press the pound key.

Please limit yourself to one question and one followed up and please them by what we can probably Q&A Ross.

<unk>.

And our first question comes from amount of Bill Cats Citigroup. Your line is nope.

Okay. Thank you very much for taking the questions are good evening, everybody. So then maybe it wouldn't stuff you Big picture, obviously detailed three or four things that are really resonating in a marketplace could you unpack maybe the the organic growth that you're seeing maybe take it down a little bit to the different channels, you know between sort of the traditional channels versus newer one so.

Speak to what's particularly resonating in the marketplace, that's driving the very strong both new assets as well as the recruited assets.

Yeah. Thanks, Bill, let me take a stab at that <unk> and I'll try to give you a little color and then if you've got a follow on police far away. So.

Look I think if you think about our our growth. We we first and foremost look across all of the different models or parts of the market that we serve and look at how we're doing from new store sales same store sales and retention right and if you.

Match that to the investments that we make strategically in our model. They are meant to server support any parts of that growth formula. So we obviously see record high results in the new store sales, which is.

Referenced in the trailing 12 month recruiting that we've done where we've we've brought in over 40 billion in assets.

Which was a record high for us so that would reinforce that you know that or in the water is is making good progress I'll come back to that I think same store sales has been durable and kind of sustained itself in a in a <unk> in a similar place over the last couple of years this year more of that opera.

290 is coming from it visors broadening their value to existing clients and ultimately getting are rewarded for that value by gathering more assets with those <unk> existing clients, which is a bit of a different ship from in prior years, where they may get a higher mix of that growth from new clients that they attract.

And then on the retention front clearly that's us investing in our model improving enhancing the service experience. The technology capabilities, you know our ability to serve and support in a bold the model going forward and sort of play out into the future where advisers needs are and I think that is best reflected in.

And the retention rate, which is up 200 basis points over the last couple of years. So I think that gives you a feel if you will around the different orders that we have in the water and and the contribution they're making to that so I think we're getting a good contribution across the board with the most significant coming in the growing of the of news.

Door sales are recruiting and if I click down on the market's based on your question most of that recruiting result over the last 12 months has come from our traditional market something about our traditional independent and the institutions marketplace. We've got the three new models are markets that we're ramping in.

S. W. S. As the first one that you're beginning to see some contribution now come from that and the pipeline. There is Sal more importantly, we're moving people through that pipeline and I think you'll you'll begin to see a bigger contribution of that in 2021 from the S. W. S model.

Our strategic wealth service model then you've also have our employee base smaller Lynds go model. This week branded it and that is just new to the marketplace. It's getting a really positive reception I think for some of the differentiated capabilities. We're building that pipeline, we think that that.

Solution is appealing to an interesting segment of the marketplace and so again I I think we're we're quite bullish on the contribution that can come from that in the future and none of the growth has come from that model up to this point and then finally the R. I a only we are in or a custodian or or we support so.

M R. As we're going in and and investing in that model and evolving it such that we think it's gonna create a really interesting compelling.

Uhm solution, that's differentiated in the marketplace at a time, where we expect to see some churn pick up in that part of the marketplace. So that's a little bit of how we think about the contribution up to this point with those models, but then how you might think about them differently. As we go forward I hope that helps.

Oh, that's that's a tough one is thank you maybe one for Matt just sort of thinking about your commentary where you ended in terms of cancel priorities just stepping bags do you think about core expense growth I just look at the next year, how how much of an opportunity is there to bend down the underlying expense grow with just given everything that's been going on with <unk>.

Over it and work from home and remote office backdrop versus maybe not laying that burned down and reinvesting back in business too for the turbocharge organic growth.

Yeah, Hey, Bill Uhm, so I need as we think about expenses next year, well, we'll share our plans on on the next course call, but I think from a principal standpoint, I think you've hit on it in your question when I think about Gore G and a and spending it's really back to the capital allocation priorities and I think we see the highest <unk>.

Best use of capital to invest in drive organic <unk>.

And I think that will be the principle that we bring to that and that will be the principal will bring to to laying on a cord G&A plans for next year.

Thank you.

Okay.

Thank you and our next question comes from the line of Stephen Shoebox with Wolfram Research and one is now open.

Hi, Good afternoon Dag afternoon, ma'am, thanks for taking my questions, maybe just starting off with a strategic question for Dan you know some of the acquisitions, including advisor World then more recently blurs their products or services, which are being marketed have advisors outside of the L. P O channel and as your <unk>.

Hi, G evolves and you continue to build out just some of <unk> more proprietary business solutions, especially given some of the strong demand for those services you've seen from your own advisors. How are you thinking about the opportunity to maybe white label and market. Some of those solutions outside of your current adviser network, especially given some of the walls competitors within that.

Solution space trader much higher valuation multiples.

Yes, even <unk> a good question look with respect to Blaze and advisory World.

Those are both part of our strategy, where we use M&A in some cases to help accelerate the development of our capabilities and then fully integrating those those capabilities into our overall ecosystem or workflows for our advisers in in this case, that's very much what we're doing here.

<unk> is is is capitalizing on a really good solution appropriate you out in the marketplace and bringing it into improve and enhance the overall workflow associated with portfolio construction and development right and trading as a as a big component of that.

That said the the second opportunity associated with this acquisition is certainly to continue to support the market share that they have outside of the L. P. L platform and that is our intent to do that here is to continue to serve and support it continue to invest and innovate in the <unk>.

Building tool and certainly a bold that offering to those clients I think by doing that it gives us the chance to continue to learn and understand how to serve a marketplace outside of the L. P. L platform, which then strategically positions us in reserve.

The right to if we ever want a shift or pivot and and uhm begin to serve that third party marketplace in a more significant way I think it gives us the foundation to work from and and do that well so those not the priority right now it's <unk>.

Certainly is of a strategic element of value here that gives us a chance to learn and and and allows us to be positioned to to do that.

Okay. Thanks for those remarks stand and maybe just a clarifying question follow up to Bill was earlier, one on organic growth and investment man I know your investment. Some recent quarters have been largely focused on driving organic Russ we saw strong momentum in September.

I was hoping you can just give us some more color on you know whether that organic growth momentum has continued into October and what that can mean for this corps jna expansions queue for as we contemplate some of those additional investments.

Yeah, sure, Steve and I hate when we we look at what we've seen so far in October right being here pretty much at the end of the month that that momentum has continued uhm. So I describe it is consistent with September I would keep in mind. The majority of advisory fees are charged and paid in the first month of a quarter. So when you look at the trends from set.

Timbered October that's gonna have a natural bias down just from the the change in the amount of fees, putting that aside October in in a is really trending at a similar level to September sweet we've seen that returned to organic growth continue.

And then on the on the cash balance side of the cast sweep side. We've continued to see cash build in October at a modest pay so I think we're we're seeing some good results there on the core G&A side. Your point that we remain on track for that lower half of our outlook range, so that lower half being call at 915 to around 927.

And I think to the point of your question, where we would land in that range, especially with three quarters being completed and just one left I think the main yeah variable is the variable expenses associated with organic growth and how we finished a year so [noise].

Given the first three quarters as well as what we've seen so far in October I'd say, we're probably gonna be towards the upper end of that range meeting the 915 to 927 range, but we do have two more months to go so I'll have to see how it plays out but that would be the perspective, where we are today.

That's great man. Thanks, so much for taking my questions.

Thank you.

Our next question comes from the line of Alex blow steam with Goldman set so I want it now.

Oh, Great Hi, everybody. So I I was hoping we could talk a little bit more about the banking channel. You know you guys announce to sizeable deals in the last couple of months Uhm. So maybe talk a little bit about what's changing that channel that makes you guys more of a attractive place for for some of these advisers to to join in.

Then from a financial perspective, maybe you could just kind of walk us through sort of a framework around gross profit hour away and EBITDA Ro eh for for those type of transactions, including amortization of transition assistance that you know amount I think you alluded to that in your earlier comments that that's probably gonna pick up next year some of those F. A.

On board.

Yes, Alex is Dan let me take the first half of that and then I'll I'll, let Matt finish up with sort of <unk> of that so.

With respect to the the general financial institutions marketplace, you know we we.

Seen some some good solid momentum over the last couple of years.

And as you all know it so roughly a one trillion dollar asset market place in roughly a third of that businesses outsource today. So last year, we recruited 5 billion, which mainly would've been sure that's coming from what was already out source the.

This year, we're on track to double those results and again, it's mainly where they're participants that are already outsourcing that solution or service I think strategically we challenged ourselves around this concept of can we add value.

To a part of the marketplace. The traditionally hasn't helped sourced and if so how might you do that in in this case. It's these larger financial institutions and so I think what we've done is try to go in and <unk> and are they or ensure that we could deliver for them a differentiated client <unk>.

Variance, which we know is important in their overall offering out.

Out in the marketplace and how they position themselves and if we can complement that and extend that overall value proposition in a differentiated way. That's interesting if we can find ways with which to optimize the financial contribution of this type of business line within the financial institutions would be a second place that we've.

<unk> and finally, ultimately shifting the risk profile for them. I think is is typically unappealing characteristic of the model and so those are the areas that we focused on to try to come up with innovative ways of which to ship that evolved that such that this market that had never been outsourced became an opportunity.

And that's where we focused in and tried to show up with a differentiated solution and I've had the opportunity to have that dialogue with some of these financial institutions. We think it's pretty appealing. It's a it's a pretty neat model and you know I think we've got a couple of wins and and we're out there actively sharing that concept in that model.

No not for everyone. We think it's pretty appealing. So that's the concept we've used to try to extend the market. If you will in this in this channel I hope that answered your question.

Yep and and it's on the on the financial side when when you look at the traditional bank channel usually the majority of the assets at those institutions or on the brokerage side. So you kind of start and look at our gross profit are away in those assets are in the 15 to 20 basis point range and then for the larger banks given their size returns are usually at.

The lower end of that range. So so that's the way to think about gross profit on the cost side and I think one of the the primary benefits of the transactions, we can really bring our scale to serve them in an efficient way. So there's really a lower cost to serve.

And then on the transition assistance side, we we always underwrite to returns so given those dynamics that the T. A later ta rates are typically lower for those banks I'm just put those larger bank. So when you put all that together the economics or accretive on the the EBITA margin for US and then I think on these two specific ones as we.

Get closer and in future quarters will give you a little bit of color onto the extent on how they're onboarding and things will impact the financials and those periods.

Awesome, Thanks, and my follow up I guess it qualifies as a follow up uhm is around M&A broadly and just curious to get your thoughts that you know in case, we do have a change in tax law and you know there's a change in capital gain taxes to what extent do you think that could be a driver in increased consolidation Indian.

History with you as an acquirer potentially or some of your financial advisors, you know acquiring other practices with kind of financial backing a L. P. All because I I know obviously, that's that's a an interesting element to the story that you guys bring to the financial adviser just kinda, allowing them to to use you said a balance sheet for acquisitions.

Yeah, I think the the the fundamental point, Alex which is a good one that you're making is where there's change there's usually a broad set of different questions or new needs that come up for people contemplate mmm, new scenarios that they may not a face before and we do think.

The environment as we look out for any number of reasons, including potential tax law changes certainly drives more consolidation and activity on the M and a front.

And whether that would be at the advisor level, which is a logical place to ask that question or more at the at the corporate level I think we see that landscape being and and the trajectory of the activity. They are trending up on on both fronts and and obviously as we said from a strategic <unk>.

<unk>, we would typically be a participant on both of those levels as we as we have in in the past couple of years and you know we would take our our disciplined approach where we make sure that these acquisitions makes sense from.

A strategic standpoint of financial one and and operationally, but I think we're aligned and the premise of your question that you're going to see more activity.

Great. Thank you very much.

Thank you.

Our next question comes from them.

Craig Stevens on it.

With credit Suisse.

Thanks, Good evening, everyone and hope you're all doing well I wanted to follow up on Na's. So three he was impacted by taxes and seasonality and then next year you have to add in a accretive transactions closing. So can you comment on your ability to a salary.

After 6% level into 2021.

Yeah, Hey, Thanks for the question, then and [noise] let.

Let me take a first run at that you fill in anything that that you think would be helpful. So I I think if you look at it.

Two three as a jumping off point, where you had roughly a 6% annually.

Annualized growth rate.

That it was driven by certainly July as you say with the the tax payment trends and that'll pop up next year in April rather than a July let's hope, but I think you'll you'll certainly see that Edwin in that particular month that the techs payments occurs and then there's always a little seasonality in the summer, but let's just.

Say that that that that that's that's 6% to 7% is the right more blended jumping off right I think as we look out and push ourselves our challenge ourselves to drive that number four or higher.

You know outside of the 34 billion that comes from the too large financial institutions that we referred to I think we see us continuing to invest in our model that makes it more appealing improve the effectiveness of our own sales activities of this development.

Activities, our traditional markets continue to tribute contribute to that to a higher growth rate in terms of new recruiting I think our new markets. As you supplement then then they begin to contribute because as I said up to this point, we've had very little contribution from them. So.

We see that as an opportunity as they ramped in more robustly next year Uhm. So those are both places where we would challenge ourselves to continue to extend the growth rate, especially as it as respect to new store sales. We continued to invest in the model from a service experience standpoint.

And you know we've got retention levels at the 98% level now we think that's a pretty sound and install it outcomes. So I think as we go forward and continue to invest in that service experience. That's probably a good way to think about retention and then I think same store sales as a place that we continue to believe.

<unk>, there's there's more opportunity there and we continue to innovate, especially inside business solutions with them.

A new offering called grow solutions that isn't mix for mental phase right, now, where we're being more explicit and uhm coming up with new ways in which to help advisors grow their existing businesses and so though I don't think that's a short run opportunity, we do see that as a longterm opportunities.

82 to tease out more contribution in same store sense. So I hope that helps you as we think about at least going into next year, where that ramp would come is probably new store sales and longer term, you'll probably get it from new store in same store.

Thank you Dan very comprehensive I have one follow up piano question, probably for a map, but I just wanted your perspective on the 25% increase year. We are in transition assistance versus I think it was a a 4% increase in net new advisors.

Yeah sure credit man I think that the approach on T. A is is really the same right. It's underwritten to returns and those returns based on the assets that come over and I think what you're starting to see and not just this year, but over the past several years, that's starting to recruit larger and larger advisors.

And the return hurdles haven't changed so they get any dynamic you're saying there is disrespect is just related to us being able to bring on more advisors for more assets.

Great. Thanks for taking my questions.

Thank you.

And our next question comes from the line of Michael Cypress with Morgan Stanley and that is in Oregon.

Hey, good evening. Thanks for taking my question I, just wanted to circle back on the Sensually managed uhm assets and platform there it looks like that stabilized here at around 14.5% of of client house and so I. Just hope you could talk a little bit more about some of the initiatives that you're putting in place and thinking about to further accelerate the penetration uhm how was the product set evolving and if you could also touch.

Upon maybe describe the profile of the type of advisors that are are participating essentially meant a tough one.

So let me let me take some of those and get up I, Miss one or two of the of the different sub sub questions. In there. Please just a redirect me, but <unk>. So look we believe that this this <unk>.

Model based approach or models management based approach that's emerging inside advisors practices is is a significant and sustainable trend. It's it's a really good way for them to to optimize portfolio construction in a really efficient way in and uhm and construction.

<unk> Slash management and and it applies both as Rep. This P M. All the way over to your centrally managed platforms and so we see the opportunity to make investments in this this models based approach being relevant across that entire advisory <unk>.

That form that said if you go move over to the centrally managed uhm concepts I think we're we're trying to make investments and where were we actually believe we can continue to drive growth in and participation on those platforms continuing to add what I might call variations too.

So you you you heard us talk a lot about rep sleeve, which is the ability to use centrally managed platform and just outsource less than the turnkey option or alternative and that extends the applicable witty now of that model two more advisors.

As an example, we continued to make other investments in that platform and pull in other underlying security Z a pull an individual equities you pull in S. M. As in now you're beginning to enrich that overall centrally managed platform and you're gonna have a lot more advisors utilize it.

For a variety of different reasons for their clients. So think about variations to the centrally managed solution and also think about extending the overlying strategies that you can apply to it and the different security that you could use within it. So there's lots of ripe opportunity there to continue to invest in our.

Uhm platform to extend its clickability to a lot more advisers and help us drive more assets there I'll contribute more S. S. I think also as you know we make investments from a pricing standpoint, typically each year and we've tended to focus on advisory and we will continue to do that.

As we move forward, our advisory platforms and this would be an area, where again you you'll lower minimum she does simplify pricing you lower pricing on your essentially managed platforms, you're gonna draw more utilization of them there too so that that's sort of the spectrum of how we.

Think about the opportunity to enrich its appeal to the advisors and and ultimately how they use it to serve their client.

Great maybe just the last part of that question just around the profile of advisers that are more likely to participate or that are participating today does that any color. There with you can share.

Yeah, Yeah, you know I think a couple of thoughts there. It's it's it's actually a broad appeal across the board there's not one segment that we built it for it. It's meant that have brought application across the platform. I think is more advisors are using more advisory solutions in their overall mix.

That just overarching demand will tease out the opportunity for more to test experiment and use it we see them using it across the client size now that typically ranges somewhere from 100000 to a quarter of a million dollars in assets.

And that's not to say it was built that way, but that tends to two two today filler Ah sweet spot and perhaps how it's used I think we continue to work on the pricing you'll you'll enable it to be used up market and I also think you see advisers, who have traditionally been rep. This pm.

Or have done the portfolio construction and management themselves as their time is pressured in general or they want to allocate it to other higher values services, you're seeing more and more experiment with shifting some of that [noise] traditional rep. This P. M work over to essentially manage models, who making it E.

Z to convert from one model to the other putting them all inside one platform under one contract takes out the friction associated with that transition or that movement and as we do that over the next year or so.

We also think that will unlock to movement towards these centrally managed solutions.

Great. Thank you very much.

Thank you and our next question comes from a lot of Chris Harris with Wells Fargo on your line is now.

Yeah, Great question on the ICA guide for queue for.

Has the yield on floating balance has changed much at all.

I ask the question because it seems like a decent step down for just a half a billion dollars of fix the rolling off.

Yeah, Chris <unk> on the variable balance is is really just the contracts associated with LIBOR resetting and coming down to our current LIBOR is fed funds, obviously move pretty immediately back in back in March in LIBOR has just moved slowly after that I think where it's at today, if if history is a guy.

It is now settled in where it would typically be when fed funds is near zero, but it's just those contracts resetting.

Okay, and subsequent to quarter and there was a move up and have some medium term long term interest rates and what level of right do you guys need to see where you might entertain the idea of moving potentially some more balance isn't fixed.

Yeah, Yeah, our <unk> our focus on fixed is unchanged right targeting that 50 to 75 per cent zone of your overall balances and and and and really to minimize the the amount of impact on our economics as interest rates moves I think what's most relevant today is is less about where the curve. It is.

Israeli just the amount of liquidity in the marketplace man, it's just not a lot of demand for those fixed rate contracts. So I think minor movements in the curve probably don't change that I think over the long term if the curve Steepens I think there's a lot of opportunity you know economically for us to move more into fixed right balance is you.

Just look at where we are today in about 35% fixed if you just look at the bottom end of that target range moving up to 50%. That's about 5 billion in balance is that we can move and.

I think <unk>, if you look back over the last couple of years, when we were moving into <unk> into the fixed rate market. The sweet spot in that market was really to five your point on the curve. So if you're just trying to run some math I think thinking about the opportunity at the low end of the range of 5 billion on the five you're pointed the curve as the opportunity, but I think in the moment right now.

How is there just so much liquidity in the market, there's just not a lot of opportunities today.

Gotcha. Thank you.

Thank you and our next question comes from the line <unk> K E W.

Thank you most of my questions I asked and asked and answered it but uhm, maybe just a couple of follow up to one just on business solutions for subscriptions up to 50 quarter over quarter. Just wondering if you can give more color as to which solutions are seeing when I was uptake and then I just need to qualitatively if you could talk a bit about.

<unk>, how the solutions are resonating as part of the value proposition when you're actually pitching the the advisors for some <unk> some of your new channels.

Yeah, It's Dan let me, let me try to swing at that so maybe the second one first I think so first of all this concept about helping and adviser.

Ron and optimize how they operate their business, there's there's new capabilities there that the independent space hasn't always been focused on solving for and I think our principal was.

Make sure that we build something that is.

Digital in nature, So that you can scale and personalize it but also make sure. It has the ability to help the business owner or advisor execute versus just sort of sharing more best practices with him. So the concept was to fix an execution challenge not Ah Ah no how're knowledge channel.

And so in that spirit [noise] that continues to be our focus with respect to all of these solutions and that's what resonates regardless of the model the traditional independent model typically the independent his experienced where some of those challenges or friction points are and and when they get the <unk>.

Leverage or an admin or a C. F O that that can provide you know in the case of an admin and just leverage points of of time, where there's task to do that or.

Or better outsource to someone where they can focus and allocate that time to higher value tasks. The C. F O, though provides them real knowledge and insight that they may not have had or had the luxury of leveraging to help them enrich their decision, making so it resonates for the independent who is actually already experienced the friction.

<unk> it resonates with the strategic quilt services, because that's an advisor that's coming out of an employ model that is is curious about and a little apprehensive about running a business and the service is being available to them as a as a as a great leverage point and and a boost of confidence in being able to do.

That so those are two examples of where a new model that resonates in on an independent model.

Same value, but one's got a different experience, but it resonates with them and and I think you're seeing.

It will appeal as we as we describe those services in in any of those models I think what we've had to do remember we're still really in a phase of innovation and iteration and so we're constantly learning how to tweak how to evolve how to how to add capabilities elements or <unk>.

<unk> those in the services and so this this year has been a great learning opportunity for us to take the traditional admin C F O and marketing solutions and of all dirty utility or listen to what our clients needs through a different environment in a tough environment and and really enrich the value of so.

C E did with those solutions such that they brought in the appeal two more advisors. The other thing we're thinking about doing is is how do we continue to lower the cost of the lower the price point in.

Again extend the appeal to more advisor. So those are the things that we're doing inside business solutions to drive we think increased it adaptability and leverage of those solutions, what's growing the fastest we've seen good consistent growth across the traditional three.

Add men CFO see them, we were actually concerned inside the pandemic that people would be concerned about paying for them and maybe you'd see attrition pick up and we saw the opposite people really get great value out of these solutions during it it actually reinforce their <unk> durability undervalue and.

And again as we said we extended their versatility or their utility to these clients and so though I think it did hurt.

Selling to new advisors in the short run because of the environment. We think the value proposition is reinforced and we've seen.

Growth rates began to pick up posts that that does sort of the height of the pandemic I think the two new solutions that we mentioned, especially the insurance plan had been the the biggest drivers of growth in the last quarter. The insurance plan really resonates when you think about helping someone protect their business in the event of of an untimely or unplanned.

You know impact to their lives in and it creates a really interesting way, which to preserve the asset that they've created in their business and create an orderly way of which to ensure that it protects that asset for their family and for those ended and clients of it and make sure for and.

Orderly transition at a at a reasonable market based evaluation. So that has been very attractive because that gap out in the marketplace did not exist, especially for advisors, who were in their forties and fifties and have a longer runway left to operate their businesses, it's an extremely attractive value.

Thanks, Dan maybe a follow up for from that on capital return I think the last two quarters. You. You mentioned your state is the buyback was was paused that'll be I caught that exactly when this quarter. Just wondering if we should take that to mean that you're more comfortable restarting some level of buyback, even though you're your priority.

Typing that capital towards organic growth and emanate.

Yeah, I mean, I think maybe if if I bridges from the beginning of the year. When we were buying back shares in Q1, and and you know pretty consistently in 2019 as well I think that pause in March was really driven by the the macro uncertainty from Covid.

And while we continue to monitor the macro I think as you as you heard well in the prepared remarks. The business has really strengthened so I think all else equal we'd likely would've restarted chair repurchases bye now, but those opportunities and organic growth and M&A have have just increased and and that's really where we're deploying the council right organic growth drive in.

The highest levels in our history, we talked to a fair bit about M. A T and BMO Onboarding next year. We're just those two firms alone or 34 billion of a U M and we closed on three M&A deals and in as many months in the last three months. So I didn't get hurt right share repurchases are attractive, but the opportunities that were <unk>.

Just on right now are on organic growth and M&A and if that changes will adjust consistent with our priorities and that includes allocating capital sure verses.

Alright, thank you.

Thank you.

And our next question comes from the line of Jerry O R with Jeffrey each one is now.

Great. Thanks, maybe just one for me on I'm kind of competitive dynamics, but yeah Burger Kermit obviously has been been strong throughout the the pandemic and if if historical trends I guess or you know something to look too you know, we might expect sort of a pickup and and broker recruitment on the other.

Side of it so it just sort of curious to see or hear you know from based on conversations is they're kind of a cohort of advisors, that's waiting to kind of get to the other side before engaging with with folks such as yourselves or or perhaps you know has this you know there's been a different environment, whereby you've been able to kind of.

Just consistently uhm go out niche I tried to advisers despite the <unk>.

They don't even backdrop. Thank you.

Yeah. That's a good question certainly this environment, we have seen movement of advisors are churned as we call. It down is you look over the last 910 months uhm churn rates are down, but our when rates are up. So so the team has done a great job of persevering through some of the complex.

These created by the environment and I didn't give continue to share the story and health advisors find creative ways of which to still make that transition, we expect that creativity in that approach and and sort of that resilient heads down keep moving forward.

Approach to be taken by our team as we move forward. We do believe that as you get to the other side of the pandemic that it's reasonable to expect churn rates to trend up and with you know the additional models, we have applying them.

Across multiple markets, where the churn rate comes up we think about that as a as an interesting opportunity. So I I think your premises correct.

Great. Thanks for taking my questions here.

<unk>.

Thank you.

And our last question comes from the amount of 10 Worthington J P. Morgan in your line is now open.

Oh good good afternoon. This is will cut he fell in <unk>.

Probably <unk> so production revenue.

If I got some of it has been elevated this year I'm also elevated and three <unk> <unk>. It's it's been trying to get a little lower from the first half of the year. My math is right slide for the deck imply that 97% retention rate of production down from 98, and a half for the first half of the year and.

And it doesn't look like there's seasonality in prior years.

Why do you think production is kind of down in three Q and looking ahead. You expect this to continue to drive in <unk> continue down and stabilize around and more normal level of 96 per cent.

Uhm pay by the current levels are increased back to levels seen in the first half of the year.

Yeah. So let me let me take that one I think to.

Maybe come back to your final point in question you know, we think somewhere in that 2% to 3% range is what we're trying to play too and we think that's a reasonable landing place for attrition. So Conversely, 97% to 98% of retention I think you had.

In the first part of the year, some benefit or are tailwind. If you will around retention just because of the pandemic and what we said earlier lower churn.

In the overall marketplace kind of showed up there maybe with them a little bit of help but I think but again the growing appeal of the model. The the capability set that we're trying to invest in the service experience. We can deliver is really the drivers of that retention rate and you know we think of a reasonable place.

Is that 90, 798% range.

Okay. Thanks town.

And then on transaction the revenue man. Thanks for the commentary in the prepared remarks on trading volumes to help us understand the dynamics a little bit better could you roughly break out how much of that revenue line is transaction and how much of that is C. And then let me think about the growth of your business solutions and subscriptions, how can that growth drive that revenue line item further.

How are we gonna see that on the piano.

Yeah, I mean, the majority of that line is fees.

So you know you know call. It two thirds, the three fourths zone as fees or transactions as much smaller piece of it set it to to answer your first question on the on the business solution side. It's it's you know right now the run rate gross profits around 15 million.

Uhm for the solutions that we have so far and and I I think obviously, we we expect to grow that from there and maybe just to to emphasize dance color a little bit earlier were still in the experimental phase on some of them and and learning and growing from here, but I think where we feel quite.

Growth over the long term and perhaps more importantly, there about setting up advisors for them to be able to manage their businesses and grow their their balance sheets. If you will or are you as well as operated more efficient practice and I think if we do that you're gonna see that show up across the P&L I think that's really where the long term success can come from as well.

Got it thank you for taking my questions.

<unk>.

Thank you and this does conclude today's question and answer session when knowledge at some call back to Dan for any closing remarks.

Yeah I just wanted to thank everyone for taking the time to join US. This afternoon, and we look forward to speaking with you again next quarter have a great day and please stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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