Q4 2020 LPL Financial Holdings Inc Earnings Call
Good afternoon, and thank you for joining the fourth quarter and full year 2020 earnings conference call for LPL Financial Holdings incorporated joining.
Joining the call today are our president and Chief Executive Officer, Dan Arnold and Chief Financial Officer, Matt Audette, Dan and Matt will offer introductory remarks, and then the call will be opened for questions. The company will appreciate if analysts would limit themselves to one question and one follow up each the company has posted.
Its earnings press release, and supplementary information on the Investor Relations section of the company's website Investor Dodge L. P. L. Dot com today's call will include forward looking statements, including statements about LPL financial future financial and operating results outlook business strategies and plans.
As well as other opportunities and potential risks that 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 events to differ materially from those expressed or implied in such forward looking statements.
The company research listeners to the disclosures set forth under the caption forward looking statements in the earnings press release as well as 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 for 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 other investor Dodge L. P. L dot com with that I will now turn the call out there.
Mr Arnold.
Thank you Carmen and thanks for everyone for joining our call today.
Over the past quarter and throughout 2020, our focus remains on our mission of taking care of our advisers. So they can take care of their clients.
This is a credit to our employees, who responded with agility and ingenuity to new working conditions and new opportunities to support our advisers.
Their dedication is inspired by the unfailing commitment of our advisers, who continue to provide much needed financial advice to millions of Americans managing through a challenging environment.
As we enter the new year, we remain focused on executing on our strategy. While also evolving our long term vision of how we deliver on our mission.
We aspire to push past our old version of extending our leadership in the independent space and redefine the independent model over time and by doing so it becomes a leader across the entire advisor centered marketplace. Our approach is to build a platform that is simple and straightforward for advisers to use and constructing the per.
Perfect practice for themselves and their clients more specifically this vision centers around making it easy for advisers to join our platform with no friction or complexity and as simple as turning dials. They can determine the exact services they want to leverage pick the business model that will work best for them choose the technology and workflows that net.
The most efficient and select the product mix that best meets the needs of their clients, all while leveraging expertise and solutions to enhance the performance of their business ultimately that creates total empowerment for LPL advisors to thrive and that is the heart of our mission. During this well gives us a sustainable.
I'll pass to higher levels of organic growth increase market leadership and long term shareholder value creation.
Now with that context in mind, let's now turn to the fourth quarter and discuss our results and progress on our strategic plan.
Let's start with our fourth quarter business results.
Assets reached a new high of over $900 billion up 18% from a year ago. This increase was primarily driven by continued organic growth and equity market appreciation.
With respect to organic growth fourth quarter net new assets prior to acquisitions were a new high of 18 billion, which translated to an eight 8% annualized growth rate for the full year net new assets for 56 billion, which translates to a seven 4% annualized growth rate up from.
Five 3% a year ago.
This increase was driven by continued strength across new store sales same store sales and retention.
In the fourth quarter recruited assets remains solid at 10, 8 billion, which brought our full year total to 41 billion. This was up 6 billion from a year ago and by more than 50% over the past three years, primarily driven by the appeal of our model our ongoing innovation for the future and continued.
Solid execution by our business development team.
In the fourth quarter. We also continued to enhance the advisor experience as we delivered solid service outcomes driven by flexibility of our affiliation models evolving capabilities and technology and enhanced service experience as a result retention remained approximately 98% for the year.
Up from 96, 5% a year ago.
And net promoter scores increased by over 15 points year over year and more than 60 points in three years.
Our fourth quarter business results also led to solid financial outcomes with EPS prior to intangibles of $1 53.
Which brought our full year total to $6 46.
Let's now turn to the progress we've made executing on our strategic plan.
As we look ahead, we continue to see growing demand for advice and believe we are well positioned to serve our advisers and collectively compete for additional market share.
Now in light of this we remain focused on executing our for strategic place as a reminder for strategic play involves meeting our advisors, where they are in the evolution of their practices by winning in our traditional markets. While also leveraging new affiliation models to expand our addressable markets strategically.
We believe this combination positions us not only to deliver sustainable and repeatable organic growth, but also to increase our growth rate over time.
In our traditional markets, while advisor movement remained at lower levels over the past year, we continued to drive solid recruiting results and gain market share.
To share a little more color specifically on our third party financial institutions channel. We continue to see good momentum in the core segment of this market.
And at the same time, we remain encouraged for our opportunity with regional banks, the planning and preparation for our new relationships with BMO and <unk> are going well and we are in ongoing strategic dialogues with other prospects.
With respect to the expansion of our address of our addressable markets. We anticipate our new affiliation models will also contribute additional organic growth in 2021.
Following five strategic wealth services practice that on boarded last year, we have a solid pipeline with a number of commitments that will join in the first half of this year in January we also on boarded our first independent employee model practice, and we are seeing other prospects progress through the pipeline.
Another key component of this strategic play is using M&A as a strategic lever to complement organic growth.
Earlier in Q4, we on boarded a combined $4 billion of assets from our acquisitions of Lucida and Ek Riley then in December we signed an agreement to acquire a waddell <unk> Reed's wealth management business, which which has over 900 experienced and accomplished advisors, serving approximately 70 billion of cash.
Client assets.
The signing our teams have collaborated well with Waddell <unk> Reed and Macquarie, which is contributing to solid progress on the transactions. Thus far in the process Waddell <unk> Reed advisors, serving approximately 80% of client assets have already committed to join our platform. Following the close of the transaction.
We will give you an update on the rest of the retention pipeline next quarter.
Our second strategic play is focused on providing capabilities that help our existing advisors differentiate the marketplace and drive efficiency efficiency and.
In their practices in 2021, we plan to continue our work from last year with a focus on developing capabilities and solutions in two key areas. The first is to enrich the end client experience with expanded digital solutions enhancements to our advisory platforms and a broader set of lending solutions.
The second key area is using technology, including client works and client works connected to help advisors enhanced the performance of their practices operate more efficiently Li within their key workflows and expand scale ability to serve more clients. We believe these evolving capabilities will contribute to an increase.
Advisor growth and retention rates.
Let's next move to our third strategic play, which involves creating an industry leading experience to delight advisors and their clients.
And that in turn helps drive advisor retention.
One of the key parts of this strategic play is providing advisors with differentiated service at a time and in a manner that works best for them. We're doing this by transforming our service model into a client care model.
And we're about halfway through the implementation of this model and at this point. It has made a solid contribution to our net promoter scores, we see additional opportunity to drive these outcomes higher as we deliver the second half of this initiative.
We also see evolving our custodial platform operations as an opportunity to further enhance service levels platform scalability and efficiency as.
Part of this work our areas of focus include automating routine work with robotics, removing paper forms and increasing E delivery through digitization.
And process reengineering to drive continuous improvement we believe these initiatives combined with our transformation to a client care model position us to further strengthen the advisor experience and our platform as our business growth.
Our fourth strategic play is focused on helping advisers run the most successful businesses in the independent marketplace. One of the key components of display as our portfolio of business solutions and as a reminder, when we started business solutions over two years ago, we saw the opportunity to help advisors find better.
<unk> for certain local services the cost in excess of $1 billion a year. Our hypothesis was that we could provide higher quality services at a lower cost and free up additional time for advisors to spend on more valuable activities, including serving their clients and growing their practices.
In that spirit, we created our business solutions portfolio to solve for these discrete needs with outsource professional expertise.
Since then we have been able to expand and evolve the value proposition of the portfolio and scale our subscription base. As a result, we finished the fourth quarter with about 1400 monthly subscriptions, which more than double the level a year ago at the same time, we have expanded the portfolio to include business Optimizer and.
<unk> professional services.
We're also innovating on how we package. These solutions such that we can unlock additional value for advisors when using a combination of different offerings.
As we look ahead, we see several pathways for free for continued growth, including partnering with more of our LPL advisors, introducing new solutions and experimenting with serving advisors outside of LPL.
In Q1, we will launch the next innovation in our portfolio M&A solutions, which will be our sixth offering as context. This service grew out of CFO solutions as we identified an opportunity to help advisers acquire other practices that as far as to develop M&A capabilities.
As a service for advisors. This M&A offering will provide a turnkey solution and dedicated support for advisers from deal sourcing all the way through transaction advice capital funding and process execution.
With this offering advisors can now more easily use M&A as a repeatable and sustainable growth engine for their practices.
In summary in the fourth quarter and throughout the year, we continued to invest in the value proposition for advisors and their clients, while driving growth and increasing our market leadership as we look ahead, we remain focused on executing on our strategy to help our advisors further differentiate and win in the marketplace and drive long term shareholder value.
With that I'll turn the call over to Matt Alright.
Alright, Thank you, Dan and I'm glad to speak with everyone on today's call.
Before I review, our fourth quarter results I'd like to highlight our progress during 2020.
Looking at the year, we are proud of what we accomplished within our framework for driving long term shareholder value.
We entered 2020 with momentum and continue to invest through a volatile environment to providing industry, leading value proposition for our advisors to serve their clients and win in the marketplace.
This commitment to enhancing the support we provide our advisors resulted in the highest quarterly and full year levels of organic net new assets in our history.
By leveraging the investments in our platform and the financial strength, we built over the last several years, we entered 2021 and an even stronger position as we work to onboard our two largest financial institutions MTN BMO as well as what Ellen REIT.
So as we look ahead, we are excited to continue growing our business and leveraging our increased scale and capacity to further invest in our platform, which positions us to drive additional growth and long term shareholder value.
Now, let's turn to our fourth quarter business results total advisory and brokerage assets increased to a new high of 903 billion up 11% from Q3, driven by continued organic growth and higher equity markets.
Looking at organic growth total net new assets were $17 8 billion or an eight 8% annualized growth rate.
Moving on to recruiting and retention, which are two key drivers of organic growth.
We continued to produce strong results in the fourth quarter.
Recruited assets were $10 8 billion in Q4, which was our third consecutive quarter above $10 billion and brought our 12 month total to a new high of $40 9 billion.
At the same time full year retention was 97, 7% an improvement of over a percentage point from last year.
Looking at our business mix, we continued to see positive trends in Q4.
<unk> net new assets for $15 9 billion or 16% annualized growth rate.
Our full year total was 50 billion up almost 50% from last year and more than double our total in 2018.
Essentially managed portfolios also continued to grow as net new assets reached a new quarterly high of $2 5 billion or 17% annualized growth rate.
Now, let's turn to our Q4 financial results strong organic growth combined with expense discipline led to EPS prior to intangibles of $1 53.
Up 6% sequentially.
Looking at our top line growth gross profit was $534 million up $28 million or 6% sequentially.
Looking at the components Commission and advisory fees net of payout were $153 million up $11 million from Q3, primarily driven by organic growth and higher equity markets.
Moving on to asset based revenues sponsor revenues were $153 million in Q4.
Up $9 million sequentially as average assets increased driven by organic growth and higher equity markets.
Turning to client cash revenues, they were $105 million down $4 million from Q3, driven by lower client cash yields.
Looking at client cash balances they remained elevated at 49 billion up $2 billion sequentially.
As for client cash yields our Q4, ICA yield was 108 basis points down 10 basis points from Q3.
The decrease was primarily driven by half a billion of fixed rate contracts that matured during the quarter.
And higher cash balances.
Looking ahead to Q1, we will have the full quarter impact of the half a billion of fixed rate contracts that matured in Q4.
As well as another half billion of fixed rate contracts maturing in Q1.
Given these factors and where interest rates client rates and cash balances were at the end of Q4, we expect our Q1 ICA yield to be around 100 basis points.
Roughly half of the decline is driven by growth in balances while the other half is driven by fixed rate contract maturities.
Moving onto Q4 transaction and fee revenues, they were $130 million up 10 million sequentially, driven by higher trading volume and fee revenue.
Looking ahead to Q1, while we acknowledged the widely discussed increased in activity and the self directed space.
Our trading levels have remained more stable and consistent with what we would expect to see in the advisor led wealth management space.
As a result, our trading activity through January is in line with Q4 levels.
That said I would note there are three fewer trading days and seasonally lower fee revenue in Q1.
So we expect these two items to reduce transaction to fee revenue by $5 million.
Turning to business solutions, they continue to scale with 1400 subscriptions at the end of Q for.
This is up 200 from last quarter and double our total from a year ago. These.
These offerings now generate roughly $17 million of annual recurring gross profit.
Up from $15 million last quarter and more importantly, they help free up additional time for advisers to spent on more valuable activities, including serving their clients and growing their practices.
Now, let's turn to expenses, starting with core G&A It was $252 million in Q4 <unk>.
Leading to full year core G&A of $925 million in the lower half of our original outlook range of $915 million to $940 million.
Turning to our outlook for 2021, our long term cost strategy remains unchanged.
We continue to prioritize investments that drive organic growth, while delivering operating leverage in our core business.
Looking back over the last three years, our core G&A has grown in the mid single digit range annually as we invested to drive growth.
And over the same period. These investments have helped our organic growth more than double from 3% to 7%.
Given the success, we're seeing with these investments we are planning the same level of core G&A growth, we planned last year, which was five 5% to 8%.
So for 2021, this translates to a range of $975 million to $1 billion.
I would note this includes cost to support BMO and empty, but its prior to expenses associated with Waddell <unk> Reed.
Moving onto Q4 promotional expenses, they were $48 million down $10 million sequentially, primarily driven by lower conference expenses following our national sales conference in Q3.
Turning to Q1, we anticipate promotional expense will increase by approximately $10 million, primarily driven by increased transition assistance from recruiting and BMO and empty onboarding expenses.
Looking ahead, we anticipate BMO will joined by the end of Q1 and <unk> will join during the middle of this year.
Now, let's talk about what Ellen REIT, we are excited about the transaction and encouraged by the progress we're making with advisors.
As mentioned Waddell <unk> Reed advisors, serving approximately 80% of client assets have committed to join our platform. Following the close of the transaction.
This puts us above our 70% modeling assumption thus far in the process.
I would also note Waddell <unk> Reed wealth management assets at the end of Q4 were 70 billion, which is up $7 billion from Q3.
With respect.
Back to the ongoing earnings benefit from Waddell <unk> Reed, we will have updated estimates as we move towards the close and Onboarding dates, which we expect to be in the middle of this year.
That said today I would like to provide some color on the acquisition and integration costs, which we continue to estimate will be approximately $85 million.
That said to provide more transparency, we will add an acquisition cost line item to our management P&L beginning next quarter.
We think reviewing our results prior to these acquisition costs will be helpful. In understanding our financials. So starting in Q1, we will report our results is EPS prior to intangibles and acquisition costs.
As we look ahead, our integration work is progressing well and we anticipate up to $10 million of acquisition costs in Q1.
Looking at share based compensation expense it was $8 million in Q4 relatively flat to Q3.
Looking ahead Q1 tends to be our highest quarter of the year given the timing of our annual stock awards. So we anticipate this expense will increase by a few million dollars sequentially.
Turning to depreciation and amortization it was $29 million in Q4 up $1 million sequentially.
Looking ahead, we continue to invest in technology and recently rolled out several improvements to our advisory platform and client experience as a result, we expect depreciation and amortization to increase by $4 million sequentially.
Moving on to capital allocation, our balance sheet remained strong in Q4 with credit agreement net leverage at two six times and cash available for corporate use of $280 million.
As for capital deployment, our framework remains focused on allocating capital aligned with the returns we generate.
<unk> and organic growth first and foremost pursuing M&A opportunities, where appropriate and returning excess capital to shareholders.
In the near term, we expect the majority of our capital deployment to be focused on organic growth and M&A as we onboard BMO empty and Waddell <unk> Reed.
Once we have completed these transitions we plan to reassess our capital deployment opportunities.
At that time, we have excess capital to deploy beyond organic growth and M&A opportunities, we would anticipate restarting share repurchases.
That said, we will have to see what our opportunities look like at that time.
In closing, we delivered another quarter and year of strong business and financial results and as we look forward. We remain excited about the opportunities we see to continue investing to serve our advisers.
Grow our business and create long term shareholder value with that operator, please open the call for questions.
Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone keypad.
Draw your question press, the pound or hash pool.
And we ask that you please limit yourself to one question and one follow up.
Dan by while we compile the Q&A roster.
Our first question comes from Steven <unk> with Wolfe Research your question. Please.
Hey, Dan Hey, Matt Good afternoon.
So wanted to start with a question on organic growth. As you noted you are coming off a record year organic growth north of 7% for Q was your strongest quarter at nine so momentum was clearly building nicely towards year end.
Hoping you could speak to what Youre seeing in terms of the backlog across both the traditional market as well as some of the newer camps and how that compares with a year ago levels and this is what's informing your confidence around the sustainability of that 7% plus organic growth rate from here.
Yes, Steve So let me, let me take a stab at that and please if I don't get it all you ask a follow on so look the short answer is as we said in the remarks.
We think the pace around 7% is sustainable and then we continue to challenge ourselves.
To expand on that growth rate. So let me give you a little color as to how we think about that I think one quickly.
To Orient yourself to it is how do we get to where we are over the last call. It three years and thats been driven by new store sales, increasing by 50% over that period of time, which has come.
Almost totally out of our traditional markets.
Retention rates have improved from 96% to 98% over that period of time. So that's also a <unk>.
<unk> contribution and then same store sales continue to kind of a steady durable increase over.
Over that period of time and so what.
What you've done is you've gone.
Over that period of time from roughly below 3% organic growth rate to 7% now as we look ahead relative to the opportunity to both sustain but more importantly grow that rate.
We look to new store sales force.
And see the new markets that we've entered.
The.
Strategic wealth services model, the independent employee model and the raw markets and obviously see a much bigger opportunity set with momentum building inside those three new offerings, which largely haven't contribute a whole lot to our growth up to this point so.
That's one opportunity certainly this emerging new bank opportunity with respect to larger banks exploring outsourcing is a is a.
Way to think about an opportunity going forward.
And then we continue to improve our own efficacy of our business development team and its capabilities too.
Grow and win at higher rates. That's a third one is we continue to innovate there and then finally I think we continue to innovate around onboarding and the more seamless we can make that we believe creates two more movement in the marketplace in the future. So those are how we think about opportunities and new store sales I think it is.
If you click over to same store sales for a minute.
We see the opportunity to continue to drive.
Automation into the advisers key workflows.
When they get the benefits of efficiency freeing up time to reallocate to.
More valuable activities. We also see this technology, creating more scalability in their practices. So they can obviously.
Attracted support more clients, we continue to build out new solutions for their organic growth efforts and finally, this new M&A solutions becomes yet another way for them to.
To create another lever to grow their practices. So.
Across new store and same store sales you've got multiple oars in the water that we're working on in order to drive that rate higher if were successful on executing on these well then you can see where the logic around the opportunity set grows and we deliver higher growth rates I hope that helps.
That's great Dan a very fulsome response, thanks for all that color and maybe just to follow up for Matt just on the ICA outlook lack of deposit appetite from third party banks, it's something we've been hearing from you and also from any of your competitors typically we don't see demand for cash increase until short rates start to rise.
Clients start to engage in some form of cash sorting.
And if we enter a prolonged period, where short rates are at zero, but the yield curve steepens materially how do you see demand from third party banks evolving do you anticipate you're going to have opportunities to term out the cash taking advantage of the steepening and if cash balances continue to build from here should we assume that that's going to fall into the overflow bucket are there opportunities.
For two maybe optimize the pricing there as well.
Yes, Stephen I think you summarized the market well I think right now there is so much liquidity in the market from lots of sources that you all know that there's just not a lot of demand for the banks.
On this on the sweep funds side. So I think you see the day balances flowing into overflow contracts a little over 2 billion this quarter and I think in the near term, that's likely where cash would go.
But I think on your point in your scenario as we move past what I'd call just kind of the technicals of the market right now I think kind of an environment, where near term rates are low, but the curve starts to steepen.
There's opportunities to move into into fixed in that environment right. So of course, it's always hard to predict but I think this environment. We're in right now is really just driven by that excess cash.
When you look at our financials, right and we target and being in the 50% to 75% zone for fixed.
And we are hovering in the kind of a third of the 35% zone theres pretty meaningful upside when were able to do that.
So I think we're comfortable long term net opportunities there, but today that.
There's just not a lot of demand.
That's great Matt. Thanks, so much for taking my questions.
You bet.
Thank you. Our next question comes from Bill Katz with Citigroup. Your question. Please.
Okay. Thank you very much good evening, everybody I appreciate you taking the questions maybe Dan start with your sort of intrigued by your commentary about maybe taking business solutions on the road I was just wondering if you could maybe flesh out how you're thinking about that beta test what kind of milestones you might be looking for and then how do you think about the Tam associated with that.
Yes so.
Bill Good question look.
First of all these business solutions, our subscription based services right. So that gives us flexibility as to how an advisor can plug in and leverage the LPL platform. So that's the premise where you have a bit more flexibility in this concept about being able to serve advisers.
Outside of the LPL family, if you will.
And today, we're focused on continuing to innovate and deliver those services for for LPL advisors, So thats, where the majority of our allocation of investment goes across this strategic play and that's allowing us to continue to learn and innovate on our offering.
That said our hypothesis is these services.
<unk> be offered to all 300000 financial advisers in the marketplace. If you think about that premise of if I'm operating my own business and I have local level services that are necessary to support the.
The operation of that business.
We will then we believe we can step in and create.
Higher quality solutions at a lower cost.
Using.
Automation and digital capabilities to create real interesting scalability.
And you begin to see where you could take for an example, take our M&A solutions that we were just talking about.
If we do that well for LPL advisors than we could easily take that and point that to an adviser that doesn't necessarily sit on our platform today and help create growth opportunities associated with their practice by providing our plugging in to that type of solution. So that's the concept you are right to call. It an experimental phase now I think.
It's logical for us and our overall journey around this play to begin to experiment there.
And it's early days of that experiment, we will likely take one of these solutions and begin to explore how that might work and present itself outside of the of the LPL family of advisors.
And that will allow us some learning that didn't apply and further innovate on how we might take this portfolio outside the.
For the LPL advisor base, so I hope that helps.
That's very helpful. I appreciate the incremental change there so arnold.
Other questions for you Dan in for Matt.
Two parter, so I apologize just thinking that extra question in but.
So on the 20% of the white ale satisfies that Havent agreed to this point and I was wondering can you provide some color on why not.
And then could you just help me understand I apologize if I share I notice the interplay between the integration charges associated with Waddell and any flow through onto the core G&A line. Thank you.
Yes, Thanks, Bill I'll take the first part of that and then Matt you take the second how about that.
So bill.
As you recall, we announced the transaction.
Early December and it.
At that point, we began our retention efforts associated with.
The Waddell <unk> Reed advisors, and so we've been at that largely six weeks in.
So what youre seeing is that 80% retention rate has more to do with just the timing and where we are in the overall process.
Than anything else.
Matt said, we expect to.
Close and convert in the second quarter so.
There is still time left to have that ongoing dialogue.
And make sure that all advisors can make an informed choice around.
Where that best option is for them. So think about that just is more where we are and the timing process than anything else. Matt do you want to take the second part of that yes sure Bill on the Waddell <unk> Reed expenses, they're not included in core G&A. So we're going to have a separate line item that.
Includes the acquisition integration expenses. So you can clearly see that and there werent any in Q4.
Okay. Thank you I'll follow up offline. Thank you.
Thank you. Our next question comes from Craig Siegenthaler with Credit Suisse. Your question.
Question <unk>.
Hey, good afternoon, Dan, Matt and congrats on the record organic growth.
Thank you.
So just wanted to start with the with Dell and re transactions first so it's advisors hold a very high percentage of with Dell and IV product. How do you think about the trajectory for them to reinvest this products into other funds and could this have any economic impact on LPL, a or the commission rates and <unk>.
<unk> roughly in line with the product on Lpl's platform.
Yes.
Yeah, Hey, Matt, Yes share at all around that yeah that sounds it so Craig I would just highlight the partnership with Macquarie that really that we worked with on this transaction together. So I think when we look at.
On the other side of closing and integration I think we see ourselves continuing to be that strong partner with Macquarie meeting the day.
The Ivy funds moving over to their platform.
So I think that that relationship.
And that synergy being able to continue to experience a what ill advisers have with those funds today on the other side of this transaction was a it was a really really important part of the I think what made this deal exciting for all three parties.
So I just wanted to give you just emphasize that from a from a strategic level and then Dan is there anything you would had more.
From an operational standpoint, we don't expect some big reallocation of shift in.
How they're thinking about their portfolios are using what would then be.
Macquarie product on a go forward basis so.
I don't think youre going to see some big step function change in terms of the allocation of those of those assets. So I'm not sure you see any knock on effect from that which is the second part of your question.
Great helpful.
And I had one question on the production retention.
So at a really nice level, but we've watched it go down.
For three quarters now can you talk about any puts and takes for seasonality that could be acting that could be impacting for keogh or any other perspective on it would be helpful.
Yes, I think youre talking about our overall retention.
Inside LPL and.
Look I think this is mainly just <unk> seen it increase throughout the year, which is largely a matter of timing related to the impact of the pandemic had in the in the in the early part of the year, So where it might've been more complex or tougher inside that four to five month period.
Of real uncertainty.
I think if you just see.
Now some of that pulling through.
As we think about it and look at it over the full year.
<unk> got 98% retention and.
And as I shared last quarter, we think about a good sustainable range being somewhere around 2% to 3% of attrition or said differently, 97%, 98% retention. So that's what we're trying to manage to and work to and we feel good about the client experience and the adviser experience for providing.
And that is the primary driver of that.
Attrition rate or retention rate and so that's kind of how we're managing to it and thinking about it.
That helps.
Thank you Dan.
Thank you. Our next question comes from Alex <unk> with Goldman Sachs. Please go ahead.
Hey, guys good evening.
Wanted to ask you around.
Ta packages that are out there in the marketplace right now obviously, Raymond James talked about seeing a little bit more pressure in that market. It sounds like thats more in the employee channel, which is small for you guys for now, but curious if you're seeing any meaningful change there and maybe.
Now Matt to follow on is for you I guess with respect to promotional expense to what extent, that's putting some incremental pressure on.
Per bushel expense for you guys into 'twenty one.
I'll take the first half of that Matt and I will turn it over to you. So.
Look the short answer is we're not seeing a lot of change in transition assistance right. This time.
And you said it is.
Core principle for us.
We determined transition assistance on a on a return basis approach in our Ta rates have been stable over the last few quarters and as we entered this new year, we don't see that changing.
And when we look ahead, we think about Ta and how it's currently positioned our transition assistance along with the rest of our value proposition from capabilities technology and service and believe that that's a.
On an overall really solid competitor competitive offering and believe as.
As we go forward that it will be a source of us continuing to gain market share.
Do you want to talk about promotion with Yeah, I think Alex just building, what Dan said I think with the rates being stable I think promo in the transition assistance amortization.
Thats going up in a meaningful way it simply because recruiting and therefore organic growth has gone up so I think it will move along with our recruiting success and the rates themselves really had been quite stable.
Great Perfect and then just a follow up on what Al and Reed I know you guys gave a little bit of color on the kind of the composition of the assets et cetera at the time the deal was announced but on the 80% that you already sort of retained.
Can you give us an update on sort of what's the gross gross profit ROA on that basin that makes it assets kind of equity fixed income.
Yes.
Not yet I think it's a little bit early I think as we move towards close and onboard and we will start to give more updates on overall economics I think today, we wanted to really highlight the early success on the retention front. So we'll give you more on that at a future day.
Alright, I will stay tuned thanks.
Yes.
Thank you. Our next question comes from Chris Harris with Wells Fargo. Your question. Please.
Yes. Thanks.
Can you guys talk a little bit about your risk management controls and what youre doing to keep.
Risks reasonably well controls with all the growth that you guys are seeing across the platform.
Let me let me let me take that one and then certainly you can add anything to that.
Look, it's a core component and value proposition of what we offer.
Both from a protection of to the firm to the advisors to their clients, but it's also a really important value proposition for us is taking complexity out of this business and simplifying it to enable the advisors to operate their businesses successfully so it's a place that we have.
Constantly have to innovate on.
Regardless of our growth rates, but in a world where you are growing.
That just creates more opportunity to allocate resources to think about how you improve the efficacy and the efficiency.
Of compliance and our overall risk management programs and though we're not perfect and so we will try to play into that.
Thank you.
Look there are key components of our overall risk profile that we look at there is some 16 different.
Risk components that we actively monitor and review how we're doing in those areas.
So think about that is managing your day to day risk or your operational risk and then.
As a complement to that theres that strategic opportunity that says hey, how do we take and use robotics and artificial intelligence and automation of which to enrich the efficacy of our supervision of our oversight.
How do we.
Imagine new ways of which to use technology to drive efficiency.
Into what we do which simply just didn't creates much more scalability to support that growth and so we look at it through an operational lens and.
Dan.
And track that on a monthly basis and hold ourselves accountable to constantly iterating and learning and applying what we are doing well and are not to improve it and then we allocate resources to drive innovation to do it better and look our goal is to take risk management and turn it into an asset if we continue to.
Invest in it and we can do it better and cheaper than anyone else. It becomes a differentiator and so that's how we think about our risk management programs and that's sort of what is our north star. If you will with respect to risk management.
Helpful. Thank you.
Okay.
Thank you. Our next question comes from Jeremy Campbell with Barclays. Your question. Please.
Hey, thanks.
It looks like a really nice December drove the big robust acceleration.
On a growth, but also looks like.
Crude assets was pretty stable for the prior couple of quarters. So I was wondering if you could unpack some of the key drivers behind the December pickup.
Yeah, Hey, Jeremy It's Matt I think when you look at the interest and dividends component of that and I think to your observation that that happens typically in the third month of each quarter.
And then in the in the third month of Q4 at year end in December you have got a lot of funds that will distribute things.
All right.
So that was a driver of it but even if you kind of pull that uptick out when you look at our in our growth rate in Q4 at 888% that was about a half a percentage point, so still above an 8% organic growth rate.
So really really strong quarter in our view, but.
That interest dynamic that happens at the end of the year was the thing that bias December up a little bit if I added anything to that any of you click down on that this is where you see that durable, but steady trend upwards in same store sales, where youre seeing advisors doing a really great job of of.
Serving and supporting their existing clients, so they're actually capturing assets from those existing clients at a higher rate than historically and certainly pre pandemic.
At the same time, we've seen them now return to capturing or acquiring new clients at the rates. They were pre pandemic and so some of that dynamic underneath fourth quarter is certainly supportive of increasing growth rates.
Both across the quarter, sorry across the whole quarter and ramping up within the quarter.
Got it great.
Then Dan you gave some really nice high level color around what the growth trajectory going forward to an earlier question, but I don't know whether this is for you or for Matt, but can you just give us a quick update around how January activity shaping up so far.
For them that should shape up.
I'll take that one Jeremy.
So as we're sitting here in February we certainly have some thoughts on January.
So overall it went pretty well I mean, we're still finalizing the results.
But I would describe it as growth consistent with what we saw in 2020 right. So it's a nice nice nice organic growth there.
There are a couple of things to highlight though for January by its nature kind of building on how are we just talking about.
December by its nature that drives M&A, a little bit lower for that month.
First one is December recruiting I.
Thank you I think you know this well.
But FINRA shuts down for the last week or two of the year. So you just don't have new advisers coming onto the platform. So it naturally slows M&A down in the early parts of January each year.
And then just building on what we're talking about December while the month three is the highest kind of interest in.
Fees, driven M&A of the month month, one is the lowest right because you have the advisory fees coming out primarily in the first months of the.
Quarter. So those two things together kind of put a naturally have you have a decline in January when I put all that together I think we would expect January to be in the 4% to 5% growth.
Organic growth.
But again, we'll finalize those results and and release them in a couple of weeks.
Perfect. Thanks, a lot.
You bet.
Thank you our next question.
Kyle Voigt with <unk> your question please.
Hi, good evening.
A couple of follow ups on promotional expenses.
I'm wondering if you have any update on how much ta youre contemplating for the one day I'll deal or the ta rates associated with those assets you're expecting to onboard.
And then separately how should we think about the return of.
Higher non ta related promotional expenses.
Post pandemic World, maybe you can frame how much expense benefit you realize there in 2020 due to lower conference spend or something else.
Okay, Okay I got you.
Yes, so I'll start there I think on the what else side, I think we and Dan talked about our approach and thoughts on Ti a little bit earlier and I would say we have we have the same approach with waddell.
So there's really no different approach, there and making sure that we put those advisers in a position to.
To successfully transition onto our platform that's what transition assistance is for.
And we will underwrite it in the same way.
I think on the on the conference side of things and I'll give a little color here and Dan if you want to jump in but I think as we are.
All of over time, I think like most folks we see on the on the other side of the pandemic doing a mix of continued virtual and digital things, but also people value getting together in person I think especially in the independent advisory space for.
X value getting together, so I likely see us having a mix of what we had pre pandemic.
But it's a little bit early to kind of call, where and where and how those numbers start to change. So we will keep you updated a quarter ahead of time kind of how we gave how we did here today on promotional for next quarter.
That's on the cost side and I'll have Dan if there's anything you want it well so yes we're.
All the other comp.
Thank you.
Yes.
Thank you. Our next question comes from Jerry O'hara with Jefferies. Your question. Please.
Great. Thanks, and good evening, good evening folks.
Perhaps you could give a little bit more detail just around the <unk> timeline.
As it relates to the <unk>.
For the close advisor Onboarding uncertainty runway I know you had a nice graphic in the presentation last last quarter and I may have missed it this time around but if you could help us just kind of walk through that a little bit that would be I appreciate it.
Yes, sure Jerry we didn't we didn't update it but but it's unchanged. So I think when we think about the the next key dates which are closing and the subsequent asset transfer.
Our estimate for that is the middle of this year.
And then the the the integration.
On boarding process et cetera occurs after that and I think that will lead to an EBITDA benefit ramp of about 12 months. After closing. So if you think we're closing in on boarding in the middle of this year that would have us reach that run rate EBITDA estimate by the middle of next year the middle of 2022.
So that's what was in that presentation in those estimates are the same today.
Okay. Thanks, and then just just a follow up I think in the prepared remarks, Dan you mentioned kind of the evolving opportunity around the custodial platform.
Is there any potential kind of color you could add or context as to what that opportunity might be sizing or.
Or just I guess clients advisers anything anything you might be able add would be helpful.
Yes.
Maybe you can just give you the.
Higher level macro overview at this point I think we can give you more color as we move forward but.
With respect to our offering we currently provide this solution to a number of advisers.
That said, we are investing in our capabilities and resources that we believe match that growing opportunity set as we do expect over.
Over the next few years more advisor movement or churn.
Across that space and so we believe we can put together an interesting differentiated solution that will contribute to our ongoing organic growth and be a nice contribution to increasing that organic growth rates. So that's how we see that in where we are is.
Continuing to make sure we've got that differentiated solution and that we've got the resources in place to take that to the market. So more color on that as we go forward throughout the year, but hopefully that gives you sort of our jumping off point.
That's helpful. Thanks for taking my questions. This evening.
Okay.
Thank you. Our next question comes from Chris Schott.
Blair Your question please.
Hi, guys good afternoon.
The $10 million expected increase in promotional expense quarter over quarter, how much of that is BMO in.
And how.
How much is something else.
Marketing in conference expense are reasonably stable sequentially. So I'm, just just trying to figure out if the Q1 level is.
Kind of a new jumping off point or how to think about anything that might be I know thats more seasonal or one time.
Yes, Chris <unk>, and BMO or about half of that and they're large.
Financial institutions, where there's a bit more technology a bit more onboarding support. So that's why you see that increase in.
Well I wouldn't call that one time I'd call it connected to Onboarding, a large financial institution. So anytime we have those coming you'll see a little bit of a pickup in promotional for that but it is to your point, it's not recurring its just associated with.
With those firms and the rest of it is really.
Theres a handful of things in there, but it's primarily tied to transition assistance amortization as we continue to recruit.
Okay. So the half associated with with the two big banks as is not.
Amortization of transition assistance.
Other stuff.
That's right that's right they haven't joined yet so that wouldn't have begun.
Makes sense okay.
And then the other one was just on the new M&A offering and maybe just give us a sense of how you plan to.
Price that offering.
I'm guessing the workload there could.
Could vary a decent bit depending on the advisory firm that you're working with or the complexity of the targets. So just help us think through how day.
I would think about that.
Yes, let me, let me give you a little color on that and again I think theres more to play out here as we go forward.
If I can answer anything everything today I think I think we can give you that color over the next.
A couple of months and so.
With respect to our M&A solutions again, what we're trying to solve for is actually helping advisors acquire.
Other practices to integrate into their businesses right. So that's the context and quite frankly, we realized and recognized in working with our advisors that many of them saw this as an opportunity, but solve the complexity associated with with M&A really hard and it.
I'm out of exploring those opportunities. So our concept was could we go create or build a solution that makes it much easier and simpler for them to go from point, a to Z and that M&A process and thus.
And building a platform that helps them do that if they do it. Once then we're going to increase the odds that they can do it again and again you can sort of create this repeatable sustainable growth lever for them in a bit of a flywheel. If you think about it across a larger number of advisers. So that's the concept and so what we've done over the last year as build that in.
<unk>.
Platform for ourselves.
For for ourselves, so we will deliver that.
With LPL resources. So we've got a technology platform that we've built that will host that and drive that and digitize that and make that easier.
We.
Obviously have access to the marketplace and will help facilitate that marketplace for buyers and sellers.
We can give good transaction advice around that we know this well.
And we know the model as well so we can provide that device and are positioned to do that and then we can also provide.
The capital funding or an option to the advisor for their capital funding. So it's really delivered by US we're not working with other advisory firms and again us doing it as a service.
Our opportunity is is to.
Certainly.
A charge for the value that we're providing associated with managing through that process, but the real win for US is at the end of it is helping these advisors capture assets and grow on the platform and so.
That's how we think about that that's how you would see us pricing at associated with more discounted fees.
For the value that we provide in the M&A process, knowing that we can both help retain and grow organic assets on our platform. So I hope that helps you give the principles and the macro way, we're thinking about it more to come when we roll it out on pricing and things of that nature and that'll happen this quarter.
Alright, Thank you Matt.
Dan.
Yes.
Okay.
Thank you.
Our last question comes from Michael Cyprus from Morgan Stanley. Your question. Please.
Hey, good evening. Thanks for squeezing me in here I, just wanted to come back to the client cash levels. It looks like the allocations there came in a bit higher 4% client cash allocation I guess, how do you see that evolving from here, where do you see that leveling out say a year or two from now and what environment would you say that would be higher or lower and is there anything <unk>.
Inc. Structurally that can result in a different cash allocation than what we've seen historically on your platform.
Yes, I mean I think it's.
Can you maybe the book in to look at if you look at the periods, we've got in our in our key metrics.
Supplement right.
Do you kind of bottomed out in the low 4% range and think of that is probably the the macs deployed in the market that we've seen.
And then the other extremes when you go back.
Years and years ago, when <unk> seen the Max pullback is in the 9%, 9% 10% zone.
So it kind of feels like where we are right now at least with recent history balances are a little bit high I don't think it would surprise us if you get on the other side of the pandemic with vaccines out and whatever whatever environment you would describe as the as the new normal.
Surprise us if that if you saw that five 4% start to build back down.
As you see money money go into the market, but I would emphasize of course, that's a really hard one to predict but I think if if when we look at the history that we have that's probably what we'd expect to see.
Got it and just a quick follow up on the money fund in DCA yields there. They continue to come in the fourth quarter I'm. Just curious any color you could share on the drivers there and what would need to happen to see further compression or.
And what scenario could even go negative or how do you think about any sort of a floor on that and thoughts into 'twenty one.
Yes, you remember DCA wise, a little bit challenging because it's a fee per account not a rate so balances moving around can just change the reported rate because it's a it's a fee per account type fee.
Read into that the move into that yield much on the money market side, I think youre, just seeing that dynamic of interest rates being near zero.
And those products, where the product manufacturers can can waive fees and that puts a little bit of pressure on the yields but I don't think its anything that <unk> unexpected in an environment, where fed funds is in the 780 <unk> zone I think that's what you expect to see on money funds and of course to emphasize when you look at the balances those are.
Nearly $50 billion in client cash balances those are pretty pretty small piece of the of the overall pie.
Great. Thank you.
Thank you.
And ladies and gentlemen, this concludes.
Our Q&A session for today I will turn the call back to Dan Arnold for his final remarks.
Thank you Carmen and thanks, everyone for taking the time to join US. This afternoon, we really appreciate it and we look forward to speaking with you again next quarter.
Have a great rest of your day.
Ladies and gentlemen, thank you for your participation in today's program and you may now disconnect.
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