Q1 2021 LPL Financial Holdings Inc Earnings Call
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Okay.
Good afternoon, and thank you for joining the first quarter 2021 earnings conference call for LPL Financial Holdings incorporated.
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 open for questions.
The company would appreciate of analysts would limit themselves to one question and one follow up each.
The company has supposed to the earnings press release and supplementary information on the Investor Relations section of the company's website Investor That's L. P. L dotcom.
Today's call will include forward looking statements, including statements about LPL financial's future of a national opening results outlook, the 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.
And 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 refers listeners to the disclosures set forth under the caption forward looking statements in the earnings press release, I smell of the risk factors and the other disclosures contained in the company's recent filings with Securities and Exchange Commission.
For more information about such risks and uncertainties during the call of the company will also discuss certain non-GAAP financial measures for every constantly Asian of such non-GAAP financial measures to the comparable GAAP figures.
Please refer to the company's earnings release, which can be found at the investor that LPL Dot com.
With that I will now turn the call over to Mr. Arnold.
Thank you Jeremy and thanks to everyone for joining our call today over.
Over the past quarter, our advisers continue to be a source of the extraordinary support and guidance for their clients and at the same time, we remain focused on our mission of taking care of our advisers. So they can take care of their clients. This combination positions us to deliver another quarter of solid results, while also continuing to make.
Progress on our strategic plan.
To review both of these areas starting with our first quarter business results in.
In the quarter total assets reached a new high of over 950 billion up more than 40 per cent from a year ago.
This increase was primarily driven by continued organic growth and equity market appreciation.
With respect to organic growth first quarter net new assets were 29 day, which included 12 billion from BMO Harris financial Advisors. This result translated to a double digit annualized growth of 13% driven by continued strength across new store sales same store sales and retention.
First quarter recruited assets were 24 billion, which includes 15 billion from Bema. This reserve.
<unk> brought our total recruited assets over the past year two of new high of 56 billion.
Our continued progress on recruiting is primarily driven by the appeal of our model.
Our ongoing innovation for the future and and the expanded flexibility of our platform.
At the same time, we further enhanced the advisor experience through continued delivery of new capabilities and technology as well as the ongoing modernization of our service and operations functions. As a result asset retention remained solid at 98% in the first quarter and net promoter scores increased year over year.
Our first quarter of business results led to solid financial outcomes with the dollar 77 of EPS part of intangibles and acquisition cost.
Let's now turn to the progress we've made executing our strategic plan.
As a reminder, we have evolved our long term vision, we aspire to expand beyond our own vision of extending our leadership in the independent space and redefine the independent model over time and by doing so it become the leader across the entire advisor centered marketplace.
The approach is to build a platform that is simple and straightforward for advisers to use with the flexibility to construct the perfect practice for themselves and their clients. This approach breaks down the walls of the traditional market segments and instead focus is on creating toll empowerment for LPL advisors to thrive.
And that is the heart of our mission.
Doing this will gives us a sustainable path to higher levels of organic growth increase market leadership and long term shareholder value creation.
Now the execute on our strategy, we have organized our work into four strategic plays which I'd like to review with you in term.
Our first strategic play involves meeting advisors, where they are in the evolution of their practice by winning in our traditional markets. While also leveraging new affiliation models to expand our addressable markets strategically. We believe this combination positions us to not only deliver sustainable and repeatable organic growth, but the.
Also increase our growth rate over time.
In our traditional markets, while overall industry advisor movement remained at lower levels in the first quarter, we continued to gain share and grow our pipeline.
Looking more specifically at the regional Bank segment of our financial institution channel, we on boarded BMO Harris financial advisors in late March we continue to prepare for M and T. The joined in the next few months and we advanced conversations with additional prospects.
With respect to the expansion of our addressable markets. We continue to see momentum building in our new filiation models earlier. This month, we on boarded two new practices to strategic services.
Bringing us to a total of seven on the platform and earlier. This week, we added another advisor to our employee base model looking ahead, we feel good about our pipeline for both of these models.
Another key component of this strategic play is using M&A as a complement to organic growth.
With respect to our acquisition of water on rates wealth management business. We now have commitments from Waddell <unk> Reed advisors, who serve approximately 95% of client assets.
We're engaging closely with these advisors to help them prepare to transition to LPL and again, leveraging our platform to serve their clients and grow their businesses.
Our second strategic play is focused on providing capabilities that help our existing advisors differentiate in the marketplace and drive efficiency in their practices.
One of the key components of this point is enriching the end client experience.
<unk> platforms are increasingly at the center of the end client experience as the secular trend towards the advisory continues in our business and across the industry. Given this we remain focused on providing our advisers with an industry, leading advisory platform, including a number of recent enhancements within the quarter we.
Introduced simplified pricing and lowered account minimums on our centrally managed platforms. We also expanded our no transaction fee ETF product offering, which now serves about 40% of ETF assets in advisory accounts at the same time, we are introducing new platform capabilities in the spirit of create.
The differentiated U M. A offering that combines multiple centrally managed portfolios within a single account.
These enhancements increase the appeal accessibility and flexibility of our advisory offering which in turn supports our advisors efforts to serve their clients and win in the marketplace.
Let's next move to our third strategic play, which involves creating an industry leading service experience to delight advisors and their clients and that in turn helps drive the advisor retention.
A key component of this strategic play is transforming our service model into an omni channel client care model that provides our advisors with differentiated service.
In Q1, we completed the rollout of live chat as a complement to our voice channel advisors now have a choice of either voice or chat to efficiently connect with the service professional who is trained and certified to answer their specific question.
Our next step is completing the rollout of our digital self service experience, which together with voice and chat will position the advisors to access industry, leading service at a time of it in a manner that works best for them.
We also continue to automate and streamline key elements of our service operations in Q1 of our area of focus included enhancing the administrative support around tax season, digitizing forms and automating account transfers enhancements in these areas are helping strengthen the advisor experience and the scalability.
Of our platform as our business grows.
The remaining focused on the transformation of our service model into a client care model and continuous improvement through the automation and streamlining of our service operations. We believe were making positive contributions to the service experience advisor retention and net promoter scores.
Our fourth strategic play is focused on helping advisers run the most successful businesses in the independent marketplace. One of the key components of this play as our portfolio of business solutions, which help advisers operate their businesses. So they can focus on serving their clients and growing their practices as we did.
Just last year last quarter, we see several pathways for continued business solutions growth.
Including partnering with more of our advisors, introducing new solutions to the portfolio and experimenting with serving advisers outside of LPL.
In the first quarter of subscription base continued to scale to about 1700 monthly subscriptions that generated annualized revenue of approximately $19 million. This growth was primarily driven by our ongoing expansion and evolution of the value proposition of our existing portfolio.
Looking at our at our product roadmap, we continue to enhance our existing portfolio of solutions, while expanding into new offerings. In Q1, we launched M&A solutions, which is generating solid demand, including over 50 advisers, who are leveraging this offering today.
In Q2, we plan to introduce our seventh business solution client engage this is.
This evolved from our existing marketing offering and is focused on providing advisors with the digital approach to effectively and efficiently stay connected with their clients.
As we look outside of LPL, we plan to begin marketing M&A solutions. Later this year by experimenting with this scalable technology driven solution, we can efficiently learn from serving outside advisors, while continuing to focus our resources and investments on delivering business solutions to LPL advisors.
Now before closing I also want to highlight that we released our 2021 sustainability report last week.
We believe operating of sustainable business is good for all of our stakeholders. We hope. This report provides helpful insight into our practices and performance.
In summary in the first quarter, 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 our strategy to help our advisors further differentiate and win in the marketplace and as a result drive long term shareholder value.
With that I'll turn the call over to Matt.
Alright, Thank you, Dan and I'm glad to speak with everyone on today's call.
As we move into 2021, we remain focused on serving our advisors growing our business and delivering shareholder value.
This focus led to the highest quarter of organic growth in our history.
And in addition, we are in the midst of on boarding what will become three of our largest partners and BMO.
And what Owen REIT.
We expect these three partners to collectively add approximately 100 billion of AUM to our platform, bringing our total AUM to over one trillion.
Now, let's turn to our first quarter business results total advisory and brokerage assets increased to a new high of 958 billion.
Up 6% from Q4, driven.
Driven by continued organic growth and higher equity markets.
Looking at organic growth total net new assets were 29 billion, which translates to a 12, 8% annualized growth rate.
Prior to large bank on boarding organic growth was seven 6%.
Moving on to recruiting and retention we continue to produce strong results from the first quarter recruited assets in Q1 were the strongest in our history at 24 billion, which.
Which included $15 billion from large bank on boarding.
These results brought our 12 months of recruiting total to a new high of 56 billion.
Looking at retention remains strong at 98, 1%.
I would also note that we updated our retention metric to reflect asset retention rather than our previous method of production retention.
We believe this change will be more helpful in evaluating our business results.
And we have provided the historical data in our key metrics presentation. So you can see both the old and new metric.
Moving on to our business mix.
We continued to see positive trends in Q1.
Advisory net new assets were <unk> 23 billion or 20% annualized growth rate.
With this growth our advisory assets are now 52% of total assets as we continue to deliver differentiated advisory capabilities and benefit from the secular trend towards advisory.
Now, let's turn to our Q1 financial results strong organic growth combined with expense discipline led to EPS prior to intangibles and acquisition costs of $1 77.
Looking at our top line growth gross profit reached a new high of $579 million up $46 million or 9% sequentially.
Looking at the components Commission and advisory fees net of payout were $184 million.
The $31 million from Q4.
Primarily driven by organic growth.
And seasonally lower production expense.
Moving on to asset based revenues sponsor revenues were $168 million in Q1.
$14 million sequentially as average assets increased driven by organic growth and higher equity markets.
Turning to client cash revenues, they were $97 million down $8 million from Q4, driven by lower client cash yields.
Looking at client cash balances they remain elevated at 48 billion roughly flat with last quarter.
As for client cash yields our Q1, ICA yield was 99 basis points down nine basis points from Q4.
The decrease during the quarter was primarily driven by fixed rate and LIBOR based contracts that matured and lower short term interest rates.
Looking ahead to Q2, we will have the full quarter impact of the half of 1 billion of fixed rate contracts that matured in Q1.
As well as another $1 billion of fixed rate contracts maturing in Q2.
Given these factors and where interest rates client rates and cash balances are today, we would expect our Q2 ICA yield to be in the mid 90 basis point range.
I would also note we have no additional fixed rate contracts maturing in the second half of this year.
Moving on to Q1 transaction of fee revenues, they were $141 million up $11 million sequentially, driven by trading volume that increased throughout the quarter.
Looking ahead to Q2 trading activity in April has declined from the elevated levels. We saw on Q1.
And if this trend continues through the quarter, we would expect transaction revenue to decline by about $10 million.
Turning to the business solutions. They continue to scale was 1700 subscriptions at the end of Q1.
This is up 300 from last quarter and more than double a year ago.
These offerings now generate roughly $19 million of annual revenue up from $17 million last quarter and more importantly, they help free up additional time for advisors to spend 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 $236 million in Q1.
Looking ahead, we continue to anticipate full year 2021 core G&A to be in a range of $975 million to $1 billion.
As a reminder, this includes cost to support BMO and empty, but its prior to the expenses associated with Waddell <unk> Reed.
Moving on to Q1 promotional expenses, they were $54 million up $6 million sequentially, primarily driven by increased transition assistance from higher recruiting and large bank on boarding expenses.
Turning to Q2, we anticipate promotional expense will increase by approximately $5 million prior to Waddell <unk> Reed, primarily driven by increased transition assistance and large bank on boarding expenses.
Looking at share based compensation expense it was $11 million in Q1 up from $8 million in Q4.
Looking ahead to Q2, we expect share based compensation expense to be at a similar level to Q1.
Turning to depreciation and amortization it was $35 million in Q1 up $7 million sequentially of several improvements to our advisory platform and end client experience were rolled out sooner than anticipated.
Looking ahead, we expect depreciation in Q2 to be in line with Q1 levels.
Now, let's move to what one read the transaction is progressing better than we originally estimated across multiple fronts.
As mentioned, what Alan Reid advisor, serving approximately 95% of client assets have committed to join our platform.
Factoring in this higher level of retention and current asset levels. We expect the run rate EBITDA benefit from what Ellen read to be at least $80 million.
Up from our original $50 million estimate.
As a result of the higher retention, we now expect $110 million of acquisition costs up from our original estimate of $85 million.
These updates bring our estimated purchase multiple to five times EBITDA and improvement from our original estimate of six five times EBITDA.
Now I want to provide an update on our expected close timing.
Over the past several months, we have had strong collaboration with Waddell <unk> Reed and Macquarie and we have received the required regulatory approvals.
As a result, we are pleased to share that we anticipate closing the acquisition of Waddell <unk> Reed's wealth management business as early as tomorrow.
And we continue to expect to on board the advisors a few months after closing.
Looking ahead, we are focused on providing transparency on the progress we are making on the transaction.
With this in mind, we will share Waddell <unk> Reed financial results in two primary categories.
First to provide more clarity around our results. We have added an acquisition cost line item to our management P&L.
Looking at Q2, we expect roughly one third of our total acquisition cost to be incurred during the quarter.
Second we will keep you updated each quarter on how we expect EBITDA to build as we progress towards hitting the full run rate benefit by the middle of 2022.
In Q2, we expect annualized negative run rate EBITDA of approximately $10 million as we add resources to prepare to support what Ellen REIT.
Moving on to capital management, starting with our debt refinancing give.
Given the continued strength of our business combined with the low interest rate environment, we were able to refinance our highest cost debt from 575% to 4%.
Reducing our annual interest expense by $13 million.
We were also able to increase the size of our revolver from $750 million to $1 billion.
As for capital deployment, our framework remains focused on allocating capital in line with the returns we generate investing in organic growth first and foremost.
Pursuing M&A where appropriate.
And returning excess capital to shareholders.
In the near term, we continue to 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.
The fact that time, we of excess capital to deploy beyond organic growth and M&A.
We would anticipate restarting share repurchases.
That said, we will have to see what our options looked like at that time.
In closing, we delivered another quarter 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.
If you have any questions at this time, Please press star and then the number one on your Touchtone telephone and if your question has been answered or you wish to remove yourself from the queue you may press the pound and the.
The company would appreciate as analysts would limit themselves to the one question and one follow up each.
The first question comes from the line of Bill Katz from Citigroup. Your line is now okay. Thank you very much and good evening, everybody. So maybe Dan start off with you it.
It seems like from sitting from the headlines in your comments that the there's been an acceleration in both strategic well services and building so on sort of the independent employee side, what's changing.
At the margin here is it just time or maybe a sense of maybe peel back the layers. So whats been the incremental change in the marketplace that's resonating better.
Yes, Bill Thanks for the question.
Yeah.
As a reminder, we just launched these last year.
The Swf's in April and then the employee model in the second half of last year and.
As you know it takes a bit of positioning in the marketplace seasoning it.
The rating on your value proposition as you learn and you get feedback on bringing on clients and then having a good experience and being able to use them as a reference.
Two future prospects and considerations.
Also continued to invest and enhance in the talent on our business development team. So a combination of those things.
Our driving.
A bigger pipeline better positioning out in the marketplace from the competitive standpoint Bill.
Building on existing clients, who are having a good experience and then finally using that quality talent to ultimately help go execute so.
That's a similar concept for both Swf's.
Our strategic well services is a bit ahead of of the end of the.
Pendant employee model only because it started several months earlier, but you can see them on a similar trajectory I hope that helps.
Yes, Thanks, and then maybe one just for Matt.
I guess one of the themes that's been coming out is sort of this excess liquidity in the system. Overall I think you mentioned in the last quarter as well can you sort of maybe update us your thinking on how to sort of track through fixed to float will flow to fix I should say and so the ability to.
So the drive the third party sweep opportunity.
Yes sure of Bill I think the.
Maybe just starting with our strategy and goals here, which are really unchanged specifically on the on the fixed rate deposit side, which is really the to get to a place where 50 to 75 per cent of the portfolio is fixed.
So I think from a from a long term perspective.
It's where we're headed.
But I think to the point of your question and similar to last quarters. When you look at the amount of liquidity in the system right now, there's really just very little demand for deposits.
That said I think what you're starting to see some early indicators of that changing and maybe maybe really early indicators, but things like the yield curve starting to steepen right. The 10 year moving up where there is a.
For those banks that are on the demand side of these deposits.
Theres some theres some economics on the spread for them to invest it consumer spending picking up right. There's trillions of dollars in savings and checking accounts. It has built up over the pandemic.
Is that spending picks up that going back into the market as one of the things that could lead to the to that demand. So if those trends continue I think those are those are some of the things that could start to change and improve that demand.
But I would emphasize we're not we're not seeing that pick up today, but I would just end with I think are our long term strategy of moving into the 50% to 75% fixed zone. When there is demand we feel really good about being able to execute at that.
Okay. Thank you.
Next question comes from the line of Steven <unk> of Wolfe Research Steven Your line is now.
Hey, Dan Matt.
Afternoon.
So wanted to start off with the question on M&A and the appetite for more transformational deals in August 2017, you announced the NPH transaction Youre obtained about 70% of the assets as part of the deal. Since then you've made a lot of enhancements whether its investments in digital or just to the platform more broadly and fast.
<unk> I know you've retained 95% so just given that much stronger retention and the favorable experience with waddell given all of the metrics that are inside of it I'm just curious whether that increases your appetite to do more transformational deals as a much higher retention significantly impact some of the future deal math.
So Stephen it's Dan.
So look I think.
We continue to see M&A from a strategy standpoint, as a complement to our organic growth and as you know we look across the lens of growth opportunities or acceleration of capabilities, and so that hasnt changed and our and our overall strategy.
We do believe that if we're good at executing on these transactions.
Then that becomes an interesting differentiator on an opportunity for us in terms of.
How we might structure of deal value of deal et cetera.
So we are staying disciplined on making sure with every acquisition that we learned from those and we apply those insights and learnings such that we can execute better. The next time. If you look at the drivers of the difference in these two transactions.
I think most of it were activities that we control or drive where we maybe didn't do them as well back in 2017, 18, and we did the much better today things like being able to automate and streamline the transition of asset and advisors moving from one place to the next you take the free.
<unk> and help them continue to focus on there.
Their clients Thats, a pretty appealing scenario, our ability to take of strategy and go deliver it in a simple articulate manner to help advisors understand.
What that experience would be like what their structure of what their economics will be like on the other side of that transaction and do it at pace and clear.
You begin to.
The right dialogues very quickly that lead the good outcomes and so those are things as examples that we continue to learn and evolve and get better in terms of of our ability to execute so as we go forward to your point do.
Do we think there's continued consolidation both in.
What I might call the smaller transactions across the entire spectrum to the larger transactions, yes would we continue to have an opening in exploring and potentially participating in some of the consolidation I think based on our strategy of the absolutely answer would be yes, and to the extent that we get better and better at executing on these we will.
Use that.
Insight perspective, an advantage to think about how we consider approaching them.
Thanks for that color, Dan and then just for my follow up I wanted to ask on the essentially managed platform and the assets grew organically at a very impressive 47% rate it looks like the bulk of the increase in the quarter was tied to the BMO Onboarding was hoping you could speak to what drove such strong demand for the essentially managed product just from the.
The advisors and should we expect a higher ROI on those assets given the more attractive economics of centrally managed.
Yes.
Steve is a great observation in that you did see solid growth in centrally managed platforms.
And youre continuing to see the underlying strong baseline.
Growth in utilization of that platform increase right. So that didn't change in the first quarter across our entire platform and as we invest in AG capabilities investment content lower price we think.
Those centrally managed solutions only become that much more appealing.
And then you complement that or add that too.
In this case be most of utilization of centrally managed solutions.
And that creates a really interesting opportunity.
Not only for us to think about how we expand and grow.
Our centrally managed platform, but even unique capabilities, we made put inside of it that are helpful and supportive of large institutions.
And then all the way finally to large institutions are users of models based approach and.
Our robust centrally managed solution within WP.
<unk> enables them to leverage both the growing momentum there is their advisers have in this space the great talent they have to serve and support their clients matched with a platform that is really well aligned with their needs and the way they serve their clients and that is a pretty interesting formula.
That certainly drives higher ROE with the more advisory they do and then the utilization of those centrally managed platforms. Today Bmo's business is about a third advisory two thirds of brokerage. So as we go forward, we think our platform is on.
As a nice tool on a leverage point to help them as they evolve their business in order to serve their clients in the best way possible.
That's great color Dan Thanks, so much for taking my questions.
Thank you.
Next question comes from the line of Alex <unk> of Goldman Sachs.
Hey, good afternoon everybody.
I was hoping to zone in on the retention stats you guys provided.
Not just for Waddell, but obviously for the for the bulk of the whole.
It looks like you guys are running at about 98% overall retention on the assets. It is quite a bit above from where we've been historically and I think Dan you talked about the pandemic being the sort of as one of the reasons why retention might be strong, albeit maybe temporarily it feels like its sticking around so I just wanted to get your updated thoughts on whether or not it was sort of entering a bit of of new.
The paradigm with the retention of the odds of being as high as it's been recently.
Yeah absolutely.
As you say, if you look back historically.
Three years, you saw more of a retention rate and the 96 per cent range.
We saw if you look over the last 12 months of retention range in the 97.5% level.
So as you've said we've seen some good stability in that 97%, 98% range for the better part of the.
Last three quarters, which would indicate there is good staying power beyond the pandemic.
As you return to what I might call normal movement of advisors in the marketplace.
And so we're encouraged by that we continue to invest in the model to improve that service experience expand the capabilities.
And deliver those to our advisors such that it helps support them operate inefficient practice and the effective practice serve the clients and grow their business and you would expect retention rates to be pretty sticky for us we're trying to manage in that 97%, 98% range and think that's a that's a pretty good solid outcome.
Good sustainable place.
To operate in if we're doing our job of investing in our model, ensuring it's it's delivering the right value for our clients.
Got you thanks for that matter of follow up for you around.
Around expenses I was just hoping the unpack that a little bit so it sounds like the guidance. Obviously does not include any expenses related to Waddell <unk> Reed, whether it's kind of their expenses coming on or I guess expenses that you anticipate.
Kind of facilitate the transition of if I'm hearing that correctly, so kind of like the $10 million annualized EBITDA drag for instance that you're highlighting in the second quarter.
That expense is not in your full year expense guidance just wanted to I guess confirm that and also maybe you can help us think through expenses core G&A, Inc.
The <unk> of what al and I guess secondarily.
As you guys pointed out on the slide first quarter core G&A run rate is below the full year guide. So you anticipate a bit of of ramp so maybe just kind of walk us through.
The sources of that ramp thanks.
All right Alex the thing that was the.
The three part three part question.
Oh.
All of it I'll answer of I think you are correct I think the the guidance of 975 to 1 billion core G&A, that's excluding one al.
And the reason for that is just as as we ramp up both on.
On the EBITDA side as well as he is the acquisition cost I think the our perspective is the way to give you. The most clarity on that is to really keep them separate.
Knowing that what al between both of the revenues and gross profit on expenses, we're going to be ramping over roughly a year period to the $80 million run rate.
I think thats the way to think about it I think obviously when we get to the other side everything will be put together from a from a dialogue on the guidance standpoint I think.
We think that'll be the most clear path and way to understand the the core of our existing business. If you will as well as how and when what outcomes on board.
So I think that covers questions wanted to question three on how the existing business is ramping and it's.
Pretty similar to what you've seen in prior years, which is you kind of steadily ramp throughout the year, meaning the the Q1 run rate I think probably the premise of your question or the Genesis of your question is where our run rate right. Now is kind of below the low end of that range and it's just that natural ramping during the year on I think you saw that last year as well so that.
Would be our expectation this year.
Great Thanks for that.
Yep.
Next question comes from the line of Craig Hagan of Sandler of Credit Suisse.
Thanks, guys I had a follow up on Steve's earlier question on the essentially managed platform.
We know this business is highly gross profit ROA and ROE accretive, but can you walk us through the math relative to your advisory assets that are not on the centrally managed platform.
Yes, Craig I think the the dynamics haven't haven't really changed I think century manage usually adds about 10 basis points.
I think we've got good disclosures in our investor deck on that so I think the the dynamics there are really pretty similar to what we have there I think what I would add and note specific to BMO just to build on Dan's comments earlier, because that was the big driver in centrally managed for the quarter as when you look at those large financial institutions right those are.
Those are those are contracts that are negotiated overall and specific to large financial institutions. They typically start with a high percentage of brokerage, which brokerage assets overall on that 15 to 20 basis point range.
And just given the positive mixes at BMO that Dan highlighted a third of the assets and advisory and then a lot of that going into essentially manage I think it's pretty reasonable to assume that BMO will be at the higher end of that of that range.
The only thing I would add is similar to M&A those contracts usually there is some ramping right. The first couple of years, usually have some incentives not dissimilar from what we're just talking about on the ramp for what Alan Reid. So as that ramp occurs just as an overall point on BMO really coming out of the the high concentration in advisory and centrally manage.
You've got a really accretive.
From a margin standpoint versus our current margin on.
On that business, so hopefully that helps.
Thanks, Matt and.
Just circling back on cash sweep.
How should we think about the near term of opportunity to reinvest the $6 billion of overflow balances.
Yeah, I think when you when you look at the kind of the floating side.
Of the sweep dynamic, it's really pretty similar of what's going on the fixed contract side and that Theres just not of lot of new demand.
So if you think about those contracts on a normalized environment you typically see them at a spread of 20 to 30 basis points versus fed funds.
And in this environment, you're really seeing them kind of fed funds flat to fed funds minus five.
So I think that's kind of how I would think of the marginal investment rates there.
And then maybe give you just a little bit of color on on those as those things mature right. When you. When you think about floating rate contracts. The the nature of those are usually on a one to two year contracts that typically roll into new periods of pretty often.
Just give you context for us for the rest of the year. If you look past the Q2 guidance I gave on ICA overall, so kind of looking in the second half of the year and if the.
The contracts that mature in that period, if they if we invest reinvest all of them Craig to your question in current rates that would bring the overall ICA yield down, but just a couple of basis points by the end of the year.
So it's a relatively small of the reinvestment risk there.
And then add to that with no additional fixed maturities of the second half of the year kind of gives you. The I think of good perspective on overall ICA rates theres not a lot of downside risk at least in the current environment in the second half of the year Youre talking mid Ninety's to low Ninety's is this the way to think about it.
Great. Thank you Matt.
Next question comes from the line of Michael Cyprus of Morgan Stanley.
Hey, good afternoon. Thanks for taking the question just wanted to circle back on the business solutions. I think you had quoted about $19 million of revenue annualized I'm, just hoping you could maybe help us appreciate the profit margin on that the gross profit contribution to that and then just also maybe you can elaborate a little bit on some of the initiatives you have in place on on expanding.
Of that out and growing the penetration within the existing adviser base.
You want to take the economics on the first half on I'll give the second you guys say, Mike I think the when you look at business solutions I think the there's two ways to think through it first is on the economics and I would think of it as the as the capability in a product that's generating fee revenue like we discussed.
And then addition to that I think probably the one of the more interesting parts of the business solutions.
Really what that positions advisers that are utilizing them to do right. It's about us helping them really run their small business and a really efficient and effective way that frees them up to be focused on the wealth management side right to deliver same store sales and grow their practices or position them to do acquisitions with our new M&A. So.
<unk>, So I would really view the financial benefits of the business solutions really in a holistic way for the entire firm given the different types of dynamics that the that can drive.
And maybe to build on your product roadmap question.
As we look at our different options and alternatives to expand the portfolio and thus reach either more LPL advisors indoor.
So existing advisors of additional services.
This again is based on the premise that they're engaging in many of the services at a local level. So our concept is we can offer them on our higher quality and perhaps at the at a cheaper cost of pretty appealing combination and so if you think about our roadmap today.
<unk>.
You've got the original three offerings, which were.
Admin solution, the CFO solution and the marketing solution. So what we're doing with each one of those is we're exploring can we create new variations of those offerings of.
Which might have.
A narrow or value proposition of lower price point and solve the specific problem or challenge that an advisor.
Has to address on a weekly monthly reoccurring basis and so we.
We're working inside of our product portfolio across that entire spectrum of offerings to come up with new iterations on that and you'll see a couple of under the CFO solution.
One that we're about to the.
Begin to go to pilot in Q2 that I mentioned earlier and that was a derivative of our marketing solutions and so that's kind of innovation area number one of the roadmap.
The second one is we continue to experiment with new capabilities of our new solutions.
A great example of that with the experimenting with the pair of planning if you will a whole new offering with respect to the professional services portfolio, but one that.
That we're testing right now out in the marketplace learning Iterating and potentially will become a whole new solution. If you will to that.
Of that portfolio. So that would be an example of a new solution M&A solution would fit into that category of of new offerings and so those of the two primary places that we tend to explore.
How do we expand the product roadmap and thus create more and more value that our advisers can leverage to replace that spend that we estimate is close to $1 $5 billion of year that they spend on local level of services. So that's that's what's.
<unk> net roadmap I hope that average.
Got it thanks, and maybe just a quick follow up here just on the expense side. It looks like the share based comp on DNA were both up.
Meaningfully on a sequential and year on year basis. I know you gave some guidance into the second quarter, but just curious I guess any color on what's driving that and how you would expect us to sort of trend over the next couple of years should these wines grow in line with with AUM growth or something else or some multiplier to that.
Yes on share based comp you see this dynamic you'd share Q1 is typically the highest quarter Q2 kind of close in the drops down on the second half of the year and it's really about the timing.
Of those grants.
Kind of drives that dynamic.
Yeah. So so that's on the share based comp on depreciation I think the a little bit of context there the the.
The depreciation and amortization is largely driven by our technology spend.
And obviously, that's the area, where we're focused on developing capabilities that are key drivers of organic growth and I think the key P&L dynamic to note that you probably know, but I'll highlight anyways as the the expense really changes when you deploy the technology.
When you are spending the money.
And when you look at Q1, we just had some some larger projects that we deployed and rolled out Dan covered a few of them in his prepared remarks, so that really started the depreciation.
The expense associated with that so.
So if you look at the few quarters, leading up to this quarter, you saw relatively low or small increases in depreciation and and we would expect a similar dynamic in the next few quarters. So it's really just the kind of concentrated deployment. The overall tech spend trends have had been pretty consistent and unchanged from our from our overall expectations. So.
I hope the house.
Great. Thank you.
Next question comes from the line of Chris Harris of Wells Fargo.
Great. Thanks.
So you guys are our EMEA LPL is just growing so incredibly fast right now.
Can you maybe talk a bit about how you guys are feeling about the platform from the capacity perspective. The other words you have the capacity in place the service in place to be able to support.
All of the incremental growth youre seeing and expected to see.
Yes, it's a great question and I think it goes back to.
The start of our mission right, we've got to take care of our advisers. So they can take care of their clients, which means we've got to make sure that we're there for them day in day out from the service experience standpoint that our platform has the stability necessary to leverage it and utilize it and then ultimately.
We're providing them the capabilities to create efficient workflows and capabilities to help them differentiate with their clients and continue to win.
And we've got to make sure that we give them the tools necessary to.
Pivot their businesses into a multi channel.
Service business, where.
It's no longer just in person they've got to do it in a combined digital and in person way so theres a tremendous.
Of this opportunity for this platform the show up in support and help them and add value of every single day and that comes first and foremost for them. So we've got to be diligent around making sure that we understand and plan for that gross wells that we've got.
The technology and engineering capabilities of which to build the tools that are necessary in scale of the platform. We've got to make sure that we've got the fine tuning the testing.
The utilization of AI to help us with respect to the risk management of our overall platform and stability.
Privacy et cetera associated with it so that operating muscle to be really strong to execute on our plan comes first and foremost force love to tell you. We're perfect at it. We also have to have the humility to constantly listen to feedback and if we're not getting something right.
To quickly focus on addressing it and iterating.
And then ultimately getting better because of it and so I think that's the principal and the foundation of how we operate and execute.
Then we've got to make sure that we're investing in the right people attracting the right talent that we've got the right size talent.
That is well aligned and positioned to collaborate and execute together to deliver on our expectations. So that comes number two what our operating metrics how do we observe measure.
How we operate not on a weekly or monthly basis, but on a daily basis.
That we can take that data.
From it fine tune revised iterate et cetera to make sure that we can be the best that we can be every day and then finally, we've got to be investing in.
Technology and automation that helps the scale.
So you can scale into burst of growth or you can constantly.
With.
Consistent sustainable growth that you are constantly improving and enhancing your performance because youre able to digitize and automate it.
From into and throughout the ecosystem.
Not to mention the benefits that you get from the scalability from an economic standpoint by doing that so we continue to work on that introducing robotics deploying AI and machine learning throughout our ecosystem in order to do that and so.
We've got a lot of passion for doing it we're not perfect. We hold ourselves accountable to our NPS scores, we've got room to improve and it's priority one for the firm I hope that helps.
It does thank you.
Next question comes from the line of Gerry O'hara from Jefferies. Jerry Your line is now open.
Maybe circling back to business solutions, just curious if you have tracked or have kept any data points here on the overlap amongst advisors as it relates to the various different.
These different solutions at almost strikes me as though.
If you could kind of get the adoption of one such as admin solution of our CFO solution that could work as a gateway to additional but not sure. If you can sort of track that are seeing that metric develop.
Yes.
I think that's great strategic utility and I think that is.
A good hypothesis.
Premise that we are seeing trend.
Someone is engaged in the service if they're having good success and its a good leverage point.
There is of higher propensity to use on the other one I think as we iterate on the portfolio and expand the different offerings and you create.
As an example, not just a holistic CFO offering but you can take elements of what the CFO role might be book, keeping as an example of our F P&A work and you're able to create.
Create discrete products out of things like that I think your premise of of sort of a land and expand strategy makes even more sense. So.
There is more to play out on that as we evolve our.
Our product roadmap, but we are trying to also be digital first and use data of which to learn and understand how our clients are engaging with us. Both so that we can improve our offering better the.
Deliver.
Our service experienced of them across the portfolio.
That's a good question.
Okay fair enough.
And then perhaps you can remind us what the mix on the $100 billion.
Of of assets, that's going to be on board it across the two banks and with Dell as it relates to fee based advisory versus more traditional commission based business. I think you just sort of highlighted earlier, the BMO mix, but.
But if you could just kind of remind us what that aggregate split is that would be helpful.
Yes, Jerry I think we can be directional here I think to the point on bema Theyre, a little bit higher on the advisory side in the near typical large financial institution great meeting.
<unk> would be.
More focused on the on the brokerage side.
And then what al I think as we're as we're near closing and then on boarding I think we'll give you more specifics on that in the near future.
Okay Fair enough. Thanks, Dan Thanks for taking my questions. This evening.
Next question comes from the line of Brennan Hawken from USB UBS Brendan Your line is now open.
Great. Thanks for taking my questions.
On this one you might.
It might be.
B has been answered by the last question on why Dow on the fact that more details are coming but I wanted to follow up on Alex's question earlier.
You can see whether or not we could get some maybe some more granularity on the profile of what it will look like.
He is going to ramp.
Over time over that year or or is there how should we assume that will come on board both revenues and the expenses when we think about modeling it or with your last comment basically to say the isn't really in a position to say, we kind of hold our horses per these questions.
Yeah.
No I think the segment.
A little bit of between between the two points I think if you look at we did some updated disclosures in our key metric materials. If you have those handy I'll speak to them on pages, seven and eight but I think you've got the the mix of of what al at the time, we announced the deal.
Which is a little bit over 50% brokerage so 45% of advisory 55% brokerage the at least you can see what it looked like back then.
I think on the ramp.
Highlight a few things we had and this is where we added some detail on on slide eight just to think about our our path from closing, which could be as early as tomorrow to hitting that run rate EBITDA of $80 million and there's really I think three broad steps that are happening that would drive it.
And that's what I was given a little bit of color on earlier and it's first and foremost is really.
Adding the resources and technology on expenses, maybe to build a little bit on on the <unk>.
Question, Dan was just answering just to make sure that we are in a position to to receive what out of the company at closing of to onboard the advisors a few months after that so the expenses start first.
I think then on boarding we think will happen a few months after closing so call. It a few months from now.
And that's really where the the gross profit synergies start right. Once the advisors on their assets are on our platform and then following that it's really your classic M&A integration work to get the expense synergies and we think that will take a body of full year from close so you kind of put all of that together.
And that's I think of a pretty good roadmap from here until till hitting that run rate EBITDA.
And using that time line that I, just walked through kind of by the end of Q2 of next year of 2022.
Maybe one helpful comment relative to your gross profit point.
Because this is an acquisition the ramp of the advisors is different than the normal recruiting scenarios. So the assets and the advisers were all come over in mass. So let's say we closed tomorrow, let's just say three months later the assets come over over a weekend and the advisors come over over a weekend.
And so they will be all on our platform. So your ability to begin ramping from that point as solid and a little different from recruiting where you're ramping on over time. So hopefully that gives you a little more color.
It does thanks, it's almost sort of suggests it's more like a step function then of ramp to some degree.
Thanks for that.
Also kind of curious about.
Thinking about the impact of the reopening of the economy and the idea that people are going to start getting more comfortable with face to face meetings with vaccines rolling out of successfully as they have been.
How should we think about it in a couple of different perspectives I'm curious number one from a recruiting perspective.
Is that kind of put a bit more expense back into the recruiting effort versus before or.
Have you learned that you can be so much more efficient recruiting and zoom world.
People out of the recruiting efforts too soon.
That's the one angle and then from another angle.
Thinking about the advisors.
The net new assets over the past year.
How much of those has the amount that normally comments from the advisers existing book of business been impacted by the fact that they can't do prospecting dinners or seminars or what have you.
And do.
Do you expect that that might start to kick back in now that.
People will be coming back from restaurants and whatnot.
And maybe what kind of an impact do you think that could happen.
Sorry from the multi partner.
No. There's a lot there. So let me give you the directional answer of that just to.
I think to give you some guidepost in some places not to try to be overly precise on something we don't exactly know right. So with respect to recruiting your first part of your question.
Sure.
I think the the short answer is it does not go back to what it was before but it doesn't necessarily stay what it is today.
And I do believe that we've continued to recruit throughout.
We've had some people doing some travel throughout.
We've been incurring some expense relative to our business development activities right the.
The sort of the core G&A expenses associated with that.
But we have used technology and learn to use technology in a much much more creative way and we've broken through and set new paradigm. If you will on how to do that at an acceptable ways to do that and gotten better at it over the year. So.
I actually think you'll see a mix, where we'll use technology, where its more efficient is less wear and tear and quite frankly, it's more appealing for for the advisors of the prospect as well as for our business development resources as an example.
And then where we do need to travel and where we do make a difference in face to face we will absolutely do that so if we do this well we should find.
Both improved efficiency and efficacy in our business development efforts.
So that's how I would answer that one again not trying to be overly precise about exactly where the dialogue goes back to but I think it's some middle ground I hope that was helpful to you on the recruiting on with respect to our advisors.
A couple of things there baselines changed significantly in the first 90 days when the country shut down.
But the pace of reopening as you know has been very very different at a local level across the country and many of our advisors are doing a lot more face to face and what we might would expect living in bigger cities and so.
Consequently, I think you've already seen of pivot for a lot of advisors, probably more back to that baseline way they did business.
But I think the cool part about our advisors being in businesses for the themselves they've got to be quite innovative and have that entrepreneurial spirit right of the small business owner and most have added this digital capability to the repertoire. So now they've got two ways of which to serve clients, which again.
<unk> of the aperture of their opportunity to increase the size of their book value.
The more efficient ways to engage.
With clients and then ultimately provide a mix of those that would rather meet in person versus those that are good doing it over the the video.
Now redefined geography for them by doing that as well and so we.
We actually think this becomes a really interesting opportunity for our advisors.
As a catalyst to enhance the service experience expand the flexibility around it and also ultimately use that as a catalyst for growth do I think they're going to get back to doing dinners full time like they used to know, but I do think that dial we'll go back to.
What is <unk>.
How that advisor uniquely wants to run their practice, so youll see probably of spectrum of different outcomes, depending on the advisor themselves on their clients I'll stop there.
Yes, thanks for that color is helpful.
As there are no further questions at this time I will turn it back to Mr. Arnold.
Yes, hey, thanks, everyone for taking the time to join US. This afternoon, and we look forward to speaking with you again next quarter.
Yes.
Thank you so much of our presenters and to everyone who participated this concludes today's conference call. You may now disconnect have a great day.