Q2 2021 LPL Financial Holdings Inc Earnings Call
Good afternoon, and thank you for joining the second quarter.
2021earnings conference call for LPL Financial Holdings incorporated joining the call today on our President and Chief Executive Officer, Dan Arnold and Chief Financial Officer, Matt Audit.
And Matt will offer introductory remarks, and then the call will be opened for questions. The company would appreciate.
Warner's analysts would limit themselves to 1 question and 1 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 Dot LPL dotcom.
Today's call will include forward looking statements, including statements.
Statements about LPL financial's 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.
Good day, if 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 refers listeners to the disclosures set forth under the caption forward looking statements in the earnings press release as well as the.
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.
GAAP financial measures to the comparable GAAP figures. Please refer to the company's earnings release, which can be found at investor <unk> L. P. L. Dot com with that I will now turn the call over to Mr. Arnold.
Thank you RJ and thanks to everyone for joining our call today.
Over the past quarter.
Our advisers continue to provide their clients with personalized financial guidance on their client's journey to achieve life's goals and dreams 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 positioned us to deliver another quarter of solid results.
We are continuing to make progress on our strategic plan.
And I'd like to review both of these areas starting with our second quarter business results.
In the quarter total assets reached a new high of $1, 1 trillion up more than 45% from a year ago. This increase was primarily driven by continue.
<unk> organic growth, our Waddell, <unk> Reed acquisition and equity market appreciation.
Now with respect to organic growth second quarter net new assets were 37 billion.
This result translated to a 16% annualized growth rate driven by continued strength across new store sales same store sales.
I'll also on retention and brought our organic growth rate to over 12 per cent for the past year.
On the second quarter recruited assets were 35 billion, which brought our total over the past year to $80 billion.
Our continued growth in recurring recruited assets, including new quarterly and full year highs.
<unk> and flex our ongoing progress on enhancing the appeal of our model and expanding our addressable markets.
During the quarter, our recruiting results increased each in each of our markets with over $10 billion in our traditional independent model over 22 billion in our institution services model and approximately $2.5 billion and our new affiliate.
Relation models these broader and more diversified result helped position us to drive higher levels of recruiting going forward.
Now looking at the same store sales with the backdrop of continued strong retail engagement, our advisers remain proactive and focused on serving their clients and enhancing their offering.
As.
As a result advisors are both winning new clients and capturing more assets from existing clients, which drove same store sales to new highs in the second quarter.
At the same time, we further enhanced the advisor experience through the continued delivery of new capabilities and technology as well as the ongoing modernization of our services.
<unk> and operations functions as a result asset retention was over 98 per cent in second quarter and 98% over the past year.
Our second quarter business results led to solid financial outcomes with $1.85 of EPS prior to intangibles and acquisition cost, which is an increase of.
Per cent from a year ago.
Let's now turn to the progress we made on our strategic plan.
Now as a reminder, our long term vision is to redefine the independent model overtime and by doing so it become the leader across the entire advisor center marketplace. Our approach is to provide a platform that is simple and straightforward.
For advisors to design and run their perfect practice through a breath of affiliation models and the ability to personally configure the components of our offering to align with each advisors unique needs and goals.
Doing this well gives us a sustainable path to continued solid organic growth increased market leadership.
And long term shareholder value creation.
Now to execute on our strategy, we have organized our work into force strategic plays which I'd like to review with you in turn.
Our first strategic play involves meeting advisors, where they are in the evolution of their practice by winning in our traditional markets. We're.
We're a leading market share is now over 15%, while also leveraging new affiliation models to expand our addressable markets.
In our traditional markets. Despite advisor movement in the overall industry remaining lower in the second quarter, we continued to increase our recruiting results and gain market share the combination.
Nation of our recruiting momentum and the appeal of our model continues to expand the depth and breadth of our pipeline.
Looking at our financial institutions channel within the past 2 quarters, we on boarded 2 new clients BMO Harris and <unk>.
Then in June we announced that Qunar brokerage services made the decision to partner with us.
US and plans to join early next year.
These results reflect the market opportunity that exists to leverage our capabilities to serve large institutions.
As we look ahead, we continue to progress prospects through the pipeline and see large financial institutions as a sustainable multi year contributor to organic growth.
With respect to the expansion of our addressable markets. We continue to see momentum building across all 3 of our new affiliation models.
Over the past quarter, we added 5 new practices across our strategic wealth services and employee models and after re launching the only offering in April we've been encouraged by the positive market reaction.
Reaction, including our new our aid that joined in May.
Looking ahead, we see a growing pipeline across all of our new affiliation models.
Now another key component of this strategic play is using M&A as a complement to organic growth.
After closing our Waddell <unk> Reed acquisition in April.
Last week, we transitioned to our platform over 900 advisors, who serve approximately 98% of client assets.
Our second strategic play is focused on providing capabilities that help our existing advisors differentiate in the marketplace and drive efficiency in their practices.
1 of the key components of this play is helping our advisors and rich how they serve their clients through the use of advisory platforms and.
In that spirit, we continue to innovate on our platform. Most recently with the introduction of a number of product pricing and capability enhancements when new capability to highlight.
Increases the personalization available within our centrally managed advisory solutions now.
2 years ago, we introduced advisor sleep, which allows advisors to personalized centrally managed portfolios with their own asset allocation models, while outsourcing the day to day work of portfolio allocation and trading to us.
To build on this capability last quarter, we launched firm sleep on.
On this innovation enables larger firms and institutions to develop models that all advisors across their firms can use and thus providing additional ways to leverage our centrally managed platforms to help meet client needs.
And differentiate in the marketplace and drive efficiency and adviser practices.
On a date over 9 billion of client assets is invested across advisor sleeve and firms sleep and we will continue innovating to increase the value of these personalized investment offerings.
Let's next move to our third strategic.
Play, which involves creating an industry, leading service experience to delight advisers and their clients and in turn helped drive advisor recruiting and retention.
A key component of this strategic play is transforming our service model into an omni channel client care model.
And in second.
<unk> quarter, we launched a digital help center on machine learning based solution that gives advisers easy access to information that addresses their most common service related needs.
This resource puts information, that's personalized timely and relevant at their fingertips, thus positioning advisers to serve their clients.
Simpler and more efficient way.
Together with our voice and chat channels. The digital help center enables advisers to access industry, leading service at a time and in a manner that works best for them.
We also continue to automate and streamline key elements of our service operations.
And the enhancement of our digital operating model, including investing in new bots across our care organization.
Now this helps us to increase both our service levels and our capacity to grow as we continue to scale our business.
And we believe these investments in our client care model and the automation.
And streamlining streamlining of our service operations are making positive contributions to the service experience, while also increasing the scalability of our platform.
Our fourth strategic play is focused on helping advisers run the most successful businesses in the independent marketplace 1 of the key components.
This play is our portfolio of business solutions, which helps advisors more effectively operate their businesses. So they can focus on serving their clients and growing their practices.
As we discussed last quarter, we see multiple pathways for continued growth in business solutions, including delivering existing solutions to.
Total advisors and introducing new solutions to expand our product portfolio.
In the second quarter, our subscription base continued to scale to approximately 2100 monthly subscribers more than double a year ago.
This includes about 80 subscriptions with advisors, who joined from Waddell <unk> Reed.
The addition on the more work on business salute now the more we work on business solutions. The more opportunities we find to help our advisors solve additional challenges through the expansion of our product portfolio. We now have 7 solutions available in our product portfolio 3 additional solutions in pilot in a handful of other offerings.
Incubation phase.
As we continue to add new solutions, we expect to expand the addressable market while at the same time accelerating our pace of innovation.
Before closing I want to highlight our ongoing efforts to actively shape and refine our advisor centric culture, which is instrumental.
Mental executing our strategy.
In the second quarter, we rolled out our advisor promise, which is a modern evolution of the advisor commitment Creed, our founders wrote more than 30 years ago. We will use this promise to drive further accountability for providing industry leading advisor experience.
And to continue.
To increase the competitive advantage our advisor centric culture provides in the marketplace.
In summary in the second quarter, we continued to invest in the value proposition for advisers and their clients, while driving growth and increasing our market leadership as we look ahead, we remain focused on executing our strategy to help.
Users 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 and.
In the second quarter, we remain focused on serving our advisors growing our business and delivering shareholder.
This focus led to the highest quarter of organic growth in our history.
And in addition, we have now on boarded 3 of our largest partners and BMO empty and what Alan Reid, who collectively added over $100 billion of assets to our platform, helping drive our total assets to over 1.1.
1 trillion.
Now, let's turn to our second quarter business results, starting with organic growth total net new assets were <unk> 37 billion, which translates to a 16% annualized growth rate.
This was driven by strength across all 3 channels of growth recruiting same store sales and retention.
Value looking more closely at recruiting in Q2 recruited assets were the strongest in our history at 35 billion, which brought our 12 month total to a new high of $80 billion.
Moving on to our business mix, we continued to see positive trends in Q2 <unk>.
Advisory net new assets were 21 billion or 17.
Percent annualized growth rate.
With this growth our advisory assets are 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 Q2 financial results strong organic growth combined with.
Expense discipline led to EPS prior to intangibles and acquisition costs of $1.85.
Up 30% from a year ago.
Looking at our top line growth gross profit reached a new high of $602 million up $22 million or 4% sequentially.
Looking.
Components Commission advisory fees net of payout were $197 million up $13 million from Q1, primarily driven by organic growth and assets from Waddell <unk> Reed.
In Q2, our payout ratio was 86, 3% up about 70 basis points from Q1 due to typical.
Looking at the analogy.
Looking ahead to Q3, we anticipate our payout ratio will be approximately up approximately 100 basis points driven by the expected seasonal build in production bonus as well as the on boarding of Waddell <unk> Reed assets, which are on a slightly lower payout on their platform.
Moving on to asset based revenues.
You'll see sponsor revenues were $189 million in Q2 up $22 million sequentially.
This was driven by an increase in average assets due to organic growth, what Alan Reid and equity market appreciation.
Turning to client cash revenues, they were $90 million down 7 million from Q1 <unk>.
Driven.
And by lower ICA balances during the quarter.
Looking at overall client cash balances they were 48 billion roughly flat with last quarter.
Looking more closely at our ICA yield it was 98 basis points in Q2 relatively flat with Q1.
As we look ahead to Q3.
So where interest rates client rates and cash balances are today, we expect our Q3 ICA yield to be roughly flat to Q2.
Now looking at our fixed rate portfolio portfolio. As a reminder, we have a fixed rate maturity at the end of the third quarter, which will lower our Q4 ICA yield by approximately.
Only 10 basis points.
That said I would highlight that as the yield curve steepened earlier in Q2.
We saw demand start to return to the fixed rate sweet market.
As a result, we were able to enter into $600 million of new fixed rate contracts at the 3 year point, which was about 40 basis points at the time.
Looking beyond Q3, and given the expectation that short term interest rates will begin rising in late 2022 or early 2023, we thought it would be helpful to share the economic benefit of rising rates using the deposit betas, we experience in the most recent interest rate cycle.
Using.
Alright, Sweet balances, a 100 basis point increase in the fed funds rate would translate to approximately $340 million of annual gross profit.
Moving on to Q2 transaction and fee revenues. They were 137 million down 4 million sequentially driven by trading volume that decreased throughout the quarter.
Looking ahead to Q3 prior to Waddell <unk> Reed, we expect transaction and fee revenue to be relatively in line with Q2, as we anticipate seasonally lower transaction volumes and IRA fees will be offset by revenues from our National Advisor conference.
Turning to business solutions, we ended the quarter with approximately.
Our cone hundred subscriptions, which is up 400 from last quarter and more than double a year ago.
These offerings now generate roughly $20 million of annual revenue 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 $252 million in Q2 and $240 million prior to what on re.
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 income.
'twenty, 1 cost to support BMO and empty, but its prior to expenses associated with Waddell <unk> Reed.
Moving on to Q2 promotional expenses, they were $64 million up $10 million sequentially.
Prior to Waddell <unk> Reed cost promotion was $57 million up $3 million sequentially, primarily driven by large financial.
<unk> on boarding and increased marketing expense.
Turning to Q3 prior to Waddell <unk> Reed, we anticipate promotional expense will increase by around $10 million as we have 2 of our largest advisor conferences in Q3.
I would also note that we have shifted several conferences that are typically in the first half of.
To the fourth quarter.
This will likely lead to a similar level of promotional spend in Q4.
Our plans could change depending on the environment. So we will give you a more specific update next quarter.
Now, let's move to what Alan Reid <unk>.
Overall, the transaction is progressing even better than we expected across multiple fronts.
As mentioned, what Alan Reid advisor, serving approximately 98% of client assets have joined our platform, which is up from our prior estimate of 95%.
Factoring in this higher level of retention and current asset levels. We now expect the run rate EBITDA benefit to be at least $85 million up from.
$80 million and we continue to expect to reach this run rate by the middle of next year.
Moving on to capital management, our balance sheet remained strong in Q2 with a leverage ratio at 2.3 times and corporate cash of $278 million.
As for capital deployment, our framework remains focused.
In allocating capital aligned 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 first half of this year the majority of our capital deployment was focused on supporting organic growth and M&A.
Looking ahead.
While we continue to see compelling opportunities to deploy capital to drive growth. We also feel well positioned to restart our share repurchase program.
Initially focusing on repurchasing shares to offset dilution, which we estimate to be approximately $40 million per quarter.
We will of course remain flexible and dynamic should.
<unk> on channel opportunities to deploy capital to drive growth emerge.
In closing, we delivered another quarter of strong business and financial results, including the best organic growth in our history and just last week on boarded the advisors from Waddell <unk> Reed.
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 if you would like to ask a question over the phone line. Please press Star then the number 1 on your telephone keypad again that is.
1 do we draw your question you asked about or day Hashed E. Please standby, while we compile the Q&A roster.
The first question comes from the line of Steven <unk> from Wolfe Research. Your line is open.
Hey, good afternoon.
So wanted.
Wanted to start off with a question on just some of the ICA dynamics certainly encouraging to see the interest from bank partners for some longer dated money should help at least put some of the ICA concerns to rest, but if rates remain at zero day Bank deposit net demand remains tepid and I was hoping you could just speak to the strategy for managing.
<unk> fixed term contracts over the next few years and just generally what are you hearing from your bank partners with regards to appetite to take on some additional fixed term contracts in the current environment.
Yes Stephen.
I'll take that obviously I think when you look at our fixed rate approach and strategy, it's really unchanged.
But even the environment that you described which is our goal remains getting to 50% to 75% of the portfolio fixed of course in an environment, where there is demand that can help us do so and I think when we're in an environment like we are now with rates low and the curve relatively flat I think that's an environment, where we would stay closer to that 50%.
And if you're in an environment, where the absolute level of rates or higher.
And there is some steepness to that curve I think we would.
Naturally migrate to that 75 per cent side of the of that range. So that's been our approach for a while I think the environment. We're in really doesn't change that.
I think to your point on what we're hearing from our.
<unk> partners I think it's it's probably more of what we're seeing in their actions, which is when there is some steepness to the curve and just looking at Q2 and it was the 10 year was at that 150 to 160 zone or Theres economics on their side and that's really when you saw them start to come back into the market and we were able to execute a relatively.
Our bank call them out, but I think from a you know really an indicator of their approach and intentions I think it spoke really really loudly that once there is some economics to be had that the fixed rate sweet market is something that I think would would return. So we're obviously not in that environment. At this very moment, but I think that's a good idea as to what things could.
Small freights move up again.
Okay. Thanks for that color, Matt and then just my follow up maybe for Dan you touched on this quite a bit on your prepared remarks in terms of the better balance across all the different affiliation options.
And the accelerating organic growth that youre seeing on 1 of the questions that we probably feel most often.
Like US there is just trying to unpack given some of the momentum that youre seeing the new organic growth algorithm on the.
Especially given the momentum you're seeing within the institutional channel in particular, which seems to be adding at least 200 basis points plus of organic growth I don't know Dan if you could just speak to given the progress you're seeing on the organic growth.
From an died.
You think that's like a new sustainable organic growth rate.
If some of the success that youre seeing in the non traditional areas continues to build from here.
Yeah that makes sense and so.
Perhaps as a weighted.
Okay. Thanks.
That makes sense helps if I.
I have the microphone on I'm, sorry about that.
Yeah for for <unk>.
Context, perhaps.
No.
Look we're focused on organic growth and over the past 3 years. The team has done a great job of expanding that think about that that march from sort of 3% to over the last 12 months.
Growth, 12% right. So if you break that down to get at your question about 2 thirds of that has come from those traditional 3 oars in the water we talk about new store sales same store sales.
And attrition and if you Peel that back a little further that contribution from those.
<unk> ores is really well balanced across all 3.
Which I think speaks to the durability of that growth right. So that's 2 thirds of that journey from 3% to 12%.
And then I think if you if you look at the remaining third that's come from our entry into.
On supporting large financial institutions and.
And again I think we're being very intentional about investing in our capabilities to create an appealing solution for these large institutions.
As we've partnered with BMO and M and T. We.
So when you to invest in our capabilities 4 institutions, which we think just enrich and the the appeal of the model. So we're quite optimistic about our pipeline there and our ability to continue to pull through.
Hum pull through new institutions and so.
We can tell we see that as a contributor to growth over the next several years or an ongoing contributor to growth. So.
That might be a weighted at least to think about the dynamics of how we got to from 3 to 12 and perhaps.
How we think about going forward the durability around all of them look at the end of the day organic growth.
The key point of our strategy and we're focused on trying to drive that rate higher.
And we've got 3 good Hum avenues of which to continue to do that through our traditional markets. These expanded on a new markets and then this this this institution's marketplace. So I hope that.
As you can color on helps.
That's great color, Dan Dan and Matt. Thanks, So much for taking my questions.
You bet.
Your next question comes from the line of Bill Katz from Citigroup. Your line is open.
And good evening to everyone and thank you for taking the question I just wanted to follow up on the.
This line of questioning there.
Just coming back at a slightly different cut at the organic growth something that we're observing is combination of further penetration within each segment as I sort of look at where youre picking up share from and also that mandate sizes seem to be rising.
So could you speak a little bit to.
To maybe why the seeing the better efficacy is this just idiosyncratic or is there something else afoot here as you sort of the cumulative.
Maybe time recruitment what have you is helping to bolster saw that penetration.
Yeah. Thanks for the question Bill.
It's it's.
So Steve a good 1 as you point out in terms of maybe the nuance that sits underneath it so.
You know we look at it this way we launch these 3 new models at different times, but we launched them from a from a place of Hum our hypothesis around the business.
This model that we took to the marketplace you.
You'll get feedback you'll learn as a part of that you continue to invest in and richer capabilities within that model you successfully deliver it to clients you begin to build a reputation with those clients around the success of that model and between.
Capabilities and the building reputation you know that that supports momentum that supports confidence and prospects exploring further this opportunity and I think naturally leads to in many cases larger opportunities.
And because of that building credibility. So I think that's how we think about a the Swiss model and that's the most mature of the new models.
We're seeing sort of a similar flight pattern. If you will with Lindsay <unk>. It's just you know 678 months behind the trajectory of Swiss and then.
Or are we just we just obviously relaunched in April so hopefully that helps but we do think it's that growing credibility with delivering a good solution that is serving clients well and the continued evolution of capabilities.
We will create that natural lift on on larger clients bigger demand.
Demand growing pipelines and what we're trying to do is drive a much bigger contribution from those models.
Okay. That's helpful. Thank you for that and maybe 1 for Matt Sydney glad to see the buyback kicking a little bit sooner, maybe we are modeling.
How did you arrive at just saw the dilution offset so we think.
About the opportunity to grow organically opportunity for anything else on the M&A side of the equation.
What if somebody other metrics, we should be looking at to think about the potential pension should meet to upsize that buyback as we look ahead.
Yeah, Bill I think the.
On the key thing is just our capital allocation framework I think we're continue.
Moving to deploy capital as you can see in the quarter in organic growth and M&A, but at the same time I think when you. When you go back 6 months ago I think we're through some of the the the Chunkier capital deployments on those first 2 categories. So I think we've got a little bit more excess capital to deploy and when you run it through that framework while we.
We continue to have opportunities in those first 2 categories I think we feel quite comfortable allocating capital to share repurchases given both the capital level and the returns they generate them.
And I think as we look forward to your question I think we'll continue to look at it from that same lens with the principles of making sure we maintain a strong balance.
Continue to eat as that's quite supportive of.
Of our organic growth on.
And if the opportunities to allocate to organic growth and M&A increase we'd move capital to there.
And if returning capital to shareholders as the primary place where it makes sense, we'd move capital to there. It's all about applying the framework so.
That's how we'll continue to approach it going.
Okay. Thank you.
Your next question comes from the line of Michael Cyprus from Morgan Stanley. Your line is open.
Oh, Hey, thanks for taking the question.
On the with Dell transaction is hoping you could elaborate a little bit on the contribution in the quarter in terms on some other puts and takes.
Balance sheet I think there were also some onetime costs are some drag that was maybe partially offsetting some things there as well. So hoping you can elaborate a bit on that and how we should be thinking about the timing of the ramp here, particularly as we go into the second half of the year in terms of the contribution from Waddell.
Yes.
Sure Michael I think when you we've got hopefully some good disclosures on that that as I as I talk here you can look at or maybe even look at later on our key metrics deck on slide 8 that I think helps with that.
But I'll get a little bit a little bit of color here I think when you look in the second quarter, you know really the the main action or activity was closing on the transaction.
And we're actually able to get some of that kind of a first round of expense synergies a little bit earlier than we had expected a quarter ago. That's why you see that run rate hitting 50 million from an annual basis.
For the 2 months that we had what else on board in the quarter. As we look ahead to Q3, it's really about Onboarding is the key.
Integration activity, which happened just last weekend, so that'll lead to some more gross profit synergies also moving the advisers onto our payout grid, which is a little bit higher and.
And then eliminating the cost of their custodian now those things coincidentally kind of net out which is why you see Q3 still being at that same $50 million.
But a lot of activities happening.
And then from this point forward meeting in Q4 through the Middle of next year is really about the rest of the expense synergies and integration and those are the activities that will bring us to that $85 million plus run rate by about the middle of next year.
So that's the path on.
The run rate on the integration and run rate side on your question on the kind of 1 timers I think the acquisition costs, which we now estimate or a total that will be a total of around $100 million.
That shows up in that acquisition cost line item, which you saw that really increase in the second quarter from the closing.
And then I'd high.
Highlights of third quarter is probably going to be the quarter with the largest amount of that $100 million. You know our estimate right now is in the $40 million to $50 million range and that's really tied to the on boarding activities, which are which is the activity that naturally incurs to those costs. So I.
Hope that helps.
Super Thanks, So just a.
On the follow up on the ICA balances, we saw the overflow balances decline a bit in the quarter, just curious what appetite or ability is there to sort of expand the the variable balance isn't really take those over flows down to zero or what's the potential to do that would you say.
Well.
A quick that gets back to just when there is demand from the banks right I talked a little bit earlier about when the on the fixed rate side when when rates move up.
On the curve, meaning that you know that 3 to 5 year point. There's some demand there are on the floating rate side I think that's really going to come back to the the amount of liquidity that's in the market.
And banks needing liquidity.
City for their balance sheets, and I think where you know where we sit today, there's still just a substantial amount of liquidity in the market, but I think we're now in the second quarter in a row, where you're starting to see some signs of activity that ultimately would lead to that demand returning right consumer spending picking up right that's coming out of checking.
And savings accounts at the banks are low.
<unk> balance is beginning to grow meaning they're loaning out on that cash. So I think if you continue to see the trends. There I think those are the things that would ultimately lead to.
That demand picking up.
Great. Thank you.
Your next question comes from the line of.
Kyle Voigt from K B W. Your line is open.
Hi, good evening.
So maybe a 2 part question I think you've changed some of the rate sensitivities in your deck on the gross profit benefit from from rate hikes and you.
Note that the beta was 2.5% 3 year first for <unk>.
During the last cycle. So I guess the first question is should we take the sensitivity to me and you expect similar beta dynamics during the next hiking cycle.
And then the second part of that question is.
Really like if you look back during the last rate hiking cycle, you took advantage of the gross profit benefits.
Really increased technology spending and reinvest in the platform.
However, you're on a different spot today in terms of ongoing reinvestment into the platform. So as we look ahead towards the next rate hiking cycle and as you kind of outlined very meaningful gross profit benefits, how should we think about how much of that.
Could fall from the bottom line versus wanting to take advantage of the environment to reinvest in the business and increased spending.
Yeah, Yeah, I think on the on the sensitivities and I think that what we were trying to do there is really no give some empirical data on from the last interest rate cycle.
Right now market demand and market pricing ultimately drives where deposit betas go but I think from our chair the best information to look at to get an expectation of what would happen is what happened most recently.
And I think that's what we updated our our metrics to show, which was an average based on 15% you know that period of 2015.
That doesn't 19, but then the early part of the cycle. It was 2 and a half in the later part of the cycle 25. So I think the the market dynamics will determine where that goes but I think looking at the history from our share is probably the best thing to look at them now to your point on what to do with that revenue I think it will go back to our capital.
On a 2 patient framework or at the same thing that we're applying today on where the highest and best returns are.
And when you look at investing in the platform those are things that drive organic growth on it.
If there are things that can drive a return there we'd focus there.
And then M&A and then returning capital to shareholders, which from a gross profit standpoint can can show up.
Out of the mode of just incremental op margin and delivering operating leverage so it will just be based on our opportunity set at that time.
And I'd just emphasize I think when we.
Take a step back and even just building on what Dan was talking about earlier and our opportunities in the different channels and models. We have I think we're excited about an environment, where we could continue to grow further.
Okay.
Thank you.
Your next question comes from the line of Alex Bluestein from Goldman Sachs. Your line is open.
Great Hey, guys good evening.
So I wanted to start with a question around some of the larger mandate.
And the force BMO, LNG and Waddell <unk> on boarded in the second quarter.
Talk a little bit about the financial advisers appetite to uptake on all of this on enhanced capabilities that LPL can offer.
What resonates most there and then maybe just put some putting some numbers around that sort of gross profit ROA on that $100 billion.
On a asset so kind of where does that now on what do you think that can ultimately go.
Let me take the first half of that Matt and you take the second so yeah, Alex with respect to the advisors look the the typical hum principles that 1 large institution might choose.
<unk> or used to make the selection to partner with US typically has to do with enhanced technology capabilities. So can we provide them technology automated workflows et cetera to drive efficiency into their practices free up time for them and their teams to spend on.
On clients and prospects and so that is a priority and we spend a good bit of time.
Making sure that.
You do the appropriate level of training coaching and work to ensure that they can leverage.
That sort of comprehensive technology offering and that takes time.
They don't get that on day, 1, but you continue to work on it and they become proficient at it quickly and that becomes a big leverage point. So that is 1 area that they tend to look at a second 1 would be on the advisory.
<unk> platform that we have and the breadth of options and alternatives, we give them.
From a capability set from an inverse.
<unk> content from a pricing standpoint from a vertical integration and ease of doing business.
On that that certainly is a way for them to to provide expanded or enhanced.
Value of advice to their to their end clients.
<unk> help them differently.
She ate and support their growth aspirations and so there you get a great client experience at the end of the day matched with also.
Some tailwind for growth and so that would be a second area.
On that I would tend to highlight if you look at the institutions at a macro level right or.
Differentiate a partner in and provide a good deal of support and advice through.
Through the compliance and risk management support that we can provide shifts the risk profile for them with this business initiative and I think creates hum at an institutional level.
Our ability to element of value a second 1 is just improved and enhanced economics typically shifting from a a a model where you've got the entire cost structure and then have to make the investment in labor and technology et cetera to do it and you can go to a more outsourced arrangement.
We.
We typically see an improvement and enhancement and overall economic so I'll stop there, but those were maybe some high level things that are in it for the for the advisors and their clients as well as the institution is all about.
And then just on the on the gross profit or the return side and when you look at the financial institutions channel either typically.
Really much larger.
To the point of that first part of your question a little bit heavily focused on the brokerage side. So you get rois that are that as a starting point or closer where brokerage Airways ours, I think 15 basis points.
Yeah, a little bit of additional color on Qunar, there a network of credit Union. So we share some of that gross profit with them.
So for that particular.
El opportunity would be more on the 10 to 15 basis points zone, and then on the cost side I think that the cost to serve is lower just given it given that size and then the the ta and the underwriting factors and all of those economics, you bring it down to the bottom line.
And you look at our if you look at our EBITA operating margins.
So they are quite accretive to that with with 1 caveat that that deals of this size and the nature of this channel usually come with some <unk>.
Centres and the the early terms of the deal you know think first year and second year. So those economics grow over time as you get deeper into the contract. So I hope that helps.
That helps thanks.
Just maybe a quick clarification around the ICA dynamics.
So clearly LPL continues to have significant amount of upside to higher interest rates.
And I appreciate you guys highlighting the low deposit beta as well that that's obviously very helpful. From the last cycle. How do you think about the trade off I guess here between.
Fixing out.
40 bps for 3 years, if the demand picks up again sort of versus waiting for a potential potentially a much more material upside you know 12 to 18 months out.
Yeah, I think it goes back to that 50 to 75 per cent approach Alex I think we're really focused on.
Yes on.
Having a stable earnings stream in this area and not trying to be folks that pick the points, where interest rates makes sense and don't make sense. I think we've got a principle that is will hedge a little bit lower on the percent. If the if the economics look like they're at the lower point and a little bit higher on the on the percentage if we look like they're at a higher point, but once.
Oh that we're not trying to to tactically pick those points I think.
Specific to this quarter.
I think when you're in the market that I think we're all collectively in when a bank comes up and has demand for sweep deposits.
I think most people would say, yes, and deploy that net that's what we did on that particular opportunity.
Got it great. Thanks very much.
Your next question comes from the line of Gerry O'hara from Jefferies. Your line is open.
Great. Thanks, and good afternoon, I was I was hoping maybe we could get a little extra color on the on the business solutions. It sounds sounds like Dan May have mentioned 3.
3 in pilot in a handful of others.
Or perhaps on the come on.
I don't know if it's too early but would certainly love to hear a little bit about about those and then also what has been really resonating I think it sounded like 80 or so if my notes are right.
Already been kind of picked up from some of the widow.
All advisors, so anything additional there would be I think of our views. Thank you.
Yeah, maybe I'll give you just a quick snapshot of the product portfolio and then and then I can answer your question about maybe some of the early interest from the Lotto and read folks in and then happy to share the 3 that we've got in pilot phase.
And so if you look at the the solutions today as I mentioned there are 7 there's the original 3 which were admin solutions CFO and marketing.
With respect to what Earl and read the most popular 1 for them. Thus far has been admin solutions, which makes sense if you're thinking.
[noise] about coming in and learning, a new environment and making the transition so and you've got people in the LPL ecosystem that are experienced in supporting and helping to do that I think that the.
That's a logical place to look for a leverage point and if you didn't have access to that AD men at the you know the market.
Market rates of hiring someone directly. This is this is actually a new service and a good alternative lower cost way to do that.
With respect to the.
<unk> solutions, then that we've added to that original portfolio, you've got the assurance plan, which is we just rolled.
Rolled out the resilience plan and those 2 are ways of which to support and help advisors.
Plan for unexpected and or expected transitions from the business assurance plan was the old plan that if unfortunately.
It kind of gave somewhat downside protection.
If something happened to them unexpectedly and the business had to be transitioned. This gives them an orderly way to make that transition.
To do that resilience plan was added as a as an ideation from that on a learning and a feedback that advisers really like the assurance plan, but they also said well what if we have a short term.
Term disruption in our ability to operate a run the business could you help us with that as well and so that's where we came up with this idea with the resilience plan that gives them.
On some support in a backstop if they had an unexpected problem think about disability or something like that or if they even have a planned need to have an extended.
I'll leave from the business, such as our fraternity or maternity type of leaves and so pretty cool innovation that came from the feedback and the appeal of the assurance plan Theres also M&A solutions that we launched earlier in the year and remote office solutions that emerged during the pandemic the 3 they're in pilot real.
Real quickly you have got a book keeping solution that we're experimenting with that was born out of the CFO solution and our continued.
Innovation from the feedback that our clients give us on their needs. There's a pair of planning solution in pilot and then finally, something we call on client engage which is meant.
To be a way to support and help the advisers managing successfully the servicing communications with our clients. So I'll pause there, but that's that's something that gives you a quick snapshot on the portfolio.
Helpful. I appreciate and I appreciate that and then maybe just 1 from Matt If you might have a comment or 2 just on the environment around.
Transition assistance, what year, and what you're seeing what you're hearing I think we'd all appreciate that as well. Thank you.
Yeah sure I think the headline is where we're seeing a pretty consistent environment, which is the the overall value prop at the firm is what matters. The most and I think when you get then click down into transition assistance to help.
Help facilitate the move from 1 firm to another I think were seeing pretty similar levels that we've seen in the last few quarters. So no change on that on our end.
Fair enough. Thanks for taking my questions. This evening.
Yes.
Your next question comes from the line of Devin Ryan from JMP Securities.
<unk> Your line is open.
Great Good evening guys.
Maybe start here with just a bigger picture question.
As we watch the business scale and increase our affiliation options with a lot of success, bringing in larger advisors that have.
More complex businesses.
Does the thinking evolved at all around essentially re exploring the merits of becoming a bank and I appreciate it's complicated.
Obviously, you guys decided not to years ago, but just given those dynamics of how the business is evolving maybe coupled with.
Over the near term dynamics around rates I'm just curious.
If it kind of comes back on or the pendulum swings 1 direction there.
Yeah, maybe we both can give some color on that I'll start Matt you feel free to provide any insight. So obviously from a strategic standpoint, we have Ah Ah Ah.
Significant.
Considerations that you always think about and you're diligent around.
Always evolving your assessment given changes in the marketplace changes in the business changes in the competitive landscape and so potentially being a bank is 1 of those things that.
Set up always.
Keep active sort of that assessment in that consideration and I think we would look at it from a strategic standpoint are there capabilities that that that could potentially support advisors and their value to clients.
Is it a better way to manage.
We would all ultimately you know our cash balances and or ultimately deploy hum.
And execute against some of that on our expanded capability that I was mentioning earlier and so I I think we always look at it from the standard.
Standpoint of what's the best way to do that right. The old do do we do it ourselves or do we outsource it on the marketplace has given us lots of options of which.
On to find different ways to provide capabilities.
And and to effectively manage our cash balances.
Using someone else's balance sheet to do that and we think that strategically makes sense in the short run as long as we find the options and alternatives to do that and we can deliver the capabilities that our clients need.
And that's kind of how we see it in the short run, but I think we continually look at the different.
Dynamics and keep that assessment alive, just so it's fresh were clear and have the most informed you that we can about our set of options I'll pause or you want add anything to that yeah. I didn't know it was all set up.
Emphasized a couple of things I think that the the key.
Devin is making sure that we're in a position to deliver the products and capabilities that matter to.
Our advisers and their clients and do you need a bank charter to do that and I think to Dan's point, the marketplaces, giving us plenty of options, where you don't.
And I think the second part.
The question is whats the best return on capital right deposits on our balance sheet versus someone elses and I think if you run that math.
Especially in an environment like this.
And the return on capital of of having a bank is not a pretty picture. So I think it makes sense, where we are now but to Dan's point I think we always look to make sure if the world changes that we'd be aware of that.
Sure Okay I.
I appreciate the update there and then the follow up.
I guess.
Shorter term or versus smaller topic.
You guys talked about streamlining automating the service offering which.
It was interesting and as we think about just the bigger.
Opportunity to automate the platform.
And.
Utilize technology to kind.
Kind of scale the business from here.
How should we think about like the expense buckets, and maybe where there's incremental operating leverage in.
On the model like so service feels like that that's 1 example, where there's a number of people doing jobs were.
Some cases, new technology may be able to step in and this intermediate some of that and saved some money for LPL.
I guess, if there's any way to frame that and are there any other areas like that that could be kind of margin enhancing.
Yeah. That's a good that's a great question and it's 1 from them on <unk>.
Operational execution.
Houston standpoint, I think we're keen on exploring what are those sort of.
World of possibilities and how we might best do that so if I just gave you a little color on areas that we think about Theres certainly leveraging robotics as you say for more repetitive type of work where.
You know as you expand and you grow and you can transform that work into a more automated type of solution makes tons of sense in the short run from potential expense synergies, but adds a lot from a scalability standpoint, so across our operations and our compliance organizations.
C a.
On opportunities for Robotics, you also have hum opportunities to use AI.
AI for.
Quicker assessments and more robust broader spectrum assessments, so think about the actavis efficacy of oversight of our compliance controls.
Our risk management controls and that's a place where you could use AI to step in as a real leverage point for them for the work that our folks do and in that case that may not eliminate jobs, but that may create lots of scalability as you go forward.
Because of the more efficient and effective use.
The automation to assess greater and greater volumes of business. So that would be another example, where I think where you could use a newer technology with you if you will or automation and deploy it within the organization, maybe I'll pause there and I don't know if you want to take on the implications are.
Our contribution that may occur from that.
I'd just emphasize what Dan said I think the biggest opportunities are really and investing in and deploying technology that allows us to scale right. So far you know every every dollar of assets, we're adding we're adding less expense than we had to add for the prior asset right I think that thematic Lee that's the the primary.
I think when you look at what that could deliver I think it gets back to our principles of the amount that we would invest we're going to be focused on bolt on.
Investing to support that growth.
Same time, delivering operating leverage right and I think that you see us doing that I think right now and I think that same approach is what we would have going forward. Yeah. I'd leave you with this think.
Think about it as dry using automation and technology and modern technology to drive the future advisor and client experience.
The efficacy of your risk management oversight and finally third scalability on the overall operations.
Yeah.
Well.
Thank you, Dan and Matt I appreciate it.
And there are no other questions over the phone line at this time I would now like to turn the call over back to Mr. Dan Arnold for closing remarks, Sir yeah. Thanks, Thanks, so much RJ and 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 day.
Ladies and gentlemen, this concludes today's conference call. We thank you all for participating you may now disconnect.
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