Q3 2021 LPL Financial Holdings Inc Earnings Call

October 28, 2021

Good afternoon, and thank you for joining the third quarter 2021 earnings conference call for LPL Financial Holdings, Inc. Joining the call today are our president and Chief Executive Officer, Dan Arnold and Chief Financial Officer, Matt Audit.

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

The company would appreciate us analysts would limit themselves to one question and one follow up each other.

The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website investor LPL Dot com.

Today's call will include forward looking statements, including statements about LPL financial's future financial and operating results outlook business strategies and plans as well as other opportunity than potential risks that management foresees such forward looking statements reflect management's.

Current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward looking statements for more information about such risks and uncertainties. The company refers listeners to the disclosures.

Set forth under the caption forward looking statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission.

During the call. The company will also discuss certain non-GAAP financial measures for a reconciliation of such non-GAAP financial measures to the comparable GAAP figures. Please refer to the company's earnings release, which can be found at investor Dot L. T O dot com with that I'll now turn the call over to Mr. <unk>.

Donald.

Thank you Latif and thanks to everyone for joining our call today.

Over the past quarter, our advisors continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams and at the same time, we remain focus on our mission of taking care of our advisers. So they can take care of their clients. This combination positioned us to deliver on.

Another quarter of solid results, while also continuing to make progress on our strategic plan I'd.

I'd like to review both of these areas starting with our third quarter business results.

In the third quarter total assets reached a new high of 1.13 trillion up 40% from a year ago.

This increase was primarily driven by continued organic growth and equity market appreciation.

With respect to organic growth third quarter net new assets were 27 billion, which translated to a 10% annualized growth driven by continued strength across new store sales same store sales and retention.

Over the past year.

Net new assets totaled a 110 billion or 14% organic growth.

In the third quarter recruited assets were $13 billion, which increased our total over the past year to 83 billion or.

Our continued growth and recruited assets reflects our ongoing progress with enhancing the appeal of our model and expanding our addressable markets.

During the quarter, we continued to drive solid recruiting results across each of our markets, including 10 billion in our traditional independent model and $2 5 billion and our new affiliation models multiple channels contributing to our growth better positions us to drive higher levels of recruiting overtime.

Looking at same store sales with the backdrop of continued strong retail engagement.

Visors remained focused on serving their clients and enhancing their offering.

As a result advisors, we're both winning new clients and expanding share of wallet with existing clients. A combination that drove same store sales to new highs in the third 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 service and operations functions.

As a result asset retention was approximately 98% in the third quarter and over the past year.

In July we on boarded the advisors from Waddell <unk> Reed and the final asset retention rate for the deal was approximately 99%.

Currently we are focused on the integration work to help these advisors optimally leverage our platform and support the growth of their businesses.

Our third quarter business results led to solid financial outcomes with a $1 77 of EPS prior to intangibles and acquisition cost, which is an increase of 23% from a year ago.

Let's now turn to the progress we made on our strategic plan.

As a reminder, our long term vision is to redefine the independent model over time and by doing so it become the leader across the entire advisor centered marketplace our.

Our approach is to provide a platform that has the flexibility and personalization that make it simple and straightforward for advisors to design and run their perfect practice, we do this by providing advisors a breath of the affiliation models advisory platforms investment content technology custody.

In practice support that provides more flexibility in one place than anywhere else.

Doing this well gives us a sustainable path to an industry, leading adviser experience continued solid organic growth and increase market share.

Now to execute on our strategy, we have organized our work into four strategic plays which I'd like to review and term.

Our first strategic play involves meeting advisors, where they are in the evolution of their practice by winning in our traditional markets, where our leading market share is now over 15%.

I'll also leveraging new affiliation models to expand our addressable markets.

In our traditional markets in the third quarter, we continued to increase our recruiting results gain market share and expand the depth and breadth of our pipeline. Despite advisor movement remaining at lower levels.

Looking at the large financial institutions marketplace, we on boarded BMO Harris and <unk> earlier this year and are applying the insights from those experiences to make our institutional offering even more robust and differentiated this innovation and marketplace momentum are helping drive a solid pipeline.

With a growing number of prospects.

As we look ahead, we are preparing to onboard CUNA brokerage services in the middle of next year and continue to see financial institutions as a sustainable multi year contributor to organic growth.

With respect.

Back to the expansion of our addressable markets the combination of our compelling value proposition and positive referrals from advisors using the new models are attracting more prospects and contributing to our growth.

As a reminder, a year and a half ago, we launched strategic services and we have now added 17 practices, including eight in the past quarter.

We subsequently brought our employee model or the market later in the year and five practices have joined including two over the past three months.

And earlier this year, we relaunched our a custody offering and have been encouraged by the number of <unk>, who quickly partnered with US as we look ahead, we see these new affiliation models continuing to build momentum and becoming a larger contributor to our organic growth.

Our second strategic play is focused on providing capabilities that help our advisers differentiate in the marketplace and drive efficiency in their practices. One of the key components of this play is the breadth and flexibility of our advisory platforms from our turnkey centrally managed solutions to advisers managing.

<unk> themselves. This optionality has contributed to a two advisory now making up a majority of our total assets.

Specifically within our centrally managed solutions with our ongoing investments in capabilities and pricing.

Our assets have increased to nearly $90 billion.

At an average annual organic growth rate of over 20% for the past five years.

A key contributor to the growth of our centrally managed offerings is the increased personalization that enables advisors to use these solutions in a way that works best for them.

For example earlier this year, we introduced our firm sleeve solution, which together with advisor sleeve enables advisors and institutions to personalize centrally managed portfolios with their own asset allocation models.

We are now taking the next steps in this personalization journey by adding separately managed accounts, while also integrating all centrally managed investment content into a single count for each client.

These enhancements make it easier and more efficient for an advisor to expand the scope of their solutions, while also providing a simpler and more unified experience, which in turn contributes to the appeal and future growth of our centrally managed advisory solutions.

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 the advisor recruiting and retention.

A key component of this strategic play is transforming our service model into an omnichannel client care model as.

As a reminder, over the past year, we rolled out voice chat and digital health to our advisors, giving them access to differentiated service at a time and in a manner that works best for them.

We're now focused on helping our advisors fully leverage these channels to better serve their clients and more efficiently run their businesses.

To further enhance our service model. We're also experimenting with specialized service parts designed specifically for different types of advisor practices. These pods include integrated teams comprised of service case management compliance and relationship management.

These experience experiments are helping us to tailor services based on advisors affiliation models and practice attributes and are making positive contributions to the advisor experience.

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 helps advisors more effectively operate their businesses. So they can focus on serving their clients and growing their practices.

Now as we discussed last quarter, we see multiple pathways for continued growth in business solutions, including delivering existing solutions to additional advisors and introducing new solutions to expand our services portfolio.

In the third quarter, our subscription base continued to grow more than doubling year over year to approximately 2600 subscriptions demonstrating increasing demand and appeal.

We continue to innovate on our business solutions portfolio to expand the variety of needs. We can solve for and provide a wider range of price points to enable a broader set of advisors to engage one of our sources of innovation comes from adviser feedback on our existing solutions, which we use as a catalyst to iterate on our core offer.

Wings like CFO solutions as an example over the last year. This approach helped us identify several additional finance related needs for our advisors, which led to the development and launch of M&A solutions assurance plan in our bookkeeping pilot.

Going forward, we will continue to leverage adviser feedback as fuel to expand our solutions portfolio.

Now with the expansion and seasoning of our portfolio the strategic value of business solutions also continues to expand and has become an important component of the value proposition and a contributor to growth in our new models, such as strategic wealth services.

As we look ahead, we are focused on continuing to innovate and expand the portfolio to increase the contribution to gross profit and organic growth.

In summary in the third 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 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.

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

This focus led to another quarter of double digit organic growth.

In addition, after Onboarding, what Alan Reid BMO <unk>.

We continue to work with these advisors to acclimate and leverage our platform and capabilities. While also preparing to onboard kuna in the middle of next year.

As we look ahead, we are excited by the opportunities to help our advisers differentiate and win in the marketplace and grow our business.

Now, let's turn to our third quarter business results total advisory and brokerage assets increased to a new high of 113 trillion up.

Up 2% from Q2.

A key driver of this increase was organic growth, which totaled 27 billion or 10% annualized growth rate.

This was driven by strength across all three channels of growth.

<unk> same store sales and retention.

Looking more closely at recruiting in Q3 recruited at in Q3 recruited assets were $13 billion, which brought our 12 month total to a new high of 83 billion.

Moving onto our business mix, we continued to see positive trends in Q3.

Advisory net new assets were 21 billion or 16% 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 Q3 financial results strong organic growth combined with expense discipline led to EPS prior to intangibles and acquisition costs of $1 77 up 23% from a year ago.

Looking at our top line growth gross profit reached a new high of $631 million up $29 million or 5% sequentially.

Looking at the components Commission and advisory fees net of payout were $202 million up 5 million from Q2, primarily driven by organic growth and a full quarter contribution from what Allen REIT.

In Q3, our payout ratio was 87, 1%.

Up 80 basis points from Q2 due to typical seasonality as well as the Onboarding of Waddell, <unk> Reed, which earned a slightly lower payout on their platform.

Looking ahead to Q4, a reminder, that the production bonus increases throughout the year and is typically highest in Q4. So we anticipate our payout ratio will be up roughly 30 basis points sequentially to approximately 87, 4%.

Moving on to asset based revenues sponsor revenues were $210 million in Q3 up $21 million sequentially.

This was driven by an increase in average assets due to organic growth and a full quarter contribution from what Allen REIT.

Turning to client cash revenues, they were $91 million up $1 million from Q2.

Looking at overall client cash balances they were 51 billion up $2 billion from last quarter.

Looking more closely at our ICA yield.

It was 101 basis points in Q3 up three basis points from Q2.

<unk>.

Now moving onto our fixed rate portfolio in Q3, we added a new 1 billion fixed contract at the three year point of the curve, which was about 45 basis points at the time.

And as a reminder, at the end of the third quarter. We also had a fixed rate maturity of $2 3 billion billion, yielding approximately 160 basis points.

As we look ahead to Q4, given these factors and where interest rates client rates and cash balances are today, we expect our Q4 ICA yield to decline by approximately five basis points.

Moving onto Q3 transaction and fee revenues.

There were $140 million up $3 million sequentially.

The increase was primarily driven by revenues from our National Advisor conference and a full quarter contribution from what Allen REIT.

Looking ahead to Q4 based on the lower trading levels, we've seen so far in October.

And the typical seasonal increase in IRA fees, we expect transaction and fee revenue to be relatively in line with Q3.

Turning to business solutions, we ended the quarter with approximately 2600 subscriptions, which is up 500 from last quarter and more than double a year ago. These.

These offerings now generate roughly $25 million of annual revenue and more importantly, they contribute to organic growth by helping drive recruiting same store sales and retention.

Now, let's turn to expenses, starting with core G&A. It was $271 million in Q3 up $19 million sequentially driven by a full quarter of what Allen read and continued investment to drive and support organic growth.

Looking ahead, given our strong levels of organic growth and the variable costs associated with supporting that growth.

We are tightening our 2021 core G&A outlook.

To a range of $990 million to $1 billion.

And given our current rate of organic growth, we expect to be in the upper half of that range.

Additionally, now that we have on boarded what Allen read and have a better sense as to the timing of those expenses. We will include those costs in our overall outlook going forward.

As a result, we expect what Allen read at 55 million to $60 million to our outlook.

Which brings our total 2021 core G&A outlook to $1 $45 million to $1 billion $60 million.

Moving onto Q3 promotional expenses, they were $84 million up $20 million sequentially, primarily driven by meeting expense as two of our largest advisor conferences took place in Q3.

Turning to Q4, we anticipate promotional expense will increase by a couple million dollars sequentially driven by transition assistance.

Large financial institution on boarding expenses and advisor conferences that we rescheduled to Q4 from earlier in the year.

Now, let's move to what Allen rate in July we completed the Onboarding, which resulted in 99% of client assets, joining our platform up from 98% estimated last quarter.

With respect to run rate EBITDA, it was roughly $50 million in Q3, and we anticipate it ramping to approximately $60 million in Q4, as we build towards an $85 million run rate by the middle of next year.

Moving on to capital management, our balance sheet remained strong in Q3 with the leverage ratio at two two times and corporate cash of $266 million.

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

Investing in organic growth first and foremost.

Pursuing M&A, where appropriate and returning excess capital to shareholders.

In Q3, we allocated capital to both organic growth and M&A as well as restarted our share repurchase program buying back $40 million of our shares to roughly offset dilution.

We anticipate a similar level of share repurchases in Q4, while remaining flexible and dynamic should additional opportunities to deploy capital to drive growth emerge.

In closing, we delivered another quarter of strong business and financial results.

As we look forward, we remain excited about the opportunities we see to continue to invest in to serve our advisers.

Grow our business and create long term shareholder value with that operator, please open the call for questions.

As a reminder to ask a question. Please press star one on your Touchtone telephone again, Thats Star one and you touched on telephone to ask a question. We also ask that you limit yourself to one question and one follow up.

Our first question comes from the line.

Katz of Citigroup Your line is open.

Thank you very much so just wanted to circle back to maybe some of the recruiting trends you spoke to it sounds like you have a few more things in the hopper in the bank channel side I was wondering if you could flesh that out a little bit and then on the business solutions.

Sort of wondering you know a huge step up sequentially, where do you think you are in terms of your penetration rate of your base phase and maybe some update as it relates to the beta test outside of your core footprint. Thank you.

Yes.

Let me take those on the.

I think on the.

Institution front, which may have been your first question in terms of how.

How we think about that opportunity.

You can see that.

How we see the opportunity going forward. So look the short answer is we're excited about the opportunities across both the traditional bank outsourcing market banking credit Union outsourcing market and then the new large institution market.

And pursue those opportunities we continue to invest in our capabilities to make the model more appealing.

As a driver of growth across what is a collective one trillion market opportunity as you know so.

Again, I think we're well positioned to win the day and as we enhance our capabilities, we think that distinguishes our value proposition going forward.

And we continue to be active in exploring those possibilities across that entire landscape.

We see our pipeline continuing to grow and without giving you specifics.

We have good confidence that we can.

Continue to see this this this this financial institution space as a as an ongoing sustainable and multiyear contributor to our organic growth. So that's I think question number one with your second question on with respect to our business solutions. So look we have lots of.

City here right. This is this is a.

New offering where we continue to.

Both take our core offering and expand did so do you think about starting with 3% to four professional services and how do you then broaden if you will the reach across multiple.

Different solutions inside the LPL.

Advisor base.

And so for there I think that's predominantly where that 1200 subscriptions sit today.

We do believe there's significant upside to continue to drive that penetration as we refine the value propositions of those offerings and who we expand the number of solutions that we offer at different price points, you really significantly increase the available market with inside that 20000 advisors and so we.

We do believe that.

We're just in the logical normal early innings part of a nine inning ballgame around.

The existing advisors on the LPL platform. So I think that I hope that helps in terms of giving you that directional opportunity I think when you when you explore outside.

The LPL platform, our priority is focused on the LPL platform today. So the only place we've experimented outside is with M&A solutions, where I think it's very logical that you would we would be interested in getting both potential buyers and sellers outside of.

The LPL platform to enrich our M&A solutions, our offering and the breadth of that marketplace and so we continue to experiment there we haven't done any deals outside of the.

LPL advisor family today, but we continue to explore that possibility. So again we're.

Very early into exploring.

Offering that type of solution outside the LPL advisors I hope that helps.

Okay. Thanks, and maybe my follow up for Matt would be and thanks for taking the questions. Just in terms of your new guidance. How much of that is sort of inflation pressures were sort of hearing that across companies that are reporting.

Versus just maybe a step up of recruitment and then how do you think about the interplay for next year I know, it's obviously early days, but as we should think about maybe the.

Relationship between growth and spend thank you.

Sure Bill I think when you look at the updated guidance for this quarter. Its really are where we land on our expenses within that range is really driven by organic growth and the cost.

Typically the variable costs associated with supporting it so.

I think when you look at our growth.

This year.

In the last 12 months call it in the 14% range well into double digits, that's what's driving us up to the higher end of that range, but I'd just emphasize that still within the within the range that we started for this year.

As we look ahead to next year I mean, I think we're in the midst of planning for that right now as you can imagine and I think we'll talk a little bit about that and give you some guidance as we typically do on next quarter's call.

The thing I'd emphasize now as we're approaching it the same way, we typically do and focusing in on the same core principles, which are investing to drive and support organic growth and at the same time really focusing on delivering operating leverage. So those principles will will remain on our quarter, our planning and we'll give you an update next quarter.

Thank you.

Thank you. Our next question comes from Steven <unk> of Wolfe Research. Your question. Please hey, good afternoon.

Then.

Maybe just starting off with a question on the ICA strategy I was hoping you could provide Matt some perspective as to how demand is evolving with rate hikes expectations getting pulled forward, whether theres any market differences in demand for floating versus fixed rate contracts and given the increase in three to five year swap rates I think they are now at about.

About 90 to 120 bps.

How is your what's your appetite at least today to do additional extensions.

Yes, Stephen I think when you look at the market.

Today right, it's both from a demand standpoint as.

As well as pricing.

The headline I'd give you is it's looking better right both on the floating side in the fixed side I think to click down on that on the floating rate side and while emphasizing we haven't seen a broad based return of demand.

We are starting to have more conversations and those conversations are about folks coming to market.

Fed funds, plus five basis points zone versus <unk>.

If you go back the last few quarters, its really been fed funds flat or basically sure I will take your money, but its one one basis point that's it.

So the dialogue there is certainly improving and on the fixed rate side.

Just to say, we're starting to have dialogue, there and I think you hit it well in your question is the <unk>.

As the yield curve starts to steepen Theres just economics in there that banks can and are on their side.

So the dialogue there is picking up and you can see we've this is the second quarter in a row, we have been able to to put in a new fixed rate contract. So the headline I'd give you is things are looking better just based on the dialogue that we're having.

I think to the last part of your question on our appetite on how and when to fix out.

Our focus in philosophy, there is really unchanged and that's ultimately wanted to be at a place where the the fixed component of the portfolio is in the 50% to 75% range.

And in periods of low late rates I think we'd stay closer to the low end of that range and in periods of higher rates, especially with some steepness to the curve.

We'd stay closer to 75% right. So we're sitting at 25% today, So I think as opportunities start to emerge.

And we're able to take advantage of that and deploy that in a fixed rate I think would be interested in doing so.

Once that demand comes back so I think if if what we're hearing this quarter continues I think you'd start to see some some more demand in future quarters.

Thanks for that color and maybe for my follow up.

It's actually.

Along the same lines about delay just asked on the expense side, maybe taking a slightly different tack.

Matt I know when you had initially laid out the core G&A growth guidance last year, the five 5% to 8% growth you talked about half of that growth being allocated towards efforts too.

Accelerated organic growth in your traditional markets the other half allocated towards some newer initiatives expanding the addressable tam or market as.

Organic growth has accelerated I understand that there is some upward pressure, but I just wanted to get a sense as to whether that philosophy still holds in terms of what's going to drive core G&A growth from here and also wanted to provide some context around the promotional side given that's the biggest area of upward expense pressure that we saw in the quarter.

Are certainly higher than what we had been contemplating and how we should think about the growth in promotional from here given some of those upward pressures and the competitive environment.

Yes, I think Steve that's like a four part question.

John I think on the core G&A going forward I think that if you if you build on the focus on investing.

And spending to drive organic growth.

And it's tied really to that so if you look at our plans for next year that will we'll share next quarter that we're working through.

Whether it be it growth in traditional markets and I think you've heard a lot from Dan in the prepared remarks on how the new models are growing.

We've talked a bit about on this call and how business solutions is growing so I think it's going to all be tied to growth I think the split that we talked about this year, we will see if that same split plays out next year, but at its core.

It's really investing to drive organic growth while at the same time balancing delivering operating leverage to the bottom line.

On the promotional side I think that the headline I'd give you there as we look ahead to 2022 is there's really two drivers of a promotional.

Loan growth of the business overall, and then to our conferences and I think when you look at growth of the business overall, a little bit similar to what I was just talking about on core G&A.

The drivers are really going to be the transition assistance associated with advisors joining our platform.

And the on boarding expenses for some of the larger ones associated with that so as you as you start to look at what we've delivered over the recent periods hitting new highs for organic growth in our traditional markets right, having a full year of the larger wins like <unk> and <unk> on the platform Onboarding kuna in the middle of next year and then.

Of course beyond organic growth and what al having a full year effect of that so that's going to be the big driver on the Ta side.

On the conferences side I think like most folks and we've really pulled back on conferences last year in 2020, given the I think the obvious COVID-19 environment.

This year, we phase those backend, but I'd say, we're not at pre COVID-19 levels. So I think we're still working and planning on this for 2022, but I think we will be looking to balance what I think we are quite confident as a positive return.

On conferences in person just a few we've done recently.

I can tell you that the returns have been quite good just given the excitement.

The excitement and the interaction folks have both us as employees in the home office as well as advisers getting to see each other.

While at the same time, I think taking advantage of the digital capabilities that we've deployed this year.

As well as managing costs and the safety of those attending so that's something that will come together next quarter, but the headline for you on promotional as it's about growth overall, and then really how the conference plans land.

Knocked off far out thanks, so much for taking my questions.

Thank you. Our next question comes from Alex <unk> of Goldman Sachs. Your line is open.

Thanks, Hey, good afternoon guys.

Alright, So I will continue with a multipart questions I guess to keep everybody awake.

So essentially managed really nice growth.

Good organic growth good good asset growth.

Do you see sort of the internal addressable market in this part of the model is that something that you see advisor sort of switching from somebody else like external tamps or these new folks that are have not really use these services before and maybe just remind us on the economics again and kind of how how does LTA.

Ultimately it makes money on this does that show up in advisory or does it show up in other so just a little bit more granularity that would be great. Thanks, I'll take the first part of that Matt.

So Alex with respect to where the opportunity sits coming from I think your question's set it up well.

For the most part.

<unk>.

Advisers coming onto our platform that will move from some other solution that they had been using.

Wherever they came from so that's obviously one driver of growth.

Second driver of growth as we're seeing more and more advisors utilize centrally managed solutions versus rep as pm or constructing their own portfolios for the efficiency gains.

For the opportunities of which to.

Create some professional leverage points that allow them.

And free up time to do other things I think is a positive trade. So the more we add capability to this and lower the cost.

The more and more of that's a logical trade for them. So that is the second component.

And then I think the.

Third is that you just continue to have this ongoing transition from brokerage to advisory which is obviously a tailwind across the entire.

Platform, including centrally managed so they might you might think about it.

Through those three drivers.

And then and then Alex just on the economics I think that when you look at the long term trends where interest rates are is going to impact the numbers overall, but just to give you a sense of the different platforms. I think when you look at brokerage assets from a from an ROI standpoint, our gross profit ROA standpoint, they've been in the 15, plus or 15% to 20.

Zoned depending on where interest rates are when you move into the advisory platforms. It's about 10 basis points above that and then within the advisory platforms. When you move into essentially manage its another 10 basis points on average above that.

So hope that helps on the economic side.

Yes, that's great and then a follow up on <unk>, So $85 million plus an EBITDA contribution in middle of next year can you help us frame the opportunity around the plus how much of that would be sort of cross selling how much of that would be maybe accelerated growth for waddell advisors.

Or are there additional kind of cost cutting measures.

There may be embedded in the plus piece just trying to frame what the opportunity could be thanks, yeah.

Yeah, definitely I think future growth would be it would be above and beyond that I think when you look at our.

Moving onto our platform and what we've done so far through the quarter is really getting the synergies on the revenue or the gross profit side as we've moved them onto our platform moved them off of their custodian and I think from this point forward. It's really about the work on expense synergies right. The natural things that you would do in a corporate.

<unk> that.

We plan to get done by the Middle of next year. So the plus on 85 plus is really just that work.

That goes better than estimated at this point, that's where the plus could come from I think Alex just to add to that beyond that you would get into factoring can we support and help their same store sales growth.

Expand their utilization of advisory platforms et cetera. So those are those are things that arent necessarily contemplated that in the short run.

Got you great. Thank you very much guys.

Thank you. Our next question comes from Michael Cyprus of Morgan Stanley. Please go ahead.

Hey, good afternoon. Thanks for taking the question I was just hoping that you could update us on the digital offering what that looks like today and how do you expect that offering to evolve over the next 12 24 months, maybe you could give us a sense of what's next on the to do list there.

Hey, Michael just for.

Purposes of a little bit of a distinction are you talking about for the end client or for the advisor were both.

Both please.

Yes.

So for the advisor we continue to see an income and an important part of the overall value proposition.

Being the operating platform of which we provide them with that digital platform.

So anything that we can do that helps them operationally simplify what they do straight through processing.

User interfaces that make for simple clicks to.

Two ultimately kick off a series of integrated workflows those are great outcomes and so that's where we think about this digital platform of which helping our advisors in terms of simplifying the overall day to day processing and drive efficiencies into their work I think the second play.

That we think about is how do we add and enhance.

Robotics.

AI into these overall systems to improve and enhance the efficacy of those systems, so think about improving or enhancing our overall collaborative risk management with them would be another place. So you streamline how you think about risk management you have systems that are more.

Efficient and effective at overall, assessing some said risk and collaborating and working together with them is another opportunity and maybe a third one is how do we help them with respect to prospective insights or trends that are occurring within their client base and how to position to better serve our support them or take.

Certain actions so.

That might be three places in our spectrum in a wide spectrum of areas that we see as big opportunities on the what I would call the advisor platform.

And Thats, what we sometimes refer to as client works.

Yeah.

As a as an operating platform or client works connected where we're actually streamlining workflows with respect to the entity and investor that's been a place of investment for us that has not historically been a place that we.

Necessarily played in to create great value and in the last four years, we've pivoted pretty significantly and are trying to create.

What I would call a digital platform that we wrap around the adviser is not meant to replace the advisers actually meant to.

Hence the advisors value proposition to the client and enrich how they show up for that advisor. So think about the combination of the advisors professional IP.

Together with the with a really modernized digital experience around that and so we're investing in our digital capabilities in order to achieve that so.

Anything from your standard ability to initial.

Initiating kicked off workflows by the end investor to having robust content that provides them insights on industry.

A really robust and ongoing place to invest as we think about transforming that overtime.

To smarter more intuitive AI.

AI driven opportunities to make sure we're there when a client.

We're there with the advisor when the client needs us most.

Great. Thanks for that and just as a follow up I was hoping you could maybe elaborate a bit on the traction you were seeing in the.

Custody offering and the momentum there maybe you could comment on how many advisers have partnered with you since the relaunch of that but the feedback has been.

What sort of actions that you're taking here to enhance the growth and enhance the offering.

Yes so.

In that case, we were as I had mentioned to you before we were we were already in.

<unk> if you will for <unk>, we just had done it in a more defensive posture and so we've been investing to streamline and improve the.

Efficiency and.

Experience that we can deliver as a.

As a as a custodian for someone who is just focused on or a business or advisory business. So one that's been a I would call. It a year journey to improve that we're still working on that but we feel good about that journey and that trajectory.

And then the second thing that we've done is we've added resources to focus on growing this business and hence the combination of those intersection point launching this last spring.

And we've had some what is what we expected was a trajectory very similar to our Swiss model or LPL employee model, where you sort of build and ramp in and.

And I would say that we were pleased that the quick response, we an interest that we've had in that custodial side that exceeded a bit of the ramp that we saw in those other models.

And so we still have some iteration and work to do as we learn and get feedback from those advisers that have joined us, but it's been a small handful today and the pipeline is interesting.

Again, we've got business development resources that are focused on going out and winning this business. So I think.

You should think about it is we've seen the trajectory of those other two models.

We do think it will follow a similar pattern I'll buy it we got a faster start out of the gates, but we think it'll it'll follow a similar trajectory. If you will of growing into that so it's very very early on and we are establishing ourselves as a market player a competitor who has a viable competitive offering and capability set that's competitively priced.

And now we've got to go out and sell it and pull those deals through so I think theres more to come on that it's just really early and pleased at the quick response that we've had we've on boarded several advisors and we've got a good solid pipeline building.

Great. Thanks for taking my questions.

Thank you. Our next question comes from Brennan Hawken of UBS. Please go ahead.

Hey, good evening guys. Thanks for taking my questions.

Matt I just was curious about <unk>.

Squaring a couple of the comments on the ICA dynamics and how they've been changing it it looks like the money fund balances went up in the quarter, a decent amount, but yet I think you indicated that the.

Floaters, the ICA floaters, we're now fed funds plus five so maybe could you help me square why the money fund balances we've gone up if the floaters are looking more attractive.

Or was it that that.

Now post not 930, and that's the current environment and so we should expect those money fund balances to move out and move into the floaters.

Sure.

Yeah sure, Brian So two different things going on.

On floating rate dialog in the fed funds plus five zone I was just giving some color on what the dialogue is in the current market right. We've got no new contracts there just to try and give a sense now that there is some steepness to the curve.

That folks are starting to engage at a place that I think is constructive versus in the past it's been than one basis point.

A lot of cases, so I think I would just look to future quarters, we will update on how thats going I was just giving you a sense as to the dialogue in the marketplace right now.

On the money fund side Thats, a little bit different I think what you see happening there is really the the overflow capacity that we have where there's really two types of overflow it can be.

Contracts are bank contracts or money markets and the capacity in that part of the market is really primarily coming from money markets.

You can imagine on that type of short term money. The banks don't have a lot of economics, and therefore don't have a lot of demand for it versus the money funds don't have the similar balance sheet constraints. So thats, where you just see a lot more demand. There now those are overflow so kind of to square that back with the first part of your question when demand does return those back.

<unk> will naturally go back into whether it be floating rate contracts or fixed rate contracts.

Over the capacity returns, so a little bit of two different things going on there.

Got it okay. Thanks, and then on promotion I know.

The.

You had referenced that there is.

There's a lot of flux going on in the conference World, which is totally understandable.

Normally we would go back to pre 2020.

Reach you to <unk> you guys typically have a pretty decent drop about 10 or 12 million dollar drop in conference expense quarter over quarter.

With that I'm trying to think about the promotional indication of up a few million dollars quarter over quarter.

Would that typical seasonal pattern of the conference expense decline in the fourth quarter and therefore, the amortization would continue to ramp or is this year going to look a little different on the conference end of things.

Ticky-tacky question, just want to get it straight.

Yeah, No worries yeah, I think the last part you said there was this year is a little bit different and I think the key is when you look at when you look at last year for conferences.

Meaning Q4 of 2020, we really didn't have any any conference spend just given COVID-19 and the environment. When typically you would have it spread throughout the year.

And then when you look at our plans for this year, even though we haven't returned to pre COVID-19 levels, we've really scheduled to conferences almost entirely in the second half of the year. So when you get into the Q4 'twenty one versus Q4 2020 comparison, it's just a little bit of an abnormal year, where you've got basically half of our conference spend this year in Q.

For when to your point historically, you would typically see a decline so it's just a little bit of a different year.

Got it so more of like a flat quarter over quarter conference dynamic than the typical drop.

Yeah, and I think my comments in the prepared remarks, or just promotional up a couple million next quarter, which to your point is likely driven by growth in ta.

Got it thanks, a lot for quote for the questions.

Thank you. Our next question comes from Jerry O'hara of Jefferies. Please go ahead.

Jerry Please make sure your line is immediate.

Seeker pharma few handset.

Great. Thanks, sorry about that locked.

Log day anyway, Dan I think.

Paired remarks, you mentioned something about the traditional markets.

Continuing obviously to be strong for you all despite lower assets in motion if I, if I kind of got that correctly. So hoping you might be able to kind of flush out that dynamic a little bit whether thats, just sort of a slowing in the breakaway broker trend, whether it's a little bit more near term.

Or if it's.

Just kind of more secular in nature that would be helpful. Thank you.

Yes.

We're I mean in the traditional markets, where maybe the advisor movement I don't actually mean to reflect those that are moving out of.

The warehouses I actually have more reflecting the movement within the independent space and I do think that's more timing than anything I think you've had.

Lots of folks that are already in the independent space with some of the success that they're having in the marketplace today and growing their practices and supporting their clients.

Well as you would just add to the complexity of coming out of a significant amount of change in the prior year due to the Covid environment.

Yes.

It's much more circumstantial than it has some structural shift in terms of the advisor movement in the independent space, but I do think that's probably reflective of.

The balance of this year and as we get to a place where we seek.

Hopefully the COVID-19 environment more normalizing.

I think youll see people.

Ramp backup continuing to explore the strategic options versus just tactically managing their business and I hope that helps.

That's it for me thanks, guys.

Yes.

Thank you. Our next question comes from Devin Ryan of JMP Securities. Your line is open.

Okay, great. Good afternoon, actually just want to come back to the conversation. We're just having now about kind of independent broker movement in yes, I guess, it's a longer term point of view and Youre just talking about thinking about the market I mean, there is still huge fragmentation.

Smaller group of scale players and if you just think about.

The past year, and a half or so I mean, it just feels like the leaders are separating themselves and then its more obvious just around technology. Some of things you guys are talking about on service.

The evolution of the model and so wanted to just kind of talk little bit about how this plays out longer term and just the consolidation of the market to the larger firms has clearly been going on for years, you guys have been a winner of that but what point.

Is it all it does it really kind of accelerate because it feels like.

There may be some inertia right now and to your point, yes, there is some friction and trying to move after.

Kind of a lot of change over the past year, but.

Why why arent as advisers kind of long term kind of going towards where there's just it feels like tremendous value relative to some of the smaller platforms, just arent going to keep all your technology wise or service wise or with some of the innovation.

A large herds are bringing so it's kind of tailing on the prior question, but could you talk a little more detail there, yes, sure and so as you say outside of the current environment, we do see that structural trend from moving from a.

Let's call it a smaller provider to one that has more capabilities or higher quality capabilities that are going to help them better serve their clients so that that trend it.

It exists today, even in this environment and we do expect it to continue now as we are able to invest more robustly and new capabilities new opportunities New economics.

I think that will only accelerate that trend Devin and then at some point when it hits one of those firms hard enough then youll see as you say the capitulation point of trading.

Trading the franchise and so we.

We do expect that trend to continue.

I think we that's why we lead with organic growth and why we're so committed to investing in our capabilities to further enhance the appeal of the model because we do see the independent space is a robust opportunity to continue to fuel our organic growth now.

Now the nice thing is as you have the flexibility of the models that we offer now right. We can take those investments.

Across these different models create a much bigger opportunity set from that growing appeal in this broadened available market and so much.

Much like we see a continued trend from the <unk> captive to the independent model.

We continue to expect that to accelerate and evolve in <unk>.

Honestly, we're playing we're trying to in a significant way to be a participant in that so I think you've got it right I think the structural trends continue.

And at some point on an individual's sort of basis. These companies will hit an inflection point, where they feel like strategically it makes more sense to explore some sort of transaction and certainly we're positioned to.

Participate in that market at REIT valuations, so I hope that helps.

Yes, I appreciate it thanks Dan.

Quick follow up here you may have hit this but on commissions.

A little step back on that particular sales commissions when im looking at here.

Most of that back in the quarter.

Is it seasonality or is this kind of.

Kind of.

The right level, maybe last quarter was a little more active.

Above average.

Any color on how to think about the trajectory and whether it was just a lighter quarter because either seasonality or people.

Once engaged I mean any color on it I don't think at all.

Quarter for commissions, but maybe modeling going forward as well, yeah, yeah that makes sense and not to be overly precise.

As you say look at it over a broader set of data than just one quarter.

Naturally speaking you you have some some.

Elements of seasonality inside the third quarter because of the July August timeframe or summer timeframes, which sometimes reduces activity and so that said again without trying to make that the specific correlation here I kind of look at it more broadly over the last 12 months.

<unk> seen some some sustained elevated levels from where.

From our jumping off point in the prior 12 months and I think <unk> got a couple of things going on to think about.

Some are in market driven.

<unk> got good solid equity performance in the market you've got good liquidity in the market, which certainly drive some activity.

Coupled with I think.

Ongoing rises rising interest rate environment will create more opportunities for certain brokerage solutions to be offered think about things like annuities.

So those are some things to think about in the macro I think when you think about our structural opportunities certainly the growing number of advisers. We have will lead to more commission based and sales based business.

And then on the sort of that same sort of structural concept, though you've got the headwind of this ongoing transition from brokerage to advisory.

Those are the sort of the drivers of the inputs that that I would think about as you think about the opportunity set going forward.

Look I think the last couple of quarters. If you look at those across that entire sort of spectrum, you've got a logical sort of level of activity that I think reflects the current market environment.

Hope that helps.

Yeah, that's great. Thanks, so much.

And at this time I would like to turn the call back over to Dan for closing remarks, Sir Hey, Thanks, everyone for taking the time to join US. This afternoon. We know it's a busy day for you. So we really appreciate the time and we look forward to speaking with you again next quarter. Thanks.

And this concludes today's conference call. Thank you for participating you may now disconnect.

Yeah.

Okay.

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Yes.

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Okay.

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Thank you.

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

The company would appreciate as analysts would limit themselves to one question and one follow up each other.

The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website investor LPL Dot com.

Today's call will include forward looking statements, including statements about L. P. L financial's future financial and operating results outlook business strategies and plans as well as other opportunity than potential risks that management foresees such.

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

The company refers listeners to the disclosures set forth under the caption forward looking statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission.

During the call. The company will also discuss certain non-GAAP financial measures for a reconciliation of such non-GAAP financial measures to the comparable GAAP figures. Please refer to the company's earnings release, which can be found at investor Dot L. P. O dot com with that I will now turn the call over to <unk>.

Mr Arnold.

Thank you Latif and thanks to everyone for joining our call today.

Another quarter of solid results, while also continuing to make progress on our strategic plan I'd.

I'd like to review both of these areas starting with our third quarter business results.

In the third quarter total assets reached a new high of 1.13 trillion up 40% from a year ago.

This increase was primarily driven by continued organic growth and equity market appreciation.

Over the past year.

Net new assets totaled a 110 billion or 14% organic growth.

In the third quarter recruited assets were $13 billion, which increased our total over the past year to 83 billion or.

Our continued growth and recruited assets reflects our ongoing progress with enhancing the appeal of our model and expanding our addressable markets.

Looking at the same store sales with the backdrop of continued strong retail engagement.

Visors remained focused on serving their clients and enhancing their offering.

As a result advisors are both winning new clients and expanding share of wallet with existing clients. A combination that drove same store sales to new highs in the third quarter.

As a result asset retention was approximately 98% in the third quarter and over the past year.

In July we on boarded the advisors from Waddell <unk> Reed and the final asset retention rate for the deal was approximately 99%.

Currently we are focused on the integration work to help these advisors optimally leverage our platform and support the growth of their businesses.

Our third quarter business results led to solid financial outcomes with a $1 77 of EPS prior to intangibles and acquisition cost, which is an increase of 23% from a year ago.

Let's now turn to the progress we made on our strategic plan.

As a reminder, our long term vision is to redefine the independent model over time and by doing so it become the leader across the entire advisor centered marketplace our.

Our approach is to provide a platform that has the flexibility and personalization that make it simple and straightforward for advisors to design and run their perfect practice, we do this by providing advisors a breath of affiliation models advisory platforms investment content technology custody.

In practice support that provides more flexibility in one place than anywhere else.

Doing this well gives us a sustainable path to an industry, leading adviser experience continued solid organic growth and increased market share.

Now to execute on our strategy, we have organized our work into four strategic plays which I'd like to review and term.

Our first strategic play involves meeting advisors, where they are in the evolution of their practice by winning in our traditional markets, where our leading market share is now over 15%.

I'll also leveraging new affiliation models to expand our addressable markets.

With a growing number of prospects.

As we look ahead, we are preparing to onboard CUNA brokerage services in the middle of next year and continue to see financial institutions as a sustainable multi year contributor to organic growth.

With respect to the expansion of our addressable markets. The combination of our compelling value proposition and positive referrals from advisors using the new models are attracting more prospects and contributing to our growth.

As a reminder, a year and a half ago, we launched strategic services and we have now added 17 practices, including eight in the past quarter.

We subsequently brought our employee model or the market later in the year and five practices have joined including two over the past three months.

And earlier this year, we relaunched our RA custody offering and have been encouraged by the number of <unk>, who quickly partnered with US as we look ahead, we see these new affiliation models continuing to build momentum and becoming a larger contributor to our organic growth.

<unk> themselves. This optionality has contributed to a two advisory now making up a majority of our total assets.

Specifically within our centrally managed solutions with our ongoing investments in capabilities and pricing.

Our assets have increased to nearly $90 billion.

At an average annual organic growth rate of over 20% for the past five years.

A key contributor to the growth of our centrally managed offerings is the increased personalization that enables advisors to use these solutions in a way that works best for them.

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 Omnichannel client care model as a reminder, over the past year, we rolled out voice chat and digital helped to our advisors, giving them access to differentiated service at a time and in a manner that works best for them we are in.

Now focused on helping our advisors fully leverage these channels to better serve their clients and more efficiently run their businesses.

To further enhance our service model. We're also experimenting with specialized service pods designed specifically for different types of advisor practices. These pods include integrated teams comprised of service case management compliance and relationship management.

These experience experiments are helping us to tailor services based on advisors affiliation models and practice attributes and are making positive contributions to the advisor experience.

Our four 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 helps advisors more effectively operate their businesses. So they can focus on serving their clients and growing their practices.

In the third quarter, our subscription base continued to grow more than doubling year over year to approximately 2600 subscriptions demonstrating increasing demand and appeal.

Rings like CFO solutions as an example over the last year. This approach helped us identify several additional finance related needs for our advisors, which led to the development and launch of M&A solutions assurance plan in our bookkeeping pilot.

Going forward, we will continue to leverage adviser feedback as fuel to expand our solutions portfolio.

As we look ahead, we are focused on continuing to innovate and expand the portfolio to increase the contribution to gross profit and organic growth.

In summary in the third 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 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.

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

This focus led to another quarter of double digit organic growth.

In addition, after Onboarding, what Alan Reid BMO <unk>.

We continue to work with these advisors to acclimate and leverage our platform and capabilities. While also preparing to onboard kuna in the middle of next year.

As we look ahead, we are excited by the opportunities to help our advisers differentiate and win in the marketplace and grow our business.

Now, let's turn to our third quarter business results total advisory and brokerage assets increased to a new high of 113 trillion.

Up 2% from Q2.

A key driver of this increase was organic growth, which totaled 27 billion or 10% annualized growth rate.

This was driven by strength across all three channels of growth.

<unk> same store sales and retention.

Looking more closely at recruiting in Q3 recruited at in Q3 recruited assets were $13 billion, which brought our 12 month total to a new high of 83 billion.

Moving onto our business mix, we continue to see positive trends in Q3 <unk>.

Advisory net new assets were 21 billion or 16% 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 Q3 financial results strong organic growth combined with expense discipline led to EPS prior to intangibles and acquisition costs of $1 77.

Up 23% from a year ago.

Looking at our top line growth gross profit reached a new high of $631 million up $29 million or 5% sequentially.

Looking at the components Commission and advisory fees net of payout were $202 million.

Up 5 million from Q2, primarily driven by organic growth and a full quarter contribution from what Allen REIT.

In Q3, our payout ratio is 87, 1%.

Up 80 basis points from Q2 due to typical seasonality as well as the on boarding of Waddell <unk> Reed, which earned a slightly lower payout on their platform.

Moving on to asset based revenues sponsor revenues were $210 million in Q3 up 21 million sequentially.