Q1 2022 LPL Financial Holdings Inc Earnings Call
Good afternoon, and thank you for joining the first quarter of 2022 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 Audette.
Dan and Matt will offer introductory remarks, and then the call will be opened for questions. The company would appreciate if analysts would limit themselves to one question and one follow up.
The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website Investor Dot L. P. L 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 opportunities and potential risks that management foresees such forward looking statements reflect management's current estimates or bill.
Lease 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 disclosure 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. L. Dot com with that I will now turn the call over to Mr. Arnold.
Thank you Howard and thanks to everyone for joining our call today.
We entered 2022 with a continued focus on our mission taking care of our advisers. So they can take care of their clients.
As we progress through the first quarter market volatility and geopolitical uncertainty increase.
Conditions like these the value our advisors provide to their clients is reinforced by helping them to navigate in times of uncertainty.
Their work to provide personalized financial guidance millions of American when they need it most.
The importance of Lpl's mission. It also shines a light on the pivotal will work.
We take care of these advisors everyday.
Guided by this north Star, we work together to deliver another quarter of solid business and financial results, while continuing to make progress in our strategic plan.
I'd like to review both of these areas starting with our first quarter business.
In the quarter total assets decreased to 1.16 trillion as continued solid organic growth was more than offset by lower equity more.
With respect to organic growth the business continued to perform well despite market volatility.
First quarter net new assets were <unk> 18.
Which translated to a 6% annualized growth driven by solid new store sales same store sales and adviser retention.
These results contributed to an 11% organic growth rate as well.
Looking at recruited assets they were $10 4 billion in Q, which prior to Onboarding large financial institutions was a new high for the first quarter of the year. These results were driven by the continued enhancement of the feel of our model and the efficacy of our business develop.
Looking at same store sales they remained solid in the first quarter as our advisors continue to focus on serving their clients and differentiating their solutions in the market.
With respect to retention, 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.
As a result asset retention was approximately 98% in the first quarter and over the past 12 months.
Our first quarter business results led to solid financial outcomes with $1 95 of EPS prior to intangibles and acquisition costs and increased 10% from a year.
Let's now turn to the progress we made on our strategic plan.
As a reminder, our long term vision.
Come the leader across the entire advisor center marketplace, which for us means being the best at empowering advisors and institutions to deliver great advice to their clients and it'd be great operators of the business.
So to bring this vision to life, we are providing the capabilities and solutions that help our advisors deliver personalized advice planning experiences to their clients at the same time through human driven technology enabled solutions and expertise.
Supporting advisers and their efforts to be extraordinary businesses.
Doing this well gives us a sustainable path industry leadership across the advisor experience organic growth and market share.
Now to execute on our strategy, we have organized our work in the fourth strategic place, which I'd like to review and turn our first strategic play involves meeting advisors and institutions, where they are in the evolution of the business by winning in our traditional markets. While also leveraging new affiliation models to expand our addressable market.
Our recruiting and traditional markets continue to be a significant source of growth in Q1 with approximately 7 billion in assets in.
In the quarter, we continued to increase our win rates and expand the depth and breadth of our pipeline. Despite advisor movement in the industry remaining at lower levels.
With respect to our new affiliation models strategic well employ and our enhanced our E offering.
We recruited nearly $3 billion in assets do you want.
This quarterly total was a new high for these models and reflects the increased diversification of our recruitment.
Each of these three models, we continue to see growing demand and expanding pipeline, which position them for increased contributions to organic growth going forward.
The large financial institutions market was a new source of recruiting in 2021. The addition of BMO Harris Amendment fee for 2020 to Q&A is on track to join later this fall.
Paired and ready to onboard there are approximately 550 advisors located across almost 300.
The served $36 billion of brokerage and advisory assets.
Also within this year, we will onboard People's United which was acquired by <unk> and includes approximately 30 advisor serving 6 billion brokerage.
Right.
For these institutions, we will use new innovations that will make it easier to transition to LPL and in turn help make our offering even more appealing and ultimately contribute.
Sure.
As we look ahead at the market opportunity for large institutions, we continue to see our pipeline bill as demand for our model.
Our second strategic play is focused on providing capabilities help our advisers differentiate in the marketplace and drive efficiency in their practices as part of that focus in 2022, we are continuing to enrich our wealth management.
Including the enhancement of our advisory solutions.
Lineup with the secular trends towards advisory, which continues our business across the.
For example in the first quarter, we expanded the investment options available and are essentially managed flat by.
Separately managed accounts.
Doing so makes it easier and more efficient for advisers to leverage separately managed.
Which can drive higher utilization and further growth of centrally managed flat.
As a result, this enhancement increases our advisory platforms value to both existing and prospective advisers.
Let's next move to third strategic plan, which is focused on creating an industry, leading service experience that delights advisors and their clients and in turn helps drive advisor recruiting and retention.
As a reminder, over the past two years, we have transformed our service model into an omnichannel blank here, which.
Which includes voice chat and digital support that's giving advisers flexibility for when and how they access our.
We continue to fine tune this model to drive additional efficiency and an enhanced experience for our advisers.
The next phase of our transformation, we are focused on expanding and enriching specifically our digital support in order to provide greater flexibility speed and accuracy for advisers. As an example, we are developing end to end digital experiences and core clearing functions, including money movement Allen opening and.
Account transfer, which collectively drive the majority of our service center.
Now by streamlining our core clearing functions, we believe that we can enhance service levels, the light advisors and increased scalability and efficiency of our platform.
Our fourth strategic play is focused on developing our services portfolio helped advisers run the most successful businesses in the independent marketplace and provide comprehensive advice to their clients.
One of the key components of this play as our business services portfolio, which helps advisors more effectively operate their businesses. So they can focus on serving their clients and growing their practices.
Our subscription base continued to grow ending the quarter at nearly 3500, which more than doubled year over year, demonstrating increasing demand.
Now as we work with advisors on existing solutions, we are leveraging our learnings and insights as a catalyst for new solutions as well. Examples of this include our new book keeping solution, which is currently in pilot as well as our enhanced Adnan solutions offering which provides.
<unk> generation Tech enabled task management system.
And we also continued to make progress on the opportunity that we introduced last quarter to help advisers to provide comprehensive financial advice and planning solutions. Our first offering care planning is generated solid initial momentum in the marketplace.
Our approach is to give advisers, a scalable platform to efficiently and effectively deliver more financial plans and access greater expertise that helps them deepen our client relationships and we launched this offering in January and by the end of Q1, we had approximately 60 subscribers and at the same time, we continue to.
Work to expand this portfolio, including solutions like tax planning and high net worth.
As we look ahead, we remain focus on innovating and expanding our service portfolio, which in turn positions us to drive additional gross profit and organic growth.
In summary, the first quarter, we continued to invest in the value proposition for advisors, and they're all driving growth and increasing our market leaders.
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.
I'll turn the call over to Matt Alright, Thank you, Dan and I'm glad to speak with everyone on today's call.
As we move into 2022, we remained focus on serving our advisors growing our business delivering shareholder value.
While the market backdrop was volatile we delivered another quarter of solid net new assets and earnings.
In addition, we are preparing to onboard two large financial institutions this year with tuna and People's United Bank.
So as we look ahead, we continue to be excited about the opportunities we have to help our advisers differentiate and win in the marketplace and grow our business.
Now, let's turn to our first quarter business results.
Total advisory and brokerage assets were $1 two trillion down 4% from Q4 as continued organic growth was more than offset by lower equity markets.
Total net new assets were 18 billion or 6% annualized growth rate.
Looking more closely at recruiting in Q1 recruited assets were $10 billion, which prior to large financial institutions was a new high for the first quarter of the year and brought our 12 month total to $76 million.
Moving onto our business mix, we continue to see positive trends in Q1.
<unk> net new assets were $17 billion, where an 11% annualized growth rate.
With this growth our advisory assets reached a new high of 54% of total assets as we continue to deliver differentiated capability and benefit from the secular trend towards advisory.
Now, let's turn to our Q1 financial results we're.
Organic growth combined with expense discipline led to EPS prior to intangibles and acquisition costs of $1 95 up 10% from a year ago.
Looking at our top line growth gross profit reached a new high of $669 million up $26 million or 4% sequentially.
Looking at the components Commission and advisory fees net of payout for 227 up 27 million from Q4, primarily driven by higher advisory fees and seasonally lower production bonus.
In Q1, our payout rate was 86, 1% down about 150 basis points from Q4 <unk>.
Largely driven to the seasonal reset of the production bonus at the beginning of the year.
Looking ahead to Q2, we anticipate our payout rate will increase to the low 87% range.
Driven by the typical seasonal build in the production.
I would also note we expect the payout rate to increase following the onboarding of Qunar, but given the timing of when they join we expect to see that increase mainly in Q3.
Moving on to asset based revenues.
<unk> revenue was $212 million in Q1 down $8 million sequentially as average assets decreased during the quarter driven by lower equity.
Turning to client cash revenue it was $85 million up $3 million from Q4.
This was primarily driven by the March rate hike, which more than offset expected fixed rate contract pricing.
Looking at overall client cash balances they were 62 billion up $5 billion from last year.
Within our ICA portfolio as expected in Q1, we renewed our 1 billion fixed rate maturity into a new four year contract.
In addition in March we were able to add floating rate capacity, which drove a roughly $3 billion increase in ICA Bal.
Looking more closely at our ICA yield was 102 basis points in Q1 up one basis point from Q4 as.
As a reminder, our ICA balances are primarily indexed to fed funds. So the ICA yield benefited from the March rate hike and the last two weeks of the quarter.
As we think about our Q2 ICU and prior to any changes in interest rates, we would expect an increase in yields on our floating rate balances as we see the full benefit of the March hike will yield.
And our fixed rate portfolio will adjust for the renewal in Q1.
The net effect is we expect our Q2 ICA yield to increase by a couple of basis.
Now, let's turn to service and fee revenue.
In Q1 was $113 million up $2 million sequentially.
This was primarily driven by continued growth in our services group revenue and the seasonal increase in Iowa.
Looking more closely at our services group, which includes business services and planning and advice service.
We ended the quarter with more than 3500 subscriptions, which is up about 500 from last quarter and roughly double a year ago.
Our services group now generates roughly $30 million of annual revenue, while also contributing to organic growth by helping drive recruiting same store sales and retention.
Looking ahead to Q2, we expect service and fee revenue to decrease by a couple of million sequentially driven by seasonal declines in IRI and conferences.
Moving onto Q1 transaction, but it was $47 million up 7 million sequentially due to increased trading volume from equity market volatility.
As we look ahead to Q2 volumes in April have pulled back from elevated Q1 loan which.
Which on a run rate basis would result in a decline in transaction revenue of around $5 million you want.
Now, let's turn to expenses starting with core Janet.
It was $281 million in Q1.
Looking ahead, we plan to stay disciplined on expenses, while continuing to invest to drive growth.
I would also note that with People's now planning to join in the second half of this year, we anticipate up to $5 million of additional core G&A in 2022 to support this new large financial institution.
Moving onto Q1 promotional expense was $87 million up $1 million sequentially.
Primarily driven by transit transition assistance large financial institution, Onboarding and conference spend as we had two of our largest conferences of the year in Q1.
Looking ahead to Q2, we expect promotional expense will increase by a couple million sequentially as we anticipate increased costs from transition assistance and large financial institution Onboarding, largely offset by lower conference expense.
Now, let's move to what Allen.
The integration is on track to be substantially complete by the end of the second quarter.
With respect to run rate EBITDA, it was roughly $70 million in Q1.
And we now expect the run rate EBITDA benefit to be at least $95 million by the end of Q2.
Turning to depreciation and amortization was $45 million in Q1 up $5 million sequentially.
Looking ahead to Q2, we expect depreciation and amortization to increase by a few million dollars sequentially.
Moving on to capital management, our balance sheet remained strong in Q1 with a leverage ratio at two six times corporate cash of $270 million.
As for capital deployment, our framework remains focused on allocating capital aligned with the returns we generate.
Besting in organic growth first and foremost pursuing M&A where appropriate.
Returning excess capital to shareholders.
In Q1, we allocated capital to both organic growth and share repurchases buying back $50 million of our shares.
As we look ahead to Q2, we will remain focus on our capital allocation priorities I would note. We expect an increase in capital deployed for organic growth the onboarding of Qunar and the related transition assistance that will be paid during the quarter.
We also anticipate continuing share repurchases likely at a similar level as we did in Q1.
As we look ahead to the second half.
And if interest rates continue to increase as market expectations would apply.
We would have additional capital to deploy.
Our framework for deploying capital is unchanged it would focus on organic growth first and foremost pursuing M&A, where appropriate and returning excess capital to shareholders. We will of course remain flexible and dynamic as our capacity and opportunities to deploy capital at all.
As a final point I want to share that we've scheduled our next investor and analyst day for Wednesday November 16 in New York City.
We look forward to providing more details as we get closer to the event.
In closing, we delivered another quarter of strong business and financial results as.
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.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
In order to facilitate as many participants as possible. We ask that you. Please limit yourself to one question and one follow up again.
Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our first question or comment comes from the line of Alex <unk> from Goldman Sachs. Your line is open.
Hey, good afternoon, everybody. Thanks for the question.
Maybe we'll start with the with the ICA dynamics, great to see incremental bank pick up demand a bit here, obviously on the variable side of things.
As we think through the cycle you guys have significant amount of cash sitting in money market funds is really a form of sort of the overflow of guests because bank demand wasn't there for the last couple of quarters. How are you thinking about the ability to transfer them back into ICA, especially when the money market fund yields feel like it will start to rise and are already higher.
And then what clients would be able to get in there kind of ICA cash balances.
Yeah.
Yeah, and I think I'll hit this kind of cash we've dynamics overall that I think we will hit on the exact point you asked and I think you highlighted the money market balances really are a function of overflow as opposed to rate seeking behavior, but I think first on your point on on demand with third party banks I would just emphasize that we're really starting to see demand pick up.
<unk> seen the fixed rates are we're able to put together put in place. The last few quarters I'd just emphasize this quarter, we were able to add $3 billion in balances from new variable contracts.
At competitive rates fed funds flat on the variable side in those fixed rates were really at the relevant point on the curve when we put those in place.
And maybe even just as important to note like we're really early in the fed tightening cycle right only one increase so far haven't started to shrink the balance sheet yet.
Sure you saw the consumer spending numbers come out those are picking up lending is picking up and I think those are all things that over time would likely lead to further pickup in demand. So I think sitting here today I think I think we've we're more optimistic about demand continuing to pick up and we have been in a while for the reasons that I just said.
I think to your point on the balances themselves.
In a rising rate environment sitting in the money markets that are really overflows I think the key is just the nature of the cash balances that we have.
Don't know if you saw it but we added a page in our key metrics deck on page 18 that gives us I think a nice illustration of that which is the cash and our cash we've just largely operation right.
Alright, it means as cash available for rebalancing for bank fees.
Customer withdrawals and I think that's why you see it as one of the lowest cash as a percent of AUM really in our industry and that 5% zone.
And the key thing to your question that really tends to move that percent up or down is really market sentiment not rate seeking behavior and I think you can see that in the chart when there's elevated volatility.
Folks called in risk off mode right, you see those balances get up in the 7% zone as an example at the start of the pandemic and.
And then on the other end of the spectrum when they're fully deployed or in risk on mode. If you will you see that cash get down to call. It. The 4% you saw that if you look into 2019.
Time period, again market sentiment driven not really rate driven.
The other thing I'd note is back then back in 2019 more than half of our assets were in brokerage accounts and those tend to have less cash right. So if you look at where we are today. The majority of our assets are in advisory accounts that tend to have more cash. So if you. If you adjust for that kind of think of that low point that was at 4%, it's probably closer to four and a half.
And we're sitting at sitting at five 3% so with volatility actually rising. So I think those are the big drivers and then.
I know you didn't ask about it but on deposit betas I think like you've heard from most folks we don't see anything pointing to the change in the price sensitivity of these deposits. So what we saw a lot last cycle I think it was a good way to think about betas, which low in the early part of the cycle I think two 5% higher as you get deeper in the cycle I think 25%.
With an overall average around 15, so those are probably the big three dynamics Allen I think as we think about going into this cycle I think we feel.
Pretty pretty well set up on the <unk> side.
Great. Thanks for saving time, when a number of different follow ups and I'm sure people are going to happen.
I guess just to kind of wrap this up though and I don't want to put words in your mouth, but is your expectation to move ultimately all of the money market accounts back in to ICA, assuming that the bank demand is there.
Yeah, I think the way to think about it for operational cash rent the product as a bank products and you have a pandemic dynamic where the demand wasn't there for folks where they have call it rate seeking cash or invest in cash we have separate products for those people and those are available and they can put that money. There. That's just not really the primary nature of this cash is really.
Operations.
Awesome great. Thanks, so much.
Thank you. Our next question or comment comes from the line of Bill Katz from Citigroup. Your line is open.
Okay. Thank you very much for taking the question, maybe sort of start with business solutions.
To see a combination of just strong absolute growth quarter to quarter and then also I did pick up on the PFS pick up 63 subscriptions in the quarter can you unpack that a little bit more just sort of where you're seeing the success cross sell of cross financial advisors and within pay yes.
Is that being sort of cross sold to those that already have business solution subscriptions or new just trying to get a sense of sort of penetration and growth in front of us.
Yeah Bill its Dan.
It's a great question and I think as we step back and look at the opportunity set.
It's too old too.
In the offering across a broader set of our advisors do you think about 3500 subscriptions.
It may cover roughly.
<unk> thousand advisors, and so you've got lots of opportunity if you will to expand the offering across our client base, one and then two.
As they have success with one of these services.
And then it's very logical that.
That they would explore the extension of that relationship to engage in another service and so we do believe that that.
Certain different profiles of advisers could have as many as two or three.
Many as four of these relationships.
Truly our leverage points that drive performance in their businesses and so.
I think that's the right sort of dynamic that you identified in terms of the opportunity set.
As we look at it today most of them are.
Advisors that have one relationship.
We've seen great success as an example, with the original CFO solution, which ended up creating more value than just financial acumen that sometimes advisers need and want to leverage it actually provides additional strategic levers that really helps them think about a broad deaths.
Rod based set of challenges and considerations and decisions they have to make across the businesses and you got a partner that brings that outside in thinking and complements their perspective, and then I think they get great value out of them.
Richard the decisions they make about their businesses. So that's one that we find.
Continuing sort of growing understanding around the value of it and then happy clients share that with other clients and talk about their pragmatic experiences around it gives you an example of.
The solution like that great momentum so that's.
Maybe just a quick down to highlight one of the solutions, particularly on the other side. This new category. We just opened up around the planning concept, that's all about providing holistic advice and how do we help advisors do that in order to help them differentiate and grow and we went right at a big challenge out in the marketplace, which is if I got.
Client book of 300 clients and I only have been able to do early plans for those clients because of the complexity and the time spend et cetera, not only to set them up to support them going forward. If I've got a leverage point a resource that can help them do that and I can take that 32 to.
200 relationships within my book will then now has opened up a much much broader orientation to my client relationship. It creates a whole lot more solutions for me. This all four which creates real value and helping to grow our relationship. It also gives me a long term orientation to that client relationship where I can make sure we're executing on that.
<unk> every year, we hit new life events I stepped in to add more value. So it's a.
It's really meant.
As a big time transformation transformer, if you will into the orientation of client relationships.
Create a much more opportunity over the long haul so that's.
That's why we think that was so important and you can see then the residual kind of services that we can build around pair of planning and Thats why we talk about tax planning a state planning high net worth solutions. You can just you can just really.
Add to that.
That baseline peer applying a lot of complementary services, let me give you a little bit of a <unk>.
Framework at least for the growth potential as well as I think the two categories of solutions, we have and a little bit of a pragmatic example on these.
Great. Thanks, So much and then Matt just my follow up coming back to maybe rate sensitive a little bit can you talk a little bit about where your head's at in terms of migrating from float to fixed just given the shift of rates. So I. Appreciate the ability of the curve is sort of flattish at some point and also you had mentioned that.
You picked up a contract at fed funds flat and I think that compares to sort of fed funds plus 2030 basis points in the past would you envision as demand for deposits rises that that spread might re widen.
Okay. Thank you.
Sure Bill I mean, I think on the fixed rate appetite I think our view there is really unchanged right I think if there is demand and it's up to us on how much to fix fix out.
At $50 to 75% zone as the Sone that zone that we want to be in and I think when we're early in a cycle and there are some.
Yield curve starting to move up I think we want to be on the shorter duration side and closer to that 50%.
No.
The opportunities aren't there right because the demand is still limited from the bank side, but if we were able to execute I think it would be the same strategy that we articulated before so we'll look to see as demand comes back.
How quickly that comes back on the on the variable rate side I think yeah, I think in this environment, where there's still this amount of liquidity I think fed funds around fed funds flat. It flat I think is what you.
You should expect to see for a while.
Once you are in a place where there is demand full demand for the deposits I think if that is the point, where you would start to see spreads widen.
So the question is just how quickly does that happen that's hard to know, but I think the spreads probably don't start to widen until your demands fully being there.
Thank you very much.
Yes.
Thank you. Our next question or comment comes from the line of Aaron Hoffman from UBS. Your line is open.
Yes.
Hey, how are you doing anything but yes glad he said my last name.
Hey, guys.
So just a quick question here.
On the the expectation around <unk> ICA yield improvement only only gone up a few bps.
Is that.
Only based Matt on what we've seen so far from the fed because the forward curve is telling us that may and June are not only live there.
To both be 50.
Yeah, no absolutely that's prior to any additional rating.
And then I think you can see the sensitivities that we put out on.
If those increases do occur you can see the massive flows out of that but that was just to give you a kind of a baseline on where we are before any more.
Perfect. Okay. Thank you for clarifying that and then.
The.
I appreciate you're referencing slide 18, because that was going to be something I was going to explore.
Have you looked at what that rate looks like the percentage of cash.
Percentage of client assets in cash when you add also some of the purchase money market funds and other products that you all have available on.
The platform and how that might change over time and under different interest rate environments.
Yeah, Brian I think if you go back a couple of pages on slide 16, you can see that we've got the purchase money market funds on that chart.
So you can see that data, but the thing I would emphasize is back to the rate sensitivity of these balances and it's just not rate sensitive cash it is that operational cash.
That is used for rebalancing for paying fees the balances themselves right. If you just look at where we ended Q1 on average it's 8000 per account.
So it's just not the type of cash that's looking for investment it really is there to facilitate.
So I think when you look at slide 18, we think the primary driver is really where the equity markets are and whether that cash is fully deployed or not.
And not primarily driven by rates.
Okay. That's that's all really fair.
Of course understanding all of that it's just that we've seen given the rapidity of hikes.
Fact that that it could move so quickly.
Certainly you guys are using the money market fund sweep to a greater degree and so if it shifts over it could be a bigger change and there's been a another competitor that went through a transition from money market to bank account and it led to some disruption in the last cycle. So that's probably why there's a bit more attention there.
Thanks for taking my questions.
Sure.
Thank you. Our next question or comment comes from the line of Steven <unk> from Wolfe Research. Your line is open.
Hey, good afternoon, Dan and good afternoon, Matt.
So wanted to ask a follow up.
Sorry to beat the dead horse of slide 18, but we've gotten some questions and I. There was some confusion I wanted to clear up.
Specifically around how to think about cash growth this cycle versus last cycle. So a lot of folks are looking at the slide seeing that cash balances themselves in the last tightening cycle didn't grow very much were essentially stable.
But of course this time around your organic growth profile is much stronger I was hoping you can speak to.
What would support better organic cash growth this cycle relative to last and how you're just thinking about the cash algorithm generally it would be really helpful.
Sure I mean, I think there's a couple of things to highlight I think on the organic growth right and I talked about a little bit a little bit earlier.
If you heard but our growth continues to be more and more and buy in advisory which has higher cash balance right. So when you think about organic growth continuing to pick up maybe if you look at the slide on the right hand side of it that's where advisory growth has picked up more versus the left hand side. So I think that's one thing to factor in.
And then second I think when you look at and you look at the last cycle I think and it's not on the chart, but again the key driver is equity market movements.
Raul market sentiment and maybe if you if you hone in on.
In the end of 2018 early as early 2019, you can see that.
That spike up to five 6% rate still at the peak of the rate environment.
You had equity market drops and then of course moving over the right further when you pick up in Q1, 20% to seven 1% beginning of the pandemic. So I think what this chart shows is the thing that meaningfully move that cash is really market sentiment.
And less so interest rate sensitivity and to the point on your question continuing to grow more and more on the advisory side overall is going to bias that percentage to be up slightly as well.
That's great and then my follow up maybe for Dan I was.
Hoping you could just speak to how the M&A landscape is evolving and whether you have increased acquisition appetite as the current macro backdrop, taking a step back higher rates lower markets really should in theory bolster your relative financial position versus many of your private IBD.
The peers that are in self clearing and just wanted to get a sense as to whether this is an opportune time given the strength of your earnings profile, you're improving relative position to maybe get a little bit more aggressive on the M&A front.
Yes, Stephen I look I think our framework hasn't changed we first focus on organic growth and.
Looking at opportunities to deploy that capital.
Even when at a place of strength in order to enhance our ability to differentiate and grow organically and so in a down market, we see those opportunities around recruiting as an example.
Other firms may be struggling.
To invest in capabilities, where they have less stable platforms and.
You have the opportunity around a flight to quality as an example.
We've seen those opportunities occur at the beginning of the pandemic was a good example of that and so.
Obviously, we stand ready and positioned for those opportunities I do think and then you look at M&A as a complement to that organic growth.
Constantly looking across the landscape.
<unk> broker dealers and <unk> that may be an opportunity an interesting perspective to support our overall growth agenda.
And so those are interesting opportunities that we continue to look at and it's where you do tend to see.
Some of those emerge more readily.
More challenging markets.
And then and then.
I think I think finally, as we look across the broader landscape of the marketplace.
<unk> market spring about all the accelerated consolidation and we certainly.
Okay.
We feel well positioned and we can follow our sort of.
Formula If you will for how we think about the relevance of M&A, It's got to make strategic sense. It's got to be financially prudent we got to make sure that we can operate and execute on it.
Then we'll be rather opportunistic there too so I think that's sort of the order of which we would explore.
Deploying capital to drive growth organic.
Waller tuck in acquisitions capability acquisitions, and then finally.
Larger more transformation I hope that helps.
Very helpful. Thanks, so much for taking my questions.
Thank you. Our next question or comment comes from the line of micro Cypris from Morgan Stanley . Your line is open.
Hey, good afternoon. Thanks for the question I wanted to ask about recruiting just curious how this more volatile equity market backdrop with rising rates and a less certain macro picture I guess more broadly using impacting recruiting trends, maybe you could share a little bit of color around the pipeline and it looks like you've been adding about 300 advisers or so per quarter outside of M&A.
And the mandate wins, so just curious your perspective on sort of the forward look around sustainability of that sort of pace of adding about 300 or so per quarter.
Yes, so I might start with the just.
A quick sort of step talk on where we are and then we'll talk about a little bit about as we think about it going forward. So.
As a reminder.
Over the past year.
Accrued at 76 billion in assets and.
And if you put down on Q1 that included 10 billion in Q1, which say our largest first quarter, we've ever had X.
Large large financial institutions being a part of that so.
Certainly I think reinforces the continued.
Success and opportunity.
Even in a in it.
A marketplace that is.
A change in conditions, if you will.
And then I think if you look at we closed the quarter strong with almost 50% of that recruiting happening in March <unk> got solid momentum.
As you kind of move away from some of the.
Original episodic sort of geopolitical event that caused the volatility to start.
And then and then I think as we think.
Gives us a good baseline if you will to look forward and then you have got recruiting opportunities in the financial institution space that we talked about earlier.
People's United.
To add to that as well as this growing diversity of our recruiting across our new affiliation models.
Our.
Strategic well <unk> and <unk> New models, all contributed collectively 3 billion in the first quarter, which is high for those new models and so.
We believe that those sort of dynamics in optionality and flexibility within.
The model and our ability to continue to invest and enhance the appeal of it set us up for.
Good solid opportunity if you will as we move forward through 2022, the pipelines continue to grow in each one of those affiliation models.
So.
We are encouraged by the opportunity as we go forward look even in a down market. If we get some extended down equity market that typically works as a tailwind to recruiting.
As once you get sort of past that sort of initial stage of that more challenging markets and advisors have kind of acclimated to that they'll begin to pick up and use that time, there's an opportunity to look around and see how they strengthen their business strategically so.
If we do end up in some extended down market those can be a tailwind.
That's how we that's how we're looking at it across the balance of the year I hope that helps.
Great. Thanks, and maybe just as a follow up question.
Were mentioning some of the new affiliation models, maybe you could just talk a little bit about the the new employee model just update us on how thats progressing in terms of bringing on new advisors and assets and to what extent did an acquisition makes sense and that part of your business to be helpful. In terms of accelerating your scale and presence in the marketplace there.
Yes, good question and look that model.
It really fills in a really interesting and differentiated space in the spectrum of different models that exist in the marketplace.
And.
Just the foundation.
Its value.
Sort of leads to our hypothesis that has as good strong.
<unk> in front of it.
We certainly have had to establish ourselves with incredible solution in the marketplace.
That gets more winning and I think we see momentum building as we're doing that now.
And a variety of different geographical areas across the country and are really encouraged by how we think that model is positioned in the marketplace.
Peel and now as we as we build our market share. It gives us even further kind of right to win credibility there so very encouraging trend.
And Youre right I think this is one of those places that you might use a an acquisition strategically if you would if you just wanted to accelerate or add momentum.
To this particular model if you remember it's kind of how we started with the acquisition of Allen <unk> co, which really gave US the initial foundation of learning and insight to try to build this model.
As appealing as we could make it is differentiated.
So I think your hypothesis around could complement it with M&A is certainly a logical place we would explore.
Great. Thanks, so much.
Thank you. Our next question or comment comes from the line of Gerry O'hara from Jefferies. Your line is open.
Great. Thanks for taking the question assessing it.
Just I guess staying on seem a little bit, but the but the financial institutions. It seems as though there's been a cadence of perhaps one or one or two per year is there any sort of capacity constraint with respect to how many types of deals you can realistically expect to achieve in kind of a 12 to 18 month period either.
Staffing or just operational aspect of it all.
Yeah.
I think when we originally started with these larger financial institution deals admittedly, we had some things to learn and toward in terms of.
Well.
How you transition them.
And to LPL, and then how you support and help them acclimated I'll call. It in the first quarter six months with US which is a change management effort.
Alright.
We had lots of room for improvement as we learned around our first rounds.
We use that data and those insights and to earn and create new solutions.
Digital capabilities.
Apology solutions streamline things better understanding about how to deploy our human capital in order to support them.
And I think presumably not only will that help you get better at doing them in the second round. It also begins to help to drive efficiency and scalability into the overall effort.
And so part of that is onboarding them.
And how do we think about continuing to automate that tried to scalability into that so I would tell you we're learning into that and.
We will get better and better at it we will automate it more and more but I think it is reasonable to say there would always be some cap I think we've got to continue to innovate first into.
And we've got room for improvement there I think the second thing is also just learning how to operate at higher growth rates in <unk> and I don't mean, just in the initial transition I mean, how are you.
Support.
A higher growth rates on an ongoing basis and I think this is where we see it.
Investments in our core operating platform service compliance operations and how we're really exploring how do you digitize all of them.
To the extent that Japan, and the scalability of the model.
Really becomes interested not only in being able to facilitate those much higher growth rates on a sustainable basis.
<unk>.
Sure.
The efficiency gains.
So I think when we talked about these digital investments and our clearing function.
A great example.
<unk>.
Helping ourselves sustained higher growth rates over a longer period.
I hope that helps but that's a couple of areas, where I think we think about how we improve and invest.
<unk> ourselves for the long term for both higher growth rates and being able to bring them more.
Great that is helpful and that's it for me this afternoon. Thank you.
Thank you. Our next question or comment comes from the line of Kyle Voigt form K VW. Your line is open.
Hi, good evening.
Maybe a question on promotional expenses, if you exclude transitional assistance.
Yes, the <unk> guide would really not we're really imply not much change in that line versus the first and fourth quarter.
I'm just wondering if you can quantify how much of the <unk> guide is attributable to those onetime onboarding type costs that you cited.
And really what I'm getting at is whether this kind of $45 million range for that promo expense.
Excluding ta is a good new kind of run rate to think about moving forward.
Because when I think when we look back historically that promo Ta was running around 25 to 30 pre pandemic. So just getting a little more color there would be helpful.
And definitely when you look at Q2, there's a couple of things to highlight.
From a trend standpoint, I think the first is really conference as a reminder, this year returning back to a more call. It typical conference scheduled for us which means the majority of those expenses will show up in Q1 and Q3.
So we do expect lower conference expense in Q2, but I think the offset which I think you probed on it in your question is really.
Joining in the call.
And the on boarding expenses associated with a large financial institution. In addition to the Ta, but those actual onboarding expenses show up in promotional when they really peak in the quarter in which that institution joined and then reminder, kunitz the largest financial institution that will have that.
So you do have the typical ta growing not in rate, but I think in overall dollar amounts as our as our organic growth continues to grow or to continues to increase but I think probably the main thing I'd highlight is it's the on boarding expenses.
Which are nonrecurring for that particular institution right. If we continue to have more and more institutions will have more on boarding expenses, but they are by their nature sort of nonrecurring and if you included this quarter. If you go if you look at we put together last quarter, just looking at 2021 with with empty and BMO those were about $15 million of those expenses for the year.
<unk>.
Now when you look at this year, we have Q&A, which is kind of the size of those two institutions together plus People's which is another call. It 556 billion. So we got even more coming this year and I think that might be the key to it from a modeling standpoint on your side.
That's very helpful. Thank you.
And then another question on expenses Youre kind of guiding towards core G&A growth in that high single digit range. This year.
Yes.
More favorable interest rate and revenue backdrop would there be any reason why that growth rate would be.
Very significantly from the current guidance range of high single digits.
And also maybe if you could just discuss how you balance the tailwind.
And even more favorable macro environment between letting that kind of fall to the bottom line versus the opportunity to invest back more into the business.
Yeah definitely I mean, I think when Youre definitely can address that I think that when you think about rates going up I think about early in the cycle I would expect us to let that benefit fall to the bottom line and fully improve online.
And when I say early in the cycle think the first 100 basis points yourself right and once we get beyond that I think we would consider making additional investments.
Investment really with a focus on driving growth, but also while still resulting in an overall improvement in op margin right. So I think that's the balance we would have when we get deeper into the cycle and I think the key for US is really our capital allocation framework to drive the decision.
Organic growth is first and foremost on that list and the things that we would consider our new capabilities for advisers as an event.
Further enhancements to the service experience.
Investments in expanding the services portfolio that Dan talked about earlier that all of these things just as a few examples that can really drive growth.
And then of course beyond investing in the business. We would of course look at other uses for that capital outside the expense side, meaning M&A and returning capital to shareholders. So.
That's the framework, we would use and I think overall I think we're positioned to really remain flexible and make those decisions at the relevant time meeting windows increases correct.
Great. Thank you very much.
Thank you. Our next question or comment comes from the line of Michael Young from <unk> Securities. Your line is open.
Hey, Thanks for taking the question.
Asked maybe more of a high level question just on profitability kind of pre cash so looking at slide 14, and the gross profit ROA prior to client cash has sort of been coming down just a little bit here over the past couple of years and just wanted to get kind of a higher level thoughts on what can kind of turn that back the other way that really.
Just kind of lapping some of these onboarding and higher growth related expenses or are there other structural things that you expect that could be a benefit going forward.
Yeah, and I think the key on those trends as maybe just just to highlight the changing needs of the nature of the revenues that are in there and I think when you just think about the gross profit growth overall right before we get too right.
The things that are driving that up are going quite well right. M&A overall has been increasing year after year recruiting larger advisors.
The financial institutions channel is expanding and growing.
We've got positive mix shifts whether it be brokerage to advisory and then within advisory into our centrally managed platforms.
And then some nice growth Im sure you saw on the service and fee revenue. So those are all things that are driving nice gross profit growth.
When you look at it from an ROI standpoint.
The challenges Theyre not all asset driven revenues right. So if you can get a little noisier the advisor driven fees. The services fees transaction revenues as an example, those don't move along with assets.
So you get a little bit of noise. There. Another one that I think is really important is the large financial institution a.
M. A T BMO qunar and people that gross profit ROA is dilutive to our overall averages because those those institutions are much larger they are gross profit are ways for us are much lower.
But the transition assistance and the expenses to support them are also lower so they're margin accretive.
Clients for Us when you look at it from the lens of purely gross profit ROA like I think like.
You walked through very well just now it's going to look like there is a decline when really the economics and the op margins are actually improving so I think that's the most relevant thing from my standpoint, when you see those trends were continuing to drive growth, we're just getting more and more diversified both from the types of revenues that we have and the size of clients that we have.
That it looks like there's some compression there when that's really a quite a positive story.
That's really helpful color I appreciate that and maybe as a follow up just as you've kind of moved down the path and done more of these sort of different recruiting models are there any lessons learned sort of in terms of the structuring of the deals and the economics of the deals or are you getting better kind of incremental.
Economics now than maybe earlier on with some of the initiatives.
Helpful to hear anything about that.
Yes, I think it's alright, so I think when you when you think about the overall economics of the different models and maybe building a little bit.
What I was just talking about in the financial institutions right, there's different levels of services provided.
Not only different levels of revenues, but also different levels of expenses to support it.
And then the transition assistance to bring them on board. So I think that I think about the overall returns for us is relatively similar as a baseline than the more service and support we provide the more of those returns can go up but I think the key is about the <unk>.
Service and capabilities that we provide in those different models.
Okay. Thanks, I appreciate the color.
Thank you we have time for one final call that call is from Steven <unk> from Wolfe Research. Your line is open.
Hi, Thanks for coming in and to follow up really appreciate it.
They are repeat customers and this is crazy.
Yeah.
Now I got to ask the question I really wanted to ask on behalf of investors by myself, which is on the buyback and.
Matt heard you loud and clear about the second half and potentially some room for increasing or accelerating the buyback I know you guys have a very transparent capital return algorithm, but just given the fact that you are running with excess liquidity today, you're already at that lower leverage abound.
I was hoping you could speak to what level of buyback, we could be contemplating in a higher rate environment relative to the $125 million a quarter you had done previously and given your stronger earnings power is it reasonable to expect that it could even be above and beyond that run rate, while still support it while it's there.
Having ample free cash flow generation is to support organic growth in the dividend.
Yeah, So I think so.
Of course, all depends on the.
The opportunities we have to allocate capital to see how much eventually does the buyback, but I think maybe a couple of things right. Just just keep in mind at least for the near term in Q2 with CUNA joining.
And the transition assistance is getting paid in that quarter, that's going to be a meaningful use of cash in the near term.
Combined with the buybacks that we expect to be at a similar range for Q2, but to your point on the second half of the year I think the I think to state the obvious right with rates go up.
In line with what the market expects, we're going to have additional capital to deploy.
And I think to your point on the on the leverage range and being at the low end of the range right. Our objective would be to deploy that capital and to manage within that range and I think where that capital goes.
Back to our framework right organic growth first and foremost M&A second and returning capital to shareholders third so it really just depends on the opportunities that are in front of us at that time.
But I think if if in the scenario where the opportunities are primarily in share repurchases. The cash that we generate is filling up I would expect those share repurchases to go up just all a matter of what the opportunities are and we will make our our decisions at that time.
That's great to hear thanks, so much for accommodating the follow up.
You bet.
I show no additional questions in the queue at this time I would like to turn the conference back over to management for any closing remarks.
Thanks, everyone for taking the time to join US. This afternoon, we really appreciate it we look forward to speaking with you again next quarter take care.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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