Q3 2022 LPL Financial Holdings Inc Earnings Call
Yeah.
Good afternoon, and thank you for joining the third quarter 2022 earnings Conference call for LPL Financial Holdings, Inc. Joined the call today are our President and Chief Executive Officer, Dan Arnold and Chief Financial Officer, Matt Audette, Dan and Matt will offer introductory remarks, and then the call will be.
Open for questions. The company would appreciate if analysts limit themselves to one question and one follow up each the company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website investor LPL Dot com.
Today's call will include forward looking statements, including statements about LPL financial future financial and operating results outlook business strategies and plans as well as other opportunities and potential risks and management foresees such forward looking statements reflect management's current estimates or beliefs and.
They're 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 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 security and Exchange Commission.
During the call. The company will also discuss certain non-GAAP financial measures for 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 investors. The LPL dot com with that I will now turn the call over to Mr. Arnold.
Thank you Amy and thanks to everyone for joining our call.
Over the past quarter amid persistent market volatility our advisers continue to be a source of support and guidance for their clients helping them navigate.
Sure.
This commitment to their clients underscores the importance of our work on our mission taking care of our advisers.
Third one.
With respect to our performance third quarter was mark.
This results, which drove solid financial well.
As well as continued progress on our strategic plan.
We view both of these areas starting with our third quarter business.
In the third quarter.
Total assets decreased to one one trillion.
Continued solid organic growth was more than offset lower equity.
With respect to organic growth.
<unk> continued to perform well despite market.
Third quarter net new assets were $2 billion, representing 7% annualized.
This contributed to net.
So over the past 12 months of 101 billion, representing a 9% organic growth.
Looking at recruited assets they were $13 billion in Q3.
Bringing our total recruited assets over the past 12 months the 84 of these.
These results were driven by the ongoing enhancements to our model and our expanded addressable markets.
Looking at same store sales against the backdrop of continued market volatility.
<unk> remained focused on serving their clients and delivering a differentiated experience.
As a result, our advisors are both winning new clients and expanding wallet share with existing.
Combination, which drove improvement in same store sales.
With respect to retention, we continue to enhance 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 third quarter, 98% over the past 12 months.
Our third quarter business results led to solid financial outcomes of $3 13 of EPS prior to intangibles and acquisition costs, an increase of 77% a year ago.
Let's now turn to the progress we made on our strategic plan.
As a reminder, our long term vision has become the leader across the entire advisor center market.
Which for us means.
Being the best at empowering advisors and institutions to deliver great advice to their clients and to be great operators of the business.
To bring this vision to life, we're providing the capabilities and solutions that help our advisors deliver personalized advice and planning experiences to their clients.
At the same time through human driven technology enabled solutions and expertise, we're supporting advisers and their efforts the extraordinary business owners doing this well gives us a sustainable path to industry leadership across the advisor experience organic growth and market share.
Now to execute on our strategy, we've organized our work into for strategic planning place, which I'll review in term.
Our first strategic play involves meeting advisors and institutions, where they are in the evolution of their business.
Winning in our traditional markets, while also leveraging new affiliation models, which expand our addressable market.
Our recruiting and traditional markets continue to be a source of growth in Q3 with approximately $6 billion in assets.
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.
Following several quarters of elevated market volatility advisors are acclimating to the conditions and increasingly exploring new strategic alternatives for their practice.
This creates a more favorable scenario for us as market driven headwinds give way to the structural strength of our model.
This should result in a solid finish to the year from a recruiting team.
With respect to our new affiliation models strategic well.
<unk> and our enhanced <unk> offerings, we recruited over $2 billion in assets in.
In the quarter and believe we are well positioned to drive continued growth across all three months.
With respect to large financial institutions over the past two quarters, we on boarded two new clients Qunar People's United.
We continue to learn from each experienced and use these findings to drive innovation that improves the transition to LPL and in turn helps.
Helps make our offering even more.
As we look ahead, we continue to see our pipeline build as demand for our model growth.
Our second strategic play is focused on providing capabilities that help our advisers differentiate in the marketplace and drive efficiency in their practices.
A particular area of focus is helping our advisors create a digital experience for their clients, it's personalized for their practice.
As an example, this quarter, we extended the flexibility our advisors have and how they utilize their brand and the optionality of the content features they present to their clients.
In addition, we're always looking for opportunities to RMR advisers and their clients expanded tools products and services to navigate mark.
So that we continue to build out our research capabilities in terms of content and subject matter expertise.
We've also increased our focus on certain products like annuities and alternative investments, which are in higher demand in this market.
So that and we're working on making it easier and more efficient for advisers to provide these products. While also expanding the breadth of solutions available to meet the clients' needs.
These enhancements helped advisors broadens our value proposition and enrich the offering that provides a decline which further contributes to the appeal of our platform both existing and prospective deposits.
Let's next move to our third strategic play, 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 couple of years, we've been on a journey to transform our service model into an end to end client care model.
And we think about this journey through two primary Lynn transforming our service interface.
<unk> named the operational processing takes place behind that.
Our aspiration is to provide advisors, a multichannel experience across voice chat digital first support this offering them greater flexibility when and how they access serve.
While we continue to fine tune each of these three channels. We're currently focused on our digital first support.
We see it as an opportunity to create an easier and more efficient experience for advisers to access the information they need.
Now as we expand these capabilities advisers can increasingly engage more and more digitally to resolve their request.
Many have already share they prefer the simpler option.
But we're making a phone call.
While we're still in the early innings. We believe these enhancements will have a meaningful impact scalability of our platform. While also enhancing the client experience.
Our four strategic play is focused on developing our services portfolio that helps advisors and institutions run thriving businesses and deliver comprehensive advice to their clients.
We're encouraged by the seasoning of this business and that our value proposition continues to resonate with deposits.
Four years ago, we started our service group that strategic goal.
Solving the practice level challenges advisor space. So they can spend more time with clients.
Through ongoing innovation and expansion. These efforts have translated into the comprehensive portfolio of services we offer today.
And as a result of growing demand our services group subscription base continued to increase ending the period at roughly 4200 and generating run rate revenue of 34.
As we work with advisors on existing services, we continue to identify and solve for new needs on their behalf. One example is the launch of our latest solutions.
Based on insights from CFO solutions, we created a new service to help advisers further streamline the business decisions with accurate and timely financial reports as a result advisers can spend more time growing and managing their business. While also trucking profit.
Looking at our innovation pipeline for the remainder of the year, we have several services in pilot and others in the incubation stage and as we move forward, we remain focused on enhancing and expanding our portfolio better support our advisors and to drive 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 of 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 remain focused on serving our advisors growing our business and delivering shareholder value.
This focus led to another quarter of solid net new assets and earnings growth.
In addition, we enhanced our sweep deposit program with the launch of the client cash.
And on boarded People's United Bank.
So as we look ahead, we continue to be excited by the opportunities to help our advisers differentiate and win in the market.
Now, let's turn to our third quarter business results.
Total advisory and brokerage assets were one trillion down 2% from Q2 as continued organic growth was more than offset by lower equity.
Total net new assets were $20 billion or 7% annualized growth rate.
Our Q3 recruited assets were $13 billion, bringing our 12 month total to 84 billion.
As for our Q3 financial results the combination of organic growth rising interest rates higher ICA balances and expenses.
Led to EPS prior to intangibles and acquisition costs of $3 13.
This was up 77% from a year ago and is the highest in our history.
Looking at our top line growth gross profit reached a new high of $838 million up $127 million or 18% sequentially.
As for the components Commission and advisory fees net of payout were $182 million down.
Down $23 million from chip.
The decrease was primarily driven by the seasonal uptick in production bonus expense and lower advisory fees. Following the Q2 equity market decline.
Our payout rate for the quarter was 87, 9% up about 90 basis points from Q2 due to typical seasonality and the Onboarding unit.
Regarding asset based revenue sponsor revenue was $194 million in Q3 down $14 million sequentially.
The decrease in Q3 was driven by lower average assets during the quarter as well as the nonrecurring $8 million sponsor payments in Q2.
With respect to client cash revenues was $304 million up $147 million from Q2 <unk>.
Driven by higher average short term interest rates as well as higher ICA balances.
Looking at overall client cash balances they ended the quarter at 67 billion down $3 billion sequentially drew.
Given my client net buying activity of $20 billion.
Which is the highest quarterly level, we have ever seen.
Within our ICA portfolio, we added capacity in Q3 as we saw further improvements in thanks.
Leading to an increase in balances of $7 billion and I would highlight that $5 billion of that increase was a new fixed rate contracts.
Looking more closely at our ICA yield was 212 basis points in Q3.
78 basis points from Q2 <unk>.
Primarily driven by the increase in short term rates during the quarter.
As we look ahead to Q4, we expect our ICA yield to continue to increase base.
Based on where interest rates are today, we expect our Q4 ICA yield to increase to approximately 265 basis.
As for service and fee revenue it was $122 million in Q3 up nine.
<unk> 9 million from Q2.
Driven by revenues from our National Advisor Conference and <unk>.
Within our services group, we ended the quarter with roughly 4200 subscriptions, which is up about 300 from last quarter.
Our services group now generates roughly $34 million of annual revenue, while also contributing to organic growth by helping drive recruiting same store sales and retention.
Looking ahead to Q4 results, we do not have any large advisor conferences in the quarter should we expect service and fee revenue to decline by roughly 5 million sequentially.
Regarding Q3 transaction revenue.
It was $43 million down 1 million sequentially as trading volume decline.
As we look ahead to Q4, we have seen an increase in trading activity in October .
That said I would note there is one less trading days so that.
I would likely offset that.
So based on what we have seen to date, we would expect transaction revenue to be relatively flat with Q3.
Turning now to expenses or.
For G&A was $298 million in Q3 up $12 million sequentially.
Looking ahead, we continue to see opportunities to invest to drive growth.
So while we expect to be within our full year 2022 for G&A outlook range, we expect to be towards the higher end.
As a result, we are tightening the outlook to a range of $1 billion 185.
Two 1 billion 195.
On Q3 promotional expense it was $99 million up $15 million sequentially.
Primarily driven by higher conference expense as we hosted our largest advisor conference of the year.
Which returned to an in person format for the first time in three years.
Looking ahead to Q4, we expect lower conference spend partially offset by continued growth in recruiting transition assistance.
As a result, we expect promotional expense will decrease by approximately $15 million sequentially.
With respect.
Depreciation and amortization it was $52 million in Q3 up $3 million sequentially.
Looking ahead to Q4, we expect depreciation and amortization to increase by a few million dollars sequentially.
As for interest expense it was $33 million in Q3.
$4 million sequentially as higher LIBOR rates increase the cost of our floating rate debt.
Looking ahead to Q4, given where LIBOR rates are today, we expect interest expense to increase to approximately $36 million.
Regarding capital management, our balance sheet remained strong in Q3 with corporate cash at $424 million up $183 million from Q2.
Our leverage ratio was one seven times down from two one times in Q2.
This decline was driven by a combination of our continued growth and a higher interest rate environment, both of which have meaningfully improved our earnings power.
As we look at our leverage ratio going forward, our balance sheet strategy is unchanged. Our focus is to maintain a strong balance sheet that can absorb a market downturn, while at the same time, having the capacity to invest for growth.
With our improved earnings power, we are updating our leverage target to a range of one five to two five times, which we believe positions us well to operate over a range of economic cycles.
And strikes the right balance between preserving balance sheet strength and investing for growth.
As for capital deployment, our framework remains focused on allocating capital in line with the returns we generate investing.
Investing in organic growth first and foremost.
Are suing M&A, where appropriate and returning excess capital to shareholders.
In Q3, we allocated capital to both organic growth and share repurchases buying back $75 million of our shares.
As we look ahead to Q4, we plan to increase share repurchases to approximately $150 million.
This will complete our existing authorization of $1 billion that we established at the end of 2018.
Looking to 2023, we work to put in place a new share repurchase authorization.
Our focus was on an amount that we'd be in a position to execute against over roughly two years.
With that framing in mind, we established a new authorization of $2 billion.
Which we expect to begin executing in the first quarter of 2023.
As always we will retain the flexibility to adjust the pace of repurchases as the environment warrants or as other capital allocation opportunities across organic growth and M&A merge.
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 investing to serve our advisers grow our business and create long term shareholder value with that I will ask our operator, Amy to open the call for questions.
As a reminder to ask a question you will need to press star one on one on your telephone please.
Please standby, while we compile the Q&A roster.
And our first question comes from Steven <unk> with Wolfe Research. Your line is open.
Hey, good afternoon.
So wanted to start off with a question, Matt just on the buyback and the adjusted leverage target range. So certainly pleased to see or hear both I was hoping you could frame the timing or cadence for executing that $2 billion buyback authorization and just given the meaningful.
Step up you should see an EBITDA and leverage likely to fall below the low end of that target range in the <unk>.
Quarters, just in the absence of any opportunities around M&A, how should we think about your willingness or appetite to optimize buybacks and stay within that leverage target range over the long term.
Sure I mean, I think the core of it as I talked a little bit about in the prepared remarks is making sure that we're balancing having a strong balance sheet with deploying capital to drive growth and I think when we think through the prioritization of that it is focused on organic growth first M&A second and then returning capital to shareholders third and I think what you hear.
Staying on the $2 billion over two years that we think around $250 million and I would emphasize roughly right roughly $250 million a quarter is that right allocation now if we get through a period of time over that two years, where interest rates are are elevated for an extended period of time or there's just fewer opportunities to deploy capital towards.
Organic growth or M&A, well, then I expect I would expect that pace to increase and for us to execute against faster.
And I would highlight if the opposite occurred received more opportunities for organic growth and more opportunities for M&A that would expect it to slow down. So it's really just about the opportunity set we see in and we'll make those judgments along the way.
That's great and then maybe for my follow up a question for Dan.
On the M&A landscape, certainly a higher rates bolsters your relative competitive position versus peers, particularly those that are in self clearing I was hoping you could speak to the environment for deal activity. How active you expect to be on the M&A front.
And just the willingness of any targets to engage just given the pressures that they have been feeling in terms of equity market declines without a similar benefit are the offsetting benefit from higher rates.
Yes, Steven Thanks for the question.
As Matt said, when you think about that allocation of capital. We obviously prioritize organic growth and then we look to M&A as a complement to that organic growth.
<unk>.
I think as we've said before there is two key areas, we continue to explore and look.
To the M&A marketplace for and Thats.
Sort of speed up.
<unk> that we deliver and make available to our advisors.
<unk>.
That contributes to our overall growth and I think with respect to that second category. We continue to look through the entire ecosystem.
Smaller.
<unk> growth oriented deals like binning scattergood painful, but you saw.
<unk> in the second quarter.
All the way up to if there were more opportunistic opportunity too.
Create value.
Deploy our capital in a way that.
Makes sense relative to other options and alternatives that operationally, we can consume that acquisition.
On it well.
It's inside our strategy then we would we would be.
Interested in certainly exploring those offers and so I don't think our posture has changed at all relative to our strategy and how we think about using and leveraging M&A.
Certainly we get your point around how the market may and conditions in the market may change that may make.
Those acquisition opportunities more rightful available again, we stay consistent in our exploration of the market looking at where we can supplement our opening.
So I hope that helps.
That's very helpful color. Thanks, so much for taking my questions.
Thank you please standby our next question.
And our next question comes from Alexandra <unk> with Goldman Sachs. Your line is open.
Hey, guys. Good afternoon. Thanks for taking the question as well so maybe I could start with also a bit of a strategic question.
Along similar lines to Stephen's question, Ron M&A, but youre cash flow characteristics, obviously, improving.
Meaning from the level, but also the visibility as you're starting to extend more so from an organic perspective. If you were to think about areas, where you would want to invest more in to accelerate organic growth from here what are the products and what are the channels, where you think there could be the best opportunity to accelerate investment in in order to capture a higher share of the organic growth opportunity.
Let me start and then that you can.
You can add to that a compliment.
Thanks for the question. It's a great question. So I think look we would look across.
Two different.
Obvious landscapes, one would be how do we continue to create capabilities that help our advisers differentiate and win in the marketplace I think about anything across the spectrum of.
Our wealth management platforms and offerings to more that we can automate that.
The advisory platforms expand the content.
In terms of investment options alternatives, we continue to invest significantly and are essentially managed platforms turning that into a really interesting and competitive UMH.
Examples of where we would think about added capabilities that I think continue to help our advisers differentiate and win.
Other great examples of that are in our financial planning capabilities with pure planning function and ex planning overlays et cetera.
In other places.
We believe the advisors and show up in the marketplace with a broadening.
So that's just one example, where we would focus again the second one would be in this area of how do we help them run better businesses.
And anything that we can do that makes them more effective at making better decisions and really understanding what's happening in their businesses.
So using data turned into analytics to create better decision, making creating leverage points and expertise whether that be like.
Our CMO marketing solution as an example, our CFO solution. Those are examples of where we would continue to invest in capability and services.
So you take that combination of technology services combined.
For the purpose of helping them deliver.
Deliver better advice and differentiate.
Win more and then ultimately to help them operate and run better businesses, that's where you should think about us celebrating enhancing our overall spend level I think at the same time.
Look we continue to explore how do we expand and of all of our affiliation model such that you extend your addressable market, you actually create more and more flexibility and optionality for how that adviser.
They plug into our platform or may evolve how they use our platform over time, we think they are really compelling and interesting places.
So those are just a couple of examples of how we might think about deploying.
Hum into our overall capability set that would drive new store sales same store sales.
All of which obviously contribute towards him.
So I don't know if you want to add.
Hello, everyone.
Great. Thanks, Thanks for that and my quick follow up is just for Matt clear.
Clearly the dynamics in the brokerage sweep channel have change quite rapidly here in the last three months, even in with banks starting to see more deposit outflows. How are you thinking about the spread on the ICA portfolio. Obviously on the variable piece of the fixed I don't think has a spread on it but.
Are you starting to see competition getting to a point where <unk>.
It could actually start to increase over the last couple of quarters and kind of how would you think about the bookends of where that could ultimately go.
Yes, we're definitely seeing demand, leading leading to those spreads so maybe just to walk back kind of pre COVID-19.
I think we landed in a zone, where you typically you'd be able to get fed funds plus 20% maybe 25.
And then during Covid. If you are if you're lucky enough to get it is usually fed funds minus and then I think we lived in a place of round fed funds flat is.
Probably the last year or so.
And then I think what we're seeing right now and even the new variable contracts that we're putting in place right now or at a spread of plus 5% to 10, right. So youre starting to see things come back and I think.
I don't I don't see anything to think that the book end of where we were pre COVID-19 that plus 20 to 25 I think that's a good place to 0.2 on where we think it will go but I think the trend is a positive one and we're seeing it each quarter, including this quarter, but that plus five to 10.
Great. Thanks very much.
Thank you. Please standby for your next question.
And our next question comes from Michael <unk> with Morgan Stanley . Your line is open.
Great. Thank you just a question on the bank mandates, we saw the People's United come through in the quarter can you just remind us how much if any there is theyre still outstanding to come through from a funding standpoint on that or qunar or others. As we kind of look through the rest of the year and into next year in terms of remaining.
Balances to come through and then if you could just maybe more broadly update us on the pipeline and the conversations that youre, having with banks regarding outsourcing arrangements and would you be surprised if there were no additional announcements on that front over the next 12 months.
Yes, let me take that.
I want to start with just what's outstanding in terms of the balances to transition.
And I'll pick up yes.
Yeah. It sounds good I think it's mostly on boarded between the two of those I would call. It in the 1 billion and a half done that's left to come onboard.
That's on the on the direct side, so that it takes a little bit longer for that process for us over the $8 five would be the right time.
And then maybe for the second part of your question.
So look we continue to see.
These financial institutions.
Filiation model that we believe has ongoing growth opportunity.
Thank you.
Collectively added roughly $65 billion 70 billion.
Large financial institution assets over the last couple of years.
And continue to see strong momentum.
The demand for the solution or the offering which really just sort of introduced a new concept into.
Outsourcing model.
Sort of scale into the marketplace.
So all of the value proposition that we've talked about originally everything from risk management profile shift all the way to.
Better client experiences attracting better advisors better financial results, all still holds and I think.
What we've done over the last couple of years as we've added.
These larger institutions, we continue.
In terms of how we support them day in day out and also this is clearly how you transition them over that's a pretty big change management effort as you could imagine.
And I think given that experienced over the last couple of years, we continue to make our model more and more viewing.
So as we talk to.
Future prospects.
Well to continue to expand the value, we provide and deliver for them all of them, which we do it and simplify the change management effort in the <unk>.
Overall transition so with that.
Momentum that we have.
Matched with the improvement in <unk> value proposition.
We believe in are still very optimistic and the sort of durability around both opportunity and have a good solid pipeline and though these deals are a little bit harder to predict in terms of the timing because they are longer sales cycle.
Feel good that we have.
Opportunity.
Continue the momentum.
Okay.
Okay. Thanks, and just a follow up question on the technology portfolio spend I think you guys are expecting a little over $200 million or so this year can you just remind us what portion of that goes through the P&L versus what the capitalized how do you see that evolving and then on the P&L, we see DNA continues to drift higher.
Or the growth rate can we expect there on depreciation amortization relative to the 24% growth that we saw in the quarter on a year on year basis.
Yeah on that growth rate I mean, I think when you.
Look at the last few quarters, it's been a few million dollars a quarter and that depreciation and amortization growth and that's primarily the tech portfolio are the capitalized piece that goes there.
So I think thats a good a good framework to think about that.
On the tech portfolio, the capitalization versus expense rate it moves around depending on the type of work that we're doing that particular quarter, but I think a good rule of thumb is.
70% is capitalized 30, 30% defense.
Great. Thank you.
Thank you one moment please for our next question.
And our next question comes from Brennan Hawken with UBS. Your line is open.
Good afternoon, guys. Thanks for taking my questions.
Let's just start we've heard from some other wealth management firms that have seen a shift and more growth on the brokerage side.
Driven by Investor demand to go and find yield and more interest in bonds and whatnot.
Are you seeing that as well and should we maybe tweak our expectations for your mix of growth in the near term.
Yes.
Short answer is we are seeing some mix I think you are.
Youre right in assessing that it's very much sort of environmentally driven by the macro market conditions.
Fixed income is a good example of that I think Youre also seeing it in the Alt space in annuities.
And those drive a higher mix, perhaps deploying capital too.
The new solutions.
And it kind of a time bound way relative to the market conditions I think you've also seen it show up in a bit of a slowdown in some of the transition from brokerage to advisory in the short run as well, we think thats structural trends still makes sense and still expect that to continue.
You have a little bit of sort of environmental noise overlaying.
Yes.
I think those are the.
Right way to think about slight mix.
If you look at our overall macro trend that we still expect to see.
Much more assets deployed.
<unk>.
For reasons that we've talked about before.
And I think youll.
Youll see that we still sit in sort of two to <unk>.
<unk>, 53% range of assets now and advisory and that probably Hasnt continued to trend up as much as we would've expected.
Little bit because of the macro probably more because of some of the larger bank for enterprise solutions that we brought on just from a higher mix of brokerage assets.
Then typically independent advisors that we recruit to but we do expect once they get onto our platform and have new capabilities and access to.
Better advisory tools.
They typically begin to also.
<unk>, our transition of their books overtime from brokerage to.
Advisory So I hope that color helps you've got kind of the structural trend towards advisory that still exist for a little bit of an environmental influence over the phone.
Sure, we'll mix of cyclical and with the secular that makes sense.
Yup.
Great and then for my My second question I know it's early.
But.
And it'll be impacted by a lot of factors that will come out and play out in the next several months, but any sense about how we should be thinking about expense growth for 2023.
We've seen as the benefits of interest rates provide some tailwind that you have been driving a little bit of incremental investment in the platform should we assume that that would continue.
Along with our rate forecast that we might be using or and is there any reason to think that some of the expenses expense growth or trajectory would slow for any reason at some point.
Sure Ben I'll get it's a little early but I'll give you some color I mean, I think when we think about to your point on on interest rates and how that impacts our financials. When we do those economics.
Just building from the start of the cycle right early in the cycle. We were focused on that the benefit from those increase this fall into the bottom line and really improving margin alright, and then as we got deeper into the cycle really pivoting to our capital allocation framework and allocating that capital across the three primary areas that we look look at and.
I think investments to drive and support organic growth.
The primary category the first category that we look at.
And as you highlighted a bit when we look at this year right we've been accelerating investments.
To drive growth and support our advisors and.
Just looking at core G&A, we've typically been in the mid to single mid single digit growth rates in the past and this year will be in the 12% to 13% range right and part of that increase is coming from those incremental earnings from rates that were really deploying to improve our value proposition.
Now when we look across the other options that we see opportunities potentially in M&A right, we see opportunities and returning capital to shareholders that we've talked about today, increasing the buyback in Q4 to $150 million.
And then pivoting to a $250 million roughly $250 million per quarter next year.
Now on the level of investments next year I think if the interest rate environment does play out like it's predicted I think we're going to be in a position to have opportunities to invest and drive growth and we'll apply the same framework on the capital allocation front that we always used to guide us.
And I'll share a bit more color at Investor day in a few weeks and then we'll finalize those plans as we normally do and share them on our year end earnings call.
Great. Thanks for that color I appreciate it.
Okay.
And our next question comes from Devin Ryan with JMP Securities. Your line is open.
Thanks, Good evening.
Wanted to start with a question just on advisor recruiting.
In volatile markets, typically, we see advisory or appetite to move slow or.
Go away so good to hear the comment on the strong recruiting pipeline. So I'd like to just maybe dig in a little bit around kind of where youre seeing momentum across more channels.
Expectations on actually.
Executing on that pipeline and then I'm just curious like maybe there's a little bit of a coiled spring building some assuming that they are for conversions.
Has slowed a bit but maybe the actual conversations and what's in the pipeline is expanding so just love to get some more color there. Thanks.
Yeah Devin.
You said, it and we've talked about at the macro conditions.
Certainly can create some headwinds across new store sales or recruiting.
As we've talked about.
The complexity in the marketplace drives focus on serving and supporting their clients in the short term rightfully so sometimes been delayed more strategic considerations. So I think we saw.
Certainly.
Pick up in the third quarter as we've talked about some of those market driven headwinds.
They too.
The structural desire of an advisor to improve that practice or their programs and so.
We feel great about our pipeline across all of the different affiliation models that we have certainly our traditional one.
As well as in the new models that we've created.
And so as we go forward, we feel like certainly as these advisors pivot back to focusing on structurally enhancing programs that that aligns well with the fuel and capabilities for our model.
Sets up well for a good strong finish to the year from a recruiting standpoint, and again I think you've seen it over the.
Our <unk> channel.
The employee channel and the <unk>.
Strategic well channel those new models.
We recruited a little over $2 billion each of the last three quarters and so feel good about the growing appeal positioning in the marketplace for those as a great complement to our traditional markets and then when you overlay the.
The financial institution market over the top.
It sets up for.
The continued interesting evolution of our new store sales.
We continue to focus on trying to drive that higher.
We go forward I think if you look at the trailing 12, we've got about 84 billion and recruited.
<unk> and outcomes and we continue to work on our efficacy to execute better met with more appealing model met with.
The affiliation models.
For you to drive that.
Okay.
Yes.
Great color. Thank you Tim as a follow up.
On customer cash I appreciate its primarily operational of LPL and that's different than some others in the wealth space, but just want to think about kind of the ranges of kind of where cash is trended.
4% of assets today, you're kind of the higher end I think the average from 2016 is like five 3% in the low.
In 2019 was about 4%. So just love any help thinking about kind of where we are in that range.
Ranger.
The higher end, but is this five 3% average maybe.
Where we get back to us.
Sentiment in the market improves and gets back to something more normal.
The denominator also matters quite a bit here. So just love to think about that range a little more with you and how you guys are thinking about maybe where cash could trend just given that it is operational.
Yes, yes, it's definitely operational.
The best thing to look at our the history. The empirical data that you're referring to I think an average of 5% is where we've been so you think of that as maybe a market neutral position.
A lowe's have gone down closer to four 4%, but keep in mind, our mix of assets are as well.
Back then there were more than brokerage than they are today.
In advisory in an advisory in general have a higher amount of cash and facilitate rebalancing. So maybe that low end would that mix change that low end feels more like four 5% given that mix change and I think youre right, where we're sitting today in that six 5% zone certainly.
Towards the upper end.
The range.
Yes, okay.
It's helpful context, so I appreciate it.
Thank you. Please standby for your next question.
And our next question comes from Bill Katz with Credit Suisse. Your line is open.
Okay. Thank you very much good evening, everyone and thank you for taking the questions.
So just maybe picking up on that last line of questioning just.
Just given where you are I'm wondering if you could update us on your thinking so a fixed to float.
Relative to the $50 to 75% range as he sort of add 15 percentage points in the quarter is there any reason to think that you could take that number higher all else being equal.
And then how should we think about maybe the pacing to get back into the target range.
Yes.
Good to hear did you hear from me again welcome back.
I think our target.
Our target range remains at 50% to 75%.
In a rolling portfolio, so we're minimizing that interest rate.
Volatility and I think we're in periods of low rates, we'd want to stay closer to that 50% in periods of higher rates like we're getting into now.
Theres also some steepness to the curve I think we'd want to be closer to 75%.
And our ability to do that really is subject to the demand in the marketplace right. So maybe just a little bit of color on what we're seeing there.
Demand does continue to return right on ICA overall rate, we added $7 billion of balances in Q3, the majority of that $5 billion in VIX in.
And that brings the the amount we've been able to add this year of new fixed to nine day, alright, and thats. The most you've been able to add in a single year.
Ever meeting, even even pre COVID-19. So the environment is certainly improving.
And then when you look at from this point forward. It does feel like that it's set up for demand to continue to be strong right from the fed side of raising rates and really shrinking their balance sheet to the banks themselves where consumer spending continues to remain healthy loan balances are growing and those are all the things that would lead.
Two additional demand.
Now, whether thats fixed or not becomes more about those banks and what their asset liability management is in their interest in effect. So it becomes a little bit more challenging to take all that information and say that there'll be more fixed.
But I feel confident overall that the environment is conducive to banks needing more ICA.
And what we've seen so far has been approved so we will keep monitoring but I think if the demand is there.
To manage that 50% to 75% range that we've talked through which even though we've improved we are still below the low end of that today.
Okay, Thanks, and just a follow up.
Coming back to your commentary and perhaps I heard this incorrectly I apologize if thats the case.
I heard you say that sort of the new target leverage ratio will be one five to two and a half and look at it as something that correctly. It was previously two to two to three quarters Terry.
Why now to reduce it.
It feels like the franchise has probably never been in better shape. The earnings power steering cyclically has a significant step function in front of me for the next couple of years.
What is it about the messaging of bringing that damages. So quite a conservativism is that maybe less leverage opportunities going forward I'm just trying to understand why why bring it down.
Yes, yes of course, so I think when we look at our strategy right.
Which is unchanged right is really focused on a combination of maintaining a strong balance sheet and having capacity to invest for growth.
And the driver of the decline in the leverage ratio has really been our earnings power improve it right our growth combined with the interest rate environment has driven the leverage ratio down.
So given that and give it and thinking about what our target leverage ratio should be we wanted to solve for Tuesday, making sure we're positioning ourselves to be able to consistently supported our advisors, even when that the macro declines to the economic cycle wane and.
And then second just making sure we're striking the right balance between preserving that balance sheet strength and investing for growth and our perspective and solving for those things. We think 1525 times leverage is really something that positions us well to achieve those objectives and so that was the driver.
Perfect. Thank you very much.
Thank you. Please standby for your next question.
And our next question comes from the line of Kyle Voigt with <unk>. Your line is open.
Hi, good evening.
Most of mine have been answered already but I just had a couple of follow ups.
Maybe one on the.
The betas.
In terms of incremental data as nos increased.
Got to 20% over the last 75 basis points, but just wondering if you could provide some updated thoughts there on the trend for incremental betas as the fed is now set to more to move more meaningfully above the peak of last cycle.
Yes, I think the betas, so far have been coming in favorable right as you highlighted in the most recent Ike we're at 20%.
Sure.
When you look at the last cycle.
That would've peaked around 25% for us they are coming in a little bit better.
Our approach, though here is and will continue to monitor it is to remain competitive right. We've got a product that we want to be competitive in the marketplace.
And I think that's what drives those data. So I think we'll continue to price that way.
I would say just looking at the marketplace, we don't see anything pointing to a meaningful change in the price sensitivity of this particular product. So I think we'd be surprised if betas ended up being materially different than last time.
Okay.
A follow up on the.
The leverage conversation.
More so on corporate cash you built up your corporate cash balances to just over $400 million in the third quarter.
And even when accounting for higher repurchases.
In <unk>, you are still very likely to build cash into into the end of the year.
I'm just wondering if.
There is a near term preference to maintain higher cash balances than you have historically say over the last four or five years.
In order to maintain kind of maximum flexibility on opportunistic M&A is that a part of the.
The decision, making there for running with higher cash balances.
Well I think it's back to our capital allocation framework, it's all about being prepared to take advantage of opportunities to invest in organic growth first M&A second and returning capital to shareholders third and I think the.
The time, which which each of those things emerges can be different right. So I think what you see there is there is no.
Nothing to infer about that cash balance build other than our economics improved operating materially in the quarter and we're going to allocate it the same way we have before in our our target for corporate cash Hasnt change at $200 million.
So we're above that right now, but our targets and objectives will be to deploy it across our capital allocation framework.
Great. Thank you.
Thank you.
And as a reminder to ask a question you will need to press star one on your telephone.
Telephone.
I'm showing no further questions at this time I would now like to turn the conference back to Mr. Arnell for closing remarks.
Thanks, everyone for taking the time to join US This afternoon and as a reminder, we are holding our investor and analyst day in New York on November the 16th we look forward to speaking with you then.
As we discuss our business and greater growth or do you have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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