Q4 2022 LPL Financial Holdings Inc Earnings Call
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Good afternoon, and thank you for joining the fourth quarter 2022 earnings conference call for LPL Financial Holdings, Inc.
On 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 would limit themselves to one question and one follow up each the company has.
<unk> 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 LPL financial future.
Financial and operating results outlook business strategy and plans as.
As well as other opportunities and potential risks that management foresees such forward looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or.
Or implied in such forward looking statements.
For more information about such risks and uncertainties. The company refers listeners to the disclosures set forth under the caption forward looking statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission.
During the call. The company will also discuss certain non-GAAP financial measures for a reconciliation of such non-GAAP financial measures to the comparable GAAP figures. Please refer to the company's earnings release, which can be found at investor Dot LPL dot com with that I'll turn the call over to Mr. Arnold.
Thank you John and thanks to everyone for joining our call.
Over the past quarter and throughout 2022, Alright advisors remains a source of support and guidance required against the backdrop of increased market volatility.
In doing so they reinforce the value of their advice.
And the important role they play for their clients. We thank them for their continued commitment and dedication as we focus on our mission taking care of our advisers. So they can take care of their clients.
And with respect to our performance our fourth quarter business results drove solid financial outlook.
At the same time, we continue to make progress on the execution of our Egypt plant.
I'll review both of these areas starting with our fourth quarter businesses.
In the quarter.
<unk> assets increased to $1 one trillion.
As continued solid organic growth was complemented by higher equity Mark.
With respect to organic growth fourth quarter net new assets for 21 billion, representing 8% annualized growth. This contributed to net new assets for the year of 96 billion also representing an 8% organic.
Recruited assets for $15 billion in Q4, bringing our total for the full year to 82.
These results were driven by the ongoing enhancements to our model.
And our expanded addressable markets.
Looking at same store sales, our advisers remain focused on serving our clients and delivering a differentiated experience as a result, alright advisors of both winning new clients and expanding wallet share with existing.
A combination which showed solid same store sales in the fourth quarter.
With respect to retention, we continue to enhance the advisor experience through the delivery of new capabilities and technology as well as the ongoing modernization of our service and operations.
As a result asset retention for the fourth quarter and full year was approximately 98%.
Our fourth quarter business results led to solid financial.
$4 21.
Yes, prior to intangibles and acquisition costs, which brought our full year total to $11 52, an.
An increase of 64% from a year.
Now, let's turn to the progress we made on our strategic plan.
As a reminder, our long term vision is to become the leader across the advisor center market.
Which for us means being the best at empowering advisors and enterprises to deliver great advice to their clients and to be great operators of the business.
And to bring this vision to life, we are providing the capabilities and solutions to help our advisors deliver personalized advice and planning experience to their clients.
At the same time.
Human driven technology enabled solutions and expertise.
Sporting advisers and their efforts the extraordinary business.
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 our four strategic place, which I'll review in term.
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, which expand our addressable.
In our traditional markets ongoing enhancements to our platform and the F. C of our business development team led to continued improvement.
Two our win rates and an expansion of the depth and breadth of our pipe.
Despite advisor movement in the industry remaining at lower levels.
As a result, Q4 was our strongest quarter of recruiting in 2022 and our traditional mark.
With approximately $11 billion in that.
Looking ahead, we expect to carry this recruiting momentum into Q1.
With respect to our new affiliation models strategic well boy and our enhanced <unk>.
We recruited over $1 billion in assets in Q4 in each of these models, we continue to see growing demand and expanding pipeline.
Which positioned them for increased contributions for our organic growth.
With respect to large enterprises, they remain a meaningful source of recruiting.
Including the additions of Qunar and People's United.
Looking ahead, we expect to onboard commerce bank around the middle of this year and continue to see our pipeline build as demand for our model growth.
Same time, we continue to have success recruiting in our traditional enterprise channel, including the addition of bank pushed out in Q4.
Within this strategic play we are also seeing positive early momentum with our most recent innovation our liquidity in succession.
But we are providing a differentiated off mid succession needs of the advisors.
Over the next decades has estimated that up to a third of the size, we are and will likely address succession needs of their practice.
The solve for this need our first innovation was providing M&A support surface facilities.
<unk> the transition of practices from advisors, who advise are.
Our key learnings from that experience there are many instances due to factors like large practice size or lack of an identified successor.
Acquire a different solution.
That was out of this need we created our differentiated liquidity in succession, offering, which LPL will step in to purchase in the advisors business and serve as a bridge to the next entrepreneurial success, all while preserving the principles.
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The offering has been well received and we are encouraged our early momentum having already executed on a handful of transactions with advisors on.
This year, we will also plan to take capability to the external market place and look forward to sharing our progress.
Our second strategic play is to provide capabilities that help our advisers differentiate marketplace drive efficiency in fact.
In 2023, we will focus our development of new capabilities and solutions within this play across four key areas first we will continue to enhance our wealth management platform.
To help their.
Their clients with differentiated advice product pricing second.
Second we will continue to advance client works our core operating platform.
With the additional digitized workflows to help advisors operate more efficiently and increase their scalability serve more clients.
Third we will expand our banking and lending services to help advisors address a broader spectrum of the clients financial needs and thus deepen their role as an essential partner.
And the final areas to enrich the end client experience with additional digital solutions that increase personalization and self service.
And enable advisors to create customized experiences for their business.
We believe these evolving capabilities will help drive increased deposit growth productivity and retention.
Now, let's 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 omnichannel client care model.
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As part of this journey, we have evolved the technology and instrumentation of our traditional voice channel, while also making meaningful enhancements to our always on digital support.
As a result, approximately 75% of engagements with our digital channel fully resolved the service request and don't necessity necessitate a phone call to complete the task.
We continue to expand and refine our digital support channel, we believe that an increasing share of advisors will leverage digital first support or more flexible and efficient services.
Those will continue to evolve our service interface. We're also transforming the operational processing it takes place behind that.
For example, last year, we began automating much of the processing for our clearing.
Excluding money movement and on opening an account transfers, which collectively collectively drive the majority of our operational process.
With these learnings from our transformation and servicing operations, we are reengineering other areas of the business, including our compliance and risk management.
All of that and we've applied robotics, and AI capabilities to a number of our compliance review work, which.
Which has improved both the efficiency of the reviews as well as the overall risk management.
Efforts on this front include automating the reviews client communications marketing materials and transact.
Now by automating more workflows, we continued to increase the scalability of our platform also enhancing client experience.
Our fourth strategic play is focused on developing our services portfolio that helps advisors and institutions from driving businesses and deliver comprehensive advice to their clients.
As we discussed last quarter, we are encouraged by the seasoning of this business.
Having appeal of our value processes as.
As a result of solid demand in.
In Q4, the number of advisors utilizing our services group continued to increase we ended the year at over 3000 active users up more than 30% year over year and generating run rate revenue $36 million.
And when we started our services group, we focused on addressing some of the most complex challenges facing our advisors, which were often more acute for advisers with larger fracs.
With the insights and learnings from this initial client segment, we're now expanding our service portfolio to address the needs of a broader adviser.
As we continue to evolve the offering in 2023.
We are focused on several key opportunities for our services.
First addressing additional channels, specifically building solutions solve for needs enterprise.
Second leveraging our structured approach to innovation in order to continue to develop new services and of all of our existing portfolio.
Contributing to the growth of our new affiliation models strategic will enlink scope as well as expanding our ability to serve high net worth.
Yes.
So in summary, the fourth quarter and throughout the year, we continued to invest value proposition for advisers and their clients.
Driving growth and increasing our market leadership as.
As we look ahead, we remain focused on executing our strategy help our advisers further differentiate and win in the marketplace and as a result of 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.
Before I review, our fourth quarter results I'd like to highlight our progress during 2022.
Against an evolving market backdrop, we maintained our focus on supporting our advisers and their clients, while executing on our strategic priorities.
We continue to grow assets organically in both our traditional and new markets.
Successful onboard a new enterprise clients.
Developed and piloted our new liquidity and succession capability.
And announced two strategic acquisitions.
We accomplished this all while continuing to invest in our industry, leading value proposition and delivering record earnings per share.
Now, let's turn to our fourth quarter business results total advisory and brokerage assets were $1 one trillion.
Up 7% from Q3 as continued organic growth was complemented by higher equity markets.
Total net new assets were <unk> 21 billion or 8% annualized growth.
Our Q4 recruited assets for $15 billion.
I would note. This included 11 billion from our traditional independent model, which was the highest quarter of the year.
Looking ahead to Q1, our overall pipelines continue to remain strong.
In particular, I would highlight that within our traditional markets. The momentum we saw in Q4 has continued into Q1.
We are on pace to deliver one of our strongest first quarters in what is typically our slowest quarter of the year.
As for our Q4 financial results the combination of organic growth rising interest rates and expense discipline led to EPS prior to intangibles and acquisition cost of $4 21.
The highest in our history.
Looking at our top line growth gross profit reached a new high of $972 million.
$135 million or 16% sequentially.
As for the components Commission and advisory fees net of payout were $172 million down $10 million from Q3, primarily driven by the seasonal increase in production mode.
In Q4, our payout rate was 88, 4% up about 50 basis points from Q3 due to the seasonal build in the production.
Looking ahead to Q1, we anticipate our payout rate will decline to approximately 87% as the production bonus reset at the beginning of each year.
With respect to client cash revenues.
It was $439 million up $136 million from Q3.
As the impact of higher short term interest rates more than offset a sequential decline in balance.
Looking at overall client cash balances they ended the quarter at 64 billion down.
Down $3 billion driven by record net buying of 25 billion.
Within our ICP.
As for Q1, we expect our ICA yield to increase to approximately 315 basis.
Which includes yesterday's 25 basis point hike at an assumed deposit beta of 25%.
As for service and fee revenue was $120 million in Q4 down 2 million from Q3.
This decline was primarily driven by lower conference Robyn following our largest advisor conference of the year in Q3.
Looking ahead to Q1, we expect typical seasonal increases in IRA.
To be offset by lower conference revenue.
So we anticipate servicing fee revenue to be roughly flat to Q4.
Regarding Q4 transaction revenue it was $47 million up $4 million sequentially as trading volume increased.
Based on what we have seen in Q1 to date, we would expect transaction revenue to be roughly flat with Q4.
Turning to expenses, our core G&A was $327 million in Q4, bringing.
Bringing our full year core G&A to $1.192 billion.
This was in the middle of our outlook range and for the full year represents approximately 13% growth.
As for our outlook for 2023, our long term cost strategy remains unchanged. We plan to continue to prioritize investments that drive organic growth and create incremental operating leverage in our core business.
As we shared at our Investor and analyst at the current environment is creating opportunities to accelerate our investment plan as.
As such we expect to grow our investments at a similar pace. This year more specifically, we plan to grow our 2023 core G&A in the range of 12% to 15%.
To share a little more color on where our investments are focused this expense growth spans the following three broad categories with each driving approximately 4% to 5% growth in core G&A.
First to support our core business growth, including investments in technology and capability.
Second to support growth in our expanded addressable market and to scale, our new service.
And third to accelerate the timing of investments that advance our strategy.
To give you a sense of the near term timing of this event as we look ahead to Q1, we would expect core G&A to be in the range of $320 million to $325 million.
As always we will remain flexible and can adjust to shifts in the operating.
Turning to promotional expense in Q4, it was $84 million down $15 million sequentially, primarily driven by lower conference then.
In Q1, we expect promotional expense will increase by approximately $25 million as we have two of our largest conferences of the year during the quarter.
Looking at share based compensation expense it was $12 million in Q4 up $1 million from Q3.
As we look ahead, we anticipate this expense will increase by approximately $5 million sequentially. In Q1 is it tends to be our highest quarter of the year given the timing of our annual stock Awards.
As for interest expense it was $37 million in Q4 up $4 million sequentially as higher LIBOR rates increase the cost of our floating rate debt.
Regarding capital management, our balance sheet remained strong in Q4 with corporate cash of $459 million up $35 million from Q3.
Our leverage ratio was one four times down from one seven times in Q3.
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 for capital deployment, our framework remains focused on allocating capital aligned with the returns we generate investing in organic growth first and foremost.
Assuming M&A, where appropriate returning excess capital to shareholders.
As we look ahead to 2023, the strength of our balance sheet leaves us with ample capacity to allocate capital across our entire frame.
Specific to organic growth, we see opportunities in recruiting and continued investment in our technology platform.
On M&A, we see opportunities in the marketplace overall and within our liquidity and succession offering where we are emerging from the pilot phase and closed four deals in 2022 for around $50 million.
With regards to capital return, we plan to increase our share repurchases to roughly $250 million in Q1.
And lastly, we plan to increase our quarterly dividend by 20% beginning in Q1.
To summarize our balance sheet is strong and we are well positioned to drive value through our capital allocation framework.
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 operator. Please open the call for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one on your telephone. If your question has been answered and you wish to remove yourself from the queue. Please press star one one again and our first question comes from the line of.
Alexandra blow ask blow steam from Goldman Sachs. Your question. Please.
Hey, good afternoon. Thanks for the question everybody.
So Matt maybe we can start with the question around just the cash dynamics, obviously, it's an area that creates a lot of anxiety for investors still maybe talk a little bit about dynamics you saw in December that kind of let the balance is being a little bit better than we saw with some of the peers.
Are you seeing so far in January and then importantly, the demand from the bank channel given that the fixed extensions you highlighted.
In the deck pretty robust so maybe kind of walk us through the current environment in cash.
Yeah, Yeah sure. So I think in December we saw the typical seasonal build that you see from from tax loss harvesting and rebalancing.
And I think as you as you pull that forward into what we're seeing in January .
Cash typically goes back into the marketplace, so that $1 six or so that we saw a build in December and January naturally went back into the market.
Also highlight from a seasonality standpoint advisory fees for the three months of the quarter. The first quarter of the month as I think you know well is typically the highest month for advisory fees and those are about $1 billion in the month of January . So if you just look from a seasonal standpoint.
Have a decline of around 252 6 billion.
In the month and then in addition to that I'd just commenting on the overall market activity. We have seen just broad adviser and investor Reengagement in the marketplace and I think a good way to summarize that as our customer net buying metric the highest month. If you look at our monthly metrics. The highest month, we've ever had was back in August of that.
2022 at 10 billion for the month for January we're seeing at just north of $11 billion.
So the strongest engagement that we've had that money is really going back in to the equity markets and as you may expect longer dated fixed income securities and things like that so that's naturally going to drive down balances when you pull those seasonal factors and combined with the investment engagement. We expect January cash cash we have to be around.
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$60 billion 60 billion.
I think specific to the I think the third question last part of your question on the on the market for ICA contracts.
The headline I'd give you is it continues to improve but improved throughout 2020 to continue to improve in Q4, and maybe break it up into into two buckets.
Market for the floating rate balances the demand continues to be well in excess of the deposits that we have and youre starting to see that lead to price improvement.
So for the contracts that we're putting from our floating rate at some point now theyre more fed funds, plus 10 or 15 as opposed to last quarter. They were plus five to 10, and then back in the heart of the pandemic, if we could place them at all it was fed funds flat to down.
So the market there is quite good on the fixed rate side, we were able to add $4 billion of balances this quarter ranging from two to six years and I think when you combine that with the progress in the past few quarters. We're now not at our high but starting to get close to the high that we've had from a percent of the portfolio at 45%.
And when we look ahead to Q1, we've got 2 billion of maturities coming up and I think we feel quite good about being able to place those into new fixed rate agreement.
Even beyond that starting to be able to continue to grow the portfolio overall, just seeing the overall demand so headline I'd say from a from a buy side out.
Good.
Great. Thanks, so much and maybe just a second question around the balance sheet, it's nice to see the leverage come down now below your guys' target, which I think you guys revisited recently talked to.
Lower that so as you think about priorities between building out the lending practice.
Haps inorganic opportunities and maybe accelerating some of the share repurchases how would you think about that.
Yeah, well I think Alex that key point on the lending side is it not.
A big use of the balance sheet. So it's really more about connecting the capabilities to our clients and use that.
I think on the buyback I think just going back to our overall capital allocation framework I think we're focused on investing in the organic growth first M&A second and capital return third.
I think from a pace of the buyback. It was just all depend upon the opportunity set we see the.
The opportunities to invest in organic growth weren't there or M&A wasn't as strong as we would expect I think that that's a scenario, where we could accelerate the buyback.
And then the opposite is also true because we can slow down if opportunities.
Would lead there so the key for us is really to be flexible and maybe I'd just reiterate that our center of gravity is really that the $250 million.
Great. Thanks, so much.
Okay.
One moment for our next question.
And our next question comes from the line of Steven <unk> from Wolfe Research.
Search your question please.
Hey, good afternoon, Dan Good afternoon, Matt.
So really appreciated the additional granularity in terms of the expense guidance your prior expense guide.
15% growth in 'twenty three this latest update appears better or at least.
Tighter range at 12% to 15% is that the right way to interpret the guidance a bit better than what you offered up last time and just looking beyond 'twenty, three and thinking about that longer term expense growth algorithm is there anything we can infer from those buckets that you offered as to what's a normal pace of expense growth say in a period, where you are.
We're not accelerating your investment plans.
Yes, Steven I think on on our plans.
It really didn't change at all from Investor Day, I think the key is we gave our preliminary thinking there.
Really went through our typical year end process to finalize those plans and.
And I think Thats, where the 12% to 15% comes from so I think the.
The strategy that we have a view that this environment really to advance our investments is just the same and Youre just seeing us now land the plane with a sharper pencil.
I think specific to the three categories.
I think the answer to your question is yes. It is informative I think when you look at the investments to support our core business growth rate assuming that growth is continuing I think that level of 4% to 5% supports that growth. When you look at the second and third categories by definition, that's where we have flexibility and we can adjust those based on.
On the market and whether there is opportunity to spend in those areas are not especially that third category, where it's all about advancing things that we may have otherwise done in 'twenty four and beyond that we're now going to June 'twenty.
Thanks for that color and just for my follow up on organic growth certainly encouraging to hear that the M&A momentum in <unk> has continued to start the year I was hoping you could just speak to some of the factors that's driving that better M&A momentum just trying to gauge how much is environmental so the strength in the markets maybe.
Increasing advisors in motion versus more idiosyncratic.
And you were talking about the pipeline strength in institutional as well.
In your MD&A remarks, how much of that strength is coming from larger institutions.
And so let me take that one Steven.
There so if I Miss something you give me guidance after I'm finished so.
Look I think if we start as a jumping off point last year, 8% organic growth rate $96 billion in M&A.
Which is.
A pretty solid outcome against a challenging macro backdrop.
And I think.
Irrespective of that of that backdrop I think.
Sure.
Making the progress are working through sort of that environment. Both in terms of our teams and advisors you just continue to evolve capabilities skills and operating in any potential environment. So I think as we look forward and we think about going forward.
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We feel good that the sort of the acclamation to a tougher macro if it sustains itself.
That we can execute it better and ultimately contribute improved or better growth. So that's how I would sort of think about the environmentalists.
It may influence, what I might call short term progress around our growth efforts I think probably more importantly, strategically as we think about our opportunity.
Those drivers of that strategy right those significant re structural big durable trends all remain in place as growing demand for.
Or advice the appeal of receiving that advice through a financial professional of the attractiveness of the independent model versus other models.
All continue and I think.
We sit at the intersection of all of those and believe we are uniquely positioned to capitalize on that opportunity.
Whether that's through our market leadership singular focus on what we do robust platform of which to leverage and use as a differentiator or even though.
That capacity and commitment to invest that was just speaking to.
All of that platform and continue to differentiate.
As we think about going forward that concept to that 7% to 13% sort of growth rates that we've talked about across different.
Macro environments.
I think it's still highly relevant still how we think about it and I think last year demonstrated the ability to persevere through a tougher macro.
We'll reside within that range so.
That's how we think about the shorter run and the longer run I think to your foot down on the enterprises within that.
Look.
It's a channel that we've talked about as a as a durable growth contributor we've continued to evolve our capability set.
With more wins and with good success with those relationships creates.
Better advocacy from our clients.
That IP and insight from being on a couple of years working on those large enterprises is certainly IP that's hard to replicate.
The experience itself and so.
When we look look at that going forward. So it's pretty appealing model that is finding a marketplace that is in need of that type of model.
Pretty convicted around our solution. So we do believe that.
Within those bookends.
7% to 13%, we do get some contribution from large enterprises.
So I hope that gives you a little color.
Got it really helpful color. Thanks, so much for taking my questions.
Thank you one moment for our next question.
And our next question comes from the line of Bill Katz from Credit Suisse. Your question. Please.
Okay. Thank you so much unfortunately connection cut out a little bit Matt when you talk a little bit about the ICA dynamics.
So I guess my broader question is as you think about what's been happening in the forward market and the expectations softening up a little bit how is that informing.
The opportunity here to potentially accelerate.
The ratio of fixing out relative to the float.
And then you mentioned that demand is very healthy how should we be thinking about reinvestment rate opportunity.
Okay.
Yes, I think bill our perspective on fixed rates really to get into that target range, we have a 50% to 75%.
And I think the honest.
If you cut out wireless commenting I think the comment on the market as it continues to improve.
Right right. It is not perfect right, we can't move exactly where we want but I think if you look at the trends throughout 2022.
And as we look ahead into what we're seeing already in Q1.
Demand continues to improve I think we feel good about the maturities that we have coming in Q1 being able to place those into new fixed rate agreement.
You can see what we did in Q4 that were targeting to go out as.
And then the five and even in some cases, a six year zone based on what the market will bear.
And then when you look at the demand overall in addition to those maturities I think we feel like we've got the opportunity to throw at it and some amount from there. So the headline is the marketplace is strong.
I think with where the curve is we still think makes it makes sense to target getting into that range. If the market will allow us to do so.
Okay terrific and then just coming back to expenses again again I apologize my connection is cut out.
Of the variability to this sort of more refined 12%, 15% and sort of bringing forward that growth should we be interpreting that as we look out into 'twenty four all else being equal that the absolute level of this growth rate would decelerate or might you be in the same kind of situation.
Where you would have the opportunity here to sort of advance the organic growth is it really now a point of the tradeoff between organic growth and margin as you think about the business.
Yes, I mean, I think when you get.
To our long term long term cost strategy Bill.
Where that fourth principle is really adjusting our.
Our cost to the market. So I think we'll as you may expect we will make judgments about 2024, as we get closer to that year, but I would emphasize from an optionality standpoint, when you look at that third category of 4% to 5% that is opportunistic if the market.
Especially for 2023 with the interest rate benefits that we have allow us to make those investments and you can look at our op margins with the tailwind of interest rates swap margins continuing to be quite strong.
We're in a good place to do that if the market does not allow us to do that we've got the ability to adjust.
So I think I would definitely takeaway that we've got the flexibility and when you. When you start to look beyond 2023, we'll make we'll make those judgments as we get closer.
To that time period.
Okay. Thank you I apologize if I ask redundant questions. Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Devin Ryan from JMP Securities. Your question. Please.
Thanks, Good afternoon, Dan and Matt I guess first question as we think about the opportunity to move upstream with.
Larger advisers and higher net worth.
Over time here.
Are the capabilities that you need to add to be able to do that do you have everything you need and then just kind of investing in improving or are there. Other types of capabilities that are maybe incorporating some of that expense growth that are coming that could really help accelerate that push.
Yeah, Devin it's Dan So look at as we think about the opportunity set and high net worth space speak now of the client segment and are referred to high net worth.
That's a function of.
Our advisors overalls evolving practices.
As they have clients.
Are more clients that they have an opportunity to serve that inside that category, that's really driven the demand for services and capabilities that traditionally may not have sat inside our overall sweet spot and so.
I think that's been the real catalyst or the driver of our contemplation of building out certain capabilities and so.
Samples of that our us building out our own service around complex cases as well.
So that would be an investment that shows up in that core G&A.
<unk> referenced that.
<unk> is making as an example to your question I think you also see that an extended financial planning support. So it's not just the technology, but it's the pure planning services sit around it as an example, so those are things that we're building ourselves organic capabilities that we're building ourselves so as we've gone on the journey.
Will we have built.
Due to build certain things that are in house. There's also other things that we think are important to serve.
High net worth types of clients, maybe that's tailored insurance offerings that we traditionally haven't done inside our own insurance agency or services like.
Helping to sell a small or midsized business.
And that's where we will we will we are developing strategic partnerships, which provide those integrated solutions and services inside our overall offering rather than build them and so that's how we're putting together what we think is a compelling set of solutions that position our advisors to serve and support there.
High net worth clients now as we built out those capabilities are in the progress.
It also challenges US then to say well.
How do we better deploy those to the marketplace or leverage those if you will and I think thats, where we realized.
With the capability set that we have.
Could we utilize that to even target what I might call the advisors and specifically operate with only high network clients and I think.
That would be an example of how we better leverage these capabilities and that's something we continue to explore in terms of how we go to market with this capability, but think about it that way as we're building some of these capabilities we've been on a journey, we're not completely there but.
Some significant progress and then we will look to the outside market strategic partnerships in doing that we can take that.
Our capital light model to what is a <unk>.
<unk> value proposition use it to support our existing.
Risers and help us potentially attract.
Okay, great context, thanks, Dan.
Quick follow up here on kind of the M&A market and conditions, you sounded reasonably optimistic around what youre seeing now there was a big wealth manager.
Are deal on the wealth management space announced today.
I guess, just what are some of the themes that you're seeing in the market, there's kind of a catalyst for activity I'm not sure. If it's the same across channels, but any context around what's making you feel like it's a reasonable M&A market right now.
Yes, I think we'll continue to see.
That ongoing trend around consolidation.
I think youre, continuing to see innovation around capabilities as well and so.
That leads to transactions around certain types of IP or capability set firms may want to deploy our utilized in a different way.
And then we're seeing more robust activity around solving.
Solving for succession planning.
Individual adviser level indoor smaller practices level, and so I think youre seeing a healthy amount of activity across the ecosystem.
We continue to stay active in exploring.
All of those possibilities right Youll see us deploying capital as an example, the closings we did yesterday with thinning scattergood.
FRG I would just remind you our framework for exploring those possibilities.
First it's.
<unk>.
In sort of side that what I would call growth opportunities in traditional markets, where we see opportunity for purposes of growth.
Potentially.
Our practice in a bidding scattered will be a great example of that.
But what I will agree with you Grant a great example of that we also look in that second category, where we can add capabilities faster through an acquisition and building them ourselves. We believe we've got to stay open and agile and nimble around that framework and then the final one the third one which is the little newer one and is aligned with this new capability of liquidity in succession.
As putting capital work through acquiring.
These practices and being that bridge to that future successor, So I think that's where we're active that's where we're exploring potential possibilities.
We see pretty good activity going on as you move up.
Okay, great. Thanks, so much.
Okay.
Thank you one moment for our next question.
And our next question comes from the line of Michael Cho from Jpmorgan. Your question. Please.
Hi, Good afternoon, Dan and Matt. Thanks for Thanks for taking my question.
I just wanted to touch on just kind of zoom out will then touch on the pricing trends you're seeing in your business I guess just given.
Just given the world the environment, we're all operating in this scenario, where youre looking to.
Take price, we're actually invested in price.
As you look ahead, given all the different initiatives that you're laying out there with the business.
Yeah, Michael I'll take I'll take that one certainly.
Matt.
Yeah.
Look we look at pricing as a part of our overall offering.
Capabilities services technology.
We look at pricing.
As part of our overall investment strategy.
If you will and I think as we've shared in the past we've created.
A reoccurring theme of investing back into the platform Spa.
Specifically trying to use price to help our advisers differentiate and win in the market.
<unk>.
I think the places that we've been historically focused mode for the past four to five years has been typically around the advisory plus.
70, 75% of new assets sorry.
New cash is going to those types of solutions and we want to make sure.
We are enriching the appeal.
As we look at 2000 2013, you will see us continue to lower pricing around our centrally managed platforms.
As a way to.
Great.
More applications for advisers to leveraging noodles for clients.
With the enriched capabilities that we're adding to them.
More and more using them versus that.
You're also seeing us look at transaction charges in certain areas, we're being very tactical around that although this holistic sort of lowering transaction. We're trying to be very tactful article about where we make those changes.
We actually.
Make the adjustments, where they make most sense for advisors that ultimately.
And so I think those are a couple of examples that we will continue to pursue this year so whatever.
We can do that we think is optimal can help our advisers differentiate wins.
When in the places where it matters most of them, but we're trying to solve.
Those are a couple of things.
Hope that helps.
Yes, it does and I appreciate the color and then just one quick follow up then I think you kind of referenced this.
Just on the expenses.
Just looking at the third bucket of expenses, where we're talking about the accelerated portion I guess or the other.
You can call out.
That's going to receive those accelerated investments.
Okay.
Yes. This is Matt.
Take that one I think there is there is when you think about that third bucket. It's more about the timing of the investments. There is no specific category I think you go back to the investments that we're making.
And in technology and capabilities.
That helped improve our value proposition or help support and open up our expanded market and when you think about those plans. We've got multiyear plans of the things that we think are quite important.
And that third bucket is really about given the environment that we're in accelerating.
Some of those plans. So that's the headline there I don't know Dan if there's anything you want to just give you an additional way to frame that if you remember back at the.
The Investor and Analyst day that we did we shared the framework around vertical integration and a lot of those investments are showing up all that spectrum.
Opportunities that we have so as we drive more and more solutions into.
Sort of that lower in the ecosystem, where it really helps the advisor operated at a local level, which youll find it also coming all the way back to things that enhanced our advisory.
So I think youre seeing an accelerated investment phosphate entire spectrum as opposed to any one specific place. So I hope that helps you a framework to think about how we how.
How do we think about that.
The spectrum of investments perhaps levels.
Great. Thanks, so much guys I appreciate that color.
Okay.
Thank you one moment for our next question.
And our next question.
Comes from the line of.
Kyle Voigt from <unk> Your question please.
Hi, good evening.
Just another question on <unk>.
Centrally managed platforms, you mentioned that in our response on pricing.
Organic net new asset growth there is still strong, but it's been decelerating over the past couple of quarters. Just wondering if you could provide a little bit more color on the recent trends and then kind of where you see the opportunity to take that penetration rate to overtime with centrally managed business. Thank you.
Yes so.
Obviously with respect to our advisory platforms that sits inside.
That overall spectrum of offering and as we think about enriching that entire platform. One of the places we've been focused on a centrally managed solutions and we continue to add more capabilities and more value there.
You think about the <unk>.
Estimate content, that's available the ability for advisers to use that in different ways that really turning that into a UMH.
Expanding the SMA that are available on it there is some there is really.
Really cool enhancements and functionality that.
It is materially improving the appeal and how one would apply it in more scenarios in case. So we're excited about the potential opportunity.
To continue to sort of grow share if you will in that overall mix of business.
With respect to advisory, but you can think about wholesale full spectrum of brokerage.
Because.
More appealing we make this even that smaller accounts.
Where it's appropriate and people feel that.
Our client is better served from from that movement of brokerage to advisory a lot of that will move over to <unk>.
So.
That's one way to think about how we add capability to make it more appealing to drive utilization and I think we believe that upside can be significant certainly continuing to invest in the pricing helps also.
Drive the appeal and demand I.
I think about as you think about last year.
And rightfully so.
Still good demand, but the trend was was down.
Historically speaking centrally managed.
Usually reacts.
More or is impacted if you will by a challenging macro environment more volatility the more sort of a downward trend in equity markets. We have the combination of tough fixed income markets last year, and Thats, where we will many times see an adviser sort of more want to put their hands on the wheel and drive that so youre.
Seeing some of that.
Volatility in the marketplace, a macro marketplace noise occurring and that trend I think structurally speaking we continue to invest in the appeal of it.
And the more appealing we make it the more it should drive up utilization level on a relative basis I hope that helps.
It does thank you.
For a follow up maybe just a modeling question here for Matt.
DCA yield came in a bit above our expectation I know that's formulaic really but just wondering maybe you could provide an update on the number of accounts that flow into that program currently and how or if that number has grown recently.
Yes, I mean, I don't we don't have enough I don't have an update on the number of accounts I would I wouldn't emphasize though I think the point youre, making it as a fee per account.
So that so we quoted in basis points, but it's a little hard for it to be predictive just given balances to move up and down.
So it's the feeder account I would emphasize I don't they haven't changed materially but.
But when you get a pop perhaps that you've seen this quarter that may not be something that you would expect to see going forward just because it's not really rate driven its fee per account driven.
Yes. Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Jeff Schmitt from William Blair. Your question. Please.
Alright, thank you.
Recruited assets I'm, just curious how the recruiting environment for advisors looks right now I know you'd mentioned it was pretty strong for you but are you seeing any competitors get more aggressive on pricing just with organic growth down for the industry maybe there.
Trying to look for growth.
Yeah. So.
Look I think.
The recruiting environment.
It's well documented over the last three years.
Churn in the industry.
Has slowed in 2022, sorry, 2020 to 2022, primarily driven on the backs of the pandemic in and then the macro volatility volatility last year, which are pretty extreme impact in.
So certainly.
With less sort of swings in the Batter's box I think you have competitors that will tend to respond to that in different ways and some have gotten more aggressive on the transition assistance, if that's what you're talking about about being more aggressive.
And then certainly when you add to that.
The rising interest rates that can be more robustly.
Monetize enough so in underwriting around deals Youll see transition assistance get more aggressive in those types of environments.
Thank you.
Logic would have it that's what would occur and that's what we've seen over the last three years I think look for us.
We don't see any changes in the opportunity set I think the.
As we think about it the ongoing evolution of our capabilities the expansion of our.
Our.
Market opportunity set with our expanded affiliation models introduction of their services through advocacy of existing advisers from good experiences.
Really the key drivers of that opportunity set and our ability to drive when rates, regardless of what the churn of our opportunity set is in the marketplace.
We did see.
Oh, sorry.
Sorry, the market stabilizing more in the third quarter and more advisers now getting past that volatility and re engaging in exploring their strategic options and I think to the extent that there is.
Not some big shift in the in the macro.
We continue to expect to see that trend occurring.
And Youll continue to see folks explore.
The movement from an employee based model to independent model, we continue to see with more and more capabilities folks in the independent model looking for something that can serve and support them better and taking care of their clients.
Finally, even with being able to help with your own succession planning creates another catalyst opportunities and so I think we think those things are much more important than bigger drivers of the ultimate size of the movement.
Certainly in the short run there's been some noise or intermediate term.
Extreme scenarios right of the macro given the pandemic and the worst equity markets last year. Since 2008, I hope that helps give you some color on at least what we're seeing over the recruiting landscape yes.
Yes, absolutely. Thank you.
And then a question on the brokerage assets organic growth rate up 7% in the quarter.
How much of that was driven by bank outsourcing and I guess like what deal specifically any breakdown of that would.
It would be helpful.
Yes.
So large financial institutions is what you're asking about on the brokerage assets.
Yes right.
Yes, it was relatively minor I mean, the growth rate was 7% for the quarter prior to that it would be six 5% so relatively minor part of it.
Sure.
To add to that.
Curious around why the trend or better growth in brokerage over the.
For the past three to four quarters.
That's the.
Evolving interest rate environment and.
Advisers using solutions that may be more brokerage oriented solutions, whether that be fixed income or whether that be annuities of which to help clients seeking higher yield or higher rates and so that's where you're seeing some of that growth come from the wasn't necessary the trend prior to prior to last year.
That's what I was looking for thank you.
Right.
Thank you.
One moment for our next question.
And our next question comes from the line of Gerry O'hara from Jefferies. Your question. Please.
Thanks, maybe one for Matt.
The leverage ratio of one four coming down from one seven I think you cited kind of continued growth of higher industry environment.
What do you feel is maybe sort of.
The optimal sort of long term leverage ratio I think some some peers, both public and private tend to run at a bit of a higher number.
And just sort of want to get a little bit more color as to how you think this is Mike.
The best setup to optimize the business I think kind of in a long term environment. Thank you.
Yes, yes, I think that the.
One five to two five times I think is really the.
Our leverage ratio that we think makes sense in a range of different economic environments, and I think the the ability to maintain a strong balance sheet and have the capacity to invest for growth.
In a range of different environments. I think is a key part of our value proposition I think that's a key part.
For our advisers and clients knowing that if the macro moves.
Against us.
We're not at a leverage ratio, we're going to have to immediately pull back of investments are immediately pull back on being able to serve and support them in the host of capabilities that we have liquidity and secession being an example.
So I think I think the one five to two five times, we landed on that with a view that that's.
The right leverage ratio in a range of environments and I think it's certainly a key part of the value prop that differentiates from some of the firms that you mentioned.
And I think where we are today being at the low end or just below the low end of that.
Yes.
With a fair bit of capital deployment coming our way in Q1, including the acquisitions that we close.
As well as being positioned at that point in in a in a macro I think anything about certain at this point I think we like where we're sitting.
Great. That's it for me this evening thanks, guys.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Dan Arnold for any further remarks.
Yes, thanks, so much John and I, just want to thank everyone for taking their valuable time out to join US. This afternoon, and we look forward to speaking with you again next quarter.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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