Q1 2023 LPL Financial Holdings Inc Earnings Call

April 27, 2023

Okay.

Good afternoon, and thank you for joining the first quarter 2023 earnings conference call for LPL Financial Holdings incorporated.

The call today are our president and Chief Executive Officer, Dan Arnold and Chief Financial Officer, and head of business operations, Matt Audette.

Dan and Matt will offer introductory remarks, and then the call will be opened for questions. The company would appreciate at the analysts would 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 Companys website Investor Dot L. P O dot com.

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

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

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 non-GAAP financial measures to the comparable.

Figures.

Please refer to the company's earnings release, which can be found at Investor Dot L. P. L. Dot com with that I will now turn the call over to Mr. Arnold.

Thank you Latanya and thanks to everyone for joining our call.

Over the past quarter, Alright advisors continues to help their clients navigate market volatility and macroeconomic uncertainty.

Doing so they reinforce the value of their advice and collectively helped millions of Americans.

So their financial goals.

Rich.

We thank them for the important work and remain focused on our mission taking care of our advisers.

Take care of their clients.

Now as we look at the marketplace. We continue to experience the growing appeal of our model due to the combination of.

Our robust feature rich platform stability and scale of our industry leading model.

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As a result, we continue to make solid progress toward our vision of becoming the leader across the adviser mediated.

In that spirit, we will continue to focus on helping advisors and enterprises solve challenges and capitalize on opportunities better than anyone else and thereby serving as the most appealing player in the industry.

With respect to our performance we delivered another quarter of solid results. While also continuing to make progress on the execution of our strategic.

I'll review both of these areas starting with our first quarter business.

In the quarter total assets increased $1 two trillion as continued solid organic growth was complemented by higher equity more.

With respect to organic growth first quarter organic net new assets for 21 billion, representing seven 5% annualized.

This contributed to organic net new assets over the past 12 months 99 billion representing.

Approximately 9% organic growth.

Recruited assets were $13 billion in Q1, bringing our total for the trailing 12 months 85.

These results were driven by the ongoing enhancements to our model and our expanded addressable market.

Looking at same store sales our advisers remain focused.

Serving their clients and delivering a differentiated experience.

As a result, our advisors are both winning new clients and expanding wallet share with existing.

A combination that drove a sequential improvement in same store sales.

This increase occurred across all of our affiliation models led by solid growth in our enterprise team.

With respect to retention, we continue to enhance the advisor experience through the delivery of new capabilities and technologies as well as the evolution of our service and operations.

As a result asset retention for the first quarter was approximately 99% and 98% over the last 12 months.

Our first quarter business results led to solid financial outcomes, but $4 49 of adjusted EPS, which is more than double our level from a year ago.

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

Now as a reminder, our long term vision and the leader of the advisor Center market.

Which for us.

The best at empowering advisors and enterprises to deliver great advice to their clients and to be great operators of the business.

Now to bring this vision to life, we are providing the capabilities and solutions that help our advisors deliver personalized advice and planning experience is super important.

And at the same time through human driven technology enabled solutions and expertise, we are supporting advisers and their efforts extraordinary businesses do.

During this well it gives us a sustainable path to industry leadership across the advisor experience organic growth and market share.

As we look ahead, we continue to see growing demand for advice and increasing appeal of receiving that advice through a financial protection.

We believe that our strategy positions us well to capitalize on these key structural trend.

Now to execute on our strategy, we organize our work around two primary categories.

Resolve expansion, where we look to expand the ways that advisors and enterprises and affiliate.

Such that we can compete for all 300000 advisers in the marketplace.

And vertical integration, where we focus on providing capabilities to solve for a broader spectrum of the adviser.

And then doing so great durable differentiated.

Now while our strategy has not changed we will use the framework of horizontal expansion and vertical integration to review our strategic agenda.

This structure is an evolution of our strategic plays framework and you can see how the strategic plays map to this new orientation within our investor presentation.

With that as context, let's start with our efforts around horizontal expansion.

This work involves meeting advisors and enterprises, where they are in the evolution of the business.

Creating flexibility in our affiliation models. So they can design the perfect practice for themselves.

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As a result, this component of our strategy helps contribute to solid growth in our traditional markets. While also expanding our adjustable markets through our new affiliation models.

Our recruiting and traditional markets continue to be a significant source of growth, reaching a new first quarter high of approximately $9 billion in assets.

In the quarter, we continued to increase our win rates and expand the depth and breadth of our pipeline. Despite advisor movement in the industry remaining at lower levels.

With respect to our new affiliation models strategic well employ in our enhanced <unk> offerings, we delivered our strongest quarter to date recruiting roughly $3 billion in assets you want.

Each of these models, we continue to realize growing demand and expanding pipelines, which positioned them for increased contribution to our organic growth.

Looking ahead, we expect to carry this recruiting momentum into Q2 for both our traditional markets.

And our new affiliation models.

And with respect to large enterprises today, we announced that BMO will onboard the wealth management business with bank of the west to our enterprise.

In addition, we continue to prepare to onboard commerce.

Electively. These two deals will add approximately $11 billion of brokerage and advisory assets in the second half of the year.

Looking ahead, we continue to build our pipeline as demand for our model growth.

Now in Q1, we also continue to have success in our traditional banking credit Union space, adding approximately $1 billion of a prudent asset and this change.

Now shifting to our vertical integration efforts here, we're focused on delivering value added capabilities services and technology.

Extend across and advisers in the end.

Also the purpose of helping them differentiate and win in the marketplace.

Driving business.

Afford at this part of our strategy is helping advisors deliver their differentiated wisdom insight and advice wrapped in an easily accessible and highly personalized experience for the client.

In that spirit. This quarter, we continued to enhance our advisors value proposition to their clients.

Introducing new account aggregation capability to help advisors consider their clients holistic financial picture by enriching the end client digital portal through the expansion of customizable self service capabilities and by evolving our research offerings to include increased market commentary delivered how and where it works best.

Be advised.

Now on a separate play within our vertical integration strategy, we continue to expand and enhance our services for OLED.

Encouraged by the evolving appeal of our value proposition and the seasoning of this business.

As a result of solid demand in Q1, the number of advisors utilizing our services continued to increase and we ended the quarter at over 3300 active users up roughly 30% year over year.

Now as we work with advisors to increase utilization of existing services. We're also continuing to create new services such as our partial book sales solution.

We provide the flexibility for advisors to sell us their smaller accounts with clients that don't necessarily fit their practice, thus, creating more capacity for them to focus on managing and growing the business more robust.

This service has been received well and we are seeing solid early momentum growing pipeline of demand.

Now at the same time, we're seeing good success with our set of services that help solve the industry wide challenge of up to a third of advisers retiring over the next decade.

In that spirit over the past year, we facilitated approximately 150 acquisitions among advisors through our M&A solutions program and.

Since launching our liquidity and especially in capability in Q4, we have completed more than 10 of these deals with LPL advisors and have growing interest both inside and outside of the LPL weaknesses.

In summary in the first quarter, we continued to invest in the value proposition for advisers and their clients, while driving growth and increasing our market leaders. As we look ahead, we remain focused on executing our strategy to help our advisors further differentiate and win in the marketplace and as a result.

But 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.

As we move into 2023, we remain focused on serving our advisors growing our business and delivering shareholder value.

Against the backdrop of market uncertainty our business performed well as we continue to execute on our strategic priorities.

In recent years, we've invested in capabilities technology and service to enhance the experience of advisors enterprises and their clients.

At the same time, we've maintained a strong balance sheet with significant corporate liquidity and low leverage positioning us to support our advisors and clients in a range of macro environments.

This was most recently recognized by S&P upgraded our credit rating earlier this month.

Establishing us as an investment grade credit with both our rating agency.

By leveraging the investments in our platform and our financial strength, we continued to grow assets organically in both our traditional and new markets.

Closed two strategic acquisitions and continued our momentum with our liquidity and succession capability.

We are preparing to onboard commerce bank and bank of the west in the second half of the year.

We accomplished all of this while continuing to invest in our industry, leading value proposition and delivering record adjusted earnings per share.

So as we look ahead, we continue to be excited by the opportunities we have to help our advisers differentiate and win in the marketplace.

Now, let's turn to our first quarter business results total advisory and brokerage assets were $1 two trillion up 6% from Q4 as continued organic growth was complemented by higher Ed.

Total organic net new assets were <unk> 21 billion or seven 5% annualized growth rate.

Our Q1 recruited assets were $13 billion, which prior to large enterprises was a record first quarter of the year.

This included $3 billion of recruited assets from our new affiliation.

The largest contribution since their launch a few years ago.

Looking ahead to Q2, our momentum continues across our traditional independent and new models and we are on pace to deliver another strong quarter of recruiting.

As for our Q1 financial results the combination of organic growth rising interest rates and expense discipline led to adjusted EPS of $4 49.

The highest in our history.

Looking at our top line growth gross profit reached a new high of $1 $20 million.

Up $48 million or 5% sequentially.

As for the components Commission and advisory fees net of payout were $215 million up $43 million from Q4, primarily driven by higher advisory fees and a seasonally lower production.

In Q1, our payout rate was 86, 2% down about 220 basis points from Q4, largely due to the seasonal reset of the production bonus at the beginning of the year as well as a nonrecurring benefit of approximately 50 basis points realized during the quarter.

Looking ahead to Q2, we anticipate our payout rate will increase to approximately 87, 5% primarily driven by the typical seasonal build in the production bonus.

With respect to client cash revenues it was $439 million flat to Q4 as the impact of higher short term interest rates was offset by a sequential decline in balance.

Looking at overall client cash balances. They ended the quarter at 55 billion down $10 billion driven by record net buying of 37%.

Within our ICA portfolio, we added $3 billion of new fixed rate contracts, bringing our fixed rate balances to roughly 55% of the ICA portfolio within our target range of 50% to 75%.

Our ICA yield averaged 320 basis points in the quarter up 29 basis points from Q4, primarily due to the increases in short term rates.

As for Q2 based on where interest rates are today.

What we've seen with client cash balances so far in April we expect our ICA yield to remain unchanged at approximately 320 basis.

As the full quarter benefit of the Q1 rate hikes is offset by the mix impact of lower floating rate balances.

As for service and fee revenue it was $119 million in Q1 down $1 million from Q4, primarily driven by lower conference Rep.

Set by seasonal increases in IRI.

Looking ahead to Q2, we expect servicing fee revenue to be roughly flat sequentially.

Moving onto Q1 transaction revenue it was $49 million up 2 million sequentially as trading volume increased slightly.

Looking ahead to Q2, we expect a seasonal decline of a couple of million dollars.

Now, let's turn to expenses, starting with core G&A it.

It was $326 million in Q1.

For the full year 2023, we continue to anticipate core G&A to be in a range of $1 $335 million to 1 billion 307.

As a reminder, this year, we are opportunistically accelerating our investments to support our core business growth.

Expand our addressable markets and scale, our new services.

We are also sequenced our spending plans to build gradually through the year, which positions us to be flexible and dynamic depending on how our growth opportunities and the macro evolves from here.

To give you a sense of the near term timing of the spin in Q2, we expect core G&A to be in a range of $330 million to $340 million.

Moving on to Q1 promotional expense it was $101 million up $17 million sequentially.

Primarily driven by conference spend as we had two of our largest conferences of the year during the quarter.

In Q2, we expect promotional expense to increase to a range of $105 million to $110 million.

Due to increased transition assistance, resulting from strong recruiting and large enterprise onboarding as we prepare for Commerce Bank and bank of the west to join US in the second half of this year.

Looking at share based compensation expense was $18 million in Q1 up from $12 million in Q4 in.

In Q2, we expect a similar level of expense as the majority of our grants occur in the first two quarters of the year.

Turning to depreciation and amortization was $56 million in Q1 up $2 million sequentially, we expect it to increase to approximately $60 million next quarter.

Regarding capital management, our balance sheet remains strong.

We ended Q1 with corporate cash of $234 million down $225 million from Q4, as we closed on two acquisitions during the quarter.

Our leverage ratio was one three times down from one four times in Q4, 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 in line with the returns we generally invest.

Investing in organic growth first and foremost pursuing M&A, where appropriate and returning excess capital to shareholders.

In Q1, we allocated capital across our entire frame.

We continue to invest to drive and support organic.

On traditional M&A, we closed on two acquisitions for approximately $150 million.

Within our liquidity and succession offering we closed seven deals for around $100 million and we continue to have a solid pipeline.

With regards to capital return, we increased our share repurchases to $275 million in Q1.

We plan to further increase share repurchases in Q2 to approximately $300 million.

To summarize our balance sheet is strong and we are well positioned to drive value through our capital allocation plan.

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.

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

Certainly as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

One moment for your first question.

Okay.

And our first question will come from Steven Chu, Bob Wolfe Research. Your line is open.

Hi, Good afternoon, Dan Good afternoon, Matt.

So maybe just kicking things off with a question for Matt on the Enterprise Channel recently, you've seen some really strong recruiting momentum within that enterprise I was hoping to get your perspective on whether the recent stress in the banking space bolsters. The case for banks to partner with LPL and can you help quantify for us where the <unk>.

Enterprise backlog is today versus say they started the year.

Yes.

You said for me, Stephen but I think Dan is chomping at the bit on this maybe if you can take it.

Okay.

Yeah, No Hey, Hey look.

When you have.

Circumstances of displacement in the marketplace as you were calling out that can create challenges and opportunities.

Hum.

We will.

Some of the bank failures in Q1, we think back to 2020 with the pandemic a much more significant impact from that.

I think in the case of the recent failures, we didn't necessarily see this disruption, creating short term opportunity because it was very short lived.

And any impact somewhat new to that said I think in times like this it.

It does reinforce.

Maybe some of the really important elements of this model. So think about it this way the value of human centered right, which creates opportunity for advisors.

They are providing guidance and folks need it most in times of uncertainty.

It certainly helps reinforce the feel of us as a.

Strategic partner to advisers, given our strength and scale.

Robust capabilities, we sort of ended up being a safe Haven of quality and then finally I think right to your question or the point of your question. It does reinforce our value proposition for enterprises in particular bank debt.

That type of disruption may be a catalyst for exploring different strategic options or alternatives.

Our business lines as an example, well manage and.

And I think.

That's certainly.

This incremental demand as we go forward finally, our capital light model allows us to play offense due to invest back in the platform in order to enhance and further differentiate <unk>.

Others, perhaps do that.

The market for display.

So I think we didn't see necessarily opportunity in the short run I think it does reinforce the attributes of this model and is quite helpful to our long term growth and our positioning in the marketplace, where we can kind of turn this change in the market.

Across most disrupted.

Disrupted sort of marketplace changes, so I hope that helps.

No. That's really helpful color than that I was really just trying to share the wealth of my follow ups can be for that there just have the traditional channel.

There is some evidence that retail broker dealer consolidation activity is driving increased advisor churn and just given the strong M&A results that we saw in March but how does the recruiting backdrop in the traditional market comparator last year and do you expect to see an acceleration given some evidence of higher advisor trial.

Yeah.

Yes.

Look I mean, if we look just glancing Q1 is for.

Perhaps.

Jumping off point to your question Steven.

You see the traditional recruiting markets in a solid place for us.

Billions in assets and that channel continues continuously produced solid results and continue to increase over time.

Differentiation of our model and our capabilities creates a real appealing alternative to these advisors and quite frankly, the flexibility in our different affiliation models gives them different steps.

Albums with challenges essentially solved or are moving to our platform.

Place, where theyre trying to practice.

Depending where they are in the lifecycle of the model so.

We certainly think that just as a baseline we continued to see that part of the market strengthening and its opportunity.

From a recruiting.

As you look forward to your point around other changes that player.

Players in the marketplace in the independent space may be contemplating or considering that certainly would take the lower baseline of churn we've seen over the last couple of years and obviously creator.

It should be a much bigger opportunity set any time it changed in the marketplace, a new model that is going to trigger or be a catalyst for advisors consider their set top box.

It's relevant to how they practice.

Going forward.

And so we do believe that if those things occur.

That does create more churn in the marketplace and we take our.

Fueling model, we take a growing capability set of our business development team do a great job across all of these different affiliation models.

And.

And I think we aggressively go play offense and capitalize on that opportunity.

So that's kind of how we see the traditional marketplace, both now and if things occur in the future will be ready to go.

Explore those possibilities.

Very helpful color. Thanks, so much for taking my questions.

One moment for our next question.

And our next question will come from Alexandra <unk> of Goldman Sachs. Your line is open.

Alexandria anymore at all.

Alexander you better have a good question.

Slide <unk>.

It's late in the earnings majority for whatever goes.

So.

You guys.

Right now is a pretty sizeable win.

The <unk> channel I think a couple of weeks ago. They can pull on the larger size from what we've seen in that kind of affiliation part of your model.

Curious if you could speak to instead of the key attributes that maybe.

Maybe one the business for you guys.

And ultimately what does the pipeline look like in that part of the market and maybe just remind us on sort of the economics in that channel for LPL.

Gross profit turns are.

Yeah.

Thanks, Alex This is Dan I'll take the first part of that.

Then I'll I'll flip it to Matt for <unk>.

Via that question so.

So first of all yes.

We had a we had a nice win that you referenced a couple of weeks ago that we announced where the team did a great job of attracting CD advisor network, which is the new large foray.

And those apps.

Show up actually in the second quarter.

We're in.

And look I think.

This win does a couple of things first and foremost reinforces the strong work the team's doing to create a really compelling and differentiated solution and this part of the market.

Eight example, perhaps with that is how we're using our services portfolio to give these <unk> access to differentiated tools and resources.

<unk> always had availability to our access to which are really meant to help them better operate their businesses as they go forward once on our platforms.

A great example of how we're building and what I might call a baseline of capability set differentiation that I think is creating a more robust deal for this part of the marketplace. I think if you click down specifically on CGI advisor network and what were some of the.

Attributes that maybe attracted them want are very advisor centered model I think coupled with innovative technology that they can create integrated workflows for driving efficiency in the practice and finally in the flexibility of our solution to handle all of their assets in a more integrated way on one platform.

And so.

At a high level those are probably some of the bigger attributes that they were attracted to them. So look I think as we look forward overall, we're really excited about the opportunity and the momentum that's building in this model.

Have a number of new clients that have joined us so far this year as we referenced in the recruiting in Q1 and certainly there is more opportunities that are that are progressing in the pipeline. So we will continue to invest in the capabilities here as we see this as a very attractive market.

To create that differentiated model and continue to contribute and accelerate growth.

Hopefully that gives you a little color on both.

Particular affiliation model and then specifically with CG advisor network.

And then and then Alexander.

On the on the economics I mean, it's not it's not too just similar from from the enterprise shower, the large financial institutions, where on the raw side. It would typically have a lower gross profit ROA.

But the cost and specifically the acquisition costs are also lower because we will underwrite underwrite ta to return. So you get to a bottom line margin and economics that are that are compelling and similar to the rest of the business that you have that dynamic similar to what you have on the large enterprise side.

Okay, great. Thank you for my second maybe I'll ask a lesson tactful question can we.

Talk just about cash I think you guys gave the ICA yield of 324 second quarter, but maybe just an update on where cash stands today and the composition.

And also just around the philosophy you guys kind of started on this journey of.

Putting extensions and a couple of years ago.

With a 50% now.

Clearly the volatility and cash balances has been something we have to look like for the last six to nine months ago.

The environment continues to be sort of uncertain do you guys anticipate to continue to extend and add more <unk> or do you find yourself in a pretty good place here.

Yes, I think so.

On April and I'll I'll give some color on cash balances it and maybe just how we're seeing organic growth pull through in April as well.

And I think when you look at cash bound both of those things are as a reminder, which I'm sure you know but.

I'll remind anyways, there's two key seasonal factors for April that'll hit first and first and foremost is the tax rates tax months.

Annual taxes for our clients, usually impact cash as well as M&A by about 1 billion and a half.

And then addition, given us months one of the quarter advisory fees, primarily come out in that first month, as well, which is which is around a $1 billion. So those two seasonal factors would reduce cash by around $2 5 billion everything else being equal.

In addition to that we've continued to see strong levels of investor engagement, but the pace of cash balance declines has continued to moderate so when you look at the incremental decline in April or beyond the seasonal factors. It's about 800 million. So if you look at the first four months of this year the cash balance declines really peaked in <unk>.

<unk> and have moderated each month.

And when you take those seasonal factors into account.

April decline is the smallest decline so far so far this year. So you put all that together that puts cash suite balances just above around 51 billion.

We sit today.

On your point on fixing out.

The ICA balances I don't think.

I think the premise of the question summarized it well, we've got a target range of 50% to 75%.

With the $3 billion that we did put on this quarter.

Now within that range is 55% and I think I like where we are I think we feel well positioned.

Of course, we'll monitor the environment from here and if things evolve, where we think it makes sense to put on more fixed.

The environment, there has gotten quite constructive and we feel good about our ability to do that if it made sense, but where we sit today in this market I think we feel well positioned where we are.

Perfect. Thank you very much.

Yes.

And one moment for our next question.

And our next question will come from Jeff Schmitt of William Blair. Your line is open.

Hi, good.

Good afternoon.

Another one on the cash balances.

So I think they are around four 6% of client assets in the quarter I understand youre, saying that the pace kind of slowed but.

Appears to be driven by really strong sort of buy sell activity are we approaching a level that you think even if the markets remain strong it wont move below like I think I think it bottomed at four 3% in 2019 is that sort of a good support level.

Yes, I think a few things that I think the headline answer is yes from.

From a support level I think the best thing that we look at.

Here, which I think you were referencing is really history is the best Guy here and getting at is there a natural amount of cash that sits in an account to manage it and to do things like facilitate rebalancing facilitate staying advisory fees customer withdrawals. All so you don't see what advisers are not forced to make a trade that they would otherwise.

And make a trade it silicon those things so when you look at our history as you highlighted.

We've gotten to a place where advisers have their clients fully deployed into the marketplace, which has happened several times in our history, usually see it get down to that around 4% level.

So history tells us that that's the zone and we're not seeing anything in this environment causes us to think anything differently.

Okay.

And then on core organic growth I think you've guided into the mid to low teens kind of reiterated that view what does that assume on interest rates and would that change I guess, if the fed pause hikes for infrastructure cutting in the back half of the year, how variable I guess is that.

Function.

Yes, well I think yes.

As I comment on the prepared remarks, right. We have we have.

Repaired our spending plans to build throughout the year. So if we think there is a reason to pause or adjust we certainly have that ability I think we'd be very deliberate about that I think the investments that we're making we think drive long term value of the firm we've got our balance sheet positioned quite well to be able to do that but if we do get an environment where the investments.

Makes sense or it does mean, we need to pause we would but I think sitting here today I think we still feel quite comfortable that the 12% to 15% this year makes sense.

Given the investments that we're making and the results that we think that that will follow.

Okay. Thank you.

Okay.

One moment for our next question.

And our next question will come from Kyle Voigt of <unk>. Your line is open.

Hey, good evening, a couple of follow ups from me. The first is on Alex's question.

<unk> was previously using TBA for custody.

And with the Schwab and Ameritrade integration happening over the next year I think primarily in Q2 Q3.

I'm just wondering are you viewing that migration as a potential catalyst for putting more assets in motion.

Talking about it as an opportunity to continue to have success in that channel.

Okay.

Much like we mentioned with regard to our traditional markets.

That is certainly a change in the market.

It could be a catalyst for advisors.

Different options and alternatives.

Certainly we believe that that is a contributor too.

Ongoing potential demand.

As not only we lead up to that transition.

Yes.

I think in terms of step function change significant change management efforts, sometimes on the other side of those.

Always look.

As we would've expected in its entirety wanted and so I think that opportunity set it's been both.

For the transition and potentially.

Relative to the potential opportunity set.

I think what we're trying to do is just build a capable and appealing alternative.

Structurally be attractive and create great opportunities.

Viewed on Amit.

On our platform to the extent, we can do that I.

And I think that differentiated value with the willingness and essentially look around at other options creates.

We can.

That's what we're contemplating.

Okay.

Great. Thank you.

Second follow up is on the ICA.

On the fixed rate side, I think a lot of the demand generally comes from larger banks that may have seen deposit inflows through the recent banking crisis.

But in terms of that demand I think you guys noted that there were very constructive trends actually there I.

Can you just provide a little bit more color on what youre seeing.

<unk>.

In terms of how constructive those trends are and maybe quantifying that.

Sure I mean at a headline level I think the appetite of the demand for ICA balances overall, whether it be fixed or floating is well in excess of what we have to deploy right. So I think when we our balances were able to deploy on on both sides I think on the fixed rate side. We're just now positioned where we want to be.

And we're able to do that during the quarter I think maybe to put some data behind it and where you could probably see it move.

In the marketplace itself is really on the variable rate side, and I think that we're placing those deposits.

Deposits were starting and if you look in the current quarter of the current market. Those are now being placed at fed funds plus 15% to 25 basis points that was about a spread of 10% to 15 last quarter and compares to kind of flat to negative during the dependent so maybe that that's probably the best place to focus on.

On.

Where you can see that demand for these deposits really showing up.

Great. Thank you.

And one moment our next question.

Our next question will be coming from Michael Cyprus of Morgan Stanley . Your line is open Michael.

Hi, good evening, thanks for taking the question.

Maybe you could just go back to brokerage M&A strengths, there quite robust five 5% or so organic annualized thats up meaningfully from a year ago. So I was hoping you might be able to elaborate on what's driving the strength there on the brokerage side and how you think about the persistency of that.

So let me take that.

A couple of maybe the primary drivers as you say you'd see some growth year on year revisions as comparative basis I think.

One of the drivers would be we're in a rate environment that we hadn't seen for 15 16 17 years and.

In some cases.

There is opportunity to serve clients and meet their needs in this rate environment leads to products.

<unk>.

Maybe a utilization that is more appealing or easier to use as a brokerage structure than an advisor so.

You see some of that labor.

Is that right.

Some type of.

Okay.

Treasury rates.

The other thing that I think that you see driving that growth is also.

Some of the mix in these larger enterprise wins that we've had they have a higher mix of brokerage and advisory.

And certainly different than our typical mix of roughly 50, 253% of advisory and so when we transitioned those folks and obviously that has.

Shorter term influence and the mix, we see that as an opportunity once they get to our platform, it's much more appealing and robust.

One that has more interest in pricing to the client we do see those as opportunities.

The catalyst and shift their mix over time.

More towards the price.

What's causing that those were the primary driver.

On their ships.

Great. Thank you very helpful. And then just as a follow up question. If we look at the gross profit ROA prior to the client cash that also showed a very nice improvement year on year. It has been pretty steady in this 19% to 20 basis point range for some time, so I guess, what do you see as some of the biggest opportunities too.

Expand that over time that gross profit ROA prior to client cash what might be the two to three biggest drivers of expansion over the next couple of years, where do you see some potential partial offsets and ultimately what level do you think this could ultimately achieve.

Yeah, Michael I mean, I think that what I would emphasize is really the overall growth opportunities that we have for gross profit itself right things that we've talked a lot about on this call, but our overall organic growth.

Bringing in and recruiting larger advisors, the enterprise channel, which drives gross profit growth that actually has a lower gross profit ROA like all of those things.

Adding in our service and fee revenues and services group those things all drive growth there and I think the key thing I would highlight from an ROI standpoint is as we become a larger and more diversified.

Firm for both offerings and revenue drivers Theyre, just not all asset driven.

Especially in that service and fee revenue side.

The growth that we've had in the large enterprise channel will show up as lower gross profit ROA.

Even though we're serving and supporting those clients in a way that can drive a compelling compelling margin. So I think it's less about the ROA from a basis point standpoint, it's really about the key drivers.

Of our of our model that can drive gross profit growth overtime.

Great. Thank you.

One moment for our next question.

And our next question comes from Brennan Hawken of UBS. Your line is open Brennan.

Thanks, Good afternoon, thanks for taking the question.

Matt wed love to circle back to the comments.

Comments, you made about thinking that the prior level of cash as a percent of client assets would would work as a trough. This cycle. We've seen other firms you laid out a few of the reasons for that.

The need.

You need to have advisors that are catching the dividends and need for some baseline of cash, but we've seen at other wealth management firms that have very similar business models.

Cash as a percentage of client assets go below prior cycle trough. So.

I guess I'm just curious as to what gives you the confidence that that trough is going to hold rather than a.

Simple.

Understanding that we're in are higher for longer and therefore.

Prior trends might end up just being a bit different here and not fair too.

Well I think Brian Theres always scenarios, where things can play out differently, but I think from our standpoint history.

History is the best guide right and I think look from our business model, which I know you've you've heard us talk through a bunch, but the cash balances as a starting point are relatively small and they are.

They are transactional or operational in nature.

We've got a long term average of around 5%.

Or 7000 per account.

And when you look at that history and the primary factor that has moved those bounces up and down is really based on the markets and where and how advisors have had their clients oil and to your point on when that when those balances come down it's typically come down to that 4% we've seen it several times most recently in 2021.

As the market has really recovered post the onset of the pandemic.

So that's what we're looking at and I think it's a combination of the size of the balances and the history that we've seen.

Okay, Alright, that's fair.

And just a ticky-tacky one to follow up.

Yield on the money market sweeps has sort of seem to compress a bit.

From where it was.

About a year ago.

I had always thought of those as more or less fixed is there some sort of mix dynamic that's happening where something is causing that to compress and how should we be thinking about that going forward I know, it's a small impact just kind of curious.

Yeah, I think well in recent periods, it's come up a little bit youre, referring to.

Few years ago is that ratio looking at.

The average yield in basis points on the money market sweep. It was 30 this quarter. It was 32 the prior quarter and then 38.

In the third quarter again, okay.

Yeah, I just okay. So I put all of those in a relatively similar zone, maybe not moving around a lot whenever you do see movement. There. It's more about the mix as there is there a different firms have different paths. There is nothing from a pricing standpoint going on there and as you said the balances there are really small so it's usually a mix got it okay great. Thanks.

You bet.

One moment for our next question.

Okay.

Our next question will come from Craig Siegenthaler of Bank of America. Your line is open.

Thanks, Good afternoon.

We saw that annuity sales were up a lot I think commissions were up 52% year on year I'm curious.

<unk> annuities are the clients buying and have you seen an increase in surrenders of older annuities, just given the wide gap between where current rates are compared to where annuities were offered over the last decade.

Yes, I think that is.

Short answer to your question is what I said earlier that this in this rate environment. We haven't seen for an extended period of time, there is an opportunity to use fixed annuities as a way to help people with their desires around yields or yield that leads to lifetime income.

And that that opportunity has largely been.

You did for an extended period of time, and so because of that it's not surrenders or <unk>.

Exchanges from prior annuities.

You would've seen that coming.

We're being forced to come out of variable annuities that were set up and created.

So this is typically new money that has opportunity to find higher yields.

With the pent up demand for those higher yields.

Our.

I think well positioned and suited support for long term.

<unk> needs in the arm. So that's the primary driver.

Thank you.

And just one question on on your advisory relationships by what.

What percentage of LPL advisors with advisory relationships charge fees on total client.

Versus net client.

After backing out client cash.

Yeah, well so first of all there's limits to the amount of cash that someone can hold for a period of time within an advisory account.

Sure.

Or are there Rick.

Required to either put that money to work or move those assets out of that advisory talent. So that's your control relative I announced the cash inside advisory accounts that said their cash that they use inside of the account.

Preet levels, as we've talked about or as part of the.

Hum.

Feed that is choice.

Thank you Dan.

One moment for our next question.

And our next question will come from Michael Cho of Jpmorgan, Michael Your line is open.

Hi, good afternoon.

Thanks for taking my question I, just wanted to follow up on capital allocation again.

You mentioned four.

The leverage continues to tick lower and you've got $4 billion of firepower. If we think about the inorganic bucket just given the changing backdrop and cross back on banking.

Just had nothing kind of near term changes, including our partnerships, but then segments of panels that you might be focused on more when you think about organic just as lpl's firepower.

Can use to grow.

And then just Relatedly just in terms of the new liquidity and succession offering it looks like you're having.

Some good success there with the growing pipeline I mean can you just remind us how much capital to allocate there and maybe some capacity for a number of deals annually or dollar amount, but just yet.

Thanks.

Sure I'll start I'll start with liquidity in succession, I mean, I think if you look at what you did in the quarter I think it's a good guide.

The opportunity to hear the focus here from a capital standpoint is this relatively small right we're deploying capital.

Using disciplined return thresholds, which usually leads to purchase multiples in the six to eight times EBITDA zone.

<unk> of the deals are usually relatively small in the $10 million to $20 million range. So it's less a big use of capital and it's more about really the capability that we're that.

We built there to help transaction transition practices to the next generation that's the key for the offering.

I think on your main I think on your first question to make sure we got it as far as the opportunity set and the interest in that from an M&A standpoint, I mean, I think when you just look at where we have participated as a company it's across several channels, but anything that would really accelerate our strategy, whether it would be and are advancing in our traditional markets.

<unk>.

Expanding into newer markets for the employee channel as an example that we did.

And if we can do so in a way that just matches our strategy that we've got the operational capacity to do it really well and then it meets our disciplined financial hurdles.

I think thats, how it would be interesting from an M&A standpoint.

Dan anything on that.

We also look always at capabilities that were interesting capabilities that will accelerate.

<unk>.

And create a better opportunity with interesting returns versus building them ourselves or renting them. We're always open to exploring that too. So that's just the only other element of M&A that I might.

Okay, great. Thank you and then just a quick follow up on the on the G&A I mean, Matt you talked about some some flexibility throughout the year just given.

How things kind of shake out at the big picture, but thank.

Thank you guys are there any certain projects or initiatives that you'd call out.

Again, that's in my call in terms of the accelerated investments, where you may pause if the environment changes.

Later in the year.

Yeah.

Yes.

Not particularly I mean, maybe just to emphasize the construct and how we built up to the 12% to 15% I mean, I think that will permanent from a prioritization standpoint, we're investing first and foremost.

To support the core business and each of those categories is about a 4% to 5% growth in the year.

The second category is really about expanding our markets and scaling our new services and then that third category is really being opportunistic given the environment to accelerate components of the strategy.

So if we are pulling back it would be more than that.

It would be first in that third category, which is less about a specific initiative and more about what are you doing some things that we would have otherwise have waited until 2024 over you on.

Okay, great. Thank you so much.

One moment for our next question.

And our last question will come from Bill Katz with Credit Suisse. Your line is open.

Okay. Thank you very much for taking the questions Tonight, just coming back to the opportunity to sort of fix up versus float. So it sounds like the 55% is it that way we want to be.

So I understand that you done a great job of managing through the rate cycle in the past, but to play Devil's advocate for a moment. If you look at the forward curve and its points is a pretty pretty sharp reduction. If you will and you think that the sorting is sort of coming to a conclusion in the cash balance that is starting to stabilize why not try and pick.

Out a bit more just to reduce some of the risk to earnings in 2025.

Yes, Bill I mean, I think when we form that that target range of 50% to 75% I mean, it was it was contemplated that would be the range, we'd want to be in a range of interest rate environments.

It's not about being clairvoyant on rates and picking exactly when and how and what percentage to do it's about increasing the stability of our earnings and.

And I think we like where we're positioned in that range.

I'm not saying, we're going to we're going to sit there forever, that's how we feel today.

The environment changes or the dynamic changes, we'll adjust but I think we really like where we're positioned right now.

Okay. That's helpful and then just coming back to capital for a moment.

Thank you for the guidance on buyback into new quarter, but if I take that and your dividend it looks like the payout ratio on sort of consensus numbers for the quarter plus or minus some updates from today is almost 80, 90% and when I look at your corporate cash.

That number X the $200 million bogie that you normally like to keep handy leaves very little incremental liquidity. So as you think about it.

Inorganic opportunities liquidity succession.

I know the use of cash how do you think about the interplay between free cash flow deployment and balance sheet leverage, particularly given the macro backdrop.

Yes, well I think the key thing there Bill is well managed liquidity based on our leverage ratio right. So were below the low end of our target range of 152 and a half. So when you think about liquidity capacity.

Across all three areas right investing for organic growth M&A and returning capital to shareholders I think we feel well positioned that.

Were at that were below the low end of that range.

So thats, where we will where we manage that and we feel good where we are.

Thank you guys.

And I'm showing no further questions I would now like to turn the conference back to Dan for closing remarks.

Hey, Thanks, I just wanted to thank everyone for taking the time to join US. This afternoon. We appreciate your investment in time, we look forward to speaking with you again next quarter.

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

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Q1 2023 LPL Financial Holdings Inc Earnings Call

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