Q2 2023 LPL Financial Holdings Inc Earnings Call

July 27, 2023

Good afternoon, and thank you for joining the second quarter 2023 earnings Conference call for LPL Financial Holdings, Inc. Joining the call today are our president and Chief Executive Officer, Dan Arnold and Chief Financial Officer, 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 if 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 company's website Investor Dot L. P. L Dot com.

Today's call will include forward looking statements, including statements about L. P. L financial's future financial and operating results outlook business strategy and plans 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 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.

Please refer to the company's earnings release, which can be found at investor that L. P. L Dot com.

With that I will now turn the call over to Mr. Arnold.

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

Over the past quarter, our advisors continue to provide their clients personalized financial guidance on the journey to help them achieve their life.

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It helps support that important work.

We remain focused on our mission.

And care of our advisers, so they can take care of their clients.

This quarter, we continued to see the appeal of our model growth 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 progress toward our vision of becoming the leader of course, the adviser mediated mark.

In that spirit, we remain focused on helping advisors and enterprises solve challenges and capitalize on opportunities better than that.

No.

Thereby serve as the most appealing player in the industry.

With respect to our performance we delivered another quarter of solid results while also.

Progress on the execution of our strategic plan.

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

In the quarter total assets increased to one two trillion as continued solid organic growth was complemented by higher equity market.

With respect to organic growth second quarter organic net new assets for 22 billion, representing seven 4% annualized growth.

Proximately, 8% when adjusted for seasonal tax.

This contributed to organic net new assets over the past 12 months with 84.

Representing approximately an 8% organic growth.

In Q2 recruited assets were $19 billion.

Which represents a quarterly record excluding periods when onboarding large enterprise.

This outcome was driven by the ongoing enhancements to our model as well as our expanded addressable market.

Looking at same store sales, our advisers remain focused on serving clients and delivering a differentiated experience.

As a result <unk>.

Theres about winning new clients and expanding wallet share with existing.

Combination that drove solid same store sales in Q2.

With respect to retention, we continue to enhance the advisor experience.

Due to the delivery of new capabilities and technologies as well as the evolution of our service and operations.

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

Our second quarter business results led to solid financial outcomes $3 94, adjusted EPS, an increase of 76% from a year ago.

Let's now turn to the progress we made.

Glen.

Our long term vision is to become a 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.

To bring this vision to life, we are providing the capabilities and solutions that help advisors deliver personalized advice and planning experiences to their clients.

Same time through human driven technology enabled solutions and expertise, we're supporting advisers and their efforts extraordinary business.

Doing this well gives us a sustainable path industry leadership.

The advisor experience organic growth and market share.

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

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

Such that we can compete for all 300000 advisors and the adviser mediated market.

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

In doing so create durable differentiate with that.

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.

By creating flexibility in our affiliation model. So they can design the perfect practice for themselves and for their clients.

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

Now over the quarter, we saw strong recruiting in our traditional independent more.

Reaching a new quarterly high of approximately $14 billion.

At the same time.

<unk> of our model and the efficacy of our business development.

We maintained our industry leading win rates, while also expanding the breadth and depth.

With respect to our new affiliation models strategic well deploy and our enhanced our <unk> offering we delivered our strongest quarter to date recruiting roughly $4 billion in assets in Q2 on each of these models, we continue to experience growing demand and expanding pipeline.

Which positions them for increased contribution to organic growth.

Looking ahead, we expect to carry this recruiting momentum into Q3 for both our traditional independent market and our new affiliation.

Now as a complement to our organic growth.

We also recently announced the planned acquisition of <unk>.

California based firm with approximately 260 advisers $6 5 billion client asset.

This transaction will give brown capital advisors access to our differentiated capabilities technology and service and we look forward to onboarding them early next year.

With respect to large enterprises, we recently on boarded bank of the West and are on track to onboard Commerce Bank in August looking.

Looking ahead, we are encouraged by our growing momentum and strong pipeline across the broader enterprise market, including in our traditional bank and credit.

Now shifting to our vertical integration efforts here, we're focused on delivering value added capabilities services and technologies that extend across and advisers in the end all for the purpose of helping them differentiate and win in the marketplace and run driving business.

That spirit this quarter, we launched a new performance optimization solution for breakfast.

This capability delivers comprehensive data in a structured form so advisers can better understand their performance on an absolute and relative basis.

Over the coming months, we will further expand the functionality by enabling it to generate personalized insights around additional services technology and solutions, we offer in order to help advisers against the overall performance of the products.

Over time, we see practice of becoming a key tenant of our adviser experience leveraging the power of artificial intelligence to operate as a co pilot.

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And while we're still in early innings, we're excited about the growth opportunities that this innovation unlocks and how it will serve as an additional leverage points to help advisors on thrive.

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

And are encouraged by the evolving appeal of our value proposition and the seasoning of this business.

As a result of demand in Q2, the number of advisors utilizing our services.

To increase we ended the quarter with approximately 3500 active users up roughly 30% year over year.

As we work with advisors to increase the utilization of existing services. We're also continuing to create new services, such as our tax planning solution.

Which is part of our broader suite comprehensive advice and planning services.

This new solution helps enable tax intelligent device that can deliver material savings to clients and help further differentiate advisors value funds.

This service is receiving positive early feedback and demand in the market.

While also unlocking interesting synergies with our existing services.

Now as we continue to evolve our services portfolio, we are leveraging our structured approach to innovation in order to address the needs of our broader adviser base in that spirit, we're creating streamlined versions of existing solutions to help advisors, who may have less complex products.

Samples of these solutions include CFO Central's digital marketing and payroll all of which are progressing through our innovation pipe.

As we move forward, we remain focused on enhancing and expanding our services portfolio to better support our advisors and enterprises and to drive growth.

In summary in the second quarter, we continued to invest in value proposition for advisers and their.

While driving growth and increasing our market leadership.

As we look ahead, we remain focused on executing our strategy to help our advisors further differentiate and win in the marketplace and as a result of long term shareholder value with that I'll turn the call over to Matt.

Thank you, Dan and I'm glad to speak with everyone on today's call.

In the second quarter, we remain focused on serving our advisors growing our business and delivering shareholder value.

This focus led to strong organic growth in both our traditional and new markets.

And we continue to build momentum in our liquidity and succession offering.

In addition, we entered into an agreement to acquire the wealth management business of Crown capital.

Onboard at bank of the West earlier this month and are preparing to onboard Commerce Bank later this quarter.

We accomplished all of this while continuing to invest in our industry leading value proposition.

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 second quarter business results total advisory and brokerage assets were $1 two trillion up 6% from Q1 as continued organic growth was complemented by higher equity markets.

Total organic net new assets were $22 billion or seven 4% annualized growth rate.

Our Q2 recruited assets were $19 billion, which prior to large enterprises was a new record.

This included $4 billion of recruited assets from our new affiliation models, which is also a new record.

Looking ahead to Q3, our momentum continues and we are on pace to deliver another strong quarter of recruiting.

As for our Q2 financial results the combination of organic growth rising interest rates and expense discipline led to adjusted EPS of $3 94.

Looking at gross profit it was $990 million down $30 million or 3% sequentially.

As for the components Commission advisory fees net of payout were $218 million up $3 million from Q1, primarily driven by organic growth and higher advisory.

In Q2, our payout rate was 86, 7% up about 50 basis points from Q1 due to typical seasonality.

Looking ahead to Q3, we anticipate our payout rate will increase to 87, 5% driven.

Driven by typical seasonality as well as the Onboarding of Commerce Bank and bank of the West.

With respect to client cash revenue it was $396 million down $42 million from Q1, driven by a sequential decline in cash balances.

Looking at overall client cash balances they ended the quarter at $50 billion down $5 billion from Q1.

The primary driver of the decrease was typical April seasonality when the majority of quarterly advisory fees and tax payments here.

As we move beyond April the pace of declines moderated in both May and June .

Within our IC portfolio, the mix of fixed rate balances increased to roughly 60% within our target range of 50% to 75%.

Our ICA yield averaged 322 basis points in the quarter up two basis points from Q1 is the increase in short term rates was partially offset by a decline in higher yielding floating rate balances.

As for Q3 based on where our client cash balances and interest rates are today, we expect our ICA yield to decline by a few basis.

As the mix impact of lower floating rate balances as partially offset by the benefit of higher short term interest rates.

As for servicing fee revenue it was $123 million in Q2 up 4 million from Q1, primarily driven by strong organic growth.

Looking ahead to Q3, we expect service and fee revenue to increase by a few million dollars sequentially.

Driven by revenues from our National Advisor Conference.

Moving onto Q2 transaction of it it was $47 million down $2 million sequentially due to decreased trading volume.

As we look ahead to Q3, we expect transaction revenue to be relatively flat with Q2.

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

It was $337 million in Q2.

Looking ahead, given our strong levels of organic growth and the variable costs associated with supporting that growth. We are increasing the lower end of our 2023 core G&A range by 10 million.

We now expect our 2023 core G&A to be in a range of $1 345 million.

The $1 370 million.

To give you a sense of the near term timing of the spin in Q3, we expect <unk> to increase by $5 million to $10 million sequentially.

Moving on to Q2 promotional expense it was $107 million up $5 million sequentially.

Primarily driven by increased transition assistance, resulting from strong recruiting.

And large enterprise onboard.

In Q3, we expect promotional expense to increase to approximately $125 million to $130 million.

Primarily driven by conference spend as we will host our largest advisor conference of the year next week.

As well as the Onboarding of two large enterprises bank of the West Commerce Bank.

Looking at share based compensation expense was $17 million in Q2 down $1 million from Q1.

In Q3, we expect share based compensation expense to be roughly flat sequentially.

Turning to depreciation and amortization was $58 million in Q2 up a modest $2 million sequentially given it was a low deployment quarter.

Looking ahead to Q3, our plans for technology spend have not changed we expect more deployments in the quarter.

As a result, we expect depreciation and amortization to be roughly 65 million.

Regarding capital management, our balance sheet remains strong we ended Q2 with corporate cash of $325 million up $91 million from Q1.

Our leverage ratio was one two times down from one three times in Q1, driven by a combination of our continued growth and a higher interest rate environment.

Both of which have meaningfully improved our earnings power.

I would also note that earlier this month, we increased the size of our parent revolver from 1 billion to 2 billion.

Given the significant growth of our business in recent years. The added capacity enables us to operate comfortably within our target range of one five to two five times.

And leaves us well positioned to capitalize on growth opportunities.

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

Investing in organic growth first and foremost.

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

In Q2, we allocated capital across our entire frame.

We continue to invest to drive and support organic growth.

Specific to our liquidity and succession offering momentum is building and we continue to have a solid pipeline.

To date, we've closed 15 deals for approximately $200 million.

Including four deals for around $50 million in Q tip.

With regards to capital return, we increased our share repurchases to $350 million in Q2, as we took advantage of the pullback in our share price.

As we look ahead to Q3, we plan to repurchase $250 million of our shares consistent with our plan to execute on our $2 billion authorization over two years.

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.

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

And one moment for our first question.

And our first question will come from Alex Blaustein of Goldman Sachs. Your line is open.

Hey, good afternoon, everyone. Thanks for the question.

Then why don't we start with a kind of a broader discussion around organic growth. We've obviously seen a very steady improvement and recruited assets from you guys over the last few quarters.

Driving this improvement and how does this inform your net new asset growth expectations for the rest of the year.

Yeah. Thanks, Alex So look as a jumping off point as you said, we saw seven 4%.

Growth during the quarter and I think prior to seasonal tax payments you get closer to the 8%.

Because of that.

Yes.

Sure.

And.

And look we also saw that momentum build.

Over the last week.

Where growth has nearly doubled.

Preceding quarters, excluding the impactful awards.

So as you said like with accurately really strong momentum in that traditional independent model and then do it.

Affiliation.

Models.

Drivers of Q2.

The results or outcomes.

I think you got to look at the 1% Patricia.

Attrition rate or.

Versus 99% retention rates and look at that as a really solid and consistent outcome over the past three quarters and then that's complemented by the strong recruiting inside the quarter.

Sure.

I think if you if you look then into Q3 as.

As we go sort of short term out into the next quarter you saw good solid momentum building throughout the quarter across again additional models in the affiliation models. So we expect to see that momentum pull into Q3, and then that certainly then is complemented by.

The larger enterprises.

Onboarding.

Third quarter, so that sets up we think there is a really interesting and solid quarter.

It's driven both by.

The <unk> as well as low retention rates and then we're also seeing that steady contribution from same store sales.

Especially in a marketplace, where at higher rates and equity markets.

Advisor recruiting months.

Susan.

Capital, we can see.

Net buys.

Yes.

So we think that sets up well as we look forward.

Thank you.

Gotcha, Thanks, Matt a follow up for you just around cash dynamics.

So you guys are currently I think in about 60% fixed portion of the ICA portfolio sort of well inside your long term range, but that's been largely a function of outflows that are coming out of the variable balances. So as you look at the maturity ladder here over the next call it 12 months or so.

And assuming the curve will stay kind of in line with the forward rate.

What is your appetite to maybe reinvest some of the some of these balances into floating rates to be at the lower range of your 50% to 75% allocation to fixed.

And then within that and maybe just a quick update on where July balances stand as well. Thanks.

I think he is two follow ups.

Hello.

We will hit them for you.

I think so on the on the target range I think we feel good where we are which is right in the middle of the range of 60%.

I think you know this well, but just to reiterate we did a lot of work on setting that target range.

And to be a range that we're comfortable with our range of interest rate environments, and primarily focused on stability of earnings and not trying to be clairvoyant on.

Picking spots in moments to invest when we think the curve is good from an interest rate standpoint, so really like where we're positioned I think the specific of your point as those balances mature we would intend to maintain that middle of the range. So I don't think we need to move but to the extent. Your question was when things mature would you redeploy them.

That would be yes that would be our perspective today.

But it's really about being right in the middle of that range of being comfortable that spot.

I'd highlight too.

The environment for placing those cash balances from our fixed rate has continued to improve so the demands there the pricing has improved meeting the spread above wherever whatever term you are on the curve, we see a similar thing on the floating rate side. So we've got a good environment to place those deposits to the extent that we want.

To do so but headline is we like where we are in the on the fixed rate.

As far as how are things going in July .

I'd say the headline is consistent with the broad adviser investor engagement <unk> been seeing as well as the seasonality you would typically see in the month one of a quarter. So specifically on all those cash balances that we have advisory fees, primarily hit in the first months of the quarter. Those are about $1 1 billion, so that will reduce cash.

Cash in the month of July and then and then beyond that we've seen again continued strong levels of investor engagement continued elevated levels of net buying activity I'd say consistent with the pace in Q2, I mean, if you look at our trends there we really peaked on net buying in Q1.

So July is looking more like the pace that we saw in Q2.

And I think the cash balance declines themselves coming from that just continue to moderate lower than we saw earlier in the year.

And I think so far we're in July is about a $600 million decline above the advisory fees of $1 1 billion and maybe just to put that in context. When you look at the pace of decline.

We've seen since that since the moderation, which would be starting in may.

It's about one fifth the pace of decline that we saw earlier in the year earlier in the year being January to April . So we're seeing that moderation balance is still coming down slightly but a much much much slower pace.

And while we're talking to you all I know you didn't asked about it but we'll give you I'll give you an answer to a fourth question you didn't ask which is south of organic growth's going in.

In the month of July and kind of building on Dan's comment.

The momentum, especially from a recruiting standpoint, just continues into July that we saw in the first and second quarter. So prior to bringing on bank of the West we're tracking in the six to six 5% growth organic growth zone for July which compare that to July of last year, which was in the low 4% range. So now.

This improvement there.

And then just under $5 billion of assets for bank of the West will come on in July when you add that we're looking at organic growth of around 11% per month. So taking a step back. We describe July is just the momentum we saw in Q2, just continuing in a real positive way.

Okay perfect well, thank you for all that.

And one moment.

One moment for our next question.

And our next question will be coming from Devin Ryan of JMP Securities. Your line is open Devin.

Thanks, so much.

Just want to start on the enterprise channel.

Obviously LPL now has a number of large validating with Baird.

Dana that's built here.

Partners.

You can now show to potential partners in the future. So just wanted to talk about how that narrative has changed with enterprises.

Where you can really explicitly show them the value prop.

Same time, it seems like the bar just around regulatory and scale, which is only.

Moving higher and higher for enterprises to operate their own broker dealer. So just love to maybe hash that out a little bit and then what.

That means if anything for your pipeline there. Thanks.

Where you are.

Hypothesis is right.

Honestly the as the business model is season, and then we have the clients.

Experience real results right.

The evolution of the dialogue.

Sort of a natural one as you suggested and I think so first and foremost you start out capabilities and make sure that hypothetically they are going to get.

The economics theyre going to streamline.

Yes, the claims experience there.

We're going to create a more scalable model.

Attracting feeling better.

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And then I think.

And ultimately to make sure of it.

Philippines to do that and you can pull through those results and that creates the opening in the white space to focus more time and then how do you help them.

Since both through the expansion of advisors practices as well.

And I think that's sort of the rhythm that we're finding we're positive outcomes with enhanced risk management operational efficiency and enhanced economics.

And now we're in that stage.

Alright, very intentional and working to help them.

Ultimate results within their wealth management programs and platform I think the other thing that we've been able to do is through the season.

The re imagine and transform the onboarding or change management effort to bring these programs.

The platform that's always somewhat.

Okay.

Any times part of value proposition.

Easier.

Lower it makes that hurdle and then with the experience of being able to reference prior.

Outcomes, that's certainly good news.

It's helping I think streamline.

And not only make <unk>.

<unk> also makes it certainly more reachable assessments.

Mitch.

And then and so that's where we are in the dialogue is being able to use those outcomes have a dialogue with them.

The larger enterprises traditionally the banks, but also expanding that that value proposition outside of just brings to that broader enterprise wide marketplace and so as we do that.

It's a longer sales cycle, but the pipeline continues to grow and we feel really confident as we go forward.

Globally.

Organic.

Okay. Thanks, I appreciate the color there.

Just a follow up on.

Some of the technology initiatives. So I think last year, you guys spent $270 billion on technology.

Are you drawing down this year and that's going to be many multiples.

The vast majority of your peers, so love to just.

Maybe dig in a little bit deeper and if you can frame just the degree and importance of this technology differentiation that you think you're building at LPL, most peers and you touched on AI, Dan in the prepared remarks and application. There. So just kind of interplay with that and maybe how youre thinking about AI applications, just more broadly to improve the experience.

<unk> for advisors and I'm also help reduce costs at the firm over time. Thanks.

Yeah, absolutely so we do think.

All of the capabilities, so think about that vertical integration.

And separately.

We think that is one of the most quarter.

Elements.

Model driving organic growth.

With that as context, we think investing in that vertical integration strategy, we're reinvesting in the platform.

Yes capabilities.

A significant priority in.

Capital appropriately.

So.

If I gave you a bit of a framework for thinking about where we invest there.

I give it to you over.

Six elements, one would be the endpoint that's the adviser.

Helping them with holistic advice.

We continued to enrich one of the key elements of the art of being a financial advisors.

Third one is the wealth management platform.

Yes.

Until they solve the needs of clients.

We go on there.

And then the other three elements are more about helping them.

Operator.

The festival.

Right.

So think about flexibility to building the practice.

Filiation models.

That's where you will also get the investment.

Service business services portfolio.

I don't know.

That's where you will also.

Estimate.

Operating.

We wanted to make sure that we create.

It's scalable and efficient platform, which all of these advisors breakfast.

And then ultimately.

Got it.

These are the six categories.

Merchant category or in the context of needs for our clients that we're investing.

<unk> capital for technology purposes, and then also non.

Think about services and if we're creating this integrated.

It creates better workflows and better services wrapped around that.

But ultimately healthy deposit rate advisors.

<unk> businesses.

That's a winning formula.

To create more appealing platform to drive more successful outcomes for advisors.

With respect to your question around AI, and where we sprinkle that in in terms of that investment along the operating platform itself with our service model we're already.

Youre seeing both in terms of it's about robotics machine learning as a way to scale.

You will operating processes.

Using AI in terms of.

The efficacy of our data analytics and determining <unk> action associated with our risk management efforts within our operating platform. We've created new digital capabilities that are now taking as much as 15% to 20% of the volume.

<unk>.

Traditionally come into our service model.

With a better digital experience.

And I think with generative AI.

You get into using AI.

Related activities.

<unk>.

Interesting opportunities continue to enhance both the advisor and the Investor experience lubricants personalization I think also we see it as an opportunity to create efficiency in our own model, where do you think about those creative jobs take them.

Marketing.

Engineers.

Again in service and operations.

So really think about it.

So that's the reason we invest it gives you a little flare for kind of how we're allocating that investment and then how we're beginning to explore and utilize.

Hey.

Been using it for a couple of years, but I think with this new generative AI or AI as it opens up some interesting possibilities. We're just.

In the early innings of imagine we'd like to ask <unk> ourselves imagine if you could create AI as an additional team member every single practice.

Highly efficient stable.

That's pretty cool initiatives in salt.

I hope that helps.

Yes very.

Very helpful. Thanks, so much I appreciate it.

And one moment for our next question.

Our next question will come from Steven <unk> of Wolfe Research. Your line is open.

Hey, Good afternoon. This is Michael and I'm going to start this on for Stephen.

I just want to start off going back maybe to the organic growth side, certainly nice to see the ramp there through the end of the quarter.

Did want to ask on the competitive dynamics are larger independent player is planning to undergo rather substantial restructuring effort. It looks like some of the resulting attrition has been a relatively significant contributor to your recruiting year to date.

Can you help us size, how significant of a tailwind that's been and how sustainable is this source of organic growth.

Yes, So look I think if you if you look at the marketplace right and what's your what Youre really getting at is how do we think about <unk>.

<unk> of the marketplace and it.

At least up through second quarter.

You look at the opportunity set advisor movement is largely remains.

Flat at around 5% turnover for the last year.

Which is.

A lower level movement than historical norms as you will.

That said there has been a mix shift in that in that sort of turnover.

Positive movement or more positive movement in the traditional independent market.

And there's been a slowdown from the wireless.

As we look out would have been look forward some of what competition is doing whether it be through integrations restructurings, etc.

Those things.

And create more churn or have more turnover in the marketplace.

And we think we are well positioned across all of our different affiliation models.

To make sure that we can capitalize should that opportunity increase and more turnover.

We're in the marketplace that we're well positioned capitalize and win.

Much greater share of that opportunity.

So we.

We do think about structurally our opportunity, but we will we are.

Trying to position.

Different market opportunities that may emerge.

Scrapping.

Very helpful. And then just switching over to expenses understanding it's a bit early maybe to be thinking about 2024, as we think about rate cuts coming down the pike and the strong organic growth you're seeing how should we be thinking about core G&A growth beyond 'twenty three it sounds like 4% to 5%.

It is the first building block to run the business, but how much incremental investment should we be anticipating thanks.

Yeah, I mean I think the.

As you could imagine we're in the midst of planning for 'twenty four right now and we will share our thinking on it later in the year as we typically do but I think to your question and maybe just highlight a little bit of how we're approaching it which is as we normally do is focusing first on the investments really to drive and support organic growth and at the same time, making sure that we're delivering.

Appropriate and compelling operating leverage and really balancing those two things and I think.

When you look at at 23, the macro environment provided an opportunity for us to accelerate investments that we otherwise would have done in 'twenty four and beyond.

And that was driven by the opportunity that that Mac represented so I think when we when we're planning for 'twenty for them at.

Will all depend on what that macro outlook looks like.

And of course, there's a scenario as you described that that rates could start to come down so we.

We will certainly factor that in and we've got.

I think our history demonstrates we have got the flexibility to adjust based on that environment and we've also got the I think the confidence to invest in things that where we have the confidence they're going to drive growth.

I'll focus on balancing those things and.

We will share more color on on those plans as we typically do at our year end earnings call, but the headline would be our principles and our approach are going to remain the same.

Great and if I could just squeeze a quick housekeeping one on here tax rate was elevated during the quarter what drove that and if you could provide an update on what the go forward outlook for tax that.

That would be helpful. Thank you.

Yes, I would think about tax rate just as a kind of a core normalized tax rate in the 26% to 27% zone, we've been running below that for a while primarily from tax benefits from employee stock sales and the introductions that have come from that.

And there were just fewer in the quarter.

That's why I kind of move back up to that closer to that normalized 'twenty six 'twenty seven so I think all else equal if youre looking for.

A placeholder for going forward I think 26%, 27% is the best way to do it.

Thanks, so much.

One moment for our next question.

Yeah.

And our next question will be coming from Dan Fannon of Jefferies. Your line is open.

Good afternoon, Thanks for taking my question.

In addition to strong organic growth <unk> also been active on the inorganic side. So I was hoping you could talk about just the pipeline and conversations and how we should think about inorganic.

Uses or for growth as we think about the remainder of this year.

Kind of the current backdrop of what's out there.

Yes, so as we go forward, we will continue to use M&A as a complement to our organic growth. So no change there as you suggested and I think look as we.

In order to do that or execute well and that we are consistently assessing the marketplace in the landscape and are typically focused on re categories of opportunity first for transactions to grow in our markets, where we can capitalize on our market leadership and add scale.

In those cases, we're able to create.

Value for advisors in those practices when they transition onto our platform.

And we looked across the landscape of.

Think about anywhere from smaller broker dealers and always upward.

Examples of that is Sydney scatter good Waddell <unk> Reed.

Most recently capital. So again I think we remain focused on the marketplace. We do think there will be ongoing consolidation and we remain positioned to explore those opportunities.

I think so.

To that we also look to places where transactions that could add capabilities.

Where we can create value for advisors.

And ultimately help them drive efficiency in their practices or enhanced anytime.

Anytime we think about that type of transaction.

Look at it through the lens of.

Build buy or partner.

As capabilities in transactions and food advisory World in plays and most of it.

We continue to really evolve how we think about investing back into those capabilities and how they ultimately create value and unintended places when we originally booked.

We like that type of opportunity and then finally, the third is just deploying capital against liquidity in succession needs that are out in the market.

Certainly this gives us a pathway to put capital work that meets our disciplined return thresholds and solving a really important question, where advisers in the marketplace and rather differentiator.

Unique way.

And we've got.

Continued opportunity internally with respect to helping our advisors are already on our platform with that question and we are beginning to see external exploration as well as how we help advisors.

On the platform with that type of thing so that's the framework.

Kind of where we've got our focus and we continue to.

Assess the marketplace for those opportunities.

Thanks, That's helpful and then Matt just a follow up on the promotional spend guide the step up which you cited associated with the Onboarding as well as the conference can you separate out.

So we get a sense of kind of the economics associated with some of these larger onboarding enterprise customers.

Yes.

Directionally I mean, I think when you look at the.

The guide for Q3, it's really driven by three factors.

Timing is the biggest.

Tom boarding of the two large enterprises and third is really supporting organic growth. So.

I think when you look at conference spend that is that first bucket that is the biggest driver as a reminder, its our largest conference happens in Q3 every year.

Got over 8000 attendees coming which is a new record for us, which we're excited about this.

The engagement from our clients and their guests and being in person with us. So it's our largest conference in the largest of that conference is bad. So that's the biggest that's the biggest component.

Of the sequential change so we do have two.

Large enterprises are onboarding in one quarter right. So that would typically be the elevated both bank of the west and Commerce and then the last thing I would hit is just overall recruiting momentum.

When you look at the quarter the strong quarters, we had in Q1 and Q2 and the strength of our pipeline coming into Q3.

The related transition assistance that would come from that would also be a driver, but broadly that first bucket conferences is going to be the largest piece of it.

Great. Thank you.

And one moment for our next question.

And our next question will come from Michael Cyprus of Morgan Stanley . Your line is open.

Yeah.

Great. Thanks. Good afternoon. Thanks for taking the question you guys have had some early success with your newer only.

Only model I was hoping you could talk about your competitive positioning there, how youre offering and pricing differs from others in the marketplace on the <unk>.

On the model and as you look out over the next 12 to 24 months, what sort of enhancements.

You might be able to make to that offering to further accelerate growth from here.

Yes, thanks for the question Michael.

I'm happy to provide some color on.

Enhanced story models. So that line is look the RA market as you know is large and fast growing which.

Interesting strategic opportunities so we have been investing.

Positioning ourselves for.

Outsized share gains there.

And.

How do we think about allocating those investments first.

First and foremost.

<unk> created a differentiated offering in the marketplace.

While at the same time, improving our awareness.

We are a competitive incredible alternative to more more of the incumbents in the marketplace.

So as we do this our right to win continues to increase we believe that positions us well as we go forward both in the near term in the loans.

I'll give you a little bit more color as you asked on sort of how we.

Think about enhancing.

The value proposition.

Certainly the flexibility in our model to handle all assets in a more integrated way our platform continues to be an advantage.

Certainly then that's complemented by the vertical integration strategy.

Able to provide value not just the traditional.

Clearing custody level within the ecosystem, but also with respect to technology operating.

<unk>.

Wealth management platforms, all the way down into if you think about the business services, we've been innovating past three years.

It's an end to end values play, we think makes for the most interesting differentiation.

<unk> that are out there so they don't have to fulfill battery.

We've operated in an inefficient way or one day.

Add value, we can do it more efficient and effective way.

We think that's a that's an appealing game.

The marketplace and then finally as we grow.

In both.

As a result, the solutions success, and then greater awareness for our presence in the marketplace do you think things position us well.

To continue to drive growth from here.

We've seen good progress over the last year and a half.

Great and just a follow up question on the essentially manage assets that continues to grow in line with the rest of the business holding steady about 15% of advisory assets. It looks like so hoping you could talk about some of the initiatives as you think about expanding penetration of essentially managed ask.

It's there how are you thinking about building out the product set here as you look out over the next year or two.

Yes, it's a really interesting question as you said there is.

Well opportunities, we think to continue to enhance the appeal of that model and reduce the cost in both that combination ultimately.

Driving greater and greater utilization so.

With the evolution of models based practices.

Our continued ability to enhance our platform that really sets up for that efficient models based practice and even then partnering with our sponsors to integrate.

There are capabilities within that model's marketplaces, where simple renovation work is going on in that not only adds value for our advisors. It also creates value for our sponsors.

Right.

Opportunities for us.

I think as you look at continued.

What I might call it value.

And then the Investor think self indexing or our individual indexing and door tax overlay.

We are deploying some of those capabilities in the <unk>.

Half of this year, but just further strengthen the value of the advice that the advisors providing.

So their clients, but also.

Can do that in the centrally managed platform highly efficient integrated away for the advisor creates greater appeal until the model and then finally, just the expansion of the <unk>.

Investment content available there, we've really expanded our SMA is this year on the equity side were adding income SMA as in the second half of this year and so.

Ultimately that turns it into a true UMH.

Rich.

We'll only drive further utilization.

So those are the ways, we think about some of the ways of enhancing the capabilities to continue to drive the the appeal of that model industrial data.

Great. Thank you.

And one moment for our next question.

Our next question will be coming from Kyle Voigt of <unk> co. Your line is open.

Hi, good evening.

A few follow ups from me Matt.

Matt you had record EBITDA margins in the first half of the year at 54%.

My question is not as much about 2024, but more of a longer term question about margins.

Think about <unk>, continuing to kind of gain scale and drive growth over the coming years do you think there is still significant operating leverage left in the model from where you sit today at 54% and if so can you kind of help quantify how you think about those longer term incremental margins.

Yes, I mean, I think when you if you look at op margins in history here is very helpful.

The macro environment interest rate environment of course is going to inform those but I think when you've looked historically I think not only to us that our industry when you're in periods, where interest rates are near their lows like running in that which is which we in our recent past of course is seen when youre running with margins in the $35, 40% range Youre doing.

Somewhat well in that environment when youre in an environment like we're in now with interest rates high getting up to that 50% and above I think is running at a good level as well.

And I think those are just good bookends to think about in general I think as far as what we can deliver in the future I think ultimately.

It's going to be connected to our ability to deliver a compelling value proposition clients, our ability to continue to expand and grow in across our affiliation models as we get scale in each of those areas, we're able to balance delivering not only a great experience for those clients, but also doing it in an efficient way that allows us to deliver earnings.

So the bottom line it always balancing how much of that to then reinvest to drive further growth from here. So I think the opportunity if we're successful in all those areas.

Indexing to the macro environment point that I made to most certainly drive more operating leverage and I think ultimately the balanced and judgment about how much of that to reinvest to further expand our value proposition and further drive growth is judgment calls that will may but I think the opportunities are for success.

Yeah.

Understood. Thank you and then just a follow up on the cash discussion.

Previously noted that 4% as being around a floor level on cash as a percentage of assets. It sounds like you are now slightly below that 4% level in July to date.

But it seems that you said, you're continuing to see that slowing.

Cash declined excluding those fee billings I just wanted to reconfirm, whether anything has changed at all from an adviser behavior standpoint over the past months or quarters that would lead to a different view in terms of defining that floor level of cash at around 4%.

No I mean, I think keep in mind month, one of any quarter, you typically see our cash balance decline, but I think as we maybe take a step back and the nature of the cash that we have in these accounts is largely operational.

Typically small balances for rebalancing paying fees facilitated customer withdrawals.

When we just look at our experience.

When clients are fully deployed into the market cash does typically bottom out at those levels required to manage the account.

And Thats typically men and natural for around 4% and I think when we look at the market. We're in now I think it's fair to say that advisers and their clients are especially engage when you've got a strong fixed income market that we've been in for quite some time, that's now getting coupled with the strength in equity market.

And that's leading to net buying activity in levels that are that are roughly double historical level. So I think as we as we sit here at least looking at the end of the quarter, which is where I'd focus at roughly 4% of AUM I think that the dynamics of our cash in the transactional nature.

And Hasnt changed I think we're getting pretty close to what we would think would be full levels of deployment and kind of reaching a point of natural resistance on moving much lower from.

Now could it go below 4% of course, but I think based on what we see in our analysis, we don't think it would.

It would go below four by a substantial amount.

Yeah.

Understood. Thank you.

And one moment for our next question.

And our last question will come from Brennan Hawken of UBS Brendan Your line is open.

Hi, Good afternoon, guys. Thanks for sneaking me in I, just I, just got one last plus might've been asked and answered.

Any way or.

Our guidance you can provide for thinking about how the upcoming deals the deals that you've announced and.

And we have coming down the pike could impact the payout rate I know in the past sometimes some of the deals have I have had an impact anything coming from these upcoming deals.

Yeah, and you're right you're talking about the large enterprise on borrowings bank of the Western Commerce.

Exactly yeah.

Yeah, Yeah, I think as a general point those larger enterprises have a have a higher payout rate.

Lower from that from an AUM standpoint, we've got an advantage in serving them from a scale standpoint on the cost side. So operating margins are always compelling are compelling on those but yes. The payout rate would all else equal go up so we.

I did give a little color on payout rate for next quarter at 87, 5%.

And that would be driven by.

A handful of things, but primarily the seasonal build in our production bonus, but also bringing on those large enterprises.

In general have a higher payout.

Average.

Okay. So the 87 five would fully baked in the impact of those two deals.

No it would be the following quarter wood, because they're going to be joining during the quarter, but I was just as a headline point when we bring on large enterprises, they'll typically buy some to pay out a little but not dramatically.

Got it thanks a lot.

And I'm showing no further questions at this time I would like to turn the call back to Dan Arnold for closing remarks.

And thanks to everyone for taking the time to join US This afternoon.

With you again next quarter.

Okay.

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

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Okay.

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 posted its earnings press release and supplementary information on the Investor Relations section of the Companys website, investor Dot LPL Dot com.

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

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 LPL Dot com.

With that I will now turn the call over to Mr. Arnold.

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

Over the past quarter, our advisors continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams helped support that important work we remain focused on our mission taking care of our advisers. So they can take care of their clients.

This quarter, we continued to see the appeal of our model growth due to the combination of our robust and feature rich platform stability and scale of our industry, leading model and our capacity and commitment to invest back into the platform.

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

In that spirit, we remain focused on helping advisors and enterprises solve challenges and capitalize on opportunities better than anyone else and thereby serve 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 plan.

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

In the quarter total assets increased to one two trillion as continued solid organic growth was complemented by higher equity markets.

With respect to organic growth second quarter organic net new assets for 22 billion, representing seven 4% annualized growth.

Proximately, 8% when adjusted for seasonal taxing.

This contributed to organic net new assets over the past 12 months of 84.

Representing approximately an 8% organic growth.

In Q2 recruited assets were 19 billion.

Which represents a quarterly record excluding periods when onboarding large enterprise.

This outcome was driven by the ongoing enhancements to our model as well as our expanded addressable market.

Looking at same store sales, our advisers remain focused on serving our clients and delivering a differentiated experience.

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

Combination drove solid same store sales in Q2.

With respect to retention, we continue to enhance the advisor experience.

The delivery of new capabilities and technologies as well as the evolution of our service and operations functions.

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

Our second quarter business results led to solid financial outcomes $3 94, adjusted EPS, an increase of 76% from a year ago.

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

Our long term vision is to become a leader across the advisor center market.

Which for us means.

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

To bring this vision to life, we are providing the capabilities and solutions that help advisors deliver personalized advice and planning experiences to their clients.

At the same time through human driven technology enabled solutions and expertise, we're supporting advisers and their efforts to be extraordinary businesses.

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 organize our work around two primary categories.

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

Such that we can compete for all 300000 advisors and the adviser mediated market.

And vertical integration, where we focus on providing capabilities to solve for a broader spectrum of advisor needs and in doing so create durable differentiated with that.

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 by creating.

Flexibility in our affiliation model. So they can design the perfect practice for themselves and for their clients.

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

Now over the quarter, we saw strong recruiting in our traditional independent market.

Reaching a new quarterly high of approximately $14 billion at.

At the same time to the appeal of our model and the efficacy of our business development.

We maintained our industry leading win rates, while also expanding the breadth and depth of our pipeline.

With respect to our new affiliation models strategic well employ in our enhanced our <unk> offering we delivered our strongest quarter to date recruiting roughly $4 billion in assets in Q2.

Each of these models, we continue to experience growing demand and expanding pipeline.

Which positioned them for increased contribution to organic growth.

Looking ahead, we expect to carry this recruiting momentum into Q3 for both our traditional independent market and our new affiliation.

Now as a complement to our organic growth.

We also recently announced the planned acquisition of Crown Castle.

California based firm with approximately 260 advisers $6 5 billion in client assets.

This transaction will give brown capitals advisors access to our differentiated capabilities technology and service and we look forward to onboarding them early next year.

With respect to large enterprises, we recently on boarded bank of the West and are on track to onboard Commerce Bank in August looking.

Looking ahead, we are in.

Encouraged by our growing momentum and strong pipeline across the broader enterprise market, including in our traditional bank and credit.

Now shifting to our vertical integration efforts.

We are focused on delivering value added capabilities services and technologies that extend across and advisors.

All for the purpose of helping them differentiate and win in the marketplace and run thriving business.

In that spirit this quarter, we launched a new performance optimization solution for breakfast.

This capability delivers comprehensive data in a structured form so.

Pfizer's can better understand their performance on an absolute and relative basis and.

And over the coming months, we will further expand the functionality by enabling it to generate personalized insights around additional services technology and solutions, we offer in order to help advisers enhanced the overall performance of the practice.

Overtime, we see practice of becoming a key tenant of our adviser experience leveraging the power of artificial intelligence to operate as a co pilot for our advisors.

And while we're still in early innings, we're excited about the growth opportunities that this innovation unlocks and how it will serve as an additional leverage points help advisors on driving business.

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

And are encouraged by the evolving appeal of our value proposition and the seasoning of this business.

As a result of demand in Q2, the number of advisors utilizing our services.

To increase we ended the quarter with approximately 3500 active users up roughly 30% year over year.

As we work with advisors to increase the utilization of existing services. We're also continuing to create new services, such as our tax planning solution.

As part of our broader suite comprehensive advice and planning systems.

This new solution helps enable tax intelligent device that can deliver material savings client and help further differentiate our advisors value funds.

This service is receiving positive early feedback and demand in the market.

While also unlocking interesting synergies with our existing services.

Now as we continue to evolve our services portfolio, we are leveraging our structured approach to innovation in order to address the needs of our broader adviser base in that spirit. We are creating streamline versions of existing solutions to help advisors, who may have less complex products.

Samples of these solutions include CFO Central's digital marketing and payroll all of which are progressing through our innovation pipe.

As we move forward, we remain focused on enhancing and expanding our services portfolio to better support our advisors and enterprises and to drive growth.

In summary in the second quarter, we continued to invest in value proposition for advisors and their from <unk>.

While driving growth and increasing our market leadership as.

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 got long term shareholder value with that I'll turn the call over to Matt.

Thank you, Dan and I'm glad to speak with everyone on today's call.

In the second quarter, we remain focused on serving our advisors growing our business and delivering shareholder value.

This focus led to strong organic growth in both our traditional and new markets.

And we continued to build momentum in our liquidity and succession offering.