LPL Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 10 speakers on the call.

Operator

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 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 company's website, investor.

Operator

Lpl.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. 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 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.

Operator

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

Speaker 1

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. To help support that important work, We remain focused on our mission, taking care of our advisors, so they can take care of their clients. This quarter, We continue to see the appeal of our model growth due to the combination of our robust and feature rich platform, the 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 for our vision of becoming the leader across the advisor mediated market.

Speaker 1

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 2nd quarter business results. In the quarter, total assets increased to $1,200,000,000,000 This continued solid organic growth was complemented by higher equity markets. With respect to organic growth, 2nd quarter organic net new assets were $22,000,000,000 representing 7.4% annualized growth were approximately 8% when adjusted for seasonal tax income.

Speaker 1

This contributed to organic net new assets over the past 12 months of 84 basis, representing approximately an 8% organic growth rate. In Q2, recruited assets were 19,000,000,000 which represents a quarterly record excluding periods when onboarding large enterprises. This outcome was driven by the ongoing enhancements to our model as well as our expanded addressable market. Looking at same store sales, our advisors remain focused on serving their clients and delivering a differentiated experience. As a result, our advisors are both winning new clients and expanding wallet share with existing clients.

Speaker 1

Combination that drove solid same store sales in Q2. With respect to retention, We continue to enhance the advisor experience through the delivery of new capabilities and technology as well as the evolution of our service and operations functions. As a result, asset retention for the Q2 and over the last 12 months was approximately 99%. Our 2nd quarter business results led to solid financial outcomes of $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.

Speaker 1

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 And at the same time, through human driven technology enabled solutions and expertise, we're supporting advisors and their efforts to be extraordinary business. Doing this well gives us a sustainable path to industry leadership across the advisor experience, organic growth and market share. Now to execute on our strategy, we organize our work around 2 primary categories, horizontal expansion, where we look to expand the ways that advisors and enterprises can affiliate such that we can compete for all 300,000 advisors In the advisor mediated market. And vertical integration, where we focus on providing capabilities that solve for a broader spectrum of advisor needs And in doing so, create durable differentiated value.

Speaker 1

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 the client. 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. Now over the quarter, we saw strong recruiting in our traditional independent market, reaching a new quarterly high of approximately $14,000,000,000 in assets. At the same time, due to the appeal of our model and the efficacy of our business development team, we maintained our industry leading win rates, while also expanding the breadth and depth With respect to our new affiliation models, strategic wealth, employee and our enhanced RAA offering, We delivered our strongest quarter to date recruiting roughly $4,000,000,000 in assets in Q2.

Speaker 1

Now in each of these models, we continue to growing demand and expanding pipeline, which position them for increased contribution for 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 Capital, a California based firm with approximately 2 advisors and $6,500,000,000 Fly in assets. This transaction will give Crown Capital's advisors Access to our differentiated capabilities, technology and service, we look forward to onboarding them early next year. With respect to large enterprises, we recently onboarded Bank of the West and are on track to onboard Commerce Bank in August.

Speaker 1

Looking ahead, we are encouraged by our growing momentum and strong pipeline across the broader enterprise market, including in our traditional bank and credit lines. Now shifting to our vertical integration efforts. Here, we are focused on delivering value added capabilities, services and technology that extend across an advisor's end to end business, all for the purpose of helping them differentiate and win in the marketplace and run private business. In that spirit, this quarter we launched a new performance optimization solution called PracticeSmart. This capability delivers comprehensive data in a structured format, so advisors can better understand their performance on an absolute and relative basis.

Speaker 1

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 advisors enhance the overall performance of the practice. Over time, We see practice of becoming a key tenant of our advisor 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 point to help advisors Now in a separate play within our vertical integration strategy, we continue to expand and enhance our services portfolio 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 group continued to increase. We ended the quarter with approximately 3,500 active users, Up roughly 30% year over year.

Speaker 1

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 of comprehensive advice and planning service. This new solution helps enable tax intelligent advice that can deliver material savings to clients and help further differentiate advisors value partners. This service is receiving positive early feedback and demand in the market, while also unlocking interesting synergies with our existing services portfolio. 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 advisor base. In that spirit, we are creating streamlined versions of existing solutions to help advisors who may have less complex practices.

Speaker 1

Examples of these solutions include CFO's Essentials, digital marketing and payroll, all of which are progressing through our innovation pipeline. As we move forward, we remain focused enhancing and expanding our services portfolio to better support our advisors and enterprises and to drive growth. In summary, in the Q2, we continued to invest in value proposition for advisors and their clients, while driving growth and increasing our market leadership. As we look ahead, we remain focused on executing our strategy to help our advisors further differentiate Wynn in the marketplace and as a result, long term shareholder value. With that, I'll turn the call over to Matt.

Speaker 2

Thank you, Dan, and I'm glad to speak with everyone on today's call. In the Q2, 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, onboarded 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.

Speaker 2

So as we look ahead, we continue to be excited by the opportunities we have to help our advisors differentiate and win in the marketplace. Now let's turn to our Q2 business results. Total advisory and brokerage assets were $1,200,000,000,000 up 6% from Q1 as continued organic growth was complemented by higher equity markets. Total organic net new assets were 22,000,000,000 were a 7.4% annualized growth rate. Our Q2 recruited assets were $19,000,000,000 which prior to large enterprises was a new record.

Speaker 2

This included $4,000,000,000 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 $990,000,000 down $30,000,000 or 3% sequentially. As for the components, commission advisory fees net of payout were $218,000,000 up $3,000,000 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.

Speaker 2

Looking ahead to Q3, we anticipate our payout rate increased 87.5 percent 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 $396,000,000 down $42,000,000 from Q1, driven by a sequential decline in cash balances. Looking at overall client cash balances, they ended the quarter at $50,000,000,000 down $5,000,000,000 from Q1. The primary driver of the decrease was typical April seasonality when the majority of quarterly advisory fees and tax payments hit. As we move beyond April, the pace of declines moderated in both May June.

Speaker 2

Within our ICA portfolio, the mix of fixed rate balances increased to roughly 60%, within our target range of 50% to 75%. Our ICA yield averaged 3 22 basis points in the quarter, Up two basis points from Q1 as the increase in short term rates was partially offset by a decline in higher yielding floating rate balances. As for Q3, based on where client cash balances and interest rates are today, we expect our ICA yield to decline by a few basis points as the mix impact of lower floating rate balances is partially offset by the benefit of higher short term interest rates. As for service and fee revenue, it was $123,000,000 in Q2, up $4,000,000 from Q1, primarily driven by strong organic growth. Looking ahead to Q3, we expect service and fee revenue to increase by a few 1000000 sequentially, driven by revenues from our National Advisor Conference.

Speaker 2

Moving on to Q2 transaction revenue. It was $47,000,000 down $2,000,000 sequentially due to decreased trading volume. As we look ahead to Q3, we expect transaction revenue to be relatively flat with Q2. Now Now let's turn to expenses starting with core G and A. It was $337,000,000 in Q2.

Speaker 2

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 and A range by 10,000,000 We now expect our 2023 core G and A to be in a range of $1,345,000,000 to 1,370,000,000 To give you a sense of the near term timing of the spend, in Q3, we expect core G and A to increase by $5,000,000 to $10,000,000 sequentially. Moving on to Q2 promotional expense. It was $107,000,000 up $5,000,000 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 $125,000,000 to $130,000,000 primarily driven by conference spend as we will host our largest advisor conference of the year next week as well as the onboarding of 2 large enterprises, Bank of the West Commerce Bank. Looking at share based compensation expense, we have $17,000,000 in Q2, down $1,000,000 from Q1.

Speaker 2

In Q3, we expect share based compensation expense to be roughly flat sequentially. Turning to depreciation and amortization. It was $58,000,000 in Q2, up a modest $2,000,000 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.

Speaker 2

As a result, we expect depreciation and amortization to be roughly $65,000,000 Regarding capital management, Our balance sheet remains strong. We ended Q2 with corporate cash of $325,000,000 up $91,000,000 from Q1. Our leverage ratio was 1.2 times, down from 1.3 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 $1,000,000,000 to $2,000,000,000 Given the significant growth of our business in recent years, The added capacity enables us to operate comfortably within our target range of 1.5 to 2.5 tons and leaves us well positioned to capitalize on growth opportunities. As for capital deployment, our framework remains focused on allocating capital aligned with the returns we generate, Investing in organic growth first and foremost, pursuing M and A where appropriate and returning excess capital to shareholders.

Speaker 2

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 closed 15 deals for approximately $200,000,000 including 4 deals for around $50,000,000 in Q2. With regards to capital return, we increased our share repurchases to $350,000,000 in Q2 as we took advantage of the pullback in our share price.

Speaker 2

As we look ahead to Q3, we plan to repurchase $250,000,000 of our shares, consistent with our plan on our $2,000,000,000 authorization over 2 years. To summarize, our balance sheet is strong and we are well positioned to drive value through our capital allocation In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about We see to continue investing to serve our advisors, grow our business and create long term shareholder value. With that, operator, please open the call for questions.

Operator

Certainly. And one moment for our first question. And our next First question will come from Alex Blostein of Goldman Sachs. Your line is open.

Speaker 3

Hey, good afternoon, everyone. Thanks for the question. Dan, why don't we start with the kind of broader discussion around organic growth. We've obviously seen a very steady improvement in recruited assets From you guys over the last few quarters, 2Q of north of $18,000,000,000 I think that was a record outside of the larger kind of enterprise recruitment that you've done. So Maybe a little bit of color on what are you seeing on the ground in terms of various affiliation options that are driving this improvement and how does this inform your net new asset growth expectations for the rest of the year?

Speaker 1

Yes. Thanks, Alex. So look as a jumping off point, as you said, we saw 7.4% growth during the quarter. And I think prior to seasonal tax payments, you get closer to the 8%, We're talking about the fact that we think about the remainder of the year. And look, we also saw that momentum build Over the last 3 quarters, where growth has nearly doubled, 3 preceding quarters excluding the impact of large enterprise.

Speaker 1

So as you said and like with accurately, really strong momentum in that traditional independent model and in our new affiliation models. Drivers of Q2 results or outcomes, I think you got to look at the 1% Attrition rate or reverse 99% retention rates and look at that as a really solid and growing consistent outcome Over the past three quarters, and then that's complemented by the strong recruiting inside the quarter that we talked about. I think if you have looked then into Q3, 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 and the affiliation models. So we expect to see that momentum pull into Q3. And then that certainly then is complemented by the larger enterprises that are being onboarded In Q3.

Speaker 1

So that sets up what we think is a truly interesting and solid quarter of growth. It's driven both by Recruiting as well as lower retention rates. And then we're also seeing that steady contribution from same store sales, Especially in a marketplace where you've got higher rates and equity markets moving up, the advisors are getting on the swings and the better Capital as you see in our net buys and sales. And so we think that sets up Well, as we look forward to the rest of the year.

Speaker 3

I got you. Thanks. And Matt, a follow-up for you, just around cash dynamics. So you guys are currently I think at about 60% fixed portion of the ICA portfolio sort of well inside your long term range, but that's been largely a function of 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 these balances into floating rates To be at the lower range of your 50% to 75% allocation fixed.

Speaker 3

And then within that, maybe just a quick update on where July balance is done as well. Thanks.

Speaker 2

I think that was 2 follow ups, Alex. 2. We'll hit them for you. I think so on the target range, I think we feel good where we are, which is right in the middle of the range at 60%. And I think you know this well, but just to reiterate, we Yes, I did a lot of work on setting that target range and to be a range that we're comfortable with a range of interest rate environments and primarily focused On stability of earnings and not trying to be clairvoyant on picking spots and moments to invest when we think the curve is good from an interest rate standpoint.

Speaker 2

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 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 and be I'd highlight too, in the environment for placing those cash rebalances from a fixed rate Has continued to improve.

Speaker 2

So the demand is there. The pricing has improved, meaning 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 on As far as how are things going in July, I'd say the headline is consistent with The broad advisory investor engagement we've been seeing as well as the seasonality you would typically see in the month 1 of the quarter.

Speaker 2

So specifically on those cash balances that we have advisory fees primarily hit in the 1st month of the quarter, those are about 1,100,000,000 So that will reduce cash in the month of July. 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, 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.

Speaker 2

It's about a $600,000,000 decline above the advisory fees of 1,100,000,000 And maybe just to put that in context, when you look at the pace of decline, we've seen since the moderation, which would be starting in May, It's about 1 5th 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, Joe, I know you didn't ask I'll give you an answer to the 4th question you didn't ask, which is how is organic growth going in the month of July. And kind of building on Dan's comments, The momentum, especially from a recruiting standpoint, just continues into July that we saw in the 1st and second quarter.

Speaker 2

So prior to Bringing on Bank of the West, we're tracking in the 6% to 6.5% growth, organic growth zone for July, Which compare that to July of last year, which was in the low 4% range. So it's a nice improvement there. And then just under $5,000,000,000 of assets For Bank of the West, we'll come on in July. When you add that, we're looking at organic growth of around 11% per month. Taking a step back, we described July as just the momentum we saw in Q2 just continuing in a real positive way.

Speaker 3

Perfect, Moe. Thank you for all that.

Operator

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

Speaker 4

Thanks so much. Just want to start on the enterprise channel. Obviously, LPL now has A number of large validating wins there and data that's built here with partners that you can now show to potential partners in the future. And so I just love to talk about how the narrative has changed with enterprises, where you can really explicitly show them the value prop. And at the same time, it seems like the bar just around regulatory and scale is just only moving higher and higher for enterprises to operate their own broker dealer.

Speaker 4

So just love to maybe hash it out a little bit and then what that means, if anything, for your pipeline there? Thanks.

Speaker 1

Kevin, well, your hypothesis is right. Obviously, as the business model has seasoned in and we have the clients who have experienced real results, right, The evolution of the dialogue is sort of a natural one as you suggested. And I think so first and foremost, you start out with capabilities And make sure that hypothetically, they're going to enhance the economics. They're going to streamline and enhance client experience, they're going to create a more scalable model and more competitive ones or even attracting and obtaining better advisors. And then I think if you can ultimately make sure that you've got the capabilities to do that and you can pull through those results And that creates then the opening and the white space to focus more time on then how do you help them to grow that business both through the expansion of advisors and their practices And I think that's sort of the rhythm that we're finding where you produce those positive outcomes of enhanced risk management, Operational Efficiency and Enhanced Economics, and now we're in that stage of very intentional working to help them grow organically Their ultimate results within their wealth management programs and platform.

Speaker 1

I think the other thing that we've been able to do is through the seasoning It's completely reimagined and transformed the onboarding or changed management efforts to bring these programs onto the platform. That's always Somewhat of a obstacle to work through anytime as part of the value proposition. And I think that Easier and lower we can make that hurdle. And then with the experience of being able to reference prior Outcomes, that certainly again is helping, I think, streamline not only make the model more appealing, Also make it so that it's more reachable, accessible, right, lower initial hurdle. And so that's where we are in the dialogue is Being able to use those outcomes, have a dialogue with larger enterprises, traditionally the banks, We're also expanding that value proposition outside of Just Banks to that broader enterprise wide marketplace.

Speaker 1

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 that this is a

Speaker 4

Okay. Thanks, Dan. Appreciate the color there. Just a follow-up on some of the technology initiatives. So I think last year you guys spent $270,000,000 On technology, that's clearly growing again this year and that's going to be many multiples of really the vast majority of your peers.

Speaker 4

And so love to just Maybe dig in a little bit deeper and if you can frame just the degree and importance of kind of this technology differentiation that you think you're building at LPL for 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 you're thinking about AI application Just more broadly to improve the experience for advisors and also help reduce costs at the firm over time. Thanks.

Speaker 1

Yes, absolutely. So we do think that The quality of the capability set, if you think about that vertical integration concept that we We think that is one of the most important elements of creating a new model and driving organic So with that as context and we think investing in that vertical integration strategy or Reinvesting in that platform that enhance capabilities is a significant priority and we should allocate capital Appropriately relevant to that priority. So if I gave you a bit of a framework to think about where we invest there, I give it to you over kind of 6 elements. 1 would be the end client experience, so that's the advisor. Helping them with holistic advice to continue to enrich one of the key elements of the art of being a financial advisor, quality of The third one is the wealth management platform, that's going forward to how they solve the needs of clients and execute on their advice.

Speaker 1

And then the other three elements are more about helping them operate successful in Driving business. So think about flexibility to building the perfect practice for them. That's where you get the affiliation models. That's where you also get the investment in service business services portfolio that we can talk a lot about. That's where you also get the investment in our operating, right?

Speaker 1

We want to make sure that we create a scalable and efficient platform in which all of these Advisors are practicing. And then ultimately, I think we've got an enhancement in our overall service mix. Those are the 6 categories, if you will, I call them commercial categories, or in the context of needs for our clients that we're investing both technology, Capital for technology purposes and then also non technology investing, think about services. And if we're creating this integrated platform, It creates better workflows and better services wrapped around that technology that ultimately help these advisors and freight advisors And run thriving businesses and we think that's a winning formula to continue to create more appealing platform that drives More successful outcomes for advisors. With respect to your question around AI and where we sprinkle that in, in terms of that investment, Well, on the operating platform itself and within our service model, we're already using AI, Both in terms of think about robotics, machine learning as a way to scale predictable and renewable Operating processes, we're using AI in terms of Enhancing the efficacy of our data analytics and determining Neste's action associated with our risk management efforts Within our operating platform, we created new digital capabilities that are now taking as much as 15% to 20% of the volume It has traditionally come into our service model to help folks with a better digital experience that incorporates some AI into that.

Speaker 1

And I think with generative AI, where you get into using AI for more creative activities, we see the Interesting opportunity to continue to enhance both the advisor and the investor experience, Uber Chance Personalization. I think also, we see it as an opportunity to create efficiency in our own models where you think about those Creative jobs, take marketing, take engineers, take again in service and operations And you begin to really think about enhancing the scale of the model. So that's the reason we invest. It gives you a little flair for kind of how we're allocating that investment And then how we're beginning to explore and utilize AI. We've been using it for a couple of years, but I think with this New generative AI or NII, it opens up some interesting possibilities.

Speaker 1

We're just in the early innings of imagine. We like to ask and challenge ourselves, imagine if you could create AI as an additional team member for every single practice, which is a Highly efficient, scalable team and that's a pretty cool initiative being solved there within the. I hope that helps.

Speaker 4

Yes. Very helpful. Thanks so much. Appreciate it.

Operator

And one moment for our next question. Our next question will come from Steven Chubak of Wolfe Research. Your line is open.

Speaker 5

Hey, good afternoon. This is Michael Anongostakos on for Steven. I did 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. I did want to ask on the competitive dynamics. A larger independent player is planning to undergo rather substantial restructuring effort.

Speaker 5

Looks like some of the resulting attrition has been a relatively significant Contribut 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?

Speaker 1

Yes. So look, I think if you look at the marketplace, right, and what you're really getting at is How do we think about sizing of the marketplace? And at least up through second quarter, If you look at the opportunity set, advisor movement has largely remained pretty flat at around 5% turnover for the last year, Which is a lower level movement than historical norms as you well know. That said, there has been a mix shift In that sort of turnover, we're seeing positive movement or more positive movement in the traditional independent market. And there's been a slowdown from the wires.

Speaker 1

As we look out sort of and look forward at some of what Competition is doing, whether it be through integrations, restructurings, etcetera, those things It can create more churn or 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 occur in the marketplace that we're well positioned, capitalize and win much greater share of that opportunity that they emerge. So We do think about structurally our opportunity, but we're also at least trying to position for different market opportunities that may emerge

Speaker 5

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 and A growth beyond 2023? It sounds like 4% to 5% is the 1st building block to run the business, but how much incremental investment should we be anticipating? Thanks.

Speaker 2

Yes. I mean, I think we're as you could imagine, we're in the midst of planning for 2024 right now and we'll 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 2023, the macro environment provided an opportunity for us to accelerate investments that we otherwise would have done in 20 24 and beyond. And that was driven by the opportunity that, that macro presented.

Speaker 2

So I think when we're planning for 2024, It will all depend on what that macro outlook looks like. Of course, there's a scenario as you described that the rates could start to come down. So We will certainly factor that in and we've got I think our history demonstrates we've 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. So we'll focus on balancing those things and we'll share more color on those plans as we typically do at our year end earnings But the headline would be our principles and our approach are going to remain the same.

Speaker 5

Great. And if I could just squeeze a quick housekeeping one in 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 would be helpful.

Speaker 5

Thank you.

Speaker 2

Yes. I 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 deductions that have come from that. And there were just fewer in the quarter. And that's why I kind of moved back up to that closer to that normalized 26%, 27%.

Speaker 2

So I think all else equal, if you're looking for A placeholder for going forward, I think 26% to 27% is the best way to think.

Speaker 5

Thanks so much.

Operator

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

Speaker 6

Good afternoon. Thanks for taking my question. In addition to strong organic growth, you've also been active on the inorganic side. So I I was hoping you could talk about just the pipeline and conversations and how we should think about inorganic uses of or for growth as we think about the remainder of this year and kind of the current backdrop of what's out there?

Speaker 1

Yes. So as we go forward, we'll continue to use M and 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 on that, we're consistently assessing the marketplace and the landscape And are typically focused on 3 categories of opportunity. The 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 the advisors and Those practices when they transition onto our platform.

Speaker 1

And we look across the landscape of Think about anywhere from smaller broker dealers and RIAs, upward. Examples of that is Phoenix Scattergood, Waddell and Reed and of course most recently Crown 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 a complement to that, we also look to places or transactions that could add capabilities, right, Where we can create value for advisors and ultimately help them drive efficiency into their practices or enhance growth.

Speaker 1

Anytime we think about That type of transaction, we'll of course look at it through the lens of build by our partner As capabilities and transactions include AdvisoryWorld and Blaze and those have both, we continue to Really evolve how we think about investing back into those capabilities and how they ultimately create value In unintended places when we originally did those transactions. So we like that type of opportunity. And then finally, the third is just deploying capital against the liquidity and succession needs that are out in the market. Certainly, this gives us a pathway to put capital work that meets our The disciplined return thresholds and solving a really important question for advisors in the marketplace in a rather or unique way, and we've got continued opportunity internally With respect to helping our advisors, they're already on our platform with that question, and we're beginning to see external exploration As well as how we help advisors that are on the platform with that type of need. So that's the framework.

Speaker 1

That's Where we've got our focus and we continue to assess the marketplace for those opportunities to remain on.

Speaker 6

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 That's so we get a sense of kind of the economics associated with some of these larger onboarding enterprise customers?

Speaker 2

Yes. Well, directionally, I mean, I think when you look at the guide for Q3, it's really driven by 3 factors. Conference timing is the biggest. 2nd is onboarding of the 2 large enterprises. And 3rd is really supporting organic growth.

Speaker 2

So I think when you look at conference spend, that is that first bucket, that is the biggest driver. As a reminder, it's our largest conference. It happens in Q3 every year. We've got over 8,000 attendees coming, which is a new record for us, which we're excited about, just the engagement from our clients and their guests And being in person with us. So it's our largest conference and the largest of that conference has been.

Speaker 2

So that's the biggest component of the Now we do have 2 large enterprises that we are onboarding in 1 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 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 But broadly that first bucket conferences is going to be the largest piece of it.

Speaker 6

Great. Thank you.

Operator

And one moment for our next question. And our next question will come from Michael Cyprys of Morgan Stanley. Your line is open.

Speaker 7

Great, thanks. Good afternoon. Thanks for taking the question. You guys have had some early success with your newer RIA only models. Hoping you could talk about Your competitive positioning there, how you're offering and pricing differs from others in the marketplace on the RAA only model.

Speaker 7

And as you look out over the next 12 months to 24 months. What sort of enhancements that you might be able to make to that offering to further accelerate growth from here?

Speaker 1

Yes. Thanks for the question, Michael, and happy to provide some color on enhanced RIA model. So Headline is, look, the RA market, as you know, is large and fast growing, which presents an interesting strategic opportunity. So we have been investing Position ourselves for outsized share gains there. And how we think about allocating those 1st and foremost, it's to create a differentiated offering in the marketplace.

Speaker 1

And while at the same time improving our awareness We are a competitive and credible alternative to more of the incumbents in the marketplace. So as we do this, our right to win continues to increase and we believe that positions us well as we go forward both in the near term and the long term. If I 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 on our platform continues to be an advantage. Certainly then that's complemented by the vertical integration strategy where we're able to provide value not just at the traditional Clearing in custody level within the ecosystem, but also with respect to technology operating platforms, Wealth Management Platforms all the way down into if you think about the business services that we've been innovating So it's an end to end values play that we think makes for the most interesting differentiation For RAs that are out there, so they don't have to go build that or if they have built that stuff and have operated it In an inefficient way or one that doesn't add value, we can do it in a more efficient and effective way.

Speaker 1

We think that's That's an appealing angle to take to the marketplace. And then finally, as we grow in both the results, solutions to success and then greater awareness for our presence in the marketplace. We think those things position us well To continue to drive more growth from here. And I think we've seen good progress over the last year and a half. We're encouraged by that.

Speaker 7

Great. And just a follow-up question on the centrally managed assets that continues to grow, in line with the rest of the business holding steady about 15% Of advisory assets, it looks like. So I hope you could talk about some of the initiatives as you think about expanding penetration of centrally managed Assets there, how are you thinking about building up the product set here as you look out over the next year or 2?

Speaker 1

Yes, it's a really interesting question. As you said, there There's some cool opportunities we think to continue to enhance the feel of that model and reduce the cost in both that combination ultimately, I think drives 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 their capabilities within That models marketplace is where some cool innovation and work is going on. And that not only adds value for our advisors, it So it creates value for our sponsors that then create economic opportunities for us. I think as you look at Continued, what I might call, instanced value for an end investor, think Self indexing or individual indexing and or tax overlay.

Speaker 1

And I think we're deploying some of those capabilities In the second half of this year, it just further strengthened the value of the advice that the advisors providing To their clients, but also to the extent that we can do that in the centrally managed platform in a highly efficient and integrated A way for the advisor creates greater appeal when we switch to the model. And then finally, just the expansion of the investment content available there. We've Really expanded our SMAs this year. On the equity side, we're adding income SMAs in second half of this year. And so Ultimately, that turns it into a true UMA, which will only drive further utilization.

Speaker 1

So those are the ways we think about some of the ways of enhancing the capabilities to continue to drive the appeal of that model and thus the greater yields.

Speaker 7

Great. Thank you.

Operator

And one moment for our next question. Our next question will be coming from Kyle Voigt of KBW. Kyle, your line is open.

Speaker 8

Hi, good evening. Maybe a few follow ups for me. Matt, you hit record EBITDA margins in the first half of the year at 54%. I guess my question is not as much about 20 4, but more of a longer term question about margins. If we think about LPLA continuing to kind of gain scale and drive growth over the coming years, do you think there's still significant operating leverage left in the model from where you sit today, 54%?

Speaker 8

And if so, can you kind of help How you think about those longer term incremental margins?

Speaker 2

Yes. I mean, I think when you if you look at margins and History here is very helpful. And 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 us, but our industry, when you're in periods where interest rates are near their lows, like running in the which is Which we in our recent past, of course, have seen, when you're running with margins in the 35%, 40% range, you're doing somewhat well in that environment. When you're 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.

Speaker 2

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 to clients, our ability to continue to expand and grow Across our affiliation models as we get scale in each of those areas, we're able to balance delivering not only a great for those clients, but also doing it in an efficient way that allows us to deliver earnings to the bottom line and 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 is Indexing to the macro environment point that I made to most certainly drive more operating leverage. And I think ultimately, The balance and judgment about how much of that to reinvest to further expand our value proposition and further drive growth There's judgment calls that we'll make, but I think the opportunity is there for success.

Speaker 8

Understood. Thank you. And then Just a follow-up on the cash discussion. You previously noted that 4% as being around a floor level on cash as a percentage of assets. It sounds like you're now slightly below that 4% level in July to date.

Speaker 8

But it seems that you said you're continuing to see that slowing Cash declines excluding those fee billings. I just wanted to reconfirm whether anything has changed at all from an advisor 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%.

Speaker 2

No. I mean, I think keep in mind month 1 of any quarter, you typically see a 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. It's typically small balances for rebalancing, paying These facilitated customer withdrawals and I think 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 that's typically met a natural for around 4%. And I think We look at the market we're in now, I think it's fair to say that advisors and their clients are especially engaged.

Speaker 2

When you've got The strong fixed income market that we've been in for quite some time that's now getting coupled with a strength in equity market. And that's leading to Net buying activity and levels that are roughly double historical levels. So I think as we sit here, at least looking at the end of the quarter, which is where Roughly 4% of AUM. I think that the dynamics of our cash and the transactional nature, that hasn't 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 go below 4% by a substantial amount.

Speaker 8

Understood. Thank you.

Operator

And one moment for our next question. And our last question will come from Brennan Hawken of UBS. Brennan, your line is open.

Speaker 9

Good afternoon, guys. Thanks for sneaking me in. I just got one last, most of mine have been asked and answered. Any way or Guidance you can provide for thinking about how the upcoming deals, the deals that you've announced And we have coming down the pipe could impact the payout rate. I know in the past sometimes some of the deals have had an impact.

Speaker 9

Anything coming from these upcoming deals?

Speaker 2

Yes. And you're talking about the large enterprise onboarding, Bank of the West in Commerce?

Speaker 1

Exactly.

Speaker 2

Yes. Yes. I think as a general point, those larger enterprises have a higher payout rate. We have a lower 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 We're compelling on those.

Speaker 2

But yes, the payout rate would, all else equal, go up. So if 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, Primarily, the seasonal build in the production bonus, but also bringing on those large enterprises that in general have a higher payout than the average.

Speaker 9

Okay. So the 87.5% would fully bake in the impact of those 2 deals?

Speaker 2

No. It would be the following quarter Because they're going to be joining during the quarter, but it's just as a headline point when we bring on large enterprises, they'll typically buy stuff to pay out a little bit, not dramatically, but

Speaker 4

Got it. Thanks a lot.

Operator

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

Speaker 1

Thanks to everyone for taking the time to join us this afternoon. We look forward to speaking with you again next quarter.

Operator

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

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Earnings Conference Call
LPL Financial Q2 2023
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