LPL Financial Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2024

There are 10 speakers on the call.

Operator

Good afternoon, and thank you for joining the Q4 2023 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are President and Chief Executive Officer, Dan Arnold and Chief Financial Officer and Head of Business Operations, Matt Audette. And one follow-up each. The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor. Lpl.com.

Operator

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

Operator

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

Speaker 1

Thank you, Amy, and thanks everyone for joining our call today. Over the past quarter and throughout 2023, Our advisors continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams. As we enter the New Year, we thank our advisors for their continued commitment and dedication, while we remain focused on our mission of taking care of them so they can take care of their clients. During the Q4, we continued to see the appeal of our model grow 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 solid progress in 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.

Speaker 1

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 4th quarter business results. In the quarter, total assets increased to 1.4 trillion dollars as continued solid organic growth was complemented by higher equity markets. Regarding organic growth, 4th quarter organic net new assets were $25,000,000,000 representing 8% annualized growth. This contributed to organic net new assets for the year of 100,000,000,000 representing approximately a 9%.

Speaker 1

In the 4th quarter, recruited assets were $17,000,000,000 Bringing our total for the full year to $80,000,000,000 Prior to large enterprises, recruited assets for the full year were $67,000,000,000 an increase of nearly 50% year over year and a new annual record. This outcome was driven by the ongoing enhancements to our model as well as our expanded addressable markets. Looking at same store sales, our advisors remain focused on taking care of their clients and delivering a differentiated experience. As a result, our advisors are both winning new clients and expanding wallet share with existing, a combination that drove solid same store sales in Q4. At the same time, we continue to enhance the advisor experience through the delivery of new capabilities and technology and the evolution of our service and operations functions.

Speaker 1

As a result, asset retention for the full year was approximately 99%. Our 4th quarter business results led to solid financial outcomes with adjusted EPS of $3.51 which brought our full year total to $15.72 an increase of 36% year over year. Let's now turn to the progress we made on our strategic plan. Now as a reminder, our long term vision is to become the leader across the advisor centered market. To do that, our strategy is to invest back into the platform, provide unprecedented flexibility in how advisors can affiliate with us and to deliver capabilities and services to help maximize advisors' success throughout the lifecycle of their businesses.

Speaker 1

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 into 2 strategic categories: horizontal expansion, where we look to expand the ways that advisors and enterprises can affiliate us such that we compete for all 300,000 advisors in the market and vertical integration, where we focus on delivering capabilities, technology and services that help our advisors differentiate when in the marketplace be great operators of the business. Now with that as context, let's start with our efforts around horizontal expansion. Over the Q4, we saw strong recruiting in our traditional independent one, adding approximately $14,000,000,000 in assets. As a result of the ongoing appeal of our model and the evolution of our go to market approach, we maintained our industry leading win rates, also expanding the breadth and depth of our pipeline.

Speaker 1

With respect to our new affiliation models, strategic wealth, employee and our enhanced RAA offering, We delivered our strongest year to date recruiting roughly $15,000,000,000 in assets, nearly double the total of the prior year. As we look ahead, we expect the increasing awareness of these models in the marketplace and our ongoing enhancements to their capabilities will help drive sustained increase in their growth. Next, the traditional banking credit union space continues to be a consistent contributor to organic growth as we added approximately $1,000,000,000 of recruited assets in Q4. In addition, large enterprises remained a meaningful source of recruiting in 2023 with the addition of Bank of the West and Commerce. For 2024, We continue to prepare to onboard the retail wealth management business of Prudential Financial.

Speaker 1

Now as a part of that process, Our team has been on the road meeting with Prudential Advisors to provide them a preliminary orientation to our platform and the early feedback has been positive. Looking ahead, we are confident that the appeal of our value proposition for enterprises Match with our track record of successful execution positions us well and help solve the needs of a broad spectrum of institution. Now within our vertical integration efforts, we are focused on investing back into the model in order to deliver a comprehensive capabilities, services and technology that help our advisors differentiate and win in the marketplace and run thriving businesses. As part of this effort, over the past quarter, we continued to make progress on our aspiration of delivering an industry leading services. This work includes continuing to make our service model more flexible and efficient through a multi channel approach.

Speaker 1

The purposes of which is to offer a broad spectrum of service options, including human centric support, digital capabilities and artificial intelligence such that we can provide advisors the information they need in the channel that works best for them. In that spirit, over the last year, we have continued to expand our digital capabilities, including our digital hubs, which provides advisors always on support centralized and intuitive form. Our investments in this area enabled us to expand from 2 digital hubs to 11 over the last year, with the newest being our TaxHub, which helps advisors process tax business in a streamlined and highly efficient way. While we are still in the early innings of the adoption of this capability set, the percentage of advisors' interactions that go through digital channels It's roughly doubled over the last year from 10% to 20%. And as we continue to refine these capabilities, we believe digital solutions can ultimately serve as much as 50% of our service interactions.

Speaker 1

Now as an additional part of our vertical integration strategy, We continue to expand and enhance our service portfolio and are encouraged by the evolving appeal of our value proposition and the seasoning of our capability. As a result of solid demand, the number of advisors utilizing our portfolio of 14 available services continues to increase, We ended the year with nearly 3,900 active users, up 27% from a year ago. Looking ahead, We remain focused on addressing the needs of a broader set of advisors and are innovating on new services that will directionally double the size of our services portfolio over the next 2 years. And one of the latest innovations in our services portfolio was inspired by our broader efforts tackle the advisor transition process, which has historically been an industry wide pain point given the friction and complexity of changing firm. That said, rather than seeing the transition process as a headwind, we view it as an important strategic opportunity.

Speaker 1

As the easier we can make it for advisors to change firms, the more it will drive up advisor movement in the industry, where we are well positioned to benefit the market leader in recruiting. And to help solve for that opportunity, We have developed several new transition capabilities and solutions, including live testing environment for advisors familiarize themselves with our platform before transition, fully automated stages of the onboarding process and a suite of transition services That includes short term admin, branding and bookkeeping support, which helps simplify the transition and onboarding journey Ultimately accelerate advisors' readiness and growth. Early feedback on these transition services has been positive And they are proving to be a catalyst for additional subscriptions as 40% of advisors who use these solutions end up subscribing to 1 or more of our other ongoing services. And as we move forward, we will continue to challenge ourselves solve for advisors' needs at every stage of their practice in order to help them build the perfect business for themselves and ultimately maximize their success. In summary, in the Q4 and throughout the year, we continued to invest in value proposition for advisors and their while driving growth and increasing our market.

Speaker 1

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

Speaker 2

All right. Thank you, Dan, and I'm glad to speak with everyone on today's call. Before I review our Q4 results, I would like to highlight our progress during 2023. Against an evolving market backdrop, we maintained our focus on supporting our advisors and their clients, while executing on our strategic priorities. We continue to grow assets organically in both our traditional and new markets, Successfully onboarded new enterprise clients and continued to make progress with our liquidity and succession solution.

Speaker 2

So as we enter 2024, We remain excited about the opportunities we have to serve and support our more than 22,000 advisors, while continuing to invest in our industry leading value proposition and drive organic growth. Now let's turn to our 4th quarter business results. Total advisory and brokerage assets were $1,400,000,000,000 up 9% from Q3 as continued organic growth was complemented by higher equity. Total organic net new assets were $25,000,000,000 or approximately an 8% annualized growth rate. Our Q4 recruited assets were $17,000,000,000 which brought our total for the year to $80,000,000,000 Looking ahead to Q1, our momentum continues And we are on pace to deliver another strong quarter of recruiting.

Speaker 2

As for our Q4 financial results, combination of organic growth and expense discipline led to adjusted EPS of $3.51 Gross profit was $1,700,000,000 down $3,000,000 sequentially. Our payout rate was 87.6%, up 30 basis points from Q3 due to the seasonal build in the production business. Looking ahead to Q1, We anticipate our payout rate will decline to approximately 86.5% as the production bonus resets at the beginning of each year. With respect to client cash revenue, it was $374,000,000 down $4,000,000 from Q3 as average client cash balances declined slightly during the quarter. Client cash balances ended the quarter at 48,000,000,000 up $1,000,000,000 sequentially, marking the 1st quarterly increase since the Q2 of 2022.

Speaker 2

Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60%, within our target range of 50% to 75 As a reminder, during Q4, there were roughly $2,500,000,000 of fixed rate contracts that mature. We placed $2,000,000,000 of these maturing balances into new 5 year contracts, yielding approximately 4 15 basis points, which is roughly 85 basis points higher than their prior yield. Looking more closely at our ICA yield, it was 3 17 basis points in Q4, down one basis point from Q3. As for Q1, based on where client cash balances and interest rates are today, As well as the yields on our new fixed rate contracts, we expect our ICA yield to increase by approximately 5 basis points. As for service and fee revenue, it was $131,000,000 in Q4, down $5,000,000 from Q3.

Speaker 2

This decline was primarily driven by lower conference room, following our largest advisor conference of the year in Q3, as well as seasonally lower IRA fees. Looking ahead to Q1, we expect service and fee revenue to decrease by approximately $5,000,000 sequentially on lower conference revenue. Moving on to Q4 transaction revenue. It was $54,000,000 up $4,000,000 sequentially due to increased trading volume. As we look ahead to Q1, based on what we have seen to date, we would expect transaction revenue to increase by a couple of 1000000 sequentially.

Speaker 2

Now let's turn to expenses starting with core G and A. It was $364,000,000 in Q4, bringing our full year core G and A to $1,369,000,000 This was within our outlook range and for the full year represents approximately 15% growth. As a reminder, this included an opportunistic 5% of incremental spend focused on accelerating our capabilities as we took advantage of the favorable macro environment. Now as we look ahead to 2024, We plan to return to more normalized levels of spend, concentrating on investments that enable organic growth and drive operating leverage in our business. In addition, our ongoing investments to scale our business are driving greater efficiencies.

Speaker 2

Pulling this together, We expect our 2024 core G and A growth rate to be roughly half the rate we saw to 2023. More specifically, we intend to grow 20 24 core G and A in a range of 6.25% to 8.75%. As for Q1, we expect core G and A to be in a range of $360,000,000 to $370,000,000 Note that this core G and A spend is prior to expenses associated with Prudential. As we move closer to onboarding them towards the end of this year, we'll provide an update on 2024 core G and A. I would just emphasize that we expect only a small amount of spend in 2024 as the majority of these costs will be incurred in 2025.

Speaker 2

Moving on to Q4 promotional expense. It was $138,000,000 down $2,000,000 sequentially as lower conference spend was partially offset by higher Prudential related onboarding and integration costs. Looking ahead to Q1, We expect promotional expense to be roughly flat as we have one of our largest advisor conferences during the quarter, which will be offset by seasonal declines in marketing spend. As for regulatory expense, it was $9,000,000 in Q4. Looking forward, given the increased size and scale of our business, We would expect regulatory expense to be roughly $10,000,000 per quarter.

Speaker 2

Looking at share based compensation expense, it was $16,000,000 in Q4, flat compared to Q3. As we look ahead, we anticipate this expense will increase by approximately $6,000,000 sequentially as Q1 tends to be our highest quarter of the year given the timing of our annual stock awards. Regarding capital management, Our balance sheet remains strong in Q4 with corporate cash at $184,000,000 I would note that during the quarter, we completed our 1st investment grade debt offer, issuing $750,000,000 of senior notes. With that, our leverage ratio increased to 1.6 times It is within our target leverage range of 1.5 times to 2.5 times. Turning to how we deploy that capital, Our framework remains focused on allocating capital aligned with the returns we generate, investing in organic growth 1st and foremost, pursuing M and A where appropriate returning excess capital to shareholders.

Speaker 2

In Q4, we deployed capital across our entire frame As we continue to invest to drive and support organic growth, allocated capital to M and A within our liquidity and succession solution and returned capital to our shareholders repurchasing $225,000,000 of shares. As we look ahead to Q1, We plan to repurchase $200,000,000 of our shares, keeping us on track to execute our $2,000,000,000 authorization over 2 years. Turning now to interest expense. It was $54,000,000 in Q4, up $6,000,000 sequentially. Looking ahead to Q1, Given current debt balances and interest rates, we expect interest expense to increase by approximately $7,000,000 from Q4.

Speaker 2

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 advisors, grow our business and create long term shareholder value. With that, operator, please open the call for questions.

Operator

And our first question comes from Steven Chubak with Wolfe Research. Your line is open.

Speaker 3

Good afternoon, Dan and Matt. Thanks for taking the questions. Maybe just to Start off with a question on core G and A and organic growth. The double digit organic growth you've achieved these past 3 years, it's really been bolstered at least in part by significant investments in the platform and core G and A has also grown at double digit clip as well. So the updated core G and A guide for 24% certainly surprised positively.

Speaker 3

It does imply significant moderation as you noted, Matt, in expense growth, Which we expect the slower G and A growth to drive a commensurate slowdown in organic? Or do you feel the N and A momentum can be sustained even with that moderation in G and A spend?

Speaker 2

Yes, Stephen. I'll give you some color here, but the answer is going to be the latter. I think the investments are moderated and our confidence and conviction around continuing to drive organic growth is just the same. Now the details below that just building a little bit on what I shared in the prepared remarks. The cost strategy or investment strategy remains driving Investments prioritizing to drive organic growth as well as driving productivity and efficiency.

Speaker 2

And I think what's probably Most relevant in this conversation is also adapting as the environment evolves. So if you look at to your point on 2023 and growing 15%, You kind of break that into that 15% into 3 equal categories of about 5% each. The first was really about serving and supporting the core business growth. The second was about continuing to make investments to really improve our value prop through and establish ourselves in the new models and addressable markets to scale our services, things of that nature. And that 3rd category, that 3rd 5% was really just being opportunistic about the market and really accelerating investment.

Speaker 2

And I think when you look at the guidance for 2024, our plans for 2024, it's really pulling back in that 3rd category. We're continuing to make the investments to support organic growth. We're continuing to make the investments to improve our value proposition and capabilities. And just those two things and this may get really to the core of your question, that would typically lead to 4 gs and A growth in 8% to 10% range. But then you put on top of that the investments we're making for productivity and efficiency, which do create capacity to invest each and every year are getting even better.

Speaker 2

And it's that final point that brings us down to the 6.25% to 8.75%. So hopefully, the color helped there. But I think the headline point is our conviction on continuing to deliver organic growth in those high single digits remains.

Speaker 3

That's great to hear. And for my follow-up, Matt, I was hoping you could just provide an update on January trends. I know it's a seasonally weaker month typically for both NNA and cash. And just with cash trends also stabilizing over the last 6 months, just speak to your confidence level that some of these sorting headwinds, which have gotten a lot of airplay are largely in the rearview?

Speaker 2

Yes. I think I'll start on cash. I mean, the headline is we really saw cash start to stabilize back in July. So really if you look at the second half of the year, even by the month, we ended the year at a pretty similar level of where we ended July. So I think what we're seeing in January is really a continuation of that stability.

Speaker 2

So just a reminder, the seasonal factor that does hit in January is advisory fees typically hit primarily in the 1st month of the quarter. So those do reduce cash balances. It's around $1,200,000,000 Outside of that though, we continue to see stability. So the amount of cash balance moving from customer activity was actually a slight increase in January. So you put that together and cash balances overall for the month down $1,200,000,000 but it's primarily driven by those fees and the activity is actually a slight increase.

Speaker 2

So I think headline is continuing to see stability on the cash sweep side. On the organic growth side, and maybe just I'll give a little bit of context and perspective on the overall quarter as well as the month January. To your point on your first question, when you look at the last 3, 4 years of really driving and delivering that high single digit organic growth, Given the nature of Q1, the Q1 is usually a little bit lower. So in those years, it was typically in the 6% to 7% zone. So if we look at what we're seeing for Q1 2024, is really delivering something in a similar place, that's 6% to 7%.

Speaker 2

The only thing I would highlight and the reason for this color is we would expect January to actually be a little bit lower than normal in the 1% to 2% zone. And then February March actually to be higher than typical really at those high single digits really coming together at a 6% to 7% for the quarter. And really the reason for that is that the seasonal factors that we just talked about on the cash sweep side, meaning advisory fees hitting in the 1st month of the quarter as well as you have on the NNA front that normal slowdown in the first half of January because of the FINRA closing in the second half of December as well as advisors taking time off. You have those normal factors that come through in January. Two things I would highlight though for this January.

Speaker 2

First is recruiting. Our recruiting continues to be strong. You may recall Q1 of last year, we set a new record in recruiting prior to large enterprises at around $13,000,000,000 We're on track to exceed that in the Q1 of this year. So continued strength there. Just the timing is a little shifted more towards February March.

Speaker 2

So you got a little bit of weakness in January. And then on the attrition side, a little bit of the opposite and that attrition is going to be a little bit heavier in January versus February March As we had 2 practices that were acquired to part during the month and that's normal. It happens from time to time. We just happen to have 2 in a single month of January. Outside of that, our retention remains consistently high with the levels we've seen.

Speaker 2

So lots of color there, but I would headline it in, we're looking at Q1 and continuing in that 6% to 7% zone and you're just going to have a little bit of a different shape to the quarter with January in that 1% to 2%

Speaker 3

Lots to unpack there, but thanks

Speaker 4

so much for the detail on that.

Speaker 2

You bet.

Operator

One moment for our next question. And our next question comes from Alexander Blostein with Goldman Sachs. Your line is open.

Speaker 4

Hey, good afternoon, everyone. Thanks for the question as well. Dan, I was hoping we could talk a little bit about the large enterprise channel for you guys. It's been an area of significant success over the last couple of years. So maybe talk a little bit about deal activity expectations for 2024.

Speaker 4

And in particular, curious about the level of engagement you guys are seeing from insurance company clients on the back of the Peru deal? Thanks.

Speaker 1

Yes. Thanks, Alex. So look, with respect to our large enterprise channel, we opened this market up back in 2020 With the novel outsourcing solution and initially we targeted larger banks and have seen Some success up to this point capturing about $85,000,000,000 of assets to our platform. If you look at the total market Banks and outsourcing of Wealth Management, for Wealth Management, it's roughly in and around 1,000,000,000,000 And we believe our experience, reputation and capability set creates compelling solution that helps continue to strengthen that pipeline and offer up an interesting durable growth opportunity as we move forward. That said, at the same time, we took our solution that was targeted to banks and we made some additional investments capabilities and personalized options, which enabled us to extend the appeal of that model to, as you said, the insurance companies or product manufacturers that operate wealth management solutions.

Speaker 1

And now that market represents an additional $1,500,000,000,000 of opportunity. And with the Prudential announcement, it was a catalyst for additional inquiries exploring the question, so why aren't they outsourcing? And we continue to progress in these discussions and explore others. They're still in the early stages, but we do believe This part of the pipeline will continue to evolve as well. So, if I summarize it, as we move forward, we believe our market leadership capability That real deep IP for this enterprise channel creates a really unique growth opportunity for us.

Speaker 1

We're excited about. Great.

Speaker 4

And a quick follow-up for you, Matt. So nice to see you guys moving forward with reinvestments of the ICA maturities of $2,000,000,000 that you mentioned. How is demand holding up in the ICE channel for additional fixed maturities as we kind of think about the 6.5 $1,000,000,000 tranche that's coming up this year. And is there a way to sort of accelerate some of that reinvestment? I know you provided a schedule kind of how that shakes out over the course of the year, but Any opportunity to move a little faster in case rates just start moving lower to lock in wider spreads?

Speaker 4

Thanks.

Speaker 2

Yes, Alex. I think on the demand, the demand is strong. Like if you look at the $2,000,000,000 that we did place into new contracts towards the end of the quarter, We're able to place them in 5 year contracts, so that's kind of the longest duration that the market typically offers, which is where we prefer to be right now. And we're able to place them at a 30 basis point spread above where the curve is. And I think we've talked about for a long time in this marketplace, There really were no spreads to the curve, and sometimes there are even discounts.

Speaker 2

So I think that's probably the most empirical data that demand is out there strong and you see similar demand on the floating rate side as well. The on the second part of your question, The opportunity to accelerate really aren't there. It's kind of the nature of a fixed rate contract, right, for the same reason, on both sides of the equation a bank liquidity standpoint where they get it on their side, it's not a very common thing. So I wouldn't expect any opportunities to accelerate it. As you noted, we have when you look at the year, we've got $6,500,000,000 coming up.

Speaker 2

And if you look at the marketplace right now, we'd be able to place them in even higher rates. And If that 5 year point is available, we'll be excited to do it there as well. So market is good, but acceleration opportunity is probably not there.

Speaker 4

Got it. All right. Sounds like a plan. Thanks.

Operator

One moment for our next question. And our next question comes from Kyle Voigt with KBW. Your line is open.

Speaker 5

Hi, good evening. Maybe just a question on the Prudential expenses. First, I just wanted to confirm that the 125,000,000 of the integration and onboarding expenses in the promotional line are one time and still expected to entirely roll off by the start of 2025. And then can you just help frame the size of the incremental G and A growth we should think about in 25, either on a percentage

Speaker 4

basis year on year or framing relative to

Speaker 5

the size of the to the size of the Pru expenses in promo that will be rolling off in 2024?

Speaker 2

Yes, sure, Kyle. I mean, I think on the 125, They are definitely one time and specific to bringing Prudential on board. I think the majority of them will be in 2024. So if you look at what we spent so far in 2023, it's in the $25,000,000 $26,000,000 range. Of that remaining $100,000,000 that will primarily be in $24,000,000 but just depending on the timing of when they come on board, some of that could flow over into 2025.

Speaker 2

Now the total amount wouldn't change. It's just a math it would still be 125. It could some of it could just go into 2025, but the majority would be in 2024. On the core G and A front, I think the headline I would give you and kind of emphasize in the prepared remarks that the amount we expect in 2024 is relatively small and it's all about the timing of when they come on board. I think to your question of how to dimension it, I think I'd just go back to the estimated EBITDA when it's fully ramped, which is around $60,000,000 And maybe just look at overall margins in our business around 50%, that should give you a sense of the overall expenses, that would go along with it.

Speaker 2

So I think if you did something like that, you'd be directionally correct. I just emphasize that it's From a cost standpoint, it's likely to be primarily in 2025, just given the timing of when they're going to come on board, is towards the end of 20 24.

Speaker 5

Understood. Thank you for that. And then just on the follow-up, I guess, asked on the M and A environment. We're seeing a macro backdrop now that I expect to be a bit more favorable for M and A in the sector. Markets are at All time highs, we're starting to see some clarity on interest rates, at least relative to the past year or 2.

Speaker 5

So just wondering if you could speak to the opportunities you're seeing in the market whether bid ask spreads between sellers and buyers maybe narrowing and the number of or types of deals that you're seeing come across your desk now versus maybe this time last year?

Speaker 1

Let me take a stab at that one, Stan, and Hopefully, I'll get all your questions inside of there. So, I think as you know, M and A remains a core part of our strategy as a complement to our organic growth opportunities. And to your question, we focus on 3 primary categories of opportunities. One is, 1st to grow in our market. So potential acquisitions might include both broker dealers and RIAs.

Speaker 1

Examples of that are Finning Scattergood acquisition, Waddell and Reed acquisition and then the Crown Capital, which we're closing earlier this year. So those are Good examples of how we might look across the marketplace for those opportunities. And look, as the industry continues to consolidate, we would expect to be a participant in that consolidation. The second type of transactions that we'll look at is to add capabilities and these are Capabilities where we would ultimately evaluate and allocate and should we allocate capital to build, buy or partner and To the extent this accelerates, our desire to create that vertically integrated feature rich platform, then is where we would look to an opportunity like that. As capability transactions would include AdvisoryWorld and Blaze.

Speaker 1

And to remind you, Blaze is a trading platform that we're turning into what we think would be a really industry leading trading and rebalancing tool that We're making available to our entire client base early in the spring. So excited about that type of transaction and what we can do with it. The 3rd type of category or example of a transaction would be deploying capital against This newest capability of liquidity and succession certainly gives us a path to put our capital work in a way that both meets our disciplined return thresholds And then helps both internal and external advisors solve a really important question around this succession needs and requirements that we talked a lot about over the next 10 years. And again, I think in doing that, it positions us well to not only do that for internal advisors, but also to potentially create that solution for those that aren't part of our enterprise today. So if you just summarize all of that, we consider M and A opportunities A core part of our strategy, but we will remain disciplined to make sure that the framework of which we assess They've got to fit strategically, financially, culturally and operationally, and we'll do it with good discipline around each of these companies.

Speaker 1

I hope that helps. Thank you.

Operator

One moment for our next question. And our next question comes from Devin Ryan with JMP Securities. Your line is open.

Speaker 6

Okay, great. Thanks so much. A question for Dan, was interested by the comments you made about some of the new service Innovations and really to encourage advisors to move and I guess move to LPL. And I guess I took that more as LPL looking to win more advisors in motion. But if I look at industry churn, it's been pretty anchored at 5% to 6 recent history.

Speaker 6

So I'm just curious based on what you just talked about, whether it's some of the innovations in the services portfolio or just that you're seeing more broadly occurring in the industry that could really change that 5% to 6% rate and it would seem like it would be a pretty big deal if you can. So just love to get

Speaker 4

a sense of kind of

Speaker 6

what those innovations actually mean and then can that rate move for either LPL reasons or industry reasons? Thanks.

Speaker 1

Yes, question. So I think if we just sort of start with the first question around churn or that movement in the marketplace. And we continue to see advisor movement Remain flat. Think about that in the range of 5%, 5.5% over the better part of the last couple of years, which is below Now there has been some mix shift in that turnover and where it's coming from. In fact, in the last year, you've seen movement in the traditional independent market move up where there's been a slowdown as an example from the wires.

Speaker 1

That said, notwithstanding all of that, I think we first and foremost look at our overall win rates What is moving across all of our different affiliation models is a way to continue to understand their absolute appeal Well, they're hopefully growing appeal as we invest more into the platform or the model. And as we said earlier, Despite this lower movement in advisors, if you look at the relative market share we're picking up in our win rates, You've seen those increase over the past 3 years with that investment back into the model. And I think, Look, for the newer models, not only do we have higher opportunities to enhance the capability set there, is there On a just a fresher journey, if you will, in terms of our investment capabilities there, also their seasoning, their growing awareness credibility they have in the marketplace, can also be a catalyst for higher win rates there. So it's not just even the investment that's that. It's growing seasoning around our right to win, if you will, with those new models.

Speaker 1

And then finally, your point, I think one of the things that we look at is, we can't completely control the movement of advisors in the marketplace. What could we do to contribute to it? And this notion of concept making it easier to help an advisor move from one practice to another, Given that being what we believe is one of the big hurdles for advisors moving, boy, if you could solve for that or begin to break that down and imagine that in different ways, and thus create a much different rubric, if you will, for the change management that sort of associated moving the A to B that, that could be a real catalyst to increase that movement in the industry. And so that's the question I think we're trying to explore and that I alluded to in my remarks. And We're using our services portfolio and some of the ways in which we've learned how to add value to advisors and helping them operate, run their practice have been realized if we tweak them a bit and offered them while someone's going through a conversion, that actually could be a catalyst to making it easier to go through that change management path.

Speaker 1

And thus, if successful at doing that more structurally, Well, then you could see the knock on effect, if you will, of potentially accelerating the movement And with our ability to recruit and our positioning of our models in the marketplace, certainly that's a strategic opportunity for us. That's how we pull that together. I hope that color added.

Speaker 6

Yes. Thanks, Dan. That's great color. And I guess my follow-up is just it's interrelated to that. So, terrific momentum in recruited assets in 2023 and really the new affiliation models are clearly resonating in the market.

Speaker 6

And I believe you said $15,000,000,000 from those new channels in 2023. So that would seem to imply The legacy channels would be around $50,000,000,000 to get to the $67,000,000,000 total, if I'm correct there. So on the new affiliation channels, The contribution continues to scale and those mature, should that look like something similar to call it the $50,000,000,000 from the legacy channels or I'm just trying to size because they're growing so quickly kind of what they look like It may be maturity or something that's more mature like or maybe it's well above 50, but just want to get some thoughts on kind of where we're coming from to where we're going because there has been such tremendous growth there, especially when you split it out separately? Thanks.

Speaker 1

Yes. It's a great question. And I think as we think about those longer terms and what is that possibility. I think we start with the size of each of those markets that we've broken down into The employee base market is the largest one of all in that $11,000,000,000 to $12,000,000,000,000 range or RIA 1 is second. And then the sort of Swiss model that we have is a subset, if you will, typically those coming out of an employee based model.

Speaker 1

And so if you think about the opportunities that are associated with those, I think you would start with that broader market And then you begin to then drill down on what's our right to win, what's our ability to win, what are the capabilities to continue to grow our win rates inside those markets. And then if you do that, it's reason to believe given the size of those markets relative to the traditional independent that even if we achieve half of the win rate or the success rate we do in our traditional independent channel, Those begin to make sizable contributions that, as you were estimating, look more like the contribution on the end of the premise side. So what I'm not suggesting is we'll get there. What I am suggesting is that's an opportunity that is worthy of continuing to work into, invest into and challenge ourselves to achieve the type of win rates we have on the independent side In these large markets. Hope that helps.

Speaker 6

Yes, that's great. Thank you.

Operator

One moment for our next question. And our next question comes from Dan Fannon with Jefferies. Your line is open.

Speaker 7

Thanks. This quarter saw the biggest kind of quarter over quarter increase in sales based commissions, looks to be somewhat driven by annuities. So curious about your outlook for that and in the context of what the DOL has proposed, how you think that might change behavior or not going forward?

Speaker 1

Yes, let me take that one. Thanks for the question. We have seen some momentum, frankly, since rates have gone up, But, you've seen the interesting growth in the utilization and probably predictable growth in the utilization of fixed annuities. And then when the equity markets move and have volatility in them, and variable annuities can also be seeing opportunity to deploy capital. And so I think it's been a nice tailwind for annuities, for the better part of the year, last year plus.

Speaker 1

And you're exactly right, Q4 just reinforced that. I think as we go forward, the question around the DOL is A good one relative to brokerage and advisory. And I think as we think about that, we go back to our playbook we used in 2015 and timeframe where, as from a principled standpoint, we believe that Maintaining choice for advisors' clients is in their best interest. Hence, our interest in making sure that We do the things necessary to preserve that choice for advisors between brokerage and advisory. And our ability to ensure that We can help them adequately do that as the rules change relative to Reg BI.

Speaker 1

And then again, if the DOL ultimately goes through and changes that slightly, making sure that we're prepared to help them pivot where they can successfully continue to do that business, where it's in the best interest of its clients. And I think hard to argue with making sure that you provide people choice and then ultimately enable those advisors to serve them in an optimal way and the needs of clients. That said, I do believe that in many cases, annuities will continue to be used where they're needed, where they make sense as a rollover option or where they make In helping someone, as we talked about earlier, with downside protection, we're still just stating in the upside for the equity markets. There's good places to use them. I think that, what we will see though is in other areas, You'll probably see a bigger shift to the utilization of advisory.

Speaker 1

It's just tougher to do brokerage business. There may be some places, small accounts. There may be other scenarios where given the two options, The advisor ultimately utilizes the advisory solution. I'm still in the best interest of the client, but also just in the spirit of making sure the business can be done in an efficient way. So we do believe that's a trend.

Speaker 1

The investments in our advisory platforms, vertical integration we have around our advisory offering, Again, lines up well with structural training as well. So put a capstone on it. We will make sure that we're position to enable brokerage to continue to be used. I do think that the DOL rule would create some headwind on the percentage of brokerage business that we see, but it won't be a complete change. You'll still see it utilized with some trends we Hope that helps.

Speaker 7

Understood. And then just as a follow-up, I think Dan, you mentioned 99% retention in 2023. And then Matt, you called out January a couple of departures. So just curious if we get some context around maybe what happens in January And if you think retention might be slightly different given the environment and as we think about 2024 more broadly?

Speaker 1

Yes. No, our sense of it is, Look, we got to make sure we execute on our strategy. We got to invest in our capabilities and we got to deliver attempt to deliver an extraordinary experience on a daily basis. We have solid trends there, strengthening NPS IVs, evolving capability. We expect that retention rate in that 98.5% range to 99% range to be a good way to think about or a good Centering point, if you will, on retention for this year outside of the example What Matt used for someone sells to practice, to potentially solve for a succession solution.

Speaker 1

And look, that was the That trigger that we launched our liquidity and succession program a year ago gave us a great opportunity to go solve really important question that many advisors had. Those two examples, maybe we didn't launch ours in time enough to get a swing at those. And though we won't win them all, we do believe we've got a really appealing differentiated solution that will position us well not only help serve our clients that are already on our platform, but actually use it as a way to attract new assets to the platform because not only do we have A rich value proposition that we serve and support their daily needs, we also can help them with their succession needs. So that's how we're Thank you.

Operator

One moment for our next question. And our next question comes from the line of Ben Budish with Barclays. Your line is open.

Speaker 8

Hi, good evening and thanks for taking the question. I think most of mine have already kind of been covered, but maybe just one for Matt on the core G and A growth. Can you just talk a little bit about what to the high or low end of the range. It sounds like the Prudential ramp is going to be not too impactful for this year. So what are the sort of factors that could drive that up or down?

Speaker 8

And at what point in the year do you start to get a better sense of where that shakes out? Thank you.

Speaker 2

Yes. I think what typically drives within the ranges of the costs associated with supporting the growth that happens during the year. I think you look at Q4 of 2023 of this quarter is a good example where we came in within our range, but at the high end of the range. And that was really about the variable cost associated with growing, whether it's variable compensation associated with that growth or the direct cost to ramp up. So that's typically the driver within that range, those things.

Speaker 2

The follow-up then or no?

Speaker 8

Sorry, that was all I had. Thank you very much.

Speaker 2

Okay. All right. Nobody else gets your follow-up though. We just lost it.

Operator

One moment for our next question. And our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Speaker 5

Great. Thanks for taking the question. I just wanted to come back To Dan, some of your comments earlier just around the slower movement of advisors across the industry that you alluded to. Curious What's driving that? What might change that at the industry level?

Speaker 5

I hear you on some of the services portfolios innovations that can help move it in your favor for you guys, but just at the macro backdrop for the broader industry, just curious what might lead that churn to pick up here versus slowdown even further? And then how do you see the sort of backdrop evolving if interest rates are cut?

Speaker 1

Yes, good questions. Look, I do think You've got a number of different things that might create a slight headwind on MVMT that then at the aggregate had brought it down from, I don't know historically 7% kind of range for MVMT. And we would expect Things to return and normalize over a period of time. These little headwinds that I referenced, some of it is still a bit of A hangover from COVID and just some of the change in complexity that was created as people work through that, I think is 1. I think a second one is You've just got you've had a volatile market with a lot of geopolitical uncertainty that surrounds it and Advisors avoid sometimes making big strategic moves or pivots or adjustments in periods of time where they Really got to be focused on the clients and they don't want to create more change in the midst of uncertainty.

Speaker 1

And I think that's been something that we've seen Over the last couple of years, they've created some uncertainty. And I also think you see advisors also pivoting in a new world of How do they operate post pandemic? What they learn from that? What pressures does it put on their practices? The growing complexity of regulations may drive up costs.

Speaker 1

The whole digitalization of their businesses and their offices and what does that mean and how do they think about What is the best partner for them going forward? What are the types of services that are new to them that could transform their practice? I think just trying to assess what those options and alternatives are in a world that's flipped on its side and now You throw AI on top of that, which in the short run creates lots of noise and exuberance. Unfortunately, it's also a shiny penny that sometimes doesn't always lead to good productive outcomes. And so I think as we get further down the road of assimilating some order to the house being flipped on its side in some cases and helping them really see where they and use technology really wisely to drive productivity, but they can either leverage tools or outsource risk management to lower their costs associated with A world that's getting tougher and tougher from a regulatory standpoint, but they really do think about, hey, how do I drive growth And what do I need in my value proposition to do that?

Speaker 1

How do I leverage folks to do that? I think those are some of the questions that as they're able to solve those, it enables them to move forward in a little more informed way and thus at a faster pace. So those are some of the little, I think skirmishes, if you will, that we're overcoming as we go forward in time that will help return maybe moving back to a more normal 7%.

Speaker 5

Great. Thanks for that. And just as a follow-up question for Matt on promotional expense, If I adjust the large enterprise one timers over the past couple of years, it looks like the underlining promo expense has been in the mid to high teens. Does that sound about right to you? And arguably that's in the context of high singles organic growth.

Speaker 5

So another question there, if we expect that sort of organic growth to persist in the high singles, we expect a similar mid to high teens pace of underlying promotional expense going forward, excluding the large one timers?

Speaker 2

Well, I think the probably the best way to think about it is just to hone in on the key drivers of the growth. And I'd put it in 3 categories, which could have different trends. I think the first is organic growth overall. That's typically the biggest driver. And the TA associated with Bringing recruiting on board is the driver of that.

Speaker 2

So the amount of recruiting that we do, is really the driver there. TA rates really have not have been fairly stable, haven't changed recently. So, I think where recruiting goes is where that would go. The second is conference spend. In conference spend more kind of trends with the overall number of advisors that we have at LPL, They're really important part of how we engage with them, how they engage with each other.

Speaker 2

So as the firm scales, you could expect that spend to scale. And then lastly, as you highlighted, it's really the onboarding expenses associated with those large enterprises. So that really can be a little bit hard to predict because it depends on the firms that come on board. Prudential is a great example of we've got good insight into spending in 2024 and good insight into spending overall to bring that on board. It just depends on what happens on the other side of So, I'd really put it into those 3 categories.

Speaker 2

They kind of trend differently each. It just depends on how those three things play out.

Speaker 5

Okay. Thank you.

Operator

One moment for our next question. And our next question comes from Michael Cho with JPMorgan. Your line is open.

Speaker 9

Hey, good afternoon, Ben and Matt. Thanks for squeezing me in here. I just want to touch on enterprise quickly again. And I have just a quick 2 parter here. You talked about a healthy pipeline and sort of an uptick in conversations since the Prudential announcement.

Speaker 9

But since the Prudential announcement. But in terms of kind of looking ahead, I mean, does the Prudential Onboarding limits your bandwidth at all to do more Prudential type deals? And then second, just longer term, looking beyond Prudential, I mean, How should we think about framing the potential benefits to LPL's operating scale and leverage as you continue to gain critical mass within the enterprise opportunity set?

Speaker 1

I'll take it personally. Matt, you can give us. So, look on the first one, I think, We see an interesting pipeline on both sides of that enterprise channel. As I said before, banks and on the insuranceaudit manufacturer related market space. And with that portfolio comes the continued opportunity, right, to continue to explore and learn both How we're doing with existing programs and how that drives innovation to create more appeal in them.

Speaker 1

Second is every time you bring one on, how do you create a more automated way to have a better playbook to be more efficient at doing that, So you can do that better and faster and more economically for the lower cost. And So I would tell you we're much better than we were 3 years ago when we brought our 1st larger enterprises on and we continue to automate more and more of that kind of change management onboarding effort process. And as you rightfully said, to the excess that you're able to do that, not only are you going to create more interesting economic outcomes by lowering the amount of investment upfront in these opportunities, you also can bring them on at a faster pace. And so I think we're working our way into being able to be very thoughtful about how we bring these on in an orderly fashion, assuring That's 1st and foremost, we get the experience right, that you continue to operate your existing platform at the level that you want to. And then if you're as you again get better and better at that, I think you can line those up and bring those in a faster and faster And that's what we're challenging ourselves to do without being overly precise in exactly how that would look or what that looks like.

Speaker 1

I think we get again to challenge ourselves with pragmatic opportunities to think, how do you shorten that onboarding change management effort. So that's the problem we're trying to solve. Matt, do you want to give a second?

Speaker 2

Yes. I think the answer It's a resounding yes on other benefits to scale. I think when you look at just starting high level of the overall value proposition of this channel and the things that we're building. You're bringing on clients where they're once they're on their platform, a big part of the Attraction is getting access to our capabilities and allowing them to grow that channel faster on our platforms. You get a place where you're increasing your levels of organic growth.

Speaker 2

I think maybe to the core of your question on the cost side, in each of these instances, now you're typically building out capabilities or technology that's really important to that particular enterprise, but they're usually applicable to others as well, right? So you're not only making sure that you have the ability to serve and support this particular client that you're bringing on, but you're usually enhancing those capabilities for things that the rest of LTL or the rest channel would like. And I think Crew is a very good example of that. We're not only bringing on capabilities specific to Prudential, we're building out a platform that actually open up a much larger channel for us, and to recruit more on. So a headline point is there's certainly scale benefits and hopefully those examples are helpful.

Speaker 9

Perfect. Thanks guys. That's it for me.

Operator

And this concludes today's question and answer session. Would now like to turn the conference back to Mr. Dan Arnold for closing remarks.

Speaker 1

Yes. And hey, I just want to thank everyone for taking the time to join us this Afternoon and we look forward to speaking with you again next quarter. Thank you.

Operator

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

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Earnings Conference Call
LPL Financial Q4 2023
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