LPL Financial Holdings Inc.

Good afternoon, and thank you for joining the third quarter 2021 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, 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.lpl.com. Today's call will include four looking statements, including statements about LPL financials, 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 risk 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 risk and uncertainties, the company refers listeners to the disclosures set forth under the caption, Forward-Looking Statements, in the earnings press release, as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For 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.

Thank you, Lateef, 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. And at the same time, we remain focused on our mission of taking care of our advisors so they can take care of their clients. This combination positioned us to deliver another quarter of solid results while also continuing to make progress on our strategic plan. I'd like to review both of these areas, starting with our third quarter business results. In the third quarter, total assets reached a new high of $1.13 trillion, up 40% from a year ago. This increase was primarily driven by continued organic growth and equity market appreciation. With respect to organic growth, third quarter net new assets were $27 billion, which translated to 10% annualized growth, driven by continued strength across new store sales, same-store sales, and retention. Over the past year, net new assets totaled $110 billion or 14% organic growth. In the third quarter, recruited assets were $13 billion, which increased our total over the past year to $83 billion. Our continued growth in recruited assets reflects our ongoing progress with enhancing the appeal of our model and expanding our addressable markets. During the quarter, we continue to drive solid recruiting results across each of our markets, including $10 billion in our traditional independent model and $2.5 billion in our new affiliation models. Multiple channels contributing to our growth better positions us to drive higher levels of recruiting over time. Looking at same-store sales, with the backdrop of continued strong retail engagement, our advisors remain focused on serving their clients and enhancing their offerings. As a result, advisors are both winning new clients and expanding share of wallet with existing clients, a combination that drove same-store sales to new highs in the third quarter. At the same time, we further enhanced the advisor experience through the continued delivery of new capabilities and technology, as well as the ongoing modernization of our service and operations functions. As a result, asset retention was approximately 98% in the third quarter and over the past year. In July, we onboarded the advisors from Waddell and Reed, and the final asset retention rate for the deal was approximately 99%. Currently, we are focused on the integration work to help these advisors optimally leverage our platform and support the growth of their businesses. Our third quarter business results led to solid financial outcomes. with $1.77 of EPS prior to intangibles and acquisition cost, which is an increase of 23 percent from a year ago. Let's now turn to the progress we made on our strategic plan. Now, as a reminder, our long-term vision is to redefine the independent model over time, and by doing so, become the leader across the entire advisor-centered marketplace. Our approach is to provide a platform that has the flexibility and personalization that make it simple and straightforward for advisors to design and run their perfect practice. We do this by providing advisors a breadth of affiliation models, advisory platforms, investment content, technology, custody, and practice support that provides more flexibility in one place than anywhere else. Doing this well gives us a sustainable path to an industry leading advisor experience, continued solid organic growth, and increase market share. Now, to execute on our strategy, we have organized our work into four strategic plays, which I'd like to review in turn. Our first strategic play involves meeting advisors where they are in the evolution of their practice by winning in our traditional markets, where our leading market share is now over 15 percent, while also leveraging new affiliation models to expand our addressable markets. In our traditional markets, In the third quarter, we continued to increase our recruiting results, gain market share, and expand the depth and breadth of our pipeline, despite advisor movement remaining at lower levels. Looking at the large financial institutions marketplace, we onboarded BMO Harris and M&T earlier this year and are applying the insights from those experiences to make our institutional offering even more robust and differentiated. This innovation and marketplace momentum are helping drive a solid pipeline with a growing number of prospects. As we look ahead, we are preparing to onboard CUNA brokerage services in the middle of next year and continue to see financial institutions as a sustainable multiyear contributor to organic growth. With respect to the expansion of our addressable markets, the combination of a compelling value proposition and positive referrals from advisors using the new models are attracting more prospects and contributing to our growth. As a reminder, a year and a half ago, we launched Strategic Wealth Services, and we have now added 17 practices, including eight in the past quarter. We subsequently brought our employee model to market later in the year, and five practices have joined, including two over the past three months. Then earlier this year, we relaunched our RIA custody offering and have been encouraged by the number of RIAs who quickly partnered with us. As we look ahead, we see these new affiliation models continuing to build momentum and becoming a larger contributor to our organic growth. Our second strategic play is focused on providing capabilities that help our advisors differentiate in the marketplace and drive efficiency in their practices. One of the key components of this play is the breadth and flexibility of our advisory platforms, from our turnkey centrally managed solutions to advisors managing portfolios themselves. This optionality has contributed to advisory now making up a majority of our total assets. Specifically, within our centrally managed solutions, with our ongoing investments and capabilities and pricing, our assets have increased to nearly $90 billion, at an average annual organic growth rate of over 20 percent for the past five years. A key contributor to the growth of our centrally managed offerings is the increased personalization that enables advisors to use these solutions in a way that works best for them. For example, earlier this year, we introduced our Firm Sleeve solution, which together with Advisor Sleeve enables advisors and institutions to personalize centrally managed portfolios with their own asset allocation models. We are now taking the next steps in this personalization journey by adding separately managed accounts while also integrating all centrally managed investment content into a single account for each client. These enhancements make it easier and more efficient for an advisor to expand the scope of their solutions while also providing a simpler and more unified experience. which in turn contributes to the appeal and future growth of our centrally managed advisory solutions. Let's next move to our third strategic play, which involves creating an industry-leading service experience to delight advisors and their clients and in turn help drive advisor recruiting and retention. A key component of this strategic play is transforming our service model into an omni-channel client care model. As a reminder, over the past year, we rolled out voice, chat, and digital help to our advisors, giving them access to differentiated service at a time and in a manner that works best for them. We're now focused on helping our advisors fully leverage these channels to better serve their clients and more efficiently run their businesses. To further enhance our service model, we're also experimenting with specialized service pods, designed specifically for different types of advisor practices. These pods include integrated teams comprised of service, case management, compliance, and relationship management. These experiments are helping us to tailor services based on advisors' affiliation models and practice attributes, and are making positive contributions to the advisor experience. Our fourth strategic play is focused on helping advisors run the most successful businesses in the independent marketplace. One of the key components of this play is our portfolio of business solutions, which helps advisors more effectively operate their businesses so they can focus on serving their clients and growing their practices. Now, as we discussed last quarter, we see multiple pathways for continued growth in business solutions, including delivering existing solutions to additional advisors and introducing new solutions to expand our services portfolio. In the third quarter, our subscription base continued to grow, more than doubling year over year to approximately 2,600 subscriptions, demonstrating increasing demand and appeal. We continue to innovate on our business solutions portfolio to expand the variety of needs we can solve for and provide a wider range of price points to enable a broader set of advisors to engage. One of our sources of innovation comes from advisor feedback on our existing solutions, which we use as a catalyst to iterate on our core offerings, like CFO solutions. As an example, over the last year, this approach helped us identify several additional finance-related needs for our advisors, which led to the development and launch of M&A solutions, assurance plan, and our bookkeeping pilot. Going forward, we will continue to leverage advisor feedback as fuel to expand our solutions portfolio. Now, with the expansion and seasoning of our portfolio, the strategic value of business solutions also continues to expand and has become an important component of the value proposition and a contributor to growth in our new models such as strategic wealth services. As we look ahead, we are focused on continuing to innovate and expand the portfolio to increase the contribution to gross profit and organic growth. In summary, in the third quarter, we continued to invest in the 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 and win in the marketplace, and as a result, drive long-term shareholder value. With that, I'll turn the call over to Matt.

All right. Thank you, Dan, and I'm glad to speak with everyone on today's call. In the third quarter, we remained focused on serving our advisors, growing our business, and delivering shareholder value. This focus led to another quarter of double-digit organic growth. In addition, after onboarding Waddell & Reed, BMO, and M&T, we continue to work with these advisors to acclimate and leverage our platform and capabilities, while also preparing to onboard CUNA in the middle of next year. As we look ahead, we are excited by the opportunities to help our advisors differentiate and win in the marketplace and grow our business. Now let's turn to our third quarter business results. Total advisory and brokerage assets increased to a new high of $1.13 trillion, up 2% from Q2. A key driver of this increase was organic growth, which totaled $27 billion, or a 10% annualized growth rate. This was driven by strength across all three channels of growth, recruiting, same-store sales, and retention. Looking more closely at recruiting, in Q3, recruited assets were $13 billion, which brought our 12-month total to a new high of $83 billion. Moving on to our business mix, we continued to see positive trends in Q3. Advisory net new assets were $21 billion, or a 16% annualized growth rate. With this growth, our advisory assets are 52% of total assets as we continue to deliver differentiated advisory capabilities and benefit from the secular trend towards advisory. Now let's turn to our Q3 financial results. Strong organic growth combined with expense discipline led to EPS prior to intangibles and acquisition costs of $1.77. up 23% from a year ago. Looking at our top line growth, gross profit reached a new high of $631 million, up $29 million, or 5% sequentially. Looking at the components, commission and advisory fees net of payout were $202 million, up $5 million from Q2, primarily driven by organic growth and a full quarter contribution from Liddell and Reed. In Q3, our payout ratio is 87.1%, up 80 basis points from Q2 due to typical seasonality, as well as the onboarding of Liddell and Reed, which earned a slightly lower payout on their platform. Looking ahead to Q4, a reminder that the production bonus increases throughout the year and is typically highest in Q4. So we anticipate our payout ratio will be up roughly 30 basis points sequentially, to approximately 87.4%. Moving on to asset-based revenues. Sponsor revenues were $210 million in Q3, up $21 million sequentially. This was driven by an increase in average assets due to organic growth and a full quarter contribution from Woodell & Reed. Turning to client cash revenues, they were $91 million, up $1 million from Q2. Looking at overall client cash balances, they were $51 billion, up $2 billion from last quarter. Looking more closely at our ICA yield, it was 101 basis points in Q3, up three basis points from Q2. Now moving on to our fixed rate portfolio. In Q3, we added a new $1 billion fixed contract at the three-year point of the curve, which was about 45 basis points at the time. And as a reminder, at the end of the third quarter, we also had a fixed rate maturity of $2.3 billion, yielding approximately 160 basis points. As we look ahead to Q4, given these factors and where interest rates, client rates, and cash balances are today, we expect our Q4 ICA yield to decline by approximately five basis points. Moving on to Q3 transaction and fee revenues. there were $140 million, up $3 million sequentially. The increase was primarily driven by revenues from our National Advisor Conference and a full quarter contribution from Liddell & Reed. Looking ahead to Q4, based on the lower trading levels we've seen so far in October and the typical seasonal increase in IRA fees, we expect transaction and fee revenue to be relatively in line with Q3. Turning to business solutions. We ended the quarter with approximately 2,600 subscriptions, which is up 500 from last quarter and more than double a year ago. These offerings now generate roughly $25 million of annual revenue. And more importantly, they contribute to organic growth by helping drive recruiting, same-store sales, and retention. Now let's turn to expenses, starting with Core G&A. It was $271 million in Q3, up $19 million sequentially. driven by a full quarter of what Ellen Reed, and continued investment to drive and support organic growth. Looking ahead, given our strong levels of organic growth and the variable costs associated with supporting that growth, we are tightening our 2021 Core G&A outlook to a range of $990 million to $1 billion. And given our current rate of organic growth, we expect to be in the upper half of that range. Additionally, Now that we have onboarded WhatEllen Read and have a better sense as to the timing of those expenses, we will include those costs in our overall outlook going forward. As a result, we expect WhatEllen Read to add $55 million to $60 million to our outlook, which brings our total 2021 Core J&A Outlook to $1,045,000,000 to $1,060,000,000. Moving on to Q3 promotional expenses. They were $84 million. up $20 million sequentially, primarily driven by meeting expense, as two of our largest advisor conferences took place in Q3. Turning to Q4, we anticipate promotional expense will increase by a couple million dollars sequentially, driven by transition assistance, large financial institution onboarding expenses, and advisor conferences that we rescheduled to Q4 from earlier in the year. Now let's move to what I want to read. In July, we completed the onboarding, which resulted in 99% of client assets joining our platform, up from 98% estimated last quarter. With respect to run rate EBITDA, it was roughly 50 million in Q3, and we anticipate it ramping to approximately 60 million in Q4, as we build toward an 85 million run rate by the middle of next year. Moving on to capital management, our balance sheet remains strong in Q3, with the leverage ratio at 2.2 times, and corporate cash of $266 million. 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&A where appropriate, and returning excess capital to shareholders. In Q3, we allocated capital to both organic growth and M&A, as well as restarted our share repurchase program. buying back $40 million of our shares to roughly offset dilution. We anticipate a similar level of share purchases in Q4, while remaining flexible and dynamic should additional opportunities to deploy capital to drive growth emerge. 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.