LPL Financial Holdings Inc.

Good afternoon and thank you for joining the fourth quarter 2021 Earnings Conference call for LPL Financial Holdings, Inc. The call today are our President and Chief Executive Officer, Dan Arnold, and Chief Financial Officer, Matt Adet. Dan 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 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 risks and uncertainties that may cause actual results or 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 measures 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'll turn the call over to Mr. Arnold.

Thank you, Jonathan, and thanks to everyone for joining our call today. Over the past quarter and throughout 2021, our advisors continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams. 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 and year of solid results while continuing to make progress on our strategic plan. I'd like to review both of these areas, starting with our fourth quarter business results. In the quarter, total assets reached a new high of 1.2 trillion, which was up approximately 300 billion or 34% from a year ago. This increase was primarily driven by continued organic growth, our acquisition of Waddell & Reed's wealth management business, and complemented by equity market appreciation. With respect to organic growth, Fourth quarter net new assets were $26 billion, which translated to 9% annualized growth, driven by continued strength across new store sales, same store sales, and retention. Over the past year, organic net new assets totaled $119 billion, or 13% organic growth, up from 7% a year ago. In the fourth quarter, recruited assets were $17 billion, bringing our full year total to $89 billion. which is more than double a year ago. Our continued growth in recruited assets reflects our ongoing progress with enhancing the appeal of our model and expanding our addressable market. Looking at same-store sales, with the backdrop of a continued strong investor engagement, our advisors remain focused on serving their clients and differentiating their solutions in the marketplace. As a result, advisors are both winning new clients and expanding wallet share with existing clients. a combination that continued to drive solid same-store sales. 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 fourth quarter and over the past year. Our fourth quarter business results led to solid financial output. with $1.63 of EPS prior to intangibles and acquisition costs, which brought our full year total to $7.02, an increase of 9% from a year ago. Let's now turn to the progress we made on our strategic team. As a reminder, our long-term vision is to become the leader across the entire advisor-centered marketplace, which for us means being the best at empowering advisors to deliver great advice to their clients, and to be great operators of their businesses. To bring this vision to life, we are providing the capabilities and solutions that help our 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 in their efforts to be extraordinary entrepreneurs. Doing this well gives us a sustainable path through industry leadership across the advisor experience, organic growth, and 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 and institutions where they are in the evolution of their business by winning in our traditional markets while also leveraging new affiliation models to expand our addressable markets. In our traditional markets, fourth quarter recruiting continued to be a significant source of growth with a new high of approximately $15 billion in assets. Ongoing enhancements to our platform and the efficacy of our business development team continued to increase our win rates and expand the depth and breadth of our pipeline, despite advisor movement in the industry remaining at lower levels. With respect to our new affiliation models, strategic wealth, and our enhanced RIA custody offering, we recruited approximately $2 billion in assets in fourth quarter. In each of these three models, we continue to see growing demand and expanding pipelines, which position them going forward for increased contributions to organic growth. Large financial institutions were a new source of recruiting in 2021 with the addition of BMO Harris and M&Ts. and will continue to contribute this year with the planned onboarding of FUNA. Our insights and progress over the last 18 months have led to the continued enhancement of our value proposition, and consequently, our demand and pipeline in this market continue to build. Given our experience and more seasoned view from this work, we see large financial institutions as a more accessible market opportunity for us and another new and distinct affiliation model. that can drive sustainable organic growth over time. Our second strategic play is focused on providing capabilities that help our advisors differentiate in the marketplace and drive efficiency in their practices. In 2022, we will maintain our focus on developing capabilities and solutions in three key areas. The first is to enrich the in-client experience with expanded digital solutions that increase personalization and self-service, and enable advisors to create customized experiences for their business. Second, we will continue to enhance our wealth management platform to help advisors provide their clients with differentiated advice, products, and pricing. Third, we will continue to advance ClientWorks, our core operating platform, with additional digitized workflows to help advisors operate more efficiently and increase their scalability to serve more clients, all of which contributes to enhance performance of the practices. We believe these evolving capabilities will help drive increased advisor growth, productivity, and retention. Let's next move to our third strategic plan, which is focused on creating an industry-leading service experience that delights advisors and their clients, and in turn, helps drive advisor recruiting and retention. As a reminder, over the past two years, we have transformed our service model into an omni-channel client care model, including voice, chat, and digital support, giving advisors flexibility for when and how they access service. In 2022, we will continue to fine-tune this model to drive additional efficiency and an enhanced experience for our advisors. This year, we will also advance to the next phase of our transformation which is the streamlining and automation of our back office operations. We will leverage Six Sigma process optimization and robotics and machine learning to re-engineer our core clearing functions, including new account opening, account transfers, and money movement. These efforts will increase speed and accuracy for our advisors and their clients. In the future, we plan to extend this transformation from the service and operations organization to trading and compliance. Doing so better positions us to create frictionless, efficient processes throughout our operating, that enhance service levels, delight advisors, and increase the scalability and efficiency of our platform. Our fourth strategic play is focused on helping advisors run the most successful businesses in the independent market. 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. In the fourth quarter, our subscription base continued to grow, more than doubling year over year to approximately 3,000 subscriptions, demonstrating increasing demand and appeal. And while working with advisors on evolving our suite of business solutions, we identified a new category of opportunity that will help advisors more efficiently and effectively deliver comprehensive financial advice and planning To help solve for this need, we are innovating on services that provide expertise and leverage to do this planning in a scalable way across their entire client base. Our first offering in this area is Paraplan, which is a service that builds financial plans for advisors, who then in turn utilize them to establish an investment strategy to help clients achieve their goals and objectives. This service launched last month. and is receiving positive early feedback and engagement in the marketplace. We're also incubating other solutions, including tax planning and high network service. As we look ahead, we remain focused on innovating and expanding our services portfolio to help advisors run extraordinary businesses and provide differentiated planning and advice for their clients, and in turn, drive growth profit and organic growth over time. In summary, In the fourth quarter and throughout the year, we continue 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. Before I review our fourth quarter results, I'd like to highlight our progress during 2021. Looking at the year, we are proud of what we accomplished within our framework for driving long-term shareholder value. We entered 2021 with momentum as we grew assets organically in both our traditional and new markets and successfully onboarded what Ellen Reed, BMO, and M&T, all while continuing to invest to provide an industry-leading value proposition for our advisors, to serve their clients and win in the marketplace. This commitment to enhancing the support we provide our advisors resulted in the highest level of organic net new assets in our history. By leveraging the investments in our platform and the financial strength we built over the last several years, we again enter the new year with positive momentum. Now let's turn to our fourth quarter business results. Total advisory and brokerage assets increased to a new high, of $1.2 trillion, up 7% from Q3. The key driver of this increase was organic growth, which totaled $26 billion for a 9% annualized growth rate. For the full year, organic net new assets were $119 billion, which translates to a 13% annualized growth rate, up from 7% a year ago. This was driven by strength across all three channels of growth, recruiting, same-store sales, and retention. Looking more closely at recruiting, in Q4, recruited assets were $17 billion, which brought our 12-month total to a new high of $89 billion. Moving on to our business mix, we continue to see positive trends in Q4. Advisory net new assets were $24 billion, or a 16% annualized growth rate. With this growth, our advisory assets are now 53% of total assets. as we continue to deliver differentiated capabilities and benefit from the secular trend towards advisory. Now let's turn to our Q4 financial results. Strong organic growth, combined with expense discipline, led to EPS prior to intangibles and acquisition costs of $1.63, which brought our full year total to $7.02, up 9% from a year ago. Looking at our top-line growth, gross profit reached a new high of $643 million, up $12 million, or 2% sequentially. Looking at the components, commission advisory fees net of payout were $200 million, down $2 million from Q3, primarily driven by the seasonal increase in production loads. In Q4, our payout ratio was 87.6%, up about 45 basis points from Q3, primarily due to the seasonal build in the production load. Looking ahead to Q1, a reminder that the production bonus resets at the beginning of each year. So we anticipate our payout ratio will decline to approximately 86.5%. Moving on to asset-based revenue. Sponsor revenue was $220 million in Q4, up $9 million sequentially. This was driven by an increase in average assets due to organic growth and market appreciation, as well as synergies related to what Ellen Reed assets being on her platform. Turning to client cash revenue, it was 82 million, down 9 million from Q3. As anticipated, this was primarily driven by a fixed-rate contract maturity at the end of the third quarter. Looking at overall client cash balances, they were 57 billion, up 7 billion from last quarter. Looking more closely at our ICA yield, it was 101 basis points in Q4, unchanged from Q3. Within our fixed-rate portfolio, In Q4, we added a new $500 million three-year fixed contract. Looking ahead to Q1, we have a fixed rate maturity of $1 billion. I would like to highlight that we were able to renew that contract, that maturity, into a new four-year fixed rate contract. So, given these factors and where interest rates, client rates, and cash balances are today, we expect our Q1 ICA yield to decline by a few basis points. Next, I want to highlight an update we made to our income statement this quarter to provide additional insight into our financial. We separated transaction and fees into two lines, service and fee and transaction. We hope this additional transparency allows you to more clearly see the revenue generated from predominantly recurring advisor and investor-based services apart from our transaction revenues. We have provided a summary of these changes on page 12 of our key metrics presentation. So looking at service and fee revenue, in Q4, it was $110 million, up $5 million sequentially. This was primarily driven by continued growth in business solutions revenue and the seasonal increase in IRA fees. Looking more closely at business solutions, we ended the quarter with over 3,000 subscriptions, which is up approximately 400 from last quarter and more than double a year ago. These services now generate roughly $28 million of annual revenue. while also contributing to organic growth by helping drive recruiting, same-store sales, and retention. Looking ahead to Q1, based on typical seasonality and the growth of business solutions, we expect service and fee revenue to increase by a few million sequentially. Moving on to Q4 transaction rate, it was $39 million, up $4 million sequentially due to higher trading performance. As we look ahead to Q1, we have seen an increase in trading activity in January. That said, I would note there are two fewer trading days in the quarter, so that would likely offset that increase. So based on what we have seen to date, we would expect transaction revenue to be relatively flat with Q4. Now let's turn to expenses starting with Core G&A. It was $299 million in Q4, bringing our full-year Core G&A to $1,058,000. As expected, this was near the upper end of our outlook range, driven by the variable expenses associated with our strong organic growth. Looking at the full year for 2021 and prior to the impact of what Ellen reads, we grew core G&A by approximately 80%. Turning to our outlook for 2022, our long-term strategy is unchanged. We plan to continue to invest to drive organic growth and create incremental operations. Over the last few years, we have increased our investments to drive organic growth. Those investments are yielding positive results, including the highest levels of organic growth in our history. And so, as we look ahead to 2022, we plan to continue with the same approach. More specifically, we plan to increase our core G&A in the range of 7% to 9.5%, which is a similar growth rate to 2021. I would note that these investments will be focused in two primary areas. First, to support our core business growth, including investments in technology and capabilities, as well as a full year of what Ellen Reed expenses. And second, to support growth in our expanded addressable markets and to scale our new services. Also, to give you a sense of the near-term timing of this spend, as we look ahead to Q1, we would expect 4G&A to be in the range of $280 million to 285 million. We will, of course, remain dynamic to adjust for the pace of our growth and changes in the macro environment. But based on what we see today, we are excited about our opportunities to invest. Moving on to Q4 promotional expense, it was 86 million, up 2 million sequentially, primarily driven by costs to support our organic growth. Specifically, transition assistance in large financial institutions Turning to Q1, we anticipate promotional expense will increase to the low $90 million range, primarily driven by transition assistance, large financial institution onboarding, and conference spend as we have two of our largest conferences of the year in Q1. Now let's move to what Ellen reads. The integration work is going well and remains on track to be completed by the middle of this year. With respect to run rate EBITDA, it was roughly $70 million in Q4. Based on current asset levels and our continued progress on the integration, we now expect the run rate EBITDA benefit to be at least $90 million by the middle of 2022, up from our prior estimate of $85 million. Looking at share-based compensation expense, it was $10 million in Q4, relatively flat to Q3. As we look ahead, Q1 tends to be our highest quarter of the year, given the timing of our annual stock award. So we anticipate this expense will increase by a few million dollars sequentially. Turning to depreciation and amortization, it was $41 million in Q4, up $2 million sequentially. Looking ahead to Q1, we expect depreciation and amortization to increase by roughly $5 million sequentially. This is primarily driven by the deployment of technology to support the integration of Waddell and Reed, as well as core technology spend to enhance our industry-leading platform. given the non-recurring nature of the integration spend. Beyond Q1, we expect a more gradual rise in depreciation and amortization for the remainder of 2022. Moving on to capital management, our balance sheet remains strong in Q4 with a leverage ratio at 2.26 times and corporate cash of $237 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 Q4, we allocated capital to both organic growth and share of purchases, buying back $50 million of our shares to roughly offset dilution. We anticipate a similar level of share of purchases in Q1, while remaining flexible and dynamic as our capacity and opportunities to deploy capital evolve. 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.