LPL Financial Holdings Inc.

Good afternoon, and thank you for joining the first quarter 2022 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 Audet. Dan and Matt will offer introductory remarks, and then the call will be opened for questions. The company would appreciate if analysts would limit themselves to one question and one follow-up each. The company has posted its earnings press release and supplementary information on the investor relations section of the company's website, investor.lpl.com. 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 a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I will now turn the call over to Mr. Arnold.

Thank you, Howard, and thanks to everyone for joining our call today. We entered 2022 with a continued focus on our mission, taking care of our advisors so they can take care of their clients. As we progress through the first quarter, market volatility and geopolitical uncertainty increase. In conditions like these, the value our advisors provide to their clients is reinforced by helping them to navigate through times of uncertainty. Their work to provide personalized financial guidance to millions of Americans when they need it most highlights the importance of LPL's mission. It also shines a light on the pivotal work of our employees. We take care of these advisors every day. Guided by this North Star, we work together to deliver another quarter of solid business and financial results while continuing to make progress on our strategic plan. I'd like to review both of these areas, starting with our first quarter business report. In the quarter, total assets decreased to $1.16 trillion, as continued solid organic growth was more than offset by lower equity markets. With respect to organic growth, the business continued to perform well despite market volatility. First quarter net new assets were $18 billion, which translated to 6% annualized growth, driven by solid new store sales, same-store sales, and advisory reports. These results contributed to an 11% organic growth rate the past 12 months. Looking at recruited assets, they were $10.4 billion in Q1, which prior to onboarding large financial institutions was a new high for the first quarter of the year. These results were driven by the continued enhancement of the feel of our model and the efficacy of our business development. Looking at same-store sales, they remained solid in the first quarter as our advisors continued to focus on serving their clients, and differentiating their solutions in the marketplace. With respect to retention, 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 first quarter and over the past 12 months. Our first quarter business results led to solid financial outcomes with $1.95 of EPS prior to intangibles and acquisition costs, an increase of 10% from a year ago. Let's now turn to the progress we made on our strategic plan. As a reminder, our long-term vision is to become the leader across the entire advisor center marketplace, which for us means being the best at empowering advisors and institutions 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. At the same time, through human-driven technology-enabled solutions and expertise, we are supporting advisors in their efforts to be extraordinary business owners. 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 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 businesses by winning in our traditional markets while also leveraging new affiliation models to expand our addressable markets. Our recruiting in traditional markets continue to be a significant source of growth in Q1, with approximately $7 billion in assets. In the quarter, we 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, employee, and our enhanced RIA offering, we recruited nearly 3 billion in assets in Q1. This quarterly total was a new high for these models and reflects the increased diversification of our recruit. In each of these three models, We continue to see growing demand and expanding pipelines, which position them for increased contributions to organic growth going forward. The large financial institutions market was a new source of recruiting in 2021 with the addition of BMO Harris and M&T. For 2022, CUNA is on track to join later this fall, and we are prepared and ready to onboard their approximately 550 advisors located across almost 300 credit unions. who serve $36 billion of brokerage and advisory assets. Also within this year, we will onboard People's United Bank, which was acquired by M&T and includes approximately 30 advisors serving $6 billion of brokerage and advisory assets. For these institutions, we will use new innovations that will make it easier to transition to LPL and, in turn, help make our offering even more appealing and ultimately contribute to future growth. As we look ahead at the market opportunity for large institutions, we continue to see our pipeline build as demand for our model grows. Our second strategic play is focused on providing capabilities to help our advisors differentiate the marketplace and drive efficiency in their practices. As part of that focus, in 2022, we are continuing to enrich our wealth management platform, including the enhancement of our advisory solutions. in alignment with the secular trends towards advisory, which continues in our business and across the industry. For example, in the first quarter, we expanded the investment options available in our centrally managed platforms by integrating separately managed accounts. Doing so makes it easier and more efficient for advisors to leverage separately managed accounts, which can drive higher utilization and further growth of centrally managed platforms. As a result, this enhancement increases our advisory platform's value to both existing and prospective advisors. Let's next move to our third strategic play, 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 service client care model, which includes voice, chat, and digital support, thus giving advisors flexibility for when and how they access service. We continue to fine-tune this model to drive additional efficiency and an enhanced experience for our advisors. Now, for the next phase of our transformation, we are focused on expanding and enriching specifically our digital support in order to provide greater flexibility, speed, and accuracy for our advisors. As an example, we are developing end-to-end digital experiences and core clearing functions, including money movement, account opening, and account transfers, which collectively drive the majority of our service center activity. Now, by streamlining our core clearing functions, we believe that we can enhance service levels, delight advisors, and increase the scalability and efficiency of our platform. Our fourth strategic play? is focused on developing a services portfolio to help advisors run the most successful businesses in the independent marketplace and provide comprehensive advice to their clients. One of the key components of this play is our business services portfolio, which helps advisors more effectively operate their businesses so they can focus on serving their clients and growing their practices. Our subscription base continued to grow, ending the quarter at nearly 3,500, which more than doubled year over year, demonstrating increasing demand and appeal. Now, as we work with advisors on existing solutions, we are leveraging our learnings and insights as a catalyst for new solutions as well. Examples of this include our new bookkeeping solution, which is currently in pilot, as well as our enhanced admin solutions offering, which provides a next-generation tech-enabled task management system. And we also continue to make progress on the opportunity that we introduced last quarter to help advisors provide comprehensive financial advice and planning solutions. Our first offering, paraplanning, has generated solid initial momentum in the marketplace. Our approach is to give advisors a scalable platform to efficiently and effectively deliver more financial plans and access greater expertise that helps them deepen their client relationships. We launched this offering in January, and by the end of Q1, we had approximately 60 subscribers. And at the same time, we continue to work to expand this portfolio, including solutions like tax planning and high net worth support. As we look ahead, we remain focused on innovating and expanding our services portfolio, which in turn positions us to drive additional gross profit and organic growth over time. In summary, in the first quarter, 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. As we move into 2022, we remain focused on serving our advisors, growing our business, and delivering shareholder value. While the market backdrop was volatile, we delivered another quarter of solid net new assets and earnings growth. In addition, we are preparing to onboard two large financial institutions this year with CUNA and People's United Bank. So as we look ahead, we continue to be excited by the opportunities we have to help our advisors differentiate and win in the marketplace and grow our business. Now let's turn to our first quarter business report. Total advisory and brokerage assets were $1.2 trillion, down 4% from Q4, as continued organic growth was more than offset by lower equity markets. Total net new assets were $18 billion, worth 6% annualized growth rate. Looking more closely at recruiting, in Q1, recruited assets were $10 billion, which prior to large financial institutions was a new high for the first quarter of the year, and brought our 12-month total to $76 billion. Moving on to our business mix, we continue to see positive trends in Q1. Advisory net new assets were $17 billion, or an 11% annualized growth rate. With this growth, our advisory assets reached a new high of 54% of total assets as we continue to deliver differentiated capabilities and benefit from the secular trend towards advisory. Now let's turn to our Q1 financial results. Organic growth, combined with expense discipline, led to EPS prior to intangibles and acquisition costs of $1.95, up 10% from a year ago. Looking at our top-line growth, gross profit reached a new high of $669 million, up $26 million, or 4% sequential. Looking at the components, commission advisory fees net payout were up $27 million from Q4, primarily driven by higher advisory fees and seasonally lower production bonuses. In Q1, our payout rate was 86.1%, down about 150 basis points from Q4, largely driven to the seasonal reset of the production bonus at the beginning of the year. Looking ahead to Q2, we anticipate our payout rate will increase to the low 87% rate, primarily driven by the typical seasonal build in the production bonus. I would also note we expect the payout rate to increase following the onboarding of CUNA, but given the timing of when they join, we expect to see that increase mainly in Q3. Moving on to asset-based revenue. Sponsor revenue was $212 million in Q1, down $8 million sequentially as average assets decreased during the quarter, driven by lower equity. Turning to client cash revenue, it was $85 million, up $3 million from Q4. This was primarily driven by the March rate hike, which more than offset expected fixed-rate contract prices. Looking at overall client cash balances, they were $62 billion, up $5 billion from last week. Within our ICA portfolio, as expected, in Q1, we renewed a $1 billion fixed rate maturity into a new four-year contract. In addition, in March, we were able to add floating rate capacity, which drove a roughly $3 billion increase in ICA balances. Looking more closely at our ICA yield, it was 102 basis points in Q1. up one basis point from Q4. As a reminder, our ICA balances are primarily indexed to Fed funds, so the ICA yield benefited from the March rate hike for the last two weeks of the quarter. As we think about our Q2 ICA yield, and prior to any changes in interest rates, we would expect an increase in yields on our floating rate balances as we see the full benefit of the March hike, while yields on our fixed rate portfolio will adjust for the renewal in Q1. The net effect is we expect our Q2 ICA yield to increase by a couple of basis points. Now let's turn to service and fee revenue, which in Q1 was $113 million, up $2 million sequentially. This was primarily driven by continued growth in our services group revenue and the seasonal increase in IRA fees. Looking more closely at our services group, which includes business services and planning and advice services, we ended the quarter with more than 3,500 subscriptions, which is up about 500 from last quarter and roughly double a year ago. Our services group now generates roughly $30 million of annual revenue, while also contributing to organic growth by helping drive recruiting, same-store sales, and retention. Looking ahead to Q2, we expect service and fee revenue to decrease by a couple million sequentially, driven by seasonal declines in IRA and conference fees. Moving on to Q1 transaction revenue. It was $47 million, up $7 million sequentially, due to increased trading volume from equity market volatility. As we look ahead to Q2, volumes in April have pulled back from elevated Q1 loans, which on a run rate basis would result in a decline in transaction revenue of around $5 million in Q1. Now let's turn to expenses, starting with core units. It was $281 million in Q1. Looking ahead, we plan to stay disciplined on expenses, while continuing to invest to drive growth. I would also note that with people now planning to join in the second half of this year, we anticipate up to $5 million of additional core G&A in 2022 to support this new large financial institution. Moving on to Q1 promotional expense, it was $87 million, up $1 million sequential, primarily driven by transition assistance, large financial institution onboarding, and conference spend as we had two of our largest conferences of the year in Q1. Looking ahead to Q2, we expect promotional expense will increase by a couple million sequentially as we anticipate increased costs from transition assistance and large financial institution onboarding will largely offset by lower conference expense. Now let's move to what I want to read. The integration is on track to be substantially complete by the end of the second quarter. With respect to run rate EBITDA, It was roughly $70 million in Q1, and we now expect the run rate EBITDA benefit to be at least $95 million by the end of Q2. Turning to depreciation and amortization, it was $45 million in Q1, up $5 million sequentially. Looking ahead to Q2, we expect depreciation and amortization to increase by a few million sequentially. Moving on to capital management, our balance sheet remains strong in Q1 with a leverage ratio at 2.16 times. and corporate cash of $270 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 Q1, we allocated capital to both organic growth and share of purchases, buying back $50 million of our shares. As we look ahead to Q2, we will remain focused on our capital allocation priorities. I would note we expect an increase in capital deployed for organic growth with the onboarding of CUNA and the related transition assistance that will be paid during the quarter. We also anticipate continuing share purchases, likely at a similar level as we did in Q1. As we look ahead to the second half of the year, and if interest rates continue to increase as market expectations would apply, we would have additional capital to deploy. Our framework for deploying capital is unchanged and would focus on organic growth first and foremost, pursuing M&A where appropriate, and returning excess capital to shareholders. We will, of course, remain flexible and dynamic as our capacity and opportunities to deploy capital evolve. As a final point, I want to share that we've scheduled our next Investor and Analyst Day for Wednesday, November 16th in New York City. We look forward to providing more details as we get closer to the event. 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.