LPL Financial Holdings Inc.

Good afternoon and thank you for joining the first quarter 2023 earnings conference call for LPL Financial Holdings Incorporated. Joining the call today are our President and Chief Executive Officer Dan Arnold and Chief Financial Officer and Head of Business Operations Matt Audet. 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 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 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 Commissions. During the call, the company will also discuss certain non-GAAP financial measures. For reconciliation of 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 would now turn the call over to Mr. Arnold.

Thank you, LaTanya, and thanks to everyone for joining our call today. Over the past quarter, our advisors continued to help their clients navigate through market volatility and macroeconomic uncertainty. In doing so, they reinforced the value of their advice and collectively helped millions of Americans continue to pursue their financial goals and aspirations. We thank them for the important work and remain focused on our mission of taking care of our advisors so they can take care of their clients. Now, as we look at the marketplace, we continue to experience the growing appeal of our model due to the combination of our robust and feature-rich platform, stability and scale of our industry-leading model, and capacity and commitment to invest. As a result, we continue to make solid progress toward our vision of becoming the leader across the advisor-mediated market. In that spirit, we will continue to focus on helping advisors and enterprises solve challenges, and capitalize on opportunities better than anyone else, and thereby serving as the most appealing player in the industry. With respect to our performance, we delivered another quarter of solid results, while also continuing to make progress on the execution of our strategic plan. I'll review both of these areas, starting with our first quarter of business results. In the quarter, total assets increased to 1.2 trillion as continued solid organic growth was complemented by higher equity markets. With respect to organic growth, first quarter organic net new assets were $21 billion, representing 7.5% annualized growth. This contributed to organic net new assets over the past 12 months of $99 billion, representing approximately a 9% organic growth. Recruited assets were $13 billion in Q1, bringing our total for the trailing 12 months to $85 billion. These results were driven by the ongoing enhancements to our model and our expanded addressable market. Looking at same-store sales, our advisors remained focused in serving their clients and delivering a differentiated experience. As a result, our advisors are both winning new clients and expanding wallet share with existing clients, a combination that drove a sequential improvement in same-store sales in Q1. This increase occurred across all of our affiliation models led by solid growth in our enterprise chain. With respect to retention, we continue to enhance the advisor experience through the delivery of new capabilities and technology, as well as the evolution of our service and operations function. As a result, asset retention for the first quarter was approximately 99% and 98% over the last 12 months. Our first quarter business results led to solid financial outcomes $4.49 of adjusted EPS, which is more than double our level 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 become the leader across the advisor center market, which for us, is being the best at empowering advisors and enterprises to deliver great advice to their clients and to be great operators of the business. Now, to bring this vision to life, We are providing the capabilities and solutions to 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 are supporting advisors in their efforts to extraordinary business. Doing this well gives us a sustainable path to industry leadership across the advisor experience, organic growth, and market share. As we look ahead, we continue to see both a growing demand for advice and increasing appeal of receiving that advice from a financial profession. We believe that our strategy positions us well to capitalize on these key structural trends. Now, to execute on our strategy, we organize our work around two primary categories, horizontal expansion, where we look to expand the ways that advisors and enterprises can affiliate with. such that we can compete for all 300,000 advisors in the marketplace. And vertical integration, where we focus on providing capabilities that solve for a broader spectrum of advisor needs, and in doing so, create durable, differentiated value. Now, while our strategy has not changed, we will use the framework of horizontal expansion and vertical integration to review our strategic agenda. This structure is an evolution of our strategic plays framework You can see how the strategic plays map to this new orientation within our investor presentation. With that as context, let's start with our efforts around horizontal expansion. This work involves meeting advisors and enterprises where they are in the evolution of the business by creating flexibility in our affiliation models so they can design the perfect practice for themselves and the client. This component of our strategy helps contribute to solid growth in our traditional markets while also expanding our adjustable markets through our new affiliation models. Our recruiting in traditional markets continues to be a significant source of growth, reaching a new first quarter high of approximately $9 billion in assets. In the quarter, we continue to increase our win rate 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 RAA offering, we delivered our strongest quarter to date, recruiting roughly 3 billion in assets in Q1. In each of these models, we continue to realize growing demand and expanding pipelines, which position them for increased contribution to our organic growth. Looking ahead, we expect to carry this recruiting momentum into Q2 for both our traditional markets and our new affiliation models. And with respect to large enterprises, today we announced that BMO will onboard the wealth management business of Bank of the West to our enterprise platform. In addition, we continue to prepare to onboard commerce. Collectively, these two deals will add approximately $11 billion of brokerage and advisory assets in the second half of the year. Looking ahead, we continue to build our pipeline as demand for our model grows. Now, in Q1, we also continue to have success in our traditional bank and credit union space, adding approximately $1 billion of accrued assets in this chain. Now, shifting to our vertical integration efforts, here we are focused on delivering value-added capabilities, services, and technology that extend across an advisor's end-to-end business, all for the purpose of helping them differentiate and win in the marketplace and run thriving businesses. A core to this part of our strategy is helping advisors deliver their differentiated wisdom, insight, and advice, wrapped in an easily accessible and highly personalized experience for their clients. In that spirit, this quarter we continue to enhance our advisors' value proposition to their clients by introducing new account aggregation capabilities to help advisors consider their clients' holistic financial picture, by enriching the end-client digital portal through the expansion of customizable self-service capabilities, and by evolving our research offerings to include increased market commentary delivered how and where it works best for the advisor. Now, in a separate play within our vertical integration strategy, we continue to expand and enhance our services portfolio and are encouraged by the evolving appeal of our value proposition and the seasoning of this business. As a result of solid demand in Q1, the number of advisors utilizing our service group continued to increase. We ended the quarter at over 3,300 active users, up roughly 30% year-over-year. Now, as we work with advisors to increase the utilization of existing services, we're also continuing to create new services, such as our partial book sales solution, where we provide the flexibility for advisors to sell us their smaller accounts for clients that don't necessarily fit their practice, thus creating more capacity for them to focus on managing and growing their business more robustly. This service has been received well, and we are seeing solid early momentum in the growing pipeline of demand. Now, at the same time, we're seeing good success with our set of services that help solve the industry-wide challenge of up to a third of advisors retiring over the next decade. In that spirit, over the past year, we've facilitated approximately 150 acquisitions among advisors through our M&A solutions program. And since launching our liquidity and succession capability in Q4, we have completed more than 10 of these deals with LPL advisors and have growing interest both inside and outside of the LPL ecosystem. In summary, in the first 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. As we move into 2023, we remain focused on serving our advisors, growing our business, and delivering shareholder value. Against a backdrop of market uncertainty, our business performed well as we continue to execute on our strategic priorities. In recent years, we've invested in capabilities, technology, and service to enhance the experience of advisors, enterprises, and their clients. At the same time, we've maintained a strong balance sheet with significant corporate liquidity and low leverage, positioning us to support our advisors and clients in a range of macro environments. This was most recently recognized by S&P, who upgraded our credit rating earlier this month, establishing us as an investment-grade credit with both our rating agencies. By leveraging the investments in our platform and our financial strength, we continued to grow assets organically in both our traditional and new markets, closed two strategic acquisitions, continued our momentum with our liquidity and succession capabilities, and are preparing to onboard commerce banks, and Bank of the West in the second half of the year. We accomplished all of this while continuing to invest in our industry-leading value proposition and delivering record adjusted earnings per share. So as we look ahead, we continue to be excited by the opportunities we have to help our advisors differentiate and win in the marketplace. Now let's turn to our first quarter business results. Total advisory and brokerage assets were 1.2 trillion, up 6% from Q4, as continued organic growth was complemented by higher equities. Total organic net new assets were $21 billion, or a 7.5% annualized growth rate. Our Q1 recruited assets were $13 billion, which prior to large enterprises was a record first quarter of the year. This included $3 billion of recruited assets from our new affiliation models, the largest contribution since their launch a few years ago. Looking ahead to Q2, our momentum continues across our traditional independent and new models, and we are on pace to deliver another strong quarter of recruiting. As for our Q1 financial results, the combination of organic growth, rising interest rates, and expense discipline led to adjusted EPS of $4.49, the highest in our history. Looking at our top-line growth, gross profit reached a new high of $1.2 billion, up $48 million or 5% sequential. As for the components, commission advisory fees net of payout were $215 million, up $43 million from Q4, primarily driven by higher advisory fees and a seasonally lower production bonus. In Q1, our payout rate was 86.2%, down about 220 basis points from Q4, largely due to the seasonal reset of the production bonus at the beginning of the year, as well as a non-recurring benefit of approximately 50 basis points realized during the quarter. Looking ahead to Q2, we anticipate our payout rate will increase to approximately 87.5%, primarily driven by the typical seasonal build in the production modes. With respect to client cash revenue, it was $439 million, flat to Q4, as the impact of higher short-term interest rates was offset by a sequential decline in balance. Looking at overall client cash balances, they ended the quarter at $55 billion, down $10 billion, driven by record net buying of $37 billion. Within our ICA portfolio, we added $3 billion of new fixed-rate contracts, bringing our fixed-rate balances to roughly 55% of the ICA portfolio within our target range of 50% to 75%. Our ICA yield averaged 320 basis points in the quarter, up 29 basis points from Q4, primarily due to the increases in short-term rates. As for Q2, based on where interest rates are today and what we've seen with client cash balances so far in April, we expect our ICA yield to remain unchanged at approximately 320 basis points, as the full quarter benefit of the Q1 rate hike is offset by the mixed impact of lower floating rate balances. As for service and fee revenue, It was $119 million in Q1, down $1 million from Q4, primarily driven by lower conference revenue, offset by seasonal increases in IRA fees. Looking ahead to Q2, we expect service and fee revenue to be roughly flat sequentially. Moving on to Q1 transaction revenue, it was $49 million, up $2 million sequentially, as trading volume increased slightly. Looking ahead to Q2, we expect a seasonal decline of a couple million dollars. Now let's turn to expenses, starting with Core G&A. It was $326 million in Q1. For the full year 2023, we continue to anticipate Core G&A to be in a range of $1,335,000,000 to $1,370,000,000. As a reminder, this year we are opportunistically accelerating our investments to support our core business growth, expand our addressable markets, and scale our new services. We have also sequenced our spending plans to build gradually through the year, which positions us to be flexible and dynamic depending on how our growth opportunities and the macro evolve from here. To give you a sense of the near-term timing of this spend, in Q2, we expect Core G&A to be in a range of $330 to $340 million. Moving on to Q1 promotional expense. It was $101 million, up $17 million sequentially. primarily driven by conference spend as we had two of our largest conferences of the year during the quarter. In Q2, we expect promotional expense to increase to a range of $105 to $110 million due to increased transition assistance resulting from strong recruiting and large enterprise onboarding as we prepare for Commerce Bank and Bank of the West to join us in the second half of this year. Looking at share-based compensation expense, It was $18 million in Q1, up from $12 million in Q4. In Q2, we expect a similar level of expense as the majority of our grants occur in the first two quarters of the year. Turning to depreciation and amortization, it was $56 million in Q1, up $2 million sequentially. We expect it to increase to approximately $60 million next quarter. Regarding capital management, our balance sheet remains strong. We ended Q1 with corporate cash of $234 million, down $225 million from Q4, as we closed on two acquisitions during the quarter. Our leverage ratio was 1.3 times, down from 1.4 times in Q4, driven by a combination of our continued growth and a higher interest rate environment, both of which have meaningfully improved our earnings power. 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 across our entire framework. We continued to invest to drive and support organic growth. On traditional M&A, we closed on two acquisitions for approximately $150 million. Within our liquidity and succession offering, we closed seven deals for around $100 million, and we continue to have a solid pipeline. With regards to capital return, we increased our share of purchases to $275 million in Q1. We plan to further increase share of purchases in Q2 to approximately $300 million. To summarize, our balance sheet is strong and we are well positioned to drive value through our capital allocation plan. 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.