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.

Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. One moment for our first question. That's our first question. We'll come from Steven Schubach of Wolf Research. Your line is open.

Hi, good afternoon, Dan. Good afternoon, Matt. So maybe just kicking things off with a question for Matt on the enterprise channel. Recently, you've seen some really strong recruiting momentum within enterprise. I was hoping to get your perspective on whether the recent stress in the banking space bolsters the case for banks to partner with LPL And can you help quantify just where the enterprise backlog is today versus, say, the start of the year?

Yeah, I know you said for me, Stephen, but I think Dan is chomping at the bit on this one. Maybe he's going to take it.

Yeah, no. Hey, look, Stephen, when you have circumstances of displacement in the marketplace, as you were calling out, that can create challenges and or opportunities. And circled through some of the bank failures in Q1. We think back to 2020 with the pandemic, a much more significant impact than that. I think in the case of the recent bank failures, we didn't necessarily see this disruption creating short-term opportunity because it was very short-lived and the impact somewhat muted. That said, I think in times like this, it does reinforce... maybe some of the really important elements of this model. So think about it this way, the value of human-centered advice, right, which creates opportunity for advisors as they are providing guidance when folks need it most in times of uncertainty. It certainly helps reinforce the feel of us as a strategic partner to advisors given our strength and scale and robust capabilities. We sort of end up being a safe haven of quality And then finally, I think right to your question or the point of your question, it does reinforce our value proposition for enterprises and in particular banks that that type of disruption may be a catalyst for exploring different strategic options or alternatives for different business lines as an example of wealth management. And I think that certainly could create incremental demand as we go forward. Finally, our Capilite model allows us to play offense and continue to invest back in the platform in order to enhance and further differentiate our capabilities when others perhaps can't do that in these disruptive markets or displaced markets. So I think we didn't see necessarily opportunity in the short run. I think it does reinforce the attributes of this model and is quite helpful to our long-term growth and our positioning in the marketplace. We're we can kind of turn this change in the market into opportunity across most disrupted sort of marketplace changes. So I hope that helps.

No, it's really helpful caller, Dan. Matt, I was really just trying to share the wealth, but my follow-up is going to be for Dan here. Just on the traditional independent channel, there is some evidence that recent broker-dealer consolidation activity is driving increased advisor turn. And just given the strong NNA results that we saw in March, how does the recruiting backdrop in the traditional market compare to last year? And do you expect to see an acceleration in NNA given some evidence of higher advisor turn?

Yeah, well, look, I mean, if we look just in glance at Q1 as perhaps a jumping off question, Stephen, you know, you see the traditional recruiting markets in a solid place for us with $9 billion in assets. And that channel continues to continuously produce solid results and continue to increase over time as the differentiation of our model and our capabilities creates a real appealing alternative to these advisors. And quite frankly, the flexibility in our different affiliation models gives them different sets of sort of problems or challenges to potentially solve for by moving to our platform if they're in a place where they're trying to evolve their practice, you know, depending where they are in the lifecycle of their model. So, we certainly think that just as a baseline, we continue to see that part of the market strengthening and its opportunity from a recruiting standpoint. As you look forward to your point around other changes that players in the marketplace in the independent space may be contemplating or considering, that certainly would take the lower baseline of churn we've seen over the last couple of years and obviously create what should be a much bigger opportunity set. Anytime we create change in the marketplace, a new model, that is going to trigger or be a catalyst for advisors to consider their sets of opportunities. relative to how they practice this business going forward. And so we do believe that if those things occur, that does create more turn in the marketplace. And we take our healing model, we take the growing capability set of our business development team to do a great job across all of these different affiliation models. And I think we aggressively go play offense capitalize on that opportunity. So that's kind of how we see the traditional marketplace, both now and if things occur in the future, we'll be ready to explore those possibilities as they may emerge.

Very helpful color, Dan. Thanks so much for taking my questions.

One moment for our next question. And our next question will come from Alexander Blostein of Goldman Sachs.

Your line is open.

Alexander, very formal. Alexander, you better have a good question.

It's late in the urgency already, so whatever goes. Okay, so... You guys announced a pretty sizable win in the RIA channel, I think, a couple of weeks ago. I think it's on the larger size from what we've seen in that kind of affiliation part of the model. So I was curious if you could speak to sort of the key attributes that maybe won the business for you guys and ultimately what does the pipeline look like in that part of the market? And maybe just remind us on sort of the economics in that channel for LPL, either, you know, in the gross profit RIA terms or else.

Thanks, Alex. This is Dan. I'll take the first part of that, and then I'll flip it to Matt for kind of the part via that question. So, first of all, yeah, we had a nice win that you referenced a couple of weeks ago that we announced where The team did a great job of attracting CGE Advisor Network, which is a new large RAA. And those apps will show up actually in second quarter or the current quarter we're in. And look, I think this win does a couple things. It first and foremost reinforces the strong work the team's doing to create a really compelling and differentiated solution in this part of the market. A great example, perhaps, of that is how we're using our services portfolio to give these RAAs access to differentiated tools and resources they hadn't always had availability to or access to, which are really meant to help them better operate the businesses as they go forward once on our platform. So that's a great example of how we're building in what I might call a baseline of capability set and differentiation that we think is creating a more robust appeal for this part of the marketplace. I think if you click down specifically on CGA Advisor Network and what were some of the attributes that maybe attracted them, one, our very advisor-centered model, I think coupled with innovative technology that they can create integrated workflows for driving efficiency in the practice. And finally, in the flexibility of our solution to handle all of their assets in a more integrated way on one platform. And so at a high level, those were probably some of the bigger attributes that they were attracted to. And so, look, I think as we look forward overall, we're really excited about the opportunity and the momentum that's building in this model. We have a number of new clients that have joined us so far this year, as we referenced in the recruiting in Q1. And certainly, there's more opportunities that are progressing in the pipeline. So, We'll continue to invest in the capabilities here. As we see, this is a very attractive market to create that differentiated model and continue to contribute and accelerate both. So hopefully that gives you a little color on both that particular affiliation model and then specifically with CG at Baja Network.

And then Alexander. On the economics, I mean, it's not too dissimilar from the enterprise channel or the large financial institutions where on the RIA side, it would typically have a lower gross profit ROA, but the cost and specifically the acquisition costs are also lower because we'll underwrite TA to return. So you get to a bottom line margin in economics that are compelling and similar to the rest of the business, but you have that dynamic similar to what you have on the large enterprise side.

Okay, great. Thank you. For my second, maybe I'll ask a less insightful question. Can we talk just about cash? I think you guys gave the ICA yield of $3.20 for second quarter, but maybe just an update on where cash stands today in the composition. And also just around the philosophy, you guys kind of started on this journey of putting extentries in a couple of years ago. You're north of 50% now. Clearly, the volatility in cash balances has been something we have to live with for the last six to nine months. So, as the environment continues to be sort of uncertain, do you guys anticipate to continue to extend and add more to fixed balances, or do you find yourself in a pretty good place here?

Yeah, Alex, I think so. On April, and I'll give some color on cash balances and maybe just how we're seeing organic growth pull through in April as well. And I think when you look at cash bound, both of those things are as a reminder, which I'm sure you know, but I'll remind anyways. There's two key seasonal factors for April that I'll hit first. And first and foremost is the tax impact. It's tax month. You know, annual taxes for our clients usually impact cash as well as NNA by about a billion and a half. And then in addition, given it's month one of the quarter, advisory fees primarily come out in that first month as well, which is around $1 billion. So those two seasonal factors would reduce cash by around $2.5 billion, everything else being equal. Then in addition to that, we've continued to see strong levels of investor engagement, but the pace of cash balance declines has continued to moderate. So when you look at the incremental decline in April beyond those seasonal factors, it's about $800 million. So if you look at the first four months of this year, the cash balance declines really peaked in January and have moderated each month since. And when you take those seasonal factors into account, the April decline is the smallest decline so far this year. So you put all that together, that puts cash suite balances just above around $51 billion where we sit today. Your point on fixing out the ICA balances, I think the premise of the question summarized it well. We've got a target range of 50% to 75%. With the $3 billion that we did put on this quarter, we're now within that range of 55%. And I like where we are. I think we feel well-positioned. And, of course, we'll monitor the environment from here. And if things evolve or we think it makes sense to put on more FICs, The environment there has gotten quite constructive, and we feel good about our ability to do that if it made sense. But where we sit today in this market, I think we feel well positioned where we are.

Perfect. Thanks very much.

And one moment for our next question. And our next question will come from Jeff Schmidt of William Blair.

Your line is open.

Hi. Good afternoon. Just another one on the cash balances. So I think they're around 4.6% of client assets in the quarter. I understand you were saying that the pace kind of slowed, but, you know, appears to be driven by really strong sort of buy-sell activity. Are we approaching a level that you think even if the markets remain strong, it won't move below? Like I think it bottomed at 4.3% in 2019. Is that sort of a good support level?

Yeah, I think a few things. I think the headline answer is yes, from a support level. I think that the best, the thing that we look at here, which I think you were referencing, is really history is the best guide here. And getting at, you know, is there a natural amount of cash that sits in an account to manage it? And to do things like facilitate rebalancing, facilitate paying advisory fees, customer withdrawals, all so you don't, so an advisor is not forced to to make a trade that they would otherwise not make a trade that's still up to those things. So when you look at our history, as you highlighted, when we've gotten to a place where advisors have their clients fully deployed into the marketplace, which has happened several times in our history, you usually see it get down to that around 4% level. So history tells us that's the zone, and we're not seeing anything in this environment that causes us to think anything differently.

Okay. And then on core organic growth, I think you guided into the mid to low teens, kind of reiterated that view. What does that assume on interest rates? And would that change, I guess, if the Fed paused? Hayek's even started cutting in the back half of the year. How variable, I guess, is that assumption?

Yeah, well, I think as I comment on the prepared marks, right, we have – prepared our spending plans to build throughout the year. So if we think there's a reason to pause or adjust, we certainly have that ability. I think we would be very deliberate about that because I think the investments that we're making, we think, drive long-term value of the firm. We've got our balance sheet positioned quite well to be able to do that. But if we do get an environment where the investments don't make sense or it does mean we need to pause, we would. But I think sitting here today, I think we still feel quite comfortable that the 12% to 15% this year makes sense. given the investments that we're making and the results that we think that will follow.

Okay. Thank you. One moment for our next question. And our next question will come from Kyle Boyce of KBW.

Your line is open.

Hey, good evening. A couple of follow-ups for me. The first is on Alex's RIA question. I believe CG was previously using TDA for custody. And with the Schwab and Ameritrade integration happening over the next year, I think primarily in Q3, I'm just wondering, are you viewing that migration as a potential catalyst for putting more RIA assets in motion? And are you targeting that as an opportunity to continue to have success in that channel?

much like we mentioned with regard to our traditional markets that is certainly a change in the marketplace it could be a catalyst for advisors looking different options and alternatives and certainly we believe that that is a contributor to ongoing potential demand as not only we lead up to that transition, but even post that transition. I think in terms of step function change and significant change management efforts, sometimes on the other side of those, they don't always look what an advisor would have expected or desired or wanted. And so I think that opportunity set extends both before the transition and potentially after it relative to that potential opportunity set. And I think what we're trying to do is just build a capable and appealing alternative that will structurally be attractive and create great opportunities for the advisors to succeed on our platform. To the extent we can do that, I think that differentiated value with the willingness and need to potentially look around at other options creates an interesting opportunity. That's what we're trying to play into.

Great. Thank you. And then a second follow-up is on the ICA. On the fixed rate side, I think a lot of the demand generally comes from larger banks that may have seen deposit inflows through the recent banking crisis. But in terms of that demand, I think you just noted that there were very constructive trends actually there. I guess, can you just provide a little bit more color on what you're seeing in terms of, you know, how constructive those trends are and maybe quantifying that?

Sure. I mean, at a headline level, I think that the appetite or the demand for ICA balances overall, whether it be fixed or floating, is well in excess of what we have to deploy, right? So I think when we – our balances, we're able to deploy on both sides. I think on the fixed rate side, we're just now positioned where we want to be, and we're able to do that during the quarter. I think maybe to put some data behind it and where you could probably see it move in the marketplace itself is really on the variable rate side. And I think that when we're placing those deposits, we're starting in, you know, if you look in the current quarter or the current market, those are now being placed at Fed funds plus 15 to 25 basis points. That was about a spread of 10 to 15 last quarter and, you know, compares to kind of flat to negative during the pandemic. So maybe that's probably the best place to focus on where you can see that demand for these deposits really showing up.

Great. Thank you. And one moment for our next question. Our next question will be coming from Michael Cypress of Morgan Stanley.

Your line is open, Michael.

Hi. Good evening. Thanks for taking the question. Maybe we could circle back to brokerage. NNA strength there, quite robust, 5.5% or so organic annualized. It's up meaningfully from a year ago. So I was hoping you might be able to elaborate on what's driving the strength there on the brokerage side and how you think about the persistency of that.

Let me take that. There's a couple of maybe primary drivers. As you say, you see some growth year-on-year if we just use that as a comparative basis. And I think one of the drivers would be we're in a rate environment that we hadn't seen for 15, 16, 17 years. And in some cases, advisors' opportunity to serve their clients and meet their needs in this rate environment leads to products that have... maybe a utilization that is more appealing or easier to use as a brokerage structure than an advisory. So you see some of that . That might be a community or some type of bond, treasury, et cetera. The other thing that I think that you see driving that growth is also some of the mix in these larger enterprise wins that we've had. They have a higher mix of brokerage than advisory. It's certainly different than our typical mix of roughly 52%, 53% advisory. And so when we transition those folks in, obviously that has a shorter-term influence in the mix. We see that as an opportunity. Once they get to our platform, it's a much more appealing and robust advisory platform that has more interest in pricing to the end client. We do see those as opportunities for them and as a catalyst to shift their mix over time more towards the price. That's what's causing that. Those are the primary drivers that you're on your ship with.

Great. Thank you. Very helpful. And then just as a follow-up question, if we look at the gross profit ROA prior to the client cash, that also showed a very nice improvement year to year. It has been pretty steady in this 19 to 20 basis point range for some time. So I guess, what do you see as some of the biggest opportunities to expand that over time, the gross profit ROA prior to client cash? What might be the two to three biggest drivers of expansion over the next couple of years? Where do you see some potential partial offsets? And ultimately, what level do you think this could ultimately achieve?

Yeah, Michael. I mean, I think that what I'd emphasize is really the overall growth opportunities that we have for gross profit itself, right? Things that we've talked a lot about on this call, but our overall organic growth, bringing in and recruiting larger advisors, the enterprise channel, which drives gross profit growth, but actually has a lower gross profit ROA. Like all of those things, you know, adding in our service and fee revenues and services group, those things all drive growth there. And I think that the key thing I would highlight from an ROA standpoint is as we become a larger and more diversified firm for both offerings and revenue drivers, they're just not all asset-driven, especially in that service and fee revenue side. The growth that we've had in the large enterprise channel will show up as lower gross profit ROA, even though we're serving and supporting those clients in a way that can drive a compelling margin. So I think it's It's less about the ROA from a basis point standpoint. It's really about the key drivers of our model that can drive a gross profit growth over time.

Great.

Thank you. One moment for our next question. And our next question comes from Brennan Hawkin of UBS.

Your line is open, Brennan.

Thanks. Good afternoon. Thanks for taking the question. Matt, we'd love to circle back to the comments that you made about thinking that the prior level of cash as a percent of client assets would work as a trough this cycle. We've seen other firms, you laid out a few of the reasons for that, the need to have advisors catching the dividends and need for some baseline of cash. But we've seen at other wealth management firms that have very similar business models, the cash as a percentage of client assets go below prior cycles trough. So I guess I'm just curious as to what gives you the confidence that that trough is going to hold rather than a simple understanding that we're going to hire for longer and therefore prior trends might end up just being a bit different here. Isn't that fair too?

Yeah. Well, I think, Brennan, there's always scenarios where things can play out differently. But I think from our standpoint, you know, history is the best guy, right? And I think from, you know, our business model, which I know you've heard us talk through a bunch, but the cash balances, you know, the starting point are relatively small and they are transactional or operational in nature. We've got a long-term average of around 5%, you know, or 7,000 per account. And when you look at that history, the primary factor that has moved those balances up and down is really based on on the markets and where and how advisors have their clients deploy. And to your point on when those balances come down, it's typically come down to that 4%. We've seen it several times, you know, most recently in 2021, as the market's really recovered post the onset of the pandemic. So that's what we're looking at. And I think it's a combination of the size of the balances and the history that we've seen.

Okay. All right. That's fair. And just a ticky tacky one to follow up. The yield on the money market sweeps has sort of seemed to compress a bit from where it was, you know, about a year ago. I had always thought of those as more or less fixed. Is there some sort of mix dynamic that's happening where something is causing that to compress? And how should we be thinking about that going forward? I know it's a small impact, just kind of curious.

Yeah, I think – well, in recent periods, it's come up a little bit. You're referring to perhaps a few years ago. Is that what you're looking at?

No, the average yield in basis points on the money market sweep, it was 30. This quarter, it was 32. The prior quarter, and then 38. In the third quarter – Yeah, okay.

All right. Yeah, I just – okay. So I put all those in a relatively similar zone, meaning not moving around a lot. Whenever you do see movement there, it's more about the mix as they're at different firms and different payouts. There's nothing from a pricing standpoint going on there. And as you said, the balances there are really small. So it's usually a mix. Great. Thanks.

One moment for our next question.

Our next question will come from Craig Smith. Siegenthaler of Bank of America. Your line is open.

Thanks. Good afternoon. So we saw that annuity sales were up a lot. I think commissions were up 52% year on year. I'm curious, what type of annuities are the clients buying? And have you seen an increase in surrenders of older annuities, just given the wide gap between where current rates are compared to where annuities were offered over the last decade?

Yeah, I think the short answer to your question is what I said earlier, that in this rate environment that we haven't seen for an extended period of time, there's an opportunity to use fixed annuities as a way to help people with their desires around yield or yield that leads to lifetime income. And that opportunity has largely been muted. for an extended period of time. And so because of that, it's not surrenders or exchanges from prior annuities. I think you would have seen that coming or being forced to come out of variable annuities that were set up and created for a different purpose. And so this is typically new money that has opportunity to find higher yields with the pent-up demand for those higher yields that is are, I think, well-positioned and suited to support their long-term income needs in retirement. So that's the primary driver of that.

Thank you. And just one question on your advisory relationships, but what percentage of LPL advisors with advisory relationships charge fees on total client AUAs? versus net client AOA after backing out client cash?

Well, so first of all, there's limits to the amount of cash that someone can hold for a period of time within an advisory account or they're required to either put that money to work or move those assets out of that advisory account. That's your control relative to high amounts of cash inside advisory accounts. That said, their cash that they use inside of the account, if at appropriate levels, as we talked about before, is part of the fee that is charged.

Thank you, Dan. One moment for our next question. And our next question will come from Michael Cho of JP Morgan.

Michael, your line is open.

Hi, good afternoon, Dan and Matt. Thanks for taking my question. I just wanted to follow up on capital allocation again. I mean, you mentioned, you know, before that the leverage continues to pick lower. You know, you've got $4 billion of firepower. If you think about the inorganic bucket, you know, just given the changing backdrop and across macro and banking and I realize you said nothing kind of near-term changes from recruiting or partnerships, but are there any segments or channels that you might be focused on more when thinking about organic just as LPL's firepower just continues to grow? And then just relatedly, just in terms of the new liquidity and succession offering, it looks like you're having some good success there with the growing pipeline. I mean, can you just remind us how much capital you're looking to allocate there? and maybe just the capacity for a number of deals annually or a dollar amount. But just, yeah, if you can just provide an update there, thanks.

Sure. I'll start with liquidity and succession. I mean, I think that if you look at what we did in the quarter, I think it's a good guide. And the opportunity here, the focus here from a capital standpoint is it's relatively small, right? We're deploying capital, you know, using discipline return thresholds, which usually leads to purchase multiples in the six to eight times EBITDA zone. The size of the deals are usually relatively small in the $10 to $20 million range. So it's less a big use of capital, and it's more about really the capability that we've built there to help transition practices to the next generation. So that's the key for the offering. I think on your main – I think on your first question, make sure we got it as far as the opportunity set and the interest from an M&A standpoint. I mean, I think when you just look at where we have participated – As a company, it's across several channels, but anything that would really accelerate our strategy, whether it be in our advancing in our traditional markets, expanding into newer markets. The employee channel is an example that we did. And if we can do so in a way that just matches our strategy, that we've got the operational capacity to do it really well, and then it meets our discipline of financial hurdles. I think that's how we'd be interested from an M&A standpoint. Dan, anything you want to add?

We also look always at capabilities, if there are interesting capabilities that will accelerate our strategy and create a better opportunity with interesting returns versus building them ourselves or renting them. We are always open for that, too. So that's just the only other element of M&A that I might think.

Okay, great. No, thank you for that. And then just a quick follow-up on the G&A. I mean, Maggie talked about some flexibility throughout the year, just given, you know, how things kind of shake out in the big picture. But I guess, are there any certain projects or initiatives that you'd call out that, again, that you might call out in terms of the accelerated investments where you may pause if the environment changes, you know, later in the year?

Not particularly. I mean, maybe just to emphasize the construct and how we built up to the 12% to 15%. I mean, I think that from a prioritization standpoint, we're investing first and foremost to support the core business, right? And each of those categories is about a 4% to 5% growth in the year. The second category is really about expanding our markets and scaling our new services. And then that third category is really being opportunistic given the environment to accelerate components of the strategy. So, if we are pulling back, it would be more in that, it would be first in that third category, which is less about the specific initiative and more about we're just doing some things that we would have otherwise have waited until 2024 or beyond.

Okay, great. Thank you so much. One moment for our next question. And our last question will come from Bill Katz of Credit Suisse.

Your line is open.

Okay, thank you very much for taking the questions tonight. Just coming back to the opportunity to sort of fix out versus float. So it sounds like the 55% is about where you want to be. And I understand that you've done a great job of managing through the rate cycle in the past. But to play devil's advocate for a moment, if you look at the forward curve, and it's pointing to a pretty sharp reduction, if you will, and you think that the sorting is sort of coming to a conclusion and the cash balances are starting to stabilize, why not try and fix out a bit more just to reduce some of the risk to earnings in 24 and 25?

Yeah, Bill. I mean, I think when we form that target range of 50% to 75%, I mean, it was contemplated that would be the range we'd want to be in a range of interest rate environments. And it's not about being – clairvoyant on rates and picking exactly when and how and what percentage to do. It's about increasing the stability of our earnings. And I think we like where we're positioned in that range. I'm not saying we're going to sit there forever. That's how we feel today. If the environment changes or the dynamic changes, we'll adjust. But I think we really like where we're positioned right now.

Okay, that's helpful. And then just coming back to capital for a moment, thank you for the guidance on buyback into new quarter. But if I take that and your dividend, it looks like the payout ratio on sort of consensus numbers for the quarter, plus or minus some updates from today, is almost 80%, 90%. And when I look at your corporate cash, that number X, the $20 million bogey that you normally like to keep handy leaves very little incremental liquidity. So as you think about inorganic opportunities, liquidity succession, and other use of cash, How do you think about the interplay between free cash flow deployment and balance sheet leverage, particularly given the macro backdrop?

Yeah, well, I think the key thing there, Bill, is we'll manage liquidity based on our leverage ratio, right? So we're below the low end of our target range of 1.5 to 2.5. So we think about liquidity capacity across all three areas, right? Investing for organic growth, M&A, and returning capital to shareholders. I think we feel well-positioned. we're below the low end of that range. So that's where we manage that, and we feel good where we are.

Thank you, guys.

And I'm showing no further questions. I would now like to turn the conference back to Dan for closing remarks.

Hey, thanks. And I just want to thank everyone for taking the time to join us this afternoon. We certainly appreciate your investment of time. We look forward to speaking with you again next quarter.

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