LPL Financial Holdings Inc.

Good afternoon, and thank you for joining the fourth quarter 2023 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 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 Security and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I will now turn the call over to Mr. Arnold.

Thank you, Amy, and thanks to everyone for joining our call today. Over the past quarter and throughout 2023, our advisors continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams. As we enter the new year, we thank our advisors for their continued commitment and dedication while we remain focused on our mission of taking care of them so they can take care of their clients. During the fourth quarter, we continue to see the appeal of our model grow due to the combination of our robust and feature-rich platform, the stability and scale of our industry-leading model, and our capacity and commitment to invest back into the platform. As a result, we continue to make solid progress in helping advisors and enterprises solve challenges and capitalize on opportunities better than anyone else, and thereby serve 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 fourth quarter business results. In the quarter, total assets increased to 1.4 trillion, as continued solid organic growth was complemented by higher equity markets. Regarding organic growth, fourth quarter organic net new assets were $25 billion, representing 8% annualized growth. This contributed to organic net new assets for the year of $100 billion, representing approximately a 9%. In the fourth quarter, recruited assets were $17 billion, bringing our total for the full year to $80 billion. Prior to large enterprises, recruited assets for the full year were $67 billion, an increase of nearly 50% year-over-year and a new annual record. This outcome was driven by the ongoing enhancements to our model, as well as our expanded addressable markets. Looking at same-store sales, our advisors remain focused on taking care of their clients and delivering a differentiated experience. As a result, our advisors are both winning new clients and expanding wallet share with existing ones. The combination that drove solid same-store sales in Q4. At the same time, we continued to enhance the advisor experience through the delivery of new capabilities and technology and the evolution of our service and operations functions. As a result, asset retention for the full year was approximately 99%. Our fourth quarter business results led to solid financial outcomes with adjusted EPS of $3.51 which brought our full year total to $15.72, an increase of 36% year over year. 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-centered market. To do that, our strategy is to invest back into the platform. To provide unprecedented flexibility in how advisors can affiliate with us, and to deliver capabilities and services to help maximize advisors' success throughout the lifecycle of their businesses. Doing this well gives us a sustainable path to industry leadership across the advisor experience, organic growth, and market shape. Now, to execute on our strategy, we organize our work into two strategic categories, horizontal expansion, where we look to expand the ways that advisors and enterprises can affiliate with us such that we compete all 300,000 advisors in the marketplace, and vertical integration, where we focus on delivering capabilities, technology, and services that help our advisors differentiate when in the marketplace to be great operators of the business. Now, with that as context, let's start with our efforts around horizontal expansion. Over the fourth quarter, we saw strong recruiting in our traditional independent market, adding approximately $14 billion in assets. As a result of the ongoing appeal of our model and the evolution of our go-to-market approach, we maintained our industry-leading win rates while also expanding the breadth and depth of our pipeline. With respect to our new affiliation models, strategic wealth, employee, and our enhanced RAA offering, we delivered our strongest year to date, recruiting roughly $15 billion in assets, nearly double the total of the prior year. As we look ahead, we expect the increasing awareness of these models in the marketplace and our ongoing enhancements to their capabilities will help drive sustained increase in their growth. Next, the traditional bank and credit union space continues to be a consistent contributor to organic growth as we added approximately one billion of accrued assets . In addition, large enterprises remained a meaningful source of recruiting in 2023 with the addition of Bank of the West and Commerce. For 2024, we continue to prepare to onboard the retail wealth management business of Prudential Financial. Now, as a part of that process, our team has been on the road meeting with Prudential advisors to provide them a preliminary orientation to our platform, and the early feedback has been positive. Looking ahead, we are confident that the appeal of our value proposition for enterprises match with our track record of successful execution, positions as well, and help solve for the needs of a broad spectrum of institutions. Now, within our vertical integration efforts, we are focused on investing back into the model in order to deliver a comprehensive platform of capabilities, services, and technology that help our advisors differentiate when in the marketplace, and run thriving businesses. As part of this effort, over the past quarter, we've continued to make progress on our aspiration of delivering an industry-leading services. This work includes continuing to make our service model more flexible and efficient through a multi-channel approach, the purposes of which is to offer a broad spectrum of service options, including human-centric support, digital capabilities, and artificial intelligence so that we can provide advisors the information they need and the channel that works best for them. In that spirit, over the last year, we have continued to expand our digital capabilities, including our digital hubs, which provides advisors always-on support in centralized and intuitive form. Our investments in this area enabled us to expand from two digital hubs to 11 over the last year, with the newest being our tax hub, which helps advisors process tax business in a streamlined and highly efficient way. While we're still in the early innings of the adoption of this capability set, the percentage of advisors' interactions that go through digital channels has roughly doubled over the last year from 10% to 20%. And as we continue to refine these capabilities, we believe that digital solutions can ultimately serve as much as 50% of our service interactions. Now, as an additional part of our vertical integration strategy, we continue to expand and enhance our service portfolio and are encouraged by the evolving appeal of our value proposition and the seasoning of our capabilities. And as a result of solid demand, the number of advisors utilizing our portfolio of 14 available services continues to increase, and we ended the year with nearly 3,900 active users, up 27% from a year ago. Looking ahead, we remain focused on addressing the needs of a broader set of advisors and are innovating on new services that will directionally double the size of our services portfolio over the next two years. One of the latest innovations in our services portfolio was inspired by our broader efforts to tackle the advisor transition process, which has historically been an industry-wide pain point given the friction and complexity of changing firms. That said, rather than seeing the transition process as a headwind, we view it as an important strategic opportunity. As the easier we can make it for advisors to change firms, the more it will drive up advisor movement in the industry, where we are well positioned to benefit the market leader in recruiting. To help solve for that opportunity, we have developed several new transition capabilities and solutions, including a live testing environment for advisors to familiarize themselves with our platform for transitioning, fully automated stages of the onboarding process, and a suite of transition services that includes short-term admin, branding, and bookkeeping support, which helps simplify the transition and onboarding journey and ultimately accelerate advisors' readiness and growth. Early feedback on these transition services has been positive. and they are proving to be a catalyst for additional subscriptions as 40% of advisors who use these solutions end up subscribing to one or more of our other ongoing services. And as we move forward, we will continue to challenge ourselves to solve for advisors' needs at every stage of their practice in order to help them build the perfect business for themselves and ultimately maximize their success. 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 force. As we look ahead, we remain focused on executing on 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 would like to highlight our progress during 2023. Against an evolving market backdrop, we maintained our focus on supporting our advisors and their clients while executing on our strategic priorities. We continue to grow assets organically in both our traditional and new markets, successfully onboarded new enterprise clients, and continue to make progress with our liquidity and succession solution. So as we enter 2024, we remain excited about the opportunities we have to serve and support our more than 22,000 advisors, while continuing to invest in our industry-leading value proposition and drive organic growth. Now, let's turn to our fourth quarter business results. Total advisory and brokerage assets were $1.4 trillion, up 9% from Q3, as continued organic growth was complemented by higher equity markets. Total organic net new assets were $25 billion, or approximately an 8% annualized growth rate. Our Q4 recruited assets were $17 billion, which brought our total for the year to $80 billion. Looking ahead to Q1, our momentum continues, and we are on pace to deliver another strong quarter of recruiting. As for our Q4 financial results, the combination of organic growth and expense disciplines led to adjusted EPS of $3.51. Gross profit was $1.7 billion, down $3 million sequentially. Our payout rate was 87.6%, up 30 basis points from Q3 due to the seasonal build in the production bonus. Looking ahead to Q1, we anticipate our payout rate will decline to approximately 86.5% as the production bonus resets at the beginning of each year. With respect to client cash revenue, it was $374 million, down $4 million from Q3, as average client cash balances declined slightly during the quarter. Client cash balances ended the quarter at $48 billion, up $1 billion sequentially, marking the first quarterly increase since the second quarter of 2022. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60%. within our target range of 50 to 75%. As a reminder, during Q4, there were roughly two and a half billion of fixed rate contracts that matured. We placed two billion of these maturing balances into new five-year contracts, yielding approximately 415 basis points, which is roughly 85 basis points higher than their prior yield. Looking more closely at our ICA yield, it was 317 basis points in Q4, down one basis point from Q3. As for Q1, based on where client cash balances and interest rates are today, as well as the yields on our new fixed-rate contracts, we expect our ICA yield to increase by approximately five basis points. As for service and P revenue, it was $131 million in Q4, down $5 million from Q3. This decline was primarily driven by lower conference following our largest advisor conference of the year in Q3, as well as seasonally lower IRA fees. Looking ahead to Q1, we expect service and fee revenue to decrease by approximately $5 million sequentially on lower conference revenue. Moving on to Q4 transaction revenue, it was $54 million, up $4 million sequentially due to increased trading volume. As we look ahead to Q1, based on what we have seen to date, we would expect transaction revenue to increase by a couple million sequentially. Now let's turn to expenses starting with Core G&A. It was $364 million in Q4, bringing our full year Core G&A to $1,369,000,000. This was within our outlook range and for the full year represents approximately 15% growth. As a reminder, this included an opportunistic 5% of incremental spend focused on accelerating our capabilities as we took advantage of the favorable macro environment. Now, as we look ahead to 2024, we plan to return to more normalized levels of spend, concentrating on investments that enable organic growth and drive operating leverage in our business. In addition, our ongoing investments to scale our business are driving greater efficiency. Pulling this together, we expect our 2024 Core G&A growth rate to be roughly half the rate we saw in 2023. More specifically, we intend to grow 2024 Core G&A in a range of 6.25% to 8.75%. As for Q1, we expect Core G&A to be in a range of $360 to $370 million. Note that this Core G&A spend is prior to expenses associated with credentials. As we move closer to onboarding them towards the end of this year, we'll provide an update on 2024 Core G&A. I would just emphasize that we expect only a small amount of spend in 2024, as the majority of these costs will be incurred in 2025. Moving on to Q4 promotional expense. It was $138 million, down $2 million sequentially, as lower conference spend was partially offset by higher prudential-related onboarding and integration costs. Looking ahead to Q1, we expect promotional expense to be roughly flat, as we have one of our largest advisor conferences during the quarter, which will be offset by seasonal declines in marketing expense. As for regulatory expense, it was $9 million in Q4. Looking forward, given the increased size and scale of our business, we would expect regulatory expense to be roughly $10 million per quarter. Looking at share-based compensation expense, it was $16 million in Q4, flat compared to Q3. As we look ahead, we anticipate this expense will increase by approximately $6 million sequentially, as Q1 tends to be our highest quarter of the year given the timing of our annual stock awards. Regarding capital management, our balance sheet remains strong in Q4 with corporate cash at $184 million. I would note that during the quarter, we completed our first investment-grade debt offer, issuing $750 million of senior notes. With that, our leverage ratio increased to 1.6 times and is within our target leverage range of 1.5 to 2.5 times. Turning to how we deploy that capital, 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 deployed capital across our entire framework. as we continue to invest to drive and support organic growth, allocated capital to M&A within our liquidity and succession solution, and returned capital to our shareholders for purchasing $225 million of shares. As we look ahead to Q1, we plan to repurchase $200 million of our shares, keeping us on track to execute our $2 billion authorization over two years. Turning now to interest expense, it was 54 million in Q4, up 6 million sequentially. Looking ahead to Q1, given current debt balances and interest rates, we expect interest expense to increase by approximately 7 million from Q4. 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.

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. And our first question comes from Steven Chuback with Wolf Research. Your line is open.

Good afternoon, Dan and Matt. Thanks for taking the questions. Maybe just to start off with a question on CoreG&A and organic growth. The double-digit organic growth you've achieved these past three years, it's really been bolstered, at least in part, by significant investments in the platform. And CoreG&A has also grown that double-digit clip as well. So the updated CoreG&A guide for 24 certainly surprised positively. It does imply significant moderation, as you noted, Matt, in expense growth, but should we expect the slower G&A growth to drive a commensurate slowdown in organic, or do you feel the N&A momentum can be sustained even with that moderation in G&A spend?

Yeah, Stephen, I'll give you some color here, but the answer is going to be the latter. I think the investments are moderated, and our confidence and conviction around continuing to drive organic growth is just the same. Now, the details below that, just building a little bit on what I shared in the prepared remarks, the cost strategy or investment strategy remains driving investments, prioritizing to drive organic growth, as well as driving productivity and efficiency. I think what's probably most relevant in this conversation is also adapting as the environment evolves. So if you look at, to your point on 2023 and growing 15%, You kind of break that 15% into three equal categories of about 5% each. The first was really about serving and supporting the core business growth. The second was about continuing to make investments to really improve our value prop, improve and establish ourselves in the new models and addressable markets to scale our services, things of that nature. And that third category, that third 5%, was really just being opportunistic about the market and really accelerating investment. And I think when you look at the guidance for 2024, our plans for 2024, it's really pulling back in that third category. So we're continuing to make the investments to support organic growth. We're continuing to make the investments to improve our value proposition and capabilities. And just those two things, and this may get really to the core of your question, that would typically lead to 4G and 8% growth in the 8% to 10% range. But then you put on top of that the investments we're making for productivity and efficiency, which do create capacity to invest each and every year, are getting even better. And it's that final point that brings us down to the six and a quarter to eight and three quarters. So hopefully the color helped there, but I think the headline point is our conviction on continuing to deliver organic growth in those high single digits remains.

That's great to hear. And for my follow-up, Matt, I was hoping you could just provide an update on the January trends. I know it's a seasonally weaker month typically for both NNA and cash. And just with cash trends also stabilizing over the last six months, just speak to your confidence level that some of these sorting headwinds, which have gotten a lot of airplay, are largely in the rear view.

Yeah, I think I'll start on cash. I mean, the headline is we really saw cash start to stabilize back in July. So really, if you look at the second half of the year, even by the months, we ended the year at a pretty similar level of where we ended July. So I think what we're seeing in January is really a continuation of that stability. So just a reminder, the seasonal factor that does hit in January is advisory fees typically hit primarily in the first month of the quarter. So those do reduce cash balances. It's around $1.2 billion. Outside of that, though, we continue to see stability. So the amount of cash balance movement from customer activity was actually a slight increase in January. So you put that together and cash balance is overall for the month, they're down $1.2 billion. But it's primarily driven by those fees and the activity is actually a slight increase. So I think the headline is continuing to see stability on the cash sweep side. On the organic growth side, and maybe just I'll give a little bit of context and perspective on the overall quarter as well as the month of January. To your point on your first question, when you look at the last three, four years of really driving and delivering that high single-digit organic growth, given the nature of Q1, the first quarter is usually a little bit lower. So in those years, it was typically in the 6% to 7% zone. So if we look at what we're seeing for Q1 24, it's really delivering something in a similar place, that 6% to 7%. The only thing I would highlight, and the reason for this color is we would expect Q1 January, it would actually be a little bit lower than normal in the 1% to 2% zone. And then February and March actually would be higher than typical, really at those high single digits, really coming together at a 6% to 7% for the quarter. And really the reason for that is the seasonal factors that we just talked about on the cash sweep side, meaning advisory fees hitting in the first month of the quarter, as well as you have on the NNA front that normal slowdown in the first half of January because of the FINRA closing in the second half of December, as well as advisors taking time off. You have those normal factors that come through in January. Two things I would highlight, though, for this January. First is recruiting. Our recruiting continues to be strong. You may recall Q1 of last year, we set a new record in recruiting prior to large enterprises at around $13 billion. We're on track to exceed that in the first quarter of this year. So continued strength there. the timings a little shifted more towards February and March so you got a little bit of weakness in January and then on the attrition side a little bit of the opposite and that attrition is going to be a little bit heavier in January versus February and March as we had two practices that were acquired depart during the month and and that's normal it happens from time to time we just happen to have two in a single month of January outside of that our retention remains consistently high with the levels seen so Lots of color there, but I would headline it in. We're looking at Q1 and continuing in that 6% to 7% zone, and you're just going to have a little bit of a different shape to the quarter with January in that 1% to 2% zone.

Lots of impact there, but thanks so much for the detail, Ab.

You bet.

One moment for our next question. And our next question comes from Alexander Blostein with Goldman Sachs. Your line is open.

Hey, good afternoon, everyone. Thanks for the question as well. I was hoping we could talk a little bit about the large enterprise channel for you guys. It's been an area of significant success over the last couple of years. So maybe talk a little bit about deal activity expectations for 2024. And in particular, curious about the level of engagement you guys are seeing from insurance company clients on the back of the Peru deal. Thanks.

Yeah, thanks, Alex. So look, with respect to our large enterprise channel, we opened this market up back in 2020 with a novel outsourcing solution. And initially, we targeted larger banks and have seen some success up to this point, capturing about $85 billion of assets to our platforms. If you look at the total market for banks and outsourcing of wealth management or wealth management, it's roughly in and around $1 trillion. And we believe our experience, reputation, and capability set creates a compelling solution that helps continue to strengthen that pipeline and offer up an interesting durable growth opportunity as we move forward. That said, at the same time, you know, we took our solution that was targeted to banks and we made some additional investments and capabilities and personalized options which enabled us to extend the appeal of that model to, as you said, the insurance companies or product manufacturers that operate wealth management solutions. And now that market represents an additional $1.5 trillion of opportunity. And with the Prudential announcement, it was a catalyst for additional inquiries exploring the question, so why aren't they outsourcing? And we continue to progress in these discussions and explore others. They're still in the early stages, but we do believe this part of the pipeline will continue to evolve as well. So, you know, if I summarize it, as we move forward, we believe our market leadership capability set and real deep IP where this enterprise channel creates a really unique growth opportunity for us. We're excited about it.

Great. And a quick follow-up for you, Matt. So nice to see you guys moving forward with reinvestments of the fixed ICA maturities of $2 billion that you mentioned. How is demand holding up in the ICA channel for additional fixed maturities as we kind of think about the $6.5 billion tranche that's coming up this year? And is there a way to sort of accelerate some of that reinvestment? I know you provided a schedule, kind of how that shakes out over the course of the year, but any opportunity to move a little faster in case rates just start moving lower to lock in wider spreads? Thanks.

Yeah, Alex, I think on the demand, the demand's strong. Like if you look at the $2 billion that we did place into new contracts towards the end of the quarter, We're able to place them in five-year contracts, so kind of the longest duration that the market typically offers, which is where we prefer to be right now. And we're able to place them at a 30 basis point spread above where the curve is. And I think we've talked about for a long time in this marketplace, there really were no spreads to the curve. And sometimes there are even discounts. I think that's probably the most empirical data that the demand is out there is strong. And you see similar demand on the floating rate side as well. On the second part of your question, the opportunities to accelerate really aren't there. It's kind of the nature of a fixed-rate contract, right, for the same reason on both sides of the equation from a bank liquidity standpoint where they get it on their side. It's not a very common thing, so I wouldn't expect any opportunities to accelerate it. But as you noted, when you look at the year, we've got $6.5 billion coming up. And if you look at the marketplace right now, we'd be able to place them in even higher rates and If that five-year point is available, we'll be excited to do it there as well. So market's good, but acceleration opportunity is probably not there.

Got it. All right. Sounds like a plan. Thanks.

One moment for our next question. And our next question comes from Kyle Voigt with KBW. Your line is open.

Hi. Good evening. Maybe just a question on the prudential expenses issue. First, I just wanted to confirm that the $125 million of the integration and onboarding expenses in the promotional line are one-time and still expected to entirely roll off by the start of 2025. And then can you just help frame the size of the incremental G&A growth we should think about in 2025, either on a percentage basis year-on-year or framing relative to the size of the PRU expenses in promo that will be rolling off in 2024?

Yeah, sure, Kyle. I mean, I think on the 125, yes, they are definitely one time and specific to bringing Prudential on board. I think the majority of them will be in 2024. So if you look at what we spent so far in 23, it's in the 25, 26 million range. Of that remaining 100, that will primarily be in 24. But just depending on the timing of when they come on board, some of that could flow over into 2025. Now, the total amount wouldn't change. It's just it would still be 125. Some of it could just go into 2025, but the majority would be in 2024. On the core G&A front, I think the headline I would give you, and kind of emphasize in prepared remarks, that the amount we expect in 2024 is relatively small, and it's all about the timing of when they come on board. I think to your question of how to dimension it, I think I'd just go back to the estimated EBITDA when it's fully ramped, which is around $60 million. And maybe just look at overall margins in our business around 50%. That should give you a sense of the overall expenses that would go along with it. So I think if you did something like that, you'd be directionally correct. I just emphasize that from a cost standpoint, it's likely to be primarily in 2025, just given the timing of when they're going to come on board, is towards the end of 2024.

Understood. Thank you for that. And then just on a follow-up, You just asked on the M&A environment, you know, we're seeing a macro backdrop now that I expect to be a bit more favorable for M&A in the sector. You know, markets are at all-time highs. We're starting to see some clarity on interest rates, at least relative to the past year or two. So just wondering if you could speak to the opportunities you're seeing in the market, whether bid-ask spreads between sellers and buyers may be narrowing. and the number or types of deals that you're seeing come across your desk now versus maybe this time last year.

Let me take a stab at that one, Stan, and hopefully I'll get all of your questions inside of there. So I think, as you know, M&A remains a core part of our strategy as a complement to organic growth opportunities. And to your question, we focus on three primary categories of opportunities. One is first to grow in our market. So potential acquisitions might include both broker dealers and RIAs. Examples of that are Binning Scattergood acquisition, Waddell and Reed acquisition, and then Crown Capital, which we're closing earlier this year. So those are good examples of how we might look across the marketplace for those opportunities. And look, as the industry continues to consolidate, we would expect to be in that consolidation. The second type of transactions that we'll look at is to add capabilities. These are capabilities where we would ultimately evaluate and allocate, and should we allocate capital to build, buy, or partner, and to the extent this accelerates our desire to create that vertically integrated feature-rich platform, then this is where we would look to an opportunity like that. Past capability transactions would include Advisory World and Blaze. And to remind you, Blaze is a trading platform that we're turning into what we think would be a really industry-leading trading and rebalancing tool that we're making available to our entire client base early in the spring. So excited about that type of transaction and what we can do with it. The third type of category or example of a transaction would be deploying capital against this newest capability of liquidity and succession. It certainly gives us a path to put our capital work in a way that both meets our discipline return thresholds and then helps both internal and external advisors solve a really important question around you know, this succession needs and requirements that we've talked a lot about over the next 10 years. And again, I think in doing that, it positions us well to not only do that for internal advisors, but also to potentially create that solution for those that aren't part of our enterprise today. So if you just summarize all of that, we consider M&A opportunities a core part of our strategy. But, you know, we will remain disciplined to make sure that the framework of which we assess them, that they've got to fit strategically, financially, culturally, and operationally. And we'll do it, you know, with good discipline around each of those things. I hope that helps.

Thank you. One moment for our next question. And our next question comes from Devin Ryan. With JMP Securities, your line is open.

Okay, great. Thanks so much. Question for Dan. Was interested by the comments you made about some of the new service innovations and really to encourage advisors to move and I guess move to LPL. And I guess I took that more as LPL looking to win more advisors in motion. But if I look at industry churn, it's been pretty anchored at 5% to 6% in recent history. So I'm just curious based on what you just talked about, whether it's, you know, some of the innovations in the services portfolio or just that you're seeing more broadly occurring in the industry that could really change that 5% to 6% rate, and it would seem like it would be a pretty big deal if you can. So just love to get a sense of kind of what those innovations actually mean, and then can that rate move for either LPL reasons or industry reasons? Thanks.

Yeah, good question. So I think if we just sort of start with the first question around, you know, churn or that movement in the marketplace. And we continue to see advisory movement remain flat. Think about that in the range of five, five and a half percent over the other part of the last couple of years, which is, you know, is below historical norms. Now, there has been some mixed shift in that turnover and where it's coming from. In fact, in the last year, you've seen movement in the traditional independent market move up, where there's been a slowdown, as an example, from the wires. That said, notwithstanding all of that, I think we first and foremost look at our overall win rates and what is moving across all of our different affiliation models as a way to continue to understand their absolute appeal, as well as their hopefully growing appeal as we invest more into the platform or the model. And as we said earlier, despite this lower movement in advisors, if you look at the relative market share we're picking up in our win rates, you've seen those increase over the past three years with that investment back into the model. And I think, look, for the newer models, Not only do we have higher opportunities to enhance the capability set there as they're on just a fresher journey, if you will, in terms of our investment capabilities there, also their seasoning, their growing awareness and credibility they have in the marketplace can also be a catalyst for higher win rates there. So it's not just even the investment. growing seasoning around our right to win, if you will, with those new models. And then finally, your point. I think one of the things that we look at is if we can't completely control the movement of advisors in the marketplace, what could we do to contribute to it? And this notion or concept of making it easier to help an advisor move from one practice to another Given that being what we believe is one of the big hurdles for advisors moving, boy, if you could solve for that or begin to break that down and imagine that in different ways and thus create a much different rubric, if you will, for the change management efforts sort of associated with moving the A to B, that that could be a real catalyst to increase that movement in the industry. That's the question I think we're trying to explore and that I alluded to in my remarks. And we're using our services portfolio and some of the ways in which we've learned how to add value to advisors and helping them operate and run their practices and realized that we tweaked them a bit and offered them while someone's going through a conversion. That actually could be a catalyst to making it easier to go through that change management step. it's successful at doing that more structurally, well, then you could see the knock-on effect, if you will, of potentially accelerating the movement and with our ability to recruit and our positioning of our models in the marketplace, certainly that's a strategic opportunity for us. So that's how we pulled that together. I hope that color added something to it.

Yeah, thanks, Dan. That's great color. And I guess my follow-up is just it's interrelated to that. So terrific momentum in recruited assets in 2023. And really, the new affiliation models are clearly resonating in the market. And I believe you said 15 billion from those new channels in 2023. So that would seem to imply I think the legacy channels would be around 50 billion to get to the 67 total, if I'm correct there. So on the new affiliation channels, the contribution continues to scale and those mature. Should that look like something similar to call it the $50 billion from the legacy channels? Or I'm just trying to size because they're growing so quickly, kind of what they look like at maybe maturity or something that's more mature, or maybe well above 50, but just love to get some thoughts on kind of where we're coming from to where we're going, just because there has been such tremendous growth there, especially when you split it out separately. Thanks.

Yeah, it's a great question. And I think, you know, as we think about those longer terms and what is that possibility, I think we start with the size of each of those markets, right? And, you know, that we've broken down into the employee-based market is the largest one of all in that $11 to $12 trillion range. Your RIA one is second. And then, you know, the sort of Swiss model that we have is a subset, if you will, of typically those coming out of an employee-based model. And so if you think about the opportunities that are associated with those, I think you would start with that broader market And then you begin to then drill down on what's our right to win, what's our ability to win, what are the capabilities necessary to continue to grow our win rates inside those markets. And then if you do that, it's reason to believe, given the size of those markets relative to the traditional independent, that even if we achieve half, of the win rate or the success rate we do on our traditional independent channel, that those begin to make sizable contributions that, as you were estimating, look more like a contribution on the independent side. So what I'm not suggesting is we'll get there. What I am suggesting is that's an opportunity that is worthy of continuing to work into, invest into, and challenge ourselves to. achieve the type of win rates we have on the independent side in these large markets. I hope that helps.

Yep, that's great.

Thank you.

One moment for our next question. And our next question comes from Dan Fannin with Jefferies. Your line is open.

Thanks. This quarter saw the biggest kind of quarter-over-quarter increase in sales-based commission's looks to be somewhat driven by annuities. So curious about your outlook for that, and in the context of what the DOL has proposed, how you think that might change behavior or not going forward.

Yeah, let me take that one. Thanks for the question. We have seen some momentum, frankly, since rates have gone up, but you've seen the interesting growth in the utilization and probably predictable growth in the utilization of fixed annuities And then when the equity markets move and have volatility in them, then variable annuities can also be interesting opportunity to deploy capital. And so I think it's been a nice tailwind for annuities for the better part of the year, last year plus. And you're exactly right, fourth quarter just reinforced that. I think as we go forward, The question around the DOL is a good one relative to brokerage and advisory, and I think as we think about that, we go back to our playbook we used in 15 and 16 timeframe where, you know, from a principled standpoint, we believe that maintaining choice for advisors' clients is in their best interest, hence our interest in making sure that we do the things necessary to preserve that choice for advisors between brokerage and advisory and our ability to ensure that we can help them adequately do that as the rules change relative to Reg D.I. And then again, if the D.O.L. rule ultimately goes through and changes that slightly, making sure that we're prepared to help them pivot where they can successfully continue to do that business where it's in the best interest of the clients. And I think it's hard to argue with making sure that you provide people choice and then ultimately enable those advisors to serve them in an optimal way and meet the clients. That said, I do believe that in many cases, Annuities will continue to be used where they're needed, where they make sense as a rollover option or where they make sense in helping someone, as we talked about earlier, with downside protection still dissipating and the upsides of the equity markets. There's good places to use them. I think that what we will see, though, is in other areas, you'll probably see a bigger shift to the utilization of advisory. It's just tougher to do brokerage business. There may be some places, small accounts, there may be other scenarios where given the two options, the advisor ultimately utilizes the advisory solution. I'm still in the best interest of the client, but also just in the spirit of making sure that this can be done in an efficient and effective way. So we do believe that's a trend. since the investments in our advisory platforms, vertical integration we have around our advisory offering, again, lines up well with that type of structural training as well. So put a capstone on it. We will make sure that we're positioned to enable brokerage to be used. I do think that the DOL rule would create some headwind on the percentage of brokerage business that we see, but it but it won't be a complete change. You'll still see it utilized for some currently. Hope that helps.

Understood. And then just as a follow-up, I think, Dan, you mentioned 99% retention in 2023, and then, Matt, you called out January, a couple of departures. So just curious if we could get some context around maybe what happens in January and if you think retention might be slightly different given the environment and, you know, as we think about 2024 more broadly.

No, our sense of it is, look, we've got to make sure we execute on our strategy. We've got to invest in our capabilities, and we've got to attempt to deliver an extraordinary experience on a daily basis. We have solid trends there, strengthening NPS scores, evolving capability. We expect that retention rate in that 98.5% range to 99% range. to be a good way to think about or a good centering point, if you will, on retention for this year outside of the example of what Matt used where someone sells the practice to potentially solve for a succession solution. And look, that was the exact trigger that we launched our liquidity and succession program a year ago. It gave us a great opportunity to go solve for that really important question that many advisors had. Those two examples, maybe we didn't launch ours in time enough to get a swing at those. And though we won't win them all, we do believe we've got a really appealing, differentiated solution that will position us well, not only to help serve our clients that are already on our platform, but actually use it as a way to attract new assets to the platform because not only do we have a rich value proposition that we serve and support their daily needs, we also can help them with their succession. So that's how we're doing it.

Thank you.

One moment for our next question. And our next question comes from the line of Ben Buttish with Barclays. Your line is open.

Hi, good evening, and thanks for taking the question. I think most of mine have already kind of been covered, but maybe just one for Matt on the core G&A growth. Can you just talk a little bit about what gets you to the higher, low end of the range? It sounds like the prudential ramp is going to be not too impactful for this year, so what are the sort of factors that could drive that up or down, and at what point in the year do you start to get a better sense of where that shakes out? Thank you.

Yeah, I think what typically drives us within the range is the costs associated with the supporting the growth that happens during the year. I think you look at, you know, Q4 of 23 of this quarter is a good example where we came in within our range, but at the high end of the range. And that was really about the variable costs associated with growing, whether it's variable compensation associated with that growth or the direct costs to ramp up. So that's typically the driver within that range, those things.

Any more follow-up, Ben, or no? Sorry. That was all I had.

Thank you very much. Okay. All right. Nobody else get your follow-up, though. We just lost it.

One moment for our next question. And our next question comes from Michael Cypress with Morgan Stanley. Your line is open.

Great, thanks for taking the question. I just wanted to come back to, Dan, some of your comments earlier just around the slower movement of advisors across the industry that you alluded to. Curious what's driving that, what might change that at the industry level? I hear you on some of the services, portfolios, innovations that can help move it in your favor for you guys, but just at the macro backdrop for the broader industry, just curious what might lead that turn to pick up here versus slow down even further, and then how do you see this sort of backdrop evolving if interest rates are cut?

Yeah, good questions. Look, I do think you've got a number of different things that might create a slight headwind on movement that then at the aggregate had brought it down from, I don't know, a historically 7% kind of range for movement. And we would expect things to return and normalize over a period of time. These little headwinds that I referenced, some of it is still a bit of a hangover from COVID and just some of the change and complexity that was created as people work through that, I think is one. I think a second one is, you know, you've had a volatile market with a lot of geopolitical uncertainty that surrounds it and advisors avoid sometimes making big strategic moves or pivots or adjustments in periods of time where they've really got to be focused on their clients and they don't want to create more change in the midst of uncertainty. And I think that's been something that we've seen over the last couple of years that have created some uncertainty. And I also think you see advisors also pivoting in a new world of how do they operate in a post-pandemic, what did they learn from that? What pressures does it put on their practices? You know, the growing complexity of regulations may drive up costs. The whole digitalization of their businesses and their offices and what does that mean and how do they think about what is the best partner for them going forward? What are the types of services that are new to them that could transform their practice I think just trying to assess what those options and alternatives are in a world that's flipped on its side, and now you throw AI on top of that, which in the short run creates lots of noise and exuberance. Unfortunately, it's also a shiny penny that sometimes doesn't always lead to good productive outcomes. And so I think as we get further down the road of assimilating some order, to the house being flipped on its side in some cases and helping them really see where they can use technology really wisely to drive productivity where they can either leverage tools or outsource risk management to lower their costs associated with a world that's getting tougher and tougher from a regulatory standpoint where they really do think about, hey, how do I drive growth and what do I need in my value proposition to do that? How do I leverage folks to do that? I think those are Those are some of the interesting questions that as they're able to solve those, it enables them to move forward in a little more informed way and thus at a faster pace. So those are some of the little, I think, skirmishes, if you will, that we're overcoming as we go forward in time that will help return maybe movement back to a more normal 7%.

Great. Thanks for that. And just as a follow-up question for Matt on promotional expense, If I adjust for the large enterprise one-timers over the past couple of years, it looks like the underlying promo expense has been in the mid to high teens. Does that sound about right to you? And arguably, that's in the context of high singles organic growth. So another question there, if we expect that sort of organic growth to persist in the high singles, should we expect a similar mid to high teens pace of underlying promotional expense going forward, excluding the large one-timers?

Well, I think probably the best way to think about it is just to hone in on the key drivers of the growth. And I'd put it in three categories, which could have different trends. I think the first is organic growth overall. That's typically the biggest driver. And the TA associated with bringing recruiting on board is the driver of that. So the amount of recruiting that we do is really the driver there. TA rates really have been fairly stable, haven't changed recently. So I think where recruiting goes is where that would go. The second is conference spend. And conference spend more kind of trends with the overall number of advisors that we have at LPL. They're a really important part of how we engage with them, how they engage with each other. So as the firm scales, you could expect that spend to scale more. And then lastly, as you highlighted, it's really the onboarding expenses associated with those large enterprises. So that really can be a little bit hard to predict. It depends on the firms that come on board. Prudential is a great example of we've got good insight into spending in 24 and good insight into spending overall to bring that on board. It just depends on what happens on the other side. So I'd really put it into those three categories. They kind of trend differently each. It just depends on how those three things play out.

Thank you.

One moment for our next question. And our next question comes from Michael Cho with JP Morgan. Your line is open.

Hey, good afternoon, Dan and Matt. Thanks for squeezing me in here. I just want to touch on enterprise quickly again. And I have just a quick two-parter here. You talked about a healthy pipeline and sort of an uptick in conversations, you know, since the Prudential announcement. But in terms of kind of looking ahead, I mean, does the Prudential onboarding limit your bandwidth at all to do more Prudential-type deals? And then second, just longer term, looking beyond Prudential, I mean, how should we think about framing the potential benefits to LPL's operating scale and leverage as you continue to gain critical mass within the enterprise opportunity sets?

I'll take the first one, and Matt, you can do this. So look, on the first one, I think we see an interesting pipeline on both sides of that enterprise channel, as I said before, banks and on the insurance slash product manufacturer related market space. And with that portfolio, comes to continued opportunity, right, to continue to explore and learn both how we're doing with existing programs and how that drives innovation to create more appeal in them. Second is every time you bring one on, how do you create a more automated way of doing that, a better playbook to be more efficient at doing that so you can do that better and faster and more economically or at a lower cost? And so I would tell you we're much better than we were three years ago when we brought our first larger enterprises on, and we continue to automate more and more of that kind of change management onboarding effort process. And as you rightfully said, to the extent that you're able to do that, not only are you going to create more interesting economic outcomes by lowering the amount of investment up front in these opportunities, you also can bring them on at a faster pace. And so I think we're working our way into being able to be very thoughtful about how we bring these on in an orderly fashion, assuring that first and foremost we get the experience right, that you continue to operate your existing platform at the level that you want to. And then as you, again, get better and better at that, I think you can line those up and bring those in faster, faster pace. And that's what we're challenging ourselves to do without being overly precise in exactly how that would look or what that looks like. I think we begin to challenge ourselves with pragmatic opportunities to think, you know, how do you shorten that onboarding and change management efforts? So that's the problem we're trying to solve. Matt, you want to get this?

Yeah, yeah. I think the answer is a resounding yes on are there benefits to scale. I think when you look at just starting high level with the overall value proposition of this channel and the things that we're building. You're bringing on clients where once they're on their platform, a big part of the attraction is getting access to our capabilities and allowing them to grow that channel faster on our platform so you get a place where you're increasing your levels of organic growth. I think maybe to the core of your question on the cost side, in each of these instances, Now, you're typically building out capabilities or technology that's really important to that particular enterprise, but they're usually applicable to others as well. So you're not only making sure that you have the ability to serve and support this particular client that you're bringing on, but you're usually enhancing those capabilities for things that the rest of LPL or the rest of this channel would like. And I think Prue is a very good example of that, where we're not only bringing on capabilities specific to Prudential, we're building out a platform that can actually open up a much larger channel for us and to recruit more on. So a headline point is there's certainly scale benefits, and hopefully those examples are helpful.

Perfect. Thanks, guys. That's it for me.

And this concludes today's question and answer session. I would now like to turn the conference back to Mr. Dan Arnold for closing remarks.

Yeah, and hey, I just want to thank everyone for taking the time to join us this evening.

afternoon and we look forward to speaking with you again next quarter thank you and this concludes today's conference call thank you for participating you may now disconnect