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.