LPL Financial Holdings Inc.

Good afternoon and thank you for joining the first quarter 2024 earnings conference call for LPL Financial Holding Inc. Joining the call today are the 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 to the 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 financials, future financial and operating results, outlook, business strategies and plans, as well as other opportunities and potential risks of management foresees. Such forward-looking statements reflect management's current estimates and 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 filing with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures, for a reconciliation of non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earning release, which can be found at investors.lpl.com. With that, I would now like to turn the call over to Mr. Arnold.

Thank you, Michelle, and thanks to everyone for joining our call today. Over the past quarter, our advisors continue to provide their clients with personalized financial guidance on the journey to to help them achieve their life goals and dreams. To help support that important work, we remain focused on our mission, taking care of our advisors so they can take care of their clients. During the first quarter, we continued 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 institutions 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 first 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, first quarter organic net new assets were $17 billion, representing 5% annualized growth. This contributed to organic net new assets over the past 12 months of $96 billion, representing approximately an 8% growth rate. In the first quarter, recruited assets were $20 billion, which represents a quarterly record excluding periods when onboarding large institutions. 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, a combination that drove solid same-store sales in Q1. 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 first quarter was approximately 97% and 98% over the last 12 months. Our first quarter business results led to solid financial outcomes with adjusted EPS of $4.21. 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 marketplace. To do that, our strategy is to invest back into the platform, provide unprecedented flexibility in how advisors can affiliate with us, and to deliver capabilities and services 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 share. 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 institutions can affiliate with us, such that we are positioned to 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 and win in the marketplace and be great operators of their businesses. And with that as context, let's start with our efforts around horizontal expansion. Over the first quarter, we saw strong recruiting in our traditional independent market, reaching a new quarterly high of approximately $15 billion in assets. At the same time, due to 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 another solid quarter, recruiting roughly $2 billion in assets. And as we look ahead, we expect that the increasing awareness of these models in the marketplace and the ongoing enhancements to our capabilities will drive a sustained increase in their growth. Next, in Q1, we added approximately $3 billion of recruited assets in the traditional bank and credit union space, which continues to be a consistent contributor to organic growth. During the quarter, we also continue to make progress with the large institution marketplace, where we announced that Wintrust Financial will onboard two of its wealth management businesses to our institution services platform. At the same time, we continued our preparation to onboard the retail wealth management business of Prudential Financial. Collectively, these two deals will add approximately $66 billion of brokerage and advisory assets by early 2025. Now, as a complement to our organic growth, we also announced the planned acquisition of Atria Wealth Solutions, which supports approximately 2,400 advisors and 150 banks and credit unions, managing approximately $100 billion in client assets. This transaction will give Atria advisors access to our differentiated capabilities, technology, and service. We are on track to close the transaction in the back half of this year, and complete the conversion in mid-2025. Finally, we're seeing solid momentum with our liquidity and succession solution, as demand continues to build with existing LPL advisors while also creating interest with advisors outside our ecosystem, including our first signed external deal in the quarter. Now, within our vertical integration efforts, we remain focused on investing back into the model to deliver a comprehensive platform of capabilities, services, and technology that help our advisors differentiate and win in the marketplace and run thriving businesses. As a part of this effort, we continue to make progress across several key areas of focus, including our ongoing journey to build a world-class wealth management platform. Within that body of work, we're focused on meeting the evolving investment needs of our advisors and their clients, including the increasing interest, for non-traditional investment products. To help solve for that demand, we are reimagining the end-to-end experience of our alternatives platform, including enhancing our custodial and operational capabilities for alternative investments, making it simpler and easier to utilize, manage, and transact these products. And at the same time, expanding our alternative investment product offer, for over the last year, we have more than doubled the number of products available for advisors to utilize. Another key area within our vertical integration efforts is the continued enhancement of the experience our advisors deliver their clients. One of the primary ways we do that is providing increased flexibility for advisors to tailor their ideal client experience. For example, we designed AccountView, our in-client digital platform, such that an advisor can personalize access to features on a client-by-client basis. In addition, we recently launched a series of enhancements to our in-client statement, which provides increased flexibility in the channel of delivery and the cadence that clients receive the information, while also adding a unique interactive digital experience to further enrich the traditional statement. Our continued work on our services portfolio is also a key area of our vertical integration strategy. As a reminder, these services help solve for a broad spectrum of advisors and institutions' needs, and in doing so, help position them to deliver great, great advice and be great operators of their businesses. In that spirit, we are developing a number of solutions that help advisors expand the breadth and depth of their advice, including the more effective utilization of financial planning, catering to the more complex needs of high net worth investors and delivering more personalized investment solutions. For example, as a part of our efforts to enrich our planning capabilities, last year we introduced our tax planning service, which is seeing strong demand in the market. And more recently, we expanded our high net worth services to enhance our advisors' support for their high net worth prospects and clients. through complex case design, state planning, and investment product analysis, and the early indications have been favorable. Finally, we're in pilot with our latest innovation, our new outsourced Chief Investment Officer Service, which provides advisors with personalized investment expertise powered by LPL research. And based on the initial feedback, this is unlocking additional growth and efficiency in our advisors' practices. Collectively, these services help expand our advisors' value proposition to their clients, enable them to win new prospects, and increase the differentiation and appeal of our platform. As we move forward, we will continue to solve for our advisors' needs at every stage of their practice in order to help them build the perfect businesses for themselves and ultimately maximize their success. 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 2024, we remained focused on serving our advisors, growing our business, and delivering shareholder value. This focus led to another quarter of strong organic growth in both our traditional and new markets, and we are preparing to onboard the wealth management businesses of Prudential and Wintrust. In addition, we continue to build momentum in our liquidity and succession solution, including our first signed deal with an external practice. We also entered into an agreement to acquire Atria Wealth Solutions, which we plan to onboard to our platform in mid 2025. So as we look ahead, we remain excited by the opportunities we have to serve and support our nearly 23,000 advisors while continuing to invest in our industry-leading value proposition and drive organic growth. Now let's turn to our first quarter business results. Total advisory and brokerage assets were $1.4 trillion, up 6% from Q4. as continued organic growth was complemented by higher equity markets. Total organic net new assets were $17 billion, or approximately a 5% annualized growth rate. Our Q1 recruited assets were $20 billion, which prior to large institutions was the highest quarter on record. Looking ahead to Q2, our momentum continues, and we are on pace to deliver another strong quarter of recruiting. As for our Q1 financial results, The combination of organic growth and expense discipline led to adjusted EPS of $4.21. Gross profit was $1,066,000,000, up $59,000,000 sequentially. As for the components, commission advisory fees net of payout were $260,000,000, up $41,000,000 from Q4, primarily driven by higher advisory fees and a seasonally lower production bonus. Our payout rate was 86.6%, down 100 basis points from Q4, largely due to the seasonal reset of the production bonus at the beginning of the year. Looking ahead to Q2, we anticipate our payout rate will increase to approximately 87.5%, primarily driven by the typical seasonal build in the production. With respect to client cash revenue, it was 373 million, down roughly 1 million from Q4. Looking at overall client cash balances, They ended the quarter at $46 billion, down $2 billion sequentially, driven by advisory fees paid during the quarter. Outside of those fees, cash balances were flat to Q4. As for our ICA portfolio, the mix of fixed rate balances increased to roughly 65%, within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 323 basis points in Q1, up six basis points from Q4. As for Q2, based on where client cash balances and interest rates are today, we expect our ICA yield to decline by a few basis points. As for service and fee revenue, it was $132 million in Q1, up $1 million from Q4. Looking ahead to Q2, we expect service and fee revenue to be roughly flat sequentially. Moving on to Q1 transaction rates, it was $57 million, up $3 million sequentially as trading volume increased slightly. As we look ahead to Q2, based on typical seasonality and activity levels to date, we would expect transaction revenue to decline by a few million from Q1. Now let's turn to expenses starting with Core G&A. It was $364 million in Q1. For the full year, we continue to anticipate Core G&A to be in a range of $1,455,000,000. to $1,490,000. As a reminder, this is prior to expenses associated with Prudential and Atrium. Moving on to Q1 promotional expense, it was $132 million, down $6 million from Q4 due to lower onboarding costs for large institutions. Looking ahead to Q2, we expect promotional expense to increase by approximately $10 million sequentially due to increased transition assistance resulting from strong recruiting and large institution onboarding as we prepare for Prudential to join us in the fourth quarter. Looking at share-based compensation expense, it was $23 million in Q1, up $7 million from Q4. As we look ahead, we anticipate this expense to be at a similar level in Q2. Turning to depreciation and amortization, it was $67 million in Q1, down $1 million sequentially. Looking ahead to Q2, we expect depreciation and amortization to increase by roughly $5 million sequentially, which includes technology development for credential. Regarding capital management, our balance sheet remains strong. We ended Q1 with corporate cash of $311 million, up $127 million from Q4. Our leverage ratio was 1.6 times flat with Q4. As a reminder, we expect to close our acquisition of Atria in the second half of this year and plan to finance the transaction through a combination of cash and debt. Following the close, we continue to expect leverage to be approximately two times near the midpoint of our target leverage range. 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 deployed capital across our entire framework as we continued 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 repurchasing $70 million of shares in January. We paused share repurchases for the last two months of the quarter to ensure we maintain a strong and flexible capital position, we closed on our acquisition of Atria. Following the close expected in the second half of this year, we will evaluate restarting share purchases consistent with our existing capital frame. 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.