LPL Financial Holdings Inc.

Good afternoon, and thank you for joining the second quarter 2024 Earnings Conference call for LPL Financial Holdings, Inc. Joining the call today are 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 your questions. The company would appreciate if analysts would limit themselves to one question and one follow-up each. The company has posted its earnings press release and supplementary information on the investor relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies, and plans, as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption forward-looking statements in the earnings press release. as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For reconciliation of such non-GAAP financial measures to comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I'll turn the call over to Mr. Arnold.

Thank you, Operator, and thanks to everyone for joining our call today. To set the stage for tonight's call, I'll start by taking us through our quarterly business results and hand it over to Matt to cover the financials. Then before we open the call up for Q&A, I'll take a few minutes to share our perspective on recent events in the marketplace related to suite departments. Okay, with that as context, over the past quarter, our advisors continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams. To help support that important work, we remain focused on our mission of taking care of our advisors so they can take care of their clients. During the second 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 institutions solve challenges and capitalize on opportunities better than anyone else, and thereby serve as the most appealing player in the industry. Now, with respect to our performance, we delivered another quarter of solid results, while also continuing to make progress on the execution of our strategic plans. I'll review both of these areas, starting with our second quarter business results. In the quarter, total assets increased to $1.5 trillion, as continued solid organic growth was complemented by higher equity markets. Regarding organic growth, second quarter organic net new assets were $29 billion, representing 8% annualized growth. This contributed to organic net new assets over the past 12 months of $104 billion. also representing an 8% growth rate. In the second quarter, recruited assets were 24 big, bringing our total for the trailing 12 months to a record 93 big. These results reflect the continuing appeal of our model, as well as the strength of our recruiting across our expanded addressable markets. Looking at the 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 funds. A combination that drove solid same-store sales in Q2. At the same time, we continue 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 second quarter was approximately 98% and 98% over the last 12 months. Our second quarter business results led to solid financial outcomes with adjusted EPS, $3.88. 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 to provide unprecedented flexibility in how advisors can affiliate with us and to deliver capabilities and services help maximize advisors' success throughout the life cycle of their businesses. Doing this well gives us a sustainable path for 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 the business. And with that as context, let's start with our efforts around horizontal expansion. Over the second quarter, we saw strong recruiting in our traditional independent markets. reaching a new quarterly high of approximately $19 billion in assets. At the same time, through 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 $4 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 Q2, we added approximately $1 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 continued to make progress within the large institution market, where we advanced our preparation to onboard the retail wealth management businesses of Prudential Financial and Wintrust 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 are on track to close the acquisition of Atria Wealth Solutions later this year and complete the conversion in mid-2025. As a reminder, this acquisition will add approximately 2,400 advisors and 150 banks and credit unions, managing approximately $100 billion in client assets. In addition, we're seeing solid momentum within our liquidity and succession solution as demand continues to build with existing LPL advisors and with advisors outside of our ecosystem, including the signing of another external deal in Q2. Next, I want to update you on our OSJ ecosystem. A reminder that for many years, we have collaborated with large OSJs in serving and supporting independent advisors on our platform. We've been actively working to strengthen our alignment with these firms for a number of years. driving incremental changes to the broader OSJ ecosystem over that period. This year, we put a capstone on those efforts. And through that work, there were a couple of isolated firms that surfaced, as strategically misaligned with our mission and model, as they were limiting advisors' ability to choose how and where they do business. That posture is in stark contrast to our core principles of advisor independence. And as a result, we have resolved to separate from these relationships. Collectively, these firms have roughly $20 billion of client assets, which began to offload from our platform in July. At the end of the day, these separations will strengthen our overall ecosystem and position us to better serve the great partners on our platform. Now, within our vertical integration efforts, we remain focused on investing back into the models. to deliver a comprehensive platform of capabilities, services, and technology to help our advisors differentiate and win in the marketplace and run thriving businesses. As 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. And within this body of work, we're developing a comprehensive suite of trading capabilities that will help advisors deliver a differentiated client experience and manage their advisory business more efficiently and effectively. In that spirit, we're rolling out a new trading system, ClientWorks Rebalancer, which enables advisors to rebalance models across multiple client accounts at one time and deliver a more personalized client experience across their book of business. In doing so, our aspiration is to help more advisors run models-based practices and ultimately turn trading from the administrative function into a strategic asset. The initial feedback on ClientWorks ReBalancer has been positive. We're seeing solid early adoption. In summary, in the second 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. In the second quarter, we remain 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, closing six deals during the quarter and signing one deal with an external practice. Lastly, we remain on track to close on the Atria transaction in the second half of the year and plan to onboard their business in mid-2025. So, as we look ahead, we remain excited by the opportunities we have to serve and support our 23,000 advisors while continuing to deliver an industry-leading value proposition and drive organic growth. Now let's turn to our second quarter business results. Total advisory brokerage assets were $1.5 trillion, up 4% from Q1, as continued organic growth was complemented by higher equity markets. Total organic net new assets were $29 billion, or approximately an 8% annualized growth rate. Our Q2 recruited assets were $24 billion, which prior to large institutions was the highest quarter on record. Looking ahead to Q3, our momentum continues, and we are on pace to deliver another strong quarter of recruiting. As for our Q2 financial results, the combination of organic growth and expense disciplines led to adjusted EPS of $3.88. Gross profit was $1,079,000,000, up $13,000,000 sequentially. As for the components, commission advisory fees net of payout were $263,000,000, up $3,000,000 from Q1. Our payout rate was 87.3%, up 70 basis points from Q1 due to typical seasonality. Looking ahead to Q3, we anticipate our payout rate will increase to approximately 87.5%, driven by the typical seasonal build in the production. With respect to client cash revenue, it was $361 million, down $12 million from Q1, as average client cash balances declined slightly during the quarter. Overall client cash balances ended the quarter at $44 billion, down $2 billion sequentially, driven by record client net buying activity of $39 billion. Within our ICA portfolio, the mix of fixed rate balances increased slightly to roughly 70%, within our target range of 50% to 75%. As a reminder, during Q2, there were roughly $2.1 billion of fixed rate contracts that matured. We placed $1.7 billion of those maturing balances into new three- to six-year contracts, yielding approximately 420 basis which is roughly 220 basis points higher than their prior yield. Looking more closely at our ICA yield, it was 318 basis points in Q2, down five basis points from Q1. As for Q3, 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 10 basis points. As for service and fee revenue, It was $135 million in Q2, up $3 million from Q1. Looking ahead to Q3, we expect service and fee revenue to increase by approximately $10 million sequentially, driven by revenues from our annual focus conference, as well as higher IRA fees. Also, depending on the timing of the previously mentioned separation from a couple large OSJs, we could record up to an additional $5 million of fees. Moving on to Q2 transaction revenue. It was $59 million, up $2 million sequentially due to increased trading volumes. As we look ahead to Q3, we expect transaction revenue to be relatively flat with Q2. Now let's turn to expenses starting with Core G&A. It was $371 million in Q2. Looking ahead, if our strong levels of organic growth continue into the second half of this year, we would expect to be in the upper half of our 2024 Core G&A guidance range. As a reminder, This is prior to expenses associated with Prudential and Atria. To give you a sense of the near-term timing of the spend, in Q3, we expect 4G&A to increase by $5 to $10 million sequentially. Moving on to Q2 promotional expense. It was $148 million, up $16 million from Q1, primarily driven by Prudential-related onboarding costs, as well as increased transition assistance resulting from our strong recruiting. Looking ahead to Q3, we expect promotional expense to increase to approximately $170 to $180 million, primarily driven by conference expense, as we will host our annual focus conference next month, as well as continued credential-related onboarding and integration costs. Turning to depreciation and amortization, with $71 million in Q2, up $4 million sequentially. Looking ahead to Q3, we expect depreciation and amortization to increase by roughly $8 million sequentially, which includes approximately $3 million of technology development related to credential. Regarding capital management, we ended Q2 with corporate cash of $684 million, up $373 million from Q1. Our leverage ratio increased slightly to 1.7 times within our target leverage range of 1.5 to 2.5 times. I would note that during the quarter, we issued $1 billion of senior notes, the proceeds of which will be used to finance our acquisition of Atria. 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 Q2, the majority of our capital deployment was focused on supporting organic growth as well as M&A. where we allocated capital to our liquidity and succession solution and closed on the acquisition of Crown Capital. Specific to share purchases, a reminder that we paused buybacks following the announcement of the HRE acquisition. Our plan remains to evaluate restarting share purchases following close, which we expect to occur in the second half of this year. 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. Before we open the call up for questions, I'd like to turn it back over to Dan.