LPL Financial Holdings Inc.

Good afternoon, and thank you for joining the fourth quarter 2024 earnings conference call for LPL Financial Holdings, Inc. Joining the call today are our Chief Executive Officer, Rich Steinmeier, and President and Chief Financial Officer, Matt Audet. Rich 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 only one question. To ask a follow-up, please re-enter the queue. 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 that are Subject to known and unknown risk 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 risk 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 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. Steinmeier.

Thanks so much, Operator, and thank you to everyone for joining our call. It's a pleasure to speak with you again. Before touching on our fourth quarter results, I'd like to reflect on a few of our key accomplishments during 2024. Against an evolving market backdrop, we remain focused on serving our advisors and institutions, growing our business, and delivering shareholder value. We delivered industry-leading organic asset growth of 10% with contributions from both our traditional and new markets, including the onboarding of one of our largest institutional partners, Prudential Advisors. We set recruiting records in both our independent advisor and institutional channels. As a compliment to that strong organic growth, we closed on the acquisition of Atria and entered into an agreement to acquire the investment center. In addition, we continued to advance our pioneering liquidity and succession program where we closed 22 deals, including five with external practices. Finally, we delivered impressive financial results with record adjusted earnings per share $16.51. Okay, now let's turn to our Q4 results. In the quarter, total assets increased to a new high of $1.7 trillion as we attracted record organic net new assets of $68 billion, representing a 17% annualized growth rate. Our fourth quarter business results led to strong financial performance with the adjusted EPS of $4.25. Next, let's turn to our strategic plan and growth across our organic and inorganic initiatives. 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 unmatched flexibility in how advisors can affiliate with us, and to deliver capabilities and services to help maximize advisors' success throughout the life cycle of their businesses. Doing this well gives us a path to sustainable industry leadership, not just in the independent and institutional markets, but across all of wealth management. It's a bold aspiration, but one I'm confident that we can achieve. Over the near term, we are amplifying our focus on three key priorities. One, to maintain the client centricity that this firm was built on. Two, to empower our employees to deliver exceptionally for our advisors and their clients. and three, to deliver improved operating leverage. To help us achieve this, during the fourth quarter, we shifted our organizational structure and leadership to better align our teams, sharpen our focus on key priorities, and increase accountability. As part of these changes, we recognized outstanding individual contributions with the largest class of internal senior promotions in our history. Together, these actions strengthen our ability to leverage our tremendous talent to execute on our long-term vision. With that as context, let's review a few highlights of our business growth. In the fourth quarter, recruited assets were $79 billion, bringing our total for the year to $149 billion, both of which represent records. In our traditional independent market, we added approximately $13 billion in assets during the quarter, which contributed to record full-year recruited assets of $71 billion. exceeding our prior high by more than 40%. This improves on our already industry-leading capture rates of advisors in motion, while also expanding the breadth and depth of our pipeline. With respect to our new affiliation models, strategic wealth, independent employee, and our enhanced RIA 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 sustainable growth. We also continue to make progress within the large institutional marketplace, where during the fourth quarter, we onboarded the retail wealth management business of Prudential. It's only been a couple of months, but there are already signs that the integrated experience and enhanced capabilities we delivered are improving their attractiveness in the marketplace for advisors. Our momentum continues in Q1, where earlier this week, we onboarded Wintrust Financial's wealth management business to our institutional services platform. As a compliment to our organic growth, we closed the acquisition of Atria Wealth Solutions, welcoming their approximately 2,200 advisors, 160 institutions, and home office staff to the LPL family. The transaction is progressing well, and we remain on track to meet our 80% retention target. As for our broader business, Asset retention remains industry-leading at 98% over the last 12 months. This is a testament to our continued efforts to enhance the advisor experience through the delivery of new capabilities and technology and the evolution of our service and operations. In closing, the fourth quarter was a capstone on another outstanding year. We are well positioned to serve as an indispensable partner to our advisors and institutions to continue delivering industry-leading organic growth and to maximize long-term value for shareholders. All of this is driven by the dedication and hard work of our fantastic team. So above all, I want to thank them for their efforts. And with that, I'll turn the call over to Matt.

All right. Thanks, Rich. And I'm glad to speak with everyone on today's call. As Rich mentioned, 2024 was a strong year for the firm as we delivered meaningful growth and progressed our capabilities, leaving us well-positioned to continue to serve and support our nearly 29,000 advisors, grow our business, deliver shareholder value, and advance our key strategic priorities. Turning to our fourth quarter business results, total advisory and brokerage assets were $1.7 trillion, up 9% from Q3, as continued organic growth was complemented by our acquisition of Atria, which added $88 billion of assets in Q4. Total organic net new assets were $68 billion, an approximately 17% annualized growth rate. Prior to the onboarding of Prudential Advisors, our annualized growth rate was approximately 7%, a strong result both on an absolute and relative basis. For the full year, total organic net new assets were $141 billion, or an approximately 10% growth rate. On the recruiting front, Q4 recruited assets were a record $79 billion, which included $63 billion from Prudential. Looking ahead, given our strong pipelines, we expect our recruiting momentum to continue into 2025. However, I would note the natural seasonal headwinds to advisory movement in the back half of December typically carry into January. So we expect recruiting to ramp throughout Q1. As for our Q4 financial results, the combination of organic growth and expense discipline led to adjusted EPS of $4.25. Gross profit was $1,228,000,000. up 100 million sequentially. As for the components, commission advisory fees net of payout were 313 million, up 39 million from Q3. Our payout rate was 87.8%, up 30 basis points from Q3, due to the seasonal build in the production bonus and the onboarding of Prudential. With respect to client cash revenue, it was 397 million, up 25 million from Q3, as the sequential growth in balances more than offset the impact of lower short-term interest rates. Overall client cash balances ended the quarter at $55 billion, up $9 billion sequentially, which included approximately $4 billion from Atria and Prudential. The remaining $5 billion of cash balance growth was our largest sequential increase since the second quarter of 2022, a strong result even when considering the natural seasonal build in Q4. Within our ICA portfolio, the mix of fixed rate balances was roughly 55% within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 335 basis points in Q4, up three basis points from Q3, driven by higher yields in our fixed rate contract renewals. As we look ahead to Q1, we expect continued tailwinds from the yields in our new fixed rate contract to be partially offset by the full quarter impact of the November In December, rate cuts. As a result, we expect our ICA yield to increase by a few basis points. As for service and fee revenue, it was $139 million in Q4, down $7 million from Q3, due to lower conference revenue and IRA fees. Looking ahead to Q1, we expect service and fee revenue to be roughly flat, as the full quarter contribution from Prudential is offset by lower conference revenue and OSJ terminations. Moving on to Q4 transaction revenue, with $62 million, up $3 million from Q3. As we look ahead to Q1, trading activity levels remain roughly in line with Q4. However, I would note there are three fewer trading days in Q1, so we expect transaction revenue to decline by a few million sequentially. Now let's move on to Atria and Prudential, starting with Atria. Overall, the transaction is progressing well. and we remain on track to onboard our Atria advisors this year. As for Prudential, we onboarded $40 billion of assets in Q4 and expect the remaining $23 billion to onboarding Q1. Now let's turn to expenses starting with Core GNA. It was $422 million in Q4, bringing our full-year Core GNA to $1,515,000,000, which was within our outlook range. For the full year, prior to the impact of Atria and Prudential, we grew 2024 Core G&A by approximately 8%, roughly half the rate we grew in 2023. As we look ahead to 2025, we remain focused on delivering operating leverage in the business. In recent years, we have ramped investments to scale our business and drive greater efficiency. So while we will continue to invest to drive and support growth, the benefits of our ongoing efficiency efforts are slowing Core G&A growth in 2025. As a result, we plan to grow our core G&A in a range of 6% to 8%. In addition, we'll have the full year impact of expenses related to atrium credential, which adds $170 to $180 million. This brings our overall expectation for 2025 core G&A to be in a range of $1,730,000 to $1,780,000. To give you a sense of the near-term timing of this spend, as we look ahead to Q1, we expect core G&A to be in a range of $420 to $430 million. Moving on to Q4 promotional expense. It was $173 million, down $3 million from Q3, as lower conference expense was partially offset by seasonal increases in marketing spend, as well as transition assistance related to our strong recruiting and the acquisition of major. Looking ahead to Q1, we expect promotional expense to decrease to approximately $160 million. driven by lower prudential-related onwards. Looking at share-based compensation expense, it was $26 million in Q4, which included a $12 million impact related to the departure of our former CEO. As we look ahead to Q1, we expect this to return to a more normalized level for roughly $20 million. Turning to depreciation and amortization, it was $92 million in Q4, up $14 million sequentially. In addition to technology development related to credentials, as we noted last quarter, we recently went live with two new internal data centers, which was the main driver of the increase in Q4. Looking ahead to Q1, we expect depreciation and amortization to return to more typical levels of growth, as we expect an increase of a few million. As for interest expense, it was $82 million in Q4, up $14 million sequentially, driven by higher revolver balances following the close of the H-rate trend. I would also note that during the quarter, we completed a leverage-neutral refinancing of our existing $1 billion term loan B into a new term loan F, and as a result, expect roughly $5 million of annual interest expense saved. Regarding capital management, we ended Q4 with corporate cash of $479 million, down $229 million from Q3. As for our leverage ratio, at the end of Q4, it was 1.9 times. just below the midpoint of our target range. Moving on to 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 Q4, we deployed capital across our entire framework. As we continue to invest to drive and support organic growth, allocated capital to M&A, both within our liquidity and succession program, as well as the acquisition of Atria. And lastly, return capital to our shareholders, restarting share repurchases, buying back $100 million of our shares. As we look ahead to Q1, we expect to repurchase another $100 million of shares. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth deliver operating leverage, and create long-term shareholder value. With that, operator, please open the call for questions.