LPL Financial Holdings Inc.

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 plus release and supplementary information in 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 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, Operator. And thank you to everyone for joining our call. It's a pleasure to speak with you again. It's been a strong start to the year for LPL. We delivered another quarter of strong business performance, we reported excellent financial results, and we reached an agreement to acquire Commonwealth, significantly accelerating our progress towards our vision to be the best firm in wealth management. We accomplished this against a challenging operating backdrop with rising macroeconomic uncertainty. It's periods like this that serve as a reminder of the value of professional advice, the importance of our responsibility to support our advisors, and the strength and resiliency of our business model. Okay, now let's turn to our Q1 results. Despite market headwinds during the quarter, total assets increased to a new quarterly high of $1.8 trillion, as we attracted record organic net new assets of $71 billion, representing a 16% annualized growth rate. Our first quarter business results led to strong financial performance with record adjusted EPS of $5.15. Now let's turn to our strategic plan and our growth across our organic and inorganic activity initiatives. Our vision is clear. We aspire to be the best firm in wealth management. To do that, we are focused on three key priorities. One, pursuing novel and differentiated strategies that enable the firm's sustained success Two, creating an extraordinary employee experience, so employees in turn deliver an unparalleled client experience. And three, leading the firm with operational excellence through increased intentionality and rigor. Effectively executing on these focus areas will help us sustain our industry-leading growth while delivering improved operating leverage. With that as context, let's review a few highlights of our business growth. In the first quarter, recruited assets were $39 billion, bringing our total for the trailing 12 months to a record $167 billion. In our traditional independent market, we added approximately $20 billion in assets during Q1, a record for the first quarter of the year. 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 expanded 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. Next, we added approximately $1 billion of assets in the traditional bank and credit union market. We also continued to make progress with large institutions, where during the first quarter, we onboarded the retail wealth management business of Wintrust Financial and completed the transition of Prudential Advisors onto our platform. Our momentum continued in Q2, where in April, we announced that First Horizon would onboard its wealth management business to our institution services platform. Turning to overall asset retention, it remains industry-leading at 98% for the first quarter and 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 functions. As a compliment to our organic growth, we closed and onboarded the acquisition of the Investment Center and advanced our work to onboard and integrate Atria Wealth Solutions, for which the conversions began last weekend. Now, as for our planned acquisition of Commonwealth Financial Network, I can't underscore enough how honored we are to be partnering with the team at Commonwealth as we jointly engage with their advisors to articulate the power of combining our two firms. I have personally had the good fortune of speaking with a number of Commonwealth advisors, and the more time I spend with them, the more I understand the power of this distinguished community. Many of these advisors have worked together for decades, supported by a highly responsive management team that has cultivated a unique culture and family-like atmosphere. I have the utmost conviction in the value of preserving and fostering the Commonwealth community. We remain steadfast in our commitment to delivering on this tremendous opportunity to bring together the best of two great firms. We will preserve Commonwealth's industry-leading service experience, which has garnered the number one in independent advisor satisfaction with JD Power for 11 consecutive years. And we'll build upon that with an upgraded best-of-breed platform, including more flexible technology, a more comprehensive product set, extensive research, and unique capabilities like LPL's liquidity and succession offering. By preserving the Commonwealth experience for advisors and maintaining continuity in the broader community and culture, while also leveraging the substantial resources and capabilities of LPL, we will deliver an unparalleled offering for independent financial advisors with Commonwealth at LPL. We are still in the early innings of the retention effort, but are tracking to our plan and in line with our expectations with respect to advisor commitments. We spent the last several years building out the team, processes, and capabilities to execute large and complex onboardings, all geared towards ensuring a frictionless experience for transitioning advisors. We are now focusing those resources on this important opportunity to ensure that we deliver a seamless transition. In closing, the first quarter was a strong start to the year, and we feel great about our position as a critical partner to our advisors and institutions while we continue to maximize long-term value for shareholders. With that, I'll turn the call over to Matt.

Thanks, Rich. I'm glad to speak with everyone on today's call. As we move into 2025, 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 expanded markets as we onboarded the wealth management businesses of Prudential and Wintrust and are preparing to onboard First Horizon later this year. As a complement to our strong organic growth, we closed and onboarded the acquisition of the Investment Center in March, continued to prepare to onboard our HRE advisors, and lastly, entered into an agreement to acquire Commonwealth Financial Notes. So as we look ahead, we are more excited than ever by the opportunities we have to serve and support our growing advisory, while continuing to deliver an industry-leading value proposition and drive organic growth. Now, turning to our first quarter business results, total advisory and brokerage assets were $1.8 trillion, up 3% from Q4, as record organic net new assets more than offset lower equity needs. Total organic net new assets were $71 billion and approximately 16% annualized growth rate. Prior to the onboarding of Wintrust Advisors and the remaining Prudential assets, our annualized organic growth rate was approximately 7%, a strong result both on an absolute and relative basis. On the recruiting front, Q1 recruited assets were $39 billion, which included $16 billion from Wintrust. Prior to large institutions, recruited assets were approximately $22 billion, a record for the first quarter of the year. As for Q1 financialism, the combination of organic growth and expense discipline led to an adjusted pre-tax margin of approximately 40%. and record adjusted EPS of $5.15. Gross profit was $1,273,000,000, up 45 million sequential. As for the components, commission advisory fees net of payout were $363,000,000, up 50 million from Q4. Our payout rate was 86.8%, 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 by approximately 60 basis points, driven by the typical seasonal build in the production. With respect to client cash revenue, it was $408 million, up $11 million from Q4, as average cash balances increased during the quarter. Overall client cash balances ended the quarter at $53 billion, down $2 billion sequentially, primarily driven by advisory fees paid during the quarter. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60%, within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 337 basis points in Q1, up two basis points from Q4, driven by higher yields on our fixed rate contract renewals. As we look ahead to Q2, based on where client cash balances and interest rates are today, as well as the yields on our new fixed rate contract, we expect our ICA yield to be roughly flat to Q1. As for service and fee revenue, it was $145 million in Q1, up $6 million from Q4, driven by strong organic growth and higher IRA fees. Looking ahead to Q2, we expect service and fee revenue to increase by approximately $5 million sequentially, driven by conference revenues and the underlying growth of the business. Moving on to Q1 transaction revenue. It was $68 million, up $6 million sequentially due to increased trading bonds. As we look ahead to Q2, we expect transaction revenue to be roughly flat. Now let's move on to our recent large institution onboardings, as well as our closed and upcoming acquisitions. As for large institutions, in Q1, we onboarded Wintrust and completed the transition of Prudential onto our platform. Collectively, these onboardings added over $80 billion of client assets. In terms of M&A, we recently started the onboarding of Atria Advisors, which will continue for the next few months and expect to close our acquisition of Commonwealth in the second half of this year. These acquisitions are expected to add nearly $350 billion of client assets to our platform. Now let's turn to expenses started with 4G. It was $413 million in Q1. For the full year 2025, We're seeing early returns on our renewed focus to drive operating leverage in the business, as our efficiency efforts have slowed the growth of Core G&A. As a result, we are lowering the upper end of our outlook range by $15 million. We now anticipate full-year 2025 Core G&A to be in a range of $1,730,000,000 to $1,765,000,000, which includes $170,000,000 to $180,000,000 of expenses related to Prudential and Atrium. but as prior to expenses associated with common law. To give you a sense of the near-term timing of this, as we look ahead to Q2, we expect core G&A to be in a range of 435 to 445 million. Moving on to Q1 promotional expense, it was 152 million, down 21 million from Q4, primarily driven by lower credential-related onboarding costs, as well as seasonally lower conferences. Looking ahead to Q2, we expect promotional expense to increase by approximately 20 million, driven by conference spend, as well as increased transition assistance resulting from strong recruiting. Turning to depreciation and amortization, it was 92 million in Q1, flat sequentially. Looking ahead to Q2, we expect depreciation and amortization to increase by roughly 5 million. As for interest expense, it was 81 million in Q1, down $1 million sequentially due to lower interest expense on our floating rate. In addition, in early April, we issued $1.5 billion of senior notes to finance a portion of the acquisition of Commonwealth. As a result, in Q2, we expect interest expense to increase by approximately $20 million sequentially. Lastly, a reminder that until the closing of Commonwealth, we will earn interest on the proceeds from our recent capital. As such, we expect interest income to increase by approximately $30 million sequentially. Regarding capital management, we ended Q1 with corporate cash of $621 million, up $142 million from Q4. As for our leverage ratio, at the end of Q1, it was 1.8 times. As a reminder, we expect to close our acquisition of Commonwealth in the second half of this year. And following the close, we expect our leverage ratio to be approximately 2.25 times. a little above the midpoint of our target range of 1.5 to 2.5 times. To uphold our commitment to maintaining a strong and flexible capital position, we pause share or purchases following the announcement of our planned acquisition of Commonwealth. Following the close, we have a plan to reduce leverage closer to the midpoint of the range by the end of 2026. Once we onboard Commonwealth, we will revisit share or purchases. Guided by our leverage ratio at that time, and our overall capital allocation frame. 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 Q1, we deployed capital across our entire framework as we continued 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 the investment center. And lastly, return capital to our shareholders, buying back $100 million of our 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.