LPL Financial Holdings Inc.

Good afternoon, and thank you for joining the third quarter 2025 earnings conference call for LPL Financial Holdings, Inc. Joining the call today are Chief Executive Officer Rich Dunmire 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 supplemental 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 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 referred listeners to the disclosure 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 to 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 is hard to believe, but it's been a little over a year since I became the CEO of LPL Financial. In that time, we've advanced the firm, extending our privileged competitive position in the advisor-mediated marketplace while driving efficiency in the business. So I'd like to spend some time today sharing an update on the progress against the key initiatives I outlined on my first earnings call. But first, let's hit our Q3 results. In the quarter, total assets increased to a record $2.3 trillion, driven by our acquisition of Commonwealth and complemented by solid organic growth and higher equity markets. We attracted organic net new assets of $33 billion, representing a 7% annualized growth rate. Our third quarter business results led to strong financial performance, with a record adjusted EPS of $5.20. an increase of 25% from a year ago. With that as context, let's review a few highlights of our business growth. In the third quarter, recruited assets were $33 billion, bringing our total for the trailing 12 months to a record $168 billion. In our traditional independent market, we added approximately $12 billion in assets during Q3, where despite depressed industry-wide advisor movement, We maintained our 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 $3 billion in assets. Our third quarter advisor recruiting underscores the evolution of our business and the appeal of our flexible affiliation models. During the quarter, we attracted four separate $1 billion-plus practices, which joined us from a range of firms, including regional broker-dealers, insurance companies, and wirehouses. Our recruiting results this quarter underscore the extensibility of our offering across the entire advisor-mediated marketplace, where we have created the flexibility to serve any advisor where they are in the evolution of their practice. This breadth of affiliation models is key to the sustainability of our growth as we look ahead. We also continue to make progress with large institutions onboarding the wealth management business of First Horizon. It's only been a couple of months, but there are already signs that the integrated experience and enhanced capabilities we are delivering are improving the efficiency of their advisor practice. Turning to overall asset retention, Prior to previously disclosed misaligned OSJ assets that off-boarded during the quarter, it was 98% for Q3 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 complement to our organic growth, we closed our acquisition of Commonwealth Financial Network, welcoming There are approximately 3,000 advisors and home office staff to the LPL family. The transaction is progressing well, and we continue to track towards our 90% retention target. Thus far, advisors representing nearly 80% of assets have signed to stay with Commonwealth and LPL. From an operational standpoint, following the close, we commence work on the capability build and onboarding planning. To give you a sense of the scope of this work, we are... ushering in a foundational shift in our advisor workstation, ClientWorks, establishing a householding-based architecture compared to our historically account-based orientation, further bolstering this relationship-based logic with a single relationship agreement to vastly improve the client onboarding experience and simplify ease of movement between account sites, and launching a mobile version of our ClientWorks workstation for ease of access for advisors on the go. These are key capabilities that not only enable commonwealth conversion, but also accelerate the delivery of core functionality for the benefit of all LPL advisors. Next, let's turn to our strategic plan. Our vision is clear. We aspire to be the best firm in wealth management. To connect this back to my first earnings call a year ago, in service of this goal, we've amplified our focus in three key areas. One, maintaining the client centricity the firm was built on. Two, empowering our employees to deliver exceptionally for our advisors and their clients. And three, delivering improved operating leverage. Effectively executing on these focus areas will help us sustain our industry-leading growth while advancing the efficiency and effectiveness of our model. In terms of our clients, we have been laser-focused on preparing for a seamless onboarding of commonwealth, including the delivery of capabilities and implementation of systems and practices which will benefit all LPL advisors, new and existing. Separately, we continue to look for opportunities to strengthen our value proposition in the market while ensuring that we are pricing our services aligned with the value that we deliver. Earlier this year, we made adjustments to our production bonus as well as within our business solutions group. And looking ahead, we plan to make additional adjustments as we evolve our offering, streamlining our services portfolio to focus on high demand, high impact services that deliver the greatest value to advisors, while simplifying pricing across our advisory platforms. And to ensure we maintain our competitive position, we're making a few targeted offsetting fee adjustments where we've been priced below the market. As for our employees, we've been focused on elevating our benefits and better distributing decision-making authority to the teammates closest to our advisors. During the quarter, we also welcomed Emily Field, our new chief people officer, to help guide this critical work. And just last week, she kicked off our revamped manager learning program aimed at giving managers the necessary skills to build empowered teams and deliver exceptional employee and client experiences. Finally, Regarding our efforts to drive improved operating leverage, we've made meaningful progress reducing our cost to serve, and Matt will share some additional detail on that in a moment. To summarize, we are pleased with the third quarter results, and we feel great about our position as a critical partner to our advisors and institutions while we continue to create long-term value for our shareholders. With that, I'll turn the call over to Matt, but before I do, I just wanted to preempt that first question that we're hearing from so many of you. You wanted an update on our favorite Halloween candy. Well, mine is 100-gram bars, and Matt's is actually muscle milk. So with that, Matt, take it away.

Not on the script, Rich. You're very funny. I do like me a good protein shake. But it's not my favorite candy. Like, I do have a favorite candy. And I didn't want to tell you. I figured it would be too triggery. given your high school football nickname, Butterfingers. Oh, boo. I love those. Now I can eat them. Now I can eat them. All right, well, thank you for that intro. And I'm glad to speak with everyone on today's call. It was another productive quarter as we advanced several strategic priorities, including another quarter of industry-leading organic growth, the onboarding of the wealth management business of First Horizon, closing of our acquisition of Commonwealth, and the continued advancement of our cost efficiency work, which is driving sustainable improvement in our margins. Now turning to a few highlights from our Q3 business results. Total advisory and brokerage assets were $2.3 trillion, up 21% from Q2, as continued organic growth and higher equity markets were complemented by our acquisition of Commonwealth, which added $275 billion of assets in Q3. Total organic net new assets were $33 billion, and approximately 7% annualized growth rate, a strong result both on an absolute and relative basis. On the recruiting front, Q3 recruited assets were $33 billion, contributing to a record $168 billion over the trailing 12 months. With respect to large institutions, we successfully onboarded First Horizon with $18 billion of AUM, of which $17 billion transitioned onto our platform in Q3. Looking at Q3 financial results, the combination of organic growth and expense discipline led to an adjusted pre-tax margin of approximately 38% and record adjusted EPS of $5.20. Gross profit was $1,479,000,000, up $175,000,000 sequentially. As for the key drivers, commission and advisory fees net of payout were $426,000,000, up $77,000,000 from Q2. Our payout rate was 87.5%, up approximately 14 basis points from Q2, driven by the typical seasonal build in the production, as well as our acquisition of commonwealth. With respect to client cash revenue, it was $442 million, up $28 million from Q2. Overall client cash balances into the quarter at $56 billion, up $5 billion, which included approximately $4 billion from commonwealth. The remaining $1 billion of cash balance growth was a result of the organic growth for our business. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60%, near the midpoint of our target range of 50% to 75%. Looking more closely at our ICA yield, it was 351 basis points in Q3, up 9 basis points from Q2, driven by benefits from the Atria conversion and our acquisition of Comma. As we look ahead to Q4, based on where client cash balances and interest rates are today, we expect our ICA yield to decrease to roughly 345 basis points, driven by the impact of recent rate cuts. As for service and fee revenue, it was $175 million in Q3, up $23 million from Q2, primarily driven by revenues from our annual focus companies, as well as our acquisition economies. Looking ahead to Q4, we expect service and fee revenue to be roughly flat sequentially, as a full quarter of revenue from Commonwealth is offset by lower conference revenue and seasonally lower IRA fees. Moving on to Q3 transaction revenue. It was $67 million, up $7 million sequentially, primarily driven by Commonwealth. As we look ahead to Q4, based on activity levels to date, we expect transaction revenue to be roughly $70 million. With respect to the monetization initiatives Rich mentioned earlier, we regularly evaluate how effectively we're delivering services, pricing, and an overall experience that aligns with advisor needs. Starting next year, we will streamline our business solutions portfolio to focus on those that deliver the greatest value to advisors, further reduce pricing across our advisory platforms, and make targeted offsetting fee increases where we've been priced below the mark. These actions are designed to strengthen our competitive position while ensuring we have the resources to continue investing in platforms, tools, and services that enable advisors to grow and succeed. To help frame the financial impact to our 2026 results, we estimate that these changes would increase our trailing 12-month adjusted free tax margin by approximately one percentage point. Now let's move on to our recent acquisitions, starting with Collins. Overall, the transaction is progressing well, and we are on track to onboard Commonwealth in the fourth quarter of 2026. We continue to track towards our 90% retention target, with advisors representing nearly 80% of assets already signed. In addition, factoring in current asset levels, our run rate EBITDA expectation has increased to approximately $425 million once fully integrated. As for Atria, the onboarding is complete. And considering current assets, we are increasing our expected run rate EBITDA to approximately 155. Now let's turn to expenses starting with 4G&A. It was $477 million in Q3, below our outlook range for the quarter, as we continue to make progress driving incremental operating leverage in the business. To give you a sense of the work, we're automating manual processes in our operations and services, increasing straight-through processing and reducing friction in our service set. In addition, these initiatives have the added benefit of improving the client experience. With that as context, looking at the full year 2025, given our cost initiatives are tracking ahead of schedule, we are lowering our 2025 outlook to a range of $1,860,000,000 to $1,880,000,000. Moving on to Q3 promotional expense. It was $202,000,000, up $38,000,000 from Q2. primarily driven by conference spend as we hosted our annual focus conference in August, as well as transition assistance related to commerce. Turning to depreciation and amortization, it was $100 million in Q3, up $3 million sequentially. Looking ahead to Q4, we expect depreciation and amortization to increase by roughly $5 million. As for interest expense, it was $106 million in Q3, up $4 million sequentially. driven by increased usage of our revolver following the close of the Commonwealth transaction. Looking ahead to Q4, given current debt balances and interest rates, we expect interest expense to increase by approximately $5 million from Q3. Turning to capital management, we ended Q3 with corporate cash of $568 million, down $3 billion from Q2, as we deployed the proceeds from our capital raises to fund the acquisition of Commonwealth. While the majority of transition assistance was deployed in Q3, we expect a couple hundred million of additional payments in the fourth quarter, which will return corporate cash to more normalized levels. As a result, we anticipate Q4 interest income to decline to approximately $30 million. As for our leverage ratio, it was 2.04 times at the end of Q3, below our initial expectations for roughly 2.25 times following the close of Commonwealth. Moving on to capital deployments. 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 Q3, the majority of our capital deployment was focused on supporting organic growth and M&A, where we closed Commonwealth and continued to allocate capital to our liquidity and succession solution. To uphold our commitment to maintaining a strong and flexible capital position, share repurchases remain Paul. which we will revisit once we onboard Comma. 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.