LPL Financial Holdings Inc.

Good afternoon, and thank you for joining the fourth quarter 2025 Earnings Conference call for LPL Financial Holdings, Inc. Joining the call today are Chief Executive Officer Rich Steinmeier and President and Chief Financial Officer Matt Adet. 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 financials, 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 captioned 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 a 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'll 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. Before touching on our fourth quarter results, it was a milestone year for LPL, as we significantly advanced our key strategic priorities. To reflect on a few of our key accomplishments, we delivered industry-leading organic asset growth of 8%, including the onboarding of the retail wealth management businesses of Wintrust Financial and First Horizon, which collectively support over 200 financial advisors managing roughly $34 billion in client assets. We completed the onboarding and integration of Atria Wealth Solutions, converting seven distinct broker-dealers to the LPL platform. We signed and closed our acquisition of Commonwealth Financial Network, marking the largest deal in LPL history, welcoming their home office staff and approximately 3,000 advisors to the LPL family. We launched a national marketing campaign to elevate our brand with advisors and their clients. We significantly advanced our employee experience, resulting in our highest employee engagement scores in nearly a decade. We made meaningful progress driving improved operating leverage. And finally, our collective efforts resulted in record adjusted earnings per share of $20.09. Okay, now let's turn to our Q4 results. In the quarter, total assets increased to a record $2.4 trillion, driven by organic growth and higher equity markets. We attracted organic net new assets of $23 billion, representing a 4% annualized growth rate. Our fourth quarter business results led to strong financial performance with record adjusted EPS of $5.23, an increase of 23% from a year ago. Next, let's turn to our strategic plan and progress across our organic and inorganic 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, 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 models. With that as context, let's review a few highlights of our business growth. In Q4, recruited assets were $14 billion, bringing our total for the year to $104 billion. Throughout the quarter, our pipelines continued to build and are near record levels. Recognizing that many opportunities are in the early and mid-stages, we expect a pull-through to improve over the course of the year as we reignite our industry-leading growth engine. In our traditional markets, we added approximately $13 billion in assets during Q4, as we maintained our industry-leading capture rate of advisors in motion. With respect to our expanded affiliation models, strategic wealth, independent employee, and our enhanced RIA offering, we delivered another solid quarter, recruiting roughly $1 billion in assets. Turning to overall asset retention, it was 97% for Q4 and over the last 12 months. This is a testament to the continued efforts to enhance the advisor experience through the delivery of new capabilities and technology and the evolution of our service and operations. As for Commonwealth, we are thrilled to be working closely with our new colleagues to develop the target operating model and positioning for the Commonwealth value proposition within our suite of offerings. The work is well underway and we remain on track to onboard the Commonwealth advisors in Q4. In parallel, in partnership with our Commonwealth colleagues, we remain focused on helping their advisors understand the benefits of staying with Commonwealth, ensuring each advisor has everything needed to complete their diligence and make an informed decision. We continue to expect roughly 90% retention of client assets. As we get closer to onboarding later this year, our estimate will continue to firm up. In closing, the fourth quarter was a capstone on an outstanding year. This is a result of the dedication of our team and their unwavering commitment to our advisors. So I want to thank everyone at LPL for their efforts. As we look ahead, we remain well positioned to serve as a critical partner to our advisors and institutions to continue delivering industry-leading organic growth and to maximize long-term value for shareholders. With that, I'll turn the call over to Matt.

Thanks, Rich, and I'm glad to speak with everyone on today's call. As we reflect on 2025, it's been a year of meaningful progress for LPL as we continue to execute against some of our key strategic priorities, which include advancing our efforts to drive improved operating leverage through a combination of increased efficiency in our business and refinements to pricing to ensure it is aligned with the value we deliver, and driving further improvements to the advisor experience by removing friction through investments in automation across our service, operations, and supervision. As we look ahead, we're encouraged by the opportunities in front of us to better serve our advisors and continue strengthening our industry-leading value proposition. Now, turning to a few highlights from our Q4 business results. Total advisory and brokerage assets were $2.4 trillion, up 2% from Q3, as continued organic growth was complemented by higher equity needs. Total organic net new assets were $23 billion, an approximately 4% annualized growth rate. For the full year, total organic net new assets were $147 billion or an approximately 8% growth rate. As for our Q4 financial results, the combination of organic growth and expense discipline led to adjusted pre-tax margin of approximately 36% and record adjusted EPS of $5.23. Growth profit was $1,542,000,000, up $62,000,000 sequentially. As for the key drivers, commission advisory fees and then a payout were $453 million, up $27 million from Q3. Our payout rate was 88%, up 53 basis points from Q3, due to the seasonal build in the production bonus. With respect to client cash revenue, it was $456 million, up $14 million from Q3, as the sequential growth in balances more than offset the impact of lower short-term interest rates. Overall client cash balances end of the quarter at $61 billion, up $5 billion sequentially, a strong outcome even when considering the typical Q4 seasonal bill. Within our ICA portfolio, the mix of fixed rate balances end of the quarter at roughly 55%, within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 341 basis points in Q4, down 10 basis points from Q3, driven by the impact of the October and December rate cuts. As we look ahead to Q1, we expect the full quarter impact of the Q4 rate cuts to lower our ICA yield by roughly 10 basis points. As for service and fee revenue, it was $181 million in Q4, up $6 million from Q3, as the full quarter of Commonwealth was partially offset by lower conference revenue in IRA fees. Looking ahead to Q1, we expect first quarter service and fee revenue to increase by approximately $25 million sequentially. This is driven by two factors. First, a seasonal decline in conference revenue of approximately $10 million. This is more than offset by the impact of the fee changes we announced last quarter, which will provide an ongoing quarterly benefit to service and fee revenue of roughly $35 million or $140 million annually. Moving on to Q4 transaction revenue. It was $75 million, up $8 million from Q3, driven by increased trading volumes. 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 turn to our acquisition of Commonwealth. As Rich mentioned, the transaction is progressing well. and we remain on track to onboard in the fourth quarter. As for the financials, accounting for current client assets and cash balances, as well as interest rates, we continue to estimate run rate EBITDA of approximately $425 million once fully integrated. Next, let's move on to expenses, starting with core G&A. It was $536 million in Q4, bringing our full-year core G&A to $1,852,000,000, below the low end of our outlook range. reflecting progress we've made driving greater efficiency and lowering our cost to serve. For the full year, prior to the impact of Prudential, Atria, and Commonwealth, 2025 Core G&A increased by approximately 4%, our lowest level of growth in several years. In 2026, we plan to continue to invest in the business to deliver greater efficiencies and drive operating leverage as we scale. Prior to Commonwealth, we expect Core G&A growth of 4.5% to 7%, or $1,775,000,000 to $1,820,000,000. In addition, we'll have the full-year impact of expenses related to Commonwealth, which adds roughly $380,000,000 to $390,000,000. This brings our overall expectation for 2026 Core G&A to be in a range of $2,155,000,000 to $2,210,000,000. And 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 540 to 560 million. Next, I want to highlight a minor update to our management P&L this quarter, where we separated TA loan amortization from promotional expense. While this is not a new disclosure, we hope the updated placement allows you to more easily analyze our results. So, looking at TA loan amortization, it was 133 million in Q4, up 28 million sequentially, driven by Commonwealth-related transition assistance, as well as our ongoing recruiting. As we look ahead to Q1, we expect TA loan amortization to increase by roughly $5 million, primarily driven by Commonwealth. Turning to promotional expense, it totaled $76 million in the fourth quarter, down $21 million sequentially, primarily driven by lower conference spend. Looking ahead to Q1, we expect promotional expense to be roughly flat sequentially, Turning to depreciation and amortization, it was 105 million in Q4, up 5 million sequentially. Looking ahead to Q1, we expect depreciation and amortization to increase by 5 million. As for interest expense, it was 106 million in Q4, roughly flat sequentially, as increased usage of the revolver was offset by lower short-term interest rates. Regarding capital management, we ended Q4 with corporate cash of 470 million, down $99 million from Q3. As for our leverage ratio, it was 1.95 times at the end of Q4, near 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 continued to deploy capital in line with our priorities, investing primarily in organic growth and M&A, where we advanced the Commonwealth integration and continued to allocate capital to our liquidity and succession solution. Specific to share our purchases, a reminder that we paused buybacks following the announcement of the Commonwealth acquisition with a plan to revisit following the onboarding. As we look ahead, we are ahead of schedule with leverage already at the midpoint of our target range. and the operational work to onboard Commonwealth well underway, there may be an opportunity to refine the timing of resuming share buybacks later 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 have to continue to drive growth, deliver operating leverage, and create long-term shareholder value. With that, operator, please open the call for questions.