Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Total assets increased to $1.5 trillion, driven by solid organic growth and higher equity markets.
- Second-quarter organic net new assets were $29 billion, representing 8% annualized growth.
- Recruited assets reached $24 billion in Q2, bringing the total for the trailing 12 months to a record $93 billion.
- Asset retention for the second quarter was approximately 98%, indicating strong client loyalty.
- Adjusted EPS for the second quarter was $3.88, reflecting solid financial performance.
Negative Points
- Client cash balances declined by $2 billion sequentially, driven by record client net buying activity.
- Promotional expenses increased significantly to $148 million, primarily due to Prudential-related onboarding costs and increased transition assistance.
- Core G&A expenses are expected to increase by $5 million to $10 million sequentially in Q3.
- The separation from strategically misaligned OSJs will result in the off-boarding of approximately $20 billion of client assets.
- The payout rate increased to 87.3% in Q2 and is expected to rise further to approximately 87.5% in Q3, driven by seasonal factors.
Q & A Highlights
Q: Do you anticipate any wholesale changes to sweep deposit pricing and how sweep cash is monetized across the industry more broadly?
A: Dan Arnold, President and CEO: We evaluate all of our pricing within our strategic pricing framework and value proposition, considering factors like industry benchmarking. Currently, our cash sweep program pricing ranges from 35 to 220 basis points, placing us in the top half of the market. While future rate changes could influence pricing, we focus on evolving and transforming our value proposition to better serve advisors and clients. We have flexibility in our pricing options due to our scale and vertically integrated solutions.
Q: Given the developments relating to sweep cash, do you anticipate any changes to transition assistance (TA) for you and the industry peers?
A: Matthew Audette, CFO: Advisors prioritize capabilities, technology, service, and ongoing economics over TA. Our approach to underwriting returns at 3 to 4 times EBITDA remains unchanged. We feel confident in our value proposition and do not expect significant changes to TA.
Q: Can you provide the percentage range of cash in centrally managed accounts and discuss fiduciary obligations on advisory cash?
A: Matthew Audette, CFO: Centrally managed accounts have around $127 billion in assets, with cash levels at about 3% of AUM. Cash allocations are consistent across all models, whether contributed by LPL research or external third-party management. We ensure our cash allocations meet fiduciary obligations and provide necessary flexibility for advisors to serve their clients.
Q: What are the OSJ economics on an EBIT ROA basis relative to the firm-wide average, and do you anticipate other OSJs to exit in the intermediate term?
A: Matthew Audette, CFO: The gross profit ROA for the firm is in the low-$30 millions, while the firms we are separating from have an ROA around two-thirds of that. These firms were not growing and were a drag on organic growth. Dan Arnold, President and CEO: We have strengthened our alignment with large OSJs and feel confident in our ability to collectively serve and support advisors, contributing to overall growth.
Q: How does LPL's advisory offering differ from larger banks, and what gives you confidence in remaining insulated from regulatory actions?
A: Dan Arnold, President and CEO: We do not have an affiliated bank or proprietary mutual fund complex, avoiding potential conflicts of interest. Our cash sweep program contracts with third-party banks, offering expanded FDIC insurance. We provide clear and transparent disclosures and actively monitor cash positions within advisory accounts. We feel confident in our regulatory positioning due to our adherence to duty of care, operating controls, and disclosure requirements.
Q: What might lead you to change sweep pricing, and have you heard from regulators on your sweep rates or disclosure practices?
A: Dan Arnold, President and CEO: We review pricing through a strategic lens, focusing on differentiating in the marketplace and aligning with advisors' and clients' needs. We continuously challenge ourselves to innovate and evolve our pricing strategies. We have ongoing discussions with regulators and feel confident in our regulatory positioning.
Q: Can you provide an update on July to date sweep cash balances and the impact of OSJs offboarding?
A: Matthew Audette, CFO: July is shaping up to be a good month, with client cash balances declining by around $700 million due to seasonality and inflows. Organic growth is expected to be in the 6% to 6.5% range. We will clearly delineate the impact of OSJs offboarding in our metrics, with very little impact so far.
Q: What areas were particularly misaligned with the OSJs you are separating from, and do you anticipate other OSJs falling into similar buckets over time?
A: Dan Arnold, President and CEO: Some OSJs were buying up advisors' practices, creating a captive model that conflicted with our principles of independence. We have strengthened our alignment with large OSJs and do not anticipate similar issues in the future.
Q: Can you discuss the environment for recruiting and the economics of recruited assets today versus a year ago?
A: Matthew Audette, CFO: Our underwriting approach and economics have not changed, with recruiting coming onboard at 3 to 4 times EBITDA. Dan Arnold, President and CEO: We continue to see strong momentum in recruiting across all affiliation models, driven by the appeal of our model and our go-to-market strategy. We have a strong pipeline and feel confident in our positioning for future growth.
Q: What is driving the increase in promotional expenses, and should we expect it to normalize in the fourth quarter?
A: Matthew Audette, CFO: The increase in promotional expenses is driven by conference spend and Prudential-related onboarding costs. We expect promotional expenses to normalize in the fourth quarter after the conference and onboarding activities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
