February 11, 2014

LPL Beats Q4 Estimates, Drops Bank Plans

The IBD improves its net income by 20%, but its profit margin is hurt by weak cash-sweep results

CEO Mark Casady of LPL. CEO Mark Casady of LPL.

LPL Financial (LPLA) said Monday that its fourth-quarter profits rose 20% to $44.4 million, or $0.43 per share, from $36.9 million, or $0.34 a share, a year ago. Sales improved 16% to $1.09 billion in the period. Its adjusted results topped analysts’ estimates.

During a call with investment analysts, LPL Chairman and CEO Mark Casady explained that the independent broker-dealer is no longer pursuing any plans to form a bank holding company. It is, however, still considering the possibility of acquiring an industrial loan company.

Investor interest in LPL’s growth story had pushed the stock up 1.6% on Monday, when it closed at $52.74. After Tuesday’s early announcement of its results, though, the stock weakened by as much as 3.6%. By the afternoon, its shares were trading down about 1% at $52.20, despite an overall uptick in the market.  

“Our continued success in retaining and recruiting advisors also contributed to our strong results,” Casady said during a conference call. “We believe our 97% annual production retention continues to lead the industry … We [also] believe advisor migration to independence continues to be a sustainable, long-term trend.”

The executive noted that LPL recruited 110 net new advisors in the fourth quarter and 321 net new advisors in 2013. "Our pipeline remains strong and we are optimistic of our momentum heading into 2014,” he said.

Net new advisory assets, which exclude market movement, were $3.9 billion in Q4 and $14.6 billion for the year, a 12% jump from 2012.

Assets under custody on the company’s RIA platform grew 54% to $62.9 billion at year end and included 285 independent RIA firms versus $40.9 billion and 191 firms as of Dec. 31, 2012.

Total brokerage and advisory assets rose 17% in Q4 to $438 billion. Overall, LPL’s 13,600-plus advisors managed an average of about $32 million in client assets and had averagely yearly fees and commissions of $254,000, a 13% jump from a year ago.

Average commissions represented about $163,000 of this total, including “elevated levels” of nontraded REIT sales. Excluding these sales, commissions per advisor were $151,000.

There were some hiccups in the growth story, though. Its adjusted margin in Q4 (as a percent of net revenue) declined to 11.4% or 30 basis points vs. Q4’12, mainly due to a $7 million decline in LPL’s cash sweep revenue, according to CFO Dan Arnold. In addition, asset-based revenue growth in Q4 was “partially offset” by the drop in cash sweep revenues, Arnold says.

2014 Plans

To improve its profit margin and other results going forward, the IBD says it is rolling out a new alternative investment order entry system and enhancing its variable annuity order entry system. It will also continue to outsource back-office work.

“We've made excellent progress over the last year, generating $5 million in annualized savings based upon what we've learned as we evolved from strategy to implementation,” Casady said. “We've refined our expectations for total annual savings to approximately $30 million by 2015.

The CEO also stressed that LPL’s earnings growth and margin expansion should “become magnified when short-term interest rates begin to rise.”

Recruiting Picture

LPL is very upbeat on its recruiting outlook, with Casady pointing to research from Cogent Reports, which found that 23% of advisors are considering leaving their current firm.

"So we like advisors in motion," he said. "We know that the power to go independent is incredibly strong, both in terms of what advisors can do for their client, their ability to build their own business and have the American dream of ownership of the company and because it is accretive to them personally from a compensation standpoint as well."

The company expects to add 400 to 500 net new advisors per year going forward, especially hybrid advisors (who have an RIA and a commission-based practice). "We're also seeing good growth from other independent firms, as those advisors leave platforms [that rivals] are just unable to reinvest in the kind of programs and services that we can," Casady explainied. "That works for our force. And we're seeing a nice uptick in the banking channel for banks and credit unions looking to join the LPL platform as well."

According to the Cogent studey, LPL and Raymond James (RJF) earned the highest overall consideration for the second year in a row, with 49% and 44% of advisors likely to consider each firm, respectively. Raymond James also has an employee channel, and it owns a bank. 

As LPL considers the option of buying an industrial loan company (instead of a bank), it says it would like to take cash sweep assets, for example, "and put [them] into a high-grade portfolio to capture more of the spreads than we're able to capture today," Casady explained. "It's simple as that. We'd like it as simple. An industrial loan corp particularly gets us there, again because of the regulatory oversight and the simplistic nature of how it's designed."

Also on its call with analysts, LPL executives noted that its advisor payout rate grew to 88.1%, or 38 basis points year-over-year. The productivity-based components of the payout rate was steady at 84%, while the production bonus declined 18 basis points year-over-year to 3.2%.

"This has led to continued stability in our total payout rate as measured over a trailing 12 month basis," Arnold said.

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