LPL Financial (LPLA) shared its second-quarter earnings late last week, reporting higher net income but flat sales.
While it says it is making “significant progress” on the compliance and regulatory fronts, it also admits to grappling with slower sales commissions and decreased cash sweep revenue, which fell 9% in the period, as well as going through a series of executive changes.
Looking ahead, though, the independent broker-dealer sees five opportunities/challenges that will impact its business–as well as that of rival IBDs–in 2016.
Naturally, its executives tend to put a positive spin on where the company is headed, noting that profit margins remain about 30%. But, like the volatile investment market its 14,100 affiliated reps operate in, the financial-service industry is full of unexpected turbulence caused by fickle regulators and other factors.
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Here are five of the complex dynamics influencing LPL’s financial results in the short term.
1. Advisor retention and recruiting are “bumpy” and “lumpy” processes.
According to Chairman & CEO Mark Casady, who spoke with equity analysts on a conference call on Wednesday after the IBD released its second-quarter results, LPL had a net gain of 32 advisors in the period. For the past 12 months, it has added 290, which is roughly 24 a month on average.
“While production retention continued to be high, we had an uptick in advisor departures during the quarter due to low producers leaving our system,” Casady explained.
This means reps with average fees & commissions of $20,000.
“So they’re very small producers, and therefore good to have out of the system … [with] all due respect to them, and we just had an abnormal bump in those [departing] … for the quarter,” he added.
While LPL is “seeing an uptick in recruiting,” according to Casady, “… it’s lumpy, in terms of when it shows up and lumpy depending on when we decide to take advisors out, as happened in the second quarter.”
2. Alternative sales are under pressure.
The uncertain macroeconomic environment in the quarter “was a challenge,” Casady said, which “reduced brokerage activity across the industry.”
He said this was the case across mutual funds, fixed and variable annuities and alternative investments. “More specifically low interest rates both constrained annuity sales and limited cash sweep revenues,” Casady added.
Plus, a “maturing real estate cycle and a lack of liquidity events pressured alternative investment sales across the industry as well as ours. We expect continued softness in sales commissions on the third quarter due to the same factors,” he cautioned.
“All the three horsemen [funds, annuities and alts], pardon the expression, of commissioned sales are down, and we’re seeing this across the industry,” Casady stated. The most-recent period, he says, “felt a little bit like 2012, when we had tax uncertainty that affected commissions as well.”
Nonetheless, the chairman and CEO insists the firm is upbeat given the flows it is experiencing in its advisory products overall.