LPL Financial (LPLA) shared its earnings results early Thursday and said it would allow up to $500 million to be spent on share repurchases.
It had net income of $41.1 million, or $0.43 per share, in the third quarter vs. $33.3 million, or $0.33 per share, a year ago. On an adjusted basis, earnings were $55.8 million, or $0.55 per share, vs. $48.8 million, or $0.48 per share last year – beating analysts’ estimates by $0.01 in the most recent period.
Sales, though, were $1.055 billion, short of the $1.07 billion anticipated by analysts. Last year’s Q3 sales were $1.089 billion; in Q2’14 they were $1.090 billion.
According to LPL Chairman & CEO Mark Casady, the Q3 results were affected by “a challenging” business environment that included a “volatile equity market, decreased asset prices and near-zero percent interest rates.”
“In this environment, we had a solid business performance that was consistent with similar turbulent periods in the past,” Casady said during a call with analysts. During the period, for instance, sales commissions and net recruiting “slowed,” and lower asset levels “reduced trailing commissions, advisory fees and asset-based fees.”
The planned share buybacks, he adds, are a response to what the company says it a “temporary overhang on our shares,” which trade near $41.50 and had a 12-month high of $48.18. “As the board sees it, … our shares trade at a significant discount to what we believe is their intrinsic value.”
(In late-September, hedge fund group Marcato Capital took a 6.3% stake in the independent broker-dealer, prompting speculation that the fund, which is led by activist investor Richard McGuire, would pressure the IBD to improve its results and take steps to boost its shares.)
During the period, net new advisor flows were $4.2 billion, down slightly from last quarter but up a bit from the year-ago quarter. The number of financial advisors affiliated with the independent broker-dealer was 14,073 vs. 14,130 in Q2’15 and 13,910 in Q3’14.
Revenues tied to fees and commissions (or production) was $821.5 million vs. $854.6 million in Q2’15, and the payout ratio to advisors dropped to 85.4% of production from 86.2% in the prior period.
Average annual production per rep stands at $136,000 vs. $144,000 in Q2’15 and $150,000 last year. (Production at some wirehouses stands at around $1 million on average, while at Ameriprise Financial it was $514,000 in Q3’15.)
The number of custodial clients stands at 4,277, down from 4,281 in Q2’15 and 4,407 a year ago.
The IBD says its total client assets are $462 billion, with 39% in advisory accounts; in Q2’15, assets were $486 billion, and in Q3’14, they were $465 billion. Assets managed by hybrid advisors total $110 billion, roughly 24% of AUM.
Compliance & Costs
During the call with analysts Casady said that the IBD had been continuing with its “planned investments in compliance and legal resources to lower our risk profile.”
Expenses in the third quarter were $221 million, with regulatory expenses accounting for $8 million vs. $23 million in Q3’14 and $7 million in Q2’15. The company expects these legal & compliance spending to be less than last year, when it was $36 million.
(In contrast, promotional/marketing charges were $42 million in Q3’15 vs. $37 million in the year-ago period and $27 million in the prior quarter.)
While the details of the Department of Labor’s proposed new fiduciary standard are “still unclear,” Casady says, “We are confident that we will be able can help investors and advisor adjust to the transition, though some investors with smaller accounts may be affected.”
As the company nears “the end of its risk-management investments,” according to Casady, “… simply stated, we are going to be more efficient ..”
General and administrative costs should grow between 7.5% and 8.5% this year, he stressed, and should decline from recent levels in 2016, possibly to 2-4% for core expenses, excluding legal & compliance costs.
“If the final DOL proposal is substantially different than we anticipate, the costs to comply with it could go up,” the chairman & CEO said.
— Check out What’s Next for LPL, Marcato & Casady? on ThinkAdvisor.