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LPL Feeling Acquisitive in New Fiduciary Era; Q1 Sales Fall 9%

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LPL Financial (LPLA) said Thursday that its net income fell 1% from a year ago in the quarter to $50.4 million, as revenue declined 9% to $1.005 billion. With fewer shares outstanding, however, its earnings per share improved 8% to $0.56 from Q1’15.

Its EPS results beat estimates, though its sales performance did not.

“We are pleased that our diverse gross profit streams and tight expense management delivered strong financial results despite the extremely volatile environment in the first quarter,” said Chairman and CEO Mark Casady, in a statement.

On Wednesday, rival broker-dealer Ameriprise Financial (AMP) said its net income declined 7% year over year to $364 million, and its EPS figure improved slightly to $2.09. The earnings results, though, missed estimates, and sales weakened to about $2.8 billion from roughly $3.1 million in Q1’15 — with wealth management sales off 2% from last year at $1.2 billion.

During a conference call with equity analysts, Casady said that while the best and first use of its capital “is in organic growth of the platform … [which can create] recruiting opportunities … the second place would be M&A.”

The new DOL fiduciary rule is focused on brokerage retirement assets and accounts, which make up 30% of the firm’s assets, the CEO says.

It should “squeeze cost structures for smaller competitors,” he added. The CEO also says the firm thinks the new fiduciary standard is “likely to lead to more opportunity for M&A, and M&A as a good use of capital at the right prices…”

The CEO also was upbeat on the financial impact of the new rule. “We expect that several of the changes in the [best interest contract] will make the work [on implementation costs tied to the rule] more manageable,” he explained.

The firm has “invested significantly” in compliance and “is comfortable with the implementation cost that we’ve included in our 2016 core [general & administrative expenses] outlook,” he said.

Other Financial Results

In the first quarter, commissions brought in by LPL-affiliated reps dropped 17% year over year to $436.7 million, while advisory revenue declined 7% to $319.4 million. Combined, total gross dealer concessions – or advisor production – was $756.2 million, a drop of 13% from last year and 4% from last quarter.

Asset-based sales, though, grew 13% to $136.3 million, while transaction and fee revenues improved 1% to $102.7 million.

The number of advisors improved by 39 from last quarter but fell by five from last year to 14,093. The amount of custom-clearing subscribers (or reps affiliated win insurance firms working with LPL) stands at 4,177, down 3% from a year ago.

The average yearly production level of LPL advisors is $215,000 – representing a 13% decline from last year and a 4% weakening from the earlier period. (In contrast, independent advisors working with Raymond James have average fees and commissions of $560,000.)

The total payout ratio for affiliated reps was 84.1% in Q1’16, down 153 basis points from last quarter and a drop of 287 basis points from the prior quarter. The production-based bonus ratio (on trailing-12-month production) for the period was 2.7%.

The firm says brokerage and advisory assets were $479 billion, up 0.7% sequentially. Net new advisory assets were $2.0 billion vs. $5.2 billion last year and $3.1 billion in Q4’15.

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