Despite severe volatility in equities that chipped away at advisory assets, LPL Investment Holdings benefited from a hastening shift to advisory business models away from brokerage ones and turned in huge net income gains for the third quarter. The report followed Raymond James Financial's similarly solid annual and fourth-quarter earnings report last week.
The Boston-based parent of LPL Financial reported third-quarter net income of $36.4 million, or $0.32 per diluted share, up 39.3% from $26.1 million in third-quarter 2010.
“We’ve added advisors, accounts, and assets to our underlying business,” Robert Moore, chief financial officer of LPL Financial said during a Wednesday morning interview. “That rate of additional accounts overwhelms the market effect of the underlying assets themselves.”
So although the company felt the effects of turbulent markets, it turned in solid numbers related to its core business. LPL Financial ended the third quarter with $316.4 billion in total advisory and brokerage assets, up 7.9% from $293.3 billion from the same period in 2010. Compared with the second quarter, total assets were down 7.2% from $340.8 billion. For the third quarter alone, net new advisory assets were $96.3 billion, up $3 billion during the quarter. On an annualized basis, LPL Financial’s net new assets grew by 12%.
During the third quarter, LPL Financial saw significantly more business come from advisors, especially newer recruits, with higher-net-worth clients. That is a slight migration from the firm’s roots supporting advisors with mass affluent clients in smaller cities and towns across the country.
“Our revenue growth was supported by advisors who joined LPL Financial over the last three years,” Mark Casady, LPL Financial’s chairman and chief executive officer said during the Wednesday morning conference call. “It takes about three years for them to rebuild to their prior level of production.”
Newer advisors have an average AUM that is about 50% higher than existing ones, Robert Moore, LPL Financial’s chief financial officer, said during an interview after the call.
Nevertheless, mature advisors at practices older than one year had production that accounted for 80% of the advisory overall production number, Casady said. All advisors, from existing ones to new recruits, stayed in touch with clients during the volatile quarter. That behavior transcended market influences, thus ensuring predictable revenue streams, Casady said.
LPL Financial offers the industry’s only fully integrated back-office platform for RIAs and brokerage advisors, Casady said. That flexibility has allowed LPL to attract a net new 400 advisors for the year. Cerulli Associates, the Boston-based research firm, now ranks LPL Financial fifth in total RIA assets, Casady said.
There is one change that LPL Financial is resisting: buying back its debt in a low interest rate environment. Firstly, LPL Financial is under a covenant that restricts it from buying back it debt, Casady said during the call. Also, the company has a very low leverage level, under 2 times.
Moore added that in world where ratings still matter, there is little incentive to de-lever faster than the company already is doing, Moore said.
“We would rather use our capital for organic growth, and through the acquisition of other companies,” Casady said.
Elsewhere, other independent broker-dealers also turned in high earnings following a turbulent market period. Raymond James Financial recently reported last week that its fourth-quarter net income was $68.9 million, up 47% from the prior quarter. That was $0.54 on a per-diluted share basis. The company had $3.3 billion in net revenues for fiscal year 2011, up 14% from the previous fiscal year, and had record annual net income of $278.4 million, up 22% over fiscal year 2010.
“We have continued to invest in all of our business segments by recruiting financial advisors, investment bankers, lenders, public finance professionals, institutional salespeople and traders, while delivering record results,” Paul Reilly, CEO of Raymond James Financial, said in a statement.