Higher-than-expected expenses depressed LPL Financial's first-quarter profits, while the defection of an affiliated bank took away 40 advisors -- but the company is anticipating strong growth for 2014.

"We think the [recruiting] pipeline is solid for next quarter," says CFO Dan Arnold. Despite modest growth of 53 advisors in the first three months of the year -- down from 110 and 154 in the previous two quarters -- Arnold says, "The slowdown was an industry-wide one, and so we think the net new advisors we ultimately delivered is one of the industry's leading outcomes."

LPL did not identify the bank advisors or release further details about them.

PROFIT SQUEEZE

Arnold says a couple of main drivers depressed first-quarter net income, which fell to $53 million this year from $54.8 million last year for the nation's largest independent broker-dealer.

A seven-basis-point drop in the federal funds rate cost the firm $8 million in pre-tax earnings, or $5 million after-tax, he says. "That is a market rate that we can't change," he says.

The firm also footed about $6 million in expenses related to its move to new headquarters in San Diego – the "largest net-zero energy commercial office space in the country," LPL says. That amounted to a $4 million after-tax hit, Arnold says.

Arnold also cites higher recruiting costs due to a shift in the types of advisors LPL has been recruiting. So far this year, he says, the IBD has attracted a greater number of high-producing advisors than in the past -- resulting in a 62% increase in the amount LPL has been paying this year to lure new advisors.

The rate it pays advisors has remained steady in recent years, he says, at between 20% and 25% of advisors' trailing 12 months' commissions -- but the higher producers have required bigger payouts.

"That's a good sign," Arnold says. "It doesn't mean that we are paying more for them. It just means that the volume is much more."

WORKING WITH BANKS

LPL is focusing on its Institution Services unit, which serves banks and credit unions, as an avenue for growth. The company believes it could add another 400 advisors in coming years, he says; that division now accounts for 18% of LPL's total revenues.

LPL added 119 new advisors in this channel last year across the 700 financial institutions it serves, he says.

Financial institutions "are looking for ways to create earnings growth," according to Arnold. "This is a good one that can help them grow without creating more capital requirements on their parts.

He also sees an opportunity for LPL to move into new territory in its institutional advisory business. "We've launched a new program that positions us to help banks support their trust assets as well as their brokerage and advisory assets," he says. "That creates a whole new adjacent business for us, with that market representing $2 trillion of assets."

FEE-BASED ASSETS GROW

Growth of the firm's commission- and fee-based business contributed to the growth of net revenues to $1.087 billion  in the first quarter from $974 million in the year-ago quarter, according to LPL CEO and chairman Mark Casady.

Fee-based assets now account for 35% of all revenues for LPL, Arnold says, and the B-D continues to see "meaningful" growth in this area.

"Based on the pace of new assets being gathered today," he said, "we think that number could continue to increase ... to 40%."

Companywide, the independent B-D grew its advisory assets by 21%, he said. Adjusting for the strong stock market performance last year, Arnold says, LPL's underlying growth rate was 11%.

"Of that new asset growth," he adds, "about 50% comes from new advisors that we recruit in and about 50% comes from advisors adding to their business."

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