LPL earnings rose in 2022 with interest rates

LPL profits soar on cash earnings, influx of 1,400 financial advisors

February 3, 2023 12:54 PM

LPL Financial is developing technology, paraplanning services, insurance and strategic partnerships aimed at serving more high net worth clients, according to CEO Dan Arnold.

After LPL said on Feb. 2 that it had added nearly 1,400 financial advisors to reach a record headcount by the end of 2022, Arnold discussed in an earnings call the firm's huge hike in profits, fueled by surging interest rates, investments in areas like high net worth customers and incoming teams of planners from recruiting and M&A deals.

Arnold responded to one Wall Street analyst's question about LPL's "opportunity to move upstream with larger advisors and higher net worth over time." The evolution of advisors' practices has "really driven the demand for services and capabilities that traditionally may not have sat inside our overall sweet spot," Arnold said, according to a transcript by Seeking Alpha.

For example, the firm is working on "extended financial planning support" powered by technology tools, new tailored insurance products, consulting on sales of small and midsize businesses and potential collaborations with outside vendors, he said. The resources could eventually enable LPL to recruit more teams from private banks and other high net worth firms.

"We're building some of these capabilities," Arnold said. "We've been on a journey, we're not completely there, but we've made some significant progress."

To see the key takeaways for advisors from LPL's fourth-quarter earnings, scroll down the slideshow. For further reading, use the following links to coverage of its earnings for the third quarter, second quarter and first quarter of 2022.

Recruiting and M&A headlines

The firm closed two acquisitions last month: the Private Client Group business of Boenning & Scattergood, which has 30 advisors with $4 billion in client assets; and Financial Resources Group Investment Services, an independent LPL branch spanning 800 advisors, 85 banks and other institutions and $40 billion in client assets.

In the recruiting realm, LPL poached a major wealth program in the banking channel when Commerce Financial Advisors agreed to move to LPL's Institution Services arm by roughly the middle of 2023. The program has 30 advisors with $4.4 billion in client assets.

Financial advisor headcount

The number of advisors jumped by a net 1,399, or 7%, year over year to a record 21,275 in 2022. Falling asset values left a mark on the firm's recruited assets among incoming advisors, with a total of $82 billion down 8% from the prior year. In terms of subscription business and operations services for advisors, LPL added 1,457 paying users in 2022, and its quarterly revenue from the assistance rose 27% from the year-ago period to $36 million.

Client assets

Tumbling stocks and bond values last year pushed down LPL's client assets. Total advisory and brokerage assets dropped 8% year over year to $1.11 trillion in 2022. Advisory assets slipped 9% to $583.1 billion, while brokerage assets decreased 6% to $527.7 billion. In the quarter, net new assets plunged by 19% year over year to $21.3 billion, although clients' moves to cash boosted liquid holdings by 12% at $64.1 billion by the end of 2022.

Expenses

Costs rose 5% from a year ago to $7.5 billion, as larger headcounts from the company's recruiting and M&A deals more than outpaced revenue from lower asset values. Advisory and commission payments to advisors ticked up 3% to $5.3 billion, other compensation and benefits surged 11% to $820.7 million and promotional expenses related to recruiting and conferences increased 12% to $340 million. Regulatory expenses for legal cases and other compliance costs also climbed 14% to $33 million in 2022.

Bottom line

Higher interest rates fueled a massive hike in profits for LPL in 2022. For the year, the company generated net income of $845.7 million on revenue of $8.6 billion, or $10.60 per share. Profits and earnings per share soared 84% from the prior year, while revenue jumped 11%. Client cash assets fed the steep rise in earnings: net interest income was up 170% to $77.1 million and asset-based fees on client cash grew 164% to $953.6 million.

After the earnings release and call, JMP Securities analyst Devin Ryan maintained a "market outperform" rating for LPL's stock and wrote in a note that it had been an "upside quarter" with an "overall outlook slightly better" than the previous period.

"We have argued that shares could be choppy as we work through moving parts around customer cash and the implications of potentially peaking interest rates," Ryan wrote. "We also see a handoff occurring at some point in the coming quarters as we anticipate organic growth could accelerate to a new level based on the elevated growth investment currently being made — including a number of accelerated investments the company is incurring in 2023 that have been pulled forward from 2024."

Remark

Over the past three years, "the churn in the industry has slowed," which has caused LPL's competitors to be more aggressive with their compensation offers to departing teams, Arnold told analysts. In the second half of 2022, the company saw "more advisers now getting past that volatility and re-engaging and exploring their strategic options," he said.

"For us, we don't see any changes in the opportunity set," Arnold said. "The ongoing evolution of our capabilities, the expansion of our market opportunity set with our expanded affiliation models, introduction of our services group [and] advocacy of existing advisers from good experiences are really the key drivers of that opportunity set and our ability to drive win rates regardless of what the churn or opportunity set is in the marketplace."