LPL developing 'a key tenet of our advisor experience,' CEO says

July 28, 2023 12:54 PM

As interest rates, stock gains, recruiting momentum and organic growth boost LPL Financial's bottom line, the company is investing in more outsourced tools for financial advisors.

LPL's profits climbed by more than 75% in the second quarter, according to the independent wealth management firm's July 27 earnings statement and a call with analysts.

The company's recruiting efforts reeled in more than 1,000 new financial advisors compared to the year-ago period, and it reached a new high in the revenue generated by selling business solutions from LPL's Services Group to more than 3,500 active users who have purchased 5,238 subscriptions. In the second quarter, a new tax planning tool joined others such as an outsourced chief financial officer, digital marketing and payroll, CEO Dan Arnold said.

On top of those services, LPL also launched what he called a "performance optimization solution" that began delivering "comprehensive data in a structured format" to advisory practices in the second quarter. The company calls the service Practice Hub.

"Over the coming months, we will further expand the functionality by enabling it to generate personalized insights around additional services, technology and solutions we offer in order to help advisors enhance the overall performance of their practice," Arnold said in prepared remarks. "Over time, we see Practice Hub becoming a key tenet of our advisor experience, leveraging the power of artificial intelligence to operate as a co-pilot for our advisors. And while we're still in early innings, we're excited about the growth opportunities that this innovation unlocks and how it will serve as an additional leverage point to help advisors run thriving businesses."

M&A

LPL acquires $6.5B wealth management firm

July 26, 2023 3:43 PM

To see the key takeaways for financial advisors from LPL's second-quarter earnings, scroll down the slideshow. For a look at the firm's results in the first quarter, click here. And use the following links to coverage of its earnings for the fourth quarter, third quarter, second quarter and first quarter of 2022.

Recruiting and M&A headlines

Earlier this week, LPL unveiled its acquisition of the assets of Crown Capital Securities, an Orange County, California-based brokerage and registered investment advisory firm with 260 advisors and $6.5 billion in client assets. The transaction marks at least the ninth recruiting or M&A transition involving a firm or advisory practice with at least $1 billion in client assets, according to Financial Planning's analysis of company announcements.

LPL recruited teams with client assets of $18.6 billion in the quarter, for a total of $60 billion in the last 12 months.

About $14 billion of the recruiting influx came from other independent wealth management firms, with another $4 billion flowing to alternative affiliation channels at LPL such as its employee unit, Linsco by LPL, the corporate RIA and LPL Strategic Wealth Services, Arnold noted in his prepared remarks. The company has completed the onboarding of its latest major financial institution addition, Bank of the West, with another mega-move slated for next month in Commerce Bank.

Financial advisor headcount

The number of LPL advisors kept climbing to another record in the second quarter. LPL's headcount expanded 5% year over year, or a net 1,071, to 21,942 advisors, in the second quarter. Annualized revenue from LPL Services Group subscriptions for outsourced resources for advisors' practices rose 22% to a record $39 million.

Client assets

Rising stock values and organic net new assets of $22 billion pushed up LPL's client holdings in the last three months. Total advisory and brokerage assets jumped 16% from the year-ago period to $1.24 trillion in the second quarter, with advisory holdings growing 18% to $661.6 billion and brokerage accounts climbing 14% to $578.6 billion. Over the past five and a half years, LPL's client assets and organic asset growth rate have both roughly doubled.

On the negative side, client cash balances fell 28% to $50 billion as investors put their money back into stocks and other higher-yielding instruments. The company still anticipates it's earning an extra $1.2 billion in annual gross profits tied to interest rates based on the Fed's hikes. For the quarter, gross profits from client cash ballooned by 154% year over year to $396.24 million.

FINRA supervision case settlement

Without admitting or denying FINRA's allegations, LPL agreed in a July 25 settlement with the regulator to pay a $3 million fine plus $100,000 in additional restitution to customers that investigators say were defrauded through illegal transfers that evaded the firm's supervision. Two former LPL advisors converted about $2.4 million in client money for their own personal use, with one of them being part of a group of at least 50 who "electronically signed another person's name" on more than 1,000 documents during a four-year span, FINRA said.

"LPL takes its compliance obligations seriously and has made investments to address the underlying issues related to this matter," spokeswoman Linda Morgan said in a statement. "The firm fully cooperated with regulators to resolve and remediate this matter."

For the quarter, LPL's regulatory expenses dropped by 18% to $6.6 million. Over the past five years, the firm has paid an average of $31 million per year in regulatory charges, according to the firm's latest investor presentation.

Expenses

The higher levels of assets, onboarding of new teams and an ongoing ramp of recruiting and promotional events after the pandemic led to more expenses in the second quarter. Expenses surged 14% year over year to $2.08 billion, with the greatest drivers including advisory and commission payments, compensation and benefits, promotional costs and interest charges.

LPL will also spend an estimated $300 million on technology this year, analyst Devin Ryan of JMP Securities wrote in a note after the earnings call. That amount is "a sum many multiples of most peers, even large broker-dealers, and with management talking about further enhancements to its services offering, including increasingly utilizing artificial intelligence as just one example, we do think the technology gap in the industry is going to grow rapidly (and will become more noticeable) over the next several years, with LPL and a small group of firms best positioned to compete for talent," he wrote.

Remark

An analyst asked Arnold how the company views potential M&A opportunities. LPL seeks out deals "where we can capitalize on our market leadership and add scale" in which the firm is "able to create value for the advisors and those practices when they transition on to our platform," Arnold said. He cited the company's acquisitions of Crown Capital, Boenning & Scattergood, and Waddell & Reed as examples of such transactions.

"We do think there will be ongoing consolidation, and we remain positioned to explore those opportunities," Arnold said. "We also look to places or transactions that could add capabilities, where we can create value for advisors and ultimately help them drive efficiency into their practices or enhance growth."