LPL Q3 profits rise due to higher interest rates

LPL's profits double as firm's financial advisor headcount tops 21K

October 28, 2022 2:37 PM

The nation's largest independent broker-dealer is focusing its service upgrade efforts on "digital-first support" for its industry-leading headcount of more than 21,000 financial advisors.

After LPL Financial reported on Oct. 27 that its third-quarter profits more than doubled from the same time a year ago, CEO Dan Arnold spoke with analysts on an earnings call about the firm's strategy around its ongoing transition to what he called a "client care model" for advisors. With the firm's headcount setting records each quarter amid major recruiting gains and acquisitions, LPL is "transforming our service interface and reimagining the operational processing that takes place behind that interface," Arnold said in prepared remarks on the call.

Chat tools and other digital support methods will enable greater flexibility for advisors, he said.

"We see it as an opportunity to create an easier and more efficient experience for advisors to access the information they need," Arnold said. "Now, as we expand these capabilities, advisors can increasingly engage digitally to resolve their requests, and many have already shared that they prefer this simpler option over making a phone call. While we are still in the early innings, we believe these enhancements will have a meaningful impact to the scalability of our platform, while also enhancing the client experience."

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For the key takeaways for advisors and other wealth management professionals from LPL's third-quarter earnings, scroll down the slideshow. To see coverage of the firm's second-quarter results, click here. For a look at LPL's earnings in the first quarter, follow this link.

Financial advisor headcount

LPL's industry-leading headcount reached a record 21,044 advisors after the firm added a net 1,417 in the third quarter for a 7% increase from the year-ago period. The incoming recruits brought a combined $13 billion in client assets. In terms of subscription services sold to its base of advisors, the number of agreements with LPL practices for outsourced business, planning and investing services rose 63% to 4,233. The revenue from those subscriptions jumped 51% to a record $34 million.

Client assets

The value of clients' assets have taken a hit due to the stock slump this year. Total brokerage and advisory assets dipped 8% year over year to $1.04 trillion, with advisory accounts falling 9% to $542.6 billion and brokerage holdings dropping 8% to $495.8 billion. LPL added $19.9 billion in net new assets for the quarter, which represents a huge dropoff from $29 billion during the same time a year.

Many clients moved into cash during the quarter, with such accounts surging by 32% to $66.8 billion. Gross profit from client cash soared by 234% to nearly $304 million.

Expenses

LPL's expenses ticked down by 1% year over year to $1.9 billion as lower costs relating to advisory fees and transactions helped offset the higher spending on compensation for the larger headcount of advisors. General and administrative expenses, regulatory charges and promotional costs each jumped by double digits, with LPL's annual Focus conference for advisors driving an 18% hike in the latter category.

Bottom line

The firm earned net income of $232 million on revenue of $2.2 billion in the third quarter. LPL's profits expanded 125% from the year-ago period thanks to the earnings tied to higher interest rates. Revenue rose 7% on the elevated interest-rate business and a 62% jump in asset-based fees after massive recruiting gains such as the additions of CUNA Brokerage Services and People's United Bank.

Remark

Across CUNA Brokerage, People's United and earlier incoming mega-moves by M&T Bank and BMO Harris, LPL has added roughly 865 advisors with $77 billion in client assets, according to the firm. The firm continues "to see strong momentum in the demand" among bank and credit union-based wealth programs seeking to outsource their brokerage, RIA and other infrastructure, Arnold told analysts.

"What we've done over the last couple of years is, as we've added these larger institutions, we continue to innovate in terms of how we support them day in and day out," he said, according to a transcript by Seeking Alpha. "And also this is partly how you transition them over. That's a pretty big change management effort as you could imagine. And I think given that over the last couple of years, we continue to make our model more and more appealing."