LPL Q4 earnings fall due to rising expenses

LPL’s explosive growth pushes expenses above record revenue

February 4, 2022 1:33 PM

The largest independent brokerage tacked on the equivalent of a major midsize competitor last year, and its CEO doesn’t expect the potential headwinds in 2022 to slow down its growth.

LPL Financial added thousands of financial advisors to its industry-leading headcount through massive recruiting and an acquisition, according to its fourth-quarter earnings statement, which the company released Feb. 3. At the same time, that expansion pushed up expenses to the point that they outpaced the firm’s revenue. Amid the records in multiple other metrics, though, the company plans to keep investing in recruiting, technology and other areas.

In a call after the earnings report, an analyst asked LPL CEO Dan Arnold about the potential impact to the firm’s outreach to advisors from recent equity volatility and the expected higher interest rates coming in 2022. While Arnold acknowledged that “there are cases to where you could have a significant market displacement that could occur that could temporarily disrupt the overall trend of opportunity out in the marketplace,” he said the firm hasn’t detected any “outsized impact” from stock market movements or potential higher rates.

“The flexibility and optionality around our model, continued investment in differentiation and the capability side of our platform and then using our rate-driven sort of underwriting process, we think that is really a combination that continues to create that sort of structural differentiation out in the marketplace as we move forward,” Arnold said, according to a transcript by Seeking Alpha. “And I think that drives the primary sort of activity and results at the end of the day.”

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To see the main takeaways from LPL’s fourth-quarter earnings, scroll down our slideshow. For coverage of the firm’s results from the prior quarter, click here.

Advisor headcount and recruiting

The number of registered representatives affiliated with LPL jumped by 15% year-over-year, or 2,589 advisors, to a record 19,876 in the fourth quarter. The company’s haul of $89 billion in recruited client assets last year through two mega moves in the bank channel and accelerated momentum in adding advisors smashed its prior all-time high in a year by more than double the amount in 2020. Advisors using LPL’s employee, Strategic Wealth Services and RIA custodian models brought $2 billion in recruited assets in the fourth quarter alone, Arnold noted.

Organic growth

The firm reeled in a record $119 billion in organic net new assets in 2021, growing at a rate of 13% compared to 7% in 2020. That amount doesn’t even include the $63 billion in client assets that LPL added by acquiring Waddell & Reed’s wealth manager. “Organic growth is a key part of our strategy, as we've talked about, and we've stayed very intentional and focused on how … we deliver those results,” Arnold said, citing the faster rate of expansion last year versus that of 2020. “Those are probably pretty nice bookends as a way to think about a range of potential growth over the long run or as we go forward. Obviously, as we talked about in the last question, macro conditions at any point in time influence that overall opportunity set.”

Outsourcing subscriptions

More LPL advisors are taking the firm up on its offer of subscription-based Business Solutions, with the firm launching outsourced paraplanning last month and reaching $28 million in revenue after subscriptions more than doubled to 3,022 in 2021, analyst Devin Ryan of JMP Securities wrote in a note after the earnings. “It creates more differentiation in its offering for advisors, and in turn, a stickier relationship. The company continues to evolve the offering, identifying a new category of opportunity that will help advisors more efficiently and effectively deliver services to clients,” Ryan said. “LPL is also working on creating other solutions, such as tax planning and high net worth services.”

Rising expenses

The acquisition, record recruiting, ability to restart conferences and overall surging revenue in the business drove up the company’s expenses by 36% in 2021 to $7.11 billion. Promotional expenses relating to conferences and advisor recruiting and onboarding ($302.3 million), advisory and commission payments to advisors on the higher amount of assets ($5.18 billion), depreciation and amortization ($151.4 million) and professional services ($72.2 million) represented the fastest-growing costs last year. Besides the $300 million price tag for Waddell & Reed, the company plans to spend about $15 million in the first quarter in additional costs for the integration. That will push the total extra transition costs above $100 million.

The bottom line

LPL earned net income of $459.9 million on revenue of $7.72 billion in 2021. Revenue soared by 31% above 2020, but the higher expenses pushed down the company’s profit by 3% last year. The company plans to continue investing in growth. Chief Financial Officer Matt Audette said the former Waddell & Reed unit will generate an estimated $90 million in annual EBITDA, up from LPL’s prior forecast of $85 million. The onboarding of another huge recruiting win in CUNA Brokerage Services will bring extra costs relating to its transition of roughly 550 advisors with $36 billion in client assets this year.

Remark

In his prepared remarks, Arnold described the company’s strategy. “Our long-term vision is to become the leader across the entire advisor-centered marketplace, which, for us, means being the best at empowering advisors to deliver great advice to their clients and to be great operators of their businesses,” he said. The company’s infrastructural resources for advisors stemming from technology and more than 5,900 corporate employees “gives us a sustainable path to industry leadership across the advisor experience,” Arnold added.