If LPL Financial is indeed for sale, potential buyers are likely to be impressed by third-quarter earnings results from the nation's largest independent broker-dealer.

Net income soared 27% to $52 million, or $0.58 per share, from $41 million, or $0.43 per share, in the year-ago quarter. The earnings ran well above Wall Street analysts forecast of $0.38 per share.

"We're feeling good about our progress," Mark Casady, LPL's CEO said in a conference call with analysts after the earnings were released.

Analysts agreed. A Credit Suisse research report noted the firm's "solid quarter" and the "business inflection towards advisory." In addition, the report said the "positive implications for [LPL's] operating leverage and valuation are underappreciated."

(Bloomberg News)
(Bloomberg News)

Net new advisory assets, a key metric for advisory firms, grew at an annualized rate of 8%, or $4.1 billion and total brokerage and advisory assets increased 9% year-over-year to $502 billion.

Total operating expenses for the third quarter fell 5% from the same period last year, to $925 million.

RECRUITING TOUTED

The strong results come amid reports the IBD has hired Goldman Sachs to explore strategic options, which could include a sale.

In the call, Casady was upbeat about LPL's recruiting prospects, an area that would certainly be of interest to a potential buyer.

While adviser headcount remained steady at just over 14,000, LPL noted that if a large institutional client had not been acquired, the firm would have gained 88 new advisers in the third quarter.

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Looking ahead, Casady argued that LPL's investments in technology, implementation of the DoL's fiduciary rule and new services will attract new advisers to the firm.

He cited a "significant increase in the volume of inquires" from advisers and said he would be "comfortable" anticipating that LPL would reach its goal of 400 net new advisers for the year.

Casady predicted that LPL would gain also gain a recruiting advantage as wirehouses move away from "high payment mechanisms" to attract brokers, which would mean "less competition" for LPL.

'MORE PRODUCTIVE' TEAMS COMING OVER

What's more, adviser teams coming over to LPL are increasingly larger and "more productive," Casady said. The reason, he explained, is that new LPL advisers are coming from bigger, urban markets and from wirehouses or large independent firms.

In addition, Casady said he thought that the DoL rule would cause more large banks to reassess their advisory strategy and possibly outsource their brokerage business to LPL. "It will create more opportunities," Casady said.

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The impact on LPL's revenues will also be more immediate and substantial than transitioning assets from independents, he added, because "the [brokerage] business from a bank all moves at once."

Indeed, Casady LPL's progress would rely on organic growth and taking existing market share from competitors.

CHALLENGES AHEAD

To be sure, LPL faces plenty of challenges as it moves forward in a marketplace that is changing rapidly, resulting in what Credit Suisse calls an "uncertain operating environment."

Commissions, already under fire as a result of the coming fiduciary rule, continued to slump.

Revenues from commissions fell 10% in the third quarter to $432 million and declined 13% for the first nine months of the year. Commissions from the sale of alternative investments are down 90% from three years earlier and while commissions on variable annuity sales are also plummeting, falling about 40% over the past three years.

And while LPL keeps pushing to pivot towards a fee-based business, revenues from advisory fees also dropped in the third quarter, dropping 6% to $322 million. Revenue fell 4% to just over $1 billion, and slumped 7% for the first nine months of the year.

LPL also must continue to navigate implementation of the DoL rule and compete in a cut-throat market for recruiting and retaining advisers. Credit Suisse noted that the firm increased its payout ratio 1% in the third quarter on higher production-based bonuses.

Anticipating the fiduciary rule, Casady told analysts the firm will standardize brokerage mutual fund commissions and add more no-transaction fee funds to its corporate advisory platform later this month.

PRIORITES: EXPENSES AND BALANCE SHEET

Expense control and shoring up the company's balance sheet continue to be top priorities for LPL, according to Matt Audette, the firm's CFO.

Growing earnings and paying down debt "should strengthen our balance sheet and give us confidence to deploy capital towards an increasingly attractive set of opportunities we are seeing in the market," Audette said.

As for a possible sale, Audette reiterated that LPL wouldn't comment on "speculation and rumors" but is focusing on "creating long-term value for shareholders."

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