LPL Financial's ongoing battle to tame regulatory expenses is paying off.
Costs for regulatory-related matters in the company's second quarter earnings dropped to $6.7 million, down from $11 million in the first quarter and $8 million from the same period one year ago.
Not coincidentally, net income for the nation's largest independent broker-dealer shot up 17% to $50 million for the three-month period ended June 30, from $43 million for the same period one year ago. Gross profits, which the company defines as revenues minus direct cost of sales, also improved, rising 3.5% to $340.3 million.
LPL is "nearing completion" of the "signature regulatory items" which have plagued the company over the past year, according to Tom Lux, LPL's acting chief financial officer. "We're at the point where we are reasonably confident that going into 2016 regulatory expenses will be down substantially," Lux says.
In a statement, LPL chairman and CEO Mark Casady said the company has made "significant progress with industry, federal, and state regulators, and are close to resolving the remaining significant matters that we have been working on."
IMPRESSIVE ASSET NUMBERS
LPL also posted impressive asset numbers for the quarter.
Net new advisory assets reached a record $18 billion over the past 12 months and overall assets increased to $486 billion, up 4% compared to the second quarter of 2014. Hybrid RIA assets jumped 35% to a record $112 billion for the quarter.
Net new advisory assets were $4.3 billion for the quarter, and LPL recorded a $20.3 billion increase in total advisory and brokerage assets.
LPL only gained 32 net new advisors from the first to the second quarter this year, but Casady called the low number "abnormal," noting that 50 "very small producers" who averaged around $20,000 in production annually left the company.
The company is increasingly focusing on high-net-worth producers, he said, and that it was "good to have [the smaller producers] out of the system."
In the past year, LPL has added nearly 300 net new advisors and now has 14,130 advisors, a 2% increase from a year ago.
The net new advisory flows grew "at rates that led our public peer group," Casady noted. "In spite of the challenging macroeconomic environment in the second quarter, we like the conditions for continued long-term growth and further creation of shareholder value.”
ACQUISITIONS ON THE HORIZON?
In a conference call with analysts, Casady also signaled that LPL may soon be back in the acquisition game, which it has eschewed for the past year.
Industry consolidation and anticipated higher costs to provide financial services will "accrue to the benefit of large scale players," Casady said.
A number of smaller B-Ds may leave the business, he said, creating "lots of opportunity for growth" for LPL.
Prices for B-Ds have "returned to more rational levels" he noted, while also pointing out that LPL's balance sheet gave the company "capacity to take on acquisitions."
Staffing changes may also be in LPL's future, Casady hinted.
Automating back office processes for greater operational efficiency is an ongoing priority for the company, he told analysts. While only 15% of those processes are automated today, LPL's goal is to eventually reach 85%.
That decrease in manual labor will lead to a reduction in the company's "expense profile over time," he said.
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