LPL Financial Holdings Inc. (LPLA) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining the Second Quarter 2026 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are Chief Executive Officer, Rich Steinmeier; and President and Chief Financial Officer, Matt Audette. Rich and Matt will offer introductory remarks, and then the call will be open for questions. [Operator Instructions] The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I'll now turn the call over to Mr. Steinmeier.

Thanks, operator, and thank you to everyone for joining our call. It's a pleasure to speak with you again. After a strong start to the year, we continued our momentum in Q2. We delivered improved organic growth during the quarter while driving recruiting pipelines to record levels. We made meaningful progress in preparing to onboard Commonwealth Financial Network, and we drove material improvements in our operating leverage. We achieved this in a rapidly evolving environment as elevated macroeconomic uncertainty and market volatility at the start of the quarter gave way to a sharp market recovery during the quarter, serving as the latest reminder of the value of professional advice and the resilience of our business model. Underlying this consistent performance was the exceptional work and dedication of our teams including the talented colleagues who joined us from Commonwealth. In recognition of these efforts, J.D. Power ranked Commonwealth and LPL #1 and #2 for Independent Advisor Satisfaction. Commonwealth's award is its 13th straight #1 ranking. This is a remarkable achievement and a meaningful validation of the complementary nature of our organization and the culture we are building together. Now to highlight some of our Q2 results. In the quarter, total client assets were $2.6 trillion, up 10% from Q1 as organic growth was complemented by higher equity markets. We attracted organic net new assets of $23 billion, representing a 4% annualized growth rate. Our second quarter business results translated into another quarter of strong financial performance with record adjusted EPS of $5.84. Turning to our strategic plan. We remain unwavering in our strategy and our aspiration to be the best firm in wealth management. To that end, we remain focused on 3 key priorities: one, preserving the client centricity the firm was built on; two, empowering our employees to deliver exceptional outcomes for our advisers and institutions and their clients; and three, delivering improved operating leverage. Continued execution across these priorities will help us sustain our industry-leading growth while advancing the effectiveness and efficiency of our model. With that as context, let's review a few business highlights from the quarter. In Q2, recruited assets improved to $25 billion. Prior to large institutional wins, this was our strongest quarter of recruiting in nearly 2 years. During Q2, we continued to advance opportunities into the later stages of our recruiting pipeline. And despite the strong pull-through, the overall pipeline reached a new record. This positions us well for improved organic growth in the second half of the year. In our traditional markets, we added approximately $23 billion in assets during Q2, maintaining our industry-leading capture of advisers in motion while continuing to expand the depth and breadth of our recruiting pipeline. With respect to our expanded affiliation models, we delivered another solid quarter, recruiting roughly $2 billion in assets. Turning to overall asset retention. It was 97% for both the second quarter and over the last 12 months. This is a testament to our continued efforts to enhance the adviser experience through the delivery of new capabilities and technology and the ongoing evolution of our service and operations functions. Now let's turn to Commonwealth. The integration is progressing well, and we remain on track to onboard Commonwealth advisers in the fourth quarter. In terms of asset retention, we are in the mid-80s today, and we continue to work towards our target of 90% retention of client assets. From an operational standpoint, we are nearing the completion of the technology and capability builds needed to help facilitate a seamless conversion. Key initiatives include advancing our householding capabilities and modernizing our case management platform to support a more connected end-to-end service experience for existing Commonwealth advisers. When combined with the introduction of a single relationship agreement, this creates a more flexible relationship-centric model that improves the client experience and enhances adviser productivity. These capabilities not only enable the Commonwealth conversion, but also accelerate the delivery of core functionality for the benefit of all LPL advisers and institutions. In parallel, we are ramping up our training efforts to ensure that our Commonwealth teammates are positioned to continue delivering exceptional service to existing Commonwealth advisers, and that Commonwealth advisers and their support staff are ready to hit the ground running following the conversion to the LPL platform. In closing, the second quarter was another strong quarter for LPL. I want to take a moment to thank our entire team, both at LPL and Commonwealth for the dedication and hard work that drove these results and contributed to the recognition from J.D. Power. We are building something special, and I am incredibly proud of the passion and dedication our teams bring to supporting our advisers. As we look ahead, we remain well positioned to serve as a critical partner to our advisers and institutions to continue delivering industry-leading organic growth and to maximize long-term value for shareholders. With that, I'll turn the call over to Matt.

Thanks, Rich. I couldn't agree more. It was a tremendous quarter as the team continues to deliver remarkable results. To reiterate some of these highlights, we delivered solid improvement in organic growth, continue to advance our adviser experience, drove improved operating leverage through ongoing efficiency gains and better monetization of the value we deliver to clients, progressed our preparation to onboard Commonwealth and executed on our capital allocation strategy. We closed the acquisition of Mariner Advisor Network, remained active with our liquidity and succession capability and given the dislocation in our stock price, accelerated share repurchases. These efforts resulted in strong second quarter business and financial performance and position us well for the second half of the year. Now turning to a few highlights from our Q2 business results. Total client assets were $2.6 trillion, up 10% from Q1 as continued organic growth was complemented by higher equity markets. Total organic net new assets were $23 billion and approximately 4% annualized growth rate. As for our Q2 financial results, the combination of organic growth and expense discipline led to an adjusted pretax margin of approximately 39.3% and record adjusted EPS of $5.84. Gross profit was $1.618 billion, up $26 million sequentially. As for the key drivers, commission and advisory fees net of payout were $486 million, down $1 million from Q1. Our payout rate was 87.4%, up 22 basis points from Q1, largely due to the typical seasonal build in the production. Looking ahead, we expect our payout rate will increase by approximately 80 basis points in Q3, driven by typical seasonality as well as the previously announced reductions to our corporate advisory pricing that went into effect on July 1. With respect to client cash revenue, it was $457 million, down $3 million from Q1, primarily reflecting lower average cash balances. Overall client cash balances ended the quarter at $56.9 billion, down $2.2 billion. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60%, within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 336 basis points in Q2, unchanged sequentially. One item of note is that we are shifting our client sweep rate methodology from an asset-based tiering structure to a cash balance based tiering structure. As a result, as we look ahead to Q3, we expect our ICA yield to increase by 10 basis points. As for service and fee revenue, it was $209 million in Q2, down $2 million from Q1. Looking ahead to Q3, we expect service and fee revenue to increase by approximately $5 million, driven by revenues from our annual focus conference. Moving on to Q2 transaction revenue. It was $83 million, up $2 million from Q1, driven by record trading volumes and 1 additional trading day during the quarter. As we look ahead to Q3, we expect transaction revenue to decline by roughly $5 million. Now turning to our acquisition of Commonwealth. As Rich mentioned, the transaction continues to progress well, and we remain on track to onboard Commonwealth advisers in the fourth quarter. As for the financials, accounting for current market levels, we now estimate run rate EBITDA of approximately $435 million once fully integrated. Now let's move on to expenses starting with core G&A. It was $519 million in Q2, down $13 million sequentially and below the low end of our outlook range, reflecting our continued progress in driving greater efficiency and reducing our cost to serve. For the full year, given our progress to date, we are lowering our core G&A outlook range. We now anticipate 2026 core G&A to be in a range of $2.140 billion to $2.165 billion. To give you a sense of the near-term timing of the spend, we expect Q3 core G&A to be in the range of $540 million to $560 million. Turning to TA loan amortization. It was $142 million in Q2, up $6 million from Q1. As we look ahead to the third quarter, we expect TA loan amortization to increase to approximately $150 million, reflecting strengthening adviser recruiting. As for promotional expense, it totaled $79 million in the second quarter, up $3 million from Q1, driven by increased conference spending. Looking ahead to Q3, we expect promotional expense to increase to approximately $95 million, driven by conference spend. Turning to depreciation and amortization. It was $110 million in Q2, up $4 million sequentially. Looking ahead, we continue to invest in technology and expect depreciation and amortization to increase by roughly $8 million in Q3. Moving to our tax rate. It was approximately 26.4% in Q2, and we expect a similar level in Q3. Regarding capital management. We ended Q2 with corporate cash of $430 million, down $137 million from Q1. As for our leverage ratio, it was 1.9x at the end of Q2, near the midpoint of our target range. Moving on to capital deployment. Our framework remains the same, focused on allocating capital aligned with the returns we generate, investing in organic growth first and foremost, pursuing M&A where appropriate and returning excess capital to shareholders. In Q2, we deployed capital across our entire framework as we continue to invest to drive and support organic growth, close the acquisition of Mariner Advisor Network, remained active with our liquidity and succession capability and returned capital to shareholders. Specific to share repurchases, while our initial plan was to repurchase $125 million of our stock in Q2, the dislocation in our share price presented an attractive opportunity to deploy additional capital. So we accelerated repurchases to $309 million. Additionally, in July, our Board approved a new $2.5 billion repurchase authorization with $300 million planned for the third quarter. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth, deliver operating leverage and create long-term shareholder value. With that, operator, we are finally ready to open the call for questions.

[Operator Instructions] Our first question comes from the line of Alexander Blostein from Goldman Sachs.

So I was hoping to start with the outlook on organic growth. Obviously, June saw a nice pickup, and you talked about recruiting pipeline looking pretty robust. So maybe spend a minute on how you view organic growth for the second half of the year, whether or not NNA can sustain above 5%. And also coupled with that, we continue to hear a pretty competitive landscape for recruiting. Curious how that squares away with your -- with the outlook you've seen for the back half of the year?

Yes. Alex, it's Rich. Thanks for the question, and nice to hear from you. So -- maybe let's talk about the recruiting -- well, let's talk about organic growth through the balance of the year. I think we saw that we've got a rebound this quarter up to the 4%. Look, there's a couple of things that drove that. First is that we saw adviser movement move back in line with historical norms. That's important for us. As we capture a disproportionate share of the advisers in motion, any movement to that overall adviser movement, we're going to be 1 of the winners who benefit in that movement. And so I'd say there's a macro movement improvement that helped us aligned with our long-term share capture of advisers in motion. Second, and this continues, and you heard in prepared remarks, Commonwealth is largely coming towards the end of the recruiting and education event. We still have advisers out to continue to progress with them, to problem solve with them, get to solutioning with them. And so it's not completely over. But as we have continued on that journey, we've seen more and more of our capacity to go back into the marketplace engaged directly with advisers. And so when you think about that second half of the year, we should be able to return to more normalized levels, not only of recruiting but continuing to build pipeline. And so that makes us confident in our ability to deliver mid- to high single-digit growth over time. If you extend even further out and look at our long-term outlook, I think this is where we've strengthened our conviction even further. We continue to be the disproportionate winner in our traditional markets. We have an unmatched value proposition and actually continues to strengthen. When we look at the wirehouse and regional adviser movement, largely, we have been continuing to gain consideration, which is really important for us because as we speak to those advisers, we more often than not are 1 of the winners in those conversations, but we have to get into more conversations. So we do that by closing our capability gap, which we continue to do in quarter and throughout the balance of the year. I alluded to some of those even in prepared remarks. And continuing more importantly, to actually position our brand actively in the marketplace. So you saw us do that a year ago with our brand campaign. Additionally, we've announced a partnership with the PGA of America that we think will continue to progress our representation not only to advisers, but to their high net worth end investors, which is critically important as they consider firms they're going to consider moving to. And maybe lastly, in the institutional channel, this is 1 where we had to pause a little bit in our consideration of large opportunities to bring on to the platform because of the Commonwealth transition was so expansive and the build was so comprehensive. And now as we move towards being on the other side of that and finishing our capability builds, it opens up our ability to continue to progress pipeline in the institutional channel with opportunities to onboard them. You marry that with low attrition and steady contribution from same-store sales. And again, I look at that longer outlook and say, okay, I think we have a strong ability to sustain mid- to high single-digit growth. Maybe lastly to that competitive environment, I think it's a completely fair representation. It remains spirited. We saw -- about a year ago, we saw a move in market TA levels. They have continued to persist at higher elevated levels. And from our perspective, we stay disciplined on returns. TA is part of our conversation with advisers, but it's not the driver and to repeat this pretty regularly. But advisers who are changing firms think first about capabilities, technology and service. They then think about ongoing economics. And third, they think about upfront economics. So you put that all together, we feel incredibly strong in our ability to not only sustain our performance to improve it over the latter half of the year.

And our next question comes from the line of Steven Chubak from Wolfe Research.

I was hoping to get an update on the pricing review -- I was hoping to get an update on the pricing review. Just now that you're further along with the diligence process, what has been some of the early feedback from advisers as you've explored potential pricing changes. And what are some of the key milestones that need to be met as part of the review to get you and the Board comfortable with adopting or implementing any such pricing changes to minimize the reliance on cash economics?

Thanks, Steven. So like we said last quarter, we're actually doing that work. And I think -- we need to make sure we take that time as we probe properly to think and ensure that any potential solutions that we come up with, one, that they're well considered, that we are looking at it from all angles, but it's aligned with our long-term strategy and that it creates value for our advisers, for our institutions and for the clients that they serve. And so I'll give you a little bit of color why this may take us a little more time. We've exploded the types of advisers and institutions that we serve. If you think about the 2 business models that we have, in our adviser business, we've grown our affiliation models pretty dramatically and that looks like different profiles of advisers who have different compositions of their book. And similarly, on the institution side, we no longer just serve banks and credit unions. We serve large regional banks, national banks, these are product manufacturers. And so the complexity of the type of clients that we serve is comprehensive, maybe extensive. We've got to make sure and we're engaged with those clients to ensure as we build any solution and evaluate those solutions across 32,000 advisers, 1,000-plus institutions and 8 million end investors that they work -- the solutions work across those clients and their operating models. The levers are very clear to us. But as we go through the work, we have to make sure that it works for those constituents, and that's the update that we have on the work. We're doing that work. We don't have any precise updates on the completed work to date, but we'll make sure to update you when there's more to share.

Our next question comes from the line of Dan Fannon from Jefferies.

Matt, I was hoping you could expand upon the G&A outlook and the numbers continue to come in better than you have forecast as you think about the back half of the year. Are there -- are you still implementing some of these efficiencies to think about the ongoing benefits? Or is obviously what you're putting in the numbers today is that realistic based upon what you guys have done so far?

Yes, Dan. I mean, I think if you look at the trends, like I think the headline answer is, this is, I think, an evergreen thing. I mean the continued investments whether it be automation, efficiency, AI-driven things that do 2 things. They not only improve our efficiency and drive down our costs. They also improve our value proposition with our advisers. So I think that's something we're going to consistently do. And I think what you're seeing so far this year is some outperformance on the pace at which we're able to do this thing. So I think it's been a couple of quarters in a row, we've been able to deliver more efficiencies than we expected and we're able to lower the guidance for the year. So to underscore the guidance for the year includes everything that we have worked on and everything that we expect to work on. And I think you've seen us, there's been periods where we've met that. There's been periods we've done better than we expected. So I think that now core G&A growth of 4% to 5.5% prior to Commonwealth is our best estimate right now. But I think if you broaden that out, I think there is -- each and every year, I think we're going to be able to continue to drive investments. And again, underscore, it's not only about efficiencies, but it's improving the value proposition in our experience with our clients.

And our next question comes from the line of Devin Ryan from Citizens Bank.

Matt, a lot of good stuff in here. I want to ask about, Rich, a point you made, advisers care about capabilities in tech when they're thinking about moving firms. And so with that said, it would be good to get some color on this AI platform Latitude. I saw you just launched that or announced it a couple of days ago. And so just be good to hear about kind of functionally what are the capabilities for advisers? Are there ways you can think about framing? How it can help the productivity? And then how differentiated is it versus just table stakes that I know that may connect back to your recruiting pitch or just making the firm more attractive for institutions to think about partnering with you?

Yes. Thanks, Devin. So I think one, technology has always been important for advisers who are considering moving firms. It's usually 1 of the first things we go through. In fact, recently, we continue to accelerate in our home office visits our tech demos earlier in the sales process. The reason being that what feedback we get from advisers is that there is a material differentiation in our capabilities and technology than the competitors that they're looking at. And I would tell you, as we get through a tech demo, what we see is we win in head-to-head more often than we did even a year ago because through the last couple of years, you've seen us continue to enhance our investments made in technology. And I think the Latitude announcement is a reflection of that. We reflected that we've invested nearly $2 billion over the last few years in building the core foundational capabilities in our data, security, adviser technology and AI. Latitude is the reflection of our unified tech experience that ties all of that together. It's a crisper way to reflect the integrated nature of our technology ecosystem that we think is a really good reflection to advisers. And as they get in, they see the connectivity across all of that. It's no longer a separation of the adviser workstation and the end investor capabilities and the workflows and the cyber environment. And now the introduction for us of Cyan, our AI agent, it helps us actually operate across all of the adviser workflows and deliver contextual real-time intelligence. And so specific to your question, when we look at just Cyan and we look at how does that improve the operation effectiveness of an adviser's practice, well, a couple of our high-impact use cases that we're launching with include the ability to identify growth opportunities for advisers in their practice, as they probe into it, natural language processing to identify ways that they can grow, actions they can take. And actually, 1 of the things that's really impressive is a button that simplifies the next actions they should take to prioritize, improving their growth against the verticals that they choose to grow. Second, there's other things that we've done there to make them more efficient in their practice. We introduced Jump as a way to record and then get actions coming out of meetings. But now we're introducing through Cyan, the ability to take financial plans that they've already developed to synthesize those plans for insights to the end investor as well as ways to deliver that to the adviser that are much more efficient than they're doing today. And 1 other high-value use case is automating routine maintenance tasks. So instead of having to go into the system to make address changes, you actually just go into the agent, say you're making an address change. You indicate the change of address. And then it's automatically propagated across the entire ecosystem of Latitude. I think these are good examples of a firm that is positioning itself to lead in technology, making investments, enabling -- being enabled through AI that further differentiate us from our competitive set. And as we've not only shown our capabilities, Devin, but as actually we've demonstrated our road map for AI to advisers who are considering the firm, it usually is a significant point of differentiation between us and the other firms they're evaluating.

And our next question comes from the line of Michael Cho from JPMorgan.

I just wanted to touch on pricing as well, not so much the work that you're doing now, Rich. But the pricing adjustments that you announced last year and you implemented some earlier this year. And Matt, you called out the other parts starting in July as well. So just given some time is passed, have you seen any adjustments in an adviser behavior since announcement and implementation. And any key takeaways here from an LPL perspective? And do you see other opportunities to potentially mark-to-market maybe some of LPL's more enhanced offerings, maybe in light of Latitude and Cyan as well.

Yes, Michael, I'll just start resummarizing for you. I think the headline is things have played out as we expected. So I think when we announced this, we walked through the 3, I'll take you through the components. But we had expected net improvement in margins kind of incorporating everything that you had just walked through of about 1 percentage point. And that's largely what's played out. So just as a reminder, there was 1 in each of the -- in Q1, Q2 and Q3. So Q1 was the new fees on brokerage accounts. In Q2, it was fees on the direct mutual fund business. And those 2 things together led to an increase in service and fee revenue by about $40 million per quarter. And then the last change coming, what I talked about in prepared remarks, that's coming in Q3 with reductions on pricing in our advisory platforms, really to make them even though they're already competitive, even more competitive. And that -- those pricing reductions will show up as an increase in payout of about $20 million a quarter. So the net of all of that is around $20 million a quarter, $80 million annualized, right in line with where we thought. And so the broad point, I think it just positions as we talked about when we announced them, the first 2 fee increases were really to bring fees in those 2 areas in line with market. And then the third area in advisory, I think, is making a platform that was already competitive, competitively and value prop wise, even more competitive. So I think it's really played out how we thought.

Our next question comes from the line of Craig Siegenthaler from Bank of America.

So similar question, but I want to see if you could potentially change your revenue share arrangements with asset managers. And I wonder if you view this as a future earnings lever given that your size increase and your scale retail distribution partner. So -- and what I'm getting at is could LPL increase its underlying economics on ETFs, mutual funds and SMAs.

Craig, this is Matt. I'll just underscore kind of what Rich went through in detail as far as what we're looking at on economics and things we have changed. That's where our energy is. I think that there is other things that once we're done with concluding is there something to do there or not if there was other things to look at, we take that up. But I think when you look at our overall economics, the thing that we're staring at is cash sweep that I just underscore everything that Rich said.

And our next question comes from the line of Mike Brown from UBS.

You've observed that your advisers when they adopt your business solutions, they tend to grow 2x faster than advisers that do not. As you think about the Commonwealth cohort and the transition there, what are your expectations for the adoption of your subscription-based services like your CFO and Marketing Solutions? And do you think that there's kind of a similar opportunity set for the Commonwealth advisers?