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

All right, everybody. Welcome back. I guess it's afternoon, my time, but morning out where Matt is out in SoCal. Again, this is Jeremy Campbell, the exchanges, brokers and asset managers' analyst here at Barclays. And it's my pleasure to welcome Matt Audette, the CFO of LPL Financial, to the Barclays Global Financial Services conference. Matt, I think this is the first time that you're attending, and it's great to have you here, although I wish we were live and in-person here in Midtown, New York, but maybe next year.

Yes, indeed. Thanks for having me.

And then just as a reminder for the audience sitting in here. We do have audience response questions queued up, should be on the left-hand side of your screen. And I think the first one is the most important, how are you positioned into LTL stock, overweight, equal weight, underweight or not involved. So please take some time throughout this presentation to kind of register your votes. It's very much appreciated.

But with that, Matt, let's pivot over. And since it's the first year of having you at our conference and some investors may not be as familiar with the LPL story. Why don't you just give a quick overview of LPL business and what your value prop is?

Yes. Sure, Jeremy. I think when you start at the highest level, right, we're really a firm that supports advisers, right? I think in the things that they need to do to conduct their business, anywhere from capabilities, technology, there's a long list of things, but as a high-level answer, it's simply that. And specifically in the independent space, right? So think of someone who works for a large employee firm or a wirehouse, and they want to go off and do that on their own. We're a firm that really facilitates and allows them to do that. And for those that are not familiar with the industry, that independent section is really the section that's growing and taking market share from the wirehouses. So we're kind of in the slice of our segment that's got wind in their backs as opposed to a wind in our face. When you click down into how -- what's our strategy and what's our value proposition and focus, and it's really in 4 areas. We call these our strategic plays. If you follow us and hear us talk about play 1, 2, 3 and 4, that's our code for or nomenclature, if you will, for our strategy. And Jeremy, I think I'll just touch these at a high level because I suspect we'll have some questions that probe into them. But at a high-level play one is really about the affiliation models, right? It's from our traditional space, which is an adviser who wants to be independent, run their own small business and we serve and support them in doing so. And two, some of the newer models that we've launched really this year to support advisers actually getting to independents and to support advisers who want to be independent, but they don't want to run their own small business. So it's kind of an independent employee model. And the relevance of that is that those new models take our addressable market from, call it, around $4 trillion and tripling. So it really sets us up for -- when you think about over the long term, we've been delivering record levels of growth, and our addressable market is tripling. So it's pretty cool. Second is the technology and the capabilities. And this is probably the most obvious -- one of the more obvious ones, but when you look at the technology platform, anything and everything an adviser does on a day-to-day basis, if you've got better technology, more efficient technology, things that help them go -- send out proposals to help them manage their assets, that matters a lot to them. So it's a big part of where we invest on a technology standpoint. Third is on the customer service side. And that's been something historically, the independent space hasn't been known for. It's been known more for, hey, you get to -- an employee model or a wirehouse, you get to keep 40% of the revenue you generate. Go independent, you can keep -- you could double that even more, but you're going to have to roll your sleeves up and do a lot of things yourself. And that really played through. I think when you look at what our industry or part of our industry did from an investment in customer service or customer care, as we call it, and I think we saw that as an opportunity to differentiate, really to invest in and deliver a best-in-class experience in something where I think when you look across our space historically, ourselves included in the past had not done, right? And I think that's a big part of our investment. And you see our NPS scores and feedback really coming up because of that. And then lastly, the fourth area of the strategy, I think this is the one that is the one of the more differentiated pieces and newer pieces is really helping advisers run their small business, right? Those first 3 areas are really helping advisers do their day job, if you will. But the majority of folks in our space are also small business owners. And running small businesses where I think as an industry, we've really left that to these small boutique firms to pop up and help them do some financial services to help them do marketing, to help them do asset management, which is a little bit more connected to the core offering. What we've done is developed our business solutions, where that's an integrated capability within LPL, where you can get a CFO, you can get someone to help me with your marketing, you can get an admin, which is a big, big leverage point when you're running a small business. And that just really positions our advisers to take the vast majority of their time, if they're able to use these services and use them well, to focus on their core business or growing their core business, which allows them to grow and do better and us at the same time, right? So there's kind of a double win for us if people take that up. So I'll stop there. That's the kind of a couple of minute overview or a 5-minute overview, if you will, of the strategy.

And then, Matt, maybe you kind of have referred to it a couple of times in your response to my question there. But I think if we look at the competitive landscape, maybe some of the folks tuned in here are a little bit more familiar with on one spectrum, you kind of referenced the more of the wirehouse model where you're ticking up a bunch of our revenue as an adviser to the home office. And then on the other end of the spectrum, you have somebody like a Schwab with their RIA platform. It's pretty no frill getting a lot of back-end economics. So I think you talked a bit about what LPL offers into that middle segment, but can you just maybe go in a little more detail around why the adviser would choose you? And then maybe also just who you're coming up against? Is this a spot in the market that only LPL is selling? Or who are you seeing in these types of conversations?

Yes. I think when you look at the traditional markets, right, or traditional models and that is -- we're the dominant, the largest player in that space. That's largely firms where they're piggybacked firms, right? So they're not larger public companies. There's a bunch of names, I think you would know, but I think we're the dominant player, the largest player, specifically in that space. And I think that our value prop there is kind of, as you hinted in the question, as I described in the strategy, you've got the -- a place where an advisers now running their own small business. If you can provide an integrated solution that positions them to not -- as you described, if you're just plugging into a custodian, there's a lot of things that, that model presuppose is you have to go figure out yourself, right? You don't just have to do it yourself. You have to go find the vendors to support you, and you're almost a little bit of like a general contractor trying to coordinate all these different things. And some people love that, and that's great. But I think if you've got someone like us that can really package those things together and really position you to focus on your clients, I think that really resonates well. I think that's why the independent space is taking share from the wirehouses or the firms that are -- that don't have the model that we do. And I think that traditional space is where we've grown historically. Now I think as the newer models roll out, I think we start to have a little different competitive landscape, so that premium model or that SWS model, where we're focused on an adviser who's actually leaving an employee model situation, who needs help getting there and also needs to help running their small business, that's when you start to get into larger names that you know or even the employee model, names like a Raymond James and Ameriprise. And I think when we take a step back and look at the value proposition that we created in those models, I think we feel really good about the independent space and continuing to grow and take share there. I think we feel really good about the new models, the SWS, we just had our third team join. It's a new model, but newer models take a little bit of time to get out in the marketplace and get recognition and the sales cycle in that space is a little bit longer. But I think the growth that we've seen there has been quite good. And really, the anecdotal feedback for the teams that have actually joined and have gone through the experience, I think they had high expectations of us. And I think as an overarching statement, I think we've exceeded that. And I think it's incumbent upon us to keep delivering in that model. And then the same thing on the employee model, where the employee model from a competitive set standpoint, that market is, call it, $11 trillion, $12 trillion. And we think about 1/3 of that or $4 trillion, our advisers that -- and you can pick any of the large names that you know, but about $4 trillion of that are advisers who do want the benefits of independence, right? They want to have a payout that's not 40%, but our model, 50% to 70%, depending on your size. They want a model where their -- part of their job isn't pushing the products of the asset management arm of their firm manufacturers, having a model where they own the clients, right? They're their clients, where if they decide to leave, we're not going to pounce on them and say, your adviser quit, I'm your new adviser. That's -- they're your clients and your clients to manage. So I think that value prop we think resonates really well. And we're not guessing. We got into this space through an acquisition of an independent employee model firm, Allen & Co. that we've been working on integrating. We've learned a lot from that team and their expertise. So I think we're really well positioned with the model we put together. So I think to answer your question, right, I think we've got -- we're not just fitting in a slice in between 2 areas. I think what you're seeing from us is really developing models that are serving the evolving needs of advisers and how they want to operate. So you see us just adjusting to what matters to clients out there. And you've got north of 300,000 advisers. And in the United States, I think you see us just starting to not try and solve for all of them, obviously, but to develop more models based on what's important for them.

And we'll dive into some of the really interesting acceleration of the growth trends that you guys have seen in the past year plus or so. But I think I just wanted to start off on a topic that's been pretty well bandied about at the conference so far, and that's kind of the COVID impacts, right? I mean -- and I'd be interested to get your color around what's happened in this very unique 2020 so far around client assets, but also client cash, but how is really the pandemic impacted the business from an engagement perspective or recruiting? Or what have you learned in the digital ecosystem that you might be able to apply on a go-forward basis when we hopefully get through this thing?

Yes. It's -- I mean, I think we've all learned a lot. And I think probably the core thing that we've not necessarily well learned but also applied is investments in digital capabilities, really, really mattered before COVID. And I think they just -- it's just enhanced the benefit of those, enhanced the importance of them. And especially in the space that we operate in, where small businesses are really aligning with firms to leverage their technology and capabilities. So it just matters a lot to them. So maybe the easiest example or maybe the first thing that comes to mind is what's happened with the recruiting, right, the core driver of our organic growth. And you go back to when things started to really become clear, there was an issue back in March. I think you saw the world just kind of quickly pause. Glad we weren't doing this conference in Midtown in March, Jeremy. [indiscernible] But I think you saw everybody pause and start to think through like, what are we going to do in this environment? And I think as we started to do that and you moved into April, you really started to look to and focus on your digital capabilities, your virtual conference capabilities. Can you -- when you think about the main event that you would -- that would culminate an adviser making decision to join you or not, which is usually a multi-day or all day in-office meeting where you took them through all these things. And when you started to figure out, well, how do we replicate that in a virtual world? Well -- and I don't want to oversell it if that was easy, but we quickly were able to do that. And I think you saw our recruiting in our NNA really not miss a beat, really. I mean, you definitely had a little bit of lengthening of the sales cycle, right, which you see -- you can see flip through the numbers. But you had a really strong virtual capability that allowed you to continue to do that. Then you move to maybe the second thing in that value chain to highlight is then once someone decides to join you, the process for their assets to follow really, really matters, right? You can imagine you're running a business and affiliated with a firm, pick another one. I'm going to leave and join LPL. And the moment I do that, I instantly have no clients, right? And I've got to get them to follow me. And in a world where you have to FedEx or shift them a bunch of papers with stickies on it to sign your sign here and then send it back which is largely how things have been done in our space, not entirely, but largely, that's a little bit of a daunting thing to do in a COVID environment versus we had invested in a digital onboarding process, right? So from an adviser's client standpoint, they move to LPL, that client gets an e-mail click here, click here, click here, things go back with electronic signatures, and then their accounts move after that. So -- and I think you see that come through, I think, on the confidence of folks joining us. And then -- so maybe I'll stop there. I don't -- I could go pretty long on this one. But I think the thing I would center in on is investments in digital capabilities really paid off in a much bigger way in a COVID environment and just emphasize the importance to make the right investments in that area going forward.

Yes. Financial services is a washing paper. So I think that's one thing we could all lose and be very happy about. But I want to just pivot over to growth because it's been a pretty impressive on. We want to give it a little play time here. But I think one thing that stood out to us has just been the tremendous acceleration in your net new asset gathering over the past couple of years. I think you're now trending at somewhere in like the 6% to 8% annualized ballpark versus maybe only like 2% to 3% a couple of years ago. So Matt, I guess, what's the key catalyst here? What really drove the acceleration over the past couple of years?

Yes. It's really kind of bridge off the answer to the first question, Jeremy. I think it gets back to the strategy and the investments in both making sure we've got the right models for advisers. And really, the growth that you referenced historical growth is largely in that traditional model. So the newer ones really, I think, set us up for additional future growth. But even within our traditional space, I think it just becomes more and more important to advisers. And think about put yourself in their shoes, right? They're in a world where there's pricing pressure for that meeting. If I don't have a great value prop, the alternative for my clients is to go get some either robo product or digitally-delivered advice, that if I'm just delivering asset allocation or investment management, well then -- there's other value props out there. So I've got to step it up. I've got to be a wealth manager. I've got to be their CFO. I've got to help them with their own planning. So I need to be at a firm that can help me do that, right? And I think you see us invest in things like that, invest in goals-based planning capabilities that are inherent in our systems. I also need to have more time in my day to have that personal connection and dialogue with my clients, right? Because if I'm just treating them the same way one of those digital offerings, it treats them, like why would they pay me more, why would they sign up to be with me. So if I'm in a firm that creates capacity in my day by their digital platform. And to your point, not having paper passed around, but just setting me up to be able to serve 300 clients instead of 200 clients, like, those things are going to matter. I don't -- if I have to spend 3 hours a day with customer service or operations trying to figure things out that takes away from my day, like, you add all these things up in our traditional markets, whoever can deliver on those things and is going to, I think, carry the day and at least be able to pick up their growth pace. And I think we've been able to do that. But we have to continue to do that, right? I think we -- you've got to up your game each and every day, week, month, quarter. And I think that's the perspective we have internally is to make sure that we're upping our game, upping our value proposition to win the business of these hard-working folks that run these small businesses. I would add to that, another point that I think matters a lot, especially in these periods of volatility is your balance sheet, right? And if you're -- again, back in the perspective of a small business owner, and if I'm affiliating with the firm that I'm worried enough that the largest asset I have in my personal balance sheet is probably either my house or my practice, right, for some, it bounces around between the 2. And then after that, I don't really have much. And do I want to worry that the firm I'm affiliated with, if there's a market hiccup or a downturn that the excess cash flow that they have is really going to be pinched because they've got a lot of debt, and they're going to pay interest expense or I'm worried that they're going to not have capital to support me to grow. And I'm not saying that, that's -- that happens, right? But from an adviser, [indiscernible] want to worry about that, I think, is the key. And I think what we found is -- and we've had various levels of -- in our history, various levels of balance sheet strength, if you will, and I think what we found is a strong balance sheet matters. It matters to support and drive organic growth. And for those that have followed us, you probably know our journey of coming from targeting that 4x leverage area to now targeting in that -- with the leverage with the 2 handle, right? We've been hugging the low end of that for a while. But -- and that 2 handle zone, 2x leverage zone, I think, is a place where you've got a nice balance of having some leverage that gives you some debt, which is a cheap cost of capital to drive initiatives and make acquisitions and support growth. But at the same time, having capacity, there is a big downturn, like when we were sitting here back in March, right? You run -- and you can -- starting that at a 2x leverage standpoint put us in a really good spot to be able to absorb something like that. So I think that -- I would just emphasize that, that matters in our space. And I think it's been one of the contributors to the growth that we see.

And then, Matt, just you had mentioned day, week, month locking and tackling and focus on a go forward. And yesterday, you actually released your August metrics. I know that with July had a little bit of a weird tax impact from the July metrics because of this kind of COVID environment. But how should we think about the August metrics and the growth trends from the prior month?