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

[Audio Gap] the S&P by 15,000 basis points. And that share price and business momentum has only continued so far in 2021. So Matt, thank you for being here and congrats on the firm's success.

Thanks, Steven. I like how you quoted that number of basis points. That's very nice.

Makes it seem that much more impressive.

Yes. Yes.

So Matt, I thought we'd just start things off, spending a bit of time talking about how you see the organic growth opportunity evolving across both your traditional channel or IBD channel as well as the newer expansion markets. So first just on the traditional side. You have 14% market share of a $3 trillion TAM. And you just recorded your strongest organic growth year within the channel. I was hoping you could just speak to how you're positioned competitively within that market. And is there a ceiling in terms of how large your share can grow within the IBD channel specifically?

Sure. I mean -- and I think just starting in on that channel. I just -- maybe just to give us a baseline of the results that we've had there. And I think the headline for me is, I think, we've got a lot of room to grow from there. So if you look at our traditional markets, which have really driven the growth the past few years, we've gone from organic growth in the 3% range a few years ago in 2018 to 5% in 2019 and then 7%, 7.5% last year. And I think as we look ahead, I think we feel confident that if we continue the focus we've had, we continue the execution we've had, that we'll be able to improve it from there. And I think when I click -- and I kind of click down on how and where and why we feel good about being able to do that, maybe just breaking it out into a couple of buckets. First being just bringing new advisers to LPL. And I think the market share gains we've had in a period of time the past few -- past several years is the number of advisers changing firms has just continued to come down and down and down. Going from maybe the low-teens percent-wise, meaning individual advisers changing firms each year several years ago, to now more in the 5%, 6% zone. And in that same time period, our recruiting and growth has continued to move up, meaning the market share has really started to grow. And you think about a period of time in the future where that churn starts to come back up and even simply maintaining our market share, of course, an opportunity to grow that. But if you just assume we maintain it, you can -- you've got a next level of growth that could come from the -- bringing advisers to LPL. And then I would add to that, just really focusing on helping our existing advisers and positioning our existing advisers to grow. And I think that's really one of the reasons that folks join LPL and what drives our focus and investments in technology to make their day-to-day more efficient, what drives our creation of business solutions. Positioning an adviser to focus and let us handle a lot more of the day-to-day of running a small business, allowing them to be the wealth managers, that is really their towering strength. So I'll stop there. I mean I think the headline for us is we're excited about the progress over the last few years. And I think if we execute well, I think we feel good about being able to improve it from here.

And so one of the other channels which you've always had a strong foothold is that bank insurance channel. It's a $1 trillion TAM. Historically, you've had that leading share. And that's only grown following a few bank wins in 2020 but some pretty substantial ones with BMO and M&T. I was hoping you could speak to just the competition within the channel. And do you expect that TAM to actually expand as more banks consider outsourcing some of those wealth management services?

Yes. Actually -- and I'll start with the TAM. I think we do see that opportunity growing. And as context, the overall market, think of that as a $1 billion -- or a $1 trillion channel. And roughly 1/3 of that has outsourced today. And that's the channel where we are the market share leader and the dominant player for those that have already decided to outsource. I'd say the second 1/3 of that are really large institutions that you would be highly unlikely they would choose to outsource. And you can probably guess the names of those firms there. And then the final 1/3, and I think perhaps to the point of your question, are folks that have not outsourced yet. And from our perspective, we think it makes logical sense to do so. And I think that's where you get a BMO from -- and an M&T from who have chosen to outsource on that brokerage and advisory business. So that's the market. I think when you start to get into our value prop, which I think leads into the -- how we feel about our competitive positioning is we feel good. I mean this isn't a new space for us. It's been a capability at the firm for quite some time. Our recruiting 2 years ago was in the $5 billion range. Last year, it was $10 billion. M&T and BMO combined are in the $35 billion range, just those 2 firms for this year. So you see a nice growth there. And I think the value prop really comes down to the -- when you think about why it would make sense to outsource. So let's focus in on the capabilities for folks that are doing this themselves now. And scale in wealth management is in brokers and advisory capabilities is really, really important. The client experience that the retail clients have in this space, those expectations are only going up. The advisory capability is becoming more and more important, especially for these large institutions where maybe they started out and their capabilities were primarily in the brokerage side. And now they have a client base that's really looking for advisory capabilities. And then the risks, the regulatory environment, the compliance environment becomes more and more complex. And all of those things just lead to -- if you're going to compete well with your own offering, that you need to invest to make all those things good, have the adviser capabilities, to have that client experience that matters well. And I think when you're a bank and this is a complementary product or capability, and you're having to choose where you put your investing dollars in your core business versus its complementary capability, and you look at that versus outsourcing to somebody like us and being able to get the benefits of all the investments that we've made and leverage our expertise in that space, really allowing you to put your clients and put in front of your clients to -- in our view, one of the better or the best capabilities in the space. I think that just starts to become a compelling picture, we think, as long as we continue to deliver the value prop that I think we have been and are focused on the future. So when you put all that together, I think that the environment sets up for more banks, I think, through outsourcing. And I think from a competitive standpoint, being the leader in the space and not resting on those laurels, continuing to invest and make sure that we're delivering the value prop that got us here into the future, I think that all sets up for a pretty decent opportunity to grow from here.

And maybe just shifting gears to the newer expansion markets. You launched strategic wealth services offering, effectively an offering to help advisory practices make that transition to independents. And just your first year post launch, I believe you've attracted about $1 billion in assets to the platform, which I think speaks volume just given the disruption from COVID. What has been the early feedback from some of those early joiners? And how long, in your view, before this becomes a more meaningful contributor to organic growth?

Yes. The feedback has been good. And I think that -- maybe building on your question and really what the model is focused on and solving for, which is really playing into that long-term shifts of wire house advisers really moving to independents. And when you look at the traditional independent model, it really didn't solve for helping folks get to independents. It didn't solve for helping someone who had spent their career being a wealth manager, all of a sudden, also having to be a small business owner and operating and running a small business. And that's where the design of the model came from is really focusing on getting folks to independents with a white glove service that helps you do so. And then once you're there, helping you run that business, which is where the business solutions comes into play. So I think the early feedback I would describe is our hope in the value prop and how it resonated and was helpful in doing so really has resonated. We're starting to get referrals from the teams that have joined us. And I think when you -- to get to your question, when does this become a more meaningful contributor to growth? With the $1 billion that brought on last year, I think we're -- our perspective and focus is really to improve it from here in 2021 and beyond. And I think the thing I would emphasize is we're -- we've come into a space -- and if I look back at 2020, where we didn't really have brand recognition and a value prop in the space. So it takes some time really to not only develop that but then also for people to think of LPL and to recognize that we have a capability there and a solution there. And I think we're largely on our way of being front and center and top of mind in that consideration set which, I think, sets us up, combined with the value prop itself, to be able to grow from here. So we'll see how long that takes. It's a new area. So it typically takes longer than somewhere you've already been established. But I think our early feedback has been really, really good, Steven. And I think I'd just emphasize that if we can deliver on the value prop, which is our focus over the long term, we think this can be a big driver of growth.

And speaking of some other new initiatives and just to wrap this up on the independent employee channel, it's a $4 trillion TAM. I think you just onboarded your first team. Again, another offering that's targeted advisers looking to own the client relationships but maintain a lot of those higher-touch turnkey services that you get on the employee side. And given this is a much higher-touch offering or services offering, I was hoping you could just speak to the scalability of the model and the interest level from advisers since launch just given the potential for that increased payout.

Yes. And I think that when I think about just orienting to the value prop there, it really is similar to the SWS model and really helping an adviser who's moving from a wire house to get the benefits of independence but without being a small business owner. And the benefits I would highlight there are probably, first and foremost, owning the clients. That's a key part of independence. And a key part of our employee model is the adviser owns the clients, not the firm. Second is the product distribution. We don't manufacture our own products. So advisers are free to really manage and distribute products in the way that they choose. And then third and most definitely relevant is the economics to the adviser. A payout that broadly can be in the 30% to 40% range at your typical employee model versus think of it in the 50% to 70% in our model. So I think that the value prop is really good. I think we signed our first commitment in Q1 for the model. And I think, as you noted, it is a higher-touch model. And I think from a scaling standpoint, it's almost -- I'd emphasize the conversation we just had on SWS. It's about establishing ourselves in the employee model space and less so about it being a higher-touch model. Because I think when you think of the SWS model, that's also a higher-touch model. And I think we feel good about the capabilities. We feel good about being able to deploy them. I think it's really about just establishing ourselves in the space, starting to get some wins and teams on the platform. And I think from there, it can scale.

And so Matt, just putting all that together, as you're coming off a year where you grew assets organically, 7% plus, and that came almost exclusively from the traditional IBD channel, so as we take a step back, as the other affiliation model starts to scale in a more meaningful way and the bank TAM expands, are you anticipating a step function higher in terms of organic growth in 2021 and beyond?

Yes. I think -- I mean the opportunity is there, Steven. I think the momentum that we have going into '21 and beyond, if we execute well, I think the opportunity is most certainly there. And I think just maybe putting a little bit of color to it, the -- our 2020 organic growth rate in the mid-7% range. And then you just add M&T and BMO to that, you're in the low double-digit organic growth range as almost a starting point. And then you start to think about, well, what are the possibilities and items that could drive it from there? And you hit on them in your question is just in the traditional markets that, that record recruiting we had was in a period of time where the number of advisers changing firms was at a long-term low. So just maintaining our market share. And over time, who knows that it will be 2021? But over the longer term, if more advisers change firms, bigger opportunity there. I think the growing bank opportunity, we just discussed well. I just emphasized that, that 1/3 of the market that hasn't outsourced is, I think, we're really excited about. And then you add on what we were just talking about, success in the SWS model and employee model. And you can start to do some scenarios of success in each of those that are pretty exciting. So we know we have to deliver on the value to advisers. That's what matters. It underpins all of this. But if we can do that and do that well, I think the opportunity for a higher step function of growth is there.

And so one of the other unique aspects of the LPL offering is your Business Solutions, covering everything from professional solutions like virtual admins and CFOs to some continuity planning and M&A solutions. The subscriptions in that space, they've been increasing steadily. I think it's nearly double to 1,400. But the penetration across your adviser base, still relatively low at less than 10%. I'm curious, Matt, if you can just provide some color as to how -- what do you believe is an achievable long-term goal in terms of adviser penetration. Just how important have these solutions become as a marketing tool or an acquisition tool for attracting advisers onto the platform?

Yes. I mean I think that -- on that point and maybe just a little bit on the -- to set up the answer or my thoughts here is on the objective of Business Solutions themselves. And they really, at the highest level, are set up to help advisers run a small business and let us help do that, positioning them to focus on the wealth management side of their day and really growing that practice. So I think when we think about the appeal and potentially the penetration I think from that lens, there's certainly -- from our standpoint, we feel like there's a broad appeal when you just look at what advisers spend today on running their small business. And when you look at our advisers, it's -- think of the -- over $1 billion a year in like local level services that Business Solutions are intended to really help with. So there's certainly an opportunity set out there that's pretty large. Hard to put numbers of percentage specifically on it, Steven. But I think the opportunity is pretty large. From a marketing standpoint and an opportunity to be part of the value prop to drive growth, I'd highlight 2 things. And first is when you think about our new models, the -- one of the core components of the SWS model is providing and having Business Solutions come along with that model. It is the part of that solution that assists an adviser with running their small business when that's new to them. So Business Solutions really was a big part of being able to create that model. And then second, I'd just highlight the -- call it the à la carte use Business Solutions outside of SWS. Like the ability for an adviser who's using these solutions for the operational efficiencies that it can create in their practice. The ability to help them grow, highlighting our new M&A solution, the most recent one that we launched. You're starting to get to a place where, if I'm an adviser searching for the best home for me to be and I am focused on being able to grow, being able to be efficient, being able to do M&A on my own, and I look across the landscape, I think we feel pretty good that LPL is a really compelling place for someone like that to be. And then you start to think through, as our growth perhaps gets indexed towards advisers who really want to come to LPL to supercharge their growth, well, then it gets pretty exciting. So that's -- I think they're pretty important from a marketing standpoint and just why it's so important that we execute and deliver the value prop in a quality way.

And maybe just to make the narrative even more exciting, Matt, one of the things I did want to touch on is white labeling this offering. So the subscriber growth in Business Solutions has been quite impressive. I would say still in the context of the overall gross profit contribution, it's still relatively low. But you guys have at least hinted at the prospect of maybe marketing some of these services outside the LPL ecosystem could certainly meaningfully expand that fee opportunity. What's your vision for how you can market this product outside the LPL ecosystem? And how scalable are some of the Business Solutions offerings more specifically?

Yes. I think the vision is definitely exciting when you start to think through the -- each of the Business Solutions, just looking at the 6 that we have today. And many of them, you're not really anchored or needing to be on the LPL platform for that to be a value prop. So I think when you start thinking through that vision level, you can dream pretty big. I think from our focus right now, I'd emphasize that it's very early in thinking through that process. I think I'd describe it as we're going to go experiment and spend some time to see which solutions can resonate outside of the walls of LPL. I'd emphasize our primary focus is on the solutions being delivered to our advisers that are with us. But at the same time, we want to invest a little bit of time and a little bit of money for that longer-term vision where that can be a broader scope. So more to come there in the future. But it's something we're focused on in an experiment level.

We're certainly looking forward to those details, Matt. Maybe just switching gears over to the rate side, certainly, the topic du jour at the moment. Lots of optimism around the improving rate picture. 10-year yields steadily rising. I was hoping you can just update us on your sensitivity at both the long and short end, how you're managing that deployment of client cash from third-party -- or to third-party banks. And maybe what are some of the macro catalysts that are going to be needed to reinvigorate some of that bank demand given all the excess liquidity in the marketplace?

Yes. I mean I think on the -- just starting off on the first part of the question on the sensitivities. There on the short end, think of each individual interest rate increase. Think Fed funds, 25 bp increase, is in the range of $30 million to $50 million per move. On the longer end, which there really isn't a lot of demand, I think, towards the end of your question there given the amount of liquidity in the market. But I think the way to think about the opportunity there is we target having somewhere between 50% and 75% -- 50% to 75% of our ICA deposits in fixed rate contracts. And kind of a rolling portfolio is the idea. But that would be the broad range that we would have. Today, that's more at the 35% level. So even if you think about just -- we're an environment where there is demand and the rates make sense. Just simply moving to the bottom end of that range would have us deploying, call it, roughly $5 billion of additional balances into those fixed rate contracts. And while we've seen the 10-year move a bunch, the sweet spot in that market is in the kind of the 5-year zone or 5-year spot rate. So at least those are the dynamics that would impact that. But I think when you look at the market today, I think probably a statement obvious to everybody. But there's just such massive amounts of liquidity in the system, from checking account balances to savings account balances. I mean the Fed's balance sheet is, you know it better than me, I don't know, $7 trillion, $8 trillion, $9 trillion. It is just a lot of money in the system.

High 7s.

Is it $9 trillion?

High 7s.

$7 trillion?

High 7s. So it will be $9 trillion by the end of the year.

Yes. There you go. I mean it's large, which is the key. So when you think about the demand that comes from these large banks, it's not there today. But I think the catalyst -- and it feels like that this isn't a permanent change. This is just the moment in time that we're in now, that as you get to a place where -- whether it be herd immunity, vaccines are widely available, cash is being spent and deployed on -- beyond capital purchases and more on experiences, meaning vacations. Again, individuals are putting more investing dollars back into the market. That just feels like an environment that we'd move back to where we were, call it, 2018 and '19. Now whether the rates are at the same level, that's hard to know. But I think at least the demand for the cash, you would think of a return. So that's really, really hard to predict. That could be wrong. But at least, that's the thinking on our end.

It's really helpful context, Matt. And maybe just thinking about -- switching gears to the expense side but really more around your investment philosophy. So you guided to 5.5% to 8% core G&A growth this year. In the past, you spoke to roughly half of the incremental spend, targeting some of the newer-growth channels, which should support that step function higher in organic growth that you were alluding to earlier. How do you evaluate the return on investment dollars in some of those newer affiliation models? And what's the optimal balance in your view in terms of investment across new versus more traditional markets?

Yes. And I think -- as you highlighted, I think we've been growing core G&A in that kind of mid-single-digit zone with really a focus on driving organic growth overall, both in the traditional markets and across those new models. And the headline for us is we think we've got the right approach, the right investments and they're working. And the metric, at least to see that, really is organic growth. It's gone from that 3% a few years ago to 5% to 7% last year. And I know I've already said it but positioned potentially to be low double-digit growth this year if the trends continue. So I think we've got the right approach. I mean I think when we look at the breakdown at least of investing in the traditional market versus the new affiliation models, there's a lot of investments that apply across both sides, especially when you're thinking about the technology and the capabilities. But then when you click down from there on investing and ramping up into the new models, I think the -- last year, our perspective on the allocation was about -- of the growth was about 50-50, kind of the traditional markets, traditional organic growth versus the newer areas. I think that's a good way to think about this year as well. And of course, our philosophy is, I think you know well, Steven, is we'll be flexible. If things change, if the opportunities change, we'll adjust. But I think where we are now is, we think, the approach we've had the last couple of years is working. And we're continuing in that same dynamic.

So Matt, since admittedly this is a fintech conference, I would be remiss if I didn't ask you about your efforts on the technology side. You significantly increased digital spend. I think it's more than doubled since 2016 and has clearly helped facilitate or translate into pretty meaningful share gains, better organic growth. As you look at the competitive set, how does your tech stack compare with some of the pure firms, based on the feedback from advisers and consultants? And maybe just speak to some of the recent platform acquisitions, whether it be AdvisoryWorld or Blaze that have further strengthened your digital offering.

Yes. I think it's -- I mean the feedback has been positive. I think anybody who's delivering technology and capabilities well knows that you need to keep at that. You need to continue to invest. You need to continue to up your game. And so we're not resting. But I think the feedback's been really, really good. I think one of the top reasons you'll hear from advisers who join us and why they selected LPL is the technology. So I think we've got the right approach. I think the areas that we're investing in -- and both through building ourselves and also through acquisitions is really just focusing in on the day-to-day activities for an adviser. And where they spend their time and how we can deploy technology to make that experience better, to make that experience more efficient and things like goals-based planning, which is really important when you're operating at the wealth management level where our advisers are focused, helping them grow through a proposal generation capability, which is where the acquisition of AdvisoryWorld came in. They do several things. But proposal generation is one of the key ones and really being able to have an integrated capability that goes from proposal to acceptance to writing to opening new accounts just as a really efficient approach for an adviser versus having to go through multiple systems and re-key information. And if you can imagine doing that over and over on a daily basis, being able to solve that through technology was a big positive. And then moving over just to the portfolio management side of things. Whether you outsource it to us or essentially manage platforms or you do it yourself like a trading capability, especially in a world where advisory accounts are really growing, the ability to trade and rebalance and manage those is key. So our investments in trading, the acquisition of Blaze, as you mentioned, was really focused right in there. So that's just some color on where we're focused. But I think the headline for us is technology is a key part of the value prop. We aim to really raise the bar each year, continuing to drive value. And I think that's why you've seen us grow, that -- the dollars that we invest there, from under $100 million several years ago to now in the $170 million, $175 million range.

That's great, Matt. And I've actually received a couple of emails, questions that have come through, specifically just inquiring about the regulatory landscape under Biden. Whether that's something that -- at least from your perspective, do you expect some greater intensity in terms of the level of regulation on the advisory side? And the details have been sparse so far. But I was hoping that you could provide some thoughts just in terms of what you're hearing on the regulatory side, how you think things might change under the new administration.

Yes. I mean we've got -- we're, of course, focused on that. We've got a compliance group and a regulatory group that stays very, very close. I think the things that I would highlight is when you look at the regulation in our space, going back to the last 5 years, from DOL to Reg BI and all the changes that have come through from that, I think when you take a look back at the industry, I think that the more meaningful changes have really been made, whether they were in DOL. But as that was vacated, a lot of the changes, just the players in the market, meaning ourselves, had kept those changes made and rolled them through things like levelized pricing on variable annuities as an example. So I think a lot of those changes have been put in place. So the other thing I would highlight. I think when there is regulatory complexity, when change does come, even if it's unexpected, I think that's just another place where the LPL value prop shines. Back to the importance of kind of where we started the conversation of size and scale. And our ability to solve new regulation, new complexity usually turns out to be an opportunity. So I would just highlight that. But I think the short answer to the question is nothing material that's jumped out to us so far. But of course, we're staying close. And as you noted, it is really early.

That's great, Matt. And I know we only have a few minutes left here. So just wanted to at least end things with a bigger-picture question. But just if we look over the last 5-plus years, so admittedly not long after you became CFO, Dan was appointed CEO, the transformation that's taken place is pretty remarkable. And look, admittedly, the metrics speak for themselves. AUM has doubled, EBITDA has doubled. Organic growth has more than doubled. Your share price has more than tripled. And just given the myriad tailwinds that you cited throughout this webcast, what's your vision for the next 5 years in terms of future growth? What are the areas that you're most excited about and that you believe might be most underappreciated by the investment community?

Yes. And I appreciate the question, including in that particular period. But I think there's a big team here beyond Dan and I. And I think that, that group's working really, really well together and really focused on what matters most to our clients and just being relentless about that. I think it's really the environment that's really set us up to be able to have the success that you articulated. Well, I have wanted you to repeat the question just to say that again. But I think that that's really what's driven it. And it's what -- and when I think about the next 5 years and what excites me about that, you just start to think through if we're -- we continue to have the technology focus. We continue to improve the service experience. We have an adviser or client-centric culture that really has led to that growth -- that organic growth that we delivered. And then -- and thinking about this from a shareholder perspective. You add on top of that like the amount of advisers moving firms is at long-term lows. Interest rates are at long-term lows. And you start to put an opportunity for organic growth to grow from here. And you put a macro expansion on top of that. A coiled spring comes to mind when you think about the earnings generation capabilities in an environment like that. And then the foundation of it is really the management team and really, the LPL team overall, quite frankly, of just being relentless about serving our clients. And if you do that well, all the other things that we have talked through are going to come through. So when I put that lens or that -- those thoughts over the next 5 years and just dream a little about each of those things going well, it's pretty exciting. So I think we got to deliver it. But if we do, I think we're -- the next 5 years are going to be pretty fun.

All right. Well, we look forward to seeing it all take place, Matt. This is, I guess, the third year that we've launched this conference at Wolfe, the third year that you participated. So hopefully, we'd have you back again in person next year. But thank you for being here. I really appreciate the insights. And next, we have Payoneer at 2:20, so starting in 4 minutes. Thanks, everyone, for joining and look forward to seeing, hopefully, many of you in person in the coming months.

Take care. Enjoy it, Steven.

Bye.