Eventually, Falling Interest Rates Will Be a Headwind for LPL Financial

Sector Director

Michael Wong

LPL Financial provides an advisory and brokerage platform for advisors, broker/dealer services for financial institutions, and resources for practice management. At the end of 2022, advisors on LPL's platform served over $1 trillion of wealth management assets in the United States. LPL aims to offer services to all advisors regardless of business model. For example, advisors can be licensed with LPL Financial, giving LPL responsibility for managing risk and compliance, or they can operate as a hybrid Registered Investment Advisor using LPL Financial for custody, trading, and administrative support. LPL has also launched a new employee model that allows advisors to fully outsource practice management. Apart from independent advisors, LPL provides services to more than 2,500 advisors at banks and credit unions and more than 3,500 advisors licensed with insurance companies.

LPL’s capacity to grow its business relies on both the recruitment of new assets and ongoing retention and monetization of existing assets. Production retention, which measures the percentage of advisor-generated revenue maintained from the previous year, has recently been over 95%. This indicates to us that LPL’s services have a high level of stickiness and that maintaining advisor affiliations is an important aspect of the business. Acquisitions of advisor networks have also been a source of growth, with the 2017 acquisition of NPH for $325 million and the wealth management business of Waddell & Reed in 2021 for $300 million showing that LPL is willing and able to buy growth outright when it makes sense to do so.

Being a wealth management firm, LPL has earnings that are highly exposed to changes in the stock market and interest rates. Gross profit in 2023 could increase over 20%, as the company benefits from continued high interest rates. However, when the U.S. Federal Reserve begins to lower interest rates due to a successful soft landing or to combat a recession, gross profit growth will likely have several years of being in the low single digits if not being slightly negative.

Business Strategy & Outlook

We give LPL Financial a Narrow Morningstar Economic Moat Rating, because the broker-dealer benefits from strong switching costs, evidenced by high retention of advisors on its platform and the stickiness of investor assets. LPL claims to offer advisors the highest average payout ratios of the five largest broker/dealers, and the company is able to provide resources to advisors that its smaller competitors are often unable to match. Annualized production retention, a measure of recurring advisor revenue, has averaged over 95% over the past 10 quarters, with retention ranging from 93% to 98%. 

The percentage of advisors switching to a new broker/dealer has decreased over the past decade, and LPL’s ability to retain advisors is generally better than the industry average. In 2018, 6.5% of advisors changed firms compared with over 10% a decade ago. Though LPL is also affected by this systematic churn, recruitment of new advisors to the LPL platform has offset advisor losses in recent years. People are often reluctant to switch advisors because of their relationships with them, uncertainty about the potential cost/benefit trade-off, and inertia with financial management decision-making. Because of this, LPL benefits from stickiness of both its asset and client base. While there is a high level of competition for top advisor talent, LPL has been willing to invest to remain competitive by improving its technology offerings and services. LPL’s strong market position, best-in-class payout, and advisor resources contribute to its meaningful switching costs, which should allow LPL to generate excess returns to shareholders over the next decade.

When evaluating LPL Financial’s ability to attract and retain assets, it’s important to recognize the differing trends of advisory and brokerage asset growth. Net new organic advisory assets, which represent growth of “all-in” investment management accounts, have consistently grown at annualized rates of 6% to over 10%. Advisory assets have also been steadily growing as a percentage of total client assets, with advisory assets at 52% at the end of 2022 compared with less than 40% before 2016. In contrast, net new brokerage assets have been declining significantly. This decline in organic brokerage asset growth won’t necessarily reduce overall brokerage assets in the long term because of market effects.

We think LPL is well positioned to maintain its advisory base and marginally improve market share. Its ability to retain advisors during the recent separation of Independent Financial Partners provides evidence that associating with LPL is appealing for advisors. IFP was an Office of Supervisory Jurisdiction that announced in March 2018 its intention to build its own broker/dealer business and drop its affiliation with LPL. At the time, IFP had $9.5 billion of assets under management, which accounted for about 3% of LPL’s total AUM. LPL retained a majority of the at-risk assets. Though LPL probably offered heavy incentives for advisors to stay, including better payouts and cash bonuses, these costs can be worth the expense if the advisors remain with LPL for a long time. The discrepancy between the 50% of advisors retained and 70% of total AUM indicates that LPL was able to retain the higher-producing advisors, which suggests that retention efforts have been largely successful. For LPL, the risk of large OSJ exits from the platform is a bigger danger than systematic churn, and the relatively successful IFP retention efforts show that LPL can withstand unforeseen advisor departures with limited damage.

As part of its growth strategy, LPL acquired the advisors associated with National Planning Holdings in 2017. LPL needed to convince NPH’s advisors to move to LPL following the acquisition, since advisors are generally able to select their broker/dealer affiliation at will. The terms of the deal were structured with a purchase price of $325 million, and a contingent payment of up to $123 million based on the number of assets and advisors that move from NPH to LPL. Ultimately, LPL was able to convert about 60% of NPH advisors and fell short of its target of 70%. Though LPL was not required to fork out a contingent payment as part of the deal, we think that LPL likely overpaid for the right to integrate the NPH advisor network and that management overestimated its appeal to NPH advisors. With management indicating that mergers and acquisitions are more likely than not, we think LPL will need to show evidence of better advisor conversion following these types of acquisitions, and we like the option of contingency payment deal structures to reduce uncertainty around conversion efforts.

LPL's acquisition of the wealth management business of Waddell & Reed in 2021 went quite well. Retention of client assets was about 99% compared with the 70% that LPL modeled for the transaction. Estimated run-rate EBITDA was revised to be over $90 million compared with over $50 million when the deal was signed.

We believe LPL has the scale and resources to continue to make gains with advisor recruitment, and LPL should be able to absorb fee pressure to maintain its position as a broker/dealer of choice for advisors over the next five to 10 years. We acknowledge that LPL operates in an industry that faces uncertain regulatory conditions and a shifting business model that increasingly emphasizes acting in investors’ best interest. We think LPL's position as a market leader will not go unchallenged, but it should be able to adjust and adapt to changes. On balance, we think LPL will continue to use its scale and industry position to generate consistent net new advisor recruitment in the coming years, and we think LPL's ability to retain sticky financial assets warrants a narrow economic moat rating because of the benefits received from a high level of switching costs.

Narrow

Economic Moat

LPL Financial Hlds

LPL Financial Holdings, Inc. serves independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services, and practice management programs they need to create and grow their practices. It provides objective financial guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions. The company was founded in 1989 and is headquartered in San Diego, CA.

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LPL Financial's (LPLA) total brokerage and advisory assets balance declines due to unfavorable markets.

LPL Financial (LPLA) April Metrics Fall on Adverse Markets

SAN DIEGO, May 19, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC, a wholly owned subsidiary of LPL Financial Holdings Inc. (Nasdaq: LPLA) (the “Company”), today released its monthly activity report for April 2022.

LPL Financial Reports Monthly Activity for April 2022

CHARLOTTE, N.C., May 19, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC announced today that financial advisor Randall Pickett CIMA® and wealth associate Leslie Stephenson have joined Linsco by LPL Financial, the firm's employee advisor model. They are the second team located in the new Dallas Linsco office. Pickett reported having served approximately $180 million in advisory and brokerage assets.* He joins LPL from Oppenheimer & Co. Inc.

Financial Advisor Randall Pickett Joins Linsco by LPL Financial

LPL Financial recently posted a solid quarter overall, helped by re-accelerating momentum in its net new assets. The deal pipeline remains robust and should support growth for many years to come.

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CHARLOTTE, N.C., May 10, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC announced today that financial advisor Peter Carmack, CFA, has joined LPL Financial to launch an independent practice, Carmack Capital Management, LLC. He reported having served approximately $510 million in advisory, brokerage and retirement assets* and joins LPL from Wells Fargo Advisors.

Carmack Capital Management Joins LPL to Launch Independent Practice

CHARLOTTE, N.C., May 05, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC announced today that financial advisor Nick Bevad has joined LPL Financial, affiliating with Claritas Financial Partners, an existing firm supported by LPL Strategic Wealth Services. Bevad reported having served approximately $135 million in advisory, brokerage and retirement plan assets.* He joins from Merrill Lynch.

LPL Financial, Claritas Financial Partners Welcome Nick Bevad

LPL Financial (LPLA) records a y/y rise in revenues in the first quarter of 2022. However, higher expenses hurt results to some extent.

LPL Financial (LPLA) Q1 Earnings Beat, Revenues & Costs Rise

SAN DIEGO, April 29, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC (Nasdaq:LPLA) announced today that Brett Goodman joined the firm as executive vice president, Corporate Development and Investor Relations. Goodman will lead the firm's Corporate Development and Investor Relations teams, overseeing the development and implementation of M&A strategies to support the long-term growth of the firm as well as the firm's engagement with the shareholder community. He reports to Matt Audette, LPL Managing Director and Chief Financial Officer.

LPL Financial Hires Brett Goodman as Executive Vice President, Corporate Development and Investor Relations

LPL Financial Holdings Inc. (NASDAQ:LPLA ) Q1 2022 Earnings Conference Call April 28, 2022 5:00 PM ET Company Participants Dan Arnold – President and Chief Executive Officer Matt Audette – Chief Financial Officer Conference Call Participants Alex Blostein – Goldman Sachs Bill Katz – Citigroup Brennan Hawken – UBS Steven Chubak – Wolfe Research Michael Cyprys – Morgan Stanley Gerry O'Hara – Jefferies Kyle Voigt – KBW Michael Wong – Truist Securities Operator Good afternoon and thank you for joining the First Quarter 2022 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are our President and Chief Executive Officer, Dan Arnold; and Chief Financial Officer, Matt Audette. Dan and Matt will offer introductory remarks, and then the call will be opened for questions.

LPL Financial Holdings' (LPLA) CEO Dan Arnold on Q1 2022 Results - Earnings Call Transcript

LPL Financial Holdings Inc. (LPLA) delivered earnings and revenue surprises of 8.94% and 5.98%, respectively, for the quarter ended March 2022. Do the numbers hold clues to what lies ahead for the stock?

LPL Financial Holdings Inc. (LPLA) Q1 Earnings Top Estimates

LPL Financial Announces First Quarter 2022 Results

SAN DIEGO, April 27, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC (Nasdaq:LPLA) today announced that M&T Bank Corp. (M&T), which leverages LPL's Institution Services platform to support its retail advisory and brokerage business, plans to onboard the retail advisory and brokerage business of People's United Bank (People's United) to LPL's platform in the second half of 2022. M&T Bank recently acquired People's United Bank; the deal closed April 1. People's United's retail advisory and brokerage business comprises ~30 financial advisors who collectively serve ~$6 billion of brokerage and advisory assets estimated as of March 31st, 2022(1).

LPL Financial Welcomes People's United to Its Institution Services Platform

SAN DIEGO, April 25, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC (Nasdaq:LPLA) today announces leadership updates to the firm's Management Committee. Kabir Sethi will join LPL on May 2 as Chief Product Officer with responsibility for LPL's technology capabilities and wealth management platforms. He will lead product strategy, development and management to drive innovative, high-quality products that will benefit LPL advisors, RIAs and institutions. Additionally, LPL Managing Director Matt Enyedi will shift from LPL Business Solutions to head National Sales and Marketing. He will lead the teams focused on growing LPL's relationship with its advisors, RIAs and institutions and helping advisors grow their relationships with their clients. Both Sethi and Enyedi will report to LPL President and CEO Dan Arnold.

LPL Financial Hires Kabir Sethi, Managing Director and Chief Product Officer; Matt Enyedi to Lead National Sales and Marketing

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3 Reasons Why Growth Investors Shouldn't Overlook LPL Financial Holdings Inc. (LPLA)

CHARLOTTE, N.C., April 21, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC  (Nasdaq:LPLA) announced today that financial advisor Robert Mitchell has joined LPL, affiliating with Linsco by LPL Financial, the firm's employee advisor model. He reported to LPL having served approximately $425 million in advisory and brokerage assets,* and joins LPL from Stifel. The R. B. Mitchell Team Powered by LPL Financial will be the anchor tenant in a new Greensboro, N.C. Linsco office.

The R. B. Mitchell Team Joins Linsco by LPL Financial

LPL Financial Holdings Inc. (LPLA) is at a 52-week high, but can investors hope for more gains in the future? We take a look at the company's fundamentals for clues.

LPL Financial Holdings Inc. (LPLA) Soars to 52-Week High, Time to Cash Out?

Graphic Packaging Hld

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CHARLOTTE, N.C., April 20, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC (Nasdaq: LPLA) today announced that financial advisors Chad Keeler CRPC and Brock Rouch CIMA have launched a new independent practice, Platte River Private Wealth, through affiliation with LPL Strategic Wealth Services, a platform designed to support the unique needs of breakaway advisors. They reported to LPL that they serve approximately $380 million in advisory and brokerage assets.* They join from Morgan Stanley.

Platte River Private Wealth Launches With Support of LPL Strategic Wealth Services

CHARLOTTE, N.C., April 13, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC today announced that 119 LPL affiliated advisors were ranked among the top advisors in their respective states in the 2022 Best-In-State Wealth Advisors list published by Forbes. This is up from 92 last year.

119 LPL Financial Advisors Named 2022 Forbes Best-In-State

CHARLOTTE, N.C., April 11, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC announced today that Northern Lakes Financial Group has joined LPL Financial's broker-dealer, hybrid registered investment advisor (RIA) and custodial platforms. The group reported to LPL that it served approximately $120 million in advisory, brokerage and retirement plan assets*. They join from Thrivent Investment Management.

LPL Financial Welcomes Father-Daughter Team, Northern Lakes Financial Group

LPL Financial Holdings Inc. (LPLA) was a big mover last session on higher-than-average trading volume. The latest trend in earnings estimate revisions might not help the stock continue moving higher in the near term.

LPL Financial Holdings Inc. (LPLA) Moves 3.4% Higher: Will This Strength Last?

CHARLOTTE, N.C., April 06, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC (Nasdaq:LPLA) announced today that financial advisor Gary Edmonds and business management associate Andy Chang have joined LPL, affiliating with Linsco by LPL Financial, the firm's employee advisor model. They reported having served approximately $360 million in advisory, brokerage and retirement plan assets,* and join LPL from UBS Financial Services.

Beltway Wealth Management Joins Linsco by LPL Financial

CHARLOTTE, N.C., April 05, 2022 (GLOBE NEWSWIRE) -- LPL Financial Holdings Inc. (Nasdaq: LPLA) (the “Company”), the parent corporation of LPL Financial LLC, today announced the release of its 2022 Sustainability Report detailing the firm's progress toward its environmental, social and governance (ESG) goals. Guided by the company's continued ESG vision to take care of its advisors and their clients by operating responsibly and ethically, the report reflects the firm's progress in key focus areas, including diversity, equity and inclusion; responsible sourcing; sustainable investing; environmental stewardship; and community support.

LPL Financial Releases 2022 Sustainability Report

CHARLOTTE, N.C., April 04, 2022 (GLOBE NEWSWIRE) -- LPL Financial LLC announced today that financial advisor Lisa Tesar has joined Linsco by LPL, the firm's employee advisor model. She reported to LPL having served approximately $260 million in advisory, brokerage and retirement plan assets* and joins LPL from Morgan Stanley.

Financial Advisor Lisa Tesar Joins Linsco By LPL Financial

SAN DIEGO, March 31, 2022 (GLOBE NEWSWIRE) -- LPL Financial Holdings Inc. (Nasdaq: LPLA) (the “Company”), the parent corporation of LPL Financial LLC, announced today it will report first quarter financial results after the market closes on April 28. The Company will host a conference call to discuss its results at 5 p.m. ET the same day. Listeners can call 877-677-9122 (domestic) or 708-290-1401 (international), and use passcode 3557307.

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