LPL Financial - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 adjusted EPS was $4.51, up 16% YoY and down sequentially from $5.15; GAAP diluted EPS was $3.40. Adjusted EPS substantially beat S&P Global consensus of $3.49*; revenue of $3.84B modestly exceeded $3.78B*. Gross profit rose to $1.30B (+21% YoY).
• Operating leverage improved: adjusted pre-tax margin ~38%, Core G&A of $426M came in below outlook; client cash revenue edged up with ICA yield at 342 bps (+5 bps q/q) even as balances fell with elevated net buying.
• Guidance: 2025 Core G&A ex‑Commonwealth lowered to $1.72–$1.75B; adding Commonwealth costs lifts total to $1.88–$1.92B. Q3 color: payout ~87.6%, ICA yield roughly flat, Core G&A $495–$510M, tax ~27%.
• Strategic updates: Atria conversion completed; First Horizon expected to onboard in Q3; Commonwealth closed Aug 1 with 90% retention target and run‑rate EBITDA path ($120M at start; ~$415M fully integrated).
• Capital: corporate cash of $3.6B (pre-close), leverage 1.23x; Fitch assigned BBB rating. Post-Commonwealth leverage expected ~2.25x with a path to ~2.0x by end‑2026.

Note: Consensus figures marked with * are from S&P Global.

What Went Well and What Went Wrong

• What Went Well

  • Industry-leading growth and execution: “another quarter of strong business performance and excellent financial results,” organic NNA $21B (~5% annualized) with asset retention ~98%. “We aspire to be the best firm in wealth management.”
  • Cost discipline gaining traction: Core G&A $426M below outlook; 2025 Core G&A ex‑Commonwealth lowered to $1.72–$1.75B; management cites “renewed focus on driving operating leverage” and long runway for efficiencies.
  • Cash economics stable: ICA yield 342 bps (+5 bps q/q) and expected roughly flat in Q3; client cash revenue up $5M q/q to $414M despite seasonal/market factors.

• What Went Wrong

  • Sequential EPS decline: GAAP EPS fell to $3.40 from $4.24 and adjusted EPS to $4.51 from $5.15, reflecting higher interest expense (+$22M q/q) and acquisition-related costs.
  • Trading softness: Q2 transaction revenue $61M, down $7M q/q; Q3 implied recovery only modest (+$5M).
  • Independent RIA NNA soft: modest outflows cited; management points to regulatory ambiguity (potentially higher SEC registration threshold) driving flows toward corporate RIA.

Transcript

Speaker 4

Good afternoon and thank you for joining the second quarter 2025 earnings conference call for LPL Financial Holdings Inc. Joining the call today are our 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. The Company would appreciate if analysts would limit themselves to only one question. To ask a follow up, please re-enter the queue. 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 the 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 the comparable GAAP figures, please refer to the Company's earnings release which can be found at investor.lpl.com. With that, I will now turn the call over to Mr. Steinmeier.

Speaker 0

Thanks, operator, and thank you to everyone for joining our call. It's a pleasure to speak with you again. After an outstanding start to the year, we delivered another quarter of strong business performance and excellent financial results while continuing to advance key initiatives. We entered the second quarter against a backdrop of elevated macroeconomic uncertainty and market weakness. While markets rebounded sharply as the quarter progressed, questions remain regarding the resiliency of the equity markets in this rapidly evolving operating environment. Our advisors continue to serve a steady hand, helping to guide their clients and reinforcing our commitment to support them. Okay, now let's turn to our Q2 results. In the quarter, total assets increased to a record $1.9 trillion. Solid organic growth was complemented by higher equity markets. We attracted organic net new assets of $21 billion, representing a 5% annualized growth rate.

Our second quarter business results led to strong financial performance with the adjusted EPS of $4.51, an increase of 16% from a year ago. Next, let's turn to our strategic plan and progress across our organic and inorganic initiatives. Our vision is clear. We aspire to be the best firm in wealth management. To do that, we are focused on three key priorities: one, pursuing novel and differentiated strategies that enable the firm's sustained success; two, creating an extraordinary employee experience so employees in turn deliver an unparalleled client experience; and three, leading the firm with operational excellence through increased intentionality and rigor. Effectively executing on these focus areas will help us sustain our industry-leading growth while delivering improved operating leverage. With that as context, let's review a few highlights of our business growth in the second quarter.

Recruited assets were $18 billion, bringing our total for the trailing 12 months to $161 billion in our traditional independent market. We added approximately $15 billion in assets during Q2 where, despite a broader slowdown of industry-wide advisor movement, we maintained our industry-leading capture rates of advisors in motion while also expanding the breadth and depth of our pipeline. With respect to our expanded affiliation models, Strategic Wealth, Independent Employee, and our enhanced RIA offerings, we delivered another solid quarter recruiting roughly $3 billion in assets. As we look ahead, we expect that the increasing awareness of these models in the marketplace and the ongoing enhancements to our capabilities will drive sustainable growth. Next, we added approximately $1 billion of assets in the traditional bank and credit union market.

We also continued to make progress with large institutions where we announced that First Horizon would transition its wealth management business to our institutional services platform. As a reminder, First Horizon supports approximately 120 financial advisors managing roughly $17 billion in client assets, which we expect to onboard later in Q3. Turning to overall asset retention, it remains industry-leading at 98% for the second quarter and over the last 12 months. This is a testament to our continued efforts to enhance the advisor experience through the delivery of new capabilities and technology and the evolution of our service and operations functions as a complement to our organic growth. In July, we completed the conversion of Atria Wealth Solutions. This is no small feat when you consider that Atria had seven distinct broker-dealers that use multiple custodians.

This is a testament to our experienced team and the diligent investments we've made in recent years, and it highlights our differentiated transition capabilities relative to the rest of the industry. As for retention, we're still finalizing results, but anticipate asset retention landing at approximately 82%, ahead of our initial target of 80%. Now, as for our pending acquisition of Commonwealth Financial Network, our leadership team has had the pleasure of spending focused time with Commonwealth advisors and leadership over the last four months. This has been time well spent helping to foster increasingly constructive conversations. Today, we have a better understanding of what's important to them, preserving and fostering the Commonwealth community and culture. Plus, we've had the opportunity to showcase the resources and capabilities at LPL.

The combination creates a firm with the scale, the experience, and the permanent capital needed to serve and support their growth for decades to come. As a result, we have made steady progress with advisor commitments and remain on track to achieve our retention target. We expect to close the transaction tomorrow morning and are excited to hit the ground running as we prepare to onboard this community of advisors. To summarize, we are pleased with the second quarter results and we feel great about our position as a critical partner to our advisors and institutions while we continue to create long-term value for our shareholders. With that, I'll turn the call over to Matt.

Speaker 1

Thanks Rich. I'm glad to speak with everyone on today's call. To Rich's point, it's been an active quarter with the team delivering tremendous results. At a high level, to reiterate some of those highlights, we delivered another quarter of industry-leading organic growth, launched our first ever national marketing campaign, continued to make progress in the institutional channel as we prepare to onboard First Horizon, successfully onboarded Atria Wealth Solutions, and completed all pre-close work for the acquisition of Commonwealth Financial Network. Our disciplined execution continues to translate into strong business and financial results with our cost efficiency work pulling through to sustainable improvements in our margins. Now turning to a few highlights from our Q2 business results. Total advisory and brokerage assets were $1.9 trillion, up 7% from Q1 as continued organic growth was complemented by higher equity markets.

Total organic net new assets were $21 billion and approximately 5% annualized growth rate, a strong result both on an absolute and relative basis. On the recruiting front, Q2 recruited assets were $18 billion, contributing to $161 billion over the trailing 12 months. With respect to large onboardings during the quarter, we successfully completed the conversion of Atria Wealth Solutions' seven broker-dealers. We continue to prepare for First Horizon, which we expect to onboard in Q3, and we're progressing towards closing Commonwealth Financial Network as planned. As Rich mentioned, we expect to close the transaction tomorrow and convert Commonwealth Financial Network assets to our platform in the fourth quarter of 2026, which has moved out slightly from our original time frame as we've begun to scope the tech and operational work required to ensure advisors have an exceptional experience at close.

We continue to expect run-rate EBITDA to be roughly $120 million and approximately $415 million once fully integrated, which is underpinned by our 90% retention target. With that as context and given the timing of the close, we'll include Commonwealth Financial Network in our guidance items today. I would just note, given we have not yet closed the deal, there could be some variability in the line item geography. Looking at Q2 financial results, the combination of organic growth and expense discipline led to an adjusted pre-tax margin of approximately 38% and adjusted EPS of $4.51. Gross profit was $1,304,000,000, up $32,000,000 sequentially. As for the key drivers, commission and advisory fees, net of payout, were $349 million, down $14 million from Q1. Our payout rate was 87.3%, up approximately 60 basis points from Q1, largely due to typical seasonality.

Looking ahead to Q3, we anticipate our payout rate will increase to approximately 87.6%, driven by the typical seasonal build in the production business as well as our acquisition of Commonwealth Financial Network. With respect to client cash revenue, it was $414 million, up $5 million from Q1. Overall client cash balances ended the quarter at $51 billion, down $2 billion sequentially, primarily driven by continued elevated levels of net buying activity within our ICA portfolio. The mix of fixed rate balances ended the quarter at roughly 65%, slightly above the midpoint of our target range of 50% to 75%. Looking more closely at ICA yields, it was 342 basis points in Q2, up 5 basis points from Q1, as higher renewal rates on our fixed rate contracts offset lower average cash balances.

As we look ahead to Q3, based on where client cash balances and interest rates are today as well as the Commonwealth Financial Network related cash, we expect our ICA yield to be roughly flat sequentially. As for service and fee revenue, it was $152 million in Q2, up $7 million from Q1, primarily driven by strong organic growth. Looking ahead to Q3, we expect service and fee revenue to increase by approximately $20 million sequentially, driven by revenues from our annual Focus Conference as well as our pending acquisition of Commonwealth Financial Network. Moving on to Q2 transaction revenue, it was $61 million, down $7 million sequentially due to lower trading. As we look ahead to Q3, we expect transaction revenue to increase by approximately $5 million sequentially, primarily driven by Commonwealth Financial Network. Now let's turn to expenses.

Starting with Core G&A, it was $426 million in Q2, below our outlook range for the quarter. As we continue to make progress on our renewed focus on driving operating leverage in the business for the full year 2025, given our cost initiatives are tracking ahead of schedule, we are lowering our 2025 outlook to a range of $1.72 billion to $1.75 billion, which includes $170 million to $180 million of expense related to Prudential Advisors and Atria Wealth Solutions. Additionally, given the expected close of Commonwealth Financial Network tomorrow, we factor these expenses into our overall Core G&A outlook and expect an incremental $160 million to $170 million. As a result, our new Core G&A outlook range is $1.88 billion to $1.92 billion.

To give you a sense of the near-term timing of the spend, in Q3 we expect Core G&A to be in a range of $495 million to $510 million, including Commonwealth Financial Network. Moving on to Q2 promotional expense, it was $164 million, up $12 million from Q1, primarily driven by conference spend and transition assistance resulting from our strong recruiting. Looking ahead to Q3, we expect promotional expense to increase by approximately $35 million, driven by conference spend as we will host our annual Focus Conference next month as well as transition assistance related to Commonwealth. Turning to depreciation and amortization, it was $96 million in Q2, up $4 million sequentially. Looking ahead to Q3, we expect depreciation and amortization to increase by roughly $5 million. As for interest expense, it was $102 million in Q2, up $22 million sequentially, driven by our April debt issuance.

Looking ahead to Q3, given revolver balances following the close of the Commonwealth transaction, we expect interest expense to increase by approximately $5 million. Moving on to our tax rate, it was approximately 26% in Q2. Looking ahead, we expect Q3 to be around 27% as we anticipate recording a reserve on a couple of tax benefits. Turning to capital management, as a reminder, we funded Commonwealth through a combination of corporate cash, debt, and equity. We ended Q2 with corporate cash at $3.6 billion, up $3 billion from Q1, which included proceeds from our capital raise. Following the close, we expect corporate cash to come back down closer to our management target range of roughly $200 million, and as such, we expect Q3 interest income to be approximately $40 million.

As for our leverage ratio, it was 1.23 times at the end of Q2, in line with the plans we shared previously. We expect our leverage ratio to be approximately 2.25 times following the close, with a path to deleverage to approximately 2 times by the end of 2026. Moving on to capital deployment, our framework remains 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, the majority of our capital deployment was focused on supporting organic growth and M&A, where we continue to allocate capital to our liquidity and succession solution. To uphold our commitment to maintaining a strong and flexible capital position, we paused share repurchases, which we will revisit once we onboard Commonwealth. 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, please open the call for questions.

Speaker 4

Thank you. At this time I would like to remind everyone, in order to ask a question, please press star 1 1 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 1 1 again. As a reminder, please limit yourself to one question. To ask a follow up, please re-enter the queue. Our first question comes from the line of Alex Blostein from Goldman Sachs.

Hey guys, good evening. Not good morning, long day. I was hoping we could start with a question around Commonwealth. Obviously it's a big focus for investors. Congrats on the deal, I guess closing here tomorrow. Maybe to start with how the conversations with the team are evolving, you guys are clearly sticking with a 90% retention expectation. A little bit of color on what gives you confidence in being able to achieve that and then financially, Matt, I was hoping you maybe could hit on reasons behind keeping EBITDA run rate at $120 million to start off, despite the fact that the asset levels are a decent amount higher from the time you announced the deal.

Speaker 0

Thanks Alex. It's Rich. I'll start out and then hand that second part over to Matt. On Commonwealth, I think we've had four months of fever-pitched engagement with them where we have gotten to know the advisors, the leadership team, and more broadly the employees better and better. What we thought before we got into this partnership has been completely reinforced, which is that the Commonwealth team has built something truly special. They set the mark for what it means to serve independent advisors. Hopefully you've seen just a few weeks ago Commonwealth received their 12th consecutive number one ranking from J.D. Power for independent advisor satisfaction. As we've stated continually, we are committed to preserving that unique culture, the advisor experience, the brand, and in fact we will only enhance what they already receive with the combination of the LPL capabilities with that Commonwealth experience.

Beyond that, we'll actually transfer so much of those learnings of that exceptional delivery of the client experience, reception of advisor feedback, ingestion of that disposition, and changing capabilities to the broader LPL base. We feel really great about that moving over there as well. As we've gotten closer to the close of the transaction, which we anticipate tomorrow, we've also begun the cross-pollination of our cultures. We've connected with advisors, employees, leadership to better understand the secret sauce behind their success. Just recently, 27 Commonwealth employees attended the LPL Summer Bash in our Fort Mill campus. We sent emissaries from LPL up to Commonwealth's annual wing eating contest and cornhole tournament. In just over a week, we'll have 70 Commonwealth advisors and home office staff scheduled to join our annual Focus Conference.

As of tomorrow, I'm really excited to announce that Commonwealth CEO Wayne Bloom will join the LPL management committee upon the close of the transaction. As for the transaction itself, I feel like we're progressing things according to plan from an operational standpoint. The teams have been working closely to complete the pre-closing work and we're on track to close that deal tomorrow. With respect to integration planning, we're early in the journey but we have scoped the work to ensure we're preserving the experience. For Commonwealth advisors, on the other side of the conversion, we expect that to take place Q4 of next year. With respect to the advisor retention, Alex, which you asked specifically about, at this stage I feel good.

We've engaged with so many advisors, and for those Commonwealth advisors who are prioritizing the Commonwealth experience, their community, the technology, service, ongoing economics, and really staying at their forever home for their business and their clients, staying with Commonwealth is their only option. As with any transaction or competitive recruiting event, some advisors will prioritize differently. That exact dynamic is contemplated in our retention target. To that end, we continue to feel confident about our ability to capture 90%, which does mean we understand that 10% of the advisors will make a different choice and go somewhere else. All that being said, there's nothing that's been surprising in terms of competitive response or advisor decisioning. Maybe it's been a little bit noisier in the trades than we had expected, but that's of little consequence.

To summarize, we remain extremely excited about the partnership, and the deal is progressing according to plan. I'll turn it to Matt.

Speaker 1

Thanks, Rich. Yeah, Alex. On the run-rate EBITDA, AUM is definitely up, but cash balances are down a little bit, so they kind of roughly offset. The mix of that run-rate EBITDA, you could say, has improved a little bit, but that's the reason it hasn't changed.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Steven Chubak from Wolfe Research.

Hi, good afternoon, Rich and Matt.

Speaker 0

Thanks for taking my question, Matt.

It's a question on the expense optimization, and specifically the updated guidance for Core G&A growth of 5% ex deals certainly suggests your efforts to bend the cost curve are clearly bearing fruit, given you continue to surprise positively versus the original guidance.

I was hoping you could speak to.

Whether you see room to drive further efficiency gains from here as we think about the longer term expense journey. Do you see 5% or better Core G&A growth as a sustainable long term target given some of those efficiency efforts?

Speaker 1

Yes, Steven. I mean, I think the broad point, just to underscore what I said in the prepared remarks here, is I think we've got really good momentum on the efficiency work. I think the thing that is really exciting, and the thing that has this team collectively working hard together on it, is its efficiencies that not only drive operating margin but they drive an improvement in client experience. Maybe to state the obvious, it's easy for everyone to get really motivated and really focused around that. Things are moving faster than we expected. There are things like just automating manual processes in our operations group. There are things where it's reducing friction with advisors, so it's improving that experience as well as reducing our need to answer calls related to those things.

To get to your specific part of your question, I think this is not a one-year thing. I think we have got a long runway here to continue to drive efficiencies before we even get to really starting to deploy the newer technologies that are coming out. I think we'll have to see each year from a guidance standpoint what that looks like. From a broad strategic standpoint, I think we have many, many years where we can drive improvements here not only to operating leverage but also to the experience that we're able to deliver, which dovetails back to this being just the best place for advisors to be and ultimately can be a catalyst for driving organic growth as well.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Craig Siegenthaler from BofA Merrill Lynch. Craig from BofA Merrill Lynch, your line is now open.

Thank you.

Speaker 0

Good afternoon, everyone.

I have a question on net new assets in the independent RIA channel. What drove the modest outflows this quarter? Can you provide us an update on the long term growth trajectory in this channel?

Hey Craig, can you repeat that middle part about the modest? I didn't hear the middle part.

The independent RIA channel I think had modest negative net new assets this past quarter. I had a question on what drove that and then maybe you could just refresh us on the long term growth trajectory of this channel.

Speaker 1

Yeah, Craig, there's nothing I would highlight there. I think when you look at those, the growth there, I mean you can see quarter after quarter after quarter, the growth is really in the corporate channel. We do have a little bit of the misaligned OSJs that we've talked about the last couple quarters that would impact, but there's nothing that I would highlight in particular in the quarter. You can see on those charts that it's the corporate RIA NNA that really is the key driver of that area. Rich, anything you wanted to add more on the strategy in that area?

Speaker 0

I think the thing I would say is that we continue to strengthen our offering. Craig, in supporting RIAs, one of the questions I think that you'll see arise is you've seen less flows to the RIA segment. We see more flowing into our corporate RIA. Mostly that has to do with ambiguity around the current regulatory environment. I think the SEC is currently evaluating whether or not they're going to raise a threshold for SEC registration of an RIA versus state registration. When you see that potentially moving from $100 million up to a $1 billion threshold, I think you're going to see more folks that are pausing and actually flowing into our corporate shared ADB model. I think you got to look at those things in tandem to take a look at where do you see overall flows moving into the firm.

There will be times when you'll see flows move in to our corporate RIA versus independent RIAs. I would say this is maybe that moment in time where you're seeing a little slowdown of the movement into independent RIAs because of the ambiguity in the regulatory environment that probably contributes to some of those outcomes.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Devin Ryan from Citizens JMP Securities.

Great.

Speaker 0

Hi Rich.

Hi Matt. How are you?

Speaker 1

Good.

Speaker 0

Doing well, Devin.

Speaker 1

Thank you. Great.

Another one here on Commonwealth. First off, great to confirm the retention target there and congrats on closing that tomorrow. Several industry news wires in recent weeks have talked about how some of these Commonwealth advisors are setting up their own RIAs or are looking into doing the same thing. Maybe that's actually connected to the last answer you made. Rich, would love to get some thoughts on what this means for LPL in the context of the deal. Do you lose those advisors? Are they in that 10% or is there an opportunity to continue to work with them? Just trying to think about the implications of this more broadly. Thanks.

Speaker 0

Thanks, Devin. I think you have seen a little bit more of conversations about options for the advisors. Look, this is a time of enhanced due diligence for Commonwealth Financial Network advisors. You have to keep in mind those advisors were likely not doing diligence before the announcement of the sale of Commonwealth Financial Network. As they've gone through their evaluation process, which we've been really supportive of, they've explored all kinds of different options. One of those options would be forming their own RIA. It shouldn't be too surprising given the makeup of the Commonwealth Financial Network advisors, where they skew more towards advisory, and many of them were moving down the pathway to already dropping.

Keeping in mind as you go through that evaluation on your own, you can either drop your own licenses to become an IFA inside of a shared ADV model, or you can go set up your own RIA. What you're referring to, Devin, is that kind of conversations and thought about setting up their own RIAs. Usually it's under this premise of there'll be better economics, enhanced autonomy by setting up your own RIA. I would say as we've begun doing one-on-one conversations, webinars, et cetera, what we've begun to help them realize, and many have realized, is they may have underestimated the operational lift and the regulatory complexity that comes with running your own RIA. As an RIA, they're responsible for their own regulatory compliance and risk management in addition to running the responsibilities of a small business like tech and HR.

As I just alluded to in the previous answer, one of the things that I think is adding ambiguity into whether you set up your own RIA or move under a shared ADV model is that ambiguity in the regulatory environment relative to the threshold for SEC regulation, which is quite a bit easier to work with one regulatory body than working with multiple states. If you even serve at the de minimis number of clients inside the state, you have to register with that state itself. That's a lot of what you see is advisors weighing those options about does it make sense to do that on my own. Now, specifically to your question, we support independent RIAs. We also support advisors who drop their licenses, their FINRA licenses, on our shared ADV corporate RIA.

As we've gotten deeper and deeper into these conversations, what the advisors have realized is to keep the Commonwealth experience, community, culture, service, environment, brand, et cetera that they've come to love, they can still do that either inside of an RIA construct with LPL or if they want to be an IFA inside of that shared ADV model with LPL as well. When you hear the evaluation of setting up your own RIA, it doesn't mean that they're going to move. One of the things I think they've also considered is if they choose to set up their own RIA with another custodian, they're going to have to go through a repapering event.

It means they're going to have to engage their clients, they're going to have to repaper all of their accounts, and they're going to find some lost efficiency and spend some time actually working through that transition, whereas with us, they're not going to have to go through that event as well. There's a lot for them to consider and weigh. On balance, we've seen, Devin, that advisors are seeing that we can support them. They keep their community, they keep their support model, they keep that leadership team that they love. They can do that inside of an RIA or on our shared ADV at LPL. On balance, what we're seeing is we're having very productive conversations there. I would tell you, even at 90%, what you are going to see is announcements of folks that are going to leave.

On balance, we think that center of gravity sits around 10% in spite of the fact that really it seems like each and every one of those stories is being amplified by the trades.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Dan Fannon from Jefferies.

Thanks. Good evening. Wanted to just talk about the recruiting backdrop and your outlook for NNA here.

Speaker 0

As you think about the second half.

Of the year, and maybe also just throw in advisor movement more broadly for the industry and how that compares, maybe what you thought earlier in the year.

To where we sit today. Yeah. Hey, thanks Dan. Look, I think you've probably keyed into one of the things that we're seeing as well is that with the macroeconomic uncertainty that exhibited itself in the second quarter, we saw a truncation of some of the advisor movement. Historically, we think of that advisor churn movement sitting around 5.5% to 6%. It has been truncated over the first half of this year. We see the center of gravity sitting around 5%. You see a reduction in the overall movement. A lot of times when advisors are faced with enhanced volatility in the markets, they're going to usually defer a movement reason. They don't want to be out of the market for their clients. That doesn't mean you're going to see overall movement down over the long term.

You'll just see a pushing out until we get to a more stable environment. I think we still sit with slightly elevated ambiguity as to what the macro looks like as we still sit on the tailwind on the back end of some of that uncertainty around tariffs, et cetera. We still see into the beginnings of this quarter a more truncated movement environment. I would highlight that inside of that we still have industry-leading win rates of the advisors in motion. For us, I'm really proud of the results we had in the quarter because we recruited $18 billion in Q2 worth of advisor assets. In addition to that, we have deployed a subset of our recruiting team against retaining the 3,000 Commonwealth advisors. As I mentioned, that's progressing pretty well.

You take that together and we feel really good about the results that we've had when you put both of those together, which says that the effectiveness of certainly of our business development team has been really high. We have heard the commentary from some of the competitors talking about changes in the transition assistance and more competitive TA environments and we're really attuned to that. We recruit more advisors than any other firm in the marketplace and we're in more conversations than anyone else. We're aware of the movement in TA and I would reiterate that TA for us is not the driver of the selection of advisors as to what firm they choose to join. The number one thing that they look for are capabilities, technology, service, the value exchange that comes with the firm. Second to that are the ongoing economics.

On both of those we feel we're without peer in the industry. Third in that evaluation of changing firms is the TA rate, which we have seen become more competitive during the course of the first half of the year. We remain confident that the ongoing appeal of our model positions us well to maintain our industry-leading capture of advisors in motion.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Benjamin Budish from Barclays.

Hi, good evening, and thank you for taking my question.

Speaker 0

I was wondering if you could comment at a high level about your overall gross profit ROA.

It's been declining for a few years now. I'm sure some of that is mix. Some of that is as you onboard larger enterprises, move up market with larger financial institutions.

Just curious, how do you think about?

How the next couple of years should look, especially ex cash?

How much of this is due to?

That rapid growth, how much of this trend can be bucked? How should we think about that medium-term outlook for that KPI?

Thank you.

Speaker 1

Yeah, you bet. I think broadly that as we've grown and as our revenue is diversified, that's not necessarily the best metric to look at, especially in a market where AUM is rising at a rapid pace and not all of our gross profit is AUM driven. I think that's a little bit to your point. On seeing gross profit ROA decline, you see that being driven by cash balances. You see that happening in line items like service and fees, where those are fees that are primarily driven by advisor levels and account levels, not AUM level. When you start to look at the line items that are AUM driven, like advisory fees, commissions is a little bit more transactional. I think you see a lot more stability there.

A long way of saying I think the decline there is more driven by not every metric or item in that metric being driven by basis points. In AUM we take a step back and look at where and how we're driving revenue. I think we feel very good about our gross profit growth overall, especially when you couple that with the efficiency measures and you start to look at EBITDA ROA and how that grew for the first time this quarter in quite some time when you couple those two things together. Overall I think we feel really good. I think you just get a little bit of noise in that metric because not everything is really AUM driven.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Michael Cyprys from Morgan Stanley.

Hey, good afternoon. Thanks for the question. Just wanted to ask about capital allocation. With the deal closing tomorrow, how are you thinking about that in the quarters ahead, and related to that on liquidity succession, I was hoping you could update us on the progress there, how that's contributing to results, and how you anticipate the pace of deals and capital allocation to that going forward from here.

Thank you.

Speaker 1

Yeah, Michael, I mean I think when you look at capital allocation, I think just reiterate, we've talked about a bit on the, you know, once we file the close Commonwealth Financial Network thing, keeping our plans and intentions about our leverage ratio are key for us. Right. We expect to be at a leverage ratio 2.25 times close to close. We have a plan to deleverage down to the midpoint of our range at 2 times by the end of 2026 as we integrate. I think that is going to really guide our capital allocation. Perhaps specific or not overtly asked in your question, but specific to share repurchases. I think we'll reassess those once we've gotten back down to that leverage ratio.

Within that though, I think we can continue to drive and allocate capital to organic growth, which typically is our capability, development and technology, as well as the transition assistance behind recruiting and on the M&A front, which is to the.

Speaker 0

Second part of your question.

Speaker 1

In L and S, I think that continues to go quite well. We've ended up putting about 10 deals the last couple of quarters in a row. Those are relatively small from a capital standpoint in the $10 to $20 million range each, but they drive a lot of good earnings generation for us. More importantly, there's just a great capability to help advisors transition their practices to the next generation. Overall, it continues to go well. The pace has picked up to about 10 per quarter, and it's a good use of our capital that continues to be in our plans while still landing our leverage ratio or deleveraging down to two times.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Jeff Schmitt from William Blair.

Hi, good evening. For Commonwealth, you're adding $160 million or $170 million of Core G&A for the deal, and that's around 5 or 6 basis points of AUM versus I think LPL is running at 9 basis points. I guess, one, is that the right way to look at it? Two, what would be driving that efficiency difference?

Speaker 1

Yeah, Jeff, I mean I think that I wouldn't get too focused on the initial EBITDA and the initial expense guidance because remember that is the existing Commonwealth Financial Network business. We haven't integrated that, which we will through the end of 2026. I think really as we start to do that work and as we start to get to the run-rate EBITDA of $415 million, broadly you're going to see a business that from a gross profit standpoint is similar to our business, and from a margin standpoint is going to be in the same zone. I wouldn't get too hung up on the initial run-rate numbers.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Kyle Voigt from Keefe Bruyette & Woods.

Hi, good evening everyone. Thanks for my question. It's been a volatile quarter for Sweep Cash. Obviously, there was a focus on the level of decline in the May cash number. It's good to see the rebound in June. Could you hit on some of the bigger factors that drove the volatility in cash in the quarter, particularly over the past two months? Would be great to hear if there's been any change in yield seeking behavior or whether it's been driven by different factors. Matt, maybe you could also update us on July Sweep Cash as well.

Speaker 1

Yeah, you bet. I think when you look at the quarter, it really is just driven by two factors. One in April, which is the primary driver of the decline, just your typical seasonal items, the advisory fees coming out and tax payments. As you noted, as you got deeper into the quarter, we saw some growth in June, growing by $1.4 billion. I think overall that's kind of an expected trend that you would see on the balances. The primary driver, about 2/3 of that, if you look at the cash as a percent of AUM coming down, it's just the denominator growing. We've got a strong equity market. If you look at our AUM overall, it's growing almost $100 billion on average for the last several quarters in a row. You just have the denominator growing.

Cash balances themselves have been pretty stable, around $5,000 per account for quite some time, several quarters in a row. I think it's maybe to hit home the point that percent decline is really just driven by tax payments as well as the denominator growing. Now, bridging into what we've seen so far in July, sitting here almost at the end of the month, again, first month of a quarter, it's as expected with that seasonality and specifically advisory fees hitting in that first month of the quarter. For July, that's around $1.8 billion of a decline. Outside of that, cash balances were flat other than fees hitting. Just to add on to that, from an organic growth standpoint, very similar driver there, advisory fees reducing that in the first month of the quarter.

To Rich's point earlier, that slowdown in industry-wide advisor movement in the recruiting side, you'll see that carry over into net new assets into the third quarter. We're seeing that in July. You put that together, we'd expect organic growth in July to be in the 4% zone, which for month one of a quarter I think is what you would expect. I just highlight that is prior to any additional attrition that we'll have from the misaligned OSJs that are leaving. Just a reminder there, that was an overall $20 billion that we expected to depart. $13 billion has already departed through Q2, so there's $7 billion more to go. That's primarily direct business at this point, which is a little harder to see and predict when that's going to leave, which is why I didn't include it in the estimate.

Again, no changes in the expected total there of $20 billion. Hope that helps.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Bill Katz from TD Cowen. Great.

Thank you very much. Just maybe a couple embedded questions inside of the AUM for Commonwealth. Just wondering if you could update us on the split between cash and the rest of the business. Secondly, the broader question just on liquidity and succession, what we continue to hear is that private equity firms continue to be quite aggressive in terms of scaling wealth management platforms. I'm wondering is that having any impact on the deal multiple in terms as you deploy that capital, whether it be internally or externally?

Speaker 0

Thank you.

Speaker 1

Yeah, Bill, I can take both of those. The cash as a percent of AUM at Commonwealth, it's a little bit below ours. Call it 1.5%, 2% zone. A little bit smaller balances there than we have on the LPL and Strategic Wealth side. The short answer is no. I think when you look at the multiples that we're paying, they've been consistent. I think the value prop that we have for a host of reasons including staying at LPL, staying on our systems, the overall support that the team brings when they go into that model, I mean, I could go on and on and on. I think the price has not changed. The value prop is really what's driving that. Anything that from a private equity standpoint or the things that you had referenced has really not changed the multiples that we're paying at all.

Speaker 4

Thank you. At this time, I would now like to turn the conference back over to Rich Steinmeier for closing remarks.

Speaker 0

Thank you all for joining us. We look forward to speaking with you all again in October. Have a good night and go chase down the rest of those MLB trade deadline rumors. So long.

Speaker 4

This concludes today's conference call. Thank you for participating. You may now disconnect.