Q1 2024 Earnings Summary
- LPLA's liquidity and succession solutions are gaining momentum, including their first signed deal with an external practice; these solutions have attractive economics, where ROA effectively doubles when they purchase a practice, potentially enhancing organic growth and expanding market share.
- LPLA reported a record $20 billion in recruited assets in Q1 2024, indicating strong growth momentum; continued strong recruiting pipelines and low advisor attrition support expectations for sustained organic growth.
- The acquisitions of Prudential's wealth management business and Atria Wealth Solutions will add approximately $166 billion of brokerage and advisory assets by mid-2025, significantly expanding LPLA's assets under management and competitive positioning, especially in the bank and credit union channels, and providing a durable leadership position in the industry.
- Organic growth was lower than expected in Q1 2024, achieving 5% instead of the expected 7%. This shortfall was partly due to the loss of two acquired practices in January, which accounted for a 1% impact on attrition. This may indicate challenges in retaining advisers or integrating acquisitions.
- Significant upcoming expenses related to the Prudential and Atria acquisitions may impact profitability. The company expects to spend $325 million to onboard Prudential, with $80-85 million of onboarding and integration costs remaining this year. These expenses are not yet fully accounted for in current guidance and could be higher than anticipated. ,
- Increasing funding costs could pressure net interest margins. The company has $2 billion of fixed-rate contracts maturing at 200 basis points at the end of Q2, which will need to be renewed at higher rates of around 450 basis points. This rise in funding costs could negatively affect earnings.
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Recruited Assets and Organic Growth
Q: Explain divergence in recruited assets vs. net new assets?
A: Recruited assets were up 57% year-over-year , outperforming net new assets due to the timing of onboarding, which impacted organic growth by roughly 1%. Organic growth was 5% this quarter, below the expected 7%, partly because recruiting happened later in the quarter, providing a tailwind for Q2. The recruiting pipeline remains strong across all channels, supporting future growth. -
Liquidity and Succession Business Size
Q: How significant is liquidity succession to growth targets?
A: The liquidity and succession business has closed 27 deals to date , with expectations to handle 30 to 40 deals per year. Deals average $10 million to $20 million, deploying capital at 6 to 8x EBITDA multiples. This business effectively doubles Return on Assets from about 30 basis points to 60 basis points, offering compelling economics and strategic value. -
Recruiting Economics Amid Competition
Q: Discuss recruiting economics amid competition?
A: Transition assistance rates have remained stable over the last year. While expenses increased due to higher recruited assets, the competitive landscape and priorities for advisors haven't significantly changed. The firm focuses on enhancing capabilities, technology, and service to attract advisors, which drives higher win rates despite competition. -
Capacity for Incremental M&A
Q: What is capacity for M&A given recent deals?
A: The firm has built disciplined processes for onboarding and integrating acquisitions like Atria without impacting service quality. Enhanced efficiency allows for continued M&A activity alongside current integrations, supporting growth opportunities. -
Competitive Position in Bank Channel
Q: How does Atria acquisition affect bank channel competition?
A: The Atria acquisition strengthens the firm's leadership in the bank channel, a $1 trillion opportunity. With a differentiated value proposition and operational efficiencies, the firm is well-positioned against competitors and continues to gain market share. -
Client Cash Levels and Reinvestment
Q: Expectations for cash levels and reinvestment?
A: Client cash balances have stabilized at just above 3% of assets , indicating full deployment in the market. As fixed-rate contracts mature, the firm plans to renew them, keeping the mix of fixed-rate assets between 50% to 75%. Upcoming maturities are expected to be reinvested at higher rates, moving from 200 basis points to mid-4% range. -
G&A Growth Guidance Tracking
Q: Factors affecting G&A growth guidance?
A: G&A expenses are tracking toward the low end of guidance, with Q1 annualized rate at that level. Expenses may vary within the guidance range due to levels of organic growth and associated variable costs, but the firm feels comfortable with the current trajectory. -
Impact of DOL Rule Changes
Q: Thoughts on new DOL rule impact?
A: The final DOL rule better aligns with the SEC's Reg BI, which is positive for investors. With a one-year transition period for compliance, the firm is preparing its compliance program accordingly. Potential litigation could affect timelines and requirements, but the firm views the outcome as better than the original proposal. -
Client Cash Behavior Trends
Q: What are current client cash behavior trends?
A: Clients are fully deployed with cash balances stabilizing around 3%. Seasonal factors like fees and taxes affect cash levels, but balances are expected to remain stable unless market conditions change significantly. -
Promotional Expenses and Prudential Integration
Q: Explain increase in promotional expenses?
A: Promotional expenses increased due to timing shifts in onboarding costs related to Prudential, with about $17 million incurred in Q1. An additional $80 to $85 million in onboarding costs will primarily occur this year. Expenses are associated with organic growth initiatives, conferences, and integration costs for acquisitions like Prudential.
Research analysts covering LPL Financial Holdings.