LPL Financial Holdings Inc (LPLA) 2011 Q1 法說會逐字稿

Welcome to LPL Financial first quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would like now like to turn the call over to Mr. Mark Barnett, Executive Vice President, Investor Relations. Sir, you may begin.

Thank you, Sayid. Good afternoon and welcome to the LPL financial first quarter earnings conference call. Joining me on the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his perspective on our performance during the first quarter. Following his remarks, Robert Moore, our Chief Financial Officer, will highlight drivers of our financial results. Then we will open the call for questions.

Please note that we have posted supplemental slides on the events and presentations section of the investor relations page on LPL.com. Before turning the call over to Mark, I would like to remind everyone that we are committed to transparency, including an open and candid dialogue about our current operations and future prospects. Comments made during this conference call may incorporate certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

This may include statements concerning such topics as earnings growth targets, operational plans and other opportunities we foresee. Underpinning these forward-looking statements are certain risks and uncertainties. We refer our listeners to the Safe Harbor disclosures contained in the first quarter earnings release and our latest SEC filings to appreciate those factors that may cause results to differ from those contemplated in such forward-looking statements.

In addition, comments during this call will include certain non-GAAP financial measures governed by SEC Regulation G. For a reconciliation of these measures please refer to our first quarter earnings press release. With that, I'll turn the call over to Mark Casady.

Thank you, Mark. I'm very pleased to join all of you on the call today to share with you our continued strong growth in terms of both financial and operating performance. But before discussing our results, I want to briefly note that in order to ensure we remain in compliance with securities laws, we will not discuss or address any questions pertaining to the proposed secondary offering on our earnings call this afternoon.

Now let's turn to our first quarter results. I'm happy with our performance across our business. This performance includes adjusted earnings per share growth of 24%, compared to the first quarter of last year. If we equalize the prior period share count for the 14% increase in diluted shares due to the IPO, adjusted earnings grew per share at 44%.

In addition, net revenue and adjusted EBITDA grew 18%. In terms of profitability, our first quarter operating margin was the highest level since the second quarter of 2007, and up over 200 basis points sequentially. Revenue growth in the quarter was fueled by continued acceleration in advisor activity, which began in the fourth quarter of last year, in both our independent advisor and financial institution channels. This increased activity helped drive double digit growth in commission, advisory and asset based fees over the prior year.

The largest contributor of growth in the quarter came from the 16,900 existing advisors that we currently support. Improving investor sentiment and market conditions provided a strong backdrop for our more established advisors to grow their businesses. Notably, same store sales grew at a double digit rate, quarter over quarter.

Advisory fees were up 18% reflecting the continued success of our advisory platforms and the significant consulting work we are doing with our advisors on the value of incorporating-fee based asset management into their practices. As a result, the total number of advisors using our advisory platforms continues to grow. Importantly, recent investments to expand and enhance our advisory platforms and practice management tools are helping our financial advisors capitalize on opportunities found in the improving market environment.

For example, our first quarter launch of a fee based variable annuity is a powerful example of our ability to leverage our relationships with leading product manufacturers to create innovative offering that allows advisors to deliver active portfolio management efficiently, while maintaining the income protection features of variable annuity products in a no-sales commission structure.

Another great example is the introduction of third party exchange traded funds in our model wealth portfolios. This unique offering provides our advisors with access to multiple strategists and a centrally managed fee based asset allocation platform, giving them more choice and flexibility managing client accounts.

Additionally by including EPS on our advisory platform, we avoid the irrational pricing issues associated with EPS. In March we surpassed $1 billion in AUM on this platform. Just eight months after launch, making it the most successful investment platform in our history in terms of attracting assets. Additionally, resources such as our new customer relationship management tool, from salesforce.com, and our portfolio re-balancing solution, which enables advisors to more efficiently re-balance multiple accounts are helping our advisors increase productivity so they can spend more time and effort on growing their businesses. Brokered sales were strong across all product lines. Notably, our sales commissions, led by mutual funds, variable and group annuities reached levels that have not seen since 2008.

As you would expect, given the level of activity we had strong redeployment of client cash to purchase securities. Asset gathering activity was also very robust, with net new deposits in to cash products and the opening of new client accounts. As a result of all these factors, first quarter asset growth was significant. Total advisory and brokerage assets reached a record $330 billion as of March 31, of this year, up 16% over the year ago period.

Importantly, advisory assets in our fee based platforms rose 23%, to just under $100 million, and once again significantly out-paced S&P growth over the same period. Advisory asset flows are benefiting from the mix shift towards a higher percentage of advisory business with our existing advisor base, as well as by assets from advisors who joined the firm in 2009, and whose business began to ramp our platform in 2010.

As the industry leader in offering the only fully integrated hybrid platform, we continue to see solid growth in our RAA business, with assets under custody reaching $15.5 billion. Since its launch just two and a half years ago, LPL financial has already become one of the largest RAA custodians in the industry and we continue to see strong growth in this business. New business development continued to be strong, reflected by our net new advisor growth of 528 advisors on a trailing 12 month basis.

I would also point out that industry data now confirms that LPL Financial was the leader in advisor growth during 2010. As mentioned last quarter, our new advisor classes are comprised of an increasing number of larger offices and higher average production than in prior years. Looking ahead our new business development pipeline remains healthy.

Before leaving this topic as mentioned on the fourth quarter earnings call, I want to remind you that we are no longer providing quarterly net new advisory guidance or targets. It is much more meaningful to track this statistic on a 12 month view.

Looking at other growth drivers, last week we announced our intent to acquire Concord Wealth Management. With over $10 billion in assets under administration, Concord is a leader in the rapidly expanding market for outsource technology and open-architecture investment management solutions to trusts and wealth management groups of banking institutions.

They fit well with our focus on unbiased financial advise for consumers. I am very excited about the cross-selling potential of this transaction. This is an adjacent market for us that we do not currently serve today, and presents a natural extension of our existing capabilities. Our Institution Services business is the nation's largest provider of third party investment services to banks and credit unions. Through this acquisition LPL Financial will have the ability to support both the brokerage and trust business lines of current and prospective financial institutions.

It also creates new expansion opportunity for us in this space, giving us the ability to custody personal trust assets within banks across the country. This unique combination of offerings will create an integrated wealth management solution for financial institutions that we think will redefine the market. We are the only firm able to offer this integrated approach. In conclusion, we have started the year with very solid financial results, and our momentum for growth remains strong as we progress in to 2011.

Our advisors are highly engaged with our clients, and focused on growing their businesses. The underlying economic and market environment appears to be improving and we remain optimistic about our trajectory through the remainder of the year. With that, I'll turn the call over to our CFO, Robert Moore, who will review in greater detail our financial results.

Thank you, Mark. The first quarter of 2011 was indeed strong in terms of both financial and operating performance. Led by increased advisory and investment activity we set new high water marks for net revenues, gross margin, adjusted EBITDA and adjusted earnings. Net revenue for the first quarter increased 18% from the first quarter of 2010, with recurring revenues representing 60% of total net revenues.

The primary drivers of the increase in revenues were double-digit growth in commissions, advisory, and asset-based fees. Importantly, nearly 70% of the increase in commission revenue is from increased sales activity and the remainder is due to increases in equity market levels. Notably, sales activities have returned to their highest level since the market disruption in late 2008, in both total system sales terms as well as per advisor terms.

Growth in our advisory assets, which contributes to growth in advisory fees, continued to outpace the market by a significant margin, as advisory asset balances were up 23% from March 2010, compared to only 13% for the S&P 500 index. Asset based fee growth was also significant, up 26% over the year ago quarter, driven by growth in record keeping, on the bus processing and other administrative fees.

Revenues from our cash sweep programs also achieved solid growth, up 22% over the prior year. This increase was driven by higher average deposits, a mix shift to our insured cash accounts for money market funds and higher effective federal funds rate which averaged 15 basis points during the first quarter of 2011, compared to 13 basis points in the first quarter of 2010. Our payout ratio for the quarter was 85.4%, which is 60 basis points higher than a year ago.

The increase is primarily due to the conversion of managed representatives that had been classified as LPL employees to independent contractors. This reclassification occurred in the third quarter of last year, when we changed the status of these individuals, which in turn caused an increase in production expenses and a decrease in our compensation expenses.

Compared to the fourth quarter of last year, the payout rate dropped 210 basis points, primarily reflecting the restarting of production bonus qualification for the new year. The payout will therefore increase as the year progresses and bonus targets are achieved. The increase in non-production related expenses over the prior year is due to a combination of factors which I will discuss in a moment.

But I wanted to first remind you that our expense levels in the first quarter of 2010 were lower than normal as a result of actions we took in 2009, in response to the market disruption to significantly reduce our expense base. As we discussed on our year end conference call, we had not fully restored all the targeted expense items until the fourth quarter.

We also indicated that you should use our fourth quarter expense levels as the run rate going forward after backing out the non-recurring items that we noted on that call. So despite the increase year-over-year, I want to emphasize that core run rate expenses are on track given the growth in our business and increased level of advisor activity. With that backdrop, compensation and benefit expenses increased 14%, over the year ago period, with approximately 40% of the increase attributable to the timing of merit and promotions granted in January of this year, compared to last year when the increases occurred in March.

The remainder of the uplift comes from higher staffing levels needed to support improving advisor activity, and higher production volumes. Other specific areas of note within our G&A expenses relative to the year ago quarter are that we incurred incremental costs associated with more robust business development this quarter than during the year ago quarter.

We incurred higher conference related expenses this year because attendance was significantly higher as more advisors achieved qualifying status in 2010 than in 2009. We made higher baseline accruals for our discretionary bonus and 401k match program. And we increased expenditures related to advisor facing initiatives and technology projects that drive organic growth.

As you know, we announced on March 14, that we are consolidating U-Vest on to our self clearing platform. We anticipate recording pre-tax charges of $53 million, over the course of this restructuring plan including a non-cash impairment charge of about $6 million. We expect this restructuring will improve pre-tax profitability by approximately $10 million to $12 million per year, beginning in 2012 by creating operational efficiencies and revenue opportunities.

While we incurred some restructuring costs in the first quarter it amounted to less than $1 million. We expect that a portion of the cost will be capitalized and a majority of the cost associated with this restructuring will be incurred during the third and fourth quarters of this year. I would note that U-Vest is the only remaining subsidiary with clearing activities outside of the LPL platform.

Therefore, once the U-Vest integration is complete we do not anticipate any further restructuring initiatives of this nature going forward. In terms of overall profitability, our adjusted EBITDA margin as a percent of net revenue was a very solid 14.2%, and reflected of the expected expansion from the fourth quarter. First quarter capital expenditures were just under $7 million, and we are maintaining our $50 million full year target.

Lastly, I would note that interest expense for the first quarter of 2011 declined by $6 million compared to the first quarter of 2010. Largely as a result of the debt refinancing we undertook in the second quarter of 2010, and the $40 million pro rata debt repayment made on January 31, of this year. At current interest rate levels, we expect interest expense savings of about $20 million, in 2011, relative to 2010.

At the end of the first quarter our leverage ratio was at 2.3 times, and we would expect it to continue to decline throughout 2011. We will continue to monitor debt markets for opportunities to refinance, or pay down debt, in line with our stated objective of optimizing shareholder returns. With that, Sayid, would you please open up the call for questions?

Thank you, sir.

(Operator Instructions)

Our first question comes from Ken Worthington from JPMorgan.

Hi, good afternoon, I know you don't want to get in to too many specifics about the net new advisors for the quarter, but can you talk about any trends you are seeing in terms of the quality of the ads. Are you attracting advisors are larger books or more active customers or more sticky customers? And in terms of seasonality, was this quarter characterized by anything unusual in terms of greater ads, or low attrition or vice versa, like any flavor you could give us would be helpful.

Sure, happy to do that. The way I characterize it is the way we just spoke of it, which is that the class on average, production is higher than the average, of existing advisors, I don't really want to characterize it beyond that. And the characteristic that we spoke of in the fourth quarter, which is these are larger practices, they are essentially large groups, with high total production, was just as true in the first quarter as it was in the fourth.

So we are definitely seeing movement of higher producing advisors to the independent model and to ours specifically. We also do see the pipeline continue to grow, which is always a nice thing just as we saw it growing in the third quarter and fourth quarter last year, it continues to grow here in the first quarter of this year.

So I think overall, Ken, what we are seeing is a continued opportunity to bring new advisors in, both in our independent channel, in the hybrid business and in our institutional business, and that that continues to improve nicely quarter by quarter.

Thank you.

On retention, Ken, I didn't answer your question there, let me do that part. Retention was a little better than average. So we continue to see advisors feel good about being here and remaining.

Importantly, in terms of retention, we think that that is right in line with what we seen historically, which is that our retention has gotten better over the years as we have gotten bigger as we add continued capabilities to service advisors. So nothing particularly unusual about retention in the first quarter of this year.

Thank you. And then just lastly, you gave us color about what kind of products are being sold or bought by your brokers. Does this give you any kind of leading indications about the business for the next 3 or 4 quarters?

I'm sure you get plenty of information but if you see protection being bought or more of your customers going to stocks like does that say anything about the outlook for your business, so over the next couple of quarters? And if so, what is this information telling you now?

Yes. So the product mix part of your question, I would say the answer is no. It doesn't particularly portend faster growth, same growth or slower growth, depending on the mix. So buying a mutual fund, buy more mutual funds in the first quarter than say the fourth quarter, doesn't portend that that means it will stay the same for the next several quarters. Or buy more protection products as you were saying, annuity types, for example, doesn't portend necessarily better sales.

What I would look for is the momentum that's there, what you definitely see between fourth quarter and first quarter is an increase in same store sales, and part of the discussion that we definitely want to have with our investors and with potential investors is about the fact that when you get momentum in the markets, meaning people are taking more risk based assets, they are investing more, that's definitely a characteristic that we commented upon and we're seeing them in the first quarter and we saw in the fourth quarter and that tends to have momentum to it going through the rest of the year.

That's why we said we can feel comfortable that we see momentum and feel very good about looking forward in to 2011. I don't want to overstate that. So I've got to be cautious about how I state that. But I would say that generally speaking when you have a backdrop of good markets and you have a backdrop of increased advisor activity, both those things are true in the first quarter, that typically shows up in same store sales for us, double digit for us.

We saw that in first quarter. And typically that remains with us as a momentum indicator going forward for several quarters. Plenty of things can disrupt it. So shocks to the system, certainly can disrupt it. But if those don't appear, you would assume that momentum would remain.

Great. Thank you very much.

Thank you, Ken.

Thank you. Our next question comes from Bill Katz from Citigroup.

Thank you very much. Can you hear me okay?

Yes, Bill.

Okay great. On the transaction, wondering if you could give a sense of potential accretion from that transaction.

It will be accretive transaction but it's immaterial in terms of its relative size, as you can see we didn't disclose amounts. It's roughly in the same neighborhood as what we saw with the prior acquisition that we did. In RP in terms of roughly the same size. The one difference, though, that I would point out is that RP had advisors who moved onto the platform right away, therefore there is a lot of accretive activity that occurs immediately in that transfer.

This is really a transfer of contracts in an existing business that won't be integrated and therefore we are looking for cross sell opportunities and we need to connect systems between the two groups and all those good things.

As we view it, this as a nice down payment on the future. So I wouldn't necessarily build into models if I were building them. Much in the way of impact in the first couple of years as we do that integration.

We teach the market about this new availability of an integrated solution for trust and brokerage capabilities. This is a good example of us laying down a smart business move, strategic move that will help us the medium to longer term.

Okay, that's helpful. My next question is just on the FA growth, and again I know you don't want to get into specifics, but can you comment on any of the economics in terms of kind of contracts or pricing that might be necessary in terms of attracting, is there any change, if you will, in the underlying economics of the business.

Yes, there is. And it's exactly what you see in the recovery cycle. So this is no different than what we saw in the early 2000s in the last market recovery. Is that when markets recover and advisors are starting to move, which is definitely what we saw in the fourth quarter and what we saw in the first quarter, and our pipeline would indicate we will see more of it, prices go up in terms of the money you need to use for transition assistance but not in a significant way, it's not multiples of what it was before.

So the way I characterized that is it swings between roughly $0.07 on the dollar to as much as $0.18 or $0.20 on the dollar over the cycle of business development or over the cycle of economic activity. So when times are tough, as they were in say early 2009, particularly, we would have been at the low end of that range. And then as markets recover we start to inch up towards the higher end of the range.

Any number within that range is highly accretive to us in the addition of new advisors or new institutional programs, they payoff within the first year that they arrive. So we are not concerned that we see some relative costs of business development going up, and we view this as all within the bounds of the normal cycle of recovery that we've seen in prior years.

Okay. That's both very helpful. And just two very numbers oriented questions. First, in the other revenue line, obviously very small in the scheme of everything, but it looks like a bounce rate sizable sequentially year on year, wondering is there any sort of noise in there or any explanation would be helpful. And then, from complex perspective, I know you breakout the growth in new business and the advisory channel, but overall -- how much new business did you bring in this quarter?

Do you want to try to answer the first one and let me think about the second one.

There is nothing built particularly note worthy about other, as you say, it's immaterial in the big scheme of things but the term fees were different relative to last year. So that's really the delta item that's contained within that. And can you repeat the second part of your question, please?

Sure. I was looking at your $330 billion of total system assets and maybe I'm double counting it --. But you broke out $3.7 billion of advisory asset new business, if you will. Just trying to understand in the brokerage line how much new business you also brought in. Market impact.

Thank you. We do not disclose net new assets for brokerage at this time. That's going to be a metric that we add later in the year or actually as it relates to the fourth quarter of 2011.

If you wanted us to characterize relative market impact versus relative same store sales growth we would continue to attribute this to sales growth as we said in opening remarks as opposed to just market, so this is not just the market lifting the boats, this is certainly getting some of that as everybody would in the industry.

But we are also seeing a significant double digit level same store sales growth, which is actual sales activity. That's getting more assets from existing clients and getting new clients to the book of the advisors whether they're in a bank program or they're an independent.

Okay. Thank you very much. Thanks for taking all my questions.

Absolutely.

Thank you.

Thank you. Our next question comes from Alex Cram from UBS.

Hello everyone.

Hello.

Let me actually start with numbers questions here. I think last quarter you gave guidance on the comp line, I think you said $79 million to $80 million. I look at this quarter, it's $84 million, I know there is some adjustments around $4.8 million or so in there. But I think those should have been accounted for.

So can you help us again? I know you talked a lot about the expense growth sequentially. But can you talk a little bit of what the delta is here and maybe in absolute numbers how we should think about the rest of the year. Is this a higher range than you had previously guided to?

Well, I would characterize it as some of the things we did during the first quarter particularly as it relates to the bonus accrual and 401K match, our items we brought in to first quarter this year as opposed to back loading it into the back half of the year, particularly the fourth quarter which you saw in 2010. So if you strip out those items, the underlying run rate is probably about $81 million.

And I would attribute it being at the slight high end or slightly above the higher end of the range because of the increased activity levels and advisor growth that we had during this year, during this period relative to the fourth quarter.

Great. In terms of following up on some of the other questions you had on the pipeline, any particular changes in terms of how the pipeline is building? We heard a lot from some of the other RA custodians that they are seeing increasingly more from the independent channel versus the wire houses. So maybe even with you guys going public recently and a little bit more out there in terms of the brand, do you see attracting different people than before, in terms of different channels or is this still pretty consistent?

Well it's consistent. Our history has been recruit from all different branches of the industry. So that's an important way that we are different than others. So if somebody recruited heavily from independents, and excuse me, had never recruited from independents before and that's new to them, there is definitely increased activity among the independents, we always recruited from the independents as you can imagine.

So I don't know that I see a difference in the places we can get advisors. So we are not experiencing a new source of advisors, to us it's all the same. We are seeing a shift in terms of mix shift and we characterize that in 2009, it was heavily related to the wire houses as one could imagine, then as they put golden handcuffs in place it shifted last year the independents, which is what you are hearing from custodians and others, and then this year in the first quarter it's gotten more mixed again.

Meaning there's more wire house advisors who have been available which is helpful. But we certainly are seeing an increase in, among the independents, that are becoming available, that are in the pipeline, haven't yet been counted in the numbers. So we would affirm that same point of view.

I think for us, remember that also what's different for us is the fact that we are appealing to a hybrid REA, and that's where we are different than other independent broker dealers and that we have a fully integrated solution to provide information on their commission business integrated with their advisory business as an REA.

That's where we are different. And therefore we wouldn't look like an independent advisor we would actually look a little bit more like a custodian in terms of the kind of practices that are appealing to move here, we are definitely seeing more activity in our pipeline around that business model as we would expect.

And then the third area I would touch on that's again unique to us, we are large in the independent space , the market leader for over 14 years, we are also the market leader for just a few years in the bank and credit union channel.

And in banks in particular, as you can imagine over the last two years, they have been very reticent to move programs because they've been much more concerned about their banking activities and needing to get through the banking crisis. What is happening now which hasn't shown up in first quarter results yet but is showing up in the pipeline is a significant increase in the amount of bank programs that are looking to find a new home, or to go into the business, for the first time, because they see the recurring revenue possibilities there is that are quite useful to the bank's earning profile. So that is new for us in a sense that there's is more activity in the banking pipeline than we seen in probably over a year.

Great. And then just last one here. Basically, following up on the net assets on the advised AUM side here, if I look at this, I think this quarter was the first quarter if you look at the total assets it's jumped over 30% in terms of AUM. So that continues to trickle higher. I think the annualized growth rate in terms of net new assets was something like 16%.

Which compares very favorable to some of the other public comps that you have out there. Just wondering when you look over next couple of years, how sustainable that you think that trend is? Where do you think we are going to end up in two years, three years, five years in terms of mix of business?

Is this going to get to 50/50 at some point for your client base in terms of AUM versus just assets custody or how do you see that trending up higher? Because in the past, you said something like it's flattening out but seems like to continue to grow more and more. Thank you.

Thank you for the question. I don't think we characterized that we flattened out. I think, I don't know we, I have been here for 9 years and I've never seen it flatten out in 9 years. It would be hard for me to believe we characterized our history as that. We certainly have seen slower levels of growth before. That's what happens when markets move and you have same store sales go negative as you would have expected in 2009.

So we would characterize that we are going to see asset growth both of commissionable assets and of advisory assets for that total $330 billion. Just for everybody on the phone, $100 billion is in advisory and therefore $230 billion is in commission based assets for a total of $330 billion, all new record for the company in all those measures. If you think about that, so about a third of our assets are advisory based.

So we would characterize that over the next several years, we would expect to see more of our assets in the advisory business. I don't think we could predict that it's going to be 40% or 50%, we can only predict that its going to be a higher percentage for the company over time because we know that consumers really appreciate having an advisory relationship as do advisors, so there is a really major tail wind, if you will, in terms of how consumers and advisors use advisory.

And then secondly we've always been a net new addition of assets and accounts as a company, for again as long as I know the history of the firm and that that means that we are bringing in more accounts than we lose. We have been a net addition of accounts. Accounts aren't assets.

Assets show up because the advisor or the client funds them, but that is a good indicator of the health of the system. And so we've continued to characterize that we believe will be net positive for many many more years because of the major tail wind moving to independent advice by advisors and the major desire of consumers to also buy independent advice, whether its in commission form or advisory form. So I think that's helpful. And the last characteristic that I think is helpful is of course the relative profitability of advisory assets are about 2 to 1 to commissionable assets.

So that trend is very positive for us from a shareholder standpoint, in that it creates a higher value for the same dollar of assets as advisors start to use the advisory platforms more for their business. Is that helpful?

Very much so, thank you.

Thank you. Our next question comes from Thomas Allen from Morgan Stanley.

I think you said recently that 24% of your revenue is not from institutional services and you made the Concord acquisition, so how should we expect that business mix to shift over time and what is the margin difference, if any, between institutional and independent advisor services?

In terms of the mix shift, we continue to want to diversify the company's revenues and the way we'd like to do it of course is have both segments grow. And therefore acquisitions are nice ways to get a little more balance between the two. There is no magic to the 24%, 76% split, but over time we like to see ate little more even. The reason why is because there is natural offsets that occur in the product sales cycle for each business that is different.

In tougher times like we experienced at late 2008 through middle part of 2009 our institutional business would have had a nice increase in the different product lines there, whereas the independent market tended to be decreasing same store sales. So they are again in natural balance to each other. And that's why we like more of that.

So I don't think we could characterize, Alex, what we are trying to get to, other than say we'd like more balance. And I don't believe that Concord in and of itself will be material enough to move that needle in the next couple of years, so I wouldn't really worry about that. But I would characterize that we are trying to get a bit more balance between the two. But because both segments will grow, I'm not really sure the relative margin of each matters much.

Because what's going to happen, we might shift towards institutional which is left profitable than our independent business, there is a reason why, its because that group is a much lower user of advisory platforms, like materially lower. So therefore, one of things we know is happening we are seeing a significant increase on a percentage basis of the number of bank programs in particular that are using advisory platforms here in 2011 that didn't use them a couple of years ago, that's because they are wanting that recurring fee revenue.

So I think what you might see over several years, as a business matter is more balance between the two institutional and independent, also much higher use of the advisory platforms for institutional which will make them more equal in terms of relative profitability. Therefore what I tend to try to focus on as a shareholder and CEO is of course overall growth. I want to see each of those lines grow in and of themselves over that time.

That's great, thank you.

The other thing I would just add that the restructuring of course is designed to enhance the margins on the institutional business as well. So converting U-Vest onto our self-clearing platform will expand margins overall for that particular portion of our business.

Thank you. Our next question comes from Patrick Davitt from Bank of America.

Good afternoon, guys. From the sound of the text in the press release, it looks like the majority of the commission improvement per advisor was coming from activity in market levels but you've spoken a lot in the past about this ramp up period of newly hired FA's. From what you can see internally in the timing of when the guys have been brought on, when would you expect to see more commission improvement from that driver as opposed to activity levels?

Well, it's important to understand we are getting that from the ramp. What we are trying to make sure that people see is that ramp is important, don't get me wrong, same store sales and recovery market, are significantly greater sources of growth for revenues and for profits of the firm.

So what we are trying to emphasize, because we worry about the nature of the questions we get, understandable, that people are overemphasizing new stores or ramp rate. It's important and its always positive, because they are going to increase our activity in a very known way. So we have over 10 years of data now that tells us exactly how each class will perform.

As certainly characterized on the call today, that each of the last three years classes are performing within the guidelines of what we would predict they were going to do. So that would be positive us to, what we are trying to emphasize in the release though is, just keep coming back to the fact that we've got 16,900 advisors who are here, slightly less than that if you take the three years out, that are growing their business significantly in terms of increased activities. That's really what I'm trying to emphasize when we put out the releases, just don't undercount the fact that same store sales is so powerful.

I just seem to remember there was some talk about that one year when you, where good amount, say 700ish FA's that were pretty low producers went off the platform and were placed where a similar number that were much higher producers and to some extent that would be kind of flowing in over the next year or so.

Yes. It absolutely is. So the lines that are in there that talk about the fact that previous, that the 2009 class, part of what is propelling us, we are affirming for you, they are ramping the way that we thought they would. So they are having an impact.

I just don't want you to be mistaken in analysis that would say they are having overly impact, sorry that wasn't the right word, too much impact to this year's first quarter's revenue and earnings growth. What we are trying to say to the market, ramp is happening just as we predicted and yes the 2009 class is sizeable and impactful but not nearly as impactful as same store sales.

Okay. Great, thanks. And then just some housekeeping. Could you give the margin balance proxy that's reported on the balance sheet, I think it's receivables from clients.

It's about $250 million.

$250 million, okay. Thanks.

Which has been about the level it's been at for the last year. As you know that's not particularly a big part of our overall business.

Okay. Thanks a lot, guys.

Thank you.

About a question we had gotten earlier, the one thing I would also indicate is that margin growth is actually not an indicator of future business. Because we have always been a low user margin among the client base. It isn't the fact that it's relatively flat or if it happened to go up would be circumstantial data, it wouldn't be an indicator for us of health. We really look at account growth and we look at per day sales growth as being more indicative and those, as we reported were up very nicely in the first quarter.

Okay. Thanks a lot.

Thank you. .

Thank you.

(Operator Instructions)

Our next question comes from Devin Ryan from Sandler O'Neil.

Good afternoon, guys.

Good afternoon.

You mentioned on last quarter's call that investors seemed a touch more cautious in this recovery than you saw in the early 2000's, despite the record advisor optimism. I just want to get a sense of where you think we are in terms of the recovery of retail sentiment, are we in the early innings of that or of individuals rerisking or do you feel like we are getting back to normal times pretty quickly here, maybe even quicker than you mentioned a few months ago.

I think still in the early innings. Are they a bit more positive in clients, versus where they were in our last quarterly call? Yes. Are they as effusive and as positive as our advisors?

No. So therefore there is still a gap that traditionally points to some momentum on a going forward basis that I think is helpful to understand that's there. So we are definitely seeing inclients take action in a way they weren't taking action six months ago and we are certainly seeing advisors reporting their clients being less skeptical than they were but I don't think we are back to normal levels of that by any means.

There is some evidence of that in the mix that you see in terms of variable annuity sales. Which is a somewhat tested way of reentering the risk spectrum where you have some protection, still have some leakage into equity markets, etcetera. We've seen a nice increase in alternative investment usage as well, albeit in more conservative income generating types of strategies as opposed to pure equity risk-type activity. I think as well that we really are just seeing the formative stages of that normalization of risk taking by retail.

Great. Helpful. Thanks for the details on Concord, can you talk a little bit about the environment for doing acquisitions today? What type of valuations are you seeing, then specifically just talk a little bit about your appetite for doing additional deals, that would be appreciated.

Absolutely. I think the deal market is definitely recovering. We are seeing properties become available. It's important to understand that we have a very well proddenned process that we use. So a company like Concord we known for sometime just as we knew NRP for over five years before we did the acquisition.

So we tend to know the pipeline of things that we think are interesting, well in advance. What has definitely come up in the broker dealer consolidation space thus far has been distressed properties. You read about them in the trade press all the time and they are companies that are under extreme distress like the reg is shutting them down. Or they are having some issues that they are having to deal with from a capital standpoint. We are not as interested in those kind of properties because they come with a lot of liability, and if there is not a parent company involved, it's harder to be excited about them.

Because you then get to own the liabilities for the systems. We have definitely not been as excited by what question seen in the independent broker dealer space of what's has become available thus far. But I would argue that we are early on in that process, therefore the pipeline, will likely pick up with firms that are healthier than they were a year or two ago.

So they are starting to see some recovery of their business and therefore they would feel better about selling today or a year from today then they would have felt selling six months or a year ago. So I just think we are in the early stages of probably an M&A recovery in our space, which is fine by us. We certainly built up a significant amount of cash. As we have always indicated to shareholders we want to use it in an intelligent way that gets them great returns, and in the right deal structures, we certainly know we can get a very good return off of acquisitions.

We continue to be interested in acquisitions and continue to believe that there are still good properties to come available over the next several quarters if not next several years that might be good additions to the firm overall. I wouldn't say that prices really have changed much. To my mind they haven't gone a lot up and haven't gone a lot down.

But that makes sense. These properties typically don't make any money anyway. It's hard as I jokingly say, what exactly is it worth? We know what it's worth because we can move certain amount of advisors over, there will be breakage in the process. And we can look at their records, because we so underwrite every acquisition fully as if we were taking that advisor on through the organic growth process.

In other words we will not take an advisor in the acquisition process, that we wouldn't have taken organically from a compliant standpoint. Very important to understand. So we can map all that out and that's why from our view the valuation hasn't changed much. Because we know what we can turn it in to in terms of profits on our system. I don't know that we see any more or any less competition for deals than what we saw before.

That doesn't feel much different to me. There is a few marginal players who were out there doing deals that aren't longer. I don't think that's where the action is in terms of acquisitions. For us it's about finding the right quality of property in which we can do something that helps us with scale growth in our core brokrage business either for the banks and credit unions or for independents and doing that at intelligent prices of course is the goal.

Great, thanks for taking my questions.

Sure.

Thank you.

Thank you. Our next question comes from Ed Ditmire from Macquarie.

Good afternoon, guys. I had a question on the payout ratio. Do you guys typically end up with a sense after the first quarter with where the market levels are et cetera, that if, with normalized assumptions where you will end up on the full year?

Yes, give or take, Ed. I think given what I mentioned about the reclassification of managed reps, when you get to the fourth quarter of this year, our projection would be that it would track pretty similar to what you saw in the fourth quarter of 2010. So that's the kind of trajectory that we see build from the first quarter to the fourth quarter this one is just a bit higher because of that reclassification relative to a year ago.

Okay. Thank you.

You're welcome. I'm show nothing further questions at this time.

We appreciate everyone's questions and your attention today.

Thank you, and thanks, Sayid.

You're welcome. And ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today, you may all disconnect and have a wonderful day.