LPL Financial Holdings Inc (LPLA) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to LPL Investment Holdings' second-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 is being recorded.

I would now like to introduce Mr. Trap Kloman, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to the LPL Financial's second-quarter earnings conference call.

On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his perspective on our performance during the second quarter. Following his remarks Robert Moore, our Chief Financial Officer, will highlight drivers of our financial results. We will then open the call for questions.

Please note that we have posted a financial supplement 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 note that 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 second-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 second-quarter earnings press release.

With that I will turn the call over to Mark Casady.

Thank you, Trap, and thanks to all of you for joining today's call.

Overall, I am very pleased with our performance, which reflects the strength of our business model and the ability of our advisors to generate growth. This growth has resulted in adjusted earnings per share of $0.52, growing 10.6% over the second quarter of last year. After normalizing for our share count increase due to the IPO, our adjusted earnings per share grew 27%.

This level of performance is the second consecutive quarter of double-digit same-store sales growth. Our advisors to remain focused on providing long-term financial advice to their clients which transcends short-term market volatility. This behavior reflects improving investor sentiment and a greater sense of personal and professional security as they commit to longer-term investments.

Our shift in product mix represents this trend with greater investment in bundled solutions, such as variable annuities and alternative investments, as well as increased use of our centrally managed advisory platforms. A sustained market downturn or significant economic disruption, such as the failure to increase the debt ceiling, would likely negatively impact investor behavior.

Our same-store sales growth also benefited from our advisors continuing to attract new clients. This growth is coming from referrals of existing clients who have been well-served by their advisors. The increase in client acquisition is enabled through our integrated technology and marketing support, and these solutions create efficiencies for our advisors, giving them the time and resources to build their client relationships.

To help quantify this, we initiated and designed a research study in 2010 to gain insight on the role broker-dealers play in advisor productivity and profitability. We hired PricewaterhouseCoopers to assist in the survey design, administration, and analysis. It found that our advisors, on average, are more efficient and therefore more profitable than their peers.

Advisor client growth is further aided by LPL's commitment to provide an unbiased, conflict-free environment. We know investors are seeking relationships with advisors who are free to do what is in their best interests.

Turning from investor behavior to our advisors themselves, we continue to experience strong net new advisor growth. We are successfully converting our pipeline of prospects and continue to experience very low attrition. Despite seeing increasing and, at times, exaggerated incentives offered by the employee and custodian channels, our advisors seek a much deeper and lasting value proposition in choosing a business partner.

We continue to see high satisfaction among existing advisors with our service and new technology. This has translated to growth in our independent and RIA advisor base despite the increased competition. In the institution channel we are seeing banks and credit unions re-engaging in the development of their programs. As a result, across LPL we have added 594 net new advisors on a trailing 12-month basis.

Our success in attracting advisors is further enhanced by our extensive investments to build and support a broad array of business models. This allows advisors to conduct business in any manner they choose, whether they RIA only, pursuing a hybrid model, securities only, or focusing on insurance. This flexibility also enhances our retention.

As advisors' businesses grow and their needs change they are able to evolve from one business model to another within our system. Importantly, we have priced our services to these various business models in a way that makes us indifferent to which one the advisor chooses.

In more complex situations, such as establishing a broker-dealer clearing arrangement, there will be additional upfront investment required by LPL. We remain committed to supporting the evolving business models of our customers and meet their ever-changing needs.

This focus on our advisors and their business has led to revenue growth of 13% for the quarter over last year to $894 million. We are experiencing positive momentum in our brokerage business and see excellent growth in our advisory platforms, which exceeded $100 billion in assets for the very first time. Low interest rates continue to be a concern, but we feel that they are a very low point, in part due to the turmoil caused by the political debate regarding raising the debt ceiling.

Another important fact to recall is that in the first half of 2010 we did not have fully restored expenses. Therefore, we are in line with our expectations for expenses, given the restorations we introduced after last year's lower levels of spending. We are experiencing some productivity gains from our operational efficiency efforts, but these will take time before materially impacting our run rate.

We continue to work very hard on regulatory matters. We have spent meaningful time in Washington with regulators, the administration, and Congress on the importance of a harmonized regulatory environment. We see most reform as a positive development for consumers, which is good for our business.

We do express concern about differing views between the Securities and Exchange Commission and the Department of Labor on defining a fiduciary standard and how that will play out. It does appear Congress and the administration remain focused on finding a workable solution, especially with yesterday's hearings regarding the delivery of a new definition of the fiduciary standard.

In reviewing this quarter's performance, our business continues to perform at a consistent pace that I know I have experienced throughout much of my 10 years at LPL. One of the Company's enduring strengths is the lack of volatility in our activities and results over time.

With that I will turn the call over to our CFO, Robert Moore, who will review our financial results in greater detail.

Thank you, Mark. Through the second quarter we saw many themes continue from last quarter. Most notable of these was that our advisors ongoing engagement with their clients translated into another record quarter for revenue of $894 million. Net revenue for the second quarter increased 13.1% from the second quarter of 2010 with recurring revenues representing 62.4% of total net revenues.

As in the first quarter, the primary drivers of the increase in revenue were strong growth in commissions, advisory, and asset-based fees. Net revenue grew sequentially as well, increasing 2.3% over the first quarter's results.

Underpinning this growth are our record asset levels of $341 billion, which increased 23% over the second quarter of last year, with brokerage assets up 20% year over year. Brokerage asset growth was outpaced by our advisory platform as we continue to experience a steady shift to fee-based solutions for investors.

Net new asset flows and market appreciation increased advisory assets by 31%, resulting in us exceeding $100 billion in advisory assets for the first time. This increase has primarily been driven by the organic growth of our mature advisors and the ramping of recent new advisors building their books of business.

For a second consecutive quarter sales activities remained strong, reflecting levels of productivity last seen in early 2008 before the market downturn. We added $3.1 billion in net new advisory assets during the quarter, representing 12% growth on an annualized basis, lifting total advisory assets under management to a record $103.2 billion.

Driven by the growth of our assets, asset-based fees grew 17% over the prior year. Furthermore, the fact that we are self-clearing sustains our ability to enhance growth opportunities in recordkeeping, omnibus processing, and other administrative fees.

While we continued to see strong performance, our overall revenue growth rate was moderated by a deteriorating interest rate environment. The Fed funds rate experienced a steady decline throughout the quarter. The quarterly average was 9 basis points compared to 19 basis points in the prior year and 15 basis points last quarter.

However, the effective yield on these deposits are at the higher end of the industry range, providing us with strong relative performance and advantageous positioning in a scenario where rates remain unusually low for an extended period of time. Overall, cash sweep revenue grew margin as the negative impact of a declining interest rate environment was offset by any increase in our cash balances related to overall asset growth driven by new business.

The payout ratio for the second quarter was 86.3%, which is 11 basis points higher than the year ago period and 81 basis points greater on a sequential basis. We view this as a positive sign of the health of our advisors business.

The payout growth is driven by our annual production bonus incentive structure, which increases throughout the year as our advisors achieve higher production levels. The rate of increase experienced during the first six months of 2011 is a clear indicator of the growth of our business, not simply through the addition of new advisors but through same-store sales growth from our existing advisors.

As a result of greater advisor activity year to date, advisors are achieving these production bonuses earlier in the year. We would expect the payout ratio to continue to increase for the remainder of the year but at a more moderate pace, as many advisors have already or nearly achieved their maximum production bonus levels.

I would like now to turn to our non-production-based expenses. Consistent with the first quarter, I want to note that a portion of our expense growth is attributable to reduced spending levels we maintained in the first half of 2010. These levels reflected the actions we took to lower our expenses in 2009 in response to challenging market conditions.

Our restoration of expense items to a more normalized level was completed during the fourth quarter of last year. Our expense base today reflects a more suitable run rate on a go-forward basis and we do not anticipate similar year-over-year growth continuing past the third quarter.

Compensation and benefit expenses increased 8.8% over the prior year, driven by higher staffing levels to support our advisors' growing businesses. Our positive performance also leads to higher baseline accruals for our discretionary bonus pool and 401(k) match. Sequentially compensation and benefit expenses declined 3% due to a decline in payroll benefits and temporary services.

Other G&A has increased 6.6% year over year, in large part due to our success in attracting new advisors to our platform. While the transition assistance to attract these new advisors has increased in recent quarters, the return on investment makes this an excellent use of our capital.

Sequentially, other G&A decreased $6.1 million over the first quarter, driven primarily by the timing of our advisor conferences. As a reminder, our largest conferences occur annually in the first and third quarters.

Due to the moderate growth in cash sweep revenue, restoration of expenses, and advisor growth, our adjusted EBITDA margin as a present of net revenue experienced a slight decline this quarter to 13.8%. We anticipate this metric improving in future quarters as new advisors ramp up their businesses and the prior year's quarterly results reflect the expense restoration.

Turning to our uses of cash, second-quarter capital expenditures were $9 million and we are maintaining our $50 million full-year target. In addition, we remain on track to consolidate UVEST onto our self-clearing platform by December of this year.

As a reminder, this will result in pretax expenditures of $53 million primarily in the third and fourth quarters of this year. This includes a non-cash impairment charge of about $6 million related to expected attrition, which will be reflected in our fourth-quarter advisor count. Importantly, we expect this restructuring will improve pretax profitability by approximately $10 million to $12 million per year through operational efficiencies and revenue opportunities.

We continue to experience positive trends in our interest expense which declined by $10 million compared to last year. This is the result of the debt refinancing we undertook in the second quarter of 2010 and the $40 million pro rata debt repayment we made on January 31 of this year. At the end of the second quarter, our leverage ratio was just over 2 times and we would expect it to continue to decline through 2011 due to adjusted EBITDA growth.

I want to highlight the progress we made in our share repurchase program that we announced in May. As previously communicated, our Board had approved the repurchase of up to $80 million in share buybacks to mitigate anticipated dilution from equity programs over the next two years. I am pleased to share that we have achieved this goal, repurchasing 2.3 million shares at an average price of $34.84.

We anticipate the immediate benefit of earnings per share due to the timing of the program to be offset in future quarters by our equity programs. We maintain our long-term view for deploying our capital and investing in our core business operations, which remains our number one use of cash.

We continue to see opportunity for acquisitions but remain selective, focusing on targets that meet our rigorous financial and strategic requirements. We will review our options for future share repurchases and debt repayment based on our organic growth opportunities and overall market conditions. As always, our singular focus remains on optimizing long-term shareholder returns.

With that we look forward to answering your questions. Would you please open up the call?

(Operator Instructions) Thomas Allen, Morgan Stanley.

Good morning, guys. So some traditional brokers have announced cost cuts and reductions to lower producing broker program headcount. Have you been able to benefit from this at all?

And then kind of related to that, you mentioned earlier that you were seeing exacerbated spending from employee and custodian channels, so it sounds like the transition market prices are high. Have you changed your strategy there at all? And how aggressive have you been and will you be?

Thanks, Tom. Good question. The range of money used in transition assistance, as you know, goes up and down on economic -- cycled with the economic times. So in more difficult times we are seeing a lot of movement from advisors as we did in 2009. Our average cost was single-digit, probably around $0.07 to recruit $1 of revenue, and the normal cycle would be that it would climb back up into the double digits $0.10, $0.12, $0.14, whatever there.

What is different in 2011 for us is that climb is steeper than it normally is in an economic recovery, so it's a couple of cents more than we would have guessed across the group. So we are definitely being more aggressive in terms of taking our transition assistance up to, not match what our competitors are doing because our value proposition is better than theirs in terms of fundamental assistance and ongoing support of a practice, but we are certainly responding to the competitive nature that is there.

We do see it as exaggerated and that typically that doesn't last. What happens is that a competitor will try it for six months or a year and you can -- we know who exactly is mispriced in the marketplace in this regard, although we don't want to reveal who that is. They will typically run, again for a period of time, try it, and then typically they pull back again.

So it's a phenomenon of market recovery and economic recovery; it's a phenomenon of a competitor feeling not as good about their prospects and therefore using money that is not economic to better their position. So that is the second question you asked.

The first question you asked was related to just overall changes in the marketplace. You have advisors leaving from any number of practices for a range of reasons. Because we supported advisors geographically in small towns and rural America as well as mid-tier cities and suburbs of large cities, we can accommodate a producer who does a couple hundred thousand dollars a year in Des Moines.

Life is good for that person and life is good for their clients, but they may not fit the profile of what their employee or employer wants them to be. And so we are more than happy to pick those advisors up and we have certainly benefited from those changes that are going on in payout schedules. And that is a fairly typical -- this doesn't feel any different to us than it would at other times in the economic cycle in and of itself.

Then to answer a question you didn't ask, but it helps you a little bit get a perspective on where they are coming from, is actually the class this year is nicely distributed across employee models, other independent firms, banks, insurance companies. So it looks like a more historic mixture between the various channels, which we like.

That is our strength is that we recruit and do business development across all different business models, or sources if you will. And so I like the fact that the class is showing its more historic mix and balance than it did, say, prior to the 2009 distortions.

Okay, great. And then quickly, so you obviously sent a letter to the Department of Labor in February regarding the fiduciary standard proposal. You mentioned it briefly in your prepared remarks, but did you have any takeaways from the hearing yesterday? And are there -- how are the talks progressing there?

Another good question and one that does occupy a lot of mind space here in energy. So we have met with the Department of Labor as a company, so we had an audience with the group there. They were very receptive and we were very pleased to be able to sit down with them.

They were very thoughtful about the issues that we raised that are unique to the independent model, so trying to represent the industry a bit, and are important to the overall industry no matter what business model has in terms of the impact this will have on consumers.

And they were very receptive to hearing our issues. In fact, they told us at the end of that meeting that no one else has brought them the issues that we had brought and they were quite appreciative that we had taken the time to come meet with them. And so that is good news; always good to be able to talk these things through a bit more.

We have continued with work, now shifted to the administration from our work on the Hill. We have met with the White House twice on this topic as part of groups going in under the SIFMA banner or under the Financial Services Institute, FSI, banner or Financial Services Roundtable.

So we are quite active with those organizations and either Bill Dwyer, our President of National Sales and Marketing; Stephanie Brown, our General Counsel; or I am in those meetings stating the position for the industry. So we are able to, again, be in good dialogue with the administration about the impact this will have on consumers that will make life more difficult, particularly for small balance IRA accounts.

So we are feeling a bit better out about it, because the hearing yesterday really pointed out and the panel was quite good in stressing the fact that there has been no economic review of this done. So in other words, there is nothing from the Department of Labor that shows the economic impact to a consumer yet an Oliver Wyman study that was done independently shows there is a significant impact to the consumer that is bad. They will pay more costs or they will not get services as a result of the proposed administrative action.

And there is also concern that there wasn't really good due process -- that is a legal word. That essentially the SEC has a process for rulemaking in which there is lots of hearings and discussion and really good dialogue to work through the many technical issues that go on with these things and the Department of labor doesn't have a similar structure.

So I am hopeful that that will result in the DOL delaying or withdrawing their proposal as it relates to the IRA area retail brokerage. We don't see yet evidence of that, but I thought the panel yesterday was quite good in pointing out why that would make sense. And it was both sides of the aisle that was pointing it out.

Sorry, probably more detail than you wanted.

No, that was great. Thanks, Mark.

Daniel Harris, Goldman Sachs.

Good morning. You guys talked quite a bit about the same-store sales growth during the prepared remarks. I was just wondering if you could put some more quantification around how that is relative to what you guys have experienced in the past and whether or not you think that is sustainable going forward in terms of what that growth rate is versus, again, what we have seen in the last two quarters.

Yes, thank you. So, Dan, the way we have reported the number is low double digits growth. Again, this one -- same-store sales we have been trying to point out to the analyst community and shareholders that it's important to understand that during an economic recovery, which I think we would all agree we are in a fashion of one, where the economy is growing and the markets are generally benign to positive is that we will see same-store sales become a significant stream of revenue growth and earnings growth for the Company.

What we have been concerned about as we have gotten to know the public market since November and the initial IPO is that people do like to put an emphasis to the headcount of advisors. But we are trying to really illustrate that in a recovery cycle, which we would predict we are in in 2011, 2012, and I am kind of hoping for 2013 but we will see, is that same-store sales will be a significant portion of our earnings growth.

So we have had two quarters now of low double digits. That would be pretty typical for this stage of the recovery. We can go back at least a decade's worth of numbers that I know of that show that is about where they should be. In fact, they are just a touch higher than they normally are at this point in the recovery cycle coming out of recession and a major market break that we had, of course, at the end of 2008 through early 2009. So that is why we are trying to emphasize it is just to help with the education for shareholders of the importance of same-store sales.

And also to illustrate that our business doesn't have the volatility that the direct to consumer businesses have. Because remember these are people who really aren't interested in money issues; they are interested in obtaining their goals but they really need someone who is a trusted counselor or advisor to reach those goals. And what started changing in their behavior, the end consumer, was in the fourth quarter they started committing their higher savings amounts to investment programs.

That is what we are seeing, that is what drives same-store sales overall. Once that consumer gets started there is some momentum in it and we are now reporting two quarters of pretty significant momentum in that same-store numbers and that is coming from that behavior of the end investor making a decision to commit to their advisor in an ongoing investment program.

The only thing I would add there is that as a result of that momentum historically we have seen periods of sustainable momentum. So it can, as Mark said, given a backdrop that is relatively sanguine, be something that we could continue to see for a while.

And is the best way to look at that, guys, looking at sort of the GDC per advisor? Is that the best way we will be able to track what that same-store sales growth looked like and expect that that number continues to move a little bit higher each quarter over the next few?

Yes, although again that number contains both market and essentially same-store sales, like-for-like growth basis, but that is a very good metric to track through time in terms of just looking at where the overall state of the advisor activity levels have been. We still haven't taken out the previous market highs in 2007 and early 2008 that we saw, but we are definitely getting back towards those levels.

Okay. So the other thing you guys were focused on was sort of the fee-based advisory assets and, as you noted, that went up to $103 billion. So it has ticked up to just north of 30% of total client assets -- of your total AUM, I am sorry. Where do you think that could go?

That is actually sort of in line with some of your peers at this point. Can that go closer to 40% over time, or is this 30% level sort of a number that is reasonable and as your assets grow that should grow with it?

Let me frame it for you a little bit and Robert will give you a little more detail on the numbers. I think what is important to understand is the funnel. So just imagine a funnel in your imagination and in the top of a funnel comes new advisors.

Many of the new advisors that come to us, say in the example Thomas gave us of an advisor joining us who is a couple hundred thousand dollar producer from a wirehouse or even a very large producer, they have very low use of advisory platforms. So this is a little bit of a numerator problem. Meaning that the 30% or roughly a third of production is driven by advisory is actually more a function of the fact that we keep adding so many new advisors up top who are much more dependent on and have practices oriented to the commission business.

And so what we can look at is underlying numbers, which we don't disclose, of asset growth for people who are predominately advisory based, how many advisers are predominantly advisor based. So those are showing very good growth overall in the biz.

So the mix shift. We are at 30.3% of total AUM in advisory; that is up from 28.5% a year ago so we have seen a 2 percentage point expansion in that level. And that is a steady trend that we have been speaking to you about for a while that we would anticipate continuing.

There is very good momentum behind it and very good rationale for why it's occurring, but as Mark said as long as the top-line growth in advisors is also occurring simultaneously that rate of growth won't be overly pronounced. We certainly don't see a ceiling per se in it, but we value both mixes of business.

The commission based business and brokerage based business, of course, is very important to us; quite profitable. We operate quite well there and advisory based business is a natural offspring of that.

Okay. Robert, that is helpful. Then lastly for me, so variable annuities seem like they have been healing for the better part of the last year or two. In fact, there has been some good traction in sales there this year.

My guess is that is also one of the things that is helping drive the commissions business. But would love to hear your take on how the variable annuities business is and any upsides or downsides you see from here. Thanks.

Yes, so the variable annuity business is benefiting from something a little different than what we have seen before is that we have in-client demand for protection that we have not seen out of previous market cycles.

So the dynamic that we are hearing from advisors and we are witnessing through, for example, the Insured Retirement Institute of which we are Board members, is that the in-client is saying, gee, my next door neighbor has an advisor, my friend has an advisor. They used a variable annuity and during the downturn their assets didn't go down because of that protection. Let me understand that better; what is that about?

So we are seeing consumers actually ask their advisors about annuities which we have not experienced, again, in my 10 years at LPL. So that is a good sign. That tells us that the product is becoming better understood at the consumer level and again a better educated consumer is good for our business.

Then you combine that with the fact that you have advisors -- we have, for example, our new variable annuities in our advisory platform program. That is a program where we don't pay sales commissions of course, because you can't, but what you are doing is you are putting that same product protection feature into an advisory account. And that 80% of sales for that program are coming from advisors who have not used annuities before, so we are opening up a new market by that structural change and the way those products are offered.

So part of it's a combination of recovery in the cycle, a demand by the end consumer, and part of it is the work we are doing with our insurance partners to bring -- basically open new markets to the product because we know it's a very important component of a middle-income Americans' retirement package.

They are going to get -- about 25% of their retirement check is going to come from the government and Social Security; they are probably not going to be (inaudible). And then they need to have about another 25% in some sort of guaranteed income return and a variable annuity is a great way for them to get that in place.

With the focus on retirement income that is why advisors are driving more towards that product set. So I don't really see that changing.

There will be changes in benefits; one carrier will change one thing and drop another and the balance sheets cycle in and out. But the power of our model is that we offer so many different annuity partners and, therefore, our advisers benefit from being able to switch from one carrier to another rather quickly.

Thanks a lot.

Devin Ryan, Sandler O'Neill.

Good morning, guys. I was just a little surprised that the entire share repurchase authorization was utilized as quickly as it was. So just wanted to see if we could get a little bit more color on whether that was the original plan or really just what drove that. And then maybe how we should think about your appetite or how you are contemplating doing additional repurchases going forward?

Okay, yes. When we established the plan of course we had parameters around it in terms of levels of share price repurchase that we would feel comfortable with, both in terms of the accretion level for us overall as well as the stated objective, of course, which was to mitigate dilution impacts and the choices you make about when exactly do you time that.

What we saw was during the period we initiated it there was, as you know, some market dislocation, movement in the market that made us feel that the time was appropriate for us to go ahead and accelerate those purchases, which we did over that period of time. And so we feel good that we have taken that initial tranche, which was $80 million, to go ahead and get that done now.

We will stand back and take a look at conditions as we go forward from here in terms of uses of cash, as well as our overall criteria around the benefits of share buybacks, to determine whether we do anymore. And if so, how much and when. But the initial objectives have been achieved and that was to fully mitigate the dilution impacts from our equity programs, both for this year and next.

The only highlight I would add to that is that we do have a deferred comp program that has a significant amount of shares, about half the count that we are able to buy up, that comes due in early 2012. So it's not that far away for us. So our view was if you can get it done in terms of an execution matter, get it done; just as well to have it behind us.

Okay, great. Then also, I understand the quarterly progression in the production ratio. But just when we think about maybe that ratio annually over time as the firm expands is there any leverage to bring that down at all? Or is it going to be I guess maybe going up as the more recently hired advisors are, I am assuming, maybe more productive or just they are at a higher overall production ratio? Just trying to think about kind of where that could go over time.

Well, let me do an atmospheric comment and then again Robert can go to the color. This is a good thing, right, because what it means is that advisors are growing their practices faster than we predicted. That is a sign of health of the system and their ability to really go out and attract both new clients and more assets of existing clients.

So, again, in my history of it again it's climbing a bit faster than we have seen in other cycles, but that matches that we have also had same-store sales climbing a bit faster than in other market recovery cycles. So from my perspective it's all a good thing because it means that they are doing something quite productive.

We don't see a particular structural issue in the way that it's established or its long history. Remember that production bonus has been around since time began for us. And it's not showing any characteristic that would make us think that fundamentally it needs to be redesigned or other things.

The one area that it has not changed in 20 years or 15 or somewhere in there -- someone will correct me on the exact number but it's a long time. And one could argue that there is a little bit of an inflation factor that has to be taken into account, but that is probably the only factor that makes it different than other things.

Sorry, I took that --.

No, I think that is a good response to it.

So I guess just bottom line, assuming more people are more productive over time then maybe that ratio would pick up over time? Is that fair to think that? Obviously, as you said, that is a good thing.

Modestly so. And I think the other thing you will see is that the rate at which it increases throughout the year can be accelerated as we have seen this year. So the overall level that you reach may be modestly higher, but the pace at which you get there comes sooner in the year.

So imagine it as an upward sloping to the right line and then it starts to cap because that practice will get to its maximum payout structure. These are also tied a bit to our club levels where someone will say I am just 5% away from the next club level which will entitle me to certain benefits. You will see them push towards that.

So what it tends to do is it tends to rise and the faster same-store sales occur the steeper the slope of the line is. And then it starts to flatten out because practices reach their -- either their cap or they reach their own particular potential that they have set for their business for the year. And this is true for bank programs as well as true for independent practices and so forth.

And so what you are really seeing is that slope of the line being steeper in the second quarter, which means the flatness will also come sooner in the year.

The other thing I would remind everyone of that we talked about during the IPO roadshow was this dynamic that it is -- we will give away a little bit more of that upside in a buoyant market in exchange for that protection that we get on the downside which we saw in 2009 where the payout ratio was extremely flat and historically low. And that is part of the mitigation that is built into the model.

Great, thanks very much.

Ken Worthington, JPMorgan.

Good morning. I was trying to look into the production expense and maybe try to get some insights into that. It looks like your clients are growing their business more quickly than is typical in a recovery, as you say, and you are getting kind of faster same-store sales growth. I guess my question is why is that?

The recovery has been particularly choppy. If you look at the retail trading and investment, I would say that the retail engagement has been disappointing and we see that at some other firms. Something seems to be working for LPL.

And maybe to kind of leverage off Dan Harris' question is this on -- are you seeing better engagement on the protection-based products? Is it the insurance products that are maybe doing better in this cycle and is that a more profitable business for you? Just trying to fish into that and see if I can explain the dynamics.

No, I understand, Ken. I want to come back to a statement I made in my prepared remarks says this is exactly the consistency we would expect out of this business model. And that is the piece that I think if I were going to grade myself poorly and ask for improvement in myself of explaining it this would be a good example of it.

Because what I think gets lost in the milieu of people's announcements and in their understanding of how financial systems work is that there is a lot more volatility in other business models. There is not volatility in our business model. Number one, it's because of the path we have chosen. We don't do volatile activities like underwriting or product work that would make us more market dependent.

And just as Robert explained the production bonus, while we give away a bit more on the upside, it protects us on a downside. So this produces very consistent results in terms of how the fundamental business is designed.

The other part that is true and real for us and you are now experiencing it, and the second quarter is a lovely microcosm of it, is that the end consumer here is quite different than the consumer who is a direct to a discount broker or who is a high net worth consumer who will tend to shift asset allocation more like an institution will.

These are people who are trying to save for their child's college. These are people who are trying to make sure they have enough in retirement. These are the people who make America work and who are just amazing at their ability to save money in light of other choices they have to make around the mortgages and buying a new car and those things.

So fundamentally the best way to imagine this is you and I at a kitchen table; I am your advisor, you are my client, and what I am doing is helping coach you through the need to save more money and the need to get that invested in a variety of assets. Fundamentally, if I do a good job of that, it will feel just like the 401(k) business does.

One of the things that you love as an analyst about a 401(k) business is that every two weeks contributions show up. Our business is a lot like that. These are the people who save money in their 401(k); these are people who are savers in their brokerage account and advisory account, so our business has that very similar consistent characteristic.

They are literally putting away money with every paycheck. They are literally writing a check when their bonus comes to their LPL account to be able to invest that again for a variety of needs.

So that consistency is really important to point out. And it comes from that consumer behavior that is different for our middle-income American client base than you would see at a discount brokerage firm or you would see at a wirehouse.

And in terms of the mix of business, given where we are in the recovery, is your mix of business now different than it was at the same part of the cycle in the last recovery?

Yes, there is definitely more variable annuities in it. I don't know that I could characterize that, but it's -- I would say significant is probably not too strong a word, maybe a touch strong -- difference than say the 2006 or 2005 recoveries.

Now part of that is because of the type of products that are out there. There are very different chassis, if you will, in the insurance industry than there was back in the early 2000s, so that is part of it. And part of it is what I described before which is end investment investor demand which we have not seen before, so that is a new behavior that is out there. Then otherwise the mix looks pretty good to us.

And of course, advisory for us is becoming -- even though it's a 3 percentage points difference as Robert was pointing out before, don't forget how significant that is in terms of relative profitability for the Company, goodness for the end consumer, and a good structural thing for the advisor for their business. That is very powerful because advisory platforms are generally about twice as profitable as our brokerage platforms are, and that is also true for the advisor. And it gives us ongoing recurring revenue.

So even subtle shifts, like a 3 percentage points change in advisory, can have a nice impact to profitability. So it feels like all the cylinders are operating the way they should be and that the new driver that is different than before is the fact that the end consumer is better informed about variable annuities and the power that they have. Otherwise the mix looks fairly normal.

Thank you.

Joel Jeffery, KBW.

Good morning, guys. You guys had talked a little bit, actually more than a little bit, about strong same-store growth and then some maturing and some seasoning in your new advisors. And in the past you have talked about really five drivers of your EPS growth.

Is there any one of those other drivers in there that you are relatively concerned about or you think is lagging and maybe holding you down a little bit?

No. No, it's operating just as planned and a little stronger -- a lot stronger in the same-store sales number that is there.

Our biggest concern is rates are low and they are abnormally low, as Robert said in his remarks, so I do want to point that out. That is a real risk for the business but it's not -- if you look at this quarter's results it obviously isn't holding us up from continuing to produce profits or to see fundamental growth in the business at the top line.

Then the second piece is that as a regulatory environment which just has a randomness to it because you don't know what an outcome will be. But that has nothing to do with -- that just adjusts the five drivers based on some regulatory fee that the DOL would have or something like that.

Yes, the only one of the five drivers that is dampened a bit here in the first six months of the year has been the operating margin, which I discussed. And again, I don't -- I am not particularly worried about that or concerned in terms of how we are going to progress from here. Because I think the understanding we all have about the way our expense base progressed in 2010, particularly culminating in the fourth quarter, tells us that the trajectory and the run rate that we are on will provide some fuel and oxygen back into that margin.

Okay, great. Thanks. And then I know you guys had talked a little bit about the share repurchase program that you had done. Can you just give us the period end diluted share count?

113 point -- sorry? 113.5 million.

113.5 million. Okay, thanks. Then -- again I apologize, I got on the call a little bit late, but can you talk a little bit about potentially managing the expiration of the lockups of the private equity shareholders and how you guys are thinking about their potential sales into the market?

Well, we don't have any indication from the private equity firms of an intent to sell, we have nothing to announce today, and we can only characterize that they continue to be happy shareholders and continue to have their holdings. At some point we would imagine them to lighten up, but that is a decision they will have to make and we don't know what the timeline is for that. But nothing to announce in the near future.

All right. And the lockup expiration is tomorrow, correct?

It actually happened -- yesterday?

Yesterday, yes.

So it's on now.

Okay, thank you very much.

(Operator Instructions) Bill Katz, Citi.

Good morning. A couple questions for you if I may. Can you talk a little bit about -- you mentioned client re-engagement through the quarter, but can you talk about a little bit about how you saw that on a monthly progression, if you will, April through June? And maybe what you might be seeing at the early part of July, just given the macro backdrop?

No, I won't do that, Bill. I barely like to report by quarter. This is not a business that you can look at monthly or quarterly and really come to much conclusion other than trend lines. And so I think it's a business that is much better looked at annually. Frankly, if I could do these calls once a year, I would do them but I am not allowed.

So I don't think there is something to characterize. What we have said I will just repeat is that we saw a lot of optimism in our advisors last year around this time for our annual conference. As shown in the survey that we do at that time, they were feeling very upbeat about their prospects but our numbers in terms of same-store sales growth really didn't show that yet.

Those numbers started to change in the fourth quarter to be more positive, but not yet to single -- excuse me, to low double digits in the fourth quarter. Then in first quarter and second quarter same-store sales are low double digits, which is a nice, robust recovery, and there is no reason to believe, given the momentum that we have seen over these last two quarters, that that will change much in a going forward basis.

So we are trying to really just to keep advertising that consistency of our business model versus others in financial services and haven't seen the kind of slowdown that we have seen in direct-to-consumer models.

Okay, thank you. Second question is if you look at the fee realization rate on the advisory assets, and I -- we are using two point-in-time estimates to get the average AUM, so this might be an effect on the numbers. But that fee rate has been about 104 basis points, give or take a little bit, and I recall there is some expectation of that improving on the go-forward basis.

So I am just sort of curious if you could talk about the dynamics. What might in fact get the fee rate going up or is there something else at play here?

No, I think, Bill, we feel that the rate will expand over time. Again, there is a lag effect, if you will, to the way that rate is calculated usually in terms of -- you would be better served to look at the last quarter mark-to-market, if you will, by the level of revenues from this quarter to that previous quarter because they are set in advance.

So when the market is expanding typically there is a lag effect to that. Obviously, the addition of net new advisory assets as well creates somewhat of a dampening as that money gets put to work within the advisory system.

So again we feel very good about the underlying health of the fee base within our advisory business. We have no indication that there is fee pressure there of any kind of downward motion at all, so we feel that the underlying normalized straight has remained fairly consistent through time.

I should also say that the $3.1 billion of net new assets is at a 12% annualized rate, which all indications are is quite healthy and quite good and shows the relative momentum of our business in the marketplace itself, so we feel quite good about it.

Okay, that is helpful. And then maybe you answered this question in your commentary in terms of cash usage, but in terms of -- the pipeline in terms of potential deals out there, just sort of curious. You mentioned pricing in terms of attracting the breakaway broker, but from an aggregate perspective of franchises out there is the pipeline better or less favorable than we were maybe at the end of March?

The pipeline doesn't change that much in a quarter. We continue to see good deal flow as we have over the last couple of years and we see the quality of deal flow coming forward is better, which is what we would believe to be the case. So in other words, better businesses will get to a recovery period with this kind of backdrop of the markets and so forth.

When they start to see some earnings recovery to a level that is certainly better than what they had in 2009, I think we will see more properties come on to the market that will be a good fit for us and so forth. So we feel good about the deal pipeline and we continue to emphasize that as an area to deploy capital that is quite appropriate and which we have a lot of experience.

We have done two deals since the IPO, so we feel good about that since we are only three-quarters into it, and we will continue to look for smart ways to deploy capital for shareholders.

Okay, thanks for taking my questions.

Thank you. I am showing no further questions in queue at this time. I would now like to turn the conference back over to Robert Moore for any further remarks.

I would just like to thank everybody for joining us today. If you have any further follow-up questions, of course you can call Trap and we will look forward to connecting with you again along the way. Thank you.

Thank you, ladies and gentlemen, for your participation. That concludes the conference. You may disconnect and have a wonderful day.