LPL Financial Holdings Inc (LPLA) 2011 Q3 法說會逐字稿

Good morning. My name is Bonita and I will be your conference operator today. At this time I would like to welcome everyone to the LPL Investment Holdings' third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions.) Please note that today's call is being recorded. Thank you.

And now, I would like to turn the call over to Mr. Trap Kloman. Sir, please begin.

Thank you, Bonita. Good morning and welcome to the LPL Financial third 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 quarter. Following his remarks, Robert Moore, our Chief Financial Officer, will highlight drivers of our financial results as well. We will then open the call for questions.

Please note that we have posted a financial supplement on the Events 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 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 earnings press release.

With that, I'll turn the call over to Mark Casady.

Thank you, Trap. And thanks, everyone, for joining today's call.

We delivered quarterly results that are consistent with the framework of the growth drivers we've shared in the past. Our consistent performance, especially under challenging market conditions, highlights the resiliency and stability of our business model.

The business continues to perform well, yielding adjusted earnings per share of $0.46, which represents 12% growth over the third quarter of last year. After normalizing for our share count increase due to the IPO, our adjusted earnings per share grew 28%.

While we were certainly faced with the headwinds of a declining market and a challenging interest rate environment, we've benefited from the impact of multiple organic growth drivers that led to top line revenue growth of 16% year over year.

Same-store sales of our mature advisors, which represent approximately 80% of the independent advisor and institutional relationships we support continued to expand at double-digit rates. Our advisors achieved this growth with the support of our unique platform and as a result of the strong relationships they have fostered with their clients. These established relationships are particularly meaningful during times of market volatility and uncertainty.

As these results demonstrate, the value advice is not confined to investing clients' assets when the market is performing well. The true value advice lies in understanding clients' long-term needs and positioning them for success, regardless of the market environment, and then remaining actively engaged, especially during times of market volatility.

Our open architecture, conflict-free platform allows LPL advisors to manage their clients' portfolios to reflect changing economic conditions, resulting in retention of the underlying assets and ongoing revenue opportunity.

Of course, there have been times of sustained market volatility over several quarters that have led to reduced revenue, as was experienced in the first half of 2009. However, the retention of client relationships and underlying assets enables LPL Financial and our advisors to benefit when the market stabilized, creating greater predictability in our performance as exhibited in 2010.

With the near-term economic outlook remaining challenging, and the markets are unsettled, there's elevated investor concern that these conditions have not materially changed investor behavior at this time as they remain focused on the long-term view.

Our revenue growth is also supported by the additional activity of advisors who have joined LPL Financial over the last three years. As previous discussed, as these advisors transition to the LPL platform, it takes them about three years to rebuild their prior levels of production. Their behavior as they work to expand their client relationships typically transcends market influences, again providing a more predictable revenue stream.

We remain on track with our guidance of 400 net new advisors per year, having added 598 net new advisors in the past 12 months, excluding the 206 advisors who joined us through the NRP acquisition and the attrition of 22 advisors related to the previously-announced UVEST conversion. While the cost to attract new advisors continues to rise, it remains within a range of historical cycles.

The diversity of our platform to support an array of advisor practices enhances our ability to attract business from all channels, including wirehouses. In particular, we are experiencing strong growth in our Hybrid RIA solution which we launched as a new business initiative at the end of 2008. LPL Financial is a catalyst for this growth. Our Hybrid RIA solution is the only fully integrated investment advisor and brokerage back office solution in the market. We are now ranked fifth by Ciruli in total RIA custodied assets and, as a measure of productivity, second in assets per RIA firm.

We are also experiencing growth within retirement partners, reflecting the successful integration of our acquisition of National Retirement Partners this year. Today, we consult on more than 25,000 retirement plans, making LPL Financial a leader in this space.

Although our roots in the industry are serving the mass affluent investor, the diversity and flexibility of our offering has also led to growth in our advisors who support high net worth clients. LPL Financial debuted in Barron's 2011 ranking of the top 40 wealth managers in the United States in that survey, that we came in number 26. The annual ranking, which was published in September, is based on the over $17 billion in assets under management at LPL Financial and accounts with more than $5 million in assets.

The ability to attract advisors and diverse businesses is a competitive advantage for LPL Financial and is another attribute that provides predictability in our business. Our advisor pipeline remains strong as the appeal of an independent business partner for advisors and their clients is only reinforced by current market conditions. Our flexible business model also enhances our ability to retain our existing advisor relationships, even as our advisors grow and evolve as exhibited by our 97% production retention.

Same-store sales growth and the maturing advisors have led to continued momentum in both our brokerage business and the use of our advisory platforms, particularly within our centrally managed account solutions.

This quarter advisor commissions and advisory fees increased 18% year over year. Declining markets partially mitigated this growth and the full impact of the markets on advisory fees will not be felt until the fourth quarter.

A third area of earnings growth is derived from the gearing of our top line growth, driven by the scalability of our platform. This quarter, adjusted EBITDA as a percent of net revenue remained relatively flat year over year. From my perspective, this result is understandable, reflecting in large part the notable increase in transition assistance attracting new advisors to our platform.

This investment continues to generate excellent returns. We have attracted five times as many net new advisors year to date compared to the prior year. While the cost to attract these advisors has grown over the past 12 months, we remain well within a range consistent with historical cycles and within the current marketplace.

As advisors remain focused on their clients, we remain singularly focused on providing the highest levels of service and technology in support of their efforts. Through our self-clearing and compliance capabilities, our integrated web-based technology, our business consulting and services and our dedicated research team, advisors and institutions receive the support and functionality they need to grow their businesses.

The market conditions this quarter have particularly highlighted the valued relationship our advisors have with our research team. Through our published investment strategies, daily advisor market calls, asset allocation models, recommended performance lists and centrally managed platforms our research team has helped advisors efficiently stay on top of the changing market conditions and allowed them to remain focused on their clients at a time when they are needed most.

We continue to follow regulatory affairs closely. Although there have been positive developments this quarter, including the Department of Labor extending their review regarding the fiduciary standard, there is still work left to do. Relative to last quarter, our outlook is more positive on the nature of the pending regulatory changes and we remain supportive of appropriately expanding the fiduciary standard and a harmonized regulatory environment.

In reviewing this quarter's performance, in light of the challenging market conditions our company continues to perform in the predictable manner that I've come to expect. This performance reflects not only the strength of the independent business model, but the hard work and dedication of our advisors to their clients.

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

Thank you, Mark.

In line with Mark's comments, the ongoing engagement of our advisors led to strong quarterly revenue of $883 million. Advisor production grew to $706 million and asset-based and transaction and other fees increased to $168 million. Other revenue fell slightly to $9 million.

Net revenue for the quarter increased 16.2% from the third quarter of 2010, with recurring revenues representing 63.1% of total net revenues. Sequentially, net revenues were down 1.2% as advisor activity remained strong, but the combination of seasonal effects and declining markets negatively impacted commission trails and asset-based fees.

Asset levels ended at $316 billion for the quarter, up 7.9% over the prior year as continued account growth and positive net new advisory flows were partially offset by the declining market.

The robustness of our fee-based platform continues to attract new business with net new advisory flows of $3 billion for the quarter, representing 12% annual growth on an annualized basis. As a result, advisory assets continue to represent a growing percentage of our overall assets under management, increasing to 30%. Since June 30th, total assets declined 7.2% due to lower valuation levels.

Strong commission-based sales activity remained consistent with the prior two quarters, although we have seen a small increase in cash balances as a percent of total assets to just over 7%. This remains well below the historical high of 10% we experienced in the first quarter of 2009.

Driven by the growth of our assets, asset-based fees grew 9.9% over the prior year to $90 million. Sequentially, asset-based fees declined by less than 1% as the market impact on asset values offset the benefit from new advisor and account growth.

Our overall revenue growth rate was notably moderated by a deteriorating interest rate environment. The average Fed funds effective rate for the quarter was 8 basis points compared to 19 basis points for the third quarter of the prior year and 9 basis points in the second quarter. This deterioration was partially offset by increasing cash sweep balances which grew 24.2% year over year and 8% since June 30th to $23 billion.

Although our earnings are sensitive to interest rate movements, less than 5% of our total revenues derived from cash sweep fees. In addition, the effective yield on these deposits is at the higher end of the industry range, providing us with strong relative performance.

Transactions and other fees increased 11.7% year over year to $78 million for the quarter, reflecting growth in our advisors and in new client accounts. These revenues increased 14.1% on a sequential basis, primarily due to $6 million of revenues related to our annual conference.

The payout ratio for the quarter was 87%, which is 40 basis points higher than the year-ago period and 70 basis points greater on a sequential basis. This is driven by a combination of change in product mix and strong advisor growth leading to higher production bonus expense. We anticipate the payout ratio will moderate in the fourth quarter.

Turning to non-production-based expenses, the third quarter is seasonally highlighted by an increase in promotion expense driven by our annual national conference, which took place this year in Chicago with over 4,000 advisors and industry participants in attendance. This conference is responsible for the vast majority of the $14 million in incremental expense on a sequential basis.

Consistent with the first two quarters of this year, I want to reiterate that a portion of our expense growth is attributable to the reduced spending levels we maintained in the first three quarters 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. We are well positioned for current conditions and retain the ability to actively manage our expenses as changing conditions may warrant.

Compensation and benefit expenses increased 3.6% over the prior year, driven by higher staffing levels to support growth in existing and new advisors' businesses. Our positive performance also leads to higher baseline accruals for our discretionary bonus pool and 401(k) match. Since the second quarter, compensation and benefit expenses declined 5% due to a decline in the use of temporary professional services and payroll benefits.

Other G&A has increased 4.8% year over year, in large part due to our success in attracting new advisors to our platform. Compared to the second quarter, other G&A increased 23.4%, driven primarily by the timing of our advisor conference and increased business development.

Due to deteriorating market conditions, declining Fed funds rate, restoration of expenses and increasing transition assistance, our adjusted EBITDA margin expansion was moderated this quarter. Adjusted EBITDA was 12.6% of net revenue and 43.1% of gross margin, which is calculated as net revenues less production expenses. Over the long term we maintain the firm's ability to generate on average 30 to 50 basis points in margin expansion annually.

Third quarter capital expenditures were $11.8 million and we are maintaining our $50 million full-year target. Investing in our core business operations remains our number one use of cash.

We are on track to consolidate UVEST onto our self-clearing platform by December of this year. This quarter we successfully converted 52 institutions, representing 141 advisors and $36.6 million in production, incurring $7.7 million in restructuring charges. We continue to expect this restructuring will improve pre-tax profitability by approximately $10 million to $12 million per year through operational efficiencies and revenue opportunities.

During the quarter we repurchased 300,000 shares under our open-market share repurchase program for a total of $9 million, or an average price of $28.11 per share. As of October 1, 2011 we have used 12.8% of the $70 million authorized under this program. Our fully-diluted shares outstanding as of quarter end were 111.2 million shares. Our goal continues to be to offset the dilution from future stock option plans and the release of our deferred compensation plan so that we end 2012 with our fully-diluted share count flat from where we emerged from the IPO at approximately 113 million shares.

We experienced positive trends in our interest expense, which declined by $3 million compared to last year. At the end of the third quarter, our leverage ratio was 1.87 times and we would expect it to continue to decline through 2011 due to adjusted EBITDA growth.

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. Bonita, would you please open up the call?

Thank you. (Operator Instructions.) Ken Worthington, JPMorgan.

Hi. Good morning. First, in terms of your conference, is 4,000 attendees good? That sounds like a pretty good number. And can you talk about any key themes or takeaways from this year's gathering?

Hi, Ken, it's Mark. The number's pretty typical for us in terms of a national conference. Remember that we do about 500 other conferences that are much, much smaller, anywhere from gatherings of 20 advisors to several hundred and a variety of different programs to help them share ideas and to be taught about different ways of doing business.

In terms of attitude and environment there, you'll remember that that was sort of the beginning of a pretty significant market downdraft that occurred. So, it was nice to be together during that moment. Advisors obviously had calls in to clients and were being very proactive and reactive to their client concerns, such that they were.

I think we were struck by two things. One was that there weren't nearly as many client concerns as one might have thought given 2009 and previous history. And advisor after advisors I know told both Robert and I that they felt that their clients had seen that there were downdrafts before fairly recently and that the market had climbed back. And in fact, many advisors were hearing from their clients and were advocating to their clients to buy on the weakness, which was a good sign. And I'd say the group was really very focused on continued growth of their business.

I think that's the important point for us in this quarter that I think is helpful to analysts and to owners of the shares, which is the business model is really quite different than models that you'd have at other firms where it's direct to the consumer. Here, you have a professional who's really talking about the long term, really talking about the way to think about long-term wealth creation. And it's a very different outcome for the client, and thus for our business. It's much more consistent results and much less emotion, if you will, in terms of day-to-day activities in the market. And that's what we saw at the national.

Okay. And in terms of the customer reaction to market conditions, do you see a difference between your high-end customers and your low-end customers in terms of taking advice, net new sales activity. You mentioned, like, buying on dips. Do you see any sort of bifurcation there or, generally speaking, does everybody react essentially the same?

Yes, it's a great question. We don't see what I would call a cohort-type action, except in one way, which is that advisors who use more of our capabilities grow twice as fast as those who use fewer. So, if we cohort based on number of services purchased -- because remember, we're an integrated platform so everything's there for you to use. But because we're kind of like a supermarket, one has to decide to choose this product versus that product. And here, we're talking about software or services that we offer. Advisors who use six or more services from LPL basically grow at twice the rate versus those who use two or fewer services at LPL. So in that regard, there is a difference in the cohorts in terms of how much they use the integrated platform.

Okay, great. And then the last question from me. Does it take more -- like, given all the volatility, does it take more time to bring on new advisors when volatility increases? It didn't seem to slow you down this quarter, but maybe the volatility in 3Q, does that slow down advisor growth in 4Q?

Not that we've seen so far. It -- you've got to always look at what the bigger tailwinds are, or headwinds depending on the case. And the bigger tailwinds right now are that the wirehouse retention packages that went in in mid-ish 2009 are starting to wear down. You've also got pretty significant changes occurring in management at a number of wirehouses, as we know.

We also have another -- independent firms that are having some pretty serious financial issues or have had transaction activity and that tends to stir up the pot. And that's a tailwind that advances advisors deciding to make a change or consider a change. Therefore, the marketing pipelines are heavier now then they were a year ago and that's why you saw a good flow of advisors in Q3 and we feel good about Q4.

The way I would think about it is that what it will do is, at the margin, somebody -- let's say we had a bad few weeks near a quarter end -- this is why quarterly reporting is, of course, never a CEO's favorite, is you can have people who will just push back for a couple of weeks if they need to spend a little more time with clients, if there's a particular downdraft in the market. We've seen that. We didn't see it this quarter. I think we saw it, if I remember right, Robert, maybe in the first or second quarter of this year where a large group pushed into the next quarter. That's why quarterly numbers in this regard aren't that helpful and why we continue to guide towards net new 400 per year, the per year part being the part to emphasize.

Great. Thank you very much.

Thank you, Ken.

Devin Ryan, Sandler O'Neill.

Hi, guys.

Good morning, Devin.

Good morning, Devin.

Just as a follow-up on the recruiting comments you just made, just given how turbulent markets have been, do you guys see any change or are you expecting any change from competitors in terms of what they're willing to pay for financial advisors, or how should we think about that, I guess, if these volatile markets continue?

Yes, a good question. I mean, I don't -- we personally don't think the volatile markets will continue. Our research group feels that we'll still have a year-end rally and we're starting to see the beginnings of that already. So, our backdrop's a little different than that backdrop. But if you add volatility to it, I don't know that you'll see any different behavior in fourth quarter than what we've seen all year long, which is that you are in a part of the cycle where, generally, businesses are doing better and that competitors are generally being more aggressive about the transition assistance that they use. And we're responding to that appropriately to still get good returns for shareholders and moving advisors.

But, I don't think we'll see necessarily more than what we've already seen. That's not typically our experience. What you usually see is somebody enters the market and decides to just kind of have the blue light special of transition assistance. And then they exit sometimes six months later, sometimes a year later, when someone wakes up and realizes that's a bad economic deal. And so, I don't see any of that particularly happening in the near term.

Okay, great. That's helpful. And then just on the acquisition outlook as well. It sounds like you guys are still looking to be opportunistic. But, do you expect that there could be more opportunities going forward again with these markets, or how challenging things maybe have been to date? And are you expecting some additional shakeout that may make waiting maybe the better move than looking to do a deal right here?

Yes. It's a great question. I mean, I think there's a couple of things to think about. One is we've had a belief that we've talked about since the roadshow, and still fervently believe, that good properties come on a little later, post the cycle mix-up. So meaning that, frankly, properties in real distress came on the market first. Those have kind of come onto the market and passed through. Then, the kind of near-term, near train wreck properties come on. Those have now come on and are -- there's a few that we still see coming on the market. And then, the really interesting ones come along. And I think we're just about to enter that phase, assuming our backdrop of not so much volatility in the market as those businesses that are really nice businesses recover. And people want to see their earnings recover so they can get a better price.

And so, I think we're on the verge of seeing some interesting things happen in the next 12 to 18 months. Now, that's -- hope is not a plan, as I always like to say, but that's my belief. Having watched the cycles in this company for 10 years, that's kind of typically how they go and I think we're starting to see the emergence of that.

We feel good about the pipeline for M&A, but obviously don't comment on specific properties or the size of that pipeline. But we still feel we can do a good job with shareholders' cash and investing organically in the business, investing in acquisitions selectively and intelligently for the Company as well, and the episodic share buybacks that we've been doing appropriately as we go along.

Okay. Great color. And then just lastly, a cleanup thing here. On the 5% decline in the comp expense from last quarter, it sounded like there were some lower temporary staffing levels. But, is there any structural going on there where maybe some of that sequential decline could be sustainable, or is that just primarily a seasonal item?

It was predominantly a timing item. There's really nothing that I would overly accentuate in terms of reading into that. Likely, that will rebound.

Got it. Okay. Thank you.

Thank you.

Thomas Allen, Morgan Stanley.

Hey, guys. Good morning. So, it seems like you added 160 advisors this quarter, backing out the UVEST, and so I was somewhat surprised you got to 400 on an annualize basis. Is there probably upside to that number in the next 12 to 18 months? And then, just so that we're not confused, should there be some noise next quarter from UVEST? Also, can you give us some guidance so people aren't surprised by that. Thanks.

Yes. Well, let's start with the second half of your question, because I'm not going to answer the first half of your question. The second half here -- I'm just teasing -- is that we're -- we don't give forward guidance on numbers. We have guided since the IPO of net new 400 per year and we feel very confident with that. I think many a person has told us that our history is net 500 per year. We'll let you figure out the math from there.

But, I do think your -- the second half of your question is quite important and we appreciate your asking it because we'd love to highlight to the callers and to our shareholders that we will experience approximately 100 advisors leaving the firm as a result of the movement of the UVEST broker-dealer into the LPL broker-dealer, moving from using someone else's clearing platform to our self-clearing model.

It's an excellent economic transaction. Those 100 advisors have relatively lower production than our average on the platform at LPL, number one. And number two, we'll obviously do all this work on the basis of being able to create about $10 million to $12 million of incremental EBITDA as a result of moving UVEST onto our platform. So, it's a great transaction and activity for shareholders.

The other thing maybe, Robert, you want to highlight is the cost of that.

Yes.

It's a little different than what we had talked to folks about.

Right. So, Tom, as we had originally talked about a $52 million restructuring expense attached, cash expense attached to the UVEST restructuring, we -- as we now have gotten into the detail of this are really aware that that level is going to go down to $37 million, of which we've had $14 million already incurred. And likely in the fourth quarter we will have an additional $15 million of restructuring cost incurred during the fourth quarter. So, we wanted to make sure people had the latest insight on how that is really turning out. And as Mark said, our estimations around the net pickup on pre-tax income remains the same. So, the overall benefit of the return has continued to improve.

Great, thanks. And I think you've -- you guys have guided to about 20% earnings growth over the long term. And with interest rate upside or significant interest rate upside probably further out, and then you obviously have the market headwinds this quarter, are there other things you can do to kind of -- to drive earnings growth through maybe share buybacks? But I know your float's pretty limited. Maybe some more cost containment. Anything there? Thanks.

Yes, a great question, but I'd just point out that we are overachieving on the 20% EPS growth, which is what we've talked about since the IPO approximately a year ago. This quarter is indicative of that EPS growth being quite good. And we have had headwinds, significant headwinds in terms of where interest rates are.

On a percentage basis, rates on average are down about 30%. Now, these are still small numbers, but they're small numbers against a big block of bank deposits and money market funds. So, we talked about that in the press release. Robert mentioned that in his remarks.

So, I'd completely agree with the premise that we have headwinds that will eventually, you tell me when, a couple years, start to turn into significant tailwinds. But, our 20% is premised on the organic operations of this business in terms of same-store sales, addition of new advisors and continued productivity gains, absolutely, in terms of margin improvement over, again, measured in years, not in quarters.

So, we feel quite good about our performance thus far as a public company and feel that we can continue to guide you towards that 20% EPS growth rate on a going-forward basis, without the tailwinds of interest rates moving forward. And without the tailwinds of acquisitions. We don't have to do those, either, in terms of our business being significant.

Alright, great. Thank you very much.

Thank you.

Joel Jeffrey, Keefe, Bruyette & Woods.

Yes. Hey, can you talk just a little bit about what it is you see or what it is that's driving the growth in your hybrid RIA business? What exactly is it that's sort of a unique product offering?

Well, that's a great question because I love to answer that question, particularly to people who are thinking about using us. And the most important fact of all is that we make life easier for the RIA. They come to us with a mixture of brokerage business and advisory business under their own registered investment advisor. And what we're able to do is completely integrate their operations, their statementing, their information they have to give to clients.

There's no other custodian, there's no other broker-dealer in America that can do that for that practice. That's why we're winning business. That's why we've really overnight have become the fifth largest custodian in the country. And our sales ranking's number four. So, we feel very good about continued market share growth and continued success in growing our Hybrid RIA offering.

Okay, great. And then, I don't -- I apologize if I missed this earlier, but in terms of the transition assistance expense this quarter, how much was that and is that any different from what you've seen in prior quarters?

We don't separately disclose the transition assistance number. And it's not inconsistent, given the level of advisors that joined us during the quarter, to what we've been talking about over the prior two quarters. So, it is up a bit year on year and certainly higher than it was a couple of years ago, but that's -- as Mark said, that's really consistent with the cycle.

It's a range between about 7% of recruited revenues or GDC to as much as 20% and it absolutely matches the cycles. '09 was a 7% year because you had advisors streaming out of the wirehouses looking for a home and we were happy to accept them at very low transition assistance cost. And their sale cycles were very shortened, measured in weeks, not in months as they typically are.

And then, as the economy approves and as their -- our competitors do what they do, you tend to see it rise and that's what it's doing now, but it's not abnormally so. And it also reflects a little bit of mix shift. When you have larger practices come in they tend to attract more competition, as you'd expect. And so, therefore, your mix shift of having a little bit bigger practices come in or success in the Hybrid RIA world will tend to also mix shift us when it comes to transition assistance.

So, that's all a healthy sign. As a shareholder, I always say to myself I want to see more about that spending because it's an incredible economic return; usually measures less than a year payback for us as shareholders.

Okay, great. And then just lastly, in terms of the new advisors you brought on board, are they pretty much comparable to your average FA or is there any difference between that?

No, the average FA being recruited is higher, significantly so, than the average FA who's here. We love the FAs who are here, so all those who are listening please note that we enjoy your business and thank you for it.

But remember that our FAs come from a very wide variety of practices. So, you can have FAs who are inside of banks or credit unions where average production's a little bit lower because of the nature of the business that they're doing, a lot of fixed annuities underwritten there and so forth. And you have a business that, remember, has been in practice for 50 years. So, you have advisors who are working in very small towns across America where, if you do $150,000 a year, you will live like a king or queen and have a wonderful life doing good things for your community, but your average production is going to be lower than what's here.

So, a little bit, because of our history, we have a lower average production sitting here today. A little bit because of our geography. We're in small towns and cities across America. And because we've only recently shifted to what we would call a master's level recruit, that's about five years ago, and to the Hybrid RIA model, that's only three years ago, the new classes coming in are significantly higher. Measure, Robert, 50% higher average production?

Roughly.

Yes, roughly, than what's here today.

Great. Thanks for taking my questions.

Absolutely.

Chris Shutler, William Blair.

Hi, guys. Good morning. Can you talk for a minute about the recent asset flow trends that you've seen in your centrally managed fee-based platforms? And then, have you have seen any material changes in asset flows into those portfolios as a result of the -- I guess the recent market volatility? Thanks.

Yes, great question. We really haven't seen anything in the centrally rebalanced platforms that relate to the market volatility. That's not really the motivator for an advisor. There's really two motivators, and Robert will speak to the flows question.

Is -- the first motivator is advisors are changing their practices. I think that's important to understand, is they're seeing the advantage for their clients and for their own business of going to the advisory platform, generally. So, they're converting from commission-based business to advisory-based business. That's the first major trend.

That trend, as -- I've been here 10 years, has been in place for a decade now. But what's starting to accelerate is the speed at which advisors are wanting to use the advisory platform. There's 100 reasons why, but the big ones are that you basically have a regulatory environment that tends to foster that; that's a better place to do business. You have a customer base who wants to pay you an ongoing fee for advice and planning as opposed to a commissionable fee. So, you've got some changes in consumer behavior as well.

And then, the second reason why they're using centrally rebalanced platforms as opposed to the sort of do-it-yourself advisory platforms that we also have, is because they're much more efficient. It allows the practice to essentially outsource the mechanics of rebalancing an account. It also allows them to outsource the selection of managers and strategies, asset allocation.

And why that's important is that puts them in a position with their client of being the quarterback of their financial plan. And so, the discussion and dialog are about how much should you save, what are you goals, let's pick the right managers for you, but I'm not going to buy the specific securities that your portfolio needs because my role is purely to help you with your financial health.

So, we see that practice type changing pretty significantly in the last two or three years. So, that's -- those are the major trends why we see advisors going to central platforms.

The last one I'd add is one that we've done. It's kind of our work here, which is to try to take the cost of those down over the last several years through the application of technology, through the application of our buying power with the underlying suppliers, particularly in the investment management area. And our ability to really bring scale to that business makes them a very good economic activity, meaning low cost, for the end client, which makes it much easier for the advisor to charge the fees they need to charge to make a living and do what they need to do for their client. And so, it's a good economic decision as well.

I guess the thing I would add to that, Chris, is two things. One, in that lower-cost structure that Mark was alluding to, we introduced an ETF platform just over a year ago. It now has $1.9 billion of assets in it.

Speaking somewhat to your point about flows, flows across the centrally managed platforms have continued to be positive. We haven't seen any discernable shift in that flow rate, if you will. As you know, advisory in general is growing within our overall mix. And within advisory, our centrally managed platforms are growing at a more rapid rate than advisory overall.

So, we feel quite good about those flows. Again, I think it is fair to say it's not really affected very much at all by volatility levels. There are more fundamental drivers at work in terms of why those continue to experience positive inflows.

Okay, that's good color. Thanks, guys. And then just one more question. It looks like the yields on both the commissioned and advisory side of the business were down a little sequentially. Anything going on there that you'd call out in terms of mix shift or timing issues?

No, the pricing across those areas remain consistent. So again, there tends to be some impacts, if you will, about the timing of when fees are calculated versus when the actual mark-to-markets occur. But generally speaking, they're quite stable.

Okay. Thank you.

Thank you.

Daniel Harris, Goldman Sachs.

Hey. Good morning, guys.

Good morning.

Good morning, Daniel.

So, just about a year since the IPO. I was wondering if you could point to any differences that you've seen in recruiting as a public company versus when you were private, and any differences in the type of advisors that are more interested in joining you given your status as a public company.

Yes, good question. What we certainly have noticed is that it's just a bit easier to speak about the Company. We're very well known among the advisor community, so it's not that our awareness is up because we're public, but it does make their job a bit easier in moving their clients because we're public. And we have definitely heard that feedback. I think, Robert, you've been involved in meetings, sort of even end clients, in which the public offering has been helpful.

Yes. I think it enhances the transparency. This is one of the affects we knew and part of the decision to become a listed company, was the additional transparency and visibility that it gives at a time when people are wondering about your financial stability, exactly the trajectory of the Company. It brings that into greater focus in a more transparent way.

So, it's definitely assisted us. I think the combination of the hybrid platform as an offering and what that presents in the marketplace and the more sophisticated type of advisor we're seeing, there is some convergence between us being a listed company and having those capabilities come together. It's just a good combination.

Great. No, that's helpful. Mark, you mentioned that the DOL had extended the fiduciary standard review during the quarter and it seemed like you were a little bit more positive on the outcome sequentially versus last quarter. So, what are you guys doing to prepare for any changes that may come in either direction from what you guys are expecting right now?

Well, we've done extensive studies of our client base to understand what they're using today that would be affected by a variety of regulations. And then, to model out the way that we would see them transfer to other platforms. So, we know that one of the big changes would be that, generally a fair amount of brokerage business would move to the advisory platform. That's why we've said we actually think on a net basis we would be a bit ahead in terms of these changes, but we think they're bad policy. They take away choices for consumers. They will add more costs to consumers. There'll be consumers who aren't served.

So as a shareholder matter, I suppose we would be indifferent. But as a matter of good financial health for consumers, we're not at all indifferent and we think that the Department of Labor in particular needs to exit their ideas of overseeing the brokerage business for IRAs. And we've said that publically and we've said that to the DOL and we've said that to others because we feel that there's plenty of regulation from FINRA and the SEC in that area, and a long history of good disclosure and a long history of good outcomes for consumers. So, the record's quite clear that the structure that's there today is quite good.

We have said that the fiduciary standard is very helpful because we do believe that our advisors in particular and, in general, advisors that consumers want to do business with, already act in a fiduciary way. So, we don't see that having an effect to the business other than reinforcing its existing good tenets.

We have not gone yet to what I would describe as contingency plans. If the DOL were to put something in place, they would generally give you a year to two years to implement it, because of the nature of what they would be talking about would be pretty severe. We have had some discussions of what we would design. We would probably design some automated conversion programs and paperwork that would go with that so that we could make it feel like a transition does to us, where a new advisor's joining us to make their life easy and make the client's life easy for that kind of conversion. But, we've just had some beginning dialogues about how that would work, as much to understand it as anything else, but no planning beyond that.

Okay, Mark, that's great. And then just lastly here, maybe Robert -- so the cash sweep, obviously there's still continued pressure out there all over the curb, but the Fed funds rate has been pretty consistent here sequentially, just down a tick. Should we expect any change sort of on the yield that you're getting on your cash sweep fees going forward, especially as more assets keep piling in there?

A little bit. At the margin the blended rate does come down slightly but, with Fed funds, as you say, being relatively consistent, our overall yield will remain pretty constant as well. It's really nothing that I would flag to you as being material in any respect.

Okay, great. Thanks very much.

Thank you.

Thank you.

Ed Ditmire, Macquarie.

Good morning, guys.

Good morning.

Good morning.

I have a question on the RIA or advisory assets. Is LPL becoming a better platform for pure RIAs or is your RIA growth almost entirely tied to hybrid registered rep RIA-type advisors?

Yes, it's a good premise for the question. We really appeal to a hybrid advisor. Remember that our basic model is that we manage the complexity of a financial practice for a financial professional. That's kind of our mission statement to some degree, a statement of raison d'etra, if you will. And that, if we think about what we do for a living, a hybrid RIA has a lot of complexity in their model. They're doing maybe some historical commission business from which they're receiving trails they need to report on and aggregate and performance reporting. And then they have typically newer business they're writing as an RIA on an advisory platform that has a variety of complexities to it. And sometimes they do insurance activities as well. And so, it's that complexity in which we appeal. We do have a handful of pure RIAs, but that's not where the assets are coming from for us.

As a follow-up, do you believe it's important in the long term to become a good platform for pure RIAs in case there's an industry trend that sees pure RIAs seeing good growth?

Well, I don't think you'll see that trend. So, obviously, our -- to be clear, our premise is that complexity will exist in these businesses for a very long time because people's lives are complex, right? You think about your own. You have insurance needs, you have things that you can only buy through a securities broker in terms of products, and you have activities that are really best on an advisory platform. I don't see that changing for decades, no matter -- and I've sent a lot of time in Washington. I've looked at regulations a lot. We spend a lot of time on the business. I don't see that complexity changing much at all in terms of people's lives.

This country has a rather unusually structured regulatory structure, as you know, between insurance commissioners in every state, regulators at the federal level, two of them really on the security side, and then all the states that get involved there. And then, you have regulation that relates to RIAs that used to all be with the SEC. Now, it's bifurcated between the states and the SEC. That sounds like a lot of complexity to me over the long term.

Do we want to appeal to RIAs -- do pure RIA business? Well, there's really two different markets there. One market is really someone who's a money manager, not unlike what many of the folks on the call are, where what they're running is essentially $1 billion or $5 billion investment management shop. And what they're really getting in a pure RIA custody would be somewhat of what they could get from the custodian banks, so a State Street, a Northern Trust and others, and it's just a matter of price or services that are there.

I don't see us entering that business ever. That's a very tough business. It's a very different business than the one that we're in. So it, to my mind, is far away.

There is another part, though, of the pure RIA business that -- where somebody's running a couple hundred million dollars. It's really a retail practice, but probably started centered around investment management. Those practices are actually morphing our way. They are being asked by their clients to get into financial planning and other things. So, we actually see that part of the market coming to us rather than the other way around.

That's great color. Thank you.

Absolutely. We've spent a little time on these issues.

Bill Katz, Citigroup.

Good morning, Bill.

Good morning, Bill.

Good morning. Thank you for taking my questions. Just coming back to the production discussion a little bit, it sort of came in a little bit in the third quarter, and you have some of the volatility with the UVEST coming off and so forth. How do you reconcile sort of the production expectation against your commentary that people are still engaged versus the decline sequentially? Should we be thinking that the 34,000, 35,000 advisory production is sort of the -- a reasonable run rate until volatility lifts? I'm just trying to box in what you said about the production payout dropping a little bit into the fourth quarter.

Okay. Well, two separate questions there, I guess. In terms of just overall level of production, the decline was attributable somewhat to seasonality. I wouldn't attribute it just to market volatility or to lower asset valuations in the marketplace. We every year see in the third quarter a combination of our conference, as well as just the summer doldrums have some seasonal impact. So, I wouldn't read more into that than what we've already discussed.

In terms of the payout ratio, the point there is really that, because advisors started off the year so strongly, they were reaching their production bonus levels, their maximum production bonus levels earlier in the year. And so, you saw a shift to the left, if you want to think of it that way, in terms of that overall payout ratio reaching a higher level sooner. And so, our belief about the moderation level leveling effect of that payout ratio is born of essentially that knowledge, that many are already operating at their maximum level and therefore won't go any higher between now and the end of the year.

Yes, a tough one. And just a follow-up. Just -- and may have said this and I apologize. When you mentioned earlier about your sort of platform pipeline being pretty full, not the FA but platforms, what kind of platforms are you looking at? Is it just more scale in your existing businesses or are there some ancillary services that you're looking at as well?

Yes, so on the acquisition front?

Yes, sir.

Yes. It's -- well, we have a bit of a theme going with acquisitions. The last three have been adjacencies. We like adjacencies because they are nice add-ons to the business. Again, think about our theme around complexity. So, now imagine -- let's just take NRP as a good example of it. There's a business that, at its core, is really processing activities, right, something we do already, and reporting on those activities.

But, the nuance here is now we've added the complexity of having a 401(k) plan involved, which has a whole nother set of reporting requirements and activities that are associated with it. So, we've been able to move that adjacency through an acquisition and become a market leader through it, which is exactly the kind of acquisitions we like to do.

We now have the largest platform of independent consultants to the 401(k) industry at LPL. And we have like 16 to 20 professionals who are supporting those individuals with their unique needs for DC plans. So, we love that adjacency model, where we're able to bring our scale to a submarket, if you will, in financial planning.

We certainly would look for acquisitions and are -- and have looked at some but have turned them away, that would relate to just good old fashion scale, buying another broker-dealer and moving it onto our platform. But, those really have to -- they have to be the right product mix, they have to be the right compliance underwriting. We have to feel good about liabilities. Because there's no particular reason for us to do a scale-based acquisition now that we're the size that we are, so it really has to make great economic sense for all of us as shareholders.

Yes, a tough one. Thanks for taking my questions.

Absolutely.

Thank you, Bill.

(Operator Instructions.) Douglas Sipkin of Ticonderoga Securities.

Thank you and good morning, guys.

Good morning.

I had three questions. First is, just trying to understand the capital model for you guys. Just -- it would seem that given where interest rates are and what the cost is on your debt, that buying back the debt would economically seem to be the right priority. Obviously, that's not the case. Help me understand why it's not.

Well, we have a fantastic interest rate structure now given where the market is today, number one. Number two, under our covenants we can't buy back our own debt. And I don't think that's a great use of capital anyway, because we really are delevering naturally, which is the best use of capital, as in zero, and that what I'd rather do is grow earnings a lot and then, therefore, come down in terms of leverage. So remember, we were over seven times leveraged in 2005. We're now around --?

Under two.

Under two. Well, that's pretty good. I was going to say just over two. And that's really happened the natural way. We've only paid off about $100 million worth of debt over those five or six years. And if I'm a shareholder, and I happen to be one of the biggest ones, is that I'd rather use capital for organic growth and for acquisition of earnings through acquisitions of companies.

Well -- so, you can't -- I mean, you can't pay down the loans? Because I thought you guys did pay earlier in the year?

Yes, we could. You said buyback, which means --

Oh, that's -- I'm sorry. Yes, I apologize for that.

We can always --

I meant repay.

We can always repay. That's no problem. But, it's not a particularly good use of funds because our interest rate is very low on that debt. And it's always trying to maximize your capital structure to enhance returns for both the bond holders and for the equity holders. But, maybe Robert --

Well, the other thing I would just note is that delevering in a world where credit ratings still matter and having the credit rating agencies accelerate their upgrades of our debt, which is unlikely, there is very little incentive to delever faster than we already are.

We've received an upgrade, obviously, from Moody's recently. We feel good about that. But, I think we can all agree that the pace at which upgrades are occurring in this particular type of climate is more cautious than slow. And therefore, being able to then substitute debt, or whatever remaining debt we have, at more attractive levels, of course, won't really happen until those credit ratings are essentially in line with our overall financial structure and capital structure, which we're working diligently to make happen, but that takes time. And I really don't want to get too delevered in front of the rating agencies.

Gotcha. Okay, that's very helpful. Secondly, what percentage -- so I see like $96 billion of advisory assets at the end of the quarter and you guys had impressive flows. What percentage of the revenues that come off of that are trailing versus sort of an average? I'm just trying to gauge how much of an impact has already been felt in that fee-based revenue line from the market decline. Or -- I know you mentioned they said there will be a little bit more next quarter. I mean, is it based on beginning of period asset levels or is it a combination for -- depending upon the plan of the assets?

Yes. About 60% of it is reset at beginning of period; or end of prior period is maybe the better way to look at it. And then the remaining 40% is somewhat average through the remaining months of a quarter. So, that's how you'll see it flow through during the fourth quarter.

Gotcha. And does that apply to some of the commission revenues as well, like the 12B1 trials and things like that?

No, those are coincident.

Okay, gotcha. That's very helpful.

Those are essentially mark-to-market everyday.

Right.

Yes.

Gotcha.

So, when the markets -- so literally a daily mark-to-market on trails.

Yes.

Okay, perfect. So then I guess -- so, when I think about the commissions, it -- that seems to be reflective of sort of the environment now, whereas the fee-based stuff may -- there's probably another hit -- a little bit of a drag from the market carryover.

Yes. There's a little headwind that flows into the fourth quarter on advisory-based or asset-based fees.

Great, that's helpful. And then my final question. I'm just trying to gain -- understand -- I can appreciate the -- that the sweep is not a big percentage of the revenues. I'm trying to put parameters around how profitable that stuff is for you guys. I'm just trying to gauge -- because I know you guys talk about upside when rates rise eventually, so I'm just trying to gauge what is the margin on that.

Yes. We don't disclose individual line margins. So, the best indication for you is to use the already disclosed information on what happens when rates move. And I don't know --

Right. I mean, for every -- so, to give an idea of that, every basis point movement within zero to 25 basis points of Fed funds is $1.4 million pre-tax. And then, once you get above 25 basis points in Fed funds, it declines to $700,000 per basis point.

Gotcha. Okay. So, I'll just work off that guidance. And I was hoping maybe -- but if you don't provide it, that's not a bit deal. Okay, that's perfect. Thank you for taking all my questions. I appreciate it.

Absolutely.

Thank you.

Thank you.

And there are no further questions at this time. Are there any closing remarks?

Nope. Thanks, everyone, for listening.

And thank you for your participation in today's conference call. You may now disconnect.