LPL Financial Holdings Inc (LPLA) 2011 Q4 法說會逐字稿

Good day and welcome to LPL Investment Holdings fourth 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 follow at that time. (Operator Instructions) As a reminder this conference call is being recorded. I would now like to introduce the host of today's conference, Mr. Trap Kloman. Sir, please go ahead.

Thank you. Good morning and welcome to the LPL Financial fourth quarter earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide prospective on our performance during the 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 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 perceive. Underpinning these forward-looking statements are certain risks and uncertainties. We refer 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 thank you, everyone, for joining this afternoon's call. For the fourth quarter and full year of 2011, LPL Financial continued to perform well despite volatile markets and a challenging global economy. Against this backdrop I'm very pleased with the record levels of revenue and adjusted earnings we generated for the year. The cornerstone of our performance, as always, remains the commitment of our advisors to actively engage with our clients, providing guidance and reassurance through uncertain conditions. The example our advisors set is a constant reminder of our purpose as a company. While the fourth quarter marked the one-year anniversary of our initial public offering, then, as now, our singular focus remains on supporting our financial advisors and institutions as they serve the best interests of their clients. This steadfast dedication to our advisors and institutions is the fundamental driver behind our overall success in 2011.

Our 12% revenue growth for the year was primarily derived from high single-digit same-store sales growth from our seasoned advisors who are a significant driver of our long-term growth. Additionally, we continue to retain our existing advisors, resulting in production retention for 2011 exceeding 96%. Even as the market for new business remained highly competitive, we added 549 net new advisors for the year from all channels. This excludes the attrition of 146 advisors related to the previously-announced UVEST conversion.

Our business development success has been enhanced by tremendous growth on our RIA platform. Installed assets increased 68% to $22.7 billion. And a number of RIA firms grow to 146 compared to 114 firms in 2010. Looking forward, our advisor pipeline remains strong as LPL Financial remains the provider of choice for advisors seeking an enabling business partner to help them establish and grow their practices.

In order to maintain our leadership position we continue to invest in technology to help our advisors better serve their clients. Investments in our integrated platform enable our advisors to be more productive, attract new clients, and focus on what they do best -- building relationships. For example, we have enhanced the access to critical data and important client performance information provided through Portfolio Manager, our advisor reporting tool. We also invested in employee home office technology leading to greater operational efficiencies and savings. In 2011 we upgraded our suite of servers that support our integrated web-based technology and virtualized software to increase capacity and reduce energy needs. We also dramatically streamlined our relationships with third-party vendors by increasing the automation and efficiency of our procurement, sourcing and vendor management capabilities.

Other notable successes in 2011 include the full-scale launch of our service value commitment, which is built upon a methodology referred to as Lean. Employee-based teams are empowered to rationalize processes and gain efficiencies in our operation. The ultimate objective is to make continuous improvement a way of life for our employees and advisors. For 2011, we achieved productivity and efficiency goals in a number of areas within our organization. And we expect to realize incremental economic benefits in 2012 and beyond. In addition to enhancing productivity, we are pleased with the positive impact our service value commitment has had on increasing advisor satisfaction and raised in employee engagement. Our service value commitment is not a one-year program but a permanent part of our culture. And we look forward to expanding it into more areas in 2012.

In 2011 we effectively deployed our capital by closing two acquisitions, Natural Retirement Partners and Concord. In January of 2012, we announced our intent to acquire Fortigent, a leading provider of high net worth solutions and consulting services to RIAs, banks and trust companies. This acquisition accelerates LPL Financial's growing success in the RIA space by leveraging the strength of Fortigent's high net worth array solutions, including research, marketing and practice management tools. This acquisition will not have a material impact on 2012 performance but we are excited by its long-term growth potential. Similar to National Retirement Partners and Concord, this acquisition expands our customer base and represents a strong cultural fit with our independent and conflict-free business model. Strategically this positions LPL to more aggressively attract high net worth advisors. Fortigent will enable us to build upon our success to date, serving high net worth advisors as their client, as we already rank 26 in the country based upon the Barron's annual wealth manager survey.

All these successes in 2011 translated into record results with revenue of $3.5 billion and adjusted earnings of $219 million. We generated 27% adjusted earnings growth off of 12% revenue growth by leveraging our infrastructure, expense control and interest expense savings. Despite a very strong year we experienced softness in the fourth quarter, driven by ongoing market volatility and uncertainty in the global economy. As discussed on our third quarter earnings call, times of sustained volatility may lead to reduced advisor activity. At the end of the third quarter, we were already seeing cash balances increase, resulting from advisors and their clients pursuing a more cautious behavior. And this behavior persisted throughout the fourth quarter. As a result, same-store sales growth declined from a low double-digit rate experience in the first nine months of the year, and was flat for the fourth quarter.

Throughout the year we have spoken about our multiple revenue growth drivers. And that we are not solely reliant on new advisors joining LPL. The ability of our seasoned advisors to build their businesses is a fundamental driver behind our growth, as we reported double-digit same-store sales growth in revenue throughout the first nine months of 2011. The impact of the seasoned advisors has affirmed, and affects our results in quarters when same-store sales decelerate, which is evidenced by fourth quarter revenue growth of only 1%. We value contribution to revenue growth from new advisors, but ultimately we seek to position these new advisors for same, long-term success as they transition to seasoned advisors.

The decline in investment activity, combined with weak market levels impacting our asset-based revenue, resulted in a 6% decline in fourth quarter net revenue on a sequential basis. And a 1% increase in that revenue year-over-year. Despite these challenges, we saw opportunity for growth in new business development and chose to invest additional capital to attract new and larger practices to our platform. As we begin 2012, we are monitoring external trends closely and are focusing on those measures under our control such as continued expense management, and carefully investing in the growth of our business. We expect the market rally at the end of the fourth quarter will positively impact our advisory fee revenue to start the year.

Finally, I'm pleased to share that in January of 2012 we entered into a new agreement with a leading global insurance company providing brokerage, clearing and custody services to 4,000 of their advisors. This has been a mutually beneficial relationship for both companies, and we are excited to continue to grow our business together.

Our continued success is built upon our core assets, our advisors, and their relationships with their client, and the dedication and hard work of our employees. These fundamentals of our business are constant throughout all market cycles and economic environments, positioning us for growth as markets recover. The commitment of our employees to provide high flow of customer service is central to this effort. As a result, our Company continues to perform well, and the attractiveness of our business model is evident.

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. Our business model is built upon delivering long-term profitable performance, as evidenced by our history of sustained earnings growth for 11 consecutive years. And record revenue and adjusted earnings this past year. We benefit from diverse and recurring streams of revenue. And we have the ability to effectively manage our expenses. As a result, we firmly believe that our fundamental business drivers remain solidly intact. Adding instead the sustained market volatility that resulted in modest fourth quarter financial performance reflects how shifts in momentum can impact our top line.

For the full-year 2011 we achieved record net revenues of $3.5 billion, up 12% from 2010. Driven by commission revenue growing 8% to $1.8 billion. And strong advisory fee revenue increasing 19%, surpassing $1 billion for the very first time. Commission revenue benefit ted from 15% variable annuity growth. While mutual fund sales lagged with 3% growth. We believe this behavior reflects the more conservative approach investors are seeking to achieve with long-term investment objectives.

Advisory assets under management surpassed the $100 billion mark, driven by $10.8 billion in net new asset flows, representing an 11% run rate of growth excluding market impacts. This growth resulted in advisory fees expanding to 37% of total production revenues from 35% in 2010. Strong advisor productivity led to asset growth of 5% to $330 billion, despite choppy market conditions that resulted in the S&P 500 ending flat for the year. Asset-based fees grew 13% to $360 million in 2011 related to our asset growth and stronger markets in the first half of the year impacting record-keeping and sponsor fees. Asset based fees grew despite the interest rate headwind which affected our cash sweep programs, as the Fed funds rate average declined from 18 basis points in 2010 to 10 basis points in 2011. The decline in rate was partially offset by cash balances increasing to $22.4 billion in 2011 from $19.2 billion as of the prior year.

Looking ahead, we expect some moderation in our cash sweep spread as we actively seek to negotiate extensions on certain bank contracts to manage the potential impact of a protracted low-rate environment. Although our earnings are sensitive to interest rate movements, less than 5% of our total net revenue is derived from cash sweep fees. In addition, the effective yield on these deposits is at the high end of the industry range, providing us with strong relative performance. Transaction and other fees grew 7% to $292 million, reflecting the softness in brokerage mutual fund and equity activity in 2011. In addition, a significant portion of these fees are derived from account and advisor fees which grow primarily in line with overall advisor growth, and are less sensitive to advisor production and market volatility.

Other revenue increased 12% to $46 million. For the year we continued to generate strong recurring revenues which represented 63% of our total net revenue. These recurring revenues helped deliver net revenue growth of 1% to $828 million for the fourth quarter over the prior year, despite the volatile market and flat advisor productivity Mark discussed. Advisory fees grew 11% year-over-year to $251 million in the fourth quarter, benefitting from 12 months of strong net new advisory asset flows. This growth offset a 5% decline over the prior year in commission revenue to $404 million for the quarter due to declining mutual fund activity and flat variable annuity sales.

The cash balance ratio moderated slightly by the end of the fourth quarter due to market improvement at quarter end which raised market-sensitive asset levels. While it is too soon to provide color on how this trend will impact advisor productivity in 2012, it is important to note that this level remains well below the historical high of 10% we experienced in the first quarter of 2009. Equally important is the fact that our open architecture, conflict-free platform allows our advisors to put the needs of their clients first. And retain the relationship of underlying assets through changing economic conditions, 0allowing them to benefit when the markets normalize. For the year total production expense was $2.4 billion. The production payout ratio, which excludes brokerage, clearing and exchange fees, was 86.6%, in line with historical periods and up 30 basis points over 2010 due to increased advisor productivity for the year. The production payout ratio in 2010 excludes the $222 million of one-time share-based compensation charges recorded in the fourth quarter of 2010. As previously discussed, the production payout ratio resets in the first quarter of 2012 because our production bonus schedule is based on calendar year production. While the production payout ratio can fluctuate year-to-year based on advisor productivity, we periodically review our bonus tiers and expect to manage this ratio within historical ranges.

For the quarter, the production payout ratio was higher than anticipated, increasing sequentially by 100 basis points to 88%. This increase is primarily due to our advisor deferred compensation plan and the advisor stock option plan which are embedded within this expense. These expense levels are tied to the stock market and our share price, respectively, both of which rose in the fourth quarter relative to the third quarter. Excluding this impact, the production payout ratio would have only increased by approximately 40 basis points, which is in line with expectation.

From an operational perspective we continue to manage our expense base closely and leverage our existing infrastructure. As Mark discussed, we are very excited about our service value commitment initiatives. While we have already recognized improved operational efficiencies, it has had phenomenal impact on our financial performance in 2011. Compensation grew 4% to $322 million, primarily due to the increase in average head count which grew by 159 to 2,655 employees. For the quarter, compensation declined 7% to $79 million, primarily due to a $7 million payroll tax expense in 2010 related to the IPO.

General and administrative expense decreased by 2% for the year to $253 million, in large part due to one-time expenses incurred in 2010. On an adjusted non-GAAP basis, expenses increased by 12% year-over-year, primarily as a result of three factors. As Mark discussed, we saw an opportunity and chose to increase our investment in new business development. As previously disclosed, we fully restored and increased our technology investment over 2010 to enhance our competitiveness and advisor efficiency. Finally, we returned our expenditures on conferences and education for advisors to normalized levels. In all three instances we view these expenses as wise uses of capital, which position the Company for sustained, long-term growth.

Specifically in the fourth quarter general and administrative expense declined 26%, $58 million year-over-year. This is only partially related to one-time IPO-related expense in the fourth quarter of the prior year. But also due to a favorable litigation settlement we booked in the fourth quarter of 2011. This settlement reduced expense by $10 million in the quarter, but had substantially been excluded from our non-GAAP financial measures. In addition, our professional services fees declined primarily due to reduced legal fees and the completion of the integration of our affiliated entities in 2010.

Related to our continued success in new business development, transition of systems for the quarter was slightly down year-over-year, but increased notably over the third quarter of 2011. On a go-forward basis, we see our existing compensation and general and administrative expense structure as a good run rate to fuel future growth. This view requires factoring in the seasonality of our conferences, the cyclicality of new business development, and a level of increase related to new advisor and new account growth.

Adjusted EBITDA for the year grew 11% to $459 million. We are pleased with this growth considering the volatile market conditions that persisted through the second half of the year. In surveying the competitive landscape and focusing on the needs of our advisors, we elected to invest additional resources to position the Company for future growth, thus producing our short-term earnings. Over the long term we maintain the Firm's ability to generate on average 30 to 50 basis points in margin expansion annually. For the quarter, adjusted EBITDA grew just under 2% to $101 million relative to the prior year's quarter.

Turning to non-operational items, depreciation and amortization declined 15% to $73 million for 2011, primarily due to the run-off of amortization related to internally-developed software associated with our leveraged buyout in 2005. Interest expense declined 24% to $68 million year-over-year related to our debt refinancing in mid-2010, our $40 million debt repayment in the first quarter of 2011, and the maturity of several of our fixed-rate swaps. Our tax rate for 2011 was 39.7%, continuing to track in the historic range of approximately 40%. The results of our performance in 2011 is record adjusted earnings of $219 million, representing 27% growth over the prior year. Similarly, our adjusted earnings per share grew 27% year-over-year on a normalized basis using 2011 share count. For the quarter, adjusted earnings per share was $0.44, growing 5% over the fourth quarter of the prior year. On a normalized share count basis, adjusted earnings per share grew 10% over the same quarter of the prior year.

In 2011 we completed the consolidation of the UVEST broker-dealer onto our self-clearing platform. We anticipate this restructuring to improve ongoing pretax profitability by $10 million to $12 million. We continue to maintain a strong balance sheet and delivered solid cash flow performance. Cash and cash equivalents increased $301 million for the year to $721 million. Of this balance, approximately $500 million is available for corporate use, as the remainder is reserved for daily operating needs and regulatory capital requirements. This cash growth was driven by strong operating performance, reduced interest expense, and one-time factors related to the collection of $193 million in tax benefits that arose from our IPO.

As of December 31, 2011, we have used 13% of the $70 million authorized under the second share repurchase program. We did not repurchase any shares during the fourth quarter of 2011. Capital expenditures for the year increased 84% to $43 million. And we maintain our $50 million to $75 million range for annual capital expenditures over the long-term. This range includes our expectation to invest in new facilities in Boston and San Diego in the coming years, spending approximately $6 million in 2012, $18 million in 2013, and $16 million in 2014. We are excited by our expansion into these new facilities and believe we will gain enhanced efficiencies and employee engagement in the process.

Looking ahead to 2012, our top priority remains to invest in the organic growth of our business while actively managing our expense base. We will continue to seek opportunities 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 repayments based on our organic growth opportunities and overall market conditions. As always, we continue to manage the business to optimize long-term shareholder return. I believe we are well-positioned to achieve our long-term growth goals, and I am excited about the prospects leading into 2012.

And with that, we look forward to answering your questions. Carolina, would you please open up the call.

(Operator Instructions) Thomas Allen with Morgan Stanley.

In the past two quarters you've added 333 net new advisors, backing out the UVEST attrition. This is clearly much higher than your goal and historic trends. Three questions related to that. One, how much of the growth is driven from recently added expertise, like what you got from NRP? Two, how is the market for new advisors different now? And, three, I believe you said last quarter that your new advisors were much higher producers than legacy. Do you still expect the same three- to four-year ramp period that you've talked about in the past? Thank you.

Thank you. Let me take your last question first. Which is, can we characterize the class as being higher producers than our average in the base business. And the answer to that is yes. Now, partially that's because we do need to remember that our business has been around for over 40 years, so we have a lot of advisors that have been with us for a very long time. Operating in smaller markets and their average production is lower, as a result of that heritage business that we have. And we are seeing that, as you suggest, the work we're doing to enhance our platform and to provide new services, is definitely leading to a larger business coming to us. And that business can be characterized in two ways. One it is a larger practice, there are more advisors that work together to create the firm. And also that they're higher producers on average than our existing class. So that's your third question. And I think what is different now about the environment -- continuing in my theme of going backwards -- is that there is a different world in term of business development for these last two quarters. And we see the same thing going forward in that there are much more advisors in the pipeline than what we have seen over the last 18 months to 24 months. And that's, to my mind, the natural cycle where we went through a tremendous change in 2009 in which there was a fairly significant turnover in the industry. Followed by a couple of years in which that turnover became abnormally small. And now seems to be going back to its more regular level of turnover. So that's the difference in what's happened. And probably the reason why we can explain the last two quarters overperformance.

And then, finally, I really appreciate the question about what new things we have done to help enhance business development. And I think there is absolutely a connection to the things that we are doing. The Natural Retirement Partners is really the best example I can give you at the moment where we have now incorporated that business and their advisors into our system. And, importantly, their management team which is led by Bill Chetney, is running a setup with an LPL called LPL Retirement Partners. So LPL Retirement Partners is focused on making sure we have the technology and the expertise to service those advisors who focus solely on providing consulting services to 401(k) plans. We have excellent fiduciary records there. We have an ability for them to be a fiduciary to a plan, which many broker-dealers don't have. We have fantastic insurance coverage.

The down side of that decision, we have some real interesting rollover technologies as a result of the acquisition. That means that if you're a retirement-based advisor, you want to speak to us about joining LPL, and in fact it would be fair to characterize that Bill and his team recruited as many new advisors into LPL in 2011 as they had in their previous years at the company. So they are definitely one of the reasons why we're seeing more advisors come to us.

We certainly have seen more anecdotally, and we can't point yet to success for it, that the Fortigent acquisition in the independent advisor space has generated a lot of interest. And has been viewed as a very helpful acquisition -- that is pending -- for us to be doing to assist them with their high net worth clients. So I think those combination of factors are definitely causing our pipeline to increase, and, therefore, our success in bringing on new advisors.

Okay, thanks. And then just in terms of, we're early on in 2012, but the markets have obviously been pretty strong here to date. Have you seen your advisors pick up organic growth at all? And why did they hold back a little more in 4Q? Thank you.

I think we can characterize that we're seeing the dynamics, just as we're all experiencing it, in terms of markets going up. And we feel very positive about the beginning of this year as a result of markets improving, and consumers feeling more comfortable going back to their investment programs. And what I would describe the fourth quarter, how I would characterize it is that it was a needed respite for advisors who worked very hard all year long through the first three quarters, to work with their clients and prospects to put investment plans in place. And frankly, they needed a little bit of a rest, having worked really pretty flat-out for the first nine months of the year. Meaning that they had nice sales growth each month. And the fourth quarter it is unusual for us to see them go two or three months in which they're increasing sales and then have a little bit of a slowdown, and then you see another two or three months. Last year the first nine months were consistently high, which is a little different than what we've experienced before.

So the fourth quarter for them, I can see why they probably had a little bit of a need to take a breather. And importantly, I think their clients had a need to take a breather. And it's what I sometimes call the Brian Williams effect. When your customers sees Brian Williams talk about what is happening in Europe, and he seems concerned, you get concerned. And that concerns is shared with your advisor who then collects the savings that you have, but really isn't able to invest it because you don't feel comfortable making that investment decision. So there is that slowdown in consumer behavior. That really readily changes as problems clear. And I think we've seen that happen in Europe as recently as today. But more positively over the last month or so. So, again, feel much more comfortable as we enter the new year.

Okay. Thanks. I'll get back in the queue.

Chris Harris with Wells Fargo Securities.

I just want to follow up a little bit on the addition of advisors here. Obviously, a lot of positive commentary. You guys continue to experience strong growth. Just curious to get your perspective. For advisors that really don't choose LPL or really don't want to break away, what is the objection you guys are hearing? And how can LPL overcome that as you outline your growth plans for the next couple of years?

We always say our number one competitor is inertia. Many a firm does a very nice job of taking care of their advisors, and particularly those who are higher producers. Which is the nature of the classes that we have now. And so you really can't convince someone to move when they're not ready to move. What we try to do is make sure they understand who we are, what we have on offer. And if they're not ready to move in the month of December, that we're here if they look at it again in a year or two years or five years time. It's not unusual for us with very large and complex practices, to describe the sales process as multiple years, where you're spending, three, four, five years getting to know a practice, them getting to know you. And then something causes them to move. That's really what we see as our number one issue, is just the inertia effect that comes with the nature of the business and the nature of moving that business.

I think, other than that, what you see are the normal range of reasons why someone chooses to go somewhere else. And that's so varied that there isn't a characteristic that I can point to as one dominant one. We do study it very closely. We do, after the sale interviews for those who choose not to join LPL, that have gone somewhere else. And we do that a bit with people who choose to stay where they are, although not as much there. And we try to understand what value propositions are out there.

The biggest factor that I would point to, just to add one other light to your question, is there still is a lot of money chasing advisors. Meaning that you have some firms that are out doing abnormally large transition packages. We all know that it is not unusual for one employee model to offer 300 to 400 times their revenues to move them from another employee model. And that has happened a bit among the custodians, it continues to happen a bit among the employment models. That isn't an area we're going to compete because that is an outsized business development cost versus the economics involved.

And, Chris, the only thing I would add to that, and I know it may go without saying, but not every advisor who wishes to join LPL actually does. One of the key is the underwriting process essentially that we have and the risk management assessment that we do for every advisor that joins LPL. So there is a confluence, both an attracting but also our own filtering around those who ultimately end up joining.

Thanks for the color there. And then just real quick, a follow-up. I know you guys increased your fees effective in January. I know it was a very small increase. But just curious whether you have been getting any negative feedback from that fee increase, what are you hearing from your advisors. And also whether you think you have pricing power in this business.

I think it's awfully hard to decide if you have pricing power. I think that's a very difficult decision to believe that you have. I think what is important is that we have a partnership with our customers. And that they understand, and, therefore, we got very normal and very reasonable feedback about our fee increase. That we have fixed costs that go up, just as they have fixed costs that go up. Like our health insurance premiums continue to rise. And while we try to work on that very hard from a cost containment standpoint, they still do. And so, therefore, our fixed fees that cover those fixed costs, are the ones that we do need to raise. And that is what we raised -- roughly $1,000 per advisor.

So I'd say that we heard probably a little less than we thought we might in terms of concern. We certainly saw no evidence of advisors leaving us as a result of that fee increase. In fact, we saw some evidence of advisors on more open forums and websites defending the fact that this is a fixed cost increase on some fees that haven't occurred in over 10 years. So I think there is a very good understanding and good relationship with our advisors.

I think the other, I would characterize, our commitment creed is a strong statement written by our founder many years ago back in 1989. And one of the advisors even quoted in a note to me, the last line of that, which is it is our job at LPL to do this business profitably. They want us to be healthy and we want them to be healthy, because we're partners in bring unbiased advice to Americans. And so it is important for both of us to be healthy in that relationship.

Thank you, guys.

Ed Ditmire with Macquarie.

I just have an observation and then I wanted to ask you. It looks like we're seeing reasonably good success both in gathering advisors and growing the book of business in terms of total advisory and brokerage assets. But the 4Q did see some dips. And I think the yield on those assets, in particular in the commission-based assets in terms of how much money was generated off that. And then I think in some of the attach revenues, aside from the cash products, that there might have been lower revenues in things like transaction revenues. And I wanted to get the sense if there's been any real change or if these kind of things just reflect what was particularly low engagement across the industry. And something that is likely to bounce back and allow revenues to more closely track the progress in terms of growth in advisors and client assets in the quarters to come?

Yes, I think the way to best characterize this, this is a business that is very tough to deal with quarterly. It just doesn't particularly model well quarterly. Not because it is not a great business but because it is awfully tough to be precise when you're talking about two-minute interaction, both at the advisor to the end client standpoint, and the advisor with LPL. As we look at it, you're absolutely right to characterize it as just normal mix-shift that occurs. Robert can speak a bit more to the details. But that's very normal, and within a quarter wouldn't a trend make from there. And I think one thing that is important to remember is that we have set up our payout ratios and grid in a way to try to take into account mix-shift and differences in product profitability to try to account for that over time. But by quarter wouldn't be something that we would be particularly concerned about. And we don't see anything in product trend that is particularly rough, either.

Ed, I would just add that we do see some variability in these metrics over time. So if you take advisory, the yield, as you referred to it, it fell by about 3 basis points from 28 to 25 basis points. I would characterize that as two of the three months were down pretty hard in the midst of the quarter, with only one month having the lift, and that would have been December right at the very end. So some of that is just the trail effect that you get having priced, essentially established your revenue stream at the end of the third quarter and then progressing through the course of the fourth quarter. And similarly on brokerage assets, the diminished activity level as a mix-shift that we experienced in the fourth quarter, we saw a very modest 2 basis-point reduction on that. And seeing that kind of variability, at least based on the data I've been looking at, it is not uncommon at all. So I don't think there is any kind of systematic or structural shift going on in the way we would assume the yield levels on assets to perform going forward.

Great. And can I ask a follow-up question, Robert? I think in your prepared commentary you had talked about the work you were putting into extending or renewing arrangements around the cash management products going forward. Could you please maybe repeat what you said?

Sure. Let me grab the prepared remarks. I know it was early on. The essence of it is that essentially, with an understanding of a low-interest rate environment, we are engaging in activities to look at certain contracts, bank contracts, for extension purposes beyond the current maturity date of those contracts, in recognition of what we all now know being, in all likelihood, a sustained low-rate environment. And the cash products program, and particularly the insured cash accounts within that, has been an extremely well-constructed program. It is diversified. It has a myriad of relationships that are built within it. And an above average yield that we have experienced over time. And so, as a management team, we are involved in analyzing, understanding and going to market on a proactive basis with how to mitigate, to the extent we can, the reductions in rates that could occur at the conclusion of these contracts if we just left them to expire without any proactive approach to that negotiation.

I would hasten to add that these balances are highly predictable. They are highly valuable to our counterparties. And as such, that has been the essence of the value that we have been able to create on behalf of our end clients as well as the Company in establishing these relationships and the yields and the tenor of those contracts as a result of that. So it's just me signaling to all of you the obvious about the kind of interest rate headwinds that we have, and the way we are preparing to manage through that.

Are you saying that you believe that we'll be able to keep into the same neighborhood of yield on client cash that we have been seeing in the last few quarters?

It is me suggesting that we are taking up every effort to ensure we maximize the value of that program. So it's too early to tell, and I'm not as good as Mr. Bernanke in establishing where Fed funds rates are going to be to really authoritatively describe that. Because, again, even the Fed doesn't have perfect information. There is a scenario where rates rise before 2014 on their own. So I really don't want to make any definitive claims about it as much as we view the program as very valued and valuable. And therefore, we will manage it accordingly.

Thank you.

(Operator Instructions) Daniel Harris with Goldman-Sachs.

If we think about at the Fortigent acquisition that you guys noted about a month or so ago here, and it really gets you more into the high net worth business in terms of servicing them, how does that play into your ability to attract a higher quality RIA? And then also, I think, as part of some of the new stories I read, that it seems like it is going to be beneficial to your overall ability to attract more advisors. So have you seen any inbound calls post that announcement saying that this was something they were looking for, and this is going to help the recruiting pipeline even more?

We absolutely have seen inbound calls, both for prospects to join us as a result of it, and heavily from our customers. Our advisors today are very interested in learning more, and some of whom have looked at the Fortigent capabilities are excited to use them. So we feel very good, it's come out of the very strong at the announcement, as you're suggesting. I would remind you that we're the 26th largest manager of high net worth households in America, which I'm most am proud to say on behalf of our advisors. Because I don't think people would suspect that to be true of LPL.

Certainly the vast majority of the end clients of our advisors and the institutions we serve are mass affluent Americans, or middle income Americans. But we do have a very sizeable number of advisors who focus on high net worth clients or who have a few high net worth clients in the middle of a broader practice. It's also a really good way for us to help them be even more competitive with their clients and with their prospects, as well. So I think it helps us. If you look at our RIA track record specifically, which is where you started your question, you will see that our average practice is at the very highest in the industry in terms of size. Now, some of that's because our competitors, who have been in the business longer, you will have a much more diversified business. I don't want to overstate the situation, but I do think it is important to note that we're attracting very sizeable RIA practices already who have this characteristic of being hybrids, that do both brokerage business and they have their advisory business under their own RIA. So it has really been a very good area for us to enter and a business for us to support.

Thank you.

Ken Worthington with JPMorgan.

Most of my questions were asked and answered, but one on the regulatory front. We're hearing more talk about the 401(k) business and changes to fee disclosure. What do enhanced fee disclosures do to the Retirement Partners business? It would seem like maybe activity levels increase as there is a lot of repositioning. So it seems like it could -- it's been very positively for you but maybe it's not a positive in the profitability of the business changes if the fee rates in the plan changes. So any guidance there on what, if anything, regulations mean to that business for you?

We think transparency and openness, objectivity if you will, are important in any business that we support. So we like the idea that the DOL has promulgated here, which is transparency of information to consumers. Do we think that might drive down prices a bit? Yes. So I don't want to take away the risk that comes with that. But I think what is important to understand is, from our strategic standpoint, we view that as that means that what we need to make sure is create the perfect environment for an advisor who focuses on consulting to 401(k) plans to do their business. And therefore have an ability for them to be a fiduciary. Have the ability for them to have the tools to deal with employee education need. Have the tools to deal with rollover in order to build a good long-term business. So, in other words, when you have some of that pressure and some of that disjointedness that occurs in a market because of new regulation, you have to choose either go-forward very strongly and invest in it, and then get scale which is the choice we've made. Or to back away. And we think that we're already seeing our competitors back away from the space, which means that that gives us more opportunity to bring on retirement-focus practices. And we have the leading number of retirement-focus consultants in the business, as measured by Plan Sponsor Magazine. That's one I'm sure you pick up every month. If you look at their top 100, we have something under 50. It is around 40 or 45 of the advisors on their list already here. Which gives us plenty of opportunity to grow but lets people we're in that business, that we're in the right place for them to grow that practice.

Great. Thank you very much.

Devin Ryan with Sandler O'Neill.

Just one question on your acquisition strategy, maybe a follow up on Dan's. But the most recent couple of acquisitions, Fortigent and Concord, have both been more on the technology and financial solutions size versus your traditional advisory firm with advisors. I wanted to get your thought process on those deals. Is that more a function of where valuations are for the financial advisory firms? Or the quality of the brokerages currently available? Or is it just more of a reflection of being opportunistic given your current needs?

I think opportunistic is probably the best way to characterize it. We're on scale. We've really achieved scale over the last several years. We tested it in the '08 and '09 period and came through that with flying colors, both financially for shareholders and in supporting our customers, the advisors, and creating a great place for employees to work. So we feel we've achieved scale, so we want to be very selective about acquisitions that would give us additional scale, which would be other broker-dealers. There's a lot of work that goes into integrating them, and our model is to integrate. And then also, it's a little different model than you see other acquirers out there using. They're believing that they've got an ability to bring together a pool of advisors, leaving them open as they stand. You cannot get scale that way. And it makes it very difficult to run an efficient operation as a result.

Because we're self-clearing, and because we believe in scale, and we have it, we're going to be selective about how we use shareholders' money to acquire scale. You can tell from the results of this quarter and for the entire year that organic growth has nicely picked up, that the pipeline is growing. And therefore that is a great place for us to deploy capital and grow organically in our core business of bringing new institution and new advisors into the business. And we'll continue to do that. So these acquisitions, I think it is fair to characterize them as you have. Which is they're technology or contact expertise to allow us to move into adjacent spaces on our business. Concord, for example, helps us move to serve trust companies, which our banking clients were asking us to do. And we're already in new business development work with a number of existing LPL clients to expand into their trust department. And we're also in many RFPs now for banking institutions that want to talk to us about both brokerage and trust services. So we're feeling very good about those technological acquisitions.

Thank you.

Xiaowei Hargrove, William Blair & Company.

I have a question on behalf of Chris Shutler. I just wanted to get your thoughts on the new money market regulation that is being discussed by the SEC.

I think we discussed, it's the most important. I don't want us to jump to the conclusion that Journal has, yet. We have not seen the official view of what they're going to do. My understanding is that they're looking at perhaps three ways to go about dealing with their concerns over money fund viability. All of which individually are interesting ideas and helpful to the cause in terms of having consumers and institutions feel that money funds are a viable place for them to keep their capital. So we encourage the SEC and feel good about the work they're doing to view it. We would prefer the capital buffer choice, because we think that's the one that, to us, makes the most sense. Where the money fund, you build a capital buffer. Or there is an industry association. The ICI, for example, has suggested sponsoring one that would create capital for the entire industry. And I think that's a very reasonable way to go there.

It does take time for it to build. You can't just turn it on overnight. You would have to build it over a number of years. And I think that, as I understand it, that's the SEC's concern, is will it be fast enough. I think in a world where Europe becomes less of a concern, and it seems as if everyday we're getting closer to that idea, I think it might be wise for the industry to really think about the capital buffer as the preferred choice. But in any case, I think the other way I'd characterize it for shareholders is that even if something were to happen that was unexpected, and money funds were no longer viable, it is less than 10% -- I think it is around 7%, Robert?

Correct.

That is of our cash earning stream. So it would not be material for us if something happened there. But we certainly think it is important for the industry that money funds remain a viable choice for consumers.

There will be an extended comment period once the proposal is released. I think we will all collectively have time to participate in the process, as well as understand the implementation period, if there is to be one, et cetera. So this is a topic that we can monitor and continue to revisit with you.

Great. Thank you.

Bill Katz with Citigroup.

Just coming back to the discussion on the sweep comments, Robert. Can you give us a sense, I'm just trying to frame out the potential risk here, can you just give us a sense of how much might be up for renewal on the $20-some-odd billion of assets? And what were the gross yields at the time of the initial renewal?

Bill, we really don't disclose specific line item contracts within the overall program. I think it is fair to say that we are reviewing the entire program. And within that, there is a significant portion that we look at the termination dates of the contract and the rollover dates. And we're actively looking at how to manage those out and extend those through time. But beyond that characterization, just given how early it is in the process and the various moving parts that are involved, I really wouldn't want to characterize beyond that.

Okay. And just one quick one. You mentioned you were well underway on Lean. Give us a sense, you mentioned you could maybe have some incremental savings or synergies into 2012. Could you talk about where you might see some of that leverage?

Yes. The business is growing, as we all have observed. And what that means is that in a typical year we might need to hire a certain number of new employees to come service that business. And it would be fair to say that might range from 140 to 160 employees across our various operating centers. And they are all shapes and sizes they're wonderful people. I mean literally shapes and sizes. But in terms of their cost structure, and their employment characteristics, they're typically entry-level jobs -- data processing, telephones, and so forth -- from there. And what it means when we think about Lean is, we go into a group and work on the process they use today. And let's say there were 10 steps in that process today, and we work with them to realize that we can get that down to six steps. And that means that it just takes less labor to do it. And what we're looking to do is therefore not have to hire as many people. So this is really about making the jobs we have more interesting, letting our employees be empowered to bring change they know they want to do. No one likes to do work that is not useful. And to be able to slow our run rate of growth. Robert, you can characterize some of the dollar amounts of that.

Yes. Again, we have flagged for 2011 that was a nominal level. But we have somewhere between the $5 million to $7 million range targeted for 2012 in terms of the byproduct of these efforts in terms of enhanced efficiency. As Mark suggests, that can be a combination of lower incremental costs. In other words, costs not incurred, plus actual reductions in costs across some of these programs. But the important thing is to flag the implementation of this across our entire platform and our structure, and the continuous improvement mantra that that really generates for us over time.

Okay. Thank you very much. That's very helpful.

Joel Jeffrey with Keefe, Bruyette & Woods.

Sorry if I missed this earlier but just going to the commentary on the share buy-back, it's just interesting that you guys didn't repurchase any shares in the fourth quarter despite the share price being a lot lower than it had been in terms of the average price you were repurchasing at throughout the year. Can you just give us some commentary on how you are thinking about buybacks going forward?

I think generally we continue to view it as a good use of capital. We have done a pretty significant amount of share buybacks for a company that only has 22% of its shares afloat. So we want to be careful about not doing too much. And we will continue to say, with the idea we talked about since before we went public, which is that we would like to be around 113 million shares outstanding. So the extent to which options exercising -- so we have some employees and advisors who have options that have, say, $2 strike prices. They're going to start maturing, those options, over the next two or three years. And therefore they are going to exercise them and realize their gain, and that would add to share count, as an example. We will continue to buy up shares in the open market to allow us to keep that share count around 113 million shares. We also have the deferred compensation program that is terminating in the first quarter of this year. And that will also add to share count. But again, we will mitigate against that share count to the extent that it goes beyond estimates.

You will remember that our buying was targeted specifically against options exercise, options issuance, and that deferred comp program. And so we think we've purchased enough to cover most of it at this stage. We haven't yet signaled to the market that we're going to buy up beyond the 113 million share count. And we'll be quite clear with you when we think it is appropriate for us to do that. What we want to do is continue to keep a very large cash balance available to us for opportunities in the organic growth of the business, acquisitions that are helpful, like the Fortigent one just recently announced, and other corporate activities, as well.

Thanks for taking my questions.

Alex Cram with UBS.

I hope I don't waste my only question I have tonight. But you obviously gave a lot of detail on the production expense. I was hoping you can actually give a little bit more. So when we think about the first quarter last year, I think it was 85.4, and then the annual run rate of 86.6. How should we be thinking maybe a little bit more exact or in a small range, like for the first quarter as a starting point, and then maybe for an underlying run rate for the full year? Because I think that production expense can be obviously changed based on product mix and things like that, as well. So any help would be appreciated. Thanks.

Absolutely, Alex. Let me just characterize it at 30,000 feet. It is helpful to hear it through my thinking. Number one, we have three things that have altered the production bonus that are structural and have no real impact in terms of economics but make the number look a little bit higher. One is that we used to have employees at a company that we purchased who were advisors. And we moved them to the independent model because that's what we do for a living. And they moved from being employees of LPL inside of a financial institution to being independent contractors. That moved their production expense from compensation line up into the production amount. And that is what I would call a permanent adjustment.

30 basis points.

30 basis points. Less important, it has no real economics because they used to be below the line in compensation from there. And then secondly, I would characterize it that there is two programs that we have for advisors that you want to see the increase in costs in, believe it or not. One is the deferred comp plan for them and the other one is their stock option ownership of LPL. The more that they save in their deferred comp, the more production expense goes up. And, yes, that's something that clearly ties them to LPL and it is a great thing for them in terms of servicing their needs by allowing them deferred compensation from taxation. So that's a good thing that is just structural.

And the options have the same characteristic. When the stock price goes up, which is significantly in Q4, that increases production costs but for a good reason. So those are the three things I just wanted to point out on the 30,000-foot level, that I look at it and say those are all good. Not the least bit concerned about them, no real characteristic. And then you get to basically looking at it, and we certainly looked in preparing for today's call, and several years of it. It bobbles around the same number on average over those years once you take out those three effects. Robert?

I think it is fair to say, Alex, that we're resetting the year, as we mentioned in the comments. They start January 1. The 30 basis points that Mark referred to was embedded within 2011 and is permanent in nature. And therefore that starting level relative to Q1 of last year we feel fairly comfortable with as a proxy for an entry point for 2012. And then the range at which it increases throughout the year is entirely attributable to the activity level of the advisors. So last year you saw that activity level much more accelerated in the first half of the year, than certainly we saw in 2010. And that caused the year-on-year levels to be at the higher end of the ranges that we actually normally see. But the two things are, one, sitting here today, we don't know the trajectory of that overall production payout ratio. That will be determined as we go forward from here. But more importantly, there is nothing structurally, from where we sit, that would tell us we're going to break out of a range that we're accustomed to. And that is excluding the factors Mark just alluded to in terms of the deferred comp plan as well as the share compensation element that sits within it for the advisors.

All right. That's great color. Thanks, guys.

Thank you. This concludes the Q&A portion of today's conference. At this time I'd like to turn the conference back over to management for any closing remarks.

I think we're all set. We appreciate everyone's attention and interest in the Company. And thank you very much. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a wonderful day.