LPL Financial Holdings Inc (LPLA) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LPL Investment Holdings first-quarter earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer sessions and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Trap Kloman, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Allie. Good morning and welcome to the LPL Financial first-quarter earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will be providing his perspective 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 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 filing 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.

Thanks, Trap, and thank you for joining today's call. I'm pleased to report that the first quarter of 2012 was a positive quarter for us and our advisors. The quarter was highlighted by record revenues and adjusted earnings as well as the achievement of a number of key milestones. Our differentiated model explains our successful advisors which creates long-term growth and value to shareholders.

We delivered adjusted earnings per share of $0.56 which represents 7.7% growth over the first quarter of 2011. This begins with the positive growth we experienced across our business which was reflected by a 3.2% year-over-year growth in our top-line revenue of $902 million.

As always, our financial performance was driven by the drive of our divisors and their dedication to consistently and productively engaging with their clients. This was evident when our management team had the opportunity this quarter to sit down with many of our leading advisors at our annual conference for top producers.

These advisors are not just the top producing advisors at LPL, but also leaders in the industry with diverse practices and unique background. The conference provided a dynamic educational setting for our advisors to share ideas for driving continued growth and managing the increasing complexity of their practices while utilizing LPL's unique offerings and technology enhancements.

These conferences provide the opportunity for us to take the pulse of our advisors and build upon current successes to sustain future growth. Overall advisor sentiment was very positive; clients continue to value independent advice and are engaging with their advisors on planning for the future to help them achieve their financial goals.

First-quarter growth also benefited from particularly strong activity by advisors who joined LPL in 2011, exceeding our expectations. The growth of our new and existing advisors reflects the improvement in market conditions and investors' desire to reengage in the markets.

An important driver of growth is derived from continual innovation and a recent broad-based initiative we have just launched is to unlock further opportunities from our retirement acquisition in 2011. This includes facilitating in-plan advice, capturing IRA rollovers and increasing automation. We are proud to continue to expand one of the strongest and most effective offerings for advisors in the retirement plan arena where we see an increasing growth opportunity.

We remain distinctive in the industry because of our ability to invest in our integrated technology and services. We are a provider of choice for advisors seeking independence and an enabling business partner to help them establish and grow their practices, especially in the 401(k) space.

In addition to the conference, we began 2012 with a number of key milestones which position the Company for long-term growth and stability. We announced our intent to acquire Fortigent, a leading provider of high net worth solutions and consulting services to RIAs, and I am pleased to share that we closed on this acquisition last week.

We also extended our custody and clearing agreement with a leading global insurance company, providing brokerage, clearing and custody services to over 4,000 of their advisors. We renegotiated certain contracts in our third-party cash sweep program, extending the duration while maintaining the upside of future interest rate movements.

We will experience a minor decline in our spread of our Fed funds beginning in the second quarter, but the impact on revenue and earnings will be immaterial. We remain well-positioned for this program to support our advisors.

Finally, we announced the successful completion of our debt refinancing and approval of a special dividend of $2 per share. This announcement portrays the strength of our overall financial performance and represents our focus on optimizing returns for our shareholders without limiting our ability to grow the business.

Our capital deployment strategy continues to prioritize investing in our business in advisor services. These investments constitute a primary driver for our customers' business growth and maintain our competitive advantage in the industry.

We continue to support new business development and to take advantage of opportunities at a time when advisor movement is increasing. Currently the pipeline is strong and we remain excited about our business development success as we draw upon a broad array of advisors across all channels.

While we continue to attract advisors in-line with our mass affluent core, we are also seeing growth in RIA, high net worth and retirement plan practices. We added 115 net new advisors this quarter, representing 554 net new advisors in the past 12 months. That excludes the 146 advisor attrition related to the previous announced UVEST conversion.

With the strong volume of new advisors and the inclusion of larger producing practices, the cost to attract new business has risen in absolute terms as a percentage of advisor production. Current conditions have resulted in us elevating our expectations for new advisor additions and related expense in the coming quarters. However, this investment is always one of our best uses of capital as it generates excellent returns.

With the presidential elections approaching, we feel that the debate over regulatory changes will moderate. However, we remain vigilant in closely following regulatory affairs and continue to spend meaningful time in Washington with regulators, the administration and Congress on the importance of a balanced regulatory environment.

Our outlook remains positive. We see most reform as beneficial for consumers, which is good for our business, and we firmly believe that we are well positioned to meet regulatory changes.

I did want to take a moment to note our announcement on April 18 regarding our organizational changes and our launch of a new venture to take advantage of rising opportunities in the mass market space. I'm excited Robert Moore will be expanding his responsibilities as President in COO and for Esther Stearns to assume responsibilities as CEO of our new venture. I look forward to sharing additional details in the coming months as Esther dedicates her time and energy to moving this important initiative forward. We have also initiated our search for a new CFO and will provide insight when that search is completed.

While I'm quite proud of the accomplishments this quarter, it is what I've come to expect from the hard work and dedication of our advisors and employees. It only serves to reinforce my positive expectation as we continue to look forward to the remainder of 2012 and beyond. Our advisors are highly engaged with their clients and focused on growing their businesses. I feel very good about our value proposition to support their growth and attract new advisors to the platform.

Even with the underlying economic and market conditions remaining unsettled, I remain optimistic about our ability to continue to grow the Firm along the long-term trajectory we have firmly established as the industry leader supporting independent conflict free advice. With that I'll turn the call over to our CFO, President and COO, Robert Moore, who will review our financial results in greater detail.

Thank you, Mark. Over the past several quarters we have identified and discussed various performance metrics describing the growth trajectory for our advisors and our business. We manage our business for long-term success while monitoring the short-term components that lead us forward. The first quarter of 2012 provides helpful insight into what is important to the health of our business and what that means in the greater context of our financial results.

Our financial performance starts with the success of our advisors and their engagement with their clients. Advisor productivity is largely momentum-based and, while insightful to view year-over-year results, it is important as well to track their sequential performance. We feel very good about this quarter as advisor production retention was in excess of 97% and our advisor productivity rebounded from the lower levels experienced in the fourth quarter.

Additionally, we have seen that advisors who joined LPL in 2010 and 2011 are having a strong start to the year. Additional metrics that reflect the productivity across our advisors and therefore insight into this quarter's performance are commissions per advisor and net new advisory flows. This is reflected by commissions per advisor of $144,000 on an annualized basis for the quarter compared to $126,000 in the fourth quarter and in-line with the $145,000 from the first quarter of 2011.

Our advisory platform continues to grow attracting net new advisory flows of $2.5 billion this quarter or 9% growth on an annualized basis compared to $900 million in the fourth quarter. It would be premature to characterize the improvement during the first quarter as a return to normal conditions. Our belief is that the market environment remains uneven and therefore we maintain our heightened focus on strengthening our support and services for our advisors. This must be done efficiently.

What is clear is that the value for independent advice continues to grow, regardless of market cycles and global economic issues, and we positioned LPL to be the provider of choice for advisors seeking conflict free advice.

Building upon advisor productivity, I'm pleased to announce that we achieved record net revenues of $901.8 million for the first quarter of 2012, up 3.2% year over year driven by growth in commission revenue of 2.6% to $464 million and advisory fee revenue increasing 2.8% to $251 million.

Record revenue was supported by record advisory and brokerage assets as well, which ended the quarter at $354.1 billion, increasing 7.3% year over year and 7.2% sequentially. The year-over-year growth reflects a combination of strong net new asset growth and the benefit of a 6.2% rise in the S&P 500 Index where we have about a 60% correlation. Sequentially growth was driven primarily by market appreciation as reflected by the 12% growth in the S&P 500 Index and positive net new advisory flows.

Asset-based fees grew 8.3% year over year to $97.2 million in the first quarter related to our asset growth in stronger markets impacting record keeping and sponsor fees. In addition, revenue generated from the Company's cash sweep programs, which are a sub-component of our total asset-based fees, increased 8.5% to $34.4 million compared to $31.7 million in the prior period.

Revenue from our cash sweep program was negatively impacted by a decrease in the effective federal funds rate which averaged 10 basis points for the first quarter of 2012 compared to the 15 basis points for the same period in the prior year. However, this decrease was more than offset by our cash balances increasing to $21.6 billion in the first quarter of 2012 from $19.2 billion as of the prior year. Our cash balances as a percentage of total assets under management were 6.1%, which is in line with historical norms.

Underpinning our solid financial results is our ability to continue to generate strong recurring revenues which represented 63% of our total net revenue this quarter. The production payout ratio for the quarter was 86.4% declining from 88% in the fourth quarter of 2011 with the production bonus schedule resetting based on the calendar year.

Year over year the production payout ratio increased by 94 basis points, this was driven by stronger performance of our larger producers impacting the production-based bonus, increases from advisor deferred compensation and stock compensation expense, and the shift of several financial institutions in the second half of 2011 to our clearing platform related to the UVEST conversion.

From an operational perspective, we continue to manage our expense base closely and leverage our existing infrastructure. Compensation grew 5.8% to $89 million year over year, primarily due to annual wage increases and a growing average headcount in line with our success in attracting new advisors. General and administrative expenses were flat year over year.

On a go-forward basis we see our existing compensation and general and administrative expense structure as an appropriate run rate to fuel future growth. This view requires considering the seasonality of payroll taxes in our conferences, the cyclicality of new business development and growth correlating to increased new advisor and new account growth.

Adjusted EBITDA for the quarter slightly exceeded the record level achieved last year rising 0.5% to $125 million. Based on the improvement in productivity of our advisors, factoring in the strength of the first-quarter results in the prior year and our expanded investment in 2012 in new technology initiatives, we believe the business is performing as we would expect. We maintain our long-term commitment to generating 30 basis points to 50 basis points of margin expansion.

In light of our recently announced refinancing, I would like to reiterate our expectation that we will generate approximately $10 million in annual interest expense savings based on the current interest rate levels. Our tax rate for the quarter was 38.3%, slightly below our historical range of approximately 40%, primarily due to the realization of a tax-deduction related to the release of our employee deferred compensation plan.

The result of our performance in the first quarter of 2012 is record adjusted earnings of $63.2 million representing 6.4% growth over the prior year. Our adjusted earnings per share of $0.56 represented a 7.7% growth year over year. Capital expenditures were $8.7 million for the quarter and we are maintaining our $50 million to $75 million target for the full year, including capital, which will be deployed for facilities expansion as we accelerate our planned spending.

I would like to briefly highlight our recent announcement that our Board of Directors declared a one-time special cash dividend of $2 per share payable on May 25, 2012 to all common shareholders of record as of the close of business of May 15, 2012. We also announced our plans to pay regular quarterly dividends, initially up to $0.12 per share, $0.48 annually, which we envision initiating with the second-quarter results. The declaration and amount of any regular cash dividends will remain subject in each instance to approval by our Board of Directors.

Finally, as of December 31, 2011 we had 2.8 million restricted shares outstanding under our non-qualified deferred compensation plan which were released on February 22, 2012. Participants in our plan authorized the Company to withhold shares from their distribution of common stock to satisfy their withholding tax obligation. As a result the Company repurchased 1.15 million shares for a total of $37.5 million or an average price of $32.60 per share and made the related withholding tax payment.

It is important to highlight that we continue to manage a strong balance sheet and deliver predictable cash flow performance. Currently, of our $689 million in cash and cash equivalents, $575 million is available for corporate use prior to the payment of the special dividend, as the remainder is reserved for operating needs and regulatory capital requirements.

In addition, we maintain our long-term view for deploying our capital and investing in our core business operations which remains our number one use of cash and consistent with maximizing shareholder value.

Before opening for Q&A, I wanted to mention that in order to ensure we remain in compliance with securities laws we will not discuss or address any questions pertaining to the proposed secondary offering on our earnings call this morning. With that we look forward to answering your questions. Allie, would you please open up the call?

(Operator Instructions). Ken Worthington, JPMorgan.

Good morning. A couple questions -- first, your mix continues to evolve and there's a couple different dynamics going on. It seems like the business is migrating to more advisor-based assets which is good for your gross margins. But you also mentioned this quarter that the higher producing brokers are growing more quickly, they get higher pay out which leads to lower gross margins. So as you look out which trend do you think dominates or do they just kind of offset each other over time?

Well, I think -- this is Mark Casady -- they will tend to have -- over time you'll see advisory assets will tend to be the thing that more and more advisors will head to. It just is a relatively small -- low process -- short process, whatever you want to call it -- because you've got so many new advisors who join us in a given year, Ken, typically are commission based, we then train to use the advisory platforms and they go from there.

So you remember that that mix shift between advisory and commission, if it moved 1 point in a year that would be fairly significant in terms of that kind of movement. Large branches are definitely enjoying a faster growth rate right now, but that's right now and it's kind of hard to tell whether that's going to become a trend that remains for several more quarters or just happens to be a first quarter of this year phenomenon.

Our experience is that over time all branches typically grow pretty much at a fairly slated rate. The bigger ones have always grown a bit faster than the smaller ones, partially because they're in typically closer to large urban areas or even in urban areas where they just have a more dynamic growth profile.

So while we will continue to see large branches grow a touch faster, I would certainly say that in the first quarter they grew significantly faster than the smaller branches did, which is a newer phenomenon for us and I don't think it's probably sustainable over several quarters.

All right, great, thank you. Then maybe talk about the nature of production this quarter. If you think about stocks and mutual funds versus the insurance and other protection products, how did that mix look this quarter versus how it's looked maybe last year or in prior years? It seems like the protection products continue to sell really well history wide and I wanted to see if that dynamic was a similar case for you guys?

I think that's a good overall statement. There's no doubt that particularly middle income are looking for protected investments of a variety of types, variable annuities being the most obvious answer for them in order to get upside opportunities but willing to pay some cost for downside protection. And we know that we've seen that demand since the 2008-2009 market break and it continues on.

If I look quarter over quarter, fourth quarter to first quarter, annuity sales are up nicely, about -- just under -- right around 6%, excuse me, but mutual funds are also up significantly quarter over quarter which is good to see and that's really the pickup in same-store sales that Robert mentioned in his remarks.

And then we've seen the direct business, which is typically where you're finding products that get a better yield for consumers, that's up nicely quarter over quarter. That would certainly make sense to us. And good old fixed insurance, life insurance sales are up about 10% quarter over quarter, which again is a good sign around financial planning and broader based activities for consumers.

So to me quarter over quarter it looks like you've got a population that's re-engaging nicely, as we mentioned in our remarks. And as you say, a little bit more of a bend towards protected products in the form of annuities. But I wouldn't say an overly large growth there versus say just the re-engagement in mutual fund investments.

If I look year over year, you've got a really interesting mix shift where fixed annuities continue to drop pretty significantly and you see direct investments up significantly, you see fixed insurance/life insurance up significantly and VAs actually down at year over year.

And what that's telling me is you've got a mix shift occurring, not unusual; fixed annuities are really tied to rates and as rates have gone ever lower the insurance companies have changed their rates available on fixed annuities and subsequently consumers aren't buying them.

And I think why I point that out is just to show you that we do have pretty significant mix shifts within say the commission of line and really lets us -- our model and the way our grid works allows us to really absorb those mix shifts without any issue to our gross margin or profitability.

Great. Thank you very much.

Chris Shutler, William Blair.

So you talked about elevated expectations for new advisor additions in the coming quarters. I know you mentioned strength across all channels, but is there one particular area maybe where you're seeing more robust growth in the pipeline than some of the others? And then maybe just help us understand if you can give any more granularity around the payout ratio and how that should trend over the course of the year?

So let me start with the advisors and Robert can talk on the payout ratio. What we're seeing is basically the wire houses in particular are coming through that phase of the money they gave in the spring of 2009, really maturing. So we're seeing a big pickup in our pipeline for people who are employed at the wire houses, which is a good sign.

And then among the independent firms we're seeing larger practices really express interest in moving, which is a new phenomenon. We've not seen that before and so we're seeing relatively larger branches wanting to explore at this stage and hopefully move at a future stage from the broker dealer they're in today with an already existing independent practice.

The nice thing about that from our experience is that those practices tend to ramp nicely once they're here. And we just think those are all good signs that we should see increased activity related to recruiting.

On the payout ratio side, as Mark alluded to in the answer to Ken's question with the larger producing advisors essentially growing at a faster pace, we saw evidence of that in the production-based bonus level for the first quarter at elevated levels relative to where it was a year ago.

And so, I think that the mitigation of that as we proceed from here in terms of the rate of growth -- of course the overall pick ratio continues to trend higher throughout the course of the year, culminating at the high point in the fourth quarter, but the rate of change should start to decelerate as we move through the remainder of the year.

Okay thanks. And then, any more details you guys can provide on the renegotiation of some of the ICA contracts? I know that you mentioned a few things in the press release, but were any of your bigger contracts ones that you've started to renegotiate and maybe just how you're feeling about the opportunities in terms of those deals?

Sure. So we don't give specific information on contracts because that really is important to us from a competitive perspective, so we try to be as transparent as we can in giving you our approach and characterization of how we manage the program.

So think of it like a portfolio approach where you have a large aggregate level of balances, if you will, and you're distributing those over 15 counterparty relationships, some of whom are kind of current rate based and therefore daily liquidity orientated, and some of which you are, because of the relative stability of our program and our knowledge about core levels of essentially deposits, we are able to go out and on a counterparty basis factor that into the way we structure it.

Meaning, minimum balance levels, tenor in terms of time frame for that set of deposits to remain, which of course, enhances its value. And that's really the key thing to understand about the way we're able to look at some of these underlying relationships, some of which are large, and do that process of extending those maturities and having some rate reset to reflect the differential in today's markets relative to when they were originally established.

But the compression there is not as dramatic as you would think based on our average spread because we're essentially lending long to those counterparties. So we'll continue to manage that as a portfolio approach and look at the conditions. We did provide the schedule that shows interest-rate sensitivity in our filing for -- updated for the new renegotiated contracts.

And I think you'll see that in those first two buckets of zero to 25 basis points and 26 to 125 basis points very modest decrease, but in that last bucket of 126 to 250 basis points you actually see a fairly large increase in the sensitivity there in terms of pre-tax benefit. And that is because those certain contracts had inverse relationships, in other words, they paid higher rates at low interest rates and then as rates rose that spread compressed and that aspect of those contracts has been renegotiated.

So all in all we feel quite good about the positioning of the program. As all of you know, it doesn't consume capital -- we're not a bank. It allows us on a very competitive basis to provide attractive returns for us and very competitive yields for the end investor.

Okay, thanks a lot, guys.

Chris Harris, Wells Fargo.

I just want to follow up on the prior question on the extension of the cash management contracts. I understand you can't give us the details on the renegotiation process, but just wondering, can you give us an idea as to what percentage of these contracts that are up for renegotiation that you've already -- you've been able to renegotiate? So in other words, does this represent 10%, 20% of the contracts you have up for renewal or a larger percentage than that?

It's larger than that. We really don't want to give the very specific calculation there and that does change through time as the size of the program changes, etc. So we have characterized that as a significant sub component of the overall program has gone through that renegotiation process.

Okay. And then on to the advisors, the newer advisors that are joining your platform, you mentioned that the ones coming on in 2010 and 2011 are really exceeding your expectations. Can you give us a little bit more numbers around that? How are they exceeding your expectations, by how much? And then also, the larger branches that are coming on, how large are those relative to say your typical advisor branch?

Let me do the size question -- this is Mark. They're multiples of an average branch here at LPL where they might have anywhere from 20 to as many as 75 advisors as part of them and really represent a group, usually geographically centered, that is working together.

Sometimes it's in an employee model where it's an organization that has a CEO and a CFO and so forth and the advisors are actually employed. In other cases it's a group of independents who have banded together under a similar brand name and enjoy shared services as a way of creating operating margin and marketing success in that marketplace.

So they kind of come in lots of shapes and sizes, but they are in some cases as much as tenfold the size of a typical production -- a particular group here at LPL historically.

And we're not really giving specifics on quantifying the level of additional ramp that's occurring over these classes, it's just to highlight the fact that, relative to what we've talked about in terms of those kind of first year or 12-month type of ramp levels, we're seeing notably higher levels of production and ramping relative to what we've seen in the past.

Okay, thanks. Then real quick last question for me. On the fee component -- the recurring revenue component, rather, of your total net revenues, over 60% now, 53% I think you had mentioned. How does that number compare to prior periods? Is it way up compared to where we were say a year or two ago?

Well, it's up 3% relative to a year ago we were at 60. So, and we've always talked about that sort of 55% to 65% range since the time of our IPO road show and we have no basis for sort of flagging coming out of that range. We are always happy to be at the upper end of the range, but we're not going to establish a new range yet.

Okay, thanks very much, guys.

Devin Ryan, Sandler O'Neill.

Most of my questions have been asked, but just wanted -- I would ask one on the high net worth expansion. And I guess specifically with the increased expansion of the products and technology offering, do feel like the core pieces are now in place? I'd just love to get some of the feedback that you're hearing from potential recruits. And then are you winning advisors onto the platform today that maybe wouldn't have been interested in joining just a couple years ago?

The simple answer is yes and yes, that what we're seeing is I think the industry stood up and took notice with the Fortigent announcement, to be quite straightforward about it. Meaning that people were a bit surprised in a positive way because they saw it as a marrying of an ability that we have in core processing custody services and wonderful technology and really great content about alternative investments that are at Fortigent.

And I think the first flush was, wow, we didn't expect that to, oh, that's an interesting combination to, oh, you can add value to my practice. And how we would add value, quite simply, is to be able to bundle together capabilities for existing LPL advisors -- there's not many that practice from a high net worth space today, probably measured as less than 100 practices that are that scale, but we have a lot of practices that have a single individual high net worth client.

So this would allow us to repackage some of Fortigent's capabilities for that advisor to use for one high net worth client or to focus on those less than 100 practices at LPL that are high net worth focused -- where they're already using our custody, now they get to add Fortigent capabilities in both content and technology. And then likewise for Fortigent's prospects and clients we can now offer a value basis for them for custody services, which is great.

I think a lot of interest from both sets of customers. Robert and I attended the Fortigent annual conference recently, got very positive feedback there. And we've had our largest practices in which many of those high net worth practices are located was at the event this first quarter and got a lot of positive feedback about Fortigent from there. So we're seeing this as a really wonderful way for us to help and support the high net worth end of practices.

A couple things that I think are also important to note is that in our advisory programs you'll know that we have this program that's centrally re-balanced called Model Wealth Portfolios in which we offer outside strategists today. So you've got everyone from BlackRock on the ETF side providing strategy to Morningstar on the active management side.

In addition to LPL research managing portfolios we will be able to bring Fortigent into that platform and have them manage a portfolio of alternative -- liquid alternative investments which is their specialty on the wonderful and low cost industry platform that we've built and that will be a good way for us to leverage and create monetization of the content that's at Fortigent and help create return for shareholders through the acquisition.

So we see lots of positive outlooks there. I will remind everyone that we're the 26th largest manager of high net worth households in America -- just because it's fun to say it, in and of itself. And it really comes from those roughly 100 practices that are high net worth based and, again, individual practices that have the individual high net worth clients in them, and we're proud of that; we think we can see continued growth there and Fortigent is a good way for us to continue that growth.

Okay, thank you for all the color. And then just also want to go back to comments about expenses, especially on comp. Last year there were some seasonal bonus accruals and 401(k) matching early in the year, and it sounded like that was also the case this year. So should we back out our assumption for those items to get to more of a base level or are there going to be offsets that might not -- where we might not see similar declines in the second quarter like we saw last year?

No, that's a good -- a good way to think about it.

Okay, thank you.

Bill Katz, Citigroup.

Just given the pipeline and the mix shift event base and your commentary on some of the gross margin to an earlier question, when you think about the production ratio, I think you've guided to historically (inaudible) seasonally drifting toward an 87% ratio by the end of the year, a little bit higher perhaps. Is that range still right now or should we think about a net average higher production range?

No, that range still holds, the variation that we've observed is the timing of the year in terms of last year that accelerated into the first half largely because of very buoyant market conditions and high levels of advisor engagement, etc., that led to an acceleration of the production bonuses.

They hit their sort of cap, if you will, earlier in the year in 2011 certainly relative to 2010. And so whether we're seeing a full repeat of that or a partial repeat of that remains to be seen for 2012. But we're not signaling that the historical range as it relates to the payout ratio has been altered to a higher range, it's more the timing of it within a given year.

Okay, that's helpful. The second question is, and this might be timing, but if you look even year on year or even quarter to quarter, if you look at the change in the advisory assets and you look at the result in yield kicked out by the gross advisory fees, that ratio continues to be I think somewhat lower than maybe anticipated. Could you talk a little bit about maybe the mix within the advisory assets, is any kind of sort of pricing degradation associated with that?

There's two things that are happening there. One is the renegotiation of the contract we mentioned in our remarks where there is basically a lowering of yield, if you will, that it's a one-time step change that just comes with renegotiating a large contract, but that will -- is now over and we move on from here.

And then the second part it is just a mathematical calculation that you had a run-up in the market during the first quarter. But of course we marked to market at the end of last year for the quarter, so you don't get the full run-up in the advisory assets until you get through the quarter.

The other characteristic is around the RIA platform. So for those who are moving into hybrid and so coming out of our corporate RIA where we essentially track those revenues and have them grossed up and then do the payout from that, once they go to their own RIA those fees are paid directly to them. And so, that's what is trimming some of the recognition at the revenue line for advisory fees.

I apologize. I missed your comment on the step function down. And then my last question, just from a big picture perspective, what -- in your mind what are the keys to the further margin improvement given your revised outlook for G&A and comp?

Well, the keys are fundamentals of business, right? You've got to continue to look to grind out expenses where we can. And I always think of that as really being our lean processes as well as just good old-fashioned management, making sure that we're hiring when we needed and looking for ways to add productivity.

Lean took out a significant number of positions last year, I think we characterized it as a little more than 50, and we're certainly on track to do the same this year. We also have a good process for putting new automation in place for employees to make their life easier and that always brings productivity gains as well.

So it's -- the regular job of management is to make sure that we are deploying strategies that allow us to automate and change processes to gain efficiency and we'll certainly continue to do that. And then we'll also just look for opportunities where we see simple combinations of departments or activities that aren't adding as much value to really simplify our operating environment.

We're in the process of reviewing our technology group, for example, where we're looking at applications that are heavily used and applications that are less heavily used by advisors and seeing where they may make some sense to rationalize some of the offerings that are there or looking at efficiency of co-design, for example, and seeing if we can't find more efficiencies there.

So we spend a lot of time on trying to drive G&A efficiency, it just doesn't show up certainly quarter by quarter. It's sometimes a job of a year or two to work our way through them. Robert, would you add other --?

Yes, just a couple of things there as well, Bill, in terms of we've had a heightened period of transition assistance as well, so to the extent we continue to run above the 400 net new advisor level, which we're telling you we anticipate doing that, we expense that and that is an invest ahead, if you will, in currents of cost in that we incur it largely in current period for future revenue.

But it is an extremely good investment for us overall. And then the what I'll refer to and Mark alluded to it conceptually around the marginal cost to serve, I think there we have off-shoring, outsourcing as well as enhancements to efficiency that we can bring to bear to expand that overall margin performance relative to where we are today.

Great, thanks for taking all my questions.

And with no further questions I would like to now turn the conference back over to Mr. Mark Casady for any closing remarks.

Well, thanks, Allie. We just want to thank everyone for joining the call today and have a great day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.