LPL Financial Holdings Inc (LPLA) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the LPL Financial Holdings second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to Trap Kloman, Senior Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning and welcome to the LPL Financial second quarter earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his perspective on our performance during the quarter. Following his remarks, Robert Moore, our Chief Operating Officer, will highlight drivers of our financial results, and lastly Dan Arnold, our Chief Financial Officer, will speak to our capital deployment. 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 you to know that comments made during this conference call may incorporate certain forward-looking statements. This may include statements concerning such topics as earning growth targets, operational plan and other opportunities we foresee. Underpinning these forward-looking statements are certain risks and uncertainties. We refer our listeners to the Safe Harbor disclosed contained in our 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.

Thanks, Trap. And thank you for joining today's call.

The second quarter presented uncertain market conditions that resulted in 1.5% revenue growth year over year. Our advisors have been clear in communicating to us the more cautious sentiment that exists among retail investors, causing lower investment activity, which intensified in June. While we continually strive to provide value-added technologies and services to support our advisors to grow their businesses, when faced with these macro-driven headwinds, it is challenging to produce top-line growth in the short term.

At the same time our performance has been impacted by our ongoing commitment to additional investment. Adjusted earnings for the quarter were $0.49 per share down, 5.8% relative to the second quarter of 2011. While we are managing are ongoing operating expense to reflect the slowdown in top-line performance, we continue to expand investments in key strategy areas to fuel future growth. Specifically, year over year, earnings were impacted by the added expenses related to the acquisitions Fortigent and Concord, investment in our retirement platform, and the formation of NestWise to address advisor training and enter the mass-market channel. In addition, as our business development pipeline remained very active, we increased investment and transition assistance to support new advisor growth. The cost to recruit remained steady, but the increased volume resulted in 41% expense growth in business development relative to 2011. Together these incremental items reduced adjusted earnings by $4.1 million and adjusted EPS by $0.04.

With 223 net new advisors joining LPL during the quarter, our expenditures to fuel advisor growth continue to produce results. The acquisitions and investments are consistent with stated objection to provide broad and leading edge solutions to our advisors and to end investors. We have a history of investing in the business through varying market cycles, including market downturns. This includes developing our previous platform in 1990, our move to self-clear in the year 2000, and our initiation of our independent RA platform in 2008. These advisor additions and the acquisition opportunities are not planned by quarter or timed with stronger market conditions. That's not the nature of either activity. We recognize such opportunities come in cycles, and this period will not persist indefinitely. Our strategy continues to be to capture opportunities as they arise, as long as we believe that the fundamental health of the underlying business remains intact. This sustains our value proposition to our advisors and further sets us apart from many of our competitors.

With the challenging market conditions and increased investment impacting results, we are proactively taking steps to reduce core expense run rate. Operationally, we continue to provide advisors and our clients with the high level of service and execution they're accustomed to, and stand ready to support them when growth returns. As you would expect, we are balancing this approach by pursuing cost management opportunities, and control our expenses appropriately. The result is we are better positioned to manage through the uncertain conditions that will likely persist to the end of 2012. Should conditions worsen, we'll reassess our levels of investment and degree of expense management. We have a history of being able to swiftly and effectively course-correct in the face of deteriorating market conditions. Our experiences led us to seek greater discipline in managing the efficiency with which we support our growth today. We've implemented our resource planning models to evaluate staffing needs and launched our service value commitment initiative based on Lean principles.

What does not change with shifting market conditions is the need for and value of financial advice. These macro issues and accompanying investor sentiment are not unique to today. We have great confidence in the relationships our advisors have with their clients and their relationships with us. When investor sentiment does improve, we are well positioned to resume our trajectory and margin expansion.

We know our independent and dedicated business model delivers differentiated value proposition that attracts advisors. This quarter, advisors production retention was in excess of 97%. We generated net new advisor growth of 223 advisors, and 671 net new advisors over the past four quarters. We continue to see the pipeline filled with advisors from all channels and in particular from the wire houses and independents. Our investments in the high net worth space, the RAA market and retirement platform have supplemented our strong ongoing success in attracting new advisors. As we do not control the advisors in motion at any time in the marketplace, an important measure I track is our net new advisor growth relative to our competitors. The expectation I set for our company is to be in the top three each and every year. We were number two in 2010 and 2011, and I see us on a similar trajectory to date in 2012.

I would like to provide a brief update on the management structure. Over the past year we've evaluated the next several years of challenges and opportunities for the business, and sought to align the needs of the company with the capabilities and diversity of our leadership team. As previously announced, I'm thrilled to have Esther Stearns, our former President and COO, now leading our subsidiary venture, NestWise, into the mass market. This move created the opportunity for Robert Moore, who many of you know well, to bring his invaluable leadership and array of experience no the role of President and COO. In addition, we have supplemented or existing team with new hires from the industry who have significant financial services experience. These hires include Sally Larsen, Head of Human Capital, Joan Corey, our new Chief Marketing Officer, Bob Comfort, Executive Vice President of Institution Services, Business Consulting, and Mimi Bock, our Executive Vice President of Independent Advisor Services, Business Consulting. Most recently, we announced Dan Arnold as our CFO, who brings tremendous experience from his role in our institution services channel and in the strategic channel development at LPL. I feel our management team is now in place and aligned to continue our record of sustained growth.

As we have said since the IPO, we need top-line growth to achieve margin expansion and profit growth. We've emerged from previous challenges resulting from difficult markets in a position of strength and there's nothing fundamentally different about the business model and this current cycle. We manage for long-term growth, which we believe is critical for evolving the company in a competitive marketplace, and creating value for customers, employees, and shareholders. Success is measured by years, not quarters, and our model will continue to deliver strong financial performance over time.

With that I will turn the call over to Robert, thank you.

Thank you, Mark.

The challenging market conditions and cautious investor sentiment Mark has shared manifests itself in several ways within our performance. For second quarter results, two metrics illustrate investor caution -- commissions per advisor and cash sweep assets as a percent of total assets under management. Annualized commissions per advisor, which includes mature and new advisors, and excludes advisory revenue, primarily reflects investor engagement as it is transaction-driven. For the quarter, annualized commissions per advisor were $136,000, nearly 7% lower compared to the second quarter of 2011, and 5% lower than the first quarter. This decline is partially explained by the strong advisor head count growth this quarter which lowers the average, where primarily it is due to reduced transaction activity and relatively flat market levels. Same store sales of our seasoned advisors were effectively flat as they focused their efforts on the maintenance of existing client relationships, which limited them in engaging in efforts to expand their businesses.

As expected in periods of investor caution, and longer investment sales cycles, cash sweep assets grew to $23.1 billion, or 6.5% of total assets under management, compared with 6.3% if the second quarter of 2011. This reinforces the reduced transaction activity, resulting in commissions declining to $447 million, down 2.7% year over year, and down 3.5% sequentially. This performance was offset by continued growth in advisory revenues, which were a record $268 million for the quarter. Sequentially, advisory revenues grew 6.9%, driven by net new flows and strong market performance in the prior quarter. Year over year, advisory revenues grew 1.5% despite advisory asset growth of 7.9%. Advisory revenues will grow more slowly than the growth rate of the underlying assets during periods when advisory assets on an RIA platform expand at a faster relative rate than advisory assets as a whole. We have seen this pattern consistently since we introduced the RIA platform in 2008.

Turning to item attachment revenue, strong year over year growth in transaction and other fees of 14.7% was driven by our increase in advisory fees for 2012, and the addition of Fortigent. This growth was partially offset by reduced transaction activity this quarter. Asset based fees grew by 13.6% over the second quarter of 2011 due in part to rising asset balances benefiting cash sweep and sponsor revenues.

I would like to briefly highlight the sequential performance of our cash sweep revenue. Cash sweep revenue was down less than 1% compared to the first quarter. Increases in the average asset balance were offset by a decline in the weighted average fee from 64 basis points in the first quarter of 2012 to 61 basis points in this quarter. With these top line conditions in mind, I will now turn to our payout rate which increased 48 basis points year over year. We have indicated previously that our overall payout rate will increase during the calendar year due to our production bonus structure. In years past, we have seen the rate of this increase accelerate or moderate with advisor productivity, but overall balance out over the course of the calendar year. So far this year, the growth of larger practices has accelerated this rate. In addition, the impact of the UVEST conversion has increased our baseline payout. To be clear, we continue to encourage support and reward productivity growth of our large existing advisors and practices and seek to attract larger advisors through business development. We value the absolute growth and gross margin they represent and are comfort with mix shift creating a degree pressure on the payout rate. There are adjustments we are making to costs to serve larger practices as they after us G&A synergies though time.

From an operational perspective, we have experienced a meaningful year over year increase in our expenses. Our compensation expense is up 14.3% to $93 million, and other G&A increased 37%, reflecting the numerous investment activities Mark discussed. Conference expense and compliance investment also impacted the growth of other G&A this quarter. In the case of Fortigent, Concord, and our retirement IRA roll-over program, these investments are already generating revenue but have added corresponding expense and are effectively break even. These investments have increased our expense base permanently by over $5 million a quarter, and it will take time before margins catch up to our firm-wide average.

Similarly, our commitment to NestWise has added approximately $2 million if ongoing expense per quarter. While it remains in line with expectations, we do not expect breaking even in this venture until 2014. To provide greater transparency in our performance, we expect that these investments will impact earnings per share by $0.03 to $0.05 in each of the third and fourth quarters this year relative to the results in the comparable quarters last year. The greatest variable in this expectation will be the incremental transition assistance which could positively or negatively impact this forecast.

While the impact of these investments was immediately felt in the second quarter, our efforts to manage expenses and gain operational efficiencies will take time. Some benefits will be immediate, such as appropriately managing travel and entertainment, and scaling back on new hiring. Other benefits are more fundamental to our costs to serve, such as examining our G&A requirements to support large branches, and opportunities to outsource non-advisor-facing back office functions, which create permanent efficiencies but take longer to realize. We will start to moderate our growth in operational expenses as soon as the third quarter, and our goal remains to manage the business to achieve long-term margin expansion.

Separately as a reminder, we hold our annual advisor conference in August, which is the largest of its kind in the industry, with over 3,500 advisors and product sponsors' representatives attending. In the third quarter on a sequential basis with will generate $5 million to $7 million in additional fee revenue and invest approximately $12 million to $14 million in this event, which will impact our promotional expense.

As a result of the low top line revenue growth of 1.5% year over year being offset by increased expenses, adjusted EBITDA declined 9.3% from the prior year to $112 million for the quarter. Due to the refinancing of our debt facilities, interest expense declined 26% over the prior year, to $13 million, in line with expectations. Our tax rate increase to 41.3% for quarter, due primarily to the fact our level of nondeductible expense remained constant while overall profitability declined. We affirm over time our anticipation that the tax rate will be approximately 40%. These conditions resulted in adjusted net income of $55 million and adjusted earnings per share of $0.49 for the quarter. When we take into account the $0.04 per share impact that Mark mentioned from our increased investments, and the $0.01 per share from higher tax rate, our adjusted earnings per share would be $0.54.

As we evaluate our opportunities for growth and savings in the coming quarters, I am most encouraged by the performance of several key growth metrics, advisors, asset flows and accounts. Mark already described our success in advisor retention and new advisor growth. In addition, we continue to experience positive net advisory asset flows of $2.8 billion for the quarter, representing 10% annualized growth rate. The inflow of new accounts remains healthy and, importantly, consistently above account outflows. The positive trend of these metrics affirms the value of our independent model by both advisors and their clients. The foundation is intact to produce greater top-line growth and margin expansion when healthier macro conditions exist.

With that, Dan Arnold will provide additional context on our capital management strategy. Thank you.

Thanks, Robert. It's great pleasure to speak with all of you today.

As I assume my new role as CFO, I'm excited by the compelling initiatives we're pursuing and the long-term strategic direction LPL is setting. There's much uncertainty in the markets today but it's essential that we balance the day it day needs of the business with its positioning for long term success. We consistently perform strategic review of the business to identify opportunities for both growth and greater efficiency. If one thing is certain, it's that the industry will continue to undergo profound change, and I firmly believe that our independent business model will be at the forefront of this change.

One of the distinguishing characteristics of our business model is its ability to consistently generate significant free cash flow. We do not have a capital-intensive business. This is driven by the fact that we don't own a bank, we do not engage in proprietary trading, and we do not manufacture products. As a result, we're able to deploy our capital across many opportunities without restricting our investment in the business. This quarter is a great illustration of this consistency and flexibility. We continue to commit capital to growing the business and rewarding shareholders. We spent $18.4 million on our share repurchase program, buying back 600,000 shares and delivered $223 million to shareholders in the form of a special dividend. From an investment standpoint, we've completed the acquisition of Fortigent for $38.8 million at the time of closing and spent $20 million in other capital investments. As of quarter end, our cash available for corporate use stands at $341 million.

We believe our track record of putting our capital to work is consistent since our IPO. Over the last six quarters we've invested $83 million in acquisitions, $83 million in capital investments, $145 million in share repurchases and $223 million in the special dividend. For the year we affirm or target range of $60 million to $75 million in total capital investments. We continue to utilize share repurchases to off-set dilution from our stock option programs, and with the announcement of new repurchase program of $75 million, we retain the flexibility in the future to be more aggressive. Given our resulting strong capital position, I'm pleased to announce that the board has formerly approved a $0.12 per share dividend for the third quarter. This reflects the success of the company and our positive outlook on future capital management.

I appreciate your time today and with that, I will ask Latoya to open the call for questions.

Thank you. (Operator Instructions). The first question is from Chris Harris of Wells Fargo. Your line is open.

Thanks very much. Good morning guys.

Good morning, Chris.

On the expense rationalization plan, just wondering if we can flush that out a little bit more, maybe you can give us color on the magnitude of the expense savings you guys hope to rationalize both here in the near term and long term would be helpful.

Rob, do you want to start?

Sure, Chris. Thank you for the question. I think that we approach our expense management philosophy in both tactical and strategic terms. So as I indicated in my script, we have taken steps here to trim expenses somewhat in line with the up-weighted expense levels that we're incurring from the result of the Fortigent acquisition, Concord, NestWise, etc., and over the remainder of the year seeking to essentially neutralize that as best we can. As we also indicated, though, there's a more fundamental shift in our approach to operational efficiency, and we refer to it in the context of it cost to serve. That is broken into component parts that deal with large practices as we mentioned. It also encompasses our core infrastructure and where we can find operational efficiencies within the base core run rate of our functional activities which may lend themselves to outsourcing or other things we choose to do.

Those will take more time. We're much more ambitious about those into the future, not ready to give sort of a range of expectations in terms of the levels that we seek but we draw a contrast between that and the 2008/2009 period where we knew we were encountering much more aggressive type of headwinds that required a much more dynamic approach to reducing or costs in the very, very near term and do much on a discretionary basis. We still have those levers if we find ourselves in those kinds of worsening market conditions, but sitting here today we want to fuel future growth, and when you have that kind of advisor expansion as well, just bear in mind our core growth rate in core run rate expense is about 5.5%. That's consistent with that level of up-weighted activity attached to that new advisor growth. So we'll continue to support operationally and structurally to service those advisors in the way we need to and keep a strong eye towards evolving conditions as well.

Thanks for that additional detail. Maybe shifting gears a little bit, just talking about really the trends in the overall business and how you guys did this quarter. If I look at quarter really, advisor growth, I think and obviously asset growth is exceeding probably your expectations and ours. I know you have lower interest expense now this quarter. You do have the higher expenses like we talked about, but if you back those out, you did $0.53, $0.54 in earnings in the quarter. I guess this is basically flat with a year ago versus, I think, you long term target of mid to high teens. So I guess my question is, if you normalize the expenses, it seems to me you should be earning much higher than you really did in quarter. I guess what I'm just wondering is really what's driving the lack of earnings growth if you normalize the experiences. I know you had lower activity rates but it seems like that shouldn't account for all the delta, so if you could expand that a little bit for us, that would be helpful.

This is Mark. Let me pick a couple things to think about. Remember we moved conference expenses from Q1 of last year when we had two of three major conferences into one conference in Q1 this year and one in Q2 of this year. So you're going to see elevated expenses in Q2. That's really just geography, not actual expense growth.

Secondly, you have to have top-line growth to get bottom line growth. That's a fundamental of business, and this business is no different than any other. We've always characterized that as we need growth in the high single high digits to get to that 20ish% operating growth level. So as Robert was saying before, I, like Robert, don't feel that we are doing anything than trying to match expenses to increases and new advisors, their activity which is always greater when they first get on board, and we are seeing elevated activity with existing advisors that I describe as fundamental. It has not resulted in commissions, unfortunately, but it is resulting in good asset growth, and good account growth, and cash balance growth by their customers. So that tells us that the fundamentals are all operating, that we're seeing activity levels that usually tell us that we'll start to see revenues show up at some later date. Of course, the problem with any business is that later date going to be in a couple months' time or a couple quarters' time. That we always have difficulty predicting.

I wouldn't say that we feel we have an outsized expense base to this level. We have a top-line growth opportunity for us to get more, and with more growth, we're basically able to withstand both the investment we're making in these new ventures, along with just regular operating expenses as well.

The one thing I would add, too, Chris is that the first half of last year was very strong. There's comparables, if you will, in terms of looking at the rate of growth achieved in the first and second quarters of last year, when the market slow down occurred toward the end of the third quarter into the fourth quarter, relative to what we're seeing this year.

Okay. Thanks, guys.

Thank you.

Thank you.

Thank you. The next question is (Alec Bildeston) of Goldman Sachs. Your line is open.

Hey, good morning guys.

Good morning.

Just to go back to expenses for one second -- it looks like you guys are doing $197 million in expenses right now, and it feels like your cost savings initiatives are not really going to come to fruition in the near term. Should we think about this $197 million, $200 million is a decent quarterly run rate, all else being equal from here?

Yes.

And then, Mark, to your discussion around the changes in the business, when you look at your adjusted EBITDA margin, it was around 40%, one of the lowest since the IPO. Assuming that there's no sort of fundamental change in activity levels or market performance, what gives you guys confidence that you could grow that 40% to something higher? Or, again, is 40% kind of the run rate for the EBITDA margin for the next few quarters?

Think it's probably the run rate for the next few quarters. What would change that to the positive is greater top-line growth. If we see what is essentially operational activity turning into commissions and greater advisory growth, you would certainly see top-line growth and that would expand margin. So we have a base level of expenses that Robert outlined in his prepared remarks that relate to growth initiatives that we have underway, and what you need is top line growth in order to overcome that headwind of expense and create an increase in the margin from 40% back to higher. And what we have tried to signal as much as we could early in the quarter was that when you get slow top line growth you will have challenges against the margin. But don't think of that as absolute, it's not symmetrical risk -- meaning that you are going to see the other side of that when growth returns. Our experience will tell us growth always returns. Advisors have mortgages to pay and kids to put through school and they have clients who need help and that results in activity for us at later dates. We don't see it yet, but again experience tells us that these things happen and they tend to work themselves out over a few months.

That's helpful. Thanks Mark. And then maybe to zone in a little bit more on the pipeline that you highlighted and clearly recruiting -- it's been very strong this quarter. Can you give us anything around the top of the phase you're bringing in from a productivity perspective versus the ones you currently have? I know your recruits from the wire house tend to be maybe a little bit more productive than your current base. Is that still the case or the overall mix hasn't changed?

The mix really for the last several years has been our recruiting classes have a higher average production than our existing advisors. Part of that is historic. Remember, we've been in business for 40, 50 years so you have good strong base of advisors in smaller towns where, by definition, there's a certain activity they can reach. We have about 20% of our revenues with institutions who by definition typically have a lower average production, again, mainly because they're community banks in smaller towns.

So that base tends to keep the averages down. And of course it's a number we can't really audit from a GAAP perspective but characterize for you so we can't give you the absolute numbers of the class. But we know them to be higher average production, significantly so, than what's here today. What we're seeing is actually -- where you can see it a little more transparency is in the RIA recruiting numbers, as you can see, in terms of RIA assets growing, and you can see it in terms of large practices moving and that kind of thing. That's where you typically where have more transparency from outside the company that that dynamic is there.

Got it. Appreciate it. Thanks.

Thank you.

Thank you. The next question is from Ken Worthington of JPMorgan. Your line is open.

Hi, good morning.

Hi Ken.

Continuing the trend, on the expenses -- so I wanted to focus on the three line items that moved sequentially. And I just wanted to hear the reasons or the components for the sequential move, just so I could get a better sense of what's recurring and what's not, even though I know you gave guidance overall. So comp, $89 million goes to $93 million. I think there was payroll that falls off. You had a deal that came on. About what were they in terms of those two components and if there was anything else? Promotional, you said there was a conference, how much was that conference -- was it little or was it big? And then, anything else big in there? Professional services, I think obviously you recruited a lot more, there's transition costs? Is that increase that delta transition cost, or is there something else?

I think Robert is probably best equipped to answer that.

If you got all that.

We got all that. (inaudible).

I think you focused on three components -- one was around compensation, and the other around conferences, and the third around transition assistance essentially?

Yes.

So let's take conferences, where the expense was about just over $6 million higher as a result of the timing issue of moving the conference to second quarter from the first quarter. As it relates to transition assistance it was up 41% year over year. And we don't tend to flag the specific dollar amount involved with that for competitive reasons, but you can tell from 41%, that that is fairly significant. The higher there is, a slightly higher rate that is being paid, and we've talked about that in at least the two earnings calls. We're comfortable with that in the mid-teens type of transition assistance levels. We still feel that's a very high and good use of capital. But the volume level of advisors joining increased, and that's the primary reason for that 41% delta year over year. And as it relates to the compensation, it's about $2.5 million a quarter, I believe, for Fortigent add into the quarter.

But payroll taxes fell off, I assume, going from 1Q to 2Q. So you still have the $89 million to the $93 million. I thought the $89 million was elevated in 1Q and yet comp increased more. So if I look at maybe from 4Q of last year, comp went up an awful lot. Is that really all permanent or are there other components that can fall off here?

Well, maybe it would be better if we go back to sort of baseline comparison, if you will, because I think you're referring to the unadjusted levels of comp and then going from $89 million to $93 million.

Yes.

That includes stock option benefit --

Fair.

-- which last year was $4.5 million and this year was $8.4 million.

Yes.

So the underlying delta is actually basically only $100,000 in terms of comp and benefit going from $84.5 million to $84.6 million. So I think that would tell you the drop-off you're seeing from people hitting FICA maximum and the increase coming from Fortigent which I said about $2.5 million is really about $3 million, just to be clear on that.

Okay. Now the real question, Just to talk about the mass market -- you've made a big push there. You talk about how attractive the mass market is, maybe versus the mass affluent business from your perspective. And then just philosophically, how do you service the mass market differently? Can this be as uniquely a high margin business for you and any additional information would be helpful? Thanks.

That's a great question and I appreciate you asking it because it's important to distinguish a few things. Number one is, we absolutely would characterize the investments we're making as larger than we might normally like, given top-line growth. We found ourselves in a situation where properties that we really had admired for a number of years in the cases of National Retirement Partners, Concord and Fortigent and we made the acquisitions we made, which elevated expenses and the way we characterized with you that Robert went through. We had always planned on launching NestWise and making plans to do it over 18 months to launch as we did in early January, which is your mass market question. That was after really, a couple of years of very extensive review and analysis of the marketplace and understanding the best way to enter. In normal year, you wouldn't necessarily choose to have a slowdown in top-line growth coming from fundamental same store sales drop-off nor would you also make those investments and acquisitions and launch a new adventure into the mass market.

I appreciate the question but it lets us highlight that range of investments we've made and would acknowledge to shareholders that that's where we found ourselves in a moment of time. We've been here before and my experience of firm, a couple different times that that happens.

So specifically, the mass market -- we see two things that I think are interesting. Number one is it's a massively underserved market. There's not a set of advisors or institutions fully dedicated to that space, and it's a group that very, very much needs help. We're at a time of incredible technology advantages that allow you to go to that market with a different value proposition. So what we're launching, we're doing test marketing products here in the month of August just a couple of weeks, you know we bought Veritat, which again was an acquisition what we hoped to be able to make and came along together rather quickly. And, again, given the pressures of top-line, you might not have made it, but it's the right long-term decision because that gives us an operating platform with our technology that lets us create productive advisors.

And that's what we're after -- advisors who can do two to three times the normal number of accounts you see in a typical independent practice. Once we understand and learn that productivity, and we have done it by simplifying the product line that's available to the mass market, and the mass market will accept that because there's no other products available to them today, nor the ability to get the kind of advice that we're talking about, we know that that will turn into a highly productive sales force that's profitable but we've got to get them.

The second thing we're after is we're after learning how to train advisors so that they can learn with that underserved market, they can create a standardized set of offerings and be highly productive. That then makes them good independent business owners or good independent advisors who can join existing LPL practices, whether at financial institutions or the independent firms we support. So remember, we're after two things. One is to be able to go after a market underserved and we think the technology allows us to create a productive sales force, and we're after the ability to create advisors in their second career through the training exercise that we have.

As a result of buying Veritat, we actually have eight registered advisors that joined us here in July and we have about another 11 in the pipeline who were in the process of joining Veritat before, and that really gives us a base to be retraining in this new methodology. And so far so good in terms of what we're seeing them be able to pick up in higher productivity. It's that combination of a market that's underserved, technology that allows for the advisor to be productive, and our ability to really train and educate the adviser how to do that actively that we think will lead to very good profit margins overtime. But of course, it's the start-up business that we have to get fully underway.

Great. Thank you very much.

Absolutely.

Thank you. The next question is from Thomas Allen of Morgan Stanley. Your line is open.

Hi, guys.

Good morning, Tom.

Good morning. You clearly have a very strong value proposition for advisors as illustrated by your record, net new advisor adds, very low attrition. However, your production to expense ratio keeps going up. I understand the mix issue, but what's stopping you from taking more pricing? Thanks.

I think we have already made some changes. There's three fundamental changes, I am not going to detail them for competitive reasons, that need to be made in terms of the relationship with some of our branches. And they're very, very good partners and we very much value the business we have with them, but they understand there's some changes that have occurred in the dynamic of the business. In other words, how they run their business vis-à-vis our relationship with them. One of those changes will change economics, positively for the company and negatively for them. They understand why, and appreciate our position around that and we've had good discussions with what is literally a handful of branches that are affected by it. And what's happening is you're seeing what I would describe as a conglomeration effect, meaning that a large branch is getting momentum of growth because they do an excellent job of managing sales activities at the local level, which is a nice service they're providing the company. They're doing that at a time that smaller practices are having a little harder time getting traction and that's just an anomaly that relates to timing. We won't worry about things outside of our control.

But within that large practice what's happening is as they get growth, there's a couple different ways they're doing that that are essentially causing the production bonus to go up without a corresponding amount of cost savings either cost savings by LPL or without a corresponding amount of appropriate margin expansion by LPL. And they understand that for all of us to work well together, our commitment creed says we have to do this profitably and that's really the basis under which we've gone back and to say we need to make changes. One change that has already been in in place that effectively is what you characterize and we have a couple of others that we're in discussions about now that will also help them drive long-term growth but do that with appropriately taking a production bonus that fits the production levels they have.

Thanks.

Think one thing to highlight, Thomas, to make sure I'm crystal clear is that remember that while we have a contract that allows either one of parties to leave in 30 days, the other thing that happens is in that contract is that it's typically an annualized change. So our practice has always been that while we've been able to change one aspect of a relationship because that's sort of outside the contract and an anomaly, another couple of things other things that are there have to be timed much more with year ends, and so we just again have these moments where you have essentially a distortion in the marketplace, that's the production bonus and will affect it but will not be able to affect it necessarily overnight because it will tied to the calendar.

Okay. Just on the advisory assets, the yield has come down the past two quarters and I think that's driven by the increase in RIAs. Is that being off-set elsewhere? You have very strong non-cash sweep other asset based fees. Is that offsetting that or is it a one-for-one offset?

They're not related at all, just to be clear. And what you're seeing is the average fee is coming down only because of math. What you're seeing is RIAs, remember we don't take a percentage of their fee, so their fee is let's call it 99 basis points typically for their charge to the client and an LPL advisor who is using the corporate RIA is charging about 110 or 109, somewhere in there. And if you look at it, there is really degradation occurring, it is just the mix-shift of RIAs being in strong growth mode. And again, RIAs typically are a larger practice, so you're seeing more impact that way.

But that's all geography. There's no fundamental issue that exists within those fees. So there's not a need to offset because the RIA is a very profitable business line for us already. It was in start-up mode at the end of 2008, through most of 2009 and started making profits in 2010, and makes very nice profits today. That's a geography issue. There's a slight change with the typical LPL advisor's practice, down about a basis point over a year so it was 111 and now it's 110, but I describe that as not important.

So I think the second part of your question is how does the ecosystem work around these different pieces? And sometimes you're going to get moments where everything breaks your way, prices are going up, certain practices grow at a certain pace, recruiting is very strong and you're hitting on all cylinders -- and other moments are a couple cylinders off, and that would describe this quarter reasonably well. And I don't see much concern in terms of fundamentals of the business, with the exception being the large practice discussion we just had in terms of things that need to offset one another.

Okay, thanks.

Thank you. The next question is from Devin Ryan of Sandler O'Neill. Your line is open.

Good morning, guys. How are you?

Good morning.

Just with respect to the comments about investors exhibiting more cautious behavior. Are you guys seeing signs that any of this reduction is related to a lack of investing firepower or available cash? Or is it more just market uncertainty? And then, is what we're seeing now similar to what you guys saw in the back half of last year, or is it something better or something worse?

Why don't we let our new CFO answer that one?

Thank you, Mark. I think as we look at and compare the investor behavior and the advisor's opportunity to support that and compare that back to last year, we see very similar trends in the events that occurred last August and in the subsequent performance of those advisors over the next, call it 60 days to even extend it, 180 day period. We see a very similar experience to the events that transpired in April and then that same trend where there tends to be to downward trend in the overall performance and investment activity that usually has some type of bottoming characteristic around it 60 to 75 days out. And then you see that normal trend begin to recover in an upward trend in activity and that performance.

As Mark said, the advisors have clients that have needs and typically, they are able to step in and through that counsel and that advice, help those investors reorient towards solving those goals and objectives. So we see similar trends and we see think we're seeing that subsequent to the April events of this year. I think we stand very committed that there's the long term growing need for advice in our advisor's ability to step in and serve the needs of those clients and continuing to acquire new clients because of that macro demand and the value proposition they offer at a local level. So we stand long-term bullish on their opportunity to grow their practices.

I think the only other thing I would add is of course it's quite different a dynamic when the slowdown occurs in Q4. Effectively people say, OK, investors are disengaged, I'll go ahead and use this time to be with my family and I've done pretty well for the year because they were busy the first three quarters of that year last year. Here you have a very different dynamic where the slowdown is occurring in the second quarter and probably dribbles into the third, I don't know why it wouldn't. It is the summer, after all. And we have our big national conference which always brings part of the field force in for training and discussions. So the reality is it's a very different dynamic because they come out with the September effect which is about getting back to work and getting clients' needs met and getting business on the books.

So I guess it's fair to say that you're not seeing any concerning trends of just availability of cash or money to put the work in the markets, then?

No, we're not. I think the one thing we have seen is some cash deployment by end investors into reducing debt levels and being somewhat more cautious in their overall financial management, but there's no barriers to essentially them reentering the market and being part of a well-thought-through financial plan.

We have looked at any number of indicators from account growth to cash build-up to all of the things you would look for. Although I was a long time ago, this looks like 2003 to me, where you had a slowdown earlier in the year and you had some catalyst that changed it at some later date. And the year turned out to be fine. I'm not predicting that because it's hard to predict but I do think, as Dan was saying, we need a catalyst that gets us there. We've had had the catalyst that takes it away activity, and we will wait for the catalyst that brings it back.

Okay, great. Thanks for that color. And just one follow-up on your comments on NestWise -- I really appreciate the detail you guys gave there, but could you talk about the launch of that business in terms of the timing? How long it will take to ramp for us to actually see the revenues and results or just your expectation for that? And just any color on how we should think about the potential for this business financially for you guys?

I think the way we're trying to characterize this is we need a couple of years to get it underway, in which we're going to absorb losses from it. That's this year and next year. And we're hoping to then get to break even to some profitability by 2014. But I would look for it, what we're holding ourselves to from a board level perspective, and an operating management perspective is -- are we getting people trained? Are advisors getting in there and being creative? And if we're seeing a good ratio of number of advisors that we're able to do -- we're doing this city by city -- we've picked out the first two cities to do it in. If that does well, we might choose to ramp up to a number of cities at once which will hold off profits. But would result in -- you would see it in head count increases, and we'll detail for you as we go forward, the head count increases coming through the NestWise experience because as shareholders we want you to see we're investing our income wisely in forming this new leg of growth.

I do think we'll need a couple of years to break even, to slight profitability, and remember a dynamic that will occur is we might find that NestWise has quite outsize margins in five years' time, or even has something less that outsize margins in five years' time but produces a significant number of advisors who go on to join other practices, which means they expand their business and grow. So that's the experiment that we have in front of us and the challenge making sure that we're adding value for all of us as shareholders by creating a new line of increases and number of advisors overall at LPL. We think it's a significant opportunity to add new advisors to the company.

Great. And then just lastly, on the contract renegotiation that hits the cash receipts. It looks like there was not a significant impact this quarter from the renegotiation that you mentioned. Do you guys have any other contracts that are coming due in the near term here or that you're in the process of renegotiating? And should we expect kind of similar impacts or lack of impacts from that activity?

It's a continuous program and a portfolio of counterparties, and so there's always some level of activity in terms of rollovers as well as additional counterparties we look to add, depository institutions we look to add. But there's is nothing material in terms of a large renegotiation process or anything coming due in the near term that would cause any change in our outlook or our guidance relative to the cash sweep program.

Great, thank you very much.

Thank you.

Thank you. The next question is from Bill Katz from Citigroup. Your line is open.

Hi, this is actually Steve Fullerton, filling in for Bill.

That doesn't sound like Bill.

I was wondering if you could provide an update on activity levels you guys are seeing in 3Q so far?

Yes. I think, again, in terms of terms of activities that relate to accounts opening, advisors joining and so forth, we're certainly seeing those activities either at elevated levels or certainly at normal levels, and those things typically lead to revenue growth, which is what we're all after because that we can turn into profit growth. So that's the broad brush of activity, I don't know -- Robert, do you want to?

As we mention in our scripts, our baseline beliefs about the advisor and the investor sentiments and the overall conditions we're going to operate under are unlikely to change much over the remainder of this year. We don't see anything today that tells us there's a material catalyst for upside in the market, nor do we see something that poses an inordinate threat, although it's an uncertain world out there. So we have ourselves positioned accordingly. But in terms of core operating levels, our expectations are investor activity will continue around the levels we see it now, and we'll just continue to monitor that and talk to you about it as events actually unfold.

Okay great.

I think a dynamic change that has happened since the 2009 downturn, just to highlight that, that might be helpful for everyone in the call is that in the old days I might characterize this business as two or three years on or a year or two off. That really went with the market cycle. You went through the growth period in the overall economy, followed by some sort of resettlement or a recession or something, and that tends to slow activity or so forth. That was sort of the typical rhythm. What we certainly have noticed since 2009 is a rhythm that's really more quarterly. At first, frankly, I thought it was because we were public, to be very honest. But as we've looked at it and as we evaluate this quarter in light of history, that is one thing that has changed since 2009. You're getting two or three quarters on, a quarter or two off, and that seems to be the way of the world. That also seems to be the way the markets performing over the last three years as well. And we are correlated to market activity. At least I've talked to you about that.

So I think that's one fundamental difference. What that means from a management standpoint for us, as we talked about with our board, we'll talk about with all of you as shareholders or potential shareholders, is that that means you have to think through how you manage that dynamic a little differently. So you get into a year like 2008 where it's clear as day, it's scary, and it's ugly, and all those things that you expect, and you whack the heck out of experiences and you pull through, right? And your competitors are weaker than you were coming out the other side, which is exactly what happened, and that would be a characteristic that I can find evidence of in our history as a firm and certainly kind of mirrors what happens at most financial services companies. It's the adroitness of the team that allows you to be better, you hope, than others.

Here what it calls for is fundamental understanding of the business dynamic and this volatility occurring by quarter, and a need to be smart about expenses. By that I mean not being overly conservative. That's a tough message when you have a quarter like we've had for shareholders to hear, but I believe we will see in payoff and later quarters, maybe not necessarily next quarter or the one after that a much different profile for the business. How I know that is when I look at both our history -- certainly in the ten years that I've been here -- and I look at even recent history versus something like Retirement Partners. That was a business we bought just coming through the IPO. It had a certain profile in terms of what it could do in and of itself. It was good acquisition, just based on bringing 200 advisors into the firm.

But what was really interesting is it led us to a different dynamic for three things. One is that we could charge advisors an additional set of fees that gave them good value and gave us good value as shareholders. That we knew going it into it. Two is that it creates a bigger retail business, that's what we believe, and we're actually now seeing that. And remember, we're in beta, in Q4 of last year for their automated rollover service. It's now fully up and running and we're seeing retail brokerage accounts coming from our rollover services, and we're gaining momentum in the number of plans that we're signing up for.

Then we said that there's an option that we didn't see in the original investment to do in end plan advice. We're doing a joint venture with Morningstar that is in beta now. It will not produce any profits this year, but it will be highly valuable to our advisors and to us as shareholders as that gets fully underway.

So those are good, smart, incremental investments to make. A mistake for us to be would say, "Gosh, we're going to shut that down." We've decided that it's going to cost a few million bucks extra here in the second half of the year, and we need to save that money and then we don't do it. And someone else will bring that to the market and we'll lose our competitive edge and we'll lose the opportunity to build much greater profits once we get underway with that service. And that to me is a really good encapsulation of a way to think about this quarter by quarter versus year by year in difference in the business.

Okay, great. And then in terms of the timing and expenses from the conference that you guys said is about a $6 million lift -- is there a certain e timing we should expect in future years for certain quarters that we can expect this now in 2Q going forward? Or is it just going to fall where it may?

In March of next year, both conferences are in March. So next year you will have the opposite effect because you have -- there's three major conferences and you'll have two of them in the March period from there.

I actually thought one of them was in May.

It is? Okay. I stand corrected.

We'll come back to you on that one.

Okay, great, thanks a lot.

Thank you. The next question is from Joel Jeffrey of KBW. Your line is open.

Good morning, guys.

Good morning.

I'm Just thinking about the revenue side of the business here, I mean in terms of the commission revenue you generated this quarter was down from last year and kind of flat year on year. I'm sorry, from prior quarter. Is there any product within that group particularly strong or particularly weak or certainly dominated that revenue line?

Yes. You saw a drop-off in fixed annuities as one area, but nice growth in variable annuities, okay growth in mutual funds. Alternatives were strong in Q2. So I wouldn't describe that as much of a mix shift. I think it's overall activity levels that are driving the lower commissions, not a particular mix shift of product that's occurring.

I know that's sometimes a question for people. And I just would remind the callers that mix-shift generally we're protected against through the way that our gross margin operates and the pay the payout grid operates. We pay out differently based on relative profitability of each line of product. So you can have a shift in fixed annuities which dropped off from basically due to lower rate. And that shift has not much impact to the gross margin levels. It wasn't really a product-driven mix shift. It wasn't something that plays through that way. It was just overall activities on the commission side in particular being lower than normal.

Okay, great. And then just thinking about the buy-back a little. Traditionally you guys have bought back shares to offset issuance, and it sounds like you have $75 million with which to use. How would you think about a buyback in terms of going outside of the offsetting the dilution? Is there a certain metric you look at in terms of when the stock becomes attractive or anything along those lines that you could help us with?

Yes. I'll take that one. Of course, as you stated, and as we've pursued up to this point, we've typically pursued our strategy around buybacks relative to managing dilution. And I think our intent is on that for the remainder of this year as it relates to 2012 dilution. We will also continue to assess the macro conditions as well as operating conditions, and finally the stock price to consider an alternative approach that may have us pursue more aggressively those repurchase opportunities. I think as we look into even 2013 and assess the repurchases necessary to manage dilution into 2013, that may be an opportunity to proactively ahead of 2013 pursue buybacks again given the right condition and right opportunity to do the right things for both LPL and our shareholders to pursue that aggressively. And certainly as you pointed out with the $75 million repurchase three opportunity we have, it gives us the flexibility to do that.

Thanks for answering my questions.

Thank you.

Thank you, ladies and gentlemen. (Operator Instructions). Our next question is from Alex Cram from UBS. Your line is open.

Good morning.

Good morning, Alex.

One question -- now I've got to really choose here. Actually, I wanted to come back to the NestWise. I apologize for using my one question to ask the same question again, but obviously you say profitability by 2014 so you obviously have somewhat of a detailed plan in mind. So maybe you can be a little more specific than you were when you answered prior questions in terms of what does that actually mean? Does it mean in terms of number of cities served or advisors on the platform, production levels you expect from these guys. Any incremental help? That would be great. Thank you.

We're best to characterize for you that we view that NestWise will be unprofitable in 2013 and by 2014, there will be break-even/slightly profitable based on the models we've seen today, remembering it's a brand new company, in which we've made a brand new investment in a competitor, to bring those two platforms together. I don't think we want to characterize it any further than that. What I want to point out as metrics are you'll see us grow number of advisors for the training program, and number of cities that we cover, we will certainly give you that transparency to the investment of NestWise overall. Frankly, had we had activity growth in terms of top-line growth for the quarter, we would have a lot less focus on NestWise or the other investments, because this is fairly typical. What's atypical is a combination of having slow top line growth and having several investments going at once. The portfolio is a little fuller than we would normally have it in terms of future growth opportunities, but that doesn't mean it's bad. It means that we have a moment in time where opportunities arose faster than we thought.

I think that gives me an opportunity to say that I will say both in terms of pipeline, recruiting and business opportunities for the firm, I've never seen a time that we've seen so many good opportunities for future growth. And what we're going to be happy with as shareholders in that we can go through a low-down period in which we are planting the seeds for future growth, NestWise, Fortigent, and so forth and new business recruiting -- remember these recruits come in and they have a business activity that is well-known to us and tends to ramp with great certainly over time. And when you see this level of recruiting and you see this level of investment in acquisitions, these are small acquisitions, dollar-wise, that really gives us a belief about future growth. We are just not going to characterize the future earnings from them because we don't give forward guidance.

You can ask more than one question. We just have a couple of other folks in the queue.

Well, thank you. I guess one of the things we haven't talked about is M&A, and you've been consistent here in terms of saying you're not looking for consolidating transaction. But obviously, this quarter you see that you are getting to some degree impacted by the tough environment out there and I assume some of the competitors are getting impacted even more so. So you see more interest and more approaches from other firms? Do you see, maybe, prices coming down a little bit? And does that change at all, your view on consolidating transactions? And maybe just in terms of that, the regulatory probably environment doesn't help either? Do you see that accelerating things as well? Thank you.

I think you've said it all right there, right? And I love the way you've drawn that, that's exactly how I would draw it. You have a very tough environment for regulatory costs. We're certainly seeing that in our cost base. That cannot be avoided and has to be done. Some of it is one time and some of it is going to be ongoing. And that's part of what we're trying to sort through now. It's not so much Dodd-Frank for us as it is really the aftermath of both the SEC and FINRA deciding take a different approach to the way they do reviews. That is adding costs to the industry. FINRA just raised their fees very significantly in the near term, and those are all things that have to be absorbed as new costs.

And so we'll work our way through them, we're the market leader. And we're going be quite good coming through the other side. It is going to put a lot of pressure on the competitors. Where we're seeing that develop actually is not so much in acquisitions, because frankly, the acquisitions that come up that way are weak competitors that have field forces that we're not particularly -- wouldn't recruit per se the entire group. But there are selective people that we would recruit, because of their size and because of their record and good business management that we want. So we're seeing an opportunity to really do significant business development. You saw that in the results for the quarter and that's what is different for us. We are reinvesting in business, creating an environment that someone else characterized as quite good for advisors. And I can tell you that we are going to make it quite good for shareholders as well. And that recruiting opportunity is really coming out of the factors that you mentioned in your question.

In terms of acquisitions quite specifically, we continue to look at companies like we've already purchased, just essentially technology companies that give us an edge and a market, Retirement Partners is the most developed of the idea and one we are seeing really good growth from and that will turn into profit growth with a little more volume, so that's good. And then we are looking at selective properties that are essentially consolidation plays. But we do hold a very rigorous standard for whether we would want it buy them or not based on how many of the advisors we could keep, or based on underwriting some of what we would do in recruiting of new practices. So the reason we wouldn't take them is because they're very tiny, average production, or their business management is not up to the standard that we set for this system and for the advisors who are in it.

So those are decisions you would want us to make as shareholders of the firm with that in mind. I think it will develop over time. Opportunities for better quality businesses to be for sale, as other companies are going through those kind of quarterly on and off period and they continue to be pained by the narrowness of cash yields and just the cost of increased regulatory reform.

All right. Thanks for allowing me to follow up.

Thanks you.

Thank you. The next question is from Chris Shutler of William Blair. Your line is open.

Hey guys, good morning.

Good morning.

Thanks. I know it's early and certainly appreciate you don't give guidance. But given all the moving pieces in the expense lines and the investments that you are making, I was just hoping you could give us high-level thoughts on how we should think about the margin trajectory in 2013. Maybe said another way, is there a certain level of revenue growth you need to achieve in 2013 to be able to expand margins?

I think we stick to what we've said all along, which is we that we are going to have high single digits of top-line growth to be able to get good margin expansion for the business. So that is really what we need is growth that's there.

Again, it would be easy to take down expenses. We could just shut off the things that we're doing in terms of some of these new businesses that we're developing. We could certainly make a wave of cut-backs in expenses. But what that will do is set a different process in place. That will set lower service and set up a less positive environment for advisors. That would not be good for them. Therefore, it will not be good for us because they will have a slowdown in business. So what we're seeing is an opportunity to invest through a slow-down in the top line. That's what's really revealed here in Q2. I don't think it gets much better in the next couple of quarters because that's just the way that these things tend to run. But it don't think it's a cause for alarm or cause for us to take different action.

So to characterize 2013 is with reasonable backdrop of markets, and reasonable backdrop of growth, we think we will see nice margin expansion. If we were to have a significant amount of top-line growth, we would see a significant amount of profit growth and margin expansion. We've seen that in previous history for this business -- back in 2006 and 2007 were years in which we saw that kind of dynamic play through. So I think those are all the things.

If we were to see a sustained multiquarter change in the environment, let's call it this time next year, where there does not appear to be growth coming back, I think we'll have to evaluate where we are. But we're not to that point yet, and we think this is the time to deep forging ahead with these growth opportunities. Because as I said in my prepared remarks, we've done this before and boy, has it paid off handsomely. Just two decisions in recent memory were the going self-clearing in 2000. That was enormously expensive and came right on top of the market meltdown of the dotcom bubble burst and it was brilliant to have done. We would not have the business we have today if we haven't done that.

Then in 2008, fourth quarter of 2008, we launch an RIA service. It would have been easy to say, "Let's not do that," in the midst of all this and the management team and board felt there was no better time to launch than that moment. And it turned out to be quite right. We had significant growth in 2009 that turned into profits in 2010 and we've had significant growth ever since then -- in fact well ahead of plan, almost double than what we planned than when we originally launched. So these are moments to breathe deeply and to forge ahead.

Okay. Just to reiterate -- if you do achieve sort of a high single digit revenue growth in 2013, then margin expansion is certainly not off the table?

That's right. That is the level upon which we built the guidance around our expansion of 30 to 40 basis points of margin and incrementally on an annualized basis.

Again, if we were to see mid double digits, I can never get the digits right that's why I never use the actual numbers, that obviously something that represents significantly top-line growth, we would do better than a 30 to 50 basis point margin. History has told us that's the case. We know that's the case in our own modeling out of our financials.

So I think we have three scenarios and one is it stays the same in terms of low growth and we work our way through it as we are now. Or we get high singles and that gets the train back on the tracks in terms of what we talked about during the IPO because we have conditions for the success. Or three, we have a world in which uncertainty goes away for a large part of which there's an enormous part of uncertainty across the US as we all know, or across the world for that matter, and therefore, you have a catalyst in which you have a high top line growth. And that we know we can turn into significant margin expansion.

Okay thanks. And then just one more -- maybe you could talk about the composition of the Q2's net new advisors. I know you talked about it a little bit by channel, and mentioning wire houses and independents as being particularly strong. But maybe just a little bit more color since I know the larger practice has been very strong, and generally bringing in smaller. I'm just trying to reconcile the differences there because I would think that if you're bringing in more larger practices, the size there is different on a per advisor basis than what you would see with at least the wire house channel.

Let me characterize first the channels, and then we'll go from there.

Again, so where we're seeing the strongest recruiting is from the wire houses and independents, and it's been that way last year and it's that way this year, and certainly this quarter. And we're seeing it increase in the pipeline from both those sources as well, which tells us more to come in terms of opportunities there. Again, it's very tough to figure out by quarter how it all falls. But we feel good about the pipeline building and the mix of business.

I think you're right to characterize that typically, somebody who is coming from wire house has higher than average production. You can see that in those organizations' average numbers for their system, which are two to three times the average number for us. So by definition, you're going to get someone from XYZ and wire house will join here and they will join with anywhere from 25% higher production to as much as 3 times higher production per advisor. I think and that's a fair characterization. The independence have several different types of advisors that can join us, but what we're seeing now is as you say the large practice joining, where what they're doing is essentially moving a group of advisors, 20, 30, 40 at a time, but their average production is still higher than our average production because they typically are the large practices within their existing shop and so their average production is still higher than our current average production.

And then the other group I characterize for you is within the independents are bank and credit union programs which we receive and their average production is about at or slightly lower than our average production because it's a bank program, which by definition has larger head count but lower average production. When you put that together in a blender and finish it off, what you get to is a class that has higher average production overall than our existing and typically, that number has been anywhere from 15% to as much as 50% higher than in a typical year.

Thanks for all the color.

Thank you.

Thank you. The next question is from Ed Ditmire of Macquarie. Your line is open.

Hey. Good morning guys.

Hey, Ed.

I just wanted to talk a little bit about the kind of thoughts around the margin. It strikes me that what we're looking at is something like 300 basis point, step-back from say 2011 to the back half of 2012 and how we'll start 2013. What you guys are saying if we get the double digit growth we want -- we could get as much as say a point of that back per year. And is there a broader transition where we're not really taking an incremental approach to the margin and then we're really shifting the focus to bottom line net income growth now?

Well, I think -- I'm not sure that I completely understand your question if you are trying to characterize is there an opportunity to make a different decision purely to go for profit growth, there's always that opportunity. I can tell you what I think what would likely happen if that's the case. One is that you would end up starting to change services fairly dramatically for advisors and you would start to see some degradation in our ability to recruit advisors because our satisfaction levels would go in with existing advisors, and they're our biggest source of referrals in our business. I think secondly, you would see near-term profitability improvement, there is no doubt about that. But I think it would be relatively short-lived. It might last a couple of years and you would start to see a fundamental change in the business.

I think what we're probably not characterizing for you well is that the way you described the dynamic of how profits would change is absolutely right. We've had a roll-back in margins through the second quarter and we'll start to roll forward margins in a positive way in a dynamic. But that doesn't take into account that some of the things we're doing NestWise and Fortigent and Concord should lead to higher margins beyond that. We're trying not to characterize because we're in experimentation mode, and we have plans that we think would take our margin expansion higher and absolute profits higher as a business overall.

So, that we haven't characterized because again, we're still seeing that as being several quarters, if not a couple years away in terms of those investments. But think of that as a core operating business in which you can have a choice of maximizing profits or finding a balance between near-term profits and longer-term growth. That, I think we have characterized well for you On top of that, we're adding additional investments, and they're certainly taking down near term performance, but what they're doing is setting us up for much higher profit growth in future years that we would see, say, in head counts.

Let's use a head count as a proxy for that and say, "Gee if we can do net 400 per year" -- which is what we have guided you to, we have done now a little bit higher than net 500 per year, if we include the most current quarter, probably closer to 550 on average. And that's good. That comes from the reinvestments. So you might see us in another year's time saying, "You know what, I we'll feel comfortable telling you it's net 500 on a going forward basis." That would be a fundamental shift in our ability to bring on new advisors.

The second fundamental shift could would come from NestWise, if it creates 50 advisors in 2013, we would consider that a successful launch of the business. But it wouldn't be enough to move the needle but if in a few years after that it started to move the needle by having 200 or 300 net new advisors per year, that would be significant for us in terms of new store creation and growth of the advisor population which we know sets us up for faster margin growth, or higher margin growth and faster profit growth. Does that make sense?

Yes. I think it just sounds to me what you're -- you think all these investments and the costs you're incurring now will not only accelerate the earnings per share growth rate over the next couple of years but that within a relatively short period, you'll be earning more than you would have otherwise, just in terms of the absolute.

That's right.

That's a good summary.

Ed, we would like to talk to you off-line about your characterization that margins are 300 basis points of 3% from peak to where they are now. I don't track that. I see about a 1.5% to 2% delta, which is something we've seen in past, where you've had periods where slower growth and margin pressure expert themselves. And we have our step change coming out of a period like that when growth re-exerts itself and our positioning really takes on the full measure of benefit, and we then set a new higher plateau. The company has consistently shown that ramp up through time if you look back to the year 2000, we've had these stair change steps.

Okay great. Thank you.

Thank you. Ladies and gentlemen, this concludes today conference. Thank you for your participation. You may now disconnect. Good day.