LPL Financial Holdings Inc (LPLA) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings fourth quarter earnings call. At this time all participants are in listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions).

I would now like to turn the conference over to your host, Mr. Trap Kloman, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning to the LPL Financial fourth quarter and full year earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his prospective on our performance. Following his remarks, Dan Arnold, our Chief Financial Officer, will speak to our financial results from capital deployment. Following the introductory remarks, we will open the call for questions. Please note that we have posted a financial supplement on the Events section of the Investor Relations page of 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. 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 our Safe Harbor disclosures contained in the earnings release and our latest SEC filings to appreciate those factors that may cause results to differ from those contemplated in such forward-looking statements. In addition, comments during this call will include certain non-GAAP financial measures governed by SEC Regulation G. For reconciliation of these measures, please refer to our earnings press release.

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

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

We delivered positive performance in the fourth quarter. I look forward to provide an insight into the current business environment that influenced these results and how our long term strategy is unfolding.

Our business remains dedicated to delivering increasing value to our advisors and institutions. As a result of this focus, we experienced strong growth in our fundamental drivers of shareholder value in 2012 despite difficult market conditions, low interest rates, and an uncertain political environment which led to moderate revenue growth of 5%. We lead the industry in attracting new advisors, produced excellent retention, and delivered additional capabilities to position our advisors for future growth.

This quarter 182 net new advisers joined our platform. This translates to 505 net new adviser additions for the year, representing a record year for recruited production. Excluding a large banks departure in the third quarter, we added a total of 686 net new advisers in 2012.

The movement to independence is not a temporary phenomenon, but an accelerating trend reflecting investor demand and advisor sentiment. Our success reflects differentiated value proposition. We amplify our success by broadening our capabilities organically and acquiring complementary businesses such as National Retirement Partners and Fortigent.

In reviewing our pipeline, we see continued strength in these trends over the next six to 12 months, and we expect to continue to attract advisors at a rate similar to 2012. Equally important, our current advisor relationships remain strong, as 95% our of our existing production was retained in 2012. This result remains within our annual targeted range of 95% to 97% retention. Overall, advisor productivity remained muted for the year, reflecting near-term market uncertainly due to well-known external factors, such as the general election and ongoing budget negotiations. While these events do influence quarterly results, we believe dedication to our long-term strategy is the key to sustained growth.

We are seeing early signs that the agreement to avert the fiscal cliff provided some relief to investor anxiety. In a recent internal survey, the majority of LPL advisors reported a positive business outlook for the next 12 months. They are holding more financial planning sessions with investors, and continue to open new accounts. They generated record advisory sales for 2012, which resulted in 9% growth of net new advisory assets. This momentum has continued into January, as we have seen cash deposits being invested and increased training levels to begin the year. Taken together, these trends represent the seeds for future growth.

One key environmental factor for our firm, and many others, is that we are operating in a low-interest rate environment that's forecast to persist into 2015. With institutions flush with deposits, we expect to experience a compression in the fees we receive from our ICA program as we renegotiate contracts with our bank participants. We are affirming the guidance for 2013 of a 10 to 12 basis point decline, and expect further fee compression in 2014 of approximately 10 basis points in our insured cash account fee, assuming Fed funds remain flat.

We provided a table in our financial supplement detailing a breakdown of current bank relationship maturities. Notably, some bank relationships will mature in the latter half of 2014, and we could see greater risk to our fees in 2015 if the current interest rate and deposit environment persists. We are actively working with our bank partners to minimize this risk and maintain competitive fees. As a result, we may choose to negotiate terms that could further impact our fees over the next two years to lessen the impact in 2015.

By 2016, we anticipate that a substantial majority of contracts will have been renegotiated, at which point the primary driver of prospective cash sweep revenue would be a recovery of the underlying interest rates. Ultimately, there are many external variables -- fluctuating cash rebalances, market demand for brokered deposits, Fed policy and regulation -- that could move the needle in our favor or against us, making long term guidance difficult. We still retain a significant upside to future interest rate movements and growing cash balances, both of which increase revenue and help mitigate fee compression.

We actively manage our approach to our business to drive long term success by focusing on enhancing the fundamentals and continually challenging ourselves to do things better, faster, and at a lower cost. We strive to provide more value and create simplicity for our advisors and employees to unlock greater efficiencies.

In 2012, we delivered on this strategy by stream lining the turnaround time for many operational activities, and extending service hours, enhancing advisor productivity. We also provided new capabilities in technology such as E-signature, and expanded the availability of alternative investments in our advisory platform.

Looking forward to 2013 and 2014, the service value commitment will continue to contribute to this improvement. One aspect of this initiative will involve repositioning our labor force as we increase our focus on our core strengths and transition non-advisor-facing back office functions to a best-in-class global service provider.

The acceleration of our efforts reflects the positive outcome we have had on smaller scale over the past 18 months. Dan will share with you the financial benefits of this work. Currently, we are examining outsourcing certain non-advisor-facing functions including commissions processing, account openings and transfers, document imaging, and processing work within compliance and finance.

This effort is not simply a cost-reduction exercise. Although these functions will experience a reduction in labor force, we expect additional hires in other areas of our firm, such as technology development, business consulting, research marketing, advisor training, and business development. We are supporting this growth with increasing investment in our human capital infrastructure, building capabilities in the development of our people, and enhancing our work processes. These are areas in which we are distinctive, and we will continue to invest our resources to support the greatest opportunities for growth for our advisors and our shareholders.

A critical component of this initiative focuses on implementing changes to our foundational technology. Our investment in technology will result in not only continued enhancements to our existing systems, but will also result in a faster and more cost effective ability to innovate.

Recently we have announced the appointment of Victor Fetter as Chief Information Officer and Managing Director, and Donie Lochan as Executive Vice President to lead our existing technology team to further differentiate our technology platform in the marketplace. Ultimately, these collective efforts will continue to enhance the quality of our work, speed the delivery of our services and lower our long-term cost of operating our business.

In conclusion, this past year, we improved our fundamentals in a challenging environment while returning $448 million in capital to shareholders -- $199 million through share repurchases and the remaining balance through dividends. Based upon our positive outlook on our capital resources, I'm pleased to share that the board has approved a quarterly dividend of $0.135 per share, increasing it by 12.5%.

Our success is built upon our most valuable assets, our advisors and their relationships with the clients, and the dedication and talent of our employees. These fundamentals are constant throughout all market cycles and economic environments, positioning us for sustainable long-term success.

With, that I'll turn the call over to our CFO Dan Arnold, who will review our financial results and outlook in greater detail.

Thank you, Mark.

This morning I'll be discussing five main themes. First I'll address top line results for the year, followed by a more in-depth look at fourth quarter. Next I will review the drivers influencing our expense structure, and then turn to discuss our earnings. I'll then proceed to discuss the costs and financial benefits of our service value commitment, and conclude with a review of our capital management strategy.

With respect to top line, we generated record revenue of $3.7 billion for 2012, representing 5% growth year over year. This was driven by superior business development activity and gains in the equity markets, which were partially offset by lower interest rates and sluggish advisor productivity due to investor inactivity.

Revenue growth was also supported by several strategic initiatives that contribute to do a $80 million increase in our attachment revenue. One example is the repositioning of our advisor pricing model, which generated incremental advisor fees in 2012. We also invested in our technology to expand omnibus reporting, which enabled us to improve our economics from our relationships with product manufacturers.

Finally, through the acquisition of Fortigent in May 2012, we expanded our platform to provide greater support to the high net worth market. These multiple drivers of revenue demonstrate our ability to produce growth despite challenging operating conditions.

Turning to the fourth quarter, we ended the year on a positive trajectory for advisor productivity. Annualized commissions per advisor improved to $140,000 up 4% over the third quarter. We also experienced strong net advisory flows of $2.7 billion, representing 9% annualized growth. These trends, combined with the overall growth of our advisor base, help support record revenue for the quarter of $944 million.

On a year over year basis, revenue increased 14%. Drivers behind this growth begin with commission revenue, which increased 16% over the prior year to $467 million. This growth is due to the addition of new advisors, increasing trail revenue, and improving commissions per advisor.

Another driver of revenue was the sustained demand by advisors and investors for our advisory solutions. Advisory fees of $276 million increased 10% compared to the fourth quarter of 2011. This was primarily a result of 16% asset growth year over year on our corporate RIA platform as of September 30. The advisory fee as a percentage of assets on our corporate RIA remained steady as 110 basis points. Please refer to our financial supplement for further details.

Asset-based fees increased by 15% to $103 million. This was driven by the investment in omnibus reporting, which was previously discussed, and rising asset balances, which increased record-keeping and product sponsor revenues. Cash sweep revenue increased by $2 million, or 5%, reflecting an increase in cash sweep balances to $24.7 billion. This increase occurred in the latter half of the quarter, reflecting year-end account rebalancing, but we are already seeing these balances being put back to work in January as cash sweep assets have declined year to date. Transaction and other fees increased by $12 million, or 17%, year over year. This was primarily due to the growth in the number of advisors, pricing changes implemented in 2012, and the acquisition of Fortigent.

I'd like to turn to our expenses, beginning with the payout rate. Our fourth quarter payout rate declined 33 basis points to 87.7% year over year. The decrease was primarily driven by a lower base payout rate. This base rate remained within the range of historical norms and as a result our annual base rate was flat year over year. Our production bonus growth moderated relative to previous quarters, increasing only 10 basis points from the fourth quarter in 2011. For the year, the production bonus grew 30 basis points.

I'll now discuss the G&A portion of our expenses with a breakout of key variables. For the quarter, G&A expense, excluding depreciation and amortization, and adjustments that we exclude in our determination of adjusted earnings, grew 22%, or $31 million, to $173 million year over year. A significant contributor to this increase was expense of $22 million, resulting from organic investments and acquisitions which enabled future growth in the business.

To break this $22 million down further, approximately $10 million of this is related to transition assistance, stemming from stronger business development results than the prior year. We added 182 net new advisors this quarter, compared to 48 in the fourth quarter last year. Another $12 million was related to the acquisition of Fortigent, investment in our retirement rollover strategy, increased project spend, and the start-up of NestWise.

The balance of G&A expense grew $9 million, or 6% year over year, to $150 million, reflecting the overall growth of the business and our effort to manage our discretionary expenses in response to challenging market conditions. The $9 million increase includes $5 million in incremental expense related to the remediation and estimated settlement for an ongoing regulatory matter.

I'd like to briefly detail the drivers behind the $16 million in fourth quarter GAAP expenses that were excluded in our adjusted results. These non-operating adjustments include $4 million in employee share-based compensation expense, $3 million for acquisition integration, and $1 million from the runoff and restructuring conversion costs from the consolidation of UVEST and the affiliated entities. The remaining adjustments are associated with our service value commitment, including $2 million in professional fees related to the work by outside consultants, and $3 million in other charges related to a management review we conducted in the fourth quarter to reduce layers of management.

To provide additional prospective on our expense management and our outlook for the fourth quarter, I'd like to briefly highlight our sequential performance. G&A expense of $173 million after backing out depreciation and amortization, and adjustments, was up 2% compared to $160 million in the third quarter of 2012. The G&A expense decline that we anticipated on our last conference call was achieved, as conference spend decreased this quarter. However, it was offset primarily by increased transition assistance due to our robust business development and a nominally higher cost to recruit.

We are capitalizing on the strong opportunity to capture advisors in motion in the marketplace, and payback period on transition assistance remains very attractive. This investment continues to be one of the highest and best uses of capital that delivers long term value to shareholders.

Looking forward, we expect our first quarter 2013 G&A expense, excluding depreciation and amortization and adjustments to rise by approximately $5 million compared to the fourth quarter of 2012, driven primarily by the annual resetting of payroll taxes, benefits, and conference-related expense. We expect our first quarter results will also include a settlement with the Commonwealth of Massachusetts for 500,000 and the potential for some investor restitution. We work to promptly and appropriately resolve all of the issues in this matter and we remain committed to ensuring investors are well served.

Our G&A outlook may vary based on our level of success in business development. We anticipate transition assistance remaining at levels reflecting strong recruiting. However, uncertainty of timing in the advisor pipeline may cause variance in our outlook.

Our first quarter outlook reflects the additional measures we are taking in 2013 to run our operations more efficiently and take advantage of our scale. Reflective of these efforts, we anticipate our 2013 G&A, excluding depreciation and amortization, adjustments, and promotional expense, to grow between 6% to 7% year over year. This trajectory compares favorably to our annual G&A growth in 2012 which increased 12% over 2011.

I will now review adjusted EBITDA and adjusted earnings performance for the fourth quarter and full year. For the quarter, adjusted EBITDA grew 9% to %110 million year over year due to strong top line revenue growth. Adjusted earnings per share grew 14%, supported by share repurchases, to $0.50 per share. For the year, adjusted EBITDA declined $5.2 million or 1%. This decline was impacted by regulatory expense, and our continued strategy to invest in the future growth of the business.

Adjusted earnings per share grew 4% in 2012 to $2.03, reflecting the benefit from our share repurchases, and success in refinancing our debt which lowered our interest expense. The environmental headwind of suppressed interest rates also influenced our results. To illustrate, we maximize our economics in a rate environment where the effective funds rate is at least 2%. If normalized fees were applied to the 2012 average cash sweep balances, adjusted EBITDA would have been higher by over $170 million. In other words, the suppressed interest rate environment and fee compression resulted in over 460 basis points in lost operating margin on revenue of $3.7 billion.

In addition to our ongoing efforts to manage our expense structure, we will achieve further benefit from our service value commitment as Mark discussed. We are accelerating our effort to not only operate our business at a lower cost through greater efficiencies, but also enhance our ability to service and support our advisors. We expect to begin our transition to select functions to outsourcing partners in the second quarter, and anticipate completing the transition of all of these functions by the end of the year. Once this first phase is complete, we will identify additional opportunities to reengineer certain processes and functions to capture additional efficiencies.

Savings will primarily be recognized in our compensation line item, with a partial offset occurring in professional fees related to outsourcing expense. To implement this initiative, we anticipate $70 million to $75 million in charges through 2014. These costs will primarily cover repositioning labor through outsourcing and technology investments. To date, we recognized $11 million of this expense in the second half of 2012. We anticipate incurring $6 million to $8 million in expense in the first quarter of 2013 and approximately $40 million for the entire year.

For 2013 savings associated with this effort, in addition to the $3.5 million we announced in December relating to reducing layers of management, we estimate approximately $2 million to $3 million in incremental savings to be realized in the latter half of this year. Ultimately, we project achieving full run rate savings of approximately $30 million to $35 million in 2015. For additional insight, please refer to our financial supplement.

I will now turn to our capital management performance. One of the distinctive characteristics of our business is its ability to consistently generate free cash flow even in a low growth environment. This affords us flexibility in our capital deployment strategy. We continue to commit resources to growing the business and rewarding shareholders. In 2012, we invested $55 million in capital expenditures, paid $249 million in total dividends, repurchased $199 million in shares, and reduced debt by $15 million.

Diving deeper into our share repurchase activity, we spent $88.7 million buying back 3.2 million shares at a weighted average price of $27.68 per share in the fourth quarter. This resulted in a fully diluted weighted average share account of 108.6 million for the fourth quarter. $87 million remains authorized for share repurchases, and we will continue to buy back shares when we believe our share price does not reflect the long-term earnings power of LPL.

Looking ahead, our priority remains to invest in the organic growth of our business while strategically achieving greater efficiencies in our operations. Despite external challenges, we continue to possess the business model and market leadership to remain well positioned to achieve our long term goals.

With that, Mark and I look forward to answering your questions. Operator, if you'll please open the call.

(Operator Instructions). Our first question comes from Joel Jeffrey from KBW. Please go ahead.

Good morning

Hi Joel.

Good morning.

Just wonder if you could elaborate a little bit more in terms of the cost savings and service value plan, if you could talk a little bit more on why sort of the two year time horizon to get these things implemented?

Yes. Let me start with that and then certainly Mark can add any comments to that.

In this case, this is a strategic initiative, and it is not principally borne on and focused on cost savings. It's certainly a benefit associated with the effort. But this is really a repositioning of our model strategically where we're very much focused on continuing to enhance our ability to serve our customers and advisors. And with that, the approach and the concept and the ultimate transition and repositioning of the labor force just takes a longer period of time to do that, where we go through different phases of ensuring that as we transition those roles to an outsource provider, that we thought through that well, we've got a very disciplined plan and approach of which to execute that, ensuring that in that transition, we do not disrupt our service, and ultimately achieve that desire to improve that service experience for our customers.

the only thing I would add, Joel, as Dan said to highlight a couple of moments, is what we're doing is changing the way we do the work so that our employees are really managing the most consultative, engaged role with advisors that we know advisors will need and will help them grow their business. And what we're doing is working with a partner to take those roles, whether it's essentially data entry or other basic research work that can be done more cost effectively by someone else, and we benefit from faster turnaround, and we also benefit from high-quality input which improves the service experience for our advisors. So that just does take time to work your way through parallel runs and movement of those groups.

Okay. Great. And then if you could talk little bit about what you're saying in terms of the productivity levels on sort of a per advisor basis. Is this being driven by the newer advisors ramping up a bit, or is there something larger going on in terms of their productivity?

I think in the fourth quarter, this is Mark, you definitely see overall advisor productivity improving. That's a combination of essentially advisors doing more in their existing practice, instead of using the pejorative "same-store sales" and it's of course new advisors coming online. We will see, particularly given these recruiting results, pretty consistent growth of new advisors coming on line that contribute to productivity consistently throughout the year. But in the fourth quarter what you saw that was different was existing advisors seeing their business grow, and that's also what we're seeing as we mentioned in our opening remarks in January, as well. So we're seeing some reengagement here, which is a nice sign.

Okay. Great and lastly for me, in terms of the growth in the independent RIA's again it looks good year over year, and it sounds like you guys are expecting this to continue. Is that the area you see the most substantial growth? And how could that potentially impact your year's numbers going forward?

It's certainly a very fast growing area for us, but we are seeing really fundamental growth across all areas of recruiting of new advisors. Where we're just not seeing growth until the fourth quarter is same-store sales. So the thing about our operating model -- you'll recall, as we talked about over the last couple years of being public -- is the fact that often what happens in the environment is one part offsets the other in a good way. So 2012's instructive that way. We saw very strong recruiting and just okay same-store sales until the fourth quarter of last year. And that's a fairly typical thing that can happen. What we're obviously hopeful for in 2013 is to see same store sales increase and a continued strong recruiting.

For the RIA business particularly, it basically has some impact on our P&L, because of its different accounting treatment, but it is equally profitable to us in terms of the work that we're doing with a RIA in terms of work we're doing with a registered representative threw our brokerage business or through our corporate RIA. So for us all that growth is good no matter what we see.

The last thing I'd add is in terms of external trends, Joel, is that you've got an absolute desire by a lot of financial practitioners to look at the RIA model, think about what essentially is called in the industry a hybrid approach and our core value proposition is very unique in the marketplace. No one else can offer the ability to combine their brokerage business with their advisory business. That's why we're seeing significant growth there for our company.

Great. Thanks for taking my questions.

Sure.

Our next question comes from Ed Ditmire of Macquarie. Please go ahead.

Yes. Good morning, guys.

Good morning Ed.

The class action and the outsourcing program is certainly encouraging. But the 6% to 7% G&A growth that you're projecting in 2013, that is net of the small amount of savings that come through in 2013. Is that correct?

That is correct.

So as we think about over the next couple years and what the organic expense run rate will be like going into that cost save program where most of the harvests come in 2014, is it fair to say that what you're projecting is even as you mature, that the 7% -- maybe a 7% to 8% growth in G&A expense is a normal rate for you guys year in, year out?

Ed, this is -- I mean this is Dan. The way that I would think about that is slightly different. I think as you look at last year as a great example, we experienced about 12% year over year growth in the G&A expenses. And that was upweighted by the investment by expanding our capabilities, for example, with the work at NestWise or through the acquisition of Fortigent, which has upweighted that year over year expense growth. And some of that will carry through to next year. And so you're inside that 6% to 7% number, if some of that year over year comparison because of that upweighting in expanding those capabilities.

I think as you look beyond 2013 without that impact and influence from that investment and expanding those capabilities and the focus on our core business and repositioning our model as described in the service value commitment, you begin to see a different trajectory in that G&A growth.

Okay. That's great to hear it. Thank you.

Any other questions, Ed.

No. I'm fine for now.

Okay. Thank you.

Our next question comes from Ken Worthington of JPMorgan. Please go ahead.

Hi. Good morning.

Good morning, Ken.

Just to better understand the implications of better markets and their business -- so outside of activity levels because we know that activity levels will probably improve, I wanted to focus on mix and revenue recognition. So how does a better equity environment impact what your brokers are selling and how that flows through the P&L? So I know you try to be indifferent in terms of profit over time, but is there a difference in terms of timing? Like protection products, do they pay more up front, maybe less of a trail, and vice versa? And are there other revenue timing issues that we should be aware of if market conditions continue to be robust and the mix of what is sold changes?

Well, let me answer that a couple different ways, Ken. First of all, generally mix shift doesn't impact that greatly the growth rate of the top line. So you could have a mix shift towards an insurance product or you could have a mix shift for advisory versus brokerage, and generally speaking that mix shift will tends to wash itself out given the size of the revenues. Where you would see a pronounced shift is if you saw a sudden shift into advisory but none of that is ever sudden because it takes quite some time for the advisor to learn that working advisory and so forth. So generally mix shifts are relatively not impactful. And we have plenty of examples we can show you at different times of the cycle where we've seen mix shift that essentially impacts the top line but doesn't impact the gross margin or the bottom line.

And then the second thing that I think is worth pointing out is this factor that always happens with markets. So markets run up, as they've done quite nicely here in the last few months, and of course we see that immediately every day in our brokerage business because trails and those ongoing recurring revenues get mark to market every day. So that immediately impacts our earnings rate, the advisors' earnings rate. It's a lovely gift that keeps on giving. Obviously the opposite is true when markets go down.

In the advisory platform, which is quite significant for us, remember it's about 33% of assets now for the Company, is that those are always quarter-delayed. And you actually did see that at 12/31 where we had a lovely run on the markets in the fourth quarter that affected our trails positively, but it really didn't make its way into first quarter revenues because the mark to market was pretty much the same as it was at 9/30. Now, we have had another run up here in the markets coming up in January. We hope that holds to the end of March and hopefully that would start to increase the value of the advisory fee through that. So it's always important to remember that that's essentially a quarter-delayed and is literally marked at the end of a quarter period for the next quarter after that.

Okay. Great. Thank you.

And then there's been a lot of debate on the transition maybe from fixed-income to equities or maybe just to equities. And based on kind of the data that you're seeing now and what you've seen over a long period of time, do you feel that this is just seasonality that we're seeing kind of early in the year following a good 2012, or is there any indications that the shift towards equity products is different this time than what we've seen over the last couple of years and maybe more sustainable?

Well, our business has always been about 50/50, fixed income and equities. You'll see some distortion, meaning more fixed income in say last year's numbers and the year before because you've got just that's the better place to get the return for investors. And if we look at January data which we looked at, it's about 50/50 between equity and fixed income which is a little more than norm. So in other words we're not seeing fixed income being overweighted in the first round of January numbers.

So I think, to your point, what we're seeing is a more normalized pattern of the way that investors and their advisors are putting money to work. And we're certainly seeing more interest in the equity market, as we should, given the returns that occurred there last year. And January is a telling month in terms of fixed income generally will be slightly negative, broadly speaking, across various asset classes with the exception of junk bonds. And equities of course will have a phenomenal return for the month that's there. So you see a little bit of that repositioning to take advantage of that shift in markets.

Maybe the broader question you're asking is are we in the great rotation? And I would hate to call it a rotation until I see it, meaning that we have experience since 2009 in the phenomenon where you can have a quarterly type of run where you get a nice run up in the business and so forth and the next quarter can slow down. Our history would tell us that typically over a longer period of time you get long runs, you have nine months, 12 months of very positive same-store sales, very positive positioning of portfolios, and then it shifts for whatever reason, it shifts. So we'll have to kind of wait and see. But so far in January, we're seeing a very classic return to markets and a very classic return to asset allocations.

Great. Thank you very much.

Absolutely.

Our next question comes from Bill Katz of Citi. Please go ahead.

Thank you very much thank you for taking my questions. Just given all of the cross between the charges and the timing and savings, I want to update your thoughts on quarter margin targets on a go forward basis?

Yes. Hey, Bill, this is Dan. I think as you think about the margin, both again in the last couple years in the trends and as we look forward, if you look at that core margin target outside of the adjusted expenses, we continue to see the core business and the improvement in the trajectory of the expense curve as well as with continued growth and improvement in areas such as same-store sales of our advisors. You're going to get two dynamics that support and help that enhancement of that margin. So where we've operated in and around the 13% range, I think it's fair to say that with those trends that I have just described in the business, you would continue to see a lift in that overall operating margin as we go forward.

And that's essentially the path we're on, Bill, is two things -- one is that we're absorbing the heavy investments we made in Fortigent, National Retirement Partners, NestWise over the last couple years. And those start to turn more positive as each year goes by, which is a good thing, and we know they build medium- and long-term value for shareholders, so that has an impact to margin as positive, where it's been negative to margin in the near term. And then secondly, as Dan said, the fundamentals of the business get better as we have top line growth. That's a good item. And the third item, is that obviously with service value commitment, what we're doing is improving the operating environment for our advisors and our employees and we're saving money, a lovely trifecta -- and that allows us to improve margin just on a productivity basis by using a vendor to do the more basic work.

That's helpful. And going back to the basis point discussion on the cash balances -- I guess there's been a lot of back and forth on this issue over the last year or so about how bad it's going to be to not so bad, and the margin, something I think was a bit more negative than everyone was anticipating.

What's changed in maybe the last three to six months? And I think you made some passing reference to restructuring and maybe it's my term, but I thought I heard something about opportunity to offset some of the drag. I was wondering if you could highlight what you might be able to do.

Yes. A few things. One we generally highlighted the negative nature of interest rates, us and everyone else in the world in terms of that. I think Dan did a nice job in talking about in his prepared remarks the incredible fee compression that's gone on. We've all experienced it, we're not unique in that way. I'm proud of the Company's ability to absorb that level of fee compression and not miss a beat in terms of moving forward particularly in a slow top line growth environment. That feels very good to me. So what we're trying to make sure everyone's clear about is we don't, at this moment in time, see much change to that environment of continued compression. You were hopeful that rates will rise, but not planning for that. And so therefore an environment where everything stays the same, as we get more balances in, they come in at the less favorable rate than balances we had before, and as contracts come up from existing relationships, they're going to turn at rates that are lower. And that's just a classic ladder bond portfolio. So we're just laying out a ladder bond portfolio turnover in essence, and in our ICA program in particular. That's the negative part we're trying to be clear as day about that through both our disclosure and our discussion of it.

To the positive, though, is you have things like increasing cash balances. So while the marginal rate of earnings may be lower, of course the volume of earnings is higher. So that makes it a little confusing. And then you can have a number of things happen like if Fed funds themselves went up ever so slightly between last year and -- between 2011 and 2012, which was a nice lift. And it's sad to say that we're excited when we go from 7 basis points on average to 14. That tells you how low rates really are from there. So those are the countervailing forces that tend to make it a little better. And because we can't predict the future with certainty on rates more than anyone else can, what we are trying to make sure of is everyone sees those two forces, if you will, and are clear about it over the next several years.

One last one from me. You mentioned that this round of cost savings will be $30 million, #35 million I think it was. You also indicated the end of this year there might be further opportunity for further expense savings. I'm just sort of worried that with the pretty big hit, reduction you are making G&A right now, if you will, or just holding most expenses, where else could you get some savings at this point in time?

Well, I think what we highlighted is that basically that changeover to your partner to do that work will cause the savings that we're talking about in 2014. So that's the specific item that we're talking about. That's an enormous amount of work, to be clear, in terms of working that through with them. The systems have to be in place, the service standards and so forth that need to be there and so on. So I don't necessarily see additional cost savings beyond that service value commitment work that we're doing in and of itself. We think that's substantial and quite helpful to the business.

And again, I just want to emphasize that while there's cost savings we obviously will feel good about from a shareholders standpoint, we are doing this, making sure that what we're transferring and work also gives us improved turnaround time. So, for example, new account openings used to be transaction day plus seven days for us. We're down it transaction plus three days for opening new accounts because of the work we've already done with our vendor partner and we'll do that across 24, 25 cycles.

Some of them the knock-on effect that could occur is when you reduce cycle times like that, then your service phones don't ring as often because advisors basically have their answer to the question, and so that could be a knock out effect, and that may be a little bit of an area that would save a bit more. But those would be at the margin in any case.

Thanks for taking all my questions.

Sure.

Our next question comes from Alex Blostein of Goldman Sachs. Please go ahead.

Good morning, everybody.

Good morning.

So just from the last question with respect to cash sweep balances -- I wanted to clarify a couple of things. The compression and the spread that you guys are talking about really just have to do with ensuring cash accounts, right. It has nothing to do with money market funds? We're talking about the $16.3 billion balance, right?

You're right. In fact money market funds are seeing a slight improvement in terms of the waivers in the near term.

Right. So can you give us a little bit of clarity because, I guess to Bill's question, the last couple years, you've seen the rate fairly steady on those balances. Can you give us a sense of what some of the more recent changes have been reset to? So, i.e., what they've been earning versus what they've been reset to, and how that's going to impact I guess a pretty big chunk of a reset that's coming in 2014.

Yes. So if you -- what we have to be careful about is making sure that we're not revealing competitive data that would ultimately not be good for the business. There's always a fine act between trying to be very transparent and open about issues and at the same time not provide so much information that the world knows where rates are.

Having said that, to be clear, I think we would all agree that the banking system is flooded with deposits, and you're seeing a tremendous rate of whether, it's QE exercise or whatever else that's cause that to happen. And banks are reporting publicly that they're not finding places to put those deposits -- and that, in essence, is the issue, right? We're a deposit player in the banking system, so we provide those deposits to help banks grow their balance sheets. And if their balance sheets aren't growing, their willingness to pay rates on those deposits are going to be lower.

And I would say over the last year, while Fed funds have gone up slightly, 7 to 14 basis points, the plus side number on the other side has gone down because there's not as much need for taking deposits. That could change very rapidly, meaning within a year it could very well be the other way around. But what we're trying to signal is that from sitting here today, if the world were just to stay the same, we would know that we're going to get an increasing amount of new cash under our balance sheet or onto our bank deposit system, ICA, that comes from all these new accounts opening. It's all a good thing -- and we're going to put that out in the banking system at lower marginal rates than what we would have had a year ago or two years ago.

So again, it's just the flipping of that portfolio over time. You can look at institutional CD rates as kind of an area that gives you a proxy in the marketplace that is out there. It's probably the closest that we can find to that.

Okay. So assuming let's say, for example, if the balances don't grow and cash balances stay kind of where they are, $16.3 billion, when you roll -- I guess when you roll that forward, there still ought to see some repricing, it just has to do with the level maturity? That's the way we ought to think about it?

That's exactly right you got it. That's why we're providing additional supplemental information showing those maturities.

Gotcha. So I guess to that point, if you just think about again everything else held equal, 20-plus basis points of compression over the next few years -- I'm assuming that's a fairly high margin business for you guys. Is it 80% to 90% or is it all dropped out of the bottom line? Or how much of that I guess you can offset with expenses?

Well, things like service value commitment can be ways to offset those with expenses and we obviously have absorbed a great deal of compression in Fed funds rate and we've done that through a combination of cost savings and but also increasing balances. I think the likelihood we would have lower balances in two years is near zero because our business has always had net positive cash flow from new account openings over -- I've been here 11 years so it's been over 11 years.

So I think you're likely to see a dynamic where we have more balances coming in, a lower marginal rate of the value of those deposits, some turnover in our portfolio, and that's what's leading to that sort of 10 to 12 basis points compression this year in 2013, and signaling another 10 in 2014, and we may renegotiate some contracts maturing in late 2014, early 2015 sooner that would add some early compression but we're not quantifying it beyond that.

Okay. Helpful. The second question I had was on the production expense. It feels like on the one hand clearly you guys are the FAs are doing a little better and productivity rates are going up so the productivity-based comp is higher. Is there some sort of ceiling we can think about from that payout, I think it was like 3.7% or something like that, this quarter and it's been creeping up a little bit over the last few quarters. Is there some sort of a ceiling, I guess you could implement or is there any contractual ceiling in place?

Let me talk about the relationship nature of this and then Dan will talk about the numbers.

So to be clear, our production grid basically is what it is in terms of how we've set it up. We changed it last in 2007. We think it's appropriate and competitive for our advisors because we know that by helping them with their growth, incenting them through that tiering, that's a good thing with them and a good thing for all of us in the business as shareholders, because that's where we're highly aligned as shareholders and our advisors to want that growth. So it's create to incent their growth.

I don't think I would get too lost in the relative production growth quarter over quarter certainly. And if you look at year over year, it has some nice characteristics. The one area we did point out earlier this year was that we had some distortion that occurred in the schedule related to large branches, which we worked very closely with some really great clients there, and worked through some of those issues. They were very understanding that there was some lacking in economic transfer there. We fixed that. That really won't be fully baked in until we get to next year in terms of its slowing in the rate of growth.

But actually seeing growth in the compression is a good sign, as you say, because it means that the practices are getting healthier. Dan, you might want to add in terms of numbers?

Yes, Alex. It's obviously designed to incent and reward the growth in the advisors' practices. So if you look at the year over year increase from 2011 to 2012, it was about 30 basis points. And it's hard as Mark said to look at it on a quarterly basis, so we tend to annualize that as a metric of comparison. If you go back to the prior 2010 to 2011, you had about a 38 basis point increase year over year in the number. And again, as Mark alluded to, with the changes that we made in 2012 relative to some of our large branches, what we shared last quarter was we expect that to have a positive impact in the right places in that production bonus such that is trajectory of that bonus would be lowered from 2012 to 2013 because of those changes.

Got it. Okay. So I guess if I look for this quarter, 3.4, that's kind of the top end, right, so we shouldn't expect that to continue to creep higher even if production continues to get better.

Yes. On the relative basis as you described, that's correct.

Of course, remember we reset January 1st anyway, right, because these are annualized tierings so they reset this quarter.

Got it. Great. Very helpful. Thanks, guys.

Absolutely.

Our next question comes from Thomas Allen of Morgan Stanley. Please go ahead.

Good morning, guys.

Good morning.

Just trying to dig a little more about the cost savings. You did a fairly significant amount of cost realignments when you were private. Just wondering what stopped you or what stopped your financial partners back then from doing what you're doing now? Has the technology changed? Has there been some kind of change in structural growth in the market, just how you're thinking about that. Thanks.

Yes. Good question. So the thing that's important to remember is that we're a different company than we were back in 2008 and thank goodness the world is a different world than late 2008. So clearly, if the world were to fall apart, we would have to take extraordinary steps to deal with that issue as we did in late 2008, early 2009, and we really weathered through that storm quite well with our clients, the advisors and they did a great job serving their clients. But those are extraordinary tail events we all agree. I certainly don't see tail events in the future. And again, not a perfect predictor of these things, but it feels like the world's getting a bit better than a bit worse.

So then the question is what can we do looking at our business today? The world has definitely changed as it relates to technology, the world has definitely changed as relates to our company. We're now sizeable enough for this to be interesting. We looked at this idea of working with a partner globally many years ago, actually, back in 2007, as I recall, and even 2006, and what we realized back then was we were too small. It wasn't impactful enough and it added complexity we didn't need at the time. Today when we look at our size company and we look at our competitors, what we're talking about is essentially doing the same things that we have seen other larger companies do.

We can't forget the background company of LPL was only 10 years ago we were a midsized broker/dealer with 3,000 or 4,000 advisors, a lovely business, really good stuff. And we have worked very hard to increase the scale of this business and scope of this business over the last decade. And we're now number five by revenues, number four by head count in the country. I feel very proud of that.

At that size, you can access the global markets, and you can access vendors in a different way than you could before and that's really what we're doing here. We're really pleased that we can do it. We've been experimenting with it over the last 18 months to make sure we do it right. And right is defined by making sure our advisors are well taken care of and they see improvements that come in the service offering that they have.

Okay. Very helpful. Thank you. And then another kind of big picture question -- I read recently that some of the wire houses have been beefing up their efforts to service and attract independent advisors. Can you talk a little bit about the threat there and how that's changed? Thank you?

Well, that's not what we've experienced. So I think they are fine competitors and they do a great job in their markets, and they are really on a very different path than ours. Our business is all about partnering with advisors and doing a great job for them to help them grow, and doing that a wide scope of advisor practices -- people who specialize in retirement plans, people who specialize in entire financial planning, people who specialize in being in smaller towns and cities across America, banks and credit unions as partners. So we have a very diversified business and a very large scope of types of people we serve and types of advisors we serve.

So ours is a very different business and we're in it for different reasons than other competitors. We don't have proprietary products, we don't use balance sheets in our business. I know these are fundamentals to all of you who are analysts, but it's important to remember that. So we're on a different path than others and that explains I think our success.

We think we'll be the market leader in net new additions of advisors in 2012 and I think we can let the record show that's going to be a quite significant outperformance to our competitive set, which tells you about the offerings that we have being very, very good for banks, credit unions, independent advisors, registered representatives and RIAs.

Great. Thanks, Mark.

Sure.

Our next question comes from Chris Harris of Wells Fargo Securities. Please go ahead.

Good morning, guys.

Good morning.

So my first question is on the cost saving initiative here. The $40 million you guys are budgeting for 2013, I guess it's $31.5 million net. Is any of that expense going to be excluded from your adjusted numbers for next year? I guess this year, rather?

So, Chris, if I understood you and if I don't answer your question please ask it again. But we do have $40 million set aside for this year, expected associated with the cost of the service value commitment, of which all of that is being adjusted out of our adjusted earnings calculation.

Okay. All that's not included. All right. All right.

Then related to this program, I know we're kind of focused on the cost side of the ledger, but as you guys kind of get this implemented, is there any kind of revenue enhancements we might see as a result of this? And I'm just kind of thinking out loud here, but does it maybe make your practice more attractive from an advisor's prospective, given you're going to be functioning a little bit better from an operational perspective?

It absolutely will, and thank you for asking that question because that is exactly what it is that we're after. We have, for example, 15 to 20 processing work that we do. That can be anything from entering cost information on holdings for advisor, to opening an account, to moving money, to -- you name it. I won't bore you with all 20 of them. But I can tell you our first work in this area led us to take about a third of those and really cut the turnaround time significantly. So going down to transaction day plus two for those activities, and they were anywhere from three days to five days to seven days, depending on what they were.

What we think we'll see over the next couple of years is we can get that turnaround time to transaction plus two across all of them, and maybe even able to lower them to a one day turn around. That has a tremendously positive impact to our advisors in terms of their experience with us, that drives their happiness with us and that drives their ability to grow more and refer other friends to us who are thinking about going independent. So we think it's a very positive impact in that example.

I'll give you another example. 85% of our forms are now automated, meaning that someone can sign up for E-signatures and advisor, use E-signature with their client, and all that will travel through our systems electronically -- whereas today, if they don't do that, it's got to be faxed. Again, imagine the productivity savings that an advisor's office has by doing that.

Trading and rebalancing, it's a new system we have in beta with our advisors today. What we're hearing from the first users of that system is I'm cutting literally hundreds of hours out in rebalancing accounts. I'm wondering what to do with the extra time I have. I think I'll go and grow my business, right? So that's exactly what we're looking for in terms of the dynamic of this idea.

While we haven't launched them, we're looking at small account servicing, which would be a new service we would charge a fee for, but advisors told us they would like us to have. HR consulting, HR is one of the biggest issues our advisors face. We're doing an HR help line inside of LPL to practice and make sure we get it right for our employees first, and then we will likely offer that service starting in 2014 to advisors for probably a small annual fee that lets them talk about issues that are going on from HR standpoint in their office. So there's a variety of things that are exactly to the lines that you're talking about which is let us focus on being consultative to our advisors and their practice, let's come up with other ways to help them be more productive, and offload work we can do at scale, and let us move to a partner the work that therefore can be done faster, less expensively, and with higher quality.

Okay. Mark and on that as a follow-up, all these potential revenue opportunities -- how should we think about the timing associated with those? Is that maybe like a 2014 or 2015 event as you kind of work through this initiative? Or do you think you might be able to get something out of it a little bit earlier than that?

I think 2014 or 2015 is right, because again, we're being very deliberate about the process. We'd like to do this as unobtrusively as possible with our business. So that's a good way to think about it.

Okay. Guys, last question from me. It's probably a little bit of an uncomfortable question to answer but I've got to ask it. It sounds like you reached an agreement here with the state of Massachusetts on that lawsuit. Given that agreement, is there any kind of risk to LPL that other states might kind of get involved here and file similar complaints, or is this really just an issue isolated only to the state of Massachusetts?

Well, I think what's important is that we're working with the state of Massachusetts about items that occurred in the years 2006 to 2009. We're also looking to make sure that from 2009 forward that we feel comfortable with any issues that may have been found. It is important for us to make sure that the administrative process, the sales activity that's here is done right, and that is really why we've worked with the state to work towards a settlement. So we're in that process now.

We certainly will look at processing and those administrative activities across the business, and we will obviously work with any state that may raise an issue or our primary regulator, FINRA, in those areas as well. And we think that we are in good shape as it relates to the business overall and we are in a business that's highly regulated. It's easy to imagine expecting additional inquiries or discussions with other regulatory bodies, because that's the nature of our business. But that's why we're focused on making sure that we have the right people and systems in place, and why when an issue is brought to us that we resolve it quickly and work our way through it.

Makes sense. Thanks a lot for taking my questions.

Absolutely.

Our next question comes from Devin Ryan of Sandler O'Neill. Please go ahead.

Hi good morning. Most of my questions were already asked but thanks for taking my question here. In terms of commissions, I'm just trying to think about the fourth quarter progression. Advisors and investors I think are clearly in a wait and see mode for most of the quarter. I just wanted to get a sense of how noticeable the change was in activity in December as we moved past the election and investors are likely to engage with looming tax changes and also because they can't delay their financial plans indefinitely.

Exactly. You have described it quite well. We saw a tremendous amount of activity in December that would be, I would describe as tax law structuring, so people either taking gains or losses, mainly gains, in December of 2012 to position them now under the new tax regime and try to get some of that out of the way before tax rates went up here 2013. We saw a large influx of cash balances, about 10% to 12%.

$2 billion.

$2 billion -- a lot of money that came in as a result of that activity and account opening activity. So we definitely saw that activity post-election and post-agreement. Then in January what we've seen is that cash going back out to work. Not all of it but a nice chunk of it in this month, and so some of that will certainly be people repurchasing the assets that they sold, so they now have an embedded gain that's been taxed. But a lot of it also appears to be fundamentally people getting back to the business of long-term investing through their financial advisor which of course is what we love and we hope will continue on for quite some time.

Great. Thanks for that color. And then just following up on that -- in terms of trailing revenues within commissions in the quarter, was there a noticeable change from the prior quarter? It's my understanding it takes a year or so to recapture the fees, the trailing fees so with clients repositioning late in 2011, moving from some equity funds to fixed income funds, I'm assuming more new trails start to hit in late 2012.

That's right. I think you'll see more of that from that 2011 repositioning of assets show up in 2013 as opposed to 2012 just from a timing standpoint and as they reset in the recognition of that revenue. But you're exactly right. The phenomena that occurred and the repositioning caused that annual delay in recognition of the trail again resetting and starting more robustly in 2013.

Okay. Great. Thank you.

You're welcome.

Our next question comes from Chris Shutler of William Blair. Please go ahead.

Hey, guys, good morning.

Good morning, Chris.

On the advisor editions in the quarter and then a pipeline commentary, maybe just a little more color there, Mark, in the sources of new advisors in the pipeline. How much of that is RIAs and how much of it is larger branches?

Well, the mix in terms of larger branches is about the same as it's always been so nothing particularly new there, and that's a good thing. And in terms of mix from sources, I would say that we've seen a slight uptick in the wire houses in terms of it. And we've seen about the same coming from independent practices or our independent competitors. Those advisors moving to us. About 20% of the class was registered investment advisors which continues to increase year over year. We're seeing a lot of success in net new adds there in terms of assets particularly, and we love the average practice size of those RIAs as well. We believe we're the market leader in terms of the average RIA practice size here at LPL, which tells you about the sophistication of the support and services that we have. So a really good year in terms of mix, really good year in terms of type, and obviously very positive on a gross and net basis.

Okay. Thanks. And then my second question is actually on NestWise. I know it's very small right now. But just as you look into 2013, how much are you looking to spend on that effort? And I guess when will you make the decision, and how will you make the decision, on whether to continue to invest there or to shut it down?

That's not putting it very well, but --

So NestWise is clearly a belief about what we think we need to do to help train advisors to the industry, how we need to bring financial services to the mass market overall. It's about a $12 million expenditure for us. So we certainly saw a big increase relative to zero, right, going into -- so 2011 was zero, 2012 I think was about $8 million if I remember right, and 2013 of about $12 million.

Your run rate from the fourth quarter will be the annualized number for 2013 so it's about $12 million.

So what we have to see is can they attract the number of clients they need to be able to train, a nice number of advisors and how does that machinery work in terms of getting advisors trained and so forth. So far so good in terms of where we are. And we certainly want to look at this over a several-year period because you can't figure all that out within 12 months or 24 months in and of itself. But we certainly would expect to see that flattening in terms of its cost structure because revenues will start coming in as we go into 2014. If we didn't see that, that would mean that we're not successful because we're not seeing the end consumer willing to work with us on that business and, therefore not able to train advisors the way we thought and we would probably recon figure in some way based on that. So life is always about success and getting points on the board and the subsidiary is no different.

Okay. Great my last question and this may be a tough one to answer. But it does feel like there's a ton of moving pieces right now at the Company, some of these new initiatives whether it's Fortigent, the retirement initiative, NestWise the big service value commitment project, and then there's obviously the base business you guys are trying to grow -- so just curious as a management team what your top priorities are today? And how do you view the risk of some of those initiatives that they all receive the appropriate attention to really be successful?

Really great question and one that is absolutely right to think through as we look through our portfolio. And if I look at our portfolio, I think it's important to understand what are essentially improvements in the core offering. So retirement, for example, to my mind, is right in our core, right in our sweet spot. It's been enormously economically positive for the business, and we know advisors have loved it and found new ways to grow their practice as a result. That's a home run, no matter how we look at it. And those are the kinds of single and doubles you want to do as you manage the business.

NestWise is clearly a bigger risk taking exercise. And Fortigent is probably one right behind that, it's more like a triple. If NestWise is home run using my analogy, Fortigent might need to be more of a triple to be successful. The other things we're doing are singles and doubles. If you look at our history, we've done a lot of work of singles and doubles in terms of finding ways to help advisors grow their practice based on feedback and things we do. We view all of that incremental to our core and relatively straightforward in terms of managing it.

I think our success in attracting new advisors and our success in seeing advisors return to growth here in fourth quarter and in January of 2013 tell us those things are working for them. What we're always going to do is be careful about take on too much more, and so certainly we have signaled for the last couple of quarters that beyond NestWise and Fortigent, we don't see other acquisitions on the horizon, we don't see new initiatives, start-up initiatives like NestWise because we feel we've got enough longer-term growth items in the portfolio at this stage and that allows us to stay focused on what we have today.

So hopefully that answers your question.

Yep. Thanks a lot, guys.

Our next question comes from Douglas Sipkin of Susquehanna. Please go ahead.

Yeah. Thank you and good morning guys.

Good morning.

Good morning.

So I just had more of a kind of fanatical question and then a follow-up. Obviously, we're still debating what's going to happen with money markets. Are you guys at all concerned if they make money markets so unfavorable that banks are not going to be paying as much for deposits because they're going to see an influx? Is that a pressure point that you guys are thinking through? Obviously, we're still waiting on the money market regulation so it's probably a little early to be conclusively thinking anything but just curious for your guys' thoughts around that.

I think in the end, money market fund reform will be just fine. I don't see it as a big deal. I'll tell you why. At the end of the day, if you are running a major money market program, we use JPMorgan, and you start publishing your NAV every day which they have started to do, guess how close that's going to be to $1 every day? Pretty darn close, right? I believe the market will take care of this, as the market tends to do, meaning there will be transparency on what the NAV is. On a calculated basis, I believe we have plans that as a client of JPMorgan, that is revealed to our clients on their statements, and therefore they will see it. And I think the world will kind of yawn at the end about those activities.

So I think the money fund world will remain fine and I think consumers will be well-served by the transparency. Remember, this issue is really an institutional money fund issue, not a retail money fund issue from there. I don't believe the banking system will get flooded. And in fact, what we saw at the end of last year was deposits coming out of the banking system because of the FDIC insurance going away. So as that's a positive in looking at money funds and bank deposits. So hopefully that's a helpful perspective on money fund reform for you.

No, that is. Thank you very much. And just to follow up from a product standpoint, can you maybe talk a little bit about some of the alternative segment -- has there been any sort of spillover/slow-down in activity post-some of the negative press the whole industry has gotten on non-traded REITs and things of that magnitude. I mean are investors just shying away from that now, given the industry headlines?

Yes. No. Is the simple answer and alternatives investments is a big bucket -- so let me just be clear about different parts within that, different products within it. One is there's products like hedge funds for example or hedge fund of funds or non-correlated mutual funds. So we have a very nice business in liquid alternative products, particularly through our acquisition of Fortigent. So one of the things we did was put Fortigent onto our platform in our advisory system as an overview, overlay manager to alternative investment choices. They have done very, very well, raising about double the assets that we expected for the first few months they've been on the platform. So it's a good sign that consumers and their advisors are looking for non-correlated returns which are what alternative investments essentially are.

Within the category of alternative investments, non-traded REITs get plenty of coverage no doubt, and for good reason. There's non-traded REITs that have problems with themselves fundamentally. They are bad product design, a couple cases have been fraudulent. It's important to note we have a very thorough process in our research department and in compliance for looking at non-traded REITs and all products, and those that have issues in the industry did not make their way here. So we have not seeing the issues that we have seen across the industry because of our process for vetting a product before it comes onto the platform.

We do have one product that is an economic issue, meaning that it was just bad timing in terms of when it went to invest money in the real estate market, but that is the normal course of investing. It's not related to structural issues, poor design, or poor management.

And then the other area in alternative investments and particularly around non-traded REITs is the sales practice activity, and that's the issue we raised, the state of Massachusetts raised with us. That's the issue we're working through to make sure any consumer that wasn't handled properly is allowed restitution and fixed and that's our obligation as a company, and we're very serious about that obligation.

We run a very large organization with millions of end consumers, and you're going to have situations where in a manual process, that you try to get to 100% perfection. But we're human and, therefore, we're going to have some error rate, unfortunately that does result sometimes in activities like we have with the state of Massachusetts, or we also mentioned in our release, some work we're doing with our primary regulator, FINRA, with other regulatory matters as well. So that's the nature of a large business, that's the nature of the complexity with which we operate.

So to summarize, alternative investments we think are a very viable investment choice for consumers. They make sense as a reasonable percentage of the portfolio. Let's call it 5%, 10% for certain types of consumers, and when handled properly, do provide the non-correlated returns that they should.

Great. Thank you for answering the questions.

Absolutely.

I'm showing no further questions at this time. Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.