LPL Financial Holdings Inc (LPLA) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings first quarter earnings 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 call is being recorded. I would now like to turn the call over to your host, Mr. Trap Kloman, Senior Vice President of Investor Relations. Mr. Kloman, please begin.

Thank you. Good morning and welcome to the LPL Financial first quarter earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his perspective on our performance. Following his remarks, Dan Arnold, our Chief Financial Officer, will speak to our financial results and capital deployment. Following the introductory remarks, we will open the call for questions. We would appreciate if each analyst would ask no more than two 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 the Safe Harbor disclosures contained in the earnings release and our latest SEC filings to appreciate those factors that may cause results to differ from those contemplated in such forward-looking statements. In addition, comments during this call will include certain non-GAAP financial measures governed by SEC Regulation G. For a reconciliation of these measures, please refer to our earnings press release.

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

Thank you, Trap, and thank you everyone for joining today's call. I am pleased to report on our strong start to the year, which was driven by the efforts of our advisors to serve their clients as markets improved and retail investor engagement increased during the first quarter. This led to net revenue growing 8% year-over-year to a record $975 million and drove adjusted earnings per share up 14% to $0.64 per share. We will talk more about this in depth on today's call. I also look forward to providing an update on the broader business and regulatory environment, as well as offering insight into strategic developments for the firm.

Attracting new advisors, retaining our existing advisors, and driving their productivity are the fundamentals that fuel our long-term growth. We measure the operational health of our firm by these metrics. Advisor productivity is strong this quarter, as shown by annualized commissions per advisor, increasing year-over-year and sequentially to $145,000. Advisors were engaged with our clients, positioning them to take advantage of changing market conditions. They continue to utilize our technology and services to broaden their capabilities and pursue new client relationships. The result was increased transaction activity, the opening of new accounts, and putting cash to work as cash balances declined as a percent of total assets.

We do believe the business conditions and sentiment are much stronger this year compared to the first quarter of 2012. This belief is reinforced by our interactions with our advisors. Our management team had the opportunity this quarter to meet with many leading advisors at an annual conference for our top producers. The conference provided a dynamic educational setting for our advisors to share ideas for driving continued growth. Overall, advisor sentiment was positive as they worked with investors who are willing to reengage to achieve their financial goals and who recognize that they cannot indefinitely stand on the sidelines.

In the past, we have shared that our Company has multiple growth levers. Growth in this quarter was driven by strong advisor productivity, rising markets, retention of 97% of our advisor's production, and the accelerating production of advisors added in the last 12 months. However, growth in new advisors was modest this quarter, particularly compared to strong fourth quarter activities. We believe that improving market conditions extended the business development sales cycle, with the overall level of advisor movement slowing across the industry. The slower cycle in business development is a normal event in our industry at times, particularly during the initial phases of market recovery when investor engagement is pronounced. In reviewing the first quarter industry advisor movement, we feel very good about our performance relative to our peers.

Our long-term outlook on new business development continues to be positive, as our pipeline is active and our value proposition remains compelling to an array of advisors. Although we do not control advisors in motion at any time in the marketplace, the expectation we set for our Company is to be in the top three in recruiting each and every year. We were number two in 2011 and number one in 2012, and we continue to believe in the strength of the independent model, our industry leading position, and that long-term industry trends remain in our favor.

Turning to our strategic efforts, we are making good progress implement our service value commitment. Our goal is to create a better service experience for our advisors and institutions by evolving an operating model and enhancing investments in areas that are differentiators for our business, while unlocking greater efficiencies in noncore areas. We continue to work with a third party vendor on planning this extensive project, which will take time in order to ensure a smooth transition with minimal disruption to our advisors.

To put this idea in context, I'd like to share an example that illustrates the benefits of our service value commitment. Currently, members of our insurance team allocate significant time to gathering information and performing data entry to support the servicing and sales of insurance by our advisors. Sourcing and administrative functions, such as these to a third party vendor, will enable our team to spend more time consulting directly with advisors on activities such as case design and customized marketing material that will position them for increased sales. The analysis and conclusions will remain the responsibility of our team, but our new model will enhance our productivity. In addition, sourcing the transactional task will lead to better consistency, faster turnaround times, and lower costs through the dedicated third party vendor.

Turning to the regulatory environment, we self-reported a matter related to email surveillance and production to our principal regulator in 2011. Since then, we have been working to implement enhancements to our supervisory systems and procedures related to these email issues. As we referenced last quarter, we've also been engaged in discussions with the regulator regarding the resolution of potential related rule violations and we believe this issue will be settled in the second quarter 2013.

Looking forward, we believe the regulatory environment will evolve in complexity across our industry. As a result, we continue to invest in the people, processes, and technology infrastructure necessary to maintain and strengthen our compliance capabilities. Our compliance and risk management tools are integrated into our technology platform to further enhance the overall effectiveness and scalability of our control environment.

Since 2007, the number of employees supporting LPL Financial compliance functions grew over 140%. We've committed over $12 million in compliance specific technology investment in the last two years. Although no firm in the industry is immune from the actions of ill-intended individuals, we firmly believe the independent model is best structured to provide sound, objective advice to investors.

We also see opportunities to further support advisors in light of the regulatory environment and enable them to focus on what they do best, serving investors. We believe we are well positioned to differentiate ourselves to meet this growing demand for regulatory support and are exploring ways to further our value proposition. From a leadership perspective, with the changing landscape and our continued growth, it is imperative for our management team to continually evolve.

We believe that our management team is a mosaic of collaborative efforts and its strength lies in the diversity of perspectives and commitment to position LPL Financial for long-term success. We strive to continually develop our leadership team to meet new opportunities and challenges. We've attracted exceptional executives such as Sallie Larsen to lead our human capital team and Victor Fetter to lead our technology team to further differentiate our solution in the marketplace.

In addition, we continually position existing LPL leaders to take on expanded roles. Recently, we announced that our President of Advisor and Institution Solutions, Robert Moore has broadened his responsibilities. Robert's responsibilities now include oversight of our independent advisor, institutional, and retirement business lines in addition to his existing responsibilities. Those responsibilities include a broad range of consultative teams and solutions that support the growth of our advisors and institutions. As Robert's role has expanded, so have the responsibilities of three senior executives now reporting to him, Derek Bruton, Andy Kalbaugh, and Bill Chetney oversees the day-to-day management of our business development and consulting teams. These leaders have significant industry experience and already have established a successful track record at LPL.

This change in our management structure provides them the opportunity to evolve as leaders and further support our growth. We see these management changes as central to our long-term strategy and performance.

We were also delighted this quarter to nominate Anne Mulcahy, who is the former CEO and Chairman of Xerox, for election to our Board of Directors at our upcoming annual meeting of stockholders in May. We expect the company to benefit greatly from having an additional independent director of Anne's skill, stature, and experience.

In conclusion, I'm pleased with our results this quarter and our ability to deliver long-term growth for our stockholders. Our success comes from our partnership with our advisors and their relationships with their clients, and the dedication and talent of our employees.

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

Thanks, Mark.

This morning I'll be discussing four main themes. First, I'll address top line results for the quarter and highlight the fundamental drivers behind our growth. Next, I'll review the various components of our expense structure and then discuss our earnings and profit margins. Finally, I'll conclude my remarks with a review of our capital management activity.

With respect to top line, in the first quarter we generated record revenue of $975 million, representing 8% growth year over year. Total brokerage and advisory assets rose 11% to a record $394 billion. In addition, assets per advisor grew from $27.3 million to $29.5 million. This growth was driven primarily by improved advisor productivity, enhanced market levels, and the accelerating production of 415 net new advisors added over the last 12 months.

Advisor productivity steadily increased for the second consecutive quarter, reflecting strong momentum in our business. This increase was driven by both the rebalancing of existing investor assets and the inflow of new assets. As a result of these productivity gains and appreciation in the market, annualized commissions per advisor increased to $145,000 and led to $486 million in commission revenue or 5% year-over-year growth.

This quarter, advisory fees increased 12% compared to the first quarter of 2012, to $281 million. This was primarily driven by asset growth on our corporate RIA platform. We also attracted net new advisory flows of $3 billion in the first quarter, representing 9% annualized growth. These advisory flows and recent market performance will largely benefit our advisory fee revenue and second quarter results.

I'd like to now briefly review the drivers behind our asset-based revenue. As a result of expanding omnibus processing capabilities and rising asset balances, asset based fees increased by 7% to $104 million. This growth was partially offset by cash sweep revenue declining by $3 million or 8%. This was driven by the expected repricing our ICA contracts and the fee decline in our money market fund program, which was primarily driven by the Feds' conclusion of operation twist.

In line with prior guidance, we anticipate the ICA fee to be down approximately 10 basis points in total for the year, assuming a flat Fed funds rate. As we mentioned last quarter, we continue to review our renegotiation options, which may lead to additional near term fee compression in return for long-term benefits and predictability.

Cash balances declined 6% sequentially to $23.1 billion. We experienced a buildup of client cash at the end of the fourth quarter due to the market uncertainty surrounding the fiscal cliff. With less concern regarding the federal budget debate, and improved market conditions this quarter, clients worked with their advisors to put the cash back to work. Despite the year-end fluctuation in our cash balances, the long-term trend remains positive. Cash balances have grown by more than $1 billion since the end of the third quarter last year, driven by both the addition of new advisors and the strong flows from our existing advisors.

I'd like to turn to our expenses, beginning with the payout rate. Our first quarter payout rate declined 38 basis points year-over-year to 86%. The decrease was primarily driven by a lower base payout rate due to the relatively faster growth of our advisory revenue compared to our commission revenue. As expected, the growth in our production bonus moderated relative to previous quarters, increasing only 14 basis points from the first quarter in 2012. This was mainly due to the changes we implemented in the prior year related to our large enterprises.

For the remainder of the year, the production bonus rate will increase as designed, as advisors achieve higher production tiers.

I'll now discuss the G&A portion of our expenses with a breakout of key components. For the first quarter, core G&A expense defined as compensation and G&A expenses excluding promotional expense, depreciation and amortization, and items excluded in our determination of adjusted earnings, grew year-over-year by $12 million or 8% to $146 million. A significant contributor to this increase was $7 million in expenses resulting from organic investments and acquisitions related to NestWise and Fortigent that largely began in the second quarter of 2012. The remaining $5 million increase is associated with the overall growth of the business.

Separately, our promotional expense increased by $7 million year-over-year, primarily due to the timing of a large advisor conference. As a result, we expect a decline in the conference expense in second quarter of 2013. Transition assistance expense increased marginally compared to the first quarter of 2012 due to several factors, including the mix of advisors, a marginal increase in our cost to recruit, and the way in which the assistance was structured.

Now, I'll provide some commentary on the drivers behind first quarter GAAP expenses of $13 million that were excluded in our adjusted results. These fall into two main categories, compensation related expense and restructuring costs associated with our service value commitment, which are consistent with our practices and disclosures in the past.

Of the total $13 million in adjustments, $4 million are related to employee shared based compensation and $3 million in nonrecurring severance expense. We incurred $5 million of expense related to service value commitment. Of that $5 million, approximately $2 million is for outsourcing activities such as knowledge transfer and vendor transition development. $1.5 million is for employee severance and approximately $800,000 is related to our technology transformation.

We anticipate having $6 million to $8 million in expenses in the second quarter of 2013 and remain on track to incur approximately $40 million for the entire year.

To provide additional perspective on our overall expense management and outlook for the second quarter of 2013, I'd like to briefly highlight our sequential performance. Core G&A expense of $146 million was up 4% or $5 million compared to $141 million in the fourth quarter of 2012. This increase was in line with our guidance and is mainly attributed to the anticipated annual resetting of payroll taxes and bonus accruals, and was partially offset by ongoing efforts to achieve expense savings. Looking forward, we expect our second quarter 2013 core G&A expense to rise by approximately $4 million to $5 million compared to the first quarter of 2013.

We maintain our outlook for 2014 and expect core G&A to grow 6% to 7% for the year. I will now review adjusted EBITDA and adjusted earnings performance. For the quarter, adjusted EBITDA grew 9% to $136 million year-over-year, primarily due to top line revenue growth of 8%. Excluding the impact on revenue and expenses from NestWise and Fortigent, our adjusted EBITDA would have grown 11% year-over-year. Our adjusted EBITDA margin as a percent of net revenue expanded nine basis points year-over-year to 13.9%, despite the elevated expenses related to our investments in NestWise and Fortigent.

As we fully absorb the cost associated with these investments, we anticipate generating year-over-year margin expansion in the remaining quarters of 2013, assuming advisor productivity levels drive revenue growth in the high single digits. Adjusted earnings per share grew 14% year-over-year to a record $0.64 per share. This was supported by growth in adjusted EBITDA of 9%, share repurchases reducing fully diluted shares outstanding by $5 million, and interest expense savings of $4 million. This interest expense savings resulted from the refinancing of our credit facilities in the second quarter of 2012. We believe that current debt market conditions may also provide additional opportunities to improve the efficiency and flexibility of our capital structure, and we are actively reviewing our options.

I will now to our capital management performance. One of the distinctive characteristics of our business is its ability to consistently generate free cash flow available to grow the business and reward shareholders. This quarter, we invested $14 million in capital expenditures, paid $14 million in total dividends, reduced debt by $11 million, and conducted $4.9 million worth of share repurchases. After the significant buybacks in the fourth quarter of 2012, this quarter we moderated our rate of share repurchases as we evaluated the business environment, market conditions, and share price performance. $82 million remains authorized for share repurchases and we will continue to be opportunistic buying back shares to deliver value to our investors.

In summary, our results demonstrate our ability to improve profit margins when we experience increased advisor productivity and focus on managing our expenses. Industry trends remain in our favor as advisors and investors recognize the value of our independent business model.

Looking ahead, we believe that our focused strategy and the adaptability of our business model will enable us to fully capitalize on the opportunity. With that, Mark and I look forward to answering your questions. Operator, please open the call.

(Operator Instructions) And the first question is from William Katz of Citi. Please go ahead.

Hi. This is actually Steve Fullerton filling in for Bill. Can you provide a little more detail on where you saw the cash going to work? You talked about client reengagement a bit, but can you delve into that a little deeper?

Steve, this is Dan. Good morning. I think there's two primary places that we saw that cash going to work and it primarily is the cash that was sitting on the sidelines that built up in the fourth quarter as I think investors waited for clarity in the tax environment or tax policy environment, and then they began to put that back to work in both the mix of our advisory solutions and our brokerage solutions. And so you would have seen that classic example of probably 50% of those assets going to advisory and 50% to brokerage, which is in line with typically how we experience the growth in new assets overall.

Okay, great. Thanks. And one more, just how much more do you think you can renegotiate on the sweet fees? How much more to go this year and just any further update on those negotiations?

It's Dan again. We remain active in our renegotiation focused on that part of the latter portfolio that we described to you last quarter of some of those maturities that come due at the end of '14. And so we continue to have dialogue around that portion of our portfolio. We're making progress in that dialogue and I think as we get more definitive insight on the outcomes of that, we'll certainly update you.

But we are having active conversation and no progress to report that is any different than we updated you last time.

Okay, great. Thanks a lot.

The next question is from Ken Worthington of JPMorgan. Please go ahead.

Hi, good morning. Maybe first for Dan, could you flesh out your comments on transaction -- I'm sorry, transition costs for the quarter. Net new advisors was down. You explained it well based on market conditions, but I think you indicated that the transition assistance was up. I think you had two or three reasons. So I'd love to flesh you out. And assuming we're recruiting kind of seasons and returns to more normal levels as the impact of good market conditions kind of works through, what happens to transition costs? Do they kind of normalize and we start to see things return to where they were last year or the year before? Or are they going to go up? Is kind of that trend or that thing we saw in 1Q going to persist in '13 and '14, and beyond?

So let me take the comments around the first quarter transition assistance as it relates to first quarter of 2012. It's primarily driven by two things, one the mix of the advisors. There's a spectrum of advisors we have from core advisors to what we call masters recruit, which are just larger advisors. And over that spectrum of advisors, that transition assistance may vary depending on the complexity and size of their practice. And so that mix in the size of the advisors that we recruit in has some impact over the cycles or over that comparison period.

That's one. The second is how we structure the transition assistance. Sometimes that can be paid in the form of cash all up front. In other cases, it can be paid in the form of a loan that amortizes out over a three to five year period of time and that can affect how we actually account for that transition assistance. I think at the end of the day, though, if you summarize and look at the actual cost of the transition assistance, it was up marginally year-on-year. It was actually down from the fourth quarter costs, but I think we generally look at that in the range of somewhere in the low 20% of overall transition assistance and seeing that range persist primarily for the last 12 months. And I think as we go forward, though there may be some pressure marginally upward on that cost, we see it staying in that low 20% range.

And then on sort of the money market fund yield. So they fell by half. It's six basis points but it's decently meaningful. You mentioned it was the end of twist. Is this just overnight rates going lower because of twist or is there kind of something else there? I couldn't quite get -- I didn't understand what you meant by the operation twist going away.

This is Mark and I think what we meant is that there's clearly pressure in overnight rates, right, that drives them lower. So there's nothing structural about the money fund payment and the way that it all works. It's still the same way it's always been. It's just that it's absolutely affected by near term demand and whether it's Operation Twist or just the end of the year cash flux that occurred across the entire industry as people positioned, looked like to us, a lot of people took gains not surprisingly for tax purposes in 2012. And that drove up cash balances across the industry, and those cash balances would show up in ICA and they also show up in money funds, not only at LPL but at our competitors as well. And so therefore, what happens is there's obviously a flood of supply, which drives down price. It's as simple as that as it is any market and you're right, even a few basis points is painful. So we would prefer to go the other way, but it really just has to do with supply and demand being unusually suppressed.

Thank you very much.

The next question is from Chris Shutler of William Blair. Please go ahead. One moment. Mr. Shutler, please go ahead.

Can you hear me?

Chris, we can hear you.

Okay, great. So Mark, I was hoping that maybe, or Dan, I was hoping you could refresh us on what you said on margins. I think I might have missed some of that. So you said if revenue growth is in the upper single digits you expect, was it adjusted EBITDA margin to expand in the remaining quarters?

Yes Chris, that's correct. This is Dan. With growth sustaining itself in those high single digits, we would expect year on year margin expansion associated with that growth.

And in that comment, what kind of recruiting environment are you assuming?

The recruiting environment assumed to be at normalized levels.

So your commentary from last quarter basically still stands? You expect the full year to be on par with last year, but to be more back half weighted?

Yes, that is correct. I think with respect to the slowdown in recruiting for the first part of the year, clearly as Mark reflected in his comments it is correlated with the enhanced productivity and investor reengagement as advisors focus on serving those opportunities with those clients, which stretches out the sales cycle historically when that occurs, and typically those last for periods of three to six months. And we expect to see any of that slowdown that occurred in this year with a very active and robust pipeline, we would anticipate recruiting to pick back up its pace and ultimately --

And I think another way to say it, Chris, is it's a classic quarter, right. We get up top growth. we're going to get bottom line growth. we know how to produce profits in the business, but we need more oxygen up top. Last year was about 5% top line growth and you tend to roll backwards in margin as we've said for the business. So we obviously like this kind of environment and we like the offsetting nature of when same store sales are up we know that recruiting tends to be down. And likewise, when same store sales are down, recruiting tends to be up, which gets us prepared for the next part of the cycle.

So we're looking for hopefully this classic quarter to turn into a classic year for the business.

Okay, thanks. Then the only other one from me, one of the comments we hear fairly frequently from some advisor recruiters is that some advisors feel that LPL has become a little bit less personal over the last few years just given the growth that you guys have experienced. Obviously, the growth with the OSJ model is kind of evident that advisors want a more personal experience. So Mark, maybe just talk a little bit about the SVC and give us some examples of how you plan to get closer to your advisors over time.

Sure. Happy to. So a few things. I think we have to look at the fundamentals, what do I look at to know whether the health of the system is good or not good and there's three key things I'd point to. Number one is we are obviously a place people want to join since we came in number one last year, number two the year before in terms of net new advisor ads. So that's a fabulous record by advisors voting with their business to move to us.

Number two, our retention levels are very, very high, the high 90s, 97%, 96%, 98% over the last three years, which tells you people stay and therefore are satisfied with what they're doing. And then the third measure is Net Promoter Scores, in which we look at our Net Promoter Score on a blind base against our competitors and we rank among the very highest that are there. So we feel good about the fundamentals of the business and feel good about the fact that we are offering great value for our advisors.

Completely agree that we can always find ways to improve service and improve who we are in our relationship with our advisors. I very much value their partnership and what they're doing, and we also very much understand that pressures they're under. They're running a business that has a lot more regulation because we've experienced that and often have to be the folks who have to bring that in. Secondly, their businesses are experiencing similar to what the medical practices have, is a need to be more productive. And third, it's tough to find returns for clients, right. And so they're facing a lot of pressures. We're here to help them as partners and part of the way we can do that is through our service experience and through our compliance experience.

What we've done in the last few months as we've examined groups, I think I've described to analysts before that one of the things I've done since the first of 2012, so just over a year, is essentially reprise my role as the COO of the Company and have spent a lot of time looking at our internal processes, our service levels and so forth. What we're finding is that in outsourcing, our ability to serve well and meet our SLAs and exceed them, and therefore delight our customers, we see real evidence of that happening here in the first quarter for the groups that we've already outsourced. So we're seeing a much better consistency of delivery of service as a result of that.

Number two, we're forward hiring, which is a practice we haven't had in quite some time. So meaning that rather than wait for volumes to show up, which shareholders might like a little bit better, what we've done is we've added essentially trained teams that are prepared to go into groups, whether it's in compliance where volumes can hit you pretty quickly, whether it's on the service phones, or whether it's in processing to be able to anticipate volumes that are coming. And should we see fewer volumes than expected, we can use them to do other work.

And then the third area that we've been working to delight our clients is to work on making life simpler for them. The example I like to use, just used this week with an advisor group that I met with, our forms. We've taken, believe it or not, there's 1,500 forms one can use at LPL to do work. That's not unusual for a broker dealer and an investment advisor. We've knocked those numbers down to 1,000. So we've eliminated a third of the forms. We cleaned them up so that they have consistency in terms of look and feel. Believe it or not, most of that was all faxes to us, about four million faxes per year to 64 different fax lines. We reduced that down to three fax lines and now we've automated it to an e-signature process similar to what people use for signing mortgage papers.

So we've basically taken the simplification from reduced complexity of the forms, reduced complexity of the fax machine, and then automated so we can get rid of those four million pieces of paper and turn it digital. And that is the strategy that we're focused on as a company for the next several years is to drive that simplification into our business. I think that will certainly feel and match the efficiency needs of our customers and will certainly create a more personalized and more connected LPL, which is certainly something that we strive for off of a base of an excellent relationship with advisors today.

Okay, great. Thanks a lot guys.

The next question is from Alex Cram of UBS. Please go ahead.

Good morning. Just wanted to come back to the expense side of the business, which (inaudible) other questions already, but I'm trying to ask it a little bit differently. So clearly, expense control has been a big focus of you and investors have talked to you about that over the last few quarters. And I think this quarter was very good performance on that metric, but at some point people pointed out the advisor growth was also a little bit lower, much lower than what we're used to. So maybe you could just compare and contrast a little bit how much of the expense declines are really cost saves, some of the initiatives that you're doing. How much is maybe, hey, we're really focused on cost. Maybe we're not going to be as aggressive on recruiting and maybe we're going to walk away from a situation because transition payments are going to be too high in that particular situation.

So maybe just compare and contrast the expenses and the growth of the business, the (inaudible) advisor growth and how it all connects. Thank you.

Great question. Let me start at 30,000 feet and then Dan will take it at 1,000 feet from there. So this quarter has some interesting characteristics to it. Actually, the transition system was up, right, and the reason it was up was because of the mixed shift to advisor practices in which we expense the cost. So even though the account was low, although it will be industry leading, I can tell you for the first quarter, is that what you'll see is the cost of that in this quarter was really a little bit higher than normal. So that doesn't really have control to it in the sense of being a lower number. We can get there through a lower TA number.

Secondly, we had to absorb NestWise and Fortigent, which we love as companies and love strategically, but their costs are new this quarter and they were significant on a relative basis because they weren't there a year ago. They're now fully baked into our run rate, which is good. So there's, again, a negative in terms of G&A. So what this tells you is that we're able -- it gives you a much better insight at how the model works, which is that the margin, a slightly higher growth rate in revenue, 8% as opposed to 5% allows us plenty of room to grow expenses to make sure we're serving our clients well. But at the same time, we're able to boost profits for shareholders. And so we do need to have that revenue growth.

So I'd actually just come back to that description of this quarter as classic in that sense, because from my perspective we actually felt a little more G&A than we normally would do in a normalized run rate. So it wasn't sort of savings that occurred in the G&A for the quarter that got us there. This got us there because of the dynamic of this model and what happens when you get same store sales growth.

I wouldn't worry at all about where we got to on a net advisor basis because this is, again, classic to the way the business works. What I've always love about this business is the fact that when one part of it grows, another part of it tends to slow down and that's why we should be able to consistently produce profits over time. But again, the conditions we need are for some level of same-store sales or investor engagement to make that environment work. So that's kind of the broad view of the quarter and Dan?

That was great, Mark. The only thing that I would add to that is if you focus on what we defined as our core G&A expenses, which excludes the fluctuation of the transition assistance expense from quarter-to-quarter. That I think is characterized for the rest of the year by the absorption of that up weighted and investment in Fortigent and NestWise, which as you remember began second quarter of last year and hit its full run rate in fourth quarter of last year. And so those year-on-year comparisons, as that is absorbed in, will reflect better on the true core G&A expense that is associated with operating the business model and supporting that growth. And again, that's where you'll see that trend down over the year and if you look at it over the average of the full year, it will be in that 6% to 7% range.

Okay, fair enough. Then I guess just switching gears a little bit, one of the things I don't think you talked about much today on the call is the RA business because when we look at the metrics, I think that's probably one of the biggest successes here in terms of the growth. So my question just is when you look at the growth where you are compared to the really big guys like Schwab, and Ameritrade, and Fidelity, you're certainly bigger now. So how has that changed (inaudible) prospects? How has it changed maybe the competitive advantage? Are you more on the radar screen now? Have the discussions been different? Are you attracting bigger guys and do you also feel maybe that the bigger guys or the bigger competitors are noticing you more and really gearing up to compete more with you? So how is the business changing because your phenomenal growth there?

Well, I appreciate the question, particularly the way you said it, so thank you for that.

So few things, number one, is we have the highest average assets under management per RAA in the industry. So we are attracting very good practices into this model. And so it's significantly higher than the next competitor.

We've gone from no assets in a space of 2008 when we would launched at the end of '08 auspicious time to launch to just under $50 billion at the end of this quarter, which I think is remarkable. It's made us the fifth largest custodian in a very short time we're selling number three.

So we look at our relative sales to the competitors, classic competitors in that space who are very good at what they do and we have a ton of respect for. So we feel good about where we're selling visa vie the industry, which tells you that we have a value proposition that is differentiated.

Just to remind the listeners why our value proposition is differentiated is we're the only ones that can combine the brokerage business of an advisor with the advisory business that they have, the so-called hybrid business, and that is our classic client.

Somebody who is a pure RAA we can help. We can help through our Fortigent subsidiary. We can provide custody services. You've seen some good press on a couple of different organizations, Robertson Stevens, and concerts in particular that are what I would describe as relatively pure RAAs, but who need that integrated platform to be able to attract advisors to their businesses.

So we've been able to enable our clients to be successful in bringing on new recruits for their businesses.

As mentioned I was just in Morristown, New Jersey just yesterday meeting with a team there, one of our large groups and they are, again, using that integrated platform to be successful in bringing on new recruits.

So we do see the differentiated value proposition does make a big difference. We're seeing it in the numbers, we're seeing it in success that's there and we're seeing it at a type of practice that we attract.

So I think all around we feel very, very good about our relative performance, feel very good about our competitive positioning. We'll continue to make significant investments in that platform.

We're rolling out a trading rebalancing tool that's in about 50 of our offices it just passed 50,000 trades on it and we're getting very positive response in terms of the efficiency gains of practice has by using that tool. We're getting lots of positive response on the Fortigent packaging that we're doing, bringing that technology I around reporting to practices of more high net worth based.

And then the third area that we're seeing really nice uplift is in the areas of alternative investments packaged in our central advisory platforms, again, offered through Fortigent and then also our LPL research centrally managed platform in advisory that allows an advisor to essentially outsource some of that investment management or with the trade rebalancing tool do it themselves.

We're seeing the cylinders hit all the way that we hoped they would in terms of our strategy. So we want to continue with that success and continue to push that lever.

The next question is from Douglas Sipkin of Susquehanna. Please, go ahead.

Yes. Thank you. And good morning.

So just wanted to come back to maybe the production ratio, I'm just trying to better understand how it evolves with sort of mix of revenue.

Obviously, us guys saw a nice improve in the year-over-year. Can you help me walk through maybe why the ratio came down on a year-over-year basis? I guess it has something to do with the mix of revenue.

And then my second question, and I know there's been a lot of talk on the F8 stuff. Do you guys actually have sort of a guidance number for 2013 that we think about?

Obviously, I know you guys indicated the first quarter would be slower, but I'm just trying to frame it up, how should we be thinking about the second half in terms of thinking about a growth number, basically, thinking about the whole year?

Thanks.

Let me take the second question, Dan will take the first.

In the second question if we were to see continued strong same store sales then we would see lower recruits join the firm. If we were to see have this rate that we're at today stay the same or even slightly dip we would see recruiting get back to probably a little bit more of its classic run.

Typically, we try to guide too about 500 net new as we've done over the last two years. When we've launched the firm publically, we guided net-to-net 400, because we have had a nice pickup over the last two years we guided in the fourth quarter towards a 500 number. Still feel good about that sitting here today, but what would cause that number to come down would be if we are to seek continued same store sales elevation, because advisors are then busy with their clients and therefore, are not going to entertain moving as much as they would normally. That's why we see sources like the discovery data base telling us that turnover is down in the industry, because they're busy servicing their clients as they should be.

So those are the ways to think about that. So you have kind of a way of thinking of cause and effect so as you see the conditions unearth over the next several months you can anticipate what those numbers would looks like in recruiting.

And on your first question our pay out rate is fundamentally driven by two main components, it's the base rate and that's what we reported being down year-over-year. And that is primarily driven well, it's pretty consistent in its range in and around probably a fluctuation of plus or minus 30 basis points. And it can be impacted by a mix shift in business as we have a higher payout ratio on brokerage solutions versus advisory solutions. And in this case, as we've seen the mix of advisory business growing faster than we have the brokerage it does have an impact.

Again, I think it is pretty consistent in its outcome over a full year cycle and we would expect it to be in the range that we experienced historically.

That said the second component of the payout rate is your production bonus and that is what varies throughout the year. It is engineered where every advisor resets at the beginning of each year and at zero, and as they achieve new production tiers throughout the year their payout rate will be increased as that occurs. And so, you have a normal trend throughout the year for the production bonus to grow over the year.

What has changed is some of the changes that we made in the middle of last year around our large enterprises and their recruitment of existing advisors at LPL into their practices and the impact it was having on that production bonus, so we made some changes there which we anticipated would reduce the year-on-year growth of that production bonus or the rate of that growth. And so in the past we've seen that grow as much as 40 to 50 basis points on a year-on-year basis.

We have given guidance around the expectation that that would be reduced by as much as 50% by the changes that we made last year. And we're seeing evidence of that show up in first quarter in terms of the production bonuses increase from 2012 based on the benefits of those changes.

Okay, thank you. That was very helpful.

I am showing no further questions in the queue and will now conclude the conference. Ladies and gentlemen, thank you for your participation. You may now disconnect and everyone have a good day.