LPL Financial Holdings Inc (LPLA) 2013 Q4 法說會逐字稿

Welcome to the LPL Financial Holdings' fourth quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Trap Kloman. Sir, you may begin.

Thank you, Shannon. Good morning. Welcome to the LPL Financial fourth quarter earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide 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 each. Please note that we have posted a financial supplement on the Event section of the Investor Relations page on LPL.com.

Before turning the call over to Mark, I'd 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. Under pinning 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. Thank you everyone for joining today's call. Today, I'll share insight into our performance in 2013, discuss key opportunities we see in 2014 and provide updates on our evaluation of forming a bank and our capital management strategy.

For our fourth consecutive year, the Company increased revenue generating 13% year-over-year growth to a record $4.1 billion. Adjusted earnings per share grew for a fifth consecutive year, up 20% to a record $2.44 per share benefiting from both strong growth in profits and our decision to repurchase 5.8 million shares during 2013. Revenue growth was driven by investor engagement, which for the first time since the market break in 2008 was sustained over the course of a full year and by strong market appreciation. These factors resulted in robust advisor productivity.

Fourth quarter annualized commissions per advisor reached $163,000. Net new advisory asset flows reached a record $15 billion for 2013. Advisory and brokerage assets grew 17% to $438 billion. Our continued success in retaining and recruiting advisors also contributed to our strong results.

We believe our 97% annual production retention continues to lead the industry. While the industry saw subdued advisor migration during the first half of the year, conditions improved in the second half. We believe advisor migration to independents continues to be a sustainable long-term trend.

Data from the market research firm, Cogent, indicates that 23% of advisors are open to moving to a new firm. This percentage has grown over the last three years and is approaching a level we haven't seen since 2007.

In addition, Cogent's survey found that LPL earned the highest overall consideration for advisors looking to move after placing second in the prior year's survey. Our business development results support the findings of this study, as LPL attracted 110 net new advisors over the past three months of 2013, bringing our total to 321 net new advisors for the year.

We believe this result places LPL as one of the top two recruiting firms in 2013. Our pipeline remains strong. We are optimistic about our momentum heading into 2014.

We achieved our operating results despite the continuing headwinds generated from a low interest rate environment. Cash sweep revenue declined 13% to $19 million in 2013 due to lower fees on our cash sweep assets despite an increase in asset levels. Excluding this decline, revenue grew 14%. Adjusted EBITDA increased 24%, creating margin expansion of 76 basis points.

From a strategic viewpoint in 2013, we invested in our core platform to capitalize on the broader opportunity set we've established through scale and scope. This approach sets the conditions for expanding our market share and sustaining growth.

To accomplish this: we focused on opportunities in 2013; we created value; and further differentiated our model to improve the advisory experience. In doing so, we enhanced advisor productivity, retention and recruiting. For example, we introduced significant upgrades to Account View, our online account portal to strengthen our advisors' interaction with their clients.

In addition, we successfully launched our new trade and rebalancing system that has increased advisor efficiency. Advisors have embraced this new platform. Within six months, they've already executed over 1 million trades. We leveraged recently acquired properties in the retirement and high net worth spaces to deepen our position in those markets and serve a broader range of advisors and financial institutions.

At year end, retirement planned assets under management were $99 billion and high net worth assets have grown 22% year-over-year to $23 billion. These efforts helped to support top line revenue growth across market cycles. We also made significant investments to upgrade our regulatory and risk management capabilities, including expansion of our home office supervision program.

These investments are designed to allow our advisors to dedicate more time to their clients while enhancing our risk and compliance profile. In this respect, the investments made in 2013 in technology and people will enable us to realize benefits in 2014 and beyond.

In 2014, we'll expand our commitment to creating a smarter, simpler and more personal LPL that drives further efficiency into the business, supporting the growth of our advisors and lowering our rate of expense growth to a normalized level. As a result, we will be positioned to deliver more revenue growth to the bottom line in future years.

Opportunities for driving efficiency in 2014 include launching a new alternative investment order entry system, enhancing our variable annuity order entry system, creating more efficient processes for advisors and improving our supervisory controls. We will enhance our practice management capabilities by making our resource center, which is the central hub for all advisor research, marketing programs and product access activities, more streamlined and efficient.

Among our cost savings strategies is the expansion of eDelivery capabilities to deliver more statements and performance reports electronically while having the added benefit of being more environmentally sustainable. We are also expanding our procurement efforts to lower spending in 2014, by leveraging our scale to slow the cost of headcount growth and improved pricing and service with third-party vendors. We could more efficiently focus capital on opportunities in areas where we differentiate ourselves in the marketplace.

Another key lever driving efficiency is the service value commitment, which remains an integral part of our goal to transform how we operate and manage expense growth. We launched this effort to align our labor force, to provide more strategic and personal support and allow us to focus our investments in our core strengths. A key part of this effort included transitioning non-advisor facing, back office functions to a best-in-class global service partner.

We've made excellent progress over the last year generating $5 million in annualized savings. Based upon what we've learned as we evolve from strategy to implementation, we've refined our expectations for total annual savings to approximately $30 million by 2015.

In 2013, we outsourced numerous activities across 29 business units within the Firm. These included accounting, data reconciliation, operations and insurance processing. Based upon the processes now in place with our new partners, there are clear examples of the benefits the service value commitment is bringing to our advisors and their clients.

As anticipated, we have achieved greater accuracy and speed of execution in our results. We've reduced the turnaround time by two business days and processing time frames across multiple functions including account transfers and account openings. In addition, we are consistently raising the service level accuracy rates to 99% across several operations including account processing and cash management. These improvements enhance the advisor experience and lead to greater productivity and satisfaction.

In 2014, we will focus on capturing the remaining cost savings through additional outsourcing and automation opportunities primarily within operations. These efforts should result in a more sustainable approach to efficiently investing in the business, which Dan will address further in his remarks. Our earnings growth and margin expansion will become further magnified when short-term interest rates begin to rise.

I'd now like to update you on our review of potentially owning a bank. It is important to identify the ultimate objective of this process which is to maximize the value of our cash sweep deposits in the most capital efficient way possible. The strategic value in operating the bank with regard to services for retail investors and additional custodial capabilities are secondary considerations.

Given the complexity of operating a bank in today's environment, we took a thoughtful approach to our review to insure the full impact of the capital and operational commitments were understood. After careful consideration, we've concluded that converting LPL to a bank holding company is not an optimum use of shareholder capital. While there is incremental revenue we could generate from operating a high grade investment portfolio, the need to raise excess capital to meet regulatory requirement minimums and loss of operational flexibility significantly outweigh the incremental interest yield benefits.

In conducting our analysis of bank options, we did identify the possibility of an industrial loan company as a less capital intensive structure for improving depository cash yields. We are still in the early stages of examining this opportunity which would likely have to be done through an acquisition. Importantly, if we do move forward in this path, we view an industrial loan charter not as a wholesale replacement to our current cash sweep programs but rather as a complimentary alternative that we gradually grow over several years.

This approach would allow for capital flexibility and allow us to efficiently manage regulatory and operational complexity. As a result of these conditions, we have placed no timeframe or likelihood of execution on this opportunity. The key element of this exercise is analyzing the alternative options for deploying our strong cash flows to create shareholder value.

We expect to remain opportunistic in assessing acquisitions that fit within our core growth model. We also see opportunity for continued share repurchases and dividend growth. The Board has approved an additional $150 million in share repurchase capacity, raising the total available to $218 million.

In addition, based upon our financial performance and strong free cash flow, the Board has approved a quarterly dividend increase of $0.05 per share to a total of $0.24 per share representing 26% growth. The Company anticipates evaluating our dividend policy on an annual basis going forward.

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 the fundamental drivers behind our record revenue in the fourth quarter. Second, I'll review various components of our expense structure.

I will then discuss how these factors are driving our profitability as measured by adjusted EBITDA and adjusted earnings per share. Finally, I'll conclude my remarks with the summary of our capital management activity.

In the fourth quarter, we generated record revenue of $1.1 billion representing 16% year-over-year growth. Total brokerage and advisory assets rose 17% to $438 billion.

On a per advisor basis, advisors now support $32 million in client assets from which they generated $254,000 in annualized production. This resulted in average advisor production increasing 13% year-over-year, driven by the continued growth in fee-based business, strong commission sales and market appreciation.

In the quarter, our fee-based business attracted $3.9 billion in net new advisory asset flows, representing 11% annualized growth. With a record $15 billion in net new advisory asset flows in 2013, we continued to expand our higher margin fee-based business. With the benefit of market appreciation, advisory assets grew 24% year-over-year to $152 billion compared to 14% growth in our brokerage asset.

Annualized commissions per advisor grew to $163,000, up 16% on a year-on-year basis. Excluding the elevated levels of non-traded REIT sales, commissions per advisor were $151,000 and grew 7% year-over-year, primarily driven by investor activity across multiple products including mutual funds and fixed annuities. Looking forward, we see conditions for total production per advisor to improve as the result of sustained investor engagement, improving advisor efficiency and the ongoing trend towards fee-based business.

Asset-based fees grew 9% year-over-year to $112 million, as we continue to benefit from our investment in omnibus record keeping, which is a sustainable expansion of this revenue stream; however, asset-based revenue growth has been partially offset by cash sweep revenues declining year-over-year by $7 million or 21% despite average cash sweep balances growing $2 billion.

The decline in cash sweep revenue resulted primarily from a combination of the fed funds rate following 8 basis points and the fee received from banks declining 17 basis points. We affirm our guidance of a 7 basis points decline in our ICA program by the end of 2014 assuming cash sweep asset levels and the fed fund rate remain flat. We expect a majority of this decline to occur in the first quarter.

I'd like to now focus on our expenses, including our payout rate, trends in our core expenses, promotional expense and those expenses in our GAAP results that we exclude from our determination of adjusted earnings. In the forth quarter, our payout rate grew to 88.1% up 38 basis points year-over-year. The elevation in the quarterly rate is a direct result of the increase in non-GDC sensitive factors related to the mark-to-market of our advisor deferred compensation, which is offset by other revenue and our advisor stock option program.

With improving markets and growth in our share price, the non-GDC sensitive portion of the payout rate grew 48 basis points year-over-year and 28 basis points sequentially. As a result, our gross margin was negatively affected by $2 million compared to the fourth quarter of the prior year and $1 million compared to the third quarter of this year.

Focusing on the productivity base components of the payout rate, the base rate has remained at approximately 84%. The production bonus declined 18 basis points year-over-year to 3.2%. This has lead to continued stability in our total payout rate as measured over a trailing 12 month basis.

In the fourth quarter, core G&A expenses were $167 million. Several factors contributed to core G&A exceeding our expectations this quarter. The first driver was variable expense that was the result of out-sized revenue growth. This included increased trading activity requiring more statement mailings and additional supervisory and operational resources to process non-traded REIT sales.

The second contributor to the variance was non-recurring professional fees for administering the resolution of the alternative investment and e-mail matters disclosed earlier in 2013, as well as an accrual for the full amount of an expected settlement of a related regulatory matter that we anticipate will be announced shortly. The third factor was driven by the hiring of employees in the fourth quarter to support expanded regulatory and compliance controls that were budgeted to join LPL in early 2014.

In aggregate, these variable non-recurring and timing related expenses raised our 2013 core G&A results, but have not changed our expected expense levels for 2014. As a result, we are lowering our core G&A growth rate guidance to approximately 4.5%. With our focus on developing our core capabilities combined with the benefits from our service value commitment and efficiency initiatives, we will continue to invest in the business to expand our industry leadership but do so at a normalized rate of expense growth.

In 2014, we anticipate the year-over-year expense growth rates to become increasingly favorable as the year progresses. This trajectory is driven by reduced levels of investment and a growing benefit from increasing efficiencies. On a sequential basis, core G&A is expected to decline in the first quarter of 2014 by approximately $9 million to $157 million with the variance of plus or minus $5 million.

Turning to promotional expense. We experienced continued momentum in recruiting as anticipated. The cash spent to recruit new business has remained consistent as measured by transition assistants as a percentage of an advisor's production; however, quarter-to-quarter the mix of the recruited advisors among our two channels and the production of each individual advisor influenced the amount of the transition assistance payments that are expensed or are made in the form of a forgivable loan and amortized over the term of the loan.

GAAP expenses increased $2 million from the third quarter due to a shift in the mix of business as a larger portion of our transition assistance in the prior quarter was in the form of a forgivable loan paid to a financial institution. Regarding the conference component of our promotional expense, we anticipate conference expense to grow sequentially $3 million in the first quarter related to our annual summit conference for top producers and other small regional events.

I will now provide some commentary on the drivers behind fourth quarter GAAP expenses of $24 million that were excluded in our adjusted EBITDA results. $4 million related to employee share based compensation, one-half of the adjustments or $12 million was related to the final determination for the earn out of the acquisition of retirement partners and will not recur.

The remaining $8 million of expense was related to our service value commitment. To date, we have now incurred $27 million of the expected $65 million in restructuring charges to implement our service value commitment.

Turning to adjusted EBITDA, for the quarter, the margin as a percent of net revenue declined to 11.4% or 30 basis points compared to the forth quarter of 2012. The $7 million decline in our cash sweep revenue primarily drove this margin decline. Excluding cash sweep revenue, adjusted EBITDA margins would have improved 82 basis points year-over-year.

Importantly, we retain our growing benefits to the rising interest rates and maximize our upside of $245 million in incremental revenue and pretax earnings when the fed funds rate is 2.6% based on our current cash sweep balances and bank contracts. In the fourth quarter, adjusted earnings per share of $0.63 grew $0.13 or 26% compared to the fourth quarter of 2012, driven primarily by strong revenue growth.

The rise in advisor stock based compensation due to our share price appreciation, lowered adjusted earnings per share by $0.01. This was offset by the benefit from our lower tax rate contributing $0.05 in earnings per share. The tax rate was driven by a one-time tax credit related to the installation of eco-friendly fuel cells in our new office building in San Diego. Looking forward, we anticipate our future tax rate to be approximately 39% to 40%.

I will now turn to our capital management activity. In the fourth quarter, we invested $37 million in capital expenditures, paid $19 million in total dividends and conducted $35 million of share repurchases buying back 0.9 million shares reflecting our flexibility in deploying our capital. This strategy extends our track record of returning capital to our shareholders. Since our IPO, we invested $507 million in capital to repurchase 15.2 million shares at a weighted average share price of $33.25 and declared $317 million in dividends.

With our decision to forego pursuing a conversion to a bank holding company, we retain the capital light nature of our model which provides us the opportunity to continue to invest in the business and return capital to shareholders through growing dividends and share repurchases.

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

(Operator Instructions)

Chris Shutler, William Blair.

Mark, you mentioned on the recruiting pipeline for new advisors that you remain optimistic. So just wondering if we could get a little bit more color there on what you're seeing by channel? Any thoughts on timing of recruits this year?

Well, recruits are always tough to figure out quarter by quarter. So we always try to guide towards the 400 to 500 net new advisors per year. So I certainly would say that the strength we saw in the second half of 2013 continues on here in 2014. It's in the same areas that we've seen before, hybrid advisors in particular, those who have both an RIA practice, so therefore with a custodian and have brokerage conventional activities or historical conventional activities using our broker-dealer platform continue to be the strong suit.

We're also seeing good growth from other independent firms, as those advisors lead platforms that just aren't able to reinvest in the kind of programs and services that we have. So that works well for us. We're seeing a nice uptick in the banking channel for banks and credit unions looking to join the LPL platform as well. So really very similar to what we saw in the second half of 2013, looks like it's going to be the strength in 2014.

All right. Great. Then switching gears, I think Dan mentioned on the alternative asset sales, non-traded REITs and what the commissions were excluded non-traded REIT sales. But could you just -- I haven't done the math yet. Can you just quantify the alternative asset commissions in the quarter? Help us think about or give us your latest thoughts on how those are going to progress as 2014 goes on?

Yes, Chris, so if you take our average advisor commissions that totaled $163,000 on an annualized basis for the quarter and you deduct out that which was associated with the inflated level of alternative investment sales -- if you net that out, you end up at around $151,000 in average production per advisor which is still -- was about a 7% to 8% year-over-year growth.

We're seeing strength across all product categories. We see investor engagement continuing as we move into 2014. So we're still encouraged by the advisor productivity and the opportunity to continue to expand it, even outside of that sort of up-weighted level of activity on alternative investments.

As we look to 2014 relative to alternative investments, we still think you'll see some inflated level in the first half of the year, not to the degree that we saw in third and fourth quarter. Then, we expect it to return to more normalized rates in the second half of the year.

Of course, with the low interest rate environment we're in, I think you'll see permanent increase in overall alternative investment sales because of that. So that when we return to normalized rates, we would expect it to be more in the 10%, 11% range of overall commissions versus historically the 8% range.

All right. Great. Thanks a lot guys.

Thank you.

Bill Katz, Citi.

Just coming back to capital management, sort of wondering the timeline for the $150 million of repurchase? Is there -- maybe the broader question is as you thought about dividend versus buyback, what was some of the decision-making? Is there a payout ratio associated with the buyout? Conversely, on a go forward basis, how should we think about free cash flow for buyback as we try to pencil out the $150 million?

Yes, Bill, so it's Dan. I think -- historically speaking, we've always used share buybacks as a way of mitigating dilution and opportunistically reducing our share count and thus driving value to shareholders through that effort. I think you'll see us, on a go forward basis, taking that same approach. The pace at which we pursue the share buybacks is a little harder to predict just because of external forces that may change whether that be an investment opportunity as an example or conditions in the debt market which may create opportunities or even a TPG potentially pursuing any different strategy with respect to their share.

So the pace is -- of which we would pursue that is a little harder to exactly predict. But I think if you look at history, it's a good pattern of how we'll continue to pursue our share repurchase strategy.

Relative to the mix between dividends and share repurchases, we think both are effective ways of returning capital to shareholders. We use both as a way of appealing to a broad base of investors. I think you should see us expect to use both on a go forward basis.

As Mark mentioned, from a dividend standpoint, we have accelerated our ramp up of dividends since initiating six quarters ago. I think now you'll see us take more of an annual cadence in terms of the consideration of the change in the quarterly dividend on a go forward basis, based on earnings generation and investment opportunity. I would say though, if you think about what we would target from an ongoing dividend payment, it would be somewhere around a 35% target of an overall dividend payout.

Of free cash flow.

Of free cash flow. So if you frame that going forward, you would have roughly 35% of free cash flow used on dividends, 30% for organic investment and then that would leave roughly 35% to use to pursue share repurchases, building cash or use on acquisitions.

Okay. That's helpful. Then the following question I have is just -- you mentioned that you haven't ruled out the industrial bank. Could you talk -- maybe spend a minute or two thinking about the pros and cons of that in terms of the use of capital or accretion for earnings?

Yes. This is Mark, Bill. Let me cover that one. So the industrial loan corp -- there really are not new ones being created, but there are a pool of older ones that are out there. We are planning to see if there is one that might be available for acquisition.

We're looking for something small because we would like to basically understand how to run one well and to go slowly in terms of using that to unlock the spread in cash yields that we believe we can get. So we've used it before. The example of deposits that are currently in our money-market funds in our advisory program, we cannot put into the bank sweep program due to regulatory reasons.

There's an exemption. It's all under the Department of Labor, in which if you own your own property, a bank or industrial loan corporation, either one, you'd be able to move those deposits from the money-market funds into that industrial loan corp. That's the deposits we're trying to unlock.

What we liked about an ILC is it basically -- it takes a lot less capital to unlock those deposits; therefore, it's accretive to shareholders, unlike a bank holding company. It doesn't have the same regulatory -- massive change that a BHC does. So for those reasons, we like it.

Whether we can find one and at what -- at a good value, let me add, is still open to our own speculation; therefore, we're trying to say, well, look, until we can find that we would likely go slow. If we're not, use a great deal of free cash flow to capitalize that bank. One, I don't know that we set a target, but it would be a small percentage of our annual free cash flow just to build up its deposits.

There's optionality value to owning one. Even if we had one and we didn't do anything with it, but had a very small amount of deposits, there's always optionality. Had we been able to put one in five years ago before the market crisis that would have given us optionality to expand it today. So we're looking for that optionality probably as much as anything.

Okay. Thank you. Appreciate the perspective.

Absolutely. I would remind you that we did buy $225 million of shares in 2013. So we continue to use our cash flow, as Dan said, going forward, because the dividend's up a little bit. There's a little more shift to the dividend, but we have certainly shown since the IPO that we continue to want to return free cash flow to the investors.

Thank you.

Steven Chubak, Nomura.

So on the alternative product side -- actually shifting from revenues to expenses, you alluded to expenses being elevated to help process transactions particularly within non-publicly traded REITs. I didn't know if you could clarify the level of expense associated with these types of transactions in the quarter? As well as what level of savings we could see from, I believe Mark, you alluded to a new entry system for alternative products in your prepared remarks?

Let me start with that. Dan will take the other part of your question. So we're working on -- today, we've hired a firm to help us specify what we need in an order entry system. Just to remind everyone on the call, these are completely manually processed transactions for everyone in the industry. It's very similar to what annuities used to be -- variable annuities used to be processed seven or eight years ago.

We were part of an effort back then to help create through the industry a solution of processing VAs. Just imagine that same thing happening here. But it will take most of 2014 if not dribble into 2015 to get that automation done. That would cut our cost of processing down significantly. You wouldn't have seen the kind of increase of expenses that had to go with the increase in volume that occurred in the second half of -- particularly in Q4 of 2013.

So that the -- let's call that, shorter term prospects for removing it. But probably not a terribly impactful from 2014 by itself that's there. So maybe, Dan, you can take the -- how to think about the expense going forward?

Yes. I think the complexity of the processing and the operational environment around the alternative investments is a function of basically alternative or non-traded REIT volume doubling from Q2 to Q3 and then sustaining that through Q4. So you have this accelerated pace of activity over a short period of time that was driven by the liquidity events in the market around the product manufacturers, as we described on our last call.

So that's created this short run complexity. So in the fourth quarter, we incurred between $2 million and $3 million of incremental costs associated with processing that elevated level of alternative investment activity. Of course, as you see that began to trend down over time, as we've talked about in 2014, then you could pare back that incremental investment, which is mainly in human capital.

Okay, great. Then, last one for me. At the Investor Day, you alluded to advisory activities generating roughly a 40% higher ROA versus brokerage. I didn't know if you could clarify under a more normal rate backdrop, how we should expect that ROA differential to change, presuming a larger portion of the brokerage cash specifically can be swept into the higher yielding ICA balances?

Yes, I think in a normal cash environment, you may see that squeezed by, roughly 20%. So instead of having a 40% differential, it would normalize back to more around a 30% differential.

That's why again, just to hit that point, that if we were able to convert those advisory balances, it would in effect take away all of the differential. The other thing you have to remember is that of course we're shifting to an RIA platform. In RIA assets, you get the full benefit of going into the cash sweep because it's a different legal arrangement.

So as you see our RIA custody business grow, it's at $55 billion at the end of last year, that will also have an impact that's very positive to the margins rising up, the amount that Dan mentioned, as that conversion to the RIA platform continues.

Okay. So essentially, the RIAs will converge assuming you can pursue an alternative route for those RIAs will converge assuming that you can pursue, I guess an alternative route for those RIA balances?

Well to be clear, I think on your RIA balances that benefit from the cash sweep, it's only those that are in IRAs that do not get the benefit of being able to be swept to ICA. So as the interest rate environment improves, you do get the benefit and lift in your RIA or advisory accounts across both the standard account or non-IRA account and across fully, your entire independent RIA platform. So you are going to get lift from brokerage and advisory accounts. It's just at a little different ratio.

So let's do numbers. Total advisory assets in the quarter were, $150 billion, right? Then you had -- so roughly half those assets are taxable. They can go into cash sweep. The other half are IRAs, that's where we have the issue related to the Department of Labor. Then on top of that you have another $25 billion to $30 billion of the RIA assets that can go into the bank deposits as well.

So as you can see, about $105 billion out of $175 billion are going to go into the cash sweep bank program; therefore, we'll be able to get the full appreciation. Over time, the point I was trying to make is that, as the RIA custody business grows and as -- you just have normal growth in advisory, it's going to continue to overwhelm that small amount of deposits that have to go into money funds.

All right. Makes sense. Thank you for taking my questions.

Absolutely.

Ken Worthington, JPMorgan.

This is Amanda for Ken Worthington. All of our questions have been asked and answered. Thank you.

Thanks, Amanda.

Devin Ryan, JMP Securities.

So just with respect to FAA productivity, I know that's a big focus in improving productivity and the technology effort and in a large way has revolved around you freeing advisors up to spend more time with clients outside of just simply running their businesses.

So is it possible to quantify in any way how much upside you think there may be for FAAs to get to more of an optimal production level? I know that historically, you guys have characterized the core growth rate for advisors as a few percent a year, before factoring in the market impact. So I'm just wondering if there's any way to quantify what the upside could be as advisors become more productive?

I think if you look at it structurally, one way we tend to try to track and better understand the impact on productivity is the allocation of time of the advisor. This is something we shared at the Investor Day, where the advisor to-date spends roughly 35% to 40% of their time on prospecting for acquiring new assets or working with existing clients to capture and service more assets.

So I think that's a key driver of which, if we can drive productivity and efficiency into their overall operation, then that can free up time where they can transition from administrative efforts and activities that use significant elements of their time and create opening for them to reallocate that time to more revenue generating activity.

A great example of that is our home office supervision solution that you've heard us talk about and that we're rolling out to all single person offices, of which will take time that they invest in supervisory activity and compliance requirements and shift that to a centralized resource inside LPL that then would free up time that they could allocate to revenue producing activity. So that's a great example of a solution that we drive that's not necessarily automation. It can also be a driver of future productivity gains.

Great. Appreciate the color. Then just with respect to retail sentiment. Obviously, we ended the year with some pretty strong momentum, some volatility over the past month or so. So just love to get your thoughts -- have you guys seen any change in behavior in recent weeks or anything worth noting or is it just too early to say if there's been any impact?

I think it's to early to say. We certainly characterized having seen January's numbers that they look like they are continuing on, as we saw in 2013. So that's good.

I do think we have to take into the account some of the turmoil in the markets from the emerging market issues and everything else that we're all familiar with and wouldn't surprise us at all to see a little bit of a slowdown. We're not predicting one and we haven't seen it so far in this quarter, but we have seen now a sustained year where there really wasn't much of a slowdown in same-store sales.

Typically, advisors have six to nine months of pretty heavy same-store sales activity and then typically it is a little -- sort of a quarter off if you will, either because of the investor sentiment just for pulling back a little bit and their need to sometimes catch up a little bit with the work that's there. We didn't see that at all in 2013, that's what would make it unusual and harken back to the early 2000s. We liked that part of it. Again, haven't seen it in January of 2014 but it wouldn't be unusual for it to occur. In our view of the business is we're going to have very positive outlook for 2014 as we said before.

Great. Then just lastly, just to be clear, if you were to go the industrial loan company route would that strategy still be to essentially operate as a utility bank with the securities portfolio, essentially, as it would look as a bank holding company? Or are there some additional requirements there that would change how that Company would operate?

It's the same idea. We basically take sweep assets in, put it into high grade portfolio, capture more of the spread than we're able to capture today and it's as simple as that. We like it as simple and utilitarian as possible, an industrial loan corp particularly gets us there. Again, because the regulatory oversight and the simplistic nature of how its designed.

Got it. Appreciate it.

Absolutely. Thank you.

Matt Kelley, Morgan Stanley.

So I understanding that your advisor targets for additions is a long-term target and going to be volatile year-to-year and quarter-to-quarter especially. I'd just be curious in getting your thoughts on, in the next few years, what the greatest upside potential or downside potential to that is? In other words, what could make those numbers be above or below what you targeted? What are the kind of bogeys that you're looking for?

So another way of saying that is, what do we worry about every day? Right? We worry about everything, every day, because that's what you pay us to do. I think history tells us what to worry about which is an actual spike in activity. So that's what happened in the first half of 2013, is a spike in same-store sales activity distracts current advisors from moving because they are busy, helping clients and writing business, which is a good thing.

So we could, if we were to see a spike in business in 2014 or 2015 or 2016 that's above norm -- appreciably above norm, as we saw in 2013. That could do it. That's kind of a good thing because it's a near-term -- a very earnings accretive.

Secondly, you could see a slowdown in the desire to move. Now we haven't seen that. In fact, the research is telling us just the opposite. I'd definitely recommend the Cogent Research to you to help see that. Because what I would say we were worried about three or four years ago, post the market break, was would this be a permanent change in the amount of advisors who wanted to move?

What it did was what we thought it would do. So we're glad it came out that way, is that over time as that sort of fear of 2009 receded and as those pay packages that locked people in have receded, the market is back to pretty much where it was prior to the market break, which we like. So we like advisors in motion.

We know that the power to go independent is incredibly strong, both in terms of what advisors can do for their clients, their ability to build their own business and have the American dream of ownership of a company and because it is accretive to them personally from a compensation standpoint as well.

So doing well with your clients allows you to do well for yourself, that's a pretty powerful basic function of the American economy that we support. That's why we're very bullish about the independent channel and our ability to recruit those advisors over time. But those are some of the near term and structural things in the chain.

The training programs of the wire houses and the training programs of other regional brokers have been quite good to us over the years. We wish them well in those training classes, one of them just put a big training class in. That's why we came in number two this last year in terms of net new advisor adds. We want those advisors to learn a lot, build a great business and then go independent.

So we do continue to look for ways to think about training and creating training within an independent model. We tried that with NestWise. It didn't work. We'll try again, probably with existing customers to see if we can get it to work in that context. But what we will do is keep trying, because we know that there's a great demand and need by consumers both baby boomers now and then in just a few more years, Generation X and Generation Y for financial planning.

So the back drop of that kind of demand in the market, we know we need to have more supply of advisors. That's why we'll continue to look for that trend as well, is how do we create more advisors? Maybe as second career choices and so forth.

Okay, great. That's helpful. Then one quick follow-up on that. You actually led right into my question. So on Gen X and Gen Y to your point, what are your thoughts, call it, 5 to 10 years from now, do you think that market for advisors, wire houses and independent channel, will be more competitive because that will be an increasing focus of the growth going forward than it is now versus baby boomers over the next 5 to 10 years?

Well, the beautiful thing about Gen X and Gen Y is, it's even bigger than the baby boomers, right? So demographically, it's a huge cohort of people. That's why I'd be very bullish about this industry 10 years from now. Because it's just a big group of people. I think time has always told us -- I was around in the late 1990s running a mutual fund company. Everyone was going to go direct. Everyone was going to give up their advisor. That was the end of the earth as we knew it.

So I hear some of that now. But in the end, when people become wealthy, wealthy is defined as a multiple of their salary. So they might make $50,000 a year and they have $150,000 saved. That sets in fear. That sets in a desire to really get guidance and seek counsel.

Ultimately, that's what great advisors do is provide counsel about how to think about that money and protect those assets and how to build what the goals and aspirations are for that family. I think that is a time tested and real activity. I don't think it will change anymore 10 years from now than it does today. What will change is, how we do it, right?

So today, there's no doubt that a lot of advice is done face to face and as the good old fashioned way through referrals. No doubt that 10 years from now, essentially the equivalent of Yelp in terms of recommendations and social media for an advisor are going to be as important as they are for other businesses, right? The ability to give the investor information about how their portfolio is changing is going to be critical.

The cost of that investment has to be less in 10 years than it is today. That's just the reality of any market that's efficiently changing. What that means is, an advisor has to show value by really doing what they do best, financial planning, and counsel about the psychology of money. Don't redo your kitchen for $100,000. Redo it for $25,000 and put the difference away for your future retirement.

So again, very bullish about the future. Very much believe in the fundamentals of financial planning. Absolutely think we'll get better technology and tools for both social interaction and enabling advisors to be even better counselors a decade from now than they might be today.

Okay. Thanks very much. That's very helpful.

Joel Jeffrey, Keefe, Bruyette & Woods.

Just a follow-up on the industrial bank. I just want to make sure I understand this. Are you saying that in terms of it being a sort of complementary style product, that it would only be for the money-market assets? Or are you talking about also including some of the cash? I'm just trying to figure out how we could potentially model some upside in that.

Yes. I think the best way to think of it, is there's about $4 billion of deposits in money funds today. Imagine that we would try to put -- layer that into an industrial loan corporation over years, not over months. Then once we got through that, we probably would put some incremental cash into the bank, because -- why wouldn't we? As we'd likely be able to capture greater margin.

But by then, we'll know an awful lot more about how to run the portfolio. How to think about risk management issues. How to think about the regulatory environment that's there.

So we just want to make sure we're being clear that it's at -- what I would describe as a slow strategy towards the use of such a structure, should we be able to put one in place. So I'd think of it as accretive, but probably slow in terms of transition of those assets, the $4 billion that are in money funds today and in IRAs.

To be clear, we've got $7 billion in money fund balances. But the $4 billion that Mark's referring to, in today's environment, we don't earn any yield on. So that's where you pick up the incremental opportunity and why we would tend to focus on that $4 billion tranche.

Okay, great. That's helpful. I apologize if I missed this earlier, but it does look like the interest rate sensitivity went up a little bit when you sort of changed the slide just a touch in terms of the higher end range for fed funds rates going from 2.25% to 2.60%. Can you just talk about some of the changes there? Potentially [what] the maximum compression on fees and how that impacts where the fed fund rate needs to go?

Yes, there's two primary drivers of that. One is just the growing balances. In today's environment, those incremental balances that we had are priced at lower contract levels in today's environment.

I think, as you look forward, the second driver of that has been some of the compression year-on-year that we gave you guidance on around the bank contracts themselves. So when you average those two factors in, as we look outwardly just across that size of balances, that's what's creating that differential.

Great. Thanks for taking my questions.

Steven Chubak, Nomura.

I was just hoping to clarify one item regarding the core G&A guidance. I know that it's been updated to 4.5% year-on-year increase versus a 6% prior. Didn't know if that was simply a function of the step up that we saw in professional service fees? Or whether we should attribute it to anything else?

It is a result of the step up you saw in the fourth quarter in core G&A. So our outlook for 2014 in terms of overall absolute core G&A expense has not changed. So that's what's driving the adjustment from 6% down to 4.5%.

The good news is that you spend the money in late 2013, you don't have that step cost change in 2014.

No, understood. All right. Thanks for taking my follow-up.

Of course.

Thank you. I'm showing no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.