LPL Financial Holdings Inc (LPLA) 2015 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 there will be a question-and-session and instructions will follow at that time. (Operator Instructions)

As a reminder today's call is being recorded. I would now like to turn the conference over to Chris Koegel, Head of Investor Relations. You may begin.

Thank you, Shannon. Good morning and welcome to the LPL Financial first quarter 2015 earnings conference Call. On the call today is Mark Casady, our Chairman and Chief Executive Officer who will provide his perspective on our business. Following his remarks, Dan Arnold our current President and Former Chief Financial Officer will speak to our financial results and capital deployment. Tom Lux, our Acting Chief Financial Officer, is also on the call today.

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 two supplemental financial presentations on the Events section of the Investor Relations page on lpl.com.

Before turning the call over to Mark, I would like to note that comments made during this conference call may include certain forward-looking statements. These may include statements concerning such topics as our future revenue, expenses and other financial and operating results, improvements in our risk management and compliance capabilities, the regulatory environment and it's expected impact on us, future regulatory matters, industry growth and trends, our business strategies and plans as well as 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 actual financial or operating results or the timing of matters to differ from those contemplated in such forward-looking statements.

In addition, comments during this call will include certain non-GAAP financial measures covered 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, Chris, and thank you everyone for joining our call. Today, I'll cover four topics. I'll start with our first quarter results. Second, I will [update you the new] progress on compliance and regulatory matters. Third, I'll discuss our view of the Department of Labor's latest proposal on fiduciary standards and how it relates to our business. Finally, I'll describe our long track record as a fiduciary for our advisory business.

We're pleased to see continued strong business expansion in the first quarter. We grew assets 9% year over year to reach $485 billion of total assets under custody. However, earnings gains from asset growth were offset by three expected headwinds; elevated levels of regulatory charges, declines in cash sweep revenue and timing differences from holding both of our spring advisor conferences in the first quarter of this year. As a result, we generated $0.64 of adjusted earnings per share and Dan will discuss the drivers of these financial results in greater depth.

Two important sources of our asset growth are our advisory asset gathering and our business development. Our net new advisory asset growth rate of 12% over the past year is the best among publicly traded companies in the retail advice industry, including RIA custodians.

The contribution from new business development combined with the growth from our existing clients drove a record $5.2 billion of net new advisory assets this quarter.

Our industry-leading business development efforts continue to be a key driver of asset growth. We added 62 net new advisors this quarter for a total of 372 over the past 12 months. We continue to be encouraged by our healthy 2015 business development pipeline and leading recruiting capabilities that position us to drive future asset growth.

One example of how our value proposition continues to attract new clients is the relationship with Zions Bancorp. Zions has seven separate bank brands that operate in more than 450 branches across 11 states.

Our unique ability to broaden their investment services at all levels of wealth including advisory programs was a key factor in winning Zions business. We look forward to working with Zions to help serve and grow their advisor and investor bases.

Next, I'll discuss our continued progress on compliance and regulatory matters. We continue to work diligently to upgrade our people, process and technology to help ensure that we have leading risk management capabilities. The cost of these investments which help better protect our investors and lower our risk profile are a component of our core G&A.

In 2013, we committed to a period of up-weighted investment to re-engineer and enhance our compliance capabilities. Since then we've expanded our personnel and legal risk and compliance functions by over 50%. We've also increased layers of supervisory and compliance review, particularly around more complex products and implemented a number of new systems. This work continues in 2015.

We believe we will substantially complete our period of up-weighted investment this year putting us on a path to lower expense growth going forward. We are also pleased with our work on resolving past regulatory issues. The regulatory charges for resolution and remediation are reported as a separate component of G&A.

In the first quarter of this year we recognized charges of $11 million for regulatory matters as we continue to assess identified issues and work with regulators towards a more normalized risk profile. These expenses include, among other things, estimated losses related to past issues and legal and consulting fees incurred during the period.

Our 2014 regulatory charges were elevated and we expect regulatory charges in 2015 to remain elevated as we work through past regulatory issues. However, we do not expect the average quarter for the remainder of this year to be consistently as high as the $11 million of expense in the first quarter. Most importantly, we have made significant progress in some of our largest historical matters. The months ahead, you will likely see announcements by regulators.

It may be reassuring to know that the estimated expenses for those matters have already been recorded in our financials based on our assessment of the issues involved. We anticipate exiting this period of heightened regulatory charges towards the end of 2015.

I'll now discuss our view of the Department of Labor's recently published re-proposal for its fiduciary rule. The focus of the DoL's effort is to ensure financial advisors are acting in the best interest of their clients when serving retirement account holders. LPL has publicly supported the DoL's intent for several years and our mission is to enable objective financial guidance for everybody.

We are committed to working constructively towards the final rule or industry participants, the Obama administration and Congress. We have seen the Department of Labor rule proposal evolve significantly over the past four years and we believe the rule will continue to evolve as the Department of Labor seeks to best protect investor interest and preserve consumer choice.

Even as we work to improve the rule for investors, we believe the rule as proposed would not have a material long-term adverse financial impact to our business. This is for the following reasons.

As written the current version of the proposal would not permit sales of certain alternative investments and brokerage retirement accounts. But such sales represent a minor contribution to our overall financial performance. In 2014, sales of alternative investments and brokerage retirement accounts represented approximately 2% of gross asset sales and gross profit. These figures include commissions, sponsor revenues and account fees. If alternative investments were not ultimately permitted in retirement accounts, we would expect retail investors to use our other offerings, the substitution of either brokerage mutual funds or advisory accounts for alternative investment sales with less than the potential profit impact. We've included additional disclosure in a supplemental presentation that is available on our Investor Relations website.

Additionally, our advisors and our business have succeeded by always putting the investors first. LPL's mission is to enable advisors to provide objective financial advice. This model has attracted and retained over 14,000 advisors who operate in their local communities with their own names on the doors. In their model, the clients are earned one at a time based on each advisor's expertise and local reputation as well as referrals from satisfied clients. We remain confident in our advisors' ability to help investors save for future financial goals and our business model's continuing ability to succeed in the marketplace.

Finally, I'll describe LPL's long track record acting as a fiduciary on our advisory business, giving us already developed capabilities and experience to support the proposed changes. We began a shift to advisory business over two decades ago. As an early leader in the space we launched our first advisory platform in 1991 and over the next decade expanded our advisory capabilities by adding several centrally managed platforms.

In 2008, we launched our unique Hybrid RIA platform creating even greater flexibility for advisors to conduct advisory business through LPL. As a result, 90% of our advisors are currently licensed to provide both advisory and brokerage services to their clients and are already experienced fiduciaries for their clients.

The evidence of our advisory shift is perhaps most visible on our sales and asset mix. In 2014, 62% of our gross asset sales were advisory, up from 45% five years ago and more than $180 billion of our total assets are now on advisory platforms. Still we believe there will continue to be a meaningful level of brokerage sales activity as many investors are well served in brokerage format. These investors often want to pay a single fee for guidance related to the selecting and executing a specific transaction. This is particularly true for investments in retirement accounts that are being held for a long period of time. The combination of the shift to advisory and our recurring commission stream from historic brokerage assets into today more than three-quarters of LPL's gross profit comes from recurring revenue sources.

Our recurring revenue and well-developed multi-platform offering allows to withstand industry changes quite well. Furthermore, the depth, balance and flexibility of our business model should provide a competitive advantage in any change that may come.

With that, I'll now ask Dan to offer a CFO perspective as he closes out his final quarter of service in that role. I'd also like to thank him for his leadership over the past three years as CFO and congratulate him on his new role as President. Dan?

Thank you, Mark. Today, I'll briefly summarize our first quarter financial results and then expand further on the four key elements that drive shareholder value creation, gathering assets, growing gross profit, managing expenses and allocating capital.

In the first quarter, we generated adjusted earnings per share of $0.64, a decline of $0.05 year over year. Solid business growth in assets and gross profit paired with share repurchases added $0.05 to earnings per share. At the same time regulatory related charges, decline in cash sweep revenue and the timing of our advisor conference collectively lowered adjusted earnings per share by $0.10.

Total assets grew by $10 billion in the quarter and $38 billion in the past year. Our Hybrid RIA platform contributed most of the asset growth as it expanded to $105 billion or by more than 50% compared to last year.

As Mark discussed our advisory sales now represent almost two-thirds of our gross asset sales. This will continue to drive a mix shift towards advisory assets which received higher level of investor service and are more profitable for us.

Our asset growth of 9% year over year generated a 7% increase in gross profit to reach $355 million. Excluding the expected quarterly cash sweep revenue decline of $2.4 million, our gross profit grew 9% which is in line with asset growth.

The main driver of the cash sweep revenue decline was the 9 basis point reduction in bank yields compared to last year. Long-term ICA contract step-downs decreased bank's spread by the expected 13 basis points in January while the average fed funds rate increased 4 basis points year over year.

As we previously discussed, the growth rate of our gross profit is expected to exceed that of our net revenue simply as a result of our Hybrid RIA advisory business growing more rapidly than our corporate advisory solution. Under accounting standards, the Hybrid RIA advisory fee charged to clients is not reflected as revenue on LPL's income statement whereas this fee is recorded as revenue for corporate RIA platform business.

Nonetheless, we are in similar levels of gross profit for advisory business regardless of the platform affiliation. This quarter is a good illustration of this contouring of our income statement as 9% asset growth generated 7% increase in gross profit on a 2% increase in revenue.

Turning to expenses, total quarterly G&A grew by 16% compared to last year. Nearly half of this increase was due to the 7.4% growth in core G&A expense which excludes promotional and regulatory-related charges. Core G&A is on track to achieve our full year target range of 7.5% to 8.5%. The remaining increase in G&A was driven by regulatory-related charges and promotional expenses. Regulatory related charges were up $10 million this quarter and promotional expense increased $8.5 million, primarily due to holding two of our major advisor conferences in the first quarter.

We will see a $10 million sequential reduction in conference expenses in the second quarter as a result of the timing difference. With core G&A in line with guidance, we see opportunity to drive longer-term operating leverage as regulatory charges decline and cash sweep revenue stabilize.

This quarter our adjusted EBITDA declined 4.5% while adjusted earnings was down by 11%. This difference was primarily driven by an increase in depreciation and amortization expense related to the opening of our San Diego tower. Because the tower opened in March of last year, this depreciation expense was not reflected in the run rate expenses in the first quarter of 2014. For the remainder of 2015, this change will be less significant in our quarterly comparisons.

Finally, I'll discuss our capital allocation to further enhance long-term shareholder value. We continue to invest in the business allocating $14 million to capital expenditures while returning $54 million of additional capital to shareholders through $24 million of dividend and $30 million of share buyback. Our Board has approved a new tranche of $200 million of share repurchase capacity that is in addition to the $63 million that remained at the start of the second quarter from our previously authorized repurchase plans.

As I complete my last earnings call, I'm pleased to highlight a key measure of the success of the LPL's strong cash flow generation and capital-light model. Since our IPO four years ago, we have returned more than $1.2 billion of capital through share repurchases and dividends as we work to create long-term shareholder value.

That concludes our prepared remarks. Mark and I look forward to answering your questions. Operator, please open up the call.

Thank you. (Operator Instructions) Chris Harris, Wells Fargo.

First question on your revenue sharing that shows up in your asset based revenues, wondering if you guys could help us out with figuring out how much of that revenue bucket you actually get from annuities. And assuming there is some pressure on that, is it safe to assume that those revenues drop down to your bottom line at close to 100% margin or are there things in your operating model that you guys could do to help offset or lessen the impact if there was any pressure from that?

Chris, let me take a stab at it. It's Dan. I think if you look at our overall sponsor relationships and the revenue support that we received for them, it generally comes from obviously insurance companies that we sell their annuity products and to a broader extent mutual funds, and those are the two primary drivers of our sponsor revenue that makes up the significant amount. And so with respect to annuities you would typically see somewhere roughly around a third to 35% of the overall asset-based revenue being generated from annuities.

And again those are governed by long-term contracts that have rolling terms of 10 years on them. So they're sort of evergreen 10-year rolling contracts that have put in place and established the value that we provide in order to earn that sponsor support and those contracts are typically governed by the assets under management associated with those products that we'd sold. So to the extent that there is product development or evolutionary changes associated with the products themselves, I think it's fair to explore how the sales commissions associated with that product evolution would tend to change over time. Certainly we've seen that historically.

We've seen where primarily it's all just upfront commissions offered in the old sort of vintage forms of annuities and we've seen that evolve to where you see a more balance of commission paid over the entire time of the term of the contract. And so I think that's where we see more evolutionary change associated with potentially how we earn revenue from those relationships as opposed to necessarily the sponsor revenue share that we earn from those relationships.

Okay. Just to clarify the margin you guys get on that revenue share, the sponsorship fees, should we think about it being really, really high or as I mentioned if there is some pressure on that are there things you guys can do on the expenses to offsetting the event?

Yes. So for the most part the sponsor revenue would generally have very high margins associated with it. That said, you don't generate it unless you offer the whole list value proposition and the expense becomes associated with supporting and generating the original sale upfront. So if there were some material shifts in that and I think we would think about how do we overall support the overall distribution of that type of product line and ultimately the underlying cost associated with it.

And then my follow-up maybe for Mark, does the DoL ruling or as at least how it's proposed today, does it change how you guys approach advisor recruitment at all? In other words, are you guys kind of factoring in new recruits in a different way or are you maybe kind of looking at the product mix differently than perhaps you might have say a year or two ago?

It really hasn't affected recruiting. First of all it's still early days. The Department of Labor rule it has just come out. We are all evaluating what are hundreds of pages of information. So you need to understand a bit more that our recruiting has changed fairly dramatically since the end of 2008 for several reasons. One is the Hybrid RIA solution that I think last year roughly 60% or 65% of the recruited class came to us in a Hybrid RIA form. And so we've been shifting the recruiting classes to more advisory based advisors versus those who are predominantly in the commissions business because of the offerings that we have here.

Secondly the practices we're attracting are materially higher in average size versus our average existing LPL practice. That's because they're dealing with higher net worth clients and because they are just bigger practices that are moving mainly from the wirehouses or the biggest practices within our independent competitors. So the mix shift that's occurred is really about what we have on offer and what we can do to support a practice which is bringing a different mix to recruiting in any case and that has been happening for several years. We don't really anticipate a change to the way recruiting would function as we look at the DoL issue specifically. And our first review of the proposed rules, because again the shift for us has been to advisory as a dominant strategic intent for the Company for many, many years as you can tell from our remarks.

Chris Onwugbolu, Credit Suisse.

I've a question on I guess the DoL rule. How should we think or how do you think about the cost implications of the rule that how it impacts maybe your longer term cost guidance?

Yes, it's again too early to really know. We've certainly reviewed the idea of the contract that would occur between the retail investor and the advisor as they think about their relationship. There is many aspects of it that to me look very similar to what was proposed by FINRA and the SEC back in the early 2000's, essentially a way of disclosure that helps make sure the conflict is cleared. So that to us we've looked at before isn't particularly costly to do. There's other requirements such as historical performance and ongoing performance that looks like it's going to take some technology solutions and things to put in place.

We're evaluating that now and need to spend more time on it. We also need to help work with the Department of Labor and others to talk about what's the best way to get to the core issue which is how do you illustrate to a consumer the inherent conflicts that exist in any business. And we're big believers that that disclosure is smart to do.

If you look at our website today, you can see our disclosure of things like revenue sharing, you can look at disclosure for the way payments are received, some of that is in prospectuses as well. So we're big believers that transparency is a good thing. So we like the heart of what the DoL is suggesting. There's always refinements need to be there.

I think when I think about G&A impact, to try to get to that specifically, most of this will be technology-based, and we're good at building technology. It's what we do for a living. And so as we look at it, it probably crowds out some other projects we might have otherwise liked to have done and there certainly will be a cost to putting this in place. But to my mind you might see slightly elevated G&A, but not something that would be permanent, it would be more about the technology to put in place.

To do it at this scale we have to do it. It has to be a technology-based solution with technology-based delivery to make it really work for the consumer to see it and understand it correctly.

So my take would be, I guess it's probably not factored into your 2016 thinking just now until you have a chance to really go through the rule and get a better sense as you say?

Yes, there is a lot of water to go under the bridge here on this regulation. First of all, there has to be the process of feedback and we know that the Department of Labor is quite good at listing. Just looking at how much progress they've made since 2010 in terms of where they were then versus where they are now and so we know them to be thoughtful about listening to issues that might invest -- that might ultimately have an issue with the investor not having choice or not having the information they need.

And again, from a preliminary look we've done of the contract, well there is parts that really do need work that will be a technology solution which is a capital expenditure and we spent a significant amount of capital already on technology. So we don't at this point see this being a major impact in 2016 or beyond.

Okay. Thank you. That's helpful. And then just on the net new advisory flows, it's really been a big positive for you, very, very strong. Can I just ask in terms of just a longer-term thinking of what that means for just commission revenues over time? Should you really be thinking about that as really slowing down or declines over time just given the continued switch into advisory?

I think our P&L and our remarks really cover that, right. If you look at it, we've gone from 40%-ish to 60%-ish, dominated sales by advisory. That is the path that we have set the Company on for many years because we believe that what will happen over time is that more and more consumers will want ongoing advice for a fee and there's sometimes a lot of misunderstanding about commission versus advisory. Commission means that you and I sat down, we talked about your financial needs, we basically saw that there was an opportunity to look at perhaps the long-term investment like your retirement fund and you are best served by me, given you a set of recommendations, you accepting those, you paying me a one-time fee and we move on, right. That's what a commissional business really does is what you just pay for your advice at one point in time because that's when you need it.

Ongoing advice and advisory means you pay me annually as your advisor to give you advice, a financial plan, a discussion about asset allocation, monitoring of your account all these other activities, that's why you pay. That's why that business line is more profitable for LPL and it's more profitable for the advisor because there is ongoing work that we're doing to support the investors' needs.

So sometimes I think there's a confusion in the industry about commission versus advisory, one is not bad and one is not good, they are just used for very different purposes.

Then it would be fair to say that what we're seeing as a long-term trend is the movement to advisory and more, more cases. That's because individuals have more complex wealth situations, tax changes, rule changes on estate planning, they also have more wealth than they had a decade ago. It sometimes may not feel that way but it certainly has been true since the last market break of any magnitude and that just requires more ongoing monitoring. So we see a trend that the investor needs the ongoing monitoring, we see a trend that the advisors want to provide it and what we've tried to do is position the Company so that we can make sure and help facilitate that trend and benefit from it. And I think our results show that that's exactly what's happened.

Then the second thing that sometimes misunderstood about us is our commission volume growth. That's because we add so many advisors. We're the largest recruiting force in the industry. We have the most success over the last four years aggregated in terms of bringing advisors to this platform. So by definition, they are going to bring their commission business with them and therefore our commission line grows. People mistake that for additional sales. It's actually not, it's historical assets being moved on to the platform from a recruited advisor. So we could very well have more commission revenue in five years time just because of recruiting, but in fact sales on the commissional side continue to come down. And I think that's where there can be a lot of misunderstanding about the toing and froing on the income statement of commissional business versus advisory. Hopefully, that's helpful, Chris.

Yes, the last part of the explanation is what I was looking for. Thank you.

Chris Shutler, William Blair.

Mark, could you just talk about the, sorry to harp on this, but just talk about the challenges it created for I guess LPL and the industry as a whole the DoL rule for retirement accounts that's put in place? And then you have a separate set of rules for non-retirement accounts. Just want to get your perspective on that and the fact that there could be two different sets of rules and do you think the SEC ultimately there is some harmonization that occurs here between the DoL and SEC? Thanks.

Yes, a great question and thank you for it. So if we look at it, Chris, the issue that we've been trying to work on since the Dodd-Frank original legislation is there should be one regulator who oversees all retail advice because the consumer does not understand the difference between someone showing up as an advisor registered with the SEC or an advisor registered with the state or an insurance agent or a FINRA registered broker, the consumers don't see that. The studies show that very clearly. So we've advocated there should be a single organization really looking out for the retail investor overseeing all those different business models. We've advocated that to be FINRA because they already do that for the majority of the industry.

That advocation has been part of what we've done really since 2009 in our government relations effort. That obviously didn't occur and in fact we've had more bifurcation and the Department of Labor does represent a new standard for a set of accounts that already is overseen by the SEC or by FINRA or by the states. And so it effectively has a third regulator enter into the discussion. That by definition is going to add more cost and more compliance and add more confusion potentially to the consumer. So what we advocate for is the SEC and the Department of Labor work towards a harmonized fiduciary rule as you suggest. We think there's really smart ways to do that and part of the [beck] that the DoL has proposed has elements of that or its disclosure upfront to the consumer and that the SEC could adopt aspects of that across the rest of the brokerage business and that would allow for uniformity and then FINRA could essentially be the arm that oversees those activities both for the DoL and the SEC. That would be our preferred outcome and we'll continue to work to advocate for that.

So we certainly applaud the idea of what the Department of Labor is trying to do by having a uniform standard of care or a uniform fiduciary approach and it is part of what we've advocated since the Rand study the SEC did back in the mid 2000. So we look forward to the day that that occurs.

We are certainly a scale player in this industry. We can both influence the outcome and we can also influence and create solutions that's much better than our competitors can.

We have an 11% market share in the IBD business. We're multiples larger than our next biggest competitor. It's going to be the rest of the industry that's going to have an issue dealing with higher compliance costs, it's going to be the rest of the industry that's going to have an issue with their business models withstanding that additional complexity.

And then just one other one on a different topic, on recruiting, you brought in 62 net advisors in the quarter. Can you just talk about I guess at a high level the advisor adds versus the attrition you saw in the quarter and also just curious how big Zions was in those numbers?

Dan may know the Zions numbers. I don't know off the top of my head.

Yes, Zions is roughly around 20 of the net 62 in terms of the quarter and obviously they are just ramping in, so they didn't contribute anything from a revenue standpoint, but clearly they were part of the net new adds.

So if you look at it and Zions has a wonderful footprint across 11 states. And so that's an example when our advisors work with them, they have to decide they were good, would be to add more registered representatives and so the opportunity there is about the growth from a program that's pretty small relative to the bank size and that's where they saw us as being able to really help them ramp that. So think of that as future growth as we look at it.

If I look at the dynamics of the quarter for both recruiting and retention, retention was very healthy and a large percentage of revenues was last year, remember we had 97% last year revenue retention, similar here in the first quarter which is great. And what we're seeing in terms of people leaving, they are folks who are small practices going or in some cases folks who are asking to leave in our normal risk management oversight of the program. So nothing particularly interesting in terms of the retention question.

And in terms of recruits, they look pretty much similar to what we've seen in 2014. The one thing that's different is we are seeing more interest in movement. There's been some press reports that other IBDs have experienced a slowdown. That's not what we've seen. But that would make sense as the market leader. Typically when you see a market leader continue to move forward in the way we have and continue to offer new services and capabilities as we've done, you tend to become the attractor.

We know that through studies that LPL is the number one place that folks who aren't with us will look at. So we're going to have an advantage there. Secondly, we by far offer the widest array of solutions for wealth management, whether it's high net worth focused, middle income consumer focused, bank focused, credit union focused or retirement plan focused like 401(k) plans. And so there's a lot of solutions here that can help the advisor to have a better practice that's more profitable and they can serve investors better as a result of all that. So that value proposition to us is as strong as it's ever been and the results we think show that relative to our competitors.

Devin Ryan, JMP Securities.

Just coming back to the DoL again, appreciate some of the comments around the long term expectations from the proposals that went through as is. But can you maybe help us think about what some of the near-term impacts would be if the rule didn't change, how to think about that? And then on the same topic, just on alternative sales, I know commissions and marketing allowances you guys have given us those numbers, but some of the parts of the equation are a little bit tougher like operating expenses assuming some would go away because the compliance in technology is higher from that product and then also some of the other products that you talked about could be sold in its place. Just trying to think about some of the offsets there as well would be helpful.

Yes, we try to paint the picture that essentially in the worst case so alternative investments would basically go away under this proposal that doesn't change in a rollover retirement account those would not be allowed. The way the DoL works is they have to give you a specific exemption by asset type. So there is a whole part of the rule that, that's the part I actually read, that shows all the different product pieces and you have to essentially apply for or got an exemption for specifically named product, quite different than the regulatory structure of the SEC or FINRA.

And so what's important about that is that if this rule stays in place, I think several things will happen. One is geography, right. So think about what our advisor does. They sit down with a client, they start on some form of financial plan, that could be either quite simple or very complex. We have multiple technologies available to them to do that financial plan from very sophisticated to fairly rudimentary. They then establish that plan and then looking at that plan, they typically are talking to a client about both their taxable assets and their tax exempt assets. So they would look at it and say what we're trying to do is get to a certain yield across this portfolio, we're trying to get to a certain return across this portfolio within your given risk tolerance.

Let's say that you have a low risk tolerance, well, we still need to get you exposure to the market, the stock market, because if you don't have exposure and you are in your 50s or 60s you're going to have a problem with inflation eroding your earnings power 10 or 20 years from now.

So what would be a good way to do that? A variable annuity would be a good way to do that that has downside protection built in it, that would be there or maybe it's a large cap growth, equity portfolio could be appropriate as a way to get that exposure.

Another way to look at yield of course is non-traded REITs are a way of essentially locking in a yield over the lifetime of that non-traded REITs without necessarily as much principal degradation as you'd see in a traded REIT.

When you think about that planning, typically what you'd say to both a wealthy individual and to a middle income consumer is let's put the high yielding assets in your tax free account because by putting it there, we're going to save you some taxes that's going to allow you to build up tax free using the seventh -- the eighth wonder of the world compound interest off the earnings that you have there to build up more assets over time.

The problem with the rule as we see it today is that it takes away a fundamental planning right from middle income consumers by not allowing higher-yielding assets to be in their tax free accounts. What will likely happen though they still need a higher-yielding asset. So we'd just move into the taxable part of their portfolio. So that's the geography piece.

Second piece of it is that let's assume that for whatever reason remember that we are in a different part of the cycle for real estate. There are certainly plenty of good real estate investments to make, but there's fewer today than they were five years ago. I think we can all see that. And therefore it might just be a different time for you to have less real estate. We've seen that in our own commission line where we just have fewer sales as we go forward and as we have over the last year than we had the year before that. And so certainly we could see that that dentegration come is just what I would describe as the change in opportunity in the market in terms of investment.

So as I look at all that and we think about what does it mean, what it means is you're going to see a mix shift at the commission top line of our business. We've seen mix shifts before and mix shifts are a normal part of our business. We price the way that we get paid from the advisor. Our take of that is priced differently based on the aggregate of both sponsor payments and other payments, account fees and so forth, that come with each product type. That allows us to withstand that mix shift that occurs. Not a perfect one-for-one, but it's close.

Second point you made is that there's cost, non-traded REITs and variable REITs are manually processed. So by definition they require quite a bit more human capital for us to process plus there is additional regulatory oversight. We certainly have shown that and certainly have shown the need to build a larger group of people who oversee the activities that occur for those particular products.

We feel good about our review of them and feel that we've made substantial progress there over the last year in particular. As we look at it, that cost would go away if those products go away. Again that will happen naturally as we see volumes change based on opportunities in the marketplace. If it were to happen more dramatically, it would just make its way through and we'd save some money.

So we say, okay, let's just assume that 40% of sales in REIT, that is the number, alternative investments in particular, are going through retirement based accounts today. And if you look at the aggregate of our gross profit which is 5% for that category then roughly 40% of 5% would go away. That's 2% of gross profit. That's going to shift. So there's going to be some offset of that and we're going to save some money by not having as much in processing cost.

Depending on the mix shift that recovery could be 50% quite easily and with some of the cost savings it could be more. We don't really want to get to that level of detail because there is still a lot more to sort out. But in the worst case, it would be a 2% gross profit reduction and that is not material in the size.

The last thing I'd say is let's just put that in scale to cash sweeps. We have gone through an enormous downturn in earnings power on cash. I think everyone has noticed that across the entire industry.

We had a unique set of contracts at the end of 2008 that allowed us to essentially withstand that change, we're only getting to market pricing next year, pretty remarkable. That's about $20 million a year of EBITDA hit that you've watched step down through the P&L over the last couple of years including this year and one more left in 2016. At 2% of gross profit that's less than what we've had in one year of cash sweep downturn. That is not material to this business and something that to my mind can easily be overcome in the toing and froing that goes on in any business.

And then just maybe looking at annuities a little more and you guys have called those out the last couple quarters being a little bit lighter and impacting commissions. I am just trying to get a better sense of what else may be going on there. I mean, we've been in a low interest rate environment for some time here. So has something else changed with the appetite that's driving some of the pressure there or is it just purely feel like it's rate driven and also trying to figure out is there anything related just to the push towards advisory?

Yes, so there is really a major issue, the 10 years that below 2% or maybe 2% and for insurance company or underwrite contracts that makes sense for consumers to buy it really has to be at 3%. I am hoping to see 3% soon, but we certainly don't need it to.

So what you're seeing is again this cycle or the cyclical nature of any product sale. There's times in which you should invest heavily in US equities and times you probably should lighten up and maybe go to European equities. That is what we do for a living is try to help make those decisions with a client or on behalf of a client in our advisory business. So in variable annuities, it's really quite simple.

When the insurance company can't create benefits that protect income or protect exposure to markets at prices that make sense for the consumers to buy them, our advisors don't buy them. That's the value of a financial advice. That's the value of having financial advisors. They know what the right prices for those features and benefits. That's why you've seen our volume come down because the external impact of having the 10-year well below 3%. The insurance company just can't write the benefits the way they use to.

Joel Jeffrey, KBW.

Just to go back to the first question you guys got asked and just to try to get a little bit more specifics on that, when you think about the margins on the sponsor revenue and the marketing fee that you get, are they materially higher than the sort of 40% EBITDA margin you guys make sort of firm wide on gross profit?

No. I think there's a real misunderstanding of payments that are received from product manufacturers. Let's just go through that if you don't mind a little bit step by step. First of all, remember that we are the transfer agent for millions of accounts. So that means and if you're a mutual fund company, you don't have to send the statement out on behalf of your mutual fund account holder, somebody has to and we are the somebody.

To do that, you get paid typically a flat fee per account because you're really doing the work. The mutual fund itself would have to done. Most of our revenue comes through transfer agency works that we do for a mutual fund, a variable annuity or other products that are there. That is a fee for service and an activity is not marketing payment or anything else that's there. That's the majority of the revenues that we receive from product manufacturers today. There's nothing hidden about that. It's all disclosed on our website and it's again works that we're doing to report for Mrs. Jones her holdings.

The good news is she gets to see it in aggregate with all of our different mutual funds together and all of our different assets and that's a huge value to her to see online and paper format whatever way she wants to see it. So that's first piece.

Second piece is that we do marketing that includes now data management and the use of Big Data and we have a program called Sponsor Works that has rolled out to manufacturers to help them understand the dynamics of our system and how to be effective partners with advisors in providing information about their products and in understanding what geographies to go to in our system.

We are a geographically dispersed distribution system, remembering that these practices of 4,600 approximately operate out of a number of small towns and medium-sized towns across America, and that means we need to help the manufacturers to be geographically efficient with their wholesale and resources.

We have data and sponsor works that lets them see that, understand it and lets them be more effective. Tests we've done well over a year ago, 18 months ago now, show that we could actually help them with more effective sales results and more effective penetration in terms of relationships that are here.

The other things we do is we provide events in which education goes on and training for advisors and sponsors pay for that access to allow them to be able to bring in information. It might be an international portfolio manager to talk about their view of Europe, it might be the way to best brand yourself and to think about the aspects of what you're doing in your business, it might be ways to serve the customer more effectively through the use of technologies. So there is literally hundreds of courses that are used in our system in a given year to do that training. That's also part of the payment. It's part of a fee contract that Dan mentioned earlier has a 10-year cancellation cost. And so basically it's effectively an evergreen contract with those sponsors to allow us to be able to make the investments in our infrastructure in order to effectively serve investors and the advisors who serve them.

And so, as you look at it there's a number of things that we do that will be a permanent part of our landscape, no matter what regulatory changes come and no matter what environmental changes may come in the industry. So we don't see that as particularly filled with pressure or particularly difficult when it comes to bottom line profitability because of the nature of what most of it is which is essentially a fee for providing a service and to help the retail investor get information.

And appreciate all the color you guys gave in terms of the impact of the alternative investment line on gross profit. Just wondering can you give us a sense for the actual bottom line impact of alternative investments.

Well, just a few minutes ago I said if it's 2% of gross profit, it'll be something less than that in terms of profitability because there will be offsets. I don't want to be precise and act as if we know exactly what those offsets will be because it's too early for that level of precision and mix shift is a funny thing. It depends a lot on what's happening in the external environment and where is the right opportunity for this investor to be investing based on their needs and their risk profile at a given point in time. But certainly it will be less than 2% because there will be those offsets for other product types that are used instead and there will be some cost savings that come if it's a mix shift to an electronically settled security versus a manually settled security. But even a 2% it is de minimis.

Steven Chubak, Nomura.

So Mark I very much appreciate all the disclosures that you guys provided in the presentation, particularly on gross asset sales and profits from NTRs. But I suppose I feel compelled to try and reconcile the disclosure in terms of the impact to gross profit with the impact to GAAP pretax income since a lot of shareholders really do tend to focus more on the latter.

And within the deck you noted that NTR sales contributed 5% of gross profit. The firm generated gross profits in 2014 of $1.3 billion, so that 5% equates to about $65 million on that $1.3 billion from NTR sales. And given that it's a high-margin activity although there will be some expense offsets, if we assume a higher margin of 90% we get about a $60 million contribution to pre-tax income which compares to about $295 million on a GAAP basis in 2014. So it's 20% pre-tax income contribution before considering the revenue offsets as NTR sales will be replaced with some other product like a mutual fund.

And just want to get a sense as to whether I am thinking about that appropriately and are there other mitigating factors that we should be considering?

So a couple of thoughts on that. So one, I think when you think about the total of 5% that's the whole universe of sales in both qualified and non-qualified accounts. So when we were trying to help you understand the 2% number, what we've done is is ring-fence those that are actually done in qualified accounts which is roughly 40% of the overall sales and that's where you go from the 5% down to the 2% contribution in gross profit. And then I think the second thing I heard was you were then trying to translate gross profits to EBITDA. And I'm not sure where you got the 90% of margin from gross profit to EBITDA. I think as we've said in the past, actually we have a higher level of direct costs associated with processing, non-traded REITs then we do other products because of the manual nature of it is, as Mark had said earlier. And so I think when you look at our overall average EBITDA that we drive for the entire firm that's a much better proxy for how EBITDA contribution would show up from the sale of non-traded REITs.

It may be helpful if you can give us a sense as to what those processing costs have been over the past year given the significant focus and attention that this particular product has garnered due to the lack of the product exemption?

So, if you think about how we go from gross profit rate and then all of our core G&A to support all of those different product sales, okay, so inside of that you would have operating costs so the processing of any type of transaction or trade and so there's a variety of different operational costs from account set-up to account transfers to the movement of money et cetera and that's consistent with all of the products that we do and a viable and fundamental part of our value proposition.

In this case the non-traded REITs tend to be more manuals than other. So there is a higher cost, if you will, associated with the processing. And of course then you've got the overall risk management associated with it and the investment that is made across all of our products to appropriately supervise and support those product sales and again because of the nature of non-traded REITs or even alternative investments and the complexity associated with them, there tends to be a higher level of cost associated with that overall effort.

And so if you take our gross profit directionally just as an example in the 30% range and then you have an overall expense base that would reduce that EBITDA down to the 12% level, then you're going to see non-traded REITs show up as an equivalent part of that overall shift from gross profit down to EBITDA.

And just one more quick follow-up for me. DoL proposal does require that you as well as the advisors are contractually committed to serving the clients' best interest. And, Mark, I do appreciate the fact that you have been a strong public advocate for the contractual commitment, but do you anticipate any changes in terms of advisor behavior or actions going forward just given this looming threat of potential litigation?

I don't know that we interpret it as looming threat of potential litigation. What we see is more transparency disclosure to the client at the point of sale. There's a lot of transparency disclosure now that basically the Fed website enabled for different aspects of what the DoL is essentially bringing to the contract. And secondly, the litigation as we understand it, we only have to rise to a level of class action litigation as opposed to individual arbitration type activities that we see today. You are allowed to have arbitration as a way of dealing with individual customer complaints.

I believe the concept that DoL is trying to go for here is essentially to have class actions being a way to have organizations think about activities they undertake and be thoughtful about the risks that are inherent in behavior that doesn't work.

So as we look at it, I think we should be very engaged with the Department of Labor about these issues. There will obviously be alterations from what's written today because that's the nature of a good process back and forth. And so we see there is plenty of things to sort of talk through.

But what we also see is the continued movement to advisory because we've already seen that. That's part of why we wanted to disclose the information, make sure everyone understands how much our business is already in a fiduciary format and the fact that 90% of advisors are already fiduciaries for their clients. So Mrs. Jones can have a conversation with her advisor about her assets in advisory and that is a fiduciary conversation and that is subject to all the same type of litigation risks that you're describing for the Department of Labor or they can be a commissionable advisor in which case it's subject to a best interest standard and not to a fiduciary standard. So they serve both.

When you talk to advisors and my observation of them is that when they are sitting there with a client they are not thinking which hat am I wearing, what they are thinking is what's in the best interest of this client today. That's why we've been advocates for going ahead and adopting a uniform rule.

But we certainly think the trend that we showed in the numbers of going to advisors is going to continue and if this makes it go a little faster that's fine by us because that ends up being a better outcome from a profitability standpoint speaking to shareholders and it's a better outcome for investors who need ongoing advice.

Now not all of them will and I think we do need to be concerned that smaller accounts in particular could suffer from not really having a solution that they otherwise might have, and that's the part that we want to work with the Department of Labor on just to make sure that all consumers have a chance to get professional advice and to avoid the problem that studies show which is that an investor who gets a small check, $5000, $10,000, remember a lot of rollovers of that size, they tend to cash them. That's going to create a huge problem because they're going to not have the kind of money that gets to compound over time for their ultimate retirement. That's the value of a professional advisor is to help you see that you need to put that money away and save it for the long term.

So we think it plays to the fundamentals of the business we already operate and we think it only accelerates trends that we benefit from. And we think with the kind of scale that we have, we're going to be able to work through this quite well and actually benefit from getting more advisors who are going to need the kind of solutions that we have in terms of recruiting them to our platform.

Mark, that's extremely helpful. Thank you for all the detail. I actually just have one quick follow-up since you just mentioned that you are going to benefit from your scale advantage and I can certainly agree with that notion or assessment. Do you expect to see increased consolidation off the back of the DoL proposal as some of the smaller players may struggle to absorb some of those incremental compliance costs, for example, that you spoke about earlier?

Absolutely, it will absolutely happen. The good news about this elevated G&A which I know has been difficult for shareholders, but from our perspective we have built an incredible capability that allows us to scale now with the kind of environment that really does stand up for independence and stand up for consumer choice. We are the only major player among the top 10 that provides no conflict in terms of product selection because we don't manufacture any products. We have an open architecture approach to products with a huge supply available to solve the consumers' needs. That fundamental lack of a conflict due to having manufacturing, that fundamental open architecture philosophy is incredibly valuable when you get regulation like this.

If you are a smaller player in our industry, you're not going to be able to step up to the regulatory costs that we've had just in the last few years, let alone any new things like some of the oversight work that's going to go with the contracts, for example, the DoL or potentially oversight work that's going to come through the SEC fiduciary standard.

So we continue to build out our capabilities in our regulatory oversight. We have the scale and an incredible team to do that across a number of functions and that's going to be a huge advantage for us from a business standpoint.

Alex Kramm, UBS.

I feel like most of the DoL stuff has been asked, but a couple of smaller ones. First of all, I think there is one stipulation in this about reasonable fees. And I think that's probably an area of a lot of uncertainty or nobody really knows what that means. But wanted to see if you had any views on what this whole reasonable fee means and then maybe when you think about your business related to that, I mean are there areas in your business where you would say, like, all right, in some of the mutual funds like our advisors select the ones with the highest kickbacks, so this was that that you would think about a highlight where the reasonable fee might be something where you have to look a little bit more into your business?

So, Alex, we do not receive kickbacks, let me just be clear. There is a whole range of fee prepayments that are completely disclosed on our website today. You're welcome to go look at them. (multiple speakers) all product types. And advisors do not receive any payment that's different from one product to another. I just want to make sure that we're clear about that going into your question.

If you look at the advice, remarkably the market is a very efficient machine, right. I am a capitalist. I believe in what the market does. What the market does is it says there's a cost for providing advice in person and locally and that cost remarkably is about 1% per year when you think about a relationship.

When I look at the data across portfolios that have a mixture of products in them for a consumer after that plan has been done and it's on the commission side of our business and I look at it on an advisory account that's on the advisory part of our business, they come remarkably close to 1%.

And what people confuse is they confuse payments that come out that essentially are for products that can't be sold for a period of time. So let's take a variable annuity. By contract, the individual is contracted with the insurance companies for protection against principal. Let's say that's the contract. They have to hold that contract anywhere from four to six years.

When you look at the commission payment that's made that comes out to just a little over 1% per year when you look at it. If you look at a mutual fund, mutual funds typically turn over about every three, three-and-a-half years. The commission that's paid there is lower because there is going to be a second commission within that same multi-year period.

And so, what is important here is to understand that the DoL's intent in our view is to make sure that that kind of reasonableness is occurring. We don't know that for certain. We have a lot more to learn and we look forward to engaging a lot of issues specifically, but we think that somewhere in that neighborhood is a reasonable place to be and then being able to show that that's what's happened is a key part or what we believe the regulation is trying to do and we think that's a great idea and we're going to help make that happen in an intelligent and effective way.

Then maybe secondly, when you think about these changes coming into effect in terms of timeline, how do you plan on reacting to this? I mean, maybe you can give some examples from the past when there have been regulatory changes. Is that something that you will very early preempt and say like, hey, I know this is coming in March this year or whatever, let's wait until the last minute or do you feel like when it comes to non-exempt products like non-traded REITs for example, you are going to try to make a shift happen much sooner because you see the writing on the wall, want to educate your advisors that they're ready and not really wait until everything gets shut off basically?

First of all everything is not going to get shut off. So again, I don't want to agree with your premise because I don't think your premise is correct. It makes sense for a consumer to have a mixture of different types of assets is what our consumers are trying to do. if you look at the disclosure you'll see the majority of clients here are middle income consumers. They are trying to rebuild their pension plans, right. And people misunderstand the products because they equate a revenue part of it, the fee with something that's bad. What you're missing is you're missing the extended period of holding that's going on there and coming back to this rough work payment of 1% for your fee for the advice that's been given. And so that mixture is quite important.

So as we look at it, we know that market cycles will move products in and out of favor. We should let them do that. Secondly, we are always believers that we want to be very impactful to the decisions that are made. So we have an extensive government relations activity that works with the regulators and we'll continue to work on committees to be able to help influence either through the trade associations directly or with the regulators those activities.

And so as we think about it what we are going plan for is really how do we best serve investors, no matter what the final rule may be and how do we make sure that it adheres to our principles around objective financial advice, transparency in the relationship and just smart business. We've grown advisory assets for example at the fastest rate of any publicly traded company. We've had tremendous success in bringing recruits to this world. That is because at the end the investor is getting great advice from their client -- from their advisor. They are then telling their friends that this advisor is helping them and that is helping the advisor grow their business, that's helping us grow our business.

So the market is telling us that the way that we go about financial advice is successful and it does result in better outcomes for investors and therefore we will continue to make sure that we are leading in that way of providing our open architecture platform, that transparency which we know leads to good outcomes for investors, which leads to growth. These are all connected hand in hand and I think that's the part that's misunderstood. The results would be different if there were different activities going on.

The only thing I would add to that in the spirit of that plan that Mark is talking about, you got to remember most of our advisors use the breadth of solutions today and have to think about those solutions in pivot in how they allocate those solutions whether it be market-driven headwinds or forces or whether it be something structural in nature. So as part of that plan helping the advisors transition through this is not one of the big hurdles we see because of how they approach the business today.

Ken Worthington, JP Morgan.

I do actually have two more questions on DoL. So they're not all killed yet. So the alternatives have gotten the most attention. They would also seem a big deal is how the rules could encourage the migration to low fee products. And I think the assumption or the fear is that low fee products speed distribution less. So does LPL, I know it's early, but like see risk to the business in a migration to lower fee products if the rules are implemented kind of as proposed and there is probably going to be some changes? And do you share my view that lower fee products -- if lower few products become more prevalent, that LPL might need to adapt to this to protect brokers, clients and shareholders?

Well, I think let's start at 30,000 feet. The cost of advice is coming down, right, because that's what market pressures do. I've been in this industry a long time, over 30 years and I can remember the days we used to sell mutual funds in an 8% load and today the average is under 3%. That's market pressures bringing prices down.

What we're describing right now our non-traded REITs have market pressures that are bringing prices down. Those are all good and so what we've tried to do is build an organization that continually lowers its cost. I know it's very hard to see that in our P&L right now because we've added a thicker layer of regulatory costs over and above. But if you look at our core G&A line, what you've seen is we've been able to basically remove cost here. We fill them back up with regulatory infrastructure. But what will start happening in 2016 is we'll be able to continue to reduce our footprint cost and our core G&A and we do believe our extraordinary regulatory costs will come down. That will allow you to see the P&L in the way that we know it which is that we're trying to run efficiently.

So we completely agree with the premise that cost matters to an investor, we completely believe with the premise that our job is to lower our cost continually and we completely believe with the premise that we need to help pass that along to the advisor and to the investors so they get better outcomes. And we can see decades of long history of this company to make that happen and we always see that trend continuing. So absolutely we agree that the premise is correct.

Secondly, we have to look at how product shift changes and ETFs are as much an issue as anything else would be. As we think about ETFs, they're not in the commissionable side of our business and that's part of what is different. What will happen is that an advisor will work with a client. Again remember we're 90% of advisors or both, we have programs, model wealth portfolio ETF that allows an investor to have all ETF program, allows them to get a wide variety of choices in those ETFs, allows them to use different strategists, could be LPL Research, could be BlackRock, could be others in order to solve for that particular issue. And that program, we basically are able to replicate the profitability that we have in programs that use actively managed funds whether it is transferring some payments or there are other activities. There's plenty of ways to deal with the continued drop of product payments that will come inevitably as cost comes down in the industry.

Will this accelerate it, probably, but that -- because it's a strategy we've been working on for quite some time, you will see the strategy that really accrues to the scale players and to the market leaders and we are the biggest scale player in the IBD space and we are a significant RIA custodian now for hybrids, fifth largest now in the country from 0 in 2008. So we know how to make those changes occur and we know how to deal with price changes over time and we know how to deliver profitability with present results excluded because of the elevated regulatory costs that we've had.

And then the other one is kind of brokers' ability to adapt to DoL rules. A significant amount of your brokers are dual registered. What portion of your clients however that have IRAs also have non-retirement account at LPL, because you talked about the shift that makes sense, but is there -- the client base actually shift?

Yes, so 30% of our assets are retirement account based. As we look at the rules that will be affected -- the assets that are affected by DoL, by definition means 70% are other. And so if you think about it, my experience says that investors have a variety of both taxable and tax exempt accounts with us just based on that stat alone as a way to think about it.

So remember we start with a financial plan. I think that's the part that's missed sometimes is that again it could be a very light plan, it could be incredibly complex. It depends on the client's need for that to happen. But we start from that premise.

We also talk to them about life insurance, right, because that's also part of what's needed, particularly for middle income consumers is to protect their families in the event of something happening. So there is a whole range of aspects that go on in that financial plan that give us plenty of places to make sure that we're doing what the investor needs and getting paid for the advice that comes with that either in the form of a commission or in the form of an ongoing advice fee.

So I don't particularly worry about that because we feel that we have plenty of assets. 50% of our assets are fixed income, 50% are equity, right. So we also have a very mixed portfolio. We think about the assets that are here. And so that that also has a dynamic to it that's different than some other players that we see and the industry as well.

So as I look at it, we have a nicely balanced portfolio of product types, account types and a nicely mixed portfolio of asset types. And that's why, as we see shifts that occur, the business tends to pivot very nicely to that new space and work its way through the profitability impacts of that.

One additional way to look at that is I think the directionally the average a client here has around 1.7 accounts with us. So that would be another way to think about how they may have multiple accounts across both qualified and non-qualified assets.

Perfect. Thank you. That was really what I was looking for. Thank you again.

Andrew Del Medico, Autonomous.

You mentioned that (technical difficulty) well to go through [some points of the] rule. I guess, what are you guys exactly focusing in on with them that you would like to see I guess amended that would be better for your clients longer term?

It's too early to go to that level of detail given there's hundreds of pages of information here. There is certainly ways to think about how the contract and the information is supplied to the consumer in terms of lots of work that's been done over the last 10 or 15 years and ways to present that to a consumer that's clear.

Secondly the ongoing monitoring needs to be there for less waste and make sure that that works well. So there's lots of detail. This is a very detailed business. That's why often people get detailed answers to questions because of the nature of the complexity of these kinds of businesses.

But in the end what we want to do is preserve consumer choice and have -- the consumers have plenty of choices for how they want to receive investment advice. The core principles here that we know is the smart one from the DoL is trying to make sure consumers understand what they're paying for that and that they have transparency. And we're advocates that that is a smart thing to do, but at the same time no one wants to have a consumer have fewer choices or have more expensive choices as a result of these changes. And that's the area that we will particularly work on as to ensure there's as much choice as possible for the consumer to achieve their financial targets.

Then I guess our non-traded REITs, one of your competitors highlighted training with advisors on some of the new disclosures that are coming out next year as slowing sales this quarter. I guess have you guys started working with advisors on some of the new disclosures that are coming out next year and I guess how do you expect that impacts sales going forward?

Yes. So FINRA has a rule that really hasn't got much coverage, that is rule 15-05 I think or 15-02 which comes from an original work of 12-14 is sometimes the way people talk about it. I don't mean to go completely inside baseball here, but I'm a FINRA governor. So I know something about this. And what that is is FINRA doing very good work of making sure that there's transparency over the way assets are raised for a non-traded REIT. So you have this sort of odd, well, it's not odd, it's just the way it's done, is that you have essentially a multi-year open period in which they are basically going to put money to work in a portfolio. And if you are a consumer that's there on day one, there's really not much money put to work yet. If you are a consumer that's there at the end of year two, there might be half the portfolio that's invested. And so there's different values that are there.

The way it used to be done is just a flat value of $10 during the entire offer period and FINRA wisely said, you know what, that's probably not accurate representation of the value. We'd like to see an actual value calculated, I won't go into detail of how complex that is, and that's shown to the consumer. So we've certainly been educating our field force on those changes. We've had lots of good questions from them. We've talked about this information also with (technical difficulty) that we have relationships with and made clear what our requirements are going to be for the way that those rules show up to LPL investors, those end client investors, as well as to the advisors themselves. So we see that underway.

We actually see the impact being much more about the economic cycle than I would the FINRA rule because it's really -- again where we are in the cycle of real estate investing it's still a perfectly fine asset class, but the opportunities that were there five years ago and commercial triple net leases are just different than they are today. As we've all suffered from very low interest rates these have come down in terms of relative yield and there may be other opportunities and other asset classes and so we're seeing what we think it is the normal market cycle of change.

And then I guess in the quarter you noted that alternative sales were strong, but it feels like commissions per advisor was still pretty weak. I guess what else drove that in the quarter that you saw?

So let me field that one. I think, if you look at brokerage sales as a comparison to Q1 of 2014, you see some in the biggest fundamental weakness in annuities and that's what we had talked about earlier and they were down 20% compared to last quarter, the sales. And what's driving that is what Mark talked about earlier, is just the continued trend down in the 10-year treasury and I think you saw a good bit of that occur in the second half of last year and that's really when we saw the weakness materialize in the third, fourth quarter of last year in terms of annuity sales and that affects both variable annuities and fixed annuities.

And so I talk about them as an asset category annuities and you see weakness in both. And so that's been a challenge year on year. I think the other thing that you have is just a structural trend towards a higher utilization of advisory as being the other directional influence, if you will, in terms of headwinds in commissions. But clearly the year-over-year comparison is exacerbated most by just the environmental characteristics around annuities.

Non-traded REITs were flat quarter-on-quarter compared to last year. They were a bit inflated over normalized levels in Q1 because of a liquidity event that occurred at the end of Q4 that we saw some of that assets being repositioned or cash being repositioned into new non-traded REIT sales in January. So I don't see anything other than our continued trend back towards normalization of the use of non-traded REITs and then you get the occasional volatility that may occur in that volume driven liquidity event.

And then on the transactions line, that saw a decent growth quarter-on-quarter and year-over-year. Was there anything specific in that line that really elevated this quarter or could we see that come back down going forward?

Yes. So on your transaction and fees, if you combine those two things, you had about a 13% year-on-year increase. A third of that came from just increased trading activity associated with primarily advisory accounts and then the second part, which is probably the biggest influence or two-thirds of that came from fees and there is two primary drivers of that. You had the conferences both occurring in one quarter which drove up some of the fee and the second part was the new home office supervision fee that we put in place that just began ramping in Q1.

Okay, and then we think about the home office supervision fee, I guess, how much should that benefit on a year-over-year basis?

Andrew, can you just jump in with us, each analyst to stick to two questions. I think we've had more than that at this point. So can you turn the queue over the next analyst that would be great.

Yes, absolutely.

Douglas Sipkin, Susquehanna.

Actually it's not a DoL question. Question on the balance sheet, just curious, I know you guys have I think like $120 million of debt due this year and I'm wondering has that been paid yet and if it hasn't are you guys going to use cash for that or I guess go back to a facility in terms of --?

We don't have debt coming due this year. We have -- sorry the majority of our debt is, it goes out for at least a minimum of three years plus and so I'm not sure other than -- you may be looking at the revolver.

Yes, that's what I meant. I'm sorry about that. The revolving credit, yes. So you could just re-up that again, I am assuming.

Yes, we have a capacity of $450 million in the revolver and again there's no requirements around the repayment schedule of that.

So when I'm looking at your 10-K, you have a current portion I guess that's just effectively always staying out as a current portion as part of the revolver?

Yes. The revolver is an overnight facility. The revolver facility expires with our Term Loan A in 2017.

Got you, okay. So that makes sense. I apologize for the confusion. And then the second, do you guys have any sort of like cost contingency plan just for the point like if rates never change, just because when I look at 2016 ICA fees they dropped by 50% and I don't know it's not clear what's happening with interest rates. I mean, do you have any costs that you could sort of quickly rein in a little bit if we get into that sort of an environment where we're still stuck at basically nothing or close to nothing into 2016 because obviously there is a major step-down in the ICA fee next year again?

Yes, so we clearly have signaled what the step-downs are. That's no surprise to anybody, right. And we've built this company to be able to withstand zero interest rates for ever. We've taken out an enormous amount of underlying cost and we have put some of them back because of the regulatory spend we've appropriately wanted to put in place. But if rates didn't go up forever, we'd be just fine at the margins that we're at today. So we don't see that step-down in ICA next year which goes from 45 down to 23 basis points in terms of average yield. That's all baked in and we are ready to rock and roll as it goes from there plus it's much tougher on our competitors than it is on us because we control our input costs and we control our operating expenses. And remember our competitors is IBD space don't self clear with one exception and basically that means they have no control over those costs as they go forward and they have no control over pricing changes that could occur there either.

So it's much tougher for our competitors to have a zero interest rate environment. So while it would be nice to have, from a competitive standpoint it would likely lead to more recruiting and even more business growth because it would be just tougher and tougher for the other IBDs to withstand a zero interest rate environment.

The one thing I'd add to that is, so then with next year step-down you're going to get into the 20 to 23 basis range which is what we see is more of a market normalized rate. And so that will be the last major step-down that occurs from the advantage that we had through the contracts that we put in place back in 2008.

Thank you. Ladies and gentlemen this concludes the Q&A session. Thank you for your participation on today's call. You may now disconnect and everyone have a great day.