LPL Financial Holdings Inc (LPLA) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings second-quarter earnings call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Chris Koegel, Head of Investor Relations. Please go ahead, sir.

Thank you, Candace. Good morning, and welcome to the LPL second-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, Tom Lux, our acting Chief Financial Officer, will speak to our financial results and capital deployment. Dan Arnold, our President, 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 at a time. Please note that we have posted a financial supplement on the events section of the investor relations page on LPL.com.

Before turning the call over to Mark, I'd like to note that comments made during this conference call may include certain forward-looking statements including 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 its 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 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.

Thank you, Chris, and thank you everyone for joining our call. Today, I'll cover a range of topics starting with our second-quarter results. Next, I'll provide an update on our progress on regulatory matters and our latest view of the Department of Labor proposal. I'll then discuss several of our efforts to drive incremental growth. Finally, I will summarize our perspectives on our strategic position in the industry. Our second-quarter adjusted earnings per share increased by 7% or $0.04 year over year primarily driven by solid growth in assets and gross profit enhanced by significant share repurchases. These factors were partially offset by slow sales commissions and decreases in cash sweep revenue.

Our core value proposition remains strong, and we continue to add net new assets in spite of a challenging environment. Overall, we grew assets 4% year over year to $486 billion, an increase of $20 billion over the past 12 months. Net new advisory assets grew 11% over the same period. This equates to a record $18.4 billion over 12 months. Asset growth was the primary driver of our financial growth, so we are encouraged that our net new advisory flows continue to be at the upper end of our historical ranges and publicly traded peer group growth rates. Adding assets by adding new advisors is another measure of our business growth. We gained 32 net new advisors in the quarter bringing the total for the past 12 months to 290 net new advisors. While production retention continue to be high, we had an uptick in advisor departures during the quarter due to low producers leaving our system.

The macroeconomic environment in the quarter was a challenge. Uncertainty about the timing of the Fed, open market committee actions, and concerns about Greece and China reduced brokerage activity across the industry. As we have seen in similar periods in the past, uncertainty in the market dampened our second-quarter sales volumes across mutual funds, fixed and variable annuities, and alternative investments. More specifically, low interest rates but constrained annuity sales and limited cash sweep revenues. Furthermore, a maturing real estate cycle and a lack of liquidity events pressured alternative investment sales across the industry as well as ours. We expect continued softness in sales commissions in the third quarter due to the same factors. That said, we continue to experience strong flows into advisory products and solid overall transaction volumes.

Turning to regulatory, we have been focused on improving our compliance and risk profile for several years. We added deeper compliance and legal expertise to our leadership team. We hired consultants to conduct assessments of various aspects of our systems and technology infrastructure. We focused on improving our control awareness and self assessment processes. We reprioritized our technology development efforts into remediation and enhancement of our compliance tools. And we added nearly 400 employees to our compliance, legal, and control roles. As a result, we track several areas of exposure generally involving the thoroughness or completeness of our processes and systems of supervision and surveillance of several complex products. We've worked with our various regulators to resolve and remediate many of these issues.

In 2014 and 2015, as we continued our evaluation of the exposures and worked with regulators, we have incurred higher expense levels for regulatory charges. With the recent announcement by FINRA regarding our participation with others in the industry and a settlement regarding mutual funds share class sales and other significant announcements to come very shortly, we believe that we are close to resolving the remaining significant regulatory matters that we have been working on. We operate in a complex and highly regulated industry, and our regulatory charges are unpredictable quarter to quarter. That said, we believe we have incurred the majority of the costs of these issues and have the compliance infrastructure to mitigate future exceptions, which should lead to meaningfully lower annual regulatory charges beginning in 2016.

Another area of our regulatory focus has been our involvement with the Department of Labor. We are closely monitoring the developments in the proposal as part of our efforts to advocate for our advisors and their clients, and we submitted our comments on July 21. We continue to advocate for a more workable solution that ensures advisers act in the best interest of their investors while also preserving investor choice and lowering costs. We appreciate the Department of Labor's collaboration as we discuss continued evolution of the proposal. Regardless of the final rule, our scale and flexibility give us the ability to succeed in a range of potential outcomes. Additionally, our assessment remains that the current proposal's restriction on alternative investment sales would have an impact of 2% or less on our pre-tax profit.

As we move forward, we are firmly dedicated to driving incremental growth. The changes occurring in retail advice would give us great strategic opportunity. One of our guiding principles is to share the benefits of our scale with our advisors to help them both grow and increase the efficiency of their practices in our business. We used our National Advisor Conference in Boston, which had a record attendance of over 7,000 people, to make several exciting announcements. Starting in 2016, we will meaningfully lower certain pricing on our largest centrally managed advisory platform. This should help advisors attract more assets to their practices and LPL. Our centrally managed advisory platforms drive efficiency into the investment management process and should enable advisors to spend more time with clients and new prospects.

Additionally, we announced that we were working with a third party to develop a tool for low-cost self-service to allow banks, credit unions, and independent advisors to better compete with firms that offer an automated advice model. This tool will be designed as a complement to in-person advice giving advisors greater reach into new markets, particularly millennials, multi-generational families, and small accounts. We will also be waving our IRA maintenance fee on two of our centrally managed advisory platforms. This change further enhances the appeal of our centrally managed platforms for small retirement accounts. This will provide us additional flexibility that the final Department of Labor rule directly or indirectly results in small account holders converting from brokerage to advisory accounts. Tom will discuss the minimal financial impact we anticipate from these and other changes in a few minutes.

We are continuing to roll out ClientWorks, our next-generation cloud-based advisor technology platform. In the near term, we are introducing new straight-through processing modules for money movement, corporate actions, and account opening. These enhancements are part of a program designed to help advisors significantly increase the automation of their operations. Finally, we announced an expansion of our relationship management program. Today, this program provides 1,500 of our top producing advisors with practice management and consulting to help grow their businesses. This expansion will allow us to provide similar support to an additional 1,900 advisors.

To support these efforts and our broader strategy, we continue to make progress on the multi-year transformation of our leadership team. We announced that Matt Audette will join us in late September as Chief Financial Officer to deepen our expense discipline and capital management. I am also pleased that Tom Gooley has joined us as Managing Director of Service, Training, and Operations to increase our service and efficiency. This completes our leadership transformation that began three years ago. In all these ways, we are helping advisors grow their businesses and ours.

Looking ahead, while the macroeconomic environment may continue to challenge industry sales commission, and cash sweep revenue, we are encouraged by our strong competitive position and many positives in our business. The recruiting environment remains attractive, and we are encouraged by our future prospects. The increasing complexity and expanding scope of industry regulation further illustrates the importance of scale and may lead to accelerated consolidation over the next several years. The depth and breadth of our advisory platforms position us to continue to attract assets and advisors even during periods of economic uncertainty. We are also actively managing our expenses and believe we are well positioned for margin expansion and profitable growth. With the stabilization of cash sweep contracts at market rates, shareholders should soon be able to more clearly see the fundamental earnings growth from our business. In summary, while we are cautious about sales commissions in the second half of 2015, we're encouraged by our strong relative position in the industry.

With that, I'll now ask Tom to discuss our second-quarter financial performance in greater depth. Tom?

Thank you, Mark. Today, I will briefly comment on our second-quarter financial results. We have provided expanded detail about these results in the financial supplement which is available on our website. Most of my remarks will highlight the four key elements that we believe drive the creation of shareholder value for our business: gathering assets, increasing gross profit, managing expenses, and allocating capital. In the second quarter, we had solid growth and adjusted earnings per share to $0.65. This $0.04 year-over-year increase was due to a combination of factors. Solid business growth in assets, and the related gross profit paired with share repurchases and year-over-year reduction in promotional expenses and regulatory charges, added $0.08 to earnings per share. At the same time, soft sales commissions and declines in cash sweep revenue collectively lowered adjusted earnings by $0.04.

We experienced healthy total asset growth compared to year ago. Total assets grew by 4% or $20 billion over the past 12 months primarily driven by the addition of $18.4 billion in net new advisory assets. In our asset flows and product sales, we continue to see a shift toward the advisory business. As a reminder, advisory account holders pay for higher levels of service and advisory assets are more profitable to us. Our Hybrid RIA platform assets have grown by $30 billion over the last 12 months to a record $112 billion. Strong recruiting to this platform and conversions from our corporate RIA platform have contributed to asset growth of more than 35% year over year. Our asset growth continues to guide the pace of our gross profit expansion. Assets grew 4% year over year generating a 3.5% increase in gross profit.

We had steady growth in trailing commissions, advisory fees, and attachment revenue other than cash sweep revenue. As Mark discussed, soft sales commissions continued across a number of products. Cash sweep revenues declined year over year as our above market contracts continued to step down to market rates. The main driver of the $2.2 million decline was a 10 basis point reduction in ICA fees compared to last year. This ICA fee reduction was primarily due to step downs of 13 basis points in long-term ICA contracts as anticipated, offset by an increase of 4 basis points in the average Fed funds rate. Excluding cash sweep revenue declines, our gross profit would have grown by 4.5%, slightly faster than our assets grew. Compared to the first quarter, ICA fees increased by 3 basis points with approximately half of that increase due to a higher Feds funds rate.

As we have previously discussed, the growth rate of our gross profit is expected to continue to exceed that of our net revenue as our Hybrid RIA advisory business grows more rapidly than our corporate advisory solution. Under accounting standards, the Hybrid RIA advisory fee charged to clients is not recognized 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 our advisory business regardless of platform affiliation. Additionally, I would like to note the potential financial impact of the announcements that Mark discussed, which included repricing our centrally managed platforms, developing an automated advice tool, and expanding relationship management coverage.

These activities represent investments in the business and in our advisors. The funding of these investments comes through revenue from new services and programs and a more efficient use of resources elsewhere. On a net basis, we anticipate these investments will have an annual pre-tax profit impact of less than $5 million in 2016. We further expect that these investments will provide returns through increased assets on our centrally managed platform from either a shift in existing assets or net new assets. This level of investment is included as part of our annual planning process, and we are currently developing our 2016 financial plan.

Turning to expenses. Our total quarterly G&A costs grew by a modest 2% compared to last year. Our core G&A expenses, which exclude promotional expenses and regulatory related charges, increased by 5% for the quarter and 6% for the first half. Core G&A growth in the second half should be higher as compared to the second half of 2014 as we complete our legal and compliance hiring and have full funding for our bonus rather than the reduced level we had in 2014. We're actively managing our expenses and maintain our full-year 2015 target range of core G&A growth of 7.5% to 8.5%. We continue to anticipate the 2016 core G&A growth rate will be less than the 2015 growth rate. We will provide more guidance later in the year after we've completed our budgeting process.

Declines in promotional expenses and regulatory related charges partially offset the increase in core G&A expense

Promotional expenses decreased 10% year over year due to the timing of major advisor conferences. While there were no major conferences in the second quarter this year, there was one in the second quarter of 2014. As Mark mentioned, we held our focus conference last week. In the third quarter, you will see the expected increases in conference expenses of $15 million and conference revenues of $5 million. Regulatory related charges declined 16% in the second quarter compared to a year ago as we had lower charges related to the resolution of certain items. For the full-year 2015, we anticipate regulatory related charges will be lower than the 2014 charges. We also anticipate the 2016 regulatory related charges will be meaningfully lower than the elevated levels seen in 2014 and 2015.

This quarter, our adjusted EBITDA increased 6% while adjusted earnings grew by 3% primarily due to two factors. First, depreciation and amortization expense increased 12% mostly related to technology investments implemented over the past 12 months and a full quarter's cost of the San Diego Tower. Second, the 18% year-over-year increase in GAAP pre-tax profit contributed to a 21% increase in income tax expense. EBITDA adjustments in the second quarter declined by more than 40% year over year. In last year's second quarter, we had greater restructuring costs for the service value commitment initiative as well as parallel rent from our move into our new San Diego office tower.

My final topic this morning is capital allocation. Our approach to capital allocation aims to create long-term shareholder value. We continue to have conviction in the attractiveness of our business, and this quarter we have invested $18 million of capital expenditures in technology to support growth and for the construction of our new campus in Fort Mill, South Carolina. We also returned capital to shareholders through $24 million of dividends and $86 million of share buybacks. During the second quarter, we repurchased 2.1 million shares at a weighted average price of $41.83 taking advantage of several periods when our stock traded at well below what we believe to be its intrinsic value. That concludes our prepared remarks.

Mark, Dan, and I look forward to answering your questions. Candace, could you please open up the call?

Absolutely.

(Operator Instructions)

Chris Shutler, William Blair.

First, I want to talk about some of the fee changes that you announced last week at the conference, specifically the IRA custodial fee cuts which I think, Dan, you had said at least via the press that it was about an $18 million impact, and then the lower fees on MWP for the LPR research portfolio. Help explain those, why you're making the changes. It sounds like at least on the custodial fees is to get out ahead of the DOL a bit. And just how do you get to the less than $5 million profit impact? Thanks.

So Chris, why don't we let Tom answer the math question and then we'll answer the strategy question.

So the current level of fees that we receive on the IRA fees and also on the strategist fees on MWP this year are roughly $10 million in aggregate. We've got some other items in terms of adjusting some costs and other charges in some new fee programs that minimize that. As Dan talked about the future view, and so that's the value today. Dan talked about a future view that included projected growth in assets and a repositioning that would come from that that gets to the $18 million.

And from a strategy standpoint, what we have seen over the years is as we look at platforms that allow advisors to offload work, that what ends up happening is they grow faster as they are able to spend more time prospecting and more time with clients to get a greater wallet share. So strategically, this has proven to us to be a very good strategy over time to pass our scale along to them, and it can be in this form which is the strategist fee coming out for these two platforms, for the MWP platform, Model Wealth Portfolios, which is our largest advisory platform, and removing the IRA fees, again, are another way of passing scale back. So we know that will result in incremental growth in assets which will well overwhelm the overall financial impact that would be there as well.

Just to give you a sense of that, Curian just announced as part of Jackson National that they're shutting down their third-party asset manager. We have about $1.3 billion to $1.5 billion of assets available from LPL advisors to move into our platforms and these platforms are really good places for them to move those assets. If we were to capture just roughly 50% of those assets, that by itself would overwhelm any of the price changes at all. So it's a economically sound strategy for us to pass that scale along. It's also a better mix shift for us in terms of moving assets of a client's overall portfolio from brokerage to advisory and within advisory to the centrally balanced platforms which are our highest profit margin platforms in advisory even after these changes. Dan, other color you want to add?

Chris, the only thing I would add to that is, is we enable through these price reductions to make these centrally managed programs more appealing to our advisors. It creates great efficiency for them in their practices as it simplifies the overall investment management process and frees up their time to spend more with existing clients and prospects. So that's your other opportunity. And so at the end of the day, what you're doing is exchanging the reduced fees for the opportunity to create a much greater flow of assets under these platforms.

Okay. Makes sense. And then just one more quick one. The net new advisors, guys, it was 32 in the quarter. Right now, it has been strong for a while. The annualized production retention in the quarter, can you give us that number? And then why are you seeing lower retention for some of the smaller advisors? Thanks.

Well so a few things. One is, quarterly numbers on moving advisors is always tough because you have people who are making decisions to move a bank program or move an individual business and those tend to wobble around without too much. That sort of always explains different quarters. Secondly, we continue to see good retention of assets at -- revenues, excuse me, at 97% for this quarter. So we're happy anywhere above 95% and so 97% is quite a strong showing for the quarter. So that gives you a sense of what the outflows were in terms of small producers.

So we had 50 sort of above average, meaning if you looked at just averaging out the amount of small producers that get removed from the system. Sometimes we remove them, other times it's typically a branch removing someone from their local practice. That average production of those incremental 50 is about $20,000 a person. So they were very small producers, and therefore good to have out of the system, with all due respect to them. And it was just an abnormal bump in those 50 for the quarter.

All right. Thank you.

Christian Onwugbolu, Credit Suisse.

So just especially for Mark, would like to get your thoughts on industry consolidation. You mentioned it in your prepared remarks. I guess, how were you thinking of being a bit more aggressive on acquisitions, especially with relation to the current strategy which seems to be more buybacks?

Great question. And I think a couple things are coming into view that are quite helpful to us. Number one is exactly your point and the one that we see which is that these higher costs that every firm is facing in providing financial services, whether you're a bank or whether you're a financial services advice provider accrue to the benefit of large-scale players. We're obviously the largest in the independent broker-dealer space, and we're now quite sizable and the RIA custody space, and so we have to scale to withstand that cost increase. And the Department of Labor is only going to add to that cost increase as well. It's just part of what's happening in the dynamic. Therefore, we absolutely anticipate smaller broker-dealers finding ways to change which might mean shutting their BD and moving to us. It might mean selling to us.

Zions is actually a good example on the banking side of deciding to get out of the brokerage set-up they had and transfer their advisors to us using our broker-dealers, so we see lots of opportunity for that growth as a result of that increased complexity of managing these businesses. The second issue for us is our own unique journey, which we've obviously spent the last three years working very hard to make sure that we've created an incredible infrastructure of talent, an incredible infrastructure of technology, and create the right environment for existing clients to do well. And we can see the end of that journey in the sense that our elevated spending for risk management, for example, is coming to a conclusion in 2015. Our elevated work in systems conversion continues on but delivering ClientWorks, for example, last week at Focus is a big deal. Delivering straight-through processing in several processes that are critical to advisors is a big deal.

As those things recede behind us as they will over the next few months, that actually just gives us capacity among management and in the overall operating business to take on acquisitions, which would have been tough for us a year or two ago given the core infrastructure work that we're doing. So I think we're also fit for purpose as we think about consolidation going into 2016. That then gets exactly to your point, which is cash. And always good to have cash on hand for those opportunities, so I think you will see us generally try to be thoughtful about where we are on our ratings scale, meaning that we like to stay within the guideposts that we have today of our current credit rating. Would be happy to have that degrade a bit if we found the right opportunity and could leverage to buy it. At the same time, it would mean that we tend to favor holding cash a bit more as we see some consolidation opportunities come into play. So that's the way we view the market as we sit here today.

William Katz, Citigroup.

Thanks so much for taking my questions. I really do appreciate the extra disclosure, very helpful. First question just looks at the growth rate of the FAs. This might be a tough question because of sort of what you're pruning versus what you're keeping but if you look at your transition costs, I think they are up about 30% year on year. And you look at your FAs and it's not growing at the same level. Can you talk a little bit about how you sort of see that going? And I guess the root question is, is it just more competition, more cost, lower margin on the incremental FA?

I can tell you our transition costs have not gone up 30%, so I'm not sure what you're seeing, Bill, that would get you to conclude that so we'll have to dig in further maybe with you offline to understand it. Our costs are up slightly year over year. I think roughly averaging about $0.25 on the dollar, not too far off from two or three years ago which were about $0.22 on the dollar. So we continue to be able to attract significant talent in the world, and remember that we report numbers on a net basis. Our competitors report numbers on a gross basis advance or of that, which is a big difference. And we don't care to report our gross number; it's a significant number. We think net is what matters.

The other thing you can see to get to the underlying growth is asset growth. Because at the end of the day, it's not necessarily about the person. It's about the assets the practice brings and you can see we've had very strong asset growth and that will show you that basically the cohorts that are leaving, the 50 extra that we called out of the field in this last quarter, obviously had relatively low production and relatively low assets, and the classes that are coming in have characteristics of having higher assets and higher production than our average advisor has today, and you can see that in the asset flow numbers that are there as well.

Okay, I was just looking on page 19, associated footnote number 12 as well when I was referencing the 29% growth. Second question I have for you is just in terms of your comments just now on leverage. How much leverage would you be willing to take on for consolidation? Just trying to get a sense of potential financing for your incremental transactions.

Well, we have all financing opportunities available to us. That's not really an issue so rather than speculate without a transaction in hand, I think we'd be better to talk about that when we have one in hand if we have one in hand along the way because as we look at it, we do think there's going to be opportunities. We think pricing has returned to more rational levels in the near term and so therefore we're happy to be opportunistic about that as we see opportunity in the marketplace.

We are seeing an uptick in recruiting, which also is good in terms of just growth of the business more fundamentally and organically, and we're seeing that in sort of all facets. Again, it's lumpy in terms of when it shows up and lumpy depending on when we decide to take advisors out as happened in the second quarter. So rather than speculate on leverage, I think it's fair to say based on our Treasurer's review and Tom's review, our CFO, is that we have plenty of room to do we need to do at size and scale for our industry.

Okay, and just my last one. Thanks for taking all my questions this morning. I scribbled them as quick as I could so I may have just misinterpreted. If you look at your average commission per advisor, it is down pretty substantially. Is that just from a macro perspective in terms of variable annuity sales or is there a mix issue underneath that? I was just trying to get -- .

So as we said in our comments, across the board, mutual funds, annuities, alternative investments, all the three horsemen, if you'll pardon the expression, of commission sales are down and we're seeing this across the industry. You've seen it in other earnings reports from our competitors, and we're seeing it as well. That the basically commissionable sales are just generally down, typical cyclical action when you have uncertainty in the marketplace. You've had, what is it, year five of a bull market, so not an unusual behavior. Tom and I were discussing it and it felt a little bit like 2012 when we had tax uncertainty that affected commissions as well.

So as we see it as a near-term cyclical measure, we need to be thoughtful about expenses that go along with that little bit of slowdown in commissions but there's nothing fundamentally changing in the business. The one change that's the big macro change though to emphasize is the switch to advisory. We see it in Hybrid; we see it in recruiting; we see it in platform sales. It's why it's a smart strategy for us to move more business onto the central platforms through the changes that we announced at Focus. Those are all good things to feed a very naturally occurring shift to advisory overall.

Okay. Thanks for taking all my questions this morning.

Chris Harris, Wells Fargo.

I want to follow up on that last point regarding advisor productivity. Totally get why 2Q was challenging. You guys definitely called out all those items but it sounds like you're pretty cautious on the second half. And you know, I get it that some of the pressures are interest rate related due to -- tied to annuity sales, but I think that equity markets kind of hovering around your time highs would be a pretty good time for advisors to be a little bit more active. So wondering if you just flesh that out a little bit more. And then if we do get some movement on rates, does that all of a sudden change the outlook potentially for annuity sales?

So a few things there. One is, actually I think the market in all-time highs would be awfully hard for me to advise a client of mine if I were a financial advisor, gee, let's go full into the equity markets right now. I'd advise a strategy of essentially feathering in where you buy a little bit every month and you work your way towards the positions you want and you buy stronger on weakness. That would be my advice. When I was at Focus last week, I asked advisors how they were feeling about those kind of questions and they answered it the same way. They want to be thoughtful about investor's monies and they want to be thoughtful about protecting their principal and be cautious.

I don't think there's any conditions that we would see today that are particularly compelling. The one thing that has changed this year that's helpful from an overall perspective is that both active management and diversification is starting to pay off again. The market is starting to make decisions around sectors and around regions of the world, and that has not been the case for the past five years. It's been all about basically large-cap US stocks that pay good dividends. That's been the right place to be. And if you diversified, you actually lost returns for clients. You didn't have negative returns, you just had lower overall returns. We're believers that diversification works and needs to be done in a portfolio to protect assets and protect downside. And giving up some upside in robust markets isn't a bad idea.

Well, now diversification is paying back, so it's a good time to be in diversified portfolio as well. So we don't see a particularly compelling reason. There was a bit of a sell-off with Grexit being speculated on. Frankly, it would have been helpful to have that sell-off be stronger in order to kind of clear out a little bit of lack of understanding. If you come to the fixed income markets, the other catalyst would be the Fed decisively actioning, moving forward in September. We hope that they do. And as we look at that, that would start to also do a few things. One, probably move the yield curve up the longer end a bit.

For it to really be meaningful to the insurance industry as we understand it, it would have to be about 3% on the ten year. We're a long way from 3% on the ten year for them to be have the room to create the kind of product features that are compelling for advisors to talk to their clients about. So what you're seeing is advisors looking at what's available on offer and saying, huh, I think I'll wait. And therefore, that's affecting commissionable sales. That's a good thing, right? That means they're really taking into account investors' interests and making the right decisions that comes to what product availability there is today. And then of course we are at very low cap rates on real estate with some notable exceptions there. And again, from a world where we've had over the last five years an incredible bull market in real estate investments and cap rates that started north of 10%. Cap rates that are below 4% today are just not as compelling.

You can feel that ambiguity even in my representation of it to you over the phone here, and that's the ambiguity that you can find when you walk the floors with our advisors when they describe what they're talking about with their investors. So we need a catalyzing event. Fed movement, Europe getting stronger, China getting through its malaise are all things that could be a catalyst for movement. I wouldn't overly worry about it in that we want to be clear that we think this is just short-term weakness. It probably will happen through the rest of this year, all things being equal, in the absence of the catalysts similar to what happened in 2012.

That's very helpful detail. Thank you. And then my one follow-up would be on your non-cash asset based revenues. Again, you guys had very nice growth there. In your addendum here, you mentioned that pricing improvements helped to contribute to some of that. Wondering if you can elaborate a little bit on exactly what that's related to. Thank you.

Yes. Thanks. There are a couple of items in that piece. One is basically our funding from moving funds to Omnibus and also some of our sponsor pricing arrangements have improved that led to that revenue increase. In addition, we've also seen very solid transaction activity within certain of our advisory platforms which generate transaction fees, which also contributed to the growth of revenues in that particular line.

Conor Fitzgerald, Goldman Sachs.

So just on variable annuities, I know they're an exempt product but there does seem to be a decent amount of regulatory focus just on this product. I guess as you think about the potential for the implementation of the fiduciary role, do you anticipate any impact in how your advisors use or sell their profit as product to their clients?

Well, I think it's depends a great deal on what the Department of Labor decides to do in terms of changes. They've made a lot of progress from 2011 to the most recent proposal. We've described that as a significant progress, and I think it is. There are four areas. I won't go into detail because I just don't want to bore everyone on the call of those four details that we would like to see changed that are in our letter to the DOL, quite clearly spelled out. The significant one is really the best interest contract. It's a very onerous document, and it essentially requires me as a financial advisor to give a prospect a contract before we're actually engaged in much of a dialogue about what that prospect needs. It's not workable.

In its current solution, we've suggested to the Department of Labor a more workable disclosure that's in plain English that shows you basically how people are getting paid as real transparency to the world that we think would be a much better solution. It's along the lines of what SIFMA has proposed as well because we think that's a better outcome. I'm hopeful that the Department of Labor will get there. There certainly is a lot of good discussions going on with them about making it a more workable solution. Assuming they get to a workable solution, then I think the world continues on pretty much as we see it today and not really much impact on the variable annuity side so much, as we look at it. If there isn't a change, the BIC is going to have an impact across mutual fund sales, as well as annuity sales, and we'll just have to work our way through what that means and what other remedies might be in place to get to a different place than the BIC would take us.

So without speculating on that, then let's come back to a little fundamental issue that I think is important for all to understand is, our advisors start with a financial plan. Remember that we're a financial planning firm, so I don't just go out and say, I'm selling you the hottest stock today or I have an IPO, Mrs. Jones, I'd like you look at. We're starting with a conversation about what are your goals, what's your risk, how are you protected in terms of things like life insurance and so forth? Let's do a financial plan together. We have multiple financial planning modules available on our technology that allows an advisor to really sit and discuss with a client what their goals are. Once they know that, they can then design a solution.

Remember that most of our advisors have on average 60% of their clients' wealth, so they have a lot of the assets. They are the primary advisor to that household, and they have both taxable and tax-free assets. So if I were sitting with a family today and I was looking across their portfolio with a financial plan, and I might say to a middle income consumer, we need to protect some of your downside here, we need to worry a bit about inflation in the long term. Retirement is a very long time in this day and age, thank goodness to healthcare. And as we look at it, what we want to do is use variable annuities to help protect things against inflation or provide you exposure to higher returning assets like equities but with some downside protection. That's typically what an annuity is used for.

Given the array of assets, some taxable and tax-free, gee, I can't use this if it turns out you couldn't use it within a tax-free account, then we would use it within a taxable account. And it's actually quite a good device for a taxable account because it actually turns the assets into a tax-free buildup during the life of that contract, which is obviously helpful for compounding. So to my mind, there is plenty of flexibility to get with the customer needs, which is an array of exposures to the market and an array of downside protection devices, or even diversification of a different type within that financial plan. So we need to worry about the mechanics of how all that works, absolutely. We need to oversight it and be vigilant about the work that we do, but we don't see a fundamental shift in good financial planning, so we're working for consumers and our advisors are very good financial planners.

That's helpful, thanks. And I guess if we think about assets continuing to shift into the hybrid channel, can you help us think about the long-term impact you see that having on your expense base? I guess, if that trend continues, is there any room to take expense out should you get more efficient if that's the way the business is going to go?

Well, it's a great question. A few things. One is that the extent to which those practices use things like our centrally managed platforms, that's a very profitable outcome for us so the more assets shift from brokerage to advisory, that's good. At the same time, it also provides a way for the advisor to not have to do local investment management and rebalancing, so it results in an outcome for investors that's quite good as well. So that would be a benefit to it, is really more a revenue-based benefit and an efficiency benefit because the local practice doesn't have to invest in those resources to do it and because we have technologies in place that do the rebalancing and monitoring of accounts that effectively use technology, as a human used to when I started in this business, to look over a portfolio and monitor where it is and then suggest trades the human then has to approve. So we do think it's more efficient that way.

The other thing is the liability. If you have your own RIA, you own the liability, we don't. So it does change the liability profile for us, which is useful depending on how you look at it. Although I do think longer term, there is benefits to services we provide to those RIAs like becoming their chief compliance officer for their RIA, which gives us an incremental earning opportunity in the business. And then finally, advisory business by definition tends to have less of a regulatory oversight or review, not less regulation but just the mechanics of regulation are different. There you're based on outcomes and principles as opposed to a rules-based system that's in brokerage. In a rules-based system, you've got to check a lot of stuff in order to find the inevitable one or two bad things that are there.

You might look through millions of documents to understand something or transactions. Within advisory, you can actually look at the results, what's the account done, how's it performed, how has it performed relative to an index or relative to other accounts like it. And you can actually find exceptions that way. It's a little bit easier and less onerous way of overseeing the businesses there. The bigger issue for us is, to not completely kill this question, is that for us, it's about automation of processes. Dan announced it at Focus. Our focus, so to speak, on operational efficiency that helps accrue to the advisors' benefit and ours and we've said we were about 15% automated today. We're moving to 85% automated. That will eliminate a lot of positions that are basically done at LPL today that are costly for us to do. Where we're manually reentering business, this will allow us to go to straight-through processing which will absolutely reduce our expense profile over time. So it's not an immediate effect, but it's an effect that comes into play over one or two years and that really hasn't played out in our portfolio today because we've overwhelmed it with investments made in our risk infrastructure.

All very helpful. Thanks so much for taking my questions.

Devin Ryan, JMP Securities.

Maybe starting on the custom clearing relationships. Those have been on a bit of a downward trend. So I'm just trying to get a little more perspective here, you know, has that been proactive pruning or is there any other themes kind of occurring here? And then just how do you think about that part of the business, you know, is that a growth element to the Company over time?

I'm not sure exactly I know what you mean. We have over 700 relationships in our institutional business, which includes the largest one, AXA, which is a clearing relationship but it's an outsource clearing relationship meaning all of technology and operational processes are done by us on behalf of AXA. And then we have literally hundreds and hundreds of banks and credit unions that provide an institutional relationship as well where it's our broker-dealer and our advisor that's providing in the service or they may have a local RIA that's doing it.

So we've actually seen a continued growth in that business over time. We've not seen other opportunities like AXA so maybe that's what you're referring to, but we haven't seen any runoff of the business there. What we've seen is continued growth in that business, particularly in the banking sector.

I think you're seeing the same thing in their headcount that you've seen with some of our lower producers. I think you're referencing on the custom clearing side, we talk about providing services for about 4,200 advisors who aren't licensed with us. That number is down about 5% over the last year or so. And I think that reflects some of the challenges the reduction overall in the industry in the number of advisors out there as opposed to anything that we drive. Those programs are all managed by the AXAs and the other insurance companies we have as clients so any decisions about headcount are their moves, not ours.

Got it. That's helpful. I haven't asked about that in a while so I appreciate the update.

It's a danger of headcount, right, as a proxy for economic value. It's a rough proxy. And it's sometimes not a very good one when you take out small producers or you have advisors in AXA's world that are shifting back more towards insurance-based products.

Got it, understood. That's helpful. And then maybe just coming back to some of the comments about regulatory costs and expectations, hopefully down meaningfully next year. Is that an expectation that even if some new issues come about that are not seen today, just history would suggest that we're in an elevated level and that we'll revert in back toward the mean or is there any other things that are driving the view there. And then just is the expectation that we're still going to remain in an elevated regulatory landscape maybe relative to the pre-2014 level?

Yes, I think it's absolutely fair to characterize that we're going to remain in an elevated regulatory environment. If you look at the banking world as an analogy, what's happened there is essentially the federal regulators and the CFPB have really become the primary regulators of that industry, so they have actually gone from multiple regulators to essential two primary federal ones. There are several sub-agencies there, but those are the two primary ones. In our world, we'll devolve into a much broader range of regulators, now including the Department of Labor, over essentially the same set of assets. And that by definition adds more cost because you just have more people to come ask you questions about essentially the same activities. So I think across the industry we're going to see elevated regulatory costs and elevated regulatory inquiry, and we just need to be ready for that.

I think what's important from our perspective is we want to continue to look and find ways to identify any activities, anticipate risk management situations or problems that may arise, and then get those reported to regulators as we should, and remediate any of those. That's our primary goal. We want to continue to be vigilant on that front no matter how you look at it. But I do think in our journey, this most recent FINRA settlement and the coming items that we mentioned that are near term represent a significant milestone for us in terms of our particular journey on the regulatory front, which is why we'll see our regulatory costs come down next year. I suspect our competitors' regulatory costs probably goes up from here just as the regulators move a little further into the competitors, this is part of what will happen and also just in general the addition of new regulators into the scene.

Got it. Okay. Thank you.

Steven Chubak, Nomura.

So just wanted to kick things off with a question on share-based comp and looking at revenues, they're tracking roughly flat year on year yet the share-based comp number is up about 25%. And just wanted to get a better sense as to what factors, whether it's a function of revenue mix or new hires that are driving that magnitude of increase, and how we should be thinking about the trajectory for the back half.

There are a couple of drivers behind that. First of all, over the last couple years as we've looked at our stock-based comp programs, we've moved to a three-year vesting from a five so part of what's happened is the dollar value of grants have remained relatively constant, adjusted for the increase in employees but the vesting period has changed, so you're seeing that expense recognition over a shorter period. Separately, we also changed some of the vesting procedures around and what is meant by retirement eligible. And so as people meet the retirement eligible criteria or specifications, they are eligible to vest immediately upon retirement.

Being conservative as accountants are, that requires us to recognize the expense of their grant when the grants happen so it will tend to elevate and pull some dollars of compensation expense into the first two quarters when those grants happen. So we expect it will ramp down a little bit over the rest of the year but it will still be higher than it was a year ago largely because of the differential in the vesting schedule.

Okay, thanks. That's extremely helpful. And then Mark, maybe a question for you, just a little bit of a big picture question. In years past, you had spoken to the target of 10% revenue growth, give or take, and with inflation about 6% expense growth through the cycle, and I understand that the focus has maybe shifted a bit more to gross profit due to the growing contribution from the Hybrid RIA business. But just wanted to see if there was a gross profit target that maybe we should be thinking about in terms of annual growth just so we can continue to monitor and evaluate your progress even as the contribution from the Hybrid RIA side continues to build.

Yes, I think we don't really talk about it at that level so I don't see us quite going there. But I do think it's useful statistic to have as we look at our performance since we've been public, and basically we've had 15% earnings growth as a business when you remove the externality of interest rate movements downward. So all the callers will remember that we went long in our portfolio in 2008. Those contracts lasted until all the way until first part of 2016, so we've been stepping down to market levels on our cash deposits through first quarter of next year. Those step-downs have cost us anywhere from $15 million to $25 million a year in EBITDA, quite painful. But if you remove that effect, which you can't change, wish we could but we can't, you actually do see good underlying fundamental earnings growth at 15% and that includes those elevated regulatory charges that we had.

So I think you can kind of now imagine a world going forward in 2016 in which even if rates were to stay zero, we will be mark-to-market on rates so after the first quarter, we don't face the step downs any longer. Secondly, we're saying we're going to have lower regulatory charges going forward. That sounds pretty good to me in terms of profit growth overall, and we've been what I would describe as an aggressive buyer of our own shares which only adds to that. I think secondly what I'd look for is asset growth as another proxy, and asset growth we're seeing somewhere in the 8% to 10% range as we look forward in the business, and we certainly have put up better numbers than that historically. We do think changes like the ones announced last week at Focus related to our centrally managed platforms will likely have better outcomes than that, but that's not a bad proxy from where we're trying to continue to land the plane here as we move the business forward. So that maybe is helpful in terms of your core question.

Extremely. Mark, thanks for your time, and appreciate your taking my questions.

Joel Jeffrey, KBW.

Just in terms of the comment letter you guys put through to the DOL. You talked about their sort of expense estimates being substantially lower than what could actually come through. Could you talk a little bit about where you see that specifically to your business model?

Well, I don't know that our business model is any different than anybody else's. So if you look at different competitors that size, right, and scale is that everyone's going to have to invest in the infrastructure needed to report back to the Department of Labor. Right now, that's in the BIC contract process that we were describing before and a few other areas. We're continuing to work on estimates but because we don't know what the final ruling is going to be, they're all speculative at this point. But we'll be no different than anybody else.

That will be a capital expense that will basically make its way through in the form of technology because we've already invested heavily in the regulatory infrastructure here, we don't necessarily anticipate a huge uptick in our regulatory infrastructure spend because we already done it and that we're well-positioned for. SIFMA does provide some estimates on costs, which we don't have a view of. They look like they're reasonable thought and thoughtful numbers but at least that gives you something to look at if you'd like to in terms of those costs.

And then you have a mix shift change, and that's part of what we've described as a 2% to gross margin impact, so that's where either products are disallowed and they do or do not make their way into other parts of the portfolio, and of course, we've described that if we see a shift of assets to advisory because that's the better solution for consumers as a result of the DOL's work, that will likely have a near-term negative impact but of course it actually will be positive in the medium and long term. So we'll understand all that better once we know the final regulation. We certainly are committed to having transparency about it since there seems to be so much confusion about the impact of the Department of Labor.

I will say that no matter how we look at it, it is always better for consumers if what we can do is be very clear and transparent about what costs are, and that we are working on a best interest standard or fiduciary standard in the business. That's what I know our advisors do. What I think people get confused by is that consumers often -- a better choice is to just pay a sales commission today, deal with the rollover they have, and come back and check in in five or six years. That's not a bad strategy at all, particularly for a rollover under $100,000, that's a pretty good way to go. So we just have to make sure we have those choices available to consumers is probably our biggest concern

Okay, great, and then just last thing for me. I apologize if I missed this earlier, but can you tell us how much the impact of lower alternative investment sales impacted the other revenue line in this quarter?

Yes, so overall there was the alternative investment sales were around $30 million. There was about a $5 million impact or decrease that would've gone through the other revenue line in the quarter.

Great. Thanks for taking my questions.

Ken Worthington, JPMorgan.

Good morning. This is Amanda Yao stepping in for Ken. Most of my questions have been asked and answered. Could you just highlight any other takeaways from the Focus conference that we haven't already covered and maybe help us weigh the cost and benefits of these initiatives?

I think we really on the 2014 Focus events, and this is going to sound a bit insincere but it really was the very best one I've ever seen us do. It was a lineup of speakers, very powerful speakers from outside, very powerful internal speakers in terms of our focus and our belief in person-to-person advice and our belief in the advisors with whom we work at LPL. I think the advisors saw that, felt it, and saw the tremendous investment we've made in de-risking the business and very much applaud it. Working their way through policy changes and things that are always a little bit difficult, but to a person, we had plenty of feedback about their view that this is a very smart thing for us to be investing in.

They were absolutely thrilled by technology. Our technology booths were stacked so deep we had to get microphones to project out to the crowd that gathered around each monitor to show them ClientWorks, to show them the straight-through processing modules that are rolling out, some very exciting new developments there. A lot of work about high net worth. We're seeing a tremendous growth in high net worth assets, families that are worth $5 million or more in investable assets, a lot of good client wins. We had two that occurred at Focus that brought in over $30 million in new assets. I mean just incredible things happening there. And then the retirement partners, our 401K business, we continue to see incredible growth there in new plan assets as well. So you've got that buzz that I'm trying to relate to you in my answer to you that was quite palatable among actually a very large crowd.

Just the gathering was a $1.6 billion of revenues in that room. That's bigger than our most of our competitors right by a long shot who gathered in Boston to talk about the business and to really work together. There was over 250 classes for them to attend to learn about smart ideas for their clients, to learn about ways of doing business that are more efficient, to learn about the technology that we have on offer and so forth. There was the announcement of the Affinity Program, which is a number of vendors that basically we've negotiated at scale for discounts from everything from travel services to office supplies, but more importantly to other technologies and services that advisors use in their practice today, and those savings will be significant for the average practice here at LPL, so it's one more reason to want to affiliate with us, in addition to the announcements that Dan made as well around relationship managers. And maybe you want to add some other color.

Yes, I think there was great interest in obviously the algorithmic advice solution, or Robo solution, that we talked about. They see that as a way to add that as a complement to their practices and leverage it as a way to reach new markets or multi-generational family planning, et cetera. So they see that as a very interesting possibility to help them grow their practice. And I think probably to summarize it all, they are very optimistic about their businesses and their opportunities for growth, and they were very convicted and committed to leveraging all of the different training platforms and tools and resources that we made available for the better part of four to five days to leverage that opportunity to learn new ways and opportunities to grow their business and take that back to their practices, so it was a very underlying sort of macro tone to it all.

Great. Thank you.

(Operator Instructions)

Andrew Del Medico, Autonomous Research.

On the math for the fee cuts, I'm just thinking about the mechanics of that. You mentioned the $5 million pre-tax impact but you noted asset growth and some expense offset. How should we think about I guess the asset growth benefit that you guys are implying and then the expense offsets as we run the numbers on that?

I think the large view around it is that at $5 million, it's not a significant item, so I'm not sure I would give specific guidance around how to model through it.

Yes, I think what's important and I hear a little bit in your question and I want to be sure we're clear about is, is we're not saying we're going to get massive asset growth that overwhelms the $5 million subtract $18 million, so this isn't a $13 million delta that's made up by asset growth, so the vast majority of the cost is basically give up some existing assets that are there, which are relatively small and really not much in the way of asset projection that relates to the $5 million being overwhelmed, if you will. So important to understand it's not a bet that we have to get growth in order to cover the $18 million down to $5 million. I think that's a critical part to understand that I kind of hear underlying your question.

And just to add to that, I think what Mark said earlier is remember these are recurring fees that are generated from this asset flow, and so as Mark said, you pick up somewhere between $750 million and $1 billion of incremental asset flow onto these platforms, and you hit a breakeven point on the effort and then to the extent that you continue to expand that asset flow over time on these platforms in the recurring fee nature of it, you create interesting return dynamics on the effort.

And remember that we have nearly $40 billion of sales in these platforms over all, all of our advisory platforms in a given year on a gross basis, and so therefore picking up an incremental $500 million, $1 billion, is not hard to imagine at all.

Okay great. That makes a lot of sense. Thank for clarifying. And then just on the DOL, I guess you guys cite potential 2% impact. So on the DOL, you guys cite the 2% impact on gross profit but really you limit the exposure to the alternative investments. An insurance company came out recently and said they expect the potential for a 10% to 30% impact for annuity sales. When you think about the full spectrum of the businesses that are affected by the DOL proposal, I guess is the 2% gross profit guidance a fair estimate and then how you think about just the other ways that will impact your business going forward?

Well, we laid out a very clear piece of paper that lays that out in our recent William Blair conference notes that I would recommend that you are others go to look at it there. The math is pretty straightforward to get to the 2%. I don't know what insurance companies are thinking about for their businesses; that might be quite unique to their product mix or other things. People often confuse a number of aspects about annuity sales at LPL that I want to make sure we're clear about. Remember that we serve a lot of banks and credit unions and fixed annuities are quite a good product, particularly for a banker who doesn't want to take additional deposits. They can create in their salesforce the use of fixed annuities to basically run down deposits from the bank, and that's a good strategy for banks to use and it's good for consumers to get the interest rates that they need.

We're right now in an ebb of that meaning that we're seeing fixed annuity sales down because bankers actually need deposits and because when the rate cycle that we're in, fixed annuities just aren't as good an investment as say a CD might be from that local bank. So people often confuse the annuity line of our business to be all variable annuities, but it's not. A big chunk is fixed annuities and even immediate annuities that are there. And then variable annuities are definitely down this year because long-term interest rates are well sub, I think like 240, 250 on the 10-year so that the products just aren't terribly compelling. So in some respects, the lowering of growth of VAs and the lowering of growth of alternative investments generally is a good thing as we look at the cycle through which we operate. So by definition, if you have lower sales this year, any impact the Department of Labor might have would be even lower than we anticipate going forward.

So the math is pretty straight forward, and I don't think there's really anything else there that is going to cause a tremendous shift. Remember that part of this is the investor still has to be invested, right. They're investing for a 10-year, 20-year, 30-year period, and so they don't use a product that gives them some diversification or some protection like a VA might or an alternative investment might, they're going to put it into a mutual fund which attracts a commission as well. So there's plenty of alternatives for those assets that will generate commissionable activity or generate new advisory revenues as well.

Okay. Great. Thanks, and then just last question. I wanted to follow up on the recruiting this quarter. You mentioned that it's -- your gross advisor numbers were solid. It seemed like a lot of peers had strong net advisor growth this quarter. What are you seeing from a competitive standpoint of attracting advisors, and how does the gross number look compared to past quarters and then where are things shaking out on what you guys are getting on the economic side given the last of the Transition System?

So transitions systems is around $0.25 on the dollar, which is near its range that it's been in for several years so nothing particularly new there. We had an uptick of about 50 people this quarter who left us who were very low producers, $120,000, that explains all the variance off of our track. So the recruiting members on a gross and net basis were exactly where we expected them to be and fit in line to our projections and fit in line to our historical averages. What's different this quarter is an uptick in smaller producers leaving and that just happens at different times in the cycle. Frankly, don't know particularly why it's this quarter versus first quarter or third quarter. It could certainly happen in third quarter as well as we sit here today trying to understand the best way to look at the system. Again, I'd point to asset growth. Asset growth is quite strong.

We have said that the recruiting classes are dominated by hybrid solutions, which means there's a lot of advisory assets bringing -- coming along, and therefore you continue to see very strong advisory asset growth that's both existing businesses growing, but of course also those recruited businesses coming along. So we're happy about the cohorts that are joining us and happy about the folks who are leaving us in terms of relative size of each you compare to the average of the business overall. Don't really see a fundamental change in recruiting, which I think is the core of your question, and I would challenge you to go and look at our competitors' numbers. I don't see those as net numbers. I see those as gross numbers based on what we've monitored for years of our competitors. We see nobody in the field who can compete with us across multiple markets in terms of types of advisors that we recruit, whether they're in bank programs, credit unions, or independent or RIA, we just don't see the same competitive set across all. We see specific competitors based on specific market channels.

Okay. Great. Thanks for taking my questions.

William Katz, Citigroup.

Just a couple of follow-ups. Thanks for your patience this morning. There's a lot of moving points to this story, revenue, expenses, mix shift, et cetera. Mark, I was wondering if you could update us where you think the adjusted EBITDA margin might be X any kind of change of rates as we look out at into 2016 as some of these expense bills slack in and the regulatory environment uses up a little bit for you guys, and then you think anything about the mix of the business and what it means for gross profits, Just trying to put it on the margin basis to try and think about it that way as well.

We're not going to predict 2016 numbers because we haven't done budgets yet, and we'd like to have our Board be the first place that we talk about that rather than through the analyst community, with all due respect. So I'm not going to fulfil that. I think we're all clearly aligned on wanting to have margin maintenance, meaning that we have a very profitable business today. By our review of it, if you look at our competitors, we're in the top three of highest margin providers in this industry, roughly 30% some in the business, so we don't see.

We're not trying to denigrate margins in any actions we take. We're trying to enhance profitability of the business overall. There's always a trade-off of volume of profits versus margins. In the history in which I've been in the Company for 14 years, we've always been well served to look for opportunities to accelerate total profits, and then even we kept margins in the same level. So we kept margins in the low 30% but we were able to accelerate total profits that would be quite valuable to shareholders on a cash flow basis, on an absolute dollar of earnings basis, by any measure, that would be a good thing. So those are kind of the guideposts, Bill, that maybe is a better way for me to answer your question rather than specific numbers.

Okay. Just one last follow-up. As I've listened to you talk about the dynamics driving both the fixed and variable annuity sales, and we think about the forward curves for interest rates, it doesn't seem like there's going to be a tremendous uplift in long-term interest rates per se. Is there any opportunity here to have the incremental pricing opportunity on maybe on the production payout ratio perhaps, assuming that maybe the brokerage productivity doesn't climb back as much just given the rate backdrop?

Well, yes. So that implies that there's not value to what's the dynamic that's there today. So I don't think it's quite as simple as saying, gee, we don't like this sales level so what we'll do is lower the production payouts. That doesn't make sense to me in terms of helping the business continue to grow. What we need to do is provide an environment in which the advisor has plenty of choice on how to solve the client's financial need. And so thinking that through again, starting with a financial plan that might be appropriate that they buy fixed insurance depending on profile and need. It might be appropriate that an annuity is still there. We still sell a lot of annuities here, both fixed and variable.

What we're just seeing is year-over-year changes, obviously the integrations of growth, a lack of growth in those categories. We still sell a lot of those products because they're quite useful as ways to help protect a client's downside. I don't see where that would help us in any way. It might in the short term increase profits, but I don't think in the medium or long term it would help at all in terms of helping solve that fundamental need. When we solve that need well, our history would tell us that we will grow assets over all with an advisor and with an investor. That's why we get averages like 60% wallet share of advisors in the households they serve. Many a broker-dealer would die for 60% market share of a household, so as you look at it, we think that's a fundamentally better way to run the business overall.

Okay. Thanks again.

Thank you, and I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.