LPL Financial Holdings Inc (LPLA) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings third-quarter conference call. (Operator Instructions). As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today's call, Mr. Chris Koegel, you may begin.

Thank you, Tanya. Good morning and welcome to the LPL Financial third-quarter 2015 earnings conference call. On the call today are Mark Casady, our Chairman and Chief Executive Officer; Tom Lux, who's served as our acting Chief Financial Officer for seven months, including through the third quarter; and Matt Audette, our recently appointed Chief Financial Officer.

Mark, Tom and Matt will each share introductory remarks and then we will open the call for questions. We would appreciate it if each analyst would ask no more than two questions at a time. Please also 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 would like to note that comments made during this conference call may include certain forward-looking 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 including those related to capital management and expense management; 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 will turn the call over to Mark.

Thank you, Chris, and thank you, everyone, for joining our call. Before I begin I would like to welcome our new Chief Financial Officer, Matt Audette, to his first LPL earnings call today. Matt brings a proven track record of expense management and capital allocation. While he has only been with us for a month he hit the ground running and has helped us shape the decisions that we will discuss.

I would like to also thank Tom Lux for his service as our acting Chief Financial Officer for the past seven months as well as his service for the previous six years as our Chief Accounting Officer. With more than 30 years of experience in our industry, Tom has made an invaluable contribution to LPL and we wish him well on his upcoming retirement.

Today I will briefly summarize our third-quarter results, provide our updated thinking about the Department of Labor rule and announce several significant decisions. Next Tom will speak in greater depth about our quarterly results, Matt with then expand on our future plans. Lastly we will open the call for questions.

Much like we discussed on our last quarterly call, the business environment in the third quarter was challenging. Our industry experienced volatile equity markets, decreased asset prices and near zero interest rates. In this environment we had solid business performance that was consistent with similar turbulent periods in the past.

Sales commissions and net recruiting slowed and lower asset levels reduced trailing commissions, advisory fees and asset-based fees. At the same time transaction volume and cash balances reached record levels, production retention remained high and net new advisory asset flows remained strong.

We continued our planned investment in compliance and legal resources to lower our risk profile while also carefully managing other expenses given the environment. Despite the challenging environment our solid performance on several dimensions generated third-quarter adjusted earnings per share of $0.55.

We also continue to closely monitor and participate in discussions about the Department of Labor's fiduciary proposal. At this time the final rule and its implications are still unclear. But we understand the range of potential outcomes and we have been diligently working through our options.

We are confident that we will be able to help investors and advisors adjust to the transition, though some investors will small accounts may be affected. We also have assessed the possible upfront and ongoing cost to comply with the rule and have included those estimates in the costs in our 2016 G&A growth expectations.

Of course if the final DOL rule is significantly more involved than we anticipate we would need to revise our estimates. We will continue to engage with discussions in Washington as we plan for the final rule.

I will now turn to how we plan to take advantage of the significant opportunity to unlock more of our businesse's potential. We are confident in our core business and believe we are in a position of strength. We are a leader in our markets and we continue to have a strong asset gathering and recruiting outlook.

Over the past three years we have strengthened our management team and our operating platform, including our compliance and legal infrastructure. In strengthening our team we have set in motion our focus on simplicity as demonstrated by our coming roll out of ClientWorks for our advisors, better tools and information for retail investors and automating and improving our operations.

We continue to improve our service levels under industry veterans Tom Gooley and Tim Hodge who both recently joined LPL. By the end of the year we are on track to have doubled our relationship management coverage and increased our service capacity by 25%. Our capital light model provides strong cash flow for business investments, shareholder returns and natural deleveraging.

At the same time current uncertainty of our asset prices, interest rates and the Department of Labor fiduciary rule, paired with our recent operating results, have created a substantial but temporary overhang on our shares. This overhang exists in spite of several potential catalysts for our performance.

While the timing is uncertain interest rates are likely to rise at some point and our business will generate substantial additional profits when that happens. Our multiyear investments in legal and compliance have lowered our risk profile, so we can expect meaningfully lower levels of 2016 regulatory charges than in 2015 and normalized growth in our risk management expenses.

In short, we see the competitive environment shifting in our favor and we can use our scale, enhanced capabilities, strong financial position and capital light model to our advantage. We believe there are additional actions we can take now to unlock substantially more value. Specifically, we can better manage our costs and utilize more of our balance sheet to drive shareholder returns.

First I will discuss expense management. Over the past few years we've had to invest in the infrastructure of our business and these investments remain critical to strengthening our capabilities and lowering our risk profile. But our business should generate more operating leverage.

The good news is that we are nearing the end of the necessary upwieghted investment in our risk management operations. We will make critical business investments to enhance our advisors' experience and growth while ensuring that our risk profile continues to improve. At the same time we have grown and built capabilities quickly and we know we can be more efficient.

We also operate in a dynamic market environment which currently is more challenging. So we need to be thoughtful about focusing our efforts and investments on client facing initiatives and putting more scrutiny on non-client facing activities. Therefore we are taking action to respond to the environment.

With uncertainty in equity markets, interest rates and regulation, combined with the fundamental need to show more operating leverage, we are looking at costs through a new lens. Simply stated, we are going to be more efficient at LPL.

For 2015, with three quarters now complete, we are confident that we will manage our core G&A expenses to meet our expectations of 7.5% to 8.5% growth for the year versus 2014. And we will be toward the lower part of that range.

For 2016 we plan to keep our core G&A expense growth lower than we have in recent years. We will have the full year effect of the investments we made in 2015, of course flowing into 2016 expenses, which will cause a slight increase in our expense base.

We will continue to invest in rolling out client ClientWorks, our new advisor platform, and improving our advisor service and operations. We also need to acknowledge and be flexible in our cost expectations to ensure that we can fund whatever changes we need to make for the final DOL rule.

We anticipate core G&A to grow 2% to 4% in 2016 based on these three factors and managing the rest of our core G&A expenses to be flat. Of course if the final DOL rule is significantly more involved than we anticipate, our upfront cost to comply could go up.

I want to reiterate that our success is built each day by helping our advisors serve their clients, so enhancing our value proposition while becoming more efficient is and will remain a key focus going forward.

Second, I will discuss our updated capital management strategy. Since we've been public we've operated at a net debt of 2 to 3 times adjusted EBITDA and opportunistically repurchased our shares. We have reassessed these practices to better align with the stability of our earnings stream and capital light model. We believe moving up to approximately 4 times leverage will drive meaningful value for our shareholders. Matt will speak to this in greater detail.

Next, when we consider how to deploy the proceeds from this additional leverage, along with our operating earnings, we believe our own shares are the best investment we can make at this time.

Uncertainty over equity markets, interest rates and the regulatory environment have caused our shares to trade at a significant discount to what we believe is their intrinsic value. Therefore we have decided to significantly increase the scale and pace of our share buybacks. Our Board has authorized a total of $500 million of repurchases.

We believe this shift in our capital management strategy is the best way to utilize our balance sheet, to strengthen our industry position while driving greater value for shareholders. I want you to know that we understand the competitive advantage our model provides on capital allocation and we fully intend to take advantage of it.

In closing, we remain confident and encouraged by our strong relative position in the industry. We believe the decisions we announced today on expense and capital management further improve our business potential and will create significant value for our shareholders. With that I will turn the call over to Tom.

Thank you, Mark. Today I will comment on our third-quarter financial and business results. We have provided expanded details about these results in the financial supplement which is available on our website. Most of my remarks will focus on the four key elements that we believe drive shareholder value creation for our business, gathering assets, increasing gross profit, managing expenses and allocating capital.

In the third quarter we generated adjusted earnings per share of $0.55, which was up $0.07 year over year, but down $0.10 sequentially. Compared to the second quarter, growth in transaction and cash sweep revenues combined with our share repurchases drove an increase of $0.03.

This growth was partially offset by $0.06 representing the net expenses of our annual national advisor conference. In addition, the remaining $0.07 primarily related to soft sales commissions and declines in various revenues that are sensitive to market valuations.

Starting with assets, the market environment was challenging as the S&P 500 index was down 7% from the end of the prior quarter. Despite the environment we added $4.2 billion in net new advisory flows representing an annualized growth rate of 9.3%. At the same time total advisory and brokerage assets decreased sequentially by 5% in the third quarter as the declines in market values more than offset net new asset flows.

I would also highlight that our asset mix continued its shift toward advisory which now represents 39% of total assets. New advisors contributed significantly to these net new asset flows as we continued to recruit high producing advisors. Our recruiting outlook remains positive given competitive and regulatory dynamics. Our production retention remains high at approximately 97%.

At the same time we continue to see increased levels of departures, primarily from low producers, due to the market environment. In the first three quarters of 2015 we have had departures of approximately 100 more lower producing advisors than we had through the comparable period of 2014.

As a result we saw a decline in our total advisor count over the past three months, but we remain pleased with the quality of assets and advisors coming to LPL as evidenced by our net new advisory asset flows. We remain optimistic about our recruiting momentum and our retention for the remainder of 2015 and into 2016.

We have discussed that our asset growth drives our gross profit growth. This quarter, despite the 5% decline in assets, our gross profit was relatively flat sequentially. Our strong asset gathering and diverse gross profit streams helped offset half of the impact of market declines in the quarter as volatile equity markets contributed to record transaction volumes and elevated cash balances.

Revenues from our national advisor conference also contributed $6 million of sequential growth in gross profit. At the same time the declining value of customer assets reduced market sensitive revenue streams such as trail commissions, advisory fees and sponsor revenues.

Sales commissions for variable annuity products and alternative investments continue to stagnate due to continued low long-term interest rates and concerns about valuations in the real estate market respectively.

Cash sweep revenues increased in the third quarter by $1.5 million to $24 million due to growth in client cash balances. These balances stood at a record $28 billion at the end of the period.

Turning to expenses, our quarterly G&A costs grew sequentially to $221 million primarily driven by the expenses for our national advisor conference. Our core G&A expenses, which include all of our G&A except promotional expenses and regulatory-related charges, were $171 million, flat sequentially but up 5% year over year due to new hires primarily in legal and compliance.

Promotional expenses, including the advisor recruiting costs in the form of cash transition payments, amortization of forgivable loans made as transition assistance, conference expenses and advisor marketing costs increased $15 million sequentially to $42 million. This sequential increase was due to the cost of our national advisor conference.

I would also like to remind you to that recruiting is seasonal and we often have a strong fourth quarter that can drive an increase in our transition assistance costs for that quarter.

Regulatory-related charges, which include reserves for the estimated cost of settlements including fines, penalties and restitution, expenses for legal and related consulting services provided during the period and insurance costs increased slightly sequentially to $8 million.

In the third quarter we reached agreements to resolve several of the significant regulatory matters that we have been working on. We reiterate our expectations that our total 2015 regulatory-related charges will be lower than our 2014 total. We also continue to expect that our 2016 regulatory-related charges will be meaningfully lower than our 2015 total as we believe that our compliance investments will continue to lower our risk profile.

Looking for a moment at depreciation expense, which is not included in our adjusted G&A. We incurred $17 million in the third quarter which was flat sequentially. In the fourth quarter we anticipate a $3 million one-time increase in depreciation expense as we consolidate some of our real estate footprint.

Finally, I would like to highlight our capital allocation in the third quarter. We returned $49 million of capital to shareholders through $24 million of dividends and $25 million of share buybacks. These buybacks total approximately 600,000 shares at a weighted average price of $42.12.

So far this year we have returned a total of $213 million to shareholders through $72 million of dividends and $141 million of share repurchases. In the third quarter we also invested $20 million in capital expenditures, primarily in technology, to support our growth.

With that I will turn the call over to our new CFO, Matt Audette.

Thank you, Tom. It is a pleasure to speak with everyone on the call today as LPL's Chief Financial Officer. Before I get into our announcements today, I thought it would be helpful to spend a little time talking about why I joined LPL, my experience and some early observations.

Having spent nearly my entire career at one firm and helping lead it through some challenging times, I didn't make the decision lightly to leave and come to LPL. However, I was quite intrigued by the independent model, the secular shift to advice that I think will drive long-term growth, the capital light model that empowers management to allocate capital in the best interest of shareholders, most importantly the strength and commitment of the management team to drive value for our advisors, retail investors and shareholders.

After my first month of working closely with the management team and organization I feel even more confident about my reasons for coming and the decision I made. I lived through a series of gut wrenching experiences in my career which gave me the focus and perspective on what drives value for shareholders and what doesn't.

I believe prudent expense management and shareholder focused capital allocation are critical to driving shareholder value. I believe every dollar we spend should be scrutinized to ensure it is invested to generate the greatest value, whether it is a simple expense, a capital expenditure, an investment in a business or a return of capital to shareholders.

It is also important to note that at LPL a dollar that drives the greatest value for our advisors and retail investors is oftentimes the same dollar that drives the greatest value for our shareholders.

Okay, enough about me. Let's talk about the decisions Mark announced earlier. First let's cover expense management. As Mark said, we will continue to prioritize critical business investments. For 2015 we had to make major investments to finish the build out of our compliance and legal teams and we are on track to finish those investments this year as planned.

We will also meet our 2015 core G&A growth expectations of 7.5% to 8.5% versus 2014. And we expect to be at the lower part of that range. Given our year-to-date core G&A growth of 6%, that implies a slight sequential increase in our core G&A in the fourth quarter. The primary driver of the increase in costs is -- we anticipate incurring associated with some actions that we plan to take to become more efficient in 2016.

For 2016 we are now shifting our mindset. We are aware that our business should generate greater operating leverage and demonstrate the scale advantage we have. In our recent past that leverage was masked by critical investments that needed to be made. Now that we are nearing the end of those investments we must shift our thinking.

While we will continue to invest in critical business priorities, we plan to keep our core G&A expense growth rate significantly lower than in recent years. As Mark said, we have decided to focus our investments on the most critical business needs including ClientWorks and improving our service levels while managing 2016 core G&A expense growth to 2% to 4% growth versus 2015 levels.

As always there are a lot of moving parts to 2015 and plan for 2016. So, let's walk through the details. We do have the full year effect of the investments made in 2015 flowing into 2016 expenses, which will cause a slight increase in our expense base. We need to factor in continued investments in ClientWorks and improving our service levels.

We also need to be flexible in our cost expectations to ensure that we can fund whatever changes need to be made for the future DOL rule. We have included those cost expectations in our core G&A outlook. But, keep in mind that the final rule is uncertain and, if the cost to comply ends up being much more difficult than we anticipate, our cost could go up.

For the rest of our core G&A expense base our plan now is to keep those expenses flat to 2015. To put all of this in context, our 2% to 4% core G&A growth rate for 2016 translates to approximately $30 million to $40 million lower core G&A costs for 2016 than if we continued to grow at 7.5% to 8.5%.

Turning now to our capital structure and allocation plans. I would like to expand on Mark's comments. LPL's capital light model empowers us to allocate capital in the best interest of shareholders with a lot more flexibility than most other models. As I said earlier, this was one of the key factors that attracted me to the role. It is quite clear that we are in a window of time when we can take full advantage of that flexibility to drive shareholder returns.

As I look at LPL I see a business in which EBITDA is stable and recurring. Coverage of interest payments is quite high. And rising interest rates benefit our gross profit many times more than our exposure to rising interest expenses. Given these characteristics we are quite comfortable repositioning our capital structure and taking on more leverage.

We believe as a management team and a Board, that staying in the range of 2 to 3 times leverage is not taking full advantage of our financial strength and stability. So, after much work and analysis we decided that approximately 4 times leverage makes more sense given the enhanced shareholder returns we can generate by doing so.

To provide a little color, it's not practical to attempt to run precisely at 4.0 times leverage. We can go slightly above 4 times if we find opportunities that we think can drive significant value for shareholders. And slightly below 4 times if the opportunities to deploy this leverage are not worth the cost of the debt.

In short, if we were going above 4 times we need very good returns to justify doing so. At the same time, if the returns of running at 4 times leverage decline, then we are willing to float our leverage down. The key here is that we will be dynamic in our thinking as we believe that the right capital structures can and do change over time.

But I want to emphasize we believe running at 4 times is what makes the most sense today. Also keep in mind that variability in EBITDA can also impact this ratio in an individual quarter even if we make no changes in our actual debt levels.

Now let's discuss how we can best allocate this additional capital. Our goal is to allocate our investors' capital to generate the highest return available. Returns will shift over time so we need to stay dynamic in our thinking. We believe our shares are among the best investments we can make at this time as our shares trade significantly below what we believe to be their intrinsic value. Therefore we have decided to allocate our additional capital to share repurchases.

Turning to putting this plan into action. We are moving forward quickly to execute on this decision as soon as the market will allow. We have received Board authorization to increase our debt to target 4 times leverage and buy back 500 million of our shares. We are currently working with our bankers and advisors to execute our plans, including amending our credit agreement, raising the additional debt and executing the share repurchases.

Specific to the share repurchases, given the amount of stock we are buying in relation to our total share count, as well as our daily trading volumes, please keep in mind a program of this magnitude will likely take some time to execute. That being said, we are working to determine the best and most expeditious way to buy back these shares.

Our current thinking is a meaningful portion of the repurchase will likely be done through an accelerated share repurchase plan with the remainder in open market purchases. We are actively working to launch the ASR in the near-term once we complete our financing. I would caution that this is our current thinking and our actual actions will be based on the market conditions at the time we execute.

Stepping back, I want to summarize our overall view on these capital structure and allocation announcements. Our consistent earnings stream, our flexible and stable balance sheet and our positive leverage to interest rates give us the confidence to increase our leverage to 4 times.

And we believe the best place to deploy this capital is buying our own shares as they are trading well below what we believe to be their intrinsic value. We firmly believe these actions will drive significant shareholder value so we are acting expeditiously and prudently to capture them.

And finally, on a personal note, this first month at LPL has been among the busiest work months of my life. And trust me when I say I have had some seriously busy months in my career. But I'll also say that it has been one of the most fun months I have had. And I have no doubt that the management team that I am now lucky to be part of, and the finance team that I was even luckier to inherit, has an unwavering commitment to drive value for our clients and shareholders.

With that, operator, we are ready to take questions.

(Operator Instructions). Chris Harris.

In prior calls you guys had mentioned the possibility of potentially doing M&A. And I know we have got the share buyback announced this morning. Are you still interested in looking at M&A or is the primary focus now simply on buybacks?

Well, we continue to look for M&A, Chris, and this leaves us flexibility to do M&A and take leverage up further. And so, we feel fine that we can do what we may need to do in that market. We do know of a number of properties available for sale and people looking to sell. So we will continue to evaluate those as we have done in the past.

I think we want to understand where value is and where pricing is in the market. I think there was a recently announced transaction in the last two weeks in which we saw a 14-plus multiple to EBITDA, that is a very high multiple. We are a 6 to 8 times EBITDA buyer and so that really will guide us as to what returns we can get in the M&A market. So to my mind a repurchase of our shares at an 8 times EBITDA multiple is a bargain.

Got it, okay, makes sense. Then my one follow-up -- Mark, you talked about investors with small balances potentially being impacted by DOL. Is there any way to size how large this group is relative to LPL overall? Just trying to sort of bracket the risk here.

It's small, it is less than 5% of assets, probably closer to 3%. So it is not a lot of assets that we may not be able to service. And we would characterize those as assets under $15,000 balances. So they are assets that in our advisory platforms they are just too small to deal with in and of itself.

Okay, thank you.

Christian Onwugbolu, Credit Suisse.

So maybe this one is for Matt. Matt, as you noted, you have managed a company and are well aware of the risks to a company when your present environment turns for the worse. And I appreciate LPL's model has a file -- or risk profile than your previous company. But -- and I am sure you did a lot of stress tests to make sure the Company can run higher leverage levels even in a down- side scenario. Maybe we would just like to get your thoughts on what you see as downside for this business just so that we can kind of frame the resiliency of the model.

Yes, sure, Christian. So I think in context of going to 4 times and having comfort with doing that is the core of your question. There is a bunch of different factors that give us that comfort and me specifically. And starting off with just the core business itself.

So kind of two primary factors of just steady recurring EBITDA which is a great measure for cash produced by the business combined with a capital light model. The business grows or shrinks, there is not a bunch of balance sheet capital that is necessary. So it is just a much more predictable cash production engine, if you will, and I think just lends itself to more leverage.

At the same time we are not overly risky. So when you look through what we are doing here, our plans are to continue to maintain $200 million of cash available for corporate use on the balance sheet. If you follow the details of what we announced on the debt side, we plan to pay off our revolver. So on the other side of this we will have an undrawn $400 million revolver.

And when I take a step back and look at that overall package, I feel very good about our ability to support the debt and feel good about, to Mark's point on the answer to the first question, that we also have flexibility to do more if needed.

The only thing I would add to that, Matt, is that in our history when we were privately transferred from our owner/founder to private equity firms as part of our transaction in 2005 we were levered at almost 7.5 times leverage. So the business has taken heavy leverage before, and this is not heavy leverage in the context of its history so we feel very good about it.

Okay, thank you. And then my follow-up, just a quick cleanup question. So on the core G&A guidance for 2016, the 2% to 4%, what is the baseline for that? Is that core G&A ex regulatory costs that you expect to grow 2% to 4% or is it total G&A?

You were correct on the first one, Christian, excluding regulatory costs, so just core G&A.

Great. Okay, thank you very much.

Ken Worthington.

I guess first for Mark. You said you had a much better understanding of the range of outcomes from the DOL. Maybe can you frame for us how you see kind of the negative and positive extremes with regard to the proposal?

Well, we have characterized before that we feel the DOL has made great progress and is roughly 80% of the way there. That there are about four areas that we have some concerns, without going into great detail there. The one that is the most difficult to work with is the best interest contract because of the nature of how it is suggested to be used and the quantum of data that would be there.

So it basically requires an advisor to give to an investor, prior to really having much of a discussion with them, what would be a very large disclosure document where you have lots of different fund choices for example, if you're talking to them about a mutual fund portfolio.

We have seen plenty of discussion in the press from the Department of Labor that they understand some of those concerns and they plan on making changes, you have seen that from Secretary Perez and from Phyllis Borzi who is leading the effort there. And so, we applaud them for their willingness to listen and to think through how to make that a workable document that gives good disclosure to consumers and helps bring transparency to the market.

So we do think that is the most likely outcome is a workable best interest contract that would allow us to continue to do our business. That would mean that we still have the product exemptions where there is a process where they approve certain products and don't approve of others. And let's assume they continue in that.

You have seen us disclose our (inaudible) impact to gross profits, which is about 2%, not including -- I think your phone is ringing -- is not including the -- anything related to the resell of products. So if a client -- it would affect the gross level 2% of gross profits and then obviously those assets will be invested in something else which will offset that. So even in the worst case we could imagine that is sort of a 1% net impact or less from there. So that is the most likely outcome.

Obviously you could have a situation where it goes all the way over and we decide not to offer brokerage services. That is the worst case we could imagine as we sit here today. And we think that would be a travesty for investors because it would not allow them to have a way of dealing with their financial planning needs.

Vanguard did an excellent survey that talked about the fact that those who use advisors have better outcomes. We know that they basically retain that rollover money rather than spending it and they also invest it wisely for the long-term. That often is done in a -- sort of once every few years types of review. And therefore a commissionable product is a perfectly fine way to do that.

So in a case where it is the extreme which is essentially you can't use commissionable products, we would shift to advisory. That shift would be large, there is no doubt about that, and we would make sure that that is an appropriate selection of products and capabilities for those investors from there.

That's we've characterized as having a movement of assets that are historical into advisory and then moving all new sales, if you will, into advisory again where it is appropriate and making sure that we can take care of investors in the right way. That is an extreme, I don't see that happening, but that is kind of the range of the thinking.

I think what is important to take away from our discussion here today is that we are an organization that takes action. Sometimes that action is spending at a higher level than the market would like us to, but I think you have to look at the results we are getting by getting that done.

And so, what we want to make sure all that are listening hear from us is that we are exploring every possibility, we are planning for those and we are making sure that we have in our expense base for 2016 as disclosed the ways that we can deal with that effectively and really assist the DOL in its work to get to transparency and to clarity for retail investors.

Great, thank you very much. And then in terms of the reduction in the brokerage count in the low producing brokers. Is it market conditions that are really driving them out? Maybe to what extent are you squeezing them out? And when we think about a small producer versus a large producer, are you making money on the small producers?

I assume you still are. Or is actually the small producer is kind of a net negative for LPL and it's -- unless they have a chance of really growing up to be much bigger, is it kind of in your best interest to see them maybe move to a different career?

Well, I think you said it quite well, it is not unusual when you have moments of stress that somebody looks at the range of their economic activities. I grew up in a small town in Indiana, we have LPL advisors there. Often that advisor will do the securities business as their primary means, but they also be an insurance agent, they may also be an accountant.

And so they have other businesses they are involved with. And typically in times like this they assess, gee, is my time better spent on one of the other activities where I can make better income or just, again, have a simpler life as things may go.

So it is exactly what you would expect in the market where individuals make those decisions. It is also our business owners, remember that we have 4,600 business partners here who oversee their offices and their businesses and they are making a decision about exactly your point, which is it economic to have this person in my space doing what they are doing.

That may be more a suburban location or even urban location. Maybe they had someone who they put into place a couple of years ago and they are making decisions to see that that person isn't going to grow as you suggest.

And then finally the third category are those that we look at and, again, reach that same conclusion. We have given them a couple of years. They haven't succeeded in the business the way we had thought they would and therefore they are just not going to grow into something that makes sense for them to be involved in the business with us.

Generally we make money at lower levels of production down to even $100,000. It is just not a -- very much of a quantum of profits. And the extent to which that takes away our focus from practices that are growing, we always want to focus on those practices that can grow and have good opportunity to continue to help their investors.

Great, thank you very much.

Chris Shutler.

Welcome aboard, Matt.

Thank you.

As you guys think about core G&A next year, you mentioned spending on ClientWorks. Maybe just talk about the timeline of that project. And then what are the big buckets of spend that you are going to dial back?

Well I think, let's start with the buckets of spend dialing back. We have spent over 2 years, about 2.5 years really investing heavily in our core IT infrastructure and heavily in our employee tools and toolkits.

So we have replaced really 80% of the systems our employees touch, everything from hardware that they use such as the telephone system to the way we manage telephone calls in the service center, to the document imaging system that we use. And we replaced in some cases significantly old technology or technology that didn't have the latest productivity to it.

So what we are now going to experience is a productivity dividend that comes from that heavy investment and from that focus on our core infrastructure for the business. So that is what we will spend less on, we don't need to replace a document imaging system once every five years or so. So that is now done. And that would be a good way to characterize the extent of it.

In our risk management organization we have a continuous investment, a bit more to wrap up early next year on technology, but generally the same characteristics. So now you can imagine that coming down in spending and for us not to need to hire at the same level for growth of business. So the productivity ratio, if you will, should be the payoff for that kind of investment in capital.

So that is the down part. The up part is, as you say, ClientWorks and advisor facing systems and end investor facing systems. We certainly see the consumer changing their demands on technology. We redid our investor portal for them about two years ago. We are going to do the next upgrade of that this coming year which will be very important to them. It will also let us get to more electronic statementing to allow us to get further productivity in the years ahead.

And we also of course with ClientWorks see that 2016 is a big delivery year for us. We are in beta today with roughly 1,000 advisors using the technology and beta that covers about 50% of their day-to-day life. And actually what we want to get to is 80% or 90% of that life all on ClientWorks so we can start to retire BranchNet as we move into 2017. So that is our plans today, that will be a significant change for us in our advisor facing activity. So we are excited by being able to focus on that in 2016.

All right, thank you. And then, Matt, now that you have and on the job for a month, you talked about what attracted you to the job. What is your honest assessment of what you believe LPL really needs to do a better job of going forward? A few examples would be helpful, thanks.

You want on my honest assessment, focused on that. I think the big caveat here is a month into the job I think that most of my observations are validations around the reason I took it, a lot of which are the decisions and things that we have talked about today.

I think the things that we need to focus on -- and I don't know if do better is the right term -- but it is all the things that we've highlighted today and that Mark was just talking about. By continuing to invest in technology and the service that goes along with it, ultimately just serving our advisors better. Because every single thing that we do ultimately comes from having advisors be happy with us.

So we just never want to lose sight that the ultimate end retail investor, if they are happy everything leads to us having recurring EBITDA, cash balances going up to do all the things like we just announced today. So I just think my observation is continuing to focus on that is what needs to be done.

Okay, thank you.

Bill Katz, Citigroup.

Welcome aboard as well. I appreciate you guys taking my questions this morning. Can we just stay on the financial advisor dynamics for a moment, please? Some of your peers have reported some very strong growth in FAEs over the last couple quarters and some more of a flattish view here.

Can you breakdown maybe the production that is coming in versus the production you are losing in terms of is there a pick up in productivity? It is hard to see that given the product mix and what has been going on underneath it. Just trying to get a sense of some of the ins and outs against that.

Yes, Bill, I think there's a couple things I would point to is we have seen those same announcements and always glad to see advisors generally move to the independent models, that's a good thing. And as we look at it we measure ultimately what assets are doing.

Based on public announcements we have read this far we will be the second fastest-growing advisory on a percentage basis asset growth for the quarter, which continues strong multi-quarter asset growth in that category. That's a category that's very valuable to us, worth about 120% of the economics that are associated with brokerage assets.

And so, we think we're demonstrating strong asset growth fundamentally, that does come from two places. One is existing advisors adding to their client base or adding clients adding new assets. And as you say, it is new recruits. Where we are having strength is in practices that are larger.

So the characteristics of the class this quarter are a little more than 2 times the average production that is here and bringing good assets with them. You saw a number of announcements, including some here in the fourth quarter, of practices that are quite large, hundreds of millions of dollars of assets that are moving to us, including one that has approximately $2 billion of assets moving as well.

So we continue to gather assets nicely through recruiting. This is why headcount is a kludgy way of measuring it, because we are much better off to have smaller producers go off and focus on some other industry and to have large producers join us.

The last thing I would point to is our high net worth growth. If you saw on the Barron survey, we moved up three places from number 26 to number 23 in serving high net worth families. We are growing quite significantly in that business and that is another health indicator for me of both our existing advisors and new advisors joining us in that space.

Thanks for that. Could you just qualify one thing before I ask my follow-up question? What is the brokerage flow for the quarter? I am just trying to get a sense of the overall net growth to the Company because you guys focus on the advisory (multiple speakers) but your peers focus on net assets.

Yes, and we have basically technology going into place in terms of measuring that brokerage piece. It is in beta now, and so we don't break out brokerage in and of itself. You can see overall assets are down about what percentage for the -- 5% for the quarter. So that tells you that if advisory assets are up by $4.2 billion that tells you a little bit more about the dynamic of the brokerage assets that are there.

Brokerage assets tend to be a little more equity based because they are not typically balanced portfolios. So if markets are down you see that absorption go through. So to me it looks like a fairly normalized amount of assets on the brokerage side given the public data that we have for you.

Got you. Just my follow up and, Matt, maybe this one is for you. How do you think about promotional expense next year? You run a lot of expenses through that that are not included into your difference between GAAP and your adjusted earnings and I think the market also focuses on that line. What is your sense for that kind of growth year on year in 2016?

Yes, so no guidance on that. I mean it is really driven primarily by the dollars we use to grow the business. So it is really going to be correlated with that. And of course that is hard to give guidance on. So I would leave it there.

All right, thank you.

Joel Jeffrey, KBW.

Just wanted to clarify one thing on Bill's question. Can you give us any sense of the percentage of the net new advisory assets that are from clients that are moving from brokerage to advisory?

No, we don't have it broken out in that way with -- we have details of it but we don't publicly disclose that piece of it. But it would be fair to characterize that given the announcements we made of people joining us that a lot of it is driven by those who are joining the hybrid RIA platform and those who are advisors who are in the advisory programs already growing further, that is what I observe.

I was out in the market at three different client events for advisors this quarter -- this last quarter, and certainly saw the significant growth they are having in the advisory business, again particularly for more high net worth clients.

Okay, great. And then just in terms of the commissions, can you give us a sense for the I guess maybe sequential declines in the alternative revenue sales and maybe the variable annuity sales?

Yes, I think overall the alternative investment commissions were about $26 million. I think we have sort of used in the past a bench line quarterly for those revenues being about $40 million. So it was a very soft quarter overall. And VAs were roughly flat inclusive of both sales and trail commissions.

Great, thanks for taking my questions.

Devin Ryan, JMP Securities.

When you guys went public five years ago a big focus seemed to be reducing leverage to move to investment grade. So obviously a thought has occurred since then but leverage it is moving in the other direction. So how are you thinking about a path toward investment-grade status today, is that still an objective overtime or teaches not see the same value in that today?

There is no value in it. It is not something that is going to drive economics for shareholders, it doesn't really affect our business one way or the other. I think that is what we have learned in being public for five years is what matters is how do we support advisors and investors so that they can be successful in their outcomes. That always drives value to business, being a good value, and then really making sure that we are using the balance sheet appropriately, in this case today being clear that we think we can leverage further given the economics of the model and that is a smart way for us to drive value for shareholders

Okay, all right, great, thanks for the color there. And then with respect to the fourth quarter seasonally can be a better quarter for commission activity. So just curious if you are seeing any of those same seasonal trends thus far or the fact that the markets were kind of shaken up during the third quarter, is that subbdoing activities were heading towards the end of the year

But if we look it -- a lot like 2012 where you remember this sort of this tax change overhang that occurred right through the end of the year and dampen growth through the fourth quarter that year it looks the same way to us here in 2015. This time driven by a different set of issues, really the uncertainty in the economy we are certainly hearing reports of slowing down in a number of sectors nothing that is particularly worrisome but the market hasn't quite sorted it out and the Fed's inaction and action can be in the form of either raising rates which is of course what we are hoping for at the end of the year. But since hope is not a plan we are also planning for the Fed doing nothing. I think it would help the economy if the Fed would be clear about what it is it wants to do one way or the other. And that would help clear some of the cloud that is bringing a dampening of activity --?

Yes, I think historically we do see a little bit of a pickup largely related to tax management, tax loss selling and things like that later in the fourth quarter it is early in the quarter to see anything like that. And I think as Mark described the key items that have had have caused the slow down in commissionable activity the lack of any increase in the long-term rates and the fact that we are well away from the 3% rate on the 10 year that we have talked about being a large trigger of creation a product features on VA's that make those attractive products in the investor's toolkit. We just don't see anything changing on that in the near term.

Okay, great. I appreciate the color. Thanks for taking my questions.

Steven Chubak.

Matt, welcome. Just wanted to dig a little bit deeper into some of the core G&A guidance that you had given for the 2% to 4% growth next year and I was actually hoping you could size the incremental expense that you're contemplating that is tied to the DOL preparedness specifically. I don't know how you guys are thinking about that whether it's on absolute dollar basis or on per advisor basis, but just giving us some color as to how you determine that incremental expense or investment that is required would be quite helpful.

Yes, we are not in a position to disclose the details of what we are going to do. We need to have the Department of Labor issue its guidelines so we can decide from there the best way to approach it. I think it is fair to say that one thing that is important to understand about the best interest contract as it looks an awful lot like what you do when you oversee, from an SEC perspective, advisory assets. There is a very similar construct, in our view, we already have some new technology that works quite nicely for oversight of those activities just launched very recently as part of our rebuilding of our employee infrastructure. So we do think there is some characteristics of that technology that let us focus on how to comply with the Department of Labor as we understand it today. But we need to actually see the regulation to understand the best way to respond to it. So that gives us an ability to think about how to leverage assets we already have. So that helps. Secondly we do conversions all day long, right, because of the amount of new advisors who come in to the business in which we are converting their books of business to our platforms so we can size quite easily what it would take to move over say all the existing brokerage assists to advisory, which would obviously be a significant change, to say the least, and in doing that can size what it takes operationally in terms of just that expense for that year it would be one time in nature but it needs to be there. That is included in the G&A forecast that we have given you. So, you can see that we are thoughtful about it. But not to a point of looking at it to quite the level of detail that you would like to.

Okay, so just to clarify. So that type of transformational change where you would be transitioning the brokerage assets to an advisory relationship that is contemplated within that 2% to 4% growth or not?

Within the G&A perspective it is, and that's the guideline we are giving you which is what's the cost structure of that, and what we've tried to do is give ourselves a range of sort of two outcomes and therefore you end up with having the movement of assets as part of that, that is an operational process. Now whether that is the right thing to do, right, and whether that is what the investor wants to do that is the big piece that we have to understand better from a number of sources including the investor. But we from a cost standpoint have acted as if that is going to be something that is going to happen. But I just want to make sure I am quite clear that it is not something that we can command nor should, but for planning purposes and for the G&A guidance we have given you for 2016 we have included the cost of doing that because we think that is the most prudent thing to do is to be as planned as possible in our approach.

Understood, Mark. Thanks for clarifying that. And then just one quick clean up question for me pertaining to the other revenue line. That did come in a little bit below expectations. I know that there is some mark to market noise associated with deferred comp plans as to where we should be thinking about that number, the go forward right excluding any mark to market noise just given some of the pressure that we have seen on alternative investment sales.

PLEASE NOTE IN TRANSCRIPT THAT DUE TO NADAQ'S TECHNICAL DIFFICULTIES THE CALL ENDED BEFORE LPL INTENDED.

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