LPLA – LPL Financial Holdings Inc – June 23, 2022

For some, providing financial advice is all about making money. Yet for others, it is far more purposeful. Advisors play a key role in helping clients build and protect assets, ultimately securing the long-term future of individuals and families. LPL Financial wants to ensure both advisors and their clients are well-equipped to maintain valuable and sustainable relationships. LPL’s vision is to help financial professionals build competitive businesses, whilst they serve their clients’ best interests.

To make this happen, LPL offers comprehensive support for service providers across the spectrum of the industry, from independent financial advisors to financial institutions, local advisor teams to large-scale registered investment advisor (RIA) firms, or fully autonomous business owners to advisors employed by LPL. The company’s offerings include an integrated platform of brokerage, investment advisory services, and advisory platforms that supply access to a wide range of products. It also provides money market programs and retirement solutions, along with other tools and services that enable advisors to maintain and grow their practices.

Managing over $1 trillion in brokerage and advisory client assets across almost 20k financial professionals and over 800 financial institution partners, LPL has become the U.S.’s number one independent broker-dealer and leading RIA custodian. The company is currently focused on a comprehensive strategic plan aimed at expanding its addressable market, by helping advisors differentiate in the marketplace, whilst running the most successful independent businesses, and creating an industry-leading service experience.

Formed in 1989 through the merger of two small brokerage firms, Linsco and Private Ledger, LPL was designed as an alternative to traditional Wall Street firms. Private Ledger founder Bob Ritzman sought to offer a large group of mutual funds and securities to advisors, without pushing a particular product. And when Todd Robinson purchased Linsco in 1985, he was anticipating the growing desire for advisors to run their own independent practices, which proved true in the aftermath of the stock market crash in 1987.

Two years after forming, LPL created its first of many innovative solutions to serve advisors by launching the Strategic Asset Management (SAM) platform. The company soon establish LPL Research, a team dedicated to delivering objective market and economic insights and due diligence. Following SAM, LPL implemented several other investment platforms with varying degrees of automation, scalability, and customization, to help advisors keep up with growing investor expectations and industry changes.

Its first turnkey, centrally-managed advisory platform, Optimum Market Portfolios (OMP), launched in 2003, has grown to hold $7.5 billion in assets. While in 2007, LPL’s premier centrally-managed platform, Model Wealth Portfolios (MWP) was introduced, offering customization and increased sophistication by providing a variety of investment strategies designed to align with a varying range of client goals.

Since LPL went public on the Nasdaq in 2010, it has expanded its market and product offering via several acquisitions including AdvisoryWorld, E.K. Riley Investments, Lucia Securities, and Blaze Portfolio, among others. After more than 30 years of operations, LPL has become a Fortune 500 company and continues to evolve and innovate its investment management services and platforms.

Long-serving executive, Dan H. Arnold, is currently president and chief executive officer, maintaining the roles since 2015 and 2017 respectively, and overseeing responsibility for the company’s primary client-facing functions and long-term strategy for growth. Arnold joined LPL in 2007 following its acquisition of UVEST Financial Services Group, where he previously spent 11 years as president and chief operating officer.

Prior to 2015, he served in several senior roles including the chief financial officer, responsible for formulating LPL’s financial policy, capital management efforts, and overall financial functions. He was also managing director, head of strategy, tasked with long-term strategic planning for the firm, product and platform development, and strategic investments, including acquisitions. He has also served as divisional president of Institution Services.

While former E-Trade Financial veteran, Matthew J. Audette is the current managing director and chief financial officer. Since 2015, he has contributed to the firm’s continued growth and profitability by leading corporate acquisitions, debt transactions, the client deposit portfolio, expense management, and capital allocation.

LPL help thousands of advisors, banks, institutions, RIAs, and large enterprises customize their ideal business models. They make it possible for financial advisors to have the freedom to choose the business model, services, and financial technology resources that allow them to run their practice as they see fit. Giving them the independence to manage their client relationships, as they know their clients best.

LPL’s comprehensive suite of products and services covers brokerage and advisory services, access to a broad range of investment solutions, technology and cybersecurity platforms, market research, operational support, compliance oversight, as well as consulting, educational conferences, and training opportunities. The company’s core tools and services include:
– Brokerage platform – covers variable and fixed annuities, mutual funds, equities, retirement and education savings plans, fixed income, and insurance, as well as alternative investments, such as non-traded real estate investment trusts and auction-rate notes
– Advisory platform – supplies access to mutual funds, exchange-traded funds, stocks, bonds, certain option strategies, unit investment trusts, and institutional money managers
– Money market programs and retirement solutions – provide commission-and fee-based services that allow advisors to provide brokerage services, consultation, and advice to retirement plan sponsors
– Other tools and services that enable:
– Advisors to maintain and grow their practices
– Trust and investment management oversight
– Custodial services to trusts for estates and families
– Insurance brokerage general agency services
– Technology products such as proposal generation, investment analytics, and portfolio modelling

LPL is currently focused on a comprehensive plan aimed at delivering several key strategic plays. The first is to expand its addressable market by meeting advisers and institutions where they are in the evolution of their businesses. Large financial institutions were a major source of recruiting in 2021 with the addition of BMO Harris and Waddell & Reed. For 2022, CUNA Brokerage Services is on track to join, bringing with them approximately 550 advisers located across almost 300 credit unions, who serve $36 billion of brokerage and advisory assets. Also within the year, LPL will onboard People’s United Bank, which was acquired by M&T and includes approximately 30 advisers serving $6 billion of brokerage and advisory assets.

LPL is looking to provide capabilities that help its advisors differentiate in the marketplace and drive efficiency in their practices. They are continuing to improve their wealth management platforms including the enhancement of advisory solutions, in alignment with a secular trend toward the service. A key change saw the expansion of investment options available in its centrally managed platforms by integrating separately managed accounts. A move that makes it easier and more efficient for advisors to leverage separately managed accounts which can drive higher utilization and further growth of centrally managed platforms.

To create an industry-leading service experience for advisors and their clients, which in turn, helps drive advisor recruiting and retention, LPL has transformed its service model into an omnichannel, Client Care Model which includes voice, chat, and digital support giving advisors flexibility for when and how they access the service. In addition to fine-tuning this model to drive additional efficiency, the company is focusing specifically on its digital support to provide greater flexibility, speed, and accuracy for advisors. By streamlining core clearing functions, such as money movement, account opening, and account transfers which collectively drive the majority of the company’s service center activity, LPL believes it can vastly increase the scalability and efficiency of its platform.

Finally, LPL is developing a services portfolio to help advisors run the most successful businesses in the independent. In addition to working with advisors on existing solutions, it is creating new add-ons such as a Bookkeeping solution, which is currently in pilot, as well as an enhanced Admin Solutions offering, which provides a next-generation tech-enabled task-management system. They also continue to develop financial advice and planning solutions, along with expanding their portfolio to include tax planning and high net worth solutions. The efforts are to ultimately position the company for additional gross profit and organic growth over time.

LPL started 2022 strongly thanks to a combination of organic and acquisition-based growth. Total revenue was relatively steady at $2.07 billion following the company’s record 2021 result of $7.6 billion.

Total advisory and brokerage assets increased 21% year-over-year to $1.16 trillion. Total organic net new assets over the past twelve months were $107 billion, representing 11% annualized growth, while recruited assets over the trailing twelve months were $76 billion, up approximately 34% from a year ago. The company’s effort to tap into the institutional bank channel accelerated with the onboarding of BMO Harris and M&T Bank.

Total client cash balances hit $62 billion, an increase of $5 billion sequentially, which bodes well given the current rising rate backdrop.

Gross profit increased 15% year-over-year to $669 million, while core G&A expenses increased 19% to $281 million, ultimately resulting in net income of $134 million for the quarter, up a modest 3%.

Looking ahead, consensus estimates have total revenue hitting another record for 2022 at $8.6 billion representing year-over-year growth of almost 12%. While earnings per share estimates of $8.64 are pointing to significant growth of 53% year-on-year.

With markets currently struggling, the finance sector is giving investors much cause for concern. However, LPL’s broad array of financial products and services are unique in that they do not engage in market-making activities or speculative trading. They also have no direct exposure to mortgage-related investments or securities, nor provide loans to hedge funds or other speculators, keeping their credit risk low. Its trading activities are focused solely on facilitating trades for the clients of its financial advisors. Furthermore, because the vast majority of LPL financial advisors are independent contractors rather than employees, LPL does not have a high degree of fixed costs.

While LPL competes with a variety of financial firms in various channels and markets, within the independent broker-dealer channel, the industry is highly fragmented and comprised primarily of regional firms that rely on third-party custodians and technology providers to support their operations. Competition for advisors also includes regional firms that primarily focus on specific client niches or geographic areas.

LPL’s solid start to 2022 continues to validate management’s effort to actively position the company to support faster and more sustained growth, particularly as the industry shifts to independent advice and the consolidation of advisor networks continues.

Investors also stand to benefit from a higher interest rate environment, which should materialize in the current economic setting. While its valuation versus peers may be stretched, current momentum coupled with a compelling outlook for growth appears to warrant a reasonable premium.