LPL Financial : Q1 2025 Earnings Prepared Remarks
LPLA
Published on 05/09/2025 at 05:15
LPL Financial
Q1 2025 Earnings Prepared Remarks
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Notice to Investors: Safe Harbor Statement
Statements in this presentation regarding LPL Financial Holdings Inc.'s (together with its subsidiaries, the "Company") future financial and operating results, growth, plans, priorities, business strategies, capabilities, and outlook, including forecasts and statements relating to the Company's future financial and operating results, growth, plans, priorities and business strategies, including forecasts and statements related to the Company's ICA yield, service and fee revenue, transaction revenue, Core G&A* expenses (including outlook for 2025, promotional expense, interest expense and income, depreciation and amortization, leverage ratio (including plans to reduce leverage) and share repurchases, if any; the expected closing of the Company's acquisition of Commonwealth Financial Network ("Commonwealth"); the use of proceeds from the issuance of common stock and senior notes to fund a portion of the cash consideration payable in connection with the acquisition of Commonwealth; and the amount and timing of the onboarding of acquired, recruited or transitioned brokerage and advisory assets, including from Atria Wealth Solutions, Inc. ("Atria"), Commonwealth, First Horizon Bank and The Investment Center, Inc. ("The Investment Center") as well as any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements. They reflect the Company's expectations and objectives as of May 8, 2025 and are not guarantees that the expectations or objectives expressed or implied will be achieved. The achievement of such expectations and objectives involves risks and uncertainties that may cause actual results, levels of activity or the timing of events to differ materially from those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include: the failure to satisfy the closing conditions applicable to the Company's purchase agreement with Commonwealth, including regulatory approvals; difficulties and delays in onboarding the assets of acquired, recruited, or transitioned advisors, including the receipt and timing of regulatory approvals that may be required; disruptions in the businesses of the Company that could make it more difficult to maintain relationships with advisors and their clients; the choice by clients of acquired or recruited advisors not to open brokerage and/or advisory accounts at the Company; changes in general economic and financial market conditions, including retail investor sentiment; changes in interest rates and fees payable by banks participating in the Company's client cash programs, including the Company's success in negotiating agreements with current or additional counterparties; the Company's strategy and success in managing client cash program fees; changes in the growth and profitability of the Company's fee-based offerings and asset-based revenues; fluctuations in the levels of advisory and brokerage assets, including net new assets, and the related impact on revenue; effects of competition in the financial services industry and the success of the Company in attracting and retaining financial advisors and institutions, and their ability to provide financial products and services effectively; whether the retail investors served by newly-recruited advisors choose to move their respective assets to new accounts at the Company; the effect of current, pending and future legislation, regulation and regulatory actions, including disciplinary actions imposed by federal and state regulators and self-regulatory organizations; the cost of defending, settling and remediating issues related to regulatory matters or legal proceedings, including civil monetary penalties or actual costs of reimbursing customers for losses in excess of our reserves or insurance; changes made to the Company's services and pricing, including in response to competitive developments and current, pending and future legislation, regulation and regulatory actions, and the effect that such changes may have on the Company's Gross Profit* streams and costs; execution of the Company's capital management plans, including its compliance with the terms of the Company's amended and restated credit agreement, the committed revolving credit facility and LPL Financial's committed revolving credit facility, and the indentures governing the Company's senior unsecured notes; strategic acquisitions and investments, including pursuant to the Company's liquidity and succession solution, and the effect that such acquisitions and investments may have on the Company's capital management plans and liquidity; the price, availability and trading volumes of shares of the Company's common stock, which will affect the timing and size of future share repurchases by the Company, if any; whether advisors affiliated with Atria, Commonwealth, First Horizon Bank, and The Investment Center and will transition registration to the Company and whether assets reported as serviced by such financial advisors will translate into assets of the Company; the execution of the Company's plans and its success in realizing the synergies, expense savings, service improvements or efficiencies expected to result from its investments, initiatives and acquisitions, expense plans and technology initiatives; the performance of third-party service providers to which business processes have been transitioned; the Company's ability to control operating risks, information technology systems risks, cybersecurity risks and sourcing risks; and the other factors set forth in the Company's most recent Annual Report on Form 10-K, as may be amended or updated in the Company's Quarterly Reports on Form 10-Q or other filings with the Securities and Exchange Commission. Except as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after May 8, 2025 and you should not rely on statements contained herein as representing the Company's view as of any date subsequent to May 8, 2025.
Actual remarks made on the Company's earnings conference call could vary from the prepared remarks presented here. A webcast replay of the Company's earnings conference call will be available on the Investor Relations section of the Company's website, investor.lpl.com/events. Please refer to the Company's earnings release for additional information.
*Notice to Investors: Non-GAAP Financial Measures
The prepared remarks set forth herein include discussion of certain non-GAAP financial measures. At the time these remarks were made, listeners were referred to the Company's earnings release, which had been previously published on the Company's website at investor.lpl.com, and which contained reconciliations of such non-GAAP financial measures to comparable GAAP figures. Management believes that presenting certain non-GAAP financial measures by excluding or including certain items can be helpful to investors and analysts who may wish to use this information to analyze the Company's current performance, prospects and valuation. Management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Management believes that the non-GAAP financial measures and metrics discussed herein are appropriate for evaluating the performance of the Company. These non-GAAP financial measures include but are not limited to adjusted pre-tax margin, adjusted EPS, Gross Profit and Core G&A.
Rich Steinmeier, CEO
Thanks Operator, and thank you to everyone for joining our call, it's a pleasure to speak with you again.
It's been a strong start to the year for LPL. We delivered another quarter of strong business performance, we reported excellent financial results, and we reached an agreement to acquire Commonwealth, significantly accelerating our progress toward our vision to be the best firm in wealth management. We accomplished this against a challenging operating backdrop with rising macroeconomic uncertainty. It's periods like this that serve as a reminder of the value of professional advice, the importance of our responsibility to support our advisors, and the strength and resiliency of our business model.
OK. Now, let's turn to our Q1 results. Despite market headwinds during the quarter, total assets increased to a new quarterly high of $1.8 trillion, as we attracted record organic net new assets of $71 billion, representing a 16% annualized growth rate.
Our first quarter business results led to strong financial performance with record adjusted EPS* of $5.15.
Next, let's turn to our strategic plan and our growth across our organic and inorganic initiatives.
Our vision is clear, we aspire to be the best firm in wealth management. To do that, we are focused on three key priorities: One, pursuing novel and differentiated strategies that enable the firm's sustained success. Two, creating an extraordinary employee experience, so employees in turn, deliver an unparalleled client experience. And three, leading the firm with operational excellence through increased intentionality and rigor.
Effectively executing on these focus areas will help us sustain our industry leading growth, while delivering improved operating leverage.
With that as context, let's review a few highlights of our business growth.
In the first quarter, Recruited Assets were $39 billion, bringing our total for the trailing twelve months to a record $167 billion. In our traditional independent market, we added approximately $20 billion in assets during Q1, a record for the first quarter of the year. This improves on our already industry-leading capture rates of advisors in motion, while also expanding the breadth and depth of our pipeline.
With respect to our expanded affiliation models, Strategic Wealth, Independent Employee, and our enhanced RIA offering, we delivered another solid quarter, recruiting roughly $2 billion in assets. And, as we look ahead, we expect that the increasing awareness of these models in the marketplace, and the ongoing enhancements to our capabilities, will drive sustainable growth.
Next, we added approximately $1 billion of assets in the traditional bank and credit union market.
We also continued to make progress with large institutions, where during the first quarter we onboarded the retail wealth management business of Wintrust Financial and completed the transition of Prudential Advisors onto our platform. Our momentum continued into Q2, where in April, we announced that First Horizon would onboard its wealth management business to our Institution Services platform.
Turning to overall asset retention, it remains industry leading at 98% for the first quarter and over the last twelve months. This is a testament to our continued efforts to enhance the advisor experience through the delivery of new capabilities and technology, and the evolution of our service and operations functions.
As a complement to our organic growth, we closed and onboarded the acquisition of The Investment Center, and advanced our work to onboard and integrate Atria Wealth Solutions, for which the conversions began last weekend.
Now, as for our planned acquisition of Commonwealth Financial Network, I can't underscore enough how honored we are to be partnering with the team at Commonwealth, as we jointly engage with their advisors to articulate the power of combining our two firms. I have personally had the good fortune of speaking with a number of Commonwealth advisors, and the more time I spend with them, the more I understand the power of this distinguished community. Many of these advisors have worked together for decades, supported by a highly responsive management team, that has cultivated a unique culture and family-like atmosphere. I have the upmost conviction in the value of preserving and fostering the Commonwealth community.
We remain steadfast in our commitment to delivering on this tremendous opportunity to bring together the best of two great firms. We will preserve Commonwealth's industry-leading service experience, which has garnered number one in independent advisor satisfaction with J.D. Power for 11 consecutive years.
And we'll build upon that with an upgraded best-of-breed platform, including more flexible technology, a more comprehensive product set, extensive research, and unique capabilities like LPL's Liquidity & Succession offering. By preserving the Commonwealth experience for advisors, and maintaining continuity
in the broader community and culture, while also leveraging the substantial resources and capabilities of LPL, we will deliver an unparalleled offering for independent financial advisors, with Commonwealth at LPL.
We are still in the early innings of the retention effort, but are tracking to our plan and in-line with our expectations with respect to advisor commitments. We've spent the last several years building out the team, processes, and capabilities to execute large and complex onboardings, all geared towards ensuring a frictionless experience for transitioning advisors. We are now focusing those resources on this important opportunity, to ensure that we deliver a seamless transition.
In closing, the first quarter was a strong start to the year, and we feel great about our position as a critical partner to our advisors and institutions, while we continue to maximize long-term value for shareholders.
With that, I'll turn the call over to Matt.
Matt Audette, President and CFO
Thanks, Rich. I'm glad to speak with everyone on today's call. As we move into 2025, we remain focused on serving our advisors, growing our business and delivering shareholder value. This focus led to another quarter of strong organic growth in both our traditional and expanded markets, as we onboarded the wealth management businesses of Prudential and Wintrust and are preparing to onboard First Horizon later this year. As a complement to our strong organic growth, we closed and onboarded the acquisition of The Investment Center in March, continue to prepare to onboard our Atria advisors, and lastly, entered
into an agreement to acquire Commonwealth Financial Network. So as we look ahead, we are more excited than ever by the opportunities we have to serve and support our growing advisor base, while continuing to deliver an industry leading value proposition and drive organic growth.
Now, turning to our first quarter business results. Total advisory and brokerage assets were $1.8 trillion, up 3% from Q4, as record organic net new assets more than offset lower equity markets. Total organic net new assets were $71 billion, an approximately 16% annualized growth rate. Prior to the onboarding of Wintrust advisors and the remaining Prudential assets, our annualized organic growth rate was approximately 7%, a strong result both on an absolute and relative basis.
On the recruiting front, Q1 recruited assets were $39 billion, which included $16 billion from Wintrust. Prior to large institutions, recruited assets were approximately $22 billion, a record for the first quarter of the year.
As for our Q1 financial results, the combination of organic growth and expense discipline led to an adjusted pre-tax margin* of approximately 40%, and record adjusted EPS* of $5.15. Gross Profit was
$1.273 billion, up $45 million sequentially. As for the components, commission and advisory fees net of payout were $363 million, up $50 million from Q4.
Our payout rate was 86.8%, down 100 basis points from Q4, largely due to the seasonal reset of the production bonus at the beginning of the year. Looking ahead to Q2, we anticipate our payout rate will increase by approximately 60 basis points driven by the typical seasonal build in the production bonus.
With respect to client cash revenue, it was $408 million, up $11 million from Q4, as average cash balances increased during the quarter. Overall client cash balances ended the quarter at $53 billion, down $2 billion sequentially, primarily driven by advisory fees paid during the quarter. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60%, within our target range of 50% to 75%.
Looking more closely at our ICA yield, it was 337 basis points in Q1, up 2 basis points from Q4, driven by higher yields on our fixed rate contract renewals. As we look ahead to Q2, based on where client cash balances and interest rates are today, as well as the yields on our new fixed rate contracts, we expect our ICA yield to be roughly flat to Q1.
As for Service and Fee revenue, it was $145 million in Q1, up $6 million from Q4, driven by strong organic growth and higher IRA fees. Looking ahead to Q2, we expect Service and Fee revenue to increase by approximately $5 million sequentially, driven by conference revenues and the underlying growth of the business.
Moving on to Q1 transaction revenue. It was $68 million, up $6 million sequentially due to increased trading volumes. As we look ahead to Q2, we expect transaction revenue to be roughly flat.
Now let's move on to our recent large institution onboardings, as well as our closed and upcoming acquisitions. As for large institutions, in Q1, we onboarded Wintrust and completed the transition of Prudential onto our platform. Collectively, these onboardings added over $80 billion of client assets. In terms of M&A, we recently started the onboarding of Atria advisors, which will continue for the next few months, and expect to close our acquisition of Commonwealth in the second half of this year. These acquisitions are expected to add nearly $350 billion of client assets to our platform.
Now let's turn to expenses, starting with Core G&A. It was $413 million in Q1. For the full year 2025, we're seeing early returns on our renewed focus to drive operating leverage in the business, as our efficiency efforts have slowed the growth of core G&A. As a result, we are lowering the upper end of our outlook range by $15 million. We now anticipate full year 2025 core G&A to be in a range of $1.730 billion to
$1.765 billion, which includes $170 to $180 million of expenses related to Prudential and Atria, but is prior to expenses associated with Commonwealth. To give you a sense of the near-term timing of the spend, as we look ahead to Q2, we expect Core G&A to be in a range of $435 to $445 million.
Moving on to Q1 promotional expense. It was $152 million, down $21 million from Q4, primarily driven by lower Prudential-related onboarding costs, as well as seasonally lower conference expense. Looking ahead to Q2, we expect promotional expense to increase by approximately $20 million, driven by conference spend, as well as increased transition assistance resulting from strong recruiting.
Turning to depreciation and amortization, it was $92 million in Q1, flat sequentially. Looking ahead to Q2, we expect depreciation and amortization to increase by roughly $5 million.
As for interest expense, it was $81 million in Q1, down $1 million sequentially, due to lower interest expense on our floating rate debt. In addition, in early April, we issued $1.5 billion of senior notes to finance a portion of the acquisition of Commonwealth. As a result, in Q2, we expect interest expense to increase by approximately $20 million sequentially. Lastly, a reminder that until the closing of Commonwealth, we will earn interest on the proceeds from our recent capital raise. As such, we expect interest income to increase by approximately $30 million sequentially.
Regarding capital management, we ended Q1 with corporate cash of $621 million, up $142 million from Q4. As for our leverage ratio, at the end of Q1, it was 1.8x. As a reminder, we expect to close our acquisition of Commonwealth in the second half of this year, and following the close, we expect our leverage ratio to be approximately 2.25x, a little above the midpoint of our target range of 1.5x to 2.5x. To uphold our commitment to maintaining a strong and flexible capital position, we paused share repurchases following the announcement of our planned acquisition of Commonwealth. Following the close, we have a plan to reduce leverage closer to the midpoint of the range by the end of 2026. Once we onboard Commonwealth, we will revisit share repurchases, guided by our leverage ratio at the time, and our overall capital allocation framework.
Moving on to capital deployment. Our framework remains focused on allocating capital aligned with the returns we generate: investing in organic growth first and foremost, pursuing M&A where appropriate, and returning excess capital to shareholders. In Q1, we deployed capital across our entire framework, as we continued to invest to drive and support organic growth, allocated capital to M&A, both within our Liquidity & Succession program, as well as the acquisition of The Investment Center, and lastly, returned capital to our shareholders, buying back $100 million of our shares.
In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth, deliver operating leverage, and create long-term shareholder value.
With that, Operator, please open the call for questions.
Disclaimer
LPL Financial Holdings Inc. published this content on May 08, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on May 09, 2025 at 05:54 UTC.