LPL Q2 earnings rise due to interest rates

No recruiting 'slowdown' for LPL after adding 1,750 advisors

August 4, 2022 11:06 AM

After reaching a record number of financial advisors and incoming recruited client assets, LPL Financial's CEO says an industry-wide dropoff in broker movement doesn't apply to the firm.

LPL Financial disclosed its second-quarter earnings on Aug. 2 after completing the onboarding of a mega-move of $25 billion in client assets into the firm under CUNA Brokerage Services and unveiling its agreement to acquire Boenning & Scattergood's Private Client Group business of 40 employee advisors and $5 billion in client assets. The "broader slowdown in advisor movement over the past couple of quarters" isn't playing out at LPL, CEO Dan Arnold said.

The firm's recruiting among traditional independent advisors resulted in practices with about $9 billion in client assets committing to the firm in the second quarter, he noted.

"Historically, during the initial stages of elevated market volatility, advisors often focus on supporting existing clients and may pause on making strategic decisions like switching firms," Arnold said in prepared remarks. "However, after advisors have acclimated to the conditions, they will often use times like this to consider new options for their practice, likely creating an opportunity for us from a recruiting standpoint."

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For the key takeaways for financial advisors and other wealth management professionals from LPL's second-quarter earnings, scroll down the slideshow. To see coverage of the firm's earnings in the prior quarter, click here.

Financial advisor headcount

The number of LPL financial advisors soared 8% year over year, or a net 1,757 representatives, to reach 20,871 by the end of the quarter. Incoming assets from recruited advisors jumped 25% to $43.5 billion, yielding a 12-month total of $84 billion. In terms of subscriptions for outsourced business services that LPL provides to advisors' practices, the number rose 86% to 3,871 and annualized revenue from the firm's Services Group climbed 60% to $32 million.

Client assets

Even with slumping stocks extracting some of the value of clients' assets, investors' moves into cash are boosting the wealth manager's bottom line. Total advisory and brokerage assets slipped 4% year over year to $1.06 trillion in the second quarter, with advisory assets down 3% to $558.6 billion. Net new assets of $37.2 billion remained flat with the same period a year ago.

On the other hand, client cash balances surged by 44% to $69.6 billion, or 6.5% of their total assets compared to just 4.3% in the second quarter of last year. Revenue generated from client cash grew 73% to $156.2 million.

Expenses

Because of the firm's brightened earnings expectations given the higher interest rates, LPL plans to boost "investments to drive and support organic growth" to the tune of $20 million in additional spending as part of its primary general and administrative expenses, according to the firm. Across the board, expenses increased 5% from the year-ago period to $1.8 billion, primarily driven by higher levels of advisory pay and commissions to advisors and promotional expenses relating to recruiting, conferences and other events for the brokers.

In the third quarter, LPL will spend nearly $27 million in additional promotional expenses to reach $105 million after hosting its largest event of the year, Chief Financial Officer Matt Audette noted. The firm held its national Focus conference for advisors in Denver last week.

Bottom line

LPL earned net income of $160.5 million on revenue of $2.0 billion in the quarter. Profit expanded by 35%, while revenue enlarged by 7%. In terms of the firm's earnings before interest, taxes, depreciation and amortization as a percentage of gross profit, its margin improved by more than three points to 43.7%.

Remark

Arnold sees opportunities for LPL and its advisors to boost their businesses, even with a downturn in stock values and larger economic concerns about a recession. "While market volatility led some clients to moderate their activity in the quarter, periods of heightened uncertainty are often the environments that reinforce the value of professional advice and, with time, can serve as a catalyst for advisors to grow their practices," Arnold said.