LPL not standing pat amid rival firms’ M&A deals, CEO says

LPL Financial’s hiring of a new top recruiting executive from UBS and its absence from the major M&A deals shaping the industry this year do not mark shifts in strategy or a pullback, the firm says.

Instead, the firm is boosting its technology investments in its core operating platform ClientWorks, and a series of tools it calls a “virtual admin” and “virtual” chief marketing, financial and technology officer programs. LPL spent $26 million in capital expenditures for the quarter, driven by the new tech.

In a second-quarter earnings call on July 26, CEO Dan Arnold told analysts not to “read anything into” the firm’s tapping of Richard Steinmeier, the chief digital officer at UBS Wealth Management USA, to replace Bill Morrissey as head of business development. LPL also still remains interested in M&A deals.

“If we can find that right strategic alignment, operational alignment and financial, then we think that we have interesting prospects and opportunities of which to capitalize on any potential property that may be available in the space,” Arnold said.

LPL’s closely-watched head count as the nation’s largest independent broker-dealer has expanded by 13%, or 1,793 advisors, to 16,049 from a year ago, mostly due to its acquisition of the assets of National Planning Holdings. On a quarterly basis, though, head count ticked down by 18 advisors.

Arnold attributes the reduced head count to “noise around your typical post-transaction cleanup,” including NPH advisors changing to administrative roles with their new firm. LPL also needs more time to judge the effectiveness of higher offers of transition assistance to prospective advisors it began earlier this year, he says.

Two analysts asked Arnold about a “large property” recently changing hands to a private equity sponsor, referring in all likelihood to Genstar Capital’s deal to acquire a majority stake in Cetera Financial Group. Lightyear Capital-backed Advisor Group also said it would purchase Signator Investors last month.

While experts had identified LPL as a possible suitor for Cetera, Arnold declined to discuss any specific deals. The firm’s executives “continue to see opportunity associated with M&A to add assets to our platform,” he told analysts.

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On the other hand, LPL disclosed an outflow of $1.5 billion in assets during the quarter through departures by hybrid RIA firms. At least eight hybrid practices have left the firm after LPL said it would require incoming advisors to have at least $50 million in advisory assets on the corporate RIA this year.

LPL “didn’t have alignment with a small group of hybrid RIAs” under the new policies, Arnold said. “You’re likely to see that same level of outflows in both the next two quarters.”

“That said,” he continued, “we’re obviously committed strategically to offering both the corporate RIA and the hybrid platforms. We’ll continue to invest in both and make sure our advisors can differentiate and win.”

Steinmeier’s hiring followed LPL’s completion of the NPH acquisition, which brought in 1,841 advisors instead of an expected 2,000 out of 3,200 advisors at the four IBDs. He will join the firm upon Morrissey’s retirement next month.

Asked by an analyst whether LPL was changing its approach by replacing Morrissey with a more tech-oriented executive, Arnold praised Steinmeier’s “diversity of skills and his track record of success” as rather falling under a “general management framework” sought out by LPL.

At the same time, Arnold noted a series of ClientWorks integrations with popular tech vendors, including one announced that day for Black Diamond reporting software. He says the firm is working simultaneously on three phases of upgrades for the platform to help advisors’ workflow.

In addition, LPL is now offering an administrative support aimed at helping advisors through LPL’s home-office processes and systems without hiring additional staff. The firm has launched pilots of the virtual CMO, CFO and CTO programs to assist with leads, provide capital and manage tech at LPL practices.

“Altogether, we believe our suite of virtual services will help advisors simplify, scale, lower costs and accelerate growth within their practices,” Arnold said in prepared comments at the beginning of the call.

LPL’s net income jumped by 74% year-over-year to $119 million on revenue of $1.3 billion, or $1.30 per share. The firm’s EPS of $1.42 prior to amortization beat analysts’ expected EPS of $1.20. The stock’s value increased by more than 2% to about $70.15 per share in trading the morning after earnings.

Client assets of $659.1 billion slightly missed the forecast of $660.9 billion, according to a note by Keefe, Bruyette & Woods analyst Ann Dai. Still, KBW raised its EPS estimates through 2020 and its price target to $83 per share from $80 and maintained an “outperform” rating.

The company “remains the largest player in the independent retail brokerage space and benefits from numerous scale advantages in an uncertain regulatory environment,” Dai said, adding that higher interest rates and “new growth drivers” from NPH and other possible M&A should also boost LPL’s returns "over the intermediate term."