LPL pays the price for rapid growth with 15% profit dip

LPL Financial may be a victim of its own success in adding financial advisors through recruiting and acquisitions.

Higher compensation, acquisition costs and promotional expenses tied to LPL's continuing record advisor headcount helped push down the firm's profits by double digits in the first quarter, according to LPL's April 29 earnings statement and a call with analysts. 

To be sure, those investments will likely pay off handsomely down the line in the form of continuing growth, and post-earnings notes by analysts reflected an optimistic outlook for LPL. The firm's size could one day prove unwieldy, though, as competitors pounce on any possible opportunity and LPL follows other companies that have implemented some restrictions on M&A deals by its advisors. 

After the first three months of the year, the company trumpeted its pending acquisition of Atria Wealth Solutions and its 2,400 advisors with $100 billion in client assets, a recruiting grab of Wintrust Financial's wealth business (85 advisors with $16 billion) and the deal completed this month for Crown Capital Securities (125 advisors with $5 billion). In addition, the firm closed two succession-plan deals valued at $10 million and secured its first agreement to acquire an outside retiring team's advisory practice. Since launching its liquidity and succession program two years ago, the firm has completed 27 such deals and plans to close up to 30 to 40 per year, according to Chief Financial Officer Matthew Audette.

"Our opportunity set is really driven by trying to solve that big strategic question of how do we help potentially as many as one-third of advisors retire and transition their businesses over the next 10 years," CEO Dan Arnold said, according to a transcript on Yahoo Finance. "And while there are a variety of options that are available in the marketplace, we think ours is really differentiated and a compelling one in a very elegant way to help these advisers transition their practices to take care of them, to take care of their team, to take care of their clients and ultimately create a bridge to the next entrepreneurial leader or owner." 

To see the key takeaways for advisors from LPL's first-quarter earnings, scroll down the page. And use the following links to coverage of its earnings for the fourth quarter, third quarter, second quarter and first quarter of 2023. 

No more public details on OSJ restrictions

Neither Arnold's remarks nor the analysts' questions provided any more public information about the reports this month in Citywire, Barron's and Wealth Advisor that LPL is adding amendments to its "master service agreement" contracts with large offices of supervisory jurisdiction. Those networks — the independent brokerage equivalent of branches — must get the firm's approval before selling equity to an outside investor or acquiring any LPL teams or enterprises. 

Beyond confirming that there has been a change in policy for some OSJs, the company hasn't shared any more details about the new terms of the agreement.

"Our revised MSA reflects industry standards and gives clients increased optionality in how they might monetize their business, while continuing to respect their independence," spokeswoman Kendra Galante said in a statement.

READ MORE: IBD Elite 2023: What the heck is an OSJ? 

Financial advisor headcount

The ranks of LPL advisors expanded by a net 1,363, or 6%, year over year to a new high of 22,884 in the first quarter. Recruited assets among incoming advisors and teams soared by 57% to $20.2 billion. And total corporate employees at the firm's headquarters in Boston, San Diego and Fort Mill, South Carolina, and other locations surged by 12% to 7,413.

In terms of outsourced practice management and operations services provided by LPL to advisors, the count using any of the resources jumped by 21% to 4,035, while the number of subscriptions climbed 20% to 5,935.

Client assets

Rising stock and bond values as well as incoming client assets boosted the firm's customer holdings. Total client assets increased 23% from the year-ago period to $1.44 trillion, while advisory assets grew 28% to $793 billion and brokerage assets enlarged 17% to $647.9 billion.

In the first three months of the year, LPL raked in $16.7 billion worth of net new assets.

Expenses

Recruiting, compensation to advisors and employees tied to the hiked-up business and the cost of acquisitions drove higher expenses for LPL in the first quarter. General and administrative expenses shot up 26% to $535.5 million, including a more than 200% bump in acquisition costs that reached $9.5 million.

READ MORE: LPL's Atria deal to supercharge firm's growth past 25,000 advisors

Bottom line

The larger expenses and much lower revenue tied to client cash getting redeployed into stocks, bonds or other investments left a dent in LPL's profits for the first quarter. The company generated net income of $288.8 million on revenue of $1.1 billion, or $4.21 in adjusted earnings per share. Profit slipped 15%, revenue ticked up 5% and EPS dropped 6%.

Remark

In an exchange with an analyst after his remarks, Arnold noted that advisor movement over the past 12 months "has hovered around 5%, which remains lower than the historical norms."

"That said, despite those low overall movement, our win rates continue to move higher," Arnold said. "And certainly that's an encouraging trend relative to how we think about the opportunity set. And then two, I think when we think about the environment, we look at the competitive landscape and the participants have remained largely the same, as do the priorities that advisors are looking for when they evaluate their options to potentially move. And as a reminder, the first priority is around capabilities, technology and service. That's where we continue to further distinguish ourselves as we invest back into our model."