LPL Financial's earnings took a hit in the second quarter from its yawning expense lines while the company also revealed that two major networks of financial advisors are leaving.
The two departing
"That posture is in stark contrast to our core principles of advisor independence, and as a result we have resolved to separate from these relationships," he said. "At the end of the day, these separations will strengthen our overall ecosystem and position us to better serve the great partners on our platform."
While the company's press release for the earnings said that it had "announced a planned separation from two misaligned large OSJs on our platform," it provided no further details on which of its independent branches are leaving or how many financial advisors they will be taking. [Editor's note: LPL later
The surprise announcement of the loss came after LPL
Representatives for the firm said no further information was available
Due to "the alignment and the structure we've put around the program, there's very little probability" that more OSJs will follow the exiting branches out of the firm, Arnold said.
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"We see in some cases where an OSJ may buy up their advisors' practices, turn them into more of an employee-based construct, and ultimately, because of that alignment, that approach, it's more of a captive type of model at that point, which again, is very different from the principles of independence and providing the flexibility for those advisors to move those assets where they want to or go where they want to," Arnold said. "As soon as they begin to lose the principles of independence within the model, we have a hard time with that sitting within our platform and within our ecosystem. So, that's an example of something that I think we were just trying to make sure we had alignment on and teased out, such that as we go forward, that foundational principle is in place across our collective ecosystem."
To see the key takeaways for advisors from LPL's second-quarter earnings, scroll down the page. And use the following links to coverage of its earnings in the
Recruiting and M&A headlines
LPL has
On the other hand, the departure of the two major OSJs
"From an organic growth standpoint," the as-yet unidentified outgoing OSJs "weren't growing" to the point that they were "actually a drag or reduction on organic growth" in which "'lower returning, lower growing' would be the headline on those firms," Audette told analysts. Arnold cited shifts dating as far back as a half dozen years ago in LPL's complex ties
"Now that we've strengthened and done a good job of aligning with these large OSJs, I think we're more convicted than ever that we can collectively pull through the synergies of our relationships and serve and support advisors really well, which ultimately will contribute to the overall growth of the business. I think we feel great about where we landed, and it's work that needed to be done," Arnold said. "There's some key things that we focused on and solved for. One was making sure that we were well aligned on the value to be delivered by both parties, us and them, refining the policies on how to operate within our ecosystem, and then the legal agreements that helped memorialize all of that."
Financial advisor headcount
Despite these losses, LPL's advisor headcount continued its march to another new high as the company added teams large and small in recruiting and acquisitions. The number of advisors surged 7% year over year, or a net 578 new advisors, to 23,462 in the second quarter. Recruited assets soared 31% to $24.3 billion or, stated as a total for the last 12 months, by 55% from the prior year-long period.
Client assets
Customer holdings reached another record in the period, although the focus on client cash sweeps in light of
However, as interest rates have remained high, LPL's clients have moved their cash assets out of sweep accounts that are more profitable to the company and into money markets or other liquid holdings that are more beneficial to the customer's bottom line. With the share of client cash falling by 110 basis points to 2.9%, LPL's revenue on that asset class slipped 7% to $388.9 million.
LPL's advisors have "really challenged us" to reduce advisory and transaction charges as the firm aims to "make sure that we're differentiating in the marketplace" and drive policies that are "well aligned with our advisors' needs and their clients' needs," Arnold told analysts. Asked whether there may be changes in regulatory rules for cash assets, he said that the company is "not clairvoyant, so we don't have all the answers, but we're not seeing signs" of any imminent plans to do so.
"There's a pretty tidy and clear regulatory framework that we all understand how to operate in. That regulatory framework governs the entire aggregate value proposition and relationships that we have with clients," Arnold said. "Anywhere where there may be a potential conflict within that overall aggregate business model, there's a requirement to disclose and to be clear to set that expectation for the client so that they can make an informed choice. And that's a very logical and very principled way to approach it."
Expenses
The higher asset values and accompanying compensation linked with them, interest costs on increased debt financing the Atria acquisition and promotional charges related to recruiting pushed up LPL's expenses. Total charges jumped by a quarter year over year to $2.6 billion in the second quarter.
Bottom line
In the last three months, LPL generated net income of $243.8 million on total revenue of $2.93 billion, or $3.26 per share. Earnings tumbled 15% from the same period a year ago, and earnings per share dropped 12% even though revenue climbed by 19%.
