By Andrew Welsch
LPL Financial is making strides with its program to buy retiring advisors' practices, the company's CEO, Dan Arnold said Tuesday.
The wealth management company, which operates the nation's largest independent broker-dealer, has bought out 27 practices so far, including its first non-LPL practice, Arnold said, while discussing the company's first-quarter results on a conference call.
After the market closed Tuesday, LPL reported adjusted earnings per share of $4.21, well ahead of the analyst consensus for $3.81, according to FactSet. Adjusted EPS was down 6% from the year-earlier quarter, due in part to higher expenses.
The company said revenue rose 17% year over year to $2.8 billion and expenses increased 25% to $2.4 billion. Net income, not adjusted for one-time expenses, dropped 15% to $288 million.
LPL stock was trading slightly higher Wednesday afternoon after spending much of the session in the red. Shares were recently up 0.08% at $269.35. The S&P 500 was up about 1.0%.
In its earnings report, LPL disclosed that it expects to pay $50 million during the second quarter to settle an Securities and Exchange Commission investigation of the company's compliance with recordkeeping requirements and LPL employees' use of unauthorized messaging apps to conduct business. The proposed settlement remains subject to negotiation, LPL said. The company recorded $40 million in regulatory charges during the third quarter of 2023. A company spokeswoman declined to comment on the matter.
The proposed settlement would add to the list of penalties financial-services firms have incurred as the SEC has pursued a multiyear campaign looking into recordkeeping and off-channel communications.
LPL is among the nation's largest wealth managers. During the first quarter, it grew advisor head count and assets thanks in part to ongoing recruiting efforts and acquisitions. The company had 22,884 advisors at the end of the quarter. That's up 224 sequentially and 1,363 year over year. The company said recruited advisors' assets were a record $20 billion for the quarter, and $87 billion over the previous twelve months.
Those efforts, combined with higher market valuations, helped boost total advisory and brokerage assets 23% year over year to $1.44 trillion, LPL said. Assets also increased because clients are investing new money. Other wealth managers, such as Morgan Stanley and Charles Schwab, have reported increases in assets under management.
LPL said organic net new assets were $17 billion, representing 5% annualized growth. That's a "modest deceleration" from the fourth quarter's 8% and third quarter's 11%, says J.P. Morgan Securities analyst Michael Cho. Growth was stronger in advisory assets than brokerage assets. Cho says in a May 1 note that LPL's strong recruited assets for the quarter suggests "healthy trends in the pipeline."
Succession planning. The company's program to buy advisors' practices is part of its Liquidity & Succession program, which was launched in 2022 and expanded to non-LPL advisors last year.
"We see it as this multidimensional opportunity of supporting and helping our existing advisors, which extends those assets on our platform for another generation of advisors" Arnold said.
CFO Matthew Audette said the company is "quite bullish" on the offering. Responding to an analyst question about the firm's capacity to do deals, Audette said the company can probably do 30 to 40 practice acquisitions per year. "When you put the financial aspects against that from a capital standpoint, we're applying capital consistent with our M&A framework," he said. "We'll deploy capital here at about the six to eight times Ebitda range. These deals are relatively small in the $10 million to $20 million zone and I would say skew towards closer to the $10 million side of it. And then financially, the economics are pretty attractive and that the ROA of these firms effectively doubles when we purchase them."
Analyst Devin Ryan of JMP Securities says in a note that investors have been quite keen to glean more details about LPL's succession program, including its willingness to commit capital to buy advisors' practices. Noting that there is a wave of baby boomer advisors retiring from the business, Ryan says LPL's succession program may accelerate its "consolidation of the broader wealth management market as advisors and assets go into motion in the coming years."
Write to Andrew Welsch at andrew.welsch@barrons.com
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May 01, 2024 15:51 ET (19:51 GMT)
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