LPL revenue falls in Q2 as two OSJ companies leave the company

LPL Financial’s second-quarter revenue fell amid a sharp increase in costs, and the company also announced the departure of two major financial advisor networks.

Two leaving Office of Jurisdictional Supervision Groups “These are siloed businesses that were strategically incompatible with our mission and model because they limited advisors’ ability to choose how and where they did business,” said CEO Dan Arnold in prepared comments during a July 25 call with analysts after the company published his results for the second quarter. The exits will move $20 billion of client assets off LPL platforms starting this month, he noted.

“This attitude is in stark contrast to our core principles of advisor independence, which is why we’ve decided to separate ourselves from these relationships,” he said. “At the end of the day, these splits will strengthen our entire ecosystem and allow us to better serve the great partners on our platform.”

While the company’s earnings press release noted that it “announced the planned separation of two non-cooperative large OSJs from our platform,” it did not provide any further details on which of its independent divisions were leaving our platform or how many financial advisors they would acquire.

The unexpected news of defeat came after LPL some conditions have been changed from its OSJ deals earlier this year. It also distracted from the firm’s record gains in advisors and client assets, Arnold’s announcement that LPL would maintain its cash profitability and a dent in the firm’s bottom line from higher costs.

Company officials said there was no further information on the departures. Asked by an analyst for a specific reason for the departure, Arnold cited LPL’s policy regarding M&A transactions within OSJ — the independent equivalent of a traditional brokerage arm, according to a transcript from the investment website Searching for Alpha.

Arnold said that because of the “structure and operation of the program, the likelihood of more OSJ chapters following in the footsteps of the existing ones is very small.”

“We see in some cases OSJ can buy out their advisors’ practices, transform them into more of an employee-owned structure, and ultimately, because of that alignment, that approach, it’s more of a captive model at this point, which is again very different from independence principles and giving those advisors the flexibility to move assets where they want to or where they want to go,” Arnold said. “Once they start losing independence principles within the model, we have a hard time making that sit in our platform and in our ecosystem. So that’s an example of something that I think we’ve just tried to make sure that we have alignment and we’ve mined so that as we move forward, that core principle is in place throughout our collective ecosystem.”

To see key takeaways for advisors from LPL’s second-quarter results, scroll down the page. And use the links below to view the results in The first quarteras good as fourth quarter, Third quarter, second quarter AND The first quarter of 2023 To view the lawsuit against LPL regarding the company’s cash accounts, click here.

Recruitment and M&A Headlines

LPL has two upcoming ones were unveiled multi-billion dollar teams in the last three months what left Osaic. It also completed the takeover process Crown Capital Securities and is currently in the process of finalizing the transaction and implementing recruitment activities that will lead to the employment of 5,085 advisors Prudential Financial, Wintrust Financial AND Atria Property Solutions.

On the other hand, the departure of two major OSJs stood out as rare — and, as Arnold and CFO Matt Audette said, an isolated — loss after the change to “framework agreement for the provision of services“between LPL and its independent branch networks earlier this year.

“From an organic growth perspective,” the as-yet-undetected OSJ departures “weren’t growing” to the point where they were “really a drag or a drag on organic growth,” where “‘lower profits, lower growth’ would have been the headline for these companies,” Audette told analysts. Arnold cited changes going back as far as a half-dozen years in LPL’s complex relationships with independent branches which are less profitable for LPL than consulting practices overseen by the company’s corporate office, but are also crucial recruitment and retention engines for company.

“Now that we’ve grown stronger and done well with these large OSJs, I think we’re more confident than ever that we can work together through the synergy of our relationships and really serve and support advisors well, which will ultimately contribute to the overall growth of the firm. I think we feel great about where we’ve landed, and it was a job that needed to be done,” Arnold said. “We focused on a few key things and got them done. One of them was making sure we had a good alignment on the value that both parties were going to deliver, us and them, getting the rules right on how we were going to operate in our ecosystem, and then the legal agreements that helped to enshrine all of that.”

Number of financial advisors

Despite these losses, LPL’s advisor count continued to climb toward a new record as the firm added teams large and small to recruit and acquire. Advisor count rose 7% year over year, or a net 578 new advisors, to 23,462 in the second quarter. Enrollment assets rose 31% to $24.3 billion, or, on a trailing-12-month basis, 55% from the prior-year period.

Client Assets

Customer funds reached another record high during the period, even though the focus on customer cash withdrawals in light of other companies’ ads changes in their interest rate is on liquid assets attracted the most attention from analysts during LPL’s conference call. Client assets rose 21% from the same period last year to $1.5 trillion in the second quarter, driven by rising asset values ​​and $34 billion of net new asset inflows, including $29 billion in organic inflows.

However, as interest rates remained high, LPL clients moved their cash assets from sweep accounts, which are more profitable for the firm, into money markets or other liquid assets that are more beneficial to the client’s bottom line. With the share of client cash falling 110 basis points to 2.9%, LPL’s revenue from this asset class fell 7% to $388.9 million.

LPL Advisors “really challenged us” to lower advisory and transaction fees as the firm aims to “make sure we stand out in the marketplace” and have policies that are “well-aligned with the needs of our advisors and the needs of their clients,” Arnold told analysts. Asked if there could be changes to regulatory rules for cash assets, he said the firm “is not clairvoyant, so we don’t have all the answers, but we don’t see any signs” of any imminent plans to do so.

“There’s a pretty structured and clear regulatory system where we all understand how to operate. That regulatory system governs the entire combined value proposition and the relationship that we have with customers,” Arnold said. “Wherever there might be a potential conflict within that overall combined business model, there’s a requirement to disclose and clearly define that expectation for the customer so they can make an informed choice. And that’s a very logical and very fundamental way to approach it.”

Expenses

Higher asset values ​​and associated compensation, interest expense from increased debt financing for the Atria acquisition and promotional fees related to recruiting drove up LPL’s expenses. Total fees rose quarterly year over year to $2.6 billion in the second quarter.

Summary

Over the past three months, LPL generated net income of $243.8 million on total income of $2.93 billion, or $3.26 per share. Profits were down 15% from the same period a year ago, and earnings per share were down 12%, even as revenue rose 19%.