LPL Financial, the nation’s largest independent broker-dealer, announced its financial results for the first quarter ended March 31, 2018 and gave an update on its progress onboarding advisors from National Planning Holdings.
“This quarter our earnings continued to grow, nearly doubling from a year ago,” said Matt Audette, CFO. “We grew gross profit, remained disciplined on expenses, and drove operating leverage. Going forward, our capital allocation priorities remain investing for organic growth, taking advantage of M&A opportunities if they arise, and returning capital to shareholders.”
On the company’s quarterly earnings call, president and CEO Dan Arnold discussed a number of regulatory issues including the likely-vacated DOL fiduciary rule, as well as the SEC’s new proposal for a best interest standard for brokerage accounts.
“In preparation for the DOL rule, we implemented many product, disclosure and operational changes across our brokerage platform, both for retirement and taxable accounts. As a result, we believe our advisers are well positioned to support their clients and differentiate their practices regardless of the outcome of the SEC rule,” said Arnold.
He added, “We will actively work with the SEC to provide our perspective and insight as they continue their progress on a best-interest standard. Finally, FINRA issued a proposal to reduce broker-dealer oversight responsibility on outside advisory activity. We are supportive of the concept of this rule, which preserves choice for advisers in how they operate their practices and serve their clients.”
Key Performance Indicators
Earnings per share increased 94 percent year-over-year to $1.01. The company noted that this includes $0.29 per share of cost from the NPH acquisition and the first quarter 2017 included $0.14 of debt refinancing cost. Prior to these costs, first quarter earnings per share increased 96 percent year-over-year to $1.30.
Net income increased 94 percent year-over-year to $94 million. Net income prior to the costs noted above increased 97 percent year-over-year to $120 million.
Total brokerage and advisory assets increased 22 percent year-over-year to $648 billion, up 5 percent sequentially.
Total brokerage and advisory assets prior to NPH increased 9 percent year-over-year to $578 billion, down 0.4 percent sequentially.
Total net new assets were an inflow of $38.9 billion, including $36 billion from NPH. Total net new assets prior to NPH were an inflow of $2.9 billion, translating to a 2.0 percent annualized growth rate.
Net new advisory assets prior to NPH were an inflow of $6.9 billion, translating to a 10.5 percent annualized growth rate.
Net new brokerage assets prior to NPH were an outflow of $4.1 billion, translating to a (5.2 percent) annualized rate.
Total net new assets from NPH in Q4 2017 and Q1 2018 totaled $70.2 billion.
Advisor count increased to 16,067, including 941 advisors joining from NPH. In total, approximately 1,900 advisors joined from NPH.
Production retention rate year-to-date was 96 percent.
Gross profit increased 23 percent year-over-year to $464 million, including approximately $24 million generated by NPH advisors.
EBITDA increased 21 percent year-over-year to $183 million. EBITDA prior to NPH increased 40 percent year-over-year to $213 million.
EBITDA as a percentage of gross profit was 40 percent, flat from a year ago. EBITDA as a percentage of gross profit prior to NPH was 48 percent, up from 40 percent a year ago.
Core general and administrative costs increased 14 percent year-over-year to $201 million, and increased 3 percent sequentially.
Core G&A prior to NPH increased 3 percent year-over-year to $182 million, and decreased 0.3 percent sequentially.
LPL purchased NPH last summer for an initial purchase price of $325 million and agreed to a contingent payment of between $0 and $123 million based on the level of NPH’s business that onboards onto its platform. No payment is due if less than 72 percent of NPH production is onboarded. If 72 percent or more is onboarded, the payment increases on an interpolated basis.
LPL continues to anticipate total asset transfer from NPH within a range of $70 to $75 billion.
Onboarded $36 billion in total brokerage and advisory assets, including $29.9 billion in brokerage assets and $6.2 billion in advisory assets.
First quarter onboarding expenses were $16 million, including $6 million of core G&A expense and $10 million of promotional expense. Total onboarding expense including 2017 and Q1 2018 was $36 million.
First quarter financial assistance was $53 million, including $34 million provided as forgivable loans and $19 million provided as cash assistance. Total financial assistance including 2017 and Q1 2018 was $97 million.
Finalized the purchase price of the NPH transaction at $325 million following the onboarding of the second wave of advisors, including $211 million of intangible assets. This increased first quarter amortization of intangible assets expense by $3 million sequentially.
Increased estimated NPH annual run-rate EBITDA accretion from $85 million to approximately $90 million by the end of 2018 based on the improved macro environment, the company said.
LPL returned capital to shareholders totaling $83 million in Q1 2018, translating to $0.90 per share.
Deployed $61 million of capital to repurchase 968 thousand shares at an average price of $62.84 per share in Q1 2018.
Paid dividends of $23 million on March 23, 2018.
Capital expenditures were primarily driven by technology spend and totaled $23 million in Q1.
Cash available for corporate use was $474 million as of quarter-end, and credit agreement net leverage ratio, which only applies to the revolving credit facility, was 2.46x, down 0.35x from the prior quarter.
After applying $300 million of cash available for corporate use to credit agreement net debt, this left an additional $174 million of cash, which if applied to the debt, would further reduce the credit agreement net leverage ratio to 2.25x.
LPL Financial oversees approximately $648 billion in brokerage and advisory assets as of March 31, 2018 and serves more than 16,000 financial advisors. NPH is comprised of INVEST Financial Corporation, Investment Centers of America Inc., National Planning Corporation, and SII Investments Inc.