LPL capped a strong year with additional assets under management and a higher advisor head count as markets bounced back and the firm continued to add advisors in a dog-eat-dog recruiting environment.
The largest independent broker-dealer by gross revenue, according to Financial Advisor magazine’s annual ranking, LPL has continued a streak of attracting new advisors and beating quarterly earnings estimates. In the fourth quarter, the company logged $3.51 of adjusted earnings per share, over estimates of $3.38, a surprise of 13 cents.
The company’s advisor count for the quarter was 22,660, which reflects the addition of 256 advisors after retirements and defections. The number is up by 1,385 advisors, or 7%, from last year. The company’s recruited assets were $17 billion for the fourth quarter and $80 billion for the year. That 22,600-rep figure does not include 2,600 Prudential advisors who moved their registration to the LPL enterprise platform last August.
LPL is one of the few independent brokerages that has consistently managed to grow its network in recent years. Competitors have groused that its size permits the firm to spend more on "transition assistance," but the firm clearly is taking advisors from rivals and reportedly has lofty expansion targets it intends to stick with.
However, as gross profit for the quarter increased 4% to $1.007 billion, the company’s earnings (expressed in EBITDA) fell 17% from the previous fourth quarter to $445 million as the company contended with higher core general and administrative expenses. These include advisory and commission expenses; depreciation and amortization; interest expense on its debt; brokerage, clearing and exchange charges; amortization of intangibles; market fluctuations on employee deferred compensation; ongoing promotional expenses; employee share-based compensation; regulatory charges; and acquisition costs. The company said it anticipated these and that they should be less of a burden in 2024.
The company's total advisory and brokerage assets increased 22% year-over-year to $1.35 trillion, and advisory assets rose 26% to $736 billion for the same quarter. Advisory assets also rose as a percentage of total assets, to 54.3% from 52.5% a year ago, LPL said.
The company's commission revenue rose to $682.4 million from $582.3 million in the fourth quarter of 2022, a 17% increase. Annuity sales grew to $408.5 million from $331.3 million year over year, a 23% increase.
LPL’s aggressive recruiting campaign, which included an announcement in August that it would bring on 2,600 advisors from Prudential Financial serving about $50 billion in assets, has stood out as a success story. Though many of its private rivals don't offer head count numbers, public company rival Raymond James announced last week that its recruitment had been relatively flat for the quarter, though its chairman said that some of its numbers reflected more advisors moving to its RIA channel.
Broker-dealers have in the past couple of years been enjoying the salad days of fatter interest rates, which means a rich vein of income from cash sweep accounts (client cash sitting idle in brokerage accounts). And LPL was no exception: Its net interest income more than doubled, rising to $159.4 million for the year, up from $77.1 million the year before. As Moody’s Investors Service noted last year, however, the party might have come to an end as clients move more of that money to high-yielding vehicles for themselves. The year before, LPL said interest income had skyrocketed by 170% from the end of 2021. For the fourth quarter of 2023, interest income was $43.3 million, an increase of only 6% from the previous quarter and only 17% from the same quarter last year.
LPL said in its fourth-quarter presentation that client cash balances had fallen from a high of $69.6 billion in the second quarter of 2022 to $48.5 billion in the fourth quarter of 2023. Also, as markets improved, LPL clients have less of their money sitting in cash than they did last year, when it got as high as 6.4% of their assets in the second quarter of 2022. It had fallen to a more normal 3.6% of their assets in the fourth quarter of 2023.
LPL’s president and CEO, Dan Arnold, said in an earnings call yesterday that advisors are still not moving around as much as they used to, and said turnover was only 5%, where it’s more normally at 7%. He said some of this inertia is due to the usual factors: advisors are worried about transitions and repapering, and they are trying to get a better sense of how a new firm would help them with the regulatory landscape and technological change. But he said there's also a continuing hangover from the pandemic, which has made them more cautious as they waited for the economic dust to settle.