LPL Financial reported yesterday that it had beat analysts’ earnings estimates for yet another quarter, logging $4.49 in adjusted earnings per share for the first three months of the year.

That EPS figure beat the consensus estimates of $4.33 to $4.35—providing a 3.2% to 3.7% earnings surprise. This quarterly earnings figure was more than double the earnings per share from last year, the company said, at 130% year over year.

For the first quarter ended March 31, the company reported “net income of $339 million, or $4.24 per share. This compares with $134 million, or $1.64 per share, in the first quarter of 2022 and $319 million, or $3.95 per share, in the prior quarter,” said a company statement.

The firm has beat earnings per share estimates for all of the last five quarters, according to figures compiled by Yahoo Finance.

LPL also said it had inked in a record advisor count at 21,521, which is up 246 from the previous quarter and 1,430 more than last year.

LPL is ranked No. 1 among broker-dealers by gross revenue, according to Financial Advisor magazine’s 2023 “Independent Broker-Dealer Ranking.”

The company said its net income rose during the first quarter to $339 million, or diluted earnings per share of $4.24, up 159% from a year ago. It also said it increased gross profit 52% year over year to $1.02 billion.

The firm recruited $13 billion in assets in the first quarter, it said, part of the $85 billion total for the last 12 months, and an increase of 12% from a year ago. The company’s CEO Dan Arnold noted in a Thursday evening webcast, however, that advisor migration is still at a slowdown. LPL executives previously noted that this was in part a lingering effect of Covid-19.

LPL’s share price is down 6% this year, having ended Thursday at $203.01. The shares had risen to almost $255 in early March before the banking contagion caused by the failure of Silicon Valley Bank spread through the financial services world, especially companies like LPL that were perceived to have bank-like exposure with lots of cash balances.

Equity research analyst Michael Elliott at CFRA Research has suggested, however, that this selling off has been overdone, since higher interest rates allow companies like LPL to make huge profits off interest income from the cash they’re sitting on for clients in sweep accounts.

As Financial Advisor reported in its April cover story on the broker-dealer survey, LPL’s interest income jumped to $77.1 million for 2022, according to its SEC filing, a huge 170% jump over its 2021 report of $28.6 million. In March, Elliott notably raised his opinion on LPL’s from “hold” to “buy.”

Another thing worrying investors is that broker-dealers won’t be tapping that cash tree much longer if savers suddenly get antsy about what they’re making in cash (very little) and move their money to higher yielding vehicles like T-bills and money market funds—a phenomenon known as cash sorting that strikes fear in the hearts of bankers. It’s recently caused big headline problems for Charles Schwab, for example.

“Other brokers are exposed to some cash sorting risk, but we believe this risk is much lower than that of a firm like [Schwab] which operates a very large banking segment,” Elliott said in an email to Financial Advisor. “Of note, most brokers such as LPL and [Raymond James Financial] don’t have significant client cash balances sitting idle in accounts like many banks do. Raymond James’s exposure is higher than LPL Financial’s in our view as they do operate a banking segment and had previously been trying to attract more cash deposits in 2022. LPL Financial sweeps client cash to third-party banks and earns a return [fee] from doing this. This means that LPL could actually benefit to an extent in this environment as demand for their cash increases as third-party banks look for more deposits.”

As Financial Advisor also noted in a story earlier this week, broker-dealer cash tends to be of a more transactional nature, and thus stickier. Gabriel Hack, an analyst at Moody’s Investors Service covering Advisor Group and Cetera’s parent company, was quoted as saying, “There is a certain portion of those balances that are truly transactional in nature, and not yield seeking.”

LPL reported Thursday that its total client cash balances were $55 billion, which reflected a decrease of $10 billion sequentially and $7 billion year over year. The company also said that its client cash balances as a percentage of total assets had fallen to 4.6% of total assts from 5.8% the previous quarter and 5.3% a year ago.

Partial Book Sales
LPL turned heads in February when it said it was launching a service to directly take over partial books of advisory business in which it would handle client relationships directly (a touchy subject in a relationship business). In the Thursday webcast, Arnold described this service as something that gives advisors flexibility to sell to LPL their smaller accounts of clients that don’t necessarily fit their practices “thus creating more capacity for them to focus on managing and growing their business more robustly. This service has been received well and we are seeing solid early momentum and a growing pipeline of demand.”

Arnold also said that over the last year the company has facilitated about 150 acquisitions among advisors through its M&A solutions program to deal with the problem of advisors retiring.

LPL said Thursday that its total advisory and brokerage assets increased 1% year over year to $1.18 trillion but that its advisory assets decreased 1% year over year to $621 billion and advisory assets as a percentage of the total decreased to 52.8%.

When asked why the brokerage side was so robust, Arnold said that one of the drivers was the unusual interest rate environment that the financial world hasn’t seen in 15 to 17 years. “In some cases, advisors’ opportunity to serve their clients and meet their needs in this rate environment leads to products that have maybe a utilization that is more appealing to use as a brokerage structure than an advisory [structure] … whether it’s an annuity or some type of bond, Treasury, etc.”

LPL’s pursuit of enterprise groups, i.e., financial institutions such as credit unions or insurance companies, has also played a role in the balance between brokerage and advisor assets, Arnold said.

“They have a higher mix of brokerage than advisory,” he said of these firms, “and certainly different than our typical mix of 52%, 53% advisory. So when we transition those folks in, that has a shorter-term influence in the mix. We see that as an opportunity: Once they get to our platform, it’s a much more appealing and robust advisory platform that has more interest … to the end client. We do see this as an opportunity. There’s a catalyst to shift their mix over time more toward advisory.”

Matt Audette, CFO and head of business operations, said in a statement, “In Q1, we continued to grow assets organically in both our traditional and new markets, closed two strategic acquisitions, continued our momentum with our liquidity and succession capability, and are preparing to onboard Commerce Bank and Bank of the West in the second half of the year.”

LPL also noted Thursday that S&P upgraded the company’s debt to “BBB-” on April 5—and that both S&P and Moody’s both now view LPL as an investment-grade debt.

Correction: A previous version of this article quoted Dan Arnold talking about enterprise groups as branch offices or offices of supervisory jurisdiction. In fact, when he was describing enterprise businesses he was referring to financial institutions, which could mean firms such as insurance companies or credit unions.