LPL Financial Holdings Inc. Q4 FY2020 Earnings Call

Good afternoon. And thank you for joining the Fourth Quarter and Full 2020 Earnings Conference Call for LPL Financial Holdings Incorporated. Joining the call today are our President and Chief Executive Officer, Dan Arnold; and Chief Financial Officer, Matt Audette. Dan and Matt will offer introductory remarks and then the call will be open for questions. The company will appreciate if analysts will limit themselves to one question and one follow-up each. The company has posted its earnings press release and supplementary information on the Investor Relations section of the company’s website, investor.lpl.com. Today’s call will include forward-looking statements, including statements about LPL Financial’s future financial and operating results, outlook, business strategies and plans, as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management’s current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. The company refers to listeners to the disclosures set forth under the caption Forward-looking Statements in the earnings press release, as well as the risk factors and other disclosures contained in the company’s recent filings with the Securities and Exchange Commission for more information about such risks and uncertainties. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company’s earnings release, which can be found at investor.lpl.com. With that, I will now turn the call over to Mr. Arnold.

Thank you, Carmel, and thanks to everyone for joining our call today. Over the past quarter and throughout 2020, our focus remained on our mission of taking care of our advisors, so they can take care of their clients. This is a credit to our employees who responded with agility and ingenuity to new working conditions and new opportunities to support our advisors. Their dedication is inspired by the unfailing commitment of our advisors who continue to provide much-needed financial advice to millions of Americans managing through a challenging environment. As we enter the New Year, we remain focused on executing our strategy while also evolving our long-term vision of how we deliver on our mission. We aspire to push past our old vision of extending our leadership in the independent space and redefine the independent model over time and by doing so, become the leader across the entire advisor-centered marketplace. Our approach is to build a platform that is simple and straightforward for advisors to use in constructing the perfect practice for themselves and their clients. More specifically, this vision centers around making it easy for advisors to join our platform with no friction or complexity, and as simple as turning dials, they can determine the exact services they want to leverage, pick the business model that will work best for them, choose the technology and workflows that make them most efficient, and select the product mix that best meets the needs of their clients, all while leveraging expertise and solutions to enhance the performance of their businesses. Ultimately, that creates total empowerment for LPL advisors to thrive and that is the heart of our mission. Doing this well gives us a sustainable path to higher levels of organic growth, increased market leadership and long-term shareholder value creation. With that context in mind, let’s now turn to the fourth quarter and discuss our results and progress on our strategic plan. Let’s start with our fourth quarter business results. Total assets reached a new high of over $900 billion, up 18% from a year ago. This increase was primarily driven by continued organic growth and equity market appreciation. With respect to organic growth, fourth quarter net new assets prior to acquisitions were a new high of $18 billion, which translated to an 8.8% annualized growth rate. For the full year, net new assets were $56 billion, which translates to a 7.4% annualized growth rate, up from 5.3% percent a year ago. This increase was driven by continued strength across new store sales, same-store sales and retention. In the fourth quarter, Recruited Assets remained solid at $10.8 billion, which brought our full-year total to $41 billion. This was up $6 billion from a year ago and by more than 50% over the past three years, primarily driven by the appeal of our model, our ongoing innovation for the future and continued solid execution by our business development team. In the fourth quarter, we also continued to enhance the advisor experience, as we delivered solid service outcomes driven by the flexibility of our affiliation models, evolving capabilities and technology and an enhanced service experience. As a result, retention remained approximately 98% for the year, up from 96.5% percent a year ago and Net Promoter Scores increased by over 15 points year-over-year and more than 60 points in three years. Our fourth quarter business results also led to solid financial outcomes, with EPS prior to intangibles of $1.53, which brought our full-year total to $6.46. Let’s now turn to the progress we have made executing on our strategic plan. As we look ahead, we continue to see growing demand for advice and believe we are well-positioned to serve our advisors and collectively compete for additional market share. Now, in light of this we remain focused on executing our four strategic plays. As a reminder, our first strategic play involves meeting advisors where they are in the evolution of their practices by winning in our traditional markets, while also leveraging new affiliation models to expand our addressable markets. Strategically, we believe this combination positions us, not only to deliver sustainable and repeatable organic growth but also to increase our growth rate over time. In our traditional markets while advisor movement remained at lower levels over the past year, we continued to drive solid recruiting results and gain market share. To share a little more color specifically on our third-party financial institutions channel, we continue to see good momentum in the core segment of this market, and at the same time, we remain encouraged by our opportunity with regional banks. The planning and preparation for our new relationships with BMO and M&T are going well and we are in ongoing strategic dialogues with other prospects. With respect to the expansion of our addressable markets, we anticipate our new affiliation models will also contribute additional organic growth in 2021. Following five Strategic Wealth Services practices that onboarded last year, we have a solid pipeline with a number of commitments that will join in the first half of this year. In January, we also onboarded our first Independent employee model practice and we are seeing other prospects progress through the pipeline. Another key component of this strategic play is using M&A as a strategic lever to complement organic growth. Earlier in Q4, we onboarded a combined $4 billion of assets from our acquisitions of Lucia and EK Riley, then in December, we signed an agreement to acquire Waddell & Reed’s wealth management business, which has over 900 experienced and accomplished advisors, serving approximately $70 billion of client assets. Post the signing, our teams have collaborated well with Waddell & Reed and Macquarie, which is contributing to solid progress on the transaction. Thus far in the process, Waddell & Reed advisors serving approximately 80% of client assets have already committed to join our platform following the close of the transaction. We will give you an update on the rest of the retention pipeline next quarter. Our second strategic play is focused on providing capabilities that help our existing advisors, differentiate in the marketplace and drive efficiency in their practices. In 2021, we plan to continue our work from last year, with a focus on developing capabilities and solutions in two key areas. The first is to enrich the end client experience with expanded digital solutions, enhancements to our advisory platforms and a broader set of lending solutions. The second key area is using technology, including ClientWorks and ClientWorks Connected, to help advisors enhance the performance of their practices, operate more efficiently within their key workflows and expand scalability to serve more clients. We believe these evolving capabilities will contribute to an increase in advisor growth and retention rates. Let’s next move to our third strategic play, which involves creating an industry-leading experience to delight advisors and their clients and that in turn helps drive advisor retention. One of the key parts of this strategic play is providing advisors with differentiated service at a time and in a manner that works best for them. We are doing this by transforming our service model into a client care model. We are about halfway through the implementation of this model and at this point, it has made a solid contribution to our Net Promoter Scores. We see additional opportunity to drive these outcomes higher as we deliver the second half of this initiative. We also see evolving our custodial platform operations as an opportunity to further enhance service levels, platform scalability and efficiency. As part of this work, our areas of focus include automating routine work with robotics, removing paper forms and increasing eDelivery through digitization and process re-engineering to drive continuous improvement. We believe these initiatives combined with our transformation to a client care model position us to further strengthen the advisor experience and our platform as our business grows. Our fourth strategic play is focused on helping advisors run the most successful businesses in the independent marketplace. One of the key components of this play is our portfolio of Business Solutions. As a reminder, when we started Business Solutions over two years ago, we saw the opportunity to help advisors find better alternatives for some local services that cost in excess of $1 billion a year. Our hypothesis was that we could provide higher quality services at a lower cost and free up additional time, for advisors to spend on more valuable activities, including serving their clients and growing their practices. In that spirit, we created our Business Solutions portfolio to solve for these discreet needs, with outsourced professional expertise. Since then, we have been able to expand and evolve the value proposition of the portfolio and scale our subscription base. As a result, we finished the fourth quarter with about 1,400 monthly subscriptions, which is more than double the level a year ago. At the same time, we have expanded the portfolio to include business optimizers and additional professional services. We are also innovating on how we package these solutions such that we can unlock additional value for advisors when using a combination of different offerings. As we look ahead, we see several pathways for continued growth including partnering with more of our LPL advisors, introducing new solutions, and experimenting with serving advisors outside of LPL. In Q1, we will launch the next innovation in our portfolio M&A Solutions, which will be our sixth offering. As context, this service grew out of CFO Solutions as we identified an opportunity to help advisors acquire other practices. That inspired us to develop M&A capabilities as a service for advisors. This M&A offering will provide a turnkey solution and dedicated support for advisors from deal sourcing all the way through transaction advice, capital funding and process execution. With this offering, advisors can now more easily use M&A as a repeatable and sustainable growth engine for their practices. In summary, in the fourth quarter and throughout the year, we continued to invest in the value proposition for advisors and their clients, while driving growth and increasing our market leadership. As we look ahead, we remain focused on executing our strategy to help our advisors further differentiate and win in the marketplace and drive long-term shareholder value. With that, I will turn the call over to Matt.

All right. Thank you, Dan. And I am glad to speak with everyone on today’s call. Before I review our fourth quarter results, I would like to highlight our progress during 2020. Looking at the year, we are proud of what we accomplished within our framework for driving long-term shareholder value. We entered 2020 with momentum, and continued to invest through a volatile environment to provide an industry-leading value proposition for our advisors to serve their clients and win in the marketplace. This commitment to enhancing the support we provide our advisors, resulted in the highest quarterly and full year levels of organic net new assets in our history. By leveraging the investments in our platform and the financial strength we built over the last several years, we enter 2021 in an even stronger position, as we work to onboard our two largest financial institutions, M&T and BMO, as well as Waddell & Reed. So as we look ahead, we are excited to continue growing our business and leveraging our increased scale and capacity to further invest in our platform, which positions us to drive additional growth and long-term shareholder value. Now let’s turn to our fourth quarter business results. Total advisory and brokerage assets increased to a new high of $903 billion, up 11% from Q3, driven by continued organic growth and higher equity markets. Looking at organic growth, total net new assets were $17.8 billion or an 8.8% annualized growth rate. Moving on to recruiting and retention, which are two key drivers of organic growth, we continued to produce strong results in the fourth quarter. Recruited assets were $10.8 billion in Q4, which was our third consecutive quarter above $10 billion and brought our twelve-month total to a new high of $40.9 billion. At the same time, full year retention was 97.7%, an improvement of over a percentage point from last year. Looking at our business mix we continued to see positive trends in Q4. Advisory net new assets were $15.9 billion or a 16% annualized growth rate. Our full year total was $50 billion, up almost 50% from last year and more than doubled our total in 2018. Centrally managed platforms also continued to grow, as net new assets reached a new quarterly high of $2.5 billion or a 17% annualized growth rate. Now let’s turn to our Q4 financial results. Strong organic growth, combined with expense discipline, led to EPS prior to intangibles of $1.53, up 6% sequentially. Looking at our topline growth, gross profit was $534 million, up $28 million or 6% sequentially. Looking at the components commission and advisory fees net of payout were $153 million, up $11 million from Q3, primarily driven by organic growth and higher equity markets. Moving on to asset-based revenues, sponsor revenues were $153 million in Q4, up $9 million sequentially, as average assets increased driven by organic growth and higher equity markets. Turning to client cash revenues, they were $105 million, down $4 million from Q3, driven by lower client cash yields. Looking at client cash balances, they remained elevated at $49 billion, up $2 billion sequentially. As for client cash yields, our Q4 ICA yield was 108 basis points, down 10 basis points from Q3. The decrease was primarily driven by $0.5 billion of fixed rate contracts that matured during the quarter and higher cash balances. Looking ahead to Q1, we will have the full quarter impact of the $0.5 billion of fixed rate contracts that matured in Q4, as well as another $0.5 billion of fixed rate contracts maturing in Q1. Given these factors and where interest rates, client rates and cash balances were at the end of Q4, we expect our Q1 ICA yield to be around 100 basis points. Roughly half of the decline is driven by growth in balances, while the other half is driven by fixed rate contract maturities. Moving on to Q4 transaction and fee revenues, they were $130 million, up $10 million sequentially, driven by higher trading volume and fee revenue. Looking ahead to Q1, while we acknowledge the widely discussed increase in activity in the self-directed space, our trading levels have remained more stable and consistent with what we would expect to see in the advisor-led wealth management space. As a result, our trading activity through January is in line with Q4 levels. That said, I would note, there are three fewer trading days and seasonally lower fee revenue in Q1. So we expect these two items to reduce transaction and fee revenue by $5 million. Turning to Business Solutions, they continue to scale with 1,400 subscriptions at the end of Q4. This is up 200 from last quarter, and double our total from a year ago. These offerings now generate roughly $17 million of annual recurring gross profit, up from $15 million last quarter. And more importantly, they help free up additional time for advisors to spend on more valuable activities, including serving their clients and growing their practices. Now let’s turn to expenses, starting with Core G&A. It was $252 million in Q4, leading to full year Core G&A of $925 million, in the lower half of our original outlook range of $915 million to $940 million. Turning to our outlook for 2021, our long-term cost strategy remains unchanged. We continue to prioritize investments that drive organic growth, while delivering operating leverage in our core business. Looking back, over the last three years our Core G&A has grown in the mid single-digit range annually as we invested to drive growth. And over the same period, these investments have helped our organic growth more than double from 3% to 7%. Given the success we are seeing with these investments, we are planning the same level of Core G&A growth we planned last year, which was 5.5% to 8%. So for 2021, this translates to a range of $975 million to $1 billion. I would note, this includes costs to support BMO and M&T, but is prior to expenses associated with Waddell & Reed. Moving on to Q4 promotional expenses, they were $48 million, down $10 million sequentially, primarily driven by lower conference expenses following our national sales conference in Q3. Turning to Q1, we anticipate promotional expense will increase by approximately $10 million, primarily driven by increased transition assistance from recruiting, and BMO and M&T onboarding expenses. Looking ahead, we anticipate BMO will join by the end of Q1 and M&T will join during the middle of this year. Now let’s talk about Waddell & Reed. We are excited about the transaction and encouraged by the progress we are making with advisors. As mentioned, Waddell & Reed advisors serving approximately 80% of client assets have committed to join our platform, following the close of the transaction. This puts us above our 70% modeling assumption, thus far in the process. I would also note, Waddell & Reed Wealth Management assets at the end of Q4 were $70 billion, which is up $7 billion from Q3. With respect to the ongoing earnings benefit from Waddell & Reed, we will have updated estimates as we move towards the close and onboarding dates, which we expect to be in the middle of this year. That said, today I would like to provide some color on the acquisition and integration costs, which we continue to estimate will be approximately $85 million. That said, to provide more transparency, we will add an acquisition cost line item to our management P&L beginning next quarter. We think reviewing our results prior to these acquisition costs will be helpful in understanding our financials. So starting in Q1, we will report our results as EPS prior to intangibles and acquisition costs. As we look ahead, our integration work is progressing well and we anticipate up to $10 million of acquisition costs in Q1. Looking at share-based compensation expense, it was $8 million in Q4, relatively flat to Q3. Looking ahead, Q1 tends to be our highest quarter of the year, given the timing of our annual stock awards, so we anticipate this expense will increase by a few million dollars sequentially. Turning to depreciation and amortization, it was $29 million in Q4, up $1 million sequentially. Looking ahead, we continue to invest in technology and recently rolled out several improvements to our advisory platform and end client experience. As a result, we expect depreciation and amortization to increase by $4 million sequentially. Moving on to capital allocation, our balance sheet remained strong in Q4 with credit agreement net leverage at 2.16 times and cash available for corporate use of $280 million. As for capital deployment, our framework remains focused on allocating capital aligned with the returns we generate, investing in organic growth first and foremost, pursuing M&A opportunities where appropriate and returning excess capital to shareholders. In the near-term, we expect the majority of our capital deployment to be focused on organic growth and M&A, as we onboard BMO, M&T and Waddell & Reed. Once we have completed these transitions, we plan to reassess our capital deployment opportunities. And if at that time we have excess capital to deploy beyond organic growth and M&A opportunities, we would anticipate restarting share repurchases. That said, we will have to see what our opportunities look like at that time. In closing, we delivered another quarter and year of strong business and financial results. And as we look forward, we remain excited about the opportunities we see to continue investing to serve our advisors, grow our business and create long-term shareholder value.

Thank you. Our first question comes from Steven Chubak with Wolfe Research. Please go ahead with your question.

Hey, Dan. Hey, Matt. Good afternoon.

Hi.

So I wanted to start with a question on organic growth. As you noted, you are coming off a record year organic growth north of 7% 4Q was your strongest quarter and 9%. So momentum was clearly building nicely towards year end. I was hoping you could speak to what you are seeing in terms of the backlog across both the traditional market, as well as some of the newer camps and how that compares with the year ago levels. Is this what’s informing your confidence around the sustainability of that 7% plus organic growth rate from here?

Yes. Steven, so let me take a stab at that, and please, if I don’t get it all, you ask a follow on? So, look, the short answer is, as we said in the remarks, we think that pace around 7% is sustainable. And then we continue to challenge ourselves to expand on that growth rate. So let me give you a little color as to how we think about that. I think one quick way to orient yourself to it is, how do we get to where we are over the last call it three years and that’s been driven by new store sales increasing by 50% over that period of time, which has come almost totally out of our traditional markets. Retention rates have improved from 96% to 98% over that period of time. So that’s also a helpful contribution. And then same-store sales continue kind of a steady, durable, increase over that period of time. And so what you have done is you have gone over that period of time from roughly below a 3% organic growth rate to 7%. Now, as we look ahead, relative to the opportunity to both sustain, but more importantly, grow that rate, we look to new store sales first, and see the new markets that we have entered, the strategic wealth services model, the independent employee model and the RA markets, and obviously, see a much bigger opportunity set with momentum building inside those three new offerings, which largely haven’t contributed a whole lot to our growth up to this point. So that that’s one opportunity. Certainly this emerging new bank opportunity with respect to larger banks exploring outsourcing is a second way to think about an opportunity going forward. And then we continue to improve our own efficacy of our business development team and its capabilities to grow and win at higher rates. That’s a third one as we continue to innovate there. And then, finally, I think we continue to innovate around onboarding and the more seamless we can make that we believe creates two more movement in the marketplace in the future. So those are how we think about opportunities and new store sales. I think it would be, if you click over the same-store sales for a minute, we see the opportunity to continue to drive automation into the advisors key workflows that then they get the benefits of efficiency, freeing up time to reallocate to more valuable activities. We also see this technology creating more scalability in their practices. So they can obviously attracted support more clients. We continue to build out new solutions for their organic growth efforts. And finally, this new M&A Solutions becomes yet another way for them to create another lever to grow their practices. So across new store and same-store says you have got multiple oars in the water that we are working on, in order to drive that rate higher. If we are successful on executing on these, well, then you can see where the logic around the opportunity set grows and we deliver higher growth rates. I hope that helps.

No. That’s great, Dan, a very fulsome response. So thanks for all that color. And maybe just follow up for Matt, just on the ICA outlook. The lack of deposit appetite from third-party banks, it’s something we have been hearing from you and also for many of your competitors. Typically, we don’t see demand for cash increase until short rates start to rise. Clients are to engage in some form of cash sorting. And if we enter a prolonged period where short rates are at zero, but the yield curve steepens materially. How do you see demand from third-party banks evolving? Do you anticipate you are going to have opportunities to turn out the cash, take advantage of this deepening and if cash balance continue to build from here, should we assume that that’s going to fall into the overflow bucket? Are there opportunities to maybe optimize the pricing there as well?

Yeah. Steven, you summarized the market well. Currently, there is a lot of liquidity from various sources, but there isn’t much demand for banks on the sweet fund side. As a result, we’re seeing balance flow into overflow contracts, which exceeded $2 billion this quarter. In the near term, that's likely where cash will be directed. As we move past the current technical market conditions and considering a scenario where short-term rates remain low while the yield curve steepens, there may be opportunities to shift into a fixed environment. It's always challenging to predict, but the present situation is primarily influenced by excess cash. Looking at our financials, we aim for a fixed position of 50% to 75%, but we are currently around 35%. There’s considerable upside potential when we achieve that target. We believe the long-term opportunity is strong, but right now, demand is lacking.

That’s great, Matt. Thanks so much for taking my questions.

You bet.

Thank you. Our next question comes from Bill Katz with Citigroup. Your question, please.

Okay. Thank you very much. Good evening, everybody. Appreciate you taking the questions. Maybe Dan, start with you. So I am intrigued by your commentary about maybe taking Business Solutions on the road. I was just wondering if you could maybe flesh out how you sort of thinking about that beta test, what kind of milestones you might be looking for and then how do you think about the TAM associated with that?

Thank you for the question, Bill. First, I want to highlight that our Business Solutions are subscription-based services, which gives us the flexibility to support advisors using the LPL platform. This flexibility allows us to consider serving advisors beyond the LPL family. Currently, our focus is on continuing to innovate and enhance these services for LPL advisors, and most of our investment is directed towards this strategic effort. We believe that these services could be extended to all 300,000 financial advisors in the market. If we consider the needs of independent businesses requiring local services, we believe we can offer high-quality solutions at a lower cost through automation and digital capabilities, which would create scalability. For instance, our M&A Solutions could be effectively utilized for LPL advisors, and we could adapt them for advisors who aren't currently on our platform, creating growth opportunities for their practices. This is still in the experimental phase, and it's a logical step in our journey. We are likely to take one of these solutions and explore how it functions outside of the LPL advisor base. This will help us learn valuable insights and further innovate our offerings. I hope that clarifies things.

That’s very helpful. I appreciate the incremental change there. Follow up question is for you, Dan or for Matt, two-part. So I apologize for sneaking that extra question in. But so on the 20% of the Waddell Financial advisor that haven’t agreed to this point, I was wondering if you can provide some color on why not? And then could you just help me understand, I apologize if I show you know this, the interplay between the integration charges associated with Waddell and any flow through onto the Core G&A line? Thank you.

Yeah. Thanks, Bill. I will take the first part of that and Matt, you take the second. How about that? So, Bill, as you recall, we announced the transaction in early December and at that point we began our retention efforts associated with the Waddell & Reed advisors. And so we have been at that largely six weeks. And so what you are seeing is that 80% retention rate has more to do with just the timing and where we are in the overall process than anything else. As Matt said, we expect to close and convert in the second quarter. So there’s still time left to have that ongoing dialogue and make sure that all advisors can make an informed choice around where that best option is for them. So think about that just as more where we are in the timing process than anything else. Matt, do you want to take the second part of that?

Yeah. Sure. Bill on the Waddell & Reed expenses, they are not included in Core G&A. So we are going to have a separate line item that includes the acquisition and integration expenses. So you can clearly see that and there weren’t any in Q4.

Okay. Thank you. I will follow up offline. Thank you.

Thank you. Our next question comes from Craig Siegenthaler with Credit Suisse. Your question, please.

Hey. Good afternoon, Dan, Matt, and congrats on the record organic growth.

Hey. Thank you.

So I am just wanted to start with the Waddell & Reed transaction first. So its advisors hold a very high percentage of Waddell and IV product. How do you think about the trajectory for them to reinvest this product into other funds and could this have any economic impact on LPL or the commission rates and shelf fees roughly in line with the product on LPL platform?

Yeah. Do you want me.

Yeah. Take that Matt and then I will add color around that.

Yeah. Sure. Yeah. It sounds good. So, Craig, I would just highlight the partnership with Macquarie that really that we worked with on this transaction together. So I think when we look on the other side of closing and integration, I think we see ourselves continuing to be that strong partner with Macquarie, meaning the IV Funds moving over to their platform. So I think that relationship and that synergy being able to continue the experience that what all advisors have with those funds today. On the other side of this transaction was a really, really important part of the, I think, what made this deal exciting for all three parties. So I just wanted to give you, just emphasize that from a strategic level and then Dan is anything you would add.

Yeah. More from an operational standpoint, we don’t expect some big reallocation or shift in, how they are thinking about their portfolios or using what will then be Macquarie product on a go forward basis. So, I don’t think you are going to see some big step function change in terms of the allocation of those assets. So I am not sure you see any then knock on effect from that, which is the second part of your question.

Great. That's helpful. I have a question regarding production retention, which remains at a strong level, but we have observed a decline over the past three quarters. Could you discuss any factors or seasonality that might be affecting the fourth quarter, or offer any additional insights on this?

Yeah. I think you are talking about our overall retention inside LPL. And look, I think, this is mainly just, you have seen it increase throughout the year, which is largely a matter of timing related to the impact the pandemic had in the early part of the year. So where might have been more complex or tougher inside that four-month to five-month period of real uncertainty. I think you just see now some of that pulling through. As we think about it and look at it over the full year, you have got 98% retention, and as I shared last quarter, we think about a good sustainable range being somewhere around 2% to 3% of attrition or said differently 97% to 98% retention. So that’s what we are trying to manage to and work to and we feel good about the client experience and the advisor experience we are providing. And that is the primary driver of that attrition rate or retention rate and so that’s kind of how we are managing to it and thinking about it. I hope that helps.

Thank you, Dan.

Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Good evening, everyone. I wanted to inquire about the TA packages currently available in the market. It seems that Raymond James mentioned experiencing some pressure in that area, particularly in the employee channel, which is not significant for you at the moment. Have you noticed any substantial changes? Also, Matt, I have a follow-up question regarding promotional expenses. To what extent is this adding incremental pressure on your promotional expenses for 2021?

I will take the first half of that and then Matt, I will turn it over to you. So, look, the short answer is, we are not seeing a lot of change in transition assistance rates this time. And you said it as a core principle for us, we determined transition assistance on a return basis approach and our TA rates have been stable over the last few quarters and as we enter this New Year, we don’t see that changing. And when we look ahead, we think about TA and how it’s currently positioned or transition assistance, along with the rest of our value proposition from capabilities, technology and service and believe that that’s an overall really solid competitive offering and believe, as we go forward, that it will be a source of us continuing to gain market share. Do you want to talk about promotional expense?

Yeah. I think I was just building what Dan said, I think, with the rates being stable, I think promo and the transition assistance amortization. If that’s going up in a meaningful way, it’s simply because recruiting and therefore organic growth has gone up. So I think it will move along with our recruiting success and the rates themselves really have been quite stable.

Great. Perfect. And then just a follow up on Waddell & Reed, I know you guys give a little bit of color on the kind of the composition of the assets, et cetera, at the time that the deal was announced. But on the 80% that you already sort of retained, an you give us an update on sort of what’s the gross profit ROAs on that base and the mix of assets kind of equity fixed income? Thanks.

Yeah. Not yet. I think it’s a little bit early. I think as we move towards close and onboard and we will start to get more updates on overall economics. I think, today we wanted to really highlight the early success on the retention front. So we will give you more on that at a future date.

All right. We will stay tune. Thanks.

Yeah.

Thank you. Our next question comes from Chris Harris with Wells Fargo. Your question, please.

Yeah. Thanks. Can you guys talk a little bit about your risk management controls and what you are doing to keep risk reasonably well controlled with all the growth that you guys are seeing across the platform?

Certainly. Let me address that. It's a fundamental part of our offerings, providing protection for the firm, advisors, and clients. It also plays a crucial role in simplifying our business, enabling advisors to run their operations smoothly. We must continuously innovate in this area, especially in a growing environment, which allows us to allocate resources to enhance the effectiveness and efficiency of our compliance and risk management programs. While we are not perfect, we focus on key elements of our risk profile, monitoring 16 different risk components regularly. This involves managing daily and operational risks. Additionally, we look for strategic opportunities to integrate robotics, artificial intelligence, and automation to improve our supervision and oversight. By leveraging technology, we can increase efficiency and scalability to support our growth. We approach this from an operational perspective, tracking progress monthly and holding ourselves accountable for ongoing improvement. Our aim is to convert risk management into a valuable asset; by investing in it and optimizing our processes, we can create a competitive advantage. This perspective guides our risk management strategies and objectives.

Helpful. Thank you.

Thank you. Our next question comes from Jeremy Campbell with Barclays. Your question, please.

Hey. Thanks. Looks like a really nice December drove the big robust with acceleration and M&A growth, but also it’s like your recruited assets was pretty stable with prior couple of quarters. So just wondering if you could unpack some of the key drivers behind the December pickup?

Yeah. Hey, Jeremy. It’s Matt. I think when you look at the interest and dividends component of that and as to your observation that happens typically in the third month of each quarter. And then in the third month of Q4, at year end in December, you have got a lot of funds that will distribute things annually. So that was a driver of it. But even if he had kind of pulled that uptick out, when you look at our growth rate in Q4 at 8.8%, that was about a 0.5 percentage point, so still above an 8% organic growth rate. So really, really strong quarter in our view, but that interest dynamic that happens at the end of the year was the thing that bias December up over that.

And if I added anything to that, I think, if click down on that, this is where you see that durable, but steady trend upward in same-store sales, where you are seeing advisors doing a really great job of serving and supporting their existing clients. So they are actually capturing assets from those existing clients at a higher rate than historically and certainly pre-pandemic. At the same time, we have seen them now return to capturing or acquiring new clients at the rates, they were pre-pandemic and so some of that dynamic underneath fourth quarter is certainly supportive of increasing growth rates both across the quarter, I am sorry, across the whole quarter and ramping up within the quarter.

Got it. Great. And then, Dan, you gave some really nice high-level color around with the growth trajectory going forward to an earlier question, but I don’t know whether this is for you or for Matt, but can you just give us a quick update around how January activity is shaping up so far or will shape up?

Matt, do you want to take that.

Yeah. I’ll take that one, Jeremy. Since it's February, we have some insights on January. Overall, it went well. We're still finalizing results, but I would say we saw growth similar to what we experienced in 2020, with nice organic growth. However, there are a couple of key points regarding January that influenced NNA a bit lower for that month. The first is related to December recruitment; as you know, FINRA closes for the last week or two of the year, which means no new advisors join the platform, naturally slowing NNA at the beginning of January each year. Additionally, while month three typically generates the highest fees-driven NNA, month one is the lowest due to advisor fees being deducted primarily in the first month of the quarter. These factors combined lead to a slight decline in January. Overall, we anticipate January to show organic growth in the range of 4% to 5%. We will finalize these results and share them in a couple of weeks.

Perfect. Thanks a lot.

You bet.

Thank you. Our next question comes from Kyle Voigt with KBW. Your question, please.

Hi. Good evening. Just a couple of follow ups on promotional expenses. I am wondering if you have any update on how much TA you are contemplating for the Waddell deal, whether TA rates associated with those Waddell assets you are expecting to onboard? And then separately, how should we think about the return of some higher non-TA related promotional expenses in a post-pandemic world? Maybe frame how much expense benefit you realize there in 2020 due to lower conference spend or something else?

I will start by addressing the Waddell side. Dan and I previously discussed our approach to transition assistance, and we are applying the same method for Waddell. Our goal is to ensure that advisors can successfully transition to our platform, which is the purpose of transition assistance. We will evaluate it in the same way. Regarding conferences, as we move forward, we see a blend of ongoing virtual and digital activities, but there is also a strong desire for in-person gatherings, particularly within the independent advisory sector. Therefore, I anticipate a return to a mixture of pre-pandemic events, although it is too soon to determine how those numbers will evolve. We will keep you informed on a quarterly basis regarding promotional costs for the upcoming period. Dan, do you have anything to add?

No. well said.

Yeah. All right. We are all good there, Kyle.

Thank you. Our next question comes from Gerry O’Hara with Jefferies. Your question, please.

Great. Thanks and good evening, folks. Matt, perhaps, you could give a little bit more detail just around the Waddell timeline as it relates now to the close advisor onboarding and synergy runway. I know you had a nice graphic in the presentation last quarter and I may have missed it this time around, but if you could help us just kind of walk through that a little bit, that would be appreciated?

Yeah. Sure. Gerry, we didn’t update it, but it’s unchanged. So I think when we think about the next key dates, which are closing into the subsequent asset transfer. Our estimate for that is the middle of this year and then the integration, the onboarding process, et cetera occurs after that and I think that will lead to an EBITDA benefit ramp of about 12 months after closing. So if you think we are closing and onboarding in the middle of this year, that will have us reach that run rate EBITDA estimate by the middle of next year or the middle of 2022. Yeah, so that’s what was in that presentation and those estimates are the same today.

Okay. Thanks. And then just a follow-up, I think in the prepared remarks, Dan, you mentioned kind of the evolving opportunity around the custodial platform. Is there any potential kind of color you could add or context as to what that opportunity might be sizing or just, I guess, clients advisors anything you might be able to add would be helpful?

Yeah. Hi. I will just give you a higher level macro overview at this point. I think we can give you more color as we move forward. But with respect to our RA offering, we currently provide this solution to a number of advisors. That said, we are investing in our capabilities and resources that we believe match that growing opportunity set. As we do expect over the next few years more advisor movement or churn across that space. And so we believe we can put together an interesting differentiated solution that will contribute to our ongoing organic growth and be a nice contribution to increasing that organic growth rate. So that’s how we see that and where we are is continuing to make sure we have got that differentiated solution and that we have got the resources in place to take that to the market. So more color on that as we go forward throughout the year, but hopefully that gives you a sort of our jumping off-point.

That’s helpful. Thanks for taking my questions this evening.

Thank you. Our next question comes from Chris Shutler with William Blair. Your question, please.

Hi, guys. Good afternoon. On the $10 million expected increase in promotional expense quarter-over-quarter, how much of that is BMO and M&T, and how much is something else? I am guessing marketing and conference expense are reasonably stable sequentially, so I am just trying to figure out if that Q1 level is kind of a new jumping off point or how to think about anything that might be that’s more seasonal or one-time?

Sure. Chris, M&T and BMO account for about half of that. These are large financial institutions that require more technology and on-boarding support, which is why you see that increase. I wouldn't categorize it as one-time; rather, it's linked to the on-boarding of a large financial institution. So, whenever we onboard these firms, you will notice a slight uptick in promotional expenses associated with that, but it’s important to note that it's not recurring. It's solely related to those firms. The rest of the increase mainly relates to transition assistance amortization as we continue to recruit.

Okay. So the half associated with the two big banks is not amortization of transition assistance, it’s other stuff?

That’s right. That’s right.

Okay.

They haven’t joined yet. So that wouldn’t have begun.

Yeah. Makes sense. Okay. And then the other one was just on the new M&A offering, maybe just give us a sense of how you plan to price that offering. I am guessing the workload there could vary a decent bit depending on the advisory firm that you are working with or the complexity of the target. So help us think through how to sort of think about that?

Let me provide some insights on that. There's more to be revealed as we progress. While I may not have all the answers today, we can share more details in the coming months. Regarding our M&A solutions, our goal is to assist advisors in acquiring other practices to incorporate into their businesses. We've noticed that many advisors view this as a potential opportunity, but they find the complexities of M&A daunting, which often prevents them from pursuing these opportunities. Therefore, we aimed to create a solution that simplifies the process for them. By building a platform that facilitates the entire M&A journey, we enhance the likelihood that they will engage in M&A transactions repeatedly, creating a sustainable growth mechanism across a larger advisor base. Over the past year, we have established an end-to-end platform that we will deliver with LPL resources. This includes a technology platform that streamlines the process, providing access to a marketplace of buyers and sellers, as well as offering transaction advice based on our expertise. We are also equipped to provide capital funding options to advisors. Importantly, this service comes directly from us, rather than through other advisory firms. Our aim is to charge for the value we deliver in managing this process, while ultimately helping advisors capture assets and achieve growth on our platform. We will be transparent about our pricing strategy, which will reflect discounted fees tied to the value we bring in the M&A process, as we are confident in our ability to help retain and grow organic assets on our platform. More details will follow regarding pricing in this quarter.

All right. Thank you, Matt and Dan.

Thank you. Our last question comes from Michael Cyprys with Morgan Stanley. Your question, please.

Hey. Good evening and thanks for squeezing me in here. I just want to come back to the client cash levels, looks like the allocations there came in a bit 5.4%, client cash allocations. I guess how do you see that evolving from here? Where do you see that leveling out say a year or two from now? And what environment, would you say that it would be higher or lower and has there anything changed structurally that could result in a different cash allocation than what we have seen historically on your platform?

I think if you look at our key metrics supplement, we seem to have bottomed out in the low 4% range, which appears to be the maximum deployed in the market historically. On the other hand, the maximum pullback we've seen in the past has been between 9% and 10%. Currently, it looks like balances are somewhat high. It wouldn't be surprising if, post-pandemic with vaccines and the new normal, we see the 5.4% start to decrease as more money flows into the market. However, predicting that is quite challenging. Based on our historical data, that’s likely what we would expect to happen.

Got it. Just a quick follow-up on the money fund and DCA yields, which continue to come in for the fourth quarter. I'm curious if you could share any insight on the drivers there and what would need to happen to see further compression. Is there a scenario where it could even go negative, or how do you view any sort of floor on that and your thoughts into 2021?

The DCA presented some challenges since it operates on a fee-per-account basis rather than a rate. Consequently, fluctuations in balances can affect the reported rate due to its fee structure. Therefore, I wouldn't place too much emphasis on the changes. On the money market front, you're witnessing the effects of interest rates being close to zero, which allows product manufacturers to waive fees, applying some pressure on yields. However, this is not unexpected, especially with Fed funds in the 7, 8, 9 range. This is what we anticipate in money funds. Additionally, it's important to note that among our nearly $50 billion in client cash balances, these amounts represent a relatively small portion of the overall total.

Great. Thank you.

Thank you. And ladies and gentlemen, this concludes our Q&A session for today. I will turn the call back to Dan Arnold for his final remarks.

Yeah. Thank you, Carmel. And thanks everyone for taking the time to join us this afternoon. We really appreciate it. We look forward to speaking with you again next quarter. Have a great rest of your day.

Ladies and gentlemen, thank you for your participation in today’s program and you may now disconnect.