LPL Financial Holdings Inc. Q2 FY2021 Earnings Call

Good afternoon. And thank you for joining the second quarter 2021 earnings conference call for LPL Financial Holdings, Inc. Joining the call today are our President and Chief Executive Officer Dan Arnold and Chief Financial Officer Matt Audette. Matt will offer introductory remarks, and then the call will be open for questions. The company would appreciate if analysts would limit themselves to one question and one follow-up. 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 includes 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 listeners to the disclosures set forth under the captioned 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, RJ. And thanks to everyone for joining our call today. Over the past quarter, our advisors continued to provide their clients with personalized financial guidance on their clients' journey to achieve life's goals and dreams. At the same time, we remain focused on our mission of taking care of our advisors so they can take care of their clients. This combination positioned us to deliver another quarter of solid results while also continuing to make progress on our strategic plan. I'd like to review both of these areas, starting with our second-quarter business results. In the quarter, total assets reached a new high of $1.1 trillion, up more than 45% from a year ago. This increase was primarily driven by continued organic growth, our Waddell & Reed acquisition, and equity market appreciation. Now, with respect to organic growth, second-quarter net new assets were $37 billion. This resulted in a 16% annualized growth rate driven by continued strength across new store sales, same-store sales, and retention, and brought our organic growth rate to over 12% for the past year. In the second quarter, recruited assets were $35 billion, which brought our total over the past year to $80 billion. Our continued growth in recruited assets, including new quarterly and full-year highs reflects our ongoing progress on enhancing the appeal of our model and expanding our addressable markets during the quarter. Our recruiting results increased in each of our markets with over $10 billion in our traditional independent model, over $22 billion in our institutional services model, and approximately $2.5 billion in our new affiliation models. These broader and more diversified results help position us to drive higher levels of recruiting going forward. Looking at same-store sales within the backdrop of continued strong retail engagement, our advisors remain proactive and focused on serving their clients and enhancing their offering. As a result, advisors are both winning new clients and capturing more assets from existing clients, which drove same-store sales to new highs in the second quarter. At the same time, we further enhanced the advisor experience through the continued delivery of new capabilities and technology, as well as the ongoing modernization of our service and operations functions. As a result, asset retention was over 98% in the second quarter and 98% over the past year. Our second quarter business results led to solid financial outcomes with $1.85 of EPS prior to intangibles and acquisition costs, which is an increase of 30% from a year ago. Let's now turn to the progress we made on our strategic plan. As a reminder, our long-term vision is to redefine the independent model over time and, by doing so, become the leader across the entire advisor-centric marketplace. Our approach is to provide a platform that is simple and straightforward for advisors to design and run their perfect practice through a breadth of affiliation models and the ability to personally configure the components of our offering to align with each advisor's unique needs and goals. Doing this well gives us a sustainable path to continued solid organic growth, increased market leadership, and long-term shareholder value creation. Now to execute on our strategy, we have organized our work into four strategic plays, which I'd like to review with you in turn. Our first strategic play involves meeting advisors where they are in the evolution of their practice by winning in our traditional markets, where our leading market share is now over 15%, while also leveraging new affiliation models to expand our addressable markets. Despite advisor movement in the overall industry remaining lower, in the second quarter, we continued to increase our recruiting results and gain market share. The combination of our recruiting momentum and the appeal of our model continues to expand the depth and breadth of our pipeline. Looking at our financial institutions channel, within the past two quarters, we on-boarded two new clients, BMO Harris and M&T. Then in June, we announced that CUNA Brokerage Services made the decision to partner with us and plans to join early next year. These results reflect the market opportunity that exists to leverage our capabilities to serve large institutions. As we look ahead, we continue to progress prospects through the pipeline and see large financial institutions as a sustainable multi-year contributor to organic growth. With respect to the expansion of our addressable markets, we continue to see momentum building across all three of our new affiliation models. Over the past quarter, we added five new practices across our strategic wealth services and employee models. After relaunching the RIA-only offering in April, we have been encouraged by the positive market reaction, including a new RIA that joined in May. Looking ahead, we see a growing pipeline across all of our new affiliation models. Another key component of this strategic play is using M&A as a complement to organic growth. After closing our Waddell & Reed acquisition in April, last week, we transitioned to our platform over 900 advisors who serve approximately 98% of client assets. Our second strategic play is focused on providing capabilities that help our existing advisors differentiate in the marketplace and drive efficiency in their practices. One of the key components of this play is helping our advisors enrich how they serve their clients through the use of advisory platforms. In that spirit, we continue to innovate on our platform, most recently with the introduction of a number of product pricing and capability enhancements. One new capability to highlight increases the personalization available within our centrally managed advisory solutions. Two years ago, we introduced advisor sleeves, which allows advisors to personalize centrally managed portfolios with their own asset allocation models while outsourcing the day-to-day work of portfolio allocation and trading to us. To build on this capability, last quarter, we launched firm sleeves. This innovation enables larger firms, RIAs, and institutions to develop models that all advisors across their firms can use. This provides additional ways to leverage our centrally managed platforms to help meet client needs, differentiate in the marketplace, and drive efficiency in advisor practices. Over $9 billion of client assets are invested across advisor sleeves and firm sleeves, and we will continue innovating to increase the value of these personalized investment offerings. Let's next move to our third strategic play, which involves creating an industry-leading service experience to delight advisors and their clients, and in turn help drive advisor recruiting and retention. A key component of this strategic play is transforming our service model into an omni-channel client care model. In the second quarter, we launched a digital help center, a machine learning-based solution that gives advisors easy access to information that addresses their most common service-related needs. This resource puts personalized, timely, and relevant information at their fingertips, thus positioning advisors to serve their clients in a simpler and more efficient way. Together with our voice and chat channels, the digital help center enables advisors to access industry-leading service at a time and in a manner that works best for them. We also continue to automate and streamline key elements of our service operations through the enhancement of our digital operating model, including investing in new bots across our care organization. This helps us increase both our service levels and our capacity to grow as we continue to scale our business. We believe these investments in our client care model and the automation and streamlining of our service operations are making positive contributions to the service experience while also increasing the scalability of our platform. 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, which helps advisors operate their businesses more effectively, so they can focus on serving their clients and growing their practices. As we discussed last quarter, we see multiple pathways for continued growth in business solutions, including delivering existing solutions to additional advisors and introducing new solutions to expand our product portfolio. In the second quarter, our subscription base continued to scale to approximately 2,100 monthly subscribers, more than double from a year ago. This includes about 80 subscriptions with advisors who joined from Waddell & Reed. The more we work on business solutions, the more opportunities we find to help our advisors solve additional challenges through the expansion of our product portfolio. We now have seven solutions available in our product portfolio, three additional solutions in pilot, and a handful of other offerings in the incubation phase. As we continue to add new solutions, we expect to expand the addressable market while at the same time accelerating our pace of innovation. I want to highlight our ongoing efforts to actively shape and refine our advisor-centric culture, which is instrumental to executing our strategy. In the second quarter, we rolled out our advisor promise, which is a modern evolution of the advisor commitment creed our founders wrote more than 30 years ago. We will use this promise to drive further accountability for providing an industry-leading advisor experience and to continue to increase the competitive advantage our advisor-centric culture provides in the marketplace. In summary, in the second quarter, 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, as a result, drive long-term shareholder value. With that, I'll turn the call over to Matt.

All right. Thank you, Dan. And I'm glad to speak with everyone on today's call. In the second quarter, we remained focused on serving our advisors, growing our business, and delivering shareholder value. This focus led to the highest quarter of organic growth in our history. In addition, we have now on-boarded three of our largest partners in BMO, M&T, and Waddell & Reed, who collectively added over $100 billion of assets to our platform, helping drive our total assets to over $1.1 trillion. Now let's turn to our second-quarter business results. Starting with organic growth, total net new assets were $37 billion, which translates to a 16% annualized growth rate. This was driven by strength across all three channels of growth: recruiting, same-store sales, and retention. Looking more closely at recruiting, in Q2, recruited assets were the strongest in our history at $35 billion, which brought our 12-month total to a new high of $80 billion. Moving on to our business mix, we continue to see positive trends in Q2 advisory net new assets for $21 billion, with a 17% annualized growth rate. With this growth, our advisory assets are 52% of total assets as we continue to deliver differentiated advisory capabilities and benefit from the secular trend towards advisory. Now let's turn to our Q2 financial results. Strong organic growth combined with expense discipline led to EPS prior to intangibles and acquisition costs of $1.85, up 30% from a year ago. Looking at our top-line growth, gross profit reached a new high of $602 million, up $22 million or 4% sequentially. Looking at the components, commission advisory fees, net of payout, were $197 million, up $13 million from Q1, primarily driven by organic growth and assets from Waddell & Reed in Q2. Our payout ratio was 86.3%, up about 70 basis points from Q1 due to typical seasonality. Looking ahead to Q3, we anticipate our payout ratio will be approximately up about 100 basis points, driven by the expected seasonal build in production bonus, as well as the onboarding of Waddell & Reed assets, which are under a slightly lower payout on their platform. Moving on to asset-based revenues, sponsor revenues were $189 million in Q2, up $22 million sequentially. This was driven by an increase in average assets due to organic growth, Waddell & Reed, and equity market appreciation. Turning to client cash revenues, they were $90 million, down $7 million from Q1, driven by lower ICA balances during the quarter. Looking at overall client cash balances, they were $48 billion, roughly flat with last quarter. Looking more closely at our ICA yield, it was 98 basis points in Q2, relatively flat with Q1. As we look ahead to Q3, given where interest rates, quiet rates, and cash balances are today, we expect our Q3 ICU to be roughly flat to Q2. Now looking at our fixed-rate portfolio, as a reminder, we have a fixed-rate maturity at the end of the third quarter, which will lower our Q4 yield by approximately 10 basis points. That said, I would highlight that as the yield curve steepened earlier in Q2, we saw demand start to return to the fixed-rate suite market. As a result, we were able to enter into $600 million of new fixed-rate contracts at the three-year point, which was about 40 basis points at the time. Looking beyond Q3, and given the expectation that short-term interest rates will begin rising in late 2022 or early 2023, we thought it would be helpful to share the economic benefit of rising rates using the deposit betas we experienced in the most recent interest rates cycle. Using our current suite balances, a 100-basis point increase in the fed funds rate would translate to approximately $340 million of annual gross profit. Moving on to Q2 transaction and fee revenues, they were $137 million, down $4 million sequentially, driven by trading volume that decreased throughout the quarter. Looking ahead to Q3, prior to Waddell & Reed, we expect transaction and fee revenue to be relatively in line with Q2. As we anticipate seasonally lower transaction volumes and IRA fees, this will be offset by revenues from our National Advisor Conference. Turning to business solutions, we ended the quarter with approximately 2,100 subscriptions, which is up 400 from last quarter and more than double a year ago. These offerings now generate roughly $20 million of annual revenue. 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 DNA. It was $252 million in Q2, up from $240 million prior to Waddell & Reed. Looking ahead, we continue to anticipate full year 2021 core DNA to be in a range of $975 million to $1 billion. As a reminder, this includes costs to support BMO and M&T but is prior to expenses associated with Waddell & Reed. Moving on to promotional expenses, they were $64 million, up $10 million sequentially. Prior to Waddell & Reed costs, promotion was $57 million, up $3 million sequentially, primarily driven by large financial institution onboarding and increased marketing expense. Turning to Q3, prior to Waddell & Reed, we anticipate promotional expense will increase by around $10 million, as we have two of our largest advisor conferences in Q3. I would also note that we have shifted several conferences that are typically in the first half of the year to the fourth quarter; this will likely lead to a similar level of promotional spending in Q4. Our plans could change depending on the environment, so we'll give you a more specific update next quarter. Now let's move to Waddell & Reed. Overall, the transaction is progressing even better than we expected across multiple fronts. As mentioned, Waddell & Reed advisors serving approximately 98% of client assets have joined our platform, which is up from our prior estimate of 95%. Factoring in this higher level of retention and current asset levels, we now expect the run rate EBITDA benefit to be at least $85 million, up from $80 million. We continue to expect to reach this run rate by the middle of next year. Moving on to capital management, our balance sheet remains strong in Q2, with the leverage ratio at 2.3 times and corporate cash of $278 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 where appropriate, and returning excess capital to shareholders. In the first half of this year, the majority of our capital deployment was focused on supporting organic growth and M&A. Looking ahead, while we continue to see compelling opportunities to deploy capital to drive growth, we also feel well-positioned to restart our share repurchase program. Initially focusing on repurchasing shares to offset dilution, which we estimate to be approximately $40 million per quarter, we will, of course, remain flexible and dynamic should additional opportunities to deploy capital to drive growth emerge. In closing, we delivered another quarter of strong business and financial results, including the best organic growth in our history. Just last week, we onboarded the advisors from Waddell & Reed. 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. With that, operator, please open the call for questions.

Thank you. [Operator Instructions]. The first question comes from the line of Steven Chubak from Wolfe Research. Your line is open.

Why don't I start off with a question on just some of the ICA dynamics? Certainly encouraging to see the interest from bank partners for some longer dated money, but some of the ICA concerns to rest, but if rates remain at zero, the bank deposit demand remains tepid. Could you just speak to the strategy for managing fixed-term contracts over the next few years? And just generally, what are you hearing from your bank partners with regards to their appetite to take on some additional fixed-term contracts in the current environment?

Yeah, Steven, I’ll take that. Obviously, I think when you look at our fixed rate approach and strategy, it's really unchanged, right? Even in the environment that you described, our goal remains getting to 50% to 75% of the portfolio fixed, of course, in an environment where there is demand that that can help us do so. When we're in an environment like we are now with rates low and the curve relatively flat, I think we would stay closer to that 50% point. If you're in an environment where the absolute level of rates are higher and there's some steepness to that curve, I think we would naturally migrate to that 75% side of that range. That's been our approach for a while. In terms of what we're hearing from our bank partners, it's probably more what we're seeing and their actions. When there's some steepness to the curve, as we observed in Q2 when the 10-year was at the 150 to 160 zone, there are economics on their side. That's when we saw them start to come back into the market, which allowed us to execute a relatively small amount. It speaks loudly that once there's some economics to be had, the fixed rate suite market is one that should return. So we're obviously not in that environment at this very moment, but I think it's a good idea as to what things could look like if rates move up again.

Actually, I just have my follow-up, maybe for Dan. You touched on this quite a bit in your prepared remarks in terms of the better balance across all the different affiliation options and the accelerating organic growth that you're seeing. One of the questions that we probably field most often from investors is trying to unpack, given some of the momentum that you're seeing, the new organic growth algorithm, especially given the momentum you're seeing within the institutional channel in particular, which seems to be adding at least 200 basis points plus of organic growth. If you could speak to what you think is a new sustainable organic growth rate if some of the success you're seeing in non-traditional areas continues to build from here?

Yeah, that makes sense. And so perhaps it's as a way to provide context. We're focused on organic growth, and over the past three years, the team has done a great job of expanding that—from sort of 3% to over the last 12 months reaching 12%. If you break that down to get at your question, two-thirds of that has come from those traditional three channels: new store sales, same-store sales, and attrition. If you peel that back a little further, the contribution from those channels is really well-balanced among all three, which speaks to the durability of that growth. That accounts for two-thirds of the journey from 3% to 12%. The remaining third has come from our entry into supporting large financial institutions. We have been intentional about investing in our capabilities to create an appealing solution for these institutions. As we partner with BMO and M&T, we continue to enhance our capabilities for institutions. This enriches the model's appeal. We are quite optimistic about our pipeline and our ability to continue to pursue new institutions. We see that as a contributor to growth in the next several years. Organic growth is a key point of our strategy, and we're focused on trying to drive that rate higher, with three good avenues to continue to do that through our traditional markets, these expanded new markets, and the institutional marketplace.

Your next question comes from the line of Bill Katz from Citigroup. Your line is open.

And good evening, everyone. Thank you for taking my question. I just want to follow up on Steve's line of questioning there, just addressing organic growth from a slightly different angle. Something that we're observing is a combination of further penetration within each segment. As I look at where you're picking up shifts from, mandate sizes seem to be rising. Could you speak a little bit about why we are seeing better efficacy? Is this just idiosyncratic, or is there something else afoot as you see the cumulative time and recruitment helping to bolster penetration?

Yeah, thanks for the question, Bill. It's a good one to point out the nuance that sits underneath it. We launched these three new models at different times from a place of hypothesis. You get feedback, you learn, and you continue to invest in enriching your capabilities within that model. You successfully deliver it to clients, and you begin to build a reputation with those clients around your success. As we create new capabilities and build our reputation, we support momentum. That leads to larger opportunities because of that growing credibility. We think about the Swiss model—it's the most mature of the new models—and we are seeing a similar flight pattern with a lens of growth; it’s just 6 to 8 months behind the trajectory of Swiss. The RIA model, which we just relaunched in April, is also similar. We do think it's the growing credibility that supports larger clients, bigger demand, and growing pipelines. Our goal is to drive a larger contribution from those models.

Okay, that's helpful. Thank you for that. And maybe one from Matt, glad to see the buyback taking a little bit sooner than maybe we modeled. How did you arrive at the dilution offset? I think about opportunities to grow organically and anything else on the M&A side of the equation. What are some other metrics we should be looking at to think about the potential to upsize that buyback as we look ahead?

Yeah, though the key is our capital allocation framework. We are continuing to deploy capital, as you can see in the quarter in organic growth and M&A. Six months ago, we went through some of the chunkier capital deployments in those first two categories, so we have a bit more excess capital to deploy. When you run it through that framework, we feel comfortable allocating capital to share repurchases, given both the capital level and the returns they generate. As we look forward, we'll continue to view this through the same lens, ensuring we maintain a strong balance sheet, supporting our organic growth, and allocating additional capital where it makes the most sense, whether it be to organic growth, M&A, or returning capital to shareholders.

Your next question comes from the line of Michael Cyprys from Morgan Stanley. Your line is open.

Hey, thanks for taking the question. Just on the Waddell transaction, could you elaborate a little bit on the contribution in the quarter in terms of some of the puts and takes? I think there were also some one-time costs or some drag that was maybe partially offsetting some things there as well. So could you elaborate a little bit on that and how we should be thinking about the timing of the ramp here, particularly as we go into the second half of the year in terms of the contribution from Waddell?

Yeah, sure, sure, Michael. I think when you look in the second quarter, the main action was closing the transaction, and we were actually able to get some of that first round of expense synergies a little bit earlier than we had expected a quarter ago. That's why you see that run rate hitting $50 million on an annual basis for the two months that we had Waddell onboard in the quarter. As we look ahead to Q3, the key integration activity was onboarding, which happened just last weekend. This will lead to more gross profits and synergies, as well as moving the advisers onto our payout grid, which is a little bit higher, and eliminating the cost of their custodian. Those things coincide to net out, which is why you see Q3 still projected at that same $50 million run rate. However, a lot of activities are happening. From this point forward, through Q4 and into the middle of next year, we will focus on the rest of the expense synergies and integration, which will take us to the $85 million-plus run rate by around the middle of next year. Your question regarding the one-timers: the acquisition costs are estimated to total around $100 million. That shows up in the acquisition cost line item, which you saw increase in the second quarter following the closing. The third quarter is likely to see the largest amount of that $100 million, with an estimate of $40 to $50 million range tied to onboarding activities because that activity incurs the most costs.

Super, thank you. Just a quick follow-up on the ICA balances. We saw the overflow balances decline a bit in the quarter. Just curious what appetite or ability is there to expand the variable balances and really take those overflows down to zero? What's the potential to do that, would you say?

Well, I think that gets back to when there's demand from the banks. I talked earlier about when the fixed-rate side saw demand when rates moved up along the curve. On the floating-rate side, it's going to depend on liquidity in the market and banks needing liquidity for their balance sheets. We have now seen signs of activity in the last two quarters that would lead to that demand returning. You see consumer spending picking up, which comes from checking and savings accounts at banks. Loan balances are also beginning to grow. If these trends continue, they would eventually lead to the demand picking up.

Your next question comes from the line of Kyle Voigt from KBW. Your line is open.

Hi, good evening. So maybe a two-part question: I think you've changed some of the rate sensitivities in your deck on the gross profit benefit from rate hikes. You noted that the beta was 2.5% through your first four hikes in the last cycle. Should we take the sensitivity to mean you expect similar beta dynamics during the next hiking cycle? And, secondly, if you look back during the last rate hiking cycle, you took advantage of the gross profit benefit to really increase technology spending and reinvest in the platform. However, you're in a different spot today regarding ongoing reinvestment into the platform. So as we look ahead toward the next rate hiking cycle and you outlined significant gross profit benefits, how should we think about how much of that could fall to the bottom line versus wanting to take advantage of that environment to reinvest in the business and increased spending?

Yeah, I think on the sensitivities, what we provided is empirical data from the last interest rate cycle. Market demand and pricing ultimately drive where deposit betas go. The best information to look at to get expectations is from what happened most recently. In this latest cycle, the average beta was 15%. In the earlier part of the cycle, it was 2.5%, and in the later part, it was 2.5% as well. The market dynamics determine where that goes, but I would emphasize that we will apply that same capital allocation framework: looking for returns on investment in our platforms that drive organic growth, and prioritizing M&A and returning capital to shareholders when yields on deposits may not be favorable.

This question comes from the line of Alex Blostein from Goldman Sachs. Your line is open.

You onboarded in the second quarter. Can you talk a little bit about the financial advisors' appetite to enhance the capabilities that LPL can offer? And then perhaps provide some numbers around the gross profit on that $100 billion of assets? Where is that now, and what do you think it could ultimately go?

Let me take the first half of that, Matt, and you take the second. So, yeah, Alex, with respect to the advisors—look, the typical principles that one large institution might use to select a partner typically revolve around enhanced technology capabilities. Can we provide them technology, automated workflows, etc., to drive efficiency into their practices and free up time? That is a priority, and we invest a good bit of time in training, coaching, and support so they can leverage our comprehensive technology offering. That takes time, but advisors become proficient quickly, and it becomes a good leverage point. Another key area they focus on is our advisory platform and the breadth of options we offer across investment content and pricing, allowing them to provide enhanced value of advice to their end clients for improved client experiences. Our ability to partner and provide substantial compliance and risk management support also shifts the risk profile for them with this business initiative, creating an important element of value. A second consideration is improved economics; typically, we see enhancement in economic outcomes when clients shift to a model that reduces their overall cost structure and investment burden.

Now, regarding gross profit: in our financial institution channel, the size of clients increases opportunities, with larger channels typically focused on brokerage. Consider RIA as a starting point to illustrate this. We share gross profit with some, like CUNA, which is a network of credit unions. As a result, our gross profit can be more than the 10 to 15 basis points that is typical, with our overall operating margins being quite favorable. Just to note, deals of this size often come with certain incentives for the early years of a contract, so the economic benefits can grow as you move deeper into those contracts. I hope that clarifies your question.

That helps. Thanks. And just maybe a quick clarification regarding the ICA dynamics. LPL continues to have a significant amount of upside from higher interest rates, and I appreciate you highlighted the positive beta benefits as well. However, how do you consider the trade-off between fixing out kind of at 40 bips for three years versus waiting for what could potentially be a much more material upside over the next 12 to 18 months?

I think it goes back to that 50% to 75% approach, Alex. We're focused on having a stable earning stream and not trying to be those who pick the points where interest rates make sense and don’t. Our principle is to hedge a bit lower on the percent if the economics look lower, and a bit higher if they appear favorable. In this quarter's market, I believe that when a bank comes up with demand for sweep deposits, most would say yes and deploy funds, and that's what we did with that particular opportunity.

Your next question comes from the line of Gerry O'Hara from Jefferies. Your line is open.

Great. Thanks. Good afternoon. I was hoping we could get a little extra color on the business solutions. Dan may have mentioned three in pilot and a handful of others possibly on the way. I know if it’s too early, but I would love to hear a bit about that. Additionally, what’s resonating, considering that it sounded like around 80 have already been picked up from the Waddell & Reed advisors? Any insights would be appreciated. Thank you.

Yeah. I can give you a quick snapshot of the product portfolio and address the interest from the Waddell & Reed group. As I mentioned, we now have seven solutions available in our product portfolio. The original three are the admin solution, CFO, and marketing. With the Waddell & Reed advisors, the most popular one thus far has been the admin solutions. It makes sense since these advisors coming into our ecosystem are transitioning and may need help in that area. Accessing support through our experienced LPL ecosystem, rather than hiring someone directly at market rates, offers a beneficial alternative. With respect to the new solutions we've added to that original portfolio, we launched the Assurance Plan and Resilience Plan. These help advisors plan for expected and unexpected business transitions. The Assurance Plan offers downside protection in the event of an unexpected issue that requires the business to transition. In contrast, the Resilience Plan provides support for short-term disruptions or planned leaves. Three offerings currently in pilot include a bookkeeping solution, which originated from the CFO solution, a paraplanning solution, and Client Engage—a tool to assist advisors in managing client communication efficiently. I'll pause there, but that should give you a quick snapshot of the portfolio.

Helpful. Appreciate that. And maybe one for Matt. If you could comment on the environment around transition assistance, anything you're hearing about that would be insightful. Thank you.

Sure. The headline is that we're seeing a pretty consistent environment, where the overall value proposition at the firm matters the most. When you drill down into transition assistance to facilitate the move from one firm to another, we are seeing similar levels that we've seen in the last few quarters. No significant change on our end.

Your next question comes from the line of Devin Ryan from JMP Securities. Your line is open.

Great. Good evening, guys. Let me start with a bigger picture question. As we observe the business scaling and increasing affiliation options successfully, ushering in larger advisors with more complex businesses, does your thinking evolve at all around potentially re-exploring the merits of becoming a bank? I appreciate it's complicated, and you've decided against it two years ago, but I’m just curious if it comes back on the table or if you're still assessing the opportunities.

Yeah, we can both give some color on that. From a strategic standpoint, we have a significant set of considerations that we think about, and you're diligent around always evolving your assessment given changes in the marketplace and competitive landscape. Potentially being a bank is one of those considerations we would keep active. We assess if there are capabilities that could better support advisors and their client offers, or if it would manage our cash balances more effectively. As long as we find options to provide the capabilities our clients need, we think that strategically makes sense in the short run. However, we always evaluate changes in the market dynamics to ensure that we have an informed view about our options.

What’s key is ensuring we're positioned to deliver the products and capabilities that really matter to our advisors and their clients. Do we need a bank charter to achieve that? The market has provided plenty of opportunities where we don’t, and in today’s environment, the return on capital from having a bank isn’t very appealing. We consider those points periodically, but for now, it seems logical where we are.

I appreciate the update there. And then for a follow-up, regarding automating your service offerings, could you discuss the bigger opportunity this presents in streamlining operations? How should we think about expense buckets and incremental operating leverage in the model? Service seems like an area where new technology could step in to help reduce costs for LPL. Are there other areas like this where margin enhancement could be realized?

That's an important question, and we’re keen on leveraging the world of possibilities and exploring how best to do this. Leveraging robotics for repetitive tasks allows us to transform projects into automated solutions, which helps control short-run expense synergies and creates scalability. For operations and compliance organizations, there are opportunities for integrations utilizing AI for quicker assessments and improving overall efficacy in oversight and risk management. In that instance, while it may not eliminate jobs, it enhances scalability as we grow. I would emphasize this added leverage to the future advisor experience and the overall platform's scalability.

Absolutely! Driving our operating leverage as we scale is our key focus. With every dollar of added assets, we look to minimize expenses relative to those additions. The principles we invested in this quarter indicate we are poised to deliver substantial returns moving forward.

To conclude, we are utilizing automation and state-of-the-art technology to enhance the client experience, risk management efficacy, and overall operational scalability. Thank you for your interest!

And there are no other questions on the phone line at this time. I would like to turn the call back over to Mr. Dan Arnold for closing remarks.

Thanks much, RJ. And thanks everyone for taking the time to join us this afternoon. We really appreciate it and look forward to speaking with you again next quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.