LPL Financial Holdings Inc. Q4 FY2021 Earnings Call

Good afternoon, and thank you for joining the Fourth Quarter 2021 Earnings Conference Call for LPL Financial Holdings Inc. On the call today are our President and Chief Executive Officer, Dan Arnold; and Chief Financial Officer, Matt Audette. Dan will offer introductory remarks, and then the call will be open for questions. The call 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 timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to measures 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. 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'll turn the call over to Mr. Arnold.

Thank you, Jonathan, and thanks to everyone for joining our call today. Over the past quarter and throughout 2021, our advisers continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams. At the same time, we remain focused on our mission of taking care of our advisers so they can take care of their clients. This combination positioned us to deliver another quarter and year of solid results while continuing to make progress on our strategic plan. I'd like to review both of these areas, starting with our fourth-quarter business results. In the quarter, total assets reached a new high of $1.2 trillion, which was up approximately $300 billion or 34% from a year ago. This increase was primarily driven by continued organic growth, our acquisition of Waddell & Reed's Wealth Management business, and complemented by equity market performance. With respect to organic growth, fourth-quarter net new assets were $26 billion, which translated to 9% annualized growth driven by continued strength across new-store sales, same-store sales, and retention. Over the past year, organic net new assets totaled $119 billion or 13% organic growth, up from 7% a year ago. In the fourth quarter, recruited assets were $17 billion, bringing our full-year total to $89 million, which is more than double a year ago. Our continued growth in recruited assets reflects our ongoing progress in enhancing the appeal of our model and expanding our addressable market. Looking at same-store sales, with the backdrop of strong investor engagement, our advisers remain focused on serving their clients and differentiating their solutions in the marketplace. As a result, advisers are both winning new clients and expanding wallet share with existing clients, a combination that continued to drive solid same-store sales. At the same time, we further enhanced the adviser experience through the continued delivery of new capabilities and technology as well as the ongoing modernization of our service and operations model. As a result, asset retention was approximately 98% in the fourth quarter and over the past year. Our fourth-quarter business results led to a solid financial outlook with $1.63 of EPS prior to intangibles and acquisition costs, which brought our full-year total to $7.02, an increase of 9% from a year ago. Let's now turn to the progress we made on our strategic plans. As a reminder, our long-term vision is to become the leader across the entire adviser-centered marketplace, which for us means being the best at empowering advisers to deliver great advice to their clients and to be great operators of their businesses. To bring this vision to life, we are providing the capabilities and solutions that help our advisers deliver personalized advice and planning experiences to clients. At the same time, through human-driven, technology-enabled solutions and expertise, we are supporting advisers in their efforts to be extraordinary entrepreneurs. Doing this well gives us a sustainable path to industry leadership across the adviser experience, organic growth, and market share. Now to execute our strategy, we have organized our work around four strategic plays, which I'd like to review in turn. Our first strategic play involves meeting advisers and institutions where they are in the evolution of their business by winning in our traditional markets while also leveraging new affiliation models to expand our addressable market. In our traditional markets, fourth-quarter recruiting continued to be a significant source of growth with a new high of approximately $15 billion in assets. Ongoing enhancements to our platform and the efficacy of our business development team continued to increase our win rates and expand the depth and breadth of our pipeline despite adviser movement in the industry remaining at lower levels. With respect to our new affiliation models, strategic wealth, employee, and our enhanced RIA custody offering, we recruited approximately $2 billion in assets in the fourth quarter. In each of these three models, we continue to see growing demand and expanding pipelines, which position them for increased contributions to organic growth. Large financial institutions were a new source of recruiting in 2021 with the addition of BMO Harris and M&T, and we will continue to contribute this year with the planned onboarding of CUNA. Our insights and progress over the last 18 months have led to the continued enhancement of our value proposition. Consequently, our demand and pipeline in this market continue to build. Given our experience and a more seasoned view from this work, we see large financial institutions as a more accessible market opportunity for us, and as a new and distinct affiliation model that can drive sustainable organic growth over time. Our second strategic play is focused on providing capabilities that help our advisers differentiate in the marketplace and drive efficiency in their practices. In 2022, we will maintain our focus on developing capabilities and solutions in three key areas. The first is to enrich the end-client experience with expanded digital solutions that increase personalization and self-service and enable advisers to create customized experiences for their businesses. Second, we will continue to enhance our wealth management platform to help advisers provide their clients with differentiated advice, products, and pricing. Third, we will continue to advance client work to our core operating platform, with additional digitized workflows to help advisers operate more efficiently and increase their scalability to serve more clients, all of which contributes to enhanced performance of their practices. We believe these evolving capabilities will help drive increased adviser growth, productivity, and retention. Let's next move to our third strategic play, which is focused on creating an industry-leading service experience that delights advisers and their clients and, in turn, helps drive adviser recruiting and retention. As a reminder, over the past two years, we have transformed our service model into an omnichannel client support model, including voice, chat, and digital support giving advisers flexibility in how they access service. In 2022, we will continue to fine-tune this model to drive additional efficiency and an enhanced experience for our advisers. Now this year, we will also advance to the next phase of our transformation, which is the streamlining and automation of our back-office operations. We will leverage Six Sigma process optimization and robotics and machine learning to reengineer our core clearing functions, including new account opening, transfers, and money movement. These efforts will increase speed and accuracy for our advisers and their clients. In the future, we plan to extend this transformation from service and operations to trading and compliance. Doing so better positions us to create frictionless, efficient processes throughout our operations that enhance service levels, delight advisers, and increase the scalability and efficiency of our platform. Our fourth strategic play is focused on helping advisers run the most successful businesses in the independent market. One of the key components of this play is our portfolio of business solutions, which helps advisers more effectively operate their businesses so they can focus on serving their clients and growing their practices. In the fourth quarter, our subscription base continued to grow, more than doubling year-over-year to approximately 3,000 subscribers, demonstrating increasing demand and appeal. While working with advisers to evolve our suite of business solutions, we identified a new category of opportunity that will help advisers more efficiently and effectively deliver comprehensive financial advice and planning solutions. To help solve for this need, we are innovating on services that provide expertise and leverage to deliver this planning in a scalable way across their entire client base. Our first offering in this area is paraplanning, which is a service that builds financial plans for advisers and then helps them establish an investment strategy to help clients achieve their goals and objectives. This service launched last month and is receiving positive early feedback and engagement in the marketplace. We are also incubating other solutions, including tax planning and high-net-worth services. As we look ahead, we remain focused on innovating and expanding our services portfolio to help advisers run extraordinary businesses and provide differentiated planning and advice for their clients and, in turn, to drive gross profit and organic growth over time. In summary, in the fourth quarter and throughout the year, we continued to invest in the value proposition for advisers and their clients while driving growth and increasing our market. As we look ahead, we remain focused on executing our strategy to help our advisers further differentiate and win in the marketplace, and as a result, create 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. Before I review our fourth quarter results, I’d like to highlight our progress during 2021. Looking at the year, we are proud of what we accomplished within our framework for driving long-term shareholder value. We entered 2021 with momentum as we grew assets organically in both our traditional and new markets and successfully onboarded Waddell & Reed, BMO, and M&T while continuing to invest to provide an industry-leading value proposition for our advisers to serve their clients and win in the marketplace. This commitment to enhancing the support we provide our advisers resulted in the highest level of organic net new assets in our addition. By leveraging the investments in our platform and the financial strength we’ve built over the last several years, we again entered the new year with positive momentum. Now let’s turn to our fourth-quarter business results. Total advisory and brokerage assets increased to a new high of $1.2 trillion, up 7% from Q3. The key driver of this increase was organic growth, which totaled $26 billion, or a 9% annualized growth rate. For the full year, organic net new assets were $119 billion, which translates to a 13% annualized growth rate, up from 7% a year ago. This was driven by strength across all three channels of growth: recruiting, same-store sales, and retention. Looking more closely at recruiting, in Q4, recruited assets were $17 billion, which brought our 12-month total to a new high of $89 billion. Moving on to our business mix, we continue to see positive trends in Q4. Advisory net new assets were $24 billion, or a 16% annualized growth rate. With this growth, our advisory assets are now 53% of total assets as we continue to deliver differentiated capabilities and benefit from the secular trend towards advisers. Now let’s turn to our Q4 financial results. Strong organic growth, combined with expense discipline, led to EPS prior to intangibles and acquisition costs of $1.63, which brought our full-year total to $7.02, up 9% from a year ago. Looking at our top line growth, gross profit reached a new high of $643 million, up $12 million or 2% sequentially. Looking at the components, commission and advisory fees net of payout were $200 million, down $2 million from Q3, primarily driven by the seasonal increase in production volumes. In Q4, our payout ratio was 87.6%, up about 45 basis points from Q3, primarily due to the seasonal build in the production bonus. Looking ahead to Q1, a reminder that the production bonus reset at the beginning of each year, so we anticipate our payout ratio will decline to approximately 86.5%. Moving on to asset-based revenue, sponsor revenue was $220 million in Q4, up $9 million sequentially. This was driven by an increase in average assets due to organic growth and market appreciation, as well as synergies related to Waddell & Reed assets being on our platform. Turning to client cash revenue, it was $82 million, down $9 million from Q3. As anticipated, this was primarily driven by a fixed-rate contract maturing at the end of the third quarter. Looking at overall client cash balances, they were $57 billion, up $7 billion from last quarter. Looking more closely at our ICA yield, it was 101 basis points in Q4, unchanged from Q3. Within our fixed-rate portfolio, in Q4, we added a new $500 million 3-year fixed contract. Looking ahead to Q1, we have a fixed-rate maturity of $1 billion. I would like to highlight that we were able to renew that contract at maturity into a new 4-year fixed-rate contract. Given these factors and where interest rates, client rates, and cash balances are today, we expect our Q1 ICA yield to decline by a few basis points. Next, I want to highlight an update we made to our income statement this quarter to provide additional insight into our financials. We separated transaction fees into two lines: service and fee and transactions. We hope this additional transparency allows you to more clearly see the revenue generated from predominantly recurring adviser- and investor-based services apart from our transaction revenues. We have provided a summary of these changes in our Key Metrics presentation. Looking at service and fee revenue, in Q4, it was $110 million, up $5 million sequentially. This was primarily driven by continued growth in Business Solutions revenue and the seasonal increase in IRA fees. Looking more closely at Business Solutions, we ended the quarter with over 3,000 subscriptions, which is up approximately 400 from last quarter and more than double a year ago. These services now generate roughly $28 million of annual revenue while contributing to organic growth by helping drive recruiting, same-store sales, and retention. Looking ahead to Q1, based on typical seasonality and the growth of Business Solutions, we expect service and fee revenue to increase by a few million sequentially. Moving on to Q4 transaction revenue, it was $39 million, up $4 million sequentially due to higher trading. As we look ahead to Q1, we have seen an increase in trading activity in January. That said, I would note there are two fewer trading days in the quarter, so that would likely offset that increase. Based on what we have seen to date, we would expect transaction revenue to be relatively flat with Q4. Now let’s turn to expenses, starting with core G&A. It was $299 million in Q4, bringing our full-year core G&A to $1.58 billion. As expected, this was near the upper end of our outlook range driven by the variable expenses associated with our strong organic growth. Looking at the full year for 2021 and prior to the impact of Waddell & Reed, we grew core G&A by approximately 8%. Turning to our outlook for 2022, our long-term strategy is unchanged. We plan to continue to invest to drive organic growth and create incremental operating leverage. Over the last few years, we have increased our investments to drive organic growth. Those investments are yielding positive results, including the highest levels of organic growth in our history. As we look ahead to 2022, we plan to continue with the same approach. More specifically, we plan to increase our core G&A in the range of 7% to 9.5%, which is a similar growth rate to 2021. I would note that these investments will be focused on two primary areas: first, to support our core business growth including investments in technology and capabilities as well as a full year of Waddell & Reed expenses; and second, to support growth in our expanded addressable markets and to scale our new services. To give you a sense of the near-term timing of the spend, as we look ahead to Q1, we would expect core G&A to be in the range of $280 million to $285 million. We will, of course, remain dynamic to adjust for the pace of our growth and changes in the macro environment. But based on what we see today, we are excited about our opportunities to invest. Moving on to Q4 promotional expense, it was $86 million, up $2 million sequentially, primarily driven by costs to support our organic growth, specifically, transition assistance and large financial institutions. Turning to Q1, we anticipate promotional expense will increase to the low $90 million range, primarily driven by transition assistance, large financial institution onboarding, and conference spend as we have two of our largest conferences of the year in Q1. Now let's move to Waddell & Reed. The integration work is going well and remains on track to be completed by the middle of this year. With respect to run-rate EBITDA, it was roughly $70 million in Q4. Based on current asset levels and our continued progress on the integration, we now expect the run-rate EBITDA benefit to be at least $90 million by the middle of 2022, up from our prior estimate of $85 million. Looking at share-based compensation expense, it was $10 million in Q4, relatively flat to Q3. As we look ahead, Q1 tends to be our highest quarter of the year, given the timing of our annual stockholders. We anticipate this expense will increase by a few million dollars sequentially. Turning to depreciation and amortization, it was $41 million in Q4, up $2 million sequentially. Looking ahead to Q1, we expect depreciation and amortization to increase by roughly $5 million sequentially. This is primarily driven by the deployment of technology to support the integration of Waddell & Reed as well as core technology spend to enhance our industry-leading platform. Given the nonrecurring nature of the integration spend, beyond Q1, we expect a more gradual rise in depreciation and amortization for the remainder of 2022. Moving on to capital management. Our balance sheet remained strong in Q4, the leverage ratio at 2.26x and corporate cash of $237 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 Q4, we allocated capital to both organic growth and share repurchases, buying back $50 million of our shares to roughly offset dilution. We anticipate a similar level of share repurchases in Q1 while remaining flexible and dynamic as our capacity and opportunities to deploy capital evolve. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we see to continue investing to serve our advisers, grow our business, and create long-term shareholder value. With that, operator, please open the call for questions.

[Operator Instructions] And our first question comes from the line of Alex Blostein from Goldman Sachs.

So maybe we'll start with organic growth. Not surprisingly, super strong end to the year. Obviously, wrapping up a good year for you guys from a net new asset and recruiting perspective. Given the kind of changing macro backdrop with both more equity market volatility and, obviously, down equity markets year-to-date but rising rate dynamics, curious how you think that will impact recruiting and sort of the broader competitive landscape. So are we likely to see FAs being kind of more reluctant to move given the sharp move down in the asset values? Are there likely to be more competition because, again, people are more profitable so that maybe you can afford to pay a little more? So hoping you can sort of flesh out how that plays into your organic growth outlook into next year.

Alex, it's Dan. Thanks for the question. Look, I think we always look at the structural opportunities, first and foremost, relative to organic growth. As we stated in our remarks, you've got new store sales, same-store sales, and certainly retention. As it relates to new store sales, again, I think the flexibility and optionality around our model, continued investment in differentiation and the capability side of our platform, and using our rate-driven underwriting process, we think that is really a combination that continues to create that structural differentiation out in the marketplace as we move forward. I think that drives the primary activity and results at the end of the day. Now to your point, certainly, we have to overlay some market conditions that may influence that overall trajectory in the short run. There are cases where you could have significant market displacement that could occur that could temporarily disrupt the overall trend of opportunity in the marketplace; advisers aren't moving as much because they're focused on those market conditions in serving and supporting their clients, and we've certainly seen that historically in the past. Up to this point, the volatility that we're seeing in the early part of the year, I think, is more aligned with what we've played in the last couple of years. Therefore, we're not seeing some outsized impact on disruption in the overall movement in the marketplace. I do think there's an overall, as we noted in our remarks, a bit slower movement in certain parts of the industry. Again, we don't see the macro influencing that thus far. That's always subject to change if something more dramatic should shift as we move forward. With respect to interest rates, you suggested that if there's greater economics built into recruiting, how does that influence transition assistance and/or financial incentives? Again, we've seen no reflection of changing in the underwriting across the marketplace. We continue to use a return-based approach to that concept and factor in the characteristics of our overall economics along with the macro. Again, we haven't seen any shift at this point in the overall pricing out in the marketplace for the cost of acquisition. I don't know if you want to add anything to that.

No. Fair enough. All set.

Great. A follow-up for Matt, maybe why don't we start with Waddell? Great to see the guide increase to $90 million plus from previous. Can you maybe expand a little bit on what the 'plus' depends on? Is that market-related to asset levels and rates? Or are you seeing potential for incremental synergies, whether it's on the revenue side or the expense side? So just maybe a little more color on what could drive the upside there.

Yes, definitely. I think as we move towards completing the integration by the middle of this year, the work that's left is really on the expense synergy side. As we complete that work, I think the 'plus' is if we end up getting more synergies than expected. So it's a small part of the work that's left, and I think that's where the upside would be.

Our next question comes from the line of Bill Katz from Citigroup.

All the added color and disclosure is super helpful. So Dan, maybe a question for you. It sort of seems like from your commentary that the momentum is accelerating across the pipeline. So one clarification. Was that also the largest size of the financial institution group that you have historically not been able to go after, that $300 billion? But more broadly, can you just talk about what's resonating in the marketplace as, obviously, your organic growth is accelerating?

Thanks, Bill. Yes, organic growth is a key part of our strategy, as we've talked about, and we've been very intentional and focused on how to deliver those results. If you think about our growth going forward, perhaps if you look at the last couple of years as a framework for that, you've got 7% growth in 2020 and 13% growth in 2021, and those are probably pretty nice bookends as a way to think about a range of potential growth over the long run or as we go forward. Obviously, as we discussed in the last question, macro conditions at any point in time influence that overall opportunity set. To drive that, to get specifically to the second part of your question, we continue to look at investing in our traditional markets, growing the appeal of those markets, which drives continued new store sales growth and continues to keep retention in that 2% range that we've talked about before. We believe that investing in continued capabilities that help those advisers differentiate and win in the marketplace is key to that. So think about that as focus #1. Second is expanding and accelerating the growth in our new markets. As you said, we see continued momentum building there. Some of that was a go-to-market as we're new to the marketplace. We continue to iterate and refine those models to ensure they're well positioned and appealing as they can be, and create the value they should for those different segments of the marketplace, and we're seeing that versatility and flexibility ultimately open up new opportunities. It’s even helping advisers in our existing platform who have one model and are potentially thinking about transitioning to another, to stay on our platform because we have that flexibility now. We do see continued momentum, and we've gotten off to a good start here in Q1 relative to the strategic wealth solutions as an example. Continued growing contributions from those new markets. Financial institutions, what I was referring to as large financial institutions, this being somewhat of a new market for us. It wasn't a place that we always looked for opportunity. I don't think we demonstrated an ability to bring a new solution to the marketplace that resonated, and it was a different contextualized solution for that segment of the marketplace. Through a couple of wins that we've had, it's helped us learn, understand, refine, and ultimately see that segment of the marketplace as a more sustainable avenue for growth and contribution. That’s the way to think about the large financial institution markets, if that’s helpful. Finally, the last one is helping our existing advisers grow. They’ve certainly done a great job of that over the last couple of years in tough markets, and we continue to see the opportunity to invest to help them differentiate their advice, expand their advice, solve new problems for clients, and generate net new assets from that. Those are the primary drivers underneath that growth. If you apply all of that to 2022, as we think about this year, knowing that a large financial institution is onboarding in CUNA in the first half of the year, we believe we're in the upper half range of that 7% to 13%. Hopefully, that gives you some helpful color.

That does. And just a follow-up for Matt or maybe Dan. So just devil's advocate for a moment. If your rate guidance is correct, and if we get rates, hopefully, we will and get four or five rate hikes this year, all being equal, your guidance would suggest about $2.50 a share of incremental earnings power just based on Page 16 of the supplement. So if you assume that your recruitment remains solid and that your organic growth is bookended here, how do you think about deploying that incremental cash? And maybe you could speak to the M&A pipeline versus buyback at the margins for your choices.

Yes, sure, Bill. When you look at our plans for the year, you see those clearly in the core G&A specifically in the 7% to 9.5% range, I think the primary driver where that's going to land is really the level of organic growth. Dan just gave you some nice range of outcomes and opportunity set that we see there. Interest rates do not drive that this year. In early rate cycles, those increases and benefits typically fall to the bottom line and improve margin. As we look beyond that and apply those excess funds to your question about our capital allocation framework, the approach we've taken in the past is really the same framework that we have today. That will guide us. It's back to looking at opportunities to drive more organic growth; it could be new capabilities for advisers, further enhancing the service experience, or expanding services to help advisers run their businesses. That’s a few examples. Regarding M&A, there are two categories of opportunities there. One is where you can accelerate the delivery of capabilities through M&A. We’ve done a few small acquisitions there. The other category is the classic growth acquisitions as long as the returns are compelling, which is obviously key. Lastly, returning capital to shareholders is also a compelling way to deploy. We’ll remain flexible and adjust if needed, and as we go through this year and with expected rate increases, we’ll apply those funds at that time to our framework and see what makes more sense.

Our next question comes from the line of Steven Chubak from Wolfe Research.

I wanted to start with a question on rate optionality. Matt, since your rate sensitivity disclosure the $310 million increase in gross profit from 4 hikes is based on a static balance sheet. I was hoping to unpack some of the sources of rate upside that may not be captured in that figure. In particular, with money market balances running at very elevated levels, how should we think about both the capacity and timing to move money fund balances back into ICA as the Fed begins hiking? With signs of bank demands also coming back for floating and fixed rate agreements, a bit sooner than we were expecting, how should we think about the glide path to getting back to that fixed target range of 50% to 75%?

Great question, Steven. When looking at money market balances, which you can see from the footnote, if those balances go back into ICA, that would be an additional $30 million upside per rate hike for those overall balances. This gives you a sense of the benefit if demand does come back to the market, and those funds return. Where that market stands hasn't changed much, if anything, it’s improved slightly. We’re starting to see some positive signs, such as consumer spending increasing and loan balances starting to grow off their lows at big lenders. The biggest factor, however, is the Fed not only talking about raising interest rates and tapering but also about shrinking their balance sheet. These factors, if they occur, remove liquidity from the system, and put us in a stronger position as a provider. It feels like the winds are blowing in the right direction, but things haven’t really moved significantly yet. On the fixed rate side, we were able to add a new contract this quarter, and for our upcoming maturity in Q1, we’ve secured a new four-year contract at 140 basis points. The market remains challenging, but there are good signs if those scenarios play out. Regarding our 50% to 75% target range for the fixed rate portfolio, that remains our objective. Currently, we're at 25%. In periods of low interest rates like now, if demand is present, we'd prefer to stay shorter and closer to that target. In contrast, when rates are much higher with a steep curve, we want to be closer to 75%. For now, more demand is key, which is what we’re closely monitoring.

Just wanted to follow up a little bit there just on those overflow balances. Given the point on the last question, in a rising rate environment, what are the prospects for those overflow ICA and overflow money fund balances to come back into an ICA floating? What really needs to happen? How do rising rates impact the likelihood, the timing for that to play out?

Yes, sure. It’s about the demand returning to the market on both fronts. The mechanics for this return hinge on removing excess cash off the banks. Consumer spending needs to go up, loan balances on those big lenders need to rise, and the Fed's actions will play a critical role. It’s interconnected—once demand returns, the overflow can make its way back into ICA.

Our next question comes from the line of Kyle Voigt from KBW.

Maybe first, just a follow-up question on the cash balances. Given the meaningful cash build in December that you saw, just wondering if you could share any information on whether those cash balances have been sticky thus far in January or if you're seeing those kind of flow back into the market.

Yes, we would typically see that happen. You get a normal build in Q4, and you start to see those balances go back into the market in the first few months of the year. But with all the volatility we've seen this year, those cash balances have actually continued to build. They’re up about another $1 billion for the month of January. I would emphasize that when volatility falls and things return to normal, we expect that cash will start to flow back into the market. There’s a lot of tax positioning, tax planning that occurs in December, with dividends and interest coming in, so that creates a natural tendency for that to get deployed back into the market in the coming months.

Okay. That's helpful. And then my second question is just on the D&A guidance. I think you gave some commentary on the first quarter being up $5 million and a gradual increase from there. I think that implies something likely over a 20% increase versus 2021. I'm just trying to get a sense of if you look out over the medium term, are you comfortable with the level of spend on the CapEx side? If you could just go into a little bit more detail on the drivers of the increases here, that would be helpful.

Yes. When you look at our core technology portfolio investments, which are driving that increase, we've been consistently increasing that around 8% per year for a while. We plan to do the same in 2022. The significant pickup in D&A is primarily associated with the technology needed to integrate and onboard Waddell & Reed, which had a major deployment in Q4, leading to that depreciation increase in Q1. The growth is closely tied to these integration costs stemming from our acquisition.

Our next question comes from the line of Gerry O'Hara from Jefferies.

Just one for me this evening. Clearly, some strong momentum as it relates to the Business Solutions side. Can you give us a little context about what's really resonating regarding the 400 incremental new subscriptions or what you see coming for 2022? Can you help us tie together the investment and spend looks like relating to the growth of these business solutions, if that's part of that core G&A number or if it shows up elsewhere?

How about I take part A, Matt takes part B. Thanks for the question. With respect to Business Solutions, as context, this started as an opportunity around the hypothesis of how to help advisers be not only great advisers but also great business operators. There’s significant local spending that advisers attempt to manage, from accounting and bookkeeping to cash flow analysis and marketing. So, our early research was solid. But as we showed, we receive feedback through our CFO solution, marketing solution, and admin solution. These resonate with advisers and their needs. As we continue to enhance our offerings, we also learned that we could solve specific issues that don’t necessitate a full CFO. We’ve developed second-generation products offering varying price points, making them more accessible to advisers. We’ll continue to innovate and believe there's still significant opportunity for Business Solutions. We’ve unlocked an opportunity for them to provide broader financial planning across their client base. Hence, we’re introducing new services that’ll help them with investment strategies and financial plans. That’s a crucial angle for upcoming growth.

Gerry, as for the second part regarding costs, the costs are included in our core G&A guidance for 2022. This 7% to 9.5% range includes the costs associated with the scale of our new services and specifically Business Solutions.

I just had one small follow-up. The interest rate sensitivity page shows cash balances increased, but the incremental benefit from the next 4 rate hikes went down. I would have expected it to go the other way. Can you flesh that out a little?

Yes, it did change slightly. Key changes show that overflow balances in money markets increased slightly while ICA decreased. So, while the sensitivities in the bar charts went down a little, you’ll see that the benefit associated with money market overflow returning to ICA increased. So, it shows a varied mix that we calculate based on where we are at the end of the quarter.

Our next question comes from the line of Brennan Hawken from UBS.

Your SWS wins have really been impressive. You have over 20 on the board at this point. So far, what's been the feedback as you've built this offering out from advisers that you've onboarded? Are there any ways in which, based on that feedback, you're tweaking the offering or making adjustments to make it even more compelling?

Thanks for the question. We are encouraged by the offering in the marketplace. When we first went to market with this solution, the research and insights were solid. The feedback we've received prompted us to create additional digital workflows that enhance adviser efficiency, which has proven beneficial. We’ve also gotten feedback on integrating some banking solutions, which we are working on to increase appeal. Our high-net-worth solutions are also being refined. That said, the core offering continues to be overwhelmingly positive and supports the transition to independent practices. We feel good and are committed to translating feedback into enhancements.

That makes sense. One follow-up regarding Matt and the promotional expense—when you look at the increase in that promotional expense from Q4 into the low 90s for next quarter, is that due to conference schedules or other factors such as TA or onboarding for CUNA? What’s driving that?

The increase is due to a combination of factors. We have two large conferences in Q1, and while there were large conferences in Q4 as well, this year will feature a more typical schedule with the predominant expenses showing in Q1 and Q3. Additionally, there are expected increases in TA and expenses related to onboarding large financial institutions. So it’s driven by an array of growth factors.

Our next question comes from the line of Michael Young from Truist Securities.

I wanted to follow up on the Business Solutions portion of the business again. It’s good to see you up to 3,000 subscriptions, another year of doubling that. Is there any reason we shouldn't expect that to continue to double, or even more than double? Are we accelerating there? Any thoughts on the pace of growth, especially with the new product additions?

You should think about that maintaining a similar momentum as the previous year. With a bigger base, it requires more incremental growth to achieve a doubling effect, but we’re becoming better at offering these products. The new products we’ll be launching will certainly contribute to subscription growth. We continue to refine our approach and make necessary investments along the way. The trajectory we’re on signals ongoing, consistent growth for the upcoming year.

Okay. As a follow-up, sorry for switching gears. Regarding financial institutions, you got BMO, M&T last year, and CUNA this year. From a capacity standpoint, would you be able to announce additional partnerships this year? How soon would you be prepared to execute following CUNA? Given your recent successes in that market, are you having more conversations now than a year ago regarding partnerships?

We are having more dialogue around the possibilities of serving or supporting larger financial institutions, as well as a larger set of institutions in various categories. This creates more dialogue and opportunities. We must be thoughtful about winning deals and executing well upon them. A prudent approach involves evaluating our ability to execute, matching that with demand and opportunity for sensible pacing. There are also considerations from the institutions in terms of their own execution capacities, which we'll work on collaborating and partnering with them. Without providing a precise timeframe on future deals, we have active dialogues with a broader set of prospects, and we’ll match those capabilities and timelines accordingly.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dan Arnold for any further remarks.

I just want to thank everyone for taking the time to join us this afternoon, and we look forward to speaking with you again next time. Have a good evening.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.