LPL Financial Holdings Inc. Q2 FY2023 Earnings Call

Good afternoon, and thank you for joining the Second Quarter 2023 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 and Head of Business Operations, Matt Audette. Dan and Matt will provide introductory remarks, and then the call will be open for questions. 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 regarding LPL Financial's future performance, outlook, business strategy, plans, and potential risks. These forward-looking statements represent management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may result in actual outcomes differing from those expressed. For more information on these risks and uncertainties, please refer to the Forward-looking Statements section in the earnings press release and the risk factors in the company’s recent filings with the Securities and Exchange Commission. The call will also cover certain non-GAAP financial measures. For a reconciliation of these non-GAAP measures to the corresponding GAAP figures, please consult the company’s earnings release on investor.lpl.com. With that, I will now turn the call over to Mr. Arnold.

Thank you, Tanya, 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 the journey to help them achieve their life goals and dreams. To help support that important work, we remained focused on our mission of taking care of our advisors so they can take care of their clients. This quarter, we continued to see the appeal of our model grow due to the combination of our robust and feature-rich platform, the stability and scale of our industry-leading model, and our capacity and commitment to invest back into the platform. As a result, we continue to make progress toward our vision of becoming the leader across the advisor-mediated market. In that spirit, we remain focused on helping advisors and enterprises solve challenges and capitalize on opportunities better than anyone else, thereby serving as the most appealing player in the industry. With respect to our performance, we delivered another quarter of solid results while also continuing to make progress on the execution of our strategic plan. I'll review both of these areas, starting with our second quarter business results. In the quarter, total assets increased to $1.2 trillion as continued solid organic growth was complemented by higher equity markets. With respect to organic growth, second quarter organic net new assets were $22 billion, representing 7.4% annualized growth or approximately 8% when adjusted for seasonal tax payment. This contributed to organic net new assets over the past 12 months of $84 billion, representing approximately an 8% organic growth rate. In Q2, recruited assets were $19 billion, which represents a quarterly record, excluding periods when onboarding large enterprises. This outcome was driven by the ongoing enhancements to our model as well as our expanded addressable market. Looking at same-store sales, our advisors remain focused on serving the clients and delivering a differentiated experience. As a result, our advisors are both winning new clients and expanding wallet share with existing clients, a combination that drove solid same-store sales in Q2. With respect to retention, we continue to enhance the advisor experience through the delivery of new capabilities and technology as well as the evolution of our service and operations functions. As a result, asset retention for the second quarter and over the last 12 months was approximately 99%. Our second quarter business results led to solid financial outcomes of $3.94 adjusted EPS, an increase of 76% from a year ago. Let's now turn to the progress we made on our strategic plan. Our long-term vision is to become a leader across the adviser-centered market, which for us means being the best at empowering advisors and enterprises to deliver great advice to their clients and to be great operators of the business. To bring this vision to life, we are providing the capabilities and solutions that help advisors deliver personalized advice and planning experiences to their clients. And at the same time, through human-driven technology-enabled solutions and expertise, we're supporting advisors in their efforts to be extraordinary businesses. Doing this well gives us a sustainable path to industry leadership across the adviser experience, organic growth, and market share. Now to execute on our strategy, we organized our work around two primary categories: horizontal expansion, where we look to expand the ways that advisors and enterprises can affiliate, such that we can compete for all 300,000 advisors in the adviser-mediated market. And vertical integration, where we focus on providing capabilities that solve for a broader spectrum of adviser needs and, in doing so, create durable, differentiated value. With that as context, let's start with our efforts around horizontal expansion. This work involves meeting advisors and enterprises where they are in the evolution of the business by creating flexibility in our affiliation model so they can design the perfect practice for themselves and for the client. As a result, this component of our strategy helps contribute to solid growth in our traditional markets while also expanding our addressable market through our new affiliation. Now over the quarter, we saw strong recruiting in our traditional independent market, reaching a new quarterly high of approximately $14 billion in assets. At the same time, due to the appeal of our model and the efficacy of our business development team, we maintained our industry-leading win rates while also expanding the breadth and depth of our pipeline. With respect to our new affiliation models, strategic well-employee and our enhanced RIA offering, we delivered our strongest quarter to date, recruiting roughly $4 billion in assets in Q2. In each of these models, we continue to experience growing demand and expanding pipeline which positions them for increased contribution to our organic growth. Looking ahead, we expect to carry this recruiting momentum into Q3 for both our traditional independent market and our new affiliation. Now as a complement to our organic growth, we also recently announced the planned acquisition of Ground Capital, a California-based firm with approximately 260 advisors and $6.5 billion in client assets. This transaction will give Ground Capital's advisors access to our differentiating capabilities, technology, and service. We look forward to onboarding them early next year. With respect to large enterprises, we recently onboarded Bank of the West and are on track to onboard Commerce Bank in August. Looking ahead, we are encouraged by our growing momentum and strong pipeline across the broader enterprise market, including in our traditional bank and credit loans. Now shifting to our vertical integration efforts. Here, we are focused on delivering value-added capabilities, services, and technology that extend across an adviser's end-to-end business, all for the purpose of helping them differentiate and win in the marketplace and run thriving businesses. In that spirit, this quarter, we launched a new performance optimization solution called Practice Hub. This capability delivers comprehensive data in a structured format, so advisors can better understand their performance on an absolute and relative basis. Over the coming months, we will further expand this functionality by enabling it to generate personalized insights around additional services, technology, and solutions we offer in order to help advisors enhance the overall performance of the practice. Over time, we see Practice Hub becoming a key tenet of our adviser experience, leveraging the power of artificial intelligence to operate as a co-pilot for our advisors. While we're still in early innings, we're excited about the growth opportunities that this innovation unlocks and how it will serve as an additional leverage point to help advisors run thriving businesses. Now in a separate play within our vertical integration strategy, we continue to expand and enhance our services role and are encouraged by the evolving appeal of our value proposition and the seasoning of this business. As a result of demand in Q2, the number of advisors utilizing our services group continued to increase. We ended the quarter with approximately 3,500 active users, up roughly 30% year-over-year. As we work with advisors to increase the utilization of existing services, we're also continuing to create new services, such as our tax planning solution, which is part of our broader suite of comprehensive advice and planning services. This new solution helps enable tax-intelligent advice that can deliver material savings to clients and further differentiates the adviser's value proposition. This service is receiving positive early feedback and demand in the market while also unlocking interesting synergies with our existing services portfolio. As we continue to evolve our services portfolio, we are leveraging our structured approach to innovation in order to address the needs of our broader adviser base. In that spirit, we are creating streamlined versions of existing solutions to help advisors who may have less complex products. Examples of these solutions include CFOs essentials, digital marketing, and payroll, all of which are progressing through our innovation pipeline. As we move forward, we remain focused on enhancing and expanding our services portfolio to better support our advisors and enterprises and to drive growth. In summary, in the second quarter, we continued to invest in our value proposition for advisors and their firms 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, win in the marketplace, and as a result, drive long-term shareholder value. With that, I'll turn the call over to Matt.

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 strong organic growth in both our traditional and new markets, and we continue to build momentum in our liquidity and succession offering. In addition, we entered into an agreement to acquire the Wealth Management business of Crown Capital, onboarded Bank of the West earlier this month, and are preparing to onboard Commerce Bank later this quarter. We accomplished all of this while continuing to invest in our industry-leading value proposition. So as we look ahead, we continue to be excited by the opportunities we have to help our advisors differentiate and win in the marketplace. Now let's turn to our second quarter business results. Total advisory and brokerage assets were $1.2 trillion, up 6% from Q1 as continued organic growth was complemented by higher equity markets. Total organic net new assets were $22 billion or a 7.4% annualized growth rate. Our Q2 recruited assets were $19 billion, which prior to large enterprises was a new record. This included $4 billion of recruited assets from our new affiliation models, which is also a new record. Looking ahead to Q3, our momentum continues, and we are on pace to deliver another strong quarter of recruiting. As for our Q2 financial results, the combination of organic growth, rising interest rates, and expense discipline led to adjusted EPS of $3.94. Looking at gross profit, it was $990 million, down $30 million or 3% sequentially. As for the components, commission and advisory fees net of payout were $218 million, up $3 million from Q1, primarily driven by organic growth and higher advisory. In Q2, our payout rate was 86.7%, up about 50 basis points from Q1 due to typical seasonality. Looking ahead to Q3, we anticipate our payout rate will increase to 87.5%, driven by typical seasonality as well as the onboarding of Commerce Bank and Bank of the West. With respect to client cash revenue, it was $396 million, down $42 million from Q1, driven by a sequential decline in cash balances. Looking at overall client cash balances, they ended the quarter at $50 billion, down $5 billion from Q1. The primary driver of the decrease was typical April seasonality when the majority of quarterly advisory fees and tax payments hit. As we move beyond April, the pace of declines moderated in both May and June. Within our ICA portfolio, the mix of fixed-rate balances increased to roughly 60% within our target range of 50% to 75%. Our ICA yield averaged 322 basis points in the quarter, up 2 basis points from Q1 as the increase in short-term rates was partially offset by a decline in higher yielding floating-rate balances. As for Q3, based on where client cash balances and interest rates are today, we expect our ICA yield to decline by a few basis points as the mix impact of lower floating-rate balances is partially offset by the benefit of higher short-term interest rates. As for service and fee revenue, it was $123 million in Q2, up $4 million from Q1, primarily driven by strong organic growth. Looking ahead to Q3, we expect service and fee revenue to increase by a few million sequentially, driven by revenues from our National Adviser Conference. Moving on to Q2 transaction revenue. It was $47 million, down $2 million sequentially due to decreased trading volume. As we look ahead to Q3, we expect transaction revenue to be relatively flat with Q2. Now let's turn to expenses starting with core G&A. It was $337 million in Q2. Looking ahead, given our strong levels of organic growth and the variable costs associated with supporting that growth, we are increasing the lower end of our 2023 core G&A range by $10 million. We now expect our 2023 core G&A to be in a range of $1,345,000,000 to $1,370,000,000. To give you a sense of the near-term timing of the spend in Q3, we expect our G&A to increase by $5 million to $10 million sequentially. Moving on to Q2 promotional expense. It was $107 million, up $5 million sequentially, primarily driven by increased transition assistance resulting from strong recruiting and large enterprise onboarding. In Q3, we expect promotional expense to increase to approximately $125 million to $130 million, primarily driven by conference spend as we will host our largest adviser conference of the year next week as well as the onboarding of two large enterprises, Bank of the West and Commerce Bank. Looking at share-based compensation expense with $17 million in Q2, down $1 million from Q1. In Q3, we expect share-based compensation expense to be roughly flat sequentially. Turning to depreciation and amortization. It was $58 million in Q2, up a modest $2 million sequentially, given it was a low deployment quarter. Looking ahead to Q3, our plans for technology spend have not changed. We expect more deployments in the quarter. As a result, we expect depreciation and amortization to be roughly $65 million. Regarding capital management, our balance sheet remains strong. We ended Q2 with corporate cash of $325 million, up $91 million from Q1. Our leverage ratio was 1.2x, down from 1.3x in Q1 driven by a combination of our continued growth and a higher interest rate environment, both of which have meaningfully improved our earnings power. I would also note that earlier this month, we increased the size of our parent revolver from $1 billion to $2 billion. Given the significant growth of our business in recent years, the added capacity enables us to operate comfortably within our target range of 1.5 to 2.5x and leaves us well positioned to capitalize on growth opportunities. 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 Q2, we allocated capital across our entire frame. We continue to invest to drive and support organic growth. Specific to our liquidity and succession offering, momentum is building, and we continue to have a solid pipeline. To date, we closed 15 deals for approximately $200 million, including four deals for around $50 million in Q2. With regards to capital return, we increased our share repurchases to $350 million in Q2 as we took advantage of the pullback in our share price. As we look ahead to Q3, we plan to repurchase $250 million of our shares, consistent with our plan to execute on our $2 billion authorization over two years. To summarize, our balance sheet is strong and we are well positioned to drive value through our capital allocation framework. 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 advisors, grow our business, and create long-term shareholder value. With that, operator, please open the call for questions.

And our first question will come from Alex Blostein of Goldman Sachs. Your line is open.

Hi. Good afternoon, everyone. Thanks for the question. Dan, why don't we start with the broader discussion around organic growth? We've obviously seen a very steady improvement in recruited assets from you guys over the last few quarters, 2Q of north of $18 billion. I think that was a record outside of the larger kind of enterprise recruitment that you've done. So maybe a little bit of color on what are you seeing on the ground in terms of various affiliation options that are driving this improvement? And how does this inform your net new asset growth expectations for the rest of the year?

Yes. Thanks, Alex. As a jumping-off point, as you said, we saw 4% growth during the quarter. Prior to seasonal tax payments, you get closer to the 8%. If you think about the remainder of the year, we also saw that momentum build over the last week where growth has nearly doubled compared to preceding quarters, excluding the impact of large enterprises. So, as you said and proactively, we see really strong momentum in the traditional independent model and our new affiliation models. Drivers of Q2 results or outcomes include the 1% attrition rate versus 99% for the retention rates, which look solid and consistent over the past three quarters. This is complemented by the strong recruiting inside of core delivery that we've talked about. If you look then into Q3, you'll see solid momentum building throughout the quarter across the additional models and the affiliation models. So we expect to see that momentum pull into Q3, which will be complemented by the larger enterprises being onboarded in the third quarter. This sets up what we think is a really interesting and solid order of growth, driven by recruiting as well as low retention rates. We're also seeing steady contributions from same-store sales, especially in a marketplace where we've had higher rates and equity markets moving up. Advisors are getting on base for capital, as you see in our net buys from sales. So, we think that sets up well as we look forward to the rest of the year.

Hi, got you. Thanks. And Matt, a follow-up for you just around cash dynamics. So you guys are currently, I think, at about 60% fixed portion of the ICA portfolio sort of well inside your long-term range. But that's been largely a function of outflows that are coming out of the variable balances. So as you look at the maturity ladder here over the next, call it, 12 months or so and assuming the curve will stay kind of in line with the forward rate, what is your appetite to maybe reinvest some of these balances into floating rates to be at the lower range of your 50% to 75% allocation fixed and then within that, maybe just a quick update on where July balance is then as well? Thanks.

I think that was two follow-ups, Alex, but we’ll hit them both for you. So on the target range, I think we feel good where we are, which is right in the middle of the target range at 60%. I think you know this well, but just to reiterate, we did a lot of work on setting that target range to be a range we're comfortable with in a range of interest rate environments, and primarily focused on stability of earnings over trying to be clear when trying to pick spots in moments to invest when we think the curve is good from an interest rate standpoint. So we like where we're positioned. As for your question about when those balances mature, we do intend to maintain that middle of the range. So, I don’t think we need to make significant moves. To the extent your question was about maturing balances, would you re-deploy them? Yes, that would be our perspective today. The environment for placing cash rebalances from fixed rate has continued to improve. So the demand is there, and the pricing has also improved. We see similar trends on the floating-rate side. Overall, we like where we are on the fixed rate. Regarding how things are going in July, I'd say the headline is consistent with the broad adviser and investor engagement we've been seeing for the month as well as the seasonality you typically see in the first month of a quarter. We have advisory fees, primarily hitting in the first month of the quarter. Those are about $1.1 billion, which will reduce cash in the month of July. Beyond that, we’ve continued to see strong levels of investor engagement and elevated levels of net buying activity, consistent with the trends in Q2. The cash balance declines themselves are moderating lower than we saw earlier in the year. So far in July, it's about a $600 million decline above the advisory fees of $1.1 billion, with a decline pace in the moderation starting from May. Our decline rate is about one-fifth of what we saw earlier in the year. As we talk about organic growth in July, building on Dan's comments, the recruiting momentum continues in a positive way.

One moment for our next question. And our next question will be coming from Devin Ryan of JMP Securities. Your line is open.

Thanks so much. Just want to start on the enterprise channel. Obviously, LPL now has a number of large validating wins there. Data that's built here with partners that you can now show to potential partners in the future. So, I'd just love to talk about how the narrative has changed with enterprises where you can really explicitly show them the value proposition. At the same time, it seems like the bar just around regulatory and scale, which is only moving higher for enterprises to operate through a broker-dealer. So, I just love to maybe hash it out a little bit and what that means for your pipeline there. Thanks.

Devin, your hypothesis is right; as the business model has seasoned and we have clients who have experienced real results, the evolution of the dialogue is quite natural. First and foremost, you start with capabilities and ensure they hypothetically enhance economics, streamline client experience, and create a more scalable and competitive model for maintaining better advisers. Now that we have those capabilities, we can pull through those results. This creates openings where we can focus on helping enterprises grow organically within their wealth management programs. Additionally, we’ve transformed the onboarding process to minimize hurdles in their value proposition. The outcomes of enhanced risk management, operational efficiency, and improved economics are now part of the narrative, allowing us to present larger enterprises with timely access to opportunities. This strategic approach effectively expands the pipeline for us, and we’re confident this will contribute to organic growth moving forward.

Okay, thanks. We appreciate the color. Just a follow-up on some of the technology initiatives. So I think last year, you guys spent $270 million on technology. That's clearly growing again this year, and that's going to be many multiples of really the vast majority of your peers. So I'd love to just maybe dig a little deeper. How are you thinking about technology differentiation at LPL? You touched on AI, Dan, during your prepared remarks. Can you share how you see AI applications improving the experience for advisers and also helping reduce costs at your firm over time? Thanks.

Absolutely. We believe that the quality of our capability set, particularly in the vertical integration concept we described, is critical for driving organic growth. With that as context, investing in our vertical integration strategy or reinvesting in that platform to enhance capabilities is significant. I’ll provide a framework over which we invest: first, there's the end-client experience; second, holistic advice; third, the wealth management platform; and then the supporting services that enhance attendance in the advisory field. Overall, these elements help advisers establish impactful businesses and serve their clients effectively. Regarding AI, we're already using it within robotics and machine learning to optimize our operating processes, enhance data analytics, and facilitate our risk management efforts. We've created a new digital experience that captures 15% to 20% of the volume traditionally seen within our service model, and we see generative AI as a possibility for personalization. Imagining AI as an additional team member in each practice is a significant endeavor we’re excited about.

Yes, that was very helpful. Thank you so much.

And one moment for our next question. Our next question will come from Steven Chubak of Wolfe Research.

Hi, good afternoon. This is Michael, and I am going to start with a question on organic growth. Certainly, it's nice to see the ramp there through the end of the quarter. I did want to ask on the competitive dynamics. A larger independent player is planning to undergo a rather substantial restructuring effort. It looks like some of the resulting attrition has been a relatively significant contributor to your recruiting year-to-date. Can you help us size how significant of a tailwind that’s been? And how sustainable is this source of organic growth?

Yes. If you look at the marketplace, what you're getting at is the size of the opportunity set. Adviser movement has largely remained pretty flat at around 5% turnover for the last year, which is lower than historical norms. There has been a mix shift in that turnover, but we are seeing more positive movement in the traditional independent market, with some slowdown from causal markets. As we look forward at competition, whether it be through integrations or restructurings, those things can create more churn or turnover. We believe we are well-positioned across our different affiliation models to capitalize should that opportunity increase and more turnover occur in the marketplace.

Very helpful. Switching over to expenses, understanding it's early to think about 2024 as we consider rate cuts coming down the pike and the strong organic growth you're seeing. How should we be thinking about core G&A growth beyond '23? It sounds like 4% to 5% is the first building block to run the business, but how much incremental investment should we anticipate?

Yes. As you could imagine, we're in the midst of planning for '24 right now, and we’ll share our thinking later in the year as we typically do. To your question, I think to highlight a bit of how we’re approaching it: focusing on investments that drive organic growth while ensuring appropriate operating leverage. When looking at '23, the macro environment provided an opportunity for us to accelerate investments that we normally would have done in '24 or beyond. So as we're planning, it all depends on what the macro outlook looks like. If rates start to come down, that will certainly factor into our planning. Our history shows we have the flexibility to adjust based on that environment, and we have confidence to invest in areas that will drive growth. So we'll focus on balancing those aspects, and we’ll share more details as we typically do.

Great. Just one housekeeping question here. The tax rate was elevated during the quarter. What drove that? And can you provide an update on the go-forward outlook for tax?

Yes. I think the tax rate is in the core normalized range of 26% to 27%. We've been running below that for a while, primarily from tax benefits related to employee stock sales and deductions that came from that. There were just fewer in the quarter, which brought the rate back up closer to that normalized range. All else equal, a placeholder for going forward would be in that 26% to 27% section.

And one moment for our next questions. Our next question will come from Dan Fannon of Jefferies. Your line is open.

Good afternoon. Thanks for taking my questions. In addition to strong organic growth, you've also been active on the inorganic side. Was hoping you could talk about just the pipeline and conversations and how we should think about inorganic uses of or for growth as we think about the remainder of this year and the current backdrop of what's out there.

Yes. As we move forward, we'll continue to use M&A as a complement to our organic growth. So no change there. We are consistently assessing the marketplace, focused on three categories of opportunity: first, growing in our markets to capitalize on market leadership and add scale; second, expanding capabilities that create value for advisers and drive efficiency into their practices; and third, deploying capital against liquidity and succession needs. We believe these avenues offer ongoing opportunities and are positioning ourselves well for the future.

That's helpful. And then Matt, just a follow-up on the promotional spend guidance, the step-up you cited associated with the onboarding as well as the conference. Can you separate that out so we get a sense of the economics associated with some of these larger onboarding enterprise customers?

Yes. The guide for Q3 is driven by three factors: the timing of this year's conference, which will be our largest attendence, onboarding of two large enterprises, and support for organic growth. The conference is the biggest driver, as we have over 8,000 attendees coming, a new record for us. We’re also onboarding two large enterprises, which includes increased expenses. Lastly, the strong recruiting momentum in Q1 and Q2 contributes as well, with assistance coming from that as a driver. Overall, conference spend will be the largest component.

And one moment for our next questions. Our next question will come from Michael Cyprys of Morgan Stanley. Your line is open.

You guys have had some early success with your newer RIA-only model. I was hoping you could talk about your competitive positioning there, how your offering and pricing differs from others in the marketplace, and over the next 12 to 24 months, what sort of enhancements you might be able to make to further accelerate growth.

Thanks for the question, Michael. The RIA market is large and fast-growing, presenting intriguing strategic opportunities. We have invested to position ourselves for outsized share gains, focusing on creating a differentiated offering in the marketplace. Our model’s flexibility allows for improved integrated asset handling, and we're supporting firms with technology, operating platforms, and innovative business services. Our end-to-end value proposition differentiates us and can effectively serve advisers to add real value without requiring excessive build-out from them. As we enhance our results, solutions, and visibility in the marketplace, we aim to drive further growth.

Great. And just a follow-up question on the centrally managed assets that continue to grow in line with the rest of the business, holding steady at around 15% of advisory assets. Can you talk about initiatives to expand penetration of centrally managed assets and how you are building out the product set over the next year or two?

Yes, there are pull opportunities to enhance that model. We aim to reduce costs, driving greater utilization. The evolution of models-based practices and our platform’s continued enhancement will promote that efficient practices. Partnering with sponsors to integrate their capabilities within that models marketplace will create mutual value. Additionally, expanding the investment content, we’ve introduced new equity SMAs this year, and we’re adding income SMAs in the latter half of the year. This positions us as a true UMA, which will drive further utilization.

And one moment for your next question. Our next question will come from Kyle Voigt of KBW. Your line is open.

Hi, good evening. Maybe a few follow-ups for me. Matt, you had record EBITDA margins in the first half of the year at 54%. Do you think there's still significant operating leverage left in the model from where you sit today at 54%? If so, can you quantify how you think about those longer-term incremental margins?

When assessing margins, keep in mind that both our industry and the macro environment will inform those trends. Historically, interest rates at their lows meant margins ran between 35% to 40%, and now with higher rates, being in the 50% range indicates strong performance. Looking ahead, the opportunity to deliver compelling value to clients while expanding across our models allows us to balance client experience with efficient operations, driving earnings. The potential for operating leverage will depend on these endeavors. Ultimately, judgments about reinvestment versus earnings will guide our actions moving forward.

Understood. Just a follow-up on the cash discussion. You've previously noted that around 4% is a floor level on cash as a percentage of assets. It sounds like you're now slightly below that 4% level in July. Has anything changed in terms of adviser behavior over the past months or quarters that would lead to a different view of defining that floor level?

No. It’s normal to see cash balance declines in the first month of a quarter. Our cash is primarily operational, meaning smaller balances for rebalancing, paying fees, and facilitating transactions. As our clients are fully deployed, cash naturally hovers around those levels. Looking at our experience, we find cash typically bottoms out at the levels required for these operations, and the dynamics haven't changed. Advisors and clients are engaged, given the solid fixed-income market, coupled with strength in equity markets. Thus, we’re close to what we consider optimal cash deployment levels, where maintaining around 4% of AUM is realistic.

Understood. Thank you.

And one moment for our next questions. Our last question will come from Brennan Hawken of UBS.

I just got one left. Mine have been asked and answered. Any guidance on how the upcoming deals, especially those you've announced, might impact the payout rate? I know in the past, some of the deals have had an impact. Anything you see from these upcoming deals?

Yes. As a general point, larger enterprises tend to have a higher payout rate. The combination of AUM provides us advantages in serving them from a cost perspective, leading to compelling operating margins. Thus, all else being equal, the payout rate will typically increase. I mentioned the anticipated payout rate for Q3 at 87.5%, driven by seasonal patterns and the onboarding of large enterprises. When those enterprises come on, they generally lead to increased payout rates.

Got it. Thanks a lot.

And I'm showing no further questions. At this time, I would like to turn the call back to Dan Arnold for closing remarks.

Thanks to everyone for taking the time to join us this afternoon. We look forward to speaking with you again next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.