LPL Financial Holdings Inc. Q4 FY2023 Earnings Call

Good afternoon, and thank you for joining the Fourth 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 offer introductory remarks, and then the call will be open for questions. The company would appreciate if analysts will limit themselves to one question and one follow-up each. The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. 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, everyone, for joining our call today. Over the past quarter and throughout 2023, our advisors continue to provide their clients with personalized financial guidance on their journey to help them achieve their life goals and dreams. As we enter the new year, we thank our advisors for their continued commitment and dedication while we remain focused on our mission of taking care of them so they can take care of their clients. During the fourth 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 solid progress in helping advisors and enterprises solve challenges and capitalize on opportunities better than anyone else, and thereby serve 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 fourth quarter business results. In the quarter, total assets increased to $1.4 trillion as continued solid organic growth was complemented by higher equity markets. Regarding organic growth, fourth quarter organic net new assets were $25 billion, representing 8% annualized growth. This contributed to organic net new assets for the year of $100 billion, representing approximately 9%. In the fourth quarter, recruited assets were $17 billion, bringing our total for the full year to $80 billion. Prior to large enterprises, recruited assets for the full year were $67 billion, an increase of nearly 50% year-over-year and a new annual record. 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 taking care of their clients and delivering a differentiated experience. As a result, our advisors are both winning new clients and expanding wallet share with existing clients. The combination drove solid same-store sales in Q4. At the same time, we continue to enhance the advisor experience through the delivery of new capabilities and technology and the evolution of our service and operations functions. As a result, asset retention for the full year was approximately 99%. Our fourth quarter business results led to solid financial outcomes with adjusted EPS of $3.51, which brought our full year total to $15.72, an increase of 36% year-over-year. Let's now turn to the progress we made on our strategic plan. Now as a reminder, our long-term vision has become the leader across the advisor-centered market. To do that, our strategy is to invest back into the platform, provide unprecedented flexibility in how advisors can affiliate with us and deliver capabilities and services to help maximize advisors’ success throughout the life cycle of their businesses. Doing this well gives us a sustainable path to industry leadership across the advisor experience, organic growth, and market share. Now to execute on our strategy, we organize our work into two strategic categories: horizontal expansion, where we look to expand the ways that advisors and enterprises can affiliate with us such that we compete with all 300,000 advisors in the marketplace; and vertical integration, where we focus on delivering capabilities, technology, and services that help our advisors differentiate, win in the marketplace, and be great operators of their business. With that as context, let's start with our efforts around horizontal expansion. In the fourth quarter, we saw strong recruiting in our traditional independent fund, adding approximately $14 billion in assets. As a result of the ongoing appeal of our model and the evolution of our go-to-market approach, 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 wealth, employee, and our enhanced RAA offering, we delivered our strongest year-to-date, recruiting roughly $15 billion in assets, nearly double the total of the prior year. As we look ahead, we expect the increasing awareness of these models in the marketplace and our ongoing enhancements to their capabilities will help drive sustained increases in their growth. The traditional bank and credit union space continues to be a consistent contributor to organic growth, as we added approximately $1 billion of accreted assets in Q4. In addition, large enterprises remained a meaningful source of recruiting in 2023 with the addition of Bank of the West and Commerce Bank. For 2024, we continue to prepare to onboard the retail wealth management business of Prudential. As part of that process, our team has been on the road meeting with potential advisors to provide them a preliminary orientation to our platform, and the early feedback has been positive. Looking ahead, we are confident that the appeal of our value proposition for enterprises matches with our track record of successful execution, positions us well to help solve the needs of a broad spectrum of institutions. Now within our vertical integration efforts, we are focused on investing back into the model in order to deliver a comprehensive platform capability, services, and technology that help our advisors differentiate, win in the marketplace, and run thriving businesses. As part of this effort, over the past quarter, we continued to make progress on our aspiration of delivering industry-leading services. This work includes continuing to make our service model more flexible and efficient through a multichannel approach. The purpose of which is to offer a broad spectrum of service options, including human-centric support, digital capabilities, and artificial intelligence so that we can provide advisors the information they need in the channel that works best for them. In that spirit, over the last year, we have expanded our digital capabilities, including our digital hubs, which provide advisors with always-on support in a centralized and intuitive format. Our investments in this area enabled us to expand from 2 digital hubs to 11 over the last year, with the newest being our Tax Hub, which helps advisors process tax business in a streamlined and highly efficient way. While we are still in the early innings of the adoption of this capability set, the percentage of advisor interactions that go through digital channels has roughly doubled over the last year from 10% to 20%. As we continue to refine these capabilities, we believe that digital solutions can ultimately serve as much as 50% of our service interactions. As an additional part of our vertical integration strategy, we continue to expand and enhance our service portfolio and are encouraged by the evolving appeal of our value proposition and the seasoning of our capability. As a result of solid demand, the number of advisors utilizing our portfolio of over 14 available services continues to increase, and we ended the year with nearly 3,900 active users, up 27% from a year ago. Looking ahead, we remain focused on addressing the needs of a broader set of advisors and are innovating on new services that will directionally double the size of our services portfolio over the next two years. One of the latest innovations in our services portfolio was inspired by our broader efforts to tackle the advisor transition process, which has historically been an industry-wide pain point given the friction and complexity of changing firms. That said, rather than seeing the transition process as a headwind, we view it as an important strategic opportunity. As we make it easier for advisors to change firms, it will drive advisor movement in the industry, where we are well-positioned to benefit as the market leader in recruiting. To help solve for that opportunity, we have developed several new transition capabilities and solutions, including a live testing environment for advisors to familiarize themselves with our platform before transition, fully automated stages of the onboarding process, and a suite of transition services that includes short-term administrative support, branding, and bookkeeping support, which helps simplify the transition and onboarding journey and ultimately accelerates advisor readiness and growth. Early feedback on these transition services has been positive, and they are proving to be a catalyst for additional subscriptions, as 40% of advisors who use these solutions end up subscribing for one or more of our other ongoing services. Moving forward, we will continue to challenge ourselves to solve for advisors' needs at every stage of their practice to help them build the perfect business for themselves and ultimately maximize their systems. In summary, in the fourth quarter and throughout the year, we continued to invest in the value proposition for advisors and their practices while driving growth and increasing our marketplace presence. As we look ahead, we remain focused on executing our strategy to help our advisors further differentiate and win in the marketplace, thereby enhancing long-term shareholder value.

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 would like to highlight our progress during 2023. Against an evolving market backdrop, we maintained our focus on supporting our advisors and their clients while executing on our strategic priorities. We continue to grow assets organically in both our traditional and new markets, successfully onboard new enterprise clients, and continue to make progress with our liquidity and succession solution. As we enter 2024, we remain excited about the opportunities we have to serve and support our more than 22,000 advisors, while continuing to invest in our industry-leading value proposition and drive organic growth. Now let's turn to our fourth quarter business results. Total advisory and brokerage assets were $1.4 trillion, up 9% from Q3 as continued organic growth was complemented by higher equity markets. Total organic net new assets were $25 billion or approximately an 8% annualized growth rate. Our Q4 recruited assets were $17 billion, which brought our total for the year to $80 billion. Looking ahead to Q1, our momentum continues, and we are on pace to deliver another strong quarter of recruiting. As for our Q4 financial results, the combination of organic growth and expense discipline led to adjusted EPS of $3.51. Gross profit was $1.7 billion, down $3 million sequentially. Our payout rate was 87.6%, up 30 basis points from Q3, due to the seasonal build in the production moves. Looking ahead to Q1, we anticipate our payout rate will decline to approximately 86.5% as the production bonus resets at the beginning of each year. With respect to client cash revenue, it was $374 million, down $4 million from Q3 as average client cash balances declined slightly during the quarter. Client cash balances ended the quarter at $48 billion, up $1 billion sequentially, marking the first quarterly increase since the second quarter of 2022. Within our ICA portfolio, the mix of fixed-rate balances ended the quarter at roughly 60%, within our target range of 50% to 75%. As a reminder, during Q4, there were roughly $2.5 billion of fixed-rate contracts that matured. We placed $2 billion of these maturing balances into new 5-year contracts, yielding approximately 415 basis points, which is roughly 85 basis points higher than their prior yield. Looking more closely at our ICA yield, it was 317 basis points in Q4, down 1 basis point from Q3. As for Q1, based on where client cash balances and interest rates are today, as well as the yields on our new fixed-rate contracts, we expect our ICA yield to increase by approximately 5 basis points. As for service and fee revenue, it was $131 million in Q4, down $5 million from Q3. This decline was primarily driven by lower conference room fees following our largest advisor conference of the year in Q3, as well as seasonally lower IRA fees. Looking ahead to Q1, we expect service and fee revenue to decrease by approximately $5 million sequentially on lower conference room activity. Moving on to Q4 transaction revenue. It was $54 million, up $4 million sequentially due to increased trading volume. As we look ahead to Q1, based on what we have seen to date, we would expect transaction revenue to increase by a couple of million sequentially. Now let's turn to expenses starting with core G&A. It was $364 million in Q4, bringing our full-year core G&A to $1.369 billion. This was within our outlook range and for the full year, represents approximately 15% growth. As a reminder, this included an opportunistic 5% of incremental spend focused on accelerating our capabilities as we took advantage of the favorable macro environment. As we look ahead to 2024, we plan to return to more normalized levels of spend, concentrating on investments that enable organic growth and drive operating leverage in our business. In addition, our ongoing investments to scale our business are driving greater efficiencies. Pulling this together, we expect our 2024 core G&A growth rate to be roughly half the rate we saw in 2023. More specifically, we intend to grow 2024 core G&A in a range of 6.25% to 8.75%. As for Q1, we expect core G&A to be in the range of $360 million to $370 million. Note that this core G&A spend is prior to expenses associated with Prudential. As we move closer to onboarding them towards the end of this year, we'll provide an update on 2024 core G&A. I'd just emphasize that we expect only a small amount of spend in 2024 as the majority of these costs will be incurred in 2025. Moving on to Q4 promotional expense. It was $138 million, down $2 million sequentially. Lower conference spend was partially offset by higher Prudential-related onboarding and integration costs. Looking ahead to Q1, we expect promotional expense to be roughly flat as we have one of our largest advisor conferences during the quarter, which will be offset by seasonal declines in marketing spend. As for regulatory expense, it was $9 million in Q4. Looking forward, given the increased size and scale of our business, we would expect regulatory expense to be roughly $10 million per quarter. Looking at share-based compensation expense. It was $16 million in Q4, flat compared to Q3. As we look ahead, we anticipate this expense will increase by approximately $6 million sequentially, as Q1 tends to be our highest quarter of the year, given the timing of our annual stock awards. Regarding capital management, our balance sheet remained strong in Q4 with corporate cash of $184 million. I would note that during the quarter, we completed our first investment-grade debt offer, issuing $750 million of senior notes. With that, our leverage ratio increased to 1.6x and is within our target leverage range of 1.5x to 2.5x. Turning to how we deploy that capital: 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 deployed capital across our entire frame as we continued to invest to drive and support organic growth, allocated capital to M&A within our liquidity and succession solution, and returned capital to our shareholders, repurchasing $225 million of shares. As we look ahead to Q1, we plan to repurchase $200 million of our shares, keeping us on track to execute our $2 billion authorization over two years. Turning now to interest expense. It was $54 million in Q4, up $6 million sequentially. Looking ahead to Q1, given current debt balances and interest rates, we expect interest expense to increase by approximately $7 million from Q4. 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.

Our first question comes from Steven Chubak with Wolfe Research.

Maybe just to start off with a question on core G&A and organic growth. The double-digit organic growth you've achieved these past three years has really been bolstered, at least in part, by significant investments in the platform, and core G&A has also grown at a double-digit clip as well. So the updated core G&A guidance for '24 certainly surprised positively. It does imply a significant moderation, as you noted, Matt, in expense growth. But should we expect slower G&A growth to drive a commensurate slowdown in organic growth? Or do you feel the NNA momentum can be sustained even with the moderation in G&A spend?

Yes, Steven, I'll give you some color here, but the answer is going to be the latter. I think the investments are moderated, and our confidence and conviction around continuing to drive organic growth is just the same. Now the details below that, just building a little bit on what I shared in the prepared remarks, the cost strategy or investment strategy remains focused on driving investments prioritizing organic growth as well as driving productivity and efficiency. And I think what's probably most relevant in this conversation is also adapting as the environment evolves. So if you look at, to your point, on 2023 and growing 15%. You can break that into three equal categories of about 5% each. The first was really about serving and supporting the core business growth. The second was about continuing to make investments to really improve our value proposition through establishing ourselves in the new models and addressable market to scale our services. That third category, that third 5% was really just being opportunistic about the market and really accelerating investments. In looking at the guidance for 2024 and our plans for 2024, it's really pulling back in that third category. So we're continuing to make the investments that support growth. We're continuing to make the investments to refine our value proposition and capabilities in just those two things, and this may get really to the core of your question, would typically lead to core G&A growth in the 8% to 10% range. But then you put on top of that the investments we're making in productivity and efficiency, which do create capacity to invest each and every year, are getting even better. And that final point brings us down to the 6.25% to 8.75%. Hopefully, the color helped there, but I think the headline point is that our conviction in continuing to deliver organic growth in this high single-digit range remains.

That's great to hear. And for my follow-up, Matt, I was hoping you could just provide an update on January trends. I know it's a seasonally weaker month, typically for both NNA and cash. And just with cash trends also stabilizing over the last six months, just speak to your confidence level that some of these sorting headwinds, which have gotten a lot of their play, are largely in the rearview.

Yes. I think I'll start on cash. The headline is we really saw cash start to stabilize back in July. So if you look at the second half of the year, even by the months, we ended the year at a pretty similar level to where we ended July. So what we're seeing in January is really a continuation of that stability. Just a reminder, the seasonal factor that does hit in January is advisor fees typically hit primarily in the first month of the quarter. So those do reduce cash balances. It's around $1.2 billion. Outside of that, though, we've continued to see stability. The amount of cash balance moving from customer activity was actually a slight increase in January. So you put that together, cash balances overall for the month are down $1.2 billion, but they're primarily driven by those fees, and the activity is actually a slight increase. So I think the headline is that we're continuing to see stability on the cash sweep side. On the organic growth side, maybe just to give a little bit of context and perspective on the overall quarter and the month of January. When you look at the last 3, 4 years of really delivering high single-digit organic growth, given the nature of Q1, the first quarter is usually a little bit lower, typically in the 6% to 7% range. So as we look at what we're seeing for Q1 '24, we're looking to deliver something in a similar place, around 6% to 7%. The only thing I would highlight, and the reason for this color is, we would expect January to actually be a little bit lower than normal in the 1% to 2% range, and then February and March actually to be higher than typical, really at those high single-digits, coming together at a 6% to 7% for the quarter. The reason for that is that the seasonal factors on the cash sweep side mean advisory fees hit in the first month of the quarter, as well as you have on the NNA front, that normal slowdown in the first half of January due to the FINRA closing in the second half of December as well as advisors taking time off. You have those normal factors that play out in January. Two things I would highlight, though, for this January: First is recruiting. Our recruiting continues to be strong. You may recall that in Q1 of last year, we set a new record in recruiting of around $13 billion prior to large enterprises. We're on track to exceed that in the first quarter this year. Second, on the attrition side, it’s a little bit of the opposite in that attrition is going to be a little bit heavier in January versus February and March, since we had two practices that were acquired to part during the month. That happens from time to time. We just happen to have two in a single month. Outside of that, our retention remains consistently high at the levels we've seen. So there's a lot to unpack there, but I would headline it as we're looking at Q1 and continuing in that 6% to 7% zone, with a little bit of a different shape to the quarter, with January in that 1% to 2% range.

And our next question comes from Alexander Blostein with Goldman Sachs.

Good afternoon, everyone. Thanks for the question as well. Dan, I was hoping we could talk a little bit about the large enterprise channel for you guys. It's been an area of significant success over the last couple of years. So maybe talk a little bit about deal activity expectations for 2024. And in particular, I'm curious about the level of engagement you guys are seeing from insurance company clients on the back of the Prudential deal.

Yes, thanks, Alex. With respect to our large enterprise channel, we opened this market up back in 2020 with a novel outsourcing solution. Initially, we targeted larger banks and have seen some success to this point, capturing about $85 billion of assets to our platform. If you look at the total market for banks and outsourcing of wealth management, it’s roughly around $1 trillion. We believe our experience, reputation, and capability set create a compelling solution that helps strengthen that pipeline and offer us interesting durable growth opportunities moving forward. That said, we have taken our solution that was targeted to banks and made additional investments in capabilities and personalized options, which enabled us to extend the appeal of that model to the insurance companies or product manufacturers that operate wealth management solutions. Now that market represents an additional $1.5 trillion of opportunity, and the Prudential announcement was a catalyst for additional inquiries exploring this question: Why aren’t they outsourcing? We continue to progress in these discussions and explore others. They're still in the early stages, but we do believe this part of the pipeline will continue to evolve as well. To summarize, as we move forward, we believe our market leadership capability set and a real depth to this enterprise channel creates a unique growth opportunity for us. We're excited about it.

Great. And a quick follow-up for you, Matt. It's nice to see you guys moving forward with the reinvestments of the $6.5 billion tranche of ICA maturities this year. How is demand holding up in the ICA channel for additional fixed maturities as we think about the $6.5 billion tranche coming out this year? Is there a way to sort of accelerate some of that reinvestment? I know you provided a schedule kind of how that shakes out over the course of the year. But any opportunity to move a little faster in case rates just to start moving lower to lock in wider spreads?

Yes, Alex, I think on the demand. The demand is strong. If you look at the $2 billion that we placed into new contracts towards the end of the quarter, we were able to place them in 5-year contracts. That's the longest duration that the market typically offers, which is where we prefer to be right now. We're able to place them at a 30 basis point spread above where the curve is. Historically, we’ve talked about how there were no spreads to the curve, and sometimes they were even discounts. So that's probably the most empirical data that the demand is strong. You see similar demand on the floating-rate side as well. On the second part of your question, the opportunity to accelerate really isn’t there. It’s kind of the nature of a fixed-rate contract, for the same reason on both sides of the equation from a bank liquidity standpoint where they get it on their side. It’s not a very common thing. So I wouldn’t expect any opportunities to accelerate it. But as you noted, we have $6.5 billion coming up, and if you look at the marketplace right now, we’d be able to place them in even higher rates. If that 5-year point is available, we’ll be excited to pursue that as well. So the market is good, but acceleration opportunity is probably not there.

And our next question comes from Kyle Voigt with KBW.

Maybe just a question on the Prudential expenses. First, I just wanted to confirm that the $125 million of integration and onboarding expenses in the promotional line are one-time and still expected to entirely roll off by the start of 2025. And then can you just help frame the size of the incremental G&A growth we should think about in ‘25 either on a percentage basis year-on-year or framing relative to the size of the Prudential expenses in promo that will be rolling off in '24?

Yes, sure, Kyle. I mean I think on the $125 million, yes, they are definitely one-time and specific to bringing Prudential on board. I think the majority of them will be in 2024. So if you look at what we spent so far in '23, it's in the $25 million, $26 million range. Of that remaining $100 million that will primarily be in '24. Depending on the timing of when they come on board, some of that could flow over into 2025. Now the total amount wouldn't change; it will still be $125 million. It could just go into 2025. On the core G&A front, the headline I would give you is that the amount we expect in 2024 is relatively small, and it's all about the timing of when they come on board. To dimension it, I'd go back to the estimated EBITDA when it’s fully ramped, which is around $60 million. Looking at overall margins in our business of around 50%, that should give you a sense of the overall expenses that would go along with it. If you did something like that, you'd be directionally correct. I’d just emphasize that it's likely to be primarily in 2025, given the timing of when they're going to come on board, which is towards the end of '24.

Understood. And then just on the follow-up, if you just ask on the M&A environment, we're seeing a macro backdrop now that I expect to be more favorable for M&A in the sector. Markets are at all-time highs, and we're starting to see some clarity on interest rates, at least relative to the past year or two. Just wondering if you could speak to the opportunities you're seeing in the market, whether the bid-ask spread between sellers and buyers may be narrowing and the number of or types of deals that you're seeing come across your desk now versus maybe this time last year?

Let me take a stab at that one. It's Dan, and hopefully, I'll cover all your questions. As you know, M&A remains a core part of our strategy, complementing our organic growth opportunities. In terms of opportunities, we focus on three primary categories: first, growing in our market. Potential acquisitions might include both broker-dealers and RIAs. Examples of that are our Boenning & Scattergood acquisition, Waddell & Reed acquisition, and then Crown Capital, which we’re closing earlier this year. Those are good examples of how we might look across the marketplace for those opportunities. As the industry continues to consolidate, we would expect to be a participant in that consolidation. The second type of transactions that we’ll look at is to add capabilities, where we would ultimately evaluate, and should we allocate capital to build, buy, or partner. To the extent this accelerates our desire to create that vertically integrated, feature-rich platform, this is where we would look for such opportunity. Capability transactions would include advisory world and other firms. To remind you, acquiring a trading platform that we're turning into what we think will be an industry-leading trading and rebalancing tool makes it available to our entire client base in the spring. So we're excited about this type of transaction and what we can do with it. The third category would be deploying capital against this newest capability of liquidity and succession, which certainly gives us a path to work in a disciplined way that meets our return thresholds and helps both internal and external advisors solve their succession needs. It positions us well to do this for internal advisors but also potentially create that solution for those who aren’t part of our enterprise today. In summary, we consider M&A opportunities a core part of our strategy, but we will remain disciplined to ensure that the framework with which we assess them makes sense strategically, financially, culturally, and operationally.

Okay. Great. A question for Dan. I was interested by the comments you made about some of the new service innovations and really to encourage advisors to move to LPL. I took that more as LPL looking to win more advisors in motion. If I look at industry churn, it's been pretty anchored at 5% to 6% in recent history. I’m just curious whether it’s some of these innovations in the services portfolio or just that you're seeing more broadly occurring in the industry that could really change that 5% to 6% churn rate, and it would seem like a pretty big deal if you can. So just love to get a sense of kind of what those innovations actually mean? And can that rate move for either LPL reasons or industry reasons?

Yes, good question. So I think if we start with the first question regarding churn or advisor movement in the marketplace. We continue to see advisor movement remain flat, around 5% to 5.5%, which is below historical norms. There has been a mix shift in that turnover regarding where it’s coming from. In the last year, you've seen movement in the traditional independent market rise, while there's been a slowdown from the wirehouses. That said, notwithstanding all of that, I think we first and foremost look at our overall win rates or what is moving across all of our different affiliation models as a way to understand their appeal and hopefully grow as we invest more into the platform. Despite the lower movement in advisors, our relative market share is increasing with win rates over the past three years due to our investment back into the model. If you look at the newer models, we have more opportunities to enhance their capabilities as they evolve. Their growing awareness and credibility in the marketplace can also catalyze higher win rates. Ultimately, we cannot completely control the movement of advisors in the marketplace, but we can contribute to it by solving the change management efforts, which has historically hindered movement. If we can ease the transition process for advisors, that could lead to a significant increase in industry movement, positioning us well in recruiting. So that's how we see it.

Yes. Thanks, Dan. That's great color. And I guess my follow-up relates to that. There's terrific momentum in recruited assets in 2023, and the new affiliation models are clearly resonating in the market. I believe you said $15 billion from those new channels in 2023. So that would seem to imply the legacy channels would contribute around $50 billion to get to the total $67 billion. If the new affiliation channels continue to scale, should their contributions look similar to the $50 billion from the legacy channels at some point? Or can we expect to outperform that?

Yes, it’s a great question. As we think about longer-term prospects for those new affiliations, I think we start with the size of each market. The employee-based market is the largest, in the range of $11 trillion to $12 trillion for RIAs, the second largest. The Swiss model that we represent is just a subset of those coming out of the employee-based models. As you consider opportunities in those contexts, it's reasonable to believe that, even if we achieved half of the win rates on our traditional independent channel, those new models could deliver sizable contributions. Given their vast market sizes relative to the traditional independent space, those contributions from the new affiliation channels could mirror or even surpass the $50 billion from the legacy channels. What I’m not suggesting is that we will necessarily reach that but that is an opportunity to continue working, investing, and enhancing our capabilities in those areas.

And our next question comes from Dan Fannon with Jefferies.

This quarter saw the biggest quarter-over-quarter increase in sales-based commissions, seemingly driven by annuities. So curious about your outlook for that and in the context of what the DOL has proposed, how you think that might change behavior or not going forward?

Yes. Let me take that one. Thanks for the question. We have seen some momentum since rates have gone up, with predictable growth in utilizing fixed annuities. Additionally, when equity markets are volatile, variable annuities present an interesting opportunity. It has been a tailwind for annuities for over the past year, and the fourth quarter only reinforced that. The DOL question is interesting relative to brokerage and advisory practices. As we think about maintaining choice for advisors' clients, we need to approach the changes from the DOL rule with the mindset of preserving choices for advisors and clients. Even if the rules change, we will aim to ensure that advisors can pivot effectively to continue doing business in a way that's in their clients' best interests. Thus, while we may see a shift in some areas toward advisory models, brokerage will still have a place in the market where it's effective. Annuities, in many cases, will continue to be relevant as rollover options, particularly due to their downside protection features while still allowing participation in equity market upside. So we see those as important tools in the advisor toolbox. However, I do believe the DOL rule may create some headwinds for brokerage business, reflecting a portion of that downturn. As for the retention rate, we expect it to remain in that 98.5% to 99% range for this year, except outside of examples like the one Matt shared, where practices may sell as part of a succession plan. These are primarily the triggers that we launched our liquidity and succession program to address. Outside of those, we've got solid retention. I think our focus has to be on executing our strategy, investing in capabilities, and delivering an exceptional experience for our advisors daily, as we've seen solid trends with strengthening NPS scores and evolving capabilities.

And our next question comes from the line of Ben Budish with Barclays.

I think most of my questions might have already been covered, but maybe just one for Matt on core G&A growth. Can you just talk a little bit about what gets you to the high or low end of the range? It sounds like the potential ramp is going to be not too impactful for this year. So what are the factors that could drive that up or down? And at what point in the year do you start to get a better sense of where that shakes out?

I think what typically drives us within the range is the costs associated with supporting the growth that occurs during the year. If you look at Q4 of ‘23, that quarter is a good example where we came in within our range but at the high end of that range; this was mainly due to the variable costs tied to growing the business, such as variable compensation associated with that growth as well as other direct costs to ramp up. So those are typically the drivers of any variations in the overall core G&A growth rates.

And our next question comes from Michael Cyprys with Morgan Stanley.

I just wanted to come back to, Dan, some of your comments earlier about advisor movement across the industry. I’m curious about what's driving that and what might change that at the industry level. I hear you on some of the services portfolio innovations that can help move it in your favor for you guys, but just at the macro backdrop for the broader industry. I'm curious about what might lead that churn to pick up versus slow down. How do you see the backdrop evolving if interest rates are cut?

Yes, those are good questions. I think there are several factors that create a headwind to advisor movement than the aggregate, bringing it down from the historical average of 7% movement to about 5% to 5.5%. Those are some of the lingering effects from COVID, which contributed to changes in complexity as advisors work through their practices post-pandemic. Additionally, the volatile market situation and geopolitical uncertainties may make advisors more hesitant to make large strategic moves. Advisors are also reassessing their operational models and adapting to a more digitally focused environment across their practices. This digital transformation process introduces complexity, as advisors evaluate partners in the changing regulatory landscape and consider technology solutions that can drive productivity. All those external pressures create hurdles for increasing advisor movement in the industry. As we work through these conditions, we should gradually return to a more normal churn rate in the 7% range over time.

And our next question comes from Michael Cho with JPMorgan.

I just want to touch on enterprise quickly again. And I have just a quick two-parter here. You talked about a healthy pipeline and an uptick in conversations since the Prudential announcement. In terms of looking ahead, does the Prudential onboarding limit your bandwidth at all for doing more Prudential-type deals? Second, just longer term, beyond Prudential, how should we frame potential benefits to LPL's operating scale and leverage as you continue to gain critical mass within the enterprise opportunity set?

On the first question, we see an interesting pipeline on both sides of the enterprise channel. As I mentioned, we’ve learned a lot from our existing programs and these discussions may help us innovate further and create more appeal. Every time we bring something on, our focus is on creating a more automated process along with a better playbook to ensure efficiency, so we can do this better, faster, and more economically. So we believe we are much better than we were three years ago when we started onboarding larger enterprises. Our capacity to support additional deals wouldn’t be limited as long as we can ensure the quality of service and operation. Moreover, leveraging that learning from the earlier deals helps us develop playbooks that make future onboarding more efficient. So we're confident that proper planning and execution will allow us to take on more opportunities effectively. As for the benefits of scale, once we onboard clients onto our platform, a big part of the attraction is accessing our capabilities, thus helping them grow their channels quickly. We can enhance capabilities that benefit the enterprise channel but also deliver those to a wider group within LPL. So a headline point is that there are certainly scale benefits from onboarding, and those examples are very helpful in illustrating that. Yes. And 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 quarter. Thank you.

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