Good afternoon, and thank you for joining the First Quarter 2024 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are the 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 to the questions. The company would appreciate if analysts would limit themselves to 1 question and 1 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 financials, future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks management foresees. Such forward-looking statements reflect management's current estimates and 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 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 would now like to turn the call over to Mr. Arnold.

Thank you, and thanks to everyone for joining our call today. Over the past quarter, our advisers continue 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 remain focused on our mission: taking care of our advisers so they can take care of their clients. During the first quarter, we continued to see the appeal of our model grow due to a 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 advisers and institutions 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 first 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, first quarter organic net new assets were $17 billion, representing 5% annualized growth. This contributed to organic net new assets over the past 12 months of $96 billion, representing approximately an 8% growth. In the first quarter, recruited assets were $20 billion, which represents a quarterly record, excluding periods when onboarding large institutions. This outcome was driven by the ongoing enhancements to our model as well as our expanded addressable markets. Looking at same-store sales, our advisers remain focused on taking care of their clients and delivering a differentiated experience. As a result, our advisers are both winning new clients and expanding wallet share with existing clients, a combination that drove solid same-store sales in Q1. At the same time, we continue to enhance the adviser experience through the delivery of new capabilities in technology and the evolution of our service and operations functions. As a result, asset retention for the first quarter was approximately 97% and 98% over the last 12 months. Our first quarter business results led to solid financial outcomes with adjusted EPS of $4.21. Let's now turn to the progress we made on our strategic plan. Now as a reminder, our long-term vision is to become the leader across the adviser center marketplace. To do that, our strategy is to invest back into the platform, provide unprecedented flexibility in how advisers can affiliate with us, and deliver capabilities and services to help maximize advisers' success throughout the life cycle of their businesses.

All right. Thank you, Dan, and I'm glad to speak with everyone on today's call. As we move into 2024, we remain focused on serving our advisers, growing our business and delivering shareholder value. This focus led to another quarter of strong organic growth in both our traditional and new markets, and we are preparing to onboard the wealth management businesses of Prudential and Wintrust. In addition, we continue to build momentum in our liquidity and succession solution, including our first signed deal with an external practice. We also entered into an agreement to acquire Atria Wealth Solutions, which we plan to onboard to our platform in mid-2025. So as we look ahead, we remain excited by the opportunities we have to serve and support our nearly 23,000 advisers while continuing to invest in our industry-leading value proposition and drive organic growth. Now let's turn to our first quarter business results. Total advisory and brokerage assets were $1.4 trillion, up 6% from Q4 as continued organic growth was complemented by higher equity markets. Total organic net new assets were $17 billion or approximately a 5% annualized growth rate. Our Q1 recruited assets were $20 billion, which, prior to large institutions, was the highest quarter on record. Looking ahead to Q2, our momentum continues, and we are on pace to deliver another strong quarter of recruiting.

First question. I just wanted to dig a little bit on recruited assets, had a really nice quarter, up 57% year-over-year, but also a bit stronger than the net new asset trend and maybe that's just a January dynamic. But just want to maybe dig in a little bit about the divergence that you saw this quarter between these 2 metrics. And then more broadly on recruited assets and the outlook, it sounds like you're still seeing a really good recruiting pipeline. So just love to get a little more context on that and kind of what you're seeing between both legacy channels and some of the newer affiliation channels.

Yes. So Devin, it's Dan. Let me try to go in maybe a sequential order around those questions that is helpful. So first, maybe let me just tick Q1, I think, organic growth, which I heard inside your question. So during the quarter, we posted 5% organic growth. And given the seasonality, we typically see in Q1, we would have expected that to be more like 7%. And while the underlying drivers of the business were strong, there were a couple of things in the quarter that drove the roughly 2% difference. The first was some impact from the timing of onboarding recruiting, which equated to roughly 1% to Q1 organic growth. And that's just really a function of the recruiting, as we mentioned, I think back in January's call, a lot of it happening in the second half of the quarter. And that gives you a little tailwind going into the second quarter. And then the second thing that we mentioned last quarter as well was that there were 2 acquired practices that departed in January which accounted for a 1% impact to our attrition. So outside of those impacts, which we would categorize as a bit of noise, the underlying drivers that set us up well for the rest of the year remain intact and that's where you were getting at that record level of recruiting. The strongest pipelines that we've had ever historically and our continued low levels of adviser attrition that was consistent with the experience over the last couple of years. So we feel good coming out of the quarter and how we see that opportunity emerge over the remainder of the year.

Yes, Dan. Really helpful. And just a follow-up, this is kind of interrelated, but just on the economics of all that. So the theme of competition in the space has continually been coming up. I know it's always a competitive market, so nothing necessarily new. But we look at transition assistance, it's up 6% sequentially, 25% year-over-year. I know that's directionally trending with growth. But can you maybe just talk a little bit about kind of the competitive dynamics and kind of the economics around recruiting and transition assistance? And how you feel like LPL is positioned around kind of those economics, let's say, transition deals or maybe a little bit higher than they have been.

Yes. Let me start that and then, Matt, you add any color on economics you think would be helpful. So look, I think with respect to the recruiting environment, right, we always start with the opportunity set. Adviser movement over the last 12 months has hovered around 5%, which remains lower than the historical norms. That said, despite those low overall movement, our win rates continue to move higher. And certainly, that's an encouraging trend relative to how we think about the opportunity set. And then two, I think when we think about the environment, we look at the competitive landscape and the participants have remained largely the same. As do the priorities that advisers are looking for when they evaluate their options to potentially move. And as a reminder, the first priorities is around capabilities, technology and service. That's where we continue to further distinguish ourselves as we invest back into our model. Next is the ongoing economics, which haven't changed significantly over time. And I think in the independent space, especially create a compelling and interesting scenario for advisers. And then lastly, you get transition assistance rates, which we've seen pretty stable over the last year and feel good about how we're well positioned across our portfolio of different affiliation models in terms of how we support that adviser to make that transition.

I wouldn't not really add to that. I just underscore the point, I think on, Devin, on capabilities is really what matters from a decisioning standpoint on advisers and where they're joining firms. And I think from a TA standpoint, as Dan said, the rates have really been stable for quite a while. I think it's for us and the growth there, it's more about the recruited AUM itself that's coming on board, which I know you see and follow the numbers. But Q1, which is typically the seasonally lowest quarter of the year, bringing in $20 billion prior to any large financial institutions, I think is the driver there. So it's about the level of recruiting. TA rates have been pretty stable.

You guys mentioned liquidity succession a couple of times this afternoon, and it's been coming up in prior calls as well. So maybe level set for us kind of where that business sits today, just maybe in terms of size or AUM, however you want to frame it? And how meaningful do you expect this to be to your organic growth targets, which I guess, continue to be in the high single-digit range in terms of M&A over the next couple of years?

Yes, Alex, I’ll begin by addressing the economics and capacity aspects of your question. We are quite optimistic about this offering and the solution. The economics are strong. However, there are limits to the number of deals we can undertake in a given year. Since we launched the program, we have completed 27 deals so far, and I believe our maximum capacity per year is likely in the range of 30 to 40. In terms of capital, we are applying it in accordance with our M&A framework, targeting a deployment range of 6 to 8 times EBITDA. These deals are relatively small, usually between $10 million and $20 million, with a tendency towards the lower end. Financially, the economics are quite appealing as the return on assets for these firms effectively doubles upon our acquisition. If the return is around 30 basis points, we would earn approximately 60 basis points once we own the practice, primarily due to the reduced payouts to advisors.

And in that spirit, I think since we've rolled it out to our advisers, it's been very, very appealing for those that are exposed to those possibilities. And as Matt said, we closed roughly 27 deals to date. And given the success with our existing advisers, now we've extended the question to the external marketplace and in the fourth quarter, began to explore how we could help those advisers that are on the LPL platform with the same type of solution to that big question of how do they transition their practices. And as we mentioned, we were fortunate enough to close our first deal in Q1, and we've got a pretty solid pipeline building there.

Great. No, that's very helpful. So my second question, kind of related, I guess, to some of the new initiatives. You guys have been super busy in the last few months with a number of deals, obviously being on the larger size. How should we think about the capacity for incremental M&A, call it, over the next 12 months as we're sort of waiting for close? And then obviously, you guys have to integrate it. And then as part of this conversation, maybe you can hit on the competitive dynamics in the bank channel post this deal, given that we're a pretty sizable player there.

Yes, I think relative to onboarding these programs and ensuring we have the ability to support and scale them, it is something we've been working on since we had the opportunity to onboard some of the larger financial institutions, BMO and M&T in 2021. Our guiding principle when exploring any growth initiative, whether it's a large institution win or an acquisition like Atria, is to ensure we continue to deliver an exceptional experience to our existing advisers and provide a seamless transition for those joining our platform. In this spirit, we've evolved our transition approach, improving and getting better over the last few years. We established a disciplined operating rigor, using seasoned run books and automation, all aimed at delivering high-quality, successful outcomes that are repeatable and sustainable. With each iteration, we continue to enhance the efficiency and effectiveness of our onboarding process.

Maybe just circling back to the enterprise channel. You guys have had a lot of success there over the past couple of years. I'm just hoping you could talk a little bit about the pipeline for new mandates, how those conversations are evolving. And then on the Prudential platform, more broadly on that. I was hoping maybe you could speak a little bit to the platform that you've customized and built for Prudential, just how that differs from what you've done with other enterprise clients and how you might be able to take the sort of capability set into other channels or markets over time?

Yes. So with respect to the institution pipeline, we have continued opportunity to get swings in the batter's box in the large bank space. Obviously, we've had established a series of a number of years of success in bringing those clients on and a success that those institutions are having once on the platform from a financial performance standpoint, from new capabilities and solutions and features, I think certainly reinforces the value that the model can provide them and thus helps us in those ongoing dialogues with other opportunities within the bank space. That's about a $1 trillion opportunity or a marketplace. And so there's a number of opportunities that remain out there, and we're encouraged by the dialogue we're having in that part of the marketplace. And then I think also with the win with Prudential, we expanded that market to include kind of wealth management solutions that are owned or operated by audit manufacturers and specifically insurance companies. And I think that's certainly that win created the opportunity to have a number of dialogues that companies that are similar in nature to a Prudential and certainly exploring the possibility of outsourcing, where an outsourcing solution wasn't always available in that part of the marketplace. And so a longer sales cycle and sort of longer iterative consultative approach to that. We are encouraged by the emerging dialogue and discussions we're having in that part of the markets. So those are just two different sets. I think we think are really, again, interesting and differentiating but also applicable to other potential prospects.

So I wanted to start with a follow-up on just the liquidity and succession discussion. Matt, you alluded to some of the limitations on the pace of deployment. But I was hoping you could just speak to the cadence now that this has been launched externally that we should be contemplating. And given the higher year-on-year payout ratio guide for Q2, when should we expect to see those reductions in the adviser payout rate as some of that liquidity and succession accretion really starts to come through?

On the last point, when you examine the payout, there are several factors at play. You're already observing this in the payout rate based on the 27 deals we've completed so far. If you focus on the year-over-year payout rate for Q1, it eliminates any seasonal production build. It's worth noting that last year's Q1 payout included a one-time catch-up of 40 basis points, resulting in an overall flat year-over-year payout. However, two factors contributed to a slight increase. Firstly, as Dan mentioned, the growth in the institutional channel, which typically has a higher payout rate compared to the average and also comes with lower serving costs and lower TA rates. This dynamic significantly improves bottom-line economics. Consequently, as that business expands, the payout rate is expected to increase.

And then we had some pricing reductions or pricing investments on our corporate advisory platform. We had announced those last year. Those took effect on the first quarter. So had those 2 things, that bias payout up. But then liquidity and succession did drive payout down to offset that. So there are moving parts in there, but you are absolutely starting to see that show up in the payout rate.

Yes. So Bill, you were speaking to the opportunity set. Again, it goes back to, in many cases, what we're solving for is the succession for these advisers. And I think given the size of that need has driven the proliferation of maybe innovation in that area to try to solve for it. And so if there's 300,000 advisers in the marketplace and 1/3 of them are going to retire over the next 10 years, that would be a total opportunity set. I think, for now, a lot of these transactions have been targeted for larger practices because to do these transactions, it just could be a complex administrative process to work through it. And so it's probably not fair to say then it's all 100,000 that are retiring in the next 10 years as the opportunity set. That said, the constraints around the administrative complexity to do these deals will certainly get easier as everyone in the marketplace learns, iterates, evolves on how to do that.

And our last question is going to come from the line of Benjamin Budish with Barclays.

I wanted to first ask a follow-up about cash levels, but I also want to inquire about the April update more broadly. Regarding cash, it seems like your comment about the variable aspect is linked to the timing of adviser payments and taxes, suggesting that cash might continue to decrease in April. However, you also seem quite optimistic about the recruiting pipeline. Can you provide any insights on what you're observing in terms of net new assets in April? I realize the month is nearly over.

Yes, I believe we have one more day of data to analyze. However, I can tell you that April is looking slightly better than expected, especially considering the seasonal patterns you've mentioned. Regarding client cash balances, there are two seasonal impacts in April. First, tax payments occur in April, which typically reduces cash by around $1.5 billion. The second factor is advisory fees, which are mainly deducted in the first month of each quarter; in this case, that would also reduce cash by approximately $1 billion. Together, these two factors could lead to a nearly $3 billion decline in cash sweep for the month. That said, we have actually observed cash balances increase by over $1 billion, so overall cash balances for April are down by just $1.5 billion at this point. Regarding organic growth, we continue to see the strong performance we observed in Q1. The same seasonal factors will impact net new assets in April and could decrease them by about $3 billion, or roughly 3%. Nevertheless, when we factor in the recruiting activities that have ramped up in April, along with positive developments, we are experiencing organic growth in the 5% to 6% range, which is a solid start for the quarter, especially since April is typically the slowest month of the year for growth.

Yes. I just want to thank everyone for making the time to join us this afternoon, and we look forward to speaking with you again next quarter.

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