Good afternoon, and thank you for joining the Second 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 for your questions. The company would appreciate if analysts would 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 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 disclosure 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 filing 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 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, operator, and thanks to everyone for joining our call today. To set the stage for tonight's call, I'll start by taking us through our quarterly business results and hand it over to Matt to cover the financials. Then, before we open the call up for Q&A, I'll take a few minutes to share our perspective on recent events in the marketplace related to sweep. With that as context, 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 remain focused on our mission: taking care of our advisors so they can take care of their clients. During the second quarter, we continued to see the appeal of our model grow due to the combination of our robust and feature-rich platform, 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 institutions solve challenges and capitalize on opportunities better than anyone else, thereby serving as the most appealing player in the industry. Now 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 $1.5 trillion. This continued solid organic growth was complemented by a higher equity market. Regarding organic growth, second-quarter organic net new assets were $29 billion, representing 8% annualized growth. This contributed to organic net new assets over the past 12 months of $104 billion, also representing an 8% growth rate. In the second quarter, recruited assets were $24 billion, bringing our total for the trailing 12 months to a record $93 billion. These results reflect the continuing appeal of our model as well as the strength of our recruiting across our expanded addressable markets. Looking at the same-store sales, our advisors remained 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 ones, a combination that drove solid same-store sales in Q2. At the same time, we continued to enhance the advisor experience through the delivery of new capabilities and technology and the evolution of our service and operations function. As a result, asset retention for the second quarter was approximately 98%, and 98% over the last 12 months. Our second quarter business results led to solid financial outcomes with adjusted EPS of $3.88. Let's now turn to the progress we made on our strategic plan. As a reminder, our long-term vision is to become the leader across the advisor-centered marketplace. To do that, the strategy is to invest back into the platform to provide unprecedented flexibility in how advisors can affiliate with us, and to deliver capabilities and services to help maximize advisors' success throughout the lifecycle of their businesses. Doing this well gives us the 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 institutions can affiliate with us, such that we are positioned to compete for all 300,000 advisors in the marketplace; and vertical integration, where we focus on delivering capabilities, technology, and services that help our advisors differentiate and win in the marketplace and be great operators of the business. Now with that as context, let's start with our efforts around horizontal expansion. Over the second quarter, we saw strong recruiting in our traditional independent market, reaching a new quarterly high of approximately $19 billion in assets. At the same time, through 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 another solid quarter, recruiting roughly $4 billion in assets. And as we look ahead, we expect that the increasing awareness of these models in the marketplace and the ongoing enhancements to our capabilities will drive a sustained increase in their growth. Next, in Q2, we added approximately $1 billion of recruited assets in the traditional bank and credit union space, which continues to be a consistent contributor to organic growth. During the quarter, we also continued to make progress within the large institution marketplace, where we advanced our preparation to onboard the retail wealth management businesses of Prudential Financial and Wintrust Financial. Collectively, these two deals will add approximately $66 billion of brokerage and advisory assets by early 2025. Now as a complement to our organic growth, we are on track to close the acquisition of Atria Wealth Solutions later this year and complete the conversion in mid-2025. As a reminder, this acquisition will add approximately 2,400 advisors and 150 banks and credit unions, managing approximately $100 billion in client assets. In addition, we're seeing solid momentum within our Liquidity & Succession solution as demand continues to build with existing LPL advisors and with the advisors outside of our ecosystem, including the signing of another external deal in Q2. Next, I want to update you on our OSJ ecosystem. A reminder, that for many years we have collaborated with large OSJs in serving and supporting independent advisors on our platform. We've been actively working to strengthen our alignment with these firms for a number of years, driving incremental changes to the broader OSJ ecosystem over that period. This year, we've put a capstone on those efforts. And through that work, there were a couple of isolated firms that surfaced as strategically misaligned with our mission and model because they were limiting advisors' ability to choose how and where they do business. That posture is in stark contrast to our core principles of advisor independence. As a result, we have resolved to separate from these relationships. Collectively, these firms have roughly $20 billion in applying assets, which began to be off-boarded from our platform in July. At the end of the day, these separations will strengthen our overall ecosystem and position us to better serve the great partners on our platform. Now, within our vertical integration efforts, we remain focused on investing back into the model to deliver a comprehensive platform of capabilities, services, and technology to help our advisors differentiate and win in the marketplace and run thriving businesses. As part of this effort, we continue to make progress across several key areas of focus, including our ongoing journey to build a world-class wealth management platform. Within this body of work, we're developing a comprehensive sweep of trading capabilities that will help advisors deliver a differentiated client experience and manage their advisory business more efficiently and effectively. In that spirit, we're rolling out a new trading system, ClientWorks Rebalancer, which enables advisors to rebalance models across multiple client accounts at one time and deliver a more personalized client experience across the book of business. In doing so, our aspiration is to help more advisors run model-based practices and ultimately turn trading from an administrative function into a strategic asset. The initial feedback on ClientWorks Rebalancer has been positive, and we're seeing solid early adoption. In summary, in the second quarter, we continued to invest in the value proposition for advisors and their clients while driving growth and increasing our market leadership. As we look ahead, we remain focused on executing our strategy to help our advisors further differentiate and win in the marketplace, and as a result, drive long-term shareholder value. With that, I'll turn the call over to Matt.

All right. Thank you, Dan, and I'm glad to speak with everyone on today's call. In the second quarter, we remained focused on serving our advisors, growing our business, and delivering shareholder value. This focus led to 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, closing six deals during the quarter and signing one deal with an external practice. Lastly, we remain on track to close on the Atria transaction in the second half of the year and plan to onboard their business in mid-2025. So, as we look ahead, we remain excited by the opportunities we have to serve and support our 23,000 advisors while continuing to deliver an industry-leading value proposition and drive organic growth. Now, let's turn to our second quarter business results. Total advisory brokerage assets were $1.5 trillion, up 4% from Q1, as continued organic growth was complemented by higher equity markets. Total organic net new assets were $29 billion, or approximately an 8% annualized growth rate. Our Q2 recruited assets were $24 billion, which prior to large institutions was the highest quarter on 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 and expense discipline led to adjusted EPS of $3.88. Gross profit was $1.79 million, up $13 million sequentially. As for the components, Commission Advisory Fees Net of Payout were $263 million, up $3 million from Q1. Our payout rate was 87.3%, up 70 basis points from Q1 due to typical seasonality. Looking ahead to Q3, we anticipate our payout rate will increase to approximately 87.5%, driven by the typical seasonal build and production. With respect to client cash revenue, it was $361 million, down $12 million from Q1, as average client cash balances declined slightly during the quarter. Overall client cash balances ended the quarter at $44 billion, down $2 billion sequentially, driven by record client net buying activity of $39 billion. Within our ICA portfolio, the mix of fixed rate balances increased slightly to roughly 70%, within our target range of 50% to 75%. As a reminder, during Q2, there were roughly $2.1 billion of fixed rate contracts that matured. We placed $1.7 billion of those maturing balances into new three to six-year contracts, yielding approximately 420 basis points, which is roughly 220 basis points higher than their prior yield. Looking more closely at our ICA yield, it was 318 basis points in Q2, down 5 basis points from Q1. As for Q3, 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 10 basis points. As for service and fee revenue, it was $135 million in Q2, up $3 million from Q1. Looking ahead to Q3, we expect service and fee revenue to increase by approximately $10 million sequentially, driven by revenues from our annual focus conference, as well as higher IRA fees. Also, depending on the timing of the previously mentioned separation from a couple of large OSJs, we could record up to an additional $5 million of fees. Moving on to Q2 transaction revenue, it was $59 million, up $2 million sequentially due to increased trading volumes. 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 $371 million in Q2. Looking ahead, if our strong levels of organic growth continue into the second half of this year, we would expect to be in the upper half of our 2024 Core G&A guidance range. As a reminder, this is prior to expenses associated with Prudential and Atria. To give you a sense of the near-term timing of the spend, in Q3, we expect Core G&A to increase by $5 million to $10 million sequentially. Moving on to Q2 promotional expense, it was $148 million, up $16 million from Q1, primarily driven by Prudential-related onboarding costs, as well as increased transition assistance resulting from our strong recruiting. Looking ahead to Q3, we expect promotional expense to increase to approximately $170 million to $180 million, primarily driven by conference spend, as we will host our annual focus conference next month as well as continued Prudential-related onboarding and integration costs. Turning to depreciation and amortization, with $71 million in Q2, up $4 million sequentially, looking ahead to Q3, we expect depreciation and amortization to increase by roughly $8 million sequentially, which includes approximately $3 million of technology development related to Prudential. Regarding capital management, we ended Q2 with corporate cash of $684 million, up $373 million from Q1. Our leverage ratio increased slightly to 1.7 times, within our target leverage range of 1.5 to 2.5 times. I would note that during the quarter, we issued $1 billion of senior notes, the proceeds of which will be used to finance our acquisition of Atria. 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, the majority of our capital deployment was focused on supporting organic growth as well as M&A, where we allocated capital to our liquidity and succession solution and closed on the acquisition of Crown Capital. Specific to share purchases, a reminder that we paused buybacks following the announcement of the Atria acquisition. Our plan remains to evaluate restarting share purchases following the close, which we expect to occur in the second half of this year. 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. Before we open the call for questions, I'd like to turn it back over to Dan.

Thanks, Matt. I'd be remiss not to acknowledge recent developments in the marketplace related to cash revenue and speculation on the potential read-throughs to our business. We have been evaluating the announced changes to better understand the impetus, magnitude, and competitive implications. As for the firms that have made changes, they have different business models and monetization frameworks, so we can only speculate as to the issues they may be addressing. As it relates to LPL, we continuously strive to ensure advisors have choice in the tools and products they use to serve their clients in a comprehensive way and feel good about our position both competitively and regulatory. To that end, and specific to client cash, our broad-based offerings range from solutions for operational balances to cash-like alternatives when seeking yield or income. Solutions like our Sweep Deposit Program, which offers expanded FDIC insurance and immediate liquidity for transactions of cash, to positional money market funds for those seeking higher yield and a liquid product, to CDs and fixed income funds to achieve interest rate exposure. In all, we feel good about the strong complement of cash solutions we provide. In that spirit, we do not have plans to change our prices and believe our product stack provides advisors with the solutions they need to successfully service their clients. As always, we will remain agile and nimble as we continuously evaluate our solution set and control framework for opportunities to enhance our offering. With that, operator, please open the call for questions.

Our first question comes from Steven Chubak from Wolfe Research. Please go ahead with your question.

Hi. Good afternoon, Dan. Good afternoon, Matt.

Hi there.

So, Dan, just appreciated the remarks around some of the sweep cash developments across the industry. Made it clear you have no plans to adjust sweep pricing on the platform at this time. Just looking out over the next few years, do you anticipate any wholesale changes to sweep deposit pricing and how sweep cash is monetized across the industry more broadly?

Yes, thanks for the question. And look, a little context of our jumping-off point, and then I love the future question. At the highest level, we evaluate all of our pricing in the context of our overall strategic pricing framework and value proposition, which we review regularly. Within that framework, we consider a host of factors, including industry benchmarking to ensure that we've competitively positioned ourselves in the marketplace. So, specific to the pricing of our cash sweep program, on our ICA, we take a dynamic and thoughtful approach, including household AUM-based tiers that range anywhere from 35 to 220 basis points. And that typically puts us in the top half of the marketplace, and that's where we are today. Of course, I think as you look out over the next year and you look at the rates, you expect rates to change over that period of time, that certainly will influence some of that pricing. That's kind of where we are from a jumping-off point and how we've approached it up to this point. I think as we look into the future, we obviously don't know what exactly the pricing might look like, but I do believe it challenges all of us to evolve and transform, and maybe even disrupt parts of our value proposition, including pricing, all in the spirit of helping our advisors better serve and support their clients. That's what we've been trying to do over the last five years; we've shared with you all that journey of investing back into the advisors' value proposition by lowering prices in areas that matter most to the advisors and their clients. In exchange, we're obviously then enhancing the value that we provide to them. Now, with respect to cash sweep pricing, it's just one element of the various discrete pricing mechanisms we consider, and not one of great priority to the advisors. That said, as we think about the future, we'll continue to focus on pricing through our highly strategic wins, evaluating all fees and charges in the aggregate of our value proposition, and in context of the overall priorities and needs of the advisors and their clients. To the extent that we're compelled to make a change with respect to this cash sweep program, because of our scale, vertically integrated solution, and the number of different affiliation programs that we have, we have great flexibility in how we think about our options and alternatives from a pricing standpoint. I believe that across the aggregate of our different pricing options and alternatives, we can make most any adjustment, do it in a very competitive way, and most likely turn it into a strategic opportunity. I hope that helps, some color. We don't know exactly what that looks like, but that's the discipline and the framework and the folks that we take with respect to our pricing models.

No, it's very helpful color, Dan, in framing your philosophy around that. Maybe just sticking to the same topic but just looking at it from a growth strategy lens, you got another strong quarter of NNA, continue to be active on liquidity and succession fronts. Just given some of the unknowns around the developments relating to sweep cash, whether it's competitive or regulatory, just want to get a sense as to whether that would alter your approach to underwriting deals, and do you anticipate any changes to TA for you and industry peers in light of some of these developments?

Yes, hey, Steven. When you look at TA, just first and foremost a reminder of what's most important for advisors when they're determining and deciding to change firms. Their top priorities are really the capabilities, technology, and service; that’s tier 1 for them. Then second is ongoing economics, and third is TA to really facilitate, as the name would say, the transition from one firm to another. I think our approach of underwriting to returns, which we've been doing for quite some time at three to four times EBITDA as a general rule, wouldn't change. I think when you look across our revenue model, to the extent that things move up and down within that, we've always reflected that. We've underwritten this way across a range of interest rate environments. I don't think that would change. We don't expect that to change. Just reiterating that there are other things that are much, much more important, and perhaps emphasizing Dan's point, I'll turn it back to him, that we feel good where we are positioned from a value proposition to specifically for cash sweep.

Yes, and I just might add that I reinforce the availability of the products that could give the advisors the necessary flexibility they need to meet their clients' needs. If I'm looking for yield or I'm looking for income, we make it very easily and accessible for them to access those solutions necessary to meet the needs of their clients. We're looking to simplify a client's life and make it very easy to pay for fees or get quick access to some liquidity or to store some cash in-between trades, et cetera, then we have a sweep vehicle that is intended to do that. I think that's the key to the advisors: give them the necessary flexibility so they can deliver a great experience to the client and have the solutions necessary to help them achieve their life goals and dreams, and we think that our portfolio does a good job of doing that.

Great color, and thanks so much for taking my questions.

Thank you. And our next question comes from the line of Devin Ryan from Citizens JMP.

Hey, Dan. Hi, Matt. How are you?

Hi, Devin.

I guess first question, want to ask on the centrally managed account specifically because we've received some questions on that as well. It would be great just to get the percentage range of cash in these accounts. If you can just talk about the fiduciary obligation, either at the advisor level or at the firm level, when appropriate, on advisory cash in centrally managed accounts and maybe how that's different from just fee-based more broadly, if at all?

Yes, Devin, I'll start there. When you look at centrally managed, we've got around $127 billion of assets in there; this is about 8% of total assets. From a cash standpoint, just similar to our business overall, the cash levels from a transactional cash standpoint are at low levels; think about it as about 3% of AUM, like our business overall. In those models, right, if there's a portfolio allocation of cash beyond that, that would go into what Dan was just talking about, those investing cash options. It would go into things like money market funds, treasury, short-term bonds, and things like that. I think when you look at the cash allocations within centrally managed, I'd just reiterate our overall perspective that Dan articulated quite well applies just the same to centrally managed. We feel good about how that is set up, priced, and the value prop, both on transactional cash, but as well as those investing cash products that are really available for advisors to make sure that they can serve and support their clients as needed.

I just would add that our allocations to cash within our centrally managed programs are consistent and the same across all models, whether they're contributed to by LPL research or by external third-party management.

Okay, terrific color, thank you. And then just as a follow-up, can you remind us on what the OSJ economics generally look like on an EBIT ROA basis relative to the firm white average? I believe they're lower, but we'd love to just get a little color there. And then, we know this topic's been in the headlines a bit, so not too surprising, but do you anticipate other OSJs to potentially exit in the intermediate term? It sounded like this was maybe part of a mutual process, but just wanted to get a little more color and expectations there. Thanks.

Yes, Devin, I'll start on the returns. You're right. When you look at our overall gross profit ROA for the firm, it's in the low 30s. For the firms that we're talking about, this $20 billion, it's around two-thirds of that. So, think in the low 20s. The returns are lower. From an organic growth standpoint, these folks weren't growing; they were actually a drag or reduction on organic growth. Lower returning, lower growing would be the headline on those firms. Maybe I'll turn it back to Dan on the potential exits.

Yes, Devin, as we look forward or strategically, I think now that we've strengthened and done a good job of aligning with these large OSJs, I think we're more convicted than ever that we can collectively pull through the synergies of our relationships and serve and support advisors really well. This ultimately will contribute to the overall growth of the business, and I think we feel great about where we landed; it's work that needed to be done. It was done over an extended period of time dating back to 2018. We've focused on key areas and solved for them. One was making sure that we were well aligned on the value to be delivered by both parties. Hope that helps.

Very helpful, thanks so much. Thank you.

And our next question comes from the line of Alex Blostein from Goldman Sachs. Your question, please.

Hey Dan, hey Matt, hope you guys are doing well. So, sticking with the topic of the starting season, I appreciate that you might not have the perfect visibility at what sort of happened with some of your larger competitors, and the details and rationale obviously seem to be pretty murky there. But can you discuss how LPL's advisory offering might differ from what's transpired to the larger banks? What gives you confidence that you will remain insulated from any regulatory action that may result in either higher client credit and rates or incremental shifts to money market funds or other higher yielding options? Is it a function of disclosure or account size? Anything else that you could provide supporting your view and thinking there would be great?

Alex, let me start with just maybe how we think about the programs being different and then I'll answer your bigger question around how we think about our positioning from a regulatory standpoint going forward. As a starting point relative to the differences in the programs, we don't have an affiliated bank or proprietary mutual fund complex. So, we don't have that same structure or potential conflicts of interest, and we certainly have a different monetization program because of that with our cash sweep solution. They would tend to monetize that business both on the cash sweep as well as potentially through the banks, and then the foundational structure around why we don't have proprietary products and the potential elimination of conflicts associated with earning asset management fees. Those are foundational differences in our models. Second, those companies' sweep programs potentially are only sort of single-sleeved through their banks, whereas we have a program that contracts with third-party banks. We can actually create added benefit with our program through that by having 10 times the amount of FDIC insurance limits; $2.5 million for an individual, $5 million for a joint account is another place where I think there's a fundamental difference in our programs and platforms from a value standpoint. Additionally, as part of our cash program offerings, we make all of the positional money market funds available to our advisors with a really low entry point of $10,000, which is less typical in a lot of those firms that have contemplated moves. For purchases in an advisory account, there's no ticket charge associated with these movements in and out of the money funds. We’ve tried to make that easy and accessible for them to meet the needs of their clients and perform their duty of care. Now, to your second part of your question, as I said in the prepared remarks, we feel good about our positioning from a regulatory standpoint. Why do we think that? Maybe a little color around that if you take and create a framework around the regulatory guidelines; these typically will focus on duty of care obligations, operating control environment, and disclosure requirements. We regularly review all of these elements to ensure that we're operating within the prescribed requirements and guidelines. With respect to duty of care, we regularly review our sweep program and cash investment products to ensure we're meeting both our conduct standards and the needs of our advisors and their clients, that we provide the flexibility and low barriers to entry in our solutions for investing cash to help our advisors serve and support their clients. That is done consistent with their obligations as advisors. We don't provide incentives for advisors to direct allocations to cash sweep programs; that's another important point with respect to duty of care. Now, with respect to controls, we actively monitor the levels of cash position within advisory accounts, making sure that advisors are actively managing those accounts and there's not idle cash sitting in there that is not optimized, aligned with the client's goals and objectives for that overall portfolio. We provide clear and transparent disclosures describing the features and terms of our programs, including the fees we earn relative to the yield clients receive. To that end, that’s why we feel that our cash offering controls, monetization framework, meet the needs and the expectations of all of the advisors.

I got you. No, that was very comprehensive. I'll actually leave it there. I'm sure others will have questions as well. Thank you.

Thank you. And our next question comes from the line of Michael Cyprys from Morgan Stanley. Your question, please.

Great, thanks for taking the question. Maybe just continue with the same theme on understanding that you don't have plans to change your sweep pricing, but maybe just to clarify, I was just hoping you might be able to unpack what might lead you to change it at some point, what might be those different scenarios and to what extent have you heard from regulators on your sweep rates or disclosure practices and such?

Yes, I think, Michael, with respect to the second part of your question, as an ongoing matter around our ongoing reviews with regulators, this is always a part of their review, and we've had that consistent discussion with them along the way. That's part of the reason we feel very confident in our regulatory positioning today. First and foremost, when we look at pricing, it's through a strategic lens. We're always looking to ensure that we do two things: how do we differentiate in the marketplace with our overall holistic value proposition? And then two, is that well aligned with our advisors' needs and their clients' needs? Those are the two biggest drivers relative to how we might invest, innovate, or evolve our pricing strategies. In the past five years, we've focused on advisory and transaction charges because that's sort of where the trend in the business was going. That's a great example of those two being the real catalyst for how we think about that. We should always be challenging ourselves to think outside the box. What can we learn from other places, other industries around how they create value, how they price, how they create new value that extends new revenue streams? That could then offset pricing somewhere else. We take this flexibility and approach with scenario planning for how we evolve this pricing again to best serve the advisors and the clients. I hope that helps; it's nothing specific, but it gives you a sense of how we think about it.

Great. Just a follow-up question if I could here, as you look at the actions of others across the industry and based on conversations you're having with folks across the industry, including regulators, do you have any sense whether or not the goalpost is moving beyond practices that have been accepted over the years that are disclosure-based?

That is not our sense. I think there's a pretty tidy and clear regulatory framework of which that we all understand how to operate in. Again, I think anywhere where there may be a potential conflict within the overall aggregate business model, there's a requirement to disclose and to be clear to set that expectation for the client so they can make an informed choice. That’s a very logical and principled way to approach it, and when we begin to change principles, it's much harder to change that. We don’t see signs that that would change from the goal. It's a great question.

Great, thank you.

Thank you. And our next question comes from the line of Kyle Voigt from KBW. Your question, please.

Hi, good evening. Maybe I'll start on the same topic that everyone else has, but just a follow-up on the advisory cash discussion. You mentioned that 3% of the centrally managed program is in sweep. I guess, can you provide any color on cash as a percentage of client assets for total advisory accounts in the corporate RIA? So on the $568 billion of assets or so, I think in the past you've mentioned that typically there's higher cash allocations in those accounts versus brokerage, but not sure if that's still true today.

Yes, I think when you look at cash as a percentage of AUM overall, it's around 3%. The centrally managed is a little bit above that. I think when you look at the rest of advisory, it's still in the same ballpark, but it's a little higher. On brokerage, that cash is around 2.5%. Brokerage has a lot of business and accounts that just simply have no cash at all, like annuities and direct business on the mutual fund side. You end up with a smaller balance or percentage under brokerage overall. The headline point is, outside of centrally managed, on the advisory side, it's in the same ballpark; it’s just a little higher.

That's helpful, thank you. And then, Matt, just wondering also if you could give an update on July to date sweep cash balances and related to the OSJs that are off-boarding towards the end of this month or starting this month, any color on if they have a similar cash as a percentage of client assets as well, which I think would imply maybe $600 million or so of an impact that we should expect to show up in the monthly figures this quarter?

Yes, I think so. On how things are trending so far in July, a headline I would give you is it's shaping up to be a good month, especially when you factor in the seasonality that I think you're well familiar with on month one of a quarter. Specific to client cash, remember that seasonality is advisory fees primarily hit in the first month of the quarter. That would reduce cash in July by around $1.4 billion, all else being equal. Flows outside of that have been an inflow of around $700 million. When you put those two things together, what we've seen from a cash sweep standpoint in July is a decline of around $700 million, or putting it at around $43.3 billion. To add to that, on the organic growth side, those advisory fees impact organic growth the same way; $1.4 billion hits in that first month. The momentum we've seen in the first half of this year and as we saw in this quarter has continued. That puts us in the organic growth standpoint in July, looking at something in that 6% to 6.5% zone, keeping in mind that it's usually the lowest month of the quarter. Those numbers are, prior to any impact of those OSJs leaving. We'll ensure as we report results to clearly delineate the impact that those have had, meaning how much of that $20 billion has flowed out. Very little has flowed out so far. In terms of cash, I don't think there's anything distinct from an amount of cash standpoint from those two firms. We'll make it clear in the metrics over the next three or four months as it flows out.

Thanks, Matt. Thank you.

Thank you. And our next question comes from the line of Michael Cho from J.P. Morgan. Your question, please.

Hi, good afternoon. Thanks for fitting me in. I want to skip the regulatory and cash discussion. I just wanted to follow up on the OSJ. Matt, you talked through the timing and that you'll delineate going forward. I'm just curious, what kind of areas were particularly misaligned as you characterized? Going forward, how would you frame the potential for other OSJs maybe falling into similar buckets over time?

Yes, going forward to answer your second part of your question; because of the alignment and structure we've put around the program, there's very little probability that that would occur. Back to your first part of your question, we see in some cases where an OSJ may buy up their advisors' practices, turn them into more of an employee-based construct, ultimately creating a more captive type of model at that point. That is different from the principles of independence and providing flexibility for those advisors to move those assets where they want to or go where they want to. That’s our point. As soon as major principles of independence begin to be lost within the model, we have a hard time maintaining that within our platform and ecosystem. That’s an example of something that we were trying to fix.

Great, thanks, Dan. And then, just to switch gears a little bit on the annuity side, annuities continue to remain solid. Clearly, the rate environment has helped and continues to help, but I'm wondering what you're seeing at the incremental level that the strong demand in recent quarters or years could be nearing any sort of normalization point yet, just given the strong growth that annuities have been seeing on LPL's platform.

Sorry, what was the second half of that? You just broke up a little bit?

Yes, no, on any sort of normalization that you might see on the strong demand.

Thank you. Yes, look, I think if you look at the marketplace and the growth, call it over the last year or two; it's very much a couple of things happening. The foundation of an annuity as it supports and helps someone with their retirement planning is clearly a relevant problem to solve for many folks as they think about those important life goals. It’s a relevant solution across a broad opportunity set. With the rate environment becoming different than the one we lived in for an extended period, it has created an opportunity to help clients create revenue or income streams in retirement. Fixing or variable annuities are well positioned to do that as with a steepening yield curve occurring as we go forward. That may also be helpful for variable annuities in terms of the features and benefits that they provide. If you have more appealing features and benefits relative to the macro, then that differentiates annuities relative to other options and alternatives. From a seasonality standpoint, I see it probably as more of a product choice in solving a really important need for a broad set of an advisor's clients than necessarily a found opportunity to create new asset gathering opportunities since the features are more sound. I don’t think it creates some step down or step up as much; it’s just a demonstration of a heavier utilization in a product given the market conditions. That said, as we evolve and grow our number of advisors on our platform, that provides a tailwind to the overall volumes of brokerage solutions or, in this case, annuity solutions being done.

No, well said.

Great, thank you.

Thank you. And our next question comes from the line of Dan Fannon from Jefferies. Your question, please.

Thanks. So, just a question on the environment for recruiting. Obviously, $24 billion is quite strong in the quarter. Can you talk to the economics of those assets today versus maybe what you were underwriting a year ago? Ultimately, you talked about good momentum, I think, into July and the backlog. What characterizations around how that's progressing as we think about the rest of the year?

Yes, Dan, I'll start. On the economics and underwriting, to my point earlier to Steven's question, I think our underwriting approach and economics haven't changed. We underwrite to returns, and TA, and the economics there are really the third thing that advisors are looking at. The return hurdles and underwriting have not changed. When you think about it, recruiting in general comes on board at three to four times EBITDA, and that has not moved much.

Yes, and with respect maybe to your second question, just again, as we said in the remarks and as you just said, as a jumping-off point, we had recruited assets of $24 billion in Q2, and that’s $93 billion over the trailing 12, which is a solid place for momentum. We continue to see that momentum into the third quarter. I think we're seeing it across all of our affiliation models, providing good diversification in that opportunity set. That’s being driven by the continued evolution of the appeal of our model and the breadth of market we serve given the different affiliation models. So, as we look ahead to the third quarter, we certainly see momentum there. Beyond that, given those structural values that we're creating inside the model, our go-to market strategy and efficacy around how we deliver that to the marketplace, we feel a strong structural trend. Looking even further beyond the third quarter, we feel good about that momentum across all of our models. At the same time, we have some built-in large institutions that have yet to onboard, representing $66 million in recruited large institutions; that certainly is a tailwind to that outlook as well.

Yes, that is helpful. And then just a quick one, Matt, on expenses. The promotional spend is a sizable pickup both sequentially as well as year-over-year. I think you said conferences, but you have this conference every year, so just curious about the magnitude of the pickup? Should we see that normalize again in the fourth quarter after I guess, what would be seasonal pickups?

Yes, I think there are a couple of things. The conference from a seasonality standpoint is in Q3 each year. So, just considering a little, I was giving color on the sequential change. The other thing I'd keep in mind is specific to the onboarding costs associated with Prudential. A reminder of the spend there to bring them on board. There's no TA associated with Prudential; it's really important to them. The entire amount spent there and a lot of that will show up in promotional. When you think about the trends, especially year-over-year, probably the spend-related Prudential, which when you look at the overall spend— the two highest quarters will likely be Q2 and Q3 related to that. After that, meaning on the other side of our largest conference, the core drivers should drive the recruiting. We think it’s a good use of capital, but hopefully that helps give you a little sense as to why that number is increasing; it’s largely a timing of conferencing potential.

Great, thank you.

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

Just thanks everyone for taking the time to join us this afternoon, and we look forward to speaking with you again next quarter.

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