Earnings Call Transcript - LPLA Q1 2022

Operator, Operator

Good afternoon and thank you for joining the First Quarter 2022 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, Matt Audette. Dan and Matt will offer introductory remarks, and then the call will be opened for 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's financials, 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 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 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.

Dan Arnold, CEO

Thank you, Howard, and thanks to everyone for joining our call today. We entered 2022 with a continued focus on our mission, taking care of our advisers so they can take care of their clients. As we progressed through the first quarter, market volatility and geopolitical uncertainty increased. Conditions like these reinforce the value our advisers provide to their clients by helping them navigate uncertain times. They work to provide personalized financial guidance to millions of Americans when they need it most, highlighting the importance of LPL's mission. It also shines the light on the pivotal work of our employees. We take care of these advisers every day. Guided by this North Star, we worked together to deliver another quarter of solid business and financial results while continuing to make progress on our strategic plan. I'd like to review both areas, starting with our first quarter business results. In the quarter, total assets decreased to $1.16 trillion as continued solid organic growth was more than offset by lower equity markets. Despite market volatility, the business continued to perform well. First quarter net new assets were $18 billion, translating to a 6% annualized growth, driven by solid new store sales, same-store sales, and adviser retention. These results contributed to an 11% organic growth rate in the past 12 months. Looking at recruited assets, they were $10.4 billion in Q1, which prior to onboarding large financial institutions, was a new high for the first quarter of the year. These results were driven by the continued enhancement of our model and the efficacy of our business development. Looking at same-store sales, they remained solid in the first quarter as our advisers continued to focus on serving their clients and differentiating their solutions in the marketplace. Regarding retention, we further enhanced the adviser experience by delivering new capabilities and technology, as well as the ongoing modernization of our service and operations functions. As a result, asset retention was approximately 98% in the first quarter and over the past 12 months. Our first quarter business results led to solid financial outcomes with $1.95 of EPS prior to intangibles and acquisition costs, an increase of 10% from a year ago. Let's now turn to the progress we made on our strategic plan. Our long-term vision is to become the leader across the entire adviser-centered marketplace, which means being the best at empowering advisers and institutions to deliver great advice to their clients and to be exemplary operators of their businesses. To bring this vision to life, we are providing the capabilities and solutions that help our advisers deliver personalized advice and planning experiences. Simultaneously, through human-driven technology-enabled solutions and expertise, we're supporting advisers in their efforts to excel as business owners. Successfully doing this positions us for sustainable industry leadership across adviser experience, organic growth, and market share. To execute our strategy, we have organized our work into four strategic plays, which I'd like to review in turn. Our first strategic play involves meeting advisers and institutions where they are in their business evolution, winning in our traditional markets, while leveraging new affiliation models to expand our addressable market. Our recruiting in traditional markets continues to be a significant source of growth in Q1, with approximately $7 billion in assets. In the quarter, we increased our win rates and expanded the depth and breadth of our pipeline despite adviser movement in the industry remaining at lower levels. Regarding our new affiliation models, strategic wealth, employee and our enhanced RIA offering, we recruited nearly $3 billion in assets in Q1. This quarterly total was a new high for these models and reflects the increased diversification of our recruiting. In these three models, we continue to see growing demand and an expanding pipeline, positioning them for increased contributions to organic growth going forward. The large financial institutions market was a new source of recruiting in 2021 with the addition of BMO Harris and M&T. For 2022, CUNA is on track to join later this quarter. We are prepared to onboard their approximately 550 advisers located across nearly 300 credit unions, serving $36 billion of brokerage and advisory assets. This year, we will also onboard People's United Bank, acquired by M&T, which includes approximately 30 advisers serving $6 billion of brokerage and advisory assets. For these institutions, we will implement new innovations to streamline the transition to LPL and make our offering even more appealing, contributing to future growth. As we look ahead, our pipeline continues to build as demand for our model grows. Our second strategic play focuses on providing capabilities that help our advisers differentiate themselves in the marketplace and drive efficiency in their practices. In 2022, we are enriching our wealth management platforms, including enhancing our advisory solutions in alignment with the secular trend towards advisory, which continues in our business and across the industry. For example, in the first quarter, we expanded the investment options available in our centrally managed platforms by integrating separately managed accounts. This enhancement makes it easier and more efficient for advisers to leverage separately managed accounts, driving higher utilization and further growth of centrally managed platforms. Our third strategic play is focused on creating an industry-leading service experience that delights advisers and their clients and, in turn, helps drive adviser recruiting and retention. Over the past two years, we have transformed our service model into an omni-channel Client Care Model, which includes voice, chat, and digital support, providing advisers with flexibility in accessing service. We continue to refine this model to drive additional efficiency and an enhanced experience for our advisers. The next phase of our transformation focuses on enriching our digital support to provide greater flexibility, speed, and accuracy for our advisers. We are developing end-to-end digital experiences in core clearing functions, including money movement, account opening, and account transfers, which collectively drive the majority of our service center activity. Streamlining these core clearing functions, we believe we can enhance service levels, delight advisers, and increase the scalability and efficiency of our platform. Our fourth strategic play focuses on developing a services portfolio to help advisers operate successful businesses in the independent marketplace and provide comprehensive advice to their clients. A key component of this play is our Business Services portfolio, assisting advisers in effectively managing their businesses so they can focus on serving clients and growing their practices. Our subscription base continued to grow, ending the quarter at nearly 3,500, more than doubling year-over-year, demonstrating increasing demand and appeal. We are leveraging insights and learnings from working with advisers on existing solutions as catalysts for new solutions. Examples of this include our new Bookkeeping solution, currently in pilot, and our enhanced Admin Solutions offering, providing a next-generation tech-enabled task-management system. We also continue to progress on opportunities we introduced last quarter to help advisers offer comprehensive financial advice and planning solutions. Our first offering, Paraplanning, has generated solid initial momentum in the marketplace. Our approach is to provide advisers with a scalable platform to efficiently deliver more financial plans and access greater expertise that helps deepen client relationships. Launched in January, we had approximately 60 subscribers by the end of Q1. We continue to work on expanding the portfolio, including tax planning and high-net-worth solutions. We remain focused on innovating and expanding our services portfolio, positioning us to drive additional gross profit and organic growth over time. In summary, in the first quarter, we continued investing in the value proposition for advisers and their clients while driving growth and increasing market leadership. Looking ahead, we remain committed to executing our strategy to help our advisers further differentiate and win in the marketplace, ultimately driving long-term shareholder value. With that, I’ll turn the call over to Matt.

Matt Audette, CFO

All right, thank you, Dan. I'm glad to speak with everyone on today's call. As we move into 2022, we remain focused on serving our advisers, growing our business, and delivering shareholder value. While the market backdrop was volatile, we delivered another quarter of solid net new assets and earnings growth. In addition, we are preparing to onboard two large financial institutions this year: CUNA and People’s United Bank. As we look ahead, we continue to be excited about the opportunities to help our advisers differentiate and win in the marketplace while growing our business. Let's turn to our first-quarter business results. Total advisory and brokerage assets were $1.2 trillion, down 4% from Q4, as continued organic growth was more than offset by lower equity markets. Total net new assets were $18 billion, or a 6% annualized growth rate. In Q1, recruited assets were $10 billion, which prior to large financial institutions, was a new high for the first quarter of the year, bringing our 12-month total to $76 billion. Our business mix showed positive trends in Q1. Advisory net new assets were $17 billion, or an 11% annualized growth rate. With this growth, our advisory assets reached a new high of 54% of total assets, benefiting from our differentiated capabilities and the secular trend towards advisory. Looking at our Q1 financial results, organic growth combined with expense discipline led to EPS prior to intangibles and acquisition costs of $1.95, up 10% from a year ago. Our top-line growth saw gross profit reach a new high of $669 million, up $26 million or 4% sequentially. In terms of the components, commission and advisory fees net payout were $227 million, up $27 million from Q4, primarily driven by higher advisory fees and seasonally lower production bonus expenses. In Q1, our payout rate was 86.1%, down about 150 basis points from Q4, largely due to the seasonal reset of the production bonus at the start of the year. Looking ahead to Q2, we anticipate the payout rate will increase to the low 87% range, driven by the typical seasonal build in production points. Notably, we expect the payout rate to increase following the onboarding of large financial institutions, but given the timing of when they join, we anticipate that increase will be seen mainly in Q3. Moving on to asset-based revenue, sponsor revenue was $212 million in Q1, down $8 million sequentially as average assets decreased during the quarter driven by lower equity points. Turning to client cash revenue, it was $85 million, up $3 million from Q4. This increase was primarily driven by the March rate hike, which more than offset fixed rate contract pricing while looking at overall client cash balances. There were $62 billion, up $5 billion from the last quarter. Within our ICA portfolio, as expected in Q1, we renewed a $1 billion fixed rate maturity into a new four-year contract. In March, we also added floating rate capacity, leading to a roughly $3 billion increase in ICA balances. Our ICA yield was 102 basis points in Q1, up 1 basis point from Q4, benefiting from the March rate hike in the final two weeks of the quarter. For Q2, we expect an increase in yields on our floating rate balances as we see the full benefit of the March hike, while yields on our fixed rate portfolio will adjust for the renewal in Q1. The net effect is we expect our Q2 ICA yield to increase by a couple of basis points. Moving on to service and fee revenue, which was $113 million in Q1, up $2 million sequentially, driven primarily by continued growth in our services group revenue and the seasonal increase in IRA fees. Our services group, which includes business services and planning and advice services, ended the quarter with more than 3,500 subscriptions, up about 500 from last quarter, and roughly double from a year ago. Our services group now generates approximately $30 million annually while also contributing to organic growth by helping drive recruiting, same-store sales, and retention. Looking ahead to Q2, we expect service and fee revenue to decrease by a couple of million sequentially, driven by seasonal declines in IRA and conferencing. Moving on to Q1 transaction revenue, it was $47 million, up $7 million sequentially due to increased trading volume from equity market volatility. Looking ahead to Q2, transaction volumes in April have pulled back from elevated Q1 levels, which, on a run rate basis, would likely result in a decline in transaction revenue of around $5 million. Now let’s discuss expenses, starting with core SG&A, which was $281 million in Q1. Looking ahead, we plan to maintain discipline on expenses while continuing to invest to drive growth. With People’s planning to join in the second half of this year, we anticipate up to $5 million of additional core G&A in 2022 to support this new large financial institution. Regarding Q1 promotional expense, it totaled $87 million, up $1 million sequentially, primarily driven by transition assistance, large financial institution onboarding, and conference spend, with two of our largest conferences occurring in Q1. In Q2, we expect promotional expenses to rise by a couple of million sequentially due to increased costs from transition assistance and large financial institution onboarding, offset by lower conference expenses. Moving on to Waddell & Reed, the integration is on track to be substantially complete by the end of the second quarter. Our run rate EBITDA is roughly $70 million in Q1, and we expect the run rate EBITDA benefit to reach at least $95 million by the end of Q2. Depreciation and amortization were $45 million in Q1, up $5 million sequentially, and we expect depreciation and amortization to grow by a few million in Q2. Looking at capital management, our balance sheet remains strong in Q1 with the leverage ratio at 2.16 times and corporate cash of $270 million. Our capital deployment strategy is focused on aligning capital allocation with returns generated: investing in organic growth first, pursuing M&A when appropriate, and returning excess capital to shareholders. In Q1, we allocated capital to both organic growth and share repurchases, buying back $50 million of our shares. In Q2, we will remain focused on capital allocation priorities and expect an increase in capital deployed for organic growth with onboarding of large institutions and related transition assistance costs. We also anticipate continuing share purchases at a similar level as in Q1. As we look ahead to the second half of the year, if interest rates continue to rise as market expectations suggest, we will have additional capital to deploy. Our capital deployment framework remains unchanged, focusing first on organic growth, followed by M&A when appropriate and returning excess capital to shareholders. We will remain flexible and dynamic as our capacity and opportunities to deploy capital evolve. Lastly, I want to share that we've scheduled our next investor and analyst day for Wednesday, November 16, in New York City. We look forward to providing more details as we get closer to the event. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities to continue to invest, serve our advisers, grow our business, and create long-term shareholder value. With that, operator, please open the call for questions.

Operator, Operator

Our first question or comment comes from Alex Blostein from Goldman Sachs. Your line is open.

Alex Blostein, Analyst

Hey, good afternoon, everybody. Thanks for the question. Maybe we'll start with the ICA dynamics, great to see incremental bank pickup demand a bit here, obviously on the variable side of things. As we think through the cycle, you guys have significant cash still sitting in money market funds as a form of overflow, I guess, because bank demand wasn’t there for the last couple of quarters. How are you thinking about the ability to transfer them back into ICA, especially when money market fund yields feel like they’ll start to rise and are already higher than what clients would be able to get in their ICA cash balances?

Dan Arnold, CEO

Yes, Alex, I think I’ll cover just the cash sweep dynamics overall while addressing your specific point. I think you highlighted the money market balance as really a function of overflow rather than rate-seeking behavior. First, on your point regarding demand with third-party banks, I would emphasize that we are starting to see demand pickup. We added $3 billion in balances from new variable contracts at competitive rates, right, with Fed funds flat on the variable side. Those fixed rates were relevant when we put them in place. It’s important to note that we're early in the Fed tightening cycle, only one increase so far; we haven’t started to shrink the balance sheet yet. Consumer spending numbers are picking up, lending is increasing, and I think those factors are likely to lead to further pickup in demand over time. Today, we are more optimistic about demand continuing to rise than we have been in a while, based on these factors. Regarding the cash balances, I think the key is the nature of the cash balances we have. You can see in our key metrics, which illustrates that cash in our cash sweep is largely operational, meaning it's cash available for rebalancing, fee payments, and withdrawals. That's one reason why we have one of the lowest cash percentages of AUM in our industry, in that 5% zone. The primary driver of that percent moving up or down is market sentiment—not rate-seeking behavior. For example, during periods of elevated volatility, we see cash balances move up into the 7% zone. Conversely, when cash is fully deployed, those balances can drop to about 4%. Additionally, the majority of our assets are currently in advisory accounts, which tend to hold more cash than brokerage accounts, influencing those percentages. Therefore, with volatility rising, we are sitting around 5.3%. Those are the primary drivers in this context. Regarding deposit beta, we don't see any signs pointing to a change in the price sensitivity of these deposits. Historically, we've seen betas low early in the cycle, around 2.5%, increase through the cycle to around 25%, with an overall average around 15%. Those are the key dynamics, Alex, and we feel well positioned regarding the cash sweep cycle.

Alex Blostein, Analyst

Great. Thanks for saving time on a number of different follow-ups, and I’m sure people are going to be happy. To wrap this up, though, I don’t want to put words in your mouth, but is your expectation to ultimately move all the money market accounts back into ICA, assuming that the bank demand is there?

Dan Arnold, CEO

Yes. I think for operational cash, the product is a bank product, and previously, there were dynamics at play that affected demand. For clients with rate-seeking or investment cash, we have separate products available for that. However, the primary nature of this operational cash is just that—it’s for operations.

Operator, Operator

Thank you. Our next question or comment comes from the line of Bill Katz from Citigroup. Your line is open.

Bill Katz, Analyst

Okay. Thank you very much for taking the question. Maybe let’s start with business solutions. It's great to see strong absolute growth quarter over quarter, and I noted that PAS picked up 63 subscriptions in the quarter. Can you unpack that a bit more and share where you're seeing success in cross-selling across financial advisors and within PAS? Are you seeing cross-selling to those who already have business solutions subscriptions, or is it primarily new ones? Just trying to get a sense of penetration and growth ahead?

Dan Arnold, CEO

Yes, Bill, it's Dan. It's a great question. As we step back and analyze the opportunity set, we're focused on extending our offerings to a broader set of our advisers. With 3,500 subscriptions covering roughly 2,000 advisers, we have considerable opportunity to expand our offerings. When advisers experience success with one of these services, it is logical for them to consider extending that relationship to other services. Therefore, we believe that certain advisers could utilize two, three, or even four of these relationships if they truly leverage the tools that drive performance in their businesses. Currently, most advisers have only one relationship as they start. We've seen significant success with the original CFO solution, which delivers added value by providing strategic leverage that helps them approach their various business challenges and considerations. Clients sharing their positive experiences with others contributes to the growing adoption of solutions, such as the new planning concept. This approach addresses a major challenge in the marketplace—advisers struggle to deliver comprehensive plans for all clients within their book due to complexity and time constraints. Leveraging a resource can help them expand from 30 to potentially 200 relationships, transforming client interactions and opening many more opportunities for providing solutions. That’s why we believe this offering is vital, and we can also build residual services around Paraplanning, such as tax planning and high-net-worth solutions. This provides a solid foundation for growth potential.

Bill Katz, Analyst

Great. Thanks so much. And Matt, as a follow-up, regarding rate sensitivity, could you speak to your thoughts on migrating from float to fixed given the shift in rates, especially since the belly of the curve is somewhat flat? I'd appreciate it if you could elaborate a bit on that and also discuss whether we might expect a re-widening in spreads as demand for deposits rises?

Matt Audette, CFO

Sure, Bill. I think on the fixed rate appetite, our view remains unchanged. If there's demand, we need to determine how much to fix out. Our aim is to be in the 50% to 75% zone. Early in the cycle, with yields starting to rise in the yield curve moving up, we prefer to be on the shorter duration side, closer to 50%. When demand is limited from the bank side, we will wait. Once demand for deposits returns, you will likely see spreads widen. However, the timing of that is uncertain.

Operator, Operator

Thank you. Our next question or comment comes from the line of Brennan Hawken from UBS. Your line is open.

Brennan Hawken, Analyst

Hey, how are you?

Dan Arnold, CEO

Hey.

Brennan Hawken, Analyst

Yes. Glad you said my last name. So just a quick question here on the expectation around 2Q ICA yield improvement only going up a few bps. Is that solely based on what we’ve seen so far from the Fed? The forward curve indicates that we’re likely to see May and June both be rate hikes of 50 bps.

Matt Audette, CFO

Yes, absolutely. That yield increase is prior to any additional rate hikes. You can see the sensitivities we put out if those increases do occur, but that was to provide a baseline on where we are before further rate adjustments.

Brennan Hawken, Analyst

Perfect. Thank you for the clarification. Also, I appreciate you referencing Slide 18, as I wanted to explore it further. Have you looked at what that rate looks like for cash as a percentage of client assets when including purchase money market funds and other products? How might that change over time and under different interest rate environments?

Dan Arnold, CEO

Yes, Brennan. If you go back a couple of pages to Slide 16, you can see the purchase money market fund data. However, the key takeaway is that this cash is primarily operational cash that facilitates trades, fee payments, and other functions, rather than cash seeking investment. So, looking at Slide 18, we believe the primary driver is market sentiment, affecting cash deployment rather than interest rates.

Brennan Hawken, Analyst

That’s all very fair. Given the rapid pace of hikes, you guys may be using the money market fund sweep more. Shifting to ICA cash would lead to a bigger change, and there’s been another competitor that has transitioned from money market to bank account, leading to some disruption in the last cycle. That’s likely why there’s additional focus here. Thanks for your time.

Dan Arnold, CEO

Sure.

Operator, Operator

Thank you. Our next question or comment comes from the line of Steven Chubak from Wolfe Research. Your line is open.

Steven Chubak, Analyst

Hey, good afternoon, Dan. Good afternoon, Matt.

Dan Arnold, CEO

Good afternoon.

Steven Chubak, Analyst

So I wanted to ask a follow-up regarding the changes noted on Slide 18. We’ve received some questions about cash growth expectations for this tightening cycle versus the last. A lot of folks are looking at the slide and noting cash balances didn't grow significantly during the last tightening cycle; they remained relatively stable. However, this time around, your organic growth profile is much stronger. Can you discuss what could support better cash growth in this cycle compared to last? How are you thinking about the cash algorithm generally?

Matt Audette, CFO

Sure. When considering organic growth, as I mentioned earlier, our growth increasingly resides in advisory accounts, which generally have higher cash balances. This elevated organic growth will introduce variances to the associated cash percent. Furthermore, it's essential to note that in comparing cycles, cash dynamics are often more tied to market sentiment than rate changes. In the last cycle, notable equity market declines drove cash levels by over 5.6% in late 2018. However, with consistent organic growth, and the increasing advisory share that contains more cash, we anticipate a slight bias in the cash percentage moving upward versus downward.

Steven Chubak, Analyst

That’s great. As a follow-up for Dan, can you speak to how the M&A landscape is evolving? Do you have an increased acquisition appetite as the current macro backdrop with higher rates and lower markets theoretically should enhance your financial position compared to many of your private IVD peers?

Dan Arnold, CEO

Yes, Steven. Our framework hasn't changed; we prioritize organic growth first while seeking capital deployment opportunities through enhancements to our organic growth capability. In down markets, we see recruiting opportunities as other firms may struggle to invest in capabilities or maintain stable platforms. We have experienced that in the past, such as during the initial pandemic period. We're constantly looking across the landscape, exploring opportunities with smaller broker-dealers and RIAs that could complement our growth agenda. However, M&A emerges more readily during challenging market conditions. We feel well-positioned to explore such opportunities as they arise. Our approach is to ensure that any M&A makes strategic sense, is financially prudent, and operationally manageable before proceeding. So, that’s how we are preparing to pursue growth through organic and strategic acquisition.

Steven Chubak, Analyst

Very helpful. Thanks so much for taking my questions.

Operator, Operator

Thank you. Our next question or comment comes from the line of Michael Cyprys from Morgan Stanley. Your line is open.

Michael Cyprys, Analyst

Good afternoon. Thanks for the question. I wanted to ask about recruiting. I'm curious how the more volatile equity market backdrop with rising rates and a less certain macro outlook is impacting recruiting trends. Can you provide some insight into the pipeline and the sustainability of adding about 300 advisers per quarter?

Dan Arnold, CEO

Yes. To provide context, over the past year, we’ve recruited $76 billion in assets, including $10 billion in Q1 alone, marking our largest first quarter excluding large financial institutions. This underscores the success and continued opportunities even amid fluctuating market conditions. We closed the quarter strong, with nearly 50% of recruiting occurring in March, demonstrating solid momentum. Looking ahead, the pipeline opportunities in the financial institution space and our diverse recruiting models provide further growth potential. We also believe that extended down markets can act the same tailwind to recruiting, as advisers see value in evaluating their business strategically, leading them to seek stronger partnerships. Thus, we are optimistic about our growth prospects in 2022.

Michael Cyprys, Analyst

Great. Thank you. To follow up on the new affiliation models, could you elaborate on the new employee model’s progress regarding new advisers and assets? To what extent could an acquisition accelerate your scale and presence in this part of the business?

Dan Arnold, CEO

Yes, it's a good question. This model positions us distinctly within the varying models available in the market, and we are establishing credibility and leadership within this niche. We have experienced growing momentum across various geographical regions, and it positions us well for market gain. You are correct; M&A could be strategically beneficial to accelerate this model's growth. For instance, our acquisition of Allen & Co provided us with the foundation necessary to launch this offering and build its appeal. Thus, it is a space where we would look to complement our growth with targeted M&A.

Operator, Operator

Thank you. Our next question or comment comes from the line of Gerry O’Hara from Jefferies. Your line is open.

Gerry O’Hara, Analyst

Great. Thanks for taking the question. I guess staying on theme a little bit, but regarding financial institutions, there's been a cadence of perhaps one or two institutions a year. Is there any capacity constraint regarding how many deals you can realistically expect to achieve in a 12- to 18-month period, whether operationally or through staffing?

Dan Arnold, CEO

Yes. When we initially pursued these large financial institution deals, we had to learn quite a bit regarding both transitioning them to LPL and supporting them during their acclimation period. We had significant room for improvement from our early experiences. We've utilized those insights to develop innovative solutions, new digital capabilities, and technology solutions to streamline our onboarding processes and enhance our operational structures. This will allow us to increase our efficiency and scalability. Nevertheless, while we will improve, there will always be a capacity limit, necessitating continued innovation and learning as we seek to accommodate higher growth rates.

Gerry O’Hara, Analyst

Great, yes, that’s helpful. That’s it for me this afternoon. Thank you.

Operator, Operator

Thank you. Our next question or comment comes from the line of Kyle Voigt from KBW. Your line is open.

Kyle Voigt, Analyst

Hi, good evening. I’d like to ask a question regarding promotional expenses. Excluding transition assistance, the Q2 guideline suggests that this line doesn’t change significantly versus the first and fourth quarters. Can you quantify how much of the Q2 guide is attributable to one-time onboarding costs? Additionally, is this the new run rate to consider moving forward while we expect promo expenses to remain around 25 to 30 prior to the pandemic?

Dan Arnold, CEO

Yes, definitely. In Q2, a few trends come into play. The primary driver is conference spending. This year, we’re reverting to our traditional conference schedule, with many of those expenses incurred in Q1 and Q3. Therefore, we expect lower conference expenses in Q2 but expect that the onboarding expenses associated with new institutions will peak in the quarter they join. It’s important to note that, alongside transition assistance, we have onboarding expenses connected to a large financial institution that is substantially larger than those we have supported historically. This should provide some context for the promotion expenses as you look forward.

Kyle Voigt, Analyst

Very helpful. Thank you. Regarding your guidance for core G&A, you're predicting high-single digit growth this year. If favorable interest rates and revenue gain traction, will there be a significant deviation from the current guidance?

Matt Audette, CFO

Certainly. When considering rising rates early in the cycle, we envision letting that benefit fall to the bottom line. As rates cross a threshold, we are open to additional investments to drive growth while still improving margins. Our capital allocation framework will govern how we manage those funds, emphasizing organic growth first whilst maintaining flexibility in capital deployment.

Kyle Voigt, Analyst

Great. Thank you very much.

Operator, Operator

Thank you. Our final question or comment comes from Michael Wong from Truist Securities. Your line is open.

Michael Wong, Analyst

Hey, thanks for taking the question. I wanted to discuss profitability in gross profit ROA. Looking at Slide 14, the metric has been declining slightly over the past couple of years. What can you share that could help reverse that trend? Is it mainly attributed to onboarding and higher growth expenses?

Dan Arnold, CEO

The key to these trends lies in the changing nature of revenues included in that measure. Gross profit growth overall remains strong, driven by increasing NNA, recruiting larger advisers, and growth in our financial institutions channel. The favorable mix shifts we're experiencing contribute positively, yet ROA may appear noisier as asset-driven revenues fluctuate. This dilution of ROA is also influenced by acquiring large financial institutions with lower gross profit ROAs. Consequently, while it may seem like ROA experiences declines, our operating margins are improving.

Michael Wong, Analyst

That's really helpful context. Appreciate that. Just as a follow-up, as you develop these recruiting models, are there lessons learned in terms of structuring the deals or the economics improving incrementally? Have you gotten better deals now than earlier on with some of these initiatives?

Matt Audette, CFO

Sure. When considering our various models, it's essential to recognize that the overall economics vary depending on the services provided. For instance, the more services we offer, the more robust returns we can capture. We've identified the optimal balances required to support different offerings and their respective returns through ongoing evaluations of our existing relationships and foundational models.

Operator, Operator

Thank you. We have completed the questions. I'd like to turn the conference back to management for any closing remarks.

Dan Arnold, CEO

Thanks, everyone, for taking the time to join us this afternoon. We appreciate it and look forward to speaking with you again next quarter. Take care.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.