Good morning, everyone. Why don't we start off here? My name is Jeff Schmidt. I cover wealth management and capital market stocks here at William Blair. I'd like to introduce to you LPL Financial. They're the largest independent broker dealer in the U.S. They have one of the best growth profiles in the wealth management industry, just a great track record of growth. So we're really excited to have them here. We have with us here the CEO, Rich Steinmeier, to discuss the business in a fireside chat format. But before we get started, please go to WilliamBlair.com for a complete list of disclosures. So why don't we go ahead and get started, Rich. Maybe just as a starting point for the audience, you could kind of walk through at a high level
who lpl is in in what you guys do yeah thanks jeff and it's great to be here so nice to see you all so who is lpl well we are one of the leading full service wealth management firms in the industry we provide middle front and back office support of advisors and institutions in the delivery of advice and in that we're largely a platform company think about us supporting the delivery of advice through those institutions or through largely independent financial advisors. We serve 30 over 32,000 financial advisors and over 1,100 institutions in the delivery of advice supporting they support clients with more than 2.5 trillion in assets under management and that split is largely kind of 75% of the assets are through the independent channel and then and 25% of the assets are through our institutional channel. How we win in the marketplace, we largely are the leader in the markets that we serve. And so when you think about that independent broker-dealer segment, or the independent market itself more broadly, we are the leading firm in that segment, we have leading market share, and we capture more advisors in motion than any other firm in the marketplace. In addition, on the institutional segment, serving banks, product manufacturers, credit unions, insurance firms for outsourcing their wealth management. There again, where there's a full service outsource, we are the leading player in that market segment as well. We have strong back tailwinds. There's a strong movement to independence in the marketplace. So advisors are moving out of captive channels and to independence. In addition, institutions find it increasingly difficult to be able to deliver a wealth management experience as the requirements of scale continue to grow higher and higher, and so we are the beneficiaries of leading in markets for which there are strong tailwinds. We have differentiated offerings in those marketplaces. We have the strongest value exchange in those markets. We do that through capabilities, which we've invested in over decades, that are differentiated to serve both of those markets. As well, we have a client centricity around oriented towards advice, and that means in in the independent market that advisors own their own clients and they're free to serve with us or change firms at any given notice, which I think actually puts the impetus on us to be the best firm possible in delivering that experience. You take that together, that independent ethos, that history of capabilities, leadership in the markets, and recently that has led to us being on balance the highest growing firm in wealth management over a sustained period of time.
Okay, that's very helpful. And then, you know, on your organic growth, it has been a little weaker than normal over the last six months just because of some of your focus on Commonwealth. But, you know, what gives you confidence that that can return to that sort of mid to high single digit level over the coming quarters?
Yeah, and I think if you look over the last several years, what we've demonstrated is a consistent ability to be in that mid to high single digit organic growth range. and I'd reiterate that that's where we think this firm systemically lives over time I will acknowledge Jeff to your point we made an acquisition of Commonwealth and at that point the most important thing for us was to make sure that we solidified the advisors at Commonwealth made sure that we we'd redirected a lot of our sales and recruiting team to working with the 3,000 Commonwealth advisors and helping them understand the value proposition and so you can look and see over a nine month period we largely redirected our recruiting team and feel very good about that decision that we made but it had implications to our organic growth and so as we look at we now been you know increasingly moving that team back into an external focus I spent last week with the recruiting team they had a national sales conference huge energy in getting that team back into the external marketplace working directly you know to helping advisors move to LPL and hopefully you guys have seen over the last month or so maybe even two months we've picked up the number of announcements that we've made externally of advisors in motion that are joining LPL and so I think you'll see as we've brought more and more of those folks that were ring-fenced into the Commonwealth retention brought them back into the field I see growing pipelines, we see growing joins, and I think it reiterates, we've never been anything other than the top capture of advisors, even as we took those recruiters off and moved them into the Commonwealth retention, we still captured more advisors in motion than any other firm in the marketplace, in spite of the fact that we moved a large proportion of our recruiting team into Commonwealth retention, and I think that reiterates the point that that we should be able to systemically deliver mid to high single digit growth, organic growth, married with strong retention, which persists. Our advisor retention is incredibly strong and same store sales growth for in supporting our existing advisors. So I feel like that center of gravity where we've been over the last six or seven years, minus this kind of movement over to support Commonwealth is likely for us to return over the second half of this year.
So it sounds like, yeah, a lot of them have transitioned back to the external opportunities. It's in pipeline building mode that will translate to recruit assets and ultimately organic. So, yeah, that's good to hear. And then just on, you know, you've highlighted the Wirehouse channel as a target for organic growth. Could you maybe talk about how the platform's evolved and what additional enhancements are needed to improve recruiting success in that channel?
yeah I mean I think historically we have been you know the dominant capture of movement inside of the independent channel and recognized several years ago that there was an opportunity to expand our TAM we went about that primarily first by expanding our affiliation models so that we had other different types of affiliation that wire house advisors may want to come into and so we introduced an independent employee channel supported independent channel in addition to our already existing support of independent RIAs and then corporate RAs in a 1099 model. As you build out that plethora of affiliation models, we started to get higher consideration of wire house advisors because sometimes they don't want to take all of that work on on their own as they move into independence. We then married that with building increasing capabilities around taking out friction to move to LPL from other firms, building our core foundational capabilities across our operating platform, Introducing integrated lending capabilities that is increasingly critical to wire house advisors. An incredibly robust alternative investment platform as well as selling agreements that I think are second to none in terms of the availability of product inside. And then also built high net worth capabilities in support of sophisticated planning for advisors who serve high net worth and ultra high net worth clients. You take that together with our pre-existing value proposition of unmatched economic sharing, flexibility in the way that you can run your business, and then expansive product availability. You marry that with those enhanced capabilities, and I think all of a sudden you run into an opportunity where we are an incredibly relevant firm across any advisor who's looking to actually execute the business and want to be with an at-scale partner who have an integrated set of capabilities, a leading value proposition, and in fact, I think we have the leading value exchange in the marketplace, and what we see is the beginnings of heightened consideration for us. Now, in addition, last year, we began to move our brand consideration up. So we made an investment in brand, and in fact, just this morning, we announced a partnership with PGA of America, and so we will continue to extend our brand and make it more relevant in those places where wire house advisors, regional advisors are looking. So we've become the official wealth management and investment advisory firm of the PGA of America. And we'll be in support of many of their tournaments as well. And this marks the first sports brand investment we've made as a firm. We take that brand relevance plus the capabilities plus our orientation to having the advisors still own the clients. I think increasingly that positions us as the leading player across the entire wealth spectrum. You add to that the Commonwealth level of service that we will integrate with the onboarding of Commonwealth to improve our overall ways that we support advisors. And I think we continue to strengthen our value proposition as a relevant value proposition across the entire wealth segment and feel good about that. I did see that this morning. That's great news.
So LPL is the leader in the institutional channel and there really aren't many competitors certainly for You know large deals in that or large partnerships there So what differentiates you in the institutional channel and what does your pipeline look like for those partnerships?
Yeah, I mean I think first we've been in the institutional segment for 30 years, right? We have been serving we started with credit unions. We moved to community banks. We now serve regional and national banks and then move that into product manufacturers insurance firms and so our capability set is without peer and in fact when you look at it we serve of our 2.5 trillion in AUM 550 billion of that is in the institutional segment that is multiples more than our next closest competitor that serves in the marketplace look we have as firms are looking to their wealth business to think about who the best partner would be for their wealth business they're looking to drive increased growth we do that through leading platforms not only for advisors but for end investors they're looking to drive down their expenses to drive margin and so we do that through the outsourcing of the brokerage operations service supervision compliance etc and looking to de-risk the business both regulatorily and and and just inside business risk itself. What you see there is we have an incredibly strong value proposition as an at scale player who actually does do this business as a matter of course. We demote our brand and over time we go to market behind the institution or behind the advisor. That gives us an incredible advantage relative to some of our peers who actually go to market with their brand first. We've been able to invest in capabilities that are distinct to this segment. So you think about reporting and performance reporting back to the institution at a hierarchical level. So they've got to roll up either offices or regions or the business reporting itself. You think about our ability to help them recruit advisors. And so we're the number one capture of advisors in motion in the marketplace. As we direct that in support of institutions, we help them fill their advisor needs. We also have the ability to provide them business solutions as well. also some of the services that we provide. Keep in mind their wealth management business is often riding sidecar to a core business. And so the support services that we offer around advisory consulting, growth consultants, practice management consultants, all of that wealth management expertise and specialization accrues to their businesses as we get in together and make growth plans collectively to drive their growth in that business. And so for us, you take that with that tailwind which is that the the size and scale required to be a drive and lead a competitive broker dealer or wealth management business increases to raise and so we've got those tailwinds that more and more institutional firms are going to be looking to outsource that business and we are without peer in this segment we are the best firm and that demonstrate as demonstrated in our
market share in that segment so the the Commonwealth conversion you know we're getting closer this you're targeting the end of this year how confident are you that in addition to hitting your retention targets I think you've said you're already at 85% of AUM but in addition to hitting your retention targets how confident are you that this will be kind of a smooth conversion with
with little to no client disruption Jeff I was thinking about it since 2021 we've actually done nine major conversion events three M&A events and then six large institutional onboardings and so that is every time we do an institutional onboarding we are learning more and more we're building more and more capabilities to seamlessly transition the advisors to drive the tape to tape to do the bulk uploads and do the transfers that occur across the direct business as well and so every time we continue to refine our capabilities to onboard large swaths of advisors and so as we look into it we've we feel good about our continued engagement with the Commonwealth advisors they are seeing our value proposition resonate we're keeping Commonwealth intact we're keeping their service experience their communities staying in place their conferences are staying in place and so I think they're growing increasingly comfortable that what we said almost you know over a year ago that we were keeping Commonwealth as Commonwealth is in fact the case that's been demonstrated through our efforts and so that's why I think we've been able to continue to make progress in those advisors and choosing to stay with Commonwealth on that integration we've already begun the builds oh we've already begun the builds building capabilities so that we have a superset of capabilities across Commonwealth and the LPL capabilities and we feel really good about that we will be in order through Q4 to deliver the onboarding of Commonwealth in a way that is differentiated and seamless and a lot of times that's what an advisor is looking for they want continuity with their clients they don't want a disruption event obviously they're going to learn new systems but those systems are going to be more robust with more capabilities and we feel really well armed to have a very good transition event with Commonwealth
So maybe moving to M&A, once Commonwealth is onboarded, what is your appetite for the next large M&A transaction, or could you accelerate your liquidity and succession planning, or could you even just do maybe some larger institutional channel deals?
Yeah, I think it's a good question, because Commonwealth is kind of our center of gravity and it has been our focus now for over a year, which is make sure that we get it right, make sure that we don't put too much into the pipeline or even too much into our consideration set that would blur the lines around what is the most important thing, and the most important thing is to make sure we onboard that exceedingly well. And so, as I said just a minute ago, we're feeling increasingly good about our ability to do that. But maybe if I take a step back, our M&A has always been a complimentary approach. What has always come first is driving organic growth. And so you see us coming back into the marketplace in a material way, both across the advisor recruiting as well as the institutional recruiting to reinvigorate our organic growth. But M&A plays a complimentary role where we see fits that are opportunistic in nature and fit kind of our long-term objectives. I'd say the exception to that is probably liquidity in succession. We view liquidity and succession as a core part of our offering in the marketplace to help advisors who have a need to sell their business to get that to the next generation. We have a distinctive offering in the marketplace that no one else seems to have followed, where we actually provide the funding by the business, then transition that business to the next generation entrepreneur. It really resonates well, and so for us, we have stayed kind of foot on the gas to make sure that we have liquidity and succession available, that we're supporting the advisor's transitions and I would call that kind of the centerpiece of our go forward M&A program now that as you look more broadly you kind of asked about larger M&A opportunities I would say we don't feel a burning need or desire to move on to another major M&A event that will always be part of how we think about opportunistically where there are things that fit our needs but at this moment in time we feel good about completing commonwealth doubling down on some of our liquidity and succession opportunities and then opportunistically looking at M&A but it is not a critical need for us as we move forward okay and
then you know moving on to AI can you maybe talk about how LPL is incorporating AI into the business both you know either to make advisors lives easier or to just increase efficiencies across the organization yeah I think we come out
very firmly on the side of that there are huge enhancements to the way that we deliver our business and the way that advisors deliver advice and run their practices that will be enabled through the application of AI and transformative technology and so we view this as a very strong positive in support of the business and in support of the actual underlying business metrics where we kind of go is we've categorized this into three different buckets the first is supporting advisors, their practice, the efficiency of their practice, and their ability to drive growth and deliver advice. And so there's a whole cadre of things from meeting preparation, plan design, financial plan implementation, capturing notes after a meeting, to ultimately agentifying the fulfillment of simple tasks and maybe even more complex tasks that come out of those meetings. We see that as driving the efficiency of an advisor's practice and facilitating the growth. Second is in building our operations, leaning our workflows, enhancing our ability to go to market. So think of in support of service associates, having the ability to deliver outstanding service experience into our clients. But more likely, automating our workflows to take work out of the system, make it a more seamless experience, more straight through processing at a lower cost while enhancing the client experience. And then the third bucket for us, because we are a fully integrated firm, so we own our own tech stack across the board, actually using automation to modernize our tech capabilities, deliver increasing capabilities at lower costs. And so think about that as AI through largely writing code, redesigning code, modernizing code to deliver capabilities, enhance capabilities faster and more cheaply. across all of that, we view this as a huge opportunity and don't think advisors will be intermediated by AI, but in fact, will be made and positioned more actively to deliver more holistic advice to more of their clients. Maybe we can talk about the AI cash
optimization tools specifically. Stocks have certainly pulled back in recent months across the industry so because of this it how do you assess both the potential opportunities and the risks to your business model that that type of tool
may create yeah so we don't see an eminent risk that cash is going to be disintermediated through the application of AI tools look there's a couple of reasons that we would think about that the first is that advisors have been cash sorting over the last couple of years and as an active component of how they think about supporting their their clients we have given them an abundance of offerings and cash vehicles to manage cash inside the marketplace but having said that we can't ignore the realities of what you've identified which is there are market dynamics that cause us to look into the viability of cash going forward and so we're looking at that we're taking a look at what are the opportunities and risks associated with transitioning from cash yield into a more fee-like structure. Having said that, I mentioned at the beginning, we've got over 32,000 financial advisors. We serve over 1,100 institutions who serve 8 million end investors in the U.S. And so we have to make sure that whatever solution we might work through would work for our clients as well. And so we set it on earnings, but I would reiterate, we're actually doing that active evaluation of how to assess those risks and the opportunities associated with minimizing the role of cash.
Okay. And then maybe talking about efficiencies here. You've increased your focus on operating leverage. It's one of your key priorities. You're really starting when you took over. How should we be thinking about incremental efficiencies in the business?
Yeah, I think I'd expand it just a little bit. It's operating margin. We look at operating margin and we feel great about the progress we've made. It's been, you know, maybe 18 months since, you know, a reiterated focus, though we've been working for years on the delivery of efficiency. But when you think about op margin improvement, I think you think about the revenue side as well. So you think about pricing our offering appropriate to the value delivered in the marketplace and constantly looking at that value exchange between ourselves and our clients. And as we continue to add value and deliver for that, the ability to price appropriately in the marketplace. You look at product shift mix as well. Obviously for years we've been talking about brokerage to advisory. I think you can look at and talk about the inclusion of both sides of the balance sheet and banking becoming a broader component of the offering that we think about in support of advisors. And as we grow scale and we've grown tremendously, you look at that leverage that we have as we look at product manufacturers who really value that distribution on our platform and how do we make sure there's a fair value exchange with them as well, and as we continue to grow, add scale, we get leverage into that as well. So that's on the revenue side, then of course, right, there's a huge focus on the cost side, which is how do we drive efficiencies as much as possible? We just talked about AI, talked about leaning the service experience, leaning the operations, building more straight through processing, even thinking about the GCC, so for us a global capability center, and how do we think about the most efficient delivery of code, as well as where we can access talent more broadly across the globe you add that together and that should we've made great strides and i think we we believe we've made the investments we planted the seeds for a sustained continued improvement in our operating leverage over the next couple of years and as we continue to do that we'll make a choice as to you know some of that's going to accrue to the bottom line but also that's going to allow us to out invest in capabilities it will give us more capacity to continue to strengthen our value proposition. We already think it's the strongest value proposition in the marketplace. I think that's a little bit of thumb on the neck against the competitive set to say, okay, try to keep up with us. And I think we think that this is a critical role. Operating margin improvement plays a critical role in the proper construction of our P&L so that we position ourselves systemically to outperform in the marketplace.
So we've covered a lot of ground today about your current positioning the various growth initiatives that you have so if you're successful in executing on your strategy where do you see the company five years from today i think you have to look at companies and
companies have to make choices and we have made a choice to be a leader in this marketplace that is an active choice there it is it is sometimes harder you sometimes take greater risks but the truth is you'd much rather be the firm that is driving the boat and changing the industry versus the firms that are surfing in the wake and trying to figure out how to navigate in the exhaust side. And that is a choice that we actively made. We demonstrated that through our position and our acquisition of Commonwealth. And so for us, we think that we are moving to become the leader in the wealth management business. An unparalleled value proposition that continues to be strengthened with financial discipline that demonstrates leading organic growth across not only the advisor segment, but the institutional segment where we continue to strengthen our offering in two markets, as we said earlier, that have tailwinds to them. You take that together, as we've expanded our participation more broadly, just from originally that independent advisor and RIA segment into the wire and regional segment, as we've kind of raised our eyes and challenged who our competitors are, what we see is we have the unparalleled value proposition in the marketplace. But if I'm frank, what you would say is historically you would choose to join a firm like LPL with the best economics, the best flexibility, client ownership, and maybe or the best capabilities in the marketplace. We didn't always have the capabilities that were at par with the leading wire houses in the marketplace. I think as you look five years forward or a couple years forward even into this firm, what you will see is that we will move from having the best economics, the greatest flexibility greatest product choice and we will have the best capabilities in the marketplace that will be better than the firms that that advisors are at today and so that or turns to an and and i think that means we will ascend to a value proposition that will be unparalleled and really will be hard to catch and so i think in that scenario you will see an acceleration of our share capture in not only in the institutional segment but most probably in the advisor segment that should drive us into that sustained high levels of organic growth that we've demonstrated over the last six to seven years.
Okay, we're coming up on time. We have a breakout in the Adler Room shortly, but this has been really great, and I want to thank you, Rich, for joining us. Thanks, Jeff. Appreciate it.