Afternoon, and thank you for joining the Second Quarter 2021 Earnings Conference Call for LPL Financial Holdings Incorporated. Joining the call today are our President and Chief Executive Officer, Dan Arnold and Chief Financial Officer, Matt Audit. That and Matt will offer introductory remarks and then the call will be open 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 Financial's future financial and operating results, outlook, business strategies and plans, as well as other opportunities and potential risks that management foresees. Such forward looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward looking statements. 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 for more information about such risks and uncertainties. During the call, the company will also discuss certain non GAAP financial measures.
For a reconciliation of such non GAAP financial measures to the comparable GAAP figures, Please refer to the company's earnings release, which can be found at investor. Lpl.com. With that, I will now turn the call over to Mr. Arnold.
Thank you, RJ, and thanks to everyone for joining our call today. Over the past quarter, our advisors Continue to provide their clients with personalized financial guidance on their clients' journey to achieve life's goals and dreams. And at the same time, we remain focused on our mission of taking care of our advisors so they can take care of their clients. This combination positioned us to deliver another quarter solid results, while also continuing to make progress on our strategic plan. I'd like to review both of these areas, starting with our 2nd quarter business results.
In the quarter, total assets reached a new high of $1,100,000,000,000 up more than 45% from a year ago. This increase was primarily driven by continued organic growth, our Waddell and Reed acquisition and Equity Market Appreciation. Now with respect to organic growth, 2nd quarter net new assets were 37,000,000,000 This result translated to a 16% annualized growth rate driven by continued strength across new store sales, same store sales and retention and which brought our total over the past year to $80,000,000,000 Our continued growth in recruited assets, including new quarterly and full year highs, reflects our ongoing progress on enhancing the appeal of our model and expanding our addressable markets. During the quarter, our recruiting results increased in each of our markets with over $10,000,000,000 in our traditional independent model, Over $22,000,000,000 in our institution services model and approximately $2,500,000,000 in our new affiliation models. These broader and more diversified results help position us to drive higher levels of recruiting going forward.
Now looking at the same store sales, with the backdrop of continued strong retail engagement, our advisors remain proactive and focused on serving their clients and enhancing their offering. As a result, advisors are both winning new clients and capturing more assets from existing clients, which drove same store sales to new highs in the 2nd quarter. At the same time, we further enhanced the advisor through the continued delivery of new capabilities and technology as well as the ongoing modernization of our service and operations functions. As a result, Asset retention was over 98% in the 2nd quarter and 98% over the past year. Now our 2nd quarter business Results led to solid financial outcomes with $1.85 of EPS prior to intangibles and acquisition costs, which is an increase of 30% from a year ago.
Let's now turn to the progress we made on our strategic plan. Now as a reminder, our long term vision is to redefine the independent model over time and by doing so become the leader across The entire advisor centered marketplace. Our approach is to provide a platform that is simple and straightforward for advisors to design and run their perfect practice Through a breadth of affiliation models and the ability to personally configure the components of our offering to align with each advisor's unique needs and goals. Now to execute on our strategy, we have organized our work into 4 strategic plays, which I'd like to review with you in Our first strategic play involves meeting advisors where they are in the evolution of their practice by winning in our traditional markets where our leading market Share is now over 15%, while also leveraging new affiliation models to expand our addressable markets. In our traditional markets, Despite advisor movement in the overall industry remaining lower in the Q2, we continue to increase our recruiting results and gain market share.
The combination of our recruiting momentum and the appeal of our model continues to expand the depth and breadth of our pipeline. Looking at our financial institutions channel. Within the past two quarters, we on boarded 2 new clients, BMO Harris and M and T. Then in June, we announced that CUNA Brokerage Services made the decision to partner with us and plans to join early next year. These results Reflect the market opportunity that exists to leverage our capabilities to serve large institutions.
And as we look ahead, we continue to progress prospects Through the pipeline and see large financial institutions as a sustainable multiyear contributor to organic growth. With respect to the expansion of our addressable markets, we continue to see momentum building across all three of our new affiliation models. Over the past quarter, we added 5 new practices across our strategic wealth services and employee models. And after relaunching the RIA only offering in April, We have been encouraged by the positive market reaction, including a new RIA that joined in May. Looking ahead, we Now another key component of this strategic play is using M and A as a complement Organic growth.
After closing our Waddell and Reed acquisition in April, last week, we transitioned to our platform Over 900 advisors who serve approximately 98% of client assets. Our second Strategic play is focused on providing capabilities that help our existing advisors differentiate in the marketplace and drive efficiency in their practices. One of the key components of display is helping our advisors enrich how they serve their clients through the use of advisory platforms. In that spirit, we continue to innovate on our platform, most recently with the introduction of a number of product pricing and capability enhancements. Now 2 years ago, we introduced Advisor Sleep, which allows advisors to personalize centrally managed portfolios with their own asset allocation models, While outsourcing the day to day work of portfolio allocation and trading to us.
To build on this capability, last quarter, we launched Firm sleeve. This innovation enables larger firms, RIAs and institutions to develop models That all advisors across their firms can use and thus providing additional ways to leverage our centrally managed platforms to help meet client needs, $9,000,000,000 of client assets is invested across advisor sleeve and firm sleeve, and we will continue innovating to increase the value of these personalized investment offerings. Let's next move to our 3rd strategic play, which involves creating an industry leading service experience to delight advisors and their clients and in turn Forming our service model into an omnichannel client care model. In the 2nd quarter, we launched This is their most common service related needs. This resource puts information that's personalized, timely and relevant at their fingertips, thus positioning advisors to serve their clients in a simpler and more efficient way.
Together with our voice and chat channels, the digital help We also continue to automate and streamline key elements of our service operations through the enhancement of our digital operating model, including investing in new bots across our care organization. Now this helps us to increase both our service levels and our capacity to grow As we continue to scale our business. And we believe these investments in our client care model and the automation and streamlining Streamlining of our service operations are making positive contributions to the service experience while also increasing the scalability of our platform. Our 4th strategic play is focused on helping advisors run the most successful businesses in the independent marketplace. One of the key components of this play is our portfolio of business solutions, which helps advisors more effectively operate their businesses, so they can focus on serving their clients and growing their practices.
Now as we discussed last quarter, we see multiple pathways for continued growth in business Including delivering existing solutions to additional advisors and introducing new solutions to expand our product portfolio. In the Q2, our subscription base continued to scale to approximately 2,100 monthly subscribers, more than double a year ago. This includes about 80 subscriptions with advisors who joined from Waddell and Reed. Now the more work on business Solutions, the more opportunities we find to help our advisors solve additional challenges through the expansion of our product portfolio. We now have 7 solutions available in our product portfolio, 3 additional solutions in pilot and a handful of other offerings in the incubation phase.
As we continue to add new solutions, we expect to expand the addressable market, while at the same time accelerating our pace of innovation. Before closing, I want to highlight our ongoing efforts to actively shape and refine our advisor centric culture, which is instrumental to executing our strategy. In the Q2, we rolled out our advisor promise, Which is a modern evolution of the advisor commitment creed our founders wrote more than 30 years ago. We will use this promise To drive further accountability for providing industry leading advisor experience and to continue to increase the competitive advantage our advisor centric In summary, in the second quarter, we continued to invest 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 Q2, we remain focused on serving our advisors, growing our business and delivering shareholder value. This focus led to the highest quarter of organic growth in our history. And in addition, we have now on boarded 3 of our largest partners in BMO, M and T and Wood Ellen Reed, who collectively added over $100,000,000,000 of assets to our platform, helping drive our total assets to over $1,100,000,000,000 Now let's turn to our 2nd quarter business results.
Starting with organic growth, total net new assets were 37,000,000,000 which translates to a 16% annualized growth rate. This was driven by strength across all three channels of growth: recruiting, Same store sales and retention. Looking more closely at recruiting, in Q2, recruited assets were the strongest in our history at 35,000,000,000 which brought our 12 month total to a new high of $80,000,000,000 Moving on to our business mix, we continue to see positive trends in Q2. Advisory net new assets were $21,000,000,000 or 17% annualized growth rate. With this growth, our advisory assets are 52% of total assets As we continue to deliver differentiated advisory capabilities and benefit from a secular trend towards advisory.
Now let's turn to our Q2 financial results. Strong organic growth, combined with expense discipline, led to EPS prior to intangibles and acquisition costs of $1.85 up 30% from a year ago. Looking at our top line growth, Gross profit reached a new high of $602,000,000 up $22,000,000 or 4% sequentially. Looking at the components, commission advisory fees net of payout were $197,000,000 up $13,000,000 from Q1, primarily driven by organic growth and assets from Woodell and Reed. In Q2, our payout ratio was 86.3%, up about 70 basis points from Q1 due to typical seasonality.
Looking ahead Our payout ratio will be approximately up approximately 100 basis points, driven by the expected seasonal build and production bonus, as well as the onboarding of Waddell and Reed assets, which earn a slightly lower payout on their platform. Moving on to asset based revenues. Sponsor revenues were $189,000,000 in Q2, up $22,000,000 sequentially. This was driven by an increase in average assets due Growth, Woodell and Reed and Equity Market Appreciation. Turning to client cash revenues, they were $90,000,000 down 7,000,000 driven by lower ICA balances during the quarter.
Looking at overall client cash balances, they were $48,000,000,000 roughly flat Looking more closely at our ICA yield, it was 98 basis points in Q2, relatively flat with Q1. As we look ahead to Q3, given where interest rates, client rates and cash balances are today, We expect our Q3 ICA yield to be roughly flat to Q2. Now looking at our fixed rate portfolio, as a reminder, we have a fixed rate maturity at the end of the third quarter, which will lower our Q4 ICA yield by approximately 10 basis points. That said, I would highlight that as the yield curve steepened earlier in Q2, we saw demand start to return to the fixed rate sweep market. As a result, we were able to enter into $600,000,000 of new fixed rate contracts at the 3 year point, which was about 40 basis points at the time.
Looking beyond Q3 and given the expectation that short term interest rates will begin rising In late 2022 or early 2023, we thought it would be helpful to share the economic benefit of rising rates using the deposit betas we in the most recent interest rate cycle. Using our current sweep balances, a 100 basis point increase in the Fed funds rate which translates to approximately $340,000,000 of annual gross profit. Moving on to Q2 transaction fee revenues. They were $137,000,000 down $4,000,000 sequentially, driven by trading volume that decreased throughout the quarter. Looking ahead to Q3, prior to what Owen Reid, we expect transaction and fee revenue to be relatively in line with Q2 As we anticipate seasonally lower transaction volumes and IRA fees will be offset by revenues from our National Advisor Conference.
Turning to Business Solutions. We ended the quarter with approximately 2,100 subscriptions, which is up 400 from last and more than double a year ago. These offerings now generate roughly $20,000,000 of annual revenue and more importantly, They help free up additional time for advisors to spend on more valuable activities, including serving their clients and growing their practices. Now let's turn to expenses, starting with core G and A. It was $252,000,000 in Q2 $240,000,000 prior to Waddell Reef.
Looking ahead, we continue to anticipate full year 2021 core G and A to be in a range of $975,000,000 to 1,000,000,000 As a reminder, this includes cost to support BMO and M and T, but is prior to expenses associated with Weddell and Reed. Moving on to Q2 promotional expenses. They were $64,000,000 up $10,000,000 sequentially. Prior to Laudel and Reed costs, Promotion was $57,000,000 up $3,000,000 sequentially, primarily driven by large financial institution onboarding and increased marketing expense. Turning to Q3, prior to Waddell and Reed, we anticipate promotional expense will increase by around $10,000,000 as we have 2 of our largest Adviser conferences in Q3.
I would also note that we have shifted several conferences that are typically in the first half of the year to the Q4. This will likely lead to a similar level of promotional spend in Q4. However, our plans could change depending on the environment, so we'll give you a more specific update next quarter. Now let's move to Waddell and Reed. Overall, the transaction is progressing even better than we expected across multiple fronts.
As mentioned, Waddell and Reed Advisors serving approximately 98% of client assets have joined our platform, which is up from our prior estimate of 95 Factoring in this higher level of retention and current asset levels, we now expect the run rate EBITDA benefit to be at least $85,000,000 up from $80,000,000 And we continue to expect to reach this run rate by the middle of next year. Moving on to capital management. Our balance sheet remains strong in Q2 with the leverage ratio of 2.3 times and corporate cash of 278,000,000 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 and A where appropriate and returning excess capital to shareholders. In the first half of this year, the majority of our capital deployment Focused on supporting organic growth and M and A. Looking ahead, while we continue to see compelling opportunities to deploy capital to drive growth, We also feel well positioned to restart our share repurchase program, initially focusing on repurchasing shares to offset dilution, which we estimate to be approximately $40,000,000 per quarter.
We will, of course, remain flexible and dynamic should additional opportunities to deploy capital In closing, we delivered another quarter of strong business and financial results, including the best organic growth in our history. And just last week, on boarded the advisors from Lendell and Reed. As we look forward, we remain excited about the opportunities we see to continue investing to Thank
you. Your first question comes from the line of Steven Chubak from Wolfe Research. Your line is open.
Hi, good afternoon. So wanted to start off with
a question on just some of the ITA dynamics. Certainly encouraging to see the interest from bank partners for some longer dated money. It should help at least put some of the ICA concerns to rest. But if rates remain at 0, if bank deposit demand remains tepid, Matt, I was wondering if you could just speak to the strategy for managing fixed Term contracts over the next few years. And just generally, what are you hearing from your bank partners with regards to appetite to take on some additional fixed term contracts in the current environment?
Yes, Stephen, I'll take that obviously. I think when you look at our fixed rate approach And strategy, it's really unchanged, right, even in the environment that you described, which is our goal remains getting to 50% to 75% of the portfolio fixed, Of course, in an environment where there is demand that can help us do so. And I think when we're in an environment like we are now with rates low and the curve Relatively flat. I think that's an environment where we would stay closer to that 50% point. And if you're in an environment where the absolute level of rates are higher And there's some steepness to that curve.
I think we would naturally migrate to that 75% side of that range. So That's been our approach for a while. I think the environment we're in really doesn't change that. I think to your point on what we're hearing from our bank partners, I think It's probably more what we're seeing in their actions, which is when there's some steepness to the curve and just looking at Q2 when it was the 10 year was at that 150 to 160 Zone, right, there's economics on their side and that's really when you saw them start to come back into the market And we were able to execute a relatively small amount, but I think from a really an indicator of their approach and Tensions, I think it spoke really, really loudly that once there is some economics to be had that the fixed rate sweep market is something that I think So we're obviously not in that environment at this very moment, but I think it's a good idea as to what things could look like if rates move up again.
Thanks for that color, Matt. And just my follow-up maybe for Dan. You touched on this quite a bit in your prepared remarks in terms of the better balance Across all the different affiliation options and the accelerating organic growth that you're seeing. And one of the questions that we probably feel most often from investors is just Trying to unpack, given some of the momentum that you're seeing, the new organic growth algorithm, especially given the momentum you're seeing within the institutional channel, Which seems to be adding at least 200 basis points plus of organic growth. I didn't know, Dan, if you could just speak to, Given the progress you're seeing on the organic growth side, what do you think is like a new sustainable organic growth rate If some of the success that you're seeing in the nontraditional areas continues to build from here.
Yes, that makes sense. And so perhaps there's a way to Yes, for context perhaps, Look, we're focused on organic growth. And over the past 3 years, the team has done a great job of Expanding that, think about that march from sort of 3% to over the last 12 months, 12%, right? So If you break that down to get at your question a bit, 2 thirds of that has come from those traditional 3 oars in the water we talk about, new store sales, Same store sales and attrition. And if you peel that back a little further, that contribution from those ores It's really well balanced across all three, which I think speaks to the durability of that growth, Right.
So that's 2 thirds of that journey from 3% to 12%. And then I think if you look at the remaining third, that's come from Our entry into supporting large financial institutions. And again, I think we're being very Tensional about investing in our capabilities to create an appealing solution for these large institutions. As we've partnered with BMO and M and T, we continue to invest in our capabilities And so we see that as a contributor to growth over the next several years or an ongoing contributor to growth. So That might be a way at least to think about the dynamics of how we got from 3 to 12 and perhaps How we think about going forward, the durability around them.
Look, at the end of the day, organic growth is a key point of our strategy, and we're focused on Trying to drive that rate higher. And we've got 3 good avenues of which to Continue to do that through our traditional markets, these expanded new markets and then this institution's marketplace. So I hope that gives you some color and helps.
No, that's great color, Dan. Dan and Matt, thanks so much for taking my questions.
You bet.
Your next question comes from the line of Bill Katz from Citigroup. Your line is open.
And good evening, everyone, and thank you for taking the question. Just want to follow-up on sort of Steve's line of questioning there. Just coming back at a slightly different cut at the organic growth, Something that we're observing is a combination of further penetration within each segment as I sort of look at where you're picking up share from And also that mandate sizes seem to be rising. So could you speak a little bit to maybe why they're seeing The better efficacy, is this just idiosyncratic? Or is there something else afoot here as sort of the cumulative maybe Time, recruitment, what have you is helping to bolster sort of that penetration?
Yes. Thanks for the question, Bill. And It's a good one, as you point out in terms of maybe the nuance that sits underneath it. We look at it this way. We launched these 3 new models at different times, But we launched them from a place of a hypothesis around a business model that we took to the marketplace.
You get feedback, you learn as a part of that. You continue to invest and enrich your capabilities within that model. You successfully deliver it You begin to build a reputation with those clients around the success of that model. And between new Capabilities in the building reputation, that supports momentum, that supports confidence in prospects Exploring further this opportunity and I think naturally leads to, in many cases, larger So I think that's how we think about the Swiss model and that's the most mature of the new models. We're seeing sort of a similar flight pattern, if you will, with Linsco.
It's just 6, 7, 8 months behind The trajectory of Swiss and then RAA, we just obviously relaunched in April. So Hopefully, that helps, but we do think it's that growing credibility with delivering a good solution that is serving clients well and the continued evolution We'll create that natural lift on larger clients, bigger demand, growing pipelines and What we're trying to do is drive much bigger contribution from those models. Okay. That's helpful.
Thank you for that. And maybe one for Matt. Certainly glad to see the buyback kick in a little bit soon and maybe remodeling. How did you arrive at the dilution offset? So we think about Opportunity to grow organically, opportunity for anything else on the M and A side of the equation?
And then, what are some of the other metrics we should be looking at to think about the potential Hendrix, you need to upsize that buyback as we look ahead?
Yes, Bill. I think the key thing is just our capital allocation I think we're continuing to deploy capital as you can see in the quarter in organic growth and M and A. But at the same time, I think when you go back 6 months ago, I think we're through some of the chunkier capital deployments On those first two categories, I think we've got a little bit more excess capital to deploy. And when you run it through that framework, while we continue to have Opportunities in those first two categories, I think we feel quite comfortable allocating capital to share repurchases given both the capital level and the returns they generate. And I think as we look forward to your question, I think we'll continue to look at it from that same lens with the principles of making sure we maintain a strong balance sheet as that's Quite supportive of our organic growth.
And if the opportunities to allocate to organic growth and M and A increase, we move capital to there. And if returning capital to shareholders is the primary place where it makes sense, we move capital to there. It's all about applying the framework. So That's how we'll continue to approach it going forward.
Your next question comes from the line of Michael Cyprys from Morgan Stanley. Your line is open.
Hey, thanks for taking the question. Just on the Weddell transaction, I was hoping you could elaborate a little bit on the contribution in the quarter in terms of some of the puts and takes. I think there were also some one time costs or some drag that was maybe partially offsetting some things there as well. So I hope you could Elaborate a little bit on that and how we should be thinking about the timing of the ramp here, particularly as we go into the second half of the year in terms of the contribution from Waddell.
Yes, sure, Michael. I think when you we've got hopefully some good disclosures on that, that as I talk here, you You can look at it or maybe even look at later in our key metrics deck on Slide 8 that I think helps with that. But I'll get a little bit of color here. I think when you look in the second quarter, Really the main action or activity was closing on the transaction. And we're actually able to get some of that kind of first round of expense synergies A little bit earlier than we had expected a quarter ago.
That's why you see that run rate hitting $50,000,000 from an annual basis for the 2 months that we had Lydell onboard in the quarter. As we look ahead to Q3, it's really about onboarding as the key integration activity, which Happened just last weekend, so that will lead to some more gross profit synergies, also moving the Waddell Advisors onto our payout grid, which is a little bit higher, And then eliminating the cost of their custodian. Now those things coincidentally kind of net out, which is why you see Q3 Still being at that same $50,000,000 run rate, but a lot of activity is happening. And then from this point forward, meaning in Q4 through the middle of next year is really The rest of the expense synergies and integration. And those are the activities that will bring us to that $85,000,000 plus run rate by about the middle of next year.
So that's the path on the integration and run rate side. Your question on the kind of One timers, I think the acquisition costs, which we now estimate are a total will be a total of around 100,000,000 That shows up in that acquisition cost line item, which you saw that really increase in the 2nd quarter from the closing. And I'd highlight the Q3 is probably going to be the quarter with the largest amount of that $100,000,000 Our estimate right now is in the $40,000,000 to $50,000,000 range. And that's really tied to the onboarding activities, which is the activity that naturally incurs to those costs. So Hope that helps.
Super. Thanks. And just a quick follow-up on the ICA balances. We saw the overflow Balances declined a bit in the quarter. Just curious what appetite or ability is there to sort of expand the variable balances and really Take those overflows down to 0, what's the potential to do that, would you say?
Well, I think that gets back to just when there's demand from the banks, I talked a little bit earlier about when the on the fixed rate side when rates move up along the curve, meaning that 3 to 5 year point, there's some demand there. On the floating rate side, I think it's really going to come back to the amount of liquidity that's in the market and banks needing liquidity for their balance sheets. And I think Where we sit today, there's still just a substantial amount of liquidity in the market. But I think we're now in the Q2 in a row where you're starting to See some signs of activity that ultimately would lead to that demand returning, right? Consumer spending picking up, right?
That's coming out of checking and savings Accounts at the banks, loan balances beginning to grow, meaning they're loaning out that cash. So I think if you continue to see the trends there, I think those are the things
Your
next question comes from the line of Kyle Voig from KBW. Your line is open.
Hi, good evening. So maybe a 2 part question. I think you changed some of the rate sensitivities in your deck on the gross Profit benefit from rate hikes, and you noted that the beta was 2.5% through your first four hikes during the last cycle. So, yes, the first question is, should we take the sensitivity to mean you expect similar beta dynamics during the next hiking cycle? And the second part of the question is really like if you look back during the last rate hiking cycle, you took advantage of the gross profit benefit to really increase However, you're in a different spot today in terms of ongoing reinvestment into the platform.
So As we look ahead towards the next rate hiking cycle and as you kind of outlined very meaningful gross profit benefits, How should we think about how much of that could fall to the bottom line versus wanting to take advantage of the environment to reinvest in the business and increase
Yes. I think on the sensitivities, and I think that what we were trying to do there is really It gives some empirical data on from the last interest rate cycle. Right now market demand and market pricing ultimately drives where deposit betas go. But I think from our chair, the best information to look at to get an expectation of what would happen is what happened most recently. I think that's what we updated our metrics to show, which was an average beta of 15% that period of 2015 to 2019.
But in the early part of the cycle, it was 2.5 and then later part of the cycle, 25. So I think the market dynamics We'll determine where that goes, but I think looking at the history from our share is probably the best thing to look at. Now to your point on what to do with that revenue, I think It will go back to our capital allocation framework, right, the same thing that we're applying today on where the highest and best returns are. And when you look at investing in the platform, those are things that drive organic growth. And if there are things that can drive a return there, we focus there.
And then to M and A and then returning capital to shareholders, which from a gross profit standpoint can show up in the form of just incremental op margin and delivering operating leverage. So it will just be based on our opportunity set at that time. And I just emphasize, I think when we take a step back and even just building on what Dan was talking about earlier and Our opportunities in the different channels and models we have, I think we're excited about an environment where we could continue to grow further.
Your next question comes from the line of Alex Blostein from Goldman Sachs. Your line is open.
Great. Hi, guys. Good evening. So, I wanted to start with a question around some of the larger mandates, BMO, M and T and Waddell that you onboarded in 2nd quarter. Can you talk a little bit about the financial advisors appetite to uptake all of the sort of enhanced capabilities that LPL can offer, Sort of what resonates most there?
And then maybe just putting some numbers around that, sort of gross profit ROA on that
Let me take the first half of that, Matt, and you take So, yes, Alex, with respect to the advisors, look, the typical Principles that one large institution might choose or use to make the selection to partner with us Typically has to do with enhanced technology capabilities. So can we provide them technology, automated work flows etcetera to drive efficiency into their practices, free up time for them and their teams to Spend on clients and prospects and so that is a priority and we spend a good bit of time making sure that You do the appropriate level of training, coaching and work to ensure that they can leverage That sort of comprehensive technology offering, and that takes time. They don't get that on day 1, but you continue to work on it and they Come proficient at it quickly and that becomes a big leverage point. So that is one area that they tend to look at. A second one would be The advisory platform that we have and the breadth of options and alternatives we give them from a capability set, from Content from a pricing standpoint, from a vertical integration and ease of doing business That certainly is a way for them to provide expanded or enhanced value of advice To their end clients, ultimately help them differentiate and support their growth aspirations.
And so there you get a great Client experience at the end of the day matched with also some tailwinds for growth. And so that would be a second area That I would tend to highlight, and if you look at the institutions at a macro level, right, our ability to partner and provide A good deal of support and advice through the compliance and risk management support that we can provide Shifts the risk profile for them with this business initiative and I think creates at an institutional level An important element of value, a second one is just improved and enhanced economics, typically shifting from A model where you've got the entire cost structure and then have to make the investment in labor and technology, etcetera to do it And you can go to a more outsourced arrangement. We typically see an improvement enhancement in overall economics. So I'll stop there, but those are maybe some high level things that are in it for the advisors and their clients as well as the institution as well.
And then now Just on the gross profit or the return side, when you look at the financial institutions channel, right, they're typically much To the point of the first part of your question, a little bit heavily focused on the brokerage side. So you get ROAs that are that as a A little bit of additional color in CUNA. They're a network Credit union. So, we share some of that gross profit with them. So, for that particular opportunity, it'd be more than 10 to 15 basis points zone.
And then on the cost side, I think the cost to serve is lower just given that size and then the TA and the underwriting factors in all those economics. You bring it down to the bottom line and you look at our if you look at our EBITDA operating margins, they're quite accretive to that With one caveat that deals of this size and the nature of this channel usually come with some incentives in the early terms of the deal, Think 1st year and 2nd year. So those economics grow over time as you get deeper into the contract. So I hope that helps.
Yes, that helps. Thanks. And just maybe a quick clarification around the ICA dynamics. So clearly, LPL continues to have significant amount of upside to higher interest rates and appreciate you guys highlighting the low deposit bid as well. That's How do you think about the trade off, I guess, here between fixing out kind of at 40 bps for 3 years if The demand picks up again sort of versus waiting for potentially a much more material upside 12 to 18 months out.
Yes. I think it goes back to that 50% to 75% approach, Alex. I think we're really focused on having a Stable earnings stream in this area and not trying to be folks that pick the points where interest rates make sense and don't make sense. I think we've got a principle that is We'll hedge a little bit lower on the percent if the economics look like they're at the lower point and a little bit higher On the percentage, if we look like they're at higher point. But once you get below that, we're not trying to tactically pick those points.
I think specific to this quarter, I think when you're in the market that I think we're all collectively in, when a bank comes up and has demand for sweep deposits, I think most people would say yes and deploy that and that's what we did on that particular opportunity.
Your next question comes from the line of Jerry O'Hara from Jefferies. Your line is open.
Great. Thanks and good afternoon. I was hoping maybe we could get a little extra color on the business solutions. It sounds Sounds like Dan may have mentioned 3 in pilot, a handful of others that are perhaps on the come. I don't know if it's too early, but would certainly love to hear a little bit about those.
And then also what has been really resonating, I think it sounded like 80 or so, My notes are right that have already been kind of picked up from some of the Woodell Advisors. So anything additional there would be I think of use. Thank you.
Yes. Maybe I give you just a quick snapshot of the product portfolio. And then I can answer your question about maybe some of the early interest from the Waddell and Reed folks and then happy to share the 3 that we've got in pilot phase. And so If you look at the solutions today, as I mentioned, there's 7. There's the original 3, which were admin With respect to Waddell and Reed, the most popular one for them thus far has been admin Solutions, which makes sense if you're thinking about coming in and learning a new environment and making the transition.
So, And you've got people in the LPL ecosystem that are experienced in supporting and helping do that. I think That's a logical place to look for a leverage point. And if you didn't have access to that admin at the market Rates of hiring someone directly, this is actually a new service and a good alternative lower cost way to do that. With respect To the solutions then that we've added to that original portfolio, you've got the assurance plan, which is we just rolled out the resilience plan and those 2 are ways of which to support and help advisors Plan for unexpected and or expected transitions from the business. So assurance plan was the old plan that Unfortunately, it kind of gave someone downside protection if something happened to them unexpectedly and the business had to be transitioned.
This gives them an orderly way to make that transition to do that. Resilience plan was added as an ideation from that and a learning and a feedback that advisors really like the insurance plan, but they also said, well, what if we have a short Term disruption in our ability to operate or run the business. Could you help us with that as well? And so that's where we came up with this idea with the resilience plan that gives them Some support in a backstop if they have an unexpected problem, think about disability or something like that or if they even have a Planned need to have an extended leave from the business such as fraternity or maternity type of leaves. And so Pretty cool innovation that came from the feedback and appeal of the assurance plan.
There's also M and A solutions That we launched earlier in the year and remote office solutions that emerged during the pandemic. The 3 that are in pilot real quickly, You've got a bookkeeping solution that we're experimenting with that was born out of the CFO solution and our continued Innovation from the feedback that our clients give us on their needs. There's a para planning solution in pilot. And then finally, something we call in Client Engage, which is meant to be a way to support and help the advisors managing successfully the servicing and communications with their clients. I'll pause there, but That gives you a quick snapshot of the portfolio.
Helpful and I appreciate that. And then maybe just one for Matt, if you might have A comment or 2 just on the environment around transition assistance, what you're seeing, what you're hearing. I think we'd all appreciate that as well. Thank you.
Yes, sure. I think the headline is we're seeing a pretty consistent environment, which is the overall value prop of the firm is what matters the most. And I think when you get then click down into transition assistance to help facilitate the move from one firm to another, I think we're seeing pretty similar levels that we've seen in the last few quarters. So no change on that on our end.
Your next question comes from the line of Devin Ryan from JMP Securities. Your line is open.
Great. Good evening, guys. Maybe start here with just a bigger picture question. As we watch The business scale and increased affiliation options with a lot of success bringing in larger advisors that have more complex new businesses. Does the thinking evolve at all around So re exploring the merits of becoming a bank.
And I appreciate it's complicated. And obviously, you guys decided not to years ago. But just given those dynamics of how the business is evolving, maybe coupled with some of the near term dynamics around rates, I'm just curious If it kind of comes back on or the pendulum swings in one direction there?
Yes. Maybe we both can give some color on that. I'll start, Matt. You Feel free to provide any insight. So obviously from a strategic standpoint, we have a significant set of considerations that you always And your diligent around always evolving your assessment given changes in the marketplace, changes in the business, Changes in the competitive landscape.
And so potentially being a bank is one of those things that we would always Keep active sort of that assessment and that consideration. And I think we would look at it from standpoint, are there capabilities that could potentially support advisors and their value to clients? And is it a better way to manage ultimately Our cash balances and or ultimately deploy and execute against Some of that expanded capability that I was mentioned earlier. And so I think we always look at it from the standpoint of what's the best way to do that, right, the old do we do it ourselves or do we outsource it? The marketplace has given us lots of options of which to find different ways to provide capabilities and to effectively manage our cash balances Using someone else's balance sheet to do that and we think that strategically makes sense in the Short run, as long as we find the options and alternatives to do that, then we can deliver the capabilities that our clients need.
And that's How we see it in the short run, but I think we continually look at the different market dynamics and keep that assessment alive just so it's Fresh, we're clear and have the most informed view that we can about our set of options. I'll pause it. You want to add anything to that?
Yes, that is well said. I'd just emphasize a couple of things. I think the Key, Devin, is making sure that we're in a position to deliver the products and capabilities that matter to our advisors Do you need a bank charter to do that? I think to Dan's point, the marketplace has given us plenty of options where you don't. And I think the second Part of the question is, what's the best return on capital, right, deposits on our balance sheet versus someone else's?
And I think you run that math, Especially in an environment like this and the return on capital of having a bank is not a pretty picture. So I think it makes sense where we are now. But to Dan's point, I think we always look to make sure if the world changes that we'd be aware of that.
Sure. Okay. I appreciate the update there. And then the follow-up, I guess, Shorter term or smaller topic, you guys talked about streamlining, automating The service offering, which is interesting. And as we think about just the bigger opportunity to automate The platform and utilize technology to kind of scale the business from here.
How should we think about Like expense buckets and maybe where there is incremental operating leverage in the model. Like so service It feels like that's one example where there's a number of people doing jobs where in some cases new technology may be able to step in and Disintermediate some of that and save some money for LPL. I guess, is there any way to frame that? And are there any other areas like that that could be kind of margin enhancing?
Yes, that's a good it's a great question. And it's one from an operational execution standpoint. I think we're Teed on exploring what are those sort
of
world of possibilities and how we might best do that. So if I just gave you a little color on areas that we There's certainly leveraging robotics, as you say, for more repetitive type of work, As you expand and you grow and you can transform that work into a more automated type of solution, Makes tons of sense in the short run from potential expense synergies, but adds a lot from a scalability standpoint. So Across our operations and our compliance organizations, you see opportunities for robotics. You also Have opportunities to use AI for quicker assessments and more robust Broader spectrum assessment, so think about the efficacy of oversight of our compliance controls Our risk management controls and that's a place where you could use AI to step in as a real leverage point for the work that our folks do. And in that case, that may not eliminate jobs, but that may create lots of scalability as you go forward because of the more efficient and effective use of automation to assess greater and greater volumes of business.
So That would be another example, I think, where you could use newer technology with you, if you will, or automation and deploy it within the organization. Maybe I'll pause there and I don't know if you want to take on the implications or contribution that may occur
from that. Yes. I'd just emphasize what Dan said. I think the biggest Opportunities are really in investing and deploying technology that allows us to scale, right? So for every dollar of assets we're adding, We're adding less expense than we had to add for the prior asset, right?
I think that thematically that's the primary approach. I think when you look at what that I think it gets back to our principles of the amount that we would invest. We're going to be focused on both investing to support that growth, At the same time delivering operating leverage, right? And I think that you see us doing that I think right now and I think that same approach is what we would have going I'd
leave you with this. Think about it as using automation and technology and our modern technology to drive the future Your advisor and end client experience, the efficacy of your risk management oversight And finally, 3rd, scalability in the overall operations.
And there are no other questions over the phone line at this time. I would now like to turn the call over back to Mr. Dan Arnold for closing remarks. Sir? Yes.
Thanks much, RJ, and thanks, everyone, for taking the time to join us this afternoon. We really appreciate it. We look forward to speaking with you again next quarter. Have a great day.
Ladies and gentlemen, this concludes today's conference call. We thank you all for participating. You may now disconnect.