Morning, everyone. And, I guess, is it after 12:00? Oh, no, not yet. Okay. Losing track of time when you're on stage all day. But good morning, everyone. Welcome to the 33rd Annual Financial Services Conference at Bank of America. My name is Craig Siegenthaler. I run the North American Diversified Financials vertical here. And I'm very pleased to introduce Rich Steinmeier of LPL. Rich is the firm's brand new CEO, but he's been with the firm for over six years and recently served as Chief Growth Officer, which was in charge of shaping the strategy and recruiting efforts inside the firm. Prior to LPL, Rich has held a variety of senior positions at UBS and Merrill Lynch, so I guess a little bit welcome home.
Thanks.
and also as a consultant for McKinsey & Company. So, Rich, thank you very much for joining us.
Thanks, Craig. Thanks for having me.
So, first, just quick background. LPL is among the fastest-growing wealth management firms in the world. They have $1.7 trillion of client assets today. In total, they support 29,000 financial advisors and the wealth management practices of approximately 1,200 financial institutions. In recent years, LPL expanded its offering both horizontally to address more advisors and vertically to enhance their value proposition. So with that, Rich, I think you have some opening comments you'd like to make before we get started.
Yeah, thanks, Craig. And it's really nice to be with everybody today. As Craig mentioned, I'm four months into an expanded role. And so, maybe for some of you, it's the first time I'm getting the chance to be in front of you, and I appreciate that opportunity. Craig did a really nice job of introducing the firm itself, but I thought, potentially I'd just kind of tell you a little bit about the story of the firm and where we are. As he alluded to, we are $1.7 trillion in AUM, serving roughly 29,000 advisors. We have two different ways that we go to market. Historically, we've gone to market, serving independent advisors.
And so when you think about that, advisors largely 1099, non-employee advisors, for which there's a pretty significant shift, and as I'll show you in a couple of minutes, in the industry moving from the W-2 wirehouse regional channels into independents. In addition to that independent channel, we actually serve institutions as well. And through the history of the firm, we've grown up serving individual advisors who were kind of cross-platform into a bank. And then as we grew in sophistication and orientation towards serving banks and their full wealth solutions, we grew up from serving community banks and credit unions into large regional and super regional banks as well. And that has recently expanded as well into product manufacturers and insurance players, who want to have a wealth platform, want to have capabilities, but often can't invest into those capabilities.
And so we're the leading provider in the institutional segment of a fully partnered outsourced solution. The firm goes to market, not surprisingly, as not only a custodian, but also as a broker-dealer. We have strong technology support, as well as a fully integrated solution into the market. We're a Fortune 500 company. We continue to ascend the rankings inside of Fortune 500. Largely, our orientation, which is slightly different in the marketplace, is to actually serve our clients as our clients and earn their business every single day. We believe in, you know, the propagation of advice to all American families. And so we have access. We've provided a lower access point for advisors to be in the marketplace and be successful serving a broader range of clients.
As we've changed and moved and evolved, I would tell you that we used to be kind of boxed into an independent broker-dealer. We really view ourselves as a full-service wealth management firm to serve advisors across the full breadth and institutions across the breadth of solutions as well. If you look at the near history of the firm, as Craig had alluded to, we've had pretty significant change in our organic growth trajectory, so if you look at the right-hand side of that page, I joined almost seven years ago, and we were sitting at about 3.5% organic growth.
We've put a lot of new capabilities to expand our addressable market, which I'll allude to, that has led and refined the efficacy of our sales team as well, which has led to our sustained organic growth in that kind of upper single digits to lower double digits, which we think is sustainable across a broader period of time. That organic growth has been a strong contributor to what you see on the left side, which is pretty significant growth in overall AUM inside of the firm. If you look back into the macro, you'd say we participate in the market in a pretty in an area that is supported by the macro trends in the marketplace. Obviously, there's continued growth in the advisor-mediated marketplace.
This is, we believe, that advice is best delivered through humans, and that are delivered to families around their life's goals. So you see the growth in that market. In addition, though, probably one of the more significant components is you look in the middle, what you see is in that overall advisor-mediated market, the composition of that market is beginning to tilt more and more towards independence. So we sit as the strongest firm in independence, the strongest value proposition in the market segment that is growing. Lastly, I alluded to it, while we feel very strong about that participation, we've actually expanded our participation across the market and expanded our total addressable market as we've introduced new affiliation models. Those affiliation models kind of fit our kind of two stages of our strategy. The first is horizontal expansion.
And that was started as expand our affiliation models so that advisors' practices, as they evolved, we could serve them throughout the duration over the life cycle of their practice. You could imagine someone coming out, establishing their own practice, maybe out of a wirehouse, then in time wanting to transition that into running their own RIA. And you might even imagine in time that as they got into their 60s, before they wanted to sell the business, they may want to retrench from some of the responsibilities of running the business. And so you could think about that as some of our supported models. As we expanded there, we obviously made ourselves more attractive in the marketplace in serving a broader swath of advisors who changed firms inside of the market as well. That's the horizontal component of the strategy.
The vertical integration was the historic orientation of our firm to get advisors to independence. And so much of that was getting them out of a W-2 construct into a 1099 construct, where they had greater independence, they had book ownership, they could actually that biggest asset that they had, they could monetize it themselves. But the second step in the phase of the growth in the firm was to actually build new capabilities and more capabilities to help them be successful in independence. So augmentation of our advisory consultants, augmentation of our business services/business solutions, where we show up as a CFO, show up as a chief marketing officer, do paraplanning on their support, et cetera. And that is making them not just in independence, but helping them make themselves become successful in independence.
Those are the two elements of horizontal expansion, and then vertical integration. That horizontal expansion is demonstrated here in this evolution from 2019 to current day in the markets that we can serve into. We had started in those traditional independent markets. We then introduced Strategic Wealth Services, which is a supported independence model. Think of that as building out the capability to launch a firm as they came out of a wire or come out of a regional, setting them up with a chief marketing officer, a CFO, admin services. All of those are LPL employees to augment them to be successful, in running their business as well as delivering advice. We then moved into a W-2 model with Linsco. Call that an independent employee model, meaning they still own their book. Higher payouts. They sit at 50%-70% payouts.
No small household policy, so you're getting paid on dollar one. And so the economic offering there is very strong, as well as we have a field management team in support. We then enhanced our RIA capabilities so that we could go to market as a custodian that was a very credible custodian in the marketplace. We then introduced Private Wealth. And on the institutional side, as I alluded to, started serving smaller banks, community banks, credit unions, evolved that to serve larger banks, regionals, super regionals, and then really more recently have expanded our capabilities there. And the manifestation of that maybe is our Prudential partnership. And so this kind of taken all together, Craig, is the story of the firm. Serve more, do it with distinction, have an orientation that they are our clients. And so it's our right to earn their business.
It's our obligation to earn their business every single day. And it's paid off in terms of accelerated growth in the marketplace. And I think our position to sustain that performance feels quite good at this moment.
Great. Rich, this is super helpful. Maybe to start off Q&A.
Yeah.
with a recruiting question.
Yeah.
So the breakaway broker trend has slowed a little bit the last few years, but your organic growth has remained robust. In fact, it's gotten even stronger. So what part of the value proposition or this model has really driven that? Maybe the one or two kind of key items.
Yeah. Thanks. So you're right. I think you've seen a staunching of the movement of advisors in the marketplace. And in fact, we feel at this moment we've moved and we're insulated from that movement that has moved down in the movement in the marketplace. And the reason is that we're actually capturing more movement of advisors. We capture those movements because if you think about that traditional independent marketplace, we're out investing everyone in that segment. Our capability set in that segment is unparalleled. And so as you look into and you are moving and you want to move into independence, we really are the strongest value proposition in the marketplace in terms of capabilities delivered for dollar paid for those capabilities. And I don't think it's that close anymore.
In addition to that, and so what you've seen is our traditional market, call that the independent market, we're now capturing, you know, north of 25% of all the advisors that change firms, and on that wire and regional segment, we have really strengthened our capabilities, so we used to be maybe materially gapped to the wires in terms of full sets of capabilities. Those gaps have closed so materially. When you look at the balance of the value proposition, and this is really how I think, if you want to abstract this to what is happening in the marketplace and why are we winning, we have an unparalleled value proposition, and in the wirehouses, it took us getting to introducing new affiliation models so that we got consideration. When we get consideration and get into the sales process, we win at a disproportionate rate.
And so the new affiliation models outside of having a great set of capabilities and supportive advisors also opened us up to more discussions with wirehouse advisors, wirehouses and regionals, because we became more relevant. And the last part in that, you know, capture of movement is that in the institutional segments, in the bank and credit union segment, we are the leader. We have a differentiated set of capabilities. And I would tell you in that insurance counterparty segment, we have the leading solution. I think the novel solution that we created in partnership with Prudential is unparalleled in the industry. So you take that together and say, this firm has a very strong, sustainable value proposition that as the progression of firms move on, our differentiation relative to competitors continues to strengthen. And I think the gaps continue to widen.
I'm going to move this forward so we can turn this off so we don't have to keep staring at this affiliation model chart.
It's a nice chart, though.
Not that I don't like it. I mean, I got to do a lot of it, but thanks.
Second question, organic growth.
Yeah.
So you've really expanded the TAM in the last five or six years into these new channels. I don't know if we're exactly at the maturing point yet. I still think, you know, these models are ramping, but how do you expect them to contribute to overall organic growth in the future?
Yeah, I think that it goes a little bit to what I was just alluding to. I think that the models themselves still have more run in them. If I even just take a look objectively at capture rates inside of wires and regionals, you know, six years ago, we used to sit at 3% capture of all the movement. We sit now at like 9.8%-10%. And so we've tripled capture in those segments. And I think that largely had to do with us stacking in capabilities and becoming relevant. But what was harder for us was to get the consideration. We just weren't in as many of those conversations. There was this historical perception of LPL as serving only independent advisors and maybe, you know, further saying, serving smaller advisors. Those are broken. We serve all advisors.
We are a full-service wealth management firm with a leading set of offerings, capabilities, and value proposition independent of the type of practice that you run. And in addition to that, we don't serve small advisors. I mean, we serve across the board a wide set of different sophistication levels of advisors. And so as we continue to close the gaps in capabilities across ourselves relative to maybe just, again, say the wires, when you have behind that disproportionate economics, book ownership, right, serving you as a client instead of having you be an indentured servant into the firm, I think you get a value proposition that resonates for more and more advisors. And so as I think you can look at the new models and say, I think they've got significantly more opportunity to grow and mature, and they also open consideration to all of our affiliation types.
Great. Excuse me. My next question is on the institutional channel.
Yeah.
The bank channel.
Yeah.
Enterprise, you know, has a few different names. I think you've averaged about two wins a year the last five years. My question is, has the low-hanging fruit already been plucked, or can this really nice growth trajectory continue? I'm kind of curious about what the existing TAM looks like after you've announced a bunch of wins over the last few years.
Yeah. So if you think about that large bank segment, I like that you guys put water up here that you have to have like a quarter turn to be able to open it up to drink.
You're lucky that
you're choking.
Well, you're lucky that one came off easy. Sometimes you need a bottle of them for it.
Oh, well, that would have been even better. So the truth is, if you look at the TAM inside of that large bank market, it's a $1 trillion market opportunity. Yes, we've been successful over the last five years. We've won over $100 billion in movement to the firm, but it still tells you there's a pretty significant opportunity inside that market. I would tell you as well. I think the dynamics 2021 was a pretty signature year for us. We won the privilege to serve M&T Bank as well as BMO Harris. Both of those were pretty signature wins in terms of that dynamic in that marketplace, why on earth would you outsource? And so I think it took conviction from really strong leaders at both of those firms to make those decisions to move to an outsource model.
I can tell you for them, it's paid off in spades. I was just with them on Monday night, and they're really happy with the decision. And that dynamic has shifted over time, too, if you look at like an industry trade group like BISA, what that trade group would question the folks that were making that outsource decision. And now I think what the balance is that those who haven't made an outsource decision, I think the question to them is, why haven't you? If you need to have a world-class solution in support of your, you know, world-class banking model, your capacity to invest is not going to be sufficient to actually continue to keep pace with the largest banks. And so you have to think about an alternative solution.
We provide you the ability to go to market under your brand, with an integrated set of capabilities that are on balance as good as any other firm that you're going to compete with, and so it's a really nice trade, and I think whether it's two, I think they are episodic in nature in that it does require the leadership of the bank to go through and say, okay, let's have that consideration, and that's why you see it kind of average two. I think there's still quite a bit, as I alluded to, quite a bit of opportunity in that residual large bank market, and then when you think about that development relative to that insurance/product manufacturer segment, that product manufacturer segment with the Prudential partnership looks a lot more like where large banks were for us in 2021.
And so I would imagine, I'm hopeful that you will see that continued progression of not why did you do it, but why are you not having a partnership, and as that gets to progression, we get into really interesting conversations in the RFI and RFP phases.
Great. Rich, let's talk about operating leverage. You know, it seems like maybe the language has been a little more favorable towards operating leverage versus your predecessor. But you outlined one of your key priorities now is driving operating leverage in the business. What are some examples of what supports positive operating leverage?
Yeah, I think you're right. I mean, I think that we've been a little bit more outspoken, and it actually has less to do with my predecessor and myself, and it has to do with the maturity and state of where the firm is. I think we had driven outsize investments so that we could expand that total addressable market, and so we bursted investments. We also made investments over that time frame that are investments you need to make that are multi-year investments that pay off in the future around gaining efficiency in operation, gaining improving straight-through processing, bringing in black belts to you know make sure that you're actually digitizing a process that makes intuitive sense, and so we had made those investments, but as you think about op margin moving forward, I think you'll see a couple of things.
The first is we did have to invest in all those new models. And so as we were bringing new advisors on, we were building new capabilities to continue to be able to expand that market. Largely, those models are built. Not entirely. There's still some gaps that we have, but those gaps used to look like this, and now they look like this. But the, and so your cost to serve per advisor and your onboarding cost per advisor certainly into new models will decline. I alluded to efficiency investments.
We've made significant investments over the last several years to actually drive that marginal cost of service per advisor to begin to break that from it had continued to ascend and now to kind of hit a point of inflection to begin to drive down that marginal cost to serve per advisor. And I think you should see that continue under, you know, cost disciplines. I think beyond that, you look as well in the op margin to look at where are there opportunities for us to monetize differently. So for us, we've seen a nice trend on brokerage to advisory, but I don't think it's accelerating at the pace that we have the potential to accelerate it at. So you could imagine brokerage to advisory.
You could imagine the introduction of new product sets that have a different composition in the way that you have revenue generation relative to compensable revenue. And so think about banking products. There are other opportunities to monetize through alts and others that we're bringing on to the playing field. So we look at it from both sides. There is an ability for us to continue to bend the cost curve and be responsible with the level of investment and the level of investment required to continue to mature the business. And then we think that there are pretty material opportunities as well on that monetization side. You take those together, it feels like we're in a place where this focus on operating margin is appropriate. The firm is ready to take it on, and we have pretty strong conviction to move down a pathway of continual improvement there.
Great. Let's talk about alternative investments.
Yeah.
You've been building out this platform. I'm curious, where are you in this build-out and what else do you have left to do?
Yeah, so alts is a pretty important component for us as we look to serve high net worth and then ultimately ultra-high net worth, and so that segment is a $5 trillion segment. We've built those affiliation models, as I alluded to, including introducing a Private Wealth model in November a year ago. But there's still you had to stack in a couple of capabilities, alts being a pretty material component. As we looked at the alts and how we wanted to come to market in alts, you have to recognize that this firm, more so than any firm in the marketplace, is a receiver of advisors, and so the first thing that we did was actually build a custodial platform so that we could actually onboard almost any alt that sold in the marketplace, and so we built an ability to custody alts.
We now can bring on over 2,500 different alts, and bring on in a kind of hold-and-sell positional basis. That was the first. We introduced that custodial capability last summer. The second phase then is for us to have enhanced our buying process for alts. That is the ability to go on to search, on your own, to actually go through either the subscription or buying process with an electronic signature, fully automate that. That is a process where we've built. We're in pilot right now and we'll deploy that this year, the ability for all of our advisors to easily search our inventory and then help their end investors get into a subscription or buy.
The third component is one that we've been, which is more manual in nature, those both being pretty digital builds, is we've significantly expanded our alts diligence and legal contracting teams, to bring more alts with selling agreements onto the platform. So think about private equity, private credit, et cetera. So we've expanded the offering now from the beginning of last year, having less than 30 alts to, at the end of last year, approaching nearly 80 alts with selling agreements, with continuance in that team to move that more towards 120-150 by the end of this year, which would put us basically square in the middle of completely competitive with everyone else.
Take that together and feel really good about having an anchor position, that is differentiated from a custodial capability, but from a selling agreement right in the center of gravity with a good selling experience should make us every bit competitive with anyone else that you would want to talk to as advisors think about their best partner.
So I want to hit on liquidity and succession.
Yeah.
A relatively new model. You know, what it does is it helps transfer books of business from older advisors to newer advisors. It's a differentiating factor for LPL.
Yeah.
How has the feedback been from advisors that have used it?
The feedback's been phenomenal. Just maybe some basics on this. If you look, forever, the W-2 firms have had sunset programs. It was natural if you were going to sell your business, you went through a sunset program. The independent market is really, you know, less than 40 years old as you think about it. The historical ways that advisors, when they got to, you know, sell their life's work, they would match one advisor to another. It was generally seller-financed. You actually bore some risk as the seller that the inheriting advisor may not perform well. You really weren't able to retire there. I think you saw a couple of years ago, private equity entered into this space and gave greater surety, gave kind of cash/equity offers, and we saw this come into the market.
In that scenario, largely, you went into an aggregator model. You homogenized the business. You lost your brand. Your clients went into largely a different experience. And so we stepped in with a completely different approach to this market and said, okay, wow, we recognize we actually have to have surety for sellers. So we're going to step in with our capital. We're going to buy that business from the advisor. But different than any other offering in the marketplace that I'm aware of, we actually keep the consistency of the brand. We keep the consistency of the service. And so often, those advisors have next generation that they're trying to bring into the business. And the advisor themselves just didn't want to seller-finance that business to the G2s. That's the next generation. So we step in.
We buy the business from the advisors. We then enter into selling agreement with the next generation, so the advisor gets monetized on the spot. They get long-term capital gains. They actually keep the consistency of their business, so Steinmeier Wealth Management is still Steinmeier Wealth Management. My clients still know the advisors who are servicing them. They keep their same approach. They keep their same market orientation. They don't have to paint the walls different colors and come up with different brands, and the advisor is able to retire with that monetization event. As we've done that, we've done, you know, 50 internal deals. What we've gotten is advisors saying, wow, I actually love this. I wish I had done this earlier. It's a big learning for us, because there's the burdens of being and running an independent practice can be pretty heavy. Payroll, right?
Like custodial services, like, you know, like small things that come up, but are big deals. And so those folks who've actually sold feel like this load has been lifted from them. The G2s feel fantastic because we have identified 75% of those internal purchases that we've made have a next generation identified. We put them into a next generation program to develop them. It makes the first generation advisor feel better about it as well because they don't have to be the apprentice per se. We're actually working inside of our field management organization. We give them a competitive offer in the market, and they take long-term capital gains. We've now positioned that externally as well.
We've actually completed six transactions externally with teams that were looking for a solution like this, which now puts another leg for our growth in there as we think about continued expansion and growth. There's a new model here, that's where we can have conversations externally as well.
Great. I sort of want to pull everything we talked about together and think about EPS. And we call it the EPS algo. How does successful execution across your various initiatives translate into durable through the cycle EPS?
Yeah. So as, hopefully you guys saw on that page, and I think we've demonstrated over time over the last five years now, we've sustainably lived at high single digits to low double digit organic growth. And so that's probably a pretty good anchor point to start at. And then if you have a constructive macro, you are going to grow in that double digit range in terms of overall asset growth.
And as you then look at those investments that I talked about, as we slow the pace of the expense growth and hit that inflection point and the cost to serve per advisor, you think about the opportunity that as you take those together, you're going to see continued accelerating growth and growing expenses slower than we're growing organic growth, which should drop to a leverage model that allows us to improve our EPS performance at a greater clip than we are organic growth. And we feel pretty good about organic growth overall. So you take total growth and say, okay, this looks like it's going to drop to something that should lead to sustained outperformance in EPS growth. But admittedly, I'm at a financial services conference where everybody models. I'm more of a strategic leader. So you'll tell me where that's all wrong.
I think one really nice factor with your model is the established ROCA due to several mix shifts, which most financial firms don't have. It really helps that EPS algo.
You know, the other thing that, you know, we only do wealth management. We don't get caught up in or what's in favor is asset management, investment banking. We're not that hard of a firm to penetrate. We are a pure wealth management player who knows the markets we participate in. We have two principal markets, and in those markets, we're the leader in each of the markets we participate in, and both of those markets are growing. You have more movement to independence. You have more outsourcing of institutionals, and so it's not that complex of a business. This actually makes it really simple for the people that work here as well. We know why we come to work every day. We know who we serve, and we have a pretty strong orientation to how we're going to serve them.
Last question here on the outlook. In recent years, LPL has made significant investments to enhance the platform and services, expand into new markets, and this has resulted in industry-leading growth. Assuming LPL can continue to execute well, what does LPL look like in five to ten years?
Yeah, the firm looks a lot different. I, you know, I joined almost seven years ago, and the firm feels a lot different now than it did even seven years ago. I mean, I think we solidly kind of considered ourselves an IBD. Felt, you know, that was, and I would tell you, even at that time, I thought a lot about what I would call second-trade independence of folks that went to an independent firm and then realized the capabilities were deficient and then went kind of to like an industrial strength firm. We've had a huge orientation to, you know, improving how we serve our clients, the orientation of ourselves to those clients, and so, as you mentioned, we've strengthened our capabilities. We've strengthened our servicing. We've strengthened the efficiency, and we and I think there's still room to run on that efficiency.
But when you take a step back and say, okay, so if you take that op margin improvement, if you take that continued growth, what you'll see is we're investing in capabilities at a level that I think is without peer in the industry. If we continue that discipline and we continue that growth, you would expect to see that we could out-invest, which will mean if you have a conversion ratio of investment to capabilities delivered, I think you'll see that we should be able to move from playing catch-up in capabilities to leading in capabilities. And I think there's a pretty material change here. See, what used to have to happen when you moved into independence is that you came out and you said, I'm going to compromise capabilities.
So I either want capabilities or I want a leading set of basically economics that are provided to me as the advisor. So it was, do I want capabilities or do I want to own my book to have a higher payout, to have surety of my business continuing? And there was this or. And by the way, everybody's voting with their feet. And what you will see is the answer is I want that. I want capabilities that are slightly deficient, but I want this enhanced value proposition, materially enhanced value proposition. But if you look five to ten years forward, Craig, the answer is that won't be or anymore. What you will get is the best capabilities in the marketplace, bar none. We will not be closing gaps.
We will be creating gaps between who you guys are currently anointing as the leaders in capabilities in the marketplace. That will actually be us, and you will have the industry-leading value proposition of highest payouts, book ownership, flexibility, the ability to serve your clients however you want to, and you put those two together inside of a market for advisors and institutions that want greater flexibility and the need for advice is higher than ever. If I put those together and we're able to accomplish that, I think we will feel like in five to 10 years, we won't be one of the leading IBD. We won't be a leading wealth firm. We think that there's a potential for this firm to be unabashedly the best firm in wealth management, and that is the expectations that we come to work every day to fulfill.
How do we make sure that we humbly serve our clients? We build those capabilities that they need. We do so with an exceptional value proposition. It should lead us to sustained industry leadership. That's the hope. That's what I think will probably happen.
If you do that, I think the stock will do very well. I think that's a perfect place to end. Rich, on behalf of all of us at Bank of America, Merrill Lynch, we thank you for joining us.
Thanks, Craig. Appreciate it.