The recent stress in the banking sector has not immediately bolstered LPL Financial’s opportunities to partner with those firms, but there is opportunity in the fallout if smaller banks recognize the need to diversify their income streams.
In addition to providing services to independent advisors, the company has a robust enterprise business, including brokerage services to banks and credit unions. That part of the business brought in $1 billion in assets during the first quarter, said LPL CEO Dan Arnold on a call with analysts Thursday.
“In the case of the recent bank failures, we didn’t necessarily see this disruption creating short-term opportunity because it was very short-lived, and the impact somewhat muted,” Arnold said. “It does reinforce our value proposition for enterprises and, in particular, banks. That type of disruption may be a catalyst for exploring different strategic options or alternatives for different business lines, as an example, wealth management.”
Arnold hopes the disruption further fuels his firm's business in the sector. In the second half of this year, LPL will bring on board 85 advisors at Bank of the West’s wealth management business, in the wake of current client BMO Harris' 2020 acquisition of that firm, as well as Commerce Bank’s advisors, which account for $11 billion in combined assets.
In mid-March, investor sentiment turned against LPL in the wake of the Silicon Valley Bank contagion, with its stock price falling 23% during that five-year period. On March 24, shares fell to $192, down from $255 at the beginning of the month. It has since risen to about $203, as of Thursday’s market close. On April 5, S&P Global upgraded LPL’s credit rating to investment grade, from BB+ to BBB-, citing the firm’s increased scale and less aggressive financial management.
“Our capital-light model allows us to play offense and continue to invest back in the platform in order to enhance and differentiate our capabilities from others who perhaps can’t do that in these disrupted markets or displaced markets,” he said.
Arnold said the recent broader market turmoil reinforces the value of "human-centered" advice, which benefits their affiliated advisors.
“It certainly helps reinforce the appeal of us as a strategic partner to advisors given our strength and scale and robust capabilities,” he said. “We sort of end up being a safe haven of quality.”
Analysts pointed to the firm's strong organic growth in the first quarter, and said the future prospects are promising.
"We believe the company is on pace for organic growth of 8% in 2023, with upside a possibility if additional bank outsourcing deals are announced," said Jeff Schmitt, an analyst with William Blair.
Overall, during the first quarter LPL recruited $13 billion in assets, down from $15 billion in the fourth quarter 2022 and up from $10.4 billion in the year-ago quarter. That brings trailing 12-month recruited assets to $85 billion, up approximately 12% year-over-year.
The firm’s traditional independent advisor model accounted for $9 billion of recruited assets, while its newer affiliation models, including LPL’s Strategic Wealth Services for larger advisor teams, its employee advisor model and its RIA support business, all had their strongest quarter yet, with over $3 billion in recruited assets. Its bank and credit union channel recruited $1 billion.
Total advisor headcount was 21,521, up 1%, or 246, sequentially, and up 1,430 year-over-year. Annualized advisory fees and commissions per advisor were $291,000, up 4% from the fourth quarter 2022, but down 11% from the year-ago quarter thanks largely to the broader equity market's downturn.
The firm reported total assets of $1.18 trillion for the quarter, up 1% year-over-year and 6% sequentially. It added $21 billion in organic net new assets during the quarter, down slightly from $21.3 billion in the fourth quarter but representing 7.5% annualized growth.
LPL’s Services Group, which provides advisors with marketing support and business consulting, among other services, reported subscriptions of 4,944 for the quarter, up 1,415 year-over-year.
Cash balances totaled $55 billion, down $10 billion sequentially and $7 billion year-over-year.
Overall, LPL reported net income of $338 million for the quarter, or $4.24 per share, up 159% from a year ago. Non-GAAP earnings per share was $4.49, beating analyst expectations by 16 cents. Total revenue was $2.42 billion for the quarter, up 4% sequentially and 17% year-over-year, beating analyst expectations by $20 million.