Despite the coronavirus pandemic, LPL Financial is ramping up recruiting and says it sees ample opportunities to buy smaller firms.
In a first quarter earnings call, CEO Dan Arnold told analysts he expects the COVID-19 crisis to present more opportunities for acquisitions — like the one LPL announced earlier in the week — as well as more “transformational” deals. The No. 1 IBD also added nearly 300 financial advisors in the first quarter and posted a record $12.5 billion in net new assets.
Still, the firm’s client assets and interest revenue fell on the tumbling interest rates and equity values brought on by COVID-19. And Arnold isn’t downplaying the impact of the virus by any means.
“There's no doubt this will create some structural change across the market and the industry,” Arnold said. “In a climate like this, where we talked about this significant change, we believe it creates an incredible opportunity to learn and apply that learning going forward to drive real structural differences in the business.”
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Technology and remote work are two examples. The firm is studying how it can use robotics, artificial intelligence and other digital tools. More than 90% of its nearly 4,400 corporate employees are working remotely. The firm also changed its $15-million annual flagship conference for advisors, Focus, to a fully virtual event in the third quarter.
In addition, LPL paid cash bonuses to employees who are still required to report to the office, along with offering temporary roles and placement services to family members of workers who had lost their jobs at other companies. The CEO started the call by thanking LPL’s employees and advisors for their “guidance to millions of Americans at a time when it is needed most.”
Arnold singled out the firm’s business development team for praise of its digital innovation. The firm added a net 299 advisors in the first quarter to reach a record force of 16,763 representatives. Its recruited client assets surged by 18% from the year-ago period to $8.4 billion. In the past 12 months, LPL has added more than $36 billion in recruited client assets.
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After a strong first two months of the quarter, recruiting hit a pause in March, according to Arnold. In the following month, recruited client assets have returned to slightly ahead of their first-quarter pace, along with the largest pipeline in LPL’s history, he says.
The firm also launched a new breakaway channel in April, ahead of a new employee affiliation model slated to open this quarter. LPL is now onboarding new advisors more quickly and using its infrastructure to avoid the need for in-person meetings and home-office visits, Arnold says.
“It was quite disruptive to the typical and traditional recruiting processes,” he said. “We created digitized tools to overcome those things so that we could continue our activities.”
Macroeconomic forces dampened the effect of the strong recruiting on the firm’s bottom line, though. The firm earned net income of $155.6 million on revenue of $1.46 billion, or about $2.06 per share. Even though the profit was nearly unchanged year-over-year, the adjusted EPS came in 36 cents above the analysts’ consensus at the end of the quarter.
LPL is “executing well through [the] early days of a challenging macro backdrop,” according to a note after the call by analyst Chris Shutler of William Blair. Attributing higher-than-expected gross profit, EBITDA and adjusted EPS “mainly to modeling imprecision,” Shutler said it would likely take a rising interest rate outlook for LPL’s stock to outperform the rest of the market.
The firm anticipates the close of its pending acquisition of San Diego-based Lucia Securities, an IBD with about 20 advisors and $1.5 billion in assets under management, in the second half of the year. In addition to expecting more deals of that type, Arnold’s team is leaving the door open to much larger deals if the coronavirus recession makes big firms into sellers, he says.
“The Lucia transaction is a great example of that opportunity where we can create value for both the principals and advisors of those practices as we transition their business onto our platform,” Arnold said. “With that as a backdrop, you will begin to see some potential conversations and dialogues about strategic pivots by those firms, absent some sort of V-shaped recovery.”
