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LPL Financial Holdings Inc. (NASDAQ:LPLA)

Goldman Sachs Financial Services Conference

December 4, 2012 2:10 p.m. ET

Executives

Mark Casady - Chairman and CEO

Dan Arnold - CFO

Analysts

Alex Blostein – Goldman Sachs

Alex Blostein – Goldman Sachs

Okay, I think we will keep moving along with the next presentation. Next up I would like to welcome LPL Financial. With us today are company’s chairman and CEO, Mark Casady as well CFO Dan Arnold also with me on the stage. We tend to think LPL as really the pure play on the ongoing shift in the financial advisory universe from call it the more full service brokerage firms to the independent channel which continues to be one of the more important with structural themes in the investment management world. LPL currently supports over 13,000 financial advisors with a pretty robust momentum and head count growth bringing a little over 500 face over the last 12 months which continues to be I guess the higher end of what the company typically targets. Tough macro environment and somewhat elevated expenses have pressured earnings growth in the near-term but I think we look forward to hearing how the company is looking to navigate 2013 and with that, I will turn it over to Mark.

Mark Casady

Thanks. Good afternoon everyone. We are happy to present to you today a little more about the story about the LPL and take your questions at the end. There we go, the normal safe harbor disclosure that I am sure you will all speed read in order to be well-prepared for the presentation.

Let’s talk a little bit about what it is that we do as a company. We are basically in the business of supporting financial advisors who own or practice or a part of an institution, a bank and credit union or life insurance company who are providing financial advice to retail clients. We span a fairly wide range of those retail clients from people who are really in emerging wealth for saving their first dollars towards retirement or towards college savings for children, to people who are in the high net-worth category in terms of the business overall. It’s quite a very wide range of clients that we will talk about in a moment.

I think importantly what we are providing is an essentially integrated technology and servicing platform that allows those advisors to have a great business and be able to outsource a great deal of work to us in order to be able to focus on their business development and servicing of their existing clients. We are the largest independent broker dealer in America, with basically the next competitor in our lineup is about 40% of our size and the third largest competitor in that space is about 20% of our size. We’re a dominant player in the independent broker dealer space. We have about $370 billion of in-client assets which is significant and quite a nice growth rate over the years but still relatively small vis-à-vis the entire world of brokerage assets. So we certainly have plenty of room to grow as measured by in-client assets. We are the number one provider of brokerage services and advisory services to banks and credit unions in the country. We have over 700 firms that we service today that are typically community banks and credit unions. And we basically have built a very significant defined contribution practice over just the last couple of years with something around 25,000 to 30,000 401(k) plans and about $65 billion to $75 billion of assets and over 2 million participants that we serve today. So we have a wonderful business that’s about – thinking about the way that Americans save for the most part in their 401(k) plan and providing services to that market.

This chart is really built to show you what it is that we do that provides objective financial advice to consumers as opposed to some of the other choices that they have in the marketplace. So importantly we basically don’t do any kind of proprietary fund management. We don’t use a balance sheet and a provisional life insurance or other insurance product. We don’t do investment banking, we don’t do marketing making. So our very unusual competitor basically defined by the things we don’t do and what that allows us to say to the advisors who use this is that you can provide those services to your clients that are all about improving their situation financially over time. There is no conflict in what it is that they need to do to be able to service their client.

We certainly see plenty of very good competitors across the board but they all have some range of activity that draws their attention and their operating profile towards investment banking or towards proprietary management as part of the ways that they compete. We think that this is really driving the transformation in the industry towards objective advice at the end consumer level and we see that in terms of advisors wanting to join independent practices and we see that in terms of consumers deciding to use independent and objective financial advisors.

This chart shows you our relative size to the rest of the financial services industry in financial planning and financial advice. What’s unusual about LPL in addition to some of the other characteristics is that we are self-clearing. So we operate our own operations that clear the business for our clients which allows us to control the operating environment and allows us to control the costs of that environment and the quality of the service that we provide to the advisor and to their client. And that’s quite a differentiating model when it comes to the other independents that we compete against and it’s more in line with the competitors that you see lined-up here, the largest financial services providers in the country in the space.

We have about 4% market share overall, about a 10% market share among independent broker dealers. So again by measure of a number of advisors who are here, we certainly have plenty of room to grow and attract additional advisors across a wide range of industry category. On the right hand side of this chart, you can see our fairly consistent growth rate. Obviously in 2007 we had a bit of a bump up that was related to acquisitions that we did in that year but overall about 70% of our growth through these years that are measured in this chart came organically, and about 30% of the growth came in those 2007 acquisitions, basically an organic growth story.

This really gets to why someone would join LPL in terms of making a decision in terms of their practice. Number one is we’re going to support a full range of that advisors business by the technology and services that we provide. We’re going to help to maximize the revenue opportunities in their business whether it’s selling life insurance, whether it’s supporting 401(k) retirement plans, and we’re going to minimize the kind of tasks that they have to do to keep up with the record keeping and keep up with the clients’ work that’s done. Quite simply what we are doing is we’re providing them a way to create efficiency in their business and have fewer local office staff than they would have to have if they picked one of our competitors.

We also look at the business as having essentially a research component, some of the way that you would see at warehouses. We have 40 professionals who provide research information on specific mutual fund selection, variable annuity selection as well as overseeing strategist models about asset allocation that they may want to use for their client. We also measure satisfaction of our advisors to us versus others in the industry, and you can see from this slide that we scored a 54% net promoter score in the most recent scores that we did, that would put us at the very top of the league tables compared to advisors measuring their own broker dealer who has a very high satisfaction of advisors who are affiliated with LPL versus other choices they have. That’s what leads you to recommend a friend of yours as leaving someone else’s organization to come and consider LPL and why you’re happy with us if you’re there.

The other measure is the measurement from JD Powers about the in-client satisfaction related to their work with an LPL advisor as well. And then finally, there is a couple of different studies that we have done to show that basically choosing LPL provides you an economic incentive as an advisor, that’s about the way that we do, the works that we do, and that’s the 18% more profitable than any other choice that you could make as an independent advisor. Price Waterhouse Coopers did that study for us. What they said was we have to look at every choice that you have out there and if you choose LPL, is there a measurable difference in your profitability and the dynamics of your business and there is a measurable difference and that’s 18% more profit than you would otherwise have. So we think that’s a real advantage for us, it’s one that we try to grow over time.

And then finally, we look at whether there is churn in the marketplace and what the nature of that churn is, so it makes it available advisors for us to recruit to the platform. There is a recent study by Cogent that said that 22% of all advisors, 29% of warehouse advisors want to move within the next two years and that LPL is the number one destination of choice for them as measured at a 43% of all measured willing to come look at us and consider us for moving. So we are in a great position to take advantage of the movement of advisors to the independent space.

And then finally, on the right hand side the little temple there, our ROAs that we uniquely compete in the marketplace in terms of the areas that we choose to compete and the lower part tells you that by simply changing from an employee model to an independent model you’re going to take home twice as much of your day to day commissionable pay than you would otherwise. It is a very different economic outcome for you and your business and ultimately you own the business as you build it over time.

Now for the company, we’ve done a number of things that let us get to growth over time. We’re certainly in cyclical business as most others in financial services. But what’s important about what we try to do is think about the operating leverage that we have and even in times that are relatively slow for growth, look for ways to increase our growth profile, so as we come out the other side of these kind of cyclical downturns, we can see significant growth going forward. So first of all, it’s going to be through things like bringing on those advisors and you can see in the left hand side of this chart that we have diversified the sources of where we can bring in advisors a number of significant ways from retirement based advisors as I mentioned as before to people who are registered investment advisors and so forth. Without getting into the detail of it, we certainly increased the number of places that we can bring in advisors from – and the number of firms that can potentially have an advisor move from to us over time.

We certainly have done a number of acquisitions over the year, about 10 or 11 in total. Most of the acquisitions have been related to either scale or scope, and the most recent one was Fortigent in April of this year which really brought us a high net worth capability that we’re happy to talk about it in detail but I would say at this stage we’ve done what we wanted to do in terms of scope of the market and acquisitions that related to that. So we have the capabilities we need in terms of that scope. And we feel comfortable that we have the scale that we want at the company and any other future acquisition would really be very much about a simple ROE, ROI type calculation which isn’t quite the case when you’re looking at something that relates to a capability you need to add over time.

And then on the right hand side of this chart, that acquisition strategy and our organic growth has led us to expand the addressable market to about 90% since 2009. So more and different types of advisors, and more and different types of clients allows us to really be able to get growth from a number of areas across the U.S. market.

And then finally, we’ve certainly talked about as recently as last week our service value commitment which is the company going on a process of understanding how to do things from a different perspective, how do we think about our operating model today, how do we think about improving turnaround time, improving the quality of the work that we do and really making sure that our employees are distinctive and they are offering to advisors the service that they have. So anybody who is advisor facing in our company does a very good job, and we think that’s the competitive distinction that folks who are not doing things that are advisor facing are doing activities like data entry or areas for us to be able to work with others. We talked about working with Accenture to find ways to reduce our costs and improve the quality of turnaround time and the quality of entry. So we want to go better, faster, cheaper as it relates to some areas of basic data entry and basic operational support across the company. We will have more to talk about that in early 2013 as we talk about fourth quarter earnings we will talk about the work that we’re going to be doing in a more significant way.

But suffice it to say for the last couple of years, we have been experimenting with lean processes where we can take things that we do and make them more efficient and we’ve experimented with using a vendor offshore that has allowed us to capture significantly improved turnaround time for advisors which reduces the call count coming into our service center which reduces our operating costs which is obviously a wonderful way for us to think about the continuous redesign of the business.

Overall what we are trying to do by fishing in more ponds if you will in terms of number of advisors and types of clients is that we’re also trying to drive of course asset accumulation because at the end of the day it’s the amount of assets that you have under administration, in our case under management that count towards being able to grow our profits over time. You can see here that we have a significant amount of growth of AUM over time, and I would say we’re in a phase where we’re seeing good AUM growth but not yet materialized in the form of revenues and earnings. That means that’s to come. I think the term I heard from last week conference is spring loaded for growth. And I think that’s probably a fair way to characterize it that when the macro conditions get better these assets will produce good commissionable action and good revenue growth for us over time.

We think that our value proposition as measured by that Price Waterhouse Cooper study, the work that we do in marketing and sales support are all ways that we can help advisors to grow their business and service their clients going forward. So that tells you a bit more about our relative AUM growth versus the market and our relative amount of assets in terms of our historical growth over time.

So assets are where we really begin in terms of the cycle of turning that into profits. This slide is really about the levers of things that we can do to have those assets turn into those profits and revenue growth. And the first one quite simply is same store sales growth, advisors doing more work with existing clients or advisors win a new client, we certainly have seen the pressure through the third quarter of this year of essentially flat to even negative same store sales, that’s unusual. Usually that we’re hopeful for a recovery in terms of same store sales but with the macro backdrop the way it is whether it’s the election or the fiscal cliff that has definitely gotten retail consumers to disengage. Until we see those things resolved we don’t think they will re-engage any time soon. We are hopeful that same store sales will pick up as soon as the government sorts out fiscal cliff issue and it’s clear what the new taxation is going to look like in ways that advisors can help them plan.

We obviously have new advisors joining us through additions and essentially new practices that are joining the firm. We’ve had as Alex said a record couple of years in terms of net new advisors joining over 500 per year. We had advertised about net 400 per year, so we feel very good about the continued build of the pipeline for advisors moving and we see that there is a increased level of advisor movement coming in the future. And then we have other things that we can do like good old fashioned productivity which is very tough to do on a low growth environment but relatively easy to do as our growth rates pick up, we can do margin improvement through those lean processes, through some of the offshoring work we’re doing and so forth.

And then finally, of course interest rates, like every other interest rate sense of the business are a significant area of earnings for us. We don’t need them to produce decent profit growth but they certainly are solely missed in terms of their absence today and we believe that some day it will return but we are running the company as if they will never return and that allows us to really focus on productivity drivers and focus on creating the right relationship with advisors and advisors with their client.

This gives you a little bit better sense of our track record over time and through obviously a wide range of market cycles. I think if you look at the fundamentals of our business they are quite strong, even though that we have not seen that manifest itself in top line growth, that’s the fundamental of those new stores growing, same store is ready to grow in terms of what they are doing. And then we do see productivity gains that you started to materialize just a little bit in Q3 that we think will become more pronounced as we go forward. And as we look at the business we’ve seen a margin compression like we had this year in our history, in 2007 we had a similar margin compression. You can see that, then led to increased growth of gross margin and absolute profits on a going forward basis.

So as an update of where we are at the moment, I mentioned the cautiousness of retail investors, strong advisor pipeline and our retention remaining strong overall for the business. We certainly are managing expenses and I think that’s little bit clearer to investors starting in Q3 than it was in Q2. And we talked about the fact that we are expanding our service value commitment work and we will have more to talk to you about that in the future.

So even with all those sort of two approach related to where the business is today, the business produces incredibly strong amount of cash flow for us to use for a variety of reasons. What this chart tries to show you is that we’ve been very shareholder friendly since going public two years ago deploying a significant amount of money in the form of dividends $240 million in the last two years, $200 million in share repurchases and we've announced that we are going to start taking share count down and we throw off $125 million or $150 million a year to be used for ongoing dividends and that share count reduction. That's cash that we don't need to run the business along the way, and if we were to find acquisitions that made sense from an ROE standpoint we have plenty of leveraging power in our debt structure to be able to go out and do a sizable acquisition or two and do that using leverage which would be highly accretive to our shareholders as well.

We certainly don’t think that the current price represents the earnings power of the business and we are certainly seeing a price degradation occur as one of our private equity owners distributed shares about a month ago, the good news in that is it allowed four people to get more float in the market, we have about 8 million more shares now available and the private equity owners are down to about 42% of the share count and the price today is about where it was when they distributed shares little less than a month ago which just gives you a sense of how we’re delevering and the work we’re doing to use cash intelligently for all of us as shareholders.

So in summary, feel great about the scale and the size of the firm and the relative position. We believe we have a very distinct value proposition in attracting advisors and those advisors attracting their clients. We have a proven financial track record both as a public company now and as a private company over many years, very strong cash flow to use to reduce share count and other ways for the business. We certainly feel very good about the tailwinds of our business. People choosing to go to the independent model from out of the models that are there and a long serving management team that’s very much dedicated to creating shareholder value for all of us as shareholders of the firm.

Why don’t I stop there and Alex will prep for questions.

Question-and-Answer Session

Alex Blostein – Goldman Sachs

Sort of grab a seat and then I will start with a few and then we will turn over to the audience. So it feels like over the last year or so and certainly steam (ph) has been coming out in a lot of presentation today that wealth management is the new hot commodity because it feels like it's one of the few businesses that’s not experienced the same type of pressures as whether you're a manufacturer with asset management, getting squeezed by passive or your bank or your insurance company, your interest rate dynamics, so I guess a little bit about the evolution of competitive dynamics in the space as you guys compete for talent. So when Morgan Stanley saying we’re focused on retaining more people, a lot of your float came from the warehouses. How is that playing in, is that starting to show up in higher competition packages and I guess do you see yourself continuing in the 400 to 500 on recruitment basis that you have with that?

Mark Casady

So why we don’t we start with the last part of that first is that we certainly feel comfortable that we’re going to be in that 400 to 500 net new per year going forward, and how we see it today is through the pipeline building from our marketing efforts we’re hitting really all-time highs of leads coming in that we know eventually convert to advisors choosing to join LPL in a variety of forms. Then that gets us to what makes us unique in terms of recruiting and bringing advisors on board is that we can offer a pretty wide variety of models. This is what we’ve really changed over the course of the last call it eight years, as you can join us as an employee of a bank, you can join us as an employee of a independent practice, you can join us as an independent practice owner. You can join us as a partner to an independent practice. So there are about 12 different ways that you could join the firm as an advisor and so pick what feels best for you from an employment model or independent contractor status which most people don’t quite realize about the firm.

Secondly, you can pick whatever business model you want, you can have your own RAA, you can use our corporate RAA. You can be a life practice person and we’ve got the business solutions to make that work for you. So that allows us to recruit in a lot of different places across the industry. So we don’t typically see the same competitors in each of those places, somebody who is going for a hybrid RAA we see a different set of competitors competing for that person or we might see for somebody coming out of say an insurance company as a top producer and wanting to look for a new home. So that lets us this sort of all weather recruiter and you have seen it consistently the good returns in terms of number of new advisors joining us relative to the rest of the industry. We’ve been number two in the industry for net new additions for the last two and half years. We don’t see ourselves really altering from that course and the others kind of move around it from there. So we’re pretty consistent at business development and so forth. I think the last point I would make, there certainly is more expensive for recruiting today, there is transition assistance which is essentially we give to somebody to say you’re going to have to buy a computer system, pay your first month lease, hire some people, you’re going to need to move accounts that’s going to cost you some lost earning for a period of time. So we will underwrite that for you.

And our underwriting costs are about $0.20 in the dollar. And if you compare that to the warehouses where they are like $0.200 to the dollar, $2 for every dollar revenue we’re very inexpensive in terms of our transition assistance and we’re running because of that profit differential and the service model and the high net promoter scores is why someone chooses to use LPL versus someone else. We think we can weather that competition very, very well and see that advisors in motion are what we are really after and we do think there’s going to be a big increase in advisors in motion.

Alex Blostein – Goldman Sachs

Thinking I guess on some of the comments you made around same store sales and this notion that you introduced about people that joining LPL over time to get back to ramp up to their normal kind of productivity, given the fact that you brought in I guess a little bit more financial advisors, more recently (inaudible) I guess for a little bit of a backdrop as you’re looking to 2013 and 2014. But can you help us size I guess, assuming there is no change in the macro environment markets stay where they are, activity does (inaudible) stay where they are, just by simple virtue of those financial advisors becoming more productive like they were at their prior shop, what does that do to your top line revenue model or any sort of metric may be helpful on that front?

Dan Arnold

So I think when we look at growth opportunities you look at same store sales, so your point around the conditions remaining as they are today and not changing materially you wouldn’t expect to see a big change in terms of same store sales growth, so call that flat going forward. You look to several other places it’s the recruiting of new advisors and it’s the ramping up of those that had been recruited in the past couple of years. And I think if you look at the number of advisors that we would recruit in any one year being somewhere – net advisors being somewhere in the 500 range, you can quickly put a number on your overall 13000 and those tend to average a bit higher production than our average production today. In fact, two to three x that, so you can get contribution from both the new advisors being recruited in and those ramping up in that mid single digit range in terms of growth year on year.

Alex Blostein – Goldman Sachs

You guys have done a number of acquisitions over the last couple of years, you mentioned a few of them. I think at a time or maybe those over the last updates that we’ve gotten from you guys, it sounds like most of that is still there kind of breakeven, some of the investments that you have done. Talk to us a bit about when you expect them to start contributing meaningfully to the bottom line?

Mark Casady

I think we will see the out-turn, the other side of the transaction for Fortigent and Concord in particular, which are the acquisitions that we did Fortigent in April, and Concord, the year before where they are starting to now go from loss makers to breakeven to starting to earn a little bit of money over the course of 2013. So we are feeling the turn of that. It isn’t material in terms of their contribution, I don’t want to overstate it but at the same time it’s important to know that we’re making the turn there. National Retirement Partners which we purchased just before the IPO in 2010 has already made that turn and in fact, we are seeing significant new recruiting coming from that acquisition.

We bought about 25 million or so in revenues from that organization, about 200 advisors and this year we will probably have little more than that in terms of new recruits which are organic growth for us. So they are already contributing it to our recruiting success and they are contributing to bottom line growth, and again not yet at par for margin but significantly well ahead of where they were before. That’s why, which is our start-up company which is really in the business of training advisors who are new to the industry, we see it as another way of recruiting. And that’s why it’s focused to the mass market mainly to be able to bring leads to those folks who are in training and ongoing advisors as part of the business model and then our hope is that for basically no transition assistance that can create a significant amount of new advisors who use the LPL capabilities on a going forward basis.

So that probably won’t turn to profits in ’14, and maybe late ’14 but the relative impact cost of that is about $3 million a quarter. So it’s real money but not necessarily meaningful in terms of the experiment we’re running there.

Alex Blostein – Goldman Sachs

Expense has been a big focus for investors when it comes to your story and you obviously alluded to a couple of things you are doing with trying to I guess maybe outsource some of the functions, (inaudible) have you already exhausted all the options that you could use internally to streamline your business, how you kind of feel like you’re operating at where you can, so the next leg of the story has to come from outsourcing or are you going to be doing sort of both I guess in the next 12 months?

Mark Casady

It’s a good question. We have put a lot of investment in technology for example towards our advisors. So as we expanded the scope of what we do that takes a lot of investment in order to be able to create the RAA solution that we have. And that led to organic growth, it’s a good return. But each capacity in our IT organization, so we mentioned that we brought in Dan to help us understand how to increase that capacity, and if I could, I would like to spend double the amount of capital in our IT organization, again it’s a rounding area when it comes to us as a shareholder. But what it would do is it allows us to spend more money on productivity enhancement which just eliminate the work that’s not helpful to be doing, not very productive. And it allows us to create new revenue sources by creating new software solutions for advisors.

So there I think we’re going to continue to increase our spending, we like to increase that in a very nice fashion over the next two or three years in order to get productivity and get additional sources that will pay for itself quite nicely, and then outsourcing which we have been at for a couple of years, what we’re really trying to say is that we’re just making sure that you know quite explicitly and our clients know the advisors, and employees know that we’re going to step it up and be very transparent about it. Rather than trying to do a little bit every quarter we’re essentially saying we’re going to do a lot of it fairly soon. And that’s – to my mind, that’s not a different strategy as much as it is about being more transparent about the current strategy and try to do a little faster in a slow growth environment. That’s a big change from where we were.

Alex Blostein – Goldman Sachs

It sounds like you will give us more color on that on earnings call. I will try anyway. Anything you can provide is that (inaudible) and what it could be, will be helpful but --

Dan Arnold

No, I think that’s right. The backdrop of all of it is certainly our strategic focus, so it’s not just labor arbitrage or cost effort. It really is rooted in how do we better deliver value through our advisors and if we can do it in a more cost effective fashion, then that tends to be a very good outcome which then we continue to lever into new capabilities and functionality to accelerate growth.

Unidentified Participant

I am new to the story but so pardon me if I ask some basic questions. I am a broker at Morgan Stanley, I’ve got $400 million in assets, and I am thinking of leaving. It strikes me that the advantage you had is that you offered the people to ability to stay a broker so they can collect commission. Whereas typically they go to swap and they go the RIA root which may be a little more complicated, then they typically wouldn’t keep commissions. But as you focus more now and as the world gets more focused on less conflicted advice, less focus on commissions and more on the AUM side of the world, how is that going to work for you in terms of trying to be more competitive with swap given the fact that they’ve spent enormous amounts of money on the custodial platform and reporting and performance and I mean can you truly be competitive with them for that kind of RIA that’s looking or that kind of brokers looking to go to that world?

Mark Casady

First of all, if you are a Morgan Stanley advisor, we’d be happy to talk to you. Number one, but importantly that you described the high grade advisor, somebody who wants to have their own RAA but also has significant brokerage even trail and no one is giving up their trail these days, right? The business is too competitive, the business is a tough business like all businesses when they slow down at market. So what you are seeing is somebody is trying to seek an answer that says how do I manage my brokerage business and how do I manage this new advisory platform. And what we’re trying to do is something quite simple, we’re just saying look, for the same cost that you could go to a custodian you will be able to keep your brokerage business. You will be able to outsource all the operating work that goes on, the statements, the websites, all the online access that your client needs to ask, for essentially the same cost.

We already do it today for 13,000 advisors and we do it now for about $34 billion worth of RAA assets from zero in 2008. We’ve had significant growth in that platform for us and we don’t need to be a bigger swap, they are fabulous at what they do but they’re really good at a very large what I describe as investment manager RAA. What we’re really good at is managing the complexity of a retail financial services practice. The gentleman or a woman that you’re speaking of is probably someone who has a relatively complex retail financially focused practice and they need to have the tools – the commissionable products, they probably have life insurance sales that they do and there is a few other products that they can only get through some of their other licenses, we can do all that for them. And this is Jones, who you probably sold an annuity to a few years ago, and who you have made an advisory account today and who you’re probably trying to sell life insurance too, what you need that complexity because we can weave together all the statements, we can weave together all the information and that way you don’t have to have local office help to do that. It’s a very valuable – value proposition and there is not anybody else who can do that for you. Otherwise you have to do it on your own and that’s more expensive as a choice.

Unidentified Participant

(Question Inaudible)

Mark Casady

We do. We are our own custodian. Again we went into the RAA market for exactly the reason you said which is that we saw that there was going to be a demand for RAAs, I will tell you that I have been surprised by how quickly that demand’s materialized. We’ve ended up from no position there as a number five by asset and we’re number four by sales. So we feel very good about our relative competitive position and I think we can have a very nice business that’s quite profitable because we’re going to really play in that hybrid RIA space, the pure RIA space.

Dan Arnold

The only thing I would add to that is if you look at the new asset growth year on year for the last couple of years for the first time two years ago we actually gathered or our advisors gathered more assets in advisory platforms, whether it be their own RIA or our corporate RIA versus brokerage assets. And so we’ve invested a great deal in putting together advisory platforms that will allow them to compete out there successfully and gather that type of assets as well as their commissions.

Unidentified Participant

Last question, do you reveal what percentage of your own revenue comes from trailers on fee based products as opposed to what percentage of it comes from commissions that are generated by advisors?

Mark Casady

We do. It’s in the public documents that show the percentage that comes from overall commissions and it shows our recurring revenues and how our gross margin is made of.

Dan Arnold

Our recurring revenue is about 60% all in, so if you look at total revenue. But if you look at just activity or commission in advisory based revenue, about a third of it comes from advisory and about two-thirds from commissions oriented business but then of that commissions oriented business a third of it is trail which is also recurring.

Mark Casady

So while there definitely is a movement to RIAs, and there’s definitely movement from us, you’ve got to remember there is a lot of products that are only available on the commissionable structure, so we don’t see the depth of brokerage occur any time soon.

Unidentified Participant

Somewhat along the same lines about the competition, of course there’s no why – how do you view the competitive landscape, it seems like this constant change in the CEO of entities like (indiscernible) I guess focus on about in different ways, and just looking out five to 10 years, what is your structure of the industry and why do you feel like your current business model is poised to win?

Mark Casady

So I think you talked about two very different types of competitors within that question and it’s – first of all, it’s a vast market. This is a giant market for financial advisors, you can’t forget that. We have a nice market share but we have a relatively tiny market share relative of what it could be. So you haven’t really seen consolidation aggressively as I think you will over the next few years. We have been a consolidator both through organic growth and a consolidator through acquisitions. So I think you will continue to see us in that way going forward. I think importantly the way we’ve chosen to compete is to say we’re going to combine custody which is definitely a price sensitive pretty commoditized business, with an integrated and proprietary technology and service platform that includes things like marketing.

We were the first broker dealer to allow advisors to be on Facebook, to be on LinkedIn, we can set you up in Tweetie overnight, believe it or not. So we actually give you the content to fill your websites and fill your social media as part of our service package. So we’re going to do is basically integrate the business management capabilities that are needed to be successful with a pretty commoditized set of products around custody, and that integration is where the value is. How other competitors do is they only sell custody, some only sell technology, some basically try to do a roll-up and own the advisors who are there which we don’t do. And so our view is that the right place to be, the place where you create value for an advisor, that’s our core value proposition and that has to be measureable as a way for us to be competitive. And that’s why we asked Price Waterhouse Coopers to do the study and we do want about every five years and that shows that LPL practice as opposed to any choice they could make including the ones that you mentioned as competitors, we are going to be a better choice for them from a profit standpoint, and ultimately profits win in the world. Their profits are profits what is going to matter as it relates to a successful business strategy over time for the company.

Alex Blostein – Goldman Sachs

The last one I have I guess is around capital which is again an important topic specifically like yours that doesn’t have a lot of capital requirements. If I hear you correctly on your comments about just the willingness to bring down the share count, it feels like the buyback is probably more profitable way to deploy capital, is that fair? That’s number one. I guess number two, private equity continues to sell down, an area now that you own 42% versus 50% or something like that just a few months ago, but it feels like it’s an important headway for the stock to kind of get over this potential selling that’s still on the coming, ultimately you deal with situations like you had a few weeks ago with just the distribution that came out of nowhere. So I guess my second question is, is there anything you guys could do to streamline the process of sell down from private equity little bit better and then be again used your own capital to take some of those shares out?

Dan Arnold

So the first question on the capital itself, I think that is correct to identify share repurchases as an efficient effective way where we see the return capital especially at the discount that the stock is trading today, we think it’s – as Mark said, it’s really below the intrinsic or the long term growth prospects of the firm. And so we’ve accelerated the pace of our stock repurchases which historically we had used as just a way to mitigate dilution, and I think in the third quarter alone we accelerated that to as much as $55 million worth of repurchases. And so we see that as a continued opportunity, we’ve got another $150 million facility sitting up there to be used for continued – purposes of share repurchases and I think it again levels that the stock is trading today we still see that opportunity. So we will continue to use that as an approach to leverage return capital.

Mark Casady

Yeah, in terms of the -- beyond this you have owners of the stock, we cannot demand when they buy or sell. There has to be clearing price. We are happy to be buyers all day long for people who want to sell at these prices and the issue is going to be when are they likely going to sell. So (indiscernible) essentially distribution shares are limited, those limited they make their own decisions as to whether they’re going to hold the stock or not. I am sure a lot of them will sell. We are ready buyers of stock, the best way for us to do that is in the open market. Tender offers in a cost effective way to do that for us as shareholders, so we’re better to be out in the open market to be buying in the open market, number one.

Number two, we do believe that there will come a point which is their clearing price and which are secondary is probably the most likely enough that how many in freeman (ph) in TPG would remove shares rather than the distribution method. We can’t forget how much the share is driven by tax planning. And we are all trying to think through the best way to position portfolios for tax planning. This is a method for them to have done that, whether it’s illegal or legal, it’s a different issue but we have to admit that they at least got the tax planning to understand as part of this.

And importantly for us is once we spent the $150 million of the authorization Dan mentioned, our worry wasn’t enough float in the world for us to go and take more out. Now we have 8 million more shares we can take out, so that at least increases float by another couple 100 million that we could take out share buybacks. So from our perspective we’re in a good place. I totally agree with the characterization that there is an overhang over the last 42% and I do believe that that will come out in the secondary in the future days.

Alex Blostein – Goldman Sachs

Great. I think we’ll wrap it here.

Mark Casady

Thank you very much.

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