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LPL Financial Holdings Inc. (NASDAQ:LPLA)

Investor Day Conference Call

November 12, 2013 at 8:25 AM ET

Executives

Trap Kloman – Senior Vice President, Investor Relations

Mark Casady – Chairman and Chief Executive Officer

Robert Moore – President

Dan Arnold – Chief Financial Officer

Dan Krems – Executive Vice President of Corporate Strategy

Derek Bruton – Managing Director, Independent Advisor Services

Victor Fetter – Chief Information Officer

Michelle Oroschakoff – Chief Risk Officer

Analysts

Devin Ryan – JMP Securities

Chris Shutler –William Blair

Trap Kloman

Good morning. My name is Trap Kloman and welcome to LPL Financials inaugural Investor Day. Thank you to those listening on the webcast. We appreciate your interest in LPL Financial and we look forward to this opportunity to connect with you all and answer questions you have.

Before we begin I do want to cover few comments. We’ll be having Q&A today and will be doing in two separate sessions throughout the presentations and as you record your questions until then and for the benefit of those listening on the webcast please wait for microphone to be provided. For those of presentation here you will find a final copy available on the investor section of website at lpl.com.

As discussion greater detail in the Safe Harbor disclosures slide in this presentation comes may today incorporate certain forward-looking statements, this may includes statements concerning such topics such strategies for growth. Business model and other opportunities we precede. Underpinning this forward-looking statements are certain risks and uncertainties please refer to this safe harbor disclosure and to our latest SEC filings to appreciate those factors that may cause results to differ from those contemplated in such forward-looking statements.

We also discuss financial measure that do not confirmed to U.S. GAAP we can find additional related information including a reconciliation of such measures in the investor relation section of our website at lpl.com and the appendix of this presentation.

And with that I’ll turn the call over to our Chairman and Chief Executive Officer, Mark Casady.

Mark S. Casady

So welcome to Minneapolis I mean New York, its great to have you all here, we appreciate you taking the time to get to know the company little bit deeper that you may have had a chance to see before. This is our inaugural Investor Day almost three years to the date that we went public, so fun moment for us in terms of the journey we’ve had as a company. But I remind of you a few key overview points and then we’ll get to the main events here. The first is to remind that we’ve been an industry leader for a number of years in the retail financial space as a largest independent broker dealer, is now the fifth largest RIA custodian with a presence across the U.S. extensively.

We can now through independent advisors, through financial institutions reach retail investors directly or reach retail investors through their retirement savings plans at work. So we’ve built a formidable position in retail financial advice over the last decade and we see that as an area for us to continue to exploit growth over the next several years. Number one, we’ve benefited from the tailwind of those advisors deciding to go to the independent model and we’ve also been catalyst for that change, because of the platform that we offer and we’ll talk about it a bit more throughout this morning.

We very much believe in the mission that we provide objective financial advise to millions of Americans, we are uniquely positioned to the marketplace among the top-10 retail investment advise providers and that we do not have any competing businesses, we’re not in investment banking, we don’t run proprietary products, we don’t have a bank and as we think about our mission we think that unique position allows us to provide that objective advice through advisors in a way that really should give us distinctive growth characteristics as a company over the next several years. So it’s important to take away both the mission and the leadership that it represents and the unique positioning that it represent as well, in terms of objective financial advice.

What have we been doing during the three years is focusing on fundamentals, in the left hand side of this chart in the upper part is adding new advisors making sure that we expand in new market like retirement, RIA and high-net-worth. On the lover left hand side focusing on our cost and efficiency through the service value commitment and then making sure we have the right leadership team to take us forward over the next many years with the platform that we’ve built today.

On the right hand side that’s led to a significant amount of assets that we have build up essentially over the last few years, but particularly over these three that we know are the source of future profits for the company, they have been good source growth for us up to this date. As stewards of capital for shareholders which we hold as a very really mission for us as a management team, we’ve repurchased 14% of the firm’s shares over the last three years which I would describe is reasonably aggressive when we think about it. And we also have been very good at returning capital in the form of dividends as well. So we’ll continue to be good stewards of capital for you shareholders as we look forward in the company.

Today, we are going to focus on four key areas as we go through our presentation. One is how do we bring our differentiated value proportion to grow revenues that’s the business were in, you will hear a lot about that with our first two speakers this morning. We’ll then turn towards how we become more efficient through advisors making them be more effective and efficient at the local levels, so they can grow their practice and be successful and more efficient among employees as well, which obviously accrues to the benefit of shareholders and to our customers in that efficiency.

We’re going to do that in a world of increasing complexity, particularly around the regulatory environment and how it’s changed just since the 2009 market break and how we are really focused on risk management and compliance really more so than ever before importantly recognizing the complexity of this environment that’s what has changed in the near-term. And then finally, how do we think about our performance going forward and to set up for you the view of how we think about our performance can we have as a company over the next few years in terms of earning and the opportunity for that growth.

There is a good lineup of speakers some that you have not heard from before, newer executives have joined us Victor Fetter, and Michelle Oroschakoff who have been here in the last year as well as Derrick Dan and Robert who have been with us for a numbers of years. And this really allows you to go deeper in the company to get a sense of the quality of those individuals and the quality and the works that they are doing to provide shareholder value and to provide value for our customers and/or the advisors.

We’re also very pleased to have three distinguished panelists with us today Bill Glavin from Oppenheimer, Bob Reynolds from Putnam and Nick Lane from AXA representing the distribution industry in a sense of those who creates products to bring through the system, so they can give you a sense of the industry and give you a sense about the else place within it as well. And then we’ll wrap up with a review of our financials and how we’re taking the company forward from there.

So we have a full morning plan for you and we look forward to your questions in each in the Q&A breaks as Trap mentioned before. With that I’ll turn it over to Dan Krems who is our Head of Strategy. Thank you very much.

Dan Krems

Thank you Mark, pleasure to be here today, I’m responsible for running corporate strategy at LPL that includes our organic growth strategy as well any acquisition related activities. We look at the markets that our business has an opportunity to be in, the capabilities we will need to win in those marketplaces as well as making sure that our employees understand that strategy and that we move that strategy through the execution in our annual planning activities.

A little bit about my responsibility. I’m excited to be here today to talk to you about our strategy of building a smarter, simpler, more personal LPL and the benefits it will have for our advisors and for company in terms of the efficiency, productivity and growth.

Before I get in to that strategy, I want to take a moment to just refresh on a couple of metrics that are key to the marketplace for retail financial advice. But first, it’s a simple one, but an important one. The existing marketplace for professional, financial advice is a very big marketplace. There is $13 trillion guided today by investment professionals. This is about 60% of the total investable assets with the individual investor consumer public, so this is the preferred method for guidance of invested assets with the individual investor public. That’s key point number one.

The second key point that I want to talk about is the driver shaping the expansion or demand for growth in these services today. So you see not only the $13 trillion that are guided by financial advisors today but the $6 trillion that’s accumulated in defined contribution retirement plan that will move toward a need for advisor overtime.

More importantly, we are at an interesting point today because of the baby boomer demographic in our country. More Americans are going to enter their peak earnings years those are aged 55 to 64 from now until 2020 than ever before. So we are going to add 4 million Americans to that demographics over the next seven years that will drive a sustained increase in demand for financial advice. So big marketplace, with very favorable demographics that will drive growth in demand for these services.

When we look at what’s happening with market share in that marketplace, we see a very important trend that’s clearly taking shape here, which is that independent firms are winning market share away from employee firms. You will notice that over the last four years, we are seeing independent share of market go from 30% to 36% so not only is there a trend towards independence but LPL has performed very well as that trend has unfolded.

Our market share of independent has grown from 5% to 8% market share over that same time period, more importantly when we look forward we see trend that will continue in the marketplace and we seen an opportunity that will continue for us in terms of a movement towards independent advisors. Even with this trend you still see almost two thirds of the total assets in the market place with employee firms today, so very long tail of opportunity in front of us in terms of the opportunity to win more assets as the trend towards independents continues.

So I’m going to talk a little bit about how we’re set up against the opportunity. I know we’re newer to the public markets, we haven’t had as much chance to talk about strategically where we come from. So we’ve done some very important work over the last decade or so to position ourselves for this opportunity. If you look back at what we’ve done, we’ve created scale in our business, and we’ve expanded the scope of advisors that we can serve and the services that are available to their end clines, so that we are well positioned for that demand and independent advice going forward. We believe this positions us very well for future, as we can serve not at the wide array of advisors, but move towards independents, where we can provide the services that they need to meet the objectives of the end investors from an mass marketplace to high-net-worth investors.

Let’s talk a little bit about our strategy of building a smarter, simpler and more personal LPL. We believe this presents the best opportunity to unlock value for our business. want to focus on three key areas within our strategy. The first is, our strategy is built on focusing on our core footprint. Which means, leveraging the capabilities that we have today to serve a wide variety of advisors that are independent and that will look to go independent in the coming years. Rather than rely on the strategy that looks though adjacencies or is heavily dependent on M&A, we see a vast amount of opportunity in our core business and we’ll be focused on our core business. This will help us further unlock the value from the over 13,000 advisors that we serve today, we’ll also unlock value with over 750 financial institutions that we serve as clients, that’s key element number one.

Second, we placed the significant amount of focus on simplicity, being at the heart of everything we do creating simplicity for our advisors in the way that they run their practice, creating simplicity within our own business to make us more efficient and in terms of how we operate. Victor Fetter, our Chief Information Officer will talk a little bit later today about how we’re using technology in big ways to make that simplicity come to live. But I think there are interesting stories from around our organization that illustrates how we can do that both using technology and without technology.

One I’ll share quickly involves a team of employees at LPL that’s responsible for reviewing policy that we formulated over the years, that may not be working as well as we would like for the benefit of our advisors or the clients that they serve. This team reviews policies to understand how they are impacting our advisors. They recently reviewed a policy that relates to automated distribution on client accounts for clients that have elected to take that service. We would set the policy up so that the client had to reelect this event every year. And we realized through managing these processes that with the change in the way that this policy was structured, we could move to a one-time approval and keep that in place on a permanent basis.

It may seem like a small thing, that stays about 30 minutes once a year for our advisors or their staff, but when you look at the fact that have 25,000 clients who have this policy in place. That’s over 12,000 hours returned to our advisors in terms of efficiency. So this is one of many, many policies, one of many, many areas where we see opportunity in our business and we have employees everyday attacking at the heart of simplicity to make sure that every process is as smooth as it can be, every process has the minimal number of steps hat it can have and they were unlocking efficiency in our advisors business in and own through simplicity.

Last, when we take the efficiency gains through simplicity and we combine them with a more personal experience by providing additional complicated services to our advisors, this unlocks productivity in their business. and I’ll speak in more detailed in a moment about exactly how this plays out for advisors, but our ability to combine simplicity, generate efficiency and in expanded suit of personal customized services to our advisors gives us the opportunity to unlock advisor productivity, helping our advisors strengthen their client relationships with existing clients, as well as win new business in the marketplace.

So our capabilities and our strategy, we believe positions us uniquely in the industry. If you think about this from the perspective of an advisor who is choosing a firm, they typically look at two key questions. Do you have the versatility to support my business model, and support the way that I want to serve my clients? And can you help me do it as profitability as I possibly can? When you look at how the industry shapes out on these metrics. You see that the employee model firms don’t have the same set of capabilities that the independent firms have. That’s creating the classic disruption leading to the market share repositioning as I talked about earlier.

What we believe is that we are further differentiated from the rest of the independent firms. Our existing capabilities in the breath of services we offer, combined with our strategy to focus on smarter, simpler and more personnel, places us in a unique place going forward. We not only have the ability to meet all the flexibilities that advisors are looking for in their business and with their clients, but because of the expanded set of service we offer, we actually end up replacing a lot of local services that will be – who would be sourced by other independent advisors, could be marketing services, could be independent research, could be local compliance guidance, we have the ability to provide all those services to our advisors, increasing their productivity and saving them time and money in their local marketplace. That’s what differentiates us against rest of the independent competitor side.

When we think about our biggest opportunities in our market, there are really three that jump out in terms of coming into focus for us. The first is with independent advisors, not only is there a flight to quality with independent advisors moving to the strongest, healthiest and most capable independent brokerage firms, But there is an increased trend towards the RIA and Hybrid marketplace. We are extremely well positioned with both of these trends, they are drivers of opportunity for us and will allows to expand on our market leading position as the nation’s number one leading broker dealer and to expand our market share.

The second opportunity is with financial institution, as banks in credit union come under increasing pressure to diversify the revenue stream and to find greater operating efficiency. Our market leading capabilities help them operate with greater efficiency with a largest provider in the space, by over three times the size of the next largest provider. We’re also creating a differentiated set of capabilities that were expand our ability to serve banks and credit union not just with their brokerage needs, but with their banks trust assets as well. this allows the bank trust department to operate on the same platform as the brokerage business creating greater efficiency, greater continuity of service provided and expanding our opportunity in terms of wallet share with the existing banks and credit union we serve today as well as with banks and in credit unions that we bring board going forward.

Last in the retirement plan business, we have created three ways to monetize advice within the plan business, the first is at the plan level, which many firms are doing today. The second is individual advice tailored to the needs of participants within financial plan. This is a capability that not many firms have developed, it allows our advisors to develop relationships earlier on in the life cycle with investors and serve their needs in a more customized individualized way adding value to their investment experience and creating value for the advisor and monetizing the services that they provide.

Third area is with the rollout for opportunity, we’ve also created a capabilities to track the movement of the participants in and out of plans so that we know when those transfer events are happening and we position our advisors to provided advice and guidance on the front end of that activity, serving the opportunities as investors transition out of their retirement plans.

So one of our keys to winning is certainly evolving the way that our advisors do business and you can see this opportunity in the way that advisors spend their time. If you look at an average advisor time spent studies for the marketplace today, you see that advisors spend about 40% of their day, with clients and prospectus. The remaining 60% is spent business administration compliance activities, investment management other forms of activity that the advisor would not consider revenue generation for productivity enhancing activities.

Our strategy and our opportunity is to focus on adding these key ingredients in greater fashion to their practice. So adding more consultative practice management, scalable investment platforms, integrated technology and robust servicing compliance is the unlocking mechanism that can shift the way that advisors spend their time, freeing them up to spend greater amounts of time strengthening client relationships and winning more business in the marketplace. This outlines our strategy for shifting our advisor time spent unlocking the productive in their practice.

All of this is occurring at a very important moment, there is shift in the way that clients expect to be served by financial advisors that’s playing out right now. The important change in the expectation that’s set up on financial advisors what used to be sufficient is no longer sufficient in terms of the breadth of advice provided, the speed of which its provided and a complexity of need that are being served.

Our ability to free our advisors time up to spend great amounts of time on these activities is the key to strengthening client relations and differentiating the services that our advisors provide in the marketplace. Interesting timing again, market research by spectrum which focuses on end investors has proven across all market cycles that above all else the number one factor that leads to a satisfied client is the ability for an advisor to listen, understand and communicate how they are delivering financial advice to meet that investors needs. It’s more important than performance; it’s more important than the fees they charge, more important than any other factor. So our ability to free our advisors time to focus on these activities and really strengthens the relationship that they have with their existing clients; generates greater referral activity and it generates ability for them to find more new business in the marketplace.

So if you take a step back from our list, you see marketplace that’s big, it has the drivers in place, for a standard growth and sustained growth over time you see our capabilities well positioned to capitalize on the trend towards independence and that sustained market growth. And you see an opportunity for us to execute on a strategy of a smarter, simpler, more personal LPL Financial.

If we can do that, we believe we create benefits for our advisors in the form of efficiency, productivity and higher satisfaction. We also create benefits for our firm in the form of sustained operational efficiency at a corporate level, growth and outsize financial performance benefit our shareholders. Next up, I want to introduce their Derek Bruton, Managing Director of Independent Advisor Services.

Derek Bruton

Thank you, Dan. Good morning everyone, how are you all doing? Okay, my name is Derek Bruton and I over see our Independent Advisor Services business at LPL, the 12,000 independent advisors that make up the bulk of our revenue within the firm. You're thinking why they put the little guy in charge of growth within the firm, right?

Mark hired me about six years ago because he wanted to literally and figures that you have somebody all 12,000 advisors could lookup to and I have that at LPL so it’s a good thing. But I’m also very, very passionate about growth within our firm. Because we have an unbelievable opportunity Dan talked about the number of investors that are going to be seeking advice, number of baby-boomer seeking advice over the next 10 to 15 years.

He also talked about the independent broker-dealer space, the independent advisor space is the space of choice for advisors looking to go and breakaway from their current models. So all of that is going in our favor. What I want to talk about today is how we’re tracking that business and how we’re growing that business. And then lastly how we’re retaining that business. It’s a simple but laser like focus, we have within our firm and we’re very, very good and what we do here.

So let’s talk a little bit about the tracking our business and what we have been able to do. So if you look on the chart on the left, this is just in 2012 but it’s indicative of a track record. We've had a success over the last several years. We recruit in 2012, more production, more GDC as we call it. Then our seven top competitors combined, and we’ve seen that over the years, we've built a model. We've built this structural advantage within our model, that allows us to pull from different sources.

In fact, just a study that just came out by Cogent Research, one of the industry research firms shows that in 2013, nearly half of every advisor that’s in motion. That’s looking to make a change and started an independent business its considering LPL; nearly half. And we see that every day in our recruiting, where we’re seeing advisors that are looking to leave the Wirehouse with the employee model, we are definitely in their sites every time they are looking to move and so that’s an improvement from 2012 where we are at a 43%.

So we feel very good about that I hear from many of our competitors that they are often out there, they are often out there competing into LPL, when they are talking to an advisor. And why is that the case? What we draw up from the amazing ray of advisor basis. If you look at the bar chart on the left, we draw from the independent RIA markets. The hybrid RIA market which I’ll talk about in a second.

Our course the independent broker dealer markets and then lastly the employee based are often called the Wirehouse a regional markets. So we are able to source from many different areas and many different channels and that has allowed us over the last three years to really have an equal distribution of our recruiting from these different channels. So we’re not dependant on any one source of business or anyone one channel in our business.

For example in 2008 to 2009, when there was a disruption in the Wirehouse channel with the merger activity, we saw a lot of business coming in from that channel. In 2011, 2012 we saw the independent channel hit a lot of, incurred a lot of problems, capital dried up, their margins were under pressure, their businesses weren’t able to reinvest in technology and services, and a lot of those advisers left and look at LPL and joined us.

And then just most recently is the Hybrid RIA market and Hybrid for those of you don’t know is RIA and independent RIA that also has commission based business so they are doing advisory, fee based business and commission based business and we’ve built the model that’s attracted a number of those, in fact 45% of our recruiting last year came through the Hybrid RIA channel and I expect that to continue overtime, but we don’t have dependents on anyone channel that’s allowed us to stay head of the competition recruiting.

In fact I would like to highlight just a couple of IBD in the Hybrid and the independent broker dealer market many of you might not know there are over 2000 independent broker dealer in the country. Some of them are smallest $2 million to revenue and so what we’ve seen over the last couple years particularly with interest rates where they are with the pressure that these broker dealers have felt from the compliance of regulatory side, the cost of gone up they have haven’t been able to recruit, their inability to invest back in their business has led a lot of the advisors that are at these firms to see greener passes. And they have looked at LPL, they have our ability to invest back in the business, they have seen our sustainable structural advantages that we have in our business and they come to LPL.

And the same goes in the Hybrid space, we’ve been to build a platform that allows the commission and fee based business on technology platform service through, one service group reported through one statement and that’s attract number of advisors who want to be independent yet don’t want to leave behind or perhaps want to pursue even more commission based business and it gives them the flexibility to attract a number of clients who want certain types, want to be serviced and advised in different ways.

Our Hybrid platform has really been differentiated, its a unique platform in the market, we are able to – because we self clear we are able to cost see that business, we are able to hang a license the rep licenses at LPL and its been a tremendous platform. And as I mentioned, most of our growth from recruiting are close to most our growth today is through RIA channel. So what happens once we’ve attracted that business? We’re very much focused maniacally focused on opening our advisors to grow their business once they come on the platform. Now with 12,000 advisors in a number of services that Dan talked about, Victor talked about in technology and Michelle talk about you might think well how does an advisor find their way through LPL.

Well we have a very comprehensive solution, its all driven through one point of contact. And that’s the relationship manager at LPL. So all of our larger advisors are signed to relationship manager, they go through this one person and then they have access to expertise and through our sale at LPL in number of different service that other firms just cannot provide or they try to provide through that one relationship manager. One thing we’ve learned and Dan talked about this is over the years there is greater and greater complexity in this business and its nearly possible for one person to service and advisor, but one person that services them and has access to all these points whether it be in marketing or business or practice management or retirement the relationship manager can pull in these experts and drive solutions to our advisors.

And what this has done and what we’ve seen is that more engaged our advisors are in our services and our technology in our platform the faster they grow their business and its really a simple focus we are expert at the back office and middle officer for our advisors, they are experts at relationship management with their clients and with their prospects. And if we can deliver to them more time for them to spend in front of their client who by the way are the best referral sources for prospects, the better of they are the more than levering our scale and our expertise in areas where it just does not make sense to replicate them at a local level.

So again, whether its best practices, whether its marketing help for example we help our advisors to set up their collateral, help them set up their website, we help them differentiate and establish their value proposition and most recently we are really focused on their social media presence. It’s an effective way for advisors to build their brand and advertise their brand in their communities and again what all that leads to is a reallocation to their time and the things that matter in their business.

But lately what we found is that all advisors aren’t created equal and all businesses are not create equal and overtime, these businesses have evolved and LPL has done very well as [indiscernible] once said to go where the pup is going not where it is. We’ve evolved our businesses, we’ve anticipated our advisors changes in their businesses, and we’ve stayed ahead of them, but we’ve also noted that we need a segmented approach.

That there are larger OSGs out there, there are hybrid RIAs. There are those that are looking to retire and get out of the business, but are looking for successors. So we’ve segmented approach and relationship management, and marketing and our service to make sure that we’re delivering the services to advisors when they need them in their business. And this is – we’re just evolving this over the last year we will continue to do this. But it’s been a great approach to make sure that we’re delivering the right services at the right time.

And this is all kind of leads to retention. My last Slide, this is we’ve been a market leader in retention in 97% of production year-over-year. And that’s because as I said earlier, we continue to anticipate where our advisors are going and build the services, the platforms, the technology, to address their business needs over time. We talked about hybrid RIAs, one of the biggest things going on in our business right now, given the average age of advisors which is about 58, 58 years old in then the industry today, is succession planning and business acquisition. Many advisors would probably tell me is that they want to work until they are in the grave.

And that’s true, but when their definition of work changes overtime, it goes from five days to four days to three days and being in charge of growth at LPL, that means that you are probably growing less overtime. So my job is to pair up all the advisors out of 12000 that are younger than the 58, with those that are older to put a succession plan in place, potentially set up an acquisition of their business and we’ve been very active in matching those advisors, doing valuations of their businesses and then actually providing capital to help them finance deals, all keeping it within LPL. And by doing that overtime, we will address the issue of ageing advisor population, and we will not lose those businesses and won’t lose those accounts. So we’ve been very proud of our retention number overtime, I don’t see this changing whatsoever.

So again it all bring – comes back to the three main principles within the business attracting new advisors, extremely important. Once they get on board, helping them grow their businesses and take their accounts and their clients to the next level. And lastly, obviously, retaining that business and ensuring that it does not go to the competition, it stays within the LPL family.

And I’m going to stop there and I’m going to bring to Dan back on stage and we’re going to take questions for about 10 minutes I think Trap. Is that right? So any questions and we’ve got mikes throughout the audience here? Right here in front?

Question-and-Answer Session

Unidentified Analyst

This is a question for Dan, the one charge you had up there that showed advisors spending less than 40% of time on revenue opportunities. So you guys think about your kind of medium to long-term goals, where do you guys think you can ultimately take that number? And what kind of timeframe should we be thinking about?

Dan H. Arnold

I think there are opportunities to start to make progress immediately. I think a lot of the technology that we’ve launched this year as it becomes more familiar to advisors, will start driving the time spent. Victor has a story that I know he’s going to share later today that it provides deeper illustration about how these technologies change the way that advisors spend their time in the practice. Longer-term, I think I’m not sure that we known what the upper boundary is. I think we think that there’s a great deal of opportunity in front of us. And I think you will continue to see kind of march forward in terms of shift in time spent starting immediately continuing into the foreseeable future.

Unidentified Analyst

Thanks. So just looking to slide talking about the opportunities in financial institutions is something that you guys have spoken about. It’s an opportunity that I think a lot of firms have talked about for many years and it’s been of that, but I think a lot of people have really difficulty getting traction in that business. And so can you talk maybe a little bit about what you guys are doing different, I know there has been some acquisitions that have probably enhanced your offering. But just what you guys are doing different to get traction and how that’s working just given that it could be a really an interesting opportunity?

Unidentified Company Representative

Yes absolutely. So I think it’s important to go back to the acquisition of UVEST and look at what that acquisition created in terms of capability within our system. We took an existing business that we had serving financial institutions combined it with UVEST as a market leader that created an immediate kind of market dominant leader like I said, we are three times large than the next largest provider.

Gives us a deep experience those management team that came with UVEST, Dan Arnold, who he is actually part of that management team. And the depth of expertise and understanding at how institution is function in the decision making process is very important. So our existing types of relationship with those 750 institutions, gives us an understanding of how to position ourselves with decision makers within the institutional space.

Because you not only have the advisors providing the advice, you have the program manger running the program and the way that program manger plugs into the executive team and implement its executive decisions amongst the bank leadership is really what unlocks the boarder opportunities. So our understanding of how this is reaching to that audience, position the services that we offering, communicate effectively to the decision making set within the bank, I think it gives unique positioning and unique understanding to execute on that opportunities.

Mark S. Casady

On many of these institutions have also are now figuring out what our independent advisors have known for a quite a while is that a move towards more of recurring revenues stream in their business, and there ability to cross sell their deposit clients and the transactional clients that they have, is going to build that sustainable revenues stream that they haven’t had in the past.

So just over the last couple of years we brought our independent advisors together with our institutional clients and they are very much learning from each other. They have a way to expand their value proposition in their banks, in credit unions.

Unidentified Analyst

Hi thank you. I have two questions; one on scope, you had a slide that said you can catered a 92% of the advisors out there. What don’t you hit right now, and how important is it that you catered of that last 8%. And then the second is on that average age of the advisors being 58 years old, where was it five years ago? How does that impact productivity as the age, and can you just give us some numbers. How different is the growth rates for firms that are run by say a 40 year old versus firms run by a 60 year old?

Derek Bruton

Sure I’ll take the question about the importance of serving, who we serve in that 92%, we don’t serve in the importance of what remains outside. So our ability to sub-advisors includes everything from what we would consider the mass market all the way through the high net worth. We defined the high net worth, that’s extending up into $25 million of investable assets, above that level 50 ultra high net worth you begin to see an extremely different set of services provided and extremely different set of dynamics.

We have clearly placed that outside of our strategic footprint. We do not intend to go into the ultra high net worth business at this time. We don’t think that is a critical component to our growth opportunity. There is certainly a lot of opportunity there for other who are positioned for that space. We believe we are in great shape with 92% that we serve.

Mark S. Casady

We clear the 58 years older, average age in the industry, at LPL it’s around 53 so we have a younger client base than the typical industry today. And I don’t know the exact numbers, but I will say that number continues to grow higher over the years. So advisors are getting older over the years. Not as many new entrants into the marketplace is dry and not many people retiring is driving that age. However within LPL, like I said, we have with 12,000 advisors you are bound to have many, many that are under that 53 year old number.

And we are very eager to grow their business. They are much more in that growth mode and let’s say 65 years old. We tend to be on the down slope of their carrier and as a result we are trying to aim bring in more advisors, younger advisors train them. We have several training programs that we have at LPL to help them build their businesses from a practice management standpoint, hiring and firing, utilizing our investment processes versus trying to bring them in themselves, and that is driving more younger advisors into our business.

And with the opportunity to acquire those older businesses over time, so I think we have a better – sustainable advantage over other broker dealers who are just seeing older advisors lead their firms right now. And what was your last question, I’m sorry.

Unidentified Analyst

I’d like you to talk on, you mention that your selling that your selling consolidating this firms, how much of you actually consolidated over the last three years. I think if that’s the goal let’s say, part of the value proposition, how active are you there.

Mark S. Casady

Why don’t we get back to you on the exact number of deals because – we have that number but let me just say it’s just over the – we’ve built this our business acquisition theme over the last three years. And I would say on average around 50 deals or so a year. And I’ll get you the exacts on that, but they continue to increase people just become aware the of the capabilities that we have within our business.

Unidentified Analyst

Thank you. Just past on the 40% of time spent on revenue generation. How does that compared to the best in class player in the space. What would that be and what is the gap between you and them. It’s my first question and secondly I think you spoke to RIA being the biggest opportunity for you guys or the fact that where recruiting is now. Can you wrap some numbers around the relative economics between RIAs you are recruiting now as well as the traditional independent broker dealer model?

Unidentified Company Representative

Okay. So to your first question in terms of how our advisors form against others as it relates to time spent. We have few sources of information we have really published information which can aggregate everyone across the industry. We can’t see individuals into other firms. So we know the aggregate and we have our own information. And our advisors are couple of percentage points ahead of the industry aggregate. I think it’s in the mid to high 30s in terms of – If you cut the categories apples-to-apples our advisors are couple of points ahead today. You see some of the differentiation what we talked about with our existing positioning. But we still see it as an opportunity further extend on that lease.

Unidentified Company Representative

And then in distant terms of the RIA market that the business that is exposing right out of the hybrid business. As I mentioned earlier and part of that by frankly because we built the model where they do not have to drop their licenses or drop their commission based business. They can’t do all in one platform and that has been the predominant part of our growth on the recruiting side. And just in terms of profitability it’s and Dan Arnold may address this little bit later. But it’s fairly mutual in terms of we really don’t care if they set up with their own RIA compared to our corporate RIA, we’ve built our business and our model in a way where it’s neutral to us.

Unidentified Analyst

I think to some of the end point up on the question before that you said earlier that they are and a lot of your – you have a big diversification in terms of your advisors factors or so. A lot of device there are a lot of different things. So can you to some degree bucket this a little bit and you did in the presentation in terms of What are the kind of groups that you are thinking about in terms of guys that might be more focused on – insurance guys more focused on time and the RIA you just mentioned and things like that. And what areas are you seeing that are really growing and maybe some areas that we see that actually slowed down and some of these guys have to reinvent themselves. So it’s load of question. But you know what I am getting at.

Unidentified Company Representative

We have to continue to be opportunistic in this business and as I mentioned earlier there have been periods of times over the last six, seven years where different business channels have faltered more than others. And we are taking advantage of that because of our platform we can attract across multiple channels. But as I was talking about earlier that the channels that I feel are trending right now are those in the independent space where the broker dealers are coming under an enormous amount of pressure.

And advisors when they make a change they really want to just make one more change in their lives. The transition is difficult oftentimes on their staff, on the business, particularly on their clients. So we are going to make a change they want to flight call. They want to go to a firm that they know is reinvesting the business as the profit margins do to hold up under difficult times, and requires them to just make that one more change in the business over time. So I would say that two buckets if you will that we see most of that growth coming from the independent channel and also the advisors going into that hybrid RIA marketplace today. And that hybrid could be from the Wirehouse or the independent resource from both the.

Unidentified Analyst

Hey guys. In the independent RIA space there was a slide on the recruiting opportunity that said and you plan on evolving a platform to address the independent RIA space. Can you talk a little bit about that and then secondly on a different topic, on net wise that the whole trending opportunity. Is there – can you just talk about how you think that the training a new advisors going to evolve now that [indiscernible].

Unidentified Company Representative

Okay. So when we built the hybrid RIA model, it was really built to and design as a custodian model so that when advisors do overtime and some of them do, drop their licenses or get out of the commission based business. And they go completely field. RIA is many of the custodians with the finance today. And we've built our models, so that we can handle that involving in the business and in fact many of our advisors have gone from a corporate RIA to a hybrid RIA to pure RIA over time.

And they’ve been able to keep their aspects on the same platform. No changes in account numbers; no changes is service schemes and it has been a very smooth process. And we built it that way, and quite frankly when somebody goes hybrid RIA they’re thinking more like an RIA than they are as an independent ramp.

So we had to build our platform that mode. As we looked to evolve our platform, it’s five years old and we will add $55 billion in assets and we’re very proud of that. But as we look to evolve our platform, we’ll need look at the specific need that typically and particularly in the high net worth segment that we need to cater to for those network ppliances are pretty and parcel to the RAA business.

So there is some service and investology needs and Victor is very focused on those that we need to look at as we get more and more towards the pure RIA now.

Unidentified Analyst

And to your question about training advertisers in the future and learning some that is why, I think it’s one of the silver linings there is that we did learn a lot about the market places ability to supply, even new to industry financial advisors or financial advisors are early in the carreers [ph] maybe coming out of safety programs which has become more main stream in universities.

So we established that – the recent ability to force those people and we still need to find ways to continue our focus on doing that in a more economical fashion and then the other key elements and we’re continued go back and prior learning is around how to supply before it leads this people to ensure the stability of the entering into the business. That was not sufficient and more difficult time to come together in the next [indiscernible] venture.

Before taking what we’ve learnt, and we’re committed to continuing to all about that thinking and applied tour standing advisors at some point of future. It’s time for ask more questions.

Unidentified Analyst

Okay, thanks for that very much, [ph] Citi.

Unidentified Analyst

Thanks listening today. And two questions there won't be in there and then one for you, Dan when you think about the productivity opportunity maybe we help to size. This will look out next couple of years and had one best measure if they be cross production for advisor. How you see that trending? Is there any acceleration that has to stay safe? And in that could you talk a little bit about the recovering economics, today versus maybe six months ago? Thank you.

Unidentified Company Representative

Sure in terms of measuring the productivity opportunity, I think you’ve alluded to one of the metrics that was certainly be a case that we look at on our regular basis that which is the application productivity manufacture center management, the amount of revenue generating activity both in terms of commission of low business which is a metric that we share on a that we share on a regular basis and we have to intend and operating our business.

Those are two very key measures, we can also measure it as the aggregate level in terms of asset close into the business and we continue with monitor time stamps and better understanding. I think there is both vertical support and then also reinforcement through anecdotal conversations with our advisors to make sure that we are doing what we can to move that productivity metrics forward.

Unidentified Analyst

And then just in the terms of recruitment economics, we – clearly we want the advisors to move their sticks, expenses for moving their business and there is the opportunity cost of moving business and we’re very focused on taking care of those fixed expenses as the advisors move over the termination, account termination fees and things of that nature.

But also looking that as they’ve – they’ve ramp their business at LPL, how much they are out of the market to bring it to in new accounts and we look to find ways to take care of that costs as well.

Across the industry, I think it’s in a general, there was cost of transition economics of have increased, but we’re neither is that the highest in the market terms of transition system not the lowest and could very focus, we underwrite each individual deal and we appropriately provide amount of transition systems.

Unidentified Company Representative

I think what's going on the industry with regard to the disclosure required with the Wirehouse level of advisors moving between firms is going to help us going forward. Because first of all we are no way near the rates that they pay in terms of 12 months line at whole month production and are we’ve been used to been very transparent on like those – like what we are paying for and in how our competition advises on the move.

Unidentified Analyst

Just to build upon the discussion on the separate RIA opportunity, so of the $55 billion of the hybrid RIA. Just to start how much of that has gone completely independent? You saw that the next steps some of those September those hybrid RIA fact that’s gone fully independently like what if how much of that $55 billion? You think.

Unidentified Company Representative

I don’t have precise number on the assets but on the terms of number of practices is about three dozen of those practices have gone completely independent.

Unidentified Analyst

So do you feel that you need to hit your strategic growth objective? Do you feel like you need to be in that independent RIA market, not just as retention tool for your existing hybrid RIA practices, but the ability to recruit people to start within that independent RIA business on par with Ameritrade and Schwab? Do you have the resident expertise or do you feel like you have the ability to compete in that business over a period of time? Do you need to be there?

Unidentified Company Representative

Yes and first of all let’s say we already are there, we are a custodian we are already there. We’ve grown our business on heels of the bigger churn or trend in the market which was the hybrid space. So we’ve chosen to build a costly platform that can evolve with somebody that wants to be in RIA. But to be very clear, that’s not the market that’s moving today. We are going to where the path is going and that’s hybrid business today.

So we have not chosen to go compete directly against Schwab and TD Ameritrade and others out there that are squarely in that business, because that business isn’t moving. It’s moving our independent advisors that are independent broker dealers and Wirehouse advisors looking to go independent and it’s been smart for us to focus on that those advisors in motion rather than trying to price somebody away from custodian that may not want to move.

Unidentified Analyst

I’m not talking about, trying to sum away from custodian, I am talking about a Wirehouse person who goes completely independent to a Schwab or an Ameritrade. Do you feel like you have the ability to attract that employee Wirehouse as an independent person to put yourself on the same playing field as Ameritrade and Schwab? Do you have the ability to win there?

Unidentified Company Representative

Absolutely.

Unidentified Analyst

Today you believe you already kind of…

Unidentified Company Representative

Yes. Okay.

Unidentified Analyst

Kind of two quick questions. One is as you have a goal of gaining market share at the advisor level or wallet share, what’s your revenue for advisor kind of growth that you target? And how are you achieving that?

Unidentified Company Representative

Revenue per advisor?

Unidentified Analyst

In terms of what the trends are, in terms of the revenue per advisor trend, as you gain more wallet share more fees are going to LPL. Do you have a target growth percentage?

Unidentified Company Representative

Yes I don’t believe we’ve disclosed a forward-looking growth percentage. I just want to refer you to Investor Relations and if we have available information still we can give you on a forward-looking basis, we’ll come back and share that with you.

Unidentified Analyst

And then the second one is, I’m just curious how granular or transparent the bills are to end advisor in terms of the fees that are paid to LPL? It has in two bundles a lot of years [indiscernible].

Dan H. Arnold

Want us to go?

Unidentified Company Representative

Yes.

Dan H. Arnold

Okay, so we actually – we’ve had a heritage of being very transparent with our fess to the point that we actually have a fees schedule that gives incredible visibility, but also is a little bit complex for advisors to manage and the fee that we’ve received as we’ve kind of grown and evolved as a firm is they like us to simplify the fees schedules. We’re actually in the midst of doing some work to look at it longer-term simplifications to our fees schedule that would still provide the relevant transparency that an advisor would want, but they have a very good understanding of the cost structure and the individual cost components that they pay for using LTL services.

Unidentified Company Representative

So having said that we are looking as Dan mentioned simplicity earlier, we are looking at the concept of bundling more of these fees and finding opportunities where we can drive little more simplicity yet still transparent view of fees that we charge our advisors. I know they would like to simplify their businesses and particularly their staves lives if we can simplify that in perhaps bundle. So we’re examining that right now.

Unidentified Analyst

Great thanks. So going back for a second to the slide where he went through the three, kind of buckets of opportunities which is investment advisors, financial institutions and retirement plans. Which one I guess of the three buckets do you guys see the best growth opportunity for yourself and then more importantly from a incremental margin perspective which one of these areas are most profitable for LPL and I don’t know if you could provide numbers at least rank the three will be helpful?

Unidentified Company Representative

Sure, I’ll take those questions. So in terms of prioritizing the markets we’ve actually studied extensively and quantified kind of market sizing of each of these opportunities. And the smallest of the three is in the tens of billions of dollars that give us a kind of a multi-year opportunity. I actually think if we were to quantify the opportunities, probably the independent advisor market I think is the largest when you disclose the breadth of opportunity there, the retirement space, also very large market and the institutional space. The reason that they are all in the top three is because they all present a tremendous amount of opportunity, but I would put them in that order.

In then in terms of profitability you know I think we’ve built our services so that we have healthy profitability across all three of those businesses, I mean not sure – I think if you look at kind of details of each, they are at different stages of development, so you see different profit margins business line by business like, but I’ll refer you to Trap for a little bit more information on – by business plan what profitability looks like.

Derrick Dan

Okay, well thank you very much. Next growth, productivity is very important with our advisors businesses and I’m going to introduce Trap Kloman to bring that up. That’s what I was going to do. okay.

Trap Kloman

So thank you Dan and Derrick and maybe they would briefly follow-up on that last question, I think Dan articulated well as we look at the different business practices, they are at different stages of development, and evolution and opportunity. So we certainly see potential for all to look forward you know as the retirement plan business today we look at that we definitely see lot more opportunity, we work on in-client advice there and then the financial services space they historically have done a little less fee based advisory business, which as many of you know is more profitable for us and so as they continue to evolve we’ve seen a good pickup there due to the work we’ve been doing with them with our solutions.

So hopefully that provides a little bit more color on that last question. Before we move forward with the next part of the morning due to some of the weathers, the weather conditions in [indiscernible] and attendees will take a quick 10 minute break, you can get some coffee, resituated for those people who came in and are back and we will pick back up. Thank you.

Unidentified Company Representative

Ladies and gentlemen, please take your seat we will begin momentarily. Thank you.

Trap Kloman

Thank you, everyone and I’m pleased to welcome our next presenter Victor Fetter who is going to talk about our technology strategy.

Victor Fetter

Thank you, sir. Good morning everybody get your tweets, your e-mail and everything square it away during the break. I hope so. I’m pleased to be here this morning to share a little bit around what were doing relative to technology within the organization. I have the opportunity to join LPL just under a year ago and I came from Dell. And at Dell had the opportunity to overseas the transformation technology at Dell, which included shifting the mix of spend from operations to strategic investments as well as all of the online commerce portfolio, so the entire B2B and B2C e-commerce portfolio.

I choose come to LPL because I fell and love with the mission. The mission of independent advice and more importantly I saw the opportunity for technology to a play a role in the deliver of that mission. How we support our advisors, how we support our institutional customers and how we ultimately support at the end investor. Today I’m going to share with you a little bit around the technology transformation journey that we’re on and it’s been a journey and its one we are very excited about in terms of making progress and delivering the vision that you heard Dan talk about from our strategic perspective.

Our software as a service cloud based platform is robust, it’s the best in the industry, its integrated, its connected, it provides that balance of a seamless platform for the host of business offering that Derek outlined but the same time incorporating elements of choice for the entrepreneur who has a specific way they want to run and administrator their practice. When we think about this platform for us it really is about being there, being present with our advisors on their journey. The investment that we make quite regularly is the continued evolution of this platform through all the capabilities that you see listed here.

It represents an opportunity to unlock value; it’s a chance for us to think about how we compete in the marketplace. And times are changing, we can talk about we are going to spend some time talking about how we support these constituent, but the backdrop for this as you know is a very dynamic technology landscape. We talk a lot about the impact of mobile. We talk a lot about the rise of social, raise of a digital interaction that are happenings, we spend time thinking about the impacts on cloud as a lever to simplify the operation, the role of data to help inform what were trying to do and how we make smarter decision internally as well as for our advisors. The ability to unlock value coupled with the efficient use of capital becomes the backdrop for the story the journey that were on to really reinvent ourselves.

As we think about our technology journey I would like to sum it up on these two aspects. The first is the strategic elements of smarter, simple and more personal the LPL way. And we look at those attributes on the left hand side of that slide there and you can get lens into some of those things that we have been putting in place since the start of this year. I would like to call your attention to a couple of them. The notion agile [ph] development and that is no longer thinking about long lead times in big multi-million projects, but the notion of putting just in time changes into the system based of real advisor input. The use of data that we can be smarter, have that insight in our compliance efforts and our partnerships with our product sponsors, so you will hear from a little bit later, how can we use the insights that we have in our portfolio to drive very different decisions.

We think about simpler, how do we reduce the cycle time for delivery of technology to our portfolio. How do we make sure that we have absolute clarity and where we want to win in the marketplace and ultimately how do we make it more personal, our advisors have appreciated the efforts of our engineering organization going out and sitting in their practices. We’ve done that we’ve spent time with our advisors, we spent time in the businesses hearing about where their vision, what are the strength of our platform that we need continue to maintain. Where do they see their business changing and how do evolve, we’ve taken that feedback and it’s a continued dialog, as a matter of fact we have team members in New York today visiting with our advisors and responses taking that feedback and incorporating back into our portfolio.

While all that’s going on we have the right hand side this equation, which I called the DigitalLife. And just for clarity I don’t call it the DigitalLife and I that I think of it only as tweeting. It’s a DigitalLife and that it’s a very different way that we need to have solutions available for advisors our institutions to interact with the investors. We need to incorporate those elements of the big four that I described earlier mobile, social, data, clouds into a very different experience and that we acquires a change in our processes and our thinking and over the last number of months we’ve been really focused on that. We’ve been focusing around how we drive innovation in the organization.

We’ve been holding innovation days, allowing our engineers, allowing our product managers to spend time thinking about the next generation of solution and actually prototyping them. We’ve have investing in those ideas that come directly from our teams. Through that exercise we’ve also began the process to build up a patent portfolio. Ideas that we think are revolutionary, things that will change how we deliver technology solutions. We have been thinking about architecture, making sure that we have a service based architecture that it uses reusable components. No longer developing a solution that is a point-to-point solution for a very specific business need rather having a library of capabilities that we reuse over-and-over.

You can imagine that single component right there generates value and how we think about and deliver technology reduces the cycle times, because we only do it one way and we reuse it throughout the portfolio. Along those same lines we think about relative to data how do we make sure that we streamline our data portfolio how do we make sure that we capitalize on our data and provides robust avenues to get at the data that’s required.

And finally, we’ve been investing in talent and bring talent into the organization to really drive the solutions that we want to use to win further in the marketplace. We’ve made some pretty compiling hires, when we wanted to build our business intelligent practice; we went to leading organization and hired the guy that did business intelligence. When we wanted to go and fortify our environment with the Chief Information Security Officer, we went the hired I call it the been there done that guy, so the people know their domain have the expertise and will come in add instant value to our portfolio. When we combine these capabilities, we began to think about how we are more efficient as an engineering organization, we begin to use that efficiency to fuel the future investments that we want to make.

Let me give you an example of – a couple of examples of ways that this manifests itself to those stakeholders that I talked about. First as we think about our advisors and how we use technology to help unlock the efficiencies in their practices. It is our host of solutions that we launched in August and we had great success with them, the far right there – the far left excuse me, is the streamlined office, the streamlined office is about driving efficiency and practice management.

It’s about providing a set of capabilities for the advisor to change that curve of how much time they are spending with customers versus back office operation. A component of the streamlined office includes things for example like remote deposit capture. That is an investor comes in, present the advisor with the check for new investment, no longer does the advisor or have the staff run out to the bank to make the deposits, they snap a picture of the check and the fund start flowing immediately to fund the transactions they are after.

Or the notion of an iDock experience, which begins to be the digital vault a place for advisors and investors to have all of their information digital. Coupled with any signature capability which streamline the opening of accounts, the routing of forms through the office where advisors can connect with investors remotely to do some of those tasks and no longer our investors having to coming to the office to sign, physically sign a form. That’s just one example of a portfolio that’s being getting to increase the efficiency in the office, its tightening the relationship with advisors and investors and driving us closer to that digital experience that we see happening in so many industries around us.

The second example I’ll share with you is enhanced trading. Derrick mentioned that trading platform earlier, as a way to increase efficiencies and how advisors are managing the portfolio of their investors. One advisor told me two weeks ago when I with him, he said Victor we launch the enhanced trading in August. Prior to August, it would take me five hours to complete a task. Today with your platform we can do it in under five minutes. That’s unlocking value, that’s giving value back to the advisors.

And then on the far right, is LPL Financial Mobile. It’s a tablet based experience a remote based experience for advisors to begin to have anywhere access to their book of business. Through LPL Financial Mobile advisors can look at their accounts and their holdings, they have information available on their investors. They begin to have access to research report and other capability or research information that we make available through our research team.

They also have an integrated experience of their social experience, their social footprint. Coupled with our Digital IQ brand that we are launching and the work that we’re doing there, we are beginning to help advisors capture on the rise of social. Through LPL Financial Mobile they can look at LinkedIn, Facebook, Twitter, and participate in those conversations, share their messaging and hear back from their investors, tightening relationships over all.

If I send that notion of unlocking value and increasing efficiencies, we also do it for the investors. In August we launched what we call Account View. An Account View is our investor portal, if a chance for investors to understand their portfolio, their holdings, begin to look at the data in different ways. Now it’s a great to have a portal. What is unique about portal, is its branded and supported by the advisors themselves. So it’s an advisor branded portal. It’s a chance for the advisors to get their messaging out there and to establish that digital relationship with their investors. The Account View product becomes a digital experience for investors. We have opportunities for them to access paperless statements and will soon be morphing into overall digital experience how they evolved capabilities as documents, plans, proposals, et cetera.

The relationship that the investor has been quite profound and advisors have shared with the great experience that they are hearing from their investors, in fact when you couple streamlined offers, enhanced trading, LPL Financial Mobile and Account View all of them are exceeding their projections in terms of rollouts and deliveries. The adoption take-up has been significant since our launch just a couple of months ago.

The other opportunity for technology is managing risk. And Michelle is going talk about how our compliance organization does that at LPL. One of the things that we feel that we have an opportunity is using technology to manage risk. We’ve been simplifying and streamlining our compliance tools, both for internal use and surveillance, as well as external support for our advisors engagements and risk management task. We’ve been using data to better profile potential areas of risk. Risk though extends beyond compliance. We think that risk as technology risk.

In that regard I reference earlier the hiring of Chief Information Security Officer to make sure that we have sound strategies to protect against the threat that are out there, coupled with that we’ve been investing in a robust infrastructure to provide any time disaster recovery. Mere-to-mere disaster recovery and in fact have built a new data center in Dallas to helps power those capabilities. They allow us to power the growth of our business, but also strengthen the foothold that we have on our risk management capabilities.

And we’ve also been spending time speaking about tooling for employees. How we drive employee efficiency is also a key elements of our transformation journey. To give you an example, we are going to be launching very soon and upgraded imaging platforms and on the surface that may sound like Ho Hum an imaging platform.

So when you really think about what the imaging platform of do for us, it will allow us to shrink the cycle time from a submission of form to our processing. It will allow for improved routing secured for transaction processing, it will also allow for better status notification in terms of where we are in terms of processing certain transaction. I picked on that one because it’s a good example how just a very core basic platform can add value back into the operating processes that we have internally as well as providing an upside experience for our advisors in terms of the richness of information they have around how we are processing their specific transaction.

We’ve been looking at the portfolio at large and we have been also investing and making sure that our teams have the tools that they need our sales team having remote computing devices. Our internal team making sure they have the power they need at their desktop to power the processing that we do and relationships that we build with our advisors.

Let me give you an example of that and I just got an e-mail yesterday, we’ve just launch the new phone systems, again you may say Ho Hum phone system. But the opportunity to engage in a timely manner with our investors and our advisors and our sponsors is key and through the phone system now we have voice detect capability. So now when someone leaves a voice-mail you now get the e-mail that say hey so and so called here is the message. That’s about being responsive and when using technology to unlock value.

When we pull it together our platform is robust its industry leading and there is a lot of great intellectual properties built into that platform. The transformation that we’ve been on continues to find ways to strength the operation and ultimately shift the mix from operational spend into strategic investments. While we are doing that we are adding significant value to all of our constituents involved and recognize that the landscape continues to change and positioning ourselves to be responsive through change.

With that I would like to introduce my friend and colleagues Michelle Oroschakoff to talk about compliance.

Michelle Oroschakoff

Good morning I’m glad to be here today to give you a high level overview of the governance risk and compliance function. I’m going to focus on two key themes. First, how we translate complex rules and regulations into a robust control environment and do so efficiently and effectively to enhance our advisor productivity. What I call focusing on risk that matters and second have doing this and in an efficient and effective manner provides LPL with a competitive advantage in the marketplace. What I call doing well, by doing good. GRC is an integral part of the LPL Financial Company. As you can see by the fact that I’m standing up here and one of the four teams for today is enhancing the risk in compliance culture.

Just as LPL has proven the value of providing independent investment advice to the retail investor, GRC has proven the value providing independence conflict free supervision and oversights of that business. GRC is dedicated to a robust control environment and to a best in class compliance oversight function. All of this both fulfills our regulatory obligations and protects LPL, its advisors and investing public.

So I would like to stop here for a minute and tell you a little bit about my background, I have over 20-years of experience in the industry in legal risk and compliance mostly focused on all aspects of the retail business and most recently with Morgan Stanley where I was first the Chief Compliance Officer and then the Chief Risk Officer for its global retail businesses. I was very excited to have the opportunity to join LPL, because of its passion for and commitment to independent advice for retail investors.

And you can see that the passion for independent advice is matched by its passion for creating a great control environment. The commitment here start at the top, it starts at the board, the audit committee and that tone from the top which is so critical to driving that through the organization is reinforced on regulator basis by Mark Cassidy and the rest of the management team.

I have been very impressed with the management team since I have joined with their transparency, with their collegiality, and with their commitments to the GRC mission. They are very engaged and you can see from the centralized governance structure how engaged all of LPL is with GRC. This is a structure that starts at the top and goes all the way down to line management and in financial services as I’m sure most of you here know, you can’t run an effective control environment with that engagement from front line management in risk management, its critical to our success and its absolute here as you can see its biggest bar here on the chart.

So this low risk model that LPL has put together, has given us the ability to provide comprehensive GRC solutions across the enterprise and that’s more important now than never before we are an increasingly complex environment both from a regulatory and technology perspective and providing a comprehensive solution to our advisors is something that our regulators expect and that we expect of ourselves.

Meeting those regulator expectations is key to our success, we are overseen by 53 state regulators, the SEC, FINRA, OCC and others, and all of them expect that firms of whatever size will have an adequate, compliance and risk functions backed by knowledge and empowered professional and using appropriate technology and you heard Victor mention the focus of the technology department on developing solutions for GRC to use for its advisors, because of our scale, we are able to achieve those regulatory expectation in an efficient and effective manner.

So what does that means? Well you can see here that our robust compliance and risk capabilities are delivered through a variety of programs. We have holistic risk management, holistic compliance services, we have deeply knowledgeable specialized group focused on everything from alternative investment to advertising to fraud detection and prevention. The numbers speak for themselves; we’re fulfilling important regulatory expectations at the scale with the expertise that our size allows.

6200 branches examinations conducted annually, that adds up to an extremely experienced branch examination staff. 8500 advertising sales piece is reviewed monthly, that adds up to a very experienced group of marketing and regulatory reviewers. 1000s of products approved for sale that’s because we have great due diligence team, a great research team and a great compliance and risk team.

So how are we doing this? As you can see LPL has kept pace in the growth of its GRC function with the growth of our business. We are investing in additional resources, which we can do because of our size and scale and we are bringing down the ratio of advisors to GRC staff. We found that when it comes to supervision and oversight, proximity is plus and you can see here that we’ve located our branch examiners and our supervisors across the country. We still have many people in our Scarlet and San Diego locations, but these regionally based examiners and supervisors allow us to conduct more real-time oversight, branch visits can be done within a day and alike, its also helped us in recruiting and retention, we can obtain people from across the industry and across the country.

Finally, we have a focus on leadership, because of our size we are able to have a team of dedicated professionals with an average of over 20 years of experience in the industry, we’ve recruited them from everywhere from independent broker dealers to Wirehouses to global banks to regulators and alike. So how do we execute? You can see here that our programs starts at the transaction and single person office level and I would like to just mention a key initiative that we’ve engaged in over the last year.

We have a home office supervision group; we have now eliminated all of our single person offices of supervisory jurisdiction and brought them under the home office supervision group and that was completed last month. We've also reduced the overall number of offices of supervisory jurisdiction, and our group of supervisors supervises everything from the transaction level to the approval of products to the approval of marketing material.

We then go to the oversight from the compliance department, where we have surveillance, branch examinations and the other functions of the compliance department. And finally all the way up to senior management review of advisor business conduct in appropriate circumstances. All of this allows us to provide flexible, scalable solutions to our advisors.

We allow them to have a supervisory model that meets their business needs and functions to support their entrepreneurial approach to providing investment advice to the retail public. This program also allows us to reinforce regulatory expectations on a daily basis. We have good relationships with our regulators and we meet with them on a frequent basis at everything from the state to the SRO level, in order to understand what they are doing with respect to the development of policy and also to provide the LPL voice in the development of that policy. This is something that gives our advisors [indiscernible] in how regulations are going to be developed and implemented.

Of course, as you all know, we operate in a highly regulated industry and from time to time, our regulators will point out areas where we need to remediate things that we've been doing. They examine our businesses on a regular basis and we are very committed to working proactively with them, and cooperating as we fix issues that they point out to us. So what does this mean from a practical perspective? While you can see that we have a very aligned GRC function. We are meeting our advisor’s needs in specific and important ways.

So here on the left you’ll see what do advisors need? Advisors need to identify suitable product and sell them to their clients. That’s one of the fundamental regulatory requirements associated with the retail business. What does GRC do? Risk and research provides due diligence on new products to ensure that what our advisors tell are appropriate and suitable complex products. That’s increasing regulatory focus at the moment as you can image in the flow interest rate environment with investors looking for additional yield. Some of that’s to be found in the more complex products structures. There are varying state and federal requirements associated with selling those investments.

And the GRC team has a dedicated group that does pre-purchase review of the sales of all complex products to ensure that there be installed to suitable investors in appropriate amount, that the paper work is complete in accurate and the information provided to the sponsors is complete and accurate as well. Creating marketing materials, our Head of Marketing is here today. They create marketing materials, but many of our independent and entrepreneurial advisors like to create their own marketing material.

Hence the 8,500 pieces a month to review. I can assure you that John and our team, are now creating 8,500 pieces of marketing material per month. So what do our group do, we have licensed professionals who are reviewing the marketing materials to make sure that they comply with all applicable regulations, doing any required filing and doing any required record keeping on behalf of our advisors.

So what we focus on risk of matters, our advisors can focus on business of matters providing that independent objective advice to the end investors. In conclusion, our focus on providing GRC coverage in a matter and simpler fashion coupled with our scale, gives us the best of both worlds. Our advisors are able to leverage big firm resources to their individual practices, focusing on covering there end clients, securing the knowledge that they are complying with regulatory requirements and that they are receiving appropriate oversight and education about their regulatory obligation.

And with that, I would like to invite Victor Fetter back up to answer any question. I finished early and I will say that I doubted anybody as ever complained when the compliance people finished speaking.

Unidentified Analyst

Hey, maybe just on the compliance side, can you – and maybe you mentioned it. But can you talk about how often you paint yourself an arbitration from clients and why those are and how that compares to why those arbitrations happen and how that compares to maybe some of the peers out there?

Unidentified Company Representative

Well, that’s really more of a question for our general counsel who is here. We can get back to on the exact numbers. I don’t see that we are in arbitration more frequently than our peers, but I would have to leave that to him for him to speak to. Most arbitration does focus on the suitability of investments offers. And that’s no different to peers than any other firm. And in fact, any of our regulatory issues are really the same as I’ve seen at other firm.

Unidentified Analyst

Thanks. I think some of the issues that you guys experienced recently how to deal with allocation of alternative products and the minimum amount allowed across various transactions by states. What I guess have you done to make sure that doesn’t happen again. And then when you kind of look at that current allocation across various portfolios, what kind of practice do you have in place to make sure that these allocations stay within kind of the regulatory allowed norms, so that you don’t have to insure them.

Unidentified Company Representative

Well we do a couple of things, so we did have that issue and as a result we developed a complex products supervision group which I mentioned before. Which does repurchase reveal of these alternative investments to ensure that we are complying with the statement amongst and any other requirements. So that group is in place and fully staffed and processing alternative investment transactions. So that’s how we plan. We’re also looking at Victor to build out some additional technological solutions for the future. And then of course we do have our surveillance and two plus one trade review of all transaction. So we are attacking that from three angles.

Unidentified Analyst

Question for Victor. We think about what’s important for advisors generally, just wondering if you can comment how important technology is for the advisors I mean it really done some pulling on this seems to rank pretty high, just want to get your opinion. And then secondarily, how would you rank your technology solution to peers. In what areas do you think you do really good job and maybe your peers do not?

Victor Fetter

To the first question, we spent time talking to advisors and hearing about how they feel about technology and where is it important to them .And they would say rank that are top of their list. From a couple of different perspective, if you looked at the end-to-end platform that we enabled. It starts at the front with lead generation and they want to have robust technology to help support them in driving new business growth, and they’ve recognized that. And so we have relationship with sales force, we allow our advisors to better understand the marketplace to better go out and capture leads, manage their book of business and flow that through to the entire spectrum. And you can go through any bit of the capabilities factor and advisors would say, but technology they recognize as is that the core

Now in the relationship business and so they want to use technology to help free them up to go build the breadth of relationship and provide that personal advise, and with their investors. So they see technology as the avenue to do that. We also see technology as enable or reducing their cost of operations. If we can use technology and drive increase automation and take capabilities out of manual process that are in their offices, they see that as a competitive advantage.

The last piece I would add and they also see it as their books of business grow they have a desire to use technology to help give them some time back for their own dreams and aspiration. So they are asking for us to have word with collaborative experience of anywhere to anywhere communications. And using technology to bridge the divide around how do you provide that personal experience. How you drive the efficiencies in their office at the same time give them time back to achieve their own dream. And so let me say technology is a center. If you look at some of the data that’s out there would say as an industry technology is marginal maybe, I think I saw 61% satisfaction if I recall all as a number in terms of advisors experience the technology across the industry.

When we look at our portfolio and I’m astounded by the support we get from advisors and how much they are cheering us on in terms of how far we’ve come. The solutions that we delivered in August have been outstanding in terms of the feedback that we received it’s reinforced by the adoption utilization numbers that I referenced earlier. So I would say that we’re definitely seeing continued momentum and satisfaction utilization of the technology that we’re making available to them.

Unidentified Analyst

May be also for Victor.

Victor Fetter

Yes.

Unidentified Analyst

In terms of employee efficiency, you talked about the work for simplification, has this spread to, or this is expected to lead to improve margins and more efficiency at LPL in terms of lower headcount. And in terms of the opportunity to bring technology to LPL itself to make it more efficient, what percentage of your time is spent making LPL more efficient and how big is that opportunity?

Victor Fetter

So to your first question around the workflow solution it self, is there going to be efficiency gains, yes. It allows us to scale with the growth of business to be able to redeploy resources in that manner. It is also about improved service, right. So it’s a multi dimensional projects that going to have lots of different attributes that will add benefits to the firm. So yes there’s a financial benefit and you can redeploy resources that we see from the decreasing efficiency. But it is really on the service side as well where we are able to reduce that cycle time, give more information back to advisors.

We thank that though in the entirety of technology portfolio that we’re using within LPL. And in terms of the present time, I don’t know the number, I have four kinds I can’t love one more than another, right. I got to love all of those four kids equally. And I view the same as I look at our book of business and whether it would be our advisors, their investors, our sponsors or internal LPL colleagues hey that’s four, just like my four kids. And I don’t really look at thing; I index to one over another, but really looking at opportunities across the portfolio that really have value to the end stakeholders and ultimately our shareholders.

And that’s how I spend my time is going out listening to each of those audiences and hearing about ideas and things that we should do differently. And for example, internally it is a minor deal, but referencing the innovation day, one of the things we heard from employees was we would like the ability to sell ticket challenges that we have in our environment. In other words, I don’t want us to call somebody and say hey did you know, we can improve X by doing Y et cetera, they just want to be able to type and go.

Innovation day, one of our employees says hey why don’t we just build a self ticketing tool. We did that and rolled it out within 60 days. And so now we’re able to do self ticketing in our internal operations. Reducing the cycle timing, eliminating the number of people we have to have in our internal help desk, just to meet a very basic need in terms of our internal operations. So we’re driving those behaviors and changes throughout our entire footprint.

Devin Ryan – JMP Securities

Thanks so it’s Devin Ryan with JMP. So on the technology front there’s an investment that’s continual. And it seems that spend with adding all these additional services goes up overtime. So just thinking about that as the backdrop, are there any meaningful areas where with technology changing and the needs changing where you can reduce costs or there might be areas where you may have service providers where you can push back or just change how you’re working with them?

Unidentified Company Representative

So we’ve been doing, I use the term mix shift and my colleagues have heard me reference that and that is about and everybody do something, let’s not just keep adding how much money we need in the budget. Let’s look and see where we can be more efficient internally to fuel, investments that we want to make and that’s we are talking about. To give you a couple of examples and things that we’ve done, we’ve looked at our service provider relationship that we’ve had in terms of people who are coming in and providing services to complement what we’re trying to do. We rationalize the number of providers to a core set, that’s allowed us to get access to better talent, have bigger relationships and preferred pricing. Basically, I’m getting more capacity into the system for a flat amount of money or allow to redeploy those funds for other initiatives.

When we look at our technology infrastructure, you look at the rates that we have virtualized our environment, virtualization means you can run multi-processes in a single server as appose to having a discreet server for lots of capabilities. When we look at our level in penetration of virtualization from our environment, it also passes many of our competitors, we just have these benchmarked, it also passes many of our competitors.

When you look at the ability of self provisioning, so this is how much time does it take to spend to spin up an environment for one of our engineers to go do some work? We’ve reduced that cycle time from two days to less than 15 minutes. That’s going live as we speak right now. And so each of those are examples where we’re able to use technology to drive our own efficiency which freeze up financials that we can redeploy or get back to the bottom line.

Devin Ryan – JMP Securities

Sorry for another compliance question and this might be a little bit detail, so hopefully you can answer it. On the earnings call, I hope you listened a couple of weeks ago, there was some management commentary about big upside that you guys got from non-traded REITs and I think, they were exciting particular trend where I think a lot of these things went public and then advisor shift them into private once again.

So just maybe you can just walk me through that process and how from a compliance perspective, you got comfortable with that just because – as an outsider it looks a little bit light okay. Here is the product become public and then the advisor state out of it and generate a new commission. So just trying to maybe you can walk us through that possible little bit more?

Unidentified Company Representative

Well, I can tell you about why we advice non-traded REITs by our advisors may have use the first phase when I got public to go back into another non-traded REIT. But each individual transaction is going to be separate and the suitability requirements are going to be access for each one of those transaction.

So when our non-traded REITs is invested and investors often looking for non-correlated to the equity market returns, perhaps a higher rate of return – often a higher rate of return and they would get and publically traded investment or publically traded bond or another income producing investments.

So when the process from a liquidity event when I go public, are used to go back into another non-traded REIT is often because the investors are looking for that yield and also looking for often times lower volatility that we will get in publically traded REIT.

So the processes that we have for any investment in non-traded REITs, we’d look at where the money is coming from? What the suitability, attributes of the individual investor are, and the site, so what they lived in often times or state requirements for how much of their portfolio liquid network, they can put in a particular asset class.

So we’re looking at each of those transactions to make sure that they are appropriate for investors. And I will say that that is a very granular process and that I think that it is very much geared to insuring that our people are investing in suitable products and are doing something in appropriate fashion.

Devin Ryan – JMP Securities

Just one quick follow-up, how do you view with product in general, because it seems like they continued for good supplies. I think that that supplying the advisors are using well continue in the future, because it’s sounds like for management comment that you guys think the next is able us to see lot of that activity?

Unidentified Company Representative

Yeah, I can really common on what the supply of the product is going to be perhaps we can have trapped all with you on that. I will say that it is something that our advisors life to tell certain of their clients. And so we would anticipate that they continue to be that in the future. And continue to be that in an appropriate fashion. We’re very focused on years smiling, but we’re very focused on doing it in appropriate fashion.

Devin Ryan – JMP Securities

Hi, good morning. Just following up on that need to be the dead horse, but it’s an interesting topic. I guess some of your competitors on the broker side missing with these products, because they continued to sell very well, continued to be very lucrative, yet good portion of them don’t want to engage in these products. What are they missing?

Unidentified Company Representative

I don’t know, I can’t really comment on their behalf or speculated about what they be thinking when they’re not engaged in this products, so our clients, our advisors, and investors, we like the products, we like the opportunity that offers. They may have a different point of view and they may have different products to offering.

Devin Ryan – JMP Securities

Okay, thanks.

Unidentified Company Representative

We have time for more questions.

Unidentified Analyst

Hybrid RIA claim mix sort of commission base trade and see how there was suitability standard or fiduciary standard?

Unidentified Company Representative

It depends on whether or not they are doing the trade in the brokerage account or in the RIA account. So if the client has at the first in his hybrid RIA as you heard that they are speaking about before, they’ll be doing brokerage business in which case that help with suitability standard and they also be doing investment advisory business and necessary in the investment advisory account to held to fiduciary standard.

Unidentified Company Representative

Well, thank you very much and we’re going to a break.

Unidentified Company Representative

Thank you us Michelle and Victor and to once more follow-up on the question while we have the opportunity, we’ve always had a degree of non-credit REIT sales and alternative investments in our platform and we provide that disclosure in our case in Qs and what we did see in Q3 was an elevated level and the guidance we’ve given to-date is we do foresee that remaining through the fourth quarter and into the first quarter of next year and at that point we get a little farther out into the markets and low less transparency and we will certainly keep everyone updated to that trend in future public engagements. But with that before we bring up our sponsor panel will take a quick break, so we can set the stage, everyone can get some coffee and then we’ll return. Thank you.

Unidentified Company Representative

Thank you everyone. I am please to introduce Robert Moore, our President who will be leading a sponsor panel to talk about some industry trends, and then will open up for brief Q&A with the panel. Robert.

Robert J. Moore

Yes, good morning. How are you? Everybody holding up, okay?

Unidentified Company Representative

No.

Robert J. Moore

You have I mean started yet. Okay well, as we put today agenda together you can imagine with 450 billion of assets on our platform and over 60 billion in growth sales a year to discussion around on bias conflict free advice and the access points that we create for our advisors is a fair amount importance. And within our model one of the most distinctive aspects of it is that we form partnerships with our sponsors in delivering solutions for our advisers and their end clients. It’s a hallmark of the kind of complexities that we face as well as the opportunities that we have together.

And it’s my pleasure today to have three very distinct industry leaders on our panel. So I’m joined on my far right Bill Glavin, who is the chairman and CEO of the Oppenheimer Funds, in the middle due to next Nick Lane, who is the Senior Executive Director Head of U.S. Life and Retirement, at AXA Equitable, Life Insurance Company. Nick is also the head of AXA’s broker dealer who many of you may know has a clearing relationship with LPL supporting over 4000 advisors within their system. And then to my immediate right is Bob Reynolds, who is president and CEO of Putnam Investments. So welcome to all of you.

We really appreciate you taking the time to be here, I know people are very interest in your points of view. So we are going to have 30 minutes of panel discussion followed by 10 minutes of Q&A. we will try to cover a fairly wide range of activities that are of importance to our panelist partially around industry trends overall, but also importantly the relationship they have with us at LPL.

So Bill I’m going to start with you discussing around the distribution channel and just the way you have seen distribution evolve over the last decade the kind of trends that you see that might be of interest to those who are in tendency here today.

William Glavin

Yes, sure I mean obviously there have been a lot of changes. I would highlight kind of two of them I think that and we may further elaborate this later on. One, clearly coming out of the financial crises we saw a massive consolidation of distributors and some of that was forced, some of that wasn’t forced, but that resulted in a smaller group of regally mega firms dominating the industry today. I think the other change is ongoing, but has been very pronounce is that move away from a commission based structure to more of a rapid count kind of environment, clearly something LPL does a lot of and that as a lot of implications longer-term many of which are very positive I think, but it just a very different structure than where we were 10 years ago in the industry.

Trap Kloman

Nick.

Nick Lane

I would add technology and regulation, I think in the last seven years technology in terms of an enabler has become a lot of what we do all day long and now we are seeing not just from technology as driving agents productivity, but how does technology change the way we as firms or agents interact within consumer themselves.

Trap Kloman

Dan.

Robert Reynolds

Yes, to me the most the biggest change has been the move dramatically to advisors, if you go back 10 years, 15 years ago it was 50 direct, 50 advisors now it like 19% advisors sold and I think a lot of that has to do with age of America and everything that’s going on in the markets et cetera. The other thing I would say which has been significant is the growth of so called platform business. Where you have to step up groups and like Putnam the face-off against people that manage the platforms of all the different firms and it’s much, much more institutional investment, people would have – investment people and I think that’s been a huge change.

Trap Kloman

Is there anything unique about the distribution activities within the LPL platform or activities that you see in the way you manage your capabilities and bring them to our advisors and ultimately the end investors?

Robert Reynolds

I think is one that obviously you have congratulate LPL, Marc is there and a phenomenal growth that they had and especially one public but I think the sophistication throughout the operation the enhancements made on technology and just getting information facing-off again much, much higher levels of discussions that ever happened before.

Trap Kloman

Bill.

William Glavin

Yes, I would add that I think the fact that there is no proprietary product is a bit of differentiator, especially against some of the big Wirehouse that has the management businesses and others so. We know that it’s a true partnership, because we are competing with LPL. And so they need us we need them and I think that leads to a different kind of relationship where there is a lot more closeness with LPL and a lot more information sharing that goes on, because they don’t view us as a quasi competitor and so that information flow helps accelerate our business growth and LPL’s business growth at the same time.

Trap Kloman

Nick did you want add anything?

Nick Lane

I would just comment which is I think from an insurance standpoint, insurances and an asset class. So I think post crisis people are realizing the values of insurance in terms of guarantee as the future for your portfolio. And not going trends, which is the baby boom generation we were talking about ten years ago. We’re actually retiring now. And from our consumer standpoint, it’s not just about accumulating assets. It’s about speaking relation and retirement. And I think the product set and the product mix at LPL is slightly distinctive wirehouses out there.

Unidentified Analyst

Great thank you. That’s a good segway point in terms of hot topic of course around ETF and the rapid growth and presence of ETF the proliferation of types of ETF. They post a lot of interesting dynamics both risk compliance utilization fees structures et cetera. Just what impact are you seeing of the presence in growth of those? And how do you see that over time evolving within the mutual fund business in particular? So Bob maybe start with you.

Robert J. Moore

Yeah I think it’s an interesting phenomenon in second place. I think I personally have never been a fan of average and that’s ETFs try to do. So that’s a joke come on. Well I think we’ll have to allow sometime play out on the ETFs. So I think they are trading vehicle. It was largely institutional, retail investors are just starting to get in, hedge funds have been a big players to get in and out of sectors in a hurry. So I still think it has to be played out. The key part which is played up a lot how cheap they are I think it is not full disclosure, not transparency because unlike a true – product where if the security lending taking place that goes to the shareholder of funds, security lendings and ETF and go to the manager, which a lot of – lot of it does. So it’s a hidden fee that I think should be disclosed.

And from an ETF space obviously the big in-depth houses and if you talk to them as another packaging on the index funds. Active ETFs are something we’re constantly monitoring. I think you have to look at the segment and say is it going to be real or not. I think we’re in the early innings of that. As a long-term investor I challenge it somewhat but I can see how in a wrapped product it could be part of long-term strategy.

Unidentified Company Representative

So I just I would agree with a lot of bumps. And I think that the thing to remember here is that the path of investing has been around for a long time. I then got pioneer to back in early 80’s. What changes with the ETFs is the ability for the wirehouses and the brokerage firms and impendence to sell that. In the past, they’d have to decide and I feel advisor have to decide to tell their client take after money and call 1800 vanguard and send it to them and that just wasn’t going to happen. And so the ETF is brought that as a security into the brokerage platform which allow a whole new marketplace to open up that didn’t exist that when it was direct sold only or institutional remember huge institutional index for many years.

And my personal view is that the ETFs don’t take over the world. Okay, vanguard didn’t over the world much the Jack and he thought that everybody should be in the index fund and I agree with Bob and I think that more that go into the hedge funds, the more I want to be an active manager. Because if you can outperform the index, you’re going to win by design, and it’s not that hard to do, if you guys are smart people.

But I think there is a natural kind of market for this but it is somewhere in the 20% to 30% of assets range. Vanguard never got more to about 18%, 20% of the direct business. I don’t think ETF gets much more than that. So it’s an important tool particularly for beta and beta like kind of return. It’s a cheap way to get beta exposure and there is a bunch of managers in our industry that would call themselves active that were really beta, beta plus managers and they are struggling with the advent of EFS. But if you really have a smart people that are providing true investment results that really doing their homework and you are going to be seeing that all they want.

Unidentified Company Representative

Yeah. I know we think on our centrally managed platform where we have some ETFs we think of them as good luck, lower cost input. But the value of buys and the overlay and the kind of work you have to do in developing a plan and implementing that is still very valuable so to speak.

Unidentified Company Representative

I think you have to identify the risk of any ETF for instance if you do bond index. 90% of the risk of it the Barclay’s ag have is interest rate risk. Is that something you want to put your clients in. If you’re in a S&P 500 it’s large cap stock. And whenever valuation becomes in play which you are in that period now actively manage and have superior returns over any index.

Unidentified Company Representative

The one other thing – lot of the discussions too has been around liquidity, okay. And the ability to get in and out of into a day. And you have seen that is a false truth in the ETS phase. And this happened when the back when the paper scare as we call it occurred. You have big discounts in some of the EPS particularly the high yield. 7%, 8% discounts. So if you are in a mutual fund exposed to high yield you would have got back your NAV that day if you redeem at the end of the day. If you were in an EPS you got your NAV minus an 8% discount for debt. That would be substitute to first so liquidity is there but it’s not full. And people think that the ETS crave an instant pool of liquidity. It’s the same pool of liquidity that active funds out and how it gets allocated in crisis becomes an issue in an EPS. You came for that access to liquidity during the times of stress in a market.

Unidentified Company Representative

I would pick up a...

Unidentified Company Representative

As and had I think there is a [indiscernible]. I would agree though and I think that is the theme which there is a lot of proposal and I will continue to be roll proposal.

Unidentified Company Representative

In fact, no question.

Unidentified Analyst

Great, thank you. Another topic area and Nick I’ll direct it to you is around variable annuities. Lot of press around capacity and new entrants to the market, people exiting the market obviously you are involved in that marketplace. I will be very interested in your take on just how you are assessing it these days. What kinds of trending you are seeing both in capacity terms as well as product characteristics?

Nick Lane

Yes the paradox is I would say from a consumer demand standpoint it’s never been higher, right. So as people are focused at equity stories going into retirement that is the core fundamental desire for VH with looking benefits system there. The industries had to replace this product such as this saving rate; people are getting different yields, CD REITs I think these rates have come down. People have market adjusted their new variable annuity products. I think that product features there has been some reinvention too in terms of sharing some of the upside and downside the within consumers either index length Vass or variable Vass that offer compelling value propositions. So I think there is people are manufacturing the product. The second big demand we are seeing within VA’s is either the old score back to the future taxed to further accumulation.

So the value of tax defaults showing up as taxes are going up. I know that we and other manufacturers have launched new products such as SES or Jackson’s investment edge; we will do $1.5 billion this year. I think Jackson would do $3 billion. So I think there is actually a growth opportunity for VAs both in the living benefit space and we need to make sure we deliver the returns on capital. Let me put a balance sheet on line and then also in the tax deferral stage which are – what we call IO VAs age or investment only VAs.

Unidentified Company Representative

Yeah there has been a lot of discussion again we see VA’s used as they are very considerable part of an overall plan and they sit particularly for math affluent type investors who don’t really have other access points to those types of solutions other than through VA type products.

Unidentified Company Representative

And I thought it was interesting when the Obama administration came out and said the importance of annuitization and annuities in retirement. So people see the value of annuitization and guaranteed income streams as we approach this demographic wave the products will continue to innovate but it’s definitely going to play a role out there [indiscernible].

Unidentified Company Representative

Something that it just highlights the roll of the advisor. I mean annuities are good for some investors some other investors there can be other avenues to go. And we actually did a study with retirement favors and bright works to the study. And the amount the added amount of savings is like 20% to 30% if a saver had an advisor with them. And that is when this annuity bid doesn’t would have news we take .so we use absolute return versus some type of annuity features. So it really highlights the value of the advisor.

Unidentified Analyst

Yes.

Unidentified Company Representative

The other thing you stand to I think is the addition to the VA growth. There is a fixed annuity and deferred fix annuities are also exploding right now little less kind of balance sheet in those products but this new that need for income either today or buying future income and deferring that out to some stage in the future is another explosive growth area that I think will continue as well.

Unidentified Company Representative

It is but its very capacity constrained

Unidentified Company Representative

The whole annuity business is very capacity constrained right now, so aren’t there many Insurance companies with big balance sheet if you want to spend it.

Unidentified Analyst

I want to spend…

Unidentified Company Representative

Between the ability to manufacture your product in a low interest rate environment. When you have a [indiscernible] business its get more challenging. So in some cases, rising interest rates given more relief on your existing your portfolio increase more capacity and then the result a whole category of variable annuities or annuities that don’t have balance sheet. And that’s what I recall the tax deferral or the investment only VAs.

Unidentified Analyst

So retirement income is a big area of discussion, for across for all three of year businesses. So why don’t you spend a moment just talking a bit about, how you see that unfolding, we’ve talked about the demographic trends and the level of need and of course that occurring at a time of incredibly low real interest rates and even nominal interest rates and so its somewhat of the paradox in terms of solving for peoples long-term retirement at a time when yields are so low and there is not that much innovation occurring at least yet around how to best kind of solve through that? What are your thought?

Unidentified Company Representative

Yes, I would say yes, because the RIA role of a market today is bigger than a 401K market itself. So any advisors should be in a low level from market in some way. I’m telling you and the key becomes setting up a life time distribution plan. Because you go from an accumulation which I do believe we figured out to accumulation side of it. And asking people to participate contribute a 10% and have an investment strategy I think the target based fund have been outstanding.

So plans are due that their employees are on track to save more than – replace more than 100% of the final year income on retirement on annual basis. So accumulation has been figured out, has everyone implemented? No. But I would say the retirement solution or withdrawal solution we are in a very earlier into that game, there has not been a lot of innovation yet, but I say, stay tuned, that’s why when the DOL did come out that and say ‘well may be everyone should annuatize I think that the hampers innovation in the whole sector. I think as I said earlier annuities are fine for some people, there will be capacity constrains et cetera, so let the innovation of the industry work and I think we will come up with some great very solutions.

Unidentified Analyst

Yes, tell

Unidentified Analyst

I just think that the challenge that continues that there are in people have this view that when you retire at 65, and you should start to spending your money down and you feel you can live another 30 or 40 years and so that balance are how much income do I need now versus the continuing to provide access to growth opportunities in your portfolio to pay for the 30 years out for 40 years out the initiatives about what innovation needs to be figured it out in that I think you start to see some early eventual to that are going on right now. But I still think too many people are in the kind of hunkered down in the bunker and I’m going own fixed income at a time when there is no yield and somehow think that is going to stay ahead of inflation for the next 40 years in the retirement, its just not going to happen. So that there needs to be more of this dialogue in this course.

Unidentified Company Representative

I think it picks up on the part, free key is you got to participate. Right so you have got money for retirement versus buying DVH. Then its about asset allocation and then you can select products within those, that asset class, I think the role of advisors of getting the American public to actually participate and be on the playing field and have a shot is incredibly important. And I think as we got further the accumulation the world is changing. So the deals notion retiring when you are 65, what does that look like? Personally I think, we provide two things. We provide equal dignity in retirement, we provide protection to the modern American family, because I love that show and then you know the third thing is financial literacy. Right so, part of the role is agitating people on how you actually run your portfolio.

Unidentified Company Representative

Yes, it’s very interesting right now right now. Plan design controls the day. So if we have a automatic enrollment, automatic escalation, encourage people not to save at three or five. Encourage them to save in the10 plus. And then target a – this system does work and I think it’s come down to a plan design and we need to push out the risk, I think the industry has and all of us up here is – there are a budget discussions going on Washington and they keep troll on retirement as a tax expenditure.

Everyone in this room needs a shout to everyone in know it’s a tax deferral and the way the government accounting office looks at everything is just over 10 year window. So they are overstating the cost of retirement to the treasury by 70% to 80%. And also I know the insurance company has a very powerful lobby the tax rates and insurance get is so important for people savings. And the importance of saving in this country is totally underestimated in capital markets, the help of the country and retirement security.

Unidentified Company Representative

Just to play off to that I mean you have seen lots of questions about features of security, not like it will look like it does today. You’ve got companies moving away in droves from BD plans into DC plans.

So at the end of the day the individual is responsible for the future retirement much more so than they have ever been. And to distance them by taking away tax advantages and there has been a lot of research done about firms on ICI, industry gives them a lot. That tax incentive is a huge driver of behavior. Because you look at the whether it is an IRA or a 41k and if you don’t get that tax deferral, I think a lot of people say and I’m taking money and buy TVs. And now we have got a bigger problem, because the social safety net is not working the way it’s designed in the future and they are not saving on their own.

So it’s a huge mistake in my view. And from Bob’s point there has been a lot of research around this. It’s full a scan because they are taking future revenue from the treasury and moving into the current 10-year window. And the amount they will get in future years is huge versus what they get in tax revenue in the 10-year window. But it’s helps right now. And so that discussion is going on, I think it would be a massive mistake if they try to change the taxation status of retirement today.

Unidentified Company Representative

And take a optimistic view on the crisis if you can in the fiscal. We have seen the change from BD to DC in private firms I think when you look in municipalities, you look at some of the government agencies out there. There is $3 billion in DC plans people know that they can’t afford the legacy DB if you look at what happened at Rhode Island where they went to a mandatory 5% DC with much a smaller DB. If municipalities and that money starts move into DC plans that is incredible opportunity for our industry.

And in Australia I was mentioning that again [ph] mandatory DC has I believe, the highest rate of advisor to population anywhere in the world. So I think there is some rays of optimism.

Unidentified Company Representative

They just increases from 10% to 12% mandatory to show you the importance of it.

Unidentified Analyst

Now so I think this flags for all of you, the complexities that are out there and the roll of advice. I mean the underpinning of it as you go forward is the opportunity has never been bigger. It’s never been more important in terms of how do you assemble all those dynamics that are work and put them into a reasonable plan and instill confidence in investors for their future.

I want to switch gears a little bit into technology. Now you’ve heard about it here from Victor and certainly as part of LPL’s longer-term strategic plan around business intelligence, predictive analytics. And it’s an essential component of how we view our ability to take our relationship to with advisors to the next level. It is also a place we absolutely believe is an opportunity in our relationships with you.

Why don’t you comment a little bit about some of your own efforts there, how you view that and this gets to the heart of a partnership where you are developing solution that may not exist today, based on either segmentation or information that is utilized kind of received and utilized in a different way than we have seen in the past.

Unidentified Company Representative

Yeah I mean information, big data use any term you want is changing the whole marketing game. I think social media has been huge. We came up with a practice enhancements that we ruled out due to [indiscernible], LinkedIn is a way to market and build practices has been a huge success tweeting all managers on Facebook et cetera getting the message out, creating tools the ability to analyze any mutual fund, any ETF compare portfolios, substituting one for the other. What does it do to the portfolio? And it’s very interesting the things that portfolio managers had five years ago that we thought was very sophisticated. Everyone has another [indiscernible] computer today.

So is it astounding? Net incomes to how do you remind this data and the firms out there, we call the campaign management this year we are going to spend $4 million on campaign management. To help our wholesalers whenever they walked into an advisor or in office, they have so much information. What’s that office showing, and you are able to target emails. So, people can offset, don’t want to offset it, we always can, but technology is changing the whole marketing again and I think it creates a better interface between advisors, wholesalers and ability to address customer needs so much greater.

Unidentified Company Representative

I’d agree with that. I thing this is a huge focus for our firm and I think it’s a big focus to LPLA as well in terms of trying to help us as partners to be more effective than their system. All of them have limited resources, we have a lot of people out in the field, but they don’t cover 50,000 on the 350,000 advisors out in the marketplace. How do you make sure that go to the right people with the right message at the right time. And, that’s what big data explosion is really starting to help.

We all are in early days of that. We’re doing a lot of work at our firm on that. LPL has been a big helping given the factors to do have access to lot of that. There are some industry sources that can give us some of that, but it’s always going to be better comments from the partners and that’s one of the areas that you are focused on as well, but I think we will pay benefit for all of them. So it will pay benefits to the customer and the advisor, it will pay benefits to LPLA into Oppenheimer and other manufacturer.

We’re not even in the first inning, I think we probably in the pre-game warm-up in this one, but there is a lot going on here and I think it’s really interesting and explosive area of growth in the next few years.

Unidentified Analyst

Oppenheimer was named the number one advisor what say in the industry,

Unidentified Company Representative

Probably was number two. Last year we were number one.

Unidentified Company Representative

We’ve outsourced our broker-dealer in 2005 to LPL, as state of technology and I think the next stage is not to expect and it’s who is going to have distinctive front end technology that helps us better serve clients, better articulate the value proportions and it’s a critical attribute, when we look at our partners and we wanted to business, right.

Unidentified Company Representative

The other thing I would point Bob made earlier about, people’s access to information, I mean the role we bring into our wholesalers consult because their role has changed. 10 years ago the advisor didn’t know about our profits, then it was to hard to know about them, so we had to go in and explain the products and how would works on. That stuff is available everywhere now on the Internet.

So, I don’t need us to tell them about our products, what they needed to do is, us to help them solve their practices or need that their clients may have or just explain the broader markets and what’s going on. So there is a lot more intellectual capital being delivered at the point of sale now and a lot less pursuer. I mean that business is going electronic. In our case, we are doing lot with the distributions and to distribute that kind of information.

So, you can find anything you want about any of our products on our website or we can push it to the advisors very easily. So, they don’t need our consultants to do anymore and so that of course has changed the kind of role of consultants in the training and how they work and I think that’s to the benefit of the advisor they’re getting more information that then they can help translating some better client service to the client, they’ve focused in the firm.

Unidentified Company Representative

Yeah, just to add to that, Bill, there has been an explosion of new products, especially what I call liquid alternatives, non-benchmark type products and it becomes real challenge of how do those fit in a portfolio and I don’t think anyone saying large that grows market cap et cetera is going to go away, but there is a demand and the need in the marketplace for a percentage in the alternatives and how they fit in total portfolio construction and I think that’s the value that we can bring through tools, through information et cetera as healthy advisors serve their clients better.

Unidentified Analyst

That’s a good thing, we point into the regulatory environment, which you have heard Michelle and others comes up in every conversation we have with investors or advisors and certainly within clients as well. We are very interested in your perspectives around the kind of trends you’re seeing, the kinds of issues that you think are either low return or areas that you’re particularly focused on that you could start go forward with LPL?

Unidentified Company Representative

Well, you have see on top of that, that I think when you go back to when Dodd–Frank was first announced, mutual funds were kind of left out it, and you thought oh, great, but the sites on Iraq and upon near lake, the ripple effects been unbelievable whether it’d be derivatives, and our trading partners who is going to be out there to supply the liquidity we need for our portfolio.

So we are really looking at it all. We also have a very aggressive, as many people will have to know the Department of Labor right now. And the whole thing about fiduciary and [indiscernible] and commerce you have to be on, on a daily basis. And you have to be active in Washington I think at this point either to industry groups direct one-on-one, it’s a full time job today, because I think the latest thing I read that 40% of DOT price been implemented, it supposed to be 100% by now.

The bulk of it all, two or three years late, and all those have significant impacts on our business long-term.

Unidentified Company Representative

I think Bob is on the right track. I think the other big area that we are watching this is a whole discussion about commissions. When you see in Australia and parts of Europe, we are talking about eliminating, Europe or Australia has eliminated commissions. And I think that we are very close to that.

I mean if 10 years ago, you couldn’t have that conversation, because so much of the business was commission driven. But with wraps in advisory platforms now.

So much of it is actually delivered through those platforms. So I think commissions are becoming a little bit less critical and I think you will see the regulators at some point do that, and which plays off with another theme that we are seeing a lot of this. there is a much, much bigger impact that global regulators are having on each other’s market than they ever had before.

The U.S was always the standard better and everybody kind of trying to emulate what we did. And now you’ve got Europe leading on financial transactions tax. You’ve got Australia leading on commissions. And everybody is watching everybody else and many companies that are involved in global operations that’s kind a, find their way through this maze of regulatory schemes. Some of which are in different places, right now and behave differently. So I think you’ve got some of that going in the U.S. I mean we had this whole battle with the CFTC and the SEC.

We basically pass rules around derivatives and how mutual funds that were inconsistent with each other. So if you are abided by one set of rules you are in violation of the other regulators rules.

And that’s just unbelievable, that you get yeah. And they work.

Unidentified Analyst

And then you told us they will do.

Unidentified Company Representative

Yeah. And so there is a lot of back fill complexity of regulation on the global scale it’s really a challenging environment right now, very, very challenging.

Unidentified Analyst

Yeah on the themes from an insurance standpoint today probably 99% of the products are commission based that’s been clearly not sustainable. It will probably be 50/50 out in the future.

I think that actually creates room for growth too, because there are a lot of advisors that just do fee base.

And if you can get your product in a fee base. Just on they’ll actually start taking care of that protection portfolio. To your point of regulatory issues, I think managing regulatory complexities now at differentiating capability for Forbes.

So can you manage those multiple jurisdictions in the U.S between the DOL states and et cetera and also globally. It’s now stay critical or differentiating capability out there?

Unidentified Company Representative

Yeah, this year 70% to 80% of our fund sales why should or one or two retirement shares. No TA or limited TA, so that change is definitely happened.

Unidentified company Representative

No, I think at our firm it’s got to be north of 80% is load way at this point, maybe not more. Probably close to a 90%. But there really isn’t a commission being paid even though we got a – we’ve get all kinds of share classes. So I think we get close to a point where we might just say that not going to do that any more.

Unidentified Analyst

That’s it great. I am going to wrap this part of our panel discussion up, I really appreciate it very informative and useful information.

Unidentified company Representative

I think we have other questions what the [Indiscernible] matter?

Unidentified Company Representative

We’ve just brought out a gone out of sight as we got to the stage. Time now for well and come on.

Unidentified company Representative

Okay, wait before we take questions next modern family Okay. All right, I think we have a question back there Bill. Thanks so much.

Unidentified Analyst

Can you talk a little bit about the point of sale economics what might be happening, given the consolidation of the distribution relative to the greater percentage of manufacturers out there, it seems like when we talk to a lot of distributors, they were having great conversation with manufacturers. I think this quote will gain more margins at the point of sale. [indiscernible] about that, as well as can you talk a little bit about the dynamic that you se as you work with an LPL and other in terms of that point I was talking on?

Unidentified Company Representative

I think, clearly there is – there continues to be a lot of discussion around that. The good part, I mean there were some good partners on the distribution side I would put LPL clearly in this category. They looking into say if you invest in us, whatever you want to call right you invest in us we will get you more growth. And that trade will do all day long. We can become bigger and pay a little more to do that. We are willing to do that. There are others that say – this is where you are today. I really care about your growth but I need you to pay me a lot more money. Those conversations are much, much difficult because there is no up sight to us for those conversations. And I think, we’ve see with LPL we’ve a fabulous share to LPL this year, as affirmed and they are willing to invest in our growth and in turn they are asking us to invest in their and that’s the way it works for us all day long.

I think our mission is relatively simple, we’re supposed to provide high quality products, good performance on a consistent basis, be innovative like we rolled out 26 products in last four years, new products. And there is a cost of doing that but I would say with every distributor this discussion is taking place today. The economics have changed we talked about why shares versus AB et cetera. And I think, it’s an ongoing discussion, but I don’t think it’s any different than taking place in years past. We have manufacturing distribution and how does the two work together, because both of them have to be successful for both sides to work.

So, you always want to try to create a win-win situation. And I think we always tried to understand where the distributor is coming from hopefully they tried to understand, where we’re coming from because if you are manufacturing active products, it’s a high cost in production, everyone knows that but the values got to be there, and if it’s not there, the product won’t sell. So it is a two way street.

Unidentified Company Representative

I think supply demand varies by product, so that makes dynamics [indiscernible]. I think on this well here from the panel as people are looking for business partners not particular relationships. And if you can invest in a firm where you say we can grow the pie, we can tap into the Americans that aren’t saving different tax and advisors that are using our products. Those are the partners that you are going to create value across the value chain. We scroll all of our partners based on volume mix, cost to serve, and strategic alignment and as well as we are losing on the top for the year. So there – what I find unique is they actually think of new ways to say how to we grow the pie versus what’s my share of the…

Unidentified Analyst

Great, thank you.

Unidentified Company Representative

Next question.

Unidentified Analyst

Thank you. Bill I think one of the things that you mentioned in your first comment was with differentiated LPL was the lack of proprietary product. So my question is in two scenarios, what happened if LPL offers proprietary products. First, let’s say like the money market fund, where you don’t compete and have no interest in competing with that change of relationship and then scenario two is let’s say where you do offer a product, let’s say LPL offered large cap growth towards with a variable annuity product, how would that change a relationship with LPL?

Unidentified Company Representative

Yes, it’s a good question, it’s a hypothetical question. So I don’t know what their strategic plan is but I do know my custody pretty well, and it doesn’t appear to be on the near term horizon to do that. I think, if you did something like a money-market fund, I don’t that’s a big issue. Frankly, I don’t think they get into like large cap that we care that much easy. They are bit of become a true competitor in this space. Think about JP Morgan for instance, got a real serious asset management business. Yeah, it’s going to change the relationship in some ways and how we deal with them. I don’t see that in the near term and I look forward to help the other guys. I haven’t heard anything that says where they are heading and why you would start the money fund business when the interest rates are as low, they’re going to go and you have to subsidies the fees as to keep the insight that would be.

Unidentified Company Representative

You got to pay for that. But a question, there is judgment around that, but it’s important that that’s it they wanted to….

Unidentified Company Representative

Well that’s true partnership isn’t it?

Unidentified Company Representative

I would say it will come down. Are we driving business value to a certain interest spend where that sort of [indiscernible] on the street. I mean we all about to know we are in the U.S. form 62%, we take the mutual funds and put them in our insurance products we manage 120 billion in the U.S. sales products, we distribute through LTL, the back office clearing house for our advisors, our advisors – the LTL advisors and going out to the end consumer. So I would say for 700 selling agreements we had, we’ve got a relationships that already look that way and as well with this business value, they work.

Unidentified Company Representative

No not much to add, I think evaluate every relationship for what it is. We have again of our several relationships with people that do have proprietary product, is how do they treat, proprietary versus outside and you establish relationship building on that

Unidentified Analyst

That was not a plan of question?

Unidentified Company Representative

Because you are way too down

Devin Ryan – JMP Securities

Thanks. Devin Ryan again from JMP, so the financial advisor industry has been very fragmented obviously and still is fragmented. We’ve seen a lot of consolidation in recent years, so [indiscernible] a view on to the extent there is continued consolidation there, how does that impact your, I guess, selling agreement relationships with the distributors and maybe just a thought from the economics maybe from both the manufacturing side and then to the extent we get anything on the distribution side as well?

Unidentified Company Representative

Yes, I mean, consolidation is going to happen if the business proposition is there. So again, that’s the point, you evaluate like everything else. I think the more consolidated I it is, makes distribution from our side wholesale that much easier, just distributing RIA is very, very difficult. I mean, there is a lot of them. I think the more consolidated it is, the more paying you for the work and if you establish the right relationship and have the right products it really works for again both side. So I look for more consolidation because whenever you are talking about systems, compliance, all the things that are so important to the advisor channel, consolidation is going to happen and I think the best business propositions is going to win.

Unidentified Company Representative

I am not sure as for you are going to see the kind of post integration and probably that you saw in 2008 and 2009, but I do think that the big guys will continue to attract because of the issues [indiscernible], the resources to support advisors in the field for small and mid size players let me get more and more challenging in this regulatory environment and the more risk as the fiduciary will comes in for advisors that’s going to be a bigger risk and whether you have the ability to invest in the infrastructure. So I think you’ll see a migration, but not more narrow combining with somebody, but more people moving into the top eight or 10 distributors.

I think the [indiscernible] to that is that we are seeing more of that affecting our business. So it’s hasn’t been a huge amount of big consolidation, but clearly if you are a small asset manager, 3 to 5 said $30 billion to $40 billion and that range, it’s kind of lot harder to get access to the big distributors, they are a lot more expensive, they are much more demanding of your ability to get out into their system and makes things happen in their system and those guys have don’t have those resources, so that’s where the squeeze is happening in our industry and so, which is – this is a very typical pattern for a lot of industries, that’s just on the asset management business, that’s taking a lot longer to do it, but as the distributors get bigger, those suppliers and manufacturers get bigger.

I started my career in the grocery business. It’s very fragmented industry and then they all consolidated and then all big manufacturers got much bigger and so you get this kind of core lay that happens. I think you will see that happen overtime in our business as well, since that you can say [indiscernible] at some level.

Unidentified Company Representative

So I haven’t done this for a few years. I think the interesting thing about this business, it is a greatest business in the world without a doubt and I have children, given the investment management in some form, it’s the greatest business. The interesting thing to me has been that most of the time and there is outlier to this, everyone deal the same hand and it all comes down to who can play at the best. So whether the consolidation break out, you describe the scenario, we are all going to faced with it. So it’s really who is going to play it the best and I think that’s what’s great about the business and presents this challenges and make it’s a exciting place to work

Unidentified Analyst

Great. Thank you all very much. I really appreciate it. Thanks for your time

Unidentified Company Representative

Okay. So for our final presentation of the morning, it is my privilege to invite Dan Arnold, our Chief Financial Officer. Welcome, Dan.

Dan Arnold

Thanks, Robert. So if it wasn’t painfully clear and obvious, in our strategic plan, we are not contemplating starting the money market fund. It is going to be on record for that. First of all, I’d like to thank you all for being here. we know your time is – it is valuable and we appreciate you in investing this morning to spend with us. So thank you very much for that.

We talk this morning about how our strategy, our past strategy has positioned us well, both competitively and to capitalize on the structural trends in the industry and then as we contemplate our new strategy, really leveraging those advantages to unlock value in our core footprint. So my hope is with this last session is to give you some insight and some color around how that successful execution of that strategy would translate into financial performance.

Okay. so in studying some context for that and starting with that, it’s helpful to take a look at our financial performance over the last three years since we’ve public, and a couple of things I’ll pull off of the slide. Over the last three years we have been successful at generating annual growth in revenue of around 9%, now that was done certainly with the backdrop of markets going to higher levels, which certainly were supportive of that overall effort, but it was also done in the pace of pretty challenging conditions around investor engagement up until this year.

So with that 9% growth in the top line, that produced somewhere around 12% growth, annually, in terms of EPS, roughly $0.60 a share and that was generated primarily 9% of that through growth operationally and the EBITDA. and then the rest of that was contributed through share repurchases. And that achieved in the phase of a couple of pretty steep headwinds.

One, certainly, the interest rate environment has not been our friend and we’ve seen a decline in the overall average rate in our – on our cash balances over that period of time, which is created about $0.13 per share headwind. and then you couple that with the uprated investment that we’ve made over those three years what we’ve averaged annual growth in our core G&A expenses of about 10% a year and that certainly created an environment where it was – it was more challenging to pull through more earnings relative to that top line growth.

I guess a little backdrop of just the overall financial performance as we move into talking about the strategy, our new strategy and as we launch into that maybe a hopeful way to think about, this is our use, this is a framework to kind of give you some highlights sort of line aside on some of the financial drivers within the overall strategy.

So across the top here, you’ll see I’ll highlight and give you some commentary around several levels of top line growth, some that I think our ongoing conversations that we’ve introduced for you before to just give you some new insight and then there’s some potential new ways of which to think about how we draw revenue given our next strategy. and then we move down of that part of right corner, which is certainly, how do we do this in an efficient and effective way of where we can modify that trajectory of core G&A growth within the new strategy.

And certainly, if you do those two things, we think and believe the model, then we achieved outside earnings per share growth that’s been ultimately success up for thinking about and sharing how we would manage the capital or cash flow going forward.

Okay. so we use that framework. so starting across the top line and kind of start with advisor productivity and as I think about advisor productivity, I really think about that across two dimensions, the first being how the advisor got growth in their brokerage or commission oriented business and then secondly, how they will do that across their advisory solutions.

So this slide focuses on how they’re doing relative to their brokerage or commission business. And as you can see since 2009, we’ve had a steady progression of up into the right in terms of the advisor productivity and that’s been done in the phase of this sort of secular trend towards using advisory solutions more frequently than brokerage. And so if not for that, this line would be steeper. I think there is two fundamental reasons that’s occurring, one you have just that overall growth in the overall demand for advice that Dan Krems talked about earlier in terms of whether that will be complexity in the world or that be the demographics that are driving more people to repayment there is just an overall fundamental growth in the demand for financial advice.

The second element of that is the further we get away from the market displacement. In 2008, 2009 we’re seeing investor engagement return and that continues to trend kind of up into right which is driving – now those two things are driving sort of an overall base line adjustment up in terms of the opportunity the advisors have together new assets.

And so shortly, I think this is further reinforced. If you look at our third quarter numbers, the average production per advisor is up to the 156 range. And if you take this sort of average opportunities that is growing, and you couple that with the strategy that we have in place for we’re trying to help advisors allocate more time to revenue generating activity, which ultimately then just creates capacity in their practices to handle more clients, or in that intersection of where you’ve got more demand and you’re creating more capacity it creates the possibility for them to continue to trend and drive this number up in terms of their average productivity relative to their brokerage information business.

If you transition over to the advisory side of their business again this shows the success we’ve had in terms of attracting net new advisory assets over the past years and that’s averaged 8% to 10% annually per year which tends to be an industry leading statistics and I think certainly reinforces this ongoing trend if you will towards advisory solutions so that the in investor level, but also at the advisor level, and what I mean by that is this. An advisor when they deliver an advisory solution, it actually tends to be a much more efficient way of which to manage their business.

So think about using our essentially managed platforms. They can outsource the investment management that’s bringing upfront within spend with clients or prospects. They don’t have to seek approval for everything let’s say but they can discretion on trading activity which creates much more efficiency and probably conduct a trading across their portfolios which tends to be a more efficient way of which for them to conduct their business.

The second thing it does is it creates a more reoccurring revenue in their overall practice and you get that compounding effect that comes from that, so you’ll get a growth curve in the advisor’s practice that tends to look more exponential if you will rather than a linear curve that comes from brokerage activity and so these are drivers that which are shifting advisors to send more time determining how they expand their advisory services within their overall practice.

So these trends in phenomena have led to the average over the percentage of advisory assets relative to our total assets to grow from about 26% to 34% over time. And we expect this trend to continue for all the reasons that I said. And again I think from an LPL standpoint we want to help these advisors step into that opportunities. So you’ll continue to see us within our strategy and best-in technology and automation to improve and enhance our advisory platforms, as well as, we have a group of advisory consultants that are working out their focus specifically on helping advisors expand in a just and transition their practices doing more advisory business.

Now the last opportunity associated with this trend towards advisory is the opportunity we have from an economic standpoint, because if you look at the gross margin return on assets for advisory versus brokerage, we have about a 50% higher profitability associated with the advisory assets than we do brokerage. So this secular trend if you will towards the utilization of advisory. creates certain economic trough on a go-forward basis as well.

If you move to the second opportunity there I mentioned in terms of top line revenue growth, this would be really unlocking some new growth barriers that are tend to be focused on that high margin attachment revenue that we have. And I think about this across again two ways; the first one being something we drive more value throughout our entire ecosystem and then ultimately create economics from that incremental value. So the first part of that kind of ecosystem we look that is from LPL through the advisor.

And this is I think capital – I would characterize by the need for the advisor that constantly evolve their practice and improve the economics in the overall effectiveness of their practice. And so what we try to do is step in and provide additional capability services that will do three things; one, potentially doing services or functionality on behalf of the advisor, so it ultimately helps them lower the cost, at their local level of their overall practice.

The second area would be if we can provide capability that drives efficiency or growth opportunities into their practice. A great example of this would be some of the technology that Victor was talking about, you think our trading and rebalancing tool and rollout of that tool creates great time savings and productivity gains and the advisors practice of which because of that value, we can generate economics from that in terms of fees associated with that type of capability.

And the third area would be in helping them with their regulatory requirements. And again, I think, our shift to our home office supervision program for our single person offices that Mitchell was speaking too earlier, we put that infrastructure in place, we’ve just launched that capability, and in 2015, we began to charge for that. And so this type of work will keep that trend in that top or growing up until the right. If you use the example of the home office supervision that will drive as much as 5% increase in that overall September 30 number. So, great opportunity that continue to drive value for advisors and ultimately generate economics with that incremental value.

Now, we also look at the other part of our ecosystem, which is LPL back to our products sponsors. We look at them and treat them as strategic partners critical in the overall delivery of our value in our model to the marketplace. And the same way we look at advisors, we look to partner with them to explore better ways of which to drive cost out of the business or find new and more innovative ways to how position us both to create what they called a bigger pie versus just carving up the same pieces of pie or the same size of the pie into different pieces.

And so examples of this would be, we’ve expanded our record capping, our Omnibus record capping capability across both brokerage and advisory assets. And because that helps lower the cost associated with our product sponsors and administering those products then we get economics for that and that work is in place today. And so that would tend to push the bottom graph again for their north on the September 30 numbers.

Another example of that manifest itself and some of the future work that we are doing in that both the panel and Victor talked about the opportunity to create value through business intelligence to take our unique place that we have in terms of access to data transform that into business intelligence of which to help us both collectively work with the sponsors to help our advisors grow their factors including a bigger pie. And again, if we can do that then in exchange for that incremental value, we can drive better economics.

This – the second area around I think the opportunity to drive attachment revenue, high margin attachment revenue is really about where we are in the interest rate cycle and we’ve talked you about this for the last couple of quarters. And I think this is all about as rate normalized the additional economics, we can generates from that.

So in a world where you get to 250 basis points of fed funds tends to be the optimal level of which we generate revenue across our cash balances portfolio. We would generate an additional $246 million of EBITDA, you see how that translates into EPS. And then I think just as reportedly, this is a step function change, where we don’t see the incremental benefit of that until of 250 basis points. But as the Fed takes action, each step they take action, we will recognize incremental benefit along the way. So it’s recognized both immediately and incrementally.

And here is something we haven’t shared a lot with you, I think this is the flip side of the story around the opportunity of our growing cash balances. Our cash balances, as you see from this chart has consistently grown, kind of up into the right $2 billion to $3 billion a year. Now that’s because regardless of what sort of economic cycle or market cycle we’re in, this seems to be very sticky money in the accounts, it tends to be miscellaneous, small amounts of money, in fact, the average account size is about $10,000.

And so we can see with consistent growth in terms of number of advisors and number of accounts across our existing advisors consistent to have the positive trends in terms of our overall growth in our cash balances. And with each $2 billion of incremental growth in our cash balances, we’ll generate another $30 million of EBITDA again, when rates return back to the 250 basis points range or some segment – increment of that as they grow from where they are today up to the 250 basis points. So a lot of opportunity is associated with where we are in the interest rate cycle.

Now, a cornerstone of our strategy going forward is also and just as importantly driving efficiency into our overall operations. And then we do this into this, one, finding ways of which to lower the overall cost of our core G&A or said differently the growth in our G&A on a go forward basis. And secondarily, looking for new forms of operating leverage which will shift again the growth of that curve over time.

And service value commitment that we talked about a lot about over the last year is an example of something that doing both of those is driving step function changes in our overall cost structure downwards through both the delivery of outsourcing and automation, but it’s also capitalizing by driving productivity, opportunities or operating leverage over time through our contracts with our outsourcing partners, where there is guarantees of productivity gain over the life of the relationship.

And so with the impact of sort of value commitment relative to our overall G&A you see in 2014, we will be in a very different place relative to our overall core G&A growth than we have been for the past three years, where we’ve averaged about 10% annual increase. And so through the merits of sort of value commitment through the reduction and the cost associated with net wise we end up in a approximately a 6% range in terms of core G&A growth for next year.

Now, if you get beyond 2014 and you think about how we would manage this cost structure over the sort of the period of the strategic plan, I think this bridge gives you a perspective on how to think about that. And so you get and so we assume we have about 10% revenue growth, which again is approximately in the range of what we’ve experienced over the past three years. You would get to a normal volume growth and inflation oriented growth, but the two areas I want to highlight that would be very different and sort of this space of our strategic than you’ve seen over the last three years is the level of investment that we’ve made over the three years has actually been more in the 7% to 8% range and some of this tail falls into 2014, which is offset by SEC.

But beyond 2014, we would think about the investment again setting the conditions around focusing on our core footprint being more in the 1% to 3% range. And what we would do as a leadership team through ship more diligence around our productivity, our procurement, simplicity and opportunity, we would look to create and find savings to offset that level of investment.

So that as you bridge that all the way across, you end up in an environment of driving more G&A increase more in the 4% to 6% range than what we saw over the past three years, so a very different way of thinking about how to manage our expenses over time.

I think the next slide now tries to capture the relationship between the pace of revenue growth and the expense growth. And so take the 10% fact there as the example. If we achieve that 10% revenue growth that we have over the three years, you see with the G&A growth in that 4% to 8% range, you are going to create and produce outside the DPS growth through that relationship.

So that drives the gearing ratio that relationship if you will between revenue and earnings growth of somewhere in the earnings growth revenue of somewhere in the 1.5 to 2 times range. And that set this up with that outside DPS growth of then driving additional and larger amounts of cash flow. And that brings the question, well, how do you think about that going forward. So historically speaking, or at least something to the past three years, we typically looked at our cash flow and just roughly speaking a third of that has gone to dividends, a third to what I will call strategic purposes, primarily it’s been CapEx spend with a little bit of a acquisition built into that, and then a third in more discretionary use that we typically used in a form of share repurchases.

And I think as we go forward with the strategy in place as Victor talked about the work that he is doing to create and develop technology in a better faster and cheaper way. This creates the opportunity for us to continue to expand our CapEx spend, but not do it in big step function changes, but just do it incrementally over the years, which will grow less on a percentage basis to our overall earnings.

And that creates then the opportunity for us to lower our CapEx spend as a percentage of the overall cash flow that’s created – dividend and around 2% and keep that consistent in the sort of the same order of cash that it takes today, which then creates a bigger opportunity for discretionary cash, which would then ultimately we can use to return to shareholders in greater ways. So that’s the concept of the strategy and how it ultimately contributes to our overall thinking around cash management.

So in summary as I said, we think that strategy sets itself for an opportunity for outsized EPS growth. We do that through growing top line, advisor productivity, we talked about on locking opportunities and high margin attachment revenue sources, of course, recruiting continues to be a way of which we drive that top line. We’ll do it in a way that’s 2 times as efficient as we’ve done over the past three years, which ultimately creates that expanded cash flow of which we will use to continue to expand that return of capital to our investors, right.

That gives you a quick sort of tour around how we think the strategy will translate into the financial performance. And let me finish up there and I’m going to ask Mark to come back up, and let’s talk to you a little bit about how we think this translates into an investment thesis going forward and then we’ll open the floor up for Q&A. So, Mark?

Mark S. Casady

Thank you, Dan. Certainly, you’ve gotten a fire hose worth of information this morning, so I think what happens when advisor comes to business, you see them at the end of the day, they have a look a lot like what’s on your faces now. A lot of good information, they feel good about what they’ve heard hopefully, and they’ve had a good experience of the people who do the work day to day, who do oversee a lot of the departments that are here. So we wanted to achieve that this morning, which is what I hope that you saw.

Dan covered some of the key issues that are here, but just for me to say is what we’re really focused on with the strategy and the focus of simplicity and personalization is thinking about how we’re going to make sure and unlock the earnings power of the business that’s here. You can see it in the technology investments where efficiency of an advisor and what happens to their practice and the good dynamics that occurs there. You can see it in the form of employee efficiency, what it unlock in terms of cost savings for us, and frankly a better controlled environment as well.

You can see it in the tools that Michelle spoke about in terms of those activities that give us a greater coverage of risk profile and what is a ever more complex environment for regulation, we know that we want to spend good capital dollars particularly in technology and then smart people in overseeing that.

So I think that efficiency drive is very important to getting to the G&A growth profile that Dan mentioned to you as a way for us to really make sure, it show the full value of what this model can create in environment like us that looks like it’s robust in terms of retail investors returning both to the stock market and to investing more generally feels like sort of the sixth inning of that activity.

In terms of embedding growth you talked about the March 2 advisory, you’ve heard that through a number of speakers today, and how important advisory is to us, in terms of value creation for shareholders. How important it is to the practices that are critical to the support that LPL brings to them and of course, to the end investor, in terms of achieving their financial goals and aspiration, you’ve seen it in the form of the way that we think about, the company going towards innovation.

We’ve always been an innovative organization. What we’re trying to do is make sure and bring that innovation in a very clear way, create better opportunities for growth of the business from a profitability stand point, go into adjacency, software capability and services that allow us to capture greater margin. And by far the biggest one in many respects feel spring-loaded to me is what happens when interest rates move. They will move, when is always the question. When they move over $240 million of EBITDA will show up. That is a significant percentage of our EBITDA no matter how you look at it. It’s coming and growing every year because of the fact that our cash balances grow every year. I’m not sure we couldn’t hit any lower in terms relative rates there, so we certainly feel like with the bottom of the relative rate cycle, but our balances keep growing and that grows the opportunity. So it’s a huge amount of upside for us in terms of something that frankly we don’t have to do a lot about, except prayer [ph] I think some times works, in that area.

So do focus on the importance of the ratio our cash balance income if you will, versus what it is today and versus the core operating models, ability to create returns. We already generated a significant amount of free cash flow we think we’ve demonstrated to our actions in the last three years that we are shareholder friendly. In addition to intelligently investing in the business and we will certainly continue to do that even if interest rates don’t show up we will have a lot of free cash flow in this business to be able to return to shareholders in one form or another. So that’s the investment thesis that we wanted to present to you today and hopefully that’s been achieved by our outstanding team. [ph].

So with that we’re going to open up to questions to any of us. Dan and I will kind of moderate from here and are happy to take any questions from the audience, on any topic.

Unidentified Analyst

Thanks so much. [indiscernible]. On capital management, may be when you ended up just a pickup there why it sounds like a 2% dividend yield or may be you sort of backup and talk about priorities just in terms of the discretionary free cash flow and I guess the big question around this room this, any of updated thoughts on bank versus buyback in particular? Think you.

Unidentified Company Representative

Yes so let’s start with the banking question and then that work is still in place as we shared with you at the end of third quarter and we continue our process through evaluating those options and alternatives there is three areas that we are principally focused on. One is understanding the incremental economic associated with pursing the bank. The second one is really the regulatory requirements around capital and impact that it would on our cap structure and our capital management plans going forward and capabilities going forward.

And then finally, just understand the operational complexity of managing and executing another regulated entity. And so those are the three bands of work that we’re focused on and trying to develop the, it’s a comprehensive insight to make most important sports lead, we can around our strategic options in that area. We expect to have that completed by around the end of the year and so we will definitely share that point of view with you in the coming quarter.

All right with respect to just a capital management in general and our talked in general, I think, we see the opportunity that use our cash first and foremost always from a strategic standpoint. And what are the opportunities to reinvest in the business to drive that future growth. And I think as we look forward on this new strategies, it’s very much focused on unlocking value inside our core footprint as opposed to going out in and investing in new markets, or new adjacencies that tend to require much bigger spend. I think and then also complimented by the work that Spectrum [ph] is to doing to drive real efficiency and how we do that, we see a very sustainable level of CapEx spend. And again might read slightly up as we expand the scope of the business if you will, or the scale of the business. But we don’t see big step function changes in and how we deliver or spend our capital from a strategic stand point in the area of CapEx.

I think with the respect to the return of capital to shareholders, typically we’ve looked across the through the spectrum of dividend and then ultimately and indirectly through share repurchases. And I think we see a healthy balance for pursuing both of those. We with our latest dividend increase we got up to the above the 2% dividend yield. I think Bill we think that that’s, in that directional areas is a good place from sort of comps from this financial and services space and across [indiscernible] 500 companies.

We feel good about the free cash flow that we create and that form of returning capital to shareholders. And then I think based on that and at least a certain discretionary opportunity of which we can think strategically and really identify those priorities where we would either return that capital to shareholders or pursue other strategic investments through acquisitions, et cetera. We don’t see any sizeable or material acquisition on the horizon, so we would tend to think about using that capital return to shareholders typically in the from of share repurchases.

Unidentified Company Representative

And that's just the underlying color sort of under that titrates the next year or two?

Chris Shutler –William Blair

It’s Chris Shutler, William Blair. On the core G&A side, I just want to revisit that for a second, so two components, on the new investments the 1% to 3% growth what statistics can you offer in terms of what those investments will be over the next two or three, four years. And then on the other piece, the simplicity and productivity savings same sort of question, how granular have you thought of, how granular your thought process around that so far that you have ideally one, two, three, four that you already had planned that you’re going to execute on?

Unidentified Company Representative

Yeah, so Chris that investment mainly shows up in terms of operational expenses, mainly personal increases. And I think over the past couple of years, you’ve seen us focus on, on enhancing and expanding our regulatory capabilities compliance, legal support, things of that nature, you’ve seen us expand our capability to serve and support our advisors that we paid by expanding, how we support them from an operational and a custom service standpoint, is another example of where you’ve spend has been and Victor showed it to you, in terms of the expansion in the – in our technology organization in terms of 90 additional people, of which positions us to optimize and enhance, our capability of developing technology in the future.

And I think with those big step function investments that we’ve made over the couple of years; it positions us now to think about smaller more incremental investments it again may drive top line. So expanding the number of advisory consultants that we have out in the field, as an example to help that trend towards advisors moving too, and expanding their advisory part of their practice as an example.

That would be, what we would label an investment I think relative to the offset of those investments, as we think about it is just creating more rigor around our procurement program, expanding its capability and investing in some resources of which will drive 3X to increase in the procurement savings, that we drive on an annual basis, in today's world and so again if you can expand that from $2 million to $6 million year, as an example in terms of procurement savings you see that beginning to be a meaningful offset to those incremental investments.

By the way 1% of core G&A represents about $6 million to $7 million, so that helps you calibrate how we think about that.

Unidentified Company Representative

Really, that add in terms of expense savings looks that there is very clear productivity gains, we can get to an investment and technology. One example I think and a question that you have earlier from the audience would be cashiering today, we substantially have human [Indiscernible] that takes information and receives that we know we can put a system in place that would eliminate roughly 80 jobs or 90 jots. And that's an important thing for us to do; it gives us better control, greater results and better outcome from the end investor as well as for the advisors. Smart automation that we’d want to invest in, it’s on the slate to do in 2014.

To say we have more of those would be an understatement, in terms of things that we can trying to do, remember that’s part of [Indiscernible] Chris presentation we talked to you about the importance we saw in the scale, and the importance we saw in the scope and which have very different missions than the mission that we are on now. One of the things that, it’s interesting about our company, I think is our ability to really aim the ship in a direction and then make sure that we’re aligning to that, and we hope that you walk away today, with the alignment around the simplicity message, which gets right to this point of making sure that we are getting a good core G&A savings we are getting good efficiency across the platform.

Chris Shutler –William Blair

Thanks I would like to go back to the point you guys are making around improving productivity for financial advisor so nice slide on commission growth per pay, over the last two years, that's obviously one side of the picture, because there is advisory revenues sort of going through that as well. So if you are to replicate that chart looking at kind of the overall GDC per financial advisor net of the payout what would it look like and also how much more room to the offset you can get from there?

Unidentified Company Representative

Yeah, so I think that’s a great question. As you try to tie the growth in advisory assets and translate those into revenue and then combine that with the average commission that you saw to get to an ultimate number, I think it is a collective level, we are at about $250,000 to $260,000 of overall GDC per advisor to-date. And so that's a number where again, you see roughly a third of that coming from advisory, two thirds from brokerage. And as we support and help these advisors of all the practice around advisory you would expect that number to outpace the growth in the overall commissions or brokerage but that would be a way that I think you attract the overall results.

Of that – of those productivity gains, but you also do though is uplifting that number is as we recruit new advisors, the advisors that we recruit to-date come from the mix of an individual advisor that may be $300,000 a year and overall production to larger teams that may drive up that average. So that was also influenced that average coming up, but we do see that trajectory coming up over time.

Chris Shutler –William Blair

Okay. So again put it another way the incremental upside, it sounds like will come from more of – it is an organic elements [indiscernible][0:00:27] i.e., kind of shipped over to assets and improvement in sort of same-store sales or more of a broader kind of industry reengagement that sort of you have the comp. I’m just trying to get a sense like is there still a tailwind for an industry broadly with retail of engagement, or how we kind of had a more of a plateau to where we ought to be and now incremental or just or comp all of things you guys are doing specifically at LPL?

Mark S. Casady

Great. So those specific items that they have mentioned obviously will be true for us right, the cohorts being more valuable in the recruiting classes on this measurement all clients are important to us. But in terms of economy value, there is real value and average production come in that way, obviously helping – existing practices grow more effectively through the efficiency drivers that we talked about unique to us. What – how we would characterize as Bob mention as we are going through a summary there, is the industrial assets that we certainly had a fabulous year reengagement with the retail level, we’re are seeing at the same-store sales, it doesn’t feel the offers that’s coming off of the boarder just we have.

There is plenty of things to worry about, in terms of shocks. But generally speaking that still feels positive, it feels like early innings in the same-store sale. That would be true for all of our competitors and that would certainly lift our number across both commissions, as well as advisory no doubts, but we would say that as we sit here today, we continue to see good things to our sales growth, clearly will drive better results for us.

Chris Shutler –William Blair

Okay. The news that pushed LCR puts a lot of pressure on wholesale funding and the early feedback from you ICI clients as to whether the proposal would increase maintain or decrease value here, deposit through the funding source to them?

Dan H. Arnold

Yeah. So the LCR rate or the outcome of that I think was pretty much sort of pricing with what the industry expected. So we haven’t had any feedback or negative reaction if you will to the 22 different banks that we work with in terms of provider funding for our ICA product.

I think there is some uncertainty that still needs to be clarified in the comment period that ultimately will lead to the final conclusions around whether or not, there will be actually an LCR on the balances we have commitments with these organizations over the long-term, so the end up being classified a little differently. And they don’t have that type of LCR requirement associated with them. And I think to the extent that that’s the outcome then it ultimately ends up begin a better outcome than sort of what – what the industry expected.

Chris Shutler –William Blair

On the interest rate leverage I believe you debt at floating rate, so just wondering what kind of haircut we should apply to the $1.40 incremental from higher interest expense. And then related question to that, given where rates are and potentially the outlook, are you guys considering maybe swapping from floating the fix on the interest rate?

Dan H. Arnold

The first question is about $20 million of EBITDA, so you can translate that into EPS basis. Correct, that right. Relative to the question on potentially when we might think about moving our transitioning from the floating rate to more of a ex rate construct. I think we had some natural hedges built-in through the cash balances through our margin balances, that certainly create a natural hedge. I think one of things that we continue to do is evaluate the interest rate market and the cycle and understand the cost associated with either that transition to a fixed rate, alternative or even hedging our current floating rate construct.

And we think in today’s environment with the interest rate environment that that value is not there yet, cost associated with those is creating a much better interest and the benefit you get from it. So we are not there in terms of ultimately making that decision to repositioning part of that portfolio today.

Chris Shutler –William Blair

Thanks, just going back to the core G&A couple of questions might be detail. But the first one, I think the 2% of the growth in G&A was volume based. So maybe can you just flush out what you actually mean by volume base, there is also comp at the business grow, is it really just like transaction phase and things like that and because it seems like a big number and maybe there is even efficiency gains that you can get there, so maybe you can talk about that? And then secondly none of you talk about this, but regulatory spend has obviously increased a lot recently. So what gives you comfort that you can be in that 6% or 4% to 6% on the core G&A side, if an environment of ever increasing regulation.

Victor Fetter

Yes, so first on the volume base question that is a function of really that sort of our marginal cost to each incremental dollar of revenue today and that can vary across how you bring in or drive that incremental revenue, whether it comes from market related movements or interspace movements, whether it comes through the form of a new incremental dollar of advisory revenue or it even comes from the new recruit of an advisory. And so you get somewhere around 20% of our GDC if you will is that the incremental or marginal cost associated with that revenue and so that’s where you get, if you are growing 10% your revenue you’re going to get some translation down to around the 2% level in terms of volume increases or growth.

Certainly as we drive in automation or different operating levers you’ll get benefit in terms of finding new productivity gains or operating leverage in the model as we introduce some of those new capabilities and tools. That at least helps you understand where we’re coming from the 2%. A lot of firms will look at that as a percentage of gross margin and so if you do that it’s more into 60% to 70% range. So that just helps you translate whether you doing at it or looking at it as a percentage of revenue or gross margin. Relative to your second question on investments I think as we look at and what we’ve done in the big step function changes that we’ve made up into this point, a lot of that has been the reflection of a changing regulatory environment, one that the pendulum has swung greatly since 2009.

We hope to see that pendulum necessary swinging any further out and certainly we are not suggesting that there won’t be ongoing additional regulatory requirements or things that we have to respond to and think about it. We’re looking at both, as Michelle said earlier across both additional people process and technology, and automation. That development of technology and automation will also slow that pace of investment in that area because it’s some more efficient spend if you will. And so that’s why I think we feel good that if you think about that incremental investment in the 1% to 3% range you can get there.

Unidentified Company Representative

Yes merely, going to add a bit on that, you did see it in Michelle’s charts in terms of that that cost change and human capital, if we take AI process as an example, easily 60 people who are processing more than a completely paper-based activity there. It’s true for us as everybody else, we are not unique in the fact that that is unfortunately human base processing.

Yes, we work with we have a couple of firms. We talked to about creating a solution that would automate AI processing so suddenly I don’t know when it goes down to, but it’s certainly less than 60 materially so and that’s an other example where we can invest in technology to get there. This would be modeled on what we did in the VA space, if you go back a few years we actually took a equity position in a firm called Apple 5, that was used to called Blue Frog.

When it was there it had some economic difficulties, we stepped in, we’re able to stabilize their economic, stabilize their management team as we have the investment in their automation of VA contracts. Prior to VA they were all done by human. Literally 100 to 200 people who have to go and process those activities, when we automated it, it went from 40% not in good order, down to 1% not in good order. And we spend incredible amount of money in the efficiency of the process and with much better documentation for the regulators of the state and the federal level to be able to look at why that was a good sale or whether might be an issue related to it, until we see the same thing happening with AI’s as an example. So there is lots of ways to create solutions that work across the industry that allows to really get to those efficiency drivers, again it’s another example for alternative.

Devin Ryan – JMP Securities

Thanks, Devin Ryan again with JMP. So we spoke a lot today about the tools and the technology that you are providing to help, advisor productivity. As your technology internally improves and maybe your data mining ability improved. How proactive are you guys in terms of looking at your advisor practices and saying hey, there is opportunities here, and maybe they don’t know about what we can tell them there is low hanging fruits to improve their productivity. What you’re doing on that front, how has that changed in recent years and what’s the opportunity with that?

Unidentified Company Representative

Yes, I think the data that exist and truly transforming that into business intelligence that you can use to drive value in your business. As the panel said earlier and I think as Victor alluded to it, maybe even pre-game versus in the first standing and we want to be real leader in that space we see our ourselves sitting in the unique position of having access to data across our clearing platform across our advisory platform and all of the insurance and direct business that we do that we have really unique price of having access to comprehensive side of data, which been can be taken in transform and then to intelligence that helps for example at the advisor level understand where they have opportunity and their books of business position them to better target how to go capitalize on that even given the sales ideas and concept that may level in use to capitalize on that opportunity that idea.

To the extent that we can do much of the important that reduces their time and all it will reducing them to where there want to spend their time which is in front of that client or prospect delivering what they do best. So then that’s seems to create a good dynamic for that advisor in terms of levering that capability to drive to closing the strategy.

Unidentified Company Representative

And just go about that’s a good example of macro – micro level are you starting to think about how does this client change over time this advisors back to change specifically around products and people, but in the macro level we have business consulting today for example and there screw as well as with the banks and what they literally go and look at the macro level and say where you spending your money in terms of promotional expense even capital and so forth and what do you tell you about the system that exist today that show if you are allocating that correct way.

So spend too much money on space for example and therefore not spent it money on promotion we can get them update on the comparison at a macro level to other practice.

In other area for us would be related to where they price of number of advisors come to us commission base have to learn how it use the advisor platforms its one of our real hallmarks of them and often it missed price that and so we have suggest prices for them used different platforms and which sounds almost little funny you will be surprised hopeful that is we have many cases when we look at practice and say we think under price and here is away think about it what help with three price in your business I am really change the dynamic of their practice almost immediately. So we can do it macro level today what were taking about and Dan’s examples to good one of going micro and its going to take us a lot of gap there just as we work through understand the data we have its relationship to what behaviors occur in the practice.

Unidentified Analyst

I one left over from Derek advance presentation I don’t up still may be you can advisor, but can you just talk about the pipeline again in terms of advisors because I think Dan you mentioned on the call that was robust that can you talk a little bit more detail I think some of the banks actually have in two years have a lot of five year I guess lock ups roll up so may be you can talk a little bit about how you feel about, business in a couple of years and also how you engaging with those advisor already today and kind of laser foundation – in two years have got a good real discussion and where in the process.

Dan Arnold

Well, I think Derek more than happy to that question.

Derek Bruton

I don’t know where the questions came from direct myself post. Okay I still I am very positive and very optimistic about the pipeline even in the near-term looking in Q3 going into Q1 next years very, very strong we are still seeing the sources of business being around the same from the independent broker dealer side still seen a lot of the Hybrid or a business, but I also just looking at where we normally see trends going to the first and second quarter I don’t see any led up in terms of the aggregation levels that Wirehouses right now and the pressures they have on their business to perform sold product and all of that is driving people more and more to independent the awareness of independent is certainly increased over the years.

And now they realize they have an outlet and some matter of determining which provider out there use and as I talked about earlier half the time looking at LPL. So continue to see trends in the Wirehouse business the smart that have money I realize that there will be able to at least try to address some of these things going forward but especially in the independence base in the RIA space I see a lot of positive things on the horizon.

Dan Arnold

Real data base is literally to get 150,000 advisors we have indication with sometimes are running to something registered in the industry with center around they got your post card before. So I am very expensive marketing campaign both in terms of industry trade prints in terms of direct mail the extent of largest recruiting sales force in the industry and what were way in force something that aggregate someone to the point of pop in up so we had some dialog why we get in 50% immediate Mick mentioned in the survey that they had mentioned is because of that marketing activity, then it turns to the sale and we can actually come to a home offices we’re going to get you move, and we are waiting for things to be aggravated, you got mad at your branch manager today,

something went wrong in support of your clients and that aggravates you enough to make the call and we can be in your office in two hours.

Unidentified Analyst

Hi, when you mentioned your that 50% of the advisors that are looking to go independent always considers IPO, can you talk a little bit about what your betting average is that 50% and how that has changed over time or has been relatively consistent and has been increasing?

Unidentified Company Representative

Well if we look trying to think what we quickly start will happened so, that will be held in check here hopefully hey is that as we look at betting averages broadly what is probably the best measure that even easily got and therefore verify that this is special as if you look at net new additions of advisors across the industry you can get basically data on all the top 10 retail investment providers in the industry that is only left it’s not public and they published data usually about a quarter delay, if you look in 2011 and 2012 we came in number one and that new advisor editions against the entire industry and that includes the number of people who are building classes for trainees and in this year I think in the first half of the year we came in number two was that all right and you were happy with that.

So it always want to be first, second or third position on a net new advisor and if I went back in time the data wasn’t quite so clear then so is not great comparison but clearly were batting lower in average because of the types of advisors that we were getting at the time of smaller field because the scope of what we did was smaller at the time.

So I can quite remember distinctly 10 year ago we only won our first half million dollar practice, a lot of pitched in to make that win today it takes the multimillion practice because we have an extensive way of going about recruiting both in the banking channel, credit easiness and with independent advisors and that’s the growth of the sales force that we have under [indiscernible] as well, but that data gives you a sense that we are batting above our weight in terms of our relative positioning which is what we are after in managing the company and it gives you a public place to work out the health of our recruiting process in addition to discovery database that shows that data that Derek had which is that we are the next seven firms in terms of interconnect broker dealers, if you added them all together they would equal our liquid that tells about a relative success within the AAB channel and then if you look at the RIA world we have done from zero assets in 2008 to $55 billion here today and that makes us the fifth largest custodian and pretty short order, which means we must be batting above our weight in terms of sales.

There is not public data that you can get there.

Unidentified Company Representative

Another thing I would add to that is the expansion of the scope of our business model, the first facilities potentially have a solution that has the right attributes for any potential advisor of this contemplating independent whether that are focused on retirement [indiscernible] solution or they want to affiliate with insider and institution hs also created a great deal for opportunity we have in diversify IBD channel and that look at the includes the batting average.

Unidentified Company Representative

On the question I might actually go to a question which was asked earlier which was related to downtrading REITs and also our relative compliance track record because I can see there is a lot of energy around that in the audience, you can ask Steven – is our new General Counsel maybe to give you corresponding maybe to give you perspective all of two months ago was the head of the efficacy box and service and perspective on the wife as the new set of eyes and a very critical position for us from those management standpoint maybe you can characterize customer compliance and just in trial that kind of activities that is an areas that you an lot of question….

Unidentified Company Representative

Sure. I guess let me start on the customer compliance arbitrage and probably some address some of the regulatory patients that have come up, so I have been where at LPL all of couple of months and quite a transition from 13 years at the SEC working in number of different areas but primarily in the Northeastern and a little bit down in Washington DC.

So I guess on the customer compliance not to get in to specific numbers per se but just in terms of where we stand in terms of other broker dealers, other financial services firms I can say looking at what is coming in one of the questions one of the types of the plans coming I think predominantly is what you would see at other firms that suitability type compliance disclosures, compliance kind of revolve around that those will be major areas, in terms of the numbers when we look at the size of our sales force and the relative number of complaints based on what I had seen coming from the regulatory side, I feel very good about where we are at. I don’t have specific numbers and I want to be careful about getting into particular numbers, because there is not a lot of perfect public sources of making sure we have the right data, but I feel very good about where we are at based on book my prior experience with the SEC and looking at the customer arbitrations on the regulatory side.

I guess I just want to make one point which I think is really important and it was important to me when I was thinking about coming over to LPL and that is the incredible engagement on the part of senior management and I – you know there is a lot of people in senior management but I point directly to mordacity to Mark Cassidy, to Robert Moore and the engagement on the part of the Board in terms of making sure that LPL getting it right. and that was a very important piece for me in terms of coming to LPL its something that I continued to observe as I’m hear is just this focus on getting it right and really serving the investor and making sure that that we have the right compliance teams in place the right regulatory approach.

We've really been out there reaching out to regulators, trying to make sure that they understand all of the significant stuff that we’ve made in whole bunch of as what also impressed me is in many of those meeting either Marc has been a part of the meeting or Robert Moore has been a part of meeting with seniors leaders not just on one side of the business, not just in risk, not just on the general council, but also in the business itself. So those have been some areas where I have been really impressed by the company and really encouraged by the progress.

Mark S. Casady

Thank you David. So I thought it was the important for you to hear David’s perspective just to put it – there is not good publicated data as you mentioned. We feel very comfortable that we’ve made the right investments to deal with any issues that have risen related to our growth. And at the end of the day what we own if we need to make sure we stand up for rights of investors be treated fairly. Part of our approach means that we will when we see an issue we deal with it immediately make that customer a hold deal with whatever the fine is and move on and they have we got the right trait for us to have as an organization culturally and sometimes that ends up for us a bit more in the headlines that we might like. But it’s important to understand on a relative basis, it’s a very manageable set of activity.

I think what is great about today is a chance that had to really dig in deep to the company. Again we appreciate your time and attention and great questions across the business and we are here to answer any questions you might as well we breakup for the day. So thank you very much for coming.

Trap Kloman

Thank you. so to briefly wrap up thank you everyone attending today and what Marc and I do enjoy is seeing ourselves through the lens of your questions. So I look forward to hearing what questions that may still might come after day like today, but thank. The box lunch is outside there before you and we’ll be here for the next few minutes to answer anymore questions individually. Thank you everyone.

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