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LPL Financial Holdings Inc. (NASDAQ:LPLA)

Q4 2013 Earnings Conference Call

February 11, 2014, 8:00 AM ET

Executives

Trap Kloman - Head of Investor Relations

Mark Casady - Chairman and Chief Executive Officer

Dan Arnold - Chief Financial Officer

Analysts

Chris Shutler - William Blair

Bill Katz - Citi

Steven Chubak - Nomura

Devin Ryan - JMP Securities

Matt Kelly - Morgan Stanley

Joel Jeffrey - Keefe, Bruyette & Woods

Operator

Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings Fourth Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. (Operator instructions) As a reminder, this call is being recorded.

I would now like to turn the conference to your host, Trap Kloman. Sir, you may begin.

Trap Kloman

Thank you, Shannon. Good morning and welcome to the LPL Financial's fourth quarter earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his perspective on our performance. Following his remarks, Dan Arnold, our Chief Financial Officer, will speak to our financial results and capital deployment.

Following the introductory remarks, we’ll open the call for questions. We would appreciate if each analyst would ask no more than two questions each. Please note that we have posted a financial supplement on the Events section of the Investor Relations page on lpl.com.

Before turning the call over to Mark, I'd like to note that comments made during this conference call may incorporate certain forward-looking statements. This may include statements concerning such topics as earnings growth targets, operational plans and other opportunities we foresee. Underpinning these forward-looking statements are certain risks and uncertainties. We refer all listeners to the Safe Harbor disclosures contained in the earnings release in our latest SEC filings to appreciate those factors that may cause results to differ from those contemplated in such forward-looking statements.

In addition, comments during this call will include certain non-GAAP financial measures governed by SEC Regulation G. For reconciliation of these measures, please refer to our earnings press release.

With that, I’ll turn the call over to Mark Casady.

Mark Casady

Thank you, Trap, and thank you, everyone, for joining today's call. Today, I'll share insight into our performance in 2013, discuss key opportunities we see in 2014 and provide updates on our evaluation of forming a bank and our capital management strategy.

For our fourth consecutive year, the company increased revenue, generating 13% year-over-year growth to a record $4.1 billion. Adjusted earnings per share grew for fifth consecutive year, up 20% to a record $2.44 per share, benefiting from both strong growth in profits and our decision to repurchase 5.8 million shares during 2013. Revenue growth was driven by investor engagement, which for the first time since the market break in 2008, were sustained over the course of a full year and by strong market appreciation. These factors resulted in robust advisor productivity.

Fourth quarter annualized commissions per advisor reached $163,000 and net new advisory asset furloughs reached a record $15 billion for 2013. Advisory and brokerage assets grew 17% to $438 billion.

Our continued success in retaining and recruiting advisors also contributed to our strong results. We believe our 97% annual production retention continues to lead the industry. While the industry results subdued advisor migration during the first half of the year, conditions improved in the second half. We believe advisor migration to independence continues to be a sustainable, long-term trend.

Data from the market research firm, Cogent, indicates that 23% of advisors are open to moving to new firm. This percentage has grown over the last three years as approaching a level we hadn't seen since 2007. In addition, Cogent survey found that LPL earned the highest overall consideration for advisors looking to move after placing second in the prior year's survey.

Our business development results support the findings of the study, as LPL attracted 110 net new advisors over the past three months of 2013, bringing our total 321 net new advisors for the year. We believe this result places LPL as one of the top two recruiting firms in 2013. Our pipeline remains strong and we are optimistic of our momentum heading into 2014.

We achieved our operating results despite the continuing headwinds generated from a low interest rate environment. Cash sweep revenue declined 13% to $19 million in 2013 due to lower fees on our cash sweep assets despite an increase in asset levels. Excluding this decline, revenue grew 14% and adjusted EBITDA increased 24%, creating margin expansion of 76 basis points.

From a strategic viewpoint in 2013, we invested in our core platform to capitalize on the broader opportunity set we had established through scale and scope. This approach sets the conditions for expanding our market share and sustaining growth. To accomplish this, we focused on opportunities in 2013, we created value and further differentiated our model to improve the advisor experience. In doing so, we enhanced advisor productivity, retention and recruiting. For example, we introduced significant upgrades to account view our online account portal to strengthen our advisors' interaction with their clients.

In addition, we successfully launched our new trade rebalancing system that has increased advisor efficiency. The advisors embraced this new platform and within six months they've already executed over 1 million trades.

We leveraged recently acquired properties in the retirement and high net worth spaces to deepen our position in those markets and serve a broader range of advisors and financial institutions. At year-end, retirement planned assets under management were $99 billion and high net worth assets have grown 22% year-over-year to $23 billion. These efforts help to support topline revenue growth across market cycles.

We also made significant investments to upgrade our regulatory and risk management capabilities, including expansion of our home/office supervision program. These investments are designed to allow our advisors to allocate more time to their clients, while enhancing our risk and compliance profile. In this respect, the investments made in 2013 in technology and people will enable us to realize benefits in 2014 and beyond.

In 2014, we will expand our commitment of creating a smarter, simpler and more personal LPL that drives further efficiency into the business, deploying the growth of our advisors and lowering our rate of expense growth to a normalized level. As a result, we will be positioned to deliver more revenue growth to the bottomline in future years.

Opportunities for driving efficiency in 2014 include launching a new alternative investment order entry system and enhancing our variable annuity order entry system, creating more efficient processes for advisors and improving our supervisory controls. We will enhance our practice management capabilities by making our resource center, which is the central hub for all advisor research, marketing programs and product access activities more streamline and efficient.

Among our cost savings strategies is the expansion of e-delivery capabilities to deliver more statements and performance reports electronically, while having the added benefit of being more environmentally sustainable.

We're also expanding our procurement efforts to lower spending in 2014 by leveraging our scale to slow the cost of headcount growth and improve pricing and service with third-party vendors, we can more efficiently focus capital on opportunities in areas we differentiate ourselves in the marketplace.

Another key lever driving efficiency is the service value commitment, which remains an integral part of our goal to transform how we operate and manage expense growth. We launched this effort to align our labor force to provide more strategic and personal support and allow us to focus our investments in our core strengths. A key part of this effort included transitioning non-advisor-facing back-office functions to a best-in-class global service partner.

We've made excellent progress over the last year, generating $5 million in annualized savings based upon what we've learned as we evolved from strategy to implementation. We've refined our expectations for total annual savings to approximately $30 million by 2015.

In 2013, we outsourced numerous activities across 29 business units within the firm. These included accounting, data reconciliation, operations and insurance processing. Based upon the processes now in place with our new partners, there're clear examples of the benefits to service value commitment it's bringing to our advisors and their clients.

As anticipated, we have achieved greater accuracy and speed of execution on our results. We've reduced the turnaround time by two business days and processing timeframes across multiple functions, including account transfers and account opening. In addition, we're consistently raising the service level accuracy rates to 99% across several operations, including account processing and cash management. These improvements enhance the advisor experience and lead to greater productivity and satisfaction.

In 2014, we will focus on cash in the remaining cost savings through additional outsourcing and automation opportunities primarily within operations. These efforts should result in a more sustainable approach to efficiently investing in the business, which Dan will address further in his remarks. Our earnings growth and the margin expansion will become magnified when short-term interest rates begin to rise.

I'd now like to update you on our review of potentially owning a bank. It is important to identify the ultimate objective of this process, which is to maximize the value of our cash sweep deposits in the most capital efficient way possible. The strategic value in operating the bank with regard to services to retail investors and additional custodial capabilities are secondary considerations. Given the complexity of operating a bank in today's environment, we took a thoughtful approach to our review to ensure the full impact of the capital and operational commitments were understood.

After careful consideration, we concluded that converting LPL to a bank holding company is not an optimum use of shareholder capital. While there is incremental revenue we can generate from operate a high-grade investment portfolio, the need to raise excess capital to meet regulatory requirement minimums and loss of operational flexibility significantly outweighed the incremental interest yield benefits.

In conducting our analysis of bank options, we didn't identify the possibility of an industrial loan company as a less capital-intensive structure for improving depository cash yields. We are still in the early stages of examining this opportunity, which would likely have to be done through an acquisition. Importantly, if we do move forward in this path, we view industrial loan charter not as a wholesale replacement to our current cash sweep programs, but rather as a complementary alternative that we gradually grow over several years. This approach would allow for capital flexibility, allow us to efficiently manage regulatory and operational complexity. As a result of these conditions, we have placed no timeframe or likelihood of execution on this opportunity.

The element of this exercise would analyze the alternative options for deploying our cash flows to create shareholder value. We expect to remain opportunistic in assessing acquisitions that fit within our core growth model. We also see opportunities for continued share repurchases and dividend growth. The Board has approved an additional $150 million in share repurchase capacity, raising the total available to $180 million.

In addition, based upon our financial performance, the strong free cash flow, the Board has approved the quarterly dividend increase of $0.05 per share to a total $0.24 per share, representing 26% growth. The company anticipates evaluating our dividend policy on an annual basis going forward.

With that, I'll turn the call over to our CFO, Dan Arnold, to review our financial results and outlook in greater detail.

Dan Arnold

Thanks, Mark. This morning, I'll be discussing four main themes. First, I'll address the fundamental drivers behind our record revenue in the fourth quarter. Second, I'll review various components of our expense structure. I would then discuss how these factors are driving our profitability as measured by adjusted EBITDA and adjusted earnings per share. Finally, I'll conclude my remarks with a summary of our capital management activity.

In the fourth quarter, we generated record revenue of $1.1 billion, representing 16% year-over-year growth. Total brokerage and advisory assets rose 17% to $438 billion. On a per advisor basis, advisors now support $32 million in client assets from which they generated $254,000 in annualized production. This resulted in average advisor production increasing 13% year-over-year, driven by the continued growth in fee-based business, strong commission sales and market appreciation.

In the quarter, our fee-based business attracted $3.9 billion in net new advisory asset flows, representing 11% annualized growth. With the record $15 billion in net new advisory asset flows in 2013, we continued to expand our higher-margin fee-based business. With a benefit of market appreciation, advisory assets grew 24% year-over-year to $152 billion compared to 14% growth in our brokerage assets.

Annualized commissions per advisor grew to $163,000, up 16% on a year-on-year basis. Excluding the elevated levels of non-traded REIT sales, commissions per advisor were $151,000 and grew 7% year-over-year, primarily driven by investor activity across multiple products, including mutual funds and fixed annuities. Looking forward, we see conditions for total production per advisor to improve as a result of sustained investor engagement, improving advisory efficiency and the ongoing trend toward fee-based business.

Asset-based fees grew 9% year-over-year to $112 million, as we continue to benefit from our investment in the omnibus recordkeeping, which is a sustainable expansion of this revenue stream. However, asset-based revenue growth has been partially offset by cash sweep revenues declining year-over-year by $7 million or 21%, while average cash sweep balance is growing $2 billion.

Decline in cash sweep revenue resulted primarily from a combination of the fed funds rate falling 8 basis points and the fee received from banks declining 17 basis points. We affirm our guidance of the 7 basis points decline in our ICA program by the end of 2014, assuming cash sweet asset levels and the fed fund rate remain flat. We expect the majority of this decline to occur in the first quarter.

I'd like to now focus on our expenses, including our payout rate, trends in our core expenses, promotional expense and those expenses in our GAAP results that we exclude from our determination of adjusted earnings.

In the fourth quarter, our payout rate grew to 88.1% of 38 basis points year-over-year. The elevation in the quarterly rate is a direct result of the increase in non-GDC-sensitive factors related to the mark-to-market of our advisor deferred compensation, which is offset by other revenue and our advisor stock option program. With improving markets and growth in our share price, the non-GDC-sensitive portion of the payout rate grew 48 basis points year-over-year and 28 basis points sequentially. As a result, our gross margin was negatively affected by $2 million compared to the fourth quarter of the prior year and $1 million compared to the third quarter of this year.

Focusing on the productivity-based components of the payout rate, the base rate has remained at approximately 84% and the production bonus declined 18 basis points year-over-year to 3.2%. This has led to continued stability in our total payout rate as measured over a trailing 12 month basis.

In the fourth quarter, core G&A expenses were $167 million. Several factors contributed to core G&A exceeding our expectations this quarter. The first driver was variable expense that was the result of outsized revenue growth. This included increased trading activity requiring more statement mailings and additional supervisory and operational resources to process non-traded REIT sales. The second contributor to the variance was non-recurring professional fees were administering the resolution of the alternative investment and e-mail matters disclosed earlier in 2013, as well as an accrual for the full amount of an expected settlement of a related regulatory matter that we anticipate will be announced shortly. The third factor was driven by the hiring of employees in the fourth quarter to support expanded regulatory and compliance controls that were budgeted to join LPL in early 2014.

In aggregate, these variable non-recurring and timing related expenses raised our 2013 core G&A results, but have not changed our expected expense levels for 2014. As a result, we're lowering our core G&A growth rate guidance to approximately 4.5%. With our focus on developing our core capabilities combined with the benefits from our service value commitment and efficiency initiatives, we will continue to invest in the business to expand our industry leadership, but do so at a normalized rate of expense growth.

In 2014, we anticipate the year-over-year expense growth rates to become increasingly favorable as the year progresses. This trajectory is driven by reduced levels of investment and a growing benefit from increasing efficiencies. On a sequential basis, core G&A is expected to decline in the first quarter of 2014 by approximately $9 million to $157 million with a variance of plus or minus $5 million.

Turning to promotional expense, we experienced continued momentum in recruiting, as anticipated. The cash spent to recruit new business has remained consistent as measured by transition assistance as a percentage of an advisor's production. However, quarter-to-quarter, the mix of the recruited advisors among our two channels and the production of each individual advisor influenced the amount of the transition assistance payments that are expensed or are made in the form of a forgivable loan and amortized over the term of the loan.

GAAP expenses increased $2 million from the third quarter due to a shift in the mix of business, as a larger portion of our transition assistance in the prior quarter was in the form of a forgivable loan paid to a financial institution.

Regarding the conference component of our promotional expense, we anticipate conference expense to grow sequentially $3 million in the first quarter related to our Annual Summit Conference for top producers and other small regional events.

I'll now provide some commentary on the thoughts behind fourth quarter GAAP expenses of $24 million that were excluded in our adjusted EBITDA results. $4 million related to employee share-based compensation, one-half of the adjustments or $12 million was related to the final determination for the earn-out of the acquisition of retirement partners and will not recur. The remaining $8 million of expense was related to our service value commitment. To date, we have now incurred $27 million of the expected $65 million in restructuring charges to implement our service value commitment.

Turning to adjusted EBITDA, for the quarter, the margin as a percent of net revenue declined to 11.4% or 30 basis points compared to the fourth quarter of 2012. The $7 million decline in our cash sweep revenue primarily drove this margin decline. Excluding cash sweep revenue, adjusted EBITDA margins would have improved to 82 basis points year-over-year. Importantly, we retain our growing benefit to the rising interest rates and maximize our upside of $245 million in incremental revenue and pre-tax earnings when the fed funds rate is 2.6% based on our current cash sweep balances and bank contracts.

In the fourth quarter, adjusted earnings per share of $0.63 grew $0.13 or 26% compared to the fourth quarter of 2014, driven primarily by strong revenue growth. The rise in advisor stock-based compensation due to our share price appreciation lowered adjusted earnings per share by $0.01. This was offset by the benefit from our lower tax rate contributing $0.05 in earnings per share.

The tax benefit was driven primarily by a one-time tax credit related to the installation of eco-friendly fuel cells in our new office building in San Diego. Looking forward, we anticipate our future tax rate to be approximately 39% to 40%.

I will now turn to our capital management activity. In the fourth quarter, we invested $37 million in capital expenditures, paid $19 million total dividends and conducted $35 million of share repurchases buying back 0.9 million shares, reflecting our flexibility in deploying our capital. This strategy extends our track record of returning capital to our shareholders. Since our IPO, we invested $507 million in capital to repurchase 15.2 million shares at a weighted average share price of $33.25 and declare a $317 million in dividends.

With our decision to forego pursuing a conversion to a bank holding company, we retain the capitalized nature of our model, which provides us the opportunity to continue to invest in the business and return capital to shareholders through growing dividends and share repurchases.

With that, Mark and I look forward to answering your questions. Operator, please open the call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Chris Shutler of William Blair. You may begin.

Chris Shutler - William Blair

Mark, you mentioned on the recruiting pipeline for new advisors that you remain optimistic. So just wondering if we could get a little bit more color there on what you're seeing by channel, any thoughts on timing of recruits this year?

Mark Casady

Well, recruits are always up to figure out quarter-by-quarter, right? So we always try to guide towards the 400 to 500 net new advisors per year. So I certainly would say that the strength we saw in the second half of 2013 continues on here in 2014. And it's in the same areas that we've seen before. Hybrid advisors in particular are those who have both an RA practice, so therefore with a custodian, and have brokerage commission activities or historical commission activities using our brokered dealer platform continue to be in the strong suit. We're also seeing good growth from other independent firms, as those advisors lead platform are just unable to reinvest in the kind of programs and services that we can. That works for our force. And we're seeing a nice uptick in the banking channel for banks and credit unions looking to join the LPL platform as well. So very similar to what we saw in the second half of 2013, looks like it's going to be the strike in 2014.

Chris Shutler - William Blair

And then switching gears, I think Dan mentioned on the alternative asset sales, non-traded REITs and what the commissions were excluding non-traded REIT sales. Can you just quantify the alternative asset commissions in the quarter and help us think about or give us your latest thoughts on how those are going to progress in 2014 year and so on?

Dan Arnold

Chris, if you take our average advisor commissions that totaled $163,000 on an annualized basis for the quarter and you deduct out that which was associated with the inflated level of alternative investment sales, if you net that out, you end up with around $151,000 in average production per advisor, which still was about 7% to 8% year-over-year growth. And we're seeing strength across all product categories. We see investor engagement continuing as we move into 2014. And so we're still encouraged by the advisor productivity and the opportunity to continue to expand that, even outside of that sort of upweighted level of activity on alternative investments.

As we look at 2014 relative to alternative investments, we still think that you'll see some inflated level in the first half of the year, not to the degree that we saw in third and fourth quarter, and then we expect it to return to more normalized rates in the second half of the year. Of course, with the low interest rate environment we're in, I think you'll see some permanent increase in the overall alternative investment sales because of that, so that when we return to normalized rates, we would expect it to be more in 10%, 11% range of overall commissions versus historically the 8% range.

Operator

Our next question is from Bill Katz with Citi. You may begin.

Bill Katz - Citi

Just going back to capital management, sort of wondering the timeline for the $150 million of repurchase? And maybe there's a broader question is, is as you thought about the dividend versus buyback, what were some of the decision-making? Is there a payout ratio associated with the buyout and conversely? On a go-forward, how should we think about free cash flow for buyback as we try and pencil up the $150 million?

Dan Arnold

I think historically speaking, we've always used share buybacks as a way of mitigating dilution and opportunistically reducing our share count and thus driving value to shareholders through that effort. I think you'll see us on a go-forward basis taking that same approach. The pace at which we pursue those share buybacks is a little harder to predict just because of external forces that may change whether that be an investment opportunity, as an example, or conditions in the debt market which may create opportunities or even TPG potentially pursuing any different strategy with respect to their shares. So the pace at which we would pursue that is a little harder to exactly predict. But I think if you look at history, it's a good pattern of how we'll continue to pursue our share repurchase strategy.

Relative to the mix between dividends and share repurchases, we think both are effective ways of returning capital to shareholders and we use both as a way of appealing to a broad base of investors. And I think you should see us expect to use both on a go-forward basis. As Mark mentioned, from a dividend standpoint, we have accelerated our ramp-up of dividends since initiating six quarters ago. And I think now you'll see us take more of an annual cadence in terms of the consideration of the change in the quarterly dividend on go-forward basis based on earnings generation and investment opportunity.

I would say, though, if you think about what we would target from an ongoing dividend payment, it would be somewhere around a 35% target of an overall dividend payout. And so if you frame that going forward, you would have roughly 35% of free cash flow used on dividends, 30% for organic investment. And then that would leave roughly 35% to use to pursue share repurchases, building cash or use on acquisitions.

Bill Katz - Citi

And then the following question I have is just you mentioned that you haven't ruled out the industrial bank. Can you maybe spend a minute or two thinking about the pros and cons of that in terms of the use of capital or accretion for earnings?

Mark Casady

So the industrial loan corp. really are not new ones being created with their pool of over wins that are out there and we're going to see if there is one that might be available for acquisition. We're looking for something small, because we'd like to basically understand how to run one well and to go slowly in terms of use of that to unlock the spread in cash yields that we believe we can get.

Before the example of deposits that are currently in our money market funds and our advisory program, we cannot put into the bank suite program due to regulatory reasons. There is an exemption, it's all under the Department of Labor, in which if you own your own property or bank or industrial loan corporation, either one, you'd be able to move those deposits from the money market funds into that industrial loan corp. That's the deposits we're trying to unlock.

And so what we liked about an ILC is that basically it takes a lot less capital to unlock those deposits, therefore it's accretive to shareholders unlike a bank holding company, and it doesn't have the same regulatory massive change that a BHC does. So for those reasons, we like it. Whether we can find one and at a good value is still to our own speculation. And therefore, we're trying to say, well, look, until we can find that we'd likely go slow and therefore not use a great deal of free cash flow to capitalize that bank. I don't know that we can sort of target, but it'll be a small percentage of our annual free cash flow just to build up fixed deposits.

There is always optionality. Have we been able to put one in five years ago or before the market crisis, that would give us the optionality to expand it today. So we're really looking for that optionality probably as much as anything.

I would remind you that we did buy $225 million of shares in 2013. So we continue to use cash flow, as Dan said, going forward, get the dividends up a little bit, a little more shift to the dividend. But we've certainly shown since the IPO that we continue to want to return free cash flow to the investors.

Operator

Our next question is from Steven Chubak of Nomura. You may begin.

Steven Chubak - Nomura

So on the alternative product side, actually shifting from revenues to expenses, your relative expenses are being elevated to help process transactions to really within non-publicly traded REITs. I don't know if you could clarify the level of expense associated with these types of transactions in the quarter, as well as what level of savings we could see from new entry system for alternative products?

Mark Casady

We're working on with a firm to help us specify what we need in an order entry system. To sort of remind everyone on the call, these are completely manual-free process transactions for everyone in the industry. It's very similar to what annuities used to be, the way annuities used to be processed seven, eight years ago. We were part of an effort back then to help create through the industry a solution to processing DA. Just imaging that same thing happening here. But it will take most of 2014 if not dribble into '15 to get that automation done. That would cut our cost of processing down significantly. You wouldn't have seen the kind of increase of expenses that had to go with the increase in volume that occurred in Q4 of 2013.

Dan Arnold

Yeah, I think the complexity of the processing and the operational environment around the alternative investments is a function of basically alternative or non-traded REIT volume doubling from Q2 to Q3 and then sustaining that through Q4. So you have this accelerated pace of activity over a short period of time that was driven by the liquidity events in the market around the product manufacturers as we described on our last call. And so that's created this short run complexity. And so in the fourth quarter, we incurred between $2 million and $3 million of incremental cost associated with processing that elevated level of alternative investment activity.

Of course, as you see that begin to trend down, over time as we talked about in 2014, then you could pare back at incremental investment, which is mainly in human capital.

Steven Chubak - Nomura

At the Investor Day, you alluded to advisory activities generating roughly a 40% higher ROA versus brokerage. And I didn't know if you're going to clarify under a more normal rate back job how we should expect an ROA differential to change, presuming a larger portion of the brokerage cash specifically can be sucked into the higher yielding ICA balances?

Dan Arnold

I think in a normal cash environment, you may see that squeezed by roughly 20%. So instead of having a 40% differential, it would normalize back to more around a 30% differential.

Mark Casady

And that's why if we're able to convert those advisory balances, it in fact will take away all the differential. The other thing to remember is that of course for shifting to an RAA platform, RAA assets get the full benefit of going into the cash sweep because it's a different legal arrangement. And so as you see our RAA business grow to $55 billion at the end of last year, that'll also have an impact. It's very positive with the margins rising up to the amount that Dan mentioned, that conversion to the RAA platform.

Steven Chubak - Nomura

So essentially the ROA will converge assuming that you can pursue, I guess, an alternative route for those RAA balances?

Dan Arnold

Well, to be clear, on your RAA balances that benefit from the cash sweep, it's only those that are in IRAs that do not get the benefit of being able to be swept to ICA. So as the interest rate environment improves, you do get the benefit in your RAA or advisory accounts across both the standard or non-IRA account and across your entire independent RAA platform. So you're going to get lift both from brokerage and advisory accounts. It's just a little different rates here.

Mark Casady

So to put it in numbers, the total advisory assets in the quarter were $150 million. So roughly half of those assets are taxable. So they can into cash sweep. The other half are IRA, that's where we have the issue related to the Department of Labor. And then half of that, you have another $25 billion to $30 billion of the RAA asset that can into the bank deposits as well. So as you can see about $105 billion out of $175 billion are going to go into the cash sweep bank program. And therefore, we'll be able to get the full appreciation.

And over time, the point I was trying to make is that as the RAA custody business grows and as you just have normal growth at advisory, it's going to continue to overwhelm that small amount of deposits that have to go into money funds.

Operator

Our next question is from Devin Ryan of JMP Securities. You may begin.

Devin Ryan - JMP Securities

Just with respect to FA productivity, I know that's a big focus in improving productivity and the technology effort in a larger ways revolve around you freeing advisors off to spend more time with clients outside of just simply running your businesses. So is it possible to quantify in any way how much upside you think there may be for FAs to get to more of an optimal production level. I know that historically you guys have kind of characterized the core growth rate for advisors as a few percent a year before factoring in the market impact. So I'm just wondering if there's any way to kind of quantify what the upside could be as advisors become more productive?

Dan Arnold

I think if you look at it structurally, one way we tend to try to attract and better understand the impact on productivity is the allocation of time of the advisor. And this is something we shared at the Investor Day, where the advisor today spends roughly 35% to 40% of their time on prospecting for acquiring new assets or working with existing clients to capture and service more assets. And so I think that's a key driver of which if we can drive productivity and efficiency into their overall operations, then that can free up time where they can transition from administrative efforts and activities to use significant elements of their time and create opening for them to reallocate that time to more revenue-generating activity.

A great example of that is our home/office supervision solution that you've heard us talk about and that we're rolling out to all the single person in our offices, at which we'll take time that they invest in supervisory activity and compliance requirements and shift that to a centralized resource implied LPL that then would free up time that they could allocate to revenue-producing activities. So that's a great example of a solution that we drive that's not necessarily automation, but also can be a driver of future productivity gains.

Devin Ryan - JMP Securities

And then just with respect to retail sentiment, obviously we ended the year with some pretty strong momentum, some volatility over the past month or so. So just love to get your thoughts, have you guys seen change in the behavior in recent weeks or anything with noting or is just relative per se, has there been any impact?

Mark Casady

I think it's too early to say. We certainly characterize having seen January and on, as we saw in 2013, so that's good. I do think we have to take into account some of the turmoil in the markets, some of the emerging market issues and everything else that we're all familiar with. And it wouldn't surprise us at all to see a little bit of a slowdown, well, not particularly one. We haven't seen it so far in this quarter, but we have seen now a sustained year where there wasn't much of a slowdown in same-store sales.

Typically, advisors have six to nine months of pretty heavy same-store sales activity and then take a quarter off, if you will, either because of the investor sentiments just pulling back a little bit and their need to sometimes catch up a little bit with the work that's there. We've seen it going on in 2013. Now that's what would make it unusual and hearken back to the early 2000s, we like that part of it. Again, having seen it in January of 2014, but it wouldn't be unusual for to occur. And our view of the business is we're going to have a very positive outlook for 2014, as we said before.

Devin Ryan - JMP Securities

And then just lastly, just to be clear, if you were to go the industrial loan company route, will that strategy still be essentially operative utility bank with the securities portfolio essentially as they would look as a bank holding company or are there some additional requirements there that would kind of change how that company would operate?

Mark Casady

Same idea. We basically take sweep assets and put it into a high-grade portfolio to capture more of the spreads than we're able to capture today. It's simple as that. We'd like it as simple. An industrial loan corp particularly gets us there, again because of the regulatory oversight and the simplistic nature of how it's designed.

Operator

Our next question is from Matt Kelly of Morgan Stanley. You may begin.

Matt Kelly - Morgan Stanley

I understand that your advisor targets for additions is a long-term target and it's going be volatile year-to-year and quarter-to-quarter especially. I'm just being curious in getting your thoughts on in the next few years what the greatest upside potential or downside potential to that is? In other words, what can make those numbers be above or below what you target? What are the kind of bogeys that you're looking for?

Mark Casady

That's what we worry about everyday, right, and we worry about everything, because that's what you pay us to do. There was an actual spike in activity, so that's what happened in the first half of '13 is a spike in same-store sales activity distracts current advisors from moving, because they're busy, helping clients and running business, which is a good thing. So if we were to see a spike in business in 2014 or 2015 or '16 that's appreciably above norm, as we saw in '13, that's kind of a good thing, because near-term it's very earnings accretive.

Secondly, you could see a slowdown in the desire to move. And we haven't seen that. In fact, the research is telling us just the opposite. I definitely recommend the Cogent research to you. They help see that. I would say we're worried about three or four years ago post the market break was would this be a permanent change in the amount of advisors who wanted to move. And what we it did was what we thought it would do, and so we're glad it came up that way is that over time as that sort of fear of 2009 receded and as those pay packages locked people in got markets back to pretty much where it was prior to the market break, which we like.

So we like advisors in motion. We know that the power to go independent is incredibly strong, both in terms of what advisors can do for their client, their ability to build their own business and have the American dream of ownership of the company and because it is accretive to them personally from a compensation standpoint as well. So doing well with your clients allows you to do well for yourself, that's a powerful basic function of the American economy that we support. And that's why we're very bullish about the independent channel and our ability to recruit those advisors over time. So those are the some of the near-term and structural things that change.

The training programs of the wire houses and the training programs of other regional brokers have been quite good to us over the years. We wish them well in those training class. One of them just put a big training class, and that's why we came in number two this last year in terms of net new advisor add. We want those advisors to learn a lot, build a great business and then go independent. And so we do continue to look for ways to think about training and an independent model. We tried that with [ph] nationalized, it didn't work, and we'll try again probably with existing customers and see if we can get it to work in that context. But what we'll do is keep trying, because we know that there is a great demand and need by consumers, both baby boomers and in just a few more years generation x and generation y for financial planning.

So with the backdrop of that kind of demand in the market, we know we have more supply of advisors and that's why we look for that trend as well as how do we create more advisors.

Matt Kelly - Morgan Stanley

So gen x and gen y, to your point, 10 years from now, do you think that market for advisors, wire houses and independent channel will be more competitive, because that will be an increasing focus of the growth going forward than it is now versus baby boomers for maybe the next five to 10 years?

Mark Casady

Well, the beautiful thing about gen x and gen y is it's even bigger than the baby boomers, right? So demographically, it's a huge kind of group of people. It's why I'd be very bullish about this industry 10 years from now because it's just a big group of people. And I around in the late '90s, running a mutual fund company and everyone was going to go direct and everyone was going to give up their advisor and that was the end of it as we knew it. I hear some of that now. But in the end, when people become wealthy, wealthy is defined as a multiple (inaudible). So they might make $50,000 a year and they have $150,000 saved, and that sent desire to really get guidance and seek counsel and ultimately that's what great advisors do is provide counsel about how to think about that money and protect those assets and how to build what the goals and aspirations are for that family. And I think that is time-tested and real activity. And I think it'll change really more 10 years from now than it does today.

Well, it will change how we do it. So today, there's no doubt that a lot of advisors come face-to-face. No doubt that 10 years from now, essentially the equivalent of in terms of recommendation in social media, advisors are going to be as important as they are for other businesses, right. The ability to give the investor information about how their portfolio is changing is going to be critical. And the cost of that investment has to be less in 10 years than it is today. That's just the reality of any market that's efficiently changing.

What that means is an advisor has to show value by really doing what they do best, financial planning and counsel about the psychology of money. We do your kitchen for $100,000. We do it for $25,000 and put the difference away for your future retirement. So again, very bullish about the future, very much the lead and the fundamental financial planning, absolutely think will get better technology and tools for growth, social interaction and enabling advisors to be even better counselers decades from now than they might be today.

Operator

Our next question is from Joel Jeffrey of Keefe, Bruyette & Woods. You may begin.

Joel Jeffrey - Keefe, Bruyette & Woods

Just a follow-up on the industrial, I just want to make sure I understand this. Are you saying that in terms of it being sort of a complementary product that it'd only be for the money market assets, or are you talking about (inaudible) model some upside in that?

Mark Casady

Yeah, I think the best way to think of it is there's about $4 billion of deposits in the money funds today. Imagine that we would try to put the layer into the industrial loan corporation over years, not over months, and then once we got through that, we probably would put some incremental cash into the bankers as we'd likely do a cash at a greater margin. But by then, we'll know an awful lot more about how to run the portfolio, how to think about risk management issues, how to think about the regulatory environment that's there. But we just want to make sure we're being clear that what I could describe is a slow strategy towards the use of such a structure should we be able to put one in place.

And so I think of it as accretive, but probably slow in terms of transition of those assets, the $4 billion that are in money funds today and IRAs.

Dan Arnold

And to be clear, we've got $7 billion in money fund balances. The $4 billion that Mark is referring to in today's environment, we don't earn any yield on. And so that's where you pick up the incremental opportunity and why we would tend to focus on that $4 billion tranche.

Joel Jeffrey - Keefe, Bruyette & Woods

It sounds like the interest rate sensitivity went up just a little bit and you sort of changed the slide just to touch in terms of the higher end range for fed funds rate going from 225 to 260. Can you just talk about some of the changes there and potentially what the maximum compression on fees and how that impacts on where the fed fund rate needs to go?

Dan Arnold

Yeah, there's two primary drivers of that. One is just the growing balances. And in today's environment, those incremental balances that we have are priced at lower contract levels in today's environment. I think as you look forward, the second driver of that has been some of the compression year-on-year that we gave you guidance on around the bank contracts themselves. And so when you average those two factors in, as we look out just across that size of balances, that's what's creating that differential.

Operator

We have a follow-up question from Steven Chubak of Nomura. You may begin.

Steven Chubak - Nomura

I was just hoping to clarify one item regarding the core G&A guidance. I know that it's been updated to 4.5% year-on-year versus the 6% prior and didn't know if that was simply a function of the step-up that we saw in professional service fees or whether we should attribute it to anything else?

Dan Arnold

It is a result of the step-up you saw in the fourth quarter in core G&A. And so our outlook for 2014 in terms of overall absolute core G&A expense has not changed. And that's what's driving the adjustment from 6% down to 4.5%.

Mark Casady

The good news is, is that you spin the money, in 2013, that cost changed in 2014.

Operator

Thank you. I'm showing no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.

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