LPL Investment Holding's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.26.11 | About: LPL Financial (LPLA)

LPL Investment Holding Inc. (NASDAQ:LPLA)

Q3 2011 Earnings Conference Call

October 26, 2011 08:00 ET

Executives

Trap Kloman – Investor Relations

Mark Casady – Chairman and Chief Executive Officer

Robert Moore – Chief Financial Officer

Analysts

Ken Worthington – JPMorgan

Devin Ryan – Sandler O'Neill

Thomas Allen – Morgan Stanley

Joel Jeffrey – Keefe, Bruyette & Woods

Chris Shutler – William Blair

Daniel Harris – Goldman Sachs

Douglas Sipkin – Ticonderoga Securities

Operator

Good morning. My name is (Benita) and I will be your conference operator today. At this time, I would like to welcome everyone to the LPL Investment Holdings Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Please note that today’s call is being recorded. Thank you.

And now, I would like to turn the call over to Mr. Trap Kloman. Sir, please begin.

Trap Kloman – Investor Relations

Thank you, (Benita). Good morning and welcome to the LPL Financial third 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 during the quarter. Following his remarks, Robert Moore, our Chief Financial Officer, will highlight drivers of our financial results as well. We will then open the call for questions.

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 within the meaning of the Private Securities Litigation Reform Act of 1995. These 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 our listeners to the Safe Harbor disclosures contained in the earnings release and 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 a reconciliation of these measures, please refer to our earnings press release.

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

Trap Kloman – Investor Relations

Thank you Trap and thanks everyone for joining today’s call. We delivered quarterly results that are consistent with the framework of the growth drivers we have shared in the past. Our consistent performance especially under challenging market conditions highlights the resiliency and stability of our business model. The business continues to perform well yielding adjusted earnings per share of $0.46, which represents 12% growth over the third quarter of last year.

After normalizing for our share count increase due to the IPO, our adjusted earnings per share grew 28%. While we were certainly faced with the headwinds of the declining market and a challenging interest rate environment, we have benefited from the impact of multiple organic growth drivers that led the top line revenue growth of 16% year-over-year. Same store sales of our matured advisors which represent approximately 80% of the independent advisor and institutional relationships we support continued to expand the double-digit rates.

Our advisors achieved this growth with the support of our unique platform as a result of the strong relationships they have fostered with our clients. These established relationships are particularly meaningful during times of market volatility and uncertainty. As these results demonstrate the value advice is not confined to investing client’s assets when the market is performing well. The true value advice lies in understanding client’s long-term needs and positioning them for success regardless of market environment. And then remaining actively engaged especially during times of market volatility.

Our open architecture conflict-free platform allows LPL advisors to manage their client’s portfolios to reflect changing economic conditions resulting in retention of the underlying assets and ongoing revenue opportunity. Of course, there have been times of sustained market volatility over several quarters that have led to reduced revenue as was experienced in the first half of 2009. However, the retention of client relationships and underlying assets enables LPL Financial and our advisors to benefit when the market stabilize creating greater predictability in our performance as exhibited in 2010.

With the near-term economic outlook remaining challenging and the markets are unsettled, there is elevated investor concern that these conditions have not materially changed investor behavior at this time as they remain focused on the long-term view. Our revenue growth is also supported by the additional activity of advisors who have joined LPL Financial over the last three years.

As previously discussed, these advisors transition to the LPL platform takes them about three years to rebuild their prior levels of production. Their behavior as they work to expand their client relationships typically transcends market influences again provided a predictable revenue stream. We remain on track with our guidance of 400 net new advisors per year having added 598 net new advisors in the past 12 months, excluding the 206 advisors who joined us for the NRP acquisition and the attrition of 22 advisors related to the previously announced U.S. conversion.

While the cost to attract new advisors continues to rise, it remains within a range of historical cycle reversely of our platform to support in a way of advisor practices enhances our ability to attract business from all channels including warehouses. In particular, we’re experiencing strong growth in our hybrid RIA solution, which we launched as a new business initiative at the end of 2008.

LPL Financials catalyst for this growth, a hybrid RIA solution is the only fully integrated investment advisor and brokerage back office solution in the market. We are now ranked fifth by Cerulli and total RIA custody of assets. And as a measure of productivity, second in assets per RIA firm.

We are also experiencing growth for the retirement partners reflecting the successful integration of our acquisition of National Retirement Partners this year. Today, we consult on more than 25,000 retirement plans making LPL Financial a leader in this space. Although our routes in the industry are serving the mass applet investor, the diversity and flexibility of our offering has also led the growth and our advisor should support high network clients.

The LPL Financial debuted in Barron’s 2011 ranking the Top 40 Wealth Managers’. In the United States in that survey that we came in number 26. The annual ranking which was published in September is based on the over $17 million in assets under management at LPL Financial and accounts with more than $5 million in assets. The ability to attract advisors and diverse businesses is a competitive advantage for LPL Financial and is another attribute to provide predictability in our business.

Our advisor pipeline remained strong as the appeal of an independent business partner for advisors and their clients is only reinforced by current market conditions. Our flexible business model also enhances our ability to retain our existing advisor relationships even as our advisors growing at all as exhibited by our 97% production retention.

Same-store sales growth and the maturing advisors have led the continued momentum in both our brokerage business and the use of our advisory platforms particularly within our centrally managed account solutions. This quarter, advisory commissions and advisory fees increased 18% year-over-year, declining markets partially mitigated this growth and a full impact of the markets on advisory fees will not be felt entire the fourth quarter.

The third area of earnings growth is to derive from the gaining of our top-line growth driven by the scalability of our platform. This quarter, adjusted EBITDA as a percent of net revenue remained relatively flat year-over-year, from my perspective, this result is understandable reflected at large part, the notable increase in transition of systems, attracted new advisors to our platform. This investment continues to generate excellent returns. We’ve attracted five times as many net new advisors year-to-date compared with the prior year.

While the cost to attract these advisors is grown over the past 12 months, we remained well within a range consistent with historical cycles that within the current marketplace. As advisors remained focused on their clients, we remained singularly focused on provided the highest levels of service and technology and support of their efforts.

Through our self-clearing and compliance capabilities, our integrated web-based technology, our business consulting and services, and our dedicated research team advisors and institutions received the support and functionality they need to grow their businesses. The market condition this quarter is particularly highlighted the valued relationship our advisors have with our research team. Through our published investment strategies, daily advisory market calls as allocation models recommended performance lists and centrally managed platform.

Our research team is help advisors efficiently stay on top of the change in market conditions and allow them to remain focused on their clients at the time when they needed most. We continue to follow regulatory affairs closely. Although they have been positive enrollments this quarter including the Department of Labor extending the review regarding the fiduciary standard, they are still work has to do.

Relative to last quarter, our work is most positive on the nature of the penny in regulatory changes and we remained supportive of appropriately expanding the fiduciary standard and a harmonized regulatory environment. In reviewing this quarter’s performance in light of the challenging market conditions, our company continues to perform in the predictable manner that I come to expect. This performance reflects not only the strength of the independent business model, but the hard work and dedication of our advisors to their clients.

With that, I’ll turn the call over to our CFO, Robert Moore, who will review our financial results in greater detail.

Robert Moore – Chief Financial Officer

Thank you, Mark. In line with Mark’s comments the ongoing engagement of our advisors led to strong quarterly revenue of $883 million. Advisor production grew to $706 million and asset based and transaction and other fees increased to $168 million. Other revenue fell slightly to $9 million. Net revenue for the quarter increased 16.2% from the third quarter of 2010 with recurring revenues representing 63.1% of total net revenues.

Sequentially, net revenues were down 1.2% as advisor activity remained strong, but the combination of seasonal effects and declining markets negatively impacted commission trails and asset-based fees. Asset levels ended at $316 billion for the quarter, up 7.9% over the prior year as continued account growth and positive net new advisory flows were partially offset by the declining market.

The robustness of our fee based platform continues to attract new business with net new advisory flows of $3 billion for the quarter, representing 12% annual growth on annualized basis. As a result, advisory assets continue to represent a growing percentage of our overall assets under management increasing to 30%. Since June 30, total assets declined 7.2% due to lower valuation levels.

Strong commission based sales activity remained consistent with the prior two quarters although we have seen a small increase in cash balances as a percent of total assets to just over 7%. This remains well below the historical high of 10% we experienced in the first quarter of 2009. Driven by the growth of our assets, asset-based fees grew 9.9% over the prior year to $90 million. Sequentially, asset-based fees declined by less than 1% as the market impact on asset values offset the benefit from new advisor and account growth.

Our overall revenue growth rate was notably moderated by a deteriorating interest rate environment. The average Fed Funds effective rate for the quarter was 8 basis points compared to 19 basis points for the third quarter of the prior year and 9 basis points in the second quarter. This deterioration was partially offset by increasing cash sweep balances, which grew 24.2% year-over-year and 8% since June 30 to $23 billion. Although our earnings are sensitive to interest rate movements, less than 5% of our total revenues derived from cash sweep fees.

In addition, the effective yield on these deposits is at the higher end of the industry range providing us with strong relative performance. Transactions and other fees increased 11.7% year-over-year to $78 million for the quarter reflecting growth in our advisors and in new client accounts. These revenues increased 14.1% on a sequential basis primarily due to $6 million of revenues related to our annual conference. The pay-out ratio for the quarter was 87%, which is 40 basis points higher than the year ago period and 70 basis points greater on a sequential basis. This is driven by combination of change in product mix and strong advisor growth leading to higher production bonus expense. We anticipate the pay-out ratio will moderate in the fourth quarter.

Turning to non-production based expenses, the third quarter is seasonally highlighted by an increase in promotion expense driven by our Annual National Conference, which took place this year in Chicago with over 4,000 advisors and industry participants in attendance. This conference is responsible for the vast majority of the $14 million in incremental expense on a sequential basis. Consistent with the first two quarters of this year, I want to reiterate that a portion of our expense growth is attributable to the reduced spending levels we maintained in the first three quarters of 2010. These levels reflected the actions we took to lower our expenses in 2009 in response to challenging market conditions.

Our restoration of expense items to a more normalized level was completed during the fourth quarter of last year. Our expense base today reflects a more suitable run rate on a go-forward basis. We are well-positioned for current conditions and retain the ability to actively manage our expenses as changing conditions may warrant. Compensation and benefit expenses increased 3.6% over the prior year driven by higher staffing levels to support growth in existing and new advisors businesses. Our positive performance also leads to higher baseline accruals for our discretionary bonus pool and 401(k) match. Since the second quarter, compensation and benefit expenses declined 5% due to a decline in the use of temporary professional services and payroll benefits.

Other G&A is increased 4.8% year-over-year, in large part due to our success in attracting new advisors to our platform. Compared to the second quarter, other G&A increased 23.4% driven primarily by the timing of our advisor conference and increased business development. Due to the deteriorating market conditions, declining Fed Funds rate, restoration of expenses, and increasing transition assistance, our adjusted EBITDA margin expansion was moderated this quarter.

Adjusted EBITDA was 12.6% of net revenue and 43.1% of gross margin, which is calculated as net revenues less production expenses. Over the long-term, we maintain the firm’s ability to generate on average 30 to 50 basis points in margin expansion annually. Third quarter capital expenditures were $11.8 million and we are maintaining our $50 million full year target. Investing in our core business operations remains our number one use of cash. We are on track consolidate UVEST on to our self-clearing platform by December of this year. This quarter we successfully converted 52 institutions representing 141 advisors and $36.6 million in production incurring $7.7 million in restricting charges. We continue to expect this restructuring will improved pre-tax profitability by approximately $10 million to $12 million per year through operational efficiencies and revenue opportunities.

During the quarter, we repurchased 300,000 shares under our open market share repurchase program for a total of $9 million or an average price of $28.11 per share. As of October 1, 2011, we have used 12.8% of the $70 million authorized under this program. Our fully diluted shares outstanding as of quarter end were $111.2 million shares. Our goal continues to be to offset the dilution from future stock option plans and the release of our deferred compensation plan, so that we end 2012 with our fully diluted share count flat from where we merged from the IPO at approximately 113 million shares.

We experienced positive trends in our interest expense, which declined by $3 million compared to last year. At the end of the third quarter, our leverage ratio was 1.87 times and we would expect it to continue to decline through 2011 due to adjusted EBITDA growth. We continue to see opportunity for acquisitions, but remain selective focusing on targets that meet our rigorous financial and strategic requirements. We will review our options for future share repurchases and debt repayment based on our organic growth opportunities and overall market conditions. As always, our singular focus remains on optimizing long-term shareholder returns.

With that, we look forward to answering your questions. (Benita), would you please open up the call?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Ken Worthington of JPMorgan.

Ken Worthington – JPMorgan

Hi, good morning. First, in terms of the conference, is 4,000 attendees good, that sounds like a pretty good number. And can you talk about any key themes or takeaways from this year’s gathering?

Mark Casady

Hi, Ken its Mark. The number is pretty difficult for us in terms of a national conference room that we do about 500 other conferences that are much, much smaller anywhere from gatherings of 20 advisors to several hundred in a variety of different programs to help them share ideas and to be taught about different ways of doing business. In terms of the attitude and environment there, you will remember that, that was sort of the beginning of a pretty significant market downdraft that occurred. So, it was nice to be together during that moment.

Advisors obviously had calls in the clients and we are being very proactive and reactive to their client concerns such that they were. I think we were struck by two things, one was that there weren’t nearly as many client concerns as one might have thought, given 2009 and previous history, an advisor after advisor. I know both Robert and I that they talked to that clients and team that they were down rash before fairly recently and that the market had climbed back. And in fact many advisors were hearing from their clients and more advocate of the clients to buy on the weakness which was a good sign. And I would say the group was really very focused on continue growth of their business.

And I think that’s the important point for us in this quarter that I think is helpful to analyst and to owners of the shares which is the business model, it’s really quite different than models that you’d have and other firms which direct to the consumer. But here you have a professional who is really talking about the long-term, really talking about the way to think about long-term work creation and it was a very different outcome for the client and that’s far our business, it’s much more consistent result and much less emotion if you will in terms of day-to-day activities in the market and that’s what we saw at the national.

Ken Worthington – JPMorgan

Okay. And in terms of the customer reaction to market conditions, do you see a difference between your high-end customers and your low end customers in terms of taking advice, net new sales activity you mentioned like buying on tips. Do you see any sort of bifurcation there or generally speaking, does everybody react essentially the same?

Mark Casady

Yeah, it’s a great question. We don’t see, what I would call go forward type action, except in one way which is that advisors who use more of our capabilities grow twice as fast as those who use fewer. So if we go forward based on number of services purchased because remember one integrated platform, so everything is there for you to use, but because we are kind of like a supermarket one has to decide to choose this product versus that product and here we’re talking about software or services that we offer. Advisors who use six or more services from LPL basically grow at twice the rate versus those who use two or fewer services at LPL. So in that regard there is a difference in the cohort in terms of how much they use the integrated platform.

Ken Worthington – JPMorgan

Okay, great. And then last question from me. Does it take more like given all the volatility does it take more time to bring on new advisors when volatility increases, it didn’t seem to slow you down this quarter, but maybe the volatility in 3Q, does that slow down advisor growth in 4Q?

Mark Casady

That we have seen so far it’s you’ve got to always look at what the bigger tailwinds are or headwinds depending on the case. And the bigger tailwinds right now are that the wirehouse retention packages that went in, in middish 2009 are starting to wear down. You’ve also got pretty significant changes occurring in management at a number of wirehouses as we know. We also have another independent firms that are having some pretty serious financial issues or have had transaction activity and that tends to stir up the pause. And that’s the tailwind that advances advisors deciding to making of change or consider a change. Therefore their marketing pipelines are heavier now than they were a year-ago and that’s why you saw a good flow of advisors in Q3 and we feel good about Q4.

The way I would think about it is, what I will do with the margin, somebody don’t say we had a bad few weeks, near a quarter end, that is why quarterly reporting is first ever a CEO’s favorite, and as you can have people who would just push back for a couple of weeks, if they need to spend a little more time with clients, if there is a particular downwrap to the market. We’ve seen that. We didn’t see at this quarter, I think we saw, at February right, but maybe in the first or second quarter of this year, where a large group pushed into it for the next quarter. That’s why quarterly numbers in this regard aren’t that helpful. Then why we continue to guide towards that new 400 per year either per year be in the part to emphasis.

Ken Worthington – JPMorgan

Great, thank you very much.

Mark Casady

Thank you, Ken.

Operator

Your next question is from the line of Devin Ryan with Sandler O'Neill.

Robert Moore

Good morning Devin.

Mark Casady

Good morning Devin.

Devin Ryan – Sandler O'Neill

Just as a follow-up on the recruiting comments you just made, just given how hurdle markets have been. Do you guys see any change or are you expecting any change from competitors in terms of what they’re willing to pay for financial advisors or how should we think about that if demand for markets continue.

Mark Casady

Yeah, good question. I mean, we personally don’t think the volatile markets will continue. Our research group feels that we’ll still have a year-end rally and we’re starting to see the beginnings of that already. So our backdrop is a little different than that backdrop and but if you add volatility to it, I don’t know that you will see any different behavior in fourth quarter than what we have seen all year long, which is that you are in the part of the cycle, where generally businesses are doing better and that competitors are generally being more aggressive about the transitional systems that they use and we are responding to that appropriately to still get good returns for shareholders and moving advisors, but I don’t think we will see necessarily more than what we have already seen. That’s not typically our experience.

What you usually see if somebody enters the market and decides this kind have had the little wide special of transitional systems and then they exit sometimes six months later or sometimes a year later when someone wakes up and realizes that’s a bad economic deal. And then so I don’t see any of that particularly happening in the near term.

Devin Ryan – Sandler O'Neill

Okay, great. That’s helpful. And then just on the acquisition outlook as well, it sounds like you guys are still looking to be opportunistic, but do you expect that there could be more opportunities going forward again with these markets or how challenging things maybe have been to-date and are you expecting some additional shakeout that may waiting maybe the better move then we are going to do a deal right here?

Mark Casady

Yeah, great question. I mean, I think there is a couple of things to think about, one is we have had a belief that we have talked about since the road show and still perfectly believe that good properties come on a little later post the cycle mix up, so meaning that frankly properties in real distress came on the market first. Those have kind of come on to the market and passed through, then that kind of near-train properties come on, those have now come on and are – there is a view that we still see coming on the market.

And then the really interesting ones come along and I think we are just about to enter that phase assuming our backdrop of not so much volatility in the market as those businesses that are really nice businesses recover and people want to see the earnings recover, so they can get a better price. And so I think we are on the verge of seeing some interesting things happen in the next 12 to 18 months.

Now, that’s hope it’s not a plan as I’d say, but that’s my belief having watched the cycles in this company for 10 years, that’s kind of typically how they go. And I think we are starting to see the emergence of that. We feel good about the pipeline for M&A, but obviously don’t coming on specific properties or the size of that pipeline, but we still feel we can do a good job with shareholders cash and investing organically in the business, investing our acquisitions selectively and intelligently for the company as well and episodic share buybacks that we have been doing appropriately as we go along.

Devin Ryan – Sandler O'Neill

Okay, great color. And then just lastly, a cleanup thing here on the 5% decline in the comp expense from last quarter, is sounding like there are some lower temporary staffing levels, but is there anything structural going on there, where maybe some of that the sequential decline could be sustainable or is that just primarily a seasonal item?

Mark Casady

It was predominantly a timing item. There is really nothing that I would overly accentuate in terms of reading into that. Likely that will rebound.

Devin Ryan – Sandler O'Neill

Got it. Okay, thank you.

Mark Casady

Thank you.

Operator

Your next question is from the line of Thomas Allen with Morgan Stanley.

Thomas Allen – Morgan Stanley

Hi guys. Good morning. So, it seems like you added 160 advisors this quarter backing out the UVEST. And so I was somewhat surprised you guided to 400 on an annualized basis. Is that probably upside to that number in the next 12 to 18 months? And then just so that we are not confused, should there be some noise next quarter from U.S.? Also can you give us some guidance if you aren’t surprised by that? Thanks.

Mark Casady

Yeah. Let’s start with the second half of your question, because we’re not going to answer the first half of your question. The second half here, I am just teasing, that we don’t give forward guidance on numbers. We have guided since the IPO of net new 400 per year and we feel very confident with that. I think many in person have told us that our history is net 500 per year we’ll let you figure out the map from there. But I do think second half of your question is quite important and we appreciate you asking that, because we like to highlight to the callers and to our shareholders that we will experience approximately 100 advisors leaving the firm as a result of the movement of the UNVEST broker dealer into the LPL broker dealer moving from using someone else’s claim portfolio to our self-clearing model. It’s an excellent economic transaction. Those 100 advisors have relatively lower production than our average on the platform at LPL.

Number one and number two, we are obviously do all this work on the basis of being able to create about $10 million to $12 million of incremental EBITDA as a result of moving UVEST on to our platform. So, it’s a great transaction and activity for shareholders. The other thing maybe Rob you want to highlight is the cost of that. It’s a little different than what we had talked to folks about.

Robert Moore

Right. So, Tom as we had originally talked about $52 million restructuring expense attached cash expense attached to the UVEST restructuring. We as we now have gotten into the detail of this are really aware that, that level is going to go down to $37 million which we have had $14 million already incurred and likely in the fourth quarter we will have an additional $15 million of restructuring cost incurred during the fourth quarter. So, we wanted to make sure people had the latest insight on how that is really turning out. And as Mark said, our estimations around the net pickup on pre-tax income remains the same, so the overall benefit of the return has continued to improve.

Thomas Allen – Morgan Stanley

Great, thanks. And I think you guys have guided to about 20% earnings growth over the long-term and with interest rate upside or significant interest rate upside probably further out. And then you obviously had the market headwinds this quarter? Are there other things you can do to kind of to drive earnings growth through maybe share buybacks, I know your float is pretty limited maybe similar cost containment anything there? Thanks.

Mark Casady

Yeah, great question. But I just point out that we are overachieving on the 20% EPS growth which is what we have talked about since the IPO approximately a year ago. This quarter is indicative of that EPS growth being quite good and we have had headwinds significant headwinds in terms of where interest rates are. On a percentage basis rates, rate on average are down about 30%. Now, they are still small numbers, but they are small numbers against a big block of bank deposits and money market funds. So, we talked about that in the press release. Robert mentioned that in his remarks.

So, I completely grew at the premise of that. We have headwinds that will eventually, you tell me when, couple of years starts turning to significant tailwinds. But our 20% is premised on the organic operations of this business in terms of same-store sales, the addition of new advisors, and continue productivity gains absolutely in terms of margin improvement over again measured in years not in quarters. So, we feel quite good about our performance thus far as a public company and feel that we can continue to guide you towards that 20% EPS growth rate on a going forward basis. Without the tailwinds of interest rates moving forward and without the tailwinds of acquisitions, we don’t have to do those either in terms of our business being significant.

Thomas Allen – Morgan Stanley

Great. Thank you very much.

Mark Casady

Thank you.

Operator

Your next question is from the line of Joel Jeffrey with Keefe, Bruyette & Woods.

Joel Jeffrey – Keefe, Bruyette & Woods

Yes. Can you talk just a little bit about what is as you see or what is it that’s driving the growth in your hybrid RIA business, what exactly that’s sort of a unique product offering?

Mark Casady

Well, that’s a great question, because I love to answer that question. I think with the people who are thinking about using us and most important fact of all is that we make life easier for the RIA. They come to us with a mixture of brokerage business and advisory business under their own registered investment advisor. And what we are able to do is completely integrate their operations, their statement, their information (indiscernible).

There is no the custodian, there is no other broker deal in America that can do that for that practice. That’s why we are winning business, that’s why we have in really overnight have become the fifth largest custodian in the country. Our sales ranking is number four. So, we feel very good about continued market share growth and continued success in growing our hybrid RIA offering.

Joel Jeffrey – Keefe, Bruyette & Woods

Hey great. And then I apologize if I missed this earlier, but in terms of transition assistance expense this quarter, how much was that and is that any different from what you have seen in prior quarters?

Mark Casady

We don’t separately disclose the transition assistance number and it’s not inconsistent given the level of advisors that joined us during the quarter to what we have been talking about over the prior two quarters. So, it is up a bit year-on-year and certainly higher than it was a couple of years to go, but that’s as Mark said that’s really consistent with the cycle.

Robert Moore

It is the range between about 7% of recruited revenues or DDC to as much as 20% and it absolute matches cycles. ‘09 was a 7% year, because you had advisors streaming out of the wirehouses looking for home. We are happy to accept them at very low transition assistance costs and there are sales cycles were very shortened measured in weeks not in months so they typically are. And then if the economy approves and there is our competitors do what they, you tend to see it rise and that’s what we’re doing now, but it’s not abnormally so, it also reflects a little bit of mix shift. When you have larger practices comes in, they tend to attract more competition as you’d expect and so therefore your mix shift and having a little bit bigger practices come out our success in the hybrid RIA world we’ll tend to also mix shift us when it comes to the transition assistance. So, that’s our healthy sign. As a shareholder, I was said myself I want to see more about that lending because it’s incredible economic return usually measured at less than a year payback for us our shareholders.

Joel Jeffrey – Keefe, Bruyette & Woods

Okay, great. And then just lastly in terms of the new advisors you brought on Board, are they pretty much comparable to your average affair, is there any difference between that?

Robert Moore

No, the average FA being recruited is higher significantly sold than the average FA is here. There are lot of the FAs who are here so, all those were listening please note that we enjoy your business and thank you for it. But remember that our FA is come from a very wide variety of practices. So, you’re going to have FAs who are inside of banks for credit unions where average productions are little bit lower because in the nature of the business that they are doing a lot of fixed annuities underwritten there and so forth. And you have a business that remember it has been in practice for 50 years. So, you have advisors who are working in very small towns across America where if we do $150,000 a year, we will live like a king or queen and have a wonderful life doing things for your community, but the average production is going to be lower than what here. So, a little bit (indiscernible) history, we have a lower average productions here today, a little bit because of our geography, we’re in small town and cities across America. And because we’ve only recently shifted to what we were call a masters level recruit that’s about five years ago and to the hybrid RIA model that’s only three years ago in the new classes coming in are significantly higher measured about 50% higher average production, roughly then what say here today.

Joel Jeffrey – Keefe, Bruyette & Woods

Great, thanks for taking my question.

Robert Moore

Absolutely.

Operator

Your next question is from the line of Chris Shutler with William Blair.

Chris Shutler – William Blair

Hi guys, good morning. Can you talk for a minute about the recent asset flow trend that you seen in the centrally managed fee-based platforms. And then you seen any material changes in asset flows into those portfolios as a result of the – I guess recent market volatility, thanks.

Mark Casady

Yeah, great question. We really haven’t seen anything in the centrally balanced platform as it relate to the market volatility, that’s not really the motivator for an advisor. This is really two motivators and Robert will speak to the first question, is in the first motivator is advisors are changing their practices. I think that’s important to understand. Is there seeing the advantage for their clients and for their own business of going to the advisory platform generally. So, there is converting from commission based business to advisory based business. That’s the first major trend. That trend has been here 10 years has been in place for decade down, but what’s starting to accelerate is the speed, which advisors are wanted to use the advisory platform.

There is a 100 reasons why that the big wins are that you basically have a regulatory environment that tends to faster that, that’s a better place to do business. We have a customer base who wants to pay you an ongoing fee for advice and planning as oppose to a commission fee. So, we’ve got some changes in consumer behavior as well. And then the second reason why there are using centrally balanced platform is oppose to do yourself advisory platforms that we also have is because they are much more efficient. It allows the practice to essentially outsource the mechanics of rebalancing the account. That also allows them to outsourced the selection of managers and strategies asset allocation and why that’s important is that puts them in a position with their client been in quarter back of their financial plan.

And so the discussion and dialog are about how much would you say, what your goals, what’s picked the right feel managers for you. But I’m not going to buy the specific securities that your portfolio need that my role surely help you with your financial help. So, we see that practice type changing pretty significantly in the last two or three years. So, those are the major trends in why we see advisors going to central platforms. The last one I’d add is one that we’ve done is kind of our work here, which is to try to take the cost of those down or over the last several year so the application technology through the application of our buying power with the underlying suppliers particularly in the investment management area. And our ability to really bring scale of that business makes from a very good economic activity meaning the low cost for the in client, which makes it much easier for the advisor to charge the fees. They need to charge to make a living and do what they need to do for their client. And so, it’s a good economic decision as well.

Robert Moore

I guess the thing I’d add to that Chris is two things, one in the lower cost structure that Mark was alluding to. We introduced an ETF platform just over a year ago, now has $1.9 billion of assets and it’s speaking somewhat to your point about flows – flows across essentially managed platforms is continue to be positive. We haven’t seen any disenable shift in that flow rate if you will, as you know advisory in generally is growing within our overall mix and then advisory or centrally managed platforms are growing at a more rapid rate than advisory overall. So, we feel quite good about those flows. Again I think it is fair to say it’s not really affected very much at all by volatility levels. There are more fundamental drives at work in terms of why those continue to experience positive inflows.

Chris Shutler – William Blair

Okay, that’s good color, thanks guys. And then just one more question, it looks like the yields on both the commission and advisory side of the business were down a little sequentially anything going on there that you’d call out in terms of mix shift or timing issues.

Mark Casady

The pricing across those areas remained consistent. So, again there tend to be some impacts if you will about the timing of when fees are calculated versus when the actual mark-to-markets occur, generally speaking they are quite stable.

Chris Shutler – William Blair

Okay, thank you.

Mark Casady

Thank you.

Operator

Your next question comes from the line of Daniel Harris with Goldman Sachs.

Daniel Harris – Goldman Sachs

Hey, good morning guys.

Mark Casady

Good morning.

Robert Moore

Good morning.

Daniel Harris – Goldman Sachs

So just about a year since the IPO, I was wondering if you could point to any differences that you’ve seen and we’re recruiting on the public company versus one you were private, any differences in type of divisors at a more (indiscernible) given your status as a public company?

Mark Casady

Yeah, good question, what we certainly have noticed is it is just a bit easier to speak about the company. We’re very well known among the advisor community. So, it’s not been our awareness is up because we’re public. But it does make their job a bit easier and moving their clients because we’re public and we have definitely heard that feedback and you’ve been enrolled in meetings even end clients and which the public offering has been helpful.

Robert Moore

Yeah, I think it enhances the transparency, this is one of the effects we knew in part of the decision to become a listed company was the additional transparency and visibility that it give added time when people are wondering about your financial stability exactly the trajectory of the company it brings that integrator focus in a more transparent way. So, it’s definitely assisted us. I think the combination of the hybrid platform as an offering and what that represents in the marketplace and the more sophisticated type of advisor we’re seeing. There is some convergent between us being the listed company and having those capabilities come together and it’s just a good combination.

Daniel Harris – Goldman Sachs

Great, now that’s helpful. Mark, you mentioned that the deal you had extended the fiduciary standard and review during the quarter and it seemed like you were little bit more positive on the outcome sequentially versus last quarter. So, what do you guys doing to prepare for any changes that may come in either direction from what you guys are expecting right now?

Mark Casady

Well, we’ve done extensive studies of our client base to understand what they are using today that would be affected by a variety of regulations and then the model out the way that we would see them transfer to other platform. So, we know that while the big changes would be generally a fair amount of brokerage business would move to the advisory platform. That’s why we’ve said we actually think on a net basis, we would be a bit ahead in terms of these changes, but we think the bad policy. They takeaway choices for consumer, they will add more cost to customers that the customers who are served.

So, as our shareholder matter, I suppose we would be in different. But as a matter of good financial house for consumers we’re not it all in different and we think that the Department of Labor in particular needs to accept their ideas of overseeing the brokerage business for IRAs. And we said that publicly and we said that through DOL so that the others be as we feel there is plenty of regulation for Finra and the SEC in that area and a long history of good disclosure and a long history of the outcomes for consumers. So, the record is quite clear that the structure that there today is quite good.

We have said that the fiduciary standard is very helpful because we do believe that our advisors in particular and in general advisors that customers want to do business with already (indiscernible) way. So we don’t see that having an effect to the business other than reinforcing existing good tenants. We have not gone yet to what I’d describe continuously planned. If the DLO would put something in place, it would generally give you a year or two years to implement it, it is the nature of what they would be talking about would be pretty severe. We’ve had some discussions of what we would design. We would probably design some automated conversion programs, and paperwork that would go with that, so that we can make it feel like a transition to us where our new Advisors are joining us to make their life easy and make the clients life easy, so that kind of conversion. But we’ve just had some beginning dialogs about how that would work as much to understand it is something else, but no planning beyond that.

Daniel Harris – Goldman Sachs

Okay, Mark, that’s great. And then, just lastly here, maybe Robert, so the cash which is obviously, there is still continued pressure out there all over the curve but the head funds rate has been pretty consistent here sequentially just down a bit. Shouldn’t we expect any change sort of on the yield that you’re getting on your cash sweep fees, going forward especially as more assets keep piling in there?

Robert Moore

A little bit, as the margin blended rate does come down slightly, but with Fed fund as you say being relatively consistent our overall yield will remain pretty constant as well. It’s really nothing that I would try to use as being material in any respect.

Daniel Harris – Goldman Sachs

Okay, great. Thanks very much.

Robert Moore

Thank you.

Operator

Your next question is from the line of Ed Ditmire with Macquarie.

Ed Ditmire – Macquarie

Good morning guys.

Robert Moore

Good morning.

Ed Ditmire – Macquarie

Another question on the RIA or advisory assets. Is LPL becoming a better platform for a pure RIA or their RIA growth almost entirely tied to hybrid registered RIA type advisors?

Mark Casady

Yeah, good if I missed the question. We really appealed to hybrid advisor. Remember that our basic model is that we manage the complexity, our financial practice or financial professional, that’s kind of our mission statement to some degree of the statement if you will. And that if we think about what we do for living in a hybrid RIA has a lot of complexity in their model. They are doing maybe some historical commission business, which they’re reviewing trails they need to report on and aggregate in performance reporting, and then they have typically newer business on an advisory platform that has a variety of complexities to it and sometimes they are doing short activities as well. And so it’s that complexity in which we appeal. We do have a handful of pure RIAs, but that’s not where the assets are coming from for us.

Ed Ditmire – Macquarie

As a follow-up do you believe it’s important in the long-term to become a good platform for pure RIA in case, there is an industry trend that these pure RIAs seeing good growth?

Mark Casady

Well, I don’t think you will see that trend. So obviously, to be clear, our premises, the complexity will exist in these businesses for one time because people’s lives are complex, right? You think about your own, you have insurance needs, you have things, you can only buy it through a securities broker in terms of products and you have activities that are really best done on an advisory platform. I don’t see that changing for decades. I don’t mind moving it, but I have still lot of those in Washington, I look at regulations, spend a lot of time on the business. I don’t see that complexity changing much at all in terms of peoples lives. This country has rather unusually regulatory structures you know between insurance commissioners in very state, regulators at the federal level too, really on the security side and then all the states they get involved there and then you have regulation that relates to RIAs that will be used all be with SEC now it’s (indiscernible) between the states and the SEC. That sounds like a lot of complexity to me over the long-term.

Robert Moore

(indiscernible) RIA’s business, pure RIA business, well there is really two different markets there. One market is really somebody who is a money manager, not unlike what many of the folks on the call are, where what they’re running is essentially a $1 billion or $5 billion investor management job. And what they really get it in a pure RIA custody would be somewhat of what they can get from the custodian bank, or State Street, northern trust and others. And it’s just a matter of price or services. I don’t see us entering that business ever. That’s a very tough business, it’s a very different business, and the one that we are in, so to my mind it’s far away. There is another part though, the pure RIA business, where somebody is running a couple $100 million, it’s really a retail practice but probably started, centered around investor managements, those practices are actually moving our way, they aren’t been asked by their clients to get into financial planning and other things. So, we actually see that part of the market coming to us rather than the other way around.

Ed Ditmire – Macquarie

That’s great color. Thank you.

Mark Casady

Absolutely. We spend a little time on these issues.

Operator

Your next question is from the line of Bill Katz with Citigroup.

Mark Casady

Good morning Bill.

Bill Katz – Citigroup

Good morning. Thanks for taking my questions. Just coming back to the production discussion a little bit, so it came in a little bit in the third quarter and you have some of the volatility with the UVEST coming off and so forth. How do you reconcile and sort of the production expectation against your commentary that people still engage versus the decline sequentially. Should we be thinking the 34, 35,000 advisory production is further a reasonable run rate until volatility risks? So what you said about the production pay dropping a little bit into the fourth quarter?

Mark Casady

Okay, that well two separate questions there I guess. In terms of just overall level of production, the decline was attributable somewhat to seasonality and I wouldn’t attribute it just to market volatility or to lower asset valuations in the marketplace. We every year see in the third quarter a combination of our conference as well as shift summer doldrums have some seasonal impact. So, I wouldn’t read more into that than what we have already discussed. In terms of the pay-out ratio, the point there is really that because advisors started off the year so strongly, they were reaching their production bonus levels, their maximum production bonus levels earlier in the year. And so you saw a shift to the left if you want to think of it that way in terms of that overall payout ratio reaching higher level sooner. And so our belief about the moderation level leveling effect of that pay-out ratio is boring of essentially that knowledge that many are already operating at their maximum level and therefore won’t go any higher between now and the end of the year.

Bill Katz – Citigroup

And just a follow-up (indiscernible) I apologize, when you mentioned early about your sort of platform pipeline in (indiscernible) but platforms, what kind of platforms you are looking at is just scaling your existing business and there are some ancillary services that you are looking at as well?

Mark Casady

Yeah. So, on the acquisition front?

Bill Katz – Citigroup

Yes.

Mark Casady

Yeah, it’s well we have a bit of a theme going with acquisitions, the last three have been adjacencies, we like adjacencies, because they are nice add-ons to the business. Again, think about our theme or complexity, so now imagine those just take NRP as a good example of it. There is a business that it’s core is really processing activities right something we do already and reporting on those activities, but the nuance here is now we have added the complexity of having a 401(k) plan involved which has a whole another set of reporting requirements and activities that are associated with it. So, we’ve been able to moved outages through an acquisition and become a market leader through it which is exactly the kind of acquisitions we like to do. We now have the largest platform of independent consultants to the 401(k) industry at LPL.

And we have I think 15 to 20 professionals who are supporting those individuals with our unique needs for DC plans. And we love that adjacency model where we are able to bring our scale to a sub-market if you will in financial planning. We certainly would look for acquisitions and have looked at some that turning away that would relate to just good old fashioned scale, buying another broker dealer and moving on to our platform, but those really have to that they have to be the right product mix, they have to be the right compliance underwriting. We have to feel good about liabilities, because there is no particular reason for us to do a scale based acquisition now that were the size that we are, so really have to make great economic sense for all of us are shareholders.

Bill Katz – Citigroup

And it’s helpful. Thanks for taking my questions.

Mark Casady

That’s all. Thank you Bill.

Operator

(Operator Instructions) Your next question is from the line of Douglas Sipkin of Ticonderoga Securities.

Douglas Sipkin – Ticonderoga Securities

Thank you and good morning guys.

Mark Casady

Good morning.

Douglas Sipkin – Ticonderoga Securities

I had three questions. First is just trying to understand the capital model for you guys, just it would seem that given where interest rates are and what the cost is on your debt that buying back the debt would economically seem to be the right priority. Obviously, that’s not the case. Help me understand why it’s not?

Mark Casady

Well, we have a fantastic interest rate structure now given where the market is today, number one. Number two, under our covenants can’t buyback our own debt and I don’t think that’s a great use of capital. Anyway because we really delivering naturally, which is the best use of capital as in zero and that what I rather do is grow earnings a lot and then for comedown in terms of leverage. So, never we are over seven times leverage in 2005, we’re now around under two.

Unidentified Company Speaker

Under two, that’s pretty good, just over…

Unidentified Company Speaker

And that’s really happen in the natural way. We’ve only paid off about $100 million worth of debt over those five or six years and if I am a shareholder and I really want the biggest ones that I’d rather use capital for organic growth and for acquisition of earnings through acquisition of companies.

Douglas Sipkin – Ticonderoga Securities

Well, so you can’t – I mean, you can’t pay down the launch because I thought you guys did pay earlier in the year.

Unidentified Company Speaker

You said buyback, which means.

Douglas Sipkin – Ticonderoga Securities

I’m sorry, I apologize for that, I meant repay.

Unidentified Company Speaker

We could always repay, that’s no problem. But it’s not particularly good use of funds because our interest rate is very low on that debt and it’s always trying to maximize your capital structure to enhance returns for both (indiscernible) holders and both the equity holders, but (indiscernible).

Mark Casady

And the other thing I would just note is delivering in a world where credit rating is still matter and having the credit rating agency is accelerate their upgrades of our debt, which is unlikely. There is very little incentive to deliver faster than we already are. We received in our period obviously for Moody’s recently. We feel good about that. But I think we could all agree that the phase of which upgrades our occurring in this particular type of climate is more cautious and slow and therefore being able to then substitute that or whatever remaining debt we have at more attractive levels of course not really happen until those credit ratings are essentially in line with our overall financial structure and capital structure, which will working diligently to make happen. But that’s save time and I really don’t want to get to be levered in front of the rating agencies.

Douglas Sipkin – Ticonderoga Securities

Okay, that’s very helpful. Secondly, what percentage so I seen like $96 billion of advisory assets at the end of the quarter and you guys had impressive flows? What percentage of the revenues that come off of that or trailing versus sort of an average. I’m just trying to gaze how much of an impact is already been felt in that fee-based revenue line from the market decline or I know you mentioned this it will be a little bit more next quarter, I mean is it based on beginning of carried asset levels or is that a combination for depending upon the plan of the assets.

Unidentified Company Speaker

Yeah about 60% of that is reset at beginning of period or end of prior period is may be the better way to look at it. And then the remaining 40% is somewhat average through the remaining months of a quarter. So, that’s how you’ll see it flow through the fourth quarter.

Douglas Sipkin – Ticonderoga Securities

Got it. And is that apply to some of the commission revenues as well, I would probably 1000 things like that.

Unidentified Company Speaker

No, those are coincident.

Douglas Sipkin – Ticonderoga Securities

Okay, got it.

Unidentified Company Speaker

Mark-to-market every day.

Unidentified Company Speaker

Right.

Unidentified Company Speaker

Yeah.

Unidentified Company Speaker

So got it.

Unidentified Company Speaker

Market (indiscernible) literally daily mark-to-market on trails.

Unidentified Analyst

Yeah, Okay, perfect. So, then I guess so (indiscernible) I think about the commission is that seems to be reflective of sort of the environment now where is the fee based stuff may there is probably another hit, a little bit of a drag from the market carryover.

Unidentified Company Speaker

Yeah, there is a little headwind that flows into the fourth quarter on advisory base or asset basis.

Douglas Sipkin – Ticonderoga Securities

Great, that’s helpful. And then my final question, I’m just trying again understand I can appreciate that the sweep is not a big percentage of the revenues, I’m trying to put parameters around how profitable that stuff is for you guys. I’m just trying to gaze because I know you guys talk about upside when rates rise eventually. So, I’m just trying to gaze what is the margin on that.

Unidentified Company Speaker

Yeah, we don’t disclose individual line margin. So, the best indication for is to use already disclosed information what happens when rates move and…

Douglas Sipkin – Ticonderoga Securities

Right, I mean for every so to given idea that every basis point movement within 0 to 25 basis points at set funds is $1.4 million pretax. And then once you get above 25 basis points and set funds is declined to 700,000 per basis points.

Unidentified Company Speaker

That’s okay. So I’ll just work off that guidance and I was hoping may be but if you don’t provide that’s not a big deal.

Douglas Sipkin – Ticonderoga Securities

Okay, that’s perfect. Thank you for taking all my questions. I appreciated.

Unidentified Company Speaker

Absolutely, thank you.

Operator

And there are no further questions at this time. Are there any closing remarks?

Mark Casady – Chairman and Chief Executive Officer

Thanks everyone for listening.

Operator

And thank you for your participants in today’s conference call. You may now disconnect.

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