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LPL Investment Holdings, Inc. (NASDAQ:LPLA)

Citi Investment Research 2012 Financial Services Conference

March 7, 2012 11:10 AM ET

Executives

Robert Moore – CFO and Treasurer

Robert Moore

Okay. Good morning. Very pleased to be here today and have an opportunity to speak to you about LPL Financials. So our corporate mission that we are on is to ensure and enable that investment advises delivered to all Americans by an investment advisor who operates in a conflict free environment supported by leading-edge technology and a highly motivated business partner.

The advisor is our customer and we help them manage the complexity of their business. We are the leader in our industry and have been for more than 15 years. We now rank No. 4 by a number of advisors and No. 5 by revenue. We are No. 1 in supporting community banks and credit unions with a nearly 40% market share and most recently through our acquisition National Retirement Partners, we have become a major provider to 401-K plans.

As noted on the upper portion of the slide we are able to attract advisors from across all industry channels. This is a strong contributor to future growth and distinctive to our model in terms of the diversity we are able to support. The left hand chart shows the strong growth in our advisor base since the year 2000 when we went self clearing. 70% of the growth shown has been organic with most of the acquisition growth occurring in 2006 and 2007.

On the right hand side of the slide is our industry ranking which highlights that we are the only independent broker-dealer in the top 10 and the only independent broker-dealer that is self clearing. Although we have been consistently picking up market share we remain under 5% overall with ample room to grow and deepen our market presence.

This has been accomplished without significant branding which is another area of opportunity that we will do more work on with the arrival of our new Chief Marketing Officer.

Shown here on the upper left hand side of the slide is the basis for the economic rationale for why an advisor would join LPL. Obviously there are other factors leading to us attracting advisors but the opportunity to double income and establish equity in their own business is compelling.

Importantly, we also create enhanced economics for advisers joining from other independent firms. A 2010 PWC study which we commission concluded that our advisors are approximately 18% more profitable than their peers at other independent broker-dealers.

The four pillars of our business model are shown on the right hand side of this slide. We are a leading technology provider, fully integrated to meet the rising complexity involved in delivering advice. We are unparalleled in our ability to support our advisors through ongoing training and best practices.

Our independent research draws from the collective capabilities of more than 40 investment professionals delivering due diligence, market commentary, asset allocation recommendations and daily dialogue in support of our advisors. Finally we are a clear leader in conflict free compliance driving low levels to complaints and an exemplary regulatory track record.

These four pillars are unmatched in the independent channel and are at the heart of our distinctive offering. All this results in strong net promoter scores and high rankings in the JD Power Full-Service Investor Satisfaction Survey.

Sometimes it's helpful to discuss the things that we don't do in helping you understand who we are and what we stand for. We don't have proprietary trading or product manufacturing. We don't own a bank or have investment bankers. We don't compete against our customers by going directly to their clients and offering online trading. And by working with more than 500 partner firms providing access to over 10,000 investment products, we are the standard in giving the word open to architecture.

What our customers and investors receive in LPL is a dedicated mission driven business that is capital light, free to grow and positioned for success.

The culmination of the information that I have provided thus far is a strong operating model which has the highest retention rates in the industry, a well diversified customer base, comparatively low levels of interest rate sensitivity and high levels of recurring revenue.

We see opportunities to continue to improve our operating margins through our service value commitment initiatives. This will enhance our already strong free cash flow generation and our low consumption of capital allows us to have higher payouts for our advisors, strong reinvestment in technology and service, while maintaining flexibility for acquisitions.

There has rightly been a fair amount of attention given to our cash products program. With more than $22 billion in assets our cash reprogram is a valuable and valued activity for the company and our customers.

For competitive reasons we do not provide specific information about the underlying contracts with our depository partners. However we have been highly transparent about the allocation of balances and yields between our money market option and the insured cash account offering as well their sensitivity to changes in interest rates.

We continue to add new partners for the program, given the consistent growth we are experiencing. Our recent efforts have led to us extending capacity 2018 for a significant portion of the ICA Program and we have been able to reset the spread to said funds without incurring any material impact on earnings and maintaining the full retention of upside of future interest-rate movements. We remain well-positioned for this program to support our advisors, create shareholder value and drive better relative performance than our competitors.

Yesterday we filed an 8-K describing recent developments and future intentions for optimizing our capital structure. The Company's journey has evolved from a sole proprietorship to a PE firm supported management buyout to publicly listed firm to now stating our intention to establish a more permanent capital structure that will address our optimal level of debt with a clear pathway towards deleveraging, the introduction of a regular ongoing dividend and the opportunity to return capital through a special dividend paid solely through cash on hand. This is all subject to us completing the proposed refinancing and obtaining board approval.

I want to emphasize that these steps are all approached with our ability to continue to strongly support the organic growth of our business, as well as allow for acquisitions and share repurchases that will mitigate dilution arising from our ongoing share option programs.

We have an established track record of both top line and bottom line profitable growth. Since the year 2000 we have had two down years of revenue with no declines in adjusted EBITDA. In 2009 we experienced a 12% drop in revenues and were able to expand profitability by nearly 2%. We did not require a capital infusion or any external support. We demonstrated all the values that underline independence.

In 2008 and 2010 we had essentially the same level of revenues while profits were nearly 20% higher in 2010 demonstrating the benefit of better efficiencies and lower run rate expenses. We are on a positive trajectory of sustainable and profitable growth.

I can confirm that we remain committed to our 20% adjusted earnings per share growth rate target with a three to five year investment horizon. The key drivers of our growth remain the same, supporting and expanding same store sales growth, which is the highest priority and most important contributor to our growth. Continuing to attract advisors who wish to affiliate with the industry leader in independence will remain vital for future growth.

We believe that modest growth from market appreciation is likely and we intend to achieve our guidance for improving margins by 30 to 50 basis points on an annualized basis.

Thank you for your kind and considerate attention during the prepared portion of our presentation. We will now adjourn to the 16th room up on the fourth for Q&A which will begin at 11:50. Thank you very much.

Question-and-Answer Session

[No Q&A session for this event]

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