LPL Financial Holdings 2026 Q3 Earnings Call

Thanks, operator, and thank you to everyone for joining our call. It is a pleasure to speak with you again. After an outstanding first half of the year, we delivered another quarter of strong business performance and excellent financial results while continuing to advance key initiatives. We delivered improved organic growth during the quarter. We advanced our preparation to onboard Commonwealth Financial Network later this quarter. We began the phased rollout of our proprietary AI agent, Cyan, to advisors, and we continued to deliver strong operating leverage. Now, to highlight some of our Q3 results. In the quarter, total client assets were $2.6 trillion, up slightly from Q2, as continued organic growth was largely offset by modest market headwinds. We attracted organic net new assets of $29 billion, representing a 5% annualized growth rate. Prior to large institutional wins, this was our best organic growth rate in over a year.

Our third quarter business results led to strong financial performance, with record-adjusted EPS of $5.97, an increase of 15% from a year ago. Turning to our strategic plan, our vision is clear. We aspire to be the best firm in wealth management. To do that, we remain focused on three key priorities. One, preserving the client centricity the firm was built on. Two, empowering our employees to deliver exceptional outcomes for our advisors and institutions and their clients. And three, delivering improved operating leverage. Effectively executing on these focus areas will help us sustain our industry-leading growth while advancing the efficiency and effectiveness of our model. With that as context, let's review a few business highlights from the quarter. In Q3, recruited assets were $24 billion, bringing our total for the trailing 12 months to $81 billion.

The vast majority of recruiting took place in our traditional markets, where we added approximately $23 billion in assets during Q3. We again captured an industry-leading share of advisors in motion while maintaining strong recruiting pipelines. Turning to overall asset retention, it was 97% for the third quarter and 98% over the last 12 months. This is a testament to our continued efforts to enhance the advisor experience through the delivery of new capabilities and technology and the ongoing evolution of our service and operations functions. Now let's turn to Commonwealth. Final preparations are underway, and we are on track to onboard Commonwealth advisors in mid-November. Following 18 months of collaboration with our Commonwealth colleagues, we have established the integrated operating model that preserves the core of Commonwealth's industry-leading approach to serving advisors. From an operational standpoint, the technology and capability builds that underpin this conversion are complete.

The householding architecture, advanced case management platform, and the single relationship agreement we have discussed on prior calls are built and in final testing. While each was scoped to enable the Commonwealth conversion, each also benefits every advisor and institution already on our platform. As we approach the transition, our focus has shifted to supporting Commonwealth advisors and their staff with their preparation and training. Our teams are deeply engaged with Commonwealth advisors to ensure that they can serve their clients without interruption from day one on the LPL platform. With only two weeks until conversion, we have increased clarity on final asset retention, which we now expect to be approximately 83%. As for our broader work to continue elevating the experience for all LPL advisors, during the quarter, we soft launched our proprietary AI agent, Cyan.

The initial pilot for Cyan Assist included several hundred advisors, and the early feedback has been overwhelmingly positive. We are on track to expand access to Cyan Assist to all advisors by year-end, with additional high-impact capabilities planned for early next year. In closing, the third quarter was a solid one for LPL and the final one before the largest conversion in our history. I want to take a moment to thank our teams at both LPL and Commonwealth for their tremendous hard work and dedication in getting us to this point and positioning us for a successful onboarding next month. We are building something special, and I'm incredibly proud of the passion and dedication our teams bring to supporting our advisors.

As we look ahead, we remain well-positioned to serve as a critical partner to our advisors and institutions, to continue delivering industry-leading organic growth, and to maximize long-term value for shareholders. With that, I'll turn the call over to Matt.

Thanks, Rich. It was another productive quarter as the team continues to deliver exceptional results. To reiterate some of those highlights, we delivered solid organic growth, further advanced our advisor experience through investments in our service organization, drove improved operating leverage through ongoing efficiency gains and better monetization of the value we deliver to clients, progressed our preparations to onboard Commonwealth in mid-November, and executed on our capital allocation strategy where we remained active with our Liquidity & Succession capability and returned approximately $300 million to shareholders through share repurchases. These efforts resulted in strong third-quarter business and financial performance and position us to sustain that momentum through year-end and into 2027. Now turning to a few highlights from our Q3 business results. Total client assets were $2.6 trillion, up slightly from Q2, as continued organic growth was largely offset by modest market headwinds.

Total organic net new assets were $29 billion and approximately 5% annualized growth rate. As for our Q3 financial results, the combination of top-line growth and expense discipline led to an adjusted pre-tax margin of approximately 38.6% and record adjusted EPS of $5.97. Gross profit was $1.662 billion, up $44 million sequentially. As for the key drivers, commission advisory fees net of payout were $496 million, up $10 million from Q2. Our payout rate was 88%, up approximately 50 basis points from Q2, driven by reductions to our corporate advisory pricing, as well as the typical seasonal build in the production bonus. Looking ahead, we expect our payout rate will increase by approximately 40 basis points in Q4, driven by typical seasonality. With respect to client cash revenue, it was $472 million, up $15 million from Q2.

Overall client cash balances ended the quarter at $56.6 billion, down $300 million from the prior quarter. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 65% within our target range of 50%-75%. Looking more closely at our ICA yield, it was 352 basis points in Q3, up 16 basis points sequentially, primarily driven by the updates to our client cash sweep rate methodology we discussed last quarter. As we look ahead to Q4, we expect our ICA yield to increase by approximately 20 basis points as we benefit from the full quarter impact of the methodology change, as well as the September Fed rate hike. As for service and fee revenue, it was $218 million in Q3, up $9 million from Q2, driven by revenues from our annual Focus conference.

Looking ahead to Q4, we expect service and fee revenue to decrease by a few million. Moving on to Q3 transaction revenue. It was $79 million, down $4 million from Q2 due to lower trading volumes. As we look ahead to Q4, we expect transaction revenue to increase by a few million. Now turning to our acquisition of Commonwealth. As Rich mentioned, we are on track to onboard advisors in mid-November. To ensure we deliver a great transition experience, our collective teams are engaged with advisors and their staff to assist with preparation and training, and we've added resources to handle expected increases in activity around the onboard. As Rich mentioned, with only two weeks until conversion, we have increased clarity on final asset retention, which we expect to land at approximately 83%.

As for the financials, accounting for our updated retention expectations and current market levels, we now estimate run rate EBITDA of approximately $415 million once fully integrated. This works out to a purchase price multiple of roughly 8x EBITDA, which remains a compelling use of capital. Next, let's move on to expenses, starting with core G&A. It was $532 million in Q3, up $13 million sequentially, but below the low end of our outlook range, primarily reflecting the timing of expenses that we expect to shift into Q4. For the full year, given the efficiency gains achieved throughout the year, we are narrowing our core G&A outlook range. We now anticipate 2026 core G&A to be in a range of $2.140 billion to $2.160 billion. Turning to TA loan amortization. It was $150 million in Q3, up $8 million from Q2.

As we look ahead to the fourth quarter, we expect TA loan amortization to increase to approximately $160 million. As for promotional expense, it totaled $88 million in the third quarter, up $9 million from Q2, driven by our annual Focus conference. Looking ahead to Q4, we expect a similar level of promotional expense. Turning to interest expense, it was $106 million in Q3, up $4 million sequentially. Looking ahead to Q4, we expect interest expense to increase by approximately $11 million from Q3. Turning to depreciation and amortization, it was $117 million in Q3, up $7 million sequentially. Looking ahead to Q4, we expect the increase in depreciation and amortization to be more pronounced than typical given the recent deployment of several new capabilities related to Commonwealth. As a result, we expect depreciation and amortization expense of roughly $130 million.