LPL Financial : Q1 2024 Earnings Transcript

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EDITED TRANSCRIPT

LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

EVENT DATE/TIME: APRIL 30, 2024 / 9:00PM GMT

OVERVIEW:

Company Summary

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Dan Hogan Arnold LPL Financial Holdings Inc. - President, CEO & Director

Matthew Jon Audette LPL Financial Holdings Inc. - CFO & Head of Business Operations

C O N F E R E N C E C A L L P A R T I C I P A N T S

Alexander Blostein Goldman Sachs Group, Inc., Research Division - Lead Capital Markets Analyst

Benjamin Elliot Budish Barclays Bank PLC, Research Division - Research Analyst

Daniel Thomas Fannon Jefferies LLC, Research Division - Senior Equity Research Analyst

Devin Patrick Ryan JMP Securities LLC, Research Division - MD, Director of Financial Technology Research & Equity Research Analyst Michael J. Cyprys Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

Steven Joseph Chubak Wolfe Research, LLC - Director of Equity Research

William Raymond Katz TD Cowen, Research Division - Senior Analyst

P R E S E N T A T I O N

Operator

Good afternoon, and thank you for joining the First Quarter 2024 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are the President and Chief Executive Officer, Dan Arnold; and Chief Financial Officer and Head of Business Operations; Matt Audette. Dan and Matt will offer introductory remarks, and then the call will be open to the questions.

The company would appreciate if analysts would limit themselves to 1 question and 1 follow-up, each. The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com.

Today's call will include forward-looking statements, including statements about LPL financials, future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks of management foresees. Such forward-looking statements reflect management's current estimates and beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements.

For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission.

During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release which can be found at investor.lpl.com.

With that, I would now like to turn the call over to Mr. Arnold.

Dan Hogan Arnold - LPL Financial Holdings Inc. - President, CEO & Director

Thank you, Michelle, and thanks to everyone for joining our call today. Over the past quarter, our advisors continue to provide their clients with personalized financial guidance on the journey to help them achieve their life goals and dreams. To help support that important work, we remain focused on our mission: taking care of our advisors so they can take care of their clients.

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

During the first quarter, we continued to see the appeal of our model grow due to a combination of our robust and feature-rich platform, the stability and scale of our industry-leading model, and our capacity and commitment to invest back into the platform. As a result, we continue to make solid progress and helping advisors and institutions solve challenges and capitalize on opportunities better than anyone else and thereby serve as the most appealing player in the industry.

With respect to our performance, we delivered another quarter of solid results while also continuing to make progress on the execution of our strategic plan. I'll review both of these areas, starting with our first quarter business results. In the quarter, total assets increased to $1.4 trillion as continued solid organic growth was complemented by higher equity markets. Regarding organic growth, first quarter organic net new assets were $17 billion, representing 5% annualized growth. This contributed to organic net new assets over the past 12 months of $96 billion, representing approximately an 8% growth.

In the first quarter, recruited assets were $20 billion, which represents a quarterly record, excluding periods when onboarding large institutions. This outcome was driven by the ongoing enhancements to our model as well as our expanded addressable markets.

Looking at same-store sales, Our advisors remain focused on taking care of their clients and delivering a differentiated experience. As a result, our advisors are both winning new clients and expanding wallet share with existing clients, a combination that drove solid same-store sales in Q1. At the same time, we continue to enhance the advisor experience through the delivery of new capabilities in technology and the evolution of our service and operations functions. As a result, asset retention for the first quarter was approximately 97% and 98% over the last 12 months.

Our first quarter business results led to solid financial outcomes with adjusted EPS of $4.21.

Let's now turn to the progress we made on our strategic plan. Now as a reminder, our long-term vision is to become the leader across the advisor center marketplace. To do that, our strategy is to invest back into the platform, provide unprecedented flexibility in how advisors can affiliate with us. And to deliver capabilities and services to help maximize advisors' success throughout the life cycle of the businesses.

Doing this well gives us a sustainable path to industry leadership across the advisor experience, organic growth and market share.

Now to execute on our strategy, we organize our work into 2 strategic categories: horizontal expansion, where we look to expand the ways that advisors and institutions can affiliate such that we are positioned to compete for all 300,000 advisors in the marketplace. And vertical integration, where we focus on delivering capabilities, technology and services, to help our advisors differentiate and win in the marketplace to be great operators of their businesses.

And with that as context, let's start with our efforts around horizontal expansion. Now over the first quarter, we saw strong recruiting in our traditional independent market, reaching a new quarterly high of approximately $15 billion in assets. At the same time, due to the ongoing appeal of our model and the evolution of our go-to-market approach, we maintained our industry-leading win rates while also expanding the breadth and depth of our pipeline. With respect to our new affiliation models, strategic wealth, employee and our enhanced RIA offering, we delivered another solid quarter, recruiting roughly $2 billion in assets. And as we look ahead, we expect that the increasing awareness of these models in the marketplace and the ongoing enhancements to our capabilities will drive a sustained increase in their growth.

Next, in Q1, we added approximately $3 billion of recruited assets in the traditional bank and credit union space which continues to be a consistent contributor to organic growth.

During the quarter, we also continued to make progress with the large institution marketplace where we announced that Wintrust Financial will onboard 2 of its wealth management businesses for our institution services plan.

And at the same time, we continued our preparation to onboard the retail wealth management business of Prudential Financial. Collectively, these 2 deals will add approximately $66 billion of brokerage and advisory assets by early 2025.

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

Now as a complement to our organic growth, we also announced the planned acquisition of Atria Wealth Solutions, which supports approximately 2,400 advisors and 150 banks in credit unions, managing approximately $100 billion in client assets. This transaction will give Atria advisors access to our differentiated capabilities, technology and service. We are on track to close the transaction in the back half of this year and complete the conversion in mid-2025.

And finally, we're seeing solid momentum with our liquidity and succession solution as demand continues to build with existing LPL advisors while also creating interest with advisors outside our ecosystem, including our first signed external deal in the quarter.

Now within our vertical integration efforts, we remain focused on investing back into the model to deliver a comprehensive platform of capabilities, services and technology that help our advisors differentiate and win in the marketplace and run thriving businesses. As a part of this effort, we continue to make progress across several key areas of focus, including our ongoing journey to build a world-class wealth management platform.

And within that body of work, we are focused on meeting the evolving investment needs of our advisors and their clients, including the increasing interest for non-traditional investment products. To help solve for that demand, we are reimagining the end-to-end experience of our alternatives platform, including enhancing our custodial and operational capabilities for alternative investments, making it simpler and easier to utilize, manage and transact these products. And at the same time, expanding our alternative investment product offering, where over the last year, we have more than doubled the number of products available for advisors to utilize.

Another key area within our vertical integration efforts is the continued enhancement of the experience our advisors deliver to their clients. One of the primary ways we do that is providing increased flexibility for advisors to tailor their ideal client experience. For example, we designed Account View, our end-client digital platform, so an advisor can personalize access to features on a client-by-client basis.

In addition, we recently launched a series of enhancements to our end-client statement which provides increased flexibility in the channel of delivery and the cadence that clients receive the information, also adding a unique interactive digital experience to further enrich the traditional statement.

Now our continued work on our services portfolio is also a key area of our vertical integration strategy. And as a reminder, these services help solve for a broad spectrum of advisors and institutions' need, and in doing so, help position them to deliver great advice and be great operators of the businesses. In that spirit, we are developing a number of solutions that help advisors expand the breadth and depth of their advice, including the more effective utilization of financial planning, catering to the more complex needs of high-net-worth investors and delivering more personalized investment research. For example, as a part of our efforts to enrich our planning capabilities, last year, we introduced our tax planning service, which is seeing strong demand in the market. And more recently, we expanded our high-net-worth services to enhance our advisor support of their high-net-worth prospects and clients through complex case design, estate planning and investment product analysis. And the early indications have been favorable.

Finally, we're in pilot with our latest innovation, our new Outsourced Chief Investment Officer service, which provides advisors with personalized investment expertise powered by LPL Research. And based on the initial feedback, this is unlocking additional growth and efficiency in our advisors' practices.

Collectively, these services help expand our advisors' value proposition to their clients, enable them to win new prospects, and increase the differentiation and appeal of our platform. And as we move forward, we will continue to solve for our advisors' needs at every stage of their practice in order to help them build the perfect businesses for themselves, and ultimately maximize their success.

In summary, in the first quarter, we continued to invest in the value proposition for advisors and their clients while driving growth and increasing our market leadership. As we look ahead, we remain focused on executing our strategy to help our advisors further differentiate and win in the marketplace and as a result, drive long-term shareholder value.

With that, I'll turn the call over to Matt.

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

Matthew Jon Audette - LPL Financial Holdings Inc. - CFO & Head of Business Operations

Alright. Thank you, Dan, and I'm glad to speak with everyone on today's call. As we move into 2024, we remain focused on serving our advisors, growing our business and delivering shareholder value. This focus led to another quarter of strong organic growth in both our traditional and new markets, and we are preparing to onboard the wealth management businesses of Prudential and Wintrust.

In addition, we continue to build momentum in our liquidity and succession solution, including our first signed deal with an external practice. We also entered into an agreement to acquire Atria Wealth Solutions, which we plan to onboard to our platform in mid-2025. So as we look ahead, we remain excited by the opportunities we have to serve and support our nearly 23,000 advisors while continuing to invest in our industry-leading value proposition and drive organic growth.

Now let's turn to our first quarter business results. Total advisory and brokerage assets were $1.4 trillion, up 6% from Q4 as continued organic growth was complemented by higher equity markets. Total organic net new assets were $17 billion or approximately a 5% annualized growth rate.

Our Q1 recruited assets were $20 billion, which, prior to large institutions, was the highest quarter on record. Looking ahead to Q2, our momentum continues, and we are on pace to deliver another strong quarter of recruiting.

As for our Q1 financial results, the combination of organic growth and expense discipline led to adjusted EPS of $4.21.

Gross profit was $1.66 billion, up $59 million sequentially. As for the components, commission advisory fees net of payout were $260 million, up $41 million from Q4, primarily driven by higher advisory fees and a seasonally lower production bonus.

Our payout rate was 86.6%, down 100 basis points from Q4, largely due to the seasonal reset of the production bonus at the beginning of the year. Looking ahead to Q2, we anticipate our payout rate will increase to approximately 87.5%, primarily driven by the typical seasonal build in the production bonus.

With respect to client cash revenue, it was $373 million, down roughly $1 million from Q4.

Looking at overall client cash balances, they ended the quarter at $46 billion, down $2 billion sequentially, driven by advisory fees paid during the quarter. Outside of those fees, cash balances were flat to Q4.

As for our ICA portfolio, the mix of fixed rate balances increased to roughly 65%, within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 323 basis points in Q1, up 6 basis points from Q4. As for Q2, based on our client cash balances and interest rates are today, we expect our ICA yield to decline by a few basis points.

As for service and fee revenue, it was $132 million in Q1, up $1 million from Q4. Looking ahead to Q2, we expect service and fee revenue to be roughly flat sequentially.

Moving on to Q1 transaction revenue, it was $57 million, up $3 million sequentially as trading volume increased slightly. As we look ahead to Q2, based on typical seasonality and activity levels to date, we would expect transaction revenue to decline by a few million from Q1.

Now let's turn to expenses starting with core G&A. It was $364 million in Q1. For the full year, we continue to anticipate core G&A to be in a range of $1.455 billion to $1.490 billion. As a reminder, this is prior to expenses associated with Prudential and Atria.

Moving on to Q1 promotional expense. It was $132 million, down $6 million from Q4 due to lower onboarding costs for large institutions. Looking ahead to Q2, we expect promotional expense to increase by approximately $10 million sequentially due to increased transition assistance resulting from strong recruiting and large institution onboarding as we prepare for Prudential to join us in the fourth quarter.

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

Looking at share-based compensation expense, it was $23 million in Q1, up $7 million from Q4. As we look ahead, we anticipate this expense to be at a similar level in Q2.

Turning to depreciation and amortization. It was $67 million in Q1, down $1 million sequentially. Looking ahead to Q2, we expect depreciation and amortization to increase by roughly $5 million sequentially, which includes technology development for Prudential.

Regarding capital management, our balance sheet remains strong. We ended Q1 with corporate cash of $311 million, up $127 million from Q4. Our leverage ratio was 1.6x, flat with Q4.

As a reminder, we expect to close our acquisition of Atria in the second half of this year and plan to finance the transaction through a combination of cash and debt. Following the close, we continue to expect leverage to be approximately 2.0x, near the midpoint of our target leverage range.

As for capital deployment, our framework remains focused on allocating capital aligned with the returns we generate: investing in organic growth first and foremost, pursuing M&A where appropriate and returning excess capital to shareholders.

In Q1, we deployed capital across our entire framework as we continue to invest to drive and support organic growth, allocated capital to M&A within our liquidity and succession solution, and return capital to our shareholders, repurchasing $70 million of shares in January. We paused share repurchases for the last 2 months of the quarter to ensure we maintain a strong and flexible capital position when we close on our acquisition of Atria. Following the close expected in the second half of this year, we will evaluate restarting share repurchases consistent with our existing capital framework.

In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we see to continue investing to serve our advisors, grow our business and create long-term shareholder value.

With that, operator, please open the call for questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions). Our first question is going to come from the line of Devin Ryan with Citizens JMP.

Devin Patrick Ryan - JMP Securities LLC, Research Division - MD, Director of Financial Technology Research & Equity Research Analyst

First question. I just wanted to dig a little bit on recruited assets, had a really nice quarter, up 57% year-over-year, but also a bit stronger than the net new asset trend and maybe that's just a January dynamic. But just want to maybe dig in a little bit about the divergence that you saw this quarter between these 2 metrics. And then more broadly on recruited assets and the outlook, it sounds like you're still seeing a really good recruiting pipeline. So just love to get a little more context on that and kind of what you're seeing between both legacy channels and some of the newer affiliation channels.

Dan Hogan Arnold - LPL Financial Holdings Inc. - President, CEO & Director

Yes. So Devin, it's Dan. Let me try to go in maybe a sequential order around those questions if that is helpful. So first, maybe let me just take Q1, I think, organic growth, which I heard inside your question. So during the quarter, we posted 5% organic growth. And given the seasonality we typically see in Q1, we would have expected that to be more like 7%. And while the underlying drivers of the business were strong, there were a couple of things in the quarter that drove the roughly 2% difference.

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

The first was some impact from the timing of onboarding recruiting, which equated to roughly 1% to Q1 organic growth. And that's just really a function of the recruiting, as we mentioned, I think, back in January's call, a lot of it happening in the second half of the quarter. And that gives you a little tailwind going into the second quarter.

And then the second thing that we mentioned last quarter as well was that there were 2 acquired practices that departed in January which accounted for a 1% impact to our attrition. So outside of those impacts, which we would categorize as a bit of noise, the underlying drivers that set us up well for the rest of the year remain intact and that's where you were getting at that record level of recruiting, the strongest pipelines that we've had ever historically and our continued low levels of advisor attrition that was consistent with the experience over the last couple of years. So we feel good coming out of the quarter and how we see that opportunity emerge over the remainder of the year.

I think you mentioned a bit of the -- perhaps some -- how we think about new stores specifically or recruiting going forward, maybe it was second part of your question. And I think, look, we had a really nice quarter, $20 billion in recruited assets. You see significant growth year-on-year across all affiliation models. And at the same time, an expanded addressable market, our increasing win rates, it's driving that deep pipeline that I mentioned as we -- as deep a pipeline as we've seen and certainly is supportive of where we head going forward. And that gives us a really solid conviction that we're well positioned to continue to win a larger share of advisors in motion with respect to recruiting. And I think when you add them to the committed wins we have in the large institution marketplace, that sets up with a solid opportunity with respect to new store sales as we move forward. So hopefully, that gives you a little color on the quarter and then a little color around the recruiting as well.

Devin Patrick Ryan - JMP Securities LLC, Research Division - MD, Director of Financial Technology Research & Equity Research Analyst

Yes thanks, Dan. Really helpful. And just a follow-up, this is kind of interrelated, but just on the economics of all that. So the theme of competition in the space has continually been coming up. I know it's always a competitive market, so nothing necessarily new. But we look at transition assistance, it's up 6% sequentially, 25% year-over-year. I know that's directionally trending with growth. But can you maybe just talk a little bit about kind of the competitive dynamics and kind of the economics around recruiting and transition assistance? And how you feel like LPL is positioned around kind of those economics, let's say, transition deals are maybe a little bit higher than they have been.

Dan Hogan Arnold - LPL Financial Holdings Inc. - President, CEO & Director

Yes. Let me start that and then, Matt, you add any color on economics you think would be helpful. So look, I think with respect to the recruiting environment, right, we always start with the opportunity set. Advisor movement over the last 12 months has hovered around 5%, which remains lower than the historical norms. That said, despite the low overall movement, our win rates continue to move higher. And certainly, that's an encouraging trend relative to how we think about the opportunity set.

And then two, I think when we think about the environment, we look at the competitive landscape and the participants have remained largely the same. As do the priorities that advisors are looking for when they evaluate their options to potentially move. And as a reminder, the first priority is around capabilities, technology and service. That's where we continue to further distinguish ourselves as we invest back into our model.

Next is the ongoing economics, which haven't changed significantly over time. And I think in the independent space, especially create a compelling and interesting scenario for advisors. And then lastly, you get transition assistance rates, which we've seen pretty stable over the last year and feel good about how we're well positioned across our portfolio of different affiliation models in terms of how we support that advisor to make that transition.

So given all of that, the strength of our overall value proposition continues to resonate, and we remain really confident that the ongoing appeal of our model positions us well to sustain our industry-leading win rates and market share. I don't know, you want to add anything to that, Matt?

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

Matthew Jon Audette - LPL Financial Holdings Inc. - CFO & Head of Business Operations

I wouldn't, not really, add to that. I'd just underscore the point, I think on, Devin, on capabilities is really what matters from a decisioning standpoint on advisors and where they're joining firms. And I think from a TA standpoint, as Dan said, the rates have really been stable for quite a while. I think it's for us and the growth there, it's more about the recruited AUM itself that's coming on board, which I know you see and follow the numbers. But Q1, which is typically the seasonally lowest quarter of the year, bringing in $20 billion prior to any large financial institutions, I think is the driver there. So it's about the level of recruiting. TA rates have been pretty stable.

Operator

And our next question is going to come from the line of Alex Blostein with Goldman Sachs.

Alexander Blostein - Goldman Sachs Group, Inc., Research Division - Lead Capital Markets Analyst

You guys mentioned liquidity and succession a couple of times this afternoon, and it's been coming up in prior calls as well. So maybe level set for us kind of where that business sits today, just maybe in terms of size or AUM, however you want to frame it? And how meaningful do you expect this to be to your organic growth targets, which I guess, continue to be in the high single-digit range in terms of M&A over the next couple of years?

Matthew Jon Audette - LPL Financial Holdings Inc. - CFO & Head of Business Operations

Yes, Alex, I'll start there just on some of the -- maybe the economics and capacity parts of your question. I think we're quite bullish on this offering and the solution. The economics are compelling. And I think from a capacity standpoint, I think there are ultimately limitations on the number of deals we can do in a given year. So if you look at what we've done since we launched the program, it's been 27 to date, I think when we look at our team and capacity and how you bring these practices on board, I think probably max capacity per year, I would think about in the 30 to 40 zone. So then when you put the financial aspects against that from a capital standpoint, we're applying capital consistent with our M&A framework. So they will deploy capital here at about the 6 to 8x EBITDA range. These deals are relatively small in the $10 million to $20 million zone, I would say, skewed towards -- closer to the $10 million side of it.

And then financially, the economics are pretty attractive in that the ROA of these firms effectively doubles when we purchase them. So if you're in the thick of the 30 basis point zone, we'd be earning 60 basis points once we own the practice. And that's largely a function of the reduced payout to advisors. So that's where you would see those economics show up.

So those are the economics. So I think it's really financially compelling, but I think maybe even more exciting or more compelling is really the strategic value of this solution. Maybe, Dan, may be better, if you want to jump in there?

Dan Hogan Arnold - LPL Financial Holdings Inc. - President, CEO & Director

(inaudible).

Alexander Blostein - Goldman Sachs Group, Inc., Research Division - Lead Capital Markets Analyst

Dan, I'm sorry, I don't think we could hear you, unfortunately. I don't know if it's my phone or maybe other people are having the same issue.

Dan Hogan Arnold - LPL Financial Holdings Inc. - President, CEO & Director

It was user error on my part. Sorry about that. So let me start over. And again, I think as we've discussed before, our opportunity set is really driven by trying to solve that big strategic question of how do we help potentially as many as 1/3 of advisors retire and transition their businesses over

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

the next 10 years. And while there are a variety of options that are available in the marketplace, we think ours is really differentiated and a compelling one in a very elegant way to help these advisors transition their practices to take care of them, to take care of their team, to take care of their clients and ultimately create a bridge to the next entrepreneurial leader or owner.

And in that spirit, I think since we've rolled it out to our advisors, it's been -- which was late in 2022, it's been very, very appealing for those that are exploring those possibilities. And as Matt said, we closed roughly 27 deals to date. And given the success with our existing advisors, now we've extended the question to the external marketplace and in the fourth quarter, began to explore how we could help those advisors that aren't on the LPL platform with the same type of solution to that big question of how do they transition their practices. And as we mentioned, we were fortunate enough to close our first deal in Q1, and we've got a pretty solid pipeline building there.

So I think we see it as this multidimensional opportunity of supporting and helping our existing advisors which extend those assets on our platform for another generation of advisors and then, two, also, as a catalyst for growth to complement the other opportunities that we focus on and have to drive growth. And we think it's a compelling differentiated solution. A little hard to replicate. So we think it will resonate in the external market. I hope that helps.

Alexander Blostein - Goldman Sachs Group, Inc., Research Division - Lead Capital Markets Analyst

Great. No, that's very helpful. So my second question, kind of related, I guess, to some of the new initiatives. You guys have been super busy in the last few months with a number of deals, Atria obviously being on the larger size. How should we think about the capacity for incremental M&A, call it, over the next 12 months as we're sort of waiting for Atria close? And then obviously, you guys have to integrate it. And then as part of this Atria conversation, maybe you can hit on the competitive dynamics in the bank channel post this deal, given that they're a pretty sizable player there.

Dan Hogan Arnold - LPL Financial Holdings Inc. - President, CEO & Director

Yes. So I think -- listen, relative to onboarding these programs and making sure that we have the ability to support and scale them, I think it is something that we've been working on since the good fortune of onboarding some of the larger financial institutions, BMO and M&T in 2021. And so our guiding principle when we explore any growth initiative, whether it's organic win, like large institutions or even an acquisition like Atria is to ensure that we're going to continue to deliver an exceptional experience to our existing advisors and that then we provide a seamless transition for advisors that are joining our platform. And in that spirit, we've continued to evolve our transition approach because we've iterated, we've improved and gotten a lot better over the last few years. We established a disciplined operating rigor. We use seasoned run books and automation, all in the spirit of delivering a high-quality successful outcomes that are repeatable and sustainable. And with each iteration, as I mentioned, we continue to enhance the efficiency and efficacy of how we execute the onboarding process.

Now the important part about that is that certainly then improves and enhances the quality that we deliver but also the pace at which we can deliver these. And I think as we continue to go forward with each iteration, we adopt new ideas, new concepts, new ways of which to do them in a simpler and faster way, and we'll continue to work on that and iterate that I think will help us not only deliver an industry-leading onboarding experience but do it in the simplest and fastest way possible in the market place. So that's sort of the context of how we think about increasing the capacity to support that ongoing opportunity.

I think -- and then your second question, remind me what it was.

Alexander Blostein - Goldman Sachs Group, Inc., Research Division - Lead Capital Markets Analyst

Sorry. Just the competitive positioning in the banks channel, institutions channel after you guys integrate Atria because they're a sizable player there, and now you have obviously more presence in that channel with them eventually under your umbrella.

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APRIL 30, 2024 / 9:00PM, LPLA.OQ - Q1 2024 LPL Financial Holdings Inc Earnings Call

Dan Hogan Arnold - LPL Financial Holdings Inc. - President, CEO & Director

Yes. So again, I think we've seen that marketplace as sort of an emerging opportunity where we took a novel concept back in 2020 as we began to offer it to the marketplace and establish a significant advantage from just having market share developing and growing IP around how to support and serve those clients. And then ultimately, continuing to evolve our capability set to make sure that we can help them in terms of their risk profile or muster around this business line or service, increase or enhance financial results or manage the performance of their programs to create operational efficiency and scalability into their programs and then ultimately, to support them with growth. If we can do that within this value proposition and then have the advantage of the history and the experience of operating and working with these clients, the better practice at onboarding through the change management. A very complex effort. But that gives us a distinctive advantage in the marketplace that we think really resonates when we go out and share that with any prospective new clients.

So I think we feel great about our positioning in the marketplace, the insights and perspectives that we've been bringing forward that have enriched our value proposition that again, it's hard to do if you hadn't had the experience from doing so. That's how we think about that leadership. We think it's pretty durable and an interesting ongoing growth opportunity.

Operator

And our next question is going to come from the line of Steven Chubak with Wolfe Research.

Steven Joseph Chubak - Wolfe Research, LLC - Director of Equity Research

So I wanted to start with a follow-up on just the liquidity and succession discussion. Matt, you alluded to some of the limitations on the pace of deployment. But I was hoping you could just speak to the cadence now that this has been launched externally that we should be contemplating. And given the higher year-on-year payout ratio guide for 2Q, when should we expect to see those reductions in the advisor payout rate as some of that liquidity and succession accretion really starts to come through?

Matthew Jon Audette - LPL Financial Holdings Inc. - CFO & Head of Business Operations

I think on -- so on that last point, right? I think when you look at the payout, there's a handful of things going on. But I think you're already seeing it within the payout rate just based on the 27 deals we've done so far. So maybe, if you just looked at payout rate year-over-year for Q1, so just to eliminate kind of seasonal production build. And as a reminder, the Q1 payout for last year had a 40 basis point kind of catch-upone-timer. So overall, payout was flat year-over-year.

And there are 2 things in there that actually drove out up a little bit. The first is, and kind of building on what Dan was just talking through, the institutions channel and the growth in the institutional channel, which I think you know has a much higher payout than the average, also has a much lower cost to serve, lower TA rates. When you get down to things, bottom line economics like op margins quite compelling. But if you're just looking at the payout rate, you're going to see that grow as that business grows.

And then we had some pricing reductions or pricing investments on our corporate advisory platform. We had announced those last year. Those took effect on the first quarter. So had those 2 things, that bias payout up. But then liquidity and succession did drive payout down to offset that. So there are moving parts in there, but you are absolutely starting to see that show up in the payout rate. Maybe not on an individual quarter-to-quarter just given the size of our overall business, but you are starting to see that over time.

I think on the capacity point, and not sure where you're specifically going with that. So maybe just a follow up if we're not hitting that. But I think overall, when you look at whether it's internal or external, and you think through the process to onboard these teams, make sure we're putting the proper field management in place, all the complexities associated with it, that's really where the 30 to 40 deals per year comes from just to make sure that we're bringing those on board in a way that really delivers the strategic value that Dan was describing earlier.

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