LPL Financial Holdings Inc. (LPLA) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later there will be a question-and-answer session and instructions will follow at that time. As a reminder, today's call is being recorded. I would now like to turn the conference over to Chris Koegel, Head of Investor Relations. You may begin.

Thank you, Shannon. Good morning, and welcome to the LPL Financial first quarter 2015 earnings conference call. On the call today is Mark Casady, our Chairman and Chief Executive Officer, who will provide his perspective on our business. Following his remarks, Dan Arnold, our current President and former Chief financial Officer, will speak to our financial results and capital deployment. Tom Lux, our Acting Chief Financial Officer, is also on the call today. Following the introductory remarks, we will open the call for questions. We would appreciate if each analyst would ask no more than two questions. Please note that we have posted two supplemental financial presentations on the Events section of the Investor Relations page on lpl.com. Before turning the call over to Mark, I would like to note that comments made during this conference call may include certain forward-looking statements. These may include statements concerning such topics as our future revenue, expenses and other financial and operating results, improvements in our risk management and compliance capabilities, the regulatory environment and its expected impact on us, future regulatory matters, industry growth and trends, our business strategies and plans, as well as 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 in our latest SEC filings to appreciate those factors that may cause actual financial or operating results, or the timing of matters to differ from those contemplated in such forward-looking statements. In addition, comments during this call will include certain non-GAAP financial measures covered by SEC Regulation G. For a reconciliation of these measures, please refer to our earnings press release. With that, I'll turn the call over to Mark Casady.

Thank you, Chris, and thank you, everyone, for joining our call. Today, I'll cover four topics. I'll start with our first quarter results. Second, I'll update you – continued progress on compliance and regulatory matters. Third, I'll discuss our view of the Department of Labor's latest proposal on fiduciary standards and how it relates to our business. Finally, I'll describe our long track record as a fiduciary for our advisory business. We're pleased to see continued strong business expansion in the first quarter. We grew assets 9% year-over-year to reach $485 billion of total assets under custody. However, earnings gains from asset growth will offset by three expected headwinds, elevated levels of regulatory charges, declines in cash sweep revenue, and timing differences from holding both of our spring advisor conferences in the first quarter of this year. As a result, we generated $0.64 of adjusted earnings per share, and Dan will discuss the drivers of these financial results in greater depth. Two important sources of our asset growth are our advisory asset gathering and our business development. Our net new advisory asset growth rate of 12% over the past year is the best among publicly traded companies in the retail advice industry, including RIA custodians. The contribution from new business development combined with the growth from our existing clients drove our record $5.2 billion of net new advisory assets this quarter. Our industry-leading business development efforts continue to be a key driver of asset growth. We added 62 net new advisors this quarter for a total of 372 over the past 12 months. We continue to be encouraged by our healthy 2015 business development pipeline and leading recruiting capabilities that position us to drive future asset growth. One example of how our value proposition continues to attract new clients is the relationship with Zions Bancorp. Zions have seven separate bank brands that operate in more than 450 branches across 11 states. A unique ability to broaden their investment services at all levels of wealth, including the advisory programs, was a key factor in winning Zions business. We look forward to working with Zions to help serve and grow their advisor and investor basis. Next I'll discuss our continued progress on compliance and regulatory matters. We continue to work diligently to upgrade our people, process and technology to help ensure that we have leading risk management capabilities. The cost of these investments, which help better protect our investors and lower our risk profile, are a component of our core G&A. In 2013, we committed to a period of up-weighted investment to reengineer and enhance our compliance capabilities. Since then, we've expanded our personnel and legal risk and compliance functions by over 50%. We've also increased layers of supervisory and compliance review, particularly around more complex products, and implemented a number of new systems. This work continues in 2015. We believe we will substantially complete our period of up-weighted investment this year, but it's on a path to lower expense growth going forward. We're also pleased with our work in resolving past regulatory issues. The regulatory charges for resolution and remediation are reported as a separate component of G&A. In the first quarter of this year, we recognized charges of $11 million for regulatory matters as we continued to assess identified issues and work with regulators towards a more normalized risk profile. These expenses include, among other things, estimated losses related to past issues and legal and consulting fees incurred during the period. Our 2014 regulatory charges were elevated and we expect regulatory charges in 2015 to remain elevators we work through past regulatory issues. However, we do not expect the average quarter for the remainder of this year to be consistently as high at the $11 million of expense in the first quarter. Most importantly, we have made significant progress on some of our largest historical matters. In the months ahead, you will likely see announcements by regulators. It may be reassuring to know that the estimated expenses for those matters have already been recorded on our financials based on our assessment of the issues involved. We anticipate actually in this period of heightened regulatory charges towards the end of 2015. I'll now discuss our view of the Department of Labor's recently published re-proposal for its fiduciary rule. The focus of the DOL's effort is to ensure financial advisors who are acting in the best interest of their clients when serving retirement account holders. LPL has publicly supported the DOL's intent for several years, and our mission is to enable objective financial guidance for everybody. We are committed to working constructively towards the final rule of industry participants, the Obama administration and Congress. We have seen the Department of Labor rule proposal evolve significantly over the past four years, and we believe the rule will continue to evolve as the Department of Labor seeks to best protect investor interest and preserve consumer choice. Even as we work to improve the rule for investors, we will believe the rule as proposed would not have a material long-term adverse financial impact to our business. This is for the following reasons. As written, the current version of the proposal would not permit sales of certain alternative investments in brokerage retirement accounts. But such sales represent a minor contribution to our overall financial performance. In 2014, sales of alternative investments in brokerage retirement accounts represented approximately 2% of gross asset sales and gross profit. These figures include commissions, sponsor revenues and account fees. If alternative investments were not ultimately permitted in retirement accounts, we would expect retail investors to use our other offerings, the substitution of either brokerage mutual funds or advisory accounts for alternative investment sales with less than the potential profit impact. We've included additional disclosure and a supplemental presentation that is available on our Investor Relations website. Additionally, our advisors on our business has exceeded by always putting investors first. LPL's mission is to enable advisors to provide objective financial advice. This model has attracted and retained over 14,000 advisors who operate in their local communities with their own names on the doors. In their model, the clients are earned one at a time based on each advisor's expertise and local reputation as well as referrals from satisfied clients. We remain confident on our advisors' ability to help investors save their future financial goals and our business model's continuing ability to succeed in the marketplace. Finally, I'll describe LPL's long track record acting as a fiduciary on our advisory business, giving us already developed capabilities and experience to support the proposed changes. We began the shift to advisory business over two decades ago. As an early leader in this space, we launched our first advisory platform in 1991; over the next decade, expanded our advisory capabilities by adding several centrally managed platforms. In 2008, we launched our unique hybrid RIA platform, creating even greater flexibility for advisors to conduct advisory business through LPL. As a result, 90% of our advisors are currently licensed to provide both advisory and brokerage services to their clients and are already experienced fiduciaries for their clients. The evidence of our advisory shift is perhaps most visible on our sales and asset mix. In 2014, 62% of our gross asset sales were advisory, up from 45% five years ago. And more than $180 billion of our total assets are now on advisory platforms. Still, we believe there will continue to be a meaningful level of brokerage sales activity, as many investors are well served in brokerage format. These investors often want to pay a single fee for guidance related to the selecting and executing a specific transaction. This is particularly true for investments and retirement accounts that are being held for a long period of time. The combination of the shift to advisory and our recurring commission stream from historic brokerage assets into today, more than three quarters of LPL's gross profit comes from recurring revenue sources. Our recurring revenue and well-developed multi-platform offering allow us to withstand industry changes quite well. Furthermore, the depth, balance and flexibility of our business model should provide a competitive advantage in any change that may come. And with that, I'll now ask Dan to offer his CFO perspective as he closes out his final quarter of service in that role. I'd also like to thank him for his leadership over the past three years as CFO and congratulate him on his new role as President. Dan?

Thank you, Mark. Today, I'll briefly summarize our first quarter financial results and then expand further on the four key elements that drive shareholder value creation; gathering assets, growing gross profit, managing expenses, and allocating capital. In the first quarter, we generated adjusted earnings per share of $0.64, a decline of $0.05 year-over-year. Solid business growth in assets and gross profit paired with share repurchases added $0.05 to earnings per share. At the same time, regulatory-related charges, decline in cash sweep revenue, and the timing of our advisor conference collectively lowered adjusted earnings per share by $0.10. Total assets grew by $10 billion in the quarter and $38 billion in the past year. Our hybrid RIA platform contributed most of the asset growth as it expanded to $105 billion or by more than 50% compared to last year. As Mark discussed, our advisory sales now represent almost two-thirds of our gross asset sales. This will continue to drive a mix shift towards advisory assets, which receive higher level of investor service and are more profitable for us. Our asset growth of 9% year-over-year generated a 7% increase in gross profit to reach $355 million. Excluding the expected quarterly cash sweep revenue decline of $2.4 million, our gross profit grew 9%, which is in line with asset growth. The main driver of the cash sweep revenue decline was a 9 basis point reduction in bank yields compared to last year. Long-term ICA contract step-downs decreased bank spreads by the expected 13 basis points in January while the average fed funds rate increased 4 basis points year-over-year. As we previously discussed, the growth rate of our gross profit is expected to exceed that of our net revenue simply as a result of our hybrid RIA advisory business growing more rapidly than our corporate advisory solution. Under accounting standards, the hybrid RIA advisory fee charged to clients is not reflected as revenue on LPL's income statement, whereas this fee is recorded as revenue for corporate RIA platform business. Nonetheless, we are in similar levels of gross profit for advisory business regardless of the platform affiliation. This quarter is a good illustration of this contouring of our income statement, as 9% asset growth generated 7% increase in gross profit on a 2% increase in revenue. Turning to expenses, total quarterly G&A grew by 16% compared to last year. Nearly half of this increase was due to the 7.4% growth in core G&A expense, which excludes promotional and regulatory related charges. Core G&A is on track to achieve our full-year target range of 7.5% to 8.5%. The remaining increase in G&A was driven by regulatory-related charges and promotional expenses. Regulatory-related charges were up $10 million this quarter and promotional expense increased $8.5 million primarily due to holding two of our major advisor conferences in the first quarter. We will see a $10 million sequential reduction in conference expenses in the second quarter as a result of the timing. With core G&A in line with guidance, we see opportunity to drive longer-term operating leverage as regulatory charges decline and cash sweep revenues stabilize. This quarter, our adjusted EBITDA declined 4.5% while adjusted earnings was down by 11%. This difference was primarily driven by an increase in depreciation and amortization expense related to the opening of our San Diego Tower. Because the tower opened in March of last year, this depreciation expense was not reflected in the run rate expenses in the first quarter of 2014. For the remainder of 2015, this change will be less significant in our quarterly comparisons. Finally, I'll discuss our capital allocation to further enhance long-term shareholder value. We continue to invest in the business allocating $14 million to capital expenditures while returning $54 million of additional capital to shareholders through $24 million of dividends and $30 million of share buyback. Our board has approved a new tranche of $200 million of share repurchase capacity that is in addition to the $63 million that remained at the start of the second quarter from our previously authorized repurchase plans. As I complete my last earnings call, I'm pleased to highlight a key measure of the success with LPL's strong cash flow generation and capital-light model. Since our IPO four years ago, we have returned more than $1.2 billion of capital through share repurchases and dividend as we work to create long-term shareholder value. That concludes our prepared remarks. Mark and I look forward to answering your questions. Operator, please open up the call.

Thank you. Our first question is from Chris Harris with Wells Fargo. You may begin.

Thanks. Good morning, guys.

Good morning.

Good morning.

First question on your revenue sharing that shows up in your asset-based revenues. I wonder if you guys could help us out with figuring out how much of that revenue bucket you actually get from annuities. And assuming there were some pressure on that, is it safe to assume that those revenues drop down to your bottom line and close to 100% margin? Or are there things in your operating model that you guys could do to help offset or lessen the impact if there was any pressure from that?

Chris, let me take a stab at it. It's Dan. I think if you look at our overall sponsor relationships and the revenue support that we receive for them, it generally comes from obviously insurance companies that we sell their annuity products and to a broader extent, mutual funds. And those are the two primary drivers of our sponsor revenue that makes up the significant amount. And so, with respect to annuities, you would typically see somewhere roughly around a third – 35% of that overall asset-based revenue being generated from annuities. And again, those are governed by long-term contracts that have rolling terms of 10 years on them. So there's sort of evergreen 10-year rolling contracts that have put in place and established the value that we provide in order to earn that sponsor support. And those contracts are typically governed by the assets under management associated with those products that we've sold. So, to the extent that there is product development or evolutionary changes associated with the products themselves, I think it's fair to explore how the sales commissions associated with that product evolution would tend to change over time, and certainly we've seen that historically. We've seen where primarily you saw just upfront commissions offered in the old sort of vintage forms of annuities and we've seen that evolve to where you see a more balance of commission paid over the entire time of the term of the contract. And so, I think that's where we see more evolutionary change associated with potentially how we earn revenue from those relationships as opposed to necessarily the sponsor revenue share that we earn from those relationships.

Okay. And just to clarify, the margin you guys get on that revenue share, the sponsorship fees, should we think about it being really, really high, or as I mentioned, if there's some pressure on that or the things you think you guys can do on the expenses to offset any of that?

Yeah, I think – yes. So, for the most part, the sponsor revenue would generally have very high margins associated with it. That said, you don't generate it unless you offer the holistic value proposition in the expense that comes associated with supporting and generating the original sale upfront. So if there was some material shift in that, and I think we would think about how do we overall support the overall distribution of that type of product line and ultimately the underlying cost associated with it.

Okay. Great. And then my follow-up, maybe for Mark. Is the DOL ruling or at least how it's proposed today, does it change how you guys approach advisor recruitment at all? In other words, are you guys kind of factoring in new recruits in a different way or are you maybe kind of looking at their product mix differently than perhaps you might have, say, a year or two ago?

It really hasn't affected recruiting – first of all, it's still early days. The Department of Labor ruling has just come out. We're all evaluating on hundreds of pages of information. So need to understand a bit more. But our recruiting has changed fairly dramatically since the end of 2008 for several reasons. One is the hybrid RIA solution that I think last year roughly 60% to 65% of the recruited class came to us in a hybrid RIA form. Hence we've been shifting the recruiting classes to more advisory-based advisors versus those who are predominantly in the commissions business because of the offerings that we have here. Secondly, the practices we're attracting are materially higher in average size versus our average existing LPL practice. That's because they are dealing with higher net worth clients and because they're just bigger practices that are moving mainly from the wirehouses or the biggest practices within our independent competitors. So the mix shift that's occurred is really about what we have on offer and we can do to support a practice, which is bringing a different mix to recruiting in any case. And that has been happening for several years. We don't really anticipate a change the way recruiting would function as we look at the DOL issue specifically in our first review of the proposed rules because, again, the shift for us has been to advisory as a dominant strategic intent for the company for many, many years, as you can tell from our remarks.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Christian Bolu of Credit Suisse. You may begin. Christian Bolu - Credit Suisse Securities (USA) LLC (Broker): Good morning.

Good morning. Christian Bolu - Credit Suisse Securities (USA) LLC (Broker): I have a question on, I guess, DOL rule. How should we think or who do you think about the cost implications of the rule and how it impacts maybe your longer term cost guidance?

Yeah. It's again too early to really know. We've certainly reviewed the idea that the contract that would occur between the retail investor and the advisor. As they think about their relationship, there is many aspects of it that to me look very similar to what was proposed by FINRA and the SEC back in the early 2000, essentially a way of disclosure that helps make sure the contract is clear. So that, to us, we've looked at before isn't particularly costly to do. There's other requirements such as historical performance and ongoing performance that looks like it's going to take some technology solutions and things to put in place. We're evaluating that now and need to spend more time on it. We also need to help work with the Department of Labor and others to talk about what's the best way to get to the core issue, which is how do you illustrate to a consumer the inherent conflicts that exist in any business. And we're big believers that that disclosure is smart to do. If you look at our website today, you can see our disclosure of things like revenue sharing. If you look at disclosure for the way payments are received, some of that is in prospectuses as well. So we're big believers that transparency is a good thing. So we like the heart of what the DOL is suggesting. There is always refinements that need to be there. I think when I think about G&A impact to try to get that specifically, most of this will be technology-based and we're good at building technology. It's what we do for a living. And so, as we look at it, it probably crowds out some other projects we might have otherwise liked to have done, and there'll certainly be a cost to putting this in place. But to my mind, you might see slightly elevated G&A but not something that would be permanent. It would be more about the technology to put in place. To do it at the scale we have to do it, it has to be a technology-based solution with technology-based delivery to make it really work for the consumer to see it and understand it correctly. Christian Bolu - Credit Suisse Securities (USA) LLC (Broker): Okay. So my take would be, I guess, it's probably not factored into your 2016 thinking just now until you have a chance to really go through the rule and get a better sense as you say.

Yeah. There is a lot of water to go under the bridge here on this regulation. First of all, there has to be the process of feedback and we know that the Department of Labor is quite good at listening. Just look at how much progress they've made since 2010 in terms of where they were then versus where they are now. And so we know them to be thoughtful about listening to issues that might invest – that might ultimately have an issue with the investor not having choice or not having the information they need. And again, I – from the preliminary work we've done of the contract while there is parts that really do need work, it will be a technology solution, which is a capital expenditure. And we spend a significant amount of capital already on technology. So we don't, at this point, see this being a major impact in 2016 or beyond. Christian Bolu - Credit Suisse Securities (USA) LLC (Broker): Okay. Thank you. That's helpful. And then just on the net new advisory flows, it's really been a big positive hope for you, very, very strong. Can I just ask in terms of just a longer term thinking of what that means for just commission revenues over time? Should you really be thinking about that as a really slowing down or declines over time just given the continued switch into advisory?

Well, I think our P&L and our remarks really cover that. Right? As we look at it, we've gone from 40-ish%h to 60-ish% dominated sales by advisory. That is the path that we have set the company on for many years because we believe that what will happen over time is that more and more consumers will want ongoing advice for a fee. And there is sometimes a lot of misunderstanding about commission versus advisory. Commission means that you and I sat down, we talked about your financial needs, we basically saw that there was an opportunity that look at perhaps the long-term investment like your retirement fund, and you are best served by me, given you a set of recommendations, you accepting those, you paying me a one-time fee, and we move on. Right? That's what a commissional business really does is what you just pay for your advice at one point in time because that's when you need it. Ongoing advice and advisory means you pay me annually, ask your advisor to give you advice of financial plan, a discussion about asset allocation, monitoring of your account, all these other activities. That's why you pay. That's why that business line is more profitable for LPL and it's more profitable for the advisor because there is ongoing work that we're doing to support the investors' needs. So sometimes I think there's a confusion in the industry about commission versus advisory. Not – one is not bad and one is not good. They are just used for very different purposes. But it would be fair to say that what we have seen as a long-term trend is the movement to advisory and more and more cases. That's because individuals have more complex wealth situations, tax changes, rule changes on a state planning. They also have more wealth than they had a decade ago. And sometimes it might not feel that way that it certainly has been true since the last market break of any magnitude and that just requires more ongoing monitoring. So we see a trend that the investor needs the ongoing monitoring, we see a trend that the advisors want to provide it. And what we try to do is position the companies that we can make sure and help facilitate that trend and benefit from it. And I think our results show that that's exactly what's happened. And the second thing that is sometimes misunderstood about us is our commission volume growth. That's because we add so many advisors. We're the largest recruiting force in the industry. We have the most success over the last – aggregated last four years aggregated in terms of bringing advisors to this platform. So, by definition, they are going to bring their commission business with them. And therefore, our commission line grows. People mistake that for additional sales. It's actually not; historical assets being moved under the platform from a recruited advisor. So we could very well have more commission revenue in five years' time just because of recruiting, but in fact sales on the commissional side continue to come down. And I think that's where there can be a lot of misunderstanding about the to-ing and fro-ing on the income statement of commissional business versus advisory. Hopefully, that's helpful - Christian Bolu - Credit Suisse Securities (USA) LLC (Broker): Yeah. Just – the last part of explanation is what I was looking for. Thank you.

All right. Good.

Thank you. Our next question comes from Chris Shutler of William Blair. You may begin. Christopher Shutler - William Blair & Co. LLC: Hey, guys, good morning.

Good morning, Chris.

Good morning, Chris. Christopher Shutler - William Blair & Co. LLC: Mark, can you just talk about the – sorry to harp on this, but just talk about the challenges created for – if LPL and the industry as a whole, if the DOL rules for retirement accounts is put in place, and then you have a separate set of rules for non-retirement accounts. Just want to get your perspective on that. In fact, there could be two different sets of rules. And do you think the SEC – ultimately there is some harmonization that occurs here between the DOL and SEC. Thanks.

Yeah. Great question, and thank you for it. So, if we look at it, Chris, the issue that we've been trying to work on since the Dodd-Frank original legislation, there should be one regulator who oversees all retail advice because the consumer does not understand the difference between someone showing up as an advisor registered with the SEC or an advisor registered with the state or an insurance agent or a FINRA-registered broker. The consumers don't see that. The studies show that very clearly. So we've advocated there should be a single organization really looking out for the retail investor overseeing all those different business models. We've advocated that to be FINRA because they already do that for the majority of the industry. That – the avocation has been part of what we've done really since 2009 in our government relations effort. That obviously didn't occur, and in fact, we've had more bifurcation, and the Department of Labor does represent a new standard for a set of accounts that already has overseen by the SEC or by FINRA or by the states. And so it effectively has a third regulator enter into the discussion. That by definition is going to add more cost and more compliance and add more confusion potentially to the consumer. So what we advocate for is the SEC and the Department of Labor work towards a harmonized fiduciary rule as you suggest. We think there's really smart ways to do that, and part of the deck that the DOL has proposed has elements of that where it's disclosure upfront to the consumer and that the SEC can adopt aspects of that across the rest of the brokerage business and that would allow for uniformity and then FINRA could essentially to be the arm that oversees those activities both for the DOL and the SEC. That would be our preferred outcome, and we'll continue to work to advocate for that. So we certainly applaud the idea of what the Department of Labor is trying to do by having a uniform standard of care, a uniform fiduciary approach, and it is part of what we've advocated since the [RAM] study the SEC did back in the mid-2000. So we look forward to the day that that occurs. We are certainly a scale player in this industry. We can both influence the outcome and we can also influence and create solutions that's much better than our competitors can. We have an 11% market share in the IBD business. We are multiples larger than our next biggest competitor. It's going to be the rest of the industry that's going to have an issue with dealing with higher compliance cost. It's going to be the rest of the industry that's going to have an issue with their business models withstanding that much that additional complexity. Christopher Shutler - William Blair & Co. LLC: All right. Thanks, Mark. And then just one other one on a different topic on recruiting. You brought in 62 net advisors in the quarter. Can you just talk about I guess at a high level the advisor adds versus the attrition you saw in the quarter? And also just curious how big Zions was in those numbers.

Dan, you know the Zions numbers? I don't know them off the top of my head.

Yeah. Zions is roughly around 20 of the net 62 in terms of the quarter. And obviously, they are just ramping in. So they didn't contribute anything from a revenue standpoint, but clearly they were a part of the net new adds.

So if you look at it and Zions has a wonderful footprint across the 11 states, and so that's an example one where our advice and our work with them, they have to decide they would do it, would be to add more representatives, and so the opportunity there is about the growth from a program that's pretty small relative to the bank size. And that's where they saw us as being able to really help them ramp that. So, think of that as future growth as we look at it. If I look at the dynamics of the quarter for both recruiting and retention, retention was very healthy and a large percentage of revenues as it was last year that we were 97% last year revenue retention, similar here in the first quarter, which is great. And what we're seeing in terms of people leaving our folks who are small practices going or in some cases, folks who are asking to leave in our normal risk management to oversight of the program, so nothing particularly interesting in terms of the retention question. And in terms of recruits, they look pretty much similar what we've seen in 2014. The one thing that's different is we are seeing more interest in movement. There's been some press reports that other IBDs have experienced, a slowdown that's not what we've seen, but that would make sense as the market leader. Typically when you see a market leader continue to move forward in the way we have and continue to offer new services and capabilities as we've done, we tend to become the attractor. We know that through studies that LPL has the number one place that folks who aren't with us will look at. So we're going to have an advantage there. Secondly, wee by far offer the widest array of solutions for wealth management, whether it's high net worth focused, middle income consumer focused, bank focused, credit union focused, or retirement plan focused like 401(k) plan. And so there's a lot of solutions here that can help the advisor to have a better practice that's more profitable and they can serve investors better as a result of all that. So that value proposition to us is as strong as it's ever been and the results we think show that relative to our competitors. Christopher Shutler - William Blair & Co. LLC: Okay. Thanks a lot.

Sure.

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

Yeah, thanks. Good morning.

Good morning, Devin.

Just coming back to the DOL again, appreciate some of the comments around the long-term expectations and proposal that went through as is, but can you maybe help us think about what some of the near-term impacts would be if the rule didn't change? How to think about that? And then on the same topic, just on alternative sales, I know commissions and marketing allowances, you guys have given us those numbers, but some of the parts of the equation a little bit tougher like operating expenses assuming some would go away because the compliance in technology is higher from that product. And then also some of the other products that you talked about could be sold in its place. Just kind of think about some of the offsets there as well would be helpful.

Yeah. We've tried to paint the picture that essentially, in the worst case, so alternative investments would basically go away under this proposal, it doesn't change. In a role over retirement account, those would not be allowed. The way the DOL works is they have to give you a specific exemption by asset type. So there's a whole part of the rule that this is the part actually read. It shows some of your product pieces and you have to essentially apply for or get an exemption for specifically named product, quite different than the regulatory structure of the SEC or FINRA. And so what's important about that is that if this rule stays in place, I think several things will happen. One is geography. Right? So, think about what our advisor does. They sit down with the client. They start on some form of financial plan that can be either quite simple or very complex. We have multiple technologies available to them to do that financial plan from very sophisticated to fairly rudimentary. They then establish that plan, and in looking at that plan, they typically are talking to a client about both their taxable assets and their tax exempt assets. So they would look at it and say, what we're trying to do is get to a certain yield across this portfolio, trying to get to a certain return across this portfolio with end year given risk tolerance. Let's say that you have a low risk tolerance. Well, we'll still need to get you exposure to the market, the stock market, because if you don't have exposure in year-on-year 50s or 60s, you're going to have a problem with inflation eroding your earnings power 10 years or 20 years from now. So what would be a good way to do that? A variable annuity would be a good way to do that that has downside protection built in it that would be there, or it may be that it's a large cap growth, equity portfolio could be appropriate as a way to get that exposure. Another way to look at yield, of course, is non-traded REITs are a way of essentially locking in a yield over the lifetime of that non-traded REIT, without necessarily as much principal integration, as you'd see, in a traded REIT. When you think about that planning, typically what you'd say to both the wealthy individual and to a middle income consumer is, let's put the high-yielding asset in your tax-free account. Because by putting it there, we're going to save you some taxes that's going to allow you to build up tax free using the seventh – the eighth wonder of the world, compound interest of that – the earnings that you have there to build up more assets over time. The problem with the rule, as we see it today, is that it takes away a fundamental planning right from middle income consumers by not allowing higher yielding assets to be in their tax-free accounts. What we'll likely have on those, they still need a higher yielding asset, so we're just moving to the taxable part of their portfolio. So that's the geography piece. Second piece of it is that let's assume that for whatever reason, remember that we are in a different part of the cycle for real estate, there's certainly a plenty of good real estate investments to make, but there's fewer today than there were five years ago I think we can all see that. And therefore, it might just be a different time for you to have less real estate. We've seen that in our own commission line where we just have fewer sales as we go forward and as we have over the last year than we had the year before that. And so certainly we could see that, that the integration income is just what I would describe as the change in opportunity in the market in terms of investment. So, as I look at a lot and we think about what does it mean, what it means is you are going to see a mix shift at the commission top line of our business. We've seen mix shifts before, and mix shifts are a normal part of our business. We price the way that we get paid from the advisor. Our take of that is price differently based on the aggregate of those sponsor payments and other payments, account fees and so forth that come with each product type. That allows us to withstand that mix shift that occurs. Not a perfect one for one, but it's close. Second point you made is that there is cost. Non-traded REITs and variable REITs are manually processed. So, by definition, they require quite a bit more human capital for us to process plus there is additional regulatory oversight. We certainly have shown that and certainly have shown the need to build a larger group of people who oversee the activities that occur for those particular products. We feel good about our review of them and feel that we've made substantial progress there over the last year in particular. As we look at it, that cost would go away if those products go away. Again, that will happen naturally as we see volumes change based on opportunities of the marketplace. If it were to happen more dramatically, it would just make its way through and we'd save some money. So if we say, okay, let's just assume that 40% of sales in REITs, that is the number, alternative investments in particular are going through retirement-based accounts today. And if you look at the aggregate of our gross profit, which is 5% for that category, and roughly 40% of 5% would go away. That's 2% of gross profit that's going to shift. So there's going to be some offset of that, and we're going to save some money by not having as much in processing cost. Depending on the mix shift, that recovery could be 50% quite easily, and with some of the cost savings, could be more. We don't really want to get to that level of detail because there's still a lot more to sort out. But in the worst case, it would be a 2% gross profit reduction and that is not material in the size. And the last thing I'd say is let's just put that in scale to cash sweeps. We have gone through an enormous downturn in earnings power on cash. I think everyone has noticed that across the entire industry. We had a unique set of contracts at the end of 2008 that allowed us to essentially withstand that change. We're only getting the market pricing next year, pretty remarkable. That's about $20 million a year of EBITDA hit that you've watched step down through the P&L over the last couple of years, including this year, and we have one more left in 2016. A 2% of gross profit, that's less than what we've had in one year of cash sweep downturn. That is not material for this business and something that, to my mind, that can easily be overcome in the to-ing and fro-ing that goes on in any business.

Okay. Great. Thanks. And then just maybe looking at annuities a little more and you guys have called those out the last couple quarters, should be in a little bit lighter and impacting commission. So I'm just trying to get a better sense of what else may be going on there. We've been in a low interest rate environment for sometime here. So, has something else changed with the appetite that's driving some of the pressure there or is it just purely feel like it's rate-driven, and also trying to figure out, you know, is there anything related just to the push towards advisory?

Yeah. So there's really a major issue. The 10 years at below 2% or maybe 2% and for insurance company or underwrite contracts that makes sense for consumers to buy. It really has to be at 3%. I'm hoping to see 3% soon, but we certainly have needed to. So what you are seeing is again the cycle or the cyclical nature of any product sale. There's times in which you should invest heavily in U.S. equity and times you probably should lighten up and maybe go to European equities. That is what we do for a living, is try to help make those decisions with the client or on behalf of a client in our advisory business. So, in variable annuity, it's really quite simple. When the insurance company can't create benefits that protect income or protect exposure to markets at prices that make sense for the consumers to buy them, our advice is don't buy them. That's the value of a financial advice, that's the value of having financial advisors. They know what the right price is for those features and benefits. That's why you've seen our volume come down because the external impact of having the tenure well below 3%. The insurance company just can't write the benefits the way they used to.

Okay. Great. Thanks very much.

Thank you.

Thank you. Our next question is from Joel Jeffrey of KBW. You may begin. Joel Michael Jeffrey - Keefe, Bruyette & Woods, Inc.: Hey, good morning, guys.

Good morning. Joel Michael Jeffrey - Keefe, Bruyette & Woods, Inc.: Just to go back to the first question you guys got asked and just to try to get a little bit more specifics on that. When you think about the margins on the sponsor revenue and the marketing fee that you get, are they materially higher than the sort of 40% EBITDA margin you guys make sort of firm-wide on gross profit?

No. The sponsor – I think there's a real misunderstanding of payments that are received from product manufacturers. Let's just go through that, if you don't mind, a little bit step-by-step. First of all, remember that we are the transfer agent for millions of accounts. So that means that if you are a mutual fund company, you don't have to send the statement out on behalf of your mutual fund account holder. Somebody has to, and we're the somebody. To do that, you get paid typically a flat fee per account because you're really doing the work the mutual fund itself would have to have done. Most of our revenue comes through transfer agency works that we do for a mutual fund, a variable annuity or other products that are there. That is a fee-for-service and activity. It's not marketing payment or anything else. That's the majority of the revenues that we receive from product manufacturers today. There's nothing hidden about that. It's all disclosed on our website, and it's again works that we're doing to report for Mrs. Jones for holding. The good news is she gets to see it in aggregate with all of her different mutual funds together and all of her different assets, and that's a huge value to her to see online and paper format, whatever way she wants to see it. That's first piece. Second piece is that we do marketing that includes now data management and the use of big data, and we have a program called SponsorWorks that has rolled out to manufacturers to help them understand the dynamics of our system and how to be effective partners with advisors in providing information about their products and then understanding what geographies to go to in our system. We are a geographically dispersed distribution system, remembering that these practices of 4,600 approximately operate out of a number of small towns and medium sized towns across America. And that means we need to help the manufacturers to be geographically efficient with their wholesale and resources. We have data in SponsorWorks that lets them see that, understand it, and lets them be more effective test we've done well over a year ago – or 18 months ago now, show that we can actually help them with more effective sales results and more effective penetration in terms of relationships that are here. The other things we do is we provide events, in which education goes on and training for advisors and sponsors pay for that access to allow them to be able to bring in information, might be an international portfolio manager and talk about their view of Europe. It might be the way to best brand yourself and to think about the aspects of what you're doing in your business. It might be ways to serve the customer more effectively through the use of technologies. There's literally hundreds of courses that are used this – in our system in a given year to do that training. That's also part of a payment. It's part of a fee contract that Dan mentioned earlier, has a 10-year cancellation cost. And so basically, it's effectively an evergreen contract with those sponsors to allow us to be able to make the investments in our infrastructure in order to effectively serve investors and the advisors who serve them. And so, as you look at it, there's a number of things that we do that will be a permanent part of our landscape, no matter what regulatory changes come and no matter what environmental changes may come in the industry. We don't see that as particularly filled with pressure or particularly difficult when it comes to bottom line profitability because of the nature of what most of it is, which is essentially a fee for providing a service to help the retail investor get information. Joel Michael Jeffrey - Keefe, Bruyette & Woods, Inc.: Okay. Thanks. And appreciate all the color you guys gave in terms of the impact of the alternative investment line on gross profit. Just wondering, can you give us a sense for the actual bottom line impact of alternative investments?

Well, as I just said a few minutes ago, I said if it's 2% of gross profit, it will be something less than that in terms of profitability because there'll be offsets. I don't want to be precise and act as if we know exactly what those offsets would be because it's too early for that level of precision and mix shift is a funny thing. It depends a lot on what's happening in the external environment and where is the right opportunity for this investor to be investing based on their needs and their risk profile at a given point in time. But certainly, it'll be less than 2% because there will be those offsets for other product types that are used instead and there'll be some cost savings that come, if it's a mix shift to an electronically settled security versus a manually settled security. But even 2% minimum. Joel Michael Jeffrey - Keefe, Bruyette & Woods, Inc.: All right. Thanks for taking my questions.

Absolutely.

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

Hi, good morning.

Good morning.

So, Mark, I very much appreciate all the disclosure that you guys provided in the presentation, particularly on gross asset sales and profits from NTRs. But suppose I feel compelled to try and reconcile the disclosure, in terms of the impact to gross profit with the impact to GAAP pre-tax income, since a lot of shareholders really do tend to focus more on the latter. And within the deck, you noted that NTR sales contributed 5% of gross profit, the firm generated gross profits in 2014 of $1.3 billion. So that 5% equates to about $65 million on that $1.3 billion from NTR sales. And given that it's a high margin activity although there will be some expense offsets, if we assume a higher margin of 90%, we get about a $60 million contribution to pre-tax income, which compares to about $295 million on a GAAP basis in 2014. So it's 20% pre-tax income contribution before considering the revenue offsets as NTR sales will be replaced with some other product like a mutual fund. I just want to get a sense as to whether I'm thinking about that appropriately and are there other mitigating factors that we should be considering?

So a couple of thoughts on that. So, one, I think when you think about the total of 5%, that's the whole universe of sales in both qualified and not qualified accounts. So when we were trying to help you understand the 2% number, what we've done is ring-fence those that are actually done in qualified accounts, which is roughly 40% of the overall sales. And that's where you go from the 5% down to the 2% contribution in gross profit. And then I think the second thing I heard was you were then trying to translate gross profit to EBITDA, but – and I'm not sure where you got the 90% margin from gross profit to EBITDA. I think, as we've said in the past, actually we have a higher level of direct costs associated with processing non-traded REITS than we do other products because of the manual nature of it is as Mark had said earlier. And so I think when you look at our overall average EBITDA that we drive for the entire firm, that's a much better proxy for how EBITDA contribution would show up from the sale of non-traded REITS.

Okay. It might be helpful if you can give us a sense as to what those processing costs have been over the past year, given the significant focus and attention that this particular product has garnered due to the lack of the product exemption.

Yeah. So, if you think about how we go from gross profit and then all of our core G&A to support all of those different product sales. Right? So, inside of that, you would have operating costs. So the processing of any type of transaction or trade, and so there is a variety of different operational costs from account setup to account transfers to the movement of money, et cetera. And that's consistent with all of the products that we do in a viable and fundamental part of our value proposition. In this case, the non-traded REITs tend to be more manual than others. So there's a higher cost, if you will, associated with the processing. And of course, then you've got the overall risk management associated with it and the investment that is made across all of our products to appropriately supervise and support those product sales. And again, because of the nature of non-traded REITs or even alterative investments and the complexity associated within there tends to be a higher level of cost associated with that overall effort. And so, if you take our gross profit directionally just as an example, in the 30% range and then you have an overall expense base that would reduce that EBITDA down to the 12% level, then you're going to see non-traded REITs show up as an equivalent part of that overall shift from gross profit down to EBITDA.

Okay. Thanks. And just one more quick follow-up from me, DOL proposal does require that you as well as the advisors are contractually committed to serving the client's best interest. And Mark, I do appreciate the fact that you have been a strong public advocate for the contractual commitment. But do you anticipate any changes in terms of advisor behavior actions going forward, just given this looming threat of potential litigation.

I don't – I don't know that we interpreted as looming threat of potential litigation. What we see is more transparency disclosure to decline at point of sale. There's a lot of transparency disclosure now that basically is that website enabled for the different aspects of what the DOL is essentially bringing to the contract. And secondly, the litigations, as we understand that we really have to ride to a level of class action litigation. And as opposed to individual arbitration-type activities that we see today, you are allowed to have arbitration as a way of dealing with individual customer complaints. I believe the concept the DOL is trying to go for here is essentially to have class actions be a way to have organizations, think about activities they undertake and be thoughtful about the risk that are inherent in behavior that doesn't work. So, as we look at it, I think we should be very engaged with the Department of Labor about these issues. There will obviously be alterations from what's written today because that's the nature of a good process back and forth. And so we see there's plenty of things to sort of talk through. But what we also see is the continued movement to advisory because we've already seen that that's part of why we wanted to disclose the information, makes sure everyone understands how much our business is already in a fiduciary format and the fact that 90% of advisors are already fiduciaries for their clients. So Mrs. Jones can be – have a conversation with her advisor about her assets and advisory, and that is a fiduciary conversation and that is subject to all the same type of litigation risk that you're describing for the Department of Labor or they can be a commissionable advisor, in which case, it's subject to a best interest standard and not to a fiduciary standard. So they would serve both. When you talk to advisors and my observation of them is that when they're sitting there with the client, they're not thinking which hat am I wearing. What they think is, what's the best interest of this client today? That's why we've been advocates for going ahead and adopting a uniform rule. But we certainly think that trend that we showed in the numbers that go into advisors going to continue and this makes it go little faster. That's fine by us because that ends up being a better outcome from a profitability standpoint speaking to shareholders and it's a better outcome for investors who need ongoing advice. They're not all of them well. I think we do need to be concerned that smaller accounts in particular could suffer from not really having a solution that they otherwise might have. And that's the part that we want to work with the Department of Labor on, is to make sure that all consumers have a chance to get professional advice and avoid the problem that studies show, which is that an investor who gets a small check, $5,000, $10,000, remember, a lot of rollovers of that size, we tend to cash them. That's going to create a huge problem because they're going to not have the kind of money they get to compound over time for their ultimate retirement. That's the value of professional advisor is to help you see that you need to put that money away and save it for the long-term. So we think it plays to the fundamentals of the business we already operate and we think it only accelerate heads that we benefit from, and we think for that kind of scale that we have, we're going to be able to work through this quite well and actually benefit from getting more advisors you're going to need to kind of solutions that we have in terms of recruiting them to our platform.

Mark, that's extremely helpful. Thank you for all the detail. Actually I have one quick follow-up since you just mentioned that you're going to benefit from your scale advantage and I internally agree with that notion or assessment. Do you expect to see increased consolidation off the back of the DOL proposal, like, some of the small players may struggle to absorb some of those incremental compliance costs, for example, that you spoke about earlier.

Absolutely. It will absolutely happen. The good news about this elevated G&A, which I know has been difficult for shareholders, but from our perspective, we have built an incredible capability that allows us to scale now with the kind of environment that really does stand up for independence and stand up for consumer choice. We are the only major player among the top 10 that provides no conflict in terms of product selection because we don't manufacture any product. We have an open architecture approach to products with a huge supply available to solve the consumers' needs. That fundamental, lack of conflict due to having manufacturing in that fundamental open architecture philosophy is incredibly valuable when you get regulation like this. If you are a smaller player in the industry, you're not going to be able to step up to the regulatory cost that we've had just over the last few years, let alone any new things like some of the oversight work that's going to go with the contracts. For example, the DOL are potentially oversight work that's going to come through the SEC fiduciary standard. So we continue to build out our capabilities in our regulatory oversight. We have the scale and incredible team to do that across a number of functions and that's going to be a huge advantage for us from a business standpoint.

All right. Thank you, Mark, and thanks all for taking my questions.

Thank you.

Thank you. Our next question is from Alex Kramm of UBS. You may begin.

Hey, good morning.

Alex, Good morning.

I feel like most of the DOL stuff has been asked, but a couple of smaller ones. So, first of all, I think there is one stipulation in this – about reasonable fees, and I think that's probably a lot of – an era of a lot of uncertainty or nobody really knows what that means. But I wanted to see if you had any views on what this whole responsibly fee mean and then maybe when you think about your business, related to that, I mean, are they areas in your business where you would say, like, all right, some of the mutual funds like our advisors select be the ones with the highest kickbacks, or this or that, that you would think about or highlight, we are – the reasonable fee might be something where you have to look a little bit more into your business?

So, Alex, we do not receive kickbacks. Let me just be clear. That is – there is a whole range of fee for payments that are completely disclosed on our website today. You're welcome to look at it, and that is for all product types.

Yeah. I know it and I'm sorry.

Yeah. And advisors do not receive any payment that's different for one product to another. Just want to make sure that we're clear about that and going into your question. If you look at advice, remarkably the market is a very efficient machine. Right? I'm a capitalist. I believe in what the market does. What the market does is there's a cost for providing advice in person and locally. And that cost remarkably is about 1% per year when you think about a relationship. When I look at the data across portfolios that have a mixture of products in them for a consumer after that plan has been done and it's on the commission side of our business and I look at an advisory account that's on the advisory part of our business, they come remarkably close to 1%. And what people confuse is they confuse payments that come out that essentially are for products that can't be sold for a period of time. So let's take a variable annuity. By contract, the individual is contracting with the insurance company for protection against principle. Let's say that's the contract. They have to hold that contract anywhere from four years to six years. When you look at the commission payment that's made, that comes out to just a little over 1% per year when you look at it. If you look at a mutual fund, mutual funds typically turn over about every three years, 3.5 years. The commission that's paid there is lower because there is going to be a second commission within that same multi-year period. And so what is important here is to understand that the DOL's intent in our view is to make sure that that kind of reasonableness is occurring. We don't know that for certain and we have a lot more to learn, and we look forward to engage in that issue specifically, but we think that somewhere in that neighborhood is a reasonable place to be. And then being able to show that that's what's happened is a key part of what we believe the regulation is trying to do and we think that's a great idea. And we're going to help make that happen in an intelligent and effective way.

Great. That's helpful. Then maybe secondly, when you think about these changes coming into effect in terms of timeline, how do you plan on reacting to this? I mean – and maybe you can get some examples from the past and there've been regulatory changes. Is that something that you will very early, preempt and say, like, hey, I know this is coming in March this year or whatever, let's wait until the last minute, or do you feel like when it comes to non-exempt products like non-traded REITs, for example, you're going to try to make a shift happen much sooner because you see the writing on the wall, want to educate your advisors if they're ready and not really wait until everything gets shut-off basically?

Well, first of all, everything is not going to get shut off. So, again, I don't want to agree with your premise because I don't think your premise is correct. It makes sense for a consumer to have a mixture of different types of assets because what our consumer is trying to do, you look in the disclosure, you will see the majority of clients here are middle income consumers. They're trying to rebuild their pension plans. Right? And people misunderstand the products because they equate revenue part of it, the fee with something that's bad. What you're missing is you're missing the extended period of holding that's going on there and coming back to this rough work payment of 1% per year fee for the advisors being given. And so, that mixture is quite important. So, as we look at it, we know that market cycles will move products in and out of favor. We should let them do that. Secondly, we are always believers that we want to be very impactful to the decisions that are made. So we have an extensive government relations activity that works with the regulators and we'll continue to work on committees to be able to help influence either through the trade associations directly or with the regulators those activities. And so, as we think about it, what we're going to plan for is really how do we best serve investors no matter what the final rule may be and how do we make sure that it adheres to our principles around objective financial advice, transparency in the relationship and just smart business. We have grown advisory assets, for example, at the fastest rate of any publicly traded company. We've had tremendous success in bringing recruits to this world. That is because, at the end, the investor is getting great advice from their client, from their advisor. They are then telling their friends that this advisor is helping them and that is helping the advisor grow their business, that's helping us grow our business. So the market is telling us that the way that we go about financial advice is successful and it does result in better outcomes for investors. And therefore, we will continue to make sure that we are leading in that way of providing our open-architecture platform that transparency, which we know leads to good outcomes for investors, which leads to growth. These are all connected hand-in-hand. Right? That's the part that's misunderstood. The results would be different if there were different activities going on.

The only thing I would add to that, in the spirit of that plan that Mark is talking about, you've got to remember most of our advisors use a breadth of solutions today and have to think about those solutions in pivot and how they allocate those solutions, whether it be market-driven headwinds or forces or whether it be something structural in nature. So, as part of that plan, helping the advisors transition through this is not one of the big hurdles we see because of how they approach the business today.

All right. Very good. Thank you for all the color.

Absolutely.

Thank you. Our next question is from Ken Worthington of JPMorgan. You may begin.

Hi, good morning.

Good morning, Ken.

I do actually have two more questions on DOL, so they're not all killed yet.

.

So the alternatives have gotten the most attention, it would also seem a big deal is how the rules could encourage a migration to low-fee products. And I think the assumption of the fear is that low-fee products paid distribution less. So, does LPL – I know it's early – but like, see risk to the business in a migration to lower fee products if the rules are implemented kind of as proposed and there's probably going to be some changes? And do you share my view that lower fee products – if lower-fee products become more prevalent that LPL might need to adapt to this to protect brokers, clients and shareholders?

Well, I think – let's start like 30,000 feet. The cost of advice is coming down, right, because that's what market pressures do. I've been in this industry a long time, over 30 years, and I can remember the days when we used to sell mutual funds at an 8% load. And today the average is under 3%. That's market pressures bringing prices down. What we're describing right now are non-traded REITS have market pressures that are bringing prices down. Those are all good. And so what we've tried to do is build an organization that continually lowers its cost. I know it's very hard to see that in our P&L right now because we've added a particular layer of regulatory cost over and above. But if you look at our core G&A line, what you've seen is we've been able to basically remove cost here, we filled them back up with regulatory infrastructure, but what will start happening in 2016 is we'll be able to continue to reduce our footprint cost in our core G&A and we do believe our extraordinary regulatory cost will come down. That will allow you to see the P&L in the way that we know it, which is that we're trying to run efficiently. So we completely grew with the premise that cost matters to an investor. We completely believe with the premise that our job is to lower our cost continually, and we completely believe with the premise that we need to help pass it along to the advisor and to the investor so they get better outcomes. And we can see a decades of long history at this company to make that happen, and we only see that trend continuing. So, absolutely, we agree that the premise is correct. Secondly, we have to look at how product shift change. And ETFs are as much an issue as anything else would be. As we think about ETFs, they're not in the commissionable side of our business and that's part of what is different. What will happen is an advisor will work with the client, and again, remember, 90% of advisors are both. We have programs, model wealth portfolio, ETF that allows an investor to have all ETF program, allows them to get a wide variety of choices in those ETFs, allows them to use different strategist, could be LPL research, could be BlackRock, could be others, and order that to solve for that particular issue. In that program we basically are able to replicate the profitability that we have in programs that use actively managed funds, whether it is transfer agency payments or there are other activities. There's plenty of ways to deal with the continued drop of product payments that will come inevitably as cost comes down in the industry. Will this accelerate it? Probably. But that – because it's a strategy we've been working on for quite some time, you will see the strategy that really accrues to the scale players, some of the market leaders, and we are the biggest scale player in the IBD space and we are a significant RIA custodian now for hybrids, the largest now in the country from zero in 2008. So we know how to make those changes occur and we know how to deal with price changes over time, and we know how to deliver profitability with present results excluded because of the elevated regulatory cost that we've had.

Awesome. Thank you. And then the other one is that kind of the brokers' ability to adapt to DOL rules. A significant amount of your brokers are DOL registered. What portion of your clients, however, that have IRAs also have non-retirement account at LPL? Because you talked about the shift that makes sense, but is there the – it might be a tax shift.

Yeah. So 30% of our assets are retirement account based. As we look at the rules that will be affected, the assets are affected by DOL. So that, by definition, means 70% are other. And so, if you think about it, my experience is that investors have a variety of both taxable and tax-exempt accounts where that's just based on that stat alone as a way to think about it. So, remember this – we'd start with a financial plan. I think that's the part that's missed sometimes is that that – again, it could be a very light plan. It could be incredibly complex. It depends on the clients' needs for that to happen. But we start from that premise. We also talked to them about life insurance, right, because that's also part of what's needed, particularly for middle income consumers, is to protect their families in the event of something happening. So there's a whole range of aspects that go on in that financial plan that give us plenty of places to make sure that we're doing what the investor needs and getting paid for the advice that comes with that, either in the form of a commission or in the form of an ongoing advice fee. So I don't particularly worry about that because we feel that we have probably the assets. 50% of our assets are fixed income, 50% are equity. Right? So we also have a very mixed portfolio. We think about the assets that are here. And so that also has a dynamic to it. It's different than some other players that we see in the industry as well. So, as I look at it, we have a nicely balanced portfolio of product types, account types and nicely mixed portfolio of asset types. And that's why, as we see shifts that occur, the business tends to pivot very nicely to that new space and work its way through the profitability impacts of that.

So, one additional way to look at that is, I think directionally, the average client here has around 1.7 accounts with us. So that would be another way to think about how they may have multiple accounts across both qualified and non-qualified assets.

Perfect. Thank you. That was really what I was looking for. Thank you again.

Thank you.

Our next question is from Andrew Del Medico of Autonomous. You may begin.

Hey, guys. You mentioned that your work – well to go through specific points of the rule. I guess, what are you guys exactly focusing in on with them that would like to see, I guess, amended that would be better for your clients longer-term?

Well, it's too early to go to that level of detail. There's hundreds of pages of information here. There's certainly ways to think about how the contract and information is supplied to the consumer in terms of lots of work that's been done over the last 10 years or 15 years and ways to present that to a consumer that's clear. Secondly, the ongoing monitoring needs to be there, and for ways to make sure that that works well. So there's lots of detail. This is a very detailed business. That's why often people get detailed answers to questions because of the nature of the complexity of these kinds of businesses. But in the end, what we want to do is preserve consumer choice and have the consumers have plenty of choices for how they want to receive investment advice. And whether – the core principles here that we know is a smart one from the DOL is trying to make sure consumers understand what they're paying for that, and that they have transparency. And we're advocates that that is the smart thing to do, but at the same time, no one wants to have a consumer have fewer choices or have more expensive choices as a result from these changes. And that's the area that we'll particularly work on as to ensure there's as much choice as possible for the consumer to achieve their financial targets.

And then I guess on non-treated REITs, one of your competitors highlighted a training with advisors on some of the new disclosures that would come out next year as slowing sales this quarter. And I guess, have you guys started working with advisors on some of the new disclosures that are coming out next year and I guess how do you expect that to impact sales going forward?

Yeah. So, FINRA has a rule that really hasn't gotten much coverage. That is rule 15-05 I think or 15-02. It comes from an original work of 12-14 is sometimes the way people talk about it. I don't mean to go completely inside baseball here, but I am a FINRA governor. So I know something about it. And what that is is FINRA doing very good work of making sure that there is transparency over the way assets are raised for a non-traded REIT. So you have the sort of odd – what's odd, it's the way it's done – is you have essentially a multi-year open period in which they are basically going to put money to work in a portfolio. And if you are a consumer that's there on day one, there's really not much money put to work yet. If you are a consumer that's there at the end of year-two, there might be half of the portfolio that's invested. And so there's different values that are there. The way it used to be done is just a flat value of $10 during the entire offer period. FINRA wisely said, you know what, that's probably not an accurate representation of the value. We'd like to see an actual value calculated. I won't go into detail of how complex that is, and that's shown to the consumer. So we've certainly been educating our field force on those changes. We've had lots of good questions from them, and we've talked about this information also with product peers that we have relationships with and made clear what our requirements are going to be for the way that those rules show up to LPL investors. Those end client investors as well as to the advisors themselves. So we see that underway. We actually see the impact being much more about the economic cycle than I would the FINRA rule because it's really, again, where we are in the cycle of real estate investing. It's still a perfectly fine asset class, but the opportunities that were there five years ago, and commercial triple-net leases are just different than they are today as we've all suffered from very low interest rates. These have come down in terms of relative yield and there may be other opportunities and other asset classes. And so we're seeing what we think as the normal market cycle of change.

Okay. And then I guess in this – in the quarter, you noted that alternative sales were strong. But it feels like commissions per advisor are still pretty weak. I guess, what else drove that in the quarter that you saw?

Yeah. So let me field that one. I think if you look at brokerage sales as a comparison to Q1 of 2014, you see some in the biggest fundamental weakness in annuities, and that's what we talked about earlier, and they were down 20% compared to the last quarter of the sales. And what's driving that, as what Mark talked about earlier, is just the continued trend-down in the 10-year treasury, and I think you saw a good bit of that occur in the second half of last year and that's really when we saw the weakness materialize in third quarter and fourth quarter of last year in terms of annuity sales. And that affects both variable annuities and fixed annuities. And so I talked about them as an asset category annuities and you see weakness in both. And so that's been a challenge year-on-year. I think the other thing that you have is just that structural trend towards a higher utilization of advisory as being the other directional influence, if you will, in terms of headwinds and commissions. But clearly, the year-over-year comparison has exacerbated most by the – just the environmental characteristics around annuities. Non-traded REITs were flat quarter-on-quarter compared to last year. They were a bit inflated over normalized levels in Q1 because of a liquidity event that occurred at the end of Q4 that we saw some of that assets being repositioned, or cash being repositioned into new non-traded REIT sales in January. So I don't see anything other than a continued trend back towards normalization of the use of non-traded REITs and then you get the occasional volatility that may occur in that volume, given liquidity event.

Okay. And then on the transactions line, that saw a decent growth quarter-on-quarter and year-over-year. Was there anything specific in that line that really elevated this quarter or could we see that come back down going forward?

Yeah. So, on your transaction and fees, if you combine those two things, you've had about a 13% year-on-year increase. A third of that came from just increased trading activity associated with primarily advisory accounts. And then the second part, which is probably the biggest influence or two-thirds of that came from fees, and there's two primary drivers of that. You had the conferences both occurring in one quarter, which drove up some of the fee and the second part was the new home office supervision fee that we put in place that just began ramping in Q1.

Okay. And then we think about the home office supervision fee, I guess how much should that benefit it on a year-over-year basis?

Andrew, can I just jump in? We've asked each analyst to restrict to two questions. I think we've had more than that at this point. So if you'd – can you turn the queue over to the next analyst, that would be great.

Yeah, absolutely.

Thank you. Our next question is from Douglas Sipkin of Susquehanna. You may begin.

Yeah. Thank you, and good morning. Actually, not a DOL question.

Oh, boy. What would we do?

Yeah. Question on the balance sheet, just curious, I know you guys have, I think, like $120 million of debt due this year, and I'm wondering, has that been paid yet. And if it hasn't, are you guys going to use cash for that or I guess go back to a facility in terms of...?

Yeah. We don't have debt coming due this year. We have on the – sorry, the majority of our debt is – it goes out for at least a minimum of three years plus. And so I'm not sure other than you may be looking at the revolver.

Yeah, that's what I mean. I'm sorry about that, the revolving credit, yeah. So you could just re-up that again, I'm assuming?

Yes. We have a capacity of $450 million in the revolver, and again, there is no requirements around the repayment schedule of that.

So, when I'm looking at your 10-K, you have a current portion I guess that's just effectively always staying at as a current portion as part of the revolver?

Yeah. The revolver is an overnight facility. The revolver facility expires with our term loan A in 2017.

Got you. Okay. So that makes sense. I apologize for the confusion. And then the second question, do you guys have any sort of, like, cost contingency plan just for the point, like, if rates never change, just because when I look at 2016, ICA fees, they dropped like 50%. And I don't know. It's just not – it's not clear what's happening with the interest rates. I mean, do you have any cost that you could sort of quickly rain in a little bit if we get into that sort of the environment where we're still stuck at basically nothing or close to nothing into 2016? Because obviously there's a major step-down in the ICA fee next year again.

Yeah. So we clearly have signaled what the step-downs are. That's no surprise to anybody, right? And we have built this company to be able to withstand zero interest rates forever. We've taken out an enormous amount of underlying cost. We have put some of those back because of the regulatory spend that we've appropriately wanted to put in place, but if rates were – didn't go up forever, we would be just fine at the margins that we're at today. So we don't see the step-down in ICA next year, which goes from 45 basis points down to 23 basis points in terms of average yield. That's all baked in and we're ready to rock and roll as it goes from there. Plus it's much tougher on our competitors than it is on us because we control our input costs and we control our operating expenses. And remember our competitors in the IBD space don't self clear with one exception, and basically that means they have no control over those costs as they go forward and they have no control over pricing changes that could occur there either. So it's much tougher our competitors have a zero interest rate environment. So while it would be nice to have, from a competitive standpoint, it would likely lead to more recruiting and even more business growth because it would be as tougher and tougher for the other IBDs to withstand zero interest rate environment.

The one thing I'd add to that is so then with next year step-down, you're going to get into the 20 to 23 basis range, which is what we see is more of a market normalized rate. And so that would be the last major step-down that occurs from the advantage that we had through the contracts that we put in place back in 2008.

Okay. Great. That's very helpful. Thank you very much.

Absolutely.