Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Chris Koegel, Senior Vice President of Investor Relations. Mr. Koegel, you may begin.

Thank you, Andrea. Good afternoon and welcome to the LPL Financial second quarter 2016 earnings conference call. On the call today are Mark Casady, our Chairman and CEO; and Matt Audette, our CFO. Mark and Matt will offer introductory remarks, and then we will open the call for questions. We ask that each analyst limit their question to one question and one follow-up. Please note that we have posted our earnings release on the Events and Presentations section of the Investor Relations Page on lpl.com. Before turning the call over to Mark, I'd like to note that comments made during this conference call may include certain forward-looking 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; 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, and 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 made during this call will include certain non-GAAP financial measures governed by SEC Regulation G. For a reconciliation and discussion of these measures, please refer to our earnings press release. With that, I'll turn the call over to Mark.

Thank you, Chris, and thank you, everyone, for joining our call. We had strong results again in the second quarter, which I look forward to discussing with you today. However, I would like to spend a little time grounding everyone in what we are trying to achieve. It's clear that our industry and the markets it serves are changing. The regulatory environment and consumer demands are moving the industry towards greater transparency, advisory solutions and reduced pricing. Successful companies evolve with the world in which they operate. Recognizing the changes ahead, LPL began some time ago to pivot our business, so we can position our advisors and institutions for success in changing times. This means using our capabilities and scale to lead the industry in innovating solutions to meet new regulatory requirements; staying disciplined on expenses. So we can make smart investments and capabilities that will drive market share gains; and maintaining a strong balance sheet. We believe we've made progress on these goals in the second quarter. And if we can continue to do so over the long-term, we believe we will create significant shareholder value. Let's now turn to our second quarter results in which our business continued to perform well. Commissions and advisory fees were up sequentially, and sponsored revenues increased. Assets are the key driver of financial results, and advisory assets grew organically at a 6% annualized rate. We also added 100 net new advisors in the quarter. Recruiting was strong, and we also had lower small producer attrition than we had in the latter half of 2015. A period in which some advisor practices downsized to manage through the changing regulatory environment. In the second quarter, we were disciplined on expenses, so our core G&A declined sequentially. These results led to $0.53 of earnings-per-share. Matt…

Thank you, Mark. And it's good to speak with everyone on the call today. Before we get into the quarter, I just wanted to remind everyone of our long-term financial objectives. We want to grow assets organically and benefit from market growth. Grow gross profit faster than our assets, and be disciplined on expenses to drive greater operating leverage. We also want to maintain a strong balance sheet while staying dynamic in our capital allocation. And keep in mind that our results will naturally vary somewhat from quarter to quarter, given the seasonality of our business, but we feel that we made progress on these goals in Q2. And if we can continue this momentum over the long-term, we believe we will create significant shareholder value. Now let's get into our Q2 results. We are pleased that we delivered another strong financial quarter despite the volatile environment. Commissions and advisory fees were up sequentially, as were sponsor revenues. And core G&A declined, as we remained disciplined on expenses. At the same time, the advisor payout rate increased as expected, and ICA yield decreased as an Anchor Bank contract phased out. As a result, we generated $0.53 of earnings-per-share in the second quarter. Let's now discuss our Q2 results in greater depth, starting with assets. Brokerage and advisory assets were $488 billion, up $9 billion or 2% sequentially. Net new advisory assets were $2.8 billion in Q2, up from $2 billion in the prior quarter. Assets are the key driver of our financial results, and we had good momentum in Q2. Additionally, net new advisors were 100, a good improvement in both recruiting and retention. Now turning to gross profit. It was $345 million in Q2, down $11 million or 3% from Q1. The decrease was mostly driven by seasonally higher…

Thank you. [Operator Instructions] Our first question comes from the line of Chris Shutler with William Blair. Your line is now open.

Hi guys, good afternoon.

Hi, Chris.

On the core G&A – so it looks like in the first half of the year, it was running about $343 million for the first half in total. The guidance embeds I think at least a $10 million increase in the second half. So just wondering what the incremental expense relates to? It sounds like its DOL implementation, but maybe you could get a little bit more granular there? Thanks.

Sure, Chris. I mean I think the two primary items are going to be DOL. They are expenses that are concentrated in the second half of the year. I'd also emphasize technology investments, right? Between DOL investments and technology investments, those are the two big items that we're focused on investing for growth. And those are going to grow in the second half of the year. So those are the two big ones.

Okay. And then the – it's kind of a broader question, but in the context of the DOL rule, how do you guys as a distributor or as a platform, how do you plan to monitor or limit the asset management products available on the platform to advisors? So in other words, now that there will be this best interest standard in brokerage retirement accounts, do you plan to move strategies with poor performance tracker herds or higher fees off the platform more regularly? Monitor that more regularly? Just wondering how you plan to deal with that issue? Thanks.

Sure. So on the DOL, I think we're certainly still studying all the different ins and outs of what does it mean to have reasonable compensation to operate under the BICs. I think it's still early days, despite all that work that's going on. We are, as you heard me talk about in the script, trying to create standardized compensation structures, as we've already done for variable annuities and alternative investments, and we need to turn our attention to mutual funds next. But at this time, we are not prepared to say that we are going to limit the platform in terms of restricted sponsorship or availability. And I think that's important to understand, as we do want to still have the ability for consumers and their advisors to be able to have choice that's one of our principles to operate under; that's the essence of independence. But there certainly will be areas where products that, at the margin, don't have a lot of volume – remember that a lot of positions moved to us because of recruiting, that will likely want to review and understand if we want to still support those under the best interest contract standard. But it's still too early to say definitively what we're doing.

Okay. Thank you.

Thank you. Our next question comes from the line of Christian Bolu with Credit Suisse. Your line is now open.

Good afternoon, Mark and Matt. So, first question is just on the other asset base fee line. Just trying to understand what's going on there? I guess on a year-over-year basis, that's down about 5% relative to kind of flat overall client asset levels year-over-year. Just curious what's driving the drag? And more importantly, maybe some kind of a comment on the outlook for that line. Should we think about it as growing in line with assets? Lower than assets? Higher than assets, et cetera?

Yes, sure, Christian. I mean, I think that's where sponsored payments come through, right. So revenue share and record-keeping. I'd focus more on the quarter-over-quarter, right. So we had some nice growth quarter-over-quarter there, both on rev share and record-keeping. I don't have an outlook for you, but I'd just keep in mind it's on a subset of the overall assets. So the trends in that line can be a little bit different than our overall trends and assets, because it's only reflective of where we get revenue share and record-keeping. But I'd focus on the quarter-over-quarter improvement, is how I'd look at it.

Okay. Thank you. And then on the advisory fee rate, I hear you on the one-time item. I think when we try and back that out, I get to an advisory fee rate that's lower again in the quarter. And we've had that trend for a couple of quarters now. So maybe you can just talk to what's driving kind of advisory fee rate trends and kind of why it's going lower?

Sure. I'd highlight a couple of things. First, just keep in mind, from the hybrid side; it doesn't show up in that metric, right. That metric is advisory revenues excluding hybrid, so a lot of our growth won't show up there because it shows up in attachment. Second, if you take out that one-timer, I think the trend is pretty close or pretty similar to Q1. And just a reminder that we did have a fee adjustments, we removed a strategist fee from one of our centrally managed platforms beginning this year. So I think, as a broad statement, I think when you look back at Q1 and remove that one-timer from Q2, I think that's probably the best indication of where it's going from here. But I think the two things are just hybrid doesn't show up there, and we had a fee adjustment that took effect at the beginning of the year.

And that fee adjustment, just for clarity's sake, is by a strategist and the service they are providing – not the retail price of advice that an advisor is charging. So I think that's an important distinction. Because we're not seeing particular pressures on retail level advice charges at this stage. What we have been doing is aligning cost structures through strategist fees through our changes and our wealth portfolio. And of course, we will be launching the automated platform, which, by definition, is a lower-priced product.

Okay. Thank you. I'll get back in queue.

Thank you. Our next question comes from the line of Ken Worthington with JPMorgan. Your line is now open.

Hi, good afternoon. Following up on DOL, the implications and preparations, so I'll call it three sub-questions. What are your latest thoughts on the extent to which DOL will encourage brokers to converts their business to advisory? You've talked about it before, but again, just if your views have updated as you've gone through the process? Two, what are you thinking about in terms of how DOL will change the mix of what brokers are selling? The hybrid products all had commissions that went up this quarter, which I thought was very interesting so any updated views there? And then lastly, I guess following up on the last question, my impression from the analyst day was that LPL would reduce the number of products in the platform. Mark, you seem to suggest that that may not be the case. So just maybe more a fleshing out of that area as well? Thanks.

Yes. Let's start with the last first. I'm just trying not to indicate what we think we're going to do on product selection. Clearly, there will be fewer products, and because there's going to be products that at the margin, don't make sense for us to retain in the DOL world, because again they were brought to us probably through some sort of conversion or they turned out not to be particularly successful products. This is a good opportunity to clean that up. So there will be fewer products. It's just that we are not announcing a reduction of the shelf, which is quite a different matter that we just aren't prepared to talk about at this stage. So I want to make that distinction. It's not a change on where we were on Investor Day; it's just a refinement as we continue to work our way through. And then if we look at – I'll just start from the bottom, your next question from that was the DOL product mix change. And I think you are seeing in brokerage what we have seen for quite some time, which is a movement towards more mutual fund sales and lower in annuities, and lower in alternative investments. And while VAs and our annuities generally, and alternative investments moved up a bit this quarter, I would view that as just seasonal and some recovery in the business. Remember they went incredibly low over time. The important point to think about though is that for both variable annuities and for alternative investments in brokerage, pricing has changed. So you are also seeing, essentially under our new pricing structure which has much lower upfront commissions for a variety of reasons some anticipating DOLs, some related to the federal rule changes that that is now representing what I would describe as a good environment in the New World to be operating. And I think you're now getting back to just cyclical returning of the business. And of course everything is underscored by the fact that our advisors for the most part do start with some sort of financial plan and discussion with their clients, so they are making sure they are getting the right mix and the right answer to what the clients' needs are. So it's really done in a best interest standard, which is of course, the reason why they're successful in retaining and gathering new clients. So that I think is all important to understand in and of itself before. And your first question?

Brokerage to advisory, yes.

Thank you. I can't read my own handwriting. In brokerage to advisory conversion, I don't think we are seeing any particularly increased trends there. We've had certainly the march towards more advisory for quite some time, and that continues on. Again, it has to be done in the right interest of the client, right. So is this a service they need? Ongoing advice for a fee, versus one-time kind of checkups, because they've had a rollover or something else that may be happening. So I don't see a particularly structural change yet in the movement to advisory that's too much different than the pace we've been at for quite some time as a business. And we believe that will continue to go. We do think it will pick up, so I don't want to say that it won't pick up, just to be clear, Ken. But we haven't necessarily seen it in the results thus far. We are seeing just a little bit of pickup in things like model of portfolio sales, as would make sense, given the pricing changes we've made. I know there's a lot of excitement about our new automated advice offering by advisors and so forth. So again, I think we'll see that structural change move to advisory and then it will probably pick up pace a bit, as advisors continue to evaluate the new post-DOL world.

Great. Awesome. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Steven Chubak with Nomura. Your line is now open.

Hi, good afternoon.

Hello.

So I wanted to kick things off with a question on ICA fees. And Matt, I appreciated the very detailed guidance. You noted that we should expect it to come in; in the mid-to-high 50s in 3Q, but you've consistently surprised a bit better than guidance over the last few quarters. And I just wanted to get a sense as to how much flexibility you have to renegotiate with some of these anchor bank parties where you could actually get more favorable terms than the guidance you've laid out? And if we don't get any rate hikes by the end of this year, are there any significant anchor bank contract repricings that we should be mindful of? And what could that do to the rate going forward?

Yes. So I think on the last one, I mean, we had – the last significant one has rolled off. We do have one more, but I'd say it's relatively minor and not worth highlighting in a big way. I think on the first part of your comment, I think I wouldn't describe it as consistently surprising the guidance. I would describe it as we have an amazing team that's working on placing these balances with nearly 30 banks not that they change every single quarter, but it's an active portfolio that's got a great team managing it. So I think that's what I would hone in on. And in this – the first half of this year, there was a lot of balances to place at new banks, just given that roll-off. So I think that there's a lot more opportunity to outperform, and I think the team did a great job of doing so.

Got it. And then just switching over to net new advisor trends, clearly a strong quarter in terms of net new ads; actually the best we've seen since the fourth quarter of 2014. I mean in the past, you had targeted or spoken of a target of 405 to 500 net new advisor ads per year. And I was hoping you could just speak to the pipeline and maybe how we should be thinking about that projecting over the course of the next couple of quarters?

Sure. So we are seeing two forces at work here. One is in the latter half of last year, you saw an uptick in small producers being moved out of practices, as those practices anticipated some of the regulatory environment, and I think responding to volatility and slowness in their business. And that's absolutely removed more advisors than we recruited, although we still had a good recruiting year last year. So part of it is that change I just wanted to make sure that that's clear. And in this quarter in particular, it was a strong recruiting quarter as it relates to headcount. Therefore you get to the net 100 and it certainly – nice to be back to that number in terms of how we think about medium and long-term growth for the business. And we would characterize the pipeline as strong and continuing to improve. We are starting to see semantic discussions related to the Department of Labor changes whether it's individual advisors not really feeling they're getting the answer from their particular broker-dealer, or don't feel that their advisory firm is helping them in the way that they could. And therefore they are picking up interest in making a change. And then, secondly, we are seeing some interesting institutional behavior where banks in particular are thinking through the cost of implementing these rules that are wanting to explore whether they should, in fact, give up their broker-dealers, which is obviously a great trend from our perspective. We'll see whether those turn into business or not, but I think those are all positive for us as it relates to the pipeline going forward from here. So that, I think, gives us a positive outlook as we go forward.

Thanks. And one more just quick follow-up for me regarding the CapEx numbers that were highlighted in the release, it looks like CapEx increased to $36 million. It was up $16 million sequentially, a very meaningful jump. I didn't know if you could just aggregate how much of that was a function of the new campus that you cited in terms of the build-out in the release versus technology investments?

Yes. So the new campus was the biggest piece of the increase. But keep in mind that should be completed by the end of this year. So we'll have a little bit of an elevated CapEx for a couple more quarters. But then once that campus is done, that will come back down. But we did also have an increase in technology. But I think the campus was the primary driver.

Great. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from the line of Chris Harris with Wells Fargo. Your line is now open.

Great, thank you. So there is quite a lot of moving parts to your business. It's sometimes hard for us to really see what's going on, given all of that. And we know that your gross margin was up 1% year-on-year, but some of that is impacted by interest rates and the market. So really just wanted to get your guys thoughts as to what you think your true organic growth rate of your business is right now? And what do you think it could be if you really start executing well?

Sure, Chris. I mean, I think when we think about it broadly, right and I would emphasize a lot of the things that I covered in the prepared remarks which there's a lot of seasonality, right. Even when you look at the quarters-over-quarter, but especially when you look at the sequential quarters like this quarter, where it was a great quarter, great growth metrics, but our production expense naturally rises, right. So there's just a lot of things maybe to your point that make it hard to follow. But I think at the core, when we go back to what both Mark and I indicated in the prepared remarks just growing assets both organically and with the market and again the market is just tough to predict and growing the returns on those assets at a greater rate through things like our transition to advisory, moving more assets onto our centrally managed platforms, all those things together we think are going to drive revenues over the long-term. Giving you a specific number, we don't have that, but I think we feel confident that we can executes on all those things and drive our growth rate up.

And I do think your point that if you look over the past year, you are getting the last of the anchor banks off from this quarter forward - that story is over. And that's been a story that's played through our P&L since the end of 2008. So it just put a damper on every given year, because you are removing EBITDA. The good news was we had above market rates on our deposits by going long at the end of 2008, and that's what really has now come off. But it came down in a step-cost function - as our step fee reductions function for the last several years. So it will be nice to have that behind us, because that then lets the P&L be a little bit easier to see without having to take those adjustments through.

Yes. No, absolutely. That will definitely help. A quick follow-up then, more sort of a technical question. Do you guys get any product manufacture revenue from hybrid RAAs?

Product manufacturing revenue - so we certainly get paid custodian fees. As a result of manage that money for clients, you have 12b-1 fees that are paid, as they are to all custodians, and that essentially are coming from the structure of the mutual fund. And you have networking revenues that come there as well that are part of the process - that's true for all assets in addition to advisory - or hybrid advisory, which I think is your question. Does that make sense?

Yes, it does. Thank you.

Thank you. Our next question comes from the line of Alex Kramm with UBS. Your line is now open.

Yes, hey, good evening everyone.

Hi, Alex.

I want to talk about your kind of proprietary advisory product, and hopefully I get this right. But usually we think about just very open architecture, but I think and please correct me if I'm wrong, that there is a decent amount of advisory assets on your kind of managed account service, I think it's called SAM. So that's the first part of the question - like just let me know how big those products is, and how we actually get paid on that. And secondarily - and this is the more important part, as it relates to DOL. I have heard that some of the economics, the sharing are much higher there, so I think those products have been very successful because the economics have been pretty good. So when you think about fee levelization and basically your payouts, and everything has to be the same as other products, you feel like some of the success could be reined in as obviously fees are not differentiating any more. And then you basically have slow growth in your proprietary product?

So your premise is that - yes, so that's quite a question. So I think you may have gotten the wrong call, Alex. We don't have any proprietary products here. We don't underwrite any products whatsoever, so I'm not sure what you're referring to. We have a program called SAM, which is the rep or the advisor as a portfolio manager who basically has a choice of thousands of mutual fund products or other products to choose to put there. And then basically he charges the fee or she does on the advice that's provided. And it's ongoing advice for a fee. And then we are basically the custodian for that product, and we receive then custodian expenses like networking cost and the like. So transfer agencies -so I don't see that as an issue and we don't have proprietary products, I'm not sure what you may be referring to. Now, we have another program called Model Wealth Portfolios that is a central managed platform. Now that - and that sometimes people do get confused. It's a proprietary technology. And basically what we're doing there is rebalancing accounts based on asset allocation decisions that a Black Rock or other firms could be making. And so we're outsourcing the operational aspects of that management of those accounts, and the advisors are also outsourcing the strategic asset allocation that may be there. And that really is a service - if you think about it, it's an operational type service, not a product. So it's not underwritten, it's not a fund or something like that. And it basically is an explicit fee that charges an administrative charge to the client that's there, and that's when we announce the price changes on, so that's already well-known and we're happy to go through that in more detail. But other than that, I can't think of if there's something else. Is there some other area you want to explore there?

No, I think that was great. I think I was talking about SAM. And if you're telling me that there's no proprietary I guess benefits go to you or those products are earning more than others, then there is no conflict, and obviously you should be in good shape. Secondly this is just a quick one for Matt…

We're in good shape, just to be clear, yes. Not only for that reason but that would certainly be a primary one.

No, that's great. Thanks. And then just secondly, just very quickly on I think, Matt, you talked about our buybacks a little bit. Maybe if you can just flesh it out a little bit more? I mean, obviously this is a very uncertain world that we are all going through right now, so I guess what would make you a little bit more comfortable maybe buying back the stock any more? Is it the stock price? Is it just a more comfortable outlook? Or what would give you more excited to buy back your own stock again?

Yes. So I think, Alex, hopefully, the prepared remarks are very clear. We would be incredibly excited to buy our stock back at this price. We think it would be a great investment. But I think the key for us is balancing, having a strong balance sheet. When you think about balancing, having a strong balance sheet, the industry that we're in, and the nature of our business model, our earnings outlook is a key driver of that model and it's tied to the macro environment tied to the level of the S&P, tied to the level of interest rates and the interest rate outlook. So that, really the macro environment in having some calmness there, if you will, I think is the key point. And hopefully, you heard that our sentiment there is absolutely improving, but there’s some pretty volatile macro events that are not too far in the past, right? They are pretty recent. So we just want to see some more stability there, but our sentiment is improving. And with respect to stock price, we think it's incredibly compelling at this price.

All right. Very good. Thanks.

Thank you. Our next question comes from the line of William Katz, Citigroup.

Thanks for taking my questions. A couple [indiscernible] ones. First off, in the second quarter, obviously very good recovery of commission trends across the board, a little bit unique to you guys, it seems like. But how much of this do you think is just a recovery to more normalized levels versus any kind of acceleration of activity ahead of DOL change, if you can parse it that way?

Yes, it's a good question. So I actually think you are just seeing a cyclical return of what has been very, very low commissions starting to do some recovery. I wouldn't call this a robust recovery, but I think you are seeing the beginning of a recovery of commissionable sales. And I think the good news is it's in a world in which we've already gone through changes that we made as a result of federal regulation in particular, but will work under the Department of Labor as we've looked at it. So I think these are all very encouraging signs that advisors and their clients are understanding. I think we also can't take out of effect here just market levels and those things, which is more cyclical in nature. So I don't think people are trying to rush ahead of the DOL, let me be clear, because these products are already repriced to a new lower level. So just to be clear as day about that, Bill - they are not trying to rush in before something closes or whatever might happen from there.

Okay. And then the second question is - and maybe I'm sort of reading some third-party research that's out there as well, and some survey work - some of the things I've read suggest that on the DOL, some of the interpretation is that if a financial advisor or an RA were to move, that they might not be grandfathered under the BIC. I'm sort of wondering if you guys had a view on that. And then secondarily, if in fact compensation has to be more fully disclosed and transparent, how does that, if at all, change sort of the flow of available FAs for movement?

Yes, I've read some of the same pieces. I think our view is that the base of the BIC will cover every asset, let's not kid ourselves, it's just a matter of when, right? So remember that if we go two years from now and the advisor is sitting on our platform with existing assets, and their advice to a client is keep those assets - that's advice, that's going to have to get covered under a BIC. So you are going to have to have a process that is a cleanliness process, let's call it, even when your advisors don't do anything, it's there. So by definition, BICs will be everywhere. And so I don't see that as being the restrictive issue for someone to move. They are moving for a lot of other reasons than that. They're moving because they want to get to an environment in which they can operate a better business for their investors, their clients and for their practice. And that's going to be much bigger in terms of their motivation and the economics that they have than worrying about the process that you go through. Our job is to make that process easier, as we do today for people who are moving. Moving is a big deal and takes a lot of effort and a lot of paperwork, and that kind of stuff. And we've really created quite a good process for making that as easy as possible. So what will happen is we will just incorporate a BIC process when it's needed to make that happen. So don't think it will restrict movement of advisors over time from what we can see today, given its just one more process similar to others that we've seen. Your second question or second part of…

And if I can just - one more question - a little bit of a necessary question but I look at some of the underlying flow trends, if my math is correct, it looks like you had about a $0.5 billion of outflow on the corporate RA and you have a couple-billion out on brokerage assets offset by some nice inflow of the hybrid. A, is that actually correct? And B, if rates don't change, how does that sort of play through from an incremental profit dynamic?

Yes, so I'm not sure on the rates part, Bill. On the net new asset flows, I think you know we give you advisory flows, and you can see that the hybrid versus corporate breakout and they both grew. The majority of the growth was in hybrid but corporate grew as well. So not sure what math you're doing in the back of the brokerage, but from our perspective, we had growth on both corporate sides, just primarily in hybrid.

Okay. All right. Thank you. I'll follow up later. Thank you.

Thank you. Our next question comes from the line of Devin Ryan with JMP Securities. Your line is now open.

Hey, good evening, Mark. Good evening, Matt. Just want to come back to an earlier question. I know that you guys aren't ready to announce big changes to the shelf, as you said. But one thought from Investor Day was that if there are fewer products, the economic value would improve for the remaining manufacturers. And so it wouldn't be unreasonable for LPL to share in some of that economic benefit. So I know there's still a lot of work to do and a lot to work through here, but is there a conversation or maybe contract renegotiation that needs to happen here in the coming months, just as a part of the process of getting ready for the DOL implementation? Just trying to think through kind of what is coming and whether that's something we should be looking for?

Well, I think the best way for us to characterize this is that we feel it's all manageable. There's definitely to and fro'ing, you're describing a to'ing, where you have more value in the assets that are here, assuming that you can negotiate, in a limited shelf line-up, higher sponsorship dollars that relate to those marketing activities and the like on the brokerage side, all permissible under the DOL work. And remember we would do this not just in tax-free accounts. Any adoption of change we're making, including the ones we've already made in VAs and NAIs to cover both taxable and tax-free accounts. We're just going ahead and making this as simple for the consumer and the advisor as possible. So I think that your premise is correct, there will be changes that will result in economics flowing to our benefit that's to the plus side, just like the lowering of commissions is to the negative side for the business. But when we look at all that together and we see the flow of assets coming on the direct business side now onto our books, through the new mutual fund account we described, that's again another good positive for us. That's why we're saying we think in a gross profit level it's quite manageable because of those intakes and outtakes that go on. We're just trying to be careful and be thoughtful about the sponsors, many of whom we've worked with for 30 years, as a product company and a distribution company, we've got to make evaluations around who might be in those discussions, and think through how we do that elegantly as we go along.

Yes, understood. That's great color. And I know there's a lot of considerations, moving parts, but appreciate that. Follow-up here just within mutual funds - I-shares really aren't sold frequently in commission accounts, just given their structure. There seems like there's been an increasing regulatory scrutiny on mutual funds sales practices, really even outside of the DOL when one class like an A share sold and an I-share was available. So the question is I guess do you see the mix of I-shares or sales accelerating, which I would suspect that would drive more mutual fund assets over to fee-based? And then how should we think about the economic implications, if that's the case just on overall mutual fund assets? I know there's a lot of moving parts in there.

Yes. So let's start sort of dividing the world into two parts, one is brokerage versus advisory. I have never seen, and it doesn't exist, a world in which, in the brokerage world, it's either an A share or a C share, there's no I-shares there, there is no B shares any more that used to be B shares. We don't see that world changing in terms of share class types. There are changes in which the C share won't be appropriate any longer; we are still working through that. And certainly there we want to standardize what the A shares look like so we can make that basically as straightforward as it can be for advisors and retail clients. And that's really focusing on what's good for those investors, which is to say no matter which mutual fund family you pick, they all have similar commission structures, it just really helps continue to reduce conflicts. So just to be clear, 60% of our assets are in brokerage; about 35%, 40% of our sales are there, and those will basically don't have the I-share, A share issue that you ranged, because it's a different world. Now come to advisory, and there, importantly, the A shares and C shares don't exist. And what you have are different types of share classes that a load weighed day share, and I-share sometimes. There's just all different classes. There's an alphabet soup of things. But think of it's quite simply as things that don't have sales charges, right? 12B-1 fees are a little bit of an unusual item because it's actually a servicing fee, a marketing fee that's there. And what we are talking about here is that, in our discussion today, is really around within a certain type of account - a corporate taxable advisory account, that's where 12b-1 fees won't exist any longer. So I think if I were thinking about this, in our case, it really isn't economically important because we've told you its $4 million that gets affected by going to that type of share class, so it's just not material in our results. You may be asking the question thinking about the asset management industry, and obviously they need to speak for themselves. But I think this trend has been in place for quite some time. And you can see, given the small number that we are talking about, that obviously is not much of our assets that are affected by that change. So that change has been there for a long time.

Understood. Got it. Okay. Thanks, Mark.

Sure.

Thank you. And our next question comes from the line of Doug Mewhirter with Suntrust. Your line is now open.

Hi, good evening. I just actually had just one fairly technical question and one that I probably should have known the answer to earlier. But just to clarify the fee that you - for a hybrid advisor, the fee that you would charge for them to be on the platform because I realize that they would retain almost all of their revenue or all of their revenue, but you charge generally a 10 basis point fee, I think, on assets. Is that reflected in the advisory line item or in the asset based or transaction and fee line item, just to clarify that?

This is Mark. Let me clarify a little bit about what it is and then Matt can answer where it is. In the hybrid world, you are just charging a custody fee. It certainly isn't 10 basis points but it's something less than that - but I don't want to talk about what it is specifically. And you have transaction charges that go with it. And that's actually what we get paid for the work that we do. It's important to understand. And that trend is what it is and really hasn't altered much - it's there. And then Matt can talk about where we see that as it relates to the hybrid advisory group.

Yes. There's a very small amount that shows up in the advisory line, but the vast majority is an attachment, which is the cash sweep revenue, other asset-based and transaction fees - those lines, that's where the majority of the hybrid economic show up.

Okay. And - but there is - I guess there is a small fee that they - I guess the advisor business would pay you directly for using the platform, as opposed to getting paid from their product providers or the ICA?

No, you had the concept right; I'm just saying the fees that show up for us - right, they keep their revenues - the fees that we show up for us, we have a small amount that shows up in advisory revenue, but the vast majority is in those other three lines, the attachment lines.

Okay. Thanks for that clarification. That's all my questions.

Thank you. End of Q&A

And this concludes our Q&A session for today. I would like to turn the call back over to management for any closing remarks.

Thanks very much for joining our call.