Chris Koegel - Senior Vice President-Investor Relations Mark Stephen Casady - Chairman & Chief Executive Officer Thomas Lux - Acting Chief Financial Officer Matthew J. Audette - Chief Financial Officer.

Chris M. Harris - Wells Fargo Securities LLC Christian Bolu - Credit Suisse Securities (USA) LLC (Broker) Kenneth B. Worthington - JPMorgan Securities LLC Chris C. Shutler - William Blair & Co. LLC William Raymond Katz - Citigroup Global Markets, Inc. (Broker) Joel Jeffrey - Keefe, Bruyette & Woods, Inc. Devin P. Ryan - JMP Securities LLC Steven J.

Chubak - Nomura Securities International, Inc..

Good day, ladies and gentlemen, and welcome to the LPL Financial Holdings' Third Quarter 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. As a reminder, this conference may be recorded.

I would now like to turn the conference over to our host of today's call. Mr. Chris Koegel, you may begin..

Thank you, Tanya. Good morning, and welcome to the LPL Financial third quarter 2015 earnings conference call.

On the call today are Mark Casady, our Chairman and Chief Executive Officer; Tom Lux, who served as our Acting Chief Financial Officer for seven months, including through the third quarter; and Matt Audette, our recently appointed Chief Financial Officer.

Mark, Tom, and Matt will each share introductory remarks, and then we will open the call for questions. We would appreciate it if each analyst would ask no more than two questions at a time. Please also note that we have posted a financial supplemental 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 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, including those related to capital management and expense management, 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 during this call will include certain non-GAAP financial measures governed 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..

Thank you, Chris; and thank you, everyone, for joining our call. Before I begin, I'd like to welcome our new Chief Financial Officer, Matt Audette, to his first LPL earnings call today. Matt brings a proven track record of expense management and capital allocation.

While he's only been with us for a month, he hit the ground running and has helped us shape the decisions that we will discuss. I like to also thank Tom Lux for his service as our Acting Chief Financial Officer for the past seven months, as well as his service for the previous six years as our Chief Accounting Officer.

With more than 30 years of experience in our industry, Tom has made an invaluable contribution to LPL and we wish him well in his upcoming retirement. Today, I'll briefly summarize our third quarter results, provide our updated thinking about the Department of Labor rule and announce several significant decisions.

Next, Tom will speak in greater depth about our quarterly results. Matt will then expand on our future plans. Lastly, we'll open the call for questions. Much like we discussed on our last quarterly call, the business environment in third quarter was challenging.

Our industry experienced volatile equity markets, decreased asset prices, and near-zero interest rates. In this environment, we have solid business performance that was consistent with similar turbulent periods in the past.

Sales commissions and net recruiting slowed, and lower asset levels reduced to trailing commissions, advisory fees and asset base fees. At the same time, transaction volume and cash balances reached record levels, production retention remained tight and net new advisory asset flows remained strong.

We continued our planned investment and compliance and legal resources to lower our risk profile, while also carefully managing other expenses given the environment. Despite the challenging environment, our solid performance on several dimensions generated third quarter adjusted earnings per share of $0.55.

We also continue to closely monitor and precipitate in discussions about the Department of Labor's fiduciary proposal. At this time the final rule and its implications are still unclear. But we understand the range of potential outcomes and we have been diligently working through our options.

We are confident that we'll be able to help investors and advisors adjust to the transition though some investors with small accounts maybe affected. We also have assessed the possible upfront and ongoing cost to comply with the rule and have included those estimates and the costs in our 2016 G&A growth expectations.

Of course, with the final DOL rule is significantly more involved than we anticipate, we'd need to revise our estimates. We'll continue to engage with discussions in Washington as we plan for the final rule. I'll now turn to how plan to take advantage of a significant opportunity to unlock more of our businesses' potential.

We are confident in our core business and believe we are in a position of strength. We are leader in our markets and we continue to have a strong asset gathering and recruiting outlook. Over the past three years we've strengthened our management team and our operating platform including our compliance and legal infrastructure.

In strengthening our team we have set in motion our focus on simplicity as demonstrated by our coming rollout of ClientWorks for our advisors, better tools and information to reach our investors, and automated and improving our operations.

We continue to improve our service levels under industry veterans Tom Gooley and Tim Hodge who both recently joined LPL. By the end of the year we are on track to have doubled our relationship management coverage and increased our service capacity by 25%.

Our capital-light model provides strong cash flow for business investments, shareholder returns and natural deleveraging. At the same time, current uncertainty of our asset prices, interest rates and the Department of Labor fiduciary rule paired with our recent operating results, have created a substantial, but temporary overhang on our shares.

This overhang exists in spite of several potential catalysts for our performance. While the timing is uncertain interest rates are likely to rise at some point, and our business will generate substantial additional profits when that happens, our multi-year investments in legal and compliance have lowered our risk profile.

So we can expect meaningfully lower levels of 2016 regulatory charges that in 2015 and normalized growth in our risk management expenses. In short, we see the competitive environment shifted in our favor. And we could use our scale, enhanced capabilities, strong financial position and capital-light model to our advantage.

We believe there are additional actions we can take now to unlock substantially more value, specifically we can better manage our cost, and utilize more of our balance sheet to drive shareholder returns. First, I'll discuss expense management.

Over the past few years, we've had to invest in the infrastructure of our business, and these investments remain critical to strengthen our capabilities, and lowering our risk profile, but our business should generate more operating leverage.

The good news is that we are nearing the end of the necessary upweighted investment in our risk management operations. We'll make critical business investments to enhance our advisors' experience and growth while ensuring that our risk profile continues to improve.

At the same time, we have grown and built capabilities quickly, and we know we can be more efficient. We also operate in a dynamic market environment, which currently is more challenging, so we need to be thoughtful about focusing our efforts and investments on client-facing initiatives and putting more scrutiny on non-client-facing activities.

Therefore, we are taking action to respond to the environment, but the uncertainty in equity markets, interest rates and regulation combined with the fundamental need to show more operating leverage, we're looking at cost through a new lens. Simply stated, we're going to be more efficient at LPL.

For 2015, with three quarters now complete, we are confident that we'll manage our core G&A expenses to meet our expectations of 7.5% to 8.5% growth for the year versus 2014 and we'll be toward the lower part of that range. For 2016, we plan to keep our core G&A expense growth lower than we have in recent years.

We'll have the full-year effect of the investments we made in 2015, of course flowing into 2016 expenses, which will cause a slight increase in our expense base. We'll continue to invest in rolling out ClientWorks, our new advisor platform, and improving our advisor service and operations.

We also need to acknowledge and be flexible on our cost expectations to ensure that we can fund whatever changes we need to make for the final DOL rule. We anticipate core G&A to grow 2% to 4% in 2016 based on these three factors and managing the rest of our core G&A expenses to be flat.

Of course, if the final DOL rule is significantly more involved than we anticipate, our upfront cost to comply could go up. I want to reiterate that our success is built each day by helping our advisors serve their clients. So enhancing our value proposition while becoming more efficient is and will remain a key focus going forward.

Second, I'll discuss our updated capital management strategy. Since we've been public, we've operated at a net debt of two to three times adjusted EBITDA, and opportunistically repurchased our shares. We have reassessed these practices to better align with the stability of our earnings stream and capital-light model.

We believe moving up to approximately four times leverage will drive meaningful value for our shareholders. Matt will speak to this in greater detail. Next, when we consider how to deploy the proceeds from this additional leverage, along with our operating earnings, we believe our own shares are the best investment we can make at this time.

Uncertainty over equity markets, interest rates and the regulatory environment have caused our shares to trade at a significant discount to what we believe is their intrinsic value. Therefore, we've decided to significantly increase the scale and pace of our share buybacks. Our board has authorized a total of $500 million of repurchases.

We believe this shift in our capital management strategy is the best way to utilize our balance sheet to strengthen our industry position while driving greater value for shareholders. I want you to know that we understand the competitive advantage our model provides on capital allocation, and we fully intend to take advantage of it.

In closing, we remain confident and encouraged by our strong relative position in the industry. We believe the decisions we announced today on expense and capital management further improve our business potential and will create significant value for our shareholders. With that, I'll turn the call over to Tom..

gathering assets, increasing gross profit, managing expenses and allocating capital. In the third quarter, we generated adjusted earnings per share of $0.55, which was up $0.07 year-over-year, but down $0.10 sequentially.

Compared to the second quarter, growth in transaction and cash sweep revenues combined with our share repurchases drove an increase of $0.03. This growth was partially offset by $0.06 representing the net expenses of our annual national advisor conference.

In addition, the remaining $0.07 primarily related to soft sales commissions and declines in various revenues that are sensitive to market valuations. Starting with assets, the market environment was challenging as the S&P 500 index was down 7% from the end of the prior quarter.

Despite the environment, we added $4.2 billion in net new advisory flows, representing an annualized growth rate of 9.3%. At the same time, total advisory and brokerage assets decreased sequentially by 5% in the third quarter as the declines in market values more than offset net new asset flows.

I would also highlight that our asset mix continued its shift toward advisory, which now represents 39% of total assets. New advisors contributed significantly to these net new asset flows as we continued to recruit high-producing advisors. Our recruiting outlook remains positive given competitive and regulatory dynamics.

Our production retention remains high at approximately 97%. At the same time, we continue to see increased levels of departures primarily from low producers due to the market environment. In the first three quarters of 2015, we have had departures of approximately 100 more lower-producing advisors than we had through the comparable period of 2014.

As a result, we saw a decline in our total advisor count over the past three months, but we remain pleased with the quality of assets and advisors coming to LPL, as evidenced by our new net advisory asset flows. We remain optimistic about our recruiting momentum and our retention for the remainder of 2015 and into 2016.

We have discussed that our asset growth drives our gross profit growth. This quarter, despite the 5% decline in assets, our gross profit was relatively flat sequentially.

Our strong asset gathering and diverse gross profit streams offset half of the impact of market declines in the quarter as volatile equity markets contributed to record transaction volumes and elevated cash balances. Revenues from our national advisor conference also contributed $6 million of sequential growth in gross profit.

At the same time, the declining value of customer assets reduced market-sensitive revenue streams such as trail commission, advisory fees and sponsor revenues.

Sales commissions for variable annuity products and alternative investments continued to stagnate due to continued low long-term interest rates and concerns about valuations in the real estate market respectively. Cash suite revenues increased in the third quarter by $1.5 million to $24 million due to growth in client cash balances.

These balances stood at a record $28 billion at the end of the period. Turning to expenses, our quarterly G&A costs grew sequentially to $221 million, primarily driven by the expenses for our national advisor conference.

Our core G&A expenses which include all of our G&A, except promotional expenses and regulatory related charges, were $171 million; flat sequentially, but up 5% year-over-year due to new hires primarily in legal and compliance.

Promotional expenses, including the advisor recruiting costs in the form of cash transition payments, amortization of forgivable loans, maintenance, transition assistance, conference expenses and advisor marketing costs increased $15 million sequentially to $42 million. This sequential increase was due to the cost of our national advisor conference.

I would also like to remind you that recruiting is seasonal and we often have a strong fourth quarter that can drive an increase in our transition assistance costs for that quarter.

Regulatory-related charges which include reserves for the estimated cost of settlements including fines, penalties, and restitution, expenses for legal and related consulting services provided during the period, and insurance costs, increased slightly sequentially to $8 million.

In the third quarter we reached agreements to resolve several of the significant regulatory matters that we have been working on. We reiterate our expectations that our total 2015 regulatory-related charges will be lower than our 2014 total.

We also continue to expect that our 2016 regulatory-related charges will be meaningfully lower than our 2015 total, as we believe that our compliance investments will continue to lower our risk profile.

Looking for a moment at depreciation expense, which is not included in our adjusted G&A, we incurred $17 million in the third quarter, which was flat sequentially. In the fourth quarter we anticipate a $3 million one-time increase in depreciation expense as we consolidate some of our real estate footprint.

Finally, I would like to highlight our capital allocation in the third quarter. We returned $49 million of capital to shareholders through $24 million of dividends and $25 million of share buybacks. These buybacks total approximately 600,000 shares at a weighted average price of $42.12.

So far this year we have returned a total of $213 million to shareholders through $72 million of dividends and $141 million of share repurchases. In the third quarter, we also invested $20 million in capital expenditures, primarily in technology to support our growth. With that, I'll turn the call over to our new CFO, Matt Audette..

Thank you, Tom. It's a pleasure to speak with everyone on the call today as LPL's Chief Financial Officer. Before I get into our announcements today, I thought it would be helpful to spend a little time talking about why I joined LPL, my experience and some early observations.

Having spent nearly my entire career at one firm and helping lead it through some challenging times, I didn't make the decision lightly to leave and come to LPL.

However, I was quite intrigued by the independent model, the secular shift to advise that I think will drive long-term growth, the capital-light model that empowers management to allocate capital in the best interest of shareholders, and most importantly, the strength and commitment of the management team to drive value for our advisors, retail investors and shareholders.

After my first month of working closely with the management team and organization, I feel even more confident about my reasons for coming and the decision I made. I lived through a series of gut-wrenching experiences in my career, which gave me the focus and perspective of what drives value for shareholders and what doesn't.

I believe prudent expense management and shareholder-focused capital allocation are critical to driving shareholder value.

I believe every dollar we spend should be scrutinized to ensure it's invested to generate the greatest value, whether it's a simple expense, a capital expenditure, an investment in the business or return of capital to shareholders.

It's also important to note that at LPL, a dollar that drives the greatest value for our advisors and retail investors is oftentimes the same dollar that drives the greatest value for our shareholders. Okay. Enough about me, let's talk about the decisions Mark announced earlier. First, let's cover expense management.

As Mark said, we will continue to prioritize critical business investments. For 2015, we had to make major investments to finish the build-out of our compliance and legal teams. And we're on track to finish those investments this year as planned. We will also meet our 2015 core G&A growth expectations of 7.5% to 8.5% versus 2014.

We expect to be at the lower part of that range. Given our year-to-date core G&A growth is 6%, that implies a slight sequential increase in our core G&A in the fourth quarter. The primary driver of the increase in costs is we anticipate incurring associated with some actions that we plan to take to become more efficient in 2016.

For 2016 we are now shifting our mindset. We are aware that our business should generate greater operating leverage and demonstrate the scale advantage we have. In our recent past that leverage was massed by critical investments that needed to be made. Now that we're nearing the end of those investments, we must shift our thinking.

While we'll continue to invest in critical business priorities, we plan to keep our core G&A expense growth rate significantly lower than in recent years.

As Mark said, we have decided to focus our investments on the most critical business needs, including ClientWorks and improving our service levels while managing 2016 core G&A expense growth to 2% to 4% growth versus 2015 levels. As always, there are lot of moving parts to 2015 and plan for 2016. So, let's walk through the details.

We do have the full-year effect of the investments made in 2015, flowing into 2016 expenses, which will cause a slight increase in our expense base. We need to factor in continued investments in ClientWorks and improving our service levels.

We also need to be flexible on our cost expectations to ensure that we can fund whatever changes need to be made for the future DOL rule. We have included those cost expectations in our core G&A outlook.

But, keep in mind that the final rule is uncertain, and if the cost of compliance are being much more difficult than we anticipate, our cost could go up. For the rest of our core G&A expense base, our plan now is to keep those expenses flat to 2015.

To put all this in context, our 2% to 4% core G&A growth rate for 2016 translates to approximately $30 million to $40 million lower core G&A cost for 2016 than if we continued to grow at 7.5% to 8.5%. Turning now to our capital structure and allocation plans, I'd like to expand on Mark's comments.

LPL's capital-light model empowers us to allocate capital in the best interest of shareholders with a lot more flexibility than most other models. As I said earlier, this was one of the key factors that attracted me to the role.

It's quite clear that we are in a window of time when we can take full advantage of that flexibility to drive shareholder returns. As I look at LPL, I see a business in which EBITDA is stable and recurring.

Coverage of interest payments is quite high, and rising interest rates benefit our gross profit many times more than our exposure to rising interest expenses. Given these characteristics, we are quite comfortable repositioning our capital structure and taking on more leverage.

We believe as a management team and a board that staying in the range of two times to three times leverage is not taking full advantage of our financial strength and stability. So, after much work and analysis, we decided at approximately four times leverage makes more sense given the enhanced shareholder returns we can generate by doing so.

To provide a little color, it's not practical to attempt to run precisely at four times leverage. We can go slightly above four times if we find opportunities that we think can drive significant value for shareholders. And slightly below four times, if the opportunities to deploy this leverage are not worth the cost of the debt.

In short, if we are going above four times, we need very good returns to justify doing so. At the same time, if the returns are running at four times leverage decline, then we are willing to float our leverage down. The key here is that we will be dynamic in our thinking as we believe that the right capital structures can and do change over time.

But, I want to emphasize we believe running at four times is what makes the most sense today. Also keep in mind that variability in EBITDA can also impact this ratio in an individual quarter even if we make no changes in our actual debt levels. Now, let's discuss how we can best allocate this additional capital.

Our goal is to allocate our investors' capital to generate the highest return available. Returns will shift over time, so we need to stay dynamic in our thinking. We believe our shares are among the best investments we can make at this time, as our shares trade significantly below what we believe to be their intrinsic value.

Therefore, we have decided to allocate our additional capital to share repurchases. Turning to putting this plan into action, we are moving forward quickly to execute on this decision as soon as the market will allow. We have received board authorization to increase our debt to target four times leverage and buy back $500 million of our shares.

We are currently working with our bankers and advisors to execute our plans, including amending our credit agreement, raising the additional debt and executing the share repurchases.

Specific to the share repurchases, given the amount of stock we are buying in relation to our total share count as well as our daily trading volumes, please keep in mind a program in this magnitude will likely take some time to execute. That being said, we are working to determine the best and most expeditious way to buy back these shares.

Our current thinking is a meaningful portion of the repurchase will likely be done through an accelerated share repurchase plan with the remainder in open market purchases. We are actively working to launch the ASR in the near-term once we complete our financing.

I would caution that this is our current thinking and our actual actions will be based on the market conditions at the time we execute. Stepping back, I want to summarize our overall view on these capital structure and allocation announcements.

Our consistent earnings stream, our flexible and stable balance sheet and our positive leverage to interest rates give us the confidence to increase our leverage to four times. And we believe the best place to deploy this capital is in buying our own shares as they are trading well below what we believe to be their intrinsic value.

We firmly believe these actions will drive significant shareholder value, so we are acting expeditiously and prudently to capture them. And finally, on a personal note, this first month in LPL has been among the busiest work months of my life. And trust me when I say, I've had some seriously busy months in my career.

But I'll also say that it's been one of the most fun months I have had. And I have no doubt that the management team that I'm now lucky to be part of and the finance team that I was even luckier to inherit, has an unwavering commitment to drive value for our clients and shareholders. With that, operator, we are ready to take questions..

And our first question comes from Chris Harris. Chris, your line is open..

Great. Thanks, guys. In prior calls you guys had mentioned the possibility of potentially doing M&A. And I know we've got the share buyback announced this morning.

Are you still interested in looking at M&A or is the primary focus now simply on buybacks?.

Well, we continue to look for M&A, Chris, and this leaves us flexibility to do M&A and take leverage up further. And so, we feel fine that we can do what we need to do in that market. We do know a number of properties available for sale and people looking to sell, so we'll continue to evaluate those as we have done in the past.

I think we want to understand where value is and where pricing is in the market. I think there was a recently announced transaction in the last two weeks in which we saw a 14-plus multiple to EBITDA; that's a very high multiple. We're a six times to eight times EBITDA buyer.

And so, that really will guide us as to what returns we can get in the M&A market. So, to my mind, repurchase of our shares at an eight times EBITDA multiple is a bargain..

Got it. Okay. It makes sense. And then my one follow-up; Mark, you talked about investors with small balances potentially being impacted by DOL. Is there any way to size how large this group is relative to LPL overall? Just trying to sort of bracket the risk here..

It's small. It's less than 5% of assets, probably closer to 3%. So it's not a lot of assets that we may not be able to service. And we would characterize those assets under $15,000 in balances. So, they're assets that in our advisory platforms are just too small to deal with in and of itself..

Okay. Thank you..

Thank you. And our next question comes from Christian Bolu, Credit Suisse. Your line is open, Christian..

Good morning, Mark, Tom and Matt. So maybe this one is for Matt. Matt, as you noted, you've kind of managed the company and well aware of the risks to a company when your present environment turns for the worst. And I appreciate LPL's model has a far lower risk profile than your previous company.

But, and I'm sure you did a lot of stress tests to make sure the company can run at higher leverage levels even in a downside scenario. Maybe we'd just like to get your thoughts on what you see as downside for this business, just sort of we can kind of frame the resiliency of the model..

Sure, Christian. So, I think in context of going to four times and having comfort with doing that is the core of your question. And there's a bunch of different factors that give us that comfort, and me specifically.

And starting off with just the core business itself, so kind of two primary factors of just steady recurring EBITDA, which is a great measure for cash produced by the business, combined with a capital-light model, right. The business grows or shrinks; there's not a bunch of balance sheet capital that's necessary.

So, it's just a much more predictable cash production engine, if you will. And I think just lends itself to more leverage. At the same time, we're not overly risky, so when you look through what we're doing here, our plans are to continue to maintain $200 million of cash available for corporate use on the balance sheet.

If you saw the details of what we announced on the debt side, we plan to pay off our revolver, so on the other side of this we'll have an undrawn $400 million revolver.

And when I take a step back and look at that overall package, I feel very good about our ability to support the debt and feel good about to Mark's point on the answer to the first question that we also flexibility to do more if needed..

The only thing I'd add to that, Matt, is that in our history when we were privately transferred from our owner/founder to private equity firms, as part of our transaction in 2005, we were levered at almost 7.5 times leverage. So, the business has taken heavy leverage before. This is not heavy leverage in the context of its history.

So, we feel very good about it..

Okay. Thank you.

And then my follow up, just a quick cleanup question; so on the core G&A guidance for 2016, the 2% to 4%, what's the baseline for that? Is that core G&A ex-regulatory costs that you expect to grow 2% to 4% or is it total G&A?.

You're correct on the first one, Christian, excluding regulatory cost; so just core G&A..

Great. Okay. Thank you very much..

Thank you..

And our next question comes from Ken Worthington. Your line is open, Ken..

Hi. Good morning..

Good morning, Ken..

I guess, first for Mark, you said you had a much better understanding of the range of outcomes from the DOL.

Maybe can you frame for us, how you see kind of the negative and positive extremes with regard to the proposal?.

Well, we've characterized before that we feel the DOL's made great progress and is roughly 80% of the way there, that there are about four areas we have some concerns; we're not going to the great detail there.

The one that is the most difficult to work with is the best interest contract, because the nature of how it is suggested to be used and the quantum of data that would be there.

So it basically requires an advisor to give to an investor prior to really having much of discussion with them what would be a very large disclosure document where you have lots of different fund choices, for example, if you're talking to our mutual fund portfolio.

We have seen plenty of discussion in the press from the Department of Labor that they understand some of those concerns, and they plan on making changes. You've seen that from Secretary Perez, and from Phyllis Borzi, who is leading the effort there and so we applaud them for their willingness to listen.

And to think through how to make that a workable document that gives good disclosure to consumers and helps bring transparency to the market.

So we do think that is the most likely outcome, is a workable best interest contract that would allow us to continue to do our business, that would mean that we still have the product exemptions where there's a process where they approve certain products and don't approve of others and let's assume they continue in that.

You've seen us disclose our believes about impact to gross profits, which is about 2% not including anything related to the resell of a product. So, it would affect at the gross level 2% of gross profits and then obviously those assets will be invested in something else, which will offset that.

So even in the worst case we can imagine that sort of a 1% net impact or less from there. So that's the most likely outcome.

Obviously, you can have a situation where it goes all the way over and we decide not to offer brokerage services, that's the worst case we can imagine, as we sit here today, and that we think that would be a travesty for investors, because it would not allow them to have a way of dealing with their financial planning needs.

Vanguard did an excellent survey that talked about the fact that those who use advisors have better outcomes. We know that they basically retain that rollover money rather than spending them. And they also invest it wisely for the long-term.

That often is done, sort of, once every few years types of review, and therefore, commissionable product is a perfectly fine way to do that. So in a case where it's the extreme, which is essential you can't use commissionable products, we would shift to advisory, that shift would be large, there's no doubt about that.

And we would make sure that that's an appropriate selection of products and capabilities for those investors from there.

That we characterize as having a movement of assets that are historical into advisory and then moving all new sales, if you will, into advisory again when it's appropriate and making sure that we can take care of investors in the right way. That is an extreme. I don't see that happening, but that is kind of the range of the thinking.

I think what's important to take away from our discussion here today is that, one organization that takes action, sometimes that action is spending at a higher level than the market would like us to, but I think you have to look at the results we're getting by getting that done.

And so, what we want to make sure all that are listening, hear from us is that we are exploring every possibility, we are planning for those and we are making sure that we have in our expense base, for 2016, as disclosed, the ways that we can deal with that effectively and really assist the deal well and it's work to get to transparency and clarity for retail investors..

Okay. Great. Thank you very much..

Sure..

And then, in terms of the reduction in the brokerage count and the low-producing brokers, is it market conditions that are really driving them out, maybe to what extent are you squeezing them out? And when we think about a small producer versus a large producer, are you making money on the small producers, I assume you still are, or is that actually the small producers kind of a net negative for LPL unless they have a chance to really growing up to be much bigger? Is it kind of in your best interest to see them maybe move to a different career?.

Well, I think you said it quite well. It's not unusual when you have moments of stress that somebody looks at the range of their economic activities.

I grew up at a small town in Indiana, we have LPL advisors there, often that advisor will do the securities businesses, their primary means, but they may also be an insurance agent, they may also be an accountant. And so they have other businesses they're involved with.

And typically in times like this, they assess, geez, my time better spent on one of the other activities where I can make better income or just, again, have a simpler life as things may go. So, it's exactly what you'd expect in the market where individuals make those decisions.

It's also our business owners, remember that we have 4,600 business partners here who oversee their offices and their business and they're making a decision about exactly your point, which, is it economic to have this person in my space doing what they're doing, that may be in more a suburban location or even urban location, maybe they had someone who they put into place a couple of years ago and they're making decisions to see that that person isn't going to grow, as you suggest.

And then finally, the third category are those that we look at, and again, reach that same conclusion. We've given them a couple of years, they haven't succeeded in the business the way we thought they would. And therefore, they're just not going to grow into something that makes sense for them to be involved in the business with us.

Generally, we make money at lower levels of production, down to even $100,000 is just not a very much of a quantum of profits and the extent to which that takes away our focus from practices that are growing. We always want to focus on those practices that can grow and have good opportunity to continue to help their investors..

Okay. Great. Thank you very much..

And our next question comes from Chris Shutler. Your line is open..

Hey, guys. Good morning..

Good morning, Chris..

Good morning..

And welcome aboard, Matt..

Thank you..

As you guys think about core G&A next year, you mentioned spending on ClientWorks, maybe just talk about the timeline of that project.

And then what are big buckets of spend that you're going to dial back?.

Well, I think let's start with the buckets of spend dialing back. We have spent over two years, about two-and-a-half years really investing heavily in our core IT infrastructure and heavily in our employee tools and toolkits.

So, we replaced really 80% of the systems our employees touch, everything from hardware that they use such as the telephone system to the way we manage telephone calls and the service center to the document imaging system that we use and we replaced in some cases a significantly old technology or technology that didn't have the latest productivity to it.

So, what we're now going to experience is a productivity dividend that comes from that heavy investment and from that focus on our core infrastructure for the business. So, that's what we'll spend less on we don't need to replace a document imaging system once every five years or so, so that's now done.

And that would be a good way to characterize the extent of it. In our of the risk management organization we have a continuous investment, a bit more to wrap-up early next year on technology, but generally same characteristics.

So, now you can imagine that coming down in spending, and for us not to need to hire at the same level for growth of business. So the productivity ratio, if you will, should be the payoff for that kind of investment in capital. So that's the down part.

The up part is, as you say, ClientWorks and advisor-facing systems and end-investor-facing systems, we certainly see the consumer changing their demands on technology. We redid our investor portal for them about two years ago. We're going to do the next upgrade of that this coming year, which will be very important to them.

It will also let us get to more electronic statementing to allow us to get further productivity in the years ahead. And we also, of course, with ClientWorks see the 2016 as a big delivery year for us. We're in beta today with roughly 1,000 advisors using the technology in beta that covers about 50% of their day-to-day life.

And what we want to get to is 80% or 90% of that life all on ClientWorks, so we can start to retire BranchNet as we move into 2017. So, that's our plans today. That will be a significant change for us in our advisor-facing activities. So, we're excited by being able to focus on that in 2016..

All right. Thank you. And then, Matt, now that you've been on the job for a month you talk talked about what attracted you to the job. What's your honest assessment or what you believe LPL really need to do a better job of going forward, a few examples will be helpful? Thanks..

You want honest assessment. I'm focused on that, and....

That's good..

I think the big caveat here is a month into the job I think that most of my observations are validations around the reason I took at a lot of which are the decisions and things that we've talked about today.

I think the things that we need to focus on and, I don't know if do better is the right term, but it's all the things that we've highlighted today and that Mark was just talking about, right, continuing to invest in technology and the service that goes along with it, ultimately just serving our advisors better, right, because every single thing that we do, ultimately comes from having advisors be happy with us.

So, we just never want to lose sight that the ultimate end retail investor, if they're happy, everything leads to us having recurring EBITDA, cash balances going up to do all the things like we just announced today. So, I just think, my observation is continuing to focus on that is what needs to be done..

Okay. Thank you..

Our next question comes from Bill Katz with Citigroup. Bill, your line is open..

Okay. Thanks very much. Welcome aboard as well. I appreciate you guys taking my question this morning. Could we just stay on the financial advisor dynamics for a moment, please? Some of your peers have reported some very strong growth in FAs over the last couple of quarters as some of them have flashed through here.

Can you break down, maybe, the production that's coming in versus the production you're losing in terms of, is there a pick-up in productivity? It's hard to see that given the product mix and what's being going on underneath that, just trying to get a sense of the ins and outs against that?.

Yeah. Bill, I think, there's a couple of things that I'd point to, is we have seen those same announcements and always glad to see advisors generally move to independent models; that's a good thing. And as we look at it, we measure ultimately what assets are doing.

Based on public announcements we've read thus far, we'll be the second fastest growing advisory on a percentage basis, asset growth for the quarter, which continues strong multi-quarter asset growth in that category. That's a category that's very valuable to us, worth about 120% of the economics that are associated with brokerage assets.

And so, we think we're demonstrating strong asset growth fundamentally. That does come from two places; one is existing advisors adding to their client base or adding – clients adding new assets. And as you say, it's new recruits.

Where we're having strengths and practices that are larger, so the characteristics of the class this quarter are little more than two times the average production that's here, and bringing good assets with them.

You saw a number of announcements, including some here in the fourth quarter, of our practices that are quite large, hundreds of millions of dollars of assets that are moving to us, including one that has approximately $2 billion of assets moving as well.

So, we continue to gather assets nicely through recruiting; this is why head count is a kludgy way of measuring it, because we're much better off to have smaller producers go often focus on some other industry, and to have large producers join us. Last thing I'd point to is our high net worth growth.

If you saw on the Barron survey we moved up three places from number 26 to number 23 in serving high net worth families. We are growing quite significantly in that business and that's another health indicator for me; both our existing advisors and new advisors joining us in that space..

Can you just qualify one thing before I ask my follow-up question? What is the brokerage flow for the quarter? I'm just trying to get a sense of the overall net growth to the company.

Could you guys focus on the advisory adds, but your peers focus on net assets?.

Yes. We have basically technology going in place in terms of measuring that brokerage piece. It's in beta now, and so we don't break out brokerage in and of itself. You can see overall, assets are down about what percentage for them, 5% for the quarter.

So, that tells you that if advisory assets are up by $4.2 billion, that tells you a little bit more about the dynamic of the brokerage assets that are there. Brokerage assets tend to be a little more equity-based because they're not typically balanced portfolios. So, if markets are down, you see that absorption go through.

So to me, it looks like a fairly normalized amount of assets on the brokerage side given the public data that we have for you..

Got you. Just my follow-up (46:15) How do you think about promotional expense next year? You run a lot of expenses through that that are not included into the difference between GAAP and your adjusted earnings and I think the market also focuses on that line.

What's your sense for that kind of growth year-on-year in 2016?.

Yeah. So, no guidance on that. I mean, it's really driven primarily by the dollars we use to grow the business, so it's really going to be correlated with that. And of course, that's hard to give guidance on. So, I'd leave it there..

All right. Thank you..

Thanks, Bill..

Our next question comes from Joel Jeffrey of KBW. Your line is open, Joel..

Hey, good morning, guys..

Good morning, Joel..

Just wanted to clarify one thing on Bill's question.

Can you give us any sense of the percentage of the net new advisory assets that are from clients that are moving from brokerage to advisory?.

No, we don't have it broken out in that way. We have details of it, but we don't publicly disclose that piece of it.

But it would be fair to characterize it given the announcements we made and people joining us, that a lot of it is driven by those who are joining the hybrid RIA platform, and those who – advisors who are in the advisory programs already growing further. That's what I observe rubs out in the market.

Had three different client events for advisors this quarter, this last quarter, and certainly saw the significant growth they're having in the advisory business, again, particularly from more high net worth clients..

Okay. Great. And then, just in terms of the commissions.

Can you give us a sense for the, I guess, maybe sequential declines in the alternative revenue sales and maybe the variable annuity sales?.

I think, overall, the alternative investment commissions were about $26 million. I think, we've sort of used in the past a bench-line quarterly for those revenues being about $40 million, so it was a very soft quarter overall. And VAs were roughly flat inclusive of both sales and trail commissions..

Great. Thanks for taking my questions..

Sure..

And our next question comes from Devin Ryan of JMP Securities. Your line is open..

Hey, thank you, good morning..

Hi, Devin..

When you guys went public five years ago, a big focus seemed to be reducing leverage to move to investment-grade. So, obviously, a lot has occurred since then, but leverage is moving in the other direction.

So, how are you thinking about a path toward investment-grade status today? Is that still an objective over time or do you just not see the same value in that today?.

There is no value in it. It's not something that is going to drive economics for shareholders. It doesn't really affect our business one way or the other.

I think that's what we've learned in being public for five years, is what matters is how do we support advisors and investors, so that they can be successful in their outcomes, that always drives value to business, being a good value, and then really making sure that we're using the balance sheet appropriately.

In this case today being clear that we think we can leverage further given the strength of the economics of the model and that's a smart way for us to drive value for shareholders..

Okay. All right, great. Thanks for the color there. And then, with respect to the fourth quarter, seasonally, can be a better quarter for commission activity. So I'm just curious if you're seeing any of those same seasonal trends thus far or the fact that the markets were kind of shaking up there in the third quarter.

Is that subduing activities we're heading towards the end of the year here?.

I've got some prospective and I asked Tom to do the same, but – we look at it – it does a lot like 2012 where, remember you had sort of this tax change overhang that occurred right through the end of the year and dampened growth through the fourth quarter of that year, it looks the same way to us here in 2015; this time driven by a different set of issues, really the uncertainty in the economy.

We're certainly hearing reports of slowing down in a number of sectors, nothing that's particularly worrisome, but the market hasn't quite sorted it out and the feds in action and action could be in the form of either raising rates, which is, of course, what we're hoping for at the end of the year.

But, since hope is not a plan, we're also planning for the fed doing nothing. I think it would help the economy if the fed would be clear about what it is it wants to do one way or the other and that would help clear some of the cloud that is brining that dampening to activity.

Tom, would you?.

Yeah. I think, historically, we do see a little bit of a pick-up largely related to tax management, tax loss selling and things like that later in the fourth quarter. It's early in the quarter to see anything like that.

And I think, as Mark described, the key items that have had caused the slowdown in commissionable activity, the lack of any increase in the long-term rates and the fact that we're well away from the 3% rate on the 10-year that we've talked about being a large trigger of creation of product features on Vas that make those attractive products in the investors toolkit, we just don't see anything changing on that in the near-term..

Okay, great. I appreciate the color. Thanks for taking my questions..

Sure..

And our next question comes from Steven Chubak. Your line is open, Steven..

Hi, good morning..

Good morning..

Good morning..

So, Matt, welcome. Just wanted to dig a little bit deeper into some of the core G&A guidance that you'd given for the 2% to 4% growth next year. And I was actually hoping you could size the incremental expense that you're contemplating that tied to the DOL preparedness specifically.

I don't know how you guys are thinking about it, whether it's on absolute dollar basis or per advisor basis, but just giving us some color as to how you determine that incremental expense or investment that's required will be quite helpful..

Yeah. We're not in a position to disclose the details of what we're going to do. We need to have the Department of Labor issue its guidelines, so we can decide from there the best way to approach it.

I think it is fair to say that one thing that's important to understand about the best interest contract, is it looks an awful lot like what you do when you oversee from an SEC perspective, advisory assets; it's a very similar construct.

In our view, we already have some new technology that works quite nicely for oversight of those activities just launched very recently, as part of our rebuilding of our employee infrastructure.

So, we do think there're some characteristics of that technology that let us focus on how to comply with the Department of Labor as we understand it today, but we need to actually see the regulation to understand the best way to respond to it. So that gives us an ability to think about how to leverage assets we already have, so that helps.

Secondly, we do conversions all day long, right, because of the amount of new advisors who come in to the business and which were converting their books of business to our platform.

So we can size quite easily what it would take to move over, say, all the existing brokerage assets to advisory and which would absolutely be a significant change to say the least. And in doing that can size what it takes operationally in terms of just that expense for that year.

It'd be one time in nature, but it needs to be there, that's included in the G&A forecast that we've given you. So, you can see that we're thoughtful about it, but not to a point of looking at it to quite the level of detail that you'd like to..

Okay.

So, just to clarify, so that type of transformational change where you'd be transitioning the brokerage assets to an advisory relationship, that is contemplated within that 2% to 4% growth or not?.

Within G&A, the G&A perspective, it is, because that's the guideline we're giving you as what's the cost structure of that. And what we try to do is give ourselves a range of two outcomes and therefore you end up with having the movement of assets as part of that have some operational process.

Now, whether that's the right thing to do, right, and whether that's what the investor wants to do, that's the big piece that we have to understand better from number of sources including the investor.

But, we, from a cost standpoint, have acted as if that is going to be something that is going to happen, but I just want to make sure I'm quite clear that it's not something that we can command or nor should, but for planning purposes and for the G&A guidance we've given you for 2016, we have included the cost of doing and actually we think that's the most prudent thing to do is to be as planned as possible in our approach..

Understood, Mark. Thanks for clarifying that. And then just one quick cleanup question for me on pertaining to the other revenue line, that did come in a little bit below expectations.

I noted there is some mark-to-market noise associated with deferred comp plans, but I was just trying to get a better understanding as to where we should be thinking about the numbers, the go-forward run rate excluding any mark-to-market noise, just given some of the pressure that we've seen on alternative investment sales?.

Okay. (56:13-57:45) Ladies and gentlemen, please remain on your line. [Abrupt End].