Good afternoon and thank you for joining the Third Quarter 2019 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are our President and Chief Executive Officer, Dan Arnold; and Chief Financial Officer, Matt Audette. Dan and Matt will offer introductory remarks and then the call will be opened for questions.

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

Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans, as well as other opportunities and potential risks that management foresees.

Such forward-looking statements reflect management's current estimates or beliefs and are subject to risks and uncertainties that may cause actual results to differ materially.

The company refers listeners to the Safe Harbor disclosures contained under the caption Forward-Looking Statements in the earnings press release, as well as the company's latest SEC filings to appreciate those important factors that may cause actual financial or operating results or the timing of matters to differ from those contemplated in such forward-looking statements.

During the call, the company will also discuss non-GAAP financial measures governed by SEC Regulation G. For a reconciliation of such non-GAAP measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I will now turn the call over to Mr. Arnold..

Thank you, Sherry, and thanks to everyone for joining our call. As we discussed each quarter, we believe it's awful combined with extraordinary execution and a mission-driven culture will drive long-term growth and value. Working within this framework, we delivered another quarter of solid business and financial growth.

Let's start with the review of the drivers of our business. We continue to focus on delivering organic growth, and are encouraged by the progress in the third quarter. The strength in new store sales and advisor retention, as well as solid same-store sales drove organic net new assets of $7 billion, which translates to a 4% annualized growth rate.

We also closed on our acquisition of Allen & Company, which added another $3 billion of assets that will transfer on to our platform later this year. The assets from organic growth and Allen & Company combined with the higher equity markets drove total brokerage and advisory assets to $719 billion, up 6% from a year ago.

Turning to our financial results, we had another quarter of solid topline growth as gross profit increased 10% year-over-year. We also continued to invest in the business, while staying disciplined on expenses to drive operating leverage. As a result, third quarter EPS prior to intangibles was $1.71, which was up 30% from a year ago.

Looking more broadly at the marketplace, we continue to operate in a large and growing market with favorable secular trends towards independence and advisory solutions.

In terms of the economic backdrop, while we see marketing sentiment driving volatility, many of the core drivers of the economy such as unemployment and wages remains solid and supportive of economic growth and investor engagement.

So while we remain flexible in the event of changes in the macro environment, the strength of our balance sheet and of our business model positions us well to continue investing to drive organic growth.

With that in mind, we thought it would be helpful to use our strategic framework to provide some color on where we're investing and the benefits will look to derive as a result. Our first strategic play involves winning in our traditional independent and institutional markets, while also expanding our affiliation models.

With respect to our traditional markets, our business development team continues to innovate by reinvigorating recruiting partnerships with branches and third-party recruiters, enhancing referral programs for our advisors and finally, leveraging data and analytics to increase pipeline transparency, as well as to improve execution in sales and transitions.

As a result, we're generating more leads, winning at higher rates and onboarding assets more quickly. We see this reflected in our recruited AUM as our trailing 12-month total exceeded $30 billion for the third straight quarter.

Looking ahead to Q4, we continue to be encouraged by our pipeline and expanding capabilities and efficacy of our business development team. In addition to our business development efforts, adding differentiated capabilities is also one of the best ways to attract new advisors and to help existing advisors grow their business.

In that spirit, as consumer expectations evolved to increase omni-channel customized and personalized interactions, we aim to deliver an enhanced digital investor experience that will help our advisors win in the marketplace. As a part of that effort, this quarter we're rolling out a new mobile app for our advisors clients.

This digital experience allows investors to customize and personalize the display of their account information to match their preferences. It is also integrated with our client goals functionality. So investors can measure progress related to their goals in real time.

Next year, we'll roll out version 2.0 that provides a more comprehensive view of clients' wealth through the aggregation of outside assets and offers enhanced client self-service capabilities.

In the short run, this overall effort will enhance investor experience with deeper connections and more frequent interactions; longer-term, we see the potential to create a competitively differentiated experience that is modeled after digital innovators from outside our industry and positions our advisors to increase client loyalty, attract new clients and increase share wallet.

Let's now turn to our second strategic play, where we're working to create an industry-leading service experience by continuing to invest in ClientWorks and transforming our service model into a client care model.

With respect to ClientWorks, we're focused on increasing the personalization and flexibility of the system to enhance our advisors’ service experience and help them gain efficiency in their practices. As part of these efforts, last quarter, we introduced a new library of applications.

Much like consumers use the iPhone app store, advisors can now choose applications from the library, add them to their ClientWorks pages and arrange them in ways that align how they run their practice.

For example, one of the new applications offers advisors our real-time view of key practice data and analytics that provided at a glance insights for managing and growing their practice. More broadly, advisors tell us that the additional ability to customize and personalize ClientWorks is enhancing their service experience and efficiency.

As we develop our new client care model, one of the opportunities we see is expanding our digital capabilities. As part of these efforts, over the past six months, we experimented with artificial intelligence to machine learning in our new accounts organization by launching our first set of robots into our environment.

We're seeing early benefits in form of streamlining the process and expediting the time it takes to activate an account once it's been open, while our current process can take 24 hours to activate an account, the bots are enabling straight through processing to activate accounts in minutes.

These initial experiments are triggering further exploration across the enterprise in an effort to more broadly apply the power of artificial intelligence and machine learning to enhance the client experience and the scalability of our model. Our third strategic play leads us to reimagine the support offered to advisors in the independent model.

In this play, we're focused on helping advisors more efficiently and effectively operate and grow their businesses by providing outsourced business services, digitized workflows, advisor focused capital solutions and lead generation. Let me highlight our progress in one of these areas, outsourced business services.

Now through a series of experiments, we determined that areas of expertise such as admin, marketing, CSO, and technology services are valuable leverage points for our advisors in running their business.

We then piloted these services over the past year to ensure that we could deliver them with high quality at an affordable price and make them easy to use.

After completing the pilots in August, we rebranded this portfolio of services as LPL business solutions and officially rolled them out to our advisors at our national sales conference to illustrate the power and potential of these solutions.

I want to share a story of one of our advisors, Jim Miller and his practices based in Charlottesville, Virginia with $100 million of assets and he aspires to grow his business without compromising his client's experience. That led Jim to initially seek help through our CFO Solution.

Through this partnership, his CFO helped him develop up a new pricing strategy, build a segmented client service model and identified better ways to manage his expenses. Now Jim describes his CFO is one of the best resources he has ever had and thinks of her as a member of his management team.

As a result of his experience with the CFO, Jim is now using our admin and marketing solutions as well. Looking more broadly across our Business Solutions portfolio, we currently have over 600 subscribers and we're excited to help many more advisors like Jim that are operating practices, increase their efficiency and drive their growth.

In summary, we're pleased to deliver another quarter of business and financial growth. We remain focused on combining strategy, execution and culture to serve our advisors, drive profitable growth and create long-term shareholder value. With that, I'll turn the call over to Matt..

Thank you, Dan. And I'm glad to speak with everyone on today's call.

As we review our Q3 results, we thought it would be helpful at first work through our framework for delivering long-term shareholder value, which is comprised of four objectives; growing assets organically and with complementary M&A; increase in our gross profit return on assets by expanding our services; investing to drive organic growth while staying disciplined on expenses; and returning excess capital to shareholders.

Taking a step back and looking at our Q3 results through this lens, we made progress in all four areas. We delivered the highest quarter of organic growth in our history and closed on our acquisition of Allen & Company, all while investing to drive growth and returning excess capital to shareholders.

We're pleased with this progress as we work to generate long-term shareholder value. Now let's review our Q3 results in greater depth, starting with EPS prior to intangibles, which was $1.71, up 30% from a year ago. Turning to total brokerage and advisory assets, we finished the quarter at $719 billion, up 2% sequentially.

This increase was primarily driven by our organic growth, as net new assets were $7 billion or a 4% annualized growth rate. We also added another $2.9 billion in net new assets from our acquisition of Allen & Company.

We continue to expect to transfer these assets on to our platform by the end of the year and add roughly $5 million of run rate EBITDA by early 2020. As for recruiting, we had another solid quarter with $8.7 billion of recruited AUM in Q3 and $33 billion over the past year. Looking at our business mix, we continue to see positive trends this quarter.

Advisory assets increased to 47% of total assets, primarily driven by advisory inflows of $8.2 billion or at 10% annualized growth rate. Within our advisory platform, essentially managed net new assets were $1.9 billion or 17% annualized growth rate.

This included greater use of our advisor sleeve capability, which we rolled out in Q2 and now has over $1 billion in assets. Now let's move to our Q3 financial results, starting with gross profit. It was $543 million, up $7 million or 1% sequentially.

The increase was primarily driven by higher advisory, sponsor and transaction and fee revenues, partially offset by the seasonal increase in production-based payout. Year-over-year, gross profit increased by $49 million or 10%, primarily from organic growth and higher client cash revenues.

These results contributed to our gross profit return on assets of 31.4 basis points over the last four quarters, which was up 0.3 basis points sequentially. Looking at the components of gross profit, commission and advisory fees net of payout were $132 million in Q3, up $3 million from Q2.

The increase was primarily driven by higher advisory fees, partially offset by seasonally higher production bonus expense. Moving on to asset-based revenues. Sponsor revenues were $130 million in Q3, up $3 million or 2% sequentially, driven by the growth in average asset levels and greater usage of our no transaction fee mutual fund platforms.

Turning to client cash revenues, they were $163 million, up slightly from Q2 as higher client cash balances more than offset the decline in short-term interest rates. Moving to client cash yields. Our Q3 ICA yield was 241 basis points, down 8 basis points sequentially.

The decline was primarily driven by lower average short-term rates following the fed rate cuts in July and September. Looking ahead to Q4, we'll have the full quarter impact of the two fed rate cuts in Q3. Additionally, it is widely accepted that the fed will lower rates by another 25 basis points next week.

If this occurs, we would expect our Q4 ICA yield to be in the low 220 basis point range. This assumes our client deposit beta continue to be within our expectations of 25% to 50% and no further changes in interest rates or the mix of or fixed versus floating rate balances. Let's now move on to Q3 transaction fee revenues.

They were $121 million, up $3 million sequentially. The increase was primarily driven by our national sales conference in August, partially offset by seasonally lower transaction volumes and IRA fees. Looking ahead to Q4, we do not have any large advisor conferences, so we expect a $5 million decline in confidence revenue.

Moving to interest income and other revenues, there were $14 million in Q3, down $2 million sequentially. These revenues are primarily driven by the interest we earn on our corporate cash balances as well as client margin balances. Looking forward to Q4, we anticipate they will decline by roughly $2 million, primarily driven by lower interest rates.

Now let's turn to expenses, starting with core G&A. It was $215 million in Q3, up $5 million sequentially as we continued our planned investments in technology and service to drive long-term growth. As we look ahead to Q4, we feel good about the balance of our investing plans and the related efficiencies we're delivering.

As a result, we're lowering the top end of our 2019 core G&A range by $5 million, bringing our outlook to a range of $860 million to $870 million. As we look forward to 2020, I wanted to share some context in how we're thinking about investing for growth.

Over the last few years, we have increased our investments and we're seeing positive results, including increasing levels of organic growth. Given this, we plan to continue growing our investments in 2020 at a similar pace to our growth rate in 2019.

As we think about the mix of that growth, we'll likely maintain our technology spend in the $150 million range, while slightly increasing our core G&A growth rate. We will of course, remain dynamic for changes in the macro environment. But based on what we see today, we're excited about our opportunities to invest.

We look forward to sharing more specific outlook with you after we finalize our plans later this year. Moving onto Q3 promotional expenses. They were $62 million, up $20 million sequentially, driven by our national sales conference as well as higher transition assistance and marketing expense.

Looking ahead to Q4, we anticipate promotional expense to decrease to the low $50 million range, as we have no major conferences in Q4. Moving on to capital management. Our balance sheet remains strong in Q3. The cash available for corporate use was $227 million and our credit agreement net leverage ratio was 2.0 times. Turning to capital deployment.

Our priorities remain investing for organic growth first and foremost. Taking advantage of M&A opportunities when appropriate and returning capital to shareholders. Looking at organic growth, our investments are focused on recruiting new advisors, helping existing advisors grow and enhancing our technology.

In addition to our investments for growth, we returned excess capital to shareholders in Q3. This included $130 million of share repurchases, roughly in line with our plan to complete our $1 billion authorization over two years. We also returned capital through $20 million of regular quarterly dividends in Q3.

In closing, we're pleased to have delivered another quarter of strong business and financial results. We remain focused on growing assets, increasing our gross profit return on assets, investing to drive organic growth, while staying disciplined on expenses and returning excess capital to shareholders.

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

Thank you. [Operator Instructions] Our first question comes from Bill Katz with Citi..

Okay. Thank you very much for taking my question this evening. And may be start off Dan, you sort of kicked off net new asset growth and certainly nice to see that hitting mid-single digit level particularly given some of the mix macro backdrop underneath that.

So I appreciate you still laying that two or three initiatives, I just looked out over the next 12 to 24 months, which of these probably had the most impact in driving the net new growth, and then underneath that is there still going to be more in the advisory side?.

Yeah. So thanks, Bill. Good question. Yeah, so with respect to organic growth, as I think we both reinforced in our remarks, it's a big priority for us and we're encouraged by the progress we've made over the last couple of years. But we absolutely have a focus and an aspiration to grow the results from here.

I think when we think about that approach, we kind of look at it over three fronts, you've got new store sales, same-store sales and retention. And with respect to new store sales, we've got good momentum there. I think it has – we mentioned, if you look back over the past 12 months, we've recruited roughly $33 billion of assets.

If we went back to at this time last year and looked at trailing 12 months from that period, you would have only seen about $26 billion of recruited assets, so that just reinforces I think the trajectory and the momentum we have. I think going forward the build on those results, I would think about primarily two to three.

One, we're focused on continuing to invest and enhance the efficacy of our own business development capabilities that way we win higher rates.

Two, we continue to invest in capabilities that help our advisors differentiate and that helps us attract more advisors; and then finally, as we expand and add these new affiliation models that helps us broaden our market opportunity. So those are the, kind of, the drivers of what I would call new stores sales.

I think second thing, if you move to retention, that's been an interesting positive trend over the last two years where we've actually improved our retention about 1.5%. It steadily improved throughout 2019. And in fact, this past quarter, it's the best it's been over that period of time.

And so again encouraged about our progress we're making there and that strategic play where we're focused on delivering an industry-leading client experience, we think is the key to continuing to improve retention, and I think we can continue to enhance where we are today through investing in ClientWorks and developing this new service model that I referenced.

And then finally, same-store sales, I think that's been steady and a narrow range over the last couple of years and we're really challenging ourselves to rethink and innovate there and that's what our third strategic play is all about, which is really challenging us to deliver some new capabilities, think about helping advisors, digitize the practice these business solutions that we talked about, capital allocation programs for advisors and even beginning to innovate around lead generation all are meant to support same-store sales more systemically.

So those are the sort of the oars we have in the water that are trying to ultimately drive that number up from where it is today. I hope that answers your question..

That's helpful. And then maybe one for Matt, just a follow-up, little bit of long winded questions, I apologize. So as I look at the supplement and I look at the decomposition of the gross profit ROA. And I strip out the impact of client cash that ratio has been about flatten out number of quarters.

So on the one hand, I hear the good growth, the pickup in some of the gross profit ROA dynamics underneath that, but then I also hear a lot of spending going on, so maybe two-part question, what gets the gross profit ROA to move up all else being equal, and then how much flex do have against that incremental spend as you look out for next year if the revenue backdrop and some to be little bit weaker than maybe what you are cost for..

Sure, Bill. So then on the gross profit, I mean, I just emphasize when you look at the ROA overall, it is growing, right, at 31.4 basis points up from 31.1 and you're right that growth has been on the cash side, but I just keep in mind that cash growth has not -- doesn't come just from increases in short-term interest rates.

When you look at the couple of things I would highlight when we think about the shift from brokerage to advisory and we have higher returns on the advisory side, a lot of that is from the cash balances where you tend to have higher cash on the advisory side.

I'd also highlighted the fixed rate balances, so we're getting to a lot more and much stable place for returns and that shows up in that cash line. So, it's not subject to the short-term rate movements. So I would just keep that in mind.

When you do look at that subtotal, below cash as you highlighted, I highlighted couple of things, just look at quarter-over-quarter was down 0.1 basis points, and that was really from the transaction fees line, which is not an AUM baseline, right, transactions are based from activity, the fees are really based on advisor account.

So, from our standpoint you take a step back, I mean, we feel good about the results of the strategy is driving, right? And Dan just covered a lot of it as well answering the first question from things like the growth in advisory, the growth we saw the past three years and especially this quarter and centrally managed, and that early results we're seeing on the business solutions side.

I think just continued focus and success on those over time. I think what really serves our advisors well and help them grow and we serve them well, and they grow, we grow. So, I think that's how we think about that. That's really what underpins the investment plans that I walked through in the prepared remarks for 2020.

And I think when we think about it the macros in a more challenging place to the second part of your question we’ve got a flexible cost structure where we can adjust in different market environments. But that being said, I think when you look at the investments we've been making, they really are driving organic growth.

So I think we would think long and hard before pulling that back. And then when you think about how our business model would operate in a changing macro, which is -- which could likely be driven by interest rates as well as or the equity market.

I know we have covered them several times, and we got a lot of natural hedges in our business model from things like when interest rates go down, you typically see the equity markets go up and good proxy for us as the S&P 500 where 100 points improvement there equals or even more than offset the impact from interest rate decrease.

Then you add to that the strength of the balance sheet where we're from a cash position, where we're from the leverage position at the low end of our range. We just feel like we're in a really good position to drive those investments and make those investments to drive growth.

And then maybe finally, I just highlight an environment like that, those can be some of the best environments to really invest and drive growth from the long-term.

From things like recruiting and M&A opportunities, where advisors and smaller broker-dealers are going to seek a more stable place to be, the pricing of those and that environment both recruiting M&A could be more compelling for the buyer.

And then finally, just a competitive advantage of being able to invest, and again, focus on our advisors to deliver capabilities and service that helps them compete in an environment where others which struggle to do so. I think you can get the overall picture here. I think we feel passionate about the investments we're making.

At the same time, we've got the ability to slowdown where it makes sense..

Thank you..

Thank you. Our next question comes from Steven Chubak with Wolfe Research..

So I wanted to start off with a question on cash balances.

Certainly encouraging to see the uptake in cash this quarter, I was hoping you could speak to your outlook for cash growth and confidence that 4% cash flow you’ve said in the past you continue to hold, and whether we should expect to see any change in client behavior as if I continues to cut interest rates as a potential hedge?.

Yes, Steve. So this is Matt. I think there is not a lot of rate sensitivity there. So I think the customer behavior is not something we see changing.

I think it's more about just a natural amount of cash that you need, and this is operational cash to manage the account, and you see that move in at the low end of that range as you referenced in your question around 4%. And even as we're growing, we're still at that low end of the range at 4.3%.

So, I think the rate environment doesn't cause us to have a different view on kind of cash balances. And they can ebb and flow, but I think we're probably sitting towards the lower end of the historical range. So, we don't see a ton of pressure to downside, but we're not seeing anything new that will give us concern there..

Got it.

And just my follow-up, just want to ask a question on the regulatory outlook, given the uncertainty ahead of the upcoming election, how does senior leadership preparing for potential changes in regulations such as the DOL and how do you foresee that impacting your business whether positively or negatively?.

Yeah. So let me take that one. So maybe with respect specifically to the fiduciary rule, and I'll use that as proxy for how we think about it more broadly.

I think what you're asking is, with the change in leadership in the government, you might have a different regulatory environment that you have to deal with, and in this case, perhaps the fiduciary rule standard reemerges as something to think about or consider utilize across all of our business.

And so, though we think Reg-BI better outcome for investors, that scenario should emerge, we tend to think about that across some two lens. One, we think about it as more technically, which is about how you prepare for something like that and the necessary investments to do that. And then I think we think about it strategically.

So again, using the fiduciary standard as an example, I think from a tactical standpoint you look at that, and given the preparation that we went through for the prior version of the fiduciary rule and then with Reg-BI I think we’ve done the vast majority of what's needed.

So any remaining cost would be mostly contained in our run rate spend or in our -- sort of our planned approach to our capital allocation. From a strategic standpoint, I think we believe that absolutely maintaining choice for advisors, clients is in their best interest. So you would see us continue to offer both advisory and brokerage solutions.

And I think that leads though to some interesting potential trends with that strategic posture in that approach. I think, one, you would see more of our direct brokerage assets move on to our platform. You would see a higher use of advisory solutions.

And ultimately, I think it serves potentially for industry consolidation that would likely be positive both from recruiting and an M&A standpoint. So when we step back and sort of look at that, I think it has some interesting possibilities of which we’d say, how do we think about your capital allocation relative to the regulatory space.

And we always do that as a discipline in our capital investments. Two, it would probably reinforce the fact you continue to make investments in your advisory platforms which we're doing.

And then finally, I think it further reinforces what Matt was saying earlier, is that there could be an opportunity to accelerate market share growth in a scenario like that and having strong and flexible balance sheet and business model to step into that, would certainly make sense to explore.

So I think that's how we think about that potential change in the future. I hope that answers your question..

Thanks for the helpful color..

Thank you. Our next question comes from Gerald O'Hara with Jeffries..

Great, thanks for taking the question.

I know it's still early, but with the Allen & Company deal now closed perhaps could give a little context just to how you are thinking about further expansion of that employee channel or early feedback or any kind of an additional data points just to give us a sense of where that would trend?.

Yes, happy to do that. And I think with respect to Allen & Company, we closed that in the third quarter as we referenced and we'll be transitioning those assets under our platform in the fourth quarter. So that's the focus now is, making that successful transition over and positioning them to successfully operate on our core platform.

At the same time, we've continued to develop sort of and round out the capabilities set we need to enter into this employee structured model.

We’ve also had hired a leader for that business model to make sure that, we continue to innovate around it, that we're packaging and pricing it in the right way, and that we finalized our go-to-market strategy such that I think in the 2020 as when we began to go to the marketplace with the new solution both leveraging the Allen & Company acquisition and their footprint.

As well as bringing the model more broadly to the marketplace. And we think that has some really interesting possibility. Our early research and surveying of the marketplace certainly, I think reinforces the concept and the hypothesis around the value. And in 2020, we'll work on taking that with the marketplace and executing on that.

So excited about the opportunities there..

That's helpful.

And then maybe one for Matt, just with respect to the ICA fixed rate balances as appose to ratio of fixed to floating, I know – sort of target range of 50% to 75% has been illustrated for next year, but kind of curious, if you -- are you kind of set on getting into that midpoint of the range or sort of playing it kind by year by market with backdrop? And then if you could maybe give us any sort of sense of how those maturities might be kind of paced throughout the course of the year that would be helpful.

Thank you. .

Yes, sure. I mean, I think, when you look at our fixed rate balances now at about 40%, that's about $9 billion of balances. I think, we look at our target, right. I think we feel good and comfortable about our target range of 50% to 75%. And when forming that target, I think we thought about it in a range of different interest rate environment.

So I think we certainly contemplated a lower interest rate environment and does that range make sense in that environment as well and we think it does because you come back to kind of the core point, which is really just to reduce the volatility and increase the stability of our earnings.

So putting us in a place to even further focus on our advisors and helping them serve their clients. So that's the concept, so it's unchanged in this environment.

I think, when you look at next year – just using in terms of dollars, we got about roughly $5 billion of balances that will have the opportunity to move into fixed if we think that makes sense next year which kind of puts you in low 60% or mid-60% range.

And I think I would think about the opportunity to do that of roughly evenly throughout the year little bit of ups and downs this quarter, but I think good way to think about is evenly over the year.

It will make judgments based on where we're at that time make sense to do, but I would say we're still focused on 50% to 75% even in this environment is the right range to get to..

Great Thanks for taking my questions..

Matt Audette:.

.:.

Thank you. Our next question comes from Craig Siegenthaler with Crédit Suisse. .

Hey, thanks. Good evening, everyone. .

Hi, Craig..

So just given that you recruited balances AUA balance has been so strong now for 6 quarters, can you just remind us how you adjusted your transition assistance over the last couple of years? And also, how is the competitive environment evolved from all the wealth managers as you compete for new financial advisors?.

Matt, you want to take the first part of the question..

Yes, sure. We haven't made any changes really recently, I think the changes we made maybe if you go back year or two really just about aligning the transition systems to return, And I think we’ve been doing that fairly consistently.

We haven't really seen really rate change in really any meaningful way in the market it's really just a aligning to the assets that are coming on to our platform.

And I think one of the things that perhaps stand right next is I think what we have seen in the recruiting success is many things on both our business development team and the capabilities and the service experience on our platform..

Well said, Matt. I don't have anything add to that other than you asked about competitive landscape and I don't think we have seen a material systemic shift in the transition assistance rates across the board.

You see certain companies doing certain things are trying to experiment and/or making pivots because of some other business circumstance, but I think systemically we've seen a pretty stable over that period of time..

Got it. And just as my follow-up here, I have another one on gross profit ROI, I think we all know the accretive migrations and you guys have covered them well.

But can you just flush out any uncertainty relating to pricing pressure just given what we're seeing from some other competitors in wealth management segment that are in different channels here?.

Yes, let me start with at least how we think about some of the pricing changes and then I think that we certainly can pull it back or tie it back to how you think about the gross profit ROA.

So look, the pricing changes that are occurring in the marketplace, we look at those as I think just more about the world we live in and the industries, most industries go through some type of trends and changes and evolution in terms of pricing.

And then in this case, I think, we have seen this trend occurring in – fist in start over the past 25 years, you saw some in the late part of the last century, you saw it reemerge prior to 2008.

We've seen I think, in the last 4 years to 5 years where some of that started out in passive investing and then you have seen others make some changes most recently.

I think, if you take the changes that occurred across your self-directed players, I think first and foremost, those have a much bigger impact across because that self-directed marketplace and perhaps the end client is much, much more price-sensitive there.

And that has a really small impact on our business, there's more because we don't operate in the self-directed market as you know, it has more of the residual impact on us serving RIAs that we custody their assets for.

So when we see something like that are occurring, I'll use this example, as to how we think about these pricing changes, it's more going on across the entire industry, we look at pricing as a strategic lever, and absolutely think about how the to consider that across our three strategic plays and how to best position it to serve and support our advisors to help them differentiate and win.

And so, if you look in the last couple of years, we've made pricing adjustments as a part of our strategy in order to help drive growth in areas like our advisory platforms and transaction costs, and that's been roughly on an order of magnitude or an average of about $15 million investment a year.

So I think as we go forward and we think about our strategy, as we move into 2020, I would just give you a little color that we will likely approach it in a very similar way, i.e., we're like you to focus in those areas of the advisory platform and transaction charges and secondarily it would be at a similar magnitude or impact.

And so, that's kind of how we think about pricing, is absolutely a strategic lever. We always consider it as a part of executing our strategy and it gives you a little bit of trend on how we've done it over the past three years and kind of how we're thinking about it as we move into 2020. I hope that was helpful.

Do you want to tie anything back to ROA or how it implies to your gross profit ROA?.

No. I think I summarized it well; the zone that we would be thinking about is the number that you said, so nothing to add. Hopefully, that was hopeful, Craig..

Thanks, guys. Very comprehensive..

Thank you. Our next question comes from Alex Blostein with Goldman Sachs..

Great. Hey, guys. Good afternoon. So maybe just following on the last question, with respect to the e-brokers decision to cut pricing to zero and commissions for equity in half, any way we can think about the impact of ticket charges for you guys, if you can emphasize that.

And is that one of the sort of investments you're contemplating as you are looking out into next year?.

Yes. So, I think, from a context standpoint, again, it's -- the impact on us is more of around where we custody assets for RIAs.

And, so it's a smaller level of impact and we absolutely have taken those data points and put them into our overall strategic considerations around how we reduce pricing to best support our advisors and is a part of that prioritization stack. I think, you'll likely see us thinking about that and doing something to address that.

It fits well inside that framework that I mentioned earlier..

Got it. And then, a follow-up question for Matt.

I understand it's still early, as you guys think about 2020 on expenses, but could you just talk a little bit about what kind of macroenvironment does that guide contemplate? And when you talk about to obviously be nimble and aware of the environment if things get a little bit tough for you, you have the ability to pull back.

What sort of growth algorithm are you solving for? Is that EBITDA margin within a certain range? Or improving EBITDA margin? How can we put some sort of framework around your thinking on how much you could pull back as the environment gets tougher?.

Yes. I mean, I think, I'd just emphasize that we've given you a little early indication as to where our thinking is, right? So we'll give you our finalized plans in a future day, likely on the next call. I think the environment we're thinking through, we always look at a range of environments.

I think every time we lay out our investing plans, we stage them so we have the ability to pause if the environment deteriorates. And we also, I'd just emphasize, when we look at the investments we're making, we look at it from a return based perspective.

So when you've got in front of you investments that can drive value for our advisors and help them serve their clients and drive organic growth, and choose between that and just maintaining an op margin certain amount, right, when looking at those two things and you look at the returns they are usually pretty clear what make sense to do versus what does it.

So, I think as I put it in the bucket of a high-class problem, or we've got investments that are really the driving value and we just think long and hard about pulling those back.

That being said, the macro can be in a range of scenarios, and I would just emphasize, we've got the ability to adjust our spending plans at the same time, we're always focused on in delivering efficiency, so we are in a – you've got scenarios, like if you go back to 2016 as an example, where you kept expenses relatively flat, we were still investing, we were still growing the technology portfolio.

So I'd just emphasize that as well..

Great. That's helpful context. Thanks..

Thank you. Our next question comes from Devin Ryan with JMP Securities..

Great. Thanks. Good afternoon.

Most of my questions have been asked, I just have one around just consolidation in the space, it seems higher markets and interest rates may build out some of the inferior or subscale broker models that you competing against, I'm curious with rates tuning here, whether you are seeing any early indications of more interest to sell the business, or even what expect to see sellers picking up just as obviously their businesses face more pressure than maybe they had anticipated and so a combination would make more sense in that type of backdrop?.

Yeah. So, with respect to M&A, we view it as a complement to our organic growth, and then we're in the marketplace exploring potential opportunities given that concept.

Certainly, Allen & Company is an example of some of the opportunity will you see in that case a very well-run smaller company, who saw opportunity of which to leverage some of our scale and capabilities, of which to enrich just how they serve and support their clients.

Our hypothesis would be similar to yours that as the environment gets tougher, you tease out probably some challenges of smaller organizations to have a harder time, with respect to driving earnings and cash flow and being able to reinvest in the business, and the hints our reason for being in the marketplace, and exploring those possibilities.

So we think the Allen & Company concept is a great example, how we think about that. And we continue to be in the market exploring potential possibilities.

We're also look at M&A, with respect to, if we can accelerate our capabilities development and evolution then we also are looking for opportunities of which to enrich our value proposition and again advisory world was a great example of that. So there is the two places, I think we're more most interested in the marketplace..

Okay. Great.

And then just going back to some of the comments on pricing evolution we basically didn't confirm on this call yet, but UBS just made an announcement on their SMA pricing, I guess, is not completely clear, all the nuance of that, but I'm curious, whether you are seeing any potential I guess, change or pressure in that part of the business as well?.

And as you said, I don't know that, we have exact clarity on what's been done. We have a hypothesis that they eliminated their SMA Manager fee, where they were the Manager versus the third-party.

And to give you a little bit more color on that, typically with an SMA you've got an advisory fee that reflects the value that the advisors providing and then sometimes you can have a separate fee for the Asset Manager in those type vehicles., and I think it looks to us they've just eliminated the Manager fee, when they are the Manager and haven't necessarily adjusted the advisory fee perhaps that gives the advisors some more flexibility then is to how they prize that to the end client.

That's what looks like occur to us.

As I shared with you earlier, we've been investing over the last several years from a pricing standpoint focused around our advisory platforms and transactions, and I think it was roughly two, maybe three years ago, we eliminated the management fee and/or strategist fee where we were helping construct the portfolio, if LPL was helping do that, we went to zero on that, some of our third parties have followed on that as well, which again, we did it because we felt it was a great advantage for our advisors, should be able to use that lower cost structure as a way to create more value for their clients and differentiate themselves.

So if that's what they have done, I think perhaps it makes logical sense just where the marketplace is and I don't think it would have a lot of impact on us because I think we've already made that move. That said, I may have wrong what they've done I hope that helps..

Yeah, very helpful. Appreciate that..

Thank you. Our next question comes from Chris Harris with Wells Fargo..

Thanks guys. Another question on pricing changes, pricing pressures, the 1% management fee rate roughly that you guys earn on fee-based accounts.

Certainly not at a bounce with what other broker-dealers charge, but if you look at that rate and you think about that rate relative to other areas of financial services and just given the broader pressure that pricing pressure in financial services more broadly, how much longer do you think that rate can hold? I guess, is the question, I mean, it's been remarkably stable I think over the last call it, three, four years he doesn't seem to be impacted by some of the pricing changes you've implemented.

So if you can give us some your thoughts on that that would be appreciated?.

Yes, sure. Let me take a stat of that. If I don't get it all please follow. Look, I think with respect to that price as it exists quarter, one place you do is you look across your competitive set and where the majority of our advisors operate in the massive fluent and fluent segments of the marketplace.

It seems to be a very competitive offering and as you said, there is a good stability over the years. I think for the most part advisors had to deal with any pricing sensitivity, it's been more as one-off and they view adjustments to passive investment is a way to try to solve for that.

So, I do think from a competitive standpoint, and where things exist today. It's a competitive offering.

That said, as we go forward, I think it's always a fair way to think about price, and I think in the advise space, value drive price, and what I mean by that is the sensitivity and the appeal around the value that you can deliver someone, if you can help me set-up a plan to help me achieve my life goals and dreams, if you can help me solve problems or long life's journey, if you can make sure that you execute my plans, so I don't make a misstep because I didn't do what needed to be done and you are there to make sure I execute well.

Those are really valuable opportunities for our advisors to deliver and maintain really important value.

And some of that, you might be able to automate, some of that, it's harder to automate, but we all got to be saying how do we make it more efficient and effective to deliver that, and then at the same time, I think you got to be constantly looking for can I expand my value proposition, can I focus on somewhere and solve unique problems that others can't.

And we actually believe advisors that do that, we're trying to help as many advisors that have a desire and appetite to do that, we think that they will protect most of their pricing power. And again, at the end of the day, advise space, we believe is driven by value.

We believe that all segments of the marketplace up to this point has demonstrated they prefer to have a human that they can trust, that is a professional to help and support them to do that and, then if we wrap technology around them to help enrich the value proposition, personalization, easier access, solving more complex problems and making them more efficient, we think ultimately it's a really compelling and interesting opportunity set, they can preserve most of their pricing power and where they can, we can drive efficiencies into their overall operations.

I hope that helps..

Yes. Thank you..

Thank you. Our next question comes from Michael Cyprys with Morgan Stanley..

Hey. Thanks for taking the question.

Just wanted to follow-up on the some of the strength and the recruited assets, I know you guys have touched on that a little bit earlier, but just hoping for a little bit more color in terms of which specific channels parts of the industry you guys are seeing more success than others as if from IBD space or more from the wires and any particular color you are able to share on the pipeline in terms of where that stand stay versus a year ago?.

Yes. Yes. Good question. So, look, I think the headline is, we see the recruiting environment for us healthy and we feel good about our pipeline, I think if I had color to that for you, we certainly see the continued a trend towards independence, remaining consistent and strong.

The advisor movement what we call advisor churn has been stable, but slightly below average, but we have kind of stepped into that and challenged ourselves to just improve our win rates and improve how we do things and if we're better at that than that only makes it an opportunity as those churn rates may be returned to the norm.

And then I think we see opportunities to continue to win in the independent space where advisors who are looking for a more capabilities are attracted to our model and our solution, we see the opportunity to continue to win from leaving the employee-based model, coming to the independent model and hits the reason we're rolling out our two new affiliation models to better position us there, those that are advisory centric and those that are have that feel of an employee-based model.

So, to summarize, we feel good about where the performance of our business development team and their continued evolution as a high-performing team, we like how we're positioned well in the independent space, and we like new affiliation models we'll be able to we believe compete for a full spectrum of our advisors leaving employee model..

Okay. Just maybe a quick follow-up question. You guys described and talked about the growth and outlook certainly interesting given some of the structural trends benefiting the overall industry.

I guess, what risk you see to that outlook, is it more about rates from lower or political regulatory risk, is it pricing, how are you thinking about that relative to the broader structural trend and growth opportunity?.

I think that we think about that in a couple of places, certainly the regulatory environments always question as we covered earlier, that you got to pay attention to, and I think not knowing exactly what that looks like, it makes preparational tougher, it doesn't mean that you just don't set up with several different sort of options and how you consider and try to best prepare for that, but we do believe it will require continued investment to improve the efficiency and efficacy of which we manage risk.

We actually then flip down on its size and see how do we turned that into an opportunity. If it's hard, it doesn’t mean it’s a problem.

If you can flip it on its side and you can use robotics or artificial intelligence to do that more effective than others at a lower price than you can use that advantage and push that down through your model as an example. But that's certainly one of them.

I think another one is just the pace of change and having the agility and nimbleness to execute well in a place where I believe you're only going to see change, go faster and faster and magnitude of that change is going to be bigger and bigger, so you had depth to be filtering out that which is not important focus on what is and make sure your organization has the ability to make the pivots and focus on continuous improvement and always be pulling more and more technology, automation, and digital capabilities to its environment.

We think that's really important for scalability and I think that is what our cultural transformation is all about is trying to position our enterprise to do well in an environment like that, but I think that's in the challenging environment.

So, we think that's an important thing to think about and if you don't do that well, I think that emerges as a risk to your point earlier. So, I'll pause there, but those are a couple..

Okay, great. Thank you..

Thank you. Our next question comes from Chris Shutler with William Blair..

Hey guys. Good afternoon. Couple of quick ones. So, first on the commentary around the outsourced business services, Dan.

Just give us a little more detail on how you're pricing those services? How much revenue you're generating per advisor?.

Yes.

So, those are subscription-based services and just as -- again as a reminder, for everyone, these are what we were calling all old virtual services that we rebranded as business solutions and this is where we found that if we can provide that expertise at affordable enough way then we can give access to that expertise to our advisors where the may not have been able to tap into that, think about having a CFO is a leverage point to help you think about your business as an example.

And so our concept would be first and foremost, we want to do that to set them up to improve and enhance their growth rates. And to the extent, that we're successful systematically doing that, that probably is the biggest return on that effort. That said, what we have done, is looked at these as stand-alone business solutions.

And looked at the economics of them to say can we generate a contribution for that incremental value.

And so one of the things that we have done is our principal has been let's go in and experiment where the affordability levels are for those advisors, where is their great leverage point for them to get access to the solution and this service, and then challenged ourselves to operate underneath that in a way that creates profitable contribution.

So the pricing around those on average, you should think about is, think about that is like $1,500 a month to $2,000 a month for any of those services or an individual service. So if I can get access to a CFO for $20,000 to $24,000 a year. And I can get that expertise and only paying for the portion of the portion of the CFO that I need.

I don't need a whole one, that's the concept it may cost me $100-plus-thousand to afford a CFO for my business. And if I can get access to it for 20 to 24, that ends up being a really good trade for them.

And if we can offer rate that's been profitability that creates some incremental earnings contribution for us, from that incremental value, but the biggest gain comes from helping with advisors grow their business. I hope that helps..

Yeah. It's definitely helpful, Dan. And then, on a separate topic, I am just thinking about gross profit ROA here.

Would you see the advisors that you have been adding over the last year or so pulled a similar, higher or lower amount of cash on average than your core basic advisors, just trying to understand if that is a material part of when you talk about recruiting more profitable advisors, that's a key component of it or not..

I don't think we have exact answer to that. Here is the way I would think about that in and Matt you add whatever. Look, what we do know is that our recruiting classes on average, they are mix of advisory business to brokerage business. This is our average and if that's the case then that mix of business has a big determinant on their cash balances.

So I would think they would look more like what our average is today, then necessarily a big variance from there. But I don't know, Matt, you want to add some color..

Yeah. I am just emphasize the brokerage versus advisor, there is really driver, the difference in cash rates, so the most higher percent of advisory, slightly higher cash balances, you're going to have due to the nature of that. So I think that's probably think I'll look at, as supposed to the timing of when the advisors came on board..

All right, thanks a lot..

Thank you. I'm showing no further questions in the queue at this time. I'll now like to turn the call back to over to Mr. Dan Arnold, for any closing remarks..

Yeah, hey, I just want to thank everybody for taking the time to join us this afternoon. We know you're busy. And we appreciate it. And we look forward to speaking with you again next quarter. Thanks..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..