LPL Investment Holdings, Inc. Earnings Call Nuggets: Advisory Assets, Payout Ratio
Kenneth Worthington – JPMorgan: Couple questions. First, your mix continues to evolve and there’s a couple of different dynamics going on. It seems like the business is migrating to more advisor-based assets which is good for your gross margins, but you also mentioned this quarter that the higher producing brokers are growing more quickly. They get higher payouts which leads to lower gross margins. So as you look out, which trend do you think dominates or do they just kind of offset each other overtime?
A Closer Look: LPL Investment Holdings Earnings Cheat Sheet>>
Mark S. Casady – Chairman and CEO: This is Mark Casady. They will tend to have – overtime you will see advisory assets will tend to be the thing that more and more advisors will head to. It just is a relatively low process, short process the way we call it, because you’ve got so many new advisors who join us in a given year, Ken, who typically are commission-based, we then train to use the advisory platforms and they go from there. So, you remember that that mix shift between advisory and commission, if it moved one point in a year that would be fairly significant in terms of that kind of movement. Large branches are definitely enjoying a faster growth rate right now, but that’s right now, and it’s kind of hard to tell whether that’s going to become a trend that remains for several more quarters or just happens to be a first quarter of this year phenomenon. Our experience is that over time all branches typically grow pretty much at a fairly slated rate. The bigger ones have always grown a bit faster than the smaller ones, partially because they’re in typically closer to large urban areas or even in urban areas where these just have a more dynamic growth profile. So, while we will continue to see large branches grow a touch faster, I would certainly say that in the first quarter they grew significantly faster than the smaller branches did which is a newer phenomenon for us, and I don’t think it’s probably sustainable over several quarters.
Kenneth Worthington – JPMorgan: Than, maybe talk about the nature of production this quarter. If you think about stocks and mutual funds versus the insurance and other protection products, how did that mix look this quarter versus how it’s looked maybe last year or in prior years? It seems like the protection products continue to sell really well industry-wide, and I want to see if that dynamic was similar case for you guys?
Mark S. Casady – Chairman and CEO: I think that’s a good overall statement. There is no doubt that particularly middle-income consumers are looking for protected investments of a variety of types; variable annuities being the most obvious answer for them in order to get upside opportunities, but willing to pay some cost for downside protection, and we know that we’ve seen that demand since the 2008, 2009 market break, and it continues on. If I look quarter-on-quarter, fourth quarter to first quarter, annuity sales were up nicely about – just under – right around 6%, excuse me, but mutual funds are also up significantly quarter-over-quarter, which is good to see and that’s really the pickup in same-store sales that Robert mentioned in his remarks. And then we’ve seen the direct business, which is typically where you’re finding products that get a better yield for consumers. That’s up nicely quarter-over-quarter; that would certainly make sense to us. And good old fixed insurance, life insurance sales are up about 10% quarter-over-quarter, which again is a good sign around financial planning and broader-based activities for consumers. So, to me quarter-over-quarter, it looks like you’ve got a population that’s reengaging nicely as we mentioned in our remarks, and as you say, a little bit more of bend towards protected products in the form of annuities, but I wouldn’t say an overly large growth there versus, say, just the re-engagement in mutual fund investments. But look, year-over-year you’ve got a really interesting mix shift where fixed annuities continue to drop pretty significantly, and you see direct investment is up significantly, you see fixed insurance, life insurance up significantly, and is actually down year-over-year. What that’s telling me is you’ve got a mix shift occurring; not unusual, fixed annuities are really tied to rates, and as rates have gone ever lower, the insurance companies have changed their rates available on fixed annuities and subsequently consumers are buying them. I think why I point that out is just to show you that we do have pretty significant mix shifts within, say, the commission line and really it lets us – our model and the way our grid works allows us to really absorb those mix shifts without any issue to our gross margin or profitability.
Christopher Shutler – William Blair: So you talked about elevated expectations for new advisor additions in the coming quarters. I know you mentioned strength across all channels, but is there one particular area maybe where you’re seeing more robust growth in the pipeline than some of the others, and then maybe just help us understand if you can give any more granularity around the payout ratio and how that should trend over the course of the year?
Mark S. Casady – Chairman and CEO: Yes, so let me start with the advisors and Robert can talk on the payout ratio. What we’re seeing is basically the wirehouses in particular are coming through that phase of the money they gave in the spring of 2009 really maturing. So, we’re seeing a big pick-up in our pipeline for people who are employed at the wirehouses, which is a good sign. Then among the independent firms, we’re seeing larger practices really express interest in moving, which is a new phenomenon; we’ve not seen that before, and so we’re seeing relatively larger branches wanting to explore at this stage and hopefully move at a future stage from the broker-dealer there and today with an already existing independent practice. The nice thing about that from our experience is that those practices tend to ramp nicely once they are here, and we just think those are all good signs that we should see increased activity related to recruiting.
Robert J. Moore – CFO and Treasurer: On the payout ratio side, as Mark alluded to in the answer to Ken’s question with the larger producing advisors essentially growing at a faster pace, we saw evidence of that in the production-based bonus level for the first quarter at elevated levels relative to where it was a year ago. So, I think that the mitigation of that as we proceed from here in terms of the rate of growth, of course, the overall payout ratio continues to trend higher throughout the course of the year, culminating at the high point in the fourth quarter, but the rate of change should start to decelerate as we move through the remainder of the year.
Christopher Shutler – William Blair: And the anymore details you guys could provide on the negotiation of some of the ICA contracts? I know that you mentioned a few things in the press release but were any of your bigger contracts ones that you’ve started to renegotiate or maybe just how you’re feeling about the opportunities in terms of those deals?
Robert J. Moore – CFO and Treasurer: So we don’t give specific information on contracts, because that really is important to us from a competitive perspective, so we try to be as transparent as we can in giving you our approach and characterization of how we manage the program. So think of it like a portfolio approach where you have a large aggregate level of balances, if you will, and you’re distributing those over 15 counterparty relationships, some of whom are current rate based and therefore daily liquidity orientated and some of which you are – because of the relative stability of our program and our knowledge about core levels of essentially deposits, we are able to go out and on a counterparty basis factor that into the way we structure it, meaning minimum balance levels, (tenor) in terms of timeframe for that set of deposits to remain which, of course, enhances its value, and that’s really the key thing to understand about the way we’re able to look at some of these underlying relationships, some of which are large and do that process of extending those maturities and having some rate reset to reflect the differential in today’s markets relative to when they were originally established, but the compression there is not as dramatic as you would think based on our average spread, because we’re essentially lending long to those counterparties. So, we’ll continue to manage that as a portfolio approach and look at the conditions. We did provide the schedule that shows interest rate sensitivity in our filing for – updated for the new renegotiated contracts, and I think you’ll see that in those first two buckets of zero basis points to 25 basis points and 26 basis points to 125 basis points, very modest decrease, but in that last bucket of 126 basis points to 250 basis points, you actually see a fairly large increase in the sensitivity there in terms of pre-tax benefit, and that is because those certain contracts had inverse relationships; in other words, they paid higher rates at low interest rates, and then as rates rose, that spread compressed, and that aspect of those contracts has been renegotiated. So, all-in-all, we feel quite good about the positioning of the program. As all of you know, it doesn’t consume capital. We’re not a bank. It allows us on a very competitive basis to provide attractive returns for us and very competitive yields for the end investor.