LPL Investment Holdings (

LPLA

)

Q2 2011 Earnings Call

July 27, 2011 8:00 a.m. ET

Executives

Mark Casady - Chairman and CEO

Robert Moore - CFO

Trap Kloman - VP, Investor Relations

Analysts

Thomas Allen - Morgan Stanley

Daniel Harris - Goldman Sachs

Devin Ryan - Sandler O'Neill

Ken Worthington - JP Morgan

Joel Jeffrey - KBW

Bill Katz - Citi

Presentation

Operator

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Good day ladies and gentlemen, and welcome to LPL Investment Holdings' second quarter earnings conference call. [Operator instructions.] I would now like to introduce Mr. Trap Kloman, vice president of investor relations. Please go ahead.

Trap Kloman

Good morning and welcome to the LPL Financial second quarter earnings conference call. On the call today is Mark Casady, our chairman and chief executive officer, who will provide his perspective on our performance during the second quarter. Following his remarks, Robert Moore, our chief financial officer, will highlight drivers of our financial results. We will then open the call for questions.

Please not that we have posted a financial supplement on the events and presentation 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 incorporate certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements concerning such topics as earnings growth targets, operational plans, and 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 second quarter earnings release and our latest SEC filings to appreciate those factors that may cause results 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 second quarter earnings press release.

With that, I'll turn the call over to Mark Casady.

Mark Ca

sady

Thank you Trap, and thanks to all of you for joining today's call. Overall, I'm very pleased with our performance, which reflects the strength of our business model and the ability of our advisors to generate growth.

This growth has resulted in adjusted earnings per share of $0.52, growing 10.6% over the second quarter of last year. After normalizing for our share count increase due to the IPO, our adjusted earnings per share grew 27%.

This level of performance is the second consecutive quarter of double-digit same-store sales growth. Our advisors remain focused on providing long term financial advice to their clients which transcends short-term market volatility. This behavior reflects improving investor sentiment and a greater sense of personal and professional security as they commit to longer term investments.

Our shift in product mix represents this trend, with greater investment in bundled solutions such as variable annuities and alternative investments, as well as increased use of our centrally managed advisory platforms. A sustained market downturn or significant economic destruction, such as the failure to increase the debt ceiling, would likely negatively impact investor behavior.

Our same-store sales growth also benefited from our advisors continuing to attract new clients. This growth is coming from referrals of existing clients who have been well served by their advisors.

The increase in client acquisition is enabled through our integrated technology and marketing support, and these solutions create efficiencies for our advisors, giving them the time and resources to build their client relationships.

To help quantify this, we initiated and designed a research study in 2010 to gain insight on the role broker-dealers play in advisor productivity and profitability. We hired PricewaterhouseCoopers to assist in the survey design, administration, and analysis. It found that our advisors, on average, are more efficient and therefore more profitable than their peers.

Advisor client growth is further aided by LPL's commitment to provide an unbiased conflict-free environment. We know investors are seeking relationships with advisors who are free to do what is in their best interests.

Turning from investor behavior to our advisors themselves, we continue to experience strong net new advisor growth. We are successfully converting our pipeline of prospects and continue to experience very low attrition.

Despite seeing increasing, and at times exaggerated, incentives offered by the employee and custodian channels, our advisors seek a much deeper and lasting value proposition in choosing a business partner.

We continue to see high satisfaction among existing advisors with our service and new technology. This has translated to growth in our independent and our RIA advisor base, despite the increased competition.

In the institution channel, we are seeing banks and credit unions reengaging in the development of their programs. As a result, across LPL we have added 594 net new advisors on a trailing 12-month basis.

Our success in attracting advisors is further enhanced by our extensive investors to build and support a broad array of business models. This allows advisors to conduct business in any manner they choose, whether they are RIA-only, pursuing a hybrid model, securities-only, or focusing on insurance.

This flexibility also enhances our retention. As advisors businesses grow, and their needs change, they are able to evolve from one business model to another within our system. Importantly, we have priced our services to these various business models in a way that makes us indifferent to which one the advisor chooses.

In more complex situations, such as establishing a broker-dealer clearing arrangement, there will be additional investment required by LPL. We remain committed to supporting the evolving business models of our customers and meet their ever-changing needs.

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