UPDATE 1-LPL looks to scale to drive future profit

Wed Feb 6, 2013 2:06pm EST

* Adjusted Q4 earnings rise 13.6 pct to 50 cents a share

* LPL adds 182 advisers in fourth quarter to 13,352 total at year-end

* Company plans to outsource some nonadviser-facing functions

By Ashley Lau

Feb 6 (Reuters) - LPL Financial Holdings Inc is betting the size and scale of its adviser force will ultimately bolster profits, even if it means increased short-term costs.

The Boston-based company said in its fourth-quarter financial results released Wednesday that its adviser headcount rose by 182 during the quarter to end the year at 13,352 - almost double its size since 2006 when the company had just over 7,000 advisers.

LPL, which provides technology and clearing services to self-employed brokers, has bucked a recent trend by adding to its adviser headcount even as other major brokerage firms have seen their adviser forces shrink.

"We're very much built for scale," said Chief Financial Officer Dan Arnold in an interview, adding that there are some 150,000 advisers in the industry who could be potential recruits.

Building scale can pay off in the long term, but it comes at a cost.

It can take three to four years for a new adviser team to ramp up its practice to return to the level of business they were doing when they left their old firm. And with the accumulation of assets comes the need to make those assets productive.

"It's a long-term bet," said Boston-based Aite Group senior researcher Alois Pirker. "You get your hands on the top producers... whether it pays off in the end is a gamble. Right now it's a forward-looking undertaking."

Arnold said the company had an additional $10 million, year-over-year, in transition assistance and costs associated with recruiting advisers in the fourth quarter of 2012. The company also had a year-over-year increase of $12 million from other "growth-oriented investments," including costs associated with operating recently acquired businesses.

LPL reported a higher-than-expected fourth-quarter profit on Wednesday, when adjusted for certain acquisition and integration-related expenses and other items.

CREATING EFFICIENCIES, COST-CUTTING

Adding advisers may mean cutting jobs in other areas of the company's business, an initiative which LPL began before this year.

LPL plans to outsource certain back-office jobs to other firms, the company said in a regulatory filing on Wednesday. The shift is part of a broader program called Service Value Commitment, which it expects to complete in 2015.

"This effort is not simply a cost-reduction exercise," said Chief Executive Officer Mark Casady in a statement, adding that the program also includes investing in new technology and marketing.

The program is projected to cost $70 million to $75 million through 2014, with $39 million to $42 million of those costs occurring in 2013.

The company had already started cutting non-adviser back-office jobs in the first phase of its program, and more cuts may be on the way.

"Because we had been outsourcing for a couple of years in a very small-scale way, it had created some opportunity where we could transition some of our management that used to manage those folks," Arnold said.

ADJUSTED EARNINGS BEAT ESTIMATES

LPL said fourth-quarter earnings fell to $36.9 million, or 34 cents a share, from $39.5 million, or 35 cents a share, a year earlier.

On an adjusted basis, excluding charges and other items, earnings per share rose 13.6 percent to 50 cents, beating expectations as adviser activity improved at the end of 2012. Analysts on average had forecast 48 cents, according to Thomson Reuters I/B/E/S.

The company said that net revenue rose 13.9 percent to $944.2 million, above analysts' expectations of $918.2 million.

Casady called the uptick in adviser activity, which includes more financial planning sessions and the addition of new accounts, the "seeds for future growth."

"They are focused primarily on upgrading the productivity of their existing sales forces," said New York-based financial services recruiter Mark Elzweig. "Advisors who control pools of client assets are mini-profit centers. There's a big appetite for them."

Client assets in fee-based advisory programs rose 20 percent to $122.1 billion in the fourth quarter, while overall client assets at the brokerage rose 13 percent to $373.3 billion.

Commission revenue rose 15.6 percent from a year earlier.

The company also increased its quarterly dividend 12.5 percent to 13.5 cents a share.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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