LPL 'a couple of cylinders off' in 2Q

For LPL Financial LLC, it was a good news/bad news second quarter. On Tuesday, the publicly traded broker-dealer reported strong recruiting numbers for the three-month period through June. Over that same time, however, LPL recorded a drop in income. While the firm added 223 net new advisers in the quarter, its net income fell 13.2% to $39.5 million. The firm's adjusted earnings per share dropped 6.5% to $55 million. After LPL released its earnings, which was below analysts' consensus forecast, the company's stock price was pounded. At 2:39 ET this afternoon, shares of LPL stock were trading at $28.53, down 10.98% from Monday's closing price. In an interview, LPL's president, Robert Moore, said the firm is looking to reduce expenses, but any cuts would not be as severe those in 2008 and 2009. At that time, the depth of the financial crisis, the firm cut 10% of its workforce and reduced expenses by $120 million, he noted. Mr. Moore said that the firm has no specific dollar amount for cost cutting but likely will pare expenses in a tactical and strategic manner. That could lead to some outsourcing, which the firm has already done, but not in services directly used by its 13,185 registered reps and financial advisers. “We want to mitigate incremental expenses,” Mr. Moore said. In a conference call this morning with analysts, LPL CEO Mark Casady said that for periods of time, the firm can hit on all cylinders. But the second quarter was “a couple of cylinders off,” he said. Investors were cautious in the quarter due to uncertain markets, he said. This resulted in lower investment activity and trading, with net revenue up only 1.5% to $907.8 million, compared with the comparable quarter last year. Commission revenue decreased 2.7% for the second quarter, compared with the year-earlier period, while commissions per financial adviser declined 6.2%. But the drop-off was offset by growth in adviser head count. Net new advisory assets, however, were $2.8 billion in the quarter, representing 10% growth on an annualized basis. LPL's recruiting continues to outpace its stated expectation of adding annually 400 registered reps and advisors. Mr. Casady said the new recruits came from wirehouses and other independent broker-dealers. He also noted that LPL, despite the difficult market, continued to make investments in acquisitions and startups such as NestWise LLC. Run by former LPL president and chief operating officer Esther Stearns, NestWise will train new brokers to serve the mass market, which Mr. Casady believes is underserved. Investing in programs such as NestWise is a significant way to expand the firm, Mr. Casady said. By 2014, he expects NestWise to break even or turn a slight profit.