This year has been difficult for investors. Since peaking about a year ago, the three major indices, Dow Jones Industrial Average, S&P500and Nasdaq Compoundfind themselves in bear markets – defined as a decline of 20% or more.
However, some stocks held up quite well despite difficult market conditions. A company crushing it is LPL Financial (LPLA -4.02%). Shares of the financial advisory firm are up nearly 70% since the start of 2022. Here’s its secret to winning in this bear market.
Why Investment Advisors Turn to LPL Financial
LPL Financial provides a platform that supports 21,000 financial advisors, who are mostly independent practitioners. The company provides its advisors with desktop support and its technology platform that integrates brokerage, advisory, clearing and compliance solutions.
Advisors are increasingly turning to LPL Financial for its platform, but also because the company offers more attractive payouts for its advisors. The firm focuses on advisory and brokerage services, avoiding other activities such as market making or investment banking, which it believes could lead to a conflict of interest.
He earns money in different ways. Consulting fees represent 47% of turnover; it charges clients based on a percentage of a client’s total assets. Commissions make up an additional 28% of revenue, which she earns based on the specific investment products her clients buy. It also earns asset-based commissions, which are paid on client treasury programs and for its record keeping services. These represent 18% of income and tend to be quite sensitive to changes in interest rates.
Here’s what drove LPL Financial’s growth this year
LPL Financial has thrived this year as many other businesses struggled. In the first nine months of this year, the company increased its revenue by 11%. Growth was driven by advisory fees, which increased 18%, and asset-based fees, which increased 36% from a year ago.
LPL has done an excellent job of expanding its platform to meet the growing needs of clients for advisory services and has shifted its business from brokerage services to more investment advisory services over the past few years.
Since last year, the number of advisors on its platform has increased by 7%. A key driver of advisory fee growth was the addition of Waddell & Reed’s wealth management business last year, which added $74 billion in assets to its platform.
In addition, more and more financial institutions are turning to LPL’s advisory platform. Over the past two years, LPL has integrated CUNA Mutual Group, M&T Bank, Bank of Montrealand People’s United – adding $77 billion to its total assets and 865 new advisors.
LPL has also benefited significantly from the higher interest rates it earns from customers’ cash accounts on its platform. Since the beginning of the year, the company has seen its gross margin increase by $1 billion thanks to the rise in rates. The company stands to benefit from the latest interest rate hike, which the company estimates will boost gross profit by another $180 million.
This is what could drive business growth
LPL Financial is trading at a price-earnings (P/E) ratio of 34.3, but its one-year forward P/E ratio is around 13.7, suggesting that investors expect this rate of growth continues.
There is additional growth opportunity for LPL as higher costs and complexity make it harder for smaller advisors to compete. This creates an opening for the company to further develop its consulting-friendly business model and add to its 2% share of a $5 trillion total addressable market. Analysts have high expectations for LPL Financial, predicting revenue growth of 13.8% next year and earnings per share growth of 70%.
LPL Financial has done a great job building out its investment advice platform, adding new advisers and taking advantage of higher interest rates this year – and it looks like the company’s growth story doesn’t. what to start.
Courtney Carlsen has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.