This has been a rough year for investors. Since peaking about a year ago, the three major indexes, Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, find themselves in bear markets -- defined as a decline of 20% drop or more.
However, some stocks have held up quite well despite harsh market conditions. One company crushing it is LPL Financial (LPLA 0.87%). The financial advisory company's stock is up almost 70% since the start of 2022. Here's its secret to winning in this bear market.
NASDAQ: LPLA
Key Data Points
Why investment advisors are turning to LPL Financial
LPL Financial provides a platform that supports 21,000 financial advisors, who are primarily independent practitioners. The company provides its advisors with office support and its technology platform that integrates brokerage, advisory, clearing, and compliance solutions.
Advisors increasingly have turned to LPL Financial for its platform, but also because the company offers more attractive payouts for its advisors. The company focuses on advisory and brokerage services, shunning other businesses like market making or investment banking, which it says could lead to a conflict of interest.
It makes money in a few different ways. Advisory fees account for 47% of revenue; it charges clients based on a percentage of a client's total assets. Commissions make up another 28% of revenue, which it earns based on specific investment products that its clients buy. It also earns asset-based fees, which are made on client cash programs and for its record-keeping services. These make up 18% of revenue and tend to be quite sensitive to changes in interest rates.
Here's what has driven growth at LPL Financial this year
LPL Financial has flourished this year when many other companies have struggled. Through the first nine months of this year, the company has increased revenue by 11%. The growth was driven by advisory fees, which are up 18%, and asset-based fees, which rose 36% from last year.
LPL has done an excellent job of expanding its platform to meet clients' increasing needs for advisory services and has shifted its business from brokerage services toward more investment advisory services in recent years.
Since last year, the number of advisors on its platform has grown 7%. One of the main drivers of advisory fee growth was the addition of Waddell & Reed's wealth management business last year, which resulted in the addition of $74 billion in assets to its platform.
Not only that, but more financial institutions are turning to LPL's advisory platform. In the last two years, LPL has onboarded CUNA Mutual Group, M&T Bank, Bank of Montreal, and People's United -- adding $77 billion to its total assets and 865 new advisors.
LPL has also benefited significantly from higher interest rates, which it earns from client cash accounts on its platform. Since the beginning of the year, the company has seen gross profit increase by $1 billion thanks to rising 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 further growth for the company
LPL Financial trades at a price-to-earnings ratio (P/E) of 34.3, but its one-year forward P/E ratio is about 13.7, suggesting that investors expect that pace of growth will continue.
LPLA PE Ratio data by YCharts.
There is an opportunity for further growth for LPL as higher costs and complexity make it harder for smaller advisors to compete. This creates an opening for the company to further scale up its advisory-friendly business model and add to its 2% share of a $5 trillion total addressable market. Analysts have high expectations for LPL Financial, projecting revenue growth of 13.8% next year and earnings-per-share growth of 70%.
LPL Financial has done an excellent job of building its investment advisory platform, adding new advisors, and taking advantage of higher interest rates this year -- and it looks like the company's growth story is just beginning.
