Prepared remarks
Good afternoon, and thank you for joining the Second Quarter Earnings Conference Call for LPL Financial Holdings, Inc. Joining the call today are Chief Executive Officer Richard Steinmeier and President and Chief Financial Officer Matthew Jon Audette. Richard and Matthew will offer introductory remarks, and then the call will be open for questions. The company would appreciate if analysts would limit themselves to only one question. To ask a follow-up, please re-enter the queue. The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans, as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I will now turn the call over to Mr. Steinmeier.
Thanks, operator. And thank you to everyone for joining our call. It is a pleasure to speak with you again. After a strong start to the year, we continued our momentum in Q2. We delivered improved organic growth during the quarter, while driving recruiting pipelines to record levels. We made meaningful progress in preparing to onboard Commonwealth Financial Network. And we drove material improvements in our operating leverage. We achieved this in a rapidly evolving environment as elevated macroeconomic uncertainty and market volatility at the start of the quarter gave way to a sharp market recovery during the quarter, serving as the latest reminder of the value of professional advice and the resilience of our model. Underlying this consistent performance was the exceptional work and dedication of our teams, including the talented colleagues who joined us from Commonwealth. In recognition of these efforts, J.D. Power ranked Commonwealth and LPL number one and number two for independent advisor satisfaction. Commonwealth's award is its 13th straight No. 1 ranking. This is a remarkable achievement and a meaningful validation of the complementary nature of our organization and the culture we are building together. Now to highlight some of our Q2 results. In the quarter, total client assets were $2.6 trillion, up 10% from Q1, as organic growth was complemented by higher equity markets. We attracted organic net new assets of $23 billion, representing a 4% annualized growth rate. Our second quarter business results translated into another quarter of strong financial performance with record adjusted EPS of $5.84. Turning to our strategic plan, we remain unwavering in our strategy and our aspiration to be the best firm in wealth management. To that end, we remain focused on three key priorities: (1) preserving the client centricity the firm was built on; (2) empowering our employees to deliver exceptional outcomes for our advisors, institutions, and their clients; and (3) delivering improved operating leverage. Continued execution across these priorities will help us sustain our industry-leading growth while advancing the effectiveness and efficiency of our model. With that as context, let's review a few business highlights from the quarter. In Q2, recruited assets improved to $25 billion. Prior to large institutional wins, this was our strongest quarter of recruiting in nearly two years. During Q2, we continued to advance opportunities into the later stages of our recruiting pipeline, and despite the strong pull-through, the overall pipeline reached a new record. This positions us well for improved organic growth in the second half of the year. In our traditional markets, we added approximately $23 billion in assets during Q2, maintaining our industry-leading capture of advisors in motion, while continuing to expand the depth and breadth of our recruiting pipeline. With respect to our expanded affiliation models, we delivered another solid quarter recruiting roughly $2 billion in assets. Turning to overall asset retention: it was 97% for both the second quarter and over the last 12 months. This is a testament to our continued efforts to enhance the advisor experience through the delivery of new capabilities and technology and the ongoing evolution of our service and operations functions. Now let's turn to Commonwealth. The integration is progressing well, and we remain on track to onboard Commonwealth Advisors in the fourth quarter. In terms of asset retention, we are in the mid-80s today, and we continue to work towards our target of 90% retention of client assets. From an operational standpoint, we are nearing the completion of the technology and capability builds needed to help facilitate a seamless conversion. Key initiatives include advancing our householding capabilities and modernizing our case management platform to support a more connected end-to-end service experience for existing Commonwealth advisors. When combined with the introduction of a single relationship agreement, this creates a more flexible, relationship-centric model that improves the client experience and enhances advisor productivity. These capabilities not only enable the Commonwealth conversion, but also accelerate the delivery of core functionality for the benefit of all LPL advisors and institutions. In parallel, we are ramping up our training efforts to ensure that our Commonwealth teammates are positioned to continue delivering exceptional service to existing Commonwealth advisors and that Commonwealth advisors and their support staff are ready to hit the ground running following the conversion to the LPL platform. In closing, the second quarter was another strong quarter for LPL. I want to take a moment to thank our entire team, both at LPL and Commonwealth, for the dedication and hard work that drove these results and contributed to the recognition from J.D. Power. We are building something special and I am incredibly proud of the passion and dedication our teams bring to supporting our advisors. As we look ahead, we remain well positioned to serve as a critical partner to our advisors and institutions, to continue delivering industry-leading organic growth, and to maximize long-term value for shareholders. With that, I will turn the call over to Matthew.
Thanks, Richard. I could not agree more. It was a tremendous quarter as the team continues to deliver remarkable results. To reiterate some of these highlights, we delivered solid improvement in organic growth, continued to advance our advisor experience, drove improved operating leverage through ongoing efficiency gains and better monetization of the value we deliver to clients, progressed our preparation to onboard Commonwealth, and executed on our capital allocation strategy. We closed the acquisition of Mariner Advisor Network, remained active with our liquidity and succession capability, and given the dislocation in our stock price, accelerated share repurchases. These efforts resulted in strong second quarter business and financial performance and position us well for the second half of the year. Now turning to a few highlights from our Q2 business results. Total client assets were $2.6 trillion, up 10% from Q1 as continued organic growth was complemented by higher equity markets. Total organic net new assets were $23 billion, an approximately 4% annualized growth rate. As for our Q2 financial results, the combination of organic growth and expense discipline led to an adjusted pretax margin of approximately 39.3% and record adjusted EPS of $5.84. Gross profit was $1.62 billion, up $26 million sequentially. As for the key drivers, commission and advisory fees net of payout were $486 million, down $1 million from Q1. Our payout rate was 87.4%, up 22 basis points from Q1, largely due to the typical seasonal build in production. Looking ahead, we expect our payout rate will increase by approximately 80 basis points in Q3, driven by typical seasonality as well as the previously announced reductions to our corporate advisory pricing that went into effect on July 1. With respect to client cash revenue, it was $457 million, down $3 million from Q1, primarily reflecting lower average cash balances. Overall client cash balances ended the quarter at $56.9 billion, down $2.2 billion. Within our ICA portfolio, the mix of fixed-rate balances ended the quarter at roughly 60%, within our target range of 50% to 75%. Looking more closely at our ICA yield, it was 36 basis points in Q2, unchanged sequentially. One item of note is that we are shifting our client sweep rate methodology from an asset-based tiering structure to a cash-balance-based tiering structure. As a result, as we look ahead to Q3, we expect our ICA yield to increase by 10 basis points. As for service and fee revenue, it was $209 million in Q2, down $2 million from Q1. Looking ahead to Q3, we expect service and fee revenue to increase by approximately $5 million, driven by revenues from our annual focus comp. Moving on to Q2 transaction revenue: it was $83 million, up $2 million from Q1, driven by record trading volumes and one additional trading day during the quarter. As we look ahead to Q3, we expect transaction revenue to decline by roughly $5 million. Now turning to our acquisition of Commonwealth. As Rich mentioned, the transaction continues to progress well, and we remain on track to onboard Commonwealth Advisors in the fourth quarter. As for the financials, accounting for current market levels, we now estimate run-rate EBITDA of approximately $435 million once fully integrated. Now let's move on to expenses, starting with core G&A. It was $519 million in Q2, down $13 million sequentially and below the low end of our outlook range, reflecting our continued progress in driving greater efficiency and reducing our cost to serve. For the full year, given our progress to date, we are lowering our core G&A outlook range. We now anticipate 2026 core G&A to be in a range of $2.14 billion to $2.165 billion. To give you a sense of the near-term timing of this spend, we expect Q3 core G&A to be in the range of $540 million to $560 million. Turning to TA loan amortization: it was $142 million in Q2, up $6 million from Q1. As we look ahead to the third quarter, we expect TA loan amortization to increase to approximately $150 million, reflecting strengthening advisor recruiting. As for promotional expense, it totaled $79 million in the second quarter, up $3 million from Q1, driven by increased conference spending. Looking ahead to Q3, we expect promotional expense to increase to approximately $95 million, driven by conference spend. Depreciation and amortization was $110 million in Q2, up $4 million sequentially. Looking ahead, we continue to invest in technology and expect depreciation and amortization to increase by roughly $8 million in Q3. Moving to our tax rate: it was approximately 26.4% in Q2, and we expect a similar level in Q3. Regarding capital management, we ended Q2 with corporate cash of $430 million, down $137 million from Q1. As for our leverage ratio, it was 1.9x at the end of Q2, near the midpoint of our target range. Moving on to capital deployment: our framework remains the same, focused on allocating capital aligned with the returns we generate: investing in organic growth first and foremost, pursuing M&A where appropriate, and returning excess capital to shareholders. In Q2, we deployed capital across our entire framework. As we continue to invest to drive and support organic growth, we closed the acquisition of Mariner Advisor Network, remained active with our liquidity and succession capability, and returned capital to shareholders. Specific to share repurchases, while our initial plan was to repurchase $125 million of our stock in Q2, the dislocation in our share price presented an attractive opportunity to deploy additional capital. So we accelerated repurchases to $309 million. Additionally, in July, our board approved a new $2.5 billion repurchase authorization, with $300 million planned for the third quarter. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth, deliver operating leverage, and create long-term shareholder value. With that, operator, we are finally ready to open the call for questions.
Questions and answers
Certainly. And as a reminder, ladies and gentlemen, please limit yourself to one question each. If you would like a follow-up question, you may reenter the queue. Our first question comes from the line of Alexander Blostein from Goldman Sachs. Your question, please.
Hi, good afternoon. Thank you for taking the question. I was hoping to start with the outlook on organic growth. Obviously, June saw a nice pickup, and you talked about the recruiting pipeline looking pretty robust. So maybe spend a minute on how you view organic growth for the back half of the year, whether or not NNA can sustain above 5%. And, also, coupled with that, we continue to hear a pretty competitive landscape for recruiting. Curious how that squares away with your outlook for the back half of the year. Thanks.
Yeah. Hey, Alexander. It is Richard. Thanks for the question, and nice to hear from you. So maybe let's talk about recruiting. Well, let's talk about organic growth for the balance of the year. I think we saw that we have got a rebound this quarter up to 4%. There are a couple things that drove that. First is that we saw advisor movement move back in line with historical norms. That is important for us. As we capture a disproportionate share of the advisors in motion, any movement to that overall advisor movement, we are going to be one of the winners who benefit in that movement. So let's say there is a macro movement improvement that helped us align with our long-term share capture of advisors in motion. Second, and this continues, and you heard in prepared remarks, Commonwealth is largely coming towards the end of the recruiting and education events. We still have advisors out to continue to progress with them, to problem-solve with them, to get to solutioning with them. It is not completely over. But as we have continued on that journey, we have seen more and more of our capacity to go back into the marketplace and engage directly with advisors. So when you think about that second half of the year, we should be able to return to more normalized levels, not only of recruiting, but continuing to build pipeline. And so that makes us confident in our ability to deliver mid- to high-single-digit growth over time. If you extend even further out and look at our long-term outlook, I think this is where we even strengthen our conviction further. We continue to be the disproportionate winner in our traditional markets. We have an unmatched value proposition that actually continues to strengthen. When we look at wirehouse and regional advisor movement, largely, we have been continuing to gain consideration, which is really important for us because as we speak to those advisors, we more often than not are one of the winners in those conversations, but we have to get into more conversations. So we do that by closing our capability gap, which we continue to do in quarter and throughout the balance of the year. I alluded to some of those even in prepared remarks. Continuing, more importantly, to actually position our brand actively in the marketplace. You saw us do that a year ago with our brand campaign. Additionally, we have announced a partnership with the PGA of America that we think will continue to progress our representation not only to advisors, but to their high-net-worth end investors, which is critically important as they consider firms they are going to move to. Maybe lastly, in the institutional channel, this is one where we had to pause a little bit in our consideration of large opportunities to bring onto the platform because the Commonwealth transition was so extensive and the build was so comprehensive. Now as we move towards being on the other side of that and finishing our capability build, it opens up our ability to continue to progress pipeline in the institutional channel with opportunities to onboard them. You marry that with low attrition and steady contribution from same-store sales, and again, I look at that longer outlook and say we have a strong ability to sustain mid- to high-single-digit growth. Maybe lastly to that competitive environment: I think it is completely fair to say it remains spirited. We saw about a year ago we saw a move in market TA levels. They have continued to persist at higher elevated levels. From our perspective, we stay disciplined on returns. TA is part of our conversation with advisors, but it is not the driver. Advisors who are changing firms care first about capabilities, technology, and service. They then think about ongoing economics, and third, they think about upfront economics. Put that all together, we feel incredibly strong in our ability to not only sustain our performance but improve it over the latter half of the year.
And our next question comes from the line of Steven Chubak from Wolfe Research. Your question, please.
Hi. Good afternoon, Richard and Matthew, and thanks for taking my question. I was hoping to get an update on the pricing review. Pause. Steven. I like that pause. That is our fault. We were not gracious hosts there. Thank you. That you are not, but all is forgiven. Rest assured. Was hoping to get an update on the pricing review just now that you are further along in the diligence process, what has been some of the early feedback from advisors as you have explored potential pricing changes? And what are some of the key milestones that need to be met as part of the review to get you and the board comfortable with adopting or implementing any such pricing changes to minimize the reliance on cash economics?
Yeah. Hey, Steven. So like we said last quarter, we are actually doing that work. We need to make sure we take that time to probe properly and ensure that any potential solutions that we come up with, one, are well considered, that we are looking at them from all angles, that they are aligned with our long-term strategy, and that they create value for our advisors, for our institutions, and for the clients they serve. Give you a little bit of color why this may take us a little more time. We have expanded the types of advisors and institutions that we serve. If you think about the two business models that we have, in our advisor business we have grown our affiliation models pretty dramatically, and that looks like different profiles of advisors who have different compositions of their book. Similarly on the institution side, we no longer just serve banks and credit unions. We serve large regional banks, national banks, and product manufacturers. The complexity of the types of clients we serve is extensive. We have got to make sure, and we are engaged with those clients, to ensure as we build and evaluate any solution across 32,000 advisors, 1,000-plus institutions, and 8 million end investors that the solutions work across those clients and their operating models. The levers are very clear to us, but as we go through the work, we have to make sure that it works for those constituents. That is the update we have on the work. We are doing the work. We do not have any precise updates on completed work to date. We will make sure to update you when there is more to share.
Helpful, Kyle. I appreciate it. Our next question comes from the line of Daniel Fannon from Jefferies. Your question, please.
Greg, thanks. Matthew, I was hoping you could expand upon the G&A outlook. If the numbers continue to come in better than you have forecast, as you think about the back half of the year, are you still implementing some of these efficiencies to think about the ongoing benefits? Or is what you are putting in the numbers today realistic based upon what you guys have done so far?
Yeah, Daniel. I think if you look at the trends, the headline answer is it's an evergreen thing. Continued investments — whether automation, efficiency, AI-driven initiatives — do two things. They improve our efficiency and drive down our cost, and they also improve our value proposition with our advisors. So I think that is something we'll consistently do. What you are seeing so far this year is some outperformance on the pace at which we are able to do these things. It has been a couple quarters in a row where we have been able to deliver more efficiencies than we expected, and we are able to lower the guidance for the year. To underscore, the guidance for the year includes everything that we have worked on and everything that we expect to work on. There have been periods where we have met that, and periods where we have done better than expected. So core G&A growth of 4% to 5.5% prior to Commonwealth is our best estimate right now. But if you broaden that out, each year we are going to be able to continue to drive investment. Again, it is not only about efficiencies, but improving the value proposition and experience for our clients. Thank you.
Thank you. And our next question comes from the line of Devin Ryan from Citizens Bank. Your question, please.
Hi, Richard. Hi, Matthew. Lot of good stuff in here. I want to ask about, Richard, a point you made: advisors care about capabilities and tech when they are thinking about moving firms. With that said, would it be good to get some color on this AI platform Latitude? I saw you just launched or announced it a couple days ago. So it would be good to hear about functionally what the capabilities are for advisors, ways to frame how it can help productivity, and how differentiated it is versus table stakes. I know that may connect back to your recruiting pitch or just making the firm more attractive for institutions to think about partnering with you. Thank you.
Thanks, Devin. Technology has always been important for advisors who are considering moving firms; it's usually one of the first things we go through. Recently, we have continued to accelerate home office visits and tech demos earlier in the sales process. The feedback we get from advisors is that there is a material differentiation in our capabilities and technology versus competitors. As we get through a tech demo, we win head-to-head more often than we did a year ago because over the last couple of years we have continued to enhance our investments in technology. The Latitude announcement is a reflection of that. We have invested nearly $2 billion over the last few years in building core foundational capabilities in our data, security, advisor technology, and AI. Latitude reflects our unified tech experience that ties all of that together. It is a crisper way to reflect the integrated nature of our technology ecosystem that we think is a strong signal to advisors. They see connectivity across all of that — no longer a separation of the advisor workstation and the end-investor capabilities, workflows, and cyber environment. The introduction for us of Cyan, our AI agent, helps us operate across all advisor workflows and deliver contextual, real-time intelligence. Specific to your question about Cyan and how it improves operational effectiveness of an advisor's practice: a couple of high-impact use cases we are launching include the ability to identify growth opportunities for advisors in their practice. Using natural language processing to identify ways they can grow and actions they can take, and a feature that simplifies the next actions they should take to prioritize improving growth against chosen verticals. Second, we are making them more efficient in their practice. We introduced Jump to record meetings and derive actions; now through Cyan we can synthesize financial plans already developed into insights for the end investor and deliver those to the advisor much more efficiently than today. Another high-value use case is automating routine maintenance tasks — instead of going into multiple systems to make an address change, an advisor indicates the change to the agent and it is automatically propagated across the Latitude ecosystem. These are examples of investments enabled by AI that further differentiate us. As we demonstrate our roadmap for AI to advisors who are considering the firm, it is often a significant point of differentiation between us and other firms they are evaluating.
Excellent. And our next question comes from the line of Michael Cho from JPMorgan. Your question, please.
Hi, good evening. Thanks for taking my question. I just wanted to touch on pricing as well — not so much the work you are doing now, Richard, but the pricing adjustments you announced last year and implemented earlier this year. Given the time that has passed, have you seen any adjustments in advisor behavior since announcement and implementation? Any key takeaways from an LPL perspective? And do you see other opportunities to potentially mark to market some of LPL's more enhanced offerings, perhaps in light of Latitude and Cyan as well? Thanks.
Yeah, Mike. I'll resummarize. The headline is things have played out as we expected. When we announced those changes, we walked through three steps; I will take you through the components. We expected a net improvement in margins of about one percentage point incorporating everything, and that is largely what has played out. As a reminder: Q1 was new fees on brokerage accounts; Q2 was fees on the direct mutual fund business. Those two together led to an increase in service and fee revenue of about $40 million per quarter. The last change, which Richard referenced and which we implemented in July, was reductions in pricing in our advisory business to make them even more competitive. Those reductions will show up as an increase in payout of about $20 million a quarter. The net of all of that is around $20 million a quarter, $80 million annualized — right in line with where we thought. It positions us as we discussed when we announced them — the first two fee increases brought fees in those two areas in line with market, and the third area in advisory made an already competitive platform even more competitive. So it has played out as we thought.
Thank you. Our next question comes from the line of Craig Siegenthaler from Bank of America. Your question, please.
Thanks. Good evening, everyone. Similar question, but I wanted to see if you could potentially change your revenue share arrangements with asset managers. Do you view this as a future earnings lever given that your size increases and you are a scaled retail distribution partner? In other words, could LPL increase its underlying economics on ETFs, mutual funds, and SMAs?
Hey, Craig. This is Matthew. As Richard mentioned, that is where our energy is focused — looking at economics and things we would change. Once we conclude that work, if there are other opportunities to look at, we would consider them. But when you look at our overall economics, the thing we are staring at is cash sweep. I underscore everything Richard said.
And our next question comes from the line of Michael Brown from UBS. Your question, please.
Hi, good afternoon. Thanks for taking my question. You have observed that advisors, when they adopt your business solutions, tend to grow two times faster than advisors that do not. As you think about the Commonwealth cohort and the transition there, what are your expectations for their adoption of your subscription-based services like your CFO and marketing solutions? Do you think there is a similar opportunity set for Commonwealth advisors?
Hey, Mike. You are right: we observed that when advisors outsource more of the work they do themselves, they are able to focus on core advice delivery, and you see accelerated growth. That comes through marketing and CFO solutions, but also OCIO solutions and paraplanning. When advisors reorganize thoughtfully to drive productivity and deeper engagement with clients, we see accelerated growth. We also see that inside our managed models that have many of those offerings embedded — our Strategic Wealth Services and Linsco offerings see faster growth when supported by embedded solutions. Commonwealth had a subset of business solutions and services; in fact, they have some differentiated practice management and growth support. We see that Commonwealth advisors are faster-growing and more productive. They have embedded capabilities and driven outsized same-store sales growth. As we progress conversations, many of our solutions will be attractive to them — CFO and marketing solutions included. One area to put on your radar is our liquidity and succession solutions. We find these accelerate growth in advisor practices and there is strong demand from Commonwealth advisors. Commonwealth had similar but less robust solutions. Across a cadre of solutions, there is appetite from Commonwealth advisors; it skews more heavily toward liquidity and succession because their prior solutions were not as robust as ours.
Thank you. And our next question comes from the line of Brennan Hawken from BMO Capital Markets. Your question, please.
Hi. Thanks for taking my question. This is a bit more abstract. Among some investors, there is debate about whether AI tools could eventually lead to hybrid solutions that marry AI with advisors and potentially come at a lower price point. You talk to a lot of advisors; what is the advisor view on that? Is that considered a real risk? And is there anything that could be done to insulate from this risk if it does end up emerging?
Hey, Brennan. When you look at AI solutions, you can view it as glass half full or half empty. The glass half full case: you'll see a significant enhancement in workflows inside our ecosystem — our ability to process work, drive straight-through processing, and make it easier to do business. In an advisor's practice, scheduling, preparing for meetings, running alternative investment solutions — there is material opportunity to improve efficiency. Many of the folks in an advisor's practice, like CSAs, could get much more productive and move to higher-value work delivering advice. As we look at automation of workflows inside the practice, we think there will be capacity to serve more end investors. Historically, despite many innovations, advisory fees have not materially declined over decades. If there were downward pressure on fees, advisors would have the ability to grow their practices and serve more clients in higher-value ways. We view automation and AI as enhancing the advisor's practice. It should strengthen their ability to go to market and allow them to spend more time on advice delivery, context setting, and helping take decisions with end investors. That is the theory behind our view, and it aligns with what we hear from advisors: they are more excited about AI's potential than scared of it.
Thank you. Our next question comes from the line of Michael Cyprys from Morgan Stanley. Your question, please.
Good evening. Thanks for taking the question. Just wanted to ask about expense growth. How would you characterize that underlying pace of 4% to 5.5% core G&A growth that you referenced relative to a multi-year profile? And when you layer in AI initiatives, could that be meaningful on a multi-year profile? Where do you see the biggest opportunities to change processes and workflows that could meaningfully drive the bottom line over the next couple of years?
Michael, the opportunity is large. We are balancing investment to improve experience and capacity with driving operating margin. This year gives you a taste of what we can do: reasonable expense growth while delivering increased capability and reinvigorating organic growth. The 4% to 5.5% estimate is a good balance for now. Regarding AI, I put the opportunities in three broad categories: 1) Directly serving the advisor — Latitude and Cyan provide value propositions and efficiencies, reducing phone calls and emails and processing work through the agent. 2) Internal infrastructure — service and operations can materially improve cost structure and efficiency. 3) Technology development — AI is helping us build things cheaper and faster than historically. Put together, AI can drive efficiencies on the cost side while improving our value proposition and delivering capabilities faster than most. It's an exciting multi-year opportunity.
Great. Our next question comes from the line of Benjamin Budish from Barclays. Your question, please.
In the prepared remarks, you talked about a pricing change at NDI that is going to benefit a little bit in Q3. Could you explain the mechanics of that change a bit more? How does it work, what is the rationale for doing it, is there particular behavior you are looking to incent, and how should we think about it going forward? Thank you.
You bet, Benjamin. It's primarily driven by the Commonwealth integration. Historically, LPL priced cash-based tiering based on the level of AUM that the household had with us; Commonwealth priced it based on the actual level of cash balances. Going forward, we are shifting to an integrated approach that is cash-balance-based tiering and aligns us with independent peers. Why does that lead to an increase in returns? Price tiering charges less on smaller balances and more on larger balances. Our advisors tend to have clients holding cash at relatively small levels; for the last couple of years the average amount of cash per account at LPL has been around $5,000. The net result is more cash in those lower tiers, which will lead to an increase in ICA yield on a run-rate basis of about 20 basis points. These changes go into effect in August, so view roughly half of the benefit coming in Q3 and the rest in Q4.
Okay. Our next question comes from the line of Jeffrey Schmitt from William Blair. Your question, please.
Hi. Thank you. Question on the institutional channel. You sort of took a pause through the Commonwealth deal. How would you characterize your pipeline today? Has that been building? Are you seeing demand for outsourcing increase versus a year ago, or has that been fairly stable?
Jeffrey, you are right that we had to take an intentional pause — not necessarily in engagement, but around our ability to onboard. We had to get the Commonwealth onboarding capability build ahead of everything else, which put a pause on how we progressed opportunities in the pipeline. If I reflect on our positioning in the marketplace: we are the leader in the institutional space and have been for years. The institutions we serve support $590 billion of client assets in their wealth businesses — multiples greater than our next closest competitor. We have a compelling value proposition: we accelerate growth for institutions that join, improve their margins, and reduce regulatory and compliance risk. We have proven our ability to transition complex, large-scale organizations and their wealth businesses seamlessly. We have signature clients, including recent additions like Prudential and First Horizon, who are thriving on our platform and reflect improved efficiency and accelerated growth. Put that together: our reputation to serve large institutions has built. We are more engaged now than a year ago. Large institutions — not only the number but the size and complexity — continue to grow, especially on the product manufacturer side. The bank market is tried and true and focused on efficiency. Many banks are looking at outsourcing wealth to be competitive, and we continue to see a building pipeline there. We have cleared the decks and can have more material conversations. I feel better about where we are than a year ago.
Thank you. Our next question comes from the line of Bill Katz from TD Cowen. Your question, please.
Thank you. Good evening, everybody. Two-part if I could squeeze it in. On Commonwealth, can you let me know what their cash is as a percentage of client AUA? And Matthew, could you give us an update on how things have been trending into July on both flows and client cash? Thank you.
Very aggressive, Bill. Operator said one question; I will do two. On Commonwealth, their cash balances historically have been a little bit below ours. We are a little above 2% cash; Commonwealth is a little above 1%, so they have much lower cash balances and it has always been that way. With respect to how the third quarter is going so far: for July, with a couple days remaining, it is shaping up as you would expect in the first month of the quarter, which primarily reflects the impact of advisory fees, which hit in the first month and reduced cash by $2.8 billion. Outside of that, cash balances have been flat. Put those together, July cash has decreased only by the impact of fees, putting cash around $54.1 billion. On the organic growth side, month one is usually the lowest month of the quarter because advisory fees hit in that first month. Outside of that, organic growth is continuing to pull through as recruiting picked up. Put together, July organic growth is in the zone of around 3%.
Thank you for accommodating the two-parter. Our next question comes from the line of Michael Brown from UBS. Your question, please.
Okay, thanks for taking my follow-up. I wanted to follow up on Steven's question earlier. As you evaluate the potential transition toward platform fees, should investors view that work as primarily developing a playbook that would only be implemented if competitive dynamics or client behavior create meaningful pressure on cash sweep economics? Or is management increasingly inclined to make that shift proactively regardless of whether those pressures materialize? If it is the latter, what gives you confidence that moving first creates value rather than a disadvantage, particularly if competitors are slower to follow or choose not to make a similar change at all?
Mike, thanks. If the question is whether we'll be a leader or a follower, the most important thing is getting the right answer. That is why the evaluation is so comprehensive. With 32,000 advisors and 1,000 institutions, we are a market leader and comfortable making decisions that lead the market if that is where things land. We need to make sure any path we take is well considered across our client base and aligned with our long-term strategy.
This concludes the question-and-answer session of today's program. I will hand the program back to Richard Steinmeier for any further remarks.
Thank you, operator, and thank you all for joining. We look forward to speaking to you again in October. Have a great night.
Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the program. You may now disconnect. Good day.