Washington, D.C. 20549
LPL Financial Holdings Inc.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
PART I
Item 1. Business
General Corporate Overview
We are a leader inLPL serves the retail financial advice market andadvisor-mediated marketplace as the nation'snation’s largest independent broker-dealer.broker-dealer, a leading investment advisory firm, and a top custodian. We enable independence forserve more than 22,000 financial advisors, byincluding advisors at approximately 1,100 enterprises and at approximately 570 registered investment advisor (“RIA”) firms nationwide, providing the capabilities, technology,front-, middle- and services they need, so they can focus on serving their clients. Our services include advisory and brokerage platforms, portfolio construction,back-office support our advisors need. Through our comprehensive platform, we offer integrated technology solutions; brokerage and services, comprehensiveadvisory platforms; clearing, compliance, business and compliance services,planning and advice services; consultative practice management programs and training,training; and independent research. We provide our brokerage and investment advisory servicesin-house research to more than 15,000 independent financial advisors (our "advisors"), including financial advisors at approximately 700 financial institutions across the country, enabling them to provide their retail investors ("clients") with objective financial advice through a lower conflict model. Throughhelp our advisors we are one of the largest distributors of financial productsdeliver advice to their clients and services in the United States.run successful businesses.
We are steadfast in our commitment to the advisor-mediated model and the belief that investors deserve access to personalized guidance from a financial advisor. We believe that objectiveadvisors should have the freedom to choose the business model, services and technology they need and to manage their client relationships. We believe investors achieve better outcomes when working with a financial guidance is a fundamental needadvisor, and we strive to make it easy for everyone. We enable our advisors to focus ondo what they do best—create the personal, long-term relationships that are the foundationis best for turning life’s aspirations into financial realities. We do that through a singular focus on providing our advisors with the front-, middle-, and back-office support they need to serve the large and growing market for independent investment advice. their clients.
We believe that we are the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services and open architecture access to a wide range of curated non-proprietary products all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting and market-making.
We believe investors achieve better outcomes when working with a financial advisor. We strive to make it easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting independence and choice through access to a wide range of diligently evaluated non-proprietary products.
We began operations through LPL Financial LLC, our broker-dealer subsidiary (“LPL Financial”), in 1989. LPL Financial Holdings Inc., which is the parent company of our collective businesses,business, was incorporated in Delaware in 2005. The Company’s most significant wholly owned subsidiaries are described below:
•LPL Holdings, Inc. is a direct subsidiary of LPL Financial Holdings Inc. and is an intermediate holding company of our business.
•LPL Financial LLC (“LPL Financial”) is a clearing broker-dealer and an investment advisoradviser that primarily transacts business as an agent for our advisors on behalf of their clients by providing access to a broad array of financial productsclears and services. Through our subsidiary The Private Trust Company, N.A. ("PTC"), we offer trust administration, investment management oversight, and Individual Retirement Account ("IRA") custodial services for estates and families. Fortigent Holdings Company, Inc. and its subsidiaries (settles customer transactions.
•“Fortigent”) provide solutions and consulting services to registered investment advisors, banks, and trust companies serving high-net-worth clients. Our subsidiary, LPL Insurance Associates, Inc. ("LPLIA"(“LPLIA”), operates as a brokerage general agency that offers life and disability insurance salesproducts and services.
•AW Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolio Systems LLC (“Blaze”). AdvisoryWorld offers technology products, including proposal generation, investment analytics and portfolio modeling, to both the Company’s advisors and external clients in the wealth management industry. Blaze provides an advisor-facing trading and portfolio rebalancing platform.
•The Private Trust Company, N.A. (“PTC”) provides trust administration, investment management oversight and, along with its affiliate Fiduciary Trust Company of New Hampshire, Individual Retirement Account (“IRA”) custodial services.
•LPL Employee Services, LLC and its subsidiary, Allen & Company of Florida, LLC (“Allen & Company”), along with their affiliate, Financial Resources Group Investment Services, LLC (“FRGIS”), provide primary support for the Company’s employee advisor affiliation model.
Our Strategy
At LPL, our mission is to take care of our advisors so they can take care of their clients. Our vision is to become the leader across the advisor-mediated marketplace by empowering advisors to deliver advice to their clients and operate thriving businesses. In order to achieve this vision, our strategy is to meet advisors and enterprises where they are in the evolution of their businesses, provide capabilities to help advisors differentiate and win investors, create an industry-leading service experience that delights advisors and enterprises and their clients, and help advisors and enterprises run the most successful businesses in the industry.
Our Business
Our Advisor Relationships
Our business is dedicated exclusively to our advisors; we are not a market-maker nor do we offer investment banking or underwriting services. We offer no proprietary products of our own. Because we do not offer proprietary products,own, and, as a result, we enable the independent financial advisors banks, and credit unionsenterprises that we support to offer their clients lower-conflict advice.
We work alongside advisors to navigate complex market and regulatory environments and strive to empower them to create the best outcomes for investors. In addition, we make meaningful investments in technology and services to support the growth, productivity and efficiency of advisors across a broad spectrum of business models as their practices evolve. Our advisors are a community of diverse entrepreneurial financial services professionals.professionals who support approximately 8.3 million client accounts. They build long-term relationships with their clients in communities across the United States by guiding them through the complexities of investment decisions, retirement solutions, financial planning and wealth management. Our advisors support approximately 4.8 million client accounts. Our services are designed to support the evolution of our advisors’ businesses over time and to adapt as our advisors'advisors’ needs change.
The majority of our advisors are independent practitioners who are viewed as local providers of independent advice. Many of our advisors operate under their own business name, with LPL offering assistance with their branding, marketing and promotion and regulatory review. We believe we offer a compelling economic value proposition to independent advisors, which is a key factor in our ability to attract and retain advisors and their practices. The independent channels pay advisors a greater share of advisory fees and brokerage commissions and advisory fees than the captive channels — generally 80-90%80-100% compared to 30-50%. Through for captive channels. Most of our scale and operating efficiencies, weindependent financial advisors are able to offerbusiness owners who, unlike their captive counterparts, also benefit from building equity value in their own businesses. We also support advisors through our advisors what we believe to be the highest averageindependent employee advisor affiliation model, where they benefit from a full-service employee relationship with us while generally retaining ownership of their client relationships in exchange for a slightly lower payout ratios among the five largest United States broker-dealers, ranked by number of advisors.
than our traditional independent model. Furthermore, we believe that our technology and service platforms enable our advisors to operate their practices with a greater focus on serving investors while generating revenue opportunities and at a lower cost than other independent advisors. As a result, we believe that our advisors who own practices earn
Our more pre-tax profit than practice owners affiliated with other independent brokerage firms. Finally, as business owners, our independent financial advisors, unlike captive advisors, also have the opportunity to build equity in their own businesses.
Our22,000 advisors average over 1520 years ofin the industry, experience, which generally allows us to focus on supporting and enhancing our advisors’ businesses without needing to provide basic training or subsidizing advisors who are new to the industry. Our flexible business platform allows our advisors to choose the most appropriate business model to support their clients whether they conduct brokerage business, offer brokerage andand/or fee-based services on our corporate registered investment advisor (“RIA”)RIA platform, or provide fee-based services through their own RIA practices.
The majority of our advisors are entrepreneurial independent contractors who are primarily located in rural and suburban areas and, as such, are viewed as local providers of independent advice. Many of our advisors operate under their own business name, and we may assist these advisors with their own branding, marketing and promotion, and regulatory review.RIA.
Advisors licensed with LPL Financial as registered representatives and as investment advisory representatives are able to conduct both commission-based business on our brokerage platform and fee-based business on our corporate RIA platform, and advisors licensed with LPL Financial as registered representatives conduct commission-based business on our brokerage platform. In order to be licensed with LPL Financial, advisors must be approved through our assessment process, which includes a review of each advisor’s education, experience and compliance history, among other factors. Approved advisors become registered with LPL Financial and enter into a representative agreement that establishes the duties and responsibilities of each party. Pursuant to the representative agreement, each advisor makes a series of representations, including that the advisor will disclose to all clients and prospective clients that the advisor is acting as LPL Financial's registeredFinancial’s investment advisory representative or investment advisoryregistered representative, that all orders for securities will be placed through LPL Financial, that the advisor will sell only products that LPL Financial has approved and that the advisor will comply with LPL Financial policies and procedures as well as securities rules and regulations. These advisors also agree not to engage in any outside business activity without prior approval from us and not to act in competition with us.
LPL Financial also supports over 420approximately 570 independent RIA firms that conduct their business through separate entities ("Hybrid RIAs"registered investment advisor firms (“Independent RIAs”) with over 5,200approximately 6,300 advisors who conduct their advisory business through these separate entities, rather than through LPL Financial. Hybridentities. Independent RIAs operate pursuant to the Investment Advisers Act of 1940, as amended (the "Advisers Act"“Advisers Act”), or their respective states'states’ investment advisory licensing rules. These HybridIndependent RIAs engage us for technology, clearing and custody services, as well as access to our investment platforms.platforms and business services. Advisors associated with HybridIndependent RIAs retain 100% of their advisory fees. Infees, and in return, we charge separate fees for custody, trading, administrative and support services. In addition, mostsome financial advisors associated with HybridIndependent RIAs carry their brokerage license withare registered representatives of LPL Financial and access our fully-integrated brokerage platform under standard terms, although some financial advisors associated with Hybrid RIAs do not carry a brokerage license with us. terms.
We believe we are the market leader in the enterprise channel, providing support to over 2,2003,600 financial advisors at approximately 700 banks and credit unions1,100 enterprises nationwide. The core capabilities of these institutionsenterprises may not include investment and financial planning services, or they may find the technology, infrastructure and regulatory requirements of supporting such services to be cost-prohibitive. For these institutions,enterprises, we provide their financial advisors with the infrastructure and services they need to be successful, allowing the institutionsenterprises to focus more energyattention and capital on their core businesses.
A subset of our advisors provides advice and serves group retirement plans primarily for small and mid-size businesses. As of December 31, 2017, these advisors served an estimated 41,000 retirement plans representing approximately $134.9 billion in retirement plan assets custodied at various custodians. LPL Financial provides these advisors with marketing tools and technology capabilities that are designed for retirement solutions.
We alsoFinally, we provide support to approximately 3,6003,800 additional financial advisors who are affiliated and licensed with insurance companies. These arrangements allow us to provide outsourced customized clearing, advisory platforms and technology solutions that enable the financial advisors at these insurance companies to offer a breadth of services to their client base in an efficient manner.
Our Value Proposition
The core of our business isWe are dedicated to meetingmaking it easy for advisors to do what is best for their clients. Our scale and self-clearing platform enable us to provide advisors with the evolving needs of our advisorscapabilities they need, and providing the platform and tools to grow and enhance the profitability of their businesses.service they expect, at a compelling price. We are dedicated to continuously improving the processes, systems and resources we leverage to meet these needs.
We support our advisors by providing front-, middle-, and back-office solutions through our distinct value proposition: integrated technology solutions, comprehensive clearing andservices, compliance services, consultative practice management programs and training, business services and independentplanning and advice services, along with in-house research. The comprehensive and increasingly automated nature of our offering enables our advisors to focus on their clients while successfully and efficiently managing the complexities of running their own practice.
Integrated Technology Solutions
We provide our technology and service to advisors through an integrated technology platform that is server-basedcloud-based and web-accessible. Our technology offerings are designed to permit our advisors to effectively manage all critical aspects of their businesses in an efficient manner while remaining responsive to their clients’ needs. We continue to automate time-consuming processes, such as account opening and management, document imaging, transaction execution, and account rebalancing, in an effort to improve our advisors'advisors’ efficiency and accuracy.
Comprehensive Clearing and Compliance Services
We provide custody and clearing services for the majority of our advisors’ transactions and seek to offer a simplified and streamlined advisor experience andwith expedited processing capabilities. Our self-clearing platform enables us to better control client data, more efficiently process and report trades, facilitate platform development, reduce costs and ultimately enhance the service experience for our advisors and their clients. Our self-clearing platform also enables us to serve a wide range of advisors, including those associated with Hybrid RIAs.
Compliance Services
We continue to make substantial investments in our compliance function to provide our advisors with a strong framework through which to understand and operate within regulatory guidelines, as well as guidelines that we establish. Protecting the best interests of investors and our affiliated advisors is of utmost importanceimperative to us. As the financial industry and regulatory environment evolve and become more complex, we remain devoted to serving our clients ethically and well. We have made a long-term commitment to enhancing our risk management and compliance structure, as well as our technology-based compliance and risk management tools, in order to further enhance the overall effectiveness and scalability of our control environment.
Our team of risk and compliance employees assists our advisors through:
•training and advising advisors on new products, new regulatory guidelines, compliance and risk management tools, security policies and procedures and best practices;
•advising on sales practice activities and facilitating the supervision of activities by branch managers;
•conducting technology-enabled surveillance of trading activities and sales practices;
•monitoring of registered investment advisory activities for advisors on our corporate RIA platform, monitoring of registered investment advisory activities;platform; and
•inspecting branch offices and advising on how to strengthen compliance procedures.
Consultative Practice Management Programs and Training
Our practice management programs are designed to help leaders and financial advisors in independent practices and financial institutions, as well as all levels of financial institution leadership,enterprises enhance and grow their businesses. Our experience gives us the ability to benchmark the best practices of successful advisors and develop customized recommendations to meet the specific needs of an advisor’s business and market, and our scale allows us to dedicate a team of experienced professionals to this effort. Our practice management and training services include:
•personalized business consulting that helps eligible advisors and program leadership enhance the value and operational efficiency of their businesses;
•advisory and brokerage consulting and financial planning to support advisors in growing their businesses through our broad range of products and fee-based offerings as well asand wealth management services, to assist advisors serving high-net-worth clients with comprehensive estate, tax, philanthropic, and financial planning processes;services;
•marketing strategies, including campaign templates, to enable advisors to build awareness of their services and capitalize on opportunities in their local markets;
•our Liquidity & Succession solution to expand the options of advisors seeking to monetize their businesses or free themselves from entrepreneurial burdens through the sale of their practices;
•an advisor loan program for advisors looking to either sell their own or buy another practice;
•transition services to help advisors establish independent practices and migrate client accounts to us; and
•in-person and virtual training and educational programs on topics including technology, use of advisory platforms and business development.
Independent
Business Services and Planning and Advice Services
We provide business services to advisors in areas critical to the operation of their practices, such as marketing, accounting and transaction support. Our business services portfolio includes professional services and business optimizer offerings. Professional services offerings, including CFO Solutions, Marketing Solutions, Admin Solutions, Advisor Institute, Bookkeeping, Partial Book Sales, and CFO Essentials are digital and employee-powered solutions that provide expertise to increase business-level growth and operational efficiency. Business optimizer offerings, including M&A Solutions, Digital Office, Resilience Plans and Assurance Plans, are digital solutions that provide risk mitigation and business continuity services to support practice operations and succession planning.
Our planning and advice services are digital and employee-powered solutions that help advisors and enterprises expand the breadth and depth of their advice in areas such as tax planning, paraplanning and private client support for high-net-worth relationships. The focus of planning and advice services is helping advisors increase marketplace differentiation while limiting additional complexity and risk. We are expanding our portfolio of services to address new advisor needs while also enhancing our existing solutions to deliver an industry-leading customer experience.
In-House Research
We provide our advisors with integrated access to comprehensive research on a broad range of investmentsinvestments. We share market analysis and market analysiscommentary on macro-economic events, manager research, capital markets assumptions, and strategic and tactical asset allocation.allocation advice and individual equity guidance. Our research team provides advice that is designed to empower our advisors to providebetter serve their clients, with thoughtful advice in a timely manner, including the creation of discretionary portfolios for which we serve as a portfolio manager, available through our turnkey advisory asset management platforms. OurWe are able to provide objective and unbiased investment research team actively works withto our product risk management group to reviewadvisors and their clients without the financial products offered through our platform. This includes third-party asset manager search, selection, and monitoring services for both traditional and alternative strategies across all investment access points (exchange-traded funds, mutual funds, separately managed accounts, unified managed accounts, and other products and services). We believe our lackconflict of proprietary products or investment banking services better enables us to provide research that is unbiased and objective.services.
Our Product and Solution Access
We do not manufacture any financial products. Instead, we provide our advisors with open architecturecurated access to a broad range of commission, fee-based, cash and money market products and services. Our product risk management group conducts a review on substantially all of our product offerings.
The sales and administration of these products are facilitated through our technology solutions, thatwhich allow our advisors to access client accounts, product information, asset allocation models, investment recommendations and economic insight, as well as to perform trade execution.
Commission-Based Products
Commission-based products are those for which we and our advisors receive an upfront commission and, for certain products, a trailing commission, or a mark-up or mark-down. Our brokerage offerings include variable and fixed annuities, mutual funds, equities, alternative investments such as non-traded real estate investment trusts and business development companies, retirement and 529 education savings plans, fixed income, and insurance. As of December 31, 2017, the total brokerage assets in our commission-based products were $342.1 billion. We regularly review the structure and fees of our commission-based products in the context of retail investor preferences and the changing regulatory environment.
Fee-Based Advisory Platforms and Support
LPL Financial hasWe have various fee-based advisory platforms that provide centrally managed or customized solutions from which advisors can choose to meet the investment needs of their clients, including wrap-fee programs, mutual fund asset allocation programs, an advisor-enhanced digital advice program, advisory programs offered by third-party investment advisor firms, financial planning services and retirement plan consulting services. The fee structure of our platforms enables our advisors to provide their clients with higher levels of service while establishing a recurring revenue stream for the advisor and for us. Our fee-based platforms provide access to mutual funds, exchange-traded funds, stocks, bonds, certain optionoptions strategies, unit investment trusts, and institutional money managers and no-load multi-manager variable annuities. As of December 31, 2017,2023, the total advisory assets under custody in these platforms, through both our corporate RIA platform and Hybrid RIAs,Independent RIA advisory platforms, were $273.0$735.8 billion.
Cash Sweep ProgramsCommission-Based Products
We assistCommission-based products include those for which we and our advisors receive an upfront commission and, for certain products, a trailing commission. Our brokerage offerings include variable and fixed annuities, mutual funds, equities, fixed income, alternative investments, retirement and 529 education savings plans and insurance. We regularly review the structure and fees of our commission-based products in managing their clients’ cash balances through three primary cash sweep programs depending on account type: a money market sweep vehicle involving money market fund providersthe context of retail investor preferences and two insured sweep vehicles involving banks.the changing regulatory environment, as well as the competitive landscape. As of December 31, 2017,2023, the total brokerage assets in commission-based products were $618.2 billion.
Client Cash Programs
Our client cash programs include two Federal Deposit Insurance Corporation (“FDIC”) insured bank sweep vehicles, a client cash account and a money market account, which enable our advisors to manage their clients’ cash balances. As of December 31, 2023, the total assets in our client cash sweep programs, which are held within brokerageadvisory and advisorybrokerage accounts, were approximately $29.8$48.5 billion. Our sweep programs with banks held $22.9 billion in insured cash account vehicles and $4.2 billion in deposit cash account vehicles. The balance in money market vehicles was $2.7 billion.
Other Services
We provide a number of additional tools and services that enable advisors to maintain and grow their practices. Through our subsidiary PTC, we provide custodial services to trusts for estates and families. Under our unique model, an advisor may provide a trust with investment management services, while administrative services for the trust are provided by PTC. We also offer retirement solutions for commission- and fee-based services that allow advisors to provide brokerage services, consultation and advice to retirement plan sponsors using LPL Financial. We estimate that as of December 31, 2017, there were 41,000 retirement plans served byoffer proposal generation, investment analytics and portfolio modeling capabilities to both our advisors with total retirement plan assets of approximately $134.9 billion. We earn revenue from retirement plan assets that are custodied with LPL Financial and from those that are not custodied with LPL Financial, but which are serviced by advisors through LPL Financial. Only retirement plan assets that are custodied with LPL Financial are includedexternal clients in our reported total brokeragethe wealth management industry and advisory assets.provide an advisor-facing trading and portfolio rebalancing platform.
Our Financial Model
Our overall financial performance is a function of the following dynamics of our business:following:
•Our revenues stemrevenue stems from diverse sources, including advisor-generated commission and advisory fees and commission revenue, as well as other asset-based fees from product manufacturers, omnibus,sponsors, recordkeeping, networking services, client cash sweep balances, service and fee revenue, transaction revenue and other feesrevenue for other ancillary services that we provide. Revenues areRevenue is not concentrated by advisor, product or geography. For the year ended December 31, 2017,2023, no single relationship with our independent advisor practices banks, credit unions, or insurance companiesenterprises accounted for more than 7%2% of our net revenues,advisory and commission revenue, and no single advisor accounted for more than 2%1% of our net revenues.advisory and commission revenue.
•The largest variable component of our cost base,expense, advisor payout percentages, is directly linked to revenuesrevenue generated by our advisors.
•A portion of our revenues, such as software licensing and account and client fees, arerevenue is not asset-based or correlated with the equity financial markets. Service and fee revenue is generated from advisor and retail investor services, including insurance, licensing, business services and planning and advice services, IRA custodian and other client account fees. Service and fee revenue from business services is based on recurring subscription fees. We charge separate fees to RIAs for technology, clearing, administrative, oversight and custody services, which may vary. In addition, we host certain advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee.
•Our operating model is scalable and is capable of delivering expanding profit margins over time.
•We have managed our capital allocation framework and expenditures such that we have been able to operate with low capital expenditures and limited capital requirements, and as a result have been able toboth invest in our business as well asand return valuecapital to shareholders.
The majority of our revenue base is recurring in nature, with approximately 78.1% recurring revenue in 2017.
stockholders.
Our Competitive Strengths
Market Leadership Position and Significant Scale
We are the established leader in the independent advisor market, which is our core business focus. We use our scale and position as an industry leader to champion the independent business model and the rights of our advisors.
advisors and their clients. Our scale enables us to benefit from the following dynamics:
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• | •Continual Reinvestment — We actively reinvest in our comprehensive technology platform and practice management support, which further improves the productivity of our advisors. •Economies of Scale — As one of the largest distributors of financial products in the U.S., we have been able to obtain attractive economics from product sponsors. •Payout Rates to Advisors — As one of the largest U.S. broker-dealers by number of advisors, we believe that we offer our advisors the highest average payout rates in our industry. |
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• | Economies of Scale — As one of the largest distributors of financial products in the United States, we have been able to obtain attractive economics from product manufacturers.
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• | Payout Ratios to Advisors — Among the largest United States broker-dealers by number of advisors, we believe that we offer the highest average payout ratios to our advisors.
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The combination of our ability to reinvest in our business and maintain highly competitive payout ratiosrates has enabled us to attract and retain advisors. This, in turn, has driven our growth and led to a continuous cycle of reinvestment that reinforces our established scale advantage.
Comprehensive Solutions
Our differentiator isWe differentiate through the combination of our capabilities across research, technology, risk management and practice management. LPL makesWe make meaningful investments to support the growth, productivity and efficiency of advisors across a broad spectrum of models as their practices evolve. Our focus is working alongside advisors to navigate complex environments in order to create the best outcomes for their clients.
We believe we offer a compelling value proposition to independent financial advisors and financial institutions.enterprises. This value proposition is built upon the delivery of our services through our scale, independence, and integrated technology, the sum of which we believe is not replicated in the industry. As a result, we believe that we do not have any direct competitors that offer our business model at the scale at which we offer it. For example, because we do not have any proprietary manufactured financial products, we do not view firms that manufacture asset management products and other financial products as direct competitors.
We provide comprehensive solutions to financial institutions,enterprises, such as regional banks, credit unions and insurersinsurance companies, that seek to provide a broad array of services for their clients. We believe many institutionsenterprises find the technology, infrastructure and regulatory requirements associated with delivering financial advice to be cost-prohibitive. The solutions we provide enable financial advisors at these institutionsenterprises to deliver their services on a cost-effective basis.
Flexibility of Our Business Model
Our business model allows our advisors the freedom to choose how they conduct their business, subject to certain regulatory parameters, which has helped us attract and retain advisors from multiple channels, including wire houses,wirehouses, regional broker-dealers, banks, other RIAs and other independent broker-dealers. Our platform can accommodate a variety of independent advisor business models, including independent financial advisors as independent contractors, employee advisors and HybridIndependent RIAs. The flexibility of our business model enables our advisors to transition among the independent advisor business modelsselect their preferred affiliation model and product mix as their business evolves and preferences change within the market. Our ownmarket or their client base all within an environment that allows for evolution with minimal interruption to their business and their clients.
In addition, our business model provides advisors with a multitude of customizable service and technology offerings that allow them to increase their efficiency, focus on their clients and grow their practice. For example, LPL Services Group provides business support to advisors in areas critical to the operation of their practices, such as marketing, accounting and transaction support.
Our Sources of Growth
We believe we can increase our revenue and profitability by benefiting from favorable industry trends and by executing strategies to accelerate our growth beyond that of the broader markets in which we operate.
Favorable Industry Trends
Growth in Investable Assets
According to Cerulli Associates, over the past five years assets serviced in the market segments in the United States that we address grew 8.4% per year, while retirement assets are expected to grow 5.0% per year over the next five years (in part due to the retirement of the baby boomer generation and the resulting assets that are projected to flow out of retirement plans and into IRAs). In addition, IRA assets are projected to grow from $8.4 trillion as of 2017 to $11.1 trillion by 2021.
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(1) | The Cerulli Report: The State of U.S. Retail and Institutional Asset Management 2017.
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(2) | The Cerulli Report: U.S. Retirement Markets 2017. |
Increasing Demand for Independent Financial Advice
Retail investors, particularly in the mass-affluent market, are increasingly seeking financial advice from independent sources. We are highly focused on helping independent advisors meet the needs of the mass-affluent market, which constitutes a significant and underserved portion of investable assets.
Advisor Migration to Independent Channels
Independent channels continue to gain market share from captive channels. We believe that we are not just a beneficiary of this secular shift, but an active catalyst in the movement to independence. There is an increased shift towards advisors seeking complete independence by forming an RIA firm and registering directly with the SEC or state securities regulators. This shift has led to significant growth in the number of advisors associated with Hybrid RIAs.
Macroeconomic Trends
Our business has benefited from recent interest rate increases, and we expect that it will benefit from growth in advisory and brokerage assets as well as any additional increase in interest rates.
Executing Our Growth Strategies
Increasing Productivity of Existing Advisor Base
We believe the productivity of our advisors has the potential to increase over time as we continue to develop solutions designed to enable them to add new clients, manage more of their clients’ investable assets and expand their existing practices with additional advisors. We expect to facilitate these productivity improvements by helping our advisors better manage their practices in an increasingly complex external environment, which we believe has the potential to result in the assets per advisor growing over time.
Business services and planning and advice services are a source of organic growth as a larger share of advisors adopts these service solutions.
Attracting New AdvisorsAssets to Our Platform
We intend to grow the number of advisors who areassets served by our platform — either those who are independent or who are alignedacross traditional markets and through new affiliation models. Ongoing investment in and enhancements to our platform and support teams have led to an expanded pipeline. We have also experienced momentum from a continued expansion of our advisor affiliation models, which has attracted prospects from new sources. Finally, we have opened up a new market with financial institutions. Cerulli Associates estimates there are 313,049 financial advisorsour newest enterprise affiliation model resulting in strategic relationships with M&T Bank Corporation, BMO Harris Financial Advisors, CUNA Brokerage Services, Inc., People’s United Bank, Bancwest Investment Services and Commerce Financial Advisors. Most recently, we announced an agreement with Prudential to transition the brokerage and investment advisory assets of Prudential Advisors, Prudential’s retail wealth management business, from its current third-party custodian to the Company’s Institution Services platform in the United States,second half of which we2024, subject to receipt of regulatory approval and other conditions. Related investments in our enterprise platform have a 4.9% market share, and we believe we are uniquely positioned to attract seasoned advisors of any practice size andgenerated interest from any of the channels listed below.new enterprise clients.
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Channel | | Advisors | | % of Market |
Independent Broker-Dealer(1) | | 61,600 | | 19.7% |
Insurance Broker-Dealer | | 74,532 | | 23.8% |
Wire House | | 47,470 | | 15.2% |
National and Regional Broker-Dealer | | 40,568 | | 13.0% |
Independent RIA(1) | | 38,407 | | 12.3% |
Retail Bank Broker-Dealer | | 22,798 | | 7.2% |
Hybrid RIAs(1) | | 27,674 | | 8.8% |
Total | | 313,049 | | 100.0% |
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(1) The 27,674 advisors classified as "Hybrid RIAs" are advisors who are both licensed through independent broker-dealers and registered as investment advisors. The Hybrid RIAs are excluded from the Independent Broker-Dealer and Independent RIA categories in the table above.
Competition
We compete with a variety of financial firms to attract and retain experienced and productive advisors:advisors. These financial firms operate in various channels and markets:
•Within the independent broker-dealer channel, the industry is highly fragmented and comprisedconsists primarily of regional firms that rely on third-party custodians and technology providers to support their operations. Some of the competitors in this space include:
◦Commonwealth Financial Network
◦Cetera Financial Group
◦Cambridge
•The captive wire house channel tendsWirehouses tend to consist of large nationwide firms with multiple lines of business that have a focus on the highly competitive high-net-worth investor market. Competitors in this channel include:
◦Morgan Stanley
◦Bank of America Merrill Lynch
◦UBS Financial Services Inc.
◦Wells Fargo Advisors, LLC
•Competition for advisors also includes regional firms such as Edward D. Jones & Co., L.P., Ameriprise Financial Services Inc. and Raymond James Financial Services, Inc.that primarily focus on specific client niches or geographic areas.
•Independent RIA firms, which are registered with the SEC or thoughthrough their respective states'states’ investment advisory regulator and not through a broker-dealer, may choose from a number of third-party firms to provide custodial services. Our significant competitors in this space include:
◦Charles Schwab & Co.
◦Fidelity Brokerage Services LLC
◦TD Ameritrade
Those competitors that do not offer a complete clearing solution for advisors are frequently supported by third-party clearing and custody oriented firms. Pershing LLC, a subsidiary of Bank of New York Mellon, National Financial Services LLC, a subsidiary of Fidelity Investments, and J.P. Morgan Clearing Corp., a subsidiary of J.P. Morgan Chase & Co., offer custodial services and technology solutions to independent firms and RIAs that are not self-clearing. These clearing firms and their affiliates and other providers also offer an array of service, technology and reporting tools. Albridge Solutions, a subsidiary of Bank of New York Mellon, Advent Software, Inc., Envestnet, Inc., and Morningstar, Inc., provide an array of research, analytics, and reporting solutions.
Our advisors compete for clients with financial advisors of brokerage firms, banks, insurance companies, asset management and investment advisory firms. In addition, they also compete with a number of firms offering direct-to-investor online financial services and discount brokerage services, such as Charles Schwab & Co, E*TRADE,services.
Human Capital
Our success depends on our ability to attract, hire, retain and Fidelity Brokerage Services LLC.develop highly-skilled professionals in a variety of specialties, including finance, technology, compliance, business development, cybersecurity and management.
EmployeesWorkforce
As of December 31, 2017,2023, we had 3,736approximately 8,400 full-time employees. Noneemployees, all of whom are located in the U.S. Approximately 49% of our employees self-identify as women and 40% self-identify as Black, Indigenous or People of Color.
Talent Management and Culture
Due to the complexity of our business, we compete with other companies for top talent, both inside and outside of our industry, and in multiple geographical areas within the United States. Our Human Capital efforts focus on further developing our culture of service in concert with our mission statement: We take care of our advisors so they can take care of their clients. To that end, we seek employees who are committed to excellence, integrity and living our values. Our employees are one team on one mission: to seek, embrace and apply feedback, stop and consider the big picture, and deliver results for our advisors and their clients.
Compensation and Benefits
To maintain a high-caliber, values-driven workforce that is committed to our culture, we strive to offer total rewards, including compensation, benefits and recognition programs that position our company as an employer of choice. Our compensation is designed to be performance based and competitive in the markets in which we compete. We closely monitor industry trends and practices to ensure we are able to attract and retain the personnel who are critical to our success. We also monitor internal pay equity to help ensure that our compensation practices are fair and equitable across our organization. Our Company’s senior leaders have an opportunity to receive a portion of their compensation in Company equity, and, subject to collective bargaining agreements governinga cap, we match the contributions of all of our employees to our retirement savings plan to help support their employmentlong-term financial goals. We also offer an employee stock purchase plan that enables eligible employees to acquire an ownership interest in our Company at a discount to prevailing market prices.
We offer an array of benefits intended to meet the diverse needs of our employees and their eligible dependents. From healthcare to holidays, our aim is to help our employees enjoy happy and healthy lifestyles while maintaining work-life balance. We offer comprehensive benefits to all full-time employees and part-time employees working at least 30 hours per week, which equates to over 99% of our workforce. Our health and welfare benefits include, among other things: medical coverage; dental and vision coverage; healthcare and dependent-care flexible spending accounts; Health Savings Accounts; accident and critical illness coverage; life and accidental death and dismemberment insurance; short-term and long-term disability insurance; and the LPL Live Well employee wellbeing program, which supports employees and their family members in their wellness journeys as well as offering targeted and focused programming for mental health, Type 2 Diabetes care and maternity management.
Recruiting
As a Fortune 500 company focused on innovation and growth, talent drives the success of our company. Therefore, we are focused on attracting and retaining our employees. To reach a diverse pool of talent, we are continually in the market and take a multi-faceted approach to recruiting in pursuit of diverse, entrepreneurial and dedicated team members. By expanding our reach and sourcing efforts and implementing diverse recruitment methods, we seek to create a workforce representative of the communities and partners we serve.
We continue to invest in talent recruitment channels to introduce emerging talent to the opportunities within wealth management and financial services. As part of our university recruitment strategy, we have expanded partnerships with us.colleges and universities in the local communities we serve and beyond. We build deepcontinuously seek ways to collaborate with students, faculty and diverse campus organizations to increase exposure and opportunities for students. LEAP, our Leadership Excellence and Achievement Program, encompasses the Company’s emerging talent initiatives and offers internship, part time and full time opportunities to develop the next generation of leaders.
Training and Development
We believe in our employees’ potential and provide training and development opportunities intended to maximize their performance and professional growth. To ensure that new employees integrate into our culture and their daily work, we provide a robust new-hire experience, as well as extensive ongoing training for existing employees to acquaint them with our business. We require all of our employees to complete courses in key regulatory areas, such as insider trading and anti-money laundering compliance, and we offer professional development opportunities through training sessions, on-demand learning and cross-departmental workshops, resulting in over 170,000 completed courses and workshops and approximately 200,000 development hours for our employees. In addition, we have mentorship programs that pair employees with more experienced professionals, giving mentees access to experience, expertise, and guidance. To help employees determine the next steps in their careers, we continue to provide a Career Growth Portal that provides employees with tools, resources, training courses and assessments as they chart their career paths. Lastly, we have created skills cards with curated content targeting key skills and desired capabilities to help employees develop.
Employee Safety
We aim to provide a safe, inclusive environment for our employees where they feel engaged in our business, supported in who they are and empowered to succeed. We are committed to providing a workplace that is free from violence, harassment and other unsafe or disruptive conditions and require our personnel to attend regular training sessions and workshops on those topics.
To promote health and safety in our workplace, we have an environment, health and safety function that partners with others across the organization to support compliance with applicable workplace health and safety requirements. We also have a cross-functional team, with members who have been trained to conduct threat assessments to support workplace violence prevention. We provide leaves of absence and workplace accommodations, and we provide employees with the flexibility to support their individual circumstances, where possible. In addition, the LPL Financial Foundation continues to support the LPL Care Fund, an employee-to-employee relief fund created to help employees facing unexpected and unavoidable financial hardships as a result of a natural disaster or epidemic by attracting talentedproviding tax-free grants.
Diversity, Equity and Inclusion
Our diversity, equity and inclusion (“DEI”) efforts are overseen by our chief executive officer, chief human capital officer and chief diversity officer. In 2023, the management committee received quarterly updates on DEI-related issues. Our Board of Directors, its compensation and human resources committee and its nominating and governance committee, which oversees our environmental, social and governance program, also received multiple updates on our progress in this area.
At LPL, we believe that well-being is more than just physical safety and that our employees fromshould feel welcome and supported as who they are. We seek to foster a culture of inclusivity. Our employee-led resource groups give voice to the needs, concerns and experiences of various diverse groups so that our leaders can ensure that all employees, regardless of background, are valued, respected and fully supported.
Continuous improvement is a pillar of our culture, and we regularly solicit employee feedback on the effectiveness and quality of our programs, including our diversity and inclusion programs, and their level of engagement with our business. We use this feedback to improve our programs and processes and inform decisions about our business.
In furtherance of our commitment to cultivating diversity of thought and ideas within the organization, we sponsor and encourage all of our team members to participate inEmployee Resource Groupsto leverage the individual
talents and share the perspectives and experiences of our employees across all demographics. These include, but are not limited to, groups open to all employees focusing on the experience of individuals who identify as African-American, Asian-American and Pacific Islander, Hispanic, LGBTQ, Veterans, Women, People with Disabilities and Working Parents.
Finally, our professional development and recruitment efforts include targeted outreach to and collaborations with organizations that serve historically underserved and underrepresented populations. We closely monitor employee turnover across a variety of fieldsdimensions to evaluate our effectiveness in retaining personnel. In addition, our DEI talent attraction efforts are centered on strengthening relationships with community partners, particularly historically Black colleges and developinguniversities.Our goal has been to broaden the pool of talented applicants to include groups historically underrepresented so that talent into future leaders of our businesswe can truly reach the best candidates, and our industry. Our continued growth is dependent, in part, on our ability to be an employerefforts towards this goal helped create a 2023 class of choice and an organization that recruits and retains talented employees who best fit our culture and business needs. We offer ongoing learning opportunities and programs that empower employees to grow in their professional development and careers. We provide comprehensive compensation and benefits packages,interns with significant representation by people identifying as wella woman and/or as financial education tools to assist our employees as they plan for their future.Black, Indigenous or a Person of Color.
Regulation
The financial services industry is subject to extensive regulation by United StatesU.S. federal, state and international government agencies as well as various self-regulatory organizations. We take an active leadership roleseek to participate in the development of thesignificant rules and regulations that govern our industry. We have been investing in our compliance functions to monitor our adherence to the numerous legal and regulatory requirements applicable to our business. Compliance with all applicable laws and regulations, only some of which are described below, involves a significant investment in time and resources. Any new laws or regulations applicable to our business, any changes to existing laws or regulations, or any changes to the interpretations or enforcement of those laws or regulations may affect our operations and/or financial condition.
Broker-Dealer Regulation
LPL Financial is a clearing broker-dealer registered with the SEC, a member of the Financial Industry Regulatory Authority ("FINRA"(“FINRA”) and various other self-regulatory organizations, and a participant in various clearing organizations including the Depository Trust Company, the National Securities Clearing Corporation and the Options Clearing Corporation. LPL Financial is registered as a broker-dealer in each of the 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The rules of the Municipal Securities Rulemaking Board, which are enforced by the SEC and FINRA, apply to the municipal securities activities of LPL Financial. LPL Financial is registered as an introducing broker-dealer with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). LPL Financial is regulated by the SEC, FINRA, CFTC and NFA.
Broker-dealers are subject to rules and regulations covering all aspects of the securities business, including sales and trading practices, public offerings, publication of research reports, use and safekeeping of clients’ funds and securities, capital adequacy, recordkeeping and reporting, the conduct of directors, officers and employees, qualification and licensing of supervisory and sales personnel, marketing practices, supervisory and organizational procedures intended to ensure compliance with securities laws and to prevent improper trading on material nonpublic information, limitations on extensions of credit in securities transactions, clearance and settlement procedures, anti-money laundering, cybersecurity, credit risk management and rules designed to promote high standards of commercial honor and just and equitable principles of trade. Broker-dealers are also subject to state securities laws and regulated by state securities administrators in those jurisdictions where they do business. Applicable laws, rules and regulations may be subject to varying interpretations and change from time to time. For example, in 2017, Nevada enacted a law that would require broker-dealers to adhere to certain fiduciary standards specified under Nevada law.
Regulators make periodic examinations and inquiries of us and review annual, monthly and other reports on our operations track record, and financial condition. Regulatory actions brought against us alleging violations of applicable laws, rules and regulations could result in censures, penalties and fines, settlements, disgorgement of profits, restitution to customers, remediation or the issuance of cease-and-desist orders. Such actions could also result in the restriction, suspension or expulsion from the securities industry of us or our financial advisors, officers or employees. We also may incur substantial expenses, damage to our reputation or similar adverse consequences in connection with any such actions by the SEC, FINRA, CFTC, NFA, the U.S. Department of Labor (“DOL”) or state securities regulators, regardless of the outcome.
LPL Financial'sFinancial’s margin lending is regulated by the Federal Reserve Board’s restrictions on lending in connection with client purchases and short sales of securities, and FINRA rules also require LPL Financial to impose maintenance requirements based on the value of securities contained in margin accounts. In many cases, our margin policies are more stringent than these rules.
LPL Financial's recommendations to retail customers are subject to a standard of conduct specified by the SEC (“Reg BI”). Reg BI requires that, when making recommendations, broker-dealers act in the best interest of retail
customers without placing their own financial or other interests ahead of the customer’s and regulations continueimposes obligations related to arisedisclosure, duty of care, conflicts of interest and compliance. Certain state securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and regulations. In addition, the DOL has proposed a “Retirement Security Rule” that would broaden the definition of fiduciary advice and modify the prohibited transaction exemptions in effect as of the date of this Annual Report that enable investment advice fiduciaries to receive compensation on transactions as a result of fiduciary recommendations to a plan covered by the Dodd-Frank Wall Street Reform and Consumer ProtectionEmployee Retirement Income Security Act (the “Dodd-Frank Act”of 1974, as amended (“ERISA”), which was enacted in July 2010. ProvisionsIRA or other account covered by Section 4975 of the Dodd-Frank Act that have not been implemented, but mayInternal Revenue Code of 1986, as amended (the “Code”). Compliance with proposed conduct standards could increase the complexity and costs of our compliance or affect our businessrevenue streams, including, in the future include, but are not limited to, the potential implementationcase of a more stringent fiduciary standard for broker-dealers (in addition to the DOL Rule, as defined below) andproposal, our ability to rely on the potential establishment of a new self-regulatory organization (“SRO”) for investment advisors. Compliance with these provisions could require us to review our product and service offerings for potential changes and would likely result in increased compliance costs.current prohibited transaction exemptions. Moreover, to the extent the Dodd-Frank Act affectsnew rules or regulations affect the operations, financial condition, liquidity and capital requirements of financial institutions with which we do business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us. TheAs industry compliance practices and regulatory approaches to guidance, examinations and enforcement continue to develop, the ultimate impact that the Dodd-Frank Act or otherthese new rules or regulations will have on us, the financial industry and the economy cannot be known until all applicable regulations called for underat this time. It is unclear how and whether other regulators, including banking regulators, and state securities and insurance regulators, may respond to or attempt to enforce similar issues addressed by Reg BI and the Dodd-Frank Act have been finalized and implemented.DOL.
Investment AdvisorAdviser Regulation
As an investment advisorsadviser registered with the SEC, our subsidiariessubsidiary LPL Financial and Fortigent, LLC areis subject to the requirements of the Advisers Act, and the regulations promulgated thereunder, including examination by the SEC’s staff. Such requirements relate to, among other things, fiduciary duties to clients, performance fees, maintaining an effective compliance program, solicitation arrangements, conflicts of interest, advertising, limitations on agency cross and principal transactions between the advisor and advisory clients, recordkeeping and reporting requirements, disclosure requirements and general anti-fraud provisions.
The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and associated regulations. Investment advisorsadvisers also are subject to certain state securities laws and regulations. Failure to comply with the Advisers Act or other federal and state securities laws and regulations could result in investigations, censures, penalties and fines, settlements, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders or the termination of an investment advisor’sadviser’s registration. We also may incur substantial expenses, damage to our reputation or similar adverse consequences in connection with such actions, regardless of the outcome.
Retirement Plan Services Regulation
Certain of our subsidiaries, including LPL Financial, LPL Employee Services, LLC, PTC, Fiduciary Trust Company of New Hampshire and LPLIA, are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") andERISA, Section 4975 of the Internal Revenue Code, of 1986, as amended (the "Code"), and to regulations promulgated under ERISA or the Code, insofar as the subsidiaries provide services with respect to plan clients, or otherwise deal with plan clients, plan participants and retirement, health and educational accounts that are subject to ERISA or Section 4975 of the Code. ERISA imposes certain duties on persons who are "fiduciaries"“fiduciaries” (as defined in Section 3(21) of ERISA) and prohibits certain transactions involving plans subject to ERISA and fiduciaries or other service providers to such plans. Non-compliance with or breaches of these provisions may expose an ERISA fiduciary or other service provider to liability under ERISA, which may include monetary and criminal penalties as well as equitable remedies for the affected plan. Section 4975 of the Code prohibits certain transactions involving "plans"“plans” (as defined in Section 4975(e)(1), which include, for example, IRAs and certain Keogh plans) and service providers, including fiduciaries (as defined in Section 4975(e)(3)), to such plans. Section 4975 imposes excise taxes for violations of these prohibitions.
The United States Department of Labor (“DOL”) final rule on conflicts of interest (Definition of the Term "Fiduciary", Conflicts of Interest Rule-Retirement Investment Advice (“DOL Rule”)), which became applicable on June 9, 2017, significantly broadens the circumstance in which we and our advisors may be considered anhas a “five-part test” defining fiduciary “investment advice fiduciary”advice” under ERISA and Section 4975the Code (the “Five-Part Test”). Under this test, providing non-discretionary investment advice or recommendations with respect to a covered account can cause a person to be a fiduciary under ERISA and/or the Code if the advice is provided for a fee, on a regular basis, and subject to a mutual understanding that the advice will be personalized to the needs of the Code, extending fiduciary status to manyadvice recipient and used as a primary basis for an investment professionals and activities that have historically not been considered to be fiduciary, and imposes new requirements on our various business lines. In addition to the DOL Rule, the DOL published two new prohibited transaction exemptions—the Best Interest Contract Exemption and the Class Exemption for Principal Transactions in Certain Assets—as well as amendments to and partial revocations of pre-existing exemptions. These regulations and exemptions focus in large part on conflicts of interest concerning financial professionals’ investment recommendations and marketing practices relating to retirement investors. The DOL has delayed the applicability of certain conditions of these exemptions to July 1, 2019, and is currently studying the rule’s impacts and considering whether any changes are needed. Because ERISA plans and IRAs comprise a significant portion of our business, we expect that compliance with the DOL Rule and reliance on new and amended prohibited transaction exemptions will require increased legal, compliance, information technology, and other costs and could lead to a greater risk of class action lawsuits and other litigation.decision. In addition, the DOL Rule,has proposed a “Retirement Security Rule” that would modify the Five-Part Test to broaden the definition of fiduciary advice and the prohibited transaction exemptions in its current form, creates increased risk of private arbitration and litigation, including potential class action litigation, based on violationseffect as of the DOL Rule. Thedate of this Annual Report.
The DOL’s prohibited transaction exemption 2020-03 (“PTE 2020-02”) provides broad exemptive relief for receiving variable or transaction-based compensation, and certain other “prohibited transactions,” in connection with fiduciary investment advice to investors using covered accounts if certain conditions are met. The preamble to this exemption also included the DOL’s new and expanded interpretation of when providing a rollover recommendation (or potentially other recommendations) could result in fiduciary status under the historic Five-Part Test. This new
interpretation, as well as other guidance issued by the DOL Rule, once phased in connection with this interpretation, has been the subject of multiple litigations in federal district courts challenging the DOL’s authority to issue it. On February 13, 2023, a federal court issued a decision that invalidated, in part, the DOL’s interpretation of who qualifies as a fiduciary under ERISA in providing a rollover recommendation. We operate our business in compliance with a number of DOL prohibited transaction exemptions, including PTE 2020-02, where applicable. However, as industry compliance practices and regulatory approaches to guidance, examinations and enforcement continue to develop, and the outcomes of litigation remain pending, the ultimate impact that these new rules or regulations will have on us, our advisors,the financial industry and the broader financial industry, is not fullyeconomy cannot be known at this time. ItIn addition, it is also unclear how and whether the DOL and other regulators, including the SEC, FINRA, banking regulators, and the state securities and insurance regulators may respond to or enforce elements of the Five-Part Test and PTE 2020-02 rules or interpretations.
The DOL Rule or develop their own similar lawsalso proposed amendments to the definition of “fiduciary” under ERISA and regulations. Moreover, the DOL’s ongoing studyCode and reconsiderationcertain of its existing prohibited transaction exemptions, which we expect, if completed, to result in increased legal, compliance, information technology and other costs and could lead to a greater risk of client lawsuits and enforcement activity by the DOL Rule, and potential changes thereto, impacts the degree and timing of theother regulators. The effect of theany future DOL Ruleregulations and changes on our retirement plan business in ways that cannot now be anticipated or planned for whichbut may have further impacts on our products and services and results of operations.
Commodities and Futures Regulation
LPL Financial is registered as an introducing broker with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). LPL Financial introduces commodities and futures products to ADM Investor Services, Inc. (“ADM”), and all commodities accounts and related client positions are held by ADM. LPL Financial is regulated by the CFTC and the NFA. Violations of the rules of the CFTC and the NFA could result in remedial actions including fines, registration terminations, or revocations of exchange memberships.
Trust Regulation
Through our subsidiary, PTC, we offer trust, investment management oversight and custodial services for estates and families. PTC is chartered as a non-depository national banking association. As a limited purpose national bank, PTC is regulated and regularly examined by the Office of the Comptroller of the Currency (“OCC”). PTC files reports with the OCC within 30 days after the conclusion of each calendar quarter. Because the powers of PTC are limited to providing fiduciary services and investment advice, it does not have the power or authority to accept deposits or make loans. For this reason, trust assets under PTC’s management are not insured by the FDIC.
Because of its limited purpose, PTC is not a “bank” as defined under the Bank Holding Company Act of 1956. Consequently, neither its immediate parent, PTC Holdings, Inc., nor its ultimate parent, LPLFH, is regulated by the Board of Governors of the Federal Reserve System as a bank holding company. However, PTC is subject to regulation by the OCC and to various laws and regulations enforced by the OCC, such as capital adequacy, change of control restrictions and regulations governing fiduciary duties, conflicts of interest, self-dealing and anti-money laundering. For example, the Change in Bank Control Act of 1978, as implemented by OCC supervisory policy, imposes restrictions on parties who wish to acquire a controlling interest in a limited purpose national bank such as PTC or the holding company of a limited purpose national bank such as LPLFH. In general, an acquisition of 10% or more of our common stock, or another acquisition of “control” as defined in OCC regulations, may require OCC approval. These laws and regulations are designed to serve specific bank regulatory and supervisory purposes and are not meant for the protection of PTC, PTC Holdings, Inc., LPLFH or their stockholders.
Regulatory Capital Requirements
The SEC, FINRA, the CFTC and the NFA have stringent rules and regulations with respect to the maintenance of specific levels of net capital by regulated entities. Generally, a broker-dealer’s net capital is calculated as net worth plus qualified subordinated debt less deductions for certain types of assets. The net capital rule under the Exchange Act requires a broker-dealer to maintain a minimum net capital and applies certain discounts to the value of its assets based on the liquidity of such assets. LPL Financial is also subject to the NFA'sNFA’s financial requirements and is required to maintain net capital that is in excess of or equal to the greatest of the NFA'sNFA’s minimum financial requirements. Under these requirements, LPL Financial is currently required to maintain minimum net capital that is in excess of or equal to the minimum net capital calculated and required pursuant to the SEC's Net Capital Rule.Exchange Act’s net capital rule.
The SEC, FINRA, the CFTC and the NFA impose rules that require notification when net capital falls below certain predefined criteria. These broker-dealer capital rules also dictate the ratio of debt to equity in regulatory capital composition and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a broker-dealer fails to maintain the required net capital, then certain notice requirements to the regulators are required, and the broker-dealer may be subject to suspension or revocation of registration by the applicable regulatory agency, and suspension or expulsion by these regulators ultimately could lead to the broker-dealer’s liquidation. Additionally, the net capital rule and certain FINRA rules impose requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and require prior notice to the SEC and FINRA for certain capital withdrawals. LPL Financial, , which is subject to net capital rules, has been and currently is in compliance with those rules and has net capital in excess of the minimum requirements.
Anti-Money Laundering and Sanctions Compliance
The USA PATRIOT Act of 2001, (the “PATRIOT Act”), which amended the Bank Secrecy Act, contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker-dealers, futures commission merchants and other financial services companies. Financial institutions subject to these requirements generally must have an anti-money laundering program in place, which includes monitoring for and reporting suspicious activity, implementing specialized employee training programs, designating an anti-money laundering compliance officer and annually conducting an independent test of the effectiveness of its program. In addition, sanctions administered by the United States Office of Foreign Asset Control prohibit United StatesU.S. persons from doing business with blocked persons and entities or certain sanctioned countries. We have established policies, procedures and systems designed to comply with these regulations but
weand work continuously to improve and strengthen our regulatory compliance mechanisms.
Security and Privacy
Regulatory activity in the areas of privacy and data protection continues to grow worldwide and is generally being driven by the growth of technology and related concerns about the rapid and widespread dissemination and use of information and general concerns about the security of that information. To the extent they are applicable to us, we must comply with federal and state information-related laws and regulations in the United States, including the Gramm-Leach-Bliley Act of 1999, SEC Regulation S-P, the Fair Credit Reporting Act of 1970, as amended, and Regulation S-ID.
Financial Information about Geographic Areas
Our revenues forS-ID, as well as the periods presented were derived from our operations in the United States.California Consumer Privacy Act and further potential federal and state requirements.
Trademarks
Access Overlay®, BlazePortfolio®, BranchNet®, CLIENTWORKS®, Fortigent®, LPL®, LPL Career Match®, LPL Financial (& Design)®, Manager Access Network®, Manager Access Select®, OMP®, and SPONSORWORKS® are our registered trademarks, and LPL FINANCIAL INVESTOR FOCUSED SOLUTIONSADVISORYWORLD, CLIENTWORKS CONNECTED, ALLEN & COMPANY OF FLORIDA, LLC, and THE PRIVATE TRUST COMPANY, N.A. (& Design) are among our service marks.
Item 1A. Risk Factors
Risk Factor Summary
Our business, operations and financial results are subject to varying degrees of risk and uncertainty. We are providing the following summary of risk factors to enhance readability of our risk factor disclosure. Material risks that may adversely affect our business, operations and financial results include, but are not limited to, the following:
Risks Related to Our Business and Industry
•We depend on our ability to attract and retain experienced and productive advisors, and we are subject to competition in all aspects of our business.
•Our financial condition and results of operations may be adversely affected by market fluctuations and other economic factors.
•Significant interest rate changes could affect our profitability and financial condition.
•Any damage to our reputation could harm our business and lead to a loss of revenue and net income.
•Our business is subject to risks related to litigation, arbitration claims and regulatory actions.
•There are risks inherent in the independent broker-dealer business model.
•We rely on third-party service providers, including off-shore providers, to perform technology, processing and support functions, and our operations are dependent on financial intermediaries that we do not control.
•Lack of liquidity or access to capital could impair our business and financial condition.
•Our business could be materially adversely affected as a result of the risks associated with acquisitions, investments, and strategic relationships.
•Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks.
•We face competition in attracting and retaining key talent.
•The securities settlement process exposes us to risks related to adverse movements in price.
•Our indebtedness could adversely affect our financial condition and may limit our ability to use debt to fund future capital needs.
•Restrictions under our Credit Agreement may prevent us from taking actions that we believe would be in the best interest of our business.
•Provisions of our Credit Agreement and certain of the Indentures could discourage an acquisition of us by a third-party.
•Our insurance coverage may be expensive and we may exceed our limits of insurance coverage.
•Poor service or performance of the financial products that we offer or competitive pressures on pricing of such services or products may cause clients of our advisors to withdraw their assets on short notice.
•A loss of our marketing relationships with manufacturers of financial products could harm our relationship with our advisors and, in turn, their clients.
•Changes in U.S. federal income tax law could make some of the products distributed by our advisors less attractive to clients.
Risks Related to Our Regulatory Environment
•Any failure to comply with applicable federal or state laws or regulations, or self-regulatory organization rules, exposes us to litigation and regulatory actions, which could increase our costs or negatively affect our reputation.
•Regulatory developments could adversely affect our business by increasing our costs or making our business less profitable.
•We are subject to various regulatory requirements, which, if not complied with, could result in the restriction of the conduct or growth of our business.
•Failure to comply with ERISA regulations and certain tax-qualified plan laws and regulations could result in penalties against us.
Risks Related to Our Technology
•We rely on technology in our business, and technology and execution failures could subject us to losses, litigation and regulatory actions.
•Our information technology systems may be vulnerable to security risks.
•A cyber-attack or other security breach of our technology systems or those of our advisors or third-party vendors could negatively impact our normal operations and, as a result, subject us to significant liability and harm our reputation.
•Failure to comply with the complex privacy and data protection laws and regulations to which we are subject could result in adverse action from regulators and adversely affect our business, reputation, results of operations and financial condition.
•Failure to maintain technological capabilities, flaws in existing technology, difficulties in upgrading our technology platform or the introduction of a competitive platform could have a material adverse effect on our business.
•Inadequacy or disruption of our business continuity and disaster recovery plans and procedures in the event of a catastrophe could adversely affect our business.
Risks Related to Ownership of Our Common Stock
•The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our investors.
•We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our debt service and other obligations.
•Our future ability to pay regular dividends to holders of our common stock or repurchase shares are subject to the discretion of our Board and will be limited by our ability to generate sufficient earnings and cash flows.
Risks Related to Our Business and Industry
We depend on our ability to attract and retain experienced and productive advisors.advisors, and we are subject to competition in all aspects of our business.
We derive a large portion of our revenuesrevenue from commissions and fees generated by our advisors. Our ability to attract and retain experienced and productive advisors has contributed significantly to our growth and success, and our strategic plan is premised upon continued growth in the number of our advisors and the assets they serve. If we fail to attract new advisors or to retain and motivate our current advisors, replace our advisors who retire, or assist our retiring advisors with transitioning their practices to existingother advisors on our platform, or if advisor migration away from wire houses andwirehouses to independent channels decreases or slows, our business may suffer.
The market for experienced and productive advisors is highly competitive, and we devote significant resources to attracting and retaining the most qualifiedwell-qualified advisors. In attracting and retaining advisors, we compete directly with a variety of financial institutions such as wire houses,wirehouses, regional broker-dealers, banks, insurance companies, and other independent broker-dealers.broker-dealers and RIA firms. If we are not successful in retaining highly qualified advisors, we may not be able to recover the expense involved in attracting and training these individuals. There can be no assurance that we will be successful in our efforts to attract and retain the advisors needed to achieve our growth objectives.
Recently,More broadly, we are subject to competition in all aspects of our business from:
•brokerage and investment advisory firms, including national and regional firms, as well as Independent RIAs;
•asset management firms;
•commercial banks and thrift institutions;
•insurance companies;
•other clearing/custodial technology companies; and
•investment firms offering so-called “robo” advice solutions.
Many of our competitors have substantially greater resources than we do and may offer a broader range of services and financial products across more markets. Some of our competitors operate in a different regulatory environment than we do, which may give them certain wire housescompetitive advantages in the services they offer. For example, certain of our competitors only provide clearing services and consequently would not have announcedany supervision or oversight
liability relating to actions of their withdrawalfinancial advisors. We believe that competition within our industry will intensify as signatoriesa result of consolidation and acquisition activity and because new competitors face few barriers to an industry broker recruiting protocol, complianceentry, which could adversely affect our ability to recruit new advisors and retain existing advisors.
If we fail to continue to attract highly qualified advisors, or if advisors licensed with which protects financial advisors who move from one brokerage firmus leave us to another from risk of legal action from their prior brokerage firm. As firms withdraw from the protocol,pursue other opportunities, we could become engagedface a significant decline in more litigation relatedmarket share, commission and fee revenue or net income. We could face similar consequences if current or potential clients of ours, including current clients that use our outsourced customized clearing, advisory platforms or technology solutions, decide to use one of our competitors rather than us. If we are required to increase our payout of commissions and fees to our recruiting of advisors from firms which are not signatoriesin order to the protocol. In addition, financial advisors from such firms mayremain competitive, our net income could be more reluctant to consider joining us and, if they do, they may be less successful in transitioning their clients’ assets to our platforms than financial advisors who join us from firms that are signatories to the protocol. As a result, developments with regard to the protocol could negatively impact our recruiting results or could lead to increased litigation.significantly reduced.
Our financial condition and results of operations may be adversely affected by market fluctuations and other economic factors.
Significant downturns and volatility in equity and other financial markets have had and could continue to have an adverse effect on our financial condition and results of operations.
General economic and market factors can affect our commission and fee revenue. For example, a decrease in market levels or market volatility can:
•reduce new investments by bothadvisors’ new and existing clients in financial products that are linked to the equity markets, such as variable life insurance, variable annuities, mutual funds and managed accounts;
•reduce trading activity, thereby affecting our brokerage commissionscommission revenue and our transaction revenue;
•reduce the value of advisory and brokerage assets, thereby reducing advisory fee revenue, trailing commissionscommission revenue and asset-based fee income;revenue; and
•motivate clients to withdraw funds from their accounts, thereby reducing advisory and brokerage assets, advisory fee revenue and asset-based fee income.revenue.
Other more specific trends may also affect our financial condition and results of operations, including, for example:example, changes in the mix of products preferred by investors may result in increases or decreases in our fee revenuesrevenue associated with such products depending on whether investors gravitate towards or away from such products. The timing of such trends, if any, and their potential impact on our financial condition and results of operations are beyond our control.
In addition, because certain of our expenses are fixed, our ability to reduce them in response to market factors over short periods of time is limited, which could negatively impact our profitability.
Significant interest rate changes could affect our profitability and financial condition.
Our revenues arerevenue is exposed to interest rate risk primarily from changes in fees payable to us from banks participating in our client cash sweep programs and changes in interest income earned on deposits in third-party bank accounts and short-term U.S. treasury bills, which are generally based on prevailing interest rates.
Our revenue from our client cash sweep programs has declined in the past as a result of a low interest rate environment, and our revenue may decline in the future due to decreases in interest rates, decreases in client cash balances or clients moving assets outmix shifts among the current or future deposit sweep vehicles, client cash account or money market accounts that we offer. Though the Federal Reserve increased its target federal funds rate in 2022 to combat rising inflation, there is no guarantee of further increases, or that the higher interest rate environment will be sustained. If the Federal Reserve reduces its target federal funds rate from current levels, our cash sweep programs. revenue will be impacted.
Our revenue from our client cash sweep programs also depends on our ability to manage thesuccess in placing deposits and negotiating favorable terms of both ourin agreements with third-party banks and money market fund providers participating in our programs, as well as our success in offering competitive
products, program fees and interest rates payable to clients. The expiration of contracts with favorable pricing terms, or less favorable terms in future contracts, the inability to place deposits with participantsthird-party sweep banks, or changes in ourclient cash sweep programs,or money market accounts that we offer could result in declines in our revenue.
A sustained low interest rate environment may also have a negative impact upon our ability to negotiate contracts with new banks or renegotiate existing contracts on comparable terms with banks participating in our client cash sweep programs. IfEven in a rising interest rates do not rise in accordance with management and market expectations, orrate environment, if balances or yields in our client cash sweep programs decrease, future revenuesrevenue from our client cash sweep programs may be lower than expected.
Any damage to our reputation could harm our business and lead to a loss of revenueand net income.
We have spent many years developing our reputation for integrity and client service, which is built upon our support for our advisors through: enabling technology, comprehensive clearing and compliance services, practice management programs and training and in-house research. Our ability to attract and retain advisors and employees is highly dependent upon external perceptions of our level of service, business practices and financial condition. Damage to our reputation could cause significant harm to our business and prospects and may arise from numerous sources, including:
•litigation or regulatory actions;
•failing to deliver acceptable standards of service and quality, including technology or cybersecurity failures;
•compliance failures; and
•unethical behavior and the misconduct of employees, advisors or counterparties.
Negative perceptions or publicity regarding these matters could damage our reputation among existing and potential advisors and employees, and could lead advisors to terminate their agreements with us, which they generally have the right to do unilaterally upon short notice. Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us. These occurrences could lead to loss of revenue and lower net income.
Our business is subject to risks related to litigation, arbitration claims and regulatory actions.
From time to time, we have been subjected to and are currently subject to legal and regulatory proceedings arising out of our business operations, including lawsuits, arbitration claims, governmental subpoenas and regulatory, governmental and self-regulatory organization (“SRO”) inquiries, investigations and enforcement proceedings, as well as other actions and claims. Many of our legal claims are initiated by clients of our advisors and involve the purchase or sale of investment securities, but other claims and proceedings may be, and have been, initiated by state-level and federal regulatory authorities and SROs, including the SEC, FINRA and state securities regulators, as well as clients of Independent RIAs.
The outcomes of any such legal or regulatory proceedings, including litigations, arbitrations, inquiries, investigations and enforcement proceedings by the SEC, FINRA, DOL and state securities regulators or attorneys general, are difficult to predict. A negative outcome in such a matter could result in substantial legal liability, censures, penalties and fines, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders, or injunctive or other equitable relief against us. Further, such negative outcomes individually or in the aggregate may cause us significant reputational harm and could have a material adverse effect on our ability to recruit or retain financial advisors or institutions, or our results of operations, cash flows or financial condition.
We may face liabilities for deficiencies or failures in our supervisory and regulatory compliance systems and programs. We may also face liabilities for actual or alleged breaches of legal duties to clients of our advisors or Independent RIAs, including in respect of issues related to the financial products we make available or the investment advice or securities recommendations our advisors or Independent RIAs provide to their clients.
In addition, the administration of client accounts involves operational processes such as recordkeeping and accounting, security pricing, corporate actions, and account reconciliations that are complex and rely on various tools and resources. Failure to properly perform operational tasks or errors in the design or function of these tools, could subject us to regulatory sanctions, penalties or litigation and result in reputational damage, and liability to clients.
We are subject to various standards of care, including in some cases fiduciary obligations. Moreover, new and developing state and federal regulatory requirements with respect to standards of care and other obligations, as discussed under “Risks Related to Our Regulatory Environment” below, may introduce new grounds for legal claims or enforcement actions against us in the future, in particular with respect to our brokerage services. We may also become subject to claims, allegations and legal proceedings related to employment matters, including wage and hour, discrimination or harassment claims, or matters involving others’ intellectual property or other proprietary rights, including infringement or misappropriation claims.
There are risks inherent in the independent broker-dealer business model.
Compared to wirehouses and other employee model broker-dealers, we generally offer advisors wider choice in operating their businesses with regard to product offerings, outside business activities, office technology and supervisory models. Our approach may make it more challenging for us to comply with our supervisory and
regulatory compliance obligations, particularly in light of our limited on-site supervision and the complexity of certain advisor business models.
Misconduct and errors by our employees, advisors or Independent RIAs could be difficult for us to detect and could result in actual or alleged violations of law by us, investigations, litigation, regulatory sanctions, or serious reputational or financial harm. Although we have designed policies and procedures to comply with applicable laws, rules, regulations and interpretations, we cannot always prevent or detect misconduct and errors by our employees, advisors or Independent RIAs, and the precautions we take to prevent and detect these activities may not be effective in all cases. Prevention and detection among our advisors, who are typically not our direct employees and some of whom tend to be located in small, decentralized offices, present additional challenges, particularly in the case of complex products or supervision of outside business activities, including those conducted through Independent RIAs. In addition, although we provide our advisors with requirements and recommendations for their office technology, we cannot fully control or monitor the extent of their implementation of our requirements and recommendations. Accordingly, we cannot assure that our advisors’ technology meets our standards, including with regard to information security and cybersecurity. We also cannot assure that misconduct or errors by our employees, advisors or Independent RIAs will not lead to a material adverse effect on our business, or that our insurance will be available or sufficient to cover the cost to our business of such misconduct or errors.
We rely on third-party service providers, including off-shore providers, to perform technology, processing and support functions, and our operations are dependent on financial intermediaries that we do not control.
We rely on outsourced service providers to perform certain technology, processing and support functions. For example, we have an agreement with Refinitiv US LLC (“BETAHost”), under which it provides us key operational support, including data processing services for securities transactions and back office processing support. Our use of third-party service providers may decrease our ability to control operating risks and information technology systems risks.
Any significant failures by BETAHost or our other service providers could cause us to sustain serious operational disruptions and incur losses and could harm our reputation. These third-party service providers are also susceptible to operational and technology vulnerabilities, including cyber-attacks, security breaches, ransomware, fraud, phishing attacks and computer viruses, which could result in unauthorized access, misuse, loss or destruction of data, an interruption in service or other similar events that may impact our business.
We cannot assure that our third-party service providers will be able to continue to provide their services in an efficient, cost-effective manner, if at all, or that they will be able to adequately expand their services to meet our needs and those of our advisors. An interruption in or the cessation of service by a third-party service provider and our inability to make alternative arrangements in a timely manner could cause a disruption to our business and could have a material impact on our ability to serve our advisors and their clients. In addition, we cannot predict the costs or time that would be required to find an alternative service provider.
We have transitioned certain business and technology processes to off-shore providers, which has increased the related risks described above. For example, we rely on several off-shore service providers, operating in multiple locations, for functions related to cash management, account transfers, information technology infrastructure and support and document indexing, among others. To the extent third-party service providers are located in foreign jurisdictions, we are exposed to risks inherent in such providers conducting business outside of the United States, including international economic and political conditions as well as natural disasters, and the additional costs associated with complying with foreign laws and fluctuations in currency values.
We expect that our regulators would hold us responsible for any deficiencies in our oversight and control of our third-party relationships and for the performance of such third parties. If there were deficiencies in the oversight and control of our third-party relationships, and if our regulators held us responsible for those deficiencies, our business, reputation and results of operations could be adversely affected.
In addition, certain aspects of our operations are dependent on third-party financial institutions that we do not control, such as clearing agents, securities exchanges, clearing houses and other financial intermediaries. Any failure of these intermediaries, or any interruption in their operations, either on a widespread or individual basis, could adversely affect our ability to execute transactions, service our clients and manage our exposure to risk. In the event of such failure or interruption, there is no guarantee that we would be able to find adequate and cost-effective replacements on a timely basis, if at all.
Like us, these intermediaries are exposed to risks related to fluctuations and volatility in the financial markets and broader economy, as well as specific operational risks related to their business, such as those related to technology,
security and the prevailing regulatory environment. Because we rely on these intermediaries, we share indirect exposure to these risks. If these risks were to materialize, or if there was a widespread perception that they could materialize, our business, reputation and results of operations could be adversely affected.
Lack of liquidity or access to capital could impair our business and financial condition.
Liquidity, or ready access to funds, is essential to our business. We expend significant resources investing in our business, particularly with respect to our technology and service platforms. In addition, we must maintain certain levels of required capital. As a result, reduced levels of liquidity could have a significant negative effect on us. Some potential conditions that could negatively affect our liquidity include:
•illiquid or volatile markets;
•diminished access to debt or capital markets;
•unforeseen cash or capital requirements;
•actual or alleged events of default under our Credit Agreement, Broker-Dealer Revolving Credit Facility, Indentures or other agreements governing our indebtedness;
•regulatory penalties or fines, settlements, customer restitution or other remediation costs; or
•adverse legal settlements or judgments.
The capital and credit markets continue to experience varying degrees of volatility and disruption. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for businesses similar to ours. Without sufficient liquidity, we could be required to limit or curtail our operations or growth plans, and our business would suffer.
Notwithstanding the self-funding nature of our operations, weWe may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets. These timing differences are funded either with internally generated cash flow or, if needed, with funds drawn under our revolving credit facility, Broker-Dealer Revolving Credit Facility or uncommitted lines of credit at our broker-dealer subsidiary LPL Financial .credit. We may also need access to capital in connection with the growth of our business, through acquisitions or otherwise.
In the event current resources are insufficient to satisfy our needs, we may need to rely on financing sources such as bank debt. The availability of additional financing will depend on a variety of factors such as:
•market conditions;
•the general availability of credit;
•the volume of trading activities;
•the overall availability of credit to the financial services industry;
•our credit ratings and credit capacity; and
•the possibility that ourcurrent or future lenders could develop a negative perception of our long- or short-term financial prospects as a result of industry- or company-specific considerations. Similarly, our access to funds may be impaired if regulatory authorities or rating organizations take negative actions against us.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions may limit our ability to satisfy statutory capital requirements, generate commission, fee and other market-related revenue to meet liquidity needs and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue different types of capital than we would otherwise, less effectively deploy such capital, or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility.
Our business could be materially adversely affected as a result of the risks associated with acquisitions, investments and strategic relationships.
We have made acquisitions and investments and entered into strategic relationships in the past and plan to pursue further acquisitions, investments and strategic relationships in the future, including in connection with our institution offering and Liquidity & Succession solution. These transactions are accompanied by risks. For instance, an acquisition could have a negative effect on our financial and strategic position and reputation, or the acquired business could fail to further our strategic or financial goals.
We can provide no assurances that advisors who join LPL Financial through acquisitions or investments in advisor practices will remain at LPL Financial. Moreover, we may not be able to successfully integrate acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. We may have a
lack of experience in new markets, products or technologies brought on by the acquisition, and we may have an initial dependence on unfamiliar supply or distribution partners. An acquisition may create an impairment of relationships with customers or suppliers of the acquired business or our advisors or suppliers. All of these and other potential risks may serve as a diversion of our management’s attention or other resources from other business concerns, and any of these factors could have a material adverse effect on our business. For more information about risks relating to updating our technology in connection with our business development opportunities, see “We rely on technology in our business, and technology and execution failures could subject us to losses, litigation and regulatory actions” below.
Our risk management policies and procedures may not be fully effective in mitigatingour risk exposure in all market environments or against all types of risks.
We have adopted policies and procedures to identify, monitor and manage our risk. These policies and procedures, however, may not be effective and may not be adapted quickly enough to respond effectively to changed circumstances. Some of our compliance and risk evaluation functions depend upon information technology systems, information provided by others and public information regarding markets, clients or other matters that are otherwise accessible by us. In some cases, however, that information may not be available, accurate, complete or up-to-date. Also, because many of our advisors work in decentralized offices, additional risk management challenges exist, including with regard to advisor office technology, vendors and information security practices. In addition, our existing systems, policies and procedures, and staffing levels may be insufficient to support a significant increase in our advisor population. Any such increase could require us to increase our costs, including information technology costs, in order to maintain our compliance and risk management obligations, or strain our existing policies and procedures as we evolve to support a larger advisor population. If our systems, policies and procedures are not effective, or if we are not successful in capturing risks to which we are or may be exposed, we may suffer harm to our reputation or be subject to litigation or regulatory actions that could have a material adverse effect on our business and financial condition.
We face competition in attracting and retaining key talent.
Our success depends upon the continued services of our key senior management personnel, including our executive officers and senior managers. Each of our executive officers is an employee at will, and none has an employment agreement. The loss of one or more of our key senior management personnel, and the failure to recruit a suitable replacement or replacements, could have a material adverse effect on our business.
Moreover, our success and future growth depends upon our ability to attract and retain qualified employees. There is significant competition for qualified employees in the financial services industry, and we may not be able to retain our existing employees or fill new positions or vacancies created by expansion or turnover. The loss or unavailability of these individuals could have a material adverse effect on our business.
The securities settlement process exposes us to risks related to adverse movements in price.
LPL Financial provides clearing services and trade processing for our advisors and their clients and certain institutions. Broker-dealers that clear their own trades are subject to substantially more regulatory requirements than brokers that outsource these functions to third-party providers. Errors in performing clearing functions, including clerical, technological and other errors related to the handling of funds and securities held by us on behalf of our advisors’ clients, could lead to censures, fines or other sanctions imposed by applicable regulatory authorities, as well as losses and liabilities in related lawsuits and proceedings brought by our advisors’ clients and others. Any unsettled securities transactions or wrongly executed transactions may expose our advisors and us to losses resulting from adverse movements in the prices of such securities.
Our indebtedness could adversely affect our financial condition and may limit ourability to use debt to fund future capital needs.
At December 31, 2023, we had total indebtedness of $3.7 billion, of which $1.3 billion is subject to floating interest rates. Our level of indebtedness could increase our vulnerability to general adverse economic and industry conditions. It could also require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes. In addition, our level of indebtedness may limit our flexibility in planning for changes in our business and the industry in which we operate and limit our ability to borrow additional funds. With interest rate increases, our interest expense has increased because borrowings under our Credit Agreement are based on variable interest rates.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful or feasible. Our Credit Agreement restricts our ability to sell assets. Even if we could consummate those sales, the proceeds that we realize from them may not be adequate to meet any debt service obligations then due. Furthermore, if an event of default were to occur with respect to our Credit Agreement, our Broker-Dealer Revolving Credit Facility or other future indebtedness, we could lose access to these sources of liquidity and our creditors could, among other things, accelerate the maturity of our indebtedness.
Our Credit Agreement and the Indentures governing our Notes permit us to incur additional indebtedness. Under our Credit Agreement we have the right to request additional commitments for new term loans, new revolving credit commitments and increases to then-existing term loans and revolving credit commitments subject to certain limitations. Although the Credit Agreement contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. In addition, other obligations that do not qualify as “indebtedness” under the terms of our Credit Agreement are not restricted by that agreement. To the extent new debt or other obligations are added to our currently anticipated debt levels, the substantial indebtedness risks described above would increase.
A credit rating downgrade would not impact the terms of our repayment obligations under the Credit Agreement or the Indentures. However, a credit rating downgrade to a below investment grade rating could cause currently suspended restrictive covenants and guarantees under certain of our Indentures to automatically be reinstated. Any such downgrade would negatively impact our ability to obtain comparable rates and terms on any future refinancing of our debt and could restrict our ability to incur additional indebtedness. In addition, if such downgrade were to occur, or if ratings agencies indicated that a downgrade may occur, perceptions of our financial strength could be damaged, which could affect our client relationships and decrease the number of investors, clients and counterparties that do business with us.
Restrictions under our Credit Agreement may prevent us from taking actionsthat we believe would be in the best interest of our business.
Our Credit Agreement contains customary restrictions on our activities, including covenants that may restrict us from:
•incurring additional indebtedness or issuing disqualified stock or preferred stock;
•declaring dividends or other distributions to stockholders;
•repurchasing equity interests;
•redeeming indebtedness that is subordinated in right of payment to certain debt instruments;
•making investments or acquisitions;
•creating liens;
•selling assets;
•guaranteeing indebtedness;
•engaging in certain transactions with affiliates;
•entering into agreements that restrict dividends or other payments from subsidiaries; and
•consolidating, merging or transferring all or substantially all of our assets.
These restrictions may prevent us from taking actions that we believe would be in the best interest of our business. Our ability to comply with these restrictive covenants will depend on our future performance, which may be affected by events beyond our control. If we violate any of these covenants or covenants under our Broker-Dealer Revolving Credit Facility and are unable to obtain waivers, we would be in default under our Credit Agreement or the Broker-Dealer Revolving Credit Facility, as applicable. As a result, payment of the indebtedness could be accelerated, which may permit acceleration of indebtedness under the Indentures and other agreements that contain cross-default or cross-acceleration provisions. If our indebtedness is accelerated, we may not be able to repay that indebtedness or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our indebtedness is in default for any reason, our business could be materially and adversely affected. In addition, complying with these covenants may also cause us to take actions that are not favorable to holders of our common stock and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
Provisions of our Credit Agreement and certain of the Indentures could discourage an acquisition ofus by a third-party.
Certain provisions of our Credit Agreement and the Indentures could make it more difficult or more expensive for a third-party to acquire us, and any of our future debt agreements may contain similar provisions. Upon the occurrence of certain transactions constituting a change of control, all indebtedness under our Credit Agreement may be accelerated and become due and payable and, under certain of the Indentures, noteholders will have the right to require us to repurchase our senior unsecured notes (the “Notes”) issued under such Indentures at a purchase price equal to 101% of the principal amount of such Notes plus accrued and unpaid interest, if any, to but not including the purchase date. A potential acquirer may not have sufficient financial resources to purchase our outstanding indebtedness in connection with a change of control.
Our insurance coverage may be expensive and we may exceed our limits of insurance coverage.
We are subject to claims in the ordinary course of business. These claims may involve substantial amounts of money and involve significant defense costs. It is not always possible to prevent or detect activities giving rise to claims, and the precautions we take may not be effective in all cases.
We maintain voluntary and required insurance coverage, including, among others, general liability, property, director and officer, excess Securities Investor Protection Corporation, business interruption, cyber and data breach, error and omission and fidelity bond insurance. We have self-insurance for certain potential liabilities through a wholly-owned captive insurance subsidiary. While we endeavor to self-insure and purchase coverage that is appropriate based on our assessment of our risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages. Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or a legal proceeding is inherently difficult, and there are particular uncertainties and complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary. The availability of coverage depends on the nature of the claim and the adequacy of reserves, which in turn depends in part on historical claims experience, including the actual timing and costs of resolving matters that begin in one policy period and are resolved in a subsequent period. Further to the difficulties noted above regarding assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or a legal proceeding, such assessment requires complex judgments, which may include the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact discovery; the opinions of counsel and experts; potential opportunities for settlement and the status of any settlement discussions; as well as the potential for insurance coverage and indemnification, if available. In addition, certain types of potential claims for damages cannot be insured. Our business may be negatively affected if in the future unforeseen circumstances cause us to exceed the limits of our insurance coverage or some or all of our insurance proves to be unavailable to cover our liabilities related to legal or regulatory matters. Such negative consequences could include additional expense and financial loss, which could be significant in amount. In addition, insurance claims may harm our reputation or divert management resources away from operating our business.
Poor service or performance of the financial products that we offer or competitivepressures on pricing of such services or products may cause clients of our advisorsto withdraw their assets on short notice.
Clients of our advisors have control over their assets that are served under our platforms. Poor service or performance of the financial products that we offer, the emergence of new financial products or services from others, harm to our reputation or competitive pressures on pricing of such services or products may result in the loss of clients. In addition, we must monitor the pricing of our services and financial products in relation to competitors and periodically may need to adjust commission and fee rates, interest rates on deposits and margin loans and other fee structures to remain competitive. Competition from other financial services firms, such as reduced or zero commissions to attract clients or trading volume, direct-to-investor online financial services, including so-called “robo” advice, or higher deposit rates to attract client cash balances, could result in pricing pressure or otherwise adversely impact our business. The decrease in revenue that could result from such an event could have a material adverse effect on our business.
A loss of our marketing relationships with manufacturers of financial products could harm our relationship with our advisors and, in turn, their clients.
We operate on an open architectureOur curated product platform offeringoffers no proprietary financial products. To help our advisors meet their clients’ needs with suitable investment options, we have relationships with many of the industry-leading providers of financial and insurance products. We have sponsorship agreements with some manufacturers of fixed and variable annuities, mutual funds and mutualexchange-traded funds that, subject to the survival of certain terms and conditions, may be
terminated by the manufacturer upon notice. If we lose our relationships with one or more of these manufacturers, our ability to serve our advisors and, in turn, their clients, and our business, may be materially adversely affected. As
an example, certain variable annuity product sponsors have ceased offering and issuing new variable annuity contracts. If this trend continues, we could experience a loss in the revenue currently generated from the sale of such products. In addition, certain features of such contracts have been eliminated by variable annuity product sponsors. If this trend continues, the attractiveness of these products would be reduced, potentially reducing the revenue we currently generate from the sale of such products.
Our businessChanges in U.S. federal income tax law could be materially adversely affectedmake some of the products distributed byour advisors less attractive to clients.
Some of the financial products distributed by our advisors, such as variable annuities, enjoy favorable treatment under current U.S. federal income tax law. Changes in U.S. federal income tax law, in particular with respect to variable annuity products, or with respect to tax rates on capital gains or dividends, could make some of these products less attractive to clients and, as a result, of the risks associated with acquisitions and investments.
We have made acquisitions and investments in the past and may pursue further acquisitions and investments in the future. These transactions are accompanied by risks. For instance, an acquisition could have a negative effect on our financial and strategic position and reputation or the acquired business could fail to further our strategic goals. Moreover, we may not be able to successfully integrate acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. We may have a lack of experience in new markets, products or technologies brought on by the acquisition and we may have an initial dependence on unfamiliar supply or distribution partners. An acquisition may create an impairment of relationships with customers or suppliers of the acquired business or our advisors or suppliers. All of these and other potential risks may serve as a diversion of our management's attention from other business concerns, and any of these factors could have a material adverse effect on our business.
In August 2017, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with National Planning Holdings, Inc. (“NPH”), and its four broker-dealer subsidiaries (collectively with NPH, the “NPH Sellers”) (the “NPH Acquisition”). Pursuant to the Asset Purchase Agreement, we acquired certain assets and rightsbusiness, results of the NPH Sellers, including the NPH Sellers’ business relationships withoperations, cash flows or financial advisors who became affiliated with us. Several factors could negatively affect our ability to fully realize the revenue or expense synergies or the other expected benefits of the NPH Acquisition, including, but not limited to: difficulties, cost overruns or delays in onboarding the clients or businesses of the former NPH advisors; successful execution of our onboarding and assimilation plans with regard to the former NPH advisors; disruptions to our business due to transaction, which could make it more difficult for us to maintain relationships with our financial advisors and their clients; our ability to retain the former NPH advisors and facilitate growth in their practices; and the choice by clients of the former NPH advisors not to maintain brokerage and/or advisory accounts at LPL Financial. We can provide no assurances that the assets reported as serviced by the former NPH advisors will translate into assets serviced at LPL Financial, or that the former NPH advisors who joined LPL Financial will remain at LPL Financial.condition.
Risks Related to Our Regulatory Environment
Any failure to comply with applicable federal or state laws or regulations, or SRO rules, exposes us to litigation and regulatory actions, which could increase our costs or negatively affect our reputation.
Our business, including securities and investment advisory services, is subject to extensive regulation under both federal and state laws.laws, rules and regulations, as well as SRO rules. Our broker-dealer subsidiary LPL Financial is:
•registered as a clearing broker-dealer with the SEC, each of the 50 states, and the District of Columbia, Puerto Rico and the U.S. Virgin Islands;
•registered as an investment adviser with the SEC;
•registered as an introducing broker-dealer with the CFTC;
•a member of FINRA and various other self-regulatory organizations,SROs, and a participant in various clearing organizations, including the Depository Trust Company, the National Securities Clearing Corporation and the Options Clearing Corporation; and
regulated•subject to oversight by the CFTC with respectDOL relative to its servicing of retirement plan accounts subject to ERISA and the futures and commodities trading activities it conducts as an introducing broker.Code.
The primary self-regulatorSRO of LPL FinancialFinancial’s broker-dealer activity is FINRA.FINRA, and the primary regulator of LPL Financial’s investment advisory activity is the SEC. LPL Financial is also subject to state laws, including state “blue sky” laws, and the rules of the Municipal Securities Rulemaking Board for its municipal securities activities. The CFTC has designated the NFA as LPL Financial’s primary regulator for futures and commodities trading activities.
The SEC, FINRA, theDOL, CFTC, theNFA, OCC, various securities and futures exchanges and other United States and state-level governmental or regulatory authorities continuously review legislative and regulatory initiatives and may adopt new or revised laws, regulations or interpretations. There can also be no assurance that other federal or state agencies will not attempt to further regulate our business or that specific interactions with foreign countries or foreign nationals will not trigger regulation in non-U.S. law in particular circumstances. These
legislative and regulatory initiatives may affect the way in which we conduct our business and may make our business model less profitable.
Our ability to conduct business in the jurisdictions in which we currently operate depends on our compliance with the laws, rules and regulations promulgated by federal regulatory bodies and the regulatory authorities in each of the states and other jurisdictions in which we do business. Our ability to comply with all applicable laws, rules and regulations and interpretations is largely dependent on our establishment and maintenance of compliance, audit and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit, supervisory and risk management personnel. We cannot assure you that our systems and procedures are, or have been, effective in complying with all applicable laws, rules and regulations and interpretations. In particular, the diversity of information security environments in which our services are offered makes it difficult to ensure a uniformly robust level of compliance. Regulators have in the past raised, and may in the future raise, concerns with respect to the quality, consistency or oversight of certain aspects of our compliance systems and programs and our past or future compliance with applicable laws, rules and regulations.
As of the date of this Annual Report on Form 10-K, we have a number of pending regulatory matters, includingmatters. For example, in October 2022, we received a request for information from the SEC in connection with regard to ouran investigation of the
Company’s compliance with state “blue sky” laws.records preservation requirements for business-related electronic communications stored on personal devices or messaging platforms that we have not approved. Under the SEC’s proposed resolution, we would pay a $50.0 million civil monetary penalty. As a result of the foregoing, we have recorded $40.0 million in other expense on the consolidated statements of income for the year ended December 31, 2023, to reflect the amount of the penalty that is not covered by our captive insurance subsidiary. We have not yet reached a settlement in principle with the SEC, and any settlement agreement remains subject to negotiation of the civil monetary penalty and definitive documentation. For more information, see Note 14 - Commitments and Contingencies within the notes to the consolidated financial statements in this Annual Report on Form 10-K.
Violations of laws, rules or regulations and settlements in respect of alleged violations have in the past resulted in, and could in the future result in, legal liability, censures, penalties and fines, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders or injunctive or other equitable relief against us, which individually or in the aggregate could negatively impact our financial results or adversely affect our ability to attract or retain financial advisors and institutions. Depending on the nature of the violation, we may be required to offer restitution or remediation to customers, and the costs of doing so could exceed our loss reserves.
We have established a captive insurance subsidiary that underwrites insurance for various regulatory and legal risks, although self-insurance coverage is not available for all matters. The availability of coverage depends on the nature of the claimmatters, and the adequacy of reserves, which depends in part on historical claims experience, including the actual timing and costs of resolving matters that begin in one policy period and are resolved in a subsequent period. Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or a legal proceeding is inherently difficult and requires significant and complex judgments, which may include the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact discovery; the opinions of counsel and experts; potential opportunities for settlement and the status of any settlement discussions; as well as the potential for insurance coverage and indemnification, if available. There are particular uncertainties and complexities involved when assessing the potential liabilities that are self-insured by our captive insurance subsidiary. As a result, actual self-insurance liabilities could exceed our expectations, in which case coverage may not be availablesufficient to protect us from losses we may incur. For more information about the potential limits of our insurance coverage, including our self-insurance coverage, see “Our insurance coverage may be expensive and we could incur significant additional expense.may exceed our limits of insurance coverage” above.
Regulatory developments could adversely affect our business by increasing our costs or making our business less profitable.
Our profitability could be affected by rules and regulations that impact the business and financial communities generally and, in particular, our advisors’advisors and their clients, including changes to the interpretation or enforcement of laws governing standards of care applicable to investment advice and recommendations, taxation, (including the classification of our independent contractor status ofadvisors as independent contractors rather than our advisors),employees, trading, electronic commerce, privacy, data protection and anti-money laundering. Failure to comply with these rules and regulations could subject us to regulatory actions or litigation and it could have a material adverse effect on our business, results of operations, cash flows or financial condition.
New laws, rules and regulations, or changes to the interpretation or enforcement of existing laws, rules or regulations, could also result in limitations on the lines of business we conduct or plan to conduct, modifications to our current or future business practices, compressed margins, increased capital requirements and additional costs. The regulatory environment, including a significant number of rule proposals from the SEC, continues to evolve, and will likely increase the complexity of operating our business. For example, regulators have introduced and adopted rules that subject broker-dealers and investment advisers to a higher standard of care. This includes the SEC’s Reg BI, fiduciary duty rules in Massachusetts and Nevada, and state best interest standards applicable to broker-dealers or the sale of certain annuity and insurance products. In addition, the DOL Rule and related exemptions, which became applicable on June 9, 2017 impose new requirements on our various business lines. The DOL also finalized certain prohibited transactions for broker-dealers regarding receipt of compensation for providing investment advice under arrangementsproposed a “Retirement Security Rule” that would constitute conflictsbroaden the definition of interest. The DOL has delayedfiduciary advice and modify the applicabilityprohibited transaction exemptions that enable firms to receive various types of certain conditions of these exemptions to July 1, 2019, and is currently studying the rule’s impacts and considering whether any changes are needed. However, because qualified retirement accounts and IRAs make up a significant portion of our business, we expect that implementation of the DOL Rule and related exemptions willcompensation. These developments could negatively impact our results, including the impact of increasedby increasing our expenditures related to legal, compliance, and information technology and could result in other costs.costs, including greater risks of client lawsuits and enforcement activity by regulators. These changes havemay also affected (and will likely continue to affect)affect the array of products and services we provideoffer to accountsclients and the compensation that we and our advisors receive in connection with such products and services.
It is also unclear how and whether other regulators, including the SEC, FINRA, DOL, banking regulators and theother state securities and insurance regulators may respond to, or enforce elements of, the DOL Rulethese new regulations, or develop their own similar laws and regulations. Moreover, the DOL’s ongoing study and reconsideration of the DOL Rule, and potential changes thereto,The impacts, the degree and timing of the effect of the DOL Rulethese laws and future regulations on our business in ways which cannot now be anticipated or planned for, whichand may have further impacts
on our products and services and the results of operations. Please consultConsult the “Retirement Plan Services RegulationRegulation” section within Part I, "Item“Item 1. Business"Business” for morespecific information about the risks associated with the DOL Ruleregulations and related exemptions and their potential impact on our operations.
In addition, the Dodd-Frank Act enacted wide-ranging changes in the supervision and regulation of the financial industry designed to provide for greater oversight of financial industry participants, reduce risk in banking practices and in securities and derivatives trading, enhance public company corporate governance practices and executive compensation disclosures and provide for greater protections to individual consumers and investors. Certain elements of the Dodd-Frank Act remain subject to implementing regulations that are yet to be adopted by the applicable regulatory agencies. Provisions of the Dodd-Frank Act that have not been acted upon, but yet may affect our business include but are not limited to the potential implementation of a more stringent fiduciary standard for broker-dealers (in addition to the DOL Rule) and the potential establishment of a new self-regulatory organization ("SRO") for investment advisors. Compliance with these new regulationsprovisions could require us to review our product and service
offerings for potential changes and would likely result in increased compliance costs. Moreover, to the extent the Dodd-Frank Act, affectsor other existing or new laws and regulations affect the operations, financial condition, liquidity and capital requirements of financial institutions with which we do business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us. The ultimateIt is not possible to determine the extent of the impact of any new laws, regulations or initiatives that may be imposed, or whether any existing proposals will become law. New laws or regulations could make compliance more difficult and expensive and affect the Dodd-Frankmanner in which we conduct business.
Likewise, federal and state standards prohibiting discrimination on the basis of disability in public accommodations and employment, including those related to the Americans with Disabilities Act, will have on us,are evolving to require an increasing number of public spaces, including web-based applications, to be made accessible to the financial industrydisabled.As a result, we could be required to make modifications to our internet-based applications or to our other client- or advisor-facing technologies, including our website, to provide enhanced or accessible service to, or make reasonable accommodations for, disabled persons. This adaptation of our websites and web-based applications and materials could result in increased costs and may affect the economy cannot be known until all such applicable regulations called for under the Dodd-Frank Act have been finalizedproducts and implemented.services we provide. Failure to comply with federal or state standards could result in litigation, including class action lawsuits.
In additionsum, our profitability may be adversely affected by current and future rulemaking and enforcement activity by the various federal, state and self-regulatory organizations to the DOL Rule and Dodd-Frank Act rule promulgation, other proposalswhich we are currently under consideration by federal banking regulators thatsubject. The effect of these regulatory developments on our business cannot now be anticipated or planned for, but may have an impact uponfurther impacts on our profitability.products and services and results of operations.
We are subject to various regulatory requirements, which, if not complied with, could result in the restriction of the conduct or growth of our business.
The business activities that we may conduct are limited by various regulatory agencies. Our membership agreement with FINRA may be amended by application to include additional business activities. This application process is time-consuming and may not be successful. As a result, we may be prevented from entering into or acquiring new potentially profitable businesses in a timely manner, or at all. In addition, as a member of FINRA, we are subject to certain regulations regarding changes in control. FINRA Rule 1017 of the National Association of Securities Dealers (the predecessor to FINRA) generally provides, among other things, that FINRA approval must be obtained in connection with any transaction resulting in a 25% or more change in our equitythe ownership of a FINRA member that results in one person or entity directly or indirectly owning or controlling 25% or more of our equity capital.such member. Similarly, the OCC imposes advance approval requirements for a change of control, and control is presumed to exist if a person acquires 10% or more of our common stock. These regulatory approval processes can result in delay, increased costs or impose additional transaction terms in connection with a proposed change of control such as capital contributionsor material change in business operations of us or a FINRA member that we seek to the regulated entity.acquire. As a result of these regulations, our future efforts to sell shares, or raise additional capital or participate in acquisition activity may be delayed, prohibited or prohibited.limited.
In addition, the SEC, FINRA, the CFTC, the OCC and the NFA have extensive rules and regulations with respect to capital requirements. As aOur registered broker-dealer subsidiaries, including LPL Financial, isare subject to Rule 15c3-1 (“Net Capital Rule”) under the Exchange Act, and related requirements of SROs. The CFTC and the NFA also impose net capital requirements. The Net Capital Rule specifies minimum capital requirements that are intended to ensure the general soundness and liquidity of broker-dealers. Because our holding companies are not registered broker-dealers, they are not subject to the Net Capital Rule. However, the ability of our holding companies to withdraw capital from our broker-dealer subsidiarysubsidiaries, including LPL Financial, could be restricted in the event they experience a net capital shortfall, which in turn could limit our ability to repay debt, redeem or purchaserepurchase shares of our outstanding stock or pay dividends. A large operating loss or charge against net capital could also adversely affect our ability to expand or even maintain our present levels of business.
The requirement to ensure accessibility of our websites and web-based applications to persons with rights under the Americans with Disabilities Act and other state or federal laws may result in increased cost and difficulty of compliance with evolving regulatory standards.
The Americans with Disabilities Act is a federal law that prohibits discrimination on the basis of disability in public accommodations and employment. As federal and state standards evolve to require an increasing number of public spaces, including web-based applications, to be made accessible to the disabled, we could be required to make modifications to our internet-based applications or to our other client-facing technologies, including our website, to provide enhanced or accessible service to, or make reasonable accommodations for, disabled persons. This adaptation of our websites and web-based applications and materials could result in increased costs and may affect the products and services we provide to clients. Failure to comply with federal or state standards could result in litigation, including class action lawsuits.
Failure to comply with ERISA regulations and certain retirementtax-qualified plan laws and regulations could result in penalties against us.
As discussed above, we are subject to ERISA and Section 4975 of the Code, and to regulations promulgated thereunder, insofar as we provide services with respect to plan clients, or otherwise deal with plan clientsplans, participants and certain types of investment/savings accounts that are subject to ERISA or the Code. ERISA imposes certain duties on persons who are "fiduciaries"“fiduciaries” (as defined in Section 3(21) of ERISA)ERISA and the related rules or interpretations) and prohibits certain transactions involving plans subject to ERISA and fiduciaries or other service providers to such plans. Non-compliance with or breaches of these provisions may expose an ERISA fiduciary or other service provider to liability under ERISA, which may include monetary and criminal penalties as well as equitable remedies for the affected plan. Section 4975 of the Code prohibits certain transactions involving “plans” (as defined in Section
4975(e)(1)), which include, for example, IRAs and certain Keogh plans and other qualified savings accounts, and service providers, including fiduciaries (as defined in Section 4975(e)(3)), to such plans. Section 4975 also imposes excisesexcise taxes for violations of these prohibitions.
Our failure to comply with ERISA and the Code could result in significant penalties against us that could have a material adverse effect on our business (or, in a worst case,or severely limit the extent to which we could act as fiduciaries for or provide services to these plans).
Risks Related to Our Competition
We operate in an intensely competitive industry, which could cause us to loseadvisors and their assets, thereby reducing our revenues and net income.
We are subject to competition in all aspects of our business, including competition for our advisors and their clients, from:
brokerage and investment advisory firms, including national and regional firms, as well as independent RIA firms;
asset management firms;
commercial banks and thrift institutions;
insurance companies;
other clearing/custodial technology companies; and
investment firms offering so-called “robo” advice solutions.
Many of our competitors have substantially greater resources than we do and may offer a broader range of services, including financial products, across more markets. Some operate in a different regulatory environment than we do, which may give them certain competitive advantages in the services they offer. For example, certain of our competitors only provide clearing services and consequently would not have any supervision or oversight liability relating to actions of their financial advisors. We believe that competition within our industry will intensify as a result of consolidation and acquisition activity and because new competitors face few barriers to entry, which could adversely affect our ability to recruit new advisors and retain existing advisors.
If we fail to continue to attract highly qualified advisors, or if advisors licensed with us leave us to pursue other opportunities, we could face a significant decline in market share, commission and fee revenues or net income. We could face similar consequences if current or potential clients of ours, including current clients that use our outsourced customized clearing, advisory platforms or technology solutions, decide to use one of our competitors rather than us. If we are required to increase our payout of commissions and fees to our advisors in order to remain competitive, our net income could be significantly reduced.
Poor service or performance of the financial products that we offer or competitivepressures on pricing of such services or products may cause clients of our advisorsto withdraw their assets on short notice.
Clients of our advisors have control over their assets that are served under our platforms. Poor service or performance of the financial products that we offer, the emergence of new financial products or services from others, harm to our reputation or competitive pressures on pricing of such services or products may result in the loss of accounts. In addition, we must monitor the pricing of our services and financial products in relation to competitors and periodically may need to adjust commission and fee rates, interest rates on deposits and margin loans, and other fee structures to remain competitive. Competition from other financial services firms, such as reduced commissions to attract clients or trading volume, direct-to-investor online financial services, including so-called “robo” advice, or higher deposit rates to attract client cash balances, could adversely impact our business. The decrease in revenue that could result from such an event could have a material adverse effect on our business.
We face competition in attracting and retaining key talent.
Our success and future growth depends upon our ability to attract and retain qualified employees. There is significant competition for qualified employees in the broker-dealer industry. Each of our executive officers is an employee at will and none has an employment agreement. We may not be able to retain our existing employees or fill new positions or vacancies created by expansion or turnover. The loss or unavailability of these individuals could have a material adverse effect on our business.
Moreover, our success depends upon the continued services of our key senior management personnel, including our executive officers and senior managers. The loss of one or more of our key senior management personnel, and the failure to recruit a suitable replacement or replacements, could have a material adverse effect on our business.plans.
Risks Related to Our Technology
We rely on technology in our business, and technology and execution failures could subject us to losses, litigation and regulatory actions.
Our business relies extensively on electronic data processing, storage and communications systems. In addition to better serving our advisors and their clients, the effective use of technology increases efficiency and enables firms like ours to reduce costs, and support our regulatory compliance and reporting functions.functions, and better serve advisors and their clients. Our continued success will depend, in part, upon:
upon our ability to expendcontinue to invest significant resources on our technology systems in order to meet industry and regulatory standards and consumer preferences;to:
our ability •successfully maintain and upgrade the capabilities and resiliency of our systems;
our ability to •address the needs of our advisors and their clients by using technology to provide products and services that satisfy their demands;demands while ensuring the security of the data involving those products and services;
our ability to •use technology effectively and securely to support our regulatory compliance and reporting functions;
our ability to •comply with the changing landscape of laws and regulations that govern protection of personally identifiable information; and
our ability to •retain skilled information technology employees.
Extraordinary trading volumes, malware, ransomware or attempts by hackers to introduce large volumes of fraudulent transactions into our systems, beyond reasonably foreseeable spikes in volumes, could cause our computer systems to operate at an unacceptably slow speed or even fail. Failure of our systems, which could result from these or other events beyond our control, or an inability or failure to effectively upgrade those systems, or implement new technology-driven products or services, or implement adequate disaster recovery capabilities, could result in financial losses, unanticipated disruptions in our service, to clients, liability to our advisors'advisors or advisors’ clients, compliance failures, regulatory sanctions and damage to our reputation.
We continually update our technology platform with the goal of improving its reliability, resiliency, security and functionality, including in connection with regulatory requirements, acquisitions and strategic relationships. While we seek to implement these updates with no or limited interruption to our operations or the availability of our systems, we may not be successful and resulting interruptions could be widespread, lengthy, or both. Even if no interruption occurs, these updates may not result in the benefits to our systems that we contemplate. For example, we are upgrading our technology systems in connection with our current and future business development opportunities, pending acquisitions, investments and strategic relationships. These efforts involve a significant investment of financial and personnel resources and we cannot guarantee that these upgrades or the investments that support them will be completed successfully, on time or at all, or that they will not result in interruptions to the availability of our technology systems or business operations. More generally, our failure to upgrade our systems successfully could have a material adverse effect on our business, financial condition and results of operations, as well as our ability to achieve our growth objectives. For more information about risks related to upgrading our technology platform, see “Failure to maintain technological capabilities, flaws in existing technology, difficulties in upgrading our technology platform or the introduction of a competitive platform could have material adverse effect on our business” below.
Our operations rely on the secure processing, storage and transmission of confidential and other proprietary information in our computer systems and networks, including personally identifiable information of advisors and their clients, as well as our employees. Although we take protective measures and endeavor to modify themstrengthen the security of these systems as circumstances warrant, our computer systems, software and networks are to some degree vulnerable to unauthorized access, human error, computer viruses, denial-of-service attacks, malicious code, spam attacks, phishing, ransomware or other forms of social engineering and other events that could impact the security, reliability, confidentiality, integrity and availability of our systems. To the extent third parties, such as product sponsors, also retain similarity sensitive information about our advisors or their clients, their systems may face similar vulnerabilities. We are not able to protect against these events completely given the rapid evolution of new vulnerabilities, the complex and due todistributed nature of our systems, our interdependence on the systems of other companies and the increased sophistication of potential attack vectors and methods against our systems. In particular, advisors work in a wide variety of environments, and although we require our advisors to maintain certain
minimum security levels and adopt certain security procedures by policy, we cannot ensure the universal or consistent compliance with these policies across all of our advisors, or that our policy will be adequate to address the evolving threat environment. If one or more of these events occur, they could jeopardize our own, our advisors’ or their clients’, or our counterparties’ confidential and other proprietary information processed, stored in and transmitted through our computer systems and networks, or otherwise cause interruptions or malfunctions in our own, our advisors’ or their clients’, our counterparties’, or third parties’ operations. As a result, we could be subject to litigation, client loss, reputational harm, regulatory sanctions and financial losses that are either not insured or are not fully covered through any insurance we maintain. If any person, including any of our employees or advisors, negligently disregards or intentionally breaches our established controls with respect to confidential client data, or otherwise mismanages or misappropriates that data, we could also be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions.
We currently and may in the future use, develop, and incorporate within our technology platform and services, systems and tools that incorporate artificial intelligence (“AI”) and machine learning, including generative AI. As with many innovations, AI and machine learning present risks and challenges that could adversely impact our business. The securities settlement process exposes usdevelopment, adoption and application of generative AI technologies are still in their early stages, and ineffective or inadequate AI development or deployment practices by third-party developers or vendors could result in unintended consequences. For example, AI algorithms that we use may be flawed or may be based on datasets that are biased or insufficient. In addition, any latency, disruption or failure in our AI and machine learning systems or infrastructure could result in delays or errors in our products and services. Developing, testing, and deploying resource-intensive AI systems may require additional investment and increase our costs. There also may be real or perceived social harm, unfairness or other outcomes that undermine public confidence in the use and deployment of AI and machine learning. Any of the foregoing may result in harm to risks that may expose our advisorsbusiness, results of operations or reputation.
and us to adverse movements in price.
LPL Financial provides clearing servicesThe legal and trade processing for our advisorsregulatory landscape surrounding AI and their clientsmachine learning technologies is rapidly evolving and certain financial institutions. Broker-dealers that clear their own trades are subject to substantially more regulatory
requirements than brokers that outsource these functions to third-party providers. Errorsremains uncertain, including in performing clearing functions, including clerical, technological,the areas of intellectual property, cybersecurity, privacy and other errorsdata protection. For example, there is uncertainty around the validity and enforceability of intellectual property rights related to the handlinguse, development and deployment of fundsAI and securities held by us on behalf ofmachine learning. Compliance with new or changing laws, regulations or industry standards relating to AI may impose significant operational costs and may limit our advisors' clients, could leadability to censures, fines,develop, deploy or other sanctions imposed by applicableuse AI and machine learning technologies. Failure to appropriately respond to this evolving landscape may result in legal liability, regulatory authorities as well as lossesaction or brand and liability in related lawsuits and proceedings brought by our advisors’ clients and others. Any unsettled securities transactions or wrongly executed transactions may expose our advisors and us to losses resulting from adverse movements in the prices of such securities.reputational harm.
Our information technology systems may be vulnerable to security risks.
The secure transmission of confidential information, including personally identifiable information, over public networks is a critical element of our operations. As part of our normal operations, we maintain and transmit confidential information about clients of our advisors, our advisors and our employees, as well as proprietary information relating to our business operations. The risks related to transmitting data and using service providers outside of and storing or processing data within our network are increasing based on escalating and malicious cyber activity, including activity that originates outside of the United States.States from criminal elements and hostile nation-states.
Cybersecurity requires ongoing investment and diligence against evolving threats and is subject to federal and state regulation relating to the protection of confidential information. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures, to make required notifications, or to update our technologies, websites and web-based applications to comply with industry and regulatory standards, but we may not have adequate personnel, financial or other resources to fully meet these threats and evolving standards. NewWe will also be required to effectively and efficiently govern, manage and ensure timely enhancements to our systems, including in their design, architecture and interconnections as well as their organizational and technical protections. The SEC has proposed new cybersecurity regulations for investment advisers, and other new regulations may be promulgated by relevant federal and state authorities at any time andtime. In addition, compliance with regulatory expectations may become increasingly complex as more state regulatory authorities issue or amend regulations, which sometimes conflict, governing handling of confidential information by companies within their jurisdiction. Several states have promulgated cybersecurity requirements that impact our compliance obligations. Compliance with these regulations also could be costly and disruptive to our operations, and we cannot provide assurance that the impact of these regulations would not, either individually or collectively, be material to our business.
Our application service provider systems maintain and process confidential data on behalf of advisors and their clients, some of which is critical to our advisors’ business operations. If our application service provider systems are disrupted or fail for any reason, or if our systems or facilities are infiltrated or damaged by unauthorized persons or malicious computer code, we or our advisors could experience data loss, operational disruptions, financial loss, harm to reputation, regulatory violations, class action and commercial litigation and significant business interruption.interruption or loss. In addition, vulnerabilities of our external service providers or within our software supply chain could pose security risks to client information. If any such disruption or failure realoccurs, or is perceived occurs,to have occurred, we or our advisors may be exposed to unexpected liability, advisors or their clients may withdraw assets, our reputation may be tarnished,harmed and there could be a material adverse effect on our business. Further, any actual or perceived breach or cybersecurity attack directed at other financial institutions or financial services companies, whether or not we are targeted, could lead to a general loss of customer confidence in the use of technology to conduct financial transactions, which could negatively impact us, including the market perception of the effectiveness of our security measures and technology infrastructure. The occurrence of any of these events may have a material adverse effect on our business or results of operations.
Our ownEven though we monitor and seek to improve the security of our information technology systems, are to some degreethey remain vulnerable to security risks, and there can be no guarantee that they will not be subject to unauthorized access and other security risks.access. We rely on our advisors and employees to comply with our policies and procedures to safeguard confidential data.data, but disloyal or negligent insiders pose risks. The failure of our advisors and employees to comply with such policies and procedures, either intentionally or unintentionally, could result in the loss or wrongful use of their clients’ confidential information or other sensitive information. In addition, even if we and our advisors comply with our policies and procedures, persons who circumvent security measures or bypass authentication controls could infiltrate or damage our systems or facilities and wrongfully use our confidential information or clients’ confidential information or cause interruptions or malfunctions in our operations. Cyber-attacks can be designed to collect information, manipulate, destroy or corrupt data, applications, or accounts and to disable the functioning or use of applications or technology assets. Such activity could, among other things:
seriously •damage our reputation;
•allow competitors or hackers access to our proprietary business information;
•subject us to liability for a failure to safeguard client data;
•result in the termination of relationships with our advisors;
•subject us to regulatory sanctions or obligations, based on state law or the authority of the SEC and FINRA to enforce regulations regarding business continuity planning or cybersecurity;
•subject us to litigation by consumers, advisors or other business partners that may suffer damages as a result of such activity;
•result in inaccurate financial data reporting; and
•require significant capital and operating expenditures to investigate and remediate thea breach.
As malicious cyber activity escalates, including activity that originates outside of the United States, the risks we face relating to transmission of data and our use of service providers outside of our network, as well as the storing or processing of data within our network, intensify. While we maintain cyber liability insurance, this insurance does not cover certain types of potential losses and, for covered losses, may not be sufficient to cover us for all losses and may not be sufficientin amount to protect us against all such losses.
A cyber-attack or other security breach of our technology systems or those of our advisors or third-party vendors could negatively impact our normal operations, and as a result, subject us to significant liability and harm our reputation.
We cannot be certain that our systems and networks will not be subject to successful attacks, despite the measures we have taken and may take in the future to address and mitigate cybersecurity, privacy and technology risks. Additionally, in the course of operations, we share sensitive proprietary information and personal data with vendors, third parties and other financial institutions. We also rely upon software and data feeds from various third parties. Although we have a third party management program and conduct due diligence before sharing sensitive data with third-party vendors, this due diligence may not uncover administrative, technical or electronic gaps or flaws in their processes or systems. In the past we have experienced limited breaches of information security with our vendors, which have led to notification costs and reputational harm with regulators, current and potential advisors, and advisors’ clients, and we may experience similar or more significant events in the future. Future data security incidents involving individual and regulatory notifications could lead to litigation involving other financial institutions, class actions, regulatory investigations or other harm.
Data security incidents within the financial services industry are increasing, and threat actors continue to find novel ways to attack security environments. In light of the high volume of transactions we process, the large numberdiversity of our advisors and their clients,advisors’ security environments and the increasing sophistication of malicious actors, a cyber-attackan attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber-attack could take substantial amounts of time, and that there may be extensive delays before we obtain full and reliable information. In some cases, the nature of the attack may be such that full and reliable information may never be available. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, all of which would further increase the costs and consequences of such an attack.
These incidents could involve operational disruptions, notification costs, ransom payments and reputational harm, investigations, litigation and fines with regulators, and increases in insurance premiums as well as litigation, financial disputes and reputational harm with current and potential advisors and advisors’ clients.
Failure to comply with the complex privacy and data protection laws and regulations to which we are subject could result in adverse action from regulators and adversely affect our business, reputation, results of operations and financial condition.
Many aspects of our business are subject to comprehensive legal requirements concerning the collection, use and sharing of personal information, including client and employee information. This includes rules adopted pursuant to the Gramm-Leach-Bliley Act and an ever-increasing number of state laws and regulations, such as the California Consumer Privacy Act, as amended by the California Privacy Rights Act. Similar laws are in force in Colorado, Connecticut, Utah, and Virginia, and other such laws will go into force over the next few years. We continue our efforts to safeguard the data entrusted to us in accordance with applicable law and our internal data protection policies, including taking steps to reduce the potential for the improper use or disclosure of personal information. We continue to monitor regulations related to data privacy and protection on both a domestic and international level to assess requirements and impacts on our business operations. The evolving patchwork of differing state and federal privacy and data security laws increases the cost and complexity of operating our business and our exposure to regulatory investigations, enforcement, fines, and penalties, any of which could negatively impact our business and operations. Failure to comply with these obligations could result in legal liability, censures, penalties and fines, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders, or injunctive or other equitable relief against us, which individually or in the aggregate could negatively impact our financial results or adversely affect our ability to attract or retain financial advisors and institutions. Depending on the nature of the violation, we may be required to offer restitution or remediation to customers, and the costs of doing so could exceed our loss reserves.
Failure to maintain technological capabilities, flaws in existing technology, difficulties in upgrading our technology platform or the introduction of a competitive platform could have a material adverse effect on our business.
We believe that our future success will depend in part on our ability to anticipate and adapt to technological advancements required to meet the changing demands of our advisors.advisors and their clients. We depend on highly specialized and, in many cases, proprietary technology to support our business functions, including among others:
•securities trading and custody;
•portfolio management;
•performance reporting;
•customer service;
•accounting and internal financial processes and controls; and
•regulatory compliance and reporting.
Our continued success depends on our ability to effectively adopt new or adapt existing technologies to meet changing client, industry and regulatory demands. The emergence of new industry standards and practices could render our existing systems obsolete or uncompetitive. There cannot be any assurance that another company will not design a similar or better platform that renders our technology less competitive.
Maintaining competitive technology requires us to make significant capital expenditures,investments, both in the near term and longer-term. There cannot be any assurance that we will have sufficient resources to adequately update and expand our information technology systems or capabilities, or offer our services on the personal and mobile computing devices that may be preferred by our advisors and/or their clients, nor can there be any assurance that any upgrade or expansion efforts will be sufficiently timely, successful, secure and accepted by our current and prospective
advisors or their clients. The process of upgrading and expanding our systems has at times caused, and may in the future cause, us to suffer system degradations, outages and failures. If our technology systems were to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of advisors and could harm our reputation. A breakdown in advisors’ systems could have similar effects. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to disciplinary action and to liability to our advisors and their clients. Security, stability and regulatory risks also exist because parts of our infrastructure and software are beyond their manufacturer’s stated end of life. We are working to mitigate such risks through additional controls and increased modernization spending, although we cannot provide assurance that our risk mitigation efforts will be effective, in whole or in part. For more information about risks related to upgrading our technology, see “We rely on technology in our business, and technology and execution failures could subject us to losses, litigation and regulatory actions” above.
Inadequacy or disruption of our business continuity and disaster recovery plans and procedures in the event of a catastrophe could adversely affect our business.
We have made a significant investmentinvestments in our infrastructure, and our operations are dependent on our ability to protect the continuity of our infrastructure against damage from catastrophe or natural disaster, breach of security, ransomware attack, human error, loss of power, computer and/or telecommunications failure, or other natural or man-made events. A catastrophic event could have a direct negative impact on us by adversely affecting our advisors, employees or facilities, or an indirect impact on us by adversely affecting the financial markets or the overall economy. While we have implemented business continuity and disaster recovery plans and maintain business interruption insurance, it is impossible to fully anticipate and protect against all potential catastrophes. In addition, we depend on the adequacy of the business continuity and disaster recovery plans of our third-party service providers, including off-shore service providers, in order to prevent or mitigate service interruptions. If our business continuity and disaster recovery plans and procedures, or those of our third-party service providers, were disrupted
or unsuccessful in the event of a catastrophe, we could experience a material adverse interruption of our operations.
We rely on outsourced service providers, including off-shore providers, to perform technology, processing, and support functions.
We rely on outsourced service providers to perform certain technology, processing and support functions. For example, we have an agreement with Thomson Reuters BETA Systems, a division of Thomson Reuters ("BETA Systems"), under which they provide us key operational support, including data processing services for securities transactions and back office processing support. Our use of third-party service providers may decrease our ability to control operating risks and information technology systems risks.
Any significant failures by BETA Systems or our other service providers could cause us to sustain serious operational disruptions and incur losses and could harm our reputation. These third-party service providers are also susceptible to operational and technology vulnerabilities, including cyber-attacks, security breaches, fraud, phishing attacks and computer virus, which could result in unauthorized access, misuse, loss or destruction of data, an interruption in service or other similar events that may impact our business.
We cannot assure that our third-party service providers will be able to continue to provide their services in an efficient, cost effective manner, if at all, or that they will be able to adequately expand their services to meet our needs and those of our advisors. An interruption in or the cessation of service by a third-party service provider and our inability to make alternative arrangements in a timely manner could cause a disruption to our business and could have a material impact on our ability to serve our clients. In addition, we cannot predict the costs or time that would be required to find an alternative service provider.
We have transitioned certain business and technology processes to off-shore providers, which has increased the related risks described above. For example, we rely on several off-shore service providers, operating in multiple locations, for functions related to cash management, account transfers, information technology infrastructure and support, and document indexing, among others. To the extent third-party service providers are located in foreign jurisdictions, we are exposed to risks inherent in such providers conducting business outside of the United States, including international economic and political conditions, and the additional costs associated with complying with foreign laws and fluctuations in currency values.
We expect that our regulators would hold us responsible for any deficiencies in our oversight and control of our third-party relationships and for the performance of such third parties. If there were deficiencies in the oversight and control of our third-party relationships, and if our regulators held us responsible for those deficiencies, our business, reputation, and results of operations could be adversely affected.
Risks Related to Our Business Generally
Any damage to our reputation could harm our business and lead to a loss of revenuesand net income.
We have spent many years developing our reputation for integrity and superior client service, which is built upon our support for our advisors through: enabling technology, comprehensive clearing and compliance services, practice management programs and training, and independent research. Our ability to attract and retain advisors and employees is highly dependent upon external perceptions of our level of service, business practices, and financial condition. Damage to our reputation could cause significant harm to our business and prospects and may arise from numerous sources, including:
litigation or regulatory actions;
failing to deliver minimum standards of service and quality;
compliance failures; and
unethical behavior and the misconduct of employees, advisors, or counterparties.
Negative perceptions or publicity regarding these matters could damage our reputation among existing and potential advisors and employees, and could lead advisors to terminate their agreements with us, which they generally have the right to do unilaterally upon short notice. Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us. These occurrences could lead to loss of revenue and net income.
Our business is subject to risks related to litigation, arbitration claims, and regulatory actions.
From time to time, we have been subjected to and are currently subject to legal and regulatory proceedings arising out of our business operations, including lawsuits, arbitration claims, governmental subpoenas, and
regulatory, governmental and SRO inquiries, investigations, and enforcement proceedings, as well as other actions and claims. Many of our legal claims are initiated by clients of our advisors and involve the purchase or sale of investment securities, but other claims and proceedings may be, and have been, initiated by state-level and federal regulatory authorities and SROs, including the SEC, FINRA, and state securities regulators.
The outcomes of any such litigation, arbitration claims and regulatory proceedings, including inquiries, investigations and enforcement proceedings by the SEC, FINRA and state securities regulators, are difficult to predict. A negative outcome in such a matter could result in substantial legal liability, censures, penalties and fines, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders, or injunctive or other equitable relief against us. Further, such negative outcomes individually or in the aggregate may cause us significant reputational harm and could have a material adverse effect on our ability to recruit or retain financial advisors, or our results of operations, cash flows, or financial condition.
We may face liabilities for deficiencies or failures in our compliance systems and programs, as well as actual or alleged breaches of legal duties to our advisors' clients, including in respect of issues related to the suitability of the financial products we make available in our open architecture product platform or the investment advice of our advisors based on their clients' investment objectives (including, for example, alternative investments or exchange-traded funds) and certain fiduciary obligations for advice and recommendations made to our advisory clients. Moreover, the DOL Rule applicable beginning in 2017 establishes new regulatory requirements that may introduce new grounds for legal claims, including class action litigation, against us in the future for recommendations made to brokerage retirement clients. We may also become subject to claims, allegations and legal proceedings that we infringe or misappropriate intellectual property or other proprietary rights of others. In addition, we may be subject to legal proceedings related to employment matters, including wage and hour, discrimination or harassment claims.
Our risk management policies and procedures may not be fully effective in mitigatingour risk exposure in all market environments or against all types of risks.
We have adopted policies and procedures to identify, monitor and manage our operational risk. These policies and procedures, however, may not be effective. Some of our compliance and risk evaluation functions depend upon information provided by others and public information regarding markets, clients, or other matters that are otherwise accessible by us. In some cases, however, that information may not be available, accurate, complete, or up-to-date. Also, because our advisors work in decentralized offices, additional risk management challenges may exist, including with regard to advisor office technology and information security practices. In addition, our existing policies and procedures and staffing levels may be insufficient to support a significant increase in our advisor population; such an increase may require us to increase our costs in order to maintain our compliance and risk management obligations or put a strain on our existing policies and procedures as we evolve to support a larger advisor population. If our policies and procedures are not effective or if we are not successful in capturing risks to which we are or may be exposed, we may suffer harm to our reputation or be subject to litigation or regulatory actions that could have a material adverse effect on our business and financial condition.
There are risks inherent in the independent broker-dealer business model.
Compared to wire houses and other employee model broker-dealers, we generally offer advisors wider choice in operating their businesses with regard to product offerings, outside business activities, office technology and supervisory model. Our approach may make it more challenging for us to comply with our supervisory and regulatory compliance obligations, particularly in light of our limited on-site supervision and the complexity of certain advisor business models.
Misconduct and errors by our employees and our advisors could result in violations of law by us, regulatory sanctions, or serious reputational or financial harm. Although we have designed policies and procedures to comply with applicable laws, rules, regulations and interpretations, we cannot always prevent misconduct and errors by our employees and our advisors, and the precautions we take to prevent and detect these activities may not be effective in all cases. Prevention and detection among our advisors, who are not our direct employees and some of whom tend to be located in small, decentralized offices, present additional challenges, particularly in the case of complex products or supervision of outside business activities. In addition, although we provide our advisors with requirements and recommendations for their office technology, we cannot fully control or monitor the extent of their implementation of our requirements and recommendations. Accordingly, we cannot assure that our advisors’ technology meets our standards, including with regard to information security. We also cannot assure that misconduct or errors by our employees or advisors will not lead to a material adverse effect on our business, or that our errors and omissions insurance will be sufficient to cover such misconduct or errors.
Our insurance coverage may be inadequate or expensive.
We are subject to claims in the ordinary course of business. These claims may involve substantial amounts of money and involve significant defense costs. It is not always possible to prevent or detect activities giving rise to claims, and the precautions we take may not be effective in all cases.
We maintain voluntary and required insurance coverage, including, among others, general liability, property, director and officer, excess-SIPC, business interruption, cyber and data breach, errors and omissions, and fidelity bond insurance. We have self-insurance for certain potential liabilities through a wholly-owned captive insurance subsidiary. While we endeavor to self-insure and purchase coverage that is appropriate to our assessment of our risk, we are unable to predict with certainty the frequency, nature, or magnitude of claims for direct or consequential damages. Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or a legal proceeding is inherently difficult, and there are particular uncertainties and complexities involved when assessing the potential liabilities that are self-insured by our captive insurance subsidiary. In addition, certain types of potential claims for damages cannot be insured. Our business may be negatively affected if in the future some or all of our insurance proves to be inadequate or unavailable to cover our liabilities related to legal or regulatory matters. Such negative consequences could include additional expense and financial loss, which could be significant in amount. In addition, insurance claims may harm our reputation or divert management resources away from operating our business.
Changes in United States federal income tax law could make some of the products distributed byour advisors less attractive to clients.
Some of the financial products distributed by our advisors, such as variable annuities, enjoy favorable treatment under current United States federal income tax law. Changes in United States federal income tax law, in particular with respect to variable annuity products, or with respect to tax rates on capital gains or dividends, could make some of these products less attractive to clients and, as a result, could have a material adverse effect on our business, results of operations, cash flows, or financial condition.
Risks Related to Our Debt
Our indebtedness could adversely affect our financial health and may limit ourability to use debt to fund future capital needs.
At December 31, 2017, we had total indebtedness of $2.4 billion of which $1.5 billion is subject to floating interest rates. Our level of indebtedness could increase our vulnerability to general adverse economic and industry conditions. It could also require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes. In addition, our level of indebtedness may limit our flexibility in planning for changes in our business and the industry in which we operate, and limit our ability to borrow additional funds. If interest rates increase our interest expense would increase because borrowings under our senior secured credit agreement (“Credit Agreement”) are based on variable interest rates.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful or feasible. Our Credit Agreement restricts our ability to sell assets. Even if we could consummate those sales, the proceeds that we realize from them may not be adequate to meet any debt service obligations then due. Furthermore, if an event of default were to occur with respect to our Credit Agreement or other future indebtedness, our creditors could, among other things, accelerate the maturity of our indebtedness.
Our Credit Agreement and the indenture (as supplemented, “Indenture”) governing our senior unsecured notes (as defined further below, the “Notes”) permit us to incur additional indebtedness. Under our Credit Agreement and Indenture, we have the right to request additional commitments for new term loans, new revolving credit commitments and increases to then-existing term loans and revolving credit commitments, subject to certain limitations. Although the Credit Agreement and the Indenture contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions do not prevent us from incurring obligations that do not constitute “indebtedness” as defined in the Credit Agreement or the Indenture. To the extent new debt or other obligations are added to our currently anticipated debt levels, the substantial indebtedness risks described above would increase.
A credit rating downgrade would not impact the terms of our repayment obligations under the Credit Agreement or the Indenture. However, any such downgrade would negatively impact our ability to obtain comparable rates and terms on any future refinancing of our debt and could restrict our ability to incur additional indebtedness.
Restrictions under our Credit Agreement and the Indenture governing our Notes may prevent us from taking actionsthat we believe would be in the best interest of our business.
Our Credit Agreement and the Indenture contains customary restrictions on our activities, including covenants that may restrict us from:
incurring additional indebtedness or issuing disqualified stock or preferred stock;
declaring dividends or other distributions to shareholders;
repurchasing equity interests;
redeeming indebtedness that is subordinated in right of payment to certain debt instruments;
making investments or acquisitions;
creating liens;
selling assets;
guaranteeing indebtedness;
engaging in certain transactions with affiliates;
entering into agreements that restrict dividends or other payments from subsidiaries; and
consolidating, merging, or transferring all or substantially all of our assets.
Our revolving credit facility requires us to meet specified leverage ratio and interest coverage ratio tests.
These restrictions may prevent us from taking actions that we believe would be in the best interest of our business. Our ability to comply with these restrictive covenants will depend on our future performance, which may be affected by events beyond our control. If we violate any of these covenants and are unable to obtain waivers, we would be in default under our Credit Agreement or the Indenture, as applicable, and payment of the indebtedness could be accelerated. Acceleration of our indebtedness under our Credit Agreement or the Indenture may permit acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions. If our indebtedness is accelerated, we may not be able to repay that indebtedness or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our indebtedness is in default for any reason, our business could be materially and adversely affected. In addition, complying with these covenants may also cause us to take actions that are not favorable to holders of our common stock and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
Provisions of our Credit Agreement and the Indenture could discourage an acquisition ofus by a third-party.
Certain provisions of our Credit Agreement and the Indenture could make it more difficult or more expensive for a third-party to acquire us, and any of our future debt agreements may contain similar provisions. Upon the occurrence of certain transactions constituting a change of control, all indebtedness under our Credit Agreement may be accelerated and become due and payable and noteholders will have the right to require us to repurchase the Notes at a purchase price equal to 101% of the principal amount of the Notes plus accrued and unpaid interest, if any, to but not including the purchase date. A potential acquirer may not have sufficient financial resources to purchase our outstanding indebtedness in connection with a change of control.
Risks Related to Ownership of Our Common Stock
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our investors.
The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to the following factors (in addition to the other risk factors described in this Item 1A)1A):
•actual or anticipated fluctuations in our results of operations, including with regard to interest rates or revenuesrevenue associated with our client cash sweep programs or key business lines;programs;
•variance in our financial performance from the expectations of equity research analysts;
•conditions and trends in the markets we serve;
•announcements of significant new services or products by us or our competitors;
•additions or changes to key personnel;
•the commencement or outcome of litigation or arbitration proceedings;
•the commencement or outcome of regulatory actions, including settlements with the SEC, FINRA, DOL or state securities regulators;
•changes in market valuation or earnings of our competitors;
•the trading volume of our common stock;
•future salesales of our equity securities;
•changes in the estimation of the future size and growth rate of our markets;
•legislation or regulatory policies, practices or actions, including developments related to the DOL Rule; “best interest” and “fiduciary” standards of care;
•political developments; and
•general economic conditions.
In addition, the equity markets in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. These broad market and industry factors may materially harm the market price of our common stock irrespective of our operating
performance. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against the affected company. A putative class action lawsuit has been filed against us and certain of our executive officers in federal district court alleging certain misstatements and omissions related to our share repurchases and financial performance in late 2015. This type of litigation could result in substantial costs and a diversion of our management’s attention and resources.
We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our debt service and other obligations.
We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions to meet any existing or future debt service and other obligations. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could limit or impair their ability to pay dividends or other distributions to us. In addition, FINRA regulations restrict dividends in excess of 10% of a member firm’s excess net capital without FINRA’s prior approval. Compliance with this regulation may impede our ability to receive dividends from our broker-dealer subsidiary.subsidiaries. For more information about potential limits on our ability to receive dividends from our broker-dealer subsidiaries, see “We are subject to various regulatory requirements, which, if not complied with, could result in the restriction of the conduct or growth of our business” above.
Our future ability to pay regular dividends to holders of our common stock or repurchase shares are subject to the discretion of our board of directorsBoard and will be limited by our ability to generate sufficient earnings and cash flows.
Our board of directorsBoard declared quarterly cash dividends on our outstanding common stock in 20172023 and has from time to time authorized us to repurchase shares of the Company’s issued and outstanding shares of common stock. The declaration and payment of any future quarterly cash dividend or any additional repurchase authorizations will be subject to the board of directors'Board’s continuing determination that the declaration of future dividends or repurchase of our shares are in the best interests of our stockholders and are in compliance with our Credit Agreement, the IndentureIndentures and applicable law. Such determinations will depend upon a number of factors that the board of directorsBoard deems relevant, including future earnings, the success of our business activities, capital requirements, alternative uses of capital, the general economic, financial condition and business conditions, and the future prospects of our business, and general business conditions.own business.
The future payment of dividends or repurchases of shares will also depend on our ability to generate earnings and cash flows. If we are unable to generate sufficient earnings and cash flows from our business, we may not be able to pay dividends on our common stock or repurchase additional shares. In addition, our ability to pay cash dividends on our common stock and repurchase shares is dependent on the ability of our subsidiaries to pay dividends, including compliance with limitations under our Credit Agreement.Agreement and the Indentures. Our broker-dealer subsidiary issubsidiaries, including LPL Financial, are subject to requirements of the SEC, FINRA, the CFTC, NFA and other regulators relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available for the payment of dividends to us.
Anti-takeover provisions in our certificate of incorporation and bylaws could preventor delay a change in control of our company.
Our certificate of incorporation and our bylaws contain certain provisions that may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable, including the following:
the sole ability of the board of directors to fill a vacancy created by the expansion of the board of directors;
advance notice requirements for stockholder proposals and director nominations;
limitations on the ability of stockholders to call special meetings and to take action by written consent;
the approval of holders of at least two-thirds of the shares entitled to vote generally on the making, alteration, amendment, or repeal of our certificate of incorporation or bylaws will be required to adopt, amend, or repeal our bylaws, or amend or repeal certain provisions of our certificate of incorporation;
the required approval of holders of at least two-thirds of the shares entitled to vote at an election of the directors to remove directors; and
the ability of our board of directors to designate the terms of and issue new series of preferred stock, without stockholder approval, which could be used to institute a rights plan, or a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in the acquisition.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Cybersecurity Risk Management and Strategy
We maintain an information security program (the “Program”) to help manage material risks and cybersecurity threats to our business, operations and assets. As part of our Program, we maintain policies, procedures and standards that outline the Company’s expectations, guidelines and structured approach to managing cybersecurity risks. We leverage established security frameworks, such as the National Institute of Standards and Technology Cybersecurity Framework, as guides to organize, assess and improve our Program. In addition, our employees are required to complete a cybersecurity and privacy training program each year, which is supplemented with additional awareness efforts, including phishing campaigns and informational articles.
We operate a security operation center to ingest threat intelligence, monitor for cybersecurity threats and coordinate incident response resources. In the event of a cybersecurity incident, the Company has developed a security incident response plan that establishes a structured approach for the Company’s response. The security incident response plan includes processes through which cybersecurity incidents are escalated based on a defined incident risk rating to business stakeholders and a security incident response team, as well as to the Company’s executive officers, which may result in engagement with management’s risk oversight committee (the “ROC”), the Board and the Audit and Risk Committee of the Board (“ARC”), as needed. To improve preparedness for a cybersecurity
incident, we conduct tabletop exercises at least annually. These exercises are conducted by internal personnel and with assistance from third-party experts, as needed.
Cybersecurity Governance
The Program is situated within the Company’s information security department, which is comprised of multiple teams, including security operations, security architecture and engineering, technology governance, mergers and acquisitions information security, and advisor security. The information security department is led by the chief information security officer, who has primary responsibility for managing the Program. The current chief information security officer has over 20 years of experience in information security, including a lead auditor certification from the International Organization for Standardization, an international standard for information security management systems.
The Board has delegated oversight of the Program to the ARC, including oversight of the Company’s cyber- and technology-related risks and the steps management has taken to identify, assess, monitor, and manage those risks. In addition, the Board has established a reporting structure and cadence related to oversight of the Program, which includes respective oversight responsibilities for the Board, the ARC and management risk committees, including the Technology Risk Committee, the Operational Risk Oversight Committee and the Risk Oversight Committee. Each of the Board and the ARC receive staggered periodic reports on the Program’s effectiveness and progress on at least an annual basis.
The assessment, identification and management of cybersecurity-related risks are integrated into the Company’s overall Enterprise Risk Management (“ERM”) process. Cybersecurity risk is included among the significant residual risks identified during the Company’s assessment of business risk. This risk assessment process is used to inform the Company’s strategic planning process, and to develop action plans to appropriately address and manage risk. It is also used to focus our Board and its committees on the most significant risks to our Company. In addition, the enterprise risk function has established foundational frameworks for assessing, monitoring and overseeing the Company’s risks, including risks from cybersecurity threats. This includes reporting on issues, risk events or incidents and emerging risks to applicable risk committees to provide monitoring of key risk exposures.
Engagement of Third Parties
We engage third-party subject matter experts and consultants to conduct evaluations of our security controls, including, but not limited to, penetration testing, maturity assessments or consulting on our response to emerging threats. Results of these evaluations are used to help determine priorities and initiatives to improve the overall Program. As necessary, we also engage third-party experts and consultants to assist with the incident response process to augment our internal security operation center team.
We use a third-party risk performance management program to evaluate cybersecurity risk for third-party service providers. Vendor cybersecurity controls are then assessed to determine if the vendor’s control environment meets the Company’s standards. Vendors are also assessed on a periodic ongoing basis according to their risk classification.
We have not identified any cybersecurity incidents that individually, or in the aggregate, have materially affected or are reasonably likely to materially affect the Company. Regardless, we recognize cybersecurity threats are ongoing and evolving, and there can be no guarantee that we will not be subject to a cybersecurity incident that has a material effect on our business. Please consult the “Risks Related to Our Technology” section within Part I, “Item 1A. Risk Factors” for more information about the risks associated with cybersecurity.
Item 2. Properties
Our corporate offices are locatedA summary of our significant locations at December 31, 2023 is shown in San Diego, California where we lease approximately 420,000 square feet of office space under a lease agreement that expires on April 30, 2029; in Fort Mill, South Carolina where we lease approximately 452,000 square feet of office space under a lease agreement that expires on October 31, 2036; and in Boston, Massachusetts where we lease approximately 69,000 square feet of space under a lease agreement that expires on June 30, 2023, with two five-year extensions at our option.the following table: | | | | | | | | |
Location | Approximate Square Footage | Lease Expiration |
Fort Mill, South Carolina | 461,000 | | 2036 |
San Diego, California | 420,000 | | 2029 |
Austin, Texas | 57,000 | | 2029 |
We also lease smaller administrative and operational offices in various locations throughout the United States. We believe that our existing properties are adequate for the current operating requirements of our business and that additional space will be available as needed.
Item 3. Legal Proceedings
From time to time, we have been subjected to and are currently subject to legal and regulatory proceedings arising out of our business operations, including lawsuits, arbitration claims and inquiries, investigations and enforcement proceedings initiated by the SEC, FINRA and state securities regulators, as well as other actions and claims.
A putative class action lawsuit has been filed against the Company and certain
For a discussion of legal proceedings, see Note 12.14 - Commitments and Contingencies, within the notes to the consolidated financial statements and Part I, “Item 1A. Risk Factors” in this Annual Report on Form 10-K. Please also see “Risk Factors - Any failure to comply with applicable federal or state laws or regulations exposes us to litigation and regulatory actions, which could increase our costs or negatively affect our reputation” and “Risk Factors – Our business is subject to risks related to litigation, arbitration claims, and regulatory actions” within Part I, “Item 1A. Risk Factors”.
Item 4. Mine Safety Disclosures
Not applicable.
Information about our Executive Officers
The following table provides certain information about each of the Company’s executive officers as of the date this Annual Report on Form 10-K has been filed with the SEC:
| | | | | | | | |
Name | Age | Position |
Dan H. Arnold | 59 | President and Chief Executive Officer |
Matthew J. Audette | 49 | Chief Financial Officer and Head of Business Operations |
Althea Brown | 47 | Managing Director, Chief Legal Officer |
Sara Dadyar | 50 | Managing Director, Chief Human Capital Officer |
Matthew Enyedi | 50 | Managing Director, Client Success |
Greg Gates | 46 | Managing Director, Chief Technology & Information Officer |
Aneri Jambusaria | 40 | Managing Director, LPL Services Group |
Kabir Sethi | 53 | Managing Director, Chief Product Officer |
Richard Steinmeier | 50 | Managing Director, Divisional President, Business Development |
Executive Officers
Dan H. Arnold — President and Chief Executive Officer
Mr. Arnold has served as our chief executive officer since January 2017. He has served as our president since March 2015 with responsibility for our primary client-facing functions and long-term strategy for growth. Mr. Arnold served as our chief financial officer from June 2012 to March 2015 and was responsible for formulating financial policy, leading our capital management efforts and ensuring the effectiveness of the organization’s financial functions. Prior to 2012, he was managing director, head of strategy, with responsibility for long-term strategic planning for the firm, product and platform development and strategic investments, including acquisitions. He has also served as divisional president of our Institution Services. Mr. Arnold joined our Company in January 2007 following our acquisition of UVEST Financial Services Group, Inc. Prior to joining us, Mr. Arnold worked at UVEST for 13 years serving most recently as president and chief operating officer. Mr. Arnold earned a B.S. in electrical engineering from Auburn University and holds an M.B.A. in finance from Georgia State University.
Matthew J. Audette — Chief Financial Officer and Head of Business Operations
Mr. Audette has served as our chief financial officer since 2015 and head of business operations since February 2023, with responsibility for the Company’s financial, risk, compliance and client operations functions. He leads the Company’s financial planning and analysis, treasury, controllership, tax, internal audit, corporate development and investor relations functions. In addition, he oversees the teams responsible for delivering operational speed and transparency, along with continued strong compliance and risk management, to the Company’s advisors and enterprises.
Since joining LPL Financial in 2015 as chief financial officer, Mr. Audette has led corporate acquisitions, debt transactions, the client deposit portfolio, expense management and capital allocation. In addition, he oversaw the LPL Services Group from May 2022 until February 2023. Prior to joining LPL Financial, Mr. Audette served as executive vice president and chief financial officer of E*TRADE Financial Corporation. During his 16 years with E*TRADE, he was a key contributor in the growth of the franchise, leading a variety of corporate transactions and capital activities. Mr. Audette began his career in the financial services practice at KPMG. Mr. Audette earned a B.S. in accounting from Virginia Polytechnic Institute and State University, popularly known as Virginia Tech.
Althea Brown — Managing Director, Chief Legal Officer
Ms. Brown has served as managing director, chief legal officer since September 2023. She is responsible for company-wide legal, regulatory and government relations matters and has a leading role in LPL Financial’s ongoing focus on enhancing the corporate risk profile. Ms. Brown has more than 25 years of experience in the financial services, technology and retail industries, leading high-performing legal teams for large corporations. She joined LPL Financial from Google, where she spent 11 years, serving most recently as Legal Director, overseeing a large team of product and commercial lawyers advising subsidiary Fitbit and Google’s Devices and Services’ marketing, e-commerce, retail, customer support, and vendor management teams. Earlier in her career, Ms. Brown served as supervising attorney for Morgan Stanley Smith Barney, and spent 10 years in a variety of roles at J.P. Morgan
Chase in their Investment Management and Investment Banking divisions. Ms. Brown received a B.A. in economics and French from New York University and a J.D. from Fordham University School of Law. She holds a Six Sigma Black Belt and is a Fellow with the Leadership Council on Legal Diversity.
Sara Dadyar — Managing Director, Chief Human Capital Officer
Ms. Dadyar has served as managing director, chief human capital officer of LPL Financial since January 2024. She is responsible for overseeing human resources, talent development, corporate real estate, total rewards and talent acquisition, advisor and employee learning and development, culture and engagement, and diversity, equity, inclusion and belonging. Ms. Dadyar joined LPL Financial in January 2024 from Proterra Inc., where she served as the chief people officer from October 2022 to December 2023. Prior to Proterra, Ms. Dadyar worked at GE for over 24 years, including as the executive Human Resources leader for GE Gas Power and GE Capital Americas, global executive director of Human Resources for GE Working Capital Solutions, and senior Human Resources director of GE Media, Communications and Entertainment. Ms. Dadyar earned a B.A. in art history from the University of Connecticut and completed M.S. coursework in human resources management from Manhattanville College.
Matthew Enyedi — Managing Director, Client Success
Mr. Enyedi has served as managing director, client success since February 2023. The client success organization is a client-centered, cross-functional team responsible for fueling the sustained success and satisfaction of the Company’s advisors and enterprises. Under this organization, the relationship management, marketing and communications, service and supervision teams focus on providing an integrated and consistent experience across clients’ primary touchpoints with LPL. Mr. Enyedi served as managing director, national sales and marketing from April 2022 to February 2023, with responsibility for growing the Company’s client relationships. He served as managing director, business solutions from November 2020 to April 2022, with responsibility for developing and deploying the platform of professional services for advisors now included in the LPL Services Group. Prior to that, he led LPL Financial’s national sales and wealth management organizations and was responsible for data analytics and accelerating the organic growth of the Company’s advisors across planning, advisory, brokerage and retirement plan services. Prior to joining LPL Financial in 2003, he worked as a financial advisor with UBS PaineWebber. Mr. Enyedi earned a B.A. in speech communication and business administration from the University of San Diego. He earned the Certified Investment Management Analyst® designation from the Haas School of Business at the University of California, Berkeley.
Greg Gates — Managing Director, Chief Technology & Information Officer
Mr. Gates has served as managing director, chief technology & information officer of LPL Financial since July 2021. In this role he is responsible for managing all aspects of the Company’s technology and systems applications. He leads an information technology organization responsible for delivering technology solutions and market-leading platforms that enable positive, compelling experiences for our advisors, enterprises and employees. Mr. Gates joined LPL Financial in 2018 with nearly two decades of senior-level management experience focused on the application of technology to solve business challenges on a global scale. Before joining LPL Financial, Mr. Gates led product management and engineering teams at PayPal from 2011 to 2018, focusing on internal technology platforms, merchant and consumer experiences, risk and security, and global operations. Prior to that, he led a number of technology organizations at Bank of America, culminating in leadership of Bank of America’s Contact Center Technology from 2002 to 2011. Mr. Gates earned his B.S. in biomedical engineering from Vanderbilt University and has successfully completed multiple leadership, continuing education and certification programs from several organizations.
Aneri Jambusaria – Managing Director, LPL Services Group
Ms. Jambusaria has served as managing director, LPL Services Group since February 2023. In this role, she is responsible for the development and delivery of LPL Financial’s portfolio of business services, planning and advice services, and value-added consultation functions, which address key challenges advisors and enterprises face in serving investors and operating their businesses. Ms. Jambusaria joined LPL Financial in 2020 as executive vice president, strategy and new ventures and transitioned into an expanded role in 2021 to lead the LPL Services Group. Prior to joining LPL Financial, Ms. Jambusaria held various positions at Fidelity Investments, most recently as head of the Planning Office for Enterprise Strategy and Planning. During her nine years at Fidelity, she helped shape strategy for business lines while gaining a strong understanding of wealth management and the products, solutions and technologies that serve investors. Before Fidelity, she worked as a senior consultant for Deloitte’s financial services practice. Ms. Jambusaria earned her B.S. in economics from the Wharton School at the University of Pennsylvania and her M.B.A. from Northwestern University’s Kellogg School of Management.
Kabir Sethi — Managing Director, Chief Product Officer
Mr. Sethi has served as managing director, chief product officer of LPL Financial since May 2022. He is responsible for LPL Financial’s technology platforms and wealth management offerings, ensuring the delivery of innovative products to advisors and clients. In this role, he provides strategic leadership and direction to the wealth management solutions, investment research, investor product experience, advisor technology products, and data and analytics teams, who are focused on delivering wealth solutions and digital capabilities for our advisors and enterprises, to enable them to continue driving growth and productivity in all areas of their businesses. Prior to joining LPL Financial, Mr. Sethi spent 18 years at Merrill Lynch, at which he held several leadership positions, including managing director in Bank of America’s Global Wealth & Investment Management division. He also served as head of Digital for Merrill Lynch Wealth Management and was responsible for digital platforms, including the financial advisor experience, wealth planning, and social media. Mr. Sethi earned a B.A. in economics from St. Stephen’s College at Delhi University, an M.I.B. from Columbia University, and an M.B.A. from Indian Institute of Management.
Richard Steinmeier — Managing Director, Divisional President, Business Development
Mr. Steinmeier has served as managing director and divisional president, business development of LPL Financial since August 2018. In this role, he has responsibility for recruiting new advisors and enterprises to LPL Financial and to existing advisor practices, as well as exploring new markets and merger and acquisition opportunities. Prior to joining LPL Financial, Mr. Steinmeier served as managing director, head of digital strategy and platforms for UBS Wealth Management Americas from September 2017 to August 2018 and as managing director, head of the Emerging Affluent Segment and Wealth Advice Center from August 2012 to September 2017. Prior to UBS, Mr. Steinmeier held a variety of leadership roles at Merrill Lynch, most recently as managing director of the Merrill Edge Advisory Center from February 2009 to August 2012. Prior to joining Merrill Lynch, he served as an engagement manager at McKinsey & Company from 2002 to 2006. Mr. Steinmeier earned a B.S. in economics from the Wharton School at the University of Pennsylvania and an M.B.A. from Stanford University.
PART II
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Item 5.Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Market Information
Our common stock is traded on the NASDAQNasdaq Global Select Market under the symbol “LPLA.” The closing sale price as of December 31, 2017February 16, 2024 was $57.14$257.66 per share. As of that date, there were 1,484871 common stockholders of record based on information provided by our transfer agent. The number of stockholders of record does not reflect the number of individual or institutional stockholders that beneficially own the Company'sCompany’s stock because most stock is held in the name of nominees.
The following table shows the high and low sales prices for our common stock for the periods indicated, as reported by the NASDAQ. The prices reflect inter-dealer prices and do not include retail markups, markdowns, or commissions.
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| | | | | | | |
| High | | Low |
2017 | | | |
Fourth Quarter | $ | 57.90 |
| | $ | 48.13 |
|
Third Quarter | $ | 52.27 |
| | $ | 41.92 |
|
Second Quarter | $ | 43.79 |
| | $ | 37.39 |
|
First Quarter | $ | 41.99 |
| | $ | 35.23 |
|
| | | |
2016 | | | |
Fourth Quarter | $ | 42.86 |
| | $ | 29.09 |
|
Third Quarter | $ | 30.56 |
| | $ | 20.51 |
|
Second Quarter | $ | 28.77 |
| | $ | 20.95 |
|
First Quarter | $ | 43.89 |
| | $ | 15.38 |
|
Performance Graph
The following graph compares the cumulative total stockholder return (rounded to the nearest whole dollar) of the Company'sCompany’s common stock, the Standard & Poor’s 500 Financial Sector Index and the Dow Jones U.S. Financial Services Index for the last five years.five-year period ended December 31, 2023. The graph assumes a $100 investment at the closing price on December 31, 20122018 and reinvestment of the dividends on the respective dividend payment dates without commissions. This graph does not forecast future performance of the Company'sCompany’s stock.
DividendsDividend PolicyCash dividends declared per share of common stock and total cash dividends paid during each quarter for the years ended December 31, 2017 and 2016 were as follows (in millions, except per share data):
|
| | | | | | | |
| Dividend per Share Declared | | Total Cash Dividend Paid |
2017 | | | |
Fourth quarter | $ | 0.25 |
| | $ | 22.5 |
|
Third quarter | $ | 0.25 |
| | $ | 22.5 |
|
Second quarter | $ | 0.25 |
| | $ | 22.6 |
|
First quarter | $ | 0.25 |
| | $ | 22.6 |
|
| | | |
2016 | | | |
Fourth quarter | $ | 0.25 |
| | $ | 22.3 |
|
Third quarter | $ | 0.25 |
| | $ | 22.3 |
|
Second quarter | $ | 0.25 |
| | $ | 22.3 |
|
First quarter | $ | 0.25 |
| | $ | 22.2 |
|
The payment, amount and timing of any future dividends will be subject to the discretion of our board of directorsBoard and will depend on a number of factors, including future earnings and cash flows, capital requirements, alternative uses of capital, general business conditions, our future prospects, contractual restrictions and covenants and other factors that our board of directorsBoard may deem relevant. Our Credit Agreement and Indenture governing the Notes containcontains restrictions on our activities, including paying dividends on our capital stock. For an explanation of these restrictions, see “Management’s“Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Debt and Related Covenants”.Covenants.” In addition, FINRA regulations restrict dividends in excess of 10% of a member firm’s excess net capital without FINRA’s prior approval, potentially impeding our ability to receive dividends from LPL Financial.
Securities Authorized for Issuance Under Equity Compensation Plans
The table below sets forth information on compensation plans under which our equity securities are authorized for issuance as of December 31, 2017:2023:
| | | | | | | | | | | |
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans |
Equity compensation plans approved by security holders | 546,820 | $ | 54.81 | | 12,796,123 |
| | | |
|
| | | | | | | | | | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants, and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(1) |
| | (a) | | (b) | | (c) |
Equity compensation plans approved by security holders | | 4,840,020 |
| | $ | 31.79 |
| | 7,813,333 |
|
Equity compensation plans not approved by security holders | | 26,479 |
| | $ | 22.45 |
| | |
Total | | 4,866,499 |
| | $ | 31.73 |
| | 7,813,333 |
|
___________________
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(1) | Includes shares available for future issuance under our amended and restated 2010 Omnibus Equity Incentive Plan. |
Purchases of Equity Securities by the Issuer
The table below sets forth information regarding share repurchases, reported on a monthlytrade date basis, during the fourth quarterthree months ended December 31, 2023:
| | | | | | | | | | | | | | |
Period | Total number of shares purchased | Weighted-average price paid per share | Total number of shares purchased as part of publicly announced program | Approximate dollar value of shares that may yet be purchased under the program (millions)(1) |
October 1, 2023 through October 31, 2023 | 50,145 | $ | 223.28 | | 50,145 | $ | 1,113.8 | |
November 1, 2023 through November 30, 2023 | 569,041 | $ | 223.36 | | 569,041 | $ | 986.7 | |
December 1, 2023 through December 31, 2023 | 394,277 | $ | 219.96 | | 394,277 | $ | 900.0 | |
Total | 1,013,463 | | 1,013,463 | |
(1) On September 21, 2022, the Board authorized a $2.1 billion increase to the amount available for repurchases of the Company’s issued and outstanding common shares, with $2.0 billion available for repurchases beginning in 2023. See Note 15 - 2017Stockholders’ Equity:, within the notes to the consolidated financial statements for additional information.
The repurchases may be executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of shares purchased generally determined at the discretion of the Company within the constraints of the Credit Agreement, applicable laws and consideration of the Company’s general liquidity needs. |
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Weighted-Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs(1) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs |
October 1, 2017 through October 31, 2017 | | 62,000 |
| | $ | 49.48 |
| | 62,000 |
| | 138,252,824 |
|
November 1, 2017 through November 30, 2017 | | 541,000 |
| | $ | 49.80 |
| | 541,000 |
| | 111,324,022 |
|
December 1, 2017 through December 31, 2017 | | — |
| | $ | — |
| | — |
| | 500,000,000 |
|
Total | | 603,000 |
| | $ | 49.76 |
| | 603,000 |
| |
|
|
_____________________
| |
(1) | See Note 13. , within the notes to consolidated financial statements for additional information.
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Item 6. Selected Financial DataReserved
The following table sets forth selected historical
GLOSSARY OF TERMS
Adjusted EPS: A non-GAAP financial informationmeasure defined as Adjusted Net Income divided by the weighted average number of diluted shares outstanding for the pastapplicable period.
Adjusted Net Income: A non-GAAP financial measure defined as net income plus the after-tax impact of amortization of other intangibles, acquisition costs and a regulatory charge related to an investigation of the Company’s compliance with records preservation requirements for business-related electronic communications stored on personal devices or messaging platforms that have not been approved by the Company.
Basis Point: One basis point equals 1/100th of 1%.
CFTC: The Commodity Futures Trading Commission.
Core G&A: A non-GAAP financial measure defined as total expense excluding the following expenses: advisory and commission; depreciation and amortization; interest expense on borrowings; brokerage, clearing and exchange; amortization of other intangibles; market fluctuations on employee deferred compensation; promotional (ongoing); employee share-based compensation; regulatory charges; and acquisition costs.
Corporate Cash: A component of cash and equivalents that includes the sum of cash and equivalents from the following: (1) cash and equivalents held at LPL Holdings, Inc., (2) cash and equivalents held at regulated subsidiaries as defined by the Company’s Credit Agreement, which include LPL Financial LLC and The Private Trust Company, N.A., in excess of the capital requirements of the Company’s Credit Agreement, which, in the case of LPL Financial LLC is net capital in excess of 10% of its aggregate debits, or five fiscal years. The selected historical financial information presented below should be readtimes the net capital required in conjunctionaccordance with the information includedUniform Net Capital Rule, and (3) cash and equivalents held at non-regulated subsidiaries.
Credit Agreement: The Company’s amended and restated credit agreement.
Credit Agreement EBITDA: A non-GAAP financial measure defined in the Credit Agreement as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles, and is further adjusted to exclude certain non-cash charges and other adjustments, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.
Dodd-Frank Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act.
DOL: The United States Department of Labor.
EBITDA: A non-GAAP financial measure defined as net income plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles.
ERISA: The Employee Retirement Income Security Act of 1974.
FINRA: The Financial Industry Regulatory Authority.
GAAP: Accounting principles generally accepted in the United States of America.
Gross profit: A non-GAAP financial measure defined as total revenue less advisory and commission expense; brokerage, clearing and exchange expense; and market fluctuations on employee deferred compensation.
Indentures: The indentures governing the Company’s senior unsecured notes.
Leverage Ratio: A financial metric from our Credit Agreement that is calculated by dividing Credit Agreement net debt, which equals consolidated total debt less Corporate Cash, by Credit Agreement EBITDA.
NFA: The National Futures Association.
OCC: The Office of the Comptroller of the Currency.
RIA: Registered investment advisor.
SEC: The U.S. Securities and Exchange Commission.
SRO: Self-regulatory organization.
Uniform Net Capital Rule: Refers to Rule 15c3-1 under the heading “Management’s DiscussionExchange Act, which specifies minimum capital requirements that are intended to ensure the general financial soundness and Analysisliquidity of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. We have derived the consolidated statements of income data for the years ended December 31, 2017, 2016, and 2015 and the consolidated statements of financial condition data as of December 31, 2017 and 2016 from our audited financial statements included in this Annual Report on Form 10-K. We have derived the consolidated statements of income data for the years ended December 31, 2014 and 2013 and consolidated statements of financial condition data as of December 31, 2015, 2014, and 2013 from our audited financial statements not included in this Annual Report on Form 10-K. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.broker-dealers.
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| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Consolidated statements of income data (In thousands, except per share data): | | | | |
Net revenues | $ | 4,281,481 |
| | $ | 4,049,383 |
| | $ | 4,275,054 |
| | $ | 4,373,662 |
| | $ | 4,140,858 |
|
Total expenses | $ | 3,916,911 |
| | $ | 3,751,867 |
| | $ | 3,992,499 |
| | $ | 4,078,965 |
| | $ | 3,849,555 |
|
Income before provision for income taxes | $ | 364,570 |
| | $ | 297,516 |
| | $ | 282,555 |
| | $ | 294,697 |
| | $ | 291,303 |
|
Provision for income taxes | $ | 125,707 |
| | $ | 105,585 |
| | $ | 113,771 |
| | $ | 116,654 |
| | $ | 109,446 |
|
Net income | $ | 238,863 |
| | $ | 191,931 |
| | $ | 168,784 |
| | $ | 178,043 |
| | $ | 181,857 |
|
Per share data: | | | | | | | | |
Earnings per basic share | $ | 2.65 |
| | $ | 2.15 |
| | $ | 1.77 |
| | $ | 1.78 |
| | $ | 1.74 |
|
Earnings per diluted share | $ | 2.59 |
| | $ | 2.13 |
| | $ | 1.74 |
| | $ | 1.75 |
| | $ | 1.72 |
|
Cash dividends paid per share | $ | 1.00 |
| | $ | 1.00 |
| | $ | 1.00 |
| | $ | 0.96 |
| | $ | 0.65 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Consolidated statements of financial condition data (In thousands): | | | | |
Cash and cash equivalents | $ | 811,136 |
| | $ | 747,709 |
| | $ | 724,529 |
| | $ | 412,332 |
| | $ | 516,584 |
|
Total assets | $ | 5,358,751 |
| | $ | 4,834,926 |
| | $ | 4,521,061 |
| | $ | 4,041,930 |
| | $ | 4,027,114 |
|
Total long-term borrowings, net | $ | 2,385,022 |
| | $ | 2,175,436 |
| | $ | 2,188,240 |
| | $ | 1,625,195 |
| | $ | 1,519,379 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements included in Item 8“Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. Please also refer to the section under heading "Special“Special Note Regarding Forward-Looking Statements."”
Business Overview
We are a leader in the retail financial advice market andadvisor-mediated marketplace as the nation'snation’s largest independent broker-dealer.broker-dealer, a leading investment advisory firm, and a top custodian. We enable independence forserve independent financial advisors byand enterprises, providing them with the capabilities, technology solutions, brokerage and service they need, so they can focus on serving their clients. Ouradvisory platforms, clearing services, include advisory and brokerage platforms, portfolio construction, integrated technology and services, comprehensive clearing and compliance services, consultative practice management programs and training, business services and independent research.planning and advice services, and in-house research they need to run successful businesses. We provide our brokerage and investment advisory services to more than 15,000 independent financial advisors, including financial advisors at approximately 700 financial institutions across the country, enablingenable them to provide their retail investors with objective financial advice through a lower conflict model. Through our advisors, we are one of the largest distributors of financial products and services in the United States.
We believe that objectivepersonalized financial guidance is a fundamental need to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions. Please consult Part I, “Item 1. Business” for everyone. We enable our advisors to focus on what they do best—create the personal, long-term relationships that are the foundation for turning life’s aspirations into financial realities. We do that through a singular focus on providing our advisors with the front-, middle-, and back-office support they need to serve the large and growing market for independent investment advice. We believe that we are the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services, and open architecture access to a wide range of non-proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting, and market-making.
We believe investors achieve better outcomes when working with a financial advisor. We strive to make it easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting independence and choice through access to a wide range of diligently evaluated non-proprietary products.
Executive Summary
Financial Highlights
Results forthe year ended December 31, 2017 included net income of $238.9 million, or $2.59 per share, which compares to $191.9 million, or $2.13 per share, for the year ended 2016. Increased asset based fee revenue and advisory fee revenue contributed to the earnings per share growth.
Asset Growth Trends
Total brokerage and advisory assets served were $615.1 billion as of December 31, 2017, up 20.7% from $509.4 billion as of December 31, 2016. Total net new assets were $43.4 billion for the year ended December 31, 2017, compared to $5.9 billion for the same period in 2016. Our total brokerage and advisory assets served as of December 31, 2017 included $34.4 billion in assets from the first wave of advisors that we onboarded (“Wave 1”) in connection with the NPH Acquisition.
Net new advisory assets were $32.8 billion for the year ended December 31, 2017, compared to $13.7 billion in 2016. As of December 31, 2017, our advisory assets had grown to $273.0 billion from the prior year end balance of $211.6 billion and represented 44.4% of total advisory and brokerage assets served.
Net new brokerage assets totaled inflows of $10.6 billion for the year ended December 31, 2017, compared to outflows of $7.8 billion in 2016. As of December 31, 2017, our brokerage assets had grown to $342.1 billion from the prior year end balance of $297.8 billion. The addition of brokerage assets from Wave 1 advisors more than offset the brokerage outflows that otherwise occurred during the year.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, of $1,554.8 million for the year ended December 31, 2017, increased 11.5% from $1,394.3 million for the year ended December 31, 2016. Management presents gross profit, which is calculated as net revenues less commission and advisory expenses and brokerage, clearing, and
exchange fees, because we believe that measure may be useful to investors in evaluating the Company’s core operating performance before indirect costs that are general and administrative in nature. See footnote 8 to the Financial Metrics table within the "How We Evaluate Our Business" section for additional information on gross profit. The increase in period-over-period gross profit was primarily due to increases in cash sweep revenue from the impact of the increases in the target range for the federal funds effective rate announced in each of March, June and December 2017, increase in other asset based revenue from market gains, increases in advisory revenues resulting from net new assets and market gains as represented by higher levels of the S&P 500 index.
Acquisition of NPH
On August 15, 2017, we entered into the Asset Purchase Agreement with the NPH Sellers to acquire certain assets and rights of the NPH Sellers, including business relationships with financial advisors who become affiliated with LPL Financial. We paid $325 million to the NPH Sellers at closing and have agreed to a potential contingent payment of up to $122.8 million. We onboarded $34.2 billion in brokerage and advisory assets from NPH in Wave 1, including $26.5 billion in brokerage assets and $7.7 billion in advisory assets.
Capital Management Activity
We returned $204.0 million of capital to shareholders during the year, including $90.3 million of dividends and $113.7 million of share repurchases (representing 2,619,532 shares).
On March 10, 2017, we refinanced our entire debt structure by issuing $1.7 billion of new term loan debt (“Term Loan B”) and $500.0 million aggregate principal amount of 5.75% senior unsecured notes. Under the terms of the refinanced debt structure, we extended our average maturities; diversified our funding sources to include fixed rate senior notes; removed maintenance covenants from our term loans; and increased the borrowing capacity of our undrawn revolver by $100 million. We also lowered the LIBOR spread on our term loan by 150 basis points, which lowered the interest expenses of our debt structure.
On September 21, 2017 we issued $400 million in aggregate principal amount of add-on senior unsecured notes above par at a yield to worst of 5.12% (coupon rate of 5.75%). We used $200 million in proceeds of the offering to pay down a portion of our Term Loan B, and we plan to use the remaining proceeds for general corporate purposes, including funding costs related to the NPH Acquisition. As a result of the refinancing, we also reduced the spread on the interest rates on our term loan and revolving credit facility by 25 basis points each.business activities.
Our Sources of Revenue
Our revenues arerevenue is derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust and reporting platforms. We also generate asset-based revenuesrevenue through our cashinsured bank sweep programsvehicles, money market account balances and the access that we provide to a variety of product providers with the following product lines:
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| | | | | | | |
• Alternative Investments | | • Retirement Plan Products |
• Annuities | | • Separately Managed Accounts |
• Exchange Traded Products | | • Structured Products |
• Insurance Based Products | | • Unit Investment Trusts |
• Mutual Funds | | |
Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing and ongoing account management. In return for these services, mutual funds, insurance companies, banks and other financial product manufacturerssponsors pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.clients, cash and equivalents segregated under federal or other regulations, advisor repayable loans and operating cash, which is included in interest income, net in the consolidated statements of income. A portion of our revenue is not asset-based or correlated with the equity financial markets.
We regularly review various aspects of our operations and service offerings, including our policies, procedures and platforms, in response to marketplace developments. We currently expectseek to implement changes tocontinuously improve and enhance aspects of our operations and service offerings in order to position our advisors for long-term growth and to align with competitive and regulatory developments. For example, we regularly review the structure and fees of our advisory programs,products and services, including related disclosures, in the context of the changing regulatory environment and competitive landscape for retirementadvisory and brokerage accounts.
We track recurring revenue,
Significant Events
Entered into a characterizationdefinitive purchase agreement to acquire Atria Wealth Solutions, Inc.
On February 13, 2024, the Company announced that it had entered into a definitive purchase agreement to acquire Atria, a wealth management solutions holding company headquartered in New York. As part of net revenuethe agreement, Atria will transition its brokerage and advisory assets, currently custodied with its network of broker-dealers, to the Company’s platform. The Company expects to close the transaction in the second half of 2024 with the conversion expected in mid-2025, subject to receipt of regulatory approval and other closing conditions.
Completed initial investment grade debt offering
On November 17, 2023, the Company completed its initial investment grade debt offering with the issuance of $750.0 million in aggregate principal amount of 6.750% senior unsecured notes due 2028. See Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to the consolidated financial statements for further detail.
Announced a statistical measure,strategic relationship agreement with Prudential’s retail wealth management business
On August 24, 2023, the Company announced an agreement with Prudential to transition the brokerage and investment advisory assets of Prudential Advisors, Prudential’s retail wealth management business, from its current third-party custodian to LPL Financial in the second half of 2024, subject to receipt of regulatory approval and other conditions.
Closed various acquisitions during the year
During the year ended December 31, 2023, the Company completed 19 acquisitions under our Liquidity & Succession solution, in which we definebuy advisor practices. The Company also completed the acquisition of Boenning & Scattergood’s Private Client Group and FRGIS on January 31, 2023. See Note 4 - Acquisitions, within the notes to include our revenuesthe consolidated financial statements for further detail.
Executive Summary
Financial Highlights
Results forthe year ended December 31, 2023 included net income of $1.1 billion, or $13.69 per diluted share, which compares to $845.7 million, or $10.40 per diluted share, for the year ended December 31, 2022.
Asset Trends
Total advisory and brokerage assets served were $1.4 trillion at December 31, 2023, compared to $1.1 trillion at December 31, 2022. Total net new assets were $104.1 billion for the year ended December 31, 2023, compared to $95.9 billion for the same period in 2022.
Net new advisory assets were $76.0 billion for the year ended December 31, 2023, compared to $52.4 billion in 2022. Advisory assets were $735.8 billion, or 54.3% of total advisory and brokerage assets served, at December 31, 2023, up 26% from asset-based fees, advisory fees, trailing commissions,$583.1 billion at December 31, 2022.
Net new brokerage assets were $28.1 billion for the year ended December 31, 2023, compared to $43.5 billion in 2022. Brokerage assets were $618.2 billion at December 31, 2023, up 17% from $527.7 billion at December 31, 2022.
Gross Profit Trend
Gross profit, a non-GAAP financial measure, was $4.0 billion for the year ended December 31, 2023, an increase of 26% from $3.2 billion for the year ended December 31, 2022. See the “Key Performance Metrics” section for additional information on gross profit.
Common Stock Dividends and Share Repurchases
During the year ended December 31, 2023, we paid stockholders cash sweep programs,dividends of $92.2 million and
certain other fees that are based upon client accounts and advisors. Because certain recurring revenues are associated with asset balances, they will fluctuate depending on the market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful to us despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
The table below summarizes the sources and drivers repurchased 5,075,900 of our revenue:outstanding shares for a total of $1.1 billion.
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| | | For the Year Ended December 31, 2017 |
| Sources of Revenue | Primary Drivers | Net Revenues (millions) | % of Total Net Revenue | Recurring Revenues (millions) | % Recurring |
Advisor-driven revenue with ~85%-90% payout ratio | Commission | - Sales - Transactions - Brokerage asset levels | $1,671 | 39.0% | 968 | 57.9% |
Advisory | - Corporate advisory asset levels | $1,409 | 32.9% | 1,403 | 99.6% |
Attachment revenue retained by us | Asset-Based - Cash Sweep Fees - Sponsorship Fees - Record Keeping | - Cash balances - Interest rates - Number of accounts - Client asset levels | $708 | 16.6% | 700 | 98.9% |
Transaction and Fee - Trades - Client (Investor) Accounts - Advisor Seat and Technology | - Client activity - Number of clients - Number of advisors - Number of accounts - Premium technology subscribers | $425 | 9.9% | 247 | 58.1% |
Other | - Margin accounts - Alternative investment transactions | $68 | 1.6% | 27 | 39.7% |
| Total | $4,281 | 100.0% | $3,345 | 78.1% |
How We Evaluate Our BusinessKey Performance Metrics
We focus on several business and key financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our key operating, business and key financial metrics are as follows:
| | | | | | | | |
| As of and for the Years Ended December 31, |
Operating Metrics (dollars in billions)(1) | 2023 | 2022 |
Advisory and Brokerage Assets(2) | | |
Advisory assets | $ | 735.8 | $ | 583.1 |
Brokerage assets | 618.2 | 527.7 |
Total Advisory and Brokerage Assets | $ | 1,354.1 | $ | 1,110.8 |
Advisory as a % of total Advisory and Brokerage Assets | 54.3 | % | 52.5 | % |
| | |
Net New Assets(3) | | |
Net new advisory assets | $ | 76.0 | $ | 52.4 |
Net new brokerage assets | 28.1 | 43.5 |
Total Net New Assets | $ | 104.1 | $ | 95.9 |
| | |
Organic Net New Assets | | |
Organic net new advisory assets | $ | 75.0 | $ | 52.4 |
Organic net new brokerage assets | 25.4 | 43.5 |
Total Organic Net New Assets | $ | 100.4 | $ | 95.9 |
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| |
| | |
Organic advisory net new assets annualized growth(4) | 12.9 | % | 8.1 | % |
Total organic net new assets annualized growth(4) | 9.0 | % | 7.9 | % |
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| | |
Client Cash Balances | | |
Insured cash account sweep | $ | 34.5 | $ | 46.8 |
Deposit cash account sweep | 9.3 | 11.5 |
Total Bank Sweep | 43.8 | 58.4 |
Money market sweep | 2.4 | 3.0 |
Total Client Cash Sweep Held by Third Parties | 46.2 | 61.4 |
Client cash account | 2.3 | 2.7 |
Total Client Cash Balances | $ | 48.5 | $ | 64.1 |
Client Cash Balances as a % of Total Assets | 3.6% | 5.8% |
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| | | | | | | | | | | |
| December 31, |
Operating Metrics | 2017 | | 2016 | | 2015 |
Advisory assets (in billions)(1)(2) | $ | 273.0 |
| | $ | 211.6 |
| | $ | 187.2 |
|
Brokerage assets (in billions)(1)(3) | 342.1 |
| | 297.8 |
| | 288.4 |
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Total Brokerage and Advisory Assets served(in billions)(1) | $ | 615.1 |
| | $ | 509.4 |
| | $ | 475.6 |
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| | | | | |
Net new advisory assets (in billions)(4) | $ | 32.8 |
| | $ | 13.7 |
| | $ | 16.7 |
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Net new brokerage assets (in billions)(5) | 10.6 |
| | (7.8 | ) | | (7.6 | ) |
Total Brokerage and Advisory Net New Assets (in billions) | $ | 43.4 |
| | $ | 5.9 |
| | $ | 9.1 |
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| | | | | |
Insured cash account balances (in billions)(1) | $ | 22.9 |
| | $ | 22.8 |
| | $ | 20.9 |
|
Deposit cash account balances (in billions)(1) | 4.2 |
| | 4.4 |
| | — |
|
Money market account balances (in billions)(1) | 2.7 |
| | 4.1 |
| | 8.1 |
|
Total Cash Sweep Balances | $ | 29.8 |
| | $ | 31.3 |
| | $ | 29.0 |
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| | | | | |
Advisors | 15,210 |
| | 14,377 |
| | 14,054 |
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| Years Ended December 31, |
Financial Metrics | 2017 | | 2016 | | 2015 |
Total net revenues (in millions) | $ | 4,281.5 |
| | $ | 4,049.4 |
| | $ | 4,275.1 |
|
Recurring revenue as a % of net revenue | 78.1 | % | | 74.4 | % | | 71.5 | % |
Pre-Tax income (in millions) | $ | 364.6 |
| | $ | 297.5 |
| | $ | 282.6 |
|
Net income (in millions) | $ | 238.9 |
| | $ | 191.9 |
| | $ | 168.8 |
|
Earnings per share (diluted) | $ | 2.59 |
| | $ | 2.13 |
| | $ | 1.74 |
|
Recurring gross profit rate(6) | 82.6 | % | | 81.2 | % | | 80.3 | % |
| | | | | |
Non-GAAP Financial Measures(7) | | | | | |
Gross profit (in millions)(8) | $ | 1,554.8 |
| | $ | 1,394.3 |
| | $ | 1,357.7 |
|
Gross profit growth from prior period(8) | 11.5 | % | | 2.7 | % | | 2.4 | % |
Gross profit as a % of net revenue(8) | 36.3 | % | | 34.4 | % | | 31.8 | % |
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| As of and for the Years Ended December 31, |
| 2023 | 2022 |
Net buy (sell) activity(5) | $ | 137.6 | $ | 61.6 |
| | |
Business and Financial Metrics (dollars in millions) | | |
Advisors | 22,660 | 21,275 |
Average total assets per advisor(6) | $ | 59.8 | $ | 52.2 |
| | |
Share repurchases | $ | 1,100.1 | $ | 325.0 |
Dividends | $ | 92.2 | $ | 79.8 |
Leverage ratio(7) | 1.63 | 1.39 |
| | |
| Years Ended December 31, |
Financial Metrics (dollars in millions, except per share data) | 2023 | 2022 |
Total revenue | $ | 10,052.8 | $ | 8,600.8 |
Net income | $ | 1,066.3 | $ | 845.7 |
Earnings per share (“EPS”), diluted | $ | 13.69 | $ | 10.40 |
Non-GAAP Financial Metrics (dollars in millions, except per share data) | | |
Adjusted EPS (8) | $ | 15.72 | $ | 11.52 |
Gross profit(9) | $ | 4,027.0 | $ | 3,189.9 |
EBITDA(10) | $ | 1,985.8 | $ | 1,525.3 |
Core G&A(11) | $ | 1,369.4 | $ | 1,191.9 |
____________________
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(1) | Brokerage and advisory assets are comprised of assets that are custodied, networked, and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Insured cash account balances, money market account balances, and beginning in July 2016, deposit cash account balances are also included in brokerage and advisory assets served. Our brokerage and advisory assets do not include retirement plan assets, which are custodied with various third-party providers and supported by advisors licensed with LPL Financial. The Company estimated such assets at $134.9 billion, representing approximately 41,000 retirement plans, at December 31, 2017. |
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(2) | Advisory assets consists of total advisory assets under custody at LPL Financial, consisting of total assets on LPL Financial's corporate advisory platform serviced by advisors who are investment advisor representatives of LPL Financial and assets on LPL Financial's independent advisory platform serviced by advisors who are investment advisor representatives of separate investment advisor firms (“Hybrid RIAs”) rather than of LPL Financial. See “Results of Operations” for a tabular presentation of advisory assets. |
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(3) | Brokerage assets consist of assets serviced by advisors licensed with LPL Financial. |
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(4) | Net new advisory assets consist of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. |
(1)Totals may not foot due to rounding.
(2)Consists of total advisory and brokerage assets under custody at the Company’s primary broker-dealer subsidiary, LPL Financial. Please consult the “Results of Operations” section for a tabular presentation of advisory and brokerage assets.
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(5) | Net new brokerage assets consist of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. |
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(6) | Recurring gross profit rate refers to the percentage of our gross profit, a non-GAAP financial measure, that was recurring for the period presented. Our management tracks recurring gross profit, a characterization of gross profit and a statistical measure, which is defined to include our revenues from asset-based fees, advisory fees, trailing commissions, cash sweep programs, and certain other fees that are based upon the number of client accounts and advisors, less the expenses associated with such revenues and certain other recurring expenses not specifically associated with a revenue line. Our management allocates such other recurring expenses, such as non-GDC sensitive production expenses, on a pro-rata basis against specific revenue lines at its discretion. Because certain sources of recurring gross profit are associated with asset balances, they will fluctuate depending on the market values and current interest rates. Accordingly, our recurring gross profit can be negatively impacted by adverse external market conditions. However, our management believes that recurring gross profit is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets |
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(7) | Our management believes that presenting certain non-GAAP financial measures by excluding or including certain items can be helpful to investors and analysts who may wish to use some or all of this information to analyze our current performance, prospects, and valuation. Our management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Our management believes that the non-GAAP financial measures and metrics presented above and discussed below are appropriate for evaluating the performance of the Company. |
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(8) | Set forth below is a calculation of gross profit (in millions), calculated as net revenues less commission and advisory expenses and brokerage, clearing, and exchange fees. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can be useful to investors because they show our core operating performance before indirect costs that are general and administrative in nature. |
(3)Consists of total client deposits into advisory or brokerage accounts less total client withdrawals from advisory or brokerage accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage or advisory accounts as deposits and withdrawals, respectively.
(4)Calculated as annualized current period organic net new assets divided by preceding period assets in their respective categories of advisory assets or total advisory and brokerage assets.
(5)Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial.
(6)Calculated based on the end of period total advisory and brokerage assets divided by the end of period advisor count.
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| | | | | | | | | | | |
| Years Ended December 31, |
Gross Profit | 2017 | | 2016 | | 2015 |
Total net revenues (in millions) | $ | 4,281.5 |
| | $ | 4,049.4 |
| | $ | 4,275.1 |
|
Commission and advisory expense (in millions) | 2,669.6 |
| | 2,600.6 |
| | 2,864.8 |
|
Brokerage, clearing, and exchange fees (in millions) | 57.1 |
| | 54.5 |
| | 52.6 |
|
Gross profit (in millions) | $ | 1,554.8 |
| | $ | 1,394.3 |
| | $ | 1,357.7 |
|
(7)The leverage ratio is a financial metric from our Credit Agreement and is calculated by dividing Credit Agreement net debt, which equals consolidated total debt less Corporate Cash, by Credit Agreement EBITDA. Credit Agreement EBITDA, a non-GAAP financial measure, is defined by the Credit Agreement as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles, and is further adjusted to exclude certain non-cash charges and other adjustments, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions. Please consult the “Debt and Related Covenants” section for more information. Below are reconciliations of corporate debt and other borrowings to Credit Agreement net debt as of the dates below and net income to EBITDA and Credit Agreement EBITDA for the periods presented (in millions): | | | | | | | | |
| December 31, |
Credit Agreement Net Debt Reconciliation | 2023 | 2022 |
Corporate debt and other borrowings | $ | 3,757.2 | | $ | 2,737.9 | |
Corporate Cash(12) | (183.7) | | (459.4) | |
Credit Agreement Net Debt(†) | $ | 3,573.5 | | $ | 2,278.5 | |
| | |
| Years Ended December 31, |
EBITDA and Credit Agreement EBITDA Reconciliation | 2023 | 2022 |
Net income | $ | 1,066.3 | | $ | 845.7 | |
Interest expense on borrowings | 186.8 | | 126.2 | |
Provision for income taxes | 378.5 | | 266.0 | |
Depreciation and amortization | 247.0 | | 199.8 | |
Amortization of other intangibles | 107.2 | | 87.6 | |
EBITDA(†) | $ | 1,985.8 | | $ | 1,525.3 | |
Credit Agreement Adjustments: | | |
Acquisition costs and other(13)(14) | $ | 110.2 | | $ | 50.7 | |
Employee share-based compensation | 66.0 | | 50.1 | |
M&A accretion(15) | 30.3 | | 10.6 | |
Advisor share-based compensation | 2.6 | | 2.5 | |
Credit Agreement EBITDA(†) | $ | 2,194.8 | | $ | 1,639.1 | |
| | |
| December 31, |
| 2023 | 2022 |
Leverage Ratio | 1.63 | | 1.39 | |
____________________Legal & Regulatory Matters(†) Totals may not foot due to rounding.
As(8)Adjusted EPS is a regulated entity, we are subject tonon-GAAP financial measure defined as adjusted net income, a non-GAAP financial measure defined as net income plus the after-tax impact of amortization of other intangibles, acquisition costs and a regulatory oversight and inquiriescharge related to amongan investigation of the Company’s compliance with records preservation requirements for business-related electronic communications stored on personal devices or messaging platforms that have not been approved by the Company, divided by the weighted average number of diluted shares outstanding for the applicable period. The Company presents adjusted net income and adjusted EPS because management believes that these metrics can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items, acquisition costs and a regulatory charge that management does not believe impact the Company’s ongoing operations. Adjusted net income and adjusted EPS are not measures of the Company's financial performance under GAAP and should not be considered as alternatives to net income, earnings per diluted share or any other performance measure derived in accordance with GAAP. Below is a reconciliation of net income and earnings per diluted share to adjusted net income and adjusted EPS for the periods presented (in millions, except per share data):
| | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | 2022 |
Adjusted Net Income / Adjusted EPS Reconciliation | Amount | Per Share | Amount | Per Share |
Net income / earnings per diluted share | $ | 1,066.3 | | $ | 13.69 | | $ | 845.7 | | $ | 10.40 | |
Regulatory charge(13) | 40.0 | | 0.51 | | — | | — | |
Amortization of other intangibles | 107.2 | | 1.38 | | 87.6 | | 1.08 | |
Acquisition costs(14) | 48.1 | | 0.62 | | 36.2 | | 0.44 | |
Tax benefit | (37.4) | | (0.48) | | (32.7) | | (0.40) | |
Adjusted Net Income / Adjusted EPS(†) | $ | 1,224.1 | | $ | 15.72 | | $ | 936.7 | | $ | 11.52 | |
Weighted-average shares outstanding, diluted | 77.9 | | | 81.3 | | |
____________________(†) Totals may not foot due to rounding.
(9)Gross profit is a non-GAAP financial measure defined as total revenue less advisory and commission expense; brokerage, clearing and exchange expense; and market fluctuations on employee deferred compensation. All other expense categories, including depreciation and amortization of property and equipment and amortization of other intangibles, are considered by management to be general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature. Below is a calculation of gross profit for the periods presented(in millions): | | | | | | | | |
| Years Ended December 31, |
Gross Profit | 2023 | 2022 |
Total revenue | $ | 10,052.8 | | $ | 8,600.8 | |
Advisory and commission expense | 5,915.8 | | 5,324.8 | |
Brokerage, clearing and exchange expense | 106.0 | | 86.1 | |
Employee deferred compensation(16) | 4.1 | | — | |
Gross Profit(†) | $ | 4,027.0 | | $ | 3,189.9 | |
____________________
(†) Totals may not foot due to rounding.
(10)EBITDA is a non-GAAP financial measure defined as net income plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles.The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP. Below is a reconciliation of net income to EBITDA for the periods presented (in millions):
| | | | | | | | |
| Years Ended December 31, |
EBITDA Reconciliation | 2023 | 2022 |
Net income | $ | 1,066.3 | | $ | 845.7 | |
Interest expense on borrowings | 186.8 | | 126.2 | |
Provision for income taxes | 378.5 | | 266.0 | |
Depreciation and amortization | 247.0 | | 199.8 | |
Amortization of other intangibles | 107.2 | | 87.6 | |
EBITDA(†) | $ | 1,985.8 | | $ | 1,525.3 | |
____________________(†) Totals may not foot due to rounding.
(11)Core G&A is a non-GAAP financial measure defined as total expense less the following expenses: advisory and commission; depreciation and amortization; interest expense on borrowings; brokerage, clearing and exchange; amortization of other intangibles; market fluctuations on employee deferred compensation; promotional (ongoing); employee share-based compensation; regulatory charges; and acquisition costs. Management presents core G&A because it believes core G&A reflects the corporate expense categories over which management can generally exercise a measure of control, compared with expense items our complianceover which management either cannot exercise control, such as advisory and supervisory systemscommission expense, or which management views as promotional expense necessary to support advisor growth and proceduresretention, including conferences and other controls,transition assistance. Core G&A is not a measure of the Company’s total expense as well as our disclosures, supervisioncalculated in accordance with GAAP. Below is a reconciliation of the Company’s total expense to core G&A for the periods presented(in millions):
| | | | | | | | |
| Years Ended December 31, |
Core G&A Reconciliation | 2023 | 2022 |
Total expense | $ | 8,608.1 | | $ | 7,489.2 | |
Advisory and commission | (5,915.8 | ) | (5,324.8 | ) |
Depreciation and amortization | (247.0 | ) | (199.8 | ) |
Interest expense on borrowings | (186.8 | ) | (126.2 | ) |
Amortization of other intangibles | (107.2 | ) | (87.6 | ) |
Brokerage, clearing and exchange | (106.0 | ) | (86.1 | ) |
Employee deferred compensation(16) | (4.1 | ) | — | |
Total G&A(†) | 2,041.2 | | 1,664.7 | |
Promotional (ongoing)(14)(17) | (486.3 | ) | (353.9 | ) |
Regulatory charges(13) | (71.3 | ) | (32.6 | ) |
Employee share-based compensation | (66.0 | ) | (50.1 | ) |
Acquisition costs(14) | (48.1 | ) | (36.2 | ) |
Core G&A(†) | $ | 1,369.4 | | $ | 1,191.9 | |
____________________
(†) Totals may not foot due to rounding.
(12)See the “Liquidity and reporting. Capital Resources” section for additional information about Corporate Cash.
(13)The environment of additional regulation, increasedCompany recorded a $40.0 million regulatory compliance obligations, and enhanced regulatory enforcement has resulted, and may result incharge for the future, in additional operational and compliance costs, as well as increased costs in the form of penalties and fines, investigatory and settlement costs, customer restitution, and remediationyear ended December 31, 2023 related to regulatory matters. For additional information, seean investigation of the “Risks RelatedCompany’s compliance with records preservation requirements for business-related electronic communications stored on personal
devices or messaging platforms that have not been approved by the Company applicable to Our Regulatory Environment”broker-dealer firms and the “Risks Related to Our Business Generally” sections within Part I, “Item 1A. Risk Factors”. In the ordinary course of business, we periodically identify or become aware of purported inadequacies, deficiencies, and other issues. It is our policy to evaluate these matters for potential securities law or regulatory violations, and other potential compliance issues. It is also our policy to self-report known violations and issues as required by applicable law and regulation. When deemed probable that matters may result in financial losses, we accrue for those losses based on an estimate of possible fines, customer restitution, and losses related to the repurchase of sold securities and other losses, as applicable. Certain regulatory and other legal claims and losses may be covered through our wholly-owned captive insurance subsidiary, which is chartered with the insurance commissioner in the state of Tennessee. Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or a legal proceeding is inherently difficult and requires judgments based on a variety of factors and assumptions. There are particular uncertainties and complexities involved when assessing the potential liabilities that are self-insured by our captive insurance subsidiary.
Our accruals, including those established through the captive insurance company at December 31, 2017, include estimated costs for significant regulatory matters, generally relating to the adequacy of our compliance and supervisory systems and procedures and other controls, for which we believe losses are both probable and reasonably estimable.
The outcome of regulatory matters could result in legal liability, regulatory fines, or monetary penalties in excess of our accruals and insurance, which could have a material adverse effect on our business, results of operations, cash flows, or financial condition. For more information on management’s loss contingency policies, seeinvestment advisors. See Note 12.14 - Commitments and Contingencies within the notes to the consolidated financial statements.
In June 2017, the DOL issued the DOL Rule and related exemptions became applicable. The DOL Rule broadens the circumstances in which we and our advisors may be considered a “fiduciary” with respect to certain accounts that are subject to the ERISA, and the prohibited transaction rules under section 4975 of the Internal Revenue Code. These types of accounts include many employer-sponsored retirement plans and individual retirement accounts (“IRAs”). The DOL also finalized certain prohibited transaction exemptions that allow investment advisors to receive compensation for providing investment advice under arrangements that would otherwise be prohibited due to conflicts of interest. The full implementation date for conditions under related exemptions has been delayed until July 1, 2019 as the DOL is undertaking a study and reconsideration of the rule and its impacts. Because ERISA plans and IRAs comprise a significant portion of our business, we continue to expect that compliance with the DOL Rule and reliance on new and amended prohibited transaction exemptions will require increased legal, compliance, information technology, and other costs and could lead to a greater risk of class action lawsuits and other litigation. It is also unclear how and whether other regulators, including the SEC, FINRA, banking regulators, and the state securities and insurance regulators may respond to, or enforce elements of, the DOL Rule or develop their own similar laws and regulations. Moreover, the DOL’s ongoing study and reconsideration of the DOL Rule, and changes thereto, impacts the degree and timing of the effect of the DOL Rule on our business in ways which cannot now be anticipated or planned for, which may have further impacts on our products and services, and results of operations.
Acquisitions, Integrations, and Divestitures
From time to time we undertake acquisitions or divestitures based on opportunities in the competitive landscape. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented.
On August 15, 2017, we entered into the Asset Purchase Agreement with the NPH Sellers to acquire certain assets and rights of the NPH Sellers, including the NPH Sellers' business relationships with financial advisors who become affiliated with LPL Financial. We paid $325 million to the NPH Sellers at closing, which occurred on August 15, 2017, and have agreed to a potential contingent payment of up to $122.8 million (the “NPH Contingent Payment”). The NPH Contingent Payment would be paid on an interpolated basis based on the percentage of transferred GDC, as determined under the Asset Purchase Agreement, between 72% and 93.5%. No NPH Contingent Payment would be due in the event that the transferred GDC percentage is less than 72%. We have incurred and expect to further incur increased costs related to this transaction, including: compensation and benefits expense related to the additional staffing, as well as contingent labor costs, needed to support the onboarding of the former NPH advisors and their clients to our systems, as well as to provide ongoing support to the increases in the number of advisors, clients and total assets served on our platform; fees for account closure and transfers that we agreed to pay on behalf of former NPH advisors; onboarding financial assistance costs for advisors joining LPL Financial; premium expense for insurance coverage through our captive insurance subsidiary; and technology capacity investments to support the expected increase in demands on our systems. We expect the incurrence of these costs to be largely complete by mid-2018. We also anticipate an increase to amortization related to the purchased intangible assets under the Asset Purchase Agreement. See Note 3 Acquisitions, within the notes to the consolidated financial statements for further detail. There have
(14)Acquisition costs include the costs to setup, onboard and integrate acquired entities and other costs that were incurred as a result of the acquisition. The below table summarizes the primary components of acquisition costs for the periods presented (in millions):
| | | | | | | | |
| Years Ended December 31, |
Acquisition Costs | 2023 | 2022 |
Fair value mark on contingent consideration | $ | 26.7 | | $ | — | |
Professional services | 10.0 | | 12.0 | |
Compensation and benefits | 6.1 | | 20.6 | |
Promotional(17) | 3.6 | | 2.3 | |
Other | 1.7 | | 1.3 | |
Acquisition Costs | $ | 48.1 | | $ | 36.2 | |
(15)M&A accretion is an adjustment to reflect the annualized expected run rate EBITDA of an acquisition as permitted by the Credit Agreement for up to eight fiscal quarters following the close of such acquisition.
(16)During the first quarter of 2023, the Company updated its presentation of employee deferred compensation to be consistent with its presentation of advisor deferred compensation. This change has not been no other material acquisitions, integrations, or divestitures duringapplied retroactively as the twelve monthsimpact on prior periods was not material.
(17)Promotional (ongoing) for the years ended December 31, 2017 or2023 and December 31, 2016.2022 includes $30.7 million and $16.1 million, respectively, of support costs related to full-time employees that are classified within compensation and benefits expense in the consolidated statements of income. Promotional (ongoing) for the years ended December 31, 2023 and December 31, 2022excludes $3.6 million and $2.3 million, respectively, of expenses incurred as a result of acquisitions, which are included in the acquisition costs line item.
Economic Overview and Impact of Financial Market Events
Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the United States financial markets. Inmarkets in the United States, economic data pointed to steady economic growth in the second half of 2017.States. According to the most recent estimate byfrom the U.S. Bureau of Economic Analysis, real gross domestic product (“GDP”)the U.S. economy grew 2.5% in 2023, and at an annualized ratepace of 2.6%3.3% in the fourth quarter of 2017 following growth2023 after growing at an annualized pace of 3.2%4.9% in the third quarter. These estimates translate to an overall growth rate over the last four quarters at 2.5%, slightly higher than the average for the expansion. Data received in the first quarter so far suggests continued growth near 3%. Growth has been supported by a healthy labor market, generally steady consumer spending, signs of improved business investment,2023. Although geopolitical tension and continued low (although rising)high interest rates. Stronger global growth has also provided support, with global GDP growth picking up from 2.4% in 2016 to an estimated 3.0% in 2017. U.S. business and consumer confidence have remained elevated, with only modest declines since the run-up followingrates were all headwinds, the U.S. elections in November 2016. Despite economic stability and a healthy labor market, core inflation has remained below the Federal Reserve’s (“Fed”) 2% target.
Economic expectations for 2018 shifted as the Tax Cut and Jobs Act, signed into law by President Trump on December 22, 2017 approached passage. Analysis by Congress’ non-partisan Joint Committee on Taxation estimated the new law would add an average of 0.7% growth to annual GDP compared to the current law baseline over the next 10 years while addingeconomy added approximately $1.1 trillion to the deficit. While a prospective rise in U.S. economic growth to near 3% may seem modest by historical standards, it would still be above the Congressional Budget Office’s estimate of potential GDP growth; and could be enough to further tighten the labor market, push wages higher, and increase the probability of the Fed following through on its median projected rate path of three more rate hikes in 2018.
Equity volatility remained low494,000 jobs in the fourth quarter of 2017 as it had been throughout the year, but has picked up early2023, down from 663,000 in the first quarter of 2018, while broad measures of financial stress remain largely subdued.third quarter. The S&P 500 Index further extended the bull market that began in March 2009unemployment rate averaged 3.7% in the fourth quarter, and posted a total return of 21.8% in 2017, supported by solid earnings growth, while international developed and emerging market stocks also performed well. The 10-year Treasury yield rose over much ofup slightly from the fourth quarter and into January of 2018, enabling it to finish 2017 near where it started after declining for much of the first half of the year. The broad Bloomberg Barclays Aggregate Bond Index posted a modest gainaverage in the fourththird quarter and a total return of 3.5% in 2017. Stable financial conditions during the fourth quarter helped more economically sensitive fixed income sectors generally outperform higher quality sectors both over the quarter and over the year.2023.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Federal Reserve (“Fed”) policy. During the fourth quarter of 2023, Fed policy.policymakers maintained the target range for the federal funds rate at 5.25% to 5.50%, and the equity markets rebounded as the Fed appeared to end their tightening cycle and prepare markets for future rate cuts. Please consult the “Risks“Risks Related to Our Business and Industry” section within Part I, “Item 1A. Risk Factors” for more information about the risks associated with significant interest rate changes and the potential related effects on our profitability and financial condition. Following the conclusion of its January 30 - 31, 2018 policy meeting, the Fed’s policy arm, the Federal Open Market Committee (“FOMC”), announced that it was maintaining a federal funds target range of 1.25 - 1.50%. In its policy statement, the FOMC upgraded language describing the economy, characterizing recent gains in unemployment, household spending, and business fixed investment as “solid.” Despite increased growth expectations, the statement noted little change in long-term inflation expectations. On February 5, 2018, then-current Fed board member Jerome Powell was sworn in as the 16th chair of the Fed, replacing the prior chair Janet Yellen.
Results of Operations
A discussion of changes in our results of operations during the year ended December 31, 2022 compared to the year ended December 31, 2021 has been omitted from this Annual Report on Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 23, 2023.
The following discussion presents an analysis of our results of operations for the years ended December 31, 2017, 2016,2023 and 2015.2022 (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, | |
| 2023 | 2022 | % Change |
REVENUE | | | |
Advisory | $ | 4,135,681 | | $ | 3,875,154 | | 7 | % |
Commission: | | | |
Trailing | 1,299,840 | | 1,292,358 | | 1 | % |
Sales-based | 1,252,783 | | 1,033,806 | | 21 | % |
Total commission | 2,552,623 | | 2,326,164 | | 10 | % |
Asset-based: | | | |
Client cash | 1,509,869 | | 953,624 | | 58 | % |
Other asset-based | 867,860 | | 806,649 | | 8 | % |
Total asset-based | 2,377,729 | | 1,760,273 | | 35 | % |
Service and fee | 508,437 | | 467,381 | | 9 | % |
Transaction | 199,939 | | 181,260 | | 10 | % |
Interest income, net | 159,415 | | 77,126 | | 107 | % |
Other | 119,024 | | (86,533) | | n/m |
Total revenue | 10,052,848 | | 8,600,825 | | 17 | % |
EXPENSE | | | |
Advisory and commission | 5,915,807 | | 5,324,827 | | 11 | % |
Compensation and benefits | 979,681 | | 820,736 | | 19 | % |
Promotional | 459,233 | | 339,994 | | 35 | % |
Occupancy and equipment | 248,620 | | 219,798 | | 13 | % |
Depreciation and amortization | 246,994 | | 199,817 | | 24 | % |
Interest expense on borrowings | 186,804 | | 126,234 | | 48 | % |
Amortization of other intangibles | 107,211 | | 87,560 | | 22 | % |
Brokerage, clearing and exchange | 105,984 | | 86,063 | | 23 | % |
Communications and data processing | 75,717 | | 67,687 | | 12 | % |
Professional services | 72,583 | | 72,519 | | — | % |
| | | |
Other | 209,439 | | 143,937 | | 46 | % |
Total expense | 8,608,073 | | 7,489,172 | | 15 | % |
INCOME BEFORE PROVISION FOR INCOME TAXES | 1,444,775 | | 1,111,653 | | 30 | % |
PROVISION FOR INCOME TAXES | 378,525 | | 265,951 | | 42 | % |
NET INCOME | $ | 1,066,250 | | $ | 845,702 | | 26 | % |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | Percentage Change |
| 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| (In thousands) | | | | |
REVENUES | | | | | | | | | |
Commission | $ | 1,670,824 |
| | $ | 1,737,435 |
| | $ | 1,976,845 |
| | (3.8 | )% | | (12.1 | )% |
Advisory | 1,409,247 |
| | 1,289,681 |
| | 1,352,454 |
| | 9.3 | % | | (4.6 | )% |
Asset-based | 708,333 |
| | 556,475 |
| | 493,687 |
| | 27.3 | % | | 12.7 | % |
Transaction and fee | 424,667 |
| | 415,715 |
| | 401,948 |
| | 2.2 | % | | 3.4 | % |
Interest income, net of interest expense | 24,473 |
| | 21,282 |
| | 19,192 |
| | 15.0 | % | | 10.9 | % |
Other | 43,937 |
| | 28,795 |
| | 30,928 |
| | 52.6 | % | | (6.9 | )% |
Total net revenues | 4,281,481 |
| | 4,049,383 |
| | 4,275,054 |
| | 5.7 | % | | (5.3 | )% |
EXPENSES | | | | | | |
| |
|
Commission and advisory | 2,669,599 |
| | 2,600,624 |
| | 2,864,813 |
| | 2.7 | % | | (9.2 | )% |
Compensation and benefits | 456,918 |
| | 436,557 |
| | 440,049 |
| | 4.7 | % | | (0.8 | )% |
Promotional | 171,661 |
| | 148,612 |
| | 139,198 |
| | 15.5 | % | | 6.8 | % |
Depreciation and amortization | 84,071 |
| | 75,928 |
| | 73,383 |
| | 10.7 | % | | 3.5 | % |
Amortization of intangible assets | 38,293 |
| | 38,035 |
| | 38,239 |
| | 0.7 | % | | (0.5 | )% |
Occupancy and equipment | 97,332 |
| | 92,956 |
| | 84,112 |
| | 4.7 | % | | 10.5 | % |
Professional services | 71,407 |
| | 67,128 |
| | 64,522 |
| | 6.4 | % | | 4.0 | % |
Brokerage, clearing, and exchange | 57,047 |
| | 54,509 |
| | 52,516 |
| | 4.7 | % | | 3.8 | % |
Communications and data processing | 44,941 |
| | 44,453 |
| | 46,871 |
| | 1.1 | % | | (5.2 | )% |
Restructuring charges | — |
| | — |
| | 11,967 |
| | — | % | | (100.0 | )% |
Other | 96,210 |
| | 96,587 |
| | 117,693 |
| | (0.4 | )% | | (17.9 | )% |
Total operating expenses | 3,787,479 |
| | 3,655,389 |
| | 3,933,363 |
| | 3.6 | % | | (7.1 | )% |
Non-operating interest expense | 107,025 |
| | 96,478 |
| | 59,136 |
| | 10.9 | % | | 63.1 | % |
Loss on extinguishment of debt | 22,407 |
| | — |
| | — |
| | 100.0 | % | | — | % |
INCOME BEFORE PROVISION FOR INCOME TAXES | 364,570 |
| | 297,516 |
| | 282,555 |
| | 22.5 | % | | 5.3 | % |
PROVISION FOR INCOME TAXES | 125,707 |
| | 105,585 |
| | 113,771 |
| | 19.1 | % | | (7.2 | )% |
NET INCOME | $ | 238,863 |
| | $ | 191,931 |
| | $ | 168,784 |
| | 24.5 | % | | 13.7 | % |
Revenue
RevenuesAdvisory
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers: Topic 606,Advisory revenue represents fees charged to supersede nearly all existing revenue recognition guidance under United States GAAP. In August 2015, the FASB deferred the effective date for implementation of ASU 2014-09 by one year and it is now effective for annual reporting periods beginning after December 15, 2017. We adopted the provisions of this guidance on January 1, 2018 using the modified retrospective approach. The adoption did not have a material impactadvisors’ clients’ advisory accounts on our corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. We provide ongoing investment advice and act as a custodian, providing brokerage and execution services on transactions, and perform administrative services for these accounts. Advisory fees are primarily billed to clients on a quarterly basis in advance, and are recognized as revenue recognition but willratably during the quarter. The performance obligation for advisory fees is considered a series of distinct services that are substantially the same and are satisfied daily. As the value of the eligible assets in an advisory account is susceptible to changes due to customer activity, this revenue includes variable consideration and is constrained until the date that the fees are determinable. The majority of these client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date is adjusted for estimates of contributions and withdrawals to determine the amount billed, and accordingly, the revenue earned in the following three-month period. Advisory revenue collected on our corporate RIA advisory platform is proposed by the advisor and agreed to by the client and was approximately 1% of the underlying assets for the year ended December 31, 2023.
We also support independent RIA firms that conduct their business through our Independent RIA advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access the capabilities of our investment platforms. The assets held under an Independent RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. However, the advisory revenue generated by an Independent RIA is not included in our advisory revenue. We charge separate fees to Independent RIAs for technology, clearing, administrative, oversight and custody services, which may vary and are included in our service and fee revenue in our consolidated statements of income.
The following table summarizes the composition of advisory assets for the periods presented (in billions):
| | | | | | | | | | | | | | |
| December 31, | |
| 2023 | 2022 | $ Change | % Change |
Corporate advisory assets | $ | 496.5 | | $ | 389.1 | | $ | 107.4 | | 28 | % |
Independent RIA advisory assets | 239.3 | | 194.0 | | 45.3 | | 23 | % |
Total advisory assets | $ | 735.8 | | $ | 583.1 | | $ | 152.7 | | 26 | % |
Net new advisory assets are generated throughout the quarter, therefore, the full impact of net new advisory assets to advisory revenue is not realized in the disclosures withinsame period. The following table summarizes activity impacting advisory assets for the notesperiods presented (in billions):
| | | | | | | | |
| Years Ended December 31, |
| 2023 | 2022 |
Beginning balance at January 1 | $ | 583.1 | | $ | 643.2 | |
Net new advisory assets(1) | 76.0 | | 52.4 | |
Market impact(2) | 76.7 | | (112.5) | |
Ending balance at December 31 | $ | 735.8 | | $ | 583.1 | |
____________________(1)Net new advisory assets consist of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.
(2)Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.
Advisory revenue increased during the year ended December 31, 2023 as compared to the consolidated financial statements.same period in 2022. The increase during the year ended December 31, 2023 was driven by continued organic growth, which increased advisory asset balances during the period, and a positive market impact as compared to the prior period.
Commission Revenues
We generate two types of commission revenues:revenue: (1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions.commissions that are recognized over time as earned and are generally based on the market value of investment holdings in trail-eligible assets. Sales-based commission revenues,revenue, which occuroccurs when
clients trade securities or purchase various types of investment products, primarily representrepresents gross commissions generated by our advisors. The levels of sales-based commission revenuesadvisors and can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors'advisors’ clients. Trailing commission revenues (commissions that are paid over time, such as 12(b)-1 fees) are recurring in nature and are earned based on the market value of investment holdings in trail-eligible assets. We earn trailing commission revenuesrevenue primarily on mutual funds and variable annuities held by clients of our advisors.
The following table sets forth See Note 3 - Revenue, within the notes to the consolidated financial statements for further detail regarding our commission revenue by product category, included in our consolidated statements of income (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| 2017 | | 2016 | | 2015 | | $ Change | | % Change | | $ Change | | % Change |
Variable annuities | $ | 672,236 |
| | $ | 686,667 |
| | $ | 774,610 |
| | $ | (14,431 | ) | | (2.1 | )% | | $ | (87,943 | ) | | (11.4 | )% |
Mutual funds | 534,639 |
| | 538,490 |
| | 591,049 |
| | (3,851 | ) | | (0.7 | )% | | (52,559 | ) | | (8.9 | )% |
Alternative investments | 27,112 |
| | 34,927 |
| | 133,092 |
| | (7,815 | ) | | (22.4 | )% | | (98,165 | ) | | (73.8 | )% |
Fixed annuities | 141,290 |
| | 185,060 |
| | 157,975 |
| | (43,770 | ) | | (23.7 | )% | | 27,085 |
| | 17.1 | % |
Equities | 79,180 |
| | 83,696 |
| | 97,505 |
| | (4,516 | ) | | (5.4 | )% | | (13,809 | ) | | (14.2 | )% |
Fixed income | 104,037 |
| | 86,364 |
| | 90,940 |
| | 17,673 |
| | 20.5 | % | | (4,576 | ) | | (5.0 | )% |
Insurance | 71,352 |
| | 74,910 |
| | 81,108 |
| | (3,558 | ) | | (4.7 | )% | | (6,198 | ) | | (7.6 | )% |
Group annuities | 40,437 |
| | 46,526 |
| | 49,890 |
| | (6,089 | ) | | (13.1 | )% | | (3,364 | ) | | (6.7 | )% |
Other | 541 |
| | 795 |
| | 676 |
| | (254 | ) | | (31.9 | )% | | 119 |
| | 17.6 | % |
Total commission revenue | $ | 1,670,824 |
| | $ | 1,737,435 |
| | $ | 1,976,845 |
| | $ | (66,611 | ) | | (3.8 | )% | | $ | (239,410 | ) | | (12.1 | )% |
category.
The following table sets forth the components of our commission revenue by sales-based andfor the periods presented (in thousands): | | | | | | | | | | | | | | |
| Years Ended December 31, | |
| 2023 | 2022 | $ Change | % Change |
Trailing | $ | 1,299,840 | | $ | 1,292,358 | | $ | 7,482 | | 1 | % |
Sales-based | 1,252,783 | | 1,033,806 | | 218,977 | | 21 | % |
Total commission revenue | $ | 2,552,623 | | $ | 2,326,164 | | $ | 226,459 | | 10 | % |
The increase in trailing commission revenue
(dollars in
thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
Sales-based | 2017 | | 2016 | | 2015 | | $ Change | | % Change | | $ Change | | % Change |
Variable annuities | $ | 201,626 |
| | $ | 245,393 |
| | $ | 320,552 |
| | $ | (43,767 | ) | | (17.8 | )% | | $ | (75,159 | ) | | (23.4 | )% |
Mutual funds | 134,327 |
| | 144,199 |
| | 171,622 |
| | (9,872 | ) | | (6.8 | )% | | (27,423 | ) | | (16.0 | )% |
Alternative investments | 14,289 |
| | 28,304 |
| | 125,428 |
| | (14,015 | ) | | (49.5 | )% | | (97,124 | ) | | (77.4 | )% |
Fixed annuities | 121,697 |
| | 174,271 |
| | 151,450 |
| | (52,574 | ) | | (30.2 | )% | | 22,821 |
| | 15.1 | % |
Equities | 79,180 |
| | 83,696 |
| | 97,505 |
| | (4,516 | ) | | (5.4 | )% | | (13,809 | ) | | (14.2 | )% |
Fixed income | 80,919 |
| | 66,647 |
| | 70,430 |
| | 14,272 |
| | 21.4 | % | | (3,783 | ) | | (5.4 | )% |
Insurance | 65,426 |
| | 69,162 |
| | 74,370 |
| | (3,736 | ) | | (5.4 | )% | | (5,208 | ) | | (7.0 | )% |
Group annuities | 4,565 |
| | 5,920 |
| | 7,569 |
| | (1,355 | ) | | (22.9 | )% | | (1,649 | ) | | (21.8 | )% |
Other | 541 |
| | 795 |
| | 676 |
| | (254 | ) | | (31.9 | )% | | 119 |
| | 17.6 | % |
Total sales-based revenue | $ | 702,570 |
| | $ | 818,387 |
| | $ | 1,019,602 |
| | $ | (115,817 | ) | | (14.2 | )% | | $ | (201,215 | ) | | (19.7 | )% |
Trailing | | | | | | | | | | |
|
| |
|
|
Variable annuities | $ | 470,610 |
| | $ | 441,274 |
| | $ | 454,058 |
| | $ | 29,336 |
| | 6.6 | % | | $ | (12,784 | ) | | (2.8 | )% |
Mutual funds | 400,312 |
| | 394,291 |
| | 419,427 |
| | 6,021 |
| | 1.5 | % | | (25,136 | ) | | (6.0 | )% |
Alternative investments | 12,823 |
| | 6,623 |
| | 7,664 |
| | 6,200 |
| | 93.6 | % | | (1,041 | ) | | (13.6 | )% |
Fixed annuities | 19,593 |
| | 10,789 |
| | 6,525 |
| | 8,804 |
| | 81.6 | % | | 4,264 |
| | 65.3 | % |
Fixed income | 23,118 |
| | 19,717 |
| | 20,510 |
| | 3,401 |
| | 17.2 | % | | (793 | ) | | (3.9 | )% |
Insurance | 5,926 |
| | 5,748 |
| | 6,738 |
| | 178 |
| | 3.1 | % | | (990 | ) | | (14.7 | )% |
Group annuities | 35,872 |
| | 40,606 |
| | 42,321 |
| | (4,734 | ) | | (11.7 | )% | | (1,715 | ) | | (4.1 | )% |
Total trailing revenue | $ | 968,254 |
|
| $ | 919,048 |
|
| $ | 957,243 |
|
| $ | 49,206 |
|
| 5.4 | % |
| $ | (38,195 | ) | | (4.0 | )% |
Total commission revenue | $ | 1,670,824 |
|
| $ | 1,737,435 |
|
| $ | 1,976,845 |
|
| $ | (66,611 | ) |
| (3.8 | )% |
| $ | (239,410 | ) | | (12.1 | )% |
2023 compared to 2022 was primarily due to an increase in sales of annuities during the period. The decreaseincrease in sales-based commission revenue in 20172023 compared with 2016to 2022 was primarily due to a decrease in activity for fixed and variable annuities, partially offsetdriven by an increase in sales of annuities and fixed income commissions that were primarily driven by the anticipationsecurities as a result of the federal fundshigher interest rate increases announced in March, June and December 2017 respectively. Fixed and variable annuities commissions were primarily affectedenvironment, partially offset by marketplace uncertainties in response to the DOL Rule, which became applicable on June 9, 2017 but the full implementation date for conditions under related exemptions for which was delayed until July 1, 2019, and changes in commission structures.
Trailing revenues are recurring in nature and the slight increase in 2017 revenue reflects an increase in the market value of the underlying assets.
The decrease in sales-based commission revenue in 2016 compared with 2015 was primarily due to a decrease in activity for alternative investments, variable annuities, and mutual funds. Alternative investment sales commissions were primarily challenged by marketplace uncertainties in response to regulatory changes. Significant market volatility and investor uncertainty in the low interest rate environment led to a decline in demand for variable annuities andof mutual funds and shifted investors' focus from portfolio growth to income streams with minimal risk to principal. This led to the increase in sales of fixed annuities, which pay guaranteed rates of interest and can appeal to investors wary of market volatility.
The slight decrease in 2016 trailing revenues reflects a decrease in the market value of the underlying assets.
equities.
The following table summarizes activity inimpacting brokerage assets for the periods presented (in billions):
| | | | | | | | |
| Years Ended December 31, |
| 2023 | 2022 |
Beginning balance at January 1 | $ | 527.7 | | $ | 563.2 | |
Net new brokerage assets(1) | 28.1 | | 43.5 | |
Market impact(2) | 62.4 | | (79.0) | |
Ending balance at December 31 | $ | 618.2 | | $ | 527.7 | |
____________________ |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance at January 1 | $ | 297.8 |
| | $ | 288.4 |
| | $ | 299.3 |
|
Net new brokerage assets | 10.6 |
| | (7.8 | ) | | (7.6 | ) |
Market impact (1) | 33.7 |
| | 17.2 |
| | (3.3 | ) |
Ending balance at December 31 | $ | 342.1 |
|
| $ | 297.8 |
| | $ | 288.4 |
|
(1)Net new brokerage assets consist of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. | |
(1) | (2)Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, with the remainder representing the implied growth or decline in asset balances due to market changes over the same period of time. |
Advisory Revenues
Advisory revenues primarily represent fees charged on our corporate RIA platform provided through LPL Financial to clients of our advisors based on the value of their advisory assets. Advisory fees are billed to clients at the beginning ofand ending asset balance less the period, on either a calendar quarter or non-calendar quarter basis of their choice, and are recognized as revenue ratably during the quarter. The majority of our accounts are billed in advance using values as of the last business day of each calendar quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three month period. Advisory revenues collected on our corporate RIA platform are proposed by the advisor and agreed to by the client and average 1.0% of the underlying assets. The maximum fees charged for these accounts as of December 31, 2017 was 3.0%.
We also support Hybrid RIAs, through our Hybrid RIA platform, which allows advisors to engage us for technology, clearing, and custody services, as well as access to the capabilities of our investment platforms. Most financial advisors associated with Hybrid RIAs carry their brokerage license with LPL Financial and access our fully-integrated brokerage platform under standard terms, although some financial advisors associated with Hybrid RIAs do not carry a brokerage license with us. The assets held under a Hybrid RIA's investment advisory accounts custodied with LPL Financial are included in our total advisory and brokerage assets, net new advisory assets, and advisory assets under custody metrics. However, the advisory revenue generated by a Hybrid RIA is earned by the Hybrid RIA, and accordingly is not included in our advisory revenue. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services. The administrative fees collected on our Hybrid RIA platform vary and can reach a maximum of 0.6% of the underlying assets as of December 31, 2017.
Furthermore, we support certain financial advisors at broker-dealers affiliated with insurance companies through our customized advisory platforms and charge fees to these advisors based on the value of assets within these advisory accounts.
The following table summarizes activity in advisory assets under custody for the periods presented (in billions):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance at January 1 | $ | 211.6 |
| | $ | 187.2 |
| | $ | 175.8 |
|
Net new advisory assets | 32.8 |
| | 13.7 |
| | 16.7 |
|
Market impact (1) | 28.6 |
| | 10.7 |
| | (5.3 | ) |
Ending balance at December 31 | $ | 273.0 |
|
| $ | 211.6 |
|
| $ | 187.2 |
|
| |
(1) | Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, with the remainder representing the implied growth or decline in asset balances due to market changes over the same period of time. |
Net new advisory assets for the years ended December 31, 2017, 2016, and 2015 had a limited impact on advisory fee revenue for those respective periods. Rather, net new advisory assets are a primary driver of future advisory fee revenue. The revenue for any particular quarter is primarily driven by each of the prior quarter's month-end advisory asset under management.
The growth in advisory revenue from 2016 to 2017 was due to net new advisory assets resultingmarket changes over the same period of time.
Asset-Based
Asset-based revenue consists of fees from our recruiting efforts and strong advisor productivity, as well as market gains. The higher levels of the S&P 500 index,
brokerage to advisory account conversions and the NPH Acquisition all contributed to the growth in our advisory assets during 2017.
The growth in advisory revenueclient cash programs, fees from 2015 to 2016 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity, as well as market gains as represented by higher levels of the S&P 500 index.
Assets on our Hybrid RIA platform have been growing rapidly through the recruiting of new advisors and the transition of existing advisors onto that platform. This continued shift of advisors to our Hybrid RIA platform has caused the growth in advisory revenue to appear to lag behind the rate of growth of advisory assets as we earn administrative and other fees discussed above as opposed to earning advisory fees.
The following table summarizes the composition of total advisory assets under custody for the periods noted (in billions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2017 vs. 2016 | | 2016 vs. 2015 |
| 2017 | | 2016 | | 2015 | | $ Change | | % Change | | $ Change | | % Change |
|
Corporate platform advisory assets | $ | 160.0 |
| | $ | 127.0 |
| | $ | 121.4 |
| | $ | 33.0 |
| | 26.0 | % | | $ | 5.6 |
| | 4.6 | % |
Hybrid platform advisory assets | 113.0 |
| | 84.6 |
| | 65.8 |
| | 28.4 |
| | 33.6 | % | | 18.8 |
| | 28.6 | % |
Total Advisory Assets | $ | 273.0 |
| | $ | 211.6 |
| | $ | 187.2 |
| | $ | 61.4 |
| | 29.0 | % | | $ | 24.4 |
| | 13.0 | % |
Asset-Based Revenues
Asset-based revenues are comprised of our sponsorship programs with financial product manufacturers and fees from omnibus processing and networking services (collectively referred to as “recordkeeping”). Client cash revenue is generated on advisors’ clients’ cash balances in insured bank sweep accounts and fees from cash sweep programs.money market accounts. We also receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales force education and training efforts. Compensation for these performance obligations is either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or a combination. Omnibus processing revenues arerevenue is paid to us by mutual fund product sponsors or their affiliates and areis based on the value of custodiedmutual fund assets in advisory accounts for which the Company provides omnibus processing services and the number of brokerage accounts in which the related mutual fund positions are held. Networking revenuesrevenue on brokerage assets areis correlated to the number of positions we administer and areis paid to us by mutual fund product sponsors and annuity product manufacturers. Pursuant to contractual arrangements, uninvested cash balances in our advisors’ client accounts are swept into either insured cash accounts at various banks or third-party money market funds for which we receive fees, including administrative and recordkeeping fees based on account type and the invested balances.
Asset-based revenuesrevenue for the year ended December 31, 2017,2023 increased to $708.3 million, or 27.3%, from $556.5by $617.5 million compared with the same periodto 2022, primarily due to an increase in 2016. The increase is due primarily to increased revenues from ourclient cash sweep programs. Cash sweep revenues increased to $301.4 millionrevenue. Client cash revenue for the year ended December 31, 2017, from $173.7 million for the year ended December 31, 2016,2023 increased compared to 2022 due to the impact of the increase in the target range forincreases to the federal funds effective rate, partially offset by lower average client cash sweep balances. For the year ended December 31, 2017,2023, our average client cash sweep balances decreased to $28.7$48.8 billion compared to $29.9$61.9 billion for the year ended December 31, 2016.2022.
Asset-based revenues for the year ended December 31, 2016, increased to $556.5 million, or 12.7%,Service and Fee
Service and fee revenue is generated from $493.7 million compared with the same period in 2015. The increase is due primarily to increased revenues from our cash sweep programs. Cash sweep revenues increased to $173.7 million for the year ended December 31, 2016, from $95.3 million for the year ended December 31, 2015, due primarily to the impact of the increase in the target range for the federal funds effective rateadvisor and an increase in average assets in our cash sweep program as investors increased the balances of their assets held in cash in response to the volatility in the financial markets. Our average assets in our cash sweep assets had grown to $29.9 billion from $25.8 billion, an increase of 15.9%, for the years ended December 31, 2016retail investor services, including technology, insurance, conferences, licensing, business services and 2015, respectively. The increase in cash sweep revenue was partially offset by a 3.9% decrease in other asset-based revenues, due in part to lower average billable assets.
Transactionplanning and Fee Revenues
Transaction revenues primarily include fees we charge to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Fee revenues primarily includeadvice services, IRA custodian fees, contract and licensing fees, and other client account fees. In addition, weWe charge separate fees to RIAs on our Independent RIA advisory platform for technology, clearing, administrative, oversight and custody services, which may vary. We also host certain advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee for attendance.
Transactionfee. Service and fee revenuesrevenue for the year ended December 31, 2023 increased in 2017by $41.1 million compared to 20162022, primarily due to a new fee announcedincreases in 2017 for alternative investments, which was effective for 2016 but billedIRA
custodian fees, business services and recordedplanning and advice services fees, and fees relating to confirmations and error and omission insurance.
Transaction
Transaction revenue includes transaction charges generated in 2017,both advisory and a higher volume ofbrokerage accounts from mutual funds, exchange-traded funds and fixed income transactions relatedproducts. Transaction revenue for the year ended December 31, 2023 increased by $18.7 million compared to the federal funds rate2022, primarily due to increases in March, Junethe number of transactions and December 2017,transaction charges for fixed income products, partially offset by a decrease in account termination fees that resulted from an institutional client departure in 2016 that did not repeat in 2017.
Transaction and fee revenues increased in 2016 compared to 2015 primarily due to higher transaction volumes on eligible trades and fees generated from advisory programs due to greater market volatility as well as the increase in account termination fees which resulted from the departure of an institutional client.charges for managed assets.
Interest Income, Net of Interest Expensenet
We earn interest income netprimarily from client margin accountsloans, client cash account (“CCA”) balances segregated under federal or other regulations and cash equivalents. Period-over-period variances are not materialadvisor repayable loans. Interest income, net for the year ended December 31, 2023 increased compared to 2022, primarily due to increases in interest earned on bank deposits, short-term U.S. treasury bills and correspond to changesmargin loans, partially offset by an increase in the average balances of assets in margin accounts and cash equivalents.interest paid on CCA balances.
Other Revenues
Other revenuesrevenue primarily include marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trustsincludes unrealized gains and business development companies, mark-to-market gains or losses on assets held by us for thein our advisor non-qualified deferred compensation plan and our model research portfolios interest income from client margin accounts and cash equivalents, net of operating interest expense, and other miscellaneous revenues.
revenue, which is not generated from contracts with customers. Other revenues increasedrevenue for the year ended December 31, 2017,2023increased by $205.6 million compared to the same period in 20162022, primarily due to an increase of $14.2 million in realized and unrealized gains on assets held in our advisor nonqualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan, partially offset by a decrease in alternative investment marketing allowances.
Other revenues decreased for the year ended December 31, 2016, compared to the same period in 2015 primarily due to decreases in alternative investment marketing allowances of $18.1 million associated with a decline in related sales due to marketplace uncertainties in response to regulatory changes, which were partially offset by an increase of $13.1 million in realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan, and a related increase in dividend income on assets held in our advisor non-qualified deferred compensation plan.
ExpensesExpense
CommissionAdvisory and Commission
Advisory Expenses
Commission and advisory expenses are comprisedcommission expense consists of the following: base payout amounts that are earned by and paid out to advisors and institutionsenterprises based on advisory and commission and advisory revenuesrevenue earned on each client'sclient’s account, (referred to as gross dealer concessions, or “GDC”); productionproduction-based bonuses earned by advisors and institutionsenterprises based on the levels of advisory and commission revenue they produce, compensation and advisory revenues they produce; the recognition ofbenefits paid to employee advisors, share-based compensation expense from equity awards granted to advisors and financial institutionsenterprises based on the fair value of the awards at each reporting period;grant date and the deferred commissionsadvisory and advisorycommission fee expensesexpense associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.
The following table shows the components ofsets forth our production payout and total payout ratios, each ofrate, which is a statistical or operating measure:measure, for the periods presented:
| | | | | | | | | | | |
| Years Ended December 31, | |
| 2023 | 2022 | Change |
Payout rate | 86.97 | % | 87.32 | % | (35) | bps |
|
| | | | | | | | | | | | | | |
| Years Ended December 31, | | Change |
| 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Base payout rate(1) | 82.87 | % | | 82.77 | % | | 83.22 | % | | 10 | bps | | (45 | ) bps |
Production based bonuses | 2.66 | % | | 2.64 | % | | 2.72 | % | | 2 | bps | | (8 | ) bps |
GDC sensitive payout | 85.53 | % | | 85.41 | % | | 85.94 | % | | 12 | bps | | (53 | ) bps |
Non-GDC sensitive payout(2) | 1.14 | % | | 0.50 | % | | 0.11 | % | | 64 | bps | | 39 | bps |
Total payout ratio | 86.67 | % | | 85.91 | % | | 86.05 | % | | 76 | bps | | (14 | ) bps |
_______________________________Our payout rate decreased for the year ended December 31, 2023 compared to 2022, primarily due to the effect of acquisitions during the year and changes in product mix. | |
(1) | Our production payout ratio is calculated as commission and advisory expenses, divided by GDC (see description above). |
| |
(2) | Non-GDC sensitive payoutCompensation and Benefits Compensation and benefits expense includes salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary workers and contractors. The following table sets forth our average number of employees for the periods presented: | | | | | | | | | | | | | Years Ended December 31, | | | 2023 | 2022 | % Change | Average number of employees | 7,669 | 6,524 | 18% |
Compensation and benefits expense from equity awards granted to advisors and financial institutions and mark-to-market gains or losses on amounts designated by advisors as deferred. |
Our total payout ratio increased for the year ended December 31, 20172023increased by $158.9 million compared with the same period in 2016to 2022, primarily due to an increase in non-GDC sensitive payout, which includes advisor deferred compensation and advisor share-based compensation.headcount.
Our total payout ratio for the year ended December 31, 2016 compared with the same period in 2015 remained relatively unchanged but was primarily affected by the transition
Compensation and Benefits ExpensePromotional
Compensation and benefitsPromotional expense includes salaries and wages and related benefits and taxes for our employees (including share-based compensation), as well as compensation for temporary employees and consultants.
|
| | | | | | | | | |
| Years Ended December 31, | | Change |
| 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
Average number of employees | 3,469 | | 3,320 | | 3,382 | | 4.5% | | (1.8)% |
The increase in compensation and benefits for 2017 compared with 2016 was primarily driven by higher recruiter compensation pursuant to incentive compensation plans, an increase in contingent labor for DOL Rule implementation and to support the NPH Acquisition and an increase in salary expense as a result of an increase in headcount and annual merit pay increases, partially offset by an increase in capitalized salary and benefits associated with technology projects.
The decrease in compensation and benefits for 2016 compared with 2015 was primarily driven by the decrease in salaries associated with the decline in our average number of full-time employees combined with an increase in capitalized salary and benefits associated with technology projects, which were offset by increased bonus funding in 2016 compared with 2015.
Promotional Expense
Promotional expenses includebusiness development costs related to ouradvisor recruitment and retention, costs related to hosting of certain advisoradvisory conferences that serve as training, sales and marketing events, as well asand other costs that support advisor business development costs related to recruiting, such as transition assistance and amortization related to forgivable loans issued to advisors.
The increase in promotionalgrowth. Promotional expense for 2017 compared with 2016 was primarily driventhe year ended December 31, 2023 increased by an increase in costs associated with advisor transition assistance and recruiter promotions related to NPH Wave 1 onboarding, partially offset by a decrease in amounts paid as advisor referral bonuses.
The increase in promotional expense for 2016 compared with 2015 was primarily driven by increases in business development expense associated with advisor transition assistance and advisor referral bonuses, partially offset by reduced expenses related to our annual national advisor conference.
Depreciation and Amortization Expense
Depreciation and amortization expense represents the benefits received for using long-lived assets. Those assets consist of fixed assets, which include internally developed software, hardware, leasehold improvements, and other equipment.
The increase in depreciation and amortization of $8.1$119.2 million in 2017 compared to 2016 was2022, primarily due to increases in purchased hardwarerecruited assets and internally developed softwareadvisors that led to higher costs to support transition assistance and a full year of depreciation expense associated with our office buildings in Fort Mill, South Carolina, which were completed in October 2016.
The increase in depreciation and amortization of $2.5 million in 2016 compared to 2015 was primarily due to increases in internally developed software and purchased hardware and software combined with the depreciation expense associated with our office buildings in Fort Mill, South Carolina, which were completed in October 2016.
Amortization of Intangible Assets
Amortization of intangible assets is consistent over prior periods and represents the benefits received for using long-lived assets, which consist of intangible assets established through our acquisitions. We anticipate amortization of intangible assets to increase in 2018 as a result of the intangible assets recorded as part of the NPH Acquisition.retention.
Occupancy and Equipment Expense
Occupancy and equipment expense includes the costs of leasing and maintaining our office spaces, software licensing and maintenance costs, and maintenance expensesexpense on computer hardware and other equipment.
The increase in occupancy Occupancy and equipment expense of $4.4for the year ended December 31, 2023 increased by $28.8 million in 2017 compared to 2016 was2022, primarily due to an increase in costsincreased expense related to repairssoftware licenses and maintenanceour technology portfolio.
Depreciation and Amortization
Depreciation and amortization expense relates to the use of computer hardwareproperty and equipment, as well as an increase in non-capitalizedwhich includes internally developed software, costs in support of our servicehardware, leasehold improvements and technology investments, partially offsetother equipment. Depreciation and amortization expense for the year ended December 31, 2023increased by a decrease in rent expense and software licensing fees.
The increase in occupancy and equipment expense of $8.8$47.2 million in 2016 compared to 2015 was2022, primarily due to an increaseour continued investment in costs relatedtechnology to repairssupport the integrations, enhance our advisor platform and maintenanceexperience, and support onboarding of computer hardwareenterprises.
Interest Expense on Borrowings
Interest expense on borrowings includes the interest associated with the Company’s senior notes, senior secured Term Loan B (“Term Loan B”) and equipment as well as an increase in software licensingrevolving credit facilities; amortization of debt issuance costs; and fees in supportassociated with the Company’s revolving lines of our service and technology investments.
Professional Services
Professional services includes costs paid to outside firmscredit. Interest expense on borrowings for assistance with legal, accounting, technology, regulatory, marketing, and general corporate matters, as well as non-capitalized costs related to service and technology enhancements.
The increase in professional services of $4.3the year ended December 31, 2023 increased by $60.6 million in 2017 compared to 2016 was2022, primarily due to an increaseincreases in costs relatedinterest rates associated with our Term Loan B and revolving credit facilities and higher outstanding debt balances. See Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to outsourced service and technology enhancement projects.the consolidated financial statements for further detail.
The increase in professional servicesAmortization of $2.6Other Intangibles
Amortization of other intangibles represents the benefits received for the use of long-lived intangible assets established through our acquisitions. Amortization of other intangibles for the year ended December 31, 2023 increased by $19.7 million in 2016 compared to 2015 was2022, primarily due to an increaseincreases in costs associated with legal matters, partially offset by a decrease in costs relatedintangible assets resulting from acquisitions. See Note 4 - Acquisitions and Note 9 - Goodwill and Other Intangibles, Net within the notes to outsourced service and technology enhancements.the consolidated financial statements for further detail.
Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees includeexpense includes expenses originating from trading or clearing operations as well as any exchange membership fees. Changes in brokerage, clearing and exchangeThese fees fluctuate largely in line with the volume of sales and trading activity.
Brokerage, clearing and exchange fees have remained relatively flat and consistent with the volume of sales and trading activity in 2017 compared to 2016 and 2016 compared to 2015, respectively.
Communications and Data Processing
Communications expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges, and markets. Data processing expense consists primarily of customer statement processing and postage costs.
Communications and data processing expenses remained relatively flat in 2017 compared to 2016.
The decrease in communications and data processing expenses of $2.4 million in 2016 compared to 2015 was primarily due to reduced data and conferencing services as well as reduced customer statement processing costs.
Restructuring Charges
The restructuring charges for the year ended December 31, 20152023 increased by $19.9 million compared to 2022, primarily represent expenses incurred as a result of our Service Value Commitment initiative, which was completed in 2015. These charges relate primarilydue to consulting fees paid to support our technology transformation as well as employee severance obligations and other related costs and non-cash charges for impairment. Also includedan increase in the 2015 restructuring charges arevolume of trades and expenses incurred as part of the restructuring of our subsidiary, Fortigent Holdings Company, Inc. (together with its subsidiaries, "Fortigent"), which was completed in 2015.for quote services.
Other ExpensesExpense
Other expenses includeexpense includes the estimated costs of the investigation, settlement and resolution of regulatory matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulator fees, travel-related expenses and other miscellaneous expenses. We expect other expenses to increaseOther expense depends in 2018 compared to 2017, including as a result of the greater size and scale of our business resulting from the NPH Acquisition. There are particular uncertainties and complexities involved when assessing the potential costs and timing of regulatory matters, including the availability of self-insurance coverage through our captive insurance subsidiary. Our other expenses in 2018 will dependpart on the size and timing of resolving regulatory matters and the availability of self-insurance coverage, which dependsin turn depend in part on the amount and timing of resolving historical claims.
Other expenses remained relatively flat in 2017expense for the year ended December 31, 2023 increased by $65.5 million compared to 2016.
The decrease2022, primarily due to a $40.0 million regulatory charge recognized in other expensesanticipation of $21.1 million in 2016 compareda potential settlement with the SEC to 2015 was primarily driven by lower costs relatedresolve the civil investigation into compliance with records preservation requirements for business-related electronic communications stored on personal devices applicable to broker-dealer firms and investment advisors and a fair value adjustment to our contingent consideration liabilities. See Note 4 - Acquisitions and Note 14 - Commitments and Contingencies, within the notes to the investigation, settlement, and resolution consolidated financial statements for further detail.
Non-Operating Interest Expense
Non-operating interest expense represents expense for our senior secured credit facilities. Period over period increases correspond to higher LIBOR rates, the fixed interest rate on our senior unsecured notes issued in March and September 2017 and an increase in interest expense related to our leasehold financing obligation, which we began recording in the fourth quarter of 2016, after the completion of the construction of our office buildings in Fort Mill, South Carolina in October 2016.
Loss on Extinguishment of Debt
In September 2017, we entered into a second amendment (the “Amendment”), which amended and restated the existing credit agreement of our subsidiary LPL Holdings, Inc. (“LPLH”) and repriced our existing $500.0 million senior secured revolving credit facility and $1,695.8 million senior secured Term Loan B facility. Additionally, we raised $400.0 million in aggregate principal amount of notes (the “Additional Notes”) as an add-on to the existing senior notes due 2025. We used $200 million in proceeds from the offering to pay down our existing Term Loan B to $1,500 million. In connection with the execution of the Amendment, we accelerated the recognition of $1.3 million of unamortized debt issuance costs as a loss on extinguishment of debt in our consolidated statements of income in the third quarter of 2017.
In March 2017, we closed a refinancing of our senior secured credit facilities with a new seven year Term Loan B facility in an aggregate principal amount of $1,700.0 million and a five year revolving credit facility in an aggregate amount of $500.0 million. The proceeds of the new Term Loan B, together with the proceeds from the offering of $500.0 million aggregate principal amount of 5.75% senior notes (the "Original Notes", which together with the “Additional Notes” constitute the "Notes") and cash, were used to repay our then existing senior secured credit facilities and to pay accrued interest and related fees and expenses. The refinancing led to the extinguishment of the previous Term Loan A and B facilities, which required that we accelerate the recognition of $21.1 million of related unamortized debt issuance costs, and recognize that amount as a loss on extinguishment of debt in our consolidated statements of income in the first quarter of 2017.
Provision for Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (H.R. 1), the tax reform bill (the "Tax Act"), was signed into law. The Tax Act includes numerous changes in existing tax law, including a permanent reduction in our federal corporate income tax rate from 35% to 21%. The rate reduction takes effect on January 1, 2018.
As a result of the reduction of the federal corporate income tax rate, we were required to revalue our deferred tax assets and deferred tax liabilities to account for the future impact of lower corporate tax rates on these deferred amounts. Based on available information, we recorded a one-time net tax benefit of $8.8 million primarily related to the revaluation of these deferred tax items. This decrease in income tax expense is reflected in our operating results for the fourth quarter of 2017. We will continue to analyze the Tax Act to determine the full effects of the new law, including the new lower corporate tax rate, on our financial statements.
Our effective income tax rate was 34.5%, 35.5%,26.2% and 40.3%23.9% for 2017, 2016,the years ended December 31, 2023 and 2015,2022, respectively.
The decreaseincrease in our effective income tax rate in 2017 compared to 2016for the year ended December 31, 2023 was primarily due to a decreased benefit from share-based compensation recognized during the tax benefit associated with the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting on January 1, 2017 and the revaluation of our deferred tax assets and liabilities under the Tax Act, partially offset by tax benefits recorded during 2016 associated with internally developed software that was not repeatedyear as well as an increase in 2017.
The decrease in our effective income tax rate and income tax expense in 2016 compared to 2015 was primarilynon-deductible expenses due to tax benefits associated with internally developed software that we determined in 2016.the $40.0 million regulatory charge described above. See Note 14 - Commitments and Contingencies, within the notes to the consolidated financial statements for further detail.
Liquidity and Capital Resources
Senior management establishes ourWe have established liquidity and capital policies. These policies include senior management’s review of short- and long-term cash flow forecasts, review of monthly capital expenditures, and daily monitoring of liquidity for our subsidiaries. Decisions on the allocation of capital are based upon, among other things, projected profitability and cash flow, risks of the business, regulatory capital requirements, and future liquidity needs for strategic activities. Our Treasury department assists in evaluating, monitoring, and controlling the business activities that impact our financial condition, liquidity and capital structure and maintains relationships with various lenders. The objectives of these policies areintended to support the execution of business strategiesstrategic initiatives, while ensuringmeeting regulatory capital requirements and maintaining ongoing and sufficient liquidity. We believe liquidity is of critical importance to the Company and, in particular, to LPL Financial, our primary broker-dealer subsidiary. The objective of our policies is to ensure that we can meet our strategic, operational and regulatory liquidity and capital requirements under both normal operating conditions and under periods of stress in the financial markets.
A summary of changes in cash flow data is provided below (in thousands):Liquidity
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Net cash flows provided by (used in): | | | | | |
Operating activities | $ | 443,779 |
| | $ | 274,837 |
| | $ | 279,451 |
|
Investing activities | (437,692 | ) | | (125,286 | ) | | (74,948 | ) |
Financing activities | 57,340 |
| | (126,371 | ) | | 107,694 |
|
Net increase in cash and cash equivalents | 63,427 |
| | 23,180 |
| | 312,197 |
|
Cash and cash equivalents — beginning of year | 747,709 |
| | 724,529 |
| | 412,332 |
|
Cash and cash equivalents — end of year | $ | 811,136 |
| | $ | 747,709 |
| | $ | 724,529 |
|
Cash requirements andOur liquidity needs are primarily funded throughdriven by capital requirements at LPL Financial, interest due on our cash flow from operationscorporate debt and other capital returns to stockholders. Our liquidity needs at LPL Financial are driven primarily by the level and volatility of our capacity for additional borrowing.
Net cash provided by or used in operating activities includes changes in operating assetsclient activity. Management maintains a set of liquidity sources and liabilities, including balances related to settlement and funding of client transactions, receivables from product sponsors, and accrued commission and advisory expenses due to our advisors. Operating assets and liabilities that arise from the settlement and funding of transactions by our advisors’ clients are the principal cause of changes to our net cash from operating activities and can fluctuate significantly from day to day and period to period depending on overallmonitors certain business trends and clients' behaviors.
The increasemarket metrics closely in cash flows provided by operating activities for 2017 comparedan effort to 2016 was primarily due to increases in cash provided by accrued commission and advisory expenses payable, accounts payable and accrued liabilities, cash and securities segregated under federal and other regulations and a decrease in cash used by advisor loans, partially offset by an increase in cash used by payables to broker-dealers and clearing organizations.
The decrease in cash flows provided by operating activities for 2016 compared to 2015 was primarily due to increases in client receivables, an increase in receivables from product sponsors, and an increase in advisor loans, partially offset by an increase in payables to clients, an increase in payables to broker-dealers and clearing organizations and accounts payable and accrued liabilities.
The increase in cash flows used in investing activities for 2017 compared to 2016 is primarily attributable to the $325 million payment made at the closing of the NPH Acquisition.
The increase in cash flows used in investing activities for 2016 compared to 2015 was primarily due to an increase in capital expenditure related to the construction of the Company's office buildings in Fort Mill, South Carolina and an increase in capital expenditures for technology to support growth.
The increase in cash flows provided by financing activities for 2017 compared to the same period in 2016 was primarily attributable to proceeds from our September 2017 debt refinancing and an increase in proceeds from stock option exercises, partially offset by an increase in repurchases of our common stock and debt issuance costs incurred in connection with our debt refinancings completed in March and September 2017.
The increase in cash flows used in financing activities for 2016 compared to 2015 was primarily due to an increase in repayment of senior secured credit facilities, a decrease in proceeds from our revolving credit facility, and a decrease in proceeds from stock option exercises, partially offset by a decrease in repurchase of our common stock under our repurchase programs approved by our board of directors and a decrease in dividends due to lower number of shares outstanding in 2016 compared to 2015.
ensure we have sufficient liquidity. We believe that based on current levels of cash flows from operations and anticipated growth, cash flow from operations, together with other available cash balances and external liquidity sources, of funds, which include three uncommitted lines of credit available and the revolving credit facility established through our Credit Agreement, will bewe have adequate liquidity to satisfy our short-term and long-term working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures.
Parent Company Liquidity
LPL Holdings, Inc. (the “Parent”), the direct holding company of our operating subsidiaries, considers its primary sources of liquidity to be dividends from and excess capital generated by LPL Financial, as well as capacity for additional borrowing under its $2.0 billion secured revolving credit facility, which it has the ability to borrow against for working capital and general corporate purposes.
Dividends from and excess capital generated by LPL Financial are primarily generated through our cash flow from operations. Subject to regulatory approval or notification, capital generated by regulated subsidiaries can be distributed to the Parent to the extent the capital levels exceed regulatory requirements and internal capital thresholds. During the years ended December 31, 2023 and 2022, LPL Financial paid dividends of $710.0 million and $1.1 billion to the Parent, respectively.
We believe Corporate Cash, a component of cash and equivalents, is a useful measure of the Parent’s liquidity as it represents the capital available for use in excess of the amount we are required to maintain pursuant to the Credit Agreement. Corporate Cash is the sum of cash and equivalents from the following: (1) cash and equivalents held at the Parent, (2) cash and equivalents held at regulated subsidiaries as defined by the Credit Agreement, which include LPL Financial and PTC, in excess of the capital requirements of the Credit Agreement (which, in the case of LPL Financial, is net capital in excess of 10% of its aggregate debits, or five times the net capital required in accordance with Exchange Act Rule 15c3-1) and (3) cash and equivalents held at non-regulated subsidiaries.
The following table presents the components of Corporate Cash (in thousands):
| | | | | | | | |
| December 31, 2023 | December 31, 2022 |
Cash and equivalents | $ | 465,671 | | $ | 847,519 | |
Cash at regulated subsidiaries | (410,313) | | (392,571) | |
Excess cash at regulated subsidiaries per the Credit Agreement | 128,327 | | 4,439 | |
Corporate Cash | $ | 183,685 | | $ | 459,387 | |
| | |
Corporate Cash | | |
Cash at the Parent | $ | 26,587 | | $ | 448,180 | |
Excess cash at regulated subsidiaries per the Credit Agreement | 128,327 | | 4,439 | |
Cash at non-regulated subsidiaries | 28,771 | | 6,768 | |
Corporate Cash | $ | 183,685 | | $ | 459,387 | |
Corporate Cash is monitored as part of our liquidity risk management. We target maintaining approximately $200 million in Corporate Cash, which covers approximately 12 months of principal and interest due on our corporate debt. The decrease in Corporate Cash during the year ended December 31, 2023 was driven primarily by investments in the business, including acquisitions and capital expenditures, forand capital returns to shareholders in the foreseeable future. In addition, we have certain capital adequacy requirements dueform of dividends and share repurchases offset by increases in cash resulting from operating activities and net borrowing.
We actively monitor changes to our registered broker-dealer subsidiaryliquidity needs caused by general business volumes and bank trust subsidiaryprice volatility, including higher margin requirements of clearing corporations and have metexchanges, and stress scenarios involving a sustained market downturn and the persistence of current interest rates. We believe that based on current levels of operations and anticipated growth, our cash flow from operations, together with other available sources of funds, which include five uncommitted lines of credit, the revolving credit facility established through our Credit Agreement and the committed revolving credit facility of LPL Financial, will provide us with adequate liquidity to satisfy our short-term and long-term working capital needs, the payment of all such requirementsof our obligations and expect to continue to do so for the foreseeable future. funding of anticipated capital expenditures.
We regularly evaluate our existing indebtedness, including potential issuances and refinancing thereof,opportunities, based on a number of factors, including our capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms and general market conditions. As of December 31, 2023, the earliest principal maturity date for our corporate debt with outstanding balances is in 2026 and our revolving credit facilities and uncommitted lines of credit mature between 2024 and 2026.
Share Repurchases
We engage in a share repurchase programs, which areprogram that was approved by our Board, of Directors, pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effected in open market or privately negotiated transactions, including transactions withtransactions. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate and returning excess capital to stockholders. We repurchased 5,075,900 shares for a total of $1.1 billion for the year ended December 31, 2023. As of December 31, 2023 we had $900.0 million remaining under our affiliates, with theexisting repurchase program. The timing of purchases and the amount of stock purchased generallyshare repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, the Indenture governingapplicable laws and consideration of our Notes, and general operatingliquidity needs. See Note 13.15 - Stockholders’ Equity, within the notes to the consolidated financial statements for additional information regarding our share repurchases.
Common Stock Dividends
The payment, timing and amount of any dividends are subject to approval by ourthe Board, as well as certain limits under our credit facilities. Credit Agreement. The Board approved an increase to the quarterly cash dividend to $0.30 per share beginning in the first quarter of 2023.See Note 13.15 - Stockholders’ Equity, within the notes to the consolidated financial statements for additional information regarding our dividends.
Operating
LPL Financial Liquidity
LPL Financial relies primarily on client payables to fund margin lending. LPL Financial maintains additional liquidity through external lines of credit totaling $1.2 billion at December 31, 2023. LPL Financial also maintains a line of credit with the Parent.
External Liquidity Sources
The following table presents amounts outstanding and available under our external lines of credit at December 31, 2023 (in millions):
| | | | | | | | | | | | | | |
Description | Borrower | Maturity Date | Outstanding | Available |
Senior secured, revolving credit facility | LPL Holdings, Inc. | March 2026 | $ | 280 | | $ | 1,720 | |
Broker-dealer revolving credit facility | LPL Financial LLC | July 2024 | $ | — | | $ | 1,000 | |
Unsecured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | $ | 75 | |
Unsecured, uncommitted lines of credit | LPL Financial LLC | September 2024 | $ | — | | $ | 50 | |
Secured, uncommitted lines of credit | LPL Financial LLC | March 2025 | $ | — | | $ | 75 | |
Secured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | unspecified |
Secured, uncommitted lines of credit | LPL Financial LLC | None | $ | — | | unspecified |
Capital RequirementsResources
The Company seeks to manage capital levels in support of its business strategy of generating and effectively deploying capital for the benefit of our stockholders.
Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds we are required to maintain for regulatory capital and reserves based on the requirements of our regulators and clearing organizations, which also consider client balances and trading activities. We have several sources of funds that enable us to meet increases in working capital requirements that relate to increases in client margin activities and balances. These sources include cash and cash equivalents on hand, cash and securities segregated under federal and other regulations,the committed revolving credit facility of LPL Financial and proceeds from re-pledgingrepledging or selling client securities in margin accounts. When an advisor'sadvisor’s client purchases securities on margin or uses securities as collateral to borrow from us on margin, we are permitted, pursuant to the applicable securities industry regulations, to repledge, loan or sell securities, up to 140% of the client'sclient’s margin loan balance, that collateralize those margin accounts. As of December 31, 2017, we had approximately $270.9 million of client margin loans, collateralized with securities having a fair value of approximately $379.2 million that we can repledge, loan, or sell. Of these securities, approximately $49.9 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of December 31, 2017 there were no restrictions that materially limited our ability to repledge, loan, or sell the remaining $329.3 million of client collateral.
Our other working capital needs are primarily related to advisor loans we are making to advisors and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows. We intend to use $200
million of the proceeds from our September 2017 debt refinancing for general corporate purposes, including funding costs related to the NPH Acquisition.
Notwithstanding the self-funding nature of our operations, weWe may sometimes be required to fund timing differences arisingcapital requirements necessary to effect client transactions in securities markets and cash sweep balances held at third-party banks that arise from the delayed receipt of client funds associated with the settlement of client transactions in securities markets.funds. These timing differencescapital requirements are funded either with internally generated cash flowflows or, if needed, with funds drawn on our uncommitted lines of credit at our broker-dealer subsidiary LPL Financial or underone of our revolving credit facility.facilities.
Our registered broker-dealer LPL Financial, issubsidiaries are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital. LPL Financial, our primary broker-dealer subsidiary, computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital as defined, equal to the greater of $250,000 or 2.0%2% of aggregate debit balances arising from client transactions. At December 31, 2017, LPL Financial had
The following table presents the net capital position of $99.5 million with a minimum net capital requirementthe Company’s primary broker-dealer subsidiary (in thousands):
| | | | | |
| December 31, 2023 |
LPL Financial LLC | |
Net capital | $ | 205,314 | |
Less: required net capital | 16,678 | |
Excess net capital | $ | 188,636 | |
Payment by our broker-dealer subsidiaries of $7.8 million.
LPL Financial's ability to pay dividends greater than 10% of itstheir respective excess net capital during any 35 day35-day rolling period requires approval from FINRA. In addition, payment ofeach broker-dealer subsidiary’s ability to pay dividends iswould be restricted if LPL Financial'sits net capital would be less than 5.0%5% of aggregate customer debit balances.
LPL Financial also acts as an introducing brokerbroker-dealer for commodities and futures. Accordingly, its trading activities are subject to the NFA'sNFA’s financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA'sNFA’s minimum financial requirements. The NFA was designated by the CFTCCommodity Futures Trading Commission as LPL Financial'sFinancial’s primary regulator for such activities. Currently, the highest NFA requirement is the minimum net capital calculated and required pursuant to the SEC'sSEC’s Uniform Net Capital Rule.
Our subsidiary PTC is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can initiateresult in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC'sPTC’s operations.
Supplemental Guarantor Financial Information The Company filed a registration statement on Form S-3 to register, among other things, non-convertible debt securities that may be offered by LPL Holdings, Inc. (the “Issuer”), a wholly owned subsidiary of LPLFH (together with the Issuer, the “Obligor Group”), and full and unconditional guarantees by LPLFH of such debt securities. The debt securities issued by the Issuer pursuant to such registration statement are fully and unconditionally guaranteed by LPLFH. LPLFH is a Delaware holding corporation that manages substantially all of its operations through investments in subsidiaries. See Note 1 - Organization and Description of the Company andNote 11- Corporate Debt and Related Covenants
On September 21, 2017, we entered into the Amendment and refinanced our existing $500.0 million senior secured revolving credit facility and $1,695.8 million of existing senior secured Term Loan B facility. Additionally, we raised $400.0 million in aggregate principal amount of Additional Notes as an add-on to the Original Notes. The Additional Notes are governed by the same indenture, and have the same terms, as the Original Notes. We used $200 million in proceeds from the offering to pay down our Term Loan B to $1,500 million.
On March 10, 2017, we entered into a fourth amendment agreement, which amended and restated our then-existing credit agreement and refinanced our then outstanding senior secured credit facilities with a new seven year Term Loan B facility in an aggregate principal amount of $1.7 billion and a five year revolving credit facility in an aggregate principal amount of $500.0 million. The proceeds of the new Term Loan B, together with the proceeds from the offering of $500.0 million aggregate principal amount of Original Notes and cash, were used to repay our then existing senior secured credit facilities and to pay accrued interest and related fees and expenses. As of December 31, 2017 our revolving credit facility had no outstanding borrowings. See Note 10. DebtOther Borrowings, Net, within the notes to the consolidated financial statements for further detail.additional information.
Pursuant to Rule 3-10 of Regulation S-X under the Securities Act of 1933, as amended, the following tables present summarized financial information for the Obligor Group on a combined basis. Balances and transactions between the Obligor Group have been eliminated. Financial information for non-guarantor subsidiaries, which includes all other subsidiaries of the Issuer, has been excluded and intercompany balances and transactions between the Obligor Group and non-guarantor subsidiaries are presented on separate lines. The summarized financial information below should be read in conjunction with the Company’s consolidated financial statements contained herein as the summarized financial information for the Obligor Group may not be indicative of results of operations or financial position of the Issuer or LPLFH had they operated as independent entities.
The following tables present the summarized financial information for the periods presented (in thousands):
| | | | | |
| LPL Holdings, Inc. & LPL Financial Holdings Inc. |
Combined Summarized Statements of Income | Year Ended December 31, 2023 |
Revenues(1) | $ | 105,631 | |
Revenues from non-guarantor subsidiaries | 21,340 | |
Advisory and commission expense(1) | 104,987 | |
Interest expense on borrowings | 182,559 | |
Expenses from non-guarantor subsidiaries | 14,034 | |
Loss before provision for income taxes | (251,223) | |
Net loss | (185,794) | |
____________________(1)Revenues primarily include unrealized gains and losses on assets held in the non-qualified deferred compensation plan offered to advisors and employees, while advisory and commission expense includes the deferred advisory and commission fee expense associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to advisors.
| | | | | | | | | |
| LPL Holdings, Inc. & LPL Financial Holdings Inc. | |
Combined Summarized Statements of Financial Condition | December 31, 2023 | December 31, 2022 | |
Cash and equivalents | $ | 26,587 | | $ | 448,180 | | |
Other receivables, net | 2,793 | | 10,926 | | |
Property and equipment, net | 154,920 | | 165,649 | | |
Goodwill | 1,251,908 | | 1,251,908 | | |
Other intangibles, net | 95,461 | | 123,435 | | |
Receivables from non-guarantor subsidiaries | 153,377 | | 86,069 | | |
Other assets | 1,017,289 | | 705,048 | | |
Corporate debt and other borrowings, net | 3,734,111 | | 2,717,444 | | |
Accounts payable and accrued liabilities | 53,817 | | 32,060 | | |
Payables to non-guarantor subsidiaries | 76,683 | | 67,135 | | |
Other liabilities | 986,274 | | 839,479 | | |
Debt and Related Covenants
The Credit Agreement and the Indenture governing the Notes containcontains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
•incur additional indebtedness or issue disqualified stock or preferred stock;
•declare dividends, or other distributions to shareholders;stockholders;
•repurchase equity interests;
•redeem indebtedness that is subordinated in right of payment to certain debt instruments;
•make investments or acquisitions;
•create liens;
•sell assets;
•guarantee indebtedness;
•engage in certain transactions with affiliates;
•enter into agreements that restrict dividends or other payments from subsidiaries; and
•consolidate, merge or transfer all or substantially all of our assets.
Our Credit Agreement allows us to pay dividends and distributions or repurchase our common stock only when certain conditions are met. In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, a non-GAAP financial measure, isas defined in, and calculated by management in accordance with, the Credit Agreement. The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA”,EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense tax expense,on borrowings, provision for income taxes, depreciation and amortization and amortization of other intangibles, and is further adjusted to exclude certain non-cash charges and other adjustments, (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions, including the NPH Acquisition. We presenttransactions.
As of December 31, 2023, we were in compliance with our Credit Agreement EBITDA because we believe that it can be a useful financial metric in understanding our debt capacity and covenant compliance. However, Credit Agreement EBITDA is not a measure of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, our Credit Agreement-defined EBITDA measure can differ significantly from adjusted EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions incovenants, which companies operate, capital investments, and types of adjustments made by such companies.
Set forth below is a reconciliation from our net income to Credit Agreement EBITDA for the twelve months ended December 31, 2017 (in thousands): |
| | | |
Net income | $ | 238,863 |
|
Non-operating interest expense | 107,025 |
|
Provision for income taxes | 125,707 |
|
Loss on extinguishment of debt | 22,407 |
|
Depreciation and amortization | 84,071 |
|
Amortization of intangible assets | 38,293 |
|
EBITDA | 616,366 |
|
Credit Agreement Adjustments: | |
Employee share-based compensation expense(1) | 19,413 |
|
Advisor share-based compensation expense(2) | 9,109 |
|
NPH run-rate EBITDA accretion(3) | 42,500 |
|
NPH onboarding costs | 31,831 |
|
Other(4) | 26,117 |
|
Credit Agreement EBITDA(5) | $ | 745,336 |
|
| |
(1) | Represents share-based compensation for equity awards granted to employees, officers, and directors. Such awards are measured based on the grant-date fair value and recognized over the requisite service period of the individual awards, which generally equals the vesting period. |
| |
(2) | Represents share-based compensation for equity awards granted to advisors and to financial institutions based on the fair value of the awards at each reporting period. |
| |
(3) | Represents estimated potential future cost savings, operating expense reductions or other synergies included in Credit Agreement EBITDA in accordance with the Credit Agreement relating to the NPH Acquisition. Such amounts do not represent actual performance and there can be no assurance that any such cost savings, operating expense reductions or other synergies will be realized. |
| |
(4) | Represents items that are adjustable in accordance with the Credit Agreement to calculate Credit Agreement EBITDA, including employee severance costs, employee signing costs, employee retention or completion bonuses, and other non-recurring costs. |
| |
(5) | Under the Credit Agreement, management calculates Credit Agreement EBITDA for a four-quarter period at the end of each fiscal quarter, and in so doing may make further adjustments to prior quarters. |
Our Credit Agreement and the Indenture governing the Notes prohibit us from paying dividends and distributions or repurchasing our capital stock except for limited purposes or in limited amounts. In addition, our revolving credit facility requires compliance withinclude a maximum Consolidated Total Debt to Consolidated EBITDA Ratio ("Leverage Test", as(as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio ("Interest Coverage", as(as defined in the Credit Agreement), tested as of the last day of each fiscal quarter. or “Interest Coverage.” The breach of this covenantthese financial covenants would be subject to certain equity cure rights.
As of December 31, 2017 we were in compliance with both of our financial covenants. The maximum permittedrequired ratios under our financial covenants and actual ratios were as follows:
| | | | | | | | |
| December 31, 2023 |
Financial Ratio | Covenant Requirement | Actual Ratio |
Leverage Ratio (Maximum) | 4.0 | 1.63 |
Interest Coverage (Minimum) | 3.0 | 12.54 |
|
| | | | |
| | December 31, 2017 |
Financial Ratio | | Covenant Requirement | | Actual Ratio |
Leverage Test (Maximum) | | 5.0 | | 2.81 |
Interest Coverage (Minimum) | | 3.0 | | 7.50 |
Off-Balance Sheet Arrangements
We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needsCertain restrictive covenants under certain of our advisors’ clients. These arrangements include Company commitmentsIndentures are currently suspended. However, a credit rating downgrade to extend credit. For information on these arrangements, seea below investment grade rating could cause currently suspended restrictive covenants under certain of our Indentures to be automatically reinstated.
See Note 1211 - . CommitmentsCorporate Debt and Contingencies Other Borrowings, Netand Note 19. Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk,, within the notes to the consolidated financial statements.statements for further detail regarding the Credit Agreement.
Contractual Obligations
The following table provides information with respect to our commitments and obligations as of December 31, 20172023 (in thousands):
| | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | < 1 Year | 1-3 Years | 3-5 Years | > 5 Years |
Operating leases(1) | $ | 148,205 | | $ | 28,483 | | $ | 54,413 | | $ | 52,539 | | $ | 12,770 | |
Finance leases(1) | 242,366 | | 8,727 | | 17,914 | | 18,547 | | 197,178 | |
Purchase obligations(2) | 274,023 | | 135,217 | | 114,645 | | 24,161 | | — | |
Corporate debt and other borrowings, net(3) | 3,757,200 | | 10,700 | | 1,296,500 | | 1,150,000 | | 1,300,000 | |
Interest payments(4) | 912,324 | | 217,414 | | 406,410 | | 226,750 | | 61,750 | |
Commitment and other fees(5) | 12,639 | | 6,346 | | 6,293 | | — | | — | |
Total contractual cash obligations | $ | 5,346,757 | | $ | 406,887 | | $ | 1,896,175 | | $ | 1,471,997 | | $ | 1,571,698 | |
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | < 1 Year | | 1-3 Years | | 4-5 Years | | > 5 Years |
| | | | (In thousands) | | | |
Leases and other obligations(1)(2) | $ | 480,359 |
| | $ | 63,430 |
| | $ | 81,520 |
| | $ | 65,157 |
| | $ | 270,252 |
|
Long-term borrowings(3) | 2,396,250 |
| | 14,906 |
| | 29,369 |
| | 28,787 |
| | 2,323,188 |
|
Interest payments(4) | 786,580 |
| | 108,549 |
| | 215,405 |
| | 213,186 |
| | 249,440 |
|
Commitment and other fees(5) | 12,016 |
| | 1,848 |
| | 3,576 |
| | 3,516 |
| | 3,076 |
|
Total contractual cash obligations | $ | 3,675,205 |
| | $ | 188,733 |
| | $ | 329,870 |
| | $ | 310,646 |
| | $ | 2,845,956 |
|
____________________
| |
(1) | Includes long-term contractual obligations with third-party service providers. The table above includes the minimum due over the duration of the contract. |
| |
(2) | Future minimum payments for applicable leases have not been reduced by minimum sublease rental income of $14.2 million due in the future under noncancelable subleases. See Note 12. Commitment and Contingencies, within the notes to consolidated financial statements for further detail on operating lease obligations and obligations under noncancelable service contracts.
|
| |
(3) | Represents principal payments under our Credit Agreement. See Note 10. Debt,(1)Represents future payments under operating or finance leases, respectively. See Note 12 - Leases, within the notes to the consolidated financial statements for further detail. (2)Includes future minimum payments under service, development and agency contracts and other contractual obligations. See Note 14 - Commitments and Contingencies, within the notes to the consolidated financial statements for further detail on obligations under non-cancelable service contracts. (3)Represents principal payments on our corporate debt and other borrowings. See Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to the consolidated financial statements for further detail. (4)Represents interest payments under our Credit Agreement, which include a variable interest payment for our senior secured credit facilities and a fixed interest payment for our senior unsecured notes. Variable interest payments assume the applicable interest rates at December 31, 2023 remain unchanged. See Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to the consolidated financial statements for further detail. (5)Represents commitment fees for unused borrowings on the revolving credit facility under our Credit Agreement. See Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to the consolidated financial statements for further detail. |
| |
(4) | Represents interest payments under our Credit Agreement, which includes a variable interest payment for our senior secured credit facilities and a fixed interest payment for senior unsecured notes. Variable interest payments assume the applicable interest rates at December 31, 2017 remain unchanged. See Note 10. Debt, within the notes to consolidated financial statements for further detail.
|
| |
(5) | Represents commitment fees for unused borrowings on the revolving credit facility under our Credit Agreement and interest payments for our letter of credit. See Note 10. Debt, within the notes to consolidated financial statements for further detail.
|
As of December 31, 2017,2023, we have a liability for unrecognized tax benefits of $42.7$61.6 million, which we have included in income taxes payableother liabilities in the consolidated statements of financial condition. This amount has been excluded from the contractual obligations table because we are unable to reasonably predict the ultimate amount or timing of future tax payments.
Risk is an inherent part of our businesses and activities. To effectively manage these risks, we have an ERM framework designed to facilitate the incorporation of risk assessment into decision-making processes across the Company, enable execution our business strategy, and protect our Company and its franchise. This framework aims to ensure policies and procedures are in place and appropriately designed to identify and manage risk at appropriate levels throughout our organization and within various departments.
Fair ValueOur framework is designed to promote clear lines of Financial Instrumentsrisk management ownership and accountability while providing a structured escalation process for key risk information and events. Additionally, risk is managed and monitored within business units by embedded risk groups providing guidance on governance, controls, policies and other risk management activities.
We use fair value measurementsoperate a three lines of defense model to recordmanage risk throughout the organization. Primary ownership for risk and control processes is with the business units and control owners, who are the first line of defense in effectively managing risks, and who are responsible for day-to-day compliance and risk management, including execution of operating and supervisory procedures. These business units and certain financial assetscontrol owners implement and liabilities at fair valueexecute controls to manage risk, execute risk assessments, identify emerging risks and comply with risk management policies. Within these business units a risk management function monitors, provides guidance and works with the business units and control owners to determine fair value disclosures. See Note 4. Fair Value Measurements,deploy risk management ownership within the notesfirst line of defense. The second line of defense consists of certain functions within our Finance and Business Operations department, which provides risk oversight and compliance, and Legal department, which provides related legal counsel. The third line of defense is independent verification of the effectiveness of risk management practices and internal controls and is conducted by the Internal Audit department.
Our risk management governance approach includes the Board and certain of its committees; our ROC and its subcommittees; and our three lines of defense model. We regularly reevaluate and, when necessary, modify our processes to consolidated financial statementsimprove the identification and escalation of risks and events.
In addition to the ERM framework, we also have written policies and procedures that govern the conduct of business by our advisors, employees and the terms and conditions of our relationships with product manufacturers. Our client and advisor policies address the extension of credit for client accounts, data, cyber and physical security, compliance with industry regulations and codes of conduct and ethics to govern employee and advisor conduct, among other emerging risk types.
Risk Governance Structure
Audit and Risk Committee of the Board
The ARC oversees and monitors, among other things, the Company’s enterprise risk management (except for risks assigned to other committees of the Board or retained by the Board), and is responsible for reviewing and assessing the Company’s processes to manage and control risk. In this capacity, the ARC reviews reports from risk-focused management committees; reviews emerging risks and regulatory matters; and reviews Internal Audit reports on the assessment of the Company’s control environment. The ARC reports to the Board on a regular basis and coordinates with the Board and other Board committees with respect to the oversight of risk management and risk assessment guidelines.
Compensation and Human Resources Committee of the Board
In addition to its other responsibilities, the Compensation and Human Resources Committee of the Board assesses whether our compensation arrangements encourage inappropriate risk-taking, and whether risks arising from our compensation arrangements are reasonably likely to have a material adverse effect on the Company.
Risk Oversight Committee of LPL Financial
The ROC, a management committee chaired by the chief risk officer, oversees our risk management activities, including those of our subsidiaries. The chief risk officer of LPL Financial serves as chair of the ROC, which generally meets once every two months, with additional ad hoc meetings as necessary. The members of the ROC include certain Managing Directors of LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex-officio members and represent key control areas of the Company. Participation in the ROC by senior officers is intended to ensure that the ROC covers the key risk areas of the Company, including its subsidiaries, and that the ROC thoroughly reviews significant matters relating to risk priorities, policies, control procedures and related exceptions, certain new and complex products and business arrangements, transactions with significant risk elements and identified emerging risks.
The chief risk officer provides updates on pertinent ROC discussions to the Audit and Risk Committee on a regular basis and, if necessary or requested, to the Board.
Subcommittees of the Risk Oversight Committee
The ROC has established multiple subcommittees to support effective supervision of our risk exposures and processes. The subcommittees meet regularly and are responsible for keeping the ROC informed and escalating issues in accordance with the Company’s escalation protocols. The responsibilities of such subcommittees include, for example, oversight of operational risk; oversight of the approval of new and complex investment products offered to advisors’ clients; oversight of the firm’s technology; and issues and trends related to advisor compliance.
Internal Audit Department
As the third line of defense, the Internal Audit department provides independent and objective assurance of the effectiveness of the Company’s governance, risk management and internal controls by conducting risk assessments and audits designed to identify and cover important risk categories. Internal Audit reports directly to the ARC, which provides oversight of Internal Audit’s activities and approves its annual plan. The Internal Audit department reports to the ARC at least quarterly.
Operational Risk
Operational Risk is reviewed, monitored and challenged by the Operational Risk Oversight Committee (the “OROC”), which is a subcommittee of the ROC. Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems, actions by people or external events. We are exposed to a variety of operational risks and actively monitor and manage them across the following risk categories:
•Information Security & Cybersecurity Risk – the potential disclosure, misuse or loss of our data (including client data) that may adversely impact the availability, integrity and/or confidentiality of our data or information through unintentional or malicious acts, either internal or external.
•Information Technology Risk – the potential for a detail discussion regardingtechnology failure, obsolescence or improper operation of our fair value measurements.technology systems.
•Third Party Risk – the risk of exposure caused by our reliance on third-party service providers to execute critical processes. •General Operational Risk – all other types of operational risks not detailed above, including external or internal fraud, execution, process or internal control failures, business disruptions unrelated to technology, or human capital risk, such as key person dependencies.
Regulatory and Legal Risk
The regulatory environment in which we operate is discussed in detail within Part I, “Item 1. Business” of this Annual Report on Form 10-K. In recent years, and during the period presented in this Annual Report on Form 10-K, we have observed the SEC, FINRA, DOL and state regulators broaden the scope, frequency and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance systems and programs. Please consult the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A. Risk Factors” for more information about the risks associated with operating within our regulatory environment, pending regulatory matters and the potential related effects on our operations.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which requirerequires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that of ourconsider the following critical accounting policies the following are noteworthyto be most significant because they involve a higher degree of judgment and complexity and require management to make estimates regarding matters that are uncertain and susceptible to change where such change may result in a material adverse impact on our financial position and reported financial results:condition or results of operations.
Revenue Recognition
Revenue is recognized when control of the promised service is transferred to customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. Management exercises judgment to estimate revenue accruals. In particular, our trailing commission revenue, included in commission revenue on the consolidated statements of income, is generally received in arrears and therefore requires management to estimate accrued amounts based on revenue received in prior periods, market performance and payment frequency of each product type or sponsor. See Note 2 - Summary of Significant Accounting Policies and Note 3 - Revenue, within the notes to the consolidated financial statements for further detail.
Commitments and Contingencies
ValuationLiabilities related to loss contingencies are recognized when we believe it is probable a liability has occurred and the amount can be reasonably estimated by management. We have established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated.
We also accrue for losses at our captive insurance subsidiary for those matters covered by self-insurance. Our captive insurance subsidiary records losses and loss reserve liabilities based on actuarially determined estimates of losses incurred, as well as specific reserves for proceedings and matters that are probable and estimable. Assessing the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently difficult and requires management to make significant judgments. For additional information, see Note 2 - Summary of Significant Accounting Policies and Note 14 - Commitments and Contingencies - “Legal and Regulatory Matters,” within the notes to the consolidated financial statements.
Acquisitions
Acquisitions, including those accounted for under the acquisition method of accounting for business combinations or as asset acquisitions, require management to allocate purchase consideration, including contingent consideration, to the fair value of assets acquired or liabilities assumed, as applicable. This allocation requires management to apply judgment and make assumptions about future earnings and performance and may be based on preliminary valuations. Estimates and assumptions used in the acquisition method of accounting for business combinations are subject to change during the respective measurement period, which is not to exceed one year from the acquisition date, as valuations are finalized. Any changes in estimates or assumptions will change the purchase price allocations, including any amounts allocated to other intangible assets, liabilities for contingent consideration, other assets acquired or liabilities assumed, or goodwill, as applicable. Goodwill is recognized as the excess of the purchase consideration over the fair value of net assets acquired.
Certain of the Company’s acquisitions include contingent consideration, which may result in the transfer of additional cash consideration to the sellers if certain asset or revenue growth is achieved in the years following an acquisition. For acquisitions accounted for under the acquisition method of accounting for business combinations, any such contingent consideration is recognized at its estimated fair value on the date of acquisition within other liabilities in the consolidated statements of financial condition. This contingent consideration is remeasured at its fair value at each subsequent reporting date until the contingency is resolved. Any changes in fair value are recognized in other expense in the consolidated statements of operations. The Company does not recognize a liability for contingent payments in acquisitions that are accounted for as asset acquisitions as the amounts to be paid will be uncertain until a future measurement date. For additional information, see Note 4 - Acquisitions and Note 9 - Goodwill and Other Intangibles, Net within the notes to the consolidated financial statements.
Goodwill and Other Intangibles, Net
Management also applies judgment when testing for impairment of goodwill and other indefinite-lived intangible assets, including estimating fair values. Goodwill and other indefinite-lived intangible assets are evaluated annually for impairment in the fourth fiscal quarter and between annual tests if certain events occur indicating that the carrying amounts may be impaired.
Intangible Assetsassets that are deemed to have definite lives are amortized over their useful lives or the estimated period the intangible asset will provide economic benefit. Definite-lived intangible assets are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount may not be recoverable. For additional information, see Note 2 - Summary of Significant Accounting Policies and Note 9 - Goodwill and Other Intangibles, Net within the notes to the consolidated financial statements.
Income Taxes
Share-Based CompensationIn preparing the consolidated financial statements, we estimate the provision for income taxes based on various jurisdictions where we conduct business. This requires management to estimate current tax obligations and to assess temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. These temporary differences result in deferred tax assets and liabilities, which we must then assess the likelihood that the deferred tax assets will be realized. A valuation allowance is established to the extent that it is more likely than not that such deferred tax assets will not be realized. Changes in the estimate of tax assets and liabilities occur periodically due to changes in the tax rates, changes in the business operations, implementation of tax planning strategies, resolution with taxing authorities of issues where we had previously taken certain tax positions and newly enacted statutory, judicial and regulatory guidance. For more information, see Note 2 - Summary of Significant Accounting Policies and Note 13 - Income Taxes, within the notes to the consolidated financial statements.
Recently Issued Accounting Pronouncements
SeeRefer to Note 2 - . Summary of Significant Accounting Policies, within the notes to consolidated financial statements for discussion of each of these accounting policies.
Recent Accounting Pronouncements
Refer to Note 2. Summary of Significant Accounting Policies, within the notes to consolidated financial statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We maintain trading securities owned and securities sold, but not yet purchased in order to facilitate client transactions, to meet a portion of our clearing deposit requirements at various clearing organizations, and to track the performance of our research models. Thesemodels and in connection with our dividend reinvestment program. Trading securities couldare included in investment securities while securities sold, but not yet purchased are included in other liabilities on the consolidated statements of financial condition and can include mutual funds, debt securities issued by the United States government, money market funds, corporate debt securities certificates of deposit, and equity securities.
We enter into market risk sensitive instruments for purposes other than trading, which are included in other assets on the consolidated statements of financial condition and can include deferred compensation plan assets invested in life insurance, money market and other mutual funds, investments in fractional shares held by customers, and other non-traded real estate investment trusts. Changes in the value of our trading inventorymarket risk sensitive instruments may result from fluctuations in interest rates, credit ratings of the issuer, equity prices and the correlation amongor a combination of these factors. We manage
In facilitating client transactions, our trading inventory by product type. Our activities to facilitate client transactionssecurities and securities sold, but not yet purchased generally involve mutual fund activities,funds, including dividend reinvestments. The balancesOur positions held are based upon pendingthe settlement of client activitiestransactions, which are monitored by our Service, Trading and Operations ("STO") department. Because these positions arise from pending client transactions, there are no specific trading or position limits.
Positions held to meet clearing deposit requirements consist of United StatesU.S. government securities and equity securities. The amount of securities deposited depends upon the requirements of the clearing organization. The level of securities deposited is monitored by the settlement areasettlements group within our STOTrading and Operations department.
In addition to our trading inventory and our deposit obligations, ourOur Research department develops model portfolios that are used by advisors in developing client portfolios. We maintain securities owned in internal accounts based on these model portfolios to track the performance of our Research department. At the time a portfolio is developed, we purchase the securities in that model portfolio in an amount equal to the account minimum, which varyvaries by product.
At December 31, 2017, the fair value of our trading securities owned was $17.9 million. Securities sold, but not yet purchased were $1.2 million at December 31, 2017. The fair value of securities included within other assets was $189.7 million at December 31, 2017. See Note 4. Fair Value Measurements, within the notes to consolidated financial statements for information regarding the fair value of trading securities owned, securities sold, but not yet purchased and other assets associated with our client facilitation activities. See Note 5. Held to Maturity Securities, within the notes to consolidated financial statements for information regarding the fair value of securities held to maturity.
During the twelve months ended December 31, 2017, we used a derivative financial instrument, consisting of a non-deliverable foreign currency forward contract, to mitigate foreign currency exchange risk arising under an agreement with a third-party service provider. The derivative instrument settled in June 2017. We do not enter into contracts involving derivatives or other similar financial instruments for trading or proprietary purposes.
In addition, we haveare subject to market risk resulting from system incidents and human error,operational risk events, which can require customer trade corrections for our customers.corrections. We also havebear market risk on the fees we earn that are based on the market value of advisory and brokerage assets, as well as assets on which trailtrailing commissions are paid and assets eligible for sponsor payments.
As of December 31, 2023, the fair value of our trading securities was $76.1 million, and securities sold, but not yet purchased were not material. The fair value of market risk sensitive instruments entered into for other than trading purposes included within other assets was $858.6 million as of December 31, 2023. See Note 5 - Fair Value Measurements within the notes to the consolidated financial statements for information regarding the fair value of trading securities, securities sold, but not yet purchased and other assets associated with our client facilitation activities.
Interest Rate Risk
We are exposed to risk associated with changes in interest rates. As of December 31, 2017, $1.52023, $1.3 billion of our outstanding debt under our Credit Agreement was subject to floating interest rate risk. While our senior secured term loan is subject to increases in interest rates, we do not believe that a short-term change in interest rates would have a material impact on our net income before taxes given assets owned,revenue generated by our client cash balances, which areis generally subject to the same, but off-setting, interest rate risk.
The following table summarizes the impact of increasing interest rates on our interest expense from the variable portion of our debt outstanding, calculated using the projected average outstanding balance over the subsequent twelve monthtwelve-month period (in thousands):
| | | | | | | | | | | | | | | | | |
| Outstanding Balance at December 31, 2023 | Annual Impact of an Interest Rate (†) Increase of |
| 10 Basis | 25 Basis | 50 Basis | 100 Basis |
Corporate Debt and Other Borrowings | Points | Points | Points | Points |
Term Loan B | $ | 1,027,200 | | $ | 1,023 | | $ | 2,558 | | $ | 5,116 | | $ | 10,232 | |
Revolving Credit Facility | 280,000 | | 280 | | 700 | | 1,400 | | 2,800 | |
Variable-Rate Debt Outstanding | $ | 1,307,200 | | $ | 1,303 | | $ | 3,258 | | $ | 6,516 | | $ | 13,032 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Outstanding Variable Interest Rates at December 31, 2017 | | Annual Impact of an Interest Rate Increase of |
| | | 10 Basis | | 25 Basis | | 50 Basis | | 100 Basis |
Senior Secured Term Loans | | | Points | | Points | | Points | | Points |
Term Loan B | | $ | 1,496,250 |
| | $ | 1,487 |
| | $ | 3,717 |
| | $ | 7,434 |
| | $ | 14,869 |
|
Revolving Credit Facility | | — |
| | — |
| | — |
| | — |
| | — |
|
Variable Rate Debt Outstanding | | $ | 1,496,250 |
| | $ | 1,487 |
| | $ | 3,717 |
| | $ | 7,434 |
| | $ | 14,869 |
|
____________________See Note 10(†). Debt, within the notes to consolidated financial statements for additional information.
Our interest rate risk is mitigated in part by having the interest rate for a portion of theour Term Loan B debt, $748.1 million, fixed for three months and the remaining portion, $748.1 million, fixed for six months. At the end of each of these periods the rates will beis locked in at the then current rate for one, two, three, six or twelve months as allowed under the Credit Agreement. At the end of the selected periods the rates will be locked in at the then-current rate. The effect of these fixed interest rate provisions islocks are not included in the table above.
As of December 31, 2017, weSee Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to the consolidated financial statements for additional information.
We offer our advisors and their clients three primary cashtwo FDIC insured bank sweep vehicles and a CCA that are interest rate sensitive: oursensitive. Our FDIC insured cash account ("ICA")sweep vehicles include an (1) ICA for individuals, trusts, and sole proprietorships and entities organized or operated to make a profit, such as corporations, partnerships, associations, business trusts and other organizations and (2) an insured deposit cash account ("DCA"(“DCA”) for advisory IRAs, and a money market sweep vehicle involving multiple money market fund providers. While clientsindividual retirement accounts. Clients earn interest for balances on depositdeposits in the ICA and the DCA while we earn a fee. OurThe fees we earn from ICAscash held in the ICA are based primarily on prevailing interest rates in the current interest rate environment.environment, and are therefore subject to interest rate risk. The fees that we receiveearn from the DCA vehicle are calculated as a per account fee;fee, and such fees increase as the federal funds target rate increases, subject to a cap.
The fees we receiveCompany places ICA sweep overflow into the CCA. These deposits are either used to fund client margin lending or placed in third-party bank or investment accounts, both of which are segregated under federal or other regulations, where they are held as cash or invested in short-term U.S. treasury bills. We earn interest income on cashthese bank deposits and investments in short-term U.S. treasury bills and pay interest to clients on these CCA balances, in our advisors’ client accounts in money market funds, including administrative and recordkeeping fees based on account type and the invested balances,which are also sensitive to prevailing interest rates. This interest income and expense is included in interest income, net in the consolidated statements of income. Changes in interest rates and fees for the bank deposit sweep vehicles are monitored by our Rate Setting Committee (the "RSC"“RSC”), which governs and approves any changes to our fees. By meeting promptly around the time of Federal Open Market Committee meetings, or for other market or non-market reasons, the RSC considers financial risk of the insured bank deposit sweep vehiclevehicles relative to other products into which clients may move cash balances.
Credit Risk
Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. CreditWe are subject to credit risk includes the risk thatfrom certain loans extended to advisors and enterprises when we extend to advisorsloans with repayment terms to facilitate theiradvisors’ and enterprises’ transition to our platform or to fund their business development activitiesactivities. We are not repaidalso subject to credit risk when a forgivable loan to an advisor or enterprise converts to repayable upon advisor or enterprise termination or change in full or on time. agreed upon terms.
Credit risk also includes the risk thatarises when collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet client’sclients’ contractual obligations to LPL Financial. We bear credit risk on the activities of our advisors’ clients, including the execution, settlement, and financing of various transactions on behalf of these clients.
These activities are transacted on either a cash or margin basis. Our credit exposure in these transactions consists primarily of margin accounts, through which we extend credit to advisors'advisors’ clients collateralized by securities in the client’s account.clients’ accounts. Under many of these agreements, we are permitted to sell, re-pledge,repledge or loan these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions.
As our advisors execute margin transactions on behalf of their clients, we may incur losses if clients do not fulfill their obligations, the collateral in the client’s accountclients’ accounts is insufficient to fully cover losses from such investments and our advisors fail to reimburse us for such losses. Our losses on margin accounts were immaterialnot material during the years ended December 31, 2017, 2016,2023 and 2015.2022. We monitor exposure to industry sectors and individual securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.
We are subject to concentration risk if we extend large loans to or have large commitments with a single counterparty, borrower or group of similar counterparties or borrowers, (e.g., in the same industry), or if we accept a concentrated position as collateral for a margin loan. Receivables from and payables to clients and stock borrowing and lending activities are conducted with a large number of clients and counterparties and potential concentration is monitored. We seek to limit this risk through review of the underlying business and the use of limits established by senior management taking into consideration factors including current market conditions, the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment and other positions or commitments outstanding.
Operational Risk
Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems, actions by people, or external events. We operate in diverse markets and are reliant on the ability of our employees and information technology systems, as well as third-party service providers and their systems, to manage a large number of transactions effectively. These risks are less direct and quantifiable than credit and market risk, but managing them is critical, particularly in a rapidly changing operating environment with increasing transaction volumes and in light of increasing reliance on systems capabilities and performance as well as third-party service providers. In the event of the breakdown, obsolescence, or improper operation of systems or improper action by
employees, advisors, or third-party service providers, we could suffer business disruptions, financial loss, data loss, regulatory sanctions, and damage to our reputation. Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted, or otherwise unsuccessful in maintaining the competitiveness, stability, security, or continuity of critical systems as a result of, among other things, obsolescence, improper operation, or other limitations of our current technology.
In order to assist in the mitigation and control of operational risk, we have an operational risk framework that is designed to enable assessment and reporting on operational risk across the firm. This framework aims to ensure policies and procedures are in place and appropriately designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees and advisors operate within established corporate policies and limits. Notwithstanding the foregoing, please consult the “Risks Related to Our Technology” and the “Risks Related to Our Business Generally” sections within Part I, “Item 1A. Risk Factors” for more information about the risks associated with our technology, including risks related to security, our risk management policies and procedures, and the potential related effects on our operations.
Regulatory and Legal Risk
The regulatory environment in which we operate is discussed in detail within Part I, “Item 1. Business” of this Annual Report on Form 10-K. In recent years, and during the period presented in this Annual Report on Form 10-K, we have observed the SEC, FINRA and state regulators broaden the scope, frequency, and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance systems and programs. Please consult the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our Business Generally” sections within Part I, “Item 1A. Risk Factors” for more information about the risks associated with operating within our regulatory environment, pending regulatory matters and the potential related effects on our operations.
Risk Management
We employ an enterprise risk management framework ("ERM") that is intended to address key risks and responsibilities, enable us to execute our business strategy, and protect our Company and its franchise. Our framework is designed to promote clear lines of risk management accountability and a structured escalation process for key risk information and events.
We operate a three lines of defense model whereby the primary ownership for risk and control processes is the responsibility of business and control owners who are the "first line" of defense in effectively managing risks. The first line is responsible for risk process ownership and is comprised of the business units, whose primary responsibility is for day-to-day compliance and risk management, including execution of desktop and supervisory procedures. These business owners and certain control owners implement and execute controls to manage risk, execute risk assessments, identify emerging risks, and comply with risk management policies. The second line of defense is comprised of certain departments within Compliance, Legal and Risk (“CLR”), STO, Technology, Finance, and Human Capital and this second line of defense provides risk and control assessment and oversight. The third line of defense is independent verification of the effectiveness of internal controls and is conducted by the Internal Audit department or in third-party reviews.
Our risk management governance approach includes our board of directors (the “Board”) and certain of its committees; the Risk Oversight Committee of LPL Financial (the “ROC”) and its subcommittees; the Internal Audit department and the CLR department of LPL Financial; and business line management. We regularly reevaluate and, when necessary, modify our processes to improve the identification and escalation of risks and events.
Audit Committee of the Board
In addition to its other responsibilities, the Audit Committee of the Board (the “Audit Committee”) reviews our policies with respect to risk assessment and risk management, as well as our major financial risk exposures and the steps management has undertaken to control them. The Audit Committee generally provides reports to the Board at each of the Board’s regularly scheduled quarterly meetings.
Compensation and Human Resources Committee of the Board
In addition to its other responsibilities, the Compensation and Human Resources Committee of the Board assesses whether our compensation arrangements encourage inappropriate risk-taking, and whether risks arising from our compensation arrangements are reasonably likely to have a material adverse effect on the Company.
Risk Oversight Committee of LPL Financial
The Audit Committee has mandated that the ROC oversee our risk management activities, including those of our subsidiaries. The Deputy Chief Legal and Risk Officer of LPL Financial serves as chair of the ROC, which generally meets on a monthly basis with ad hoc meetings as necessary. The members of the ROC include certain Managing Directors of LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex-officio members and represent key control areas of the Company. These individuals include, but are not limited to, the Chief Compliance Officer; the Chief Information Security Officer; and the Chief Anti-Money Laundering Officer. Participation in the ROC by senior officers is intended to ensure that the ROC covers the key risk areas of the Company, including its subsidiaries, and that the ROC thoroughly reviews significant matters relating to risk priorities, policies, control procedures and related exceptions, certain new and complex products and business arrangements, transactions with significant risk elements, and identified emerging risks.
The Audit Committee receives reports on the ROC at each of the Audit Committee regularly scheduled quarterly meetings and, as necessary or requested, to the Board. The reports generally cover topics addressed by the ROC at its meetings since the immediately preceding report. If warranted, matters of material risk are escalated to the Audit Committee or Board more frequently.
Subcommittees of the Risk Oversight Committee
The ROC has established multiple subcommittees that cover key areas of risk. The subcommittees meet regularly and are responsible for keeping the ROC informed and escalating issues in accordance with the Company’s escalation policies. The responsibilities of such subcommittees include, for example, oversight of the approval of new and complex investment products offered to advisors’ clients; oversight of the firm's technology; issues and trends related to advisor compliance and examination findings; LPL’s integrity hotline allegations; and oversight of disclosures related to our financial reporting.
Internal Audit Department
The Internal Audit department provides independent verification of the effectiveness of the Company’s internal controls by conducting risk assessments and audits designed to identify and cover important risk categories. The Internal Audit department provides regular reports to the ROC and reports to the Audit Committee at least as often as quarterly.
Control Groups
The CLR department provides compliance oversight and guidance, and conducts various risk and other assessments to address regulatory and Company-specific risks and requirements. The CLR department reports to the Chief Legal and Risk Officer, who reviews the results of the Company’s risk management process with the ROC, the Audit Committee, and the Board as necessary. Another key control group is the STO Risk Management team. This team identifies, defines, and remediates risk-related items within STO and acts as the liaison between STO and CLR. We also consider the Internal Audit department to be a control group.
Business Line Management
Each business line is responsible for managing its risk, and business line management is responsible for keeping senior management, including the members of the ROC, informed of operational risk and escalating risk matters (as defined by the Company’s escalation policies). We have conducted Company-wide escalation training for our employees. Certain business lines, including STO and Technology, have dedicated personnel with responsibilities for monitoring and managing risk-related matters. Business lines are subject to oversight by the control groups, and the Finance, CLR, Technology, and Human Capital departments also execute certain control functions and report matters to the ROC, Audit Committee, and Board as appropriate.
Advisor Policies
In addition to the ERM framework, we also have written policies and procedures that govern the conduct of business by our advisors, employees, and the terms and conditions of our relationships with product manufacturers. Our client and advisor policies address the extension of credit for client accounts, data and physical security, compliance with industry regulations, and codes of conduct and ethics to govern employee and advisor conduct, among other matters.
Item 8. Financial Statements and Supplementary Data