'We Are Not Happy': LPL Profit Falls 4.4%

Increased operating expenses and higher than anticipated regulatory costs and fines contributed to a 4.4% drop in second-quarter net income at LPL Financial.

"We are not happy with these results,"  LPL chairman and chief executive Mark Casady said in a conference call with Wall Street analysts who cover the financial services firm.

Net income for the country's largest independent broker-dealer fell to $43 million from $45 million last year for the three-month period ending June 30. Net income for the comparable first half of 2014 also slid, falling to $96.2 million from $99.8 million in 2013.

General and administrative expenses for the second quarter increased 26.4% to $106.8 million from $84.5 million for the same period last year.

"The regulatory environment was much more difficult than we anticipated," Casady said, adding that the entire industry was being subject to "heightened regulatory review."  

HEAVY FINES

Indeed, those fines -- or "the resolution of regulatory matters," as company CFO Dan Arnold puts it -- was the "core reason" for increased expenses in the second quarter, which led to the decline in profits.

Last month, LPL was fined $2 million and ordered to pay $820,000 in restitution for failing to maintain adequate books and records documenting variable annuity exchanges, according to a report on FINRA's BrokerCheck website.

LPL had estimated 9% growth in general and administrative expenses for the second quarter, Arnold says, but regulatory and risk management costs caused those expenses to rise 14% instead.

Yet in the months ahead, Arnold says, he expects expenses to drop to the "low single digits" -- which, combined with anticipated productivity and revenue growth, should create "earnings growth and margin expansion" for the rest of the year, he says.

Net revenue for LPL in the second quarter rose 7% to $ 1.092 billion from $1.018 billion for the same period last year.

'FRUSTRATION' & OPTIMISM

During the conference call, one analyst pointed out that LPL's second-quarter figure "doesn't create a great picture" at a time when the equity markets have been up substantially.

Casady expressed "frustration" that LPL was "not getting the leverage we should be getting" in its profit and loss statement. Having to "invest heavily in risk management and compliance resources" caused the company to fall "a bit behind the curve," he said.

Taking out the unanticipated growth in those two areas would bring the "run rate" of LPL expenses "down dramatically" for the rest of the year, Casady said. "The fundamentals look as good as I've seen them in my 12 years here. ... I feel strongly about our ability to control expenses going forward."

NEW ADVISORS

Both Casady and Arnold emphasized LPL's success in attracting new advisors and the popularity and profitability of its Hybrid RIA platform for brokers and advisors.

They also touted the growth potential of its retirement business in the wake of LPL's recent deal with Global Retirement Partners. 

Once that firm's advisors become integrated into the LPL system, they will add $20 million to $25 million in commissions to the company on an annualized basis, Arnold estimates.

The executives also downplayed any imminent acquisitions of broker-dealers.

"We're going to put our capital to work in different ways," Casady said -- including buying back company stock and paying out more in dividends to shareholders. "At this point we like no better opportunity than our own."

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