Regulatory Woes Ease for LPL

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LPL Financial seems to have staunched the regulatory bleeding -- at least for now.

While regulatory costs pulled down the company's net income 2% to $178 million for full-year 2014, strong gains in advisory and brokerage assets lifted revenues at the country's largest independent broker-dealer 5.6% to $4.3 billion for the year.

Perhaps more important, net earnings rose for the fourth quarter -- spiking 9.3% to $48.5 million -- after falling in the previous two quarters because of costly regulatory problems.

LPL paid over $36 million in regulatory charges in 2014, about four times what it averaged in 2013 and 2012. The company also says expects to incur further regulatory costs this year resulting from past deficiencies. As LPL chairman and CEO Mark Casady put it in a conference call with analysts, "historical matters need to be resolved."

However, regulatory costs were only $4.9 million in the fourth quarter, which ended Dec. 31, 2014, and in an interview LPL chief financial officer Dan Arnold said the company has made "good progress" implementing new risk management capabilities.

Continued implementation of the new systems this year should result in a "lower risk profile" and reduced exposure to regulatory fines in 2016, Arnold said.

Talking with analysts, Casady said LPL expected -- and welcomes -- increased regulation going forward. "The world is changing and we stand ready to change with it," he said.

In fact, "firms of size tend to benefit" from more regulation, Casady added, asserting that LPL was "very well positioned" to benefit from increased regulation of financial services because of its ability to protect advisors and clients.


LPL reported a record $18 billion in net new advisory assets for the year, and advisor productivity and market appreciation pushed total advisory and brokerage assets up 8.4% to $475 billion for the year.

The company's hybrid RIA business was particularly strong: Assets under custody on LPL Financial's independent RIA platform grew 44.4% to $90.8 billion for the year, and the number of firms on the platform jumped to 322, up from 285 in 2013.

A slip in the sale of alternative investments, particularly REITs, and soft fixed annuity sales resulting from low interest rates caused commission revenue to fall 5% in the fourth quarter. Casady characterized both developments as "normal."


The addition of 126 net new advisors in the fourth quarter pushed the company past the 14,000-advisor mark, a nearly 3% gain from 2013. Arnold said LPL expects to add roughly 400 net new advisors in 2015, and that industry churn levels would remain at around 5% annually.

Robo advisors, he maintained, were not a "major threat" to LPL's business. While robo advisors were "lowering investment costs," Casady said, they were still unable to "provide real counsel" and did not threaten LPL's "unique value proposition."

Casady also said LPL would increase its focus on its retirement planning business this year.

Adjusted earnings per share of $2.44 remained flat for the year. Growth generated by LPL's core business was offset by "the headwinds from a decline in our cash sweep revenue and charges related to the resolution of regulatory matters," Arnold said in a prepared statement.

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