LPL Financial Holdings Inc.
2016 Annual
Report
LPL 2016 Annual Report
A MARKET LEADER
We firmly believe that now more than ever there is a fundamental need for
independent financial advice in America and that investors achieve better outcomes
when working with a financial advisor.
LPL strives 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. This is the
sole focus of our business, and we believe no one does it better.
LPL has been ranked the #1 independent broker-deal for the 21st consecutive year (as
reported by Financial Planning magazine, June 1996-2016, based on total revenues).
The breadth of our services and talent, flexibility of our model, and commitment to
independent advice make LPL a leader in our chosen markets.
A Message from the
President & CEO
DEAR FELLOW SHAREHOLDER,
In the late 1960s, two small, pioneering firms were
founded by visionary entrepreneurs with the bold
idea to approach financial services holistically
and with an independent mindset for the benefit
of investors. These two companies – Linsco
and Private Ledger – later merged and became
LPL Financial, today a leading retail investment
advisory firm and the nation’s largest independent
broker-dealer based on total revenues.
Much has changed over the years, but what
hasn’t changed is our belief that independent,
objective financial guidance is a fundamental
need for everyone. We also believe this guidance
is best obtained through a personal and trusted
relationship with a financial advisor. As CEO, I am
a passionate advocate of our founders’ vision, and
I know that adhering to this vision will lead to our
continued growth and prosperity as a company.
LPL 2016 Annual Report
2016 RESULTS
The theme of 2016 was undoubtedly
“uncertainty.” Whether it was China’s slowing
economy, the Department of Labor (DOL) fiduciary
rule, Brexit, or the U.S. presidential election,
uncertainty ruled the day.
I’m proud to say, though, that LPL navigated
through this uncertainty with great success.
In fact, 2016 was one of our best recruiting years
ever, due to our investments in service, technology,
and DOL fiduciary rule preparation.
TOTAL BROKERAGE & ADVISORY ASSETS
[$ billions]
$509.4
$475.1 $475.6
$438.4
$373.3
2012
2013
2014
2015
2016
Total brokerage and advisory assets at year-end
were $509 billion, up 7 percent from the prior
year, and our advisor base grew by 323. The
fourth quarter was our strongest recruiting quarter
of the year, with net new advisory assets of $4.8
billion, and net new advisors of 192. Our full-year
production retention rate finished at 97 percent,
Member FINRA/SIPC
1
LPL 2016 Annual Report
STRENGTHENING OUR CORE
In 2016, we made significant enhancements to
our advisors’ experience while also preparing
for implementation of the DOL fiduciary rule.
We expanded and strengthened our service
organization and rolled out ClientWorks® to all our
advisors. We also lowered pricing on our centrally
managed advisory platforms, and created our
Deposit Cash Account, an additional FDIC-insured
cash sweep vehicle.
GROSS PROFIT
[$ millions]
$1,326
$1,358
$1,394
$1,248
$1,112
2012
2013
2014
2015
2016
PLANNING FOR THE DOL FIDUCIARY RULE
We spent a great deal of time in 2016 preparing
for the DOL fiduciary rule and positioning our
business wisely for the significant industry
disruption it is causing. While there is still
uncertainty about the future of the rule – and
its timing – under the new administration, we
continue to believe a higher standard of care for
retail investors is appropriate for our industry.
excluding the impact of an institutional client that
was acquired and departed in September. The
assets served by our advisors also continued to
shift towards advisory accounts, which held 42
percent of our total brokerage and advisory assets
served at the end of the year. This asset growth
and ongoing shift to advisory accounts contributed
to our full-year gross profit of $1.4 billion, up 3
percent from the prior year.
Our focus on expense management in 2016
enabled us to make significant business
investments while also lowering expense growth.
We kept our full-year core G&A growth below 1
percent, and total G&A was down slightly. This
low expense growth drove EBITDA and Earnings
per Share (EPS) growth well above gross profit
growth creating operating leverage. EBITDA was
$508 million, up 12 percent year-over-year, and
EPS was $2.13, up 22 percent year-over-year.
TOTAL ADVISORS
14,036
14,054
14,377
13,352
13,673
2012
2013
2014
2015
2016
Member FINRA/SIPC
2
LPL 2016 Annual Report
We will continue to move forward with many
of our previously announced activities and
policy changes that we believe are beneficial
for advisors and their clients, regardless of the
ultimate outcome of the DOL fiduciary rule. For
instance, we have already standardized our
variable annuity and alternative investment
commissions across financial product sponsors,
and we are continuing to work on our design for
standardized mutual fund commissions. We are
also rolling out our Guided Wealth Portfolios
advisor-enhanced advice solution.
NET INCOME
[$ thousands]
$ 1.72
$ 1.75
$ 1.74
$ 2.13
Earnings
Per Share
Our commitment to executing with excellence
means doing these things with a focus on
disciplined expense management while instilling
quality and innovation across our operations.
In closing, I am honored and excited to lead
LPL. I am also excited to be working alongside
talented leaders and employees across the firm
who are critical to helping us win in our next
phase of growth. Focusing on growth in our core
business and increasing efficiency has positioned
us well for 2017. If we succeed in delivering our
priority, we will position our advisors for success
which in turn will drive our growth. We believe
combining that growth with disciplined expense
management will drive operating leverage and
create long-term shareholder value.
$ 1.37
$ 151,918
$ 181,857
$ 178,043
$ 191,931
Sincerely,
$ 168,784
DAN ARNOLD
President & CEO
2012
2013
2014
2015
2016
LOOKING AHEAD
Looking forward to 2017, we’re focused on driving
growth by leveraging our strengths, enhancing our
capabilities, and executing with excellence. We
are committed to improving the advisor experience
and helping advisors manage regulatory change.
Member FINRA/SIPC
3
LPL 2016 Annual Report
2016 FINANCIAL HIGHLIGHTS
2016
2015
2014
2013
2012
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net revenues (in thousands) (1)
$ 4,049,383
$ 4,275,054
$ 4,373,662
$ 4,140,858
$ 3,661,088
Total operating expenses (in thousands) (1)
$ 3,655,389
$ 3,933,363
$ 4,023,484
$ 3,790,147
$ 3,339,147
Total expenses (in thousands) (1)
$ 3,751,867
$ 3,992,499
$ 4,078,965
$ 3,849,555
$ 3,410,497
Income from operations (in thousands) (1)
$ 393,994
$ 341,691
$ 350,178
$ 350,711
$ 321,941
Income before provision for income taxes (in thousands) (1)
$ 297,516
$ 282,555
$ 294,697
$ 291,303
$ 250,591
Net income (in thousands) (1)
PER SHARE DATA:
Earnings per diluted share (1)
$ 191 ,931
$ 168,784
$ 178,043
$ 181,857
$ 151,918
$ 2.13
$ 1.74
$ 1.75
$ 1.72
$ 1.37
Weighted average diluted shares outstanding (in thousands) (1)
90,013
96,786
101,651
106,003
111,060
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DATA:
Cash and cash equivalents (in thousands) (2)
$ 747,709
$ 724,529
$ 412,332
$ 516,584
$ 466,261
Total assets (in thousands) (2)
$ 4,834,926
$ 4,521,061
$ 4,041,930
$ 4,027,114
$ 3,968,007
Total debt, net (in thousands) (2) (3)
OTHER FINANCIAL AND OPERATING DATA
$ 2,175,436
$ 2,188,240
$ 1,625,195
$ 1,519,379
$ 1,297,308
Gross Profit (in thousands) (1) (4)
$ 1,394,250
$ 1,357,725
$ 1,325,945
$ 1,248,014
$ 1,112,251
EBITDA (1) (5)
Number of advisors (2)
$ 507,957
$ 453,313
$ 443,080
$ 426,252
$ 377,213
14,377
14,054
14,036
13,673
13,352
Total brokerage and advisory assets (in billions) (2)
$ 509.4
$ 475.6
$ 475.1
$ 438.4
$ 373.3
Advisory assets under custody (in billions) (2)
$ 211.6
$ 187.2
$ 175.8
$ 151.6
$ 122.1
Average number of full-time employees (1)
3,320
3,382
3,337
3,047
2,865
(1) Amounts shown are for the indicated year ended.
(2) Amounts shown are as of the indicated year ended.
(3) Total debt consists of our senior secured credit facilities, senior unsecured subordinated notes, revolving line of credit facility, and bank loans payable, net of debt issuance costs.
(4) Gross Profit is calculated as net revenues less production expenses. Production expenses consist of the following expense categories from our consolidated statements of income: (i) commission and
advisory and (ii) brokerage, clearing, and exchange. All other expense categories, including depreciation and amortization, 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 measures that may not be comparable to those of others in our industry.
(5) EBITDA is defined as net income plus interest expense, income tax expense, depreciation, and amortization. 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, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, the Company’s EBITDA can
differ significantly from EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments.
(6) You can find additional related information, including a reconciliation of EBITDA (a non-GAAP measure) for the year ended December 31, 2016 within this Annual Report on our Form 10-K for the year
ended December 31, 2016. For a reconciliation of EBITDA for the years ended December 31, 2015, 2014 and 2013, please consult our Annual Report on Form 10-K for the year ended December 31, 2015. For a
reconciliation of EBITDA for the year ended December 31, 2012, please consult our Annual Report on Form 10-K for the year ended December 31, 2014.
Member FINRA/SIPC
4
LPL Financial Holdings Inc.
10
FORM 10-K
O
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to
(cid:95)
(cid:134)
Commission file number 001-34963
LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-3717839
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
75 State Street, Boston, MA 02109
(Address of principal executive offices; including zip code)
800-877-7210
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock — $0.001 par value per share
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:95) No (cid:134)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes (cid:134) No (cid:95)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (cid:95) No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
f
Large accelerated filer (cid:95)
Accelerated filer (cid:134)
Non-accelerated filer (cid:134)
Smaller reporting company (cid:134)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134) No (cid:95)
As of June 30, 2016, the aggregate market value of the voting stock held by non-affiliates of the registrant was $1.8 billion. For purposes of
this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant were deemed to be shares
of the voting stock held by affiliates.
The number of shares of common stock, par value $0.001 per share, outstanding as of February 17, 2017 was 90,070,194.
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders are
incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
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Business
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4 Mine Safety Disclosures
Properties
Legal Proceedings
TABLE OF CONTENTS
PART I
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Selected Financial Data
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
PART III
Item 10 Directors, Executive Officers, and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accountant Fees and Services
Item 15 Exhibits and Financial Statement Schedules
EXHIBIT INDEX
Item 16 Form 10-K Summary
SIGNATURES
PART IV
i
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other information required by the
Securities Exchange Act of 1934, as amended (“Exchange Act”), with the Securities and Exchange Commission
("SEC"). You may read and copy any document we file with the SEC at the SEC’s public reference room located at
100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at
http://www.sec.gov.
On our internet site, http://www.lpl.com, we post the following filings as soon as reasonably practicable after
they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements,
our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Hard copies of all such filings are available free of
charge by request via email (investor.relations@lpl.com), telephone (800) 877-7210, or mail (LPL Financial Investor
Relations at 75 State Street, 22nd Floor, Boston, MA 02109). The information contained or incorporated on our
website is not a part of this Annual Report on Form 10-K.
When we use the terms “LPLFH”, "LPL", "LPL Financial", “we”, “us”, “our”, and the “Company” we mean LPL
Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the
context otherwise indicates.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in Item 7 - “Management's Discussion and Analysis of Financial Condition and Results of
Operations” and other sections of this Annual Report on Form 10-K regarding the Company's future financial and
operating results, outlook, growth, plans, business strategies, liquidity, future indebtedness, future share
repurchases, and future dividends, including statements regarding future resolution of regulatory matters, legal
proceedings, and related costs, future revenue and expenses, and projected savings and anticipated improvements
to the Company's operating model, services, and technologies as a result of its initiatives and programs, as well as
any other statements that are not related to present facts or current conditions or that are not purely historical,
constitute forward-looking statements. These forward-looking statements are based on the Company's historical
performance and its plans, estimates, and expectations as of February 24, 2017. The words “anticipates,”
“believes,” “expects,” “may,” “plans,” “predicts,” “will,” and similar expressions are intended to identify forward-
looking statements, although not all forward-looking statements contain these identifying words. Forward-looking
statements are not guarantees that the future results, plans, intentions, or expectations expressed or implied by the
Company will be achieved. Matters subject to forward-looking statements involve known and unknown risks and
uncertainties, including economic, legislative, regulatory, competitive, and other factors, which may cause actual
financial or operating results, levels of activity, or the timing of events, to be materially different than those
expressed or implied by forward-looking statements. Important factors that could cause or contribute to such
differences include: changes in general economic and financial market conditions, including retail investor
sentiment; fluctuations in the value of brokerage and advisory assets; fluctuations in levels of net new assets and
the related impact on revenue; fluctuations in the number of retail investors served by the Company; effects of
competition in the financial services industry; changes in the number of the Company's financial advisors and
institutions, and their ability to market effectively financial products and services; the success of the Company in
attracting and retaining financial advisors and institutions; changes in interest rates and fees payable by banks
participating in the Company's cash sweep program, including the Company's success in negotiating agreements
with current or additional counterparties; the Company's strategy in managing cash sweep program fees; changes
in the growth and profitability of the Company’s fee-based business; the effect of current, pending, and future
legislation, regulation, and regulatory actions, including the United States Department of Labor ("DOL") final rule on
conflicts of interest (Definition of the Term "Fiduciary"; Conflict of Interest Rule—Retirement Investment Advice, the
"DOL Rule"), which becomes applicable on April 10, 2017, unless otherwise delayed or changed, and disciplinary
actions imposed by federal and state regulators and self-regulatory organizations; the costs of settling and
remediating issues related to pending or future regulatory matters or legal proceedings; changes made to the
ii
Company's offerings and services in response to current, pending, and future legislation, regulation, and regulatory
actions, including the DOL Rule, and the effect that such changes may have on the Company's gross profit streams
and costs; execution of the Company's capital management plans, including its compliance with the terms of its
credit agreement; the price, the availability of shares, and trading volumes of the Company's common stock, which
will affect the timing and size of future share repurchases by the Company; execution of the Company's plans and
its success in realizing the expense savings and service improvements and efficiencies expected to result from its
initiatives and programs, particularly its expense plans and technological initiatives; the Company's success in
negotiating and developing commercial arrangements with third-party service providers; the performance of third-
party service providers to which business processes are transitioned from the Company; the Company's ability to
control operating risks, information technology systems risks, cybersecurity risks, and sourcing risks; and the other
factors set forth in Part I, Item 1A - “Risk Factors”. Except as required by law, the Company specifically disclaims
any obligation to update any forward-looking statements as a result of developments occurring after the date of this
annual report, even if its estimates change, and you should not rely on statements contained herein as representing
the Company's views as of any date subsequent to the date of this annual report.
iii
Item 1. Business
General Corporate Overview
PART I
We are a leader in the retail financial advice market, the nation's largest independent broker-dealer (based on
total revenues, Financial Planning magazine June 1996-2016), a top custodian for registered investment advisors
("RIAs"), and a leading independent consultant to retirement plans. We provide an integrated platform of brokerage
and investment advisory services to more than 14,000 independent financial advisors (our "advisors"), including
financial advisors at more than 700 financial institutions across the country, enabling them to provide their retail
investors ("clients") with objective financial advice through a lower conflict model. We also support approximately
4,000 financial advisors who are affiliated and licensed with insurance companies that use our customized clearing,
advisory platforms, and technology solutions.
Through our advisors, we are one of the largest distributors of financial products and services in the United
States, and we believe we are one of the top five firms in the United States, ranked by number of advisors.
We believe that objective financial guidance is a fundamental need 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 LPL Financial is 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. LPL strives 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, in 1989. LPL Financial
Holdings Inc., which is the parent company of our collective businesses, was incorporated in Delaware in 2005. LPL
Financial LLC is a clearing broker-dealer and an investment advisor that primarily transacts business as an agent
for our advisors on behalf of their clients by providing access to a broad array of financial products and services.
Fortigent Holdings Company, Inc. and its subsidiaries (“Fortigent”) provides solutions and consulting services to
registered investment advisors, banks, and trust companies serving high-net-worth clients. 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. Our subsidiary, LPL Insurance
Associates, Inc. ("LPLIA"), operates as a brokerage general agency that offers life, long-term care, and disability
insurance sales and services.
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, we enable the independent financial advisors, banks, and credit unions 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.
They build long-term relationships with their clients in communities across the United States by guiding them
1
through the complexities of investment decisions, retirement solutions, financial planning, and wealth-management.
Our advisors support approximately 4.7 million client accounts. Our services are designed to support the evolution
of our advisors’ businesses over time and to adapt as our advisors' needs change.
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 brokerage commissions and advisory fees than the captive channels — generally 80-90% compared to 30-
50%. Through our scale and operating efficiencies, we are able to offer our advisors what we believe to be the
highest average payout ratios among the five largest United States broker-dealers, ranked by number of advisors.
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 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.
Our advisors average over 15 years of industry experience, which 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 and fee-based services on our
corporate RIA platforms, 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.
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. 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 credit and
compliance history. 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 registered representative or investment advisory 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 420 independent RIA firms that conduct their business through separate
entities ("Hybrid RIAs") with over 4,700 advisors who conduct their advisory business through these separate
entities, rather than through LPL Financial. Hybrid RIAs operate pursuant to the Investment Advisers Act of 1940, as
amended (the "Advisers Act") or their respective states' investment advisory licensing rules. These Hybrid RIAs
engage us for technology, clearing, and custody services, as well as access to our investment platforms. Advisors
associated with Hybrid RIAs retain 100% of their advisory fees. In return, we charge separate fees for custody,
trading, administrative, and support services. In addition, 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.
We believe we are the market leader in providing support to over 2,200 financial advisors at approximately
700 banks and credit unions nationwide. For these institutions, the core capabilities of which may not include
investment and financial planning services, or that find the technology, infrastructure, and regulatory requirements
2
of supporting such services to be cost-prohibitive, we provide their financial advisors with the infrastructure and
services they need to be successful, allowing the institutions to focus more energy 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. These advisors serve over 34,000 retirement plans representing $90.2 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 also provide support to approximately 4,000 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 is dedicated to meeting the evolving needs of our advisors and providing the
platform and tools to grow and enhance the profitability of their businesses. 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 and compliance services, consultive practice
management programs and training, and independent 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-
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' efficiency and accuracy.
Comprehensive Clearing and Compliance Services
We provide custody and clearing services for the majority of our advisors’ transactions, providing a simplified
and streamlined advisor experience and 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 wider range of advisors, including Hybrid RIAs and their associated advisors.
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 importance to us. As the
financial industry and regulatory environment evolve and become more complex, we remain devoted to serving our
clients ethically and exceedingly well. We have made a long-term commitment to enhancing our risk management
and compliance structure. Our technology-based compliance and risk management tools 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;
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•
•
for advisors on our corporate RIA platform, monitoring of registered investment advisory activities; and
inspecting branch offices and advising on how to strengthen compliance procedures.
Practice Management Programs and Training
Our practice management programs are designed to help financial advisors in independent practices and
financial institutions, as well as all levels of financial institution leadership, 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 as wealth management services, to
assist advisors serving high-net-worth clients with comprehensive estate, tax, philanthropic, and financial
planning processes;
• marketing strategies, including campaign templates, to enable advisors to build awareness of their services
and capitalize on opportunities in their local markets;
• succession planning and 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 Research
We provide our advisors with integrated access to comprehensive research on a broad range of investments
and market analysis on macro-economic events, capital markets assumptions, and strategic and tactical asset
allocation. Our research team provides advice that is designed to empower our advisors to provide their clients with
thoughtful advice in a timely manner, including the creation of discretionary portfolios for which we serve as a
portfolio manager that are available through our turnkey advisory asset management platforms. Our research team
actively works with our product due diligence group to review 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 lack of
proprietary products or investment banking services better enables us to provide research that is unbiased and
objective.
Our Product and Solution Access
We do not manufacture any financial products. Instead, we provide our advisors with open architecture
access to a broad range of commission, fee-based, cash, and money market products and services. Our product
due diligence group conducts a review on substantially all of our product offerings.
The sales and administration of these products are facilitated through our technology solutions that 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
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business development companies, retirement and 529 education savings plans, fixed income, and insurance. As of
December 31, 2016, the total assets in our commission-based products were $297.8 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, including in connection with the DOL Rule.
Fee-Based Advisory Platforms and Support
LPL Financial has 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. The fee structure 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 option strategies, unit investment trusts, and institutional money managers and no-load multi-
manager variable annuities. As of December 31, 2016, the total advisory assets under custody in these platforms,
through our Corporate RIAs or Hybrid RIAs, were $211.6 billion.
Cash Sweep Programs
We assist our advisors 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 providers and two insured
sweep vehicles involving banks. As of December 31, 2016, the total assets in our cash sweep programs, which are
held within brokerage and advisory accounts, were approximately $31.3 billion. Our sweep programs with banks
held $22.8 billion in insured cash account vehicles and $4.4 billion in a deposit cash account vehicles. The balance
in money market funds was $4.1 billion.
Retirement Services
We offer retirement solutions for commission- and fee-based services that allow advisors to provide
brokerage services, consultation, and advice to plan sponsors using LPL Financial. Our advisors, whether through
LPL Financial or through a Hybrid RIA, serve over 34,000 retirement plans representing at least $90.2 billion in
retirement plan assets. These retirement plan assets are custodied with LPL Financial or various third-party
providers of retirement plan administrative services that provide us with direct reporting feeds. There are additional
retirement plan assets supported by our advisors that are custodied with third-party providers that do not provide
reporting feeds to us. Including those plans for which we receive no reporting feed, we estimate there are over
46,000 retirement plans served by our advisors with total retirement plan assets of approximately $127.3 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 included in our reported advisory and brokerage assets.
Other Services
We provide a number of 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.
Our Financial Model
Our overall financial performance is a function of the following dynamics of our business:
• Our revenues stem from diverse sources, including advisor-generated commission and advisory fees, as
well as other asset-based fees from product manufacturers, omnibus, networking services, cash sweep
balances, and transaction and other fees for other ancillary services that we provide. Revenues are not
concentrated by advisor, product, or geography. For the year ended December 31, 2016, no single
relationship with our independent advisor practices, banks, credit unions, or insurance companies
accounted for more than 7% of our net revenues, and no single advisor accounted for more than 2% of our
net revenues.
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• The largest variable component of our cost base, advisor payout percentages, is directly linked to revenues
generated by our advisors.
• A portion of our revenues, such as software licensing and account and client fees, are not correlated with
the equity financial markets.
• Our operating model is scalable and is capable of delivering expanding profit margins over time.
• We have been able to operate with low capital expenditures and limited capital requirements, and as a
result have been able to invest in our business as well as return value to shareholders.
The majority of our revenue base is recurring in nature, with approximately 74% recurring revenue in 2016.
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.
Our scale enables us to benefit from the following dynamics:
• Continual Reinvestment —
t 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 United States, we
have been able to obtain attractive economics from product manufacturers.
• Payout Ratios to Advisors — Among the five largest United States broker-dealers by number of advisors,
we believe that we offer the highest average payout ratios to our advisors.
The combination of our ability to reinvest in our business and maintain highly competitive payout ratios 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.
Value Proposition
Our differentiator is the combination of our capabilities across research, technology, risk management, and
practice management. LPL makes 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.
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We believe we offer a compelling value proposition to independent financial advisors and financial institutions.
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, such as regional banks, credit unions, and
insurers that seek to provide a broad array of services for their clients. We believe many institutions 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 institutions 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, regional broker-dealers, and other independent broker-dealers. Our platform can accommodate a
variety of independent advisor business models, including independent financial advisors and Hybrid RIAs. The
flexibility of our business model enables our advisors to transition among the independent advisor business models
and product mix as their business evolves and preferences change within the market. Our own 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.
Ability to Serve a Large Majority of Retail Assets
Our historic focus has been on advisors who serve the mass-affluent market and we believe there continues
to be an attractive opportunity in this market. Although we have grown through our focus in this area, the flexibility of
our platform allows us to expand our breadth of services to better support the high-net-worth market. As of
December 31, 2016, our advisors supported accounts with more than $1 million in assets that in the aggregate
represented $102.4 billion in advisory and brokerage assets, which is 20.1% of our total assets custodied. Our array
of integrated technology and services is capable of supporting advisors with significant production and can compete
directly with wire houses and custodians. We are able to support our advisors to meet the needs of their mass
market clients up through the high-net-worth market, which, according to Cerulli Associates, accounts for
approximately 88% of all retail assets in the United States.
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.
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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 7.0% per year, while retirement assets are expected to grow 5.7% 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 $7.9
trillion as of 2016 to $10.8 trillion by 2020.
(1) The Cerulli Report: The State of U.S. Retail and Institutional Asset Management 2016.
(2) The Cerulli Report: U.S. Retirement Markets 2016.
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. However, the clients of these advisors are generally interested in retaining assets in
brokerage accounts. This shift has led to significant growth in the number of advisors associated with Hybrid RIAs.
Macroeconomic Trends
While the current macroeconomic environment has exhibited short-term volatility, we anticipate an
appreciation in asset prices and a rise in interest rates over the long term. We expect that our business will benefit
from growth in advisory and brokerage assets as well as increasing interest rates.
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Executing Our Growth Strategies
Attracting New Advisors to Our Platform
We intend to grow the number of advisors who are served by our platform — either those who are
independent or who are aligned with financial institutions. Cerulli Associates estimates there are 313,024 financial
advisors in the United States, of which we have a 4.6% market share, and we believe that we are uniquely
positioned to attract seasoned advisors of any practice size and from any of the channels listed below.
Channel
Independent Broker-Dealer(1)
Insurance Broker-Dealer
Wire House
National and Regional Broker-Dealer
Independent RIA(1)
Retail Bank Broker-Dealer
Hybrid RIAs(1)
Total
___________________
Advisors
% of Market
65,740
75,970
47,154
39,812
34,363
23,099
26,886
21.0%
24.3%
15.1%
12.7%
11.0%
7.3%
8.6%
313,024
100.0%
(1) The 26,886 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.
Increasing Productivity of Existing Advisor Base
We believe that the productivity of our advisors will 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 can facilitate these productivity improvements by helping our
advisors better manage their practices in an increasingly complex external environment, which we believe will result
in assets per advisor growing over time.
Competition
We compete with a variety of financial firms to attract and retain experienced and productive advisors:
• Within the independent channel, the industry is highly fragmented, comprised 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:
(cid:405) Commonwealth Financial Network
(cid:405) Cetera Financial Group
(cid:405) Cambridge
• The captive wire house channel tends 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:
(cid:405) Morgan Stanley
(cid:405) Bank of America Merrill Lynch
(cid:405) UBS Financial Services Inc.
(cid:405) Wells Fargo Advisors, LLC
• Competition for advisors also includes regional firms, such as Edward D. Jones & Co., L.P., and Raymond
James Financial Services, Inc.
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• Independent RIA firms, which are registered with the SEC or though their respective 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:
(cid:405) Charles Schwab & Co.
(cid:405) Fidelity Brokerage Services LLC
(cid:405) 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. and
Fidelity Brokerage Services LLC.
Employees
As of December 31, 2016, we had 3,288 full-time employees. None of our employees is subject to collective
bargaining agreements governing their employment with us. We build deep expertise by attracting talented
employees from a variety of fields and developing that talent into future leaders of our business and our industry.
Our continued growth is dependent, in part, on our ability to be an employer 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, as well as financial education tools to assist our
employees as they plan for their future.
Regulation
The financial services industry is subject to extensive regulation by United States federal, state, and
international government agencies as well as various self-regulatory organizations. We take an active leadership
role in the development of the 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.
Broker-Dealer Regulation
LPL Financial LLC is a broker-dealer registered with the SEC, a member of the Financial Industry Regulatory
Authority ("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 LLC is registered as a broker-dealer in each of the 50 states, the
District of Columbia, Puerto Rico, and the U.S. Virgin Islands.
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, and rules designed to promote high standards of commercial honor and just and equitable principles of
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trade. Broker-dealers are also regulated by state securities administrators in those jurisdictions where they do
business. Compliance with many of the rules and regulations applicable to us involves a number of risks because
rules and regulations are subject to varying interpretations, among other reasons. Regulators make periodic
examinations and review annual, monthly, and other reports on our operations, track record, and financial condition.
Violations of rules and regulations governing a broker-dealer’s actions could result in censures, penalties and fines,
disgorgement of profits or remediation to customers, the issuance of cease-and-desist orders, the restriction,
suspension, or expulsion from the securities industry of such broker-dealer, its financial advisor(s), or its officers or
employees, or other similar adverse consequences. 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 LLC.
LPL Financial LLC'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 LLC 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.
Significant new rules and regulations continue to arise as a result of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in July 2010. Provisions of the Dodd-Frank Act
that have not been implemented, but may affect our business in the future 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 for investment advisors. Compliance with these
provisions would likely result in increased costs. Moreover, to the extent the Dodd-Frank Act affects the operations,
financial condition, liquidity, and capital requirements of financial institutions with whom 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 ultimate impact that the Dodd-Frank Act will have on us, the financial
industry, and the economy cannot be known until all applicable regulations called for under the Dodd-Frank Act
have been finalized and implemented.
Investment Advisor Regulation
As investment advisors registered with the SEC, our subsidiaries LPL Financial LLC and Fortigent, LLC are
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. In 2016, the SEC proposed new business
continuity and transition planning requirements for investment advisors. If such rules are adopted, investment
advisors will face heightened regulatory scrutiny associated with, among other matters, the integrity and resilience
of their technology, cybersecurity, and other information security systems. Further, the Treasury Department’s
Financial Crimes Enforcement Network (“FinCEN”) proposed an anti-money laundering program rule for certain
investment advisors. Should this rule be adopted, investment advisors subject to the rule would be required to
devote significant resources to developing related compliance programs.
The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and
associated regulations, ranging from fines and censure to termination of an investment advisor’s registration.
Investment advisors 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, sanctions, profit
disgorgement, client remediation, fines, or other similar consequences.
Retirement Plan Services Regulation
Certain of our subsidiaries, including LPL Financial LLC, PTC, and LPLIA, are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and 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 that are subject to
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ERISA or the Code. ERISA imposes certain duties on persons who are "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" (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 DOL Rule, if not delayed or changed, would significantly broaden the circumstance in which we and our
advisors may be considered an “investment advice fiduciary” under ERISA and Section 4975 of the Code,
extending fiduciary status to many investment professionals and activities that have historically not been considered
to be fiduciary, and impose 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. We
are continuing to analyze and evaluate the impact of the DOL Rule and related exemptions on our clients, potential
clients, and our business. However, 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. In addition, the DOL Rule creates increased risk of private arbitration and
litigation, including potential class action litigation, based on violations of the DOL Rule. The full effect of the DOL
Rule, once phased in, on us, our advisors, and the broader financial industry, is not fully known at this time. Political
changes at the federal level may also impact 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.
Commodities and Futures Regulation
LPL Financial LLC 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 LLC 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 LLC is regulated by the CFTC and 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
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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
The SEC, FINRA, CFTC, and 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 maintain a minimum net capital, and applies certain discounts to the value of
its assets based on the liquidity of such assets. LPL Financial LLC is also subject to the NFA's financial
requirements and is required to maintain net capital that is in excess of or equal to the greatest of the NFA's
minimum financial requirements. Under these requirements, LPL Financial LLC 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.
The SEC, FINRA, CFTC, and 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 that require prior notice to the SEC and
FINRA for certain capital withdrawals. LPL Financial LLC, 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 States 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 and
we 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. To the extent they are applicable to us, we must comply with these federal and state information-
related laws and regulations, including, for example, those in the United States, such as the Gramm-Leach-Bliley
Act of 1999, SEC Regulation S-P, the Fair Credit Reporting Act of 1970, as amended, and Regulation S-ID. In 2016,
the SEC proposed regulations related to business continuity and transition planning which, if adopted, would
impose additional requirements and potential liability related to security and privacy standards that must be
observed by investment advisors.
Financial Information about Geographic Areas
Our revenues for the periods presented were derived from our operations in the United States.
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Trademarks
Access Overlay®y , BranchNet®, CLIENTWORKS®, DO IT SMARTER®, Fortigent®, LPL®, LPL Career Match®,
LPL Financial (& Design)®, Manager Access Network®, Manager Access Select®, OMP®, and SPONSORWORKS®
are our registered trademarks. THE PRIVATE TRUST COMPANY, N.A. (& Design) is among our service marks.
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Item 1A. Risk Factors
Risks Related to Our Business and Industry
We depend on our ability to attract and retain experienced and productive advisors.
We derive a large portion of our revenues 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 existing advisors, or if advisor migration away from
wire houses and 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 qualified advisors. In attracting and retaining advisors, we compete
directly with a variety of financial institutions such as wire houses, regional broker-dealers, banks, insurance
companies, and other independent broker-dealers. 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.
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 both 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 commissions and our transaction revenue;
reduce the value of advisory and brokerage assets, thereby reducing advisory fee revenue and asset-
based fee income; and
• motivate clients to withdraw funds from their accounts, reducing advisory and brokerage assets, advisory
fee revenue, and asset-based fee income.
Other more specific trends may also affect our financial condition and results of operations, including, for
example: changes in the mix of products preferred by investors may result in increases or decreases in our fee
revenues 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 are exposed to interest rate risk primarily from changes in fees payable to us from banks
participating in our cash sweep programs, which are based on prevailing interest rates. In the prevailing relatively
low interest rate environment, our revenue from our cash sweep programs has declined, and our revenue may
decline further due to the expiration of contracts with favorable pricing terms, less favorable terms in future
contracts with participants in our cash sweep programs, decreases in interest rates, or clients moving assets out of
our cash sweep programs. Our revenues from our cash sweep programs also depend on our ability to manage the
terms of both our agreements with banks and money market fund providers participating in our programs, as well as
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competitive program fees and interest rates payable to clients. A sustained relatively low interest rate environment
may 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 cash sweep programs. If interest rates do not rise in
accordance with management and market expectations, future revenues from our cash sweep programs may be
lower than expected.
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; or
•
regulatory penalties or fines, 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, we 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, or uncommitted lines of credit at our broker-dealer subsidiary LPL
Financial LLC. 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 our lenders could develop a negative perception of our long- or short-term financial
prospects is 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.
A loss of our marketing relationships with manufacturers of financial products could harm our relationship
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with our advisors and, in turn, their clients.
We operate on an open architecture product platform offering 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
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of fixed and variable annuities and mutual 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 business could be materially adversely affected 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.
Risks Related to Our Regulatory Environment
Regulatory developments and our failure to comply with regulations could adversely affect our business by
increasing our costs and exposure to litigation and regulatory actions, affecting our reputation and making
our business less profitable.
Our business, including securities and investment advisory services, is subject to extensive regulation under
both federal and state laws. Our broker-dealer subsidiary, LPL Financial LLC, is:
•
registered as a 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;
• a member of 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; and
•
regulated by the CFTC with respect to the futures and commodities trading activities it conducts as an
introducing broker.
The primary self-regulator of LPL Financial LLC is FINRA. LPL Financial LLC is also subject to the rules of
Municipal Securities Rulemaking Board for its municipal securities activities. The CFTC has designated the NFA as
LPL Financial LLC’s primary regulator for futures and commodities trading activities.
The SEC, FINRA, CFTC, 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. 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,
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and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit, and
risk management personnel. While we believe that we have adopted policies and procedures reasonably designed
to comply with all applicable laws, rules and regulations, and interpretations these systems and procedures may not
be fully effective, and there can be no assurance that regulators or third-parties will not raise concerns with respect
to our past or future compliance with applicable regulations. Violations of laws, rules or regulations have in the past
and could in the future result in penalties, fines, disgorgement of profits or remediation to customers, which could
negatively impact our financial results, and/or business reputation.
Our profitability could also be affected by rules and regulations that impact the business and financial
communities generally and, in particular, our advisors’ and their clients, including changes to the interpretation or
enforcement of laws governing taxation (including the classification of independent contractor status of our
advisors), 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 rules and regulations could also result in limitations on the lines of business we conduct, modifications to
our business practices, increased capital requirements, and additional costs. For example, as discussed above, in
2016 the DOL adopted the DOL Rule and related exemptions that impose new requirements on our various
business lines. The DOL Rule is currently generally applicable in April 2017, with certain requirements becoming
applicable on January 1, 2018; however, the DOL Rule could be delayed. The DOL also finalized certain prohibited
transactions for broker-dealers regarding receipt of compensation for providing investment advice under
arrangements that would constitute conflicts of interest. We are analyzing and evaluating the impact of the DOL
Rule and related exemptions on our business, clients, and potential clients. 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 will negatively impact our results, including the impact of increased expenditures related to
legal, compliance, information technology and other costs. These changes have also affected (and will likely
continue to affect) the products and services we provide to accounts and the compensation that we and our
advisors receive in connection with such products and services. Please consult the Retirement Plan Services
Regulation section within Part I, "Item 1. Business" for more information about the risks associated with the DOL
Rule and related exemptions and their potential impact on our operations.
In addition, the Dodd-Frank Act has 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 became effective immediately, while the details of some provisions 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 regulations would likely result in increased costs. Moreover, to the extent the Dodd-Frank Act affects
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 ultimate impact that the Dodd-Frank Act will have on us, the
financial industry and the economy cannot be known until all such applicable regulations called for under the Dodd-
Frank Act have been finalized and implemented.
In addition to the DOL Rule and Dodd-Frank Act rule promulgation, other proposals are currently under
consideration by federal banking regulators that may have an impact upon our profitability. Global regulators are
engaged in ongoing efforts to build upon the Basel capital accords, which set new capital and liquidity standards for
global banking institutions (“Basel III”). Basel III is designed to strengthen bank capital requirements and introduce
new regulatory requirements on bank liquidity. In October 2013, United States banking regulators issued a final rule
implementing Basel III capital standards in the United States. In September 2014, United States banking regulators
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issued a final rule to implement the liquidity coverage ratio standards to address Basel III liquidity standards in the
United States. These new rules and proposals could negatively impact the attractiveness of cash deposits to banks
who participate in our cash sweep programs, making it more difficult for us to renew existing contracts and
negotiate new arrangements.
We are subject to various regulatory requirements, which, if not complied with, could result in the
restriction of the ongoing conduct or growth, or even liquidation of, parts 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 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. 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 change in our equity ownership that results in one person or entity
directly or indirectly owning or controlling 25% or more of our equity capital. 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 contributions to the regulated
entity. As a result of these regulations, our future efforts to sell shares or raise additional capital may be delayed or
prohibited.
In addition, the SEC, FINRA, CFTC, OCC, and NFA have extensive rules and regulations with respect to
capital requirements. As a registered broker-dealer, LPL Financial LLC is subject to Rule 15c3-1 (“Net Capital
Rule”) under the Exchange Act, and related requirements of SROs. The CFTC and 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 subsidiary could be restricted, which in turn could limit our ability to repay debt, redeem or purchase
shares of our outstanding stock, or pay dividends. A large operating loss or charge against net capital could
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 ever-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 retirement plan 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 clients that are
subject to ERISA or the Code. ERISA imposes certain duties on persons who are "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
19
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 service providers, including fiduciaries (as
defined in Section 4975(e)(3)) to such plans. Section 4975 also imposes excises 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, 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 lose
l
thereby reducing our revenues and net income.
advisors and their assets,
We are subject to competition in all aspects of our business, including competition for our advisors and their
clients, from:
• asset management firms;
• commercial banks and thrift institutions;
•
insurance companies;
• other clearing/custodial technology companies; and
• brokerage and investment banking firms.
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 advisors licensed with us leave us to pursue other
opportunities, or if current or potential clients of our advisors decide to use one of our competitors, we could face a
significant decline in market share, commission and fee revenues and net income. 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 competitive pressures on pricing of
such services or products may cause clients of our advisors to withdraw their assets on short notice.
Clients of our advisors control their assets under management with us. Poor service or performance of the
financial products that we offer, the emergence of new financial products or services from others, 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, 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.
tt
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
20
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.
Risks Related to Our Debt
Our indebtedness could adversely affect our financial health and may limit our ability to use debt to fund
future capital needs.
At December 31, 2016, we had total indebtedness of $2.2 billion. 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 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 senior secured
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 senior secured credit agreement or other future indebtedness, our
creditors could, among other things, accelerate the maturity of our indebtedness.
Our senior secured credit agreement permits us to incur additional indebtedness. Although our senior
secured 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. Also, these restrictions do not prevent us from incurring obligations that do
not constitute “indebtedness” as defined in our senior secured credit 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 our senior secured
credit agreement. 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 senior secured credit agreement may prevent us from taking actions that we believe
would be in the best interest of our business.
Our senior secured 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;
• paying dividends on, redeeming or repurchasing our capital stock;
• making investments or acquisitions;
• creating liens;
• selling assets;
• guaranteeing indebtedness;
• engaging in transactions with affiliates; and
• consolidating, merging, or transferring all or substantially all of our assets.
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We are also required 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 senior secured credit agreement and payment of the indebtedness could be accelerated. Acceleration of
our indebtedness under our senior secured credit agreement 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 senior secured credit agreement could discourage an acquisition of us by a third party.
Certain provisions of our senior secured credit agreement 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 senior secured credit
agreement may be accelerated and become due and payable. A potential acquirer may not have sufficient financial
resources to purchase our outstanding indebtedness in connection with a change of control.
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 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. Our continued success will
depend, in part, upon:
• our ability to successfully maintain and upgrade the capability 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;
• our ability to use technology effectively to support our regulatory compliance and reporting functions; and
• our ability to retain skilled information technology employees.
Extraordinary trading volumes, 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, could result in financial losses, unanticipated disruptions in service to
clients, liability to our advisors' clients, regulatory sanctions, and damage to our reputation.
Our operations rely on the secure processing, storage, and transmission of confidential and other information
in our computer systems and networks, including personally identifiable information of advisors and their clients.
Although we take protective measures and endeavor to modify them as circumstances warrant, the computer
systems, software, and networks may be vulnerable to unauthorized access, human error, computer viruses, denial-
of-service attacks, malicious code, and other events that could impact the security, reliability, and availability of our
systems. If one or more of these events occur, this could jeopardize our own, our advisors’ or their clients’, or
counterparties’ confidential and other 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. 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
22
notifications, or to update our technologies, websites and web-based applications to comply with industry and
regulatory standards (including under the Americans with Disabilities Act) and we may be subject to litigation,
regulatory sanctions, and financial losses that are either not insured or are not fully covered through any insurance
we maintain. Cybersecurity requires ongoing investment and diligence against evolving threats and is subject to
federal and state regulation relating to the protection of confidential information. New regulations may be
promulgated by relevant federal and state authorities at any time and compliance with regulatory expectations may
become increasingly complex as more state regulatory authorities issue or amend regulations governing handling of
confidential information by companies within their jurisdiction. 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. See also "Our networks may be vulnerable to
security risks" below.
The securities settlement process exposes us to risks that may expose our advisors and us to adverse
movements in price.
LPL Financial LLC provides clearing services and trade processing for our advisors and their clients 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. 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 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.
Our information technology systems may be vulnerable to security risks.
The secure transmission of confidential 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 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.
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, we or our advisors could experience data loss, financial loss, harm to reputation, regulatory violations,
class action and commercial litigation, and significant business interruption. In addition, vulnerabilities of our
external service providers could pose security risks to client information. If any such disruption or failure occurs, we
or our advisors may be exposed to unexpected liability, advisors or their clients may withdraw assets, our reputation
may be tarnished, and there could be a material adverse effect on our business.
Our information technology systems may be vulnerable to unauthorized access, computer viruses, and other
security problems in the future. We rely on our advisors and employees to comply with our policies and procedures
to safeguard confidential data. The failure of our advisors and employees to comply with such policies and
procedures 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 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 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 access to our proprietary business information;
• subject us to liability for a failure to safeguard client data;
23
•
result in the termination of relationships with our advisors;
• subject us to regulatory sanctions or burdens, 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 the 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
may not be sufficient to cover us for all losses and may not be sufficient to protect us against all such losses.
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. 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 affects our competitive advantage.
Maintaining competitive technology requires us to make significant capital expenditures, both in the near term
and longer-term. There cannot be any assurance that we will have sufficient funds to adequately update and
expand our information technology systems, nor can there be any assurance that any upgrade or expansion efforts
will be sufficiently timely, successful, and accepted by our current and prospective advisors. 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 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 may result from the use of infrastructure or software that is beyond their
manufacturer’s stated end of life, leading to security, stability, and regulatory risks. We work to mitigate such risks
through additional controls and increased modernization spending, although we cannot assure that our risk
mitigation efforts will be effective, in whole or in part.
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 investment 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, loss of power, telecommunications failure, or other natural or man-made events. A catastrophic event could
24
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. If our business continuity and disaster recovery plans
and procedures were disrupted or unsuccessful in the event of a catastrophe, we could experience a material
adverse interruption of our operations.
rr
We rely on outsourced service 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. If we had to change these service providers unexpectedly, we would also experience a disruption to
our business, and we cannot predict the costs or time that would be required to find alternative service providers.
We cannot provide any assurance that the disruption caused by a significant failure by, or change in, our service
providers would not have a material adverse effect on our business. We have transitioned additional business
processes to third-party service providers, which increases our reliance on outsourced providers, including off-shore
providers, and the related risks described above. For example, we rely on several off-shore service providers for
functions related to cash management, account transfers, information technology infrastructure and support, and
document imaging, among others. To the extent third-party service providers are located in foreign jurisdictions, we
are exposed to risks inherent in 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.
Risks Related to Our Business Generally
Any damage to our reputation could harm our business and lead to a loss of revenues and net income.
We have spent many years developing our reputation for integrity and superior client service, which is built
upon our four pillars of support for our advisors: 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. 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 actions, and governmental and SRO
investigations.
From time to time, we have been subjected to and are currently subject to legal proceedings, investigations,
examinations, and inquiries arising out of our business operations, including lawsuits, arbitration claims,
governmental subpoenas, regulatory, governmental or SRO inquiries or investigations, and other actions and
claims. Many of our legal claims are initiated by clients of our advisors and involve the purchase or sale of
25
investment securities, but other claims may be, and have been, initiated by state-level and federal regulatory
authorities and SROs, including the SEC, FINRA, CFTC, OCC, and NFA.
The outcome of any such litigation, arbitration, and governmental and SRO investigations, including
regulatory proceedings, examinations, and inquiries, cannot be predicted, and a negative outcome in such a matter
has resulted and could in the future result in substantial legal liability, regulatory fines or monetary penalties,
censure, loss of intellectual property rights, and injunctive or other equitable relief against us. Further, such outcome
may cause us significant reputational harm and could have a material adverse effect on our business, results of
operations, cash flows, or financial condition.
In our investment advisory programs, we have fiduciary obligations that require us and our advisors to act in
the best interests of our advisors' clients. We may face liabilities for actual or alleged breaches of legal duties to our
advisors' clients, 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). Among other considerations,
the DOL Rule promulgated in 2016 and applicable beginning in 2017 (if not delayed) will establish new regulatory
requirements that may introduce new grounds for legal claims, including class action litigation, against us in the
future. 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 mitigating our 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 fully effective. Some of our risk evaluation methods 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 accurate, complete, or up-to-date. Also,
because our advisors work in decentralized offices, additional risk management challenges may exist. 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 fully effective or if we are not always successful in
capturing all 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.
Misconduct and errors by our employees and our advisors, who operate in a decentralized environment,
could harm our business.
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. 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. There cannot be any
assurance that misconduct and errors by our employees and advisors will not lead to a material adverse effect on
our business.
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
26
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. 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. 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 by our
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 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):
• actual or anticipated fluctuations in our results of operations, including with regard to interest rates or
revenues associated with our cash sweep programs or key business lines;
• 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 regulatory actions;
• changes in market valuation or earnings of our competitors;
•
•
the trading volume of our common stock;
future sale 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;
• 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.
27
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.
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 directors and will be limite
earnings and cash flows.
d by our ability to generate sufficient
f
Our board of directors declared quarterly cash dividends on our outstanding common stock in 2016 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' 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
applicable law. Such determinations will depend upon a number of factors that the board of directors deems
relevant, including future earnings, the success of our business activities, capital requirements, alternative uses of
capital, the general financial condition and future prospects of our business, and general business conditions.
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 senior secured credit agreement. Our broker-dealer
subsidiary is subject to requirements of the SEC, FINRA, the CFTC, 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 prevent or 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.
28
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.
29
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate offices are located 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; 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 November 30, 2036; and in Charlotte, North Carolina where
we lease a total of approximately 174,000 square feet of space under lease agreements that expire on February 28,
2017.
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 proceedings, investigations,
examinations, and inquiries arising out of our business operations, including lawsuits, arbitration claims,
governmental subpoenas, regulatory, governmental or SRO inquiries or investigations, and other actions and
claims. In the opinion of management, there are no matters outstanding that would have a material adverse impact
on our operations, financial condition, or cash flows.
A putative class action lawsuit has been filed against the Company and certain of its executive officers in
federal district court alleging certain misstatements and omissions related to the Company’s share repurchases and
financial performance in late 2015. The Company intends to defend vigorously against the lawsuit.
For a discussion of legal proceedings, see Note 12. Commitments and Contingencies, within the notes to
consolidated financial statements in this Annual Report on Form 10-K. Please also see “Risk Factors – Our
business is subject to risks related to litigation, arbitration actions, and governmental and SRO investigations.”
Item 4. Mine Safety Disclosures
Not applicable.
30
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
PART II
Equity Securities
Market Information
Our common stock is traded on the NASDAQ under the symbol “LPLA.” The closing sale price as of
December 31, 2016 was $35.21 per share. As of that date there were 840 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'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.
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
42.86 $
30.56 $
28.77 $
43.89 $
29.09
20.51
20.95
15.38
48.00 $
48.18 $
48.00 $
47.38 $
36.41
37.72
39.41
39.83
$
$
$
$
$
$
$
$
31
Performance Graph
The following graph compares the cumulative total stockholder return (rounded to the nearest whole dollar) of
the Company's common stock, the Standard & Poor’s 500 Financial Sector Index (the "S&P 500 Financial"), and
the Dow Jones U.S. Financial Services Index (the "Dow Jones Financial") for the last five years. The graph
assumes a $100 investment at the closing price on December 31, 2011 and reinvestment of the dividends on the
respective dividend payment dates without commissions. This graph does not forecast future performance of the
Company's stock.
32
Dividends
Cash dividends declared per share of common stock and total cash dividends paid during each quarter for
the years ended December 31, 2016 and 2015 were as follows (in millions, except per share data):
2016
Fourth quarter
Third quarter
Second quarter
First quarter
2015
Fourth quarter
Third quarter
Second quarter
First quarter
Dividend
per Share
Declared
Total Cash
Dividend
Paid
$
$
$
$
$
$
$
$
0.25 $
0.25 $
0.25 $
0.25 $
0.25 $
0.25 $
0.25 $
0.25 $
22.3
22.3
22.3
22.2
23.8
23.8
24.1
24.2
Any future determination relating to the declaration and payment of dividends will be made at the discretion of
our Board of Directors 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 directors may deem relevant. Our senior secured credit
agreement contains restrictions on our activities, including paying dividends on our capital stock. For an explanation
of these restrictions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Debt”. 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 LLC.
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, 2016:
Plan category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Total
___________________
Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))(1)
(c)
7,126,179 $
27,803 $
7,153,982 $
30.43
22.47
30.40
9,696,652
—
9,696,652
(1) Includes shares available for future issuance under our amended and restated 2010 Omnibus Equity Incentive
Plan.
As of December 31, 2016, we had 27,803 warrants outstanding to purchase common stock under our 2008
LPL Investment Holdings Inc. Financial Institution Incentive Plan (the “Financial Institution Incentive Plan”), which
has not been approved by security holders. Grants have not been made under this plan since our initial public
offering in 2010. The exercise price of the outstanding warrants is equal to the fair market value on the grant date.
Warrant awards vested in equal increments over a five-year period and expire on the 10th anniversary following the
date of grant.
33
Purchases of Equity Securities by the Issuer
The table below sets forth information regarding repurchases on a monthly basis during the fourth quarter of
2016:
Period
October 1, 2016 through October 31, 2016
November 1, 2016 through November 30, 2016
December 1, 2016 through December 31, 2016
Total
_____________________
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
— $
— $
— $
— $
—
—
—
—
— $
— $
— $
— $
225,000,000
225,000,000
225,000,000
225,000,000
(1) See Note 13. Stockholders' Equity, within the notes to consolidated financial statements for additional
information.
34
Item 6. Selected Financial Data
The following table sets forth selected historical financial information for the past five fiscal years. The selected
historical financial information presented below should be read in conjunction with the information included under the
heading “Management’s Discussion and Analysis 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, 2016, 2015, and 2014
and the consolidated statements of financial condition data as of December 31, 2016 and 2015 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, 2013 and 2012 and consolidated statements of financial condition
data as of December 31, 2014, 2013, and 2012 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.
Years Ended December 31,
2016
2015
2014
2013
2012
Consolidated statements of income data (In thousands, except per share data):
Net revenues
Total expenses
$ 4,049,383 $ 4,275,054 $ 4,373,662 $ 4,140,858 $ 3,661,088
$ 3,751,867 $ 3,992,499 $ 4,078,965 $ 3,849,555 $ 3,410,497
Income before provision for income taxes
Provision for income taxes
Net income
Per share data:
Earnings per basic share
Earnings per diluted share
Cash dividends paid per share
$
$
$
$
$
$
297,516 $
282,555 $
294,697 $
291,303 $
250,591
105,585 $
113,771 $
116,654 $
109,446 $
98,673
191,931 $
168,784 $
178,043 $
181,857 $
151,918
2.15 $
2.13 $
1.00 $
1.77 $
1.74 $
1.00 $
1.78 $
1.75 $
0.96 $
1.74 $
1.72 $
0.65 $
1.39
1.37
2.24
2016
2015
2014
2013
2012
December 31,
Consolidated statements of financial condition data (In thousands):
Cash and cash equivalents
$
747,709 $
724,529 $
412,332 $
516,584 $
466,261
Total assets
Total debt, net
$ 4,834,926 $ 4,521,061 $ 4,041,930 $ 4,027,114 $ 3,968,007
$ 2,175,436 $ 2,188,240 $ 1,625,195 $ 1,519,379 $ 1,297,308
35
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 of
this 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 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 Note Regarding Forward-Looking Statements."
Overview
We are a leader in the retail financial advice market, the nation's largest independent broker-dealer (based on
total revenues, Financial Planning magazine June 1996-2016), a top custodian for registered investment advisors
("RIAs"), and a leading independent consultant to retirement plans. We provide an integrated platform of brokerage
and investment advisory services to more than 14,000 independent financial advisors (our "advisors"), including
financial advisors at more than 700 financial institutions across the country, enabling them to provide their retail
investors ("clients") with objective financial advice through a lower conflict model. We also support approximately
4,000 financial advisors who are affiliated and licensed with insurance companies with customized clearing,
advisory platforms, and technology solutions.
Through our advisors, we are one of the largest distributors of financial products and services in the United
States, and we believe that we are one of the top five firms in terms of largest overall advisor base in the United
States.
We believe that objective financial guidance is a fundamental need 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 LPL Financial is 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. LPL strives 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 for the year ended December 31, 2016 included net income of $191.9 million, or $2.13 per share,
which compares to $168.8 million, or $1.74 per share, for the year ended 2015. Earnings per share growth for the
year benefited from increased cash sweep revenue and transaction and fee revenue, staying disciplined on
expenses to create operating leverage, and a lower share count.
Asset Growth Trends
Total assets served were $509.4 billion as of December 31, 2016, up 7.1% from $475.6 billion as of
December 31, 2015. Total net new assets were $5.9 billion for the year ended December 31, 2016, compared to
$9.1 billion for the same period in 2015. In September 2016, an institutional client was acquired by a bank, with its
own broker-dealer, and departed, which resulted in a departure of approximately $4.8 billion of net new assets.
Net new advisory assets were $13.7 billion for the year ended December 31, 2016, compared to $16.7 billion
in 2015. As of December 31, 2016, our advisory assets had grown to $211.6 billion from the prior year end balance
of $187.2 billion and represented 41.5% of total advisory and brokerage assets served. In addition to our corporate
RIA platform, we offer a platform that serves independent RIA firms that conduct their advisory business through
36
separate entities (“Hybrid RIAs”) operating pursuant to the Investment Advisers Act of 1940, as amended ("Advisers
Act") or through their respective states' investment advisory laws and regulations, rather than through LPL
Financial.
As of December 31, 2016, brokerage and advisory assets custodied on our Hybrid RIA platform had grown to
$149.3 billion, compared to $118.7 billion as of the prior year end, and represented 29.3% of our total advisory and
brokerage assets served.
Net new brokerage assets totaled outflows of ($7.8) billion for the year ended December 31, 2016, compared
to outflows of ($7.6) billion in 2015. As of December 31, 2016, our brokerage assets had grown to $297.8 billion
from the prior year end balance of $288.4 billion. The decrease in net new brokerage assets were a result of a
departure of an institutional client, which resulted in the departure of approximately $4.1 billion of net new
brokerage assets.
Gross Profit Trends
Gross profit, a non-GAAP measure, of $1,394.3 million for the year ended December 31, 2016, increased
2.7% in comparison to $1,357.7 million for the year ended December 31, 2015. 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 9 to the
Financial Metrics table within the "How We Evaluate Our Business" section for additional information on gross
profit. The increase in year-over-year 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 announcements in December 2015
and 2016, higher average cash balances, increase in transaction and fee revenues due to greater market volatility,
and an increase in account termination fees that resulted from the departure of an institutional client due to an
acquisition by a bank with its own broker-dealer. These increases were partially offset by decreases in commissions
and advisory revenues, net of the correlated reduction in commission and advisory expenses and brokerage,
clearing, and exchange fees.
Capital Management Activity
We returned $114.1 million of capital to shareholders during the year, including $89.1 million of dividends and
$25.0 million of share buy backs (representing 634,651 shares).
Our Sources of Revenue
Our revenues are 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 revenues through our cash sweep programs and the access that we provide to over 750 product
providers with the following product lines:
• Alternative Investments
• Retirement Plan Products
• Annuities
• Exchange Traded Products
• Insurance Based Products
• Mutual Funds
• Separately Managed Accounts
• Structured Products
• Unit Investment Trusts
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 manufacturers pay us fees based
on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’
clients.
37
We track recurring revenue, a characterization of net revenue and a statistical measure, which we define to
include our revenues from asset-based fees, advisory fees, trailing commissions, cash sweep programs, and
certain other fees that are based upon 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 of our revenue:
Sources of Revenue
Primary Drivers
Advisor-driven
revenue with
~85%-90%
payout ratio
Commission
Advisory
Asset-Based
- Cash Sweep Fees
- Sponsorship Fees
- Record Keeping
Attachment
revenue
retained by us
Transaction and Fee
- Trades
- Client (Investor) Accounts
- Advisor Seat and Technology
Other
Total
- Sales
- Transactions
- Brokerage asset levels
- Corporate advisory
asset levels
- Cash balances
- Interest rates
- Number of accounts
- Client asset levels
- Client activity
- Number of clients
- Number of advisors
- Number of accounts
- Premium technology
subscribers
- Margin accounts
- Alternative investment
transactions
For the Year Ended December 31, 2016
Net
Revenues
(millions)
% of Total
Net
Revenue
Recurring
Revenues
(millions)
%
Recurring
$1,737
42.9%
919
52.9%
$1,290
31.9%
1,284
99.5%
$556
13.7%
539
96.9%
$416
10.3%
248
59.6%
$50
1.2%
24
48.0%
$4,049
100.0%
$3,014
74.4%
We regularly review various aspects of our operations and service offerings, including our policies,
procedures, and platforms, in response to marketplace developments. As needed, we implement changes to
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, including related disclosures, in the context of the changing regulatory environment for
retirement accounts.
38
How We Evaluate Our Business
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 business and key financial metrics
are as follows:
Business Metrics
Brokerage and advisory assets (in billions)(1)
Total brokerage and advisory net new assets (in billions)(2)
Brokerage assets (in billions)(1)(3)
Net new brokerage assets (in billions)(4)
Advisory assets under custody (in billions)(1)(5)
Net new advisory assets (in billions)(6)
Insured cash account balances (in billions)(1)
Deposit cash account balances (in billions)(1)
Money market account balances (in billions)(1)
Advisors(7)
Financial Metrics
Revenue (in millions)
Revenue increase (decrease)
Recurring revenue as a % of net revenue
Pre-Tax income (in millions)
Net income (in millions)
Earnings per share (diluted)
Non-GAAP Measures:(8)
Gross profit (in millions)(9)
Gross Profit growth from prior period(9)
Gross profit as a % of net revenue(9)
December 31,
2016
2015
2014
$
$
$
$
$
$
$
$
$
509.4
5.9
297.8
(7.8)
211.6
13.7
22.8
4.4
4.1
$
$
$
$
$
$
$
$
$
475.6
9.1
288.4
(7.6)
187.2
16.7
20.9
$
$
$
$
$
— $
8.1
$
475.1
N/A
299.3
N/A
175.8
17.5
18.6
—
7.4
14,377
14,054
14,036
Years Ended December 31,
2016
2015
2014
$ 4,049.4
$ 4,275.1
$
4,373.7
(5.3 )%
74.4 %
297.5
191.9
2.13
$
$
$
(2.3 )%
71.5 %
282.6
168.8
1.74
$
$
$
5.6 %
68.3 %
294.7
178.0
1.75
$
$
$
$ 1,394.3
$ 1,357.7
$
1,325.9
2.7%
34.4%
2.4%
31.8 %
6.2 %
30.3 %
____________________
(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. Set forth below are other client
assets at December 31 of 2016, 2015, and 2014, including retirement plan assets and certain trust and high-
net-worth assets that are custodied with third-party providers and therefore excluded from brokerage and
advisory assets served (in billions):
Retirement plan assets(a)
Trust assets
High-net-worth assets
_______________________
December 31,
2016
2015
2014
$
$
$
90.2
1.1
84.2
$
$
$
83.0 $
$
1.0
80.3
3.0
88.9 $
87.3
(a) Retirement plan assets are held in retirement plans that are supported by advisors licensed with LPL
Financial. At December 31, 2016, 2015, and 2014, our retirement plan assets represent those assets that
are custodied with third-party providers of retirement plan administrative services who provide reporting
feeds. Including those plans for which we receive no reporting feed, we estimate the total assets in
retirement plans supported to be approximately $127.3 billion at December 31, 2016. If we receive
39
reporting feeds in the future from providers for whom we do not currently receive feeds, we intend to
include and identify such additional assets in this metric. Such additional feeds since December 31, 2015
accounted for $0.2 billion of the total retirement plan assets.
(2) Represents net new assets for the twelve months ended 2016 and 2015 consisting of total inflow of funds
deposited into new brokerage and advisory accounts and additional funds deposited into existing brokerage
accounts that are serviced by advisors licensed with the Company's broker-dealer subsidiary, LPL Financial
LLC, that are custodied, networked, and non-networked and into existing advisory accounts that are custodied
in the Company's fee-based advisory platform and total outflows from all closed and existing brokerage and
advisory accounts on such platforms during the period.
(3) Brokerage assets consists of assets serviced by advisors licensed with LPL Financial 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.
(4) Represents net new assets for the twelve months ended December 31, 2016 and 2015 consisting of total inflow
of funds deposited into new brokerage accounts and additional funds deposited into existing brokerage
accounts that are serviced by advisors licensed with LPL Financial that are custodied, networked, and non-
networked and total outflows from all closed and existing brokerage accounts on such platforms during the
same period.
(5) Advisory assets under custody consist of advisory assets under management in our corporate advisory
platform, and Hybrid RIA assets in advisory accounts custodied at the Company. See “Results of Operations”
for a tabular presentation of advisory assets under custody.
(6) Represents net new assets for the twelve months ended December 31, 2016, 2015, and 2014 consisting of
total inflow of funds deposited into new advisory accounts and additional funds deposited into existing advisory
accounts that are custodied in our fee-based advisory platforms and total outflows from all closed and existing
advisory accounts custodied on such platforms during the period.
(7) Advisors are defined as those independent financial advisors and financial advisors at financial institutions who
are licensed to do business with LPL Financial.
(8) Our management believes that presenting certain non-GAAP 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 measures and metrics discussed below are appropriate for evaluating the performance of
the Company.
(9) Gross profit is 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 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 the Company's core operating performance before
indirect costs that are general administrative in nature.
Legal & Regulatory Matters
As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our
compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision
and reporting. The environment of additional regulation, increased regulatory compliance obligations, and enhanced
regulatory enforcement has resulted in additional operational and compliance costs, as well as increased costs in
the form of fines, restitution, and remediation related to regulatory matters. 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
40
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. Our ability to
estimate such costs may vary based on the current stage of evaluation and status of discussion with regulators, as
applicable.
Our accruals, including those established through the captive insurance company at December 31, 2016,
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. One of the matters relates to sales of certain securities over several years, and our accrual at
December 31, 2016, includes an estimate for the loss we expect to incur in resolving this matter including if we
were to repurchase certain affected securities at their original sales prices.
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, see
Note 12. Commitments and Contingencies, within the notes to the consolidated financial statements.
As discussed above, in April 2016, the United States Department of Labor issued the DOL Rule and related
exemptions, which broaden the circumstances under which we may be considered a “fiduciary” with respect to
certain accounts that are subject to ERISA, and the prohibited transaction rules of section 4975 of the Code,
including many employer-sponsored retirement plans and 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. We are continuing to analyze
and evaluate the impact of the DOL Rule and related amendments to exemptions on our clients, potential clients,
and our business, if the DOL Rule becomes applicable. However, 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.
Please consult the Retirement Plan Services Regulation section within Part I, "Item 1. Business" for more
information about the risks associated with the DOL Rule and related exemptions and their potential impact on our
operations.
Derivative Financial Instruments
In May 2013, we entered into a long-term contractual obligation (the "Agreement") with a third-party provider
to enhance the quality and speed and reduce the cost of our processes by outsourcing certain functions. The
Agreement provides that, on each annual anniversary date of the signing of the Agreement, the price for services
(as denominated in U.S. dollars) is to be adjusted for the then-current exchange rate between the U.S. dollars and
the Indian rupee. We bear the risk of currency movement at each annual reset date.
We use derivative financial instruments consisting solely of non-deliverable foreign currency contracts, all of
which have been designated as cash flow hedges. Through these instruments, we believe we have mitigated
foreign currency risk arising from a substantial portion of our contract obligation with the third-party provider arising
from annual anniversary adjustments. We will continue to assess the effectiveness of our use of cash flow hedges
to mitigate risk from foreign currency contracts.
See Note 2. Summary of Significant Accounting Policies and Note 8. Derivative Financial Instruments, within
the notes to consolidated financial statements for additional information regarding our derivative financial
instruments.
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
41
revenue and expense trends for periods presented. There have been no material acquisitions, integrations, or
divestitures during the twelve months ended December 31, 2016.
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. In the United States, economic data continues to point to fairly steady economic growth.
According to the most recent estimate by the Bureau of Economic Analysis, real gross domestic product (“GDP”)
growth decelerated to a 1.9% in the fourth quarter of 2016 from 3.5% in the third quarter, putting the overall growth
rate over the last four quarters at 1.9%. A largely healthy labor market, relatively strong United States consumer
spending, and an accommodative Federal Reserve ("Fed") have all been supportive of growth. In addition,
stabilizing oil prices have helped manufacturing to rebound modestly, while services sector activity remains steady.
Although there are nascent signs that economies in Europe and China may be reaccelerating, a lack of support
from global growth continues to be a concern.
The economic impact of the U.K.'s vote to leave the European Union in mid-2016 has had a muted impact on
the United States economy thus far. However, there are potential major policy initiatives as a result of the 2016
United States presidential election that may impact the economy in the near future. On balance, while growth of 2-
3% is modest by historical standards, such a growth rate, should it continue, would still be above the Congressional
Budget Office’s estimate of forecasted GDP growth, and therefore could be enough to continue to slowly tighten the
labor market, push wages higher, and increase the probability of the Fed raising rates several times in 2017.
Equity market volatility increased somewhat in the fourth quarter of 2016, especially in the weeks around the
United States election, but remained low relative to levels seen in early 2016. Despite the election and a Fed
interest rate increase in December, measures of financial stress, while not at cycle lows, remained considerably
better than levels seen early in 2016. The S&P 500 Index advanced in the fourth quarter of 2016, with virtually all of
the gains coming between Election Day (November 8, 2016) and mid-December 2016. The Index hit a new all-time
high in late November 2016 and continued to make new highs through mid-December 2016 before a very modest
pull back into year end. The S&P 500 finished the year with a 9.5% gain for 2016 (12.0% with dividends reinvested).
After the election, there was some evidence that investor confidence had improved but fund flow data and investor
sentiment surveys continue to indicate caution among retail investors. Equity market leadership shifted after the
election, rewarding sectors that market participants anticipated will benefit from policies enacted by the incoming
Congress and new administration.
The change in sector leadership-post election in part reflected a change in interest rate behavior during the
fourth quarter 2016 after the United States presidential election. Treasury yields, which started the second half of
2016 at depressed levels in response to the U.K. referendum vote rose steadily but at a modest pace over the third
quarter and through Election Day. After the election, yields moved higher reflecting forecasts for better United
States economic growth, less monetary policy stimulus, higher inflation and additional Fed rates increases. By mid-
December 2016, the yield on the 10-year Treasury note reached as high as 2.60%, the highest reading in more
than two years, and yields moved substantially higher across the yield curve during the fourth quarter.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by
Fed policy. In particular, low short-term rates can depress the profitability of our cash sweep program, due to the fee
compression needed to keep our rates competitive. Low current United States interest rates but with the prospect of
rising rates over the long term can also have an impact on demand for fixed and variable annuity products. As was
widely anticipated, at its final meeting of 2016 in December, the Fed’s policymaking arm, the Federal Open Market
Committee (FOMC) raised its target for the Fed funds rate by 0.25%, putting the new target range at between
0.50% and 0.75%. The expected path of rates continues to be moderately upward according to the updated
projections of FOMC members that accompanied the December 2016 meeting. If the economy, labor market, and
inflation continue to track to the FOMC members’ forecast, the Fed funds effective rate would be at 1.375% by year-
end 2017 and 2.125% by year-end 2018. The Fed signaled that any decision to raise rates in 2017 and beyond
would be data dependent.
42
Results of Operations
The following discussion presents an analysis of our results of operations for the years ended December 31,
2016, 2015, and 2014. Where appropriate, we have identified specific events and changes that affect comparability
or trends, and where possible and practical, have quantified the impact of such items.
Years Ended December 31,
Percentage Change
2016
2015
2014
2016 vs. 2015 2015 vs. 2014
(In thousands)
$ 1,737,435 $ 1,976,845 $ 2,118,494
(12.1)%
(4.6)%
12.7 %
3.4 %
10.9 %
(6.9)%
(5.3)%
(9.2)%
(0.8)%
6.8 %
3.5 %
(0.5)%
10.5 %
4.0 %
3.8 %
(5.2)%
(100.0)%
(17.9)%
(7.1)%
63.1 %
— %
(6.0)%
5.3 %
(7.2)%
13.7 %
(6.7 )%
1.1 %
3.6 %
8.7 %
1.1 %
(40.3 )%
(2.3 )%
(4.5 )%
4.3 %
11.6 %
26.6 %
(1.6 )%
2.0 %
3.8 %
7.1 %
7.0 %
(65.5 )%
7.7 %
(2.2 )%
14.7 %
(100.0 )%
(2.1 )%
(4.1 )%
(2.5 )%
(5.2 )%
Revenues
Commission
Advisory
Asset-based
Transaction and fee
Interest income, net of interest expense
Other
Net revenues
Expenses
Commission and advisory
Compensation and benefits
Promotional
Depreciation and amortization
Amortization of intangible assets
Occupancy and equipment
Professional services
Brokerage, clearing, and exchange
Communications and data processing
Restructuring charges
Other
1,289,681
1,352,454
1,337,959
556,475
415,715
21,282
28,795
493,687
401,948
19,192
30,928
476,595
369,821
18,982
51,811
4,049,383
4,275,054
4,373,662
2,600,624
2,864,813
2,998,702
436,557
148,612
75,928
38,035
92,956
67,128
54,509
44,453
—
440,049
139,198
421,829
124,677
73,383
38,239
84,112
64,522
52,516
46,871
11,967
57,977
38,868
82,430
62,184
49,015
43,823
34,652
96,587
117,693
109,327
Total operating expenses
3,655,389
3,933,363
4,023,484
Non-operating interest expense
Loss on extinguishment of debt
Total expenses
Income before provision for income taxes
Provision for income taxes
96,478
59,136
—
—
51,538
3,943
3,751,867
3,992,499
4,078,965
297,516
105,585
282,555
113,771
294,697
116,654
Net income
$
191,931 $
168,784 $
178,043
43
Revenues
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update("ASU") 2014-09, Revenue from Contracts with Customers: Topic 606, 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 is now effective for annual reporting periods beginning after
December 15, 2017. We expect to adopt the provisions of this guidance on January 1, 2018 using the modified
retrospective approach. The adoption is expected to have no material impact on our consolidated financial
statements but will impact the disclosures within the notes to the consolidated financial statements.
Commission Revenues
We generate two types of commission revenues: sales-based commissions and trailing commissions. Sales-
based commission revenues, which occur whenever clients trade securities or purchase various types of
investment products, primarily represent gross commissions generated by our advisors. The levels of sales-based
commission revenues 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' clients. Trailing commission revenues
are recurring in nature and are earned based on the market value of investment holdings in trail-eligible assets. We
earn trailing commission revenues (a commission that is paid over time, such as 12(b)-1 fees) primarily on mutual
funds and variable annuities held by clients of our advisors.
The following table sets forth our commission revenue, by product category, included in our consolidated
statements of income (dollars in thousands):
Years Ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
$ Change % Change $ Change % Change
Variable annuities
Mutual funds
Alternative investments
Fixed annuities
Equities
Fixed income
Insurance
Group annuities
Other
$ 686,667 $ 774,610 $ 807,634 $
591,049
538,490
610,310
(87,943 )
(52,559 )
(11.4 )% $
(8.9 )%
(33,024 )
(19,261 )
(4.1 )%
(3.2 )%
34,927
185,060
133,092
157,975
83,696
86,364
74,910
46,526
795
97,505
90,940
81,108
49,890
676
160,287
112,091
85,882
78,659
51,250
743
211,638
(98,165 )
(73.8 )%
(78,546 )
(37.1 )%
27,085
17.1 %
(2,312)
(1.4 )%
(13,809 )
(14.2 )%
(14,586 )
(13.0 )%
(4,576)
(6,198)
(3,364)
119
(5.0 )%
(7.6 )%
(6.7 )%
17.6 %
5,058
2,449
(1,360)
(67)
5.9 %
3.1 %
(2.7 )%
(9.0 )%
(6.7 )%
Total commission revenue $ 1,737,435 $ 1,976,845 $ 2,118,494 $ (239,410)
(12.1 )% $ (141,649 )
44
The following table sets forth our commission revenue, by sales-based and trailing commission revenue
(dollars in thousands):
Sales-based
Variable annuities
Mutual funds
Alternative investments
Fixed annuities
Equities
Fixed income
Insurance
Group annuities
Other
Years Ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
$ Change % Change
$ Change % Change
$ 245,393 $ 320,552 $ 359,547 $
171,622
144,199
196,567
28,304
174,271
83,696
66,647
69,162
5,920
795
125,428
151,450
97,505
70,430
74,370
7,569
676
209,975
157,338
112,091
66,572
71,120
7,236
743
(75,159)
(27,423)
(97,124)
(23.4 )% $
(16.0 )%
(38,995)
(24,945)
(77.4 )%
(84,547)
22,821
15.1 %
(5,888)
(10.8 )%
(12.7 )%
(40.3 )%
(3.7 )%
(13,809)
(14.2 )%
(14,586)
(13.0 )%
(3,783)
(5,208)
(1,649)
119
(5.4 )%
(7.0 )%
(21.8 )%
17.6 %
3,858
3,250
333
(67)
5.8 %
4.6 %
4.6 %
(9.0 )%
Total sales-based revenue $ 818,387 $ 1,019,602 $ 1,181,189 $ (201,215)
(19.7 )% $ (161,587)
(13.7 )%
Trailing
Variable annuities
$ 441,274 $ 454,058 $ 448,087 $
(12,784)
(2.8 )% $
Mutual funds
394,291
419,427
413,743
(25,136)
(6.0 )%
Alternative investments
Fixed annuities
Fixed income
Insurance
Group annuities
6,623
10,789
19,717
5,748
40,606
7,664
6,525
20,510
6,738
42,321
1,663
2,949
19,310
7,539
44,014
(1,041)
(13.6 )%
4,264
(793)
(990)
(1,715)
65.3 %
(3.9 )%
(14.7 )%
(4.1 )%
Total Trailing revenue
$ 919,048 $ 957,243 $ 937,305 $
(38,195)
(4.0 )% $
19,938
5,971
5,684
6,001
3,576
1,200
1.3 %
1.4 %
360.9 %
121.3 %
6.2 %
(801)
(10.6 )%
(1,693)
(3.8 )%
2.1 %
Total commission revenue $ 1,737,435 $ 1,976,845 $ 2,118,494 $ (239,410)
(12.1 )% $ (141,649)
(6.7 )%
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 and 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.
Trailing revenues are recurring in nature and the slight decrease in 2016 revenue reflects a decrease in the
market value of the underlying assets.
The decrease in commission revenue in 2015 compared to 2014 was primarily due to a decrease in sales-
based activity for alternative investments, fixed and variable annuities, mutual funds, and equities. Alternative
investment sales commissions were challenged throughout the year, in particular non-traded real estate investment
trusts (REITs), due to a maturing real estate cycle and uncertainties regarding upcoming regulatory changes.
Significant market volatility and investor uncertainty in the low interest rate environment continued the decline in
demand for fixed and variable annuities, mutual funds, and equities.
The slight increase in trailing revenues in 2015 compared to 2014 reflects an increase in the market value of
the underlying assets.
45
The following table summarizes activity in brokerage assets that are custodied, networked, and non-
networked for the periods presented (in billions):
Beginning balance at January 1
Net new brokerage assets
Market impact (1)
Ending balance at December 31
Years Ended December 31,
2016
2015
2014
$
288.4 $
(7.8 )
17.2
299.3 $
(7.6 )
(3.3 )
286.8
N/A
N/A
$
297.8 $
288.4 $
299.3
(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.
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 on
either a calendar quarter or non-calendar quarter basis of their choice, at the beginning of that period, 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, and can range anywhere from 0.5% to 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, 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.
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):
Beginning balance at January 1
Net new advisory assets
Market impact (1)
Ending balance at December 31
Years Ended December 31,
2016
2015
2014
$
187.2 $
13.7
10.7
175.8 $
16.7
(5.3 )
151.6
17.5
6.7
$
211.6 $
187.2 $
175.8
(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, 2016, 2015, and 2014 had a limited impact on
advisory fee revenue for those respective periods. Rather, net new advisory assets are a primary driver of future
46
advisory fee revenue and have resulted from recruiting of new advisors to our Hybrid RIA platform and the
continued shift by our existing advisors from brokerage towards more advisory business. With advisory fees for the
period calculated based on the ending market value of the immediately preceding period, revenues for any
particular quarter are primarily driven by each of the prior quarter's month-end advisory assets under management.
The growth in advisory revenue from 2014 to 2015 and then again in 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 under custody,
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,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
$ Change % Change $ Change % Change
Advisory assets under management(1) $ 127.0 $ 121.4 $ 125.1 $
Hybrid RIA assets in advisory accounts
custodied by LPL Financial
84.6
65.8
50.7
Total advisory assets under custody
$ 211.6 $ 187.2 $ 175.8 $
5.6
18.8
24.4
4.6 % $
(3.7)
(3.0 )%
28.6 %
13.0 % $
15.1
11.4
29.8 %
6.5 %
_______________________________
(1) Consists of advisory assets under management on our corporate advisory platform.
Asset-Based Revenues
Asset-based revenues are comprised of our sponsorship programs with financial product manufacturers,
omnibus processing and networking services, and fees from cash sweep programs. We receive fees from certain
financial product manufacturers in connection with sponsorship programs that support our marketing and sales
education and training efforts. Omnibus processing revenues are paid to us by mutual fund product sponsors and
are based on the value of custodied assets in advisory accounts and the number of brokerage accounts in which
the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number
of positions we administer and are paid to us by mutual fund 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 revenues for the year ended December 31, 2016, increased to $556.5 million, or 12.7%, 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 rate 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, 2016 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.
Asset-based revenues for the year ended December 31, 2015 increased to $493.7 million, or 3.6%, from
$476.6 million for the year ended December 31, 2014. The increase was due to increased fees from omnibus
processing services resulting from higher average market indices on the value of those underlying assets and
increased revenues from product sponsors related to favorable terms on renegotiated contracts, partially offset by
decreased revenues from our cash sweep programs. Cash sweep revenue decreased to $95.3 million in 2015 from
$99.7 million in 2014 due to fee compression that resulted from a repricing of certain underlying contracts, partially
offset by an increase in average assets in our cash sweep programs as investors increased the balances of their
47
assets held in cash in response to the volatility in the financial markets. As of December 31, 2015, our cash sweep
assets had grown to $29.0 billion from $26.0 billion as of December 31, 2014, with average cash sweep assets of
$25.8 billion and $23.9 billion during the years ended December 31, 2015 and 2014, respectively. The increases in
average asset balances were offset by a slight decrease in our average cash sweep yield from 42 basis points to 37
basis points for the years ended December 31, 2015 and 2014, respectively.
48
Transaction 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 include IRA custodian fees,
contract and licensing fees, and other client account fees. In addition, we host certain advisor conferences that
serve as training, education, sales, and marketing events, for which we charge a fee for attendance.
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 due to an
acquisition by a bank with its own broker-dealer during the year.
Transaction and fee revenues increased in 2015 compared to 2014 primarily due to higher transaction
volumes on eligible trades and fees generated from the introduction of our home office supervisory program.
Interest Income, Net of Interest Expense
We earn interest income, net from client margin accounts and cash equivalents. Period-over-period variances
are not material and correspond to changes in the average balances of assets in margin accounts and cash
equivalents.
Other Revenues
Other revenues primarily include marketing allowances received from certain financial product manufacturers,
primarily those who offer alternative investments, such as non-traded REITs and business development companies,
mark-to-market gains or losses on assets held by us for the 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.
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 offset by the
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.
Other revenues decreased in 2015 compared to 2014 primarily due to decreases in alternative investment
marketing allowances of $14.8 million associated with a 37% decline in related sales. The remainder of the
decrease was primarily the result of a change to a $3.0 million loss in 2015 from a $2.1 million gain in 2014 in
realized and unrealized gains/losses on approximately $100.7 million of assets held in our advisor non-qualified
deferred compensation plan. The primary driver of the loss was market performance on the underlying investment
allocations chosen by advisors in the plan.
Expenses
Commission and Advisory Expenses
Commission and advisory expenses are comprised of the following: base payout amounts that are earned by
and paid out to advisors and institutions based on commission and advisory revenues earned on each client's
account (referred to as gross dealer concessions, or “GDC”); production bonuses earned by advisors and
institutions based on the levels of commission and advisory revenues they produce; the recognition of share-based
compensation expense from equity awards granted to advisors and financial institutions based on the fair value of
the awards at each reporting period; and the deferred commissions and advisory fee expenses associated with
mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.
49
Our production payout ratio is calculated as commission and advisory expenses divided by GDC. We
calculate GDC as the sum of our commission and advisory revenues, as set forth on our audited consolidated
statements of income. The following table shows the components of our production payout and total payout ratios,
each of which is a statistical or operating measure:
Base payout rate(1)
Production based bonuses
GDC sensitive payout
Non-GDC sensitive payout(2)
Total Payout Ratio
_______________________________
Years Ended December 31,
Change
2016
2015
2014
2016 vs. 2015 2015 vs. 2014
82.77 %
83.22 %
83.71 %
2.64 %
2.72 %
2.79 %
85.41 %
85.94 %
86.50 %
0.50 %
0.11 %
0.26 %
85.91 %
86.05 %
86.76 %
(45) bps
(8 ) bps
(53) bps
39 bps
(14) bps
(49) bps
(7 ) bps
(56) bps
(15) bps
(71) bps
(1) Our production payout ratio is calculated as commission and advisory expenses, divided by GDC (see
description above).
(2) Non-GDC sensitive payout includes share-based compensation 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, a statistical or operating measure, for the year ended December 31, 2016 compared
with the same period in 2015 remained relatively unchanged but was primarily affected by the ongoing transition of
advisors to our Hybrid RIA platform, a decrease in our production bonuses correlating to lower sales during the
period, offset by higher advisor share-based compensation following increases in our stock price. Production based
bonuses are based on qualified levels of commission and advisory revenues produced by advisors during a
calendar year.
The decrease in our total payout ratio, a statistical or operating measure, for the year ended December 31,
2015 compared to the same period in 2014, was primarily driven by the continued transition of advisors to our
Hybrid RIA platform and a decrease in our production bonuses correlating to lower sales during the period.
Compensation and Benefits Expense
Compensation and benefits expense includes salaries and wages and related employee benefits and taxes
for our employees (including share-based compensation), as well as compensation for temporary employees and
consultants.
Average Number of Employees
Years Ended December 31,
Change
2016
3,320
2015
3,382
2014
3,337
2016 vs. 2015
2015 vs. 2014
(1.8)%
1.3%
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.
The increase in compensation and benefits for 2015 compared with 2014, was primarily driven by increases
in salary that reflects our annual merit pay increase cycle and group health insurance costs combined with the
increase in the average number of employees.
Promotional Expense
Promotional expenses include costs related to our hosting of certain advisor conferences that serve as
training, sales, and marketing events, as well as business development costs related to recruiting, such as
transition assistance and amortization related to forgivable loans issued to advisors.
50
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.
The increase in promotional expense for 2015 compared with the same period in 2014, was primarily driven
by increases in business development expense associated with advisor transition assistance and broker training
and education.
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 $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 new office building in Fort Mill, South Carolina which completed construction in
October 2016.
The increase in depreciation and amortization of $15.4 million in 2015 compared to 2014, was due to the
capital expenditures in 2014 related to the relocation to our San Diego office building and the increased levels of
continuing development of capitalized software.
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.
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 expenses on computer hardware and other equipment.
The increase in occupancy and equipment expense of $8.8 million in 2016 compared to 2015, was primarily
due to an increase in costs related to repairs and maintenance of computer hardware and equipment as well as an
increase in software licensing fees in support of our service and technology investments.
The increase in occupancy and equipment expense of $1.7 million in 2015 compared to 2014, was primarily
due to an increase in non-capitalized costs related to service and technology enhancements related to software
licensing fees and repairs and maintenance of computer hardware and equipment, partially offset by a decrease in
rental expense.
Professional Services
Professional services includes costs paid to outside firms 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 $2.6 million in 2016 compared to 2015, was primarily due to an
increase in costs associated with legal matters, partially offset by a decrease in costs related to outsourced service
and technology enhancements.
The increase in professional services of $2.3 million in 2015 compared to 2014, was primarily due to an
increase in non-capitalized costs related to service and technology enhancements, partially offset by an decrease in
costs associated with legal matters.
51
Brokerage, Clearing, and Exchange Fees
Brokerage, clearing, and exchange fees include expenses originating from trading or clearing operations as
well as any exchange membership fees. Changes in brokerage, clearing and exchange 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 2016 compared to 2015 and 2015 compared to 2014, 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.
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.
The increase in communications and data processing expenses of $3.0 million in 2015 compared to 2014,
was primarily due to an increase in customer statement processing costs.
Restructuring Charges
The restructuring charges for the year ended December 31, 2015, primarily represent expenses incurred as a
result of our Service Value Commitment initiative, which was completed in 2015. These charges relate primarily 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 included in the 2015 restructuring charges are expenses
incurred as part of the restructuring of our subsidiary, Fortigent Holdings Company, Inc. (together with its
subsidiaries, "Fortigent"), which was completed in 2015.
Other Expenses
Other expenses include the estimated costs of the investigation, settlement, and resolution of regulatory
matters, licensing fees, insurance, broker-dealer regulator fees, and other miscellaneous expenses.
The decrease in other expenses of $21.1 million in 2016 compared to 2015, was primarily driven by lower
costs of the investigation, settlement, and resolution of regulatory matters as well as reduced travel expenses.
The increase in other expenses of $8.4 million in 2015 compared to 2014, was primarily driven by increases
in our captive insurance expense.
Non-Operating Interest Expense
Non-operating interest expense represents expense for our senior secured credit facilities. Period over period
variances correspond to changes in the level of outstanding indebtedness relating to these facilities.
Loss on Extinguishment of Debt
In October 2014, we amended the maturity date of certain credit facilities in our previous credit agreement
and effectively increased our revolving credit facility by $150.0 million. The amendment was accounted for as a
partial modification and debt extinguishment, which required that we accelerate the recognition of $3.9 million of
related unamortized debt issuance costs that had no future economic benefit, and recognize that amount as a loss
on extinguishment of debt.
Provision for Income Taxes
Our effective income tax rate was 35.5%, 40.3%, and 39.6% for 2016, 2015, and 2014, respectively. The
decrease in our effective tax rate and income tax expense in 2016 compared to 2015 was primarily due to tax
benefits associated with internally developed software that we determined in 2016.
52
The increase in our effective tax rate and income tax expense for 2015 compared to 2014 was primary due
to change in estimates in unrecognized tax positions.
Liquidity and Capital Resources
Senior management establishes our 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 are to support the execution of business strategies while ensuring
ongoing and sufficient liquidity.
A summary of changes in cash flow data is provided below (in thousands):
Net cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents — beginning of year
Years Ended December 31,
2016
2015
2014
$
274,837 $
279,451 $
232,242
(125,286 )
(74,948 )
(93,132 )
(126,371)
107,694
(243,362 )
23,180
724,529
312,197
412,332
(104,252 )
516,584
Cash and cash equivalents — end of year
$
747,709 $
724,529 $
412,332
Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our
capacity for additional borrowing.
Net cash provided by or used in operating activities includes changes in operating assets 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 overall
trends and clients' behaviors.
Cash flows provided by operating activities decreased in 2016 when compared to 2015 primarily due to
increases in clients receivable, an increase in receivable 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.
Cash flows provided by operating activities increased in 2015 when compared to 2014 primarily due to
increases in accounts payable and accrued liabilities relating to advisor deferred compensation, self-insurance, and
deferred commissions, partially offset by uses of cash associated with advisor loans.
Cash flows used in investing activities for 2016 increased when compared to 2015 primarily due to an
increase in capital expenditure related to the construction of the Company's new campus in Fort Mill, South
Carolina and an increase in capital expenditures for technology to support growth .
Cash flows used in investing activities during 2015 decreased in comparison to 2014 primarily due to a
decrease in capital expenditures.
Cash flows used in financing activities for 2016 increased compared to the same period in 2015 were 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
53
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 the current period compared to the prior period.
Cash flows provided by financing activities in 2015 increased in comparison to 2014 due to proceeds from our
senior secured term loan, partially offset by repurchases of common stock.
We believe that based on current levels of operations and anticipated growth, cash flow from operations,
together with other available sources of funds, which include three uncommitted lines of credit available and the
revolving credit facility established through our senior secured credit agreement, will be adequate to satisfy our
working capital needs, the payment of all of our obligations, and the funding of anticipated capital expenditures for
the foreseeable future. In addition, we have certain capital adequacy requirements due to our registered broker-
dealer subsidiary and bank trust subsidiary and have met all such requirements and expect to continue to do so for
the foreseeable future. We regularly evaluate our existing indebtedness, including refinancing thereof, 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.
Share Repurchases
The Board of Directors has approved several share repurchase programs pursuant to which we may
repurchase issued and outstanding shares of our common stock. Purchases may be effected in open market or
privately negotiated transactions, including transactions with our affiliates, with the timing of purchases and the
amount of stock purchased generally determined at our discretion within the constraints of our senior secured credit
agreement and general operating needs. See Note 13. Stockholders' Equity, within the notes to consolidated
financial statements for additional information regarding our share repurchases.
Dividends
The payment, timing, and amount of any dividends are subject to approval by our Board as well as certain
limits under our credit facilities. See Note 13. Stockholders' Equity, within the notes to consolidated financial
statements for additional information regarding our dividends.
Operating Capital Requirements
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, and proceeds from re-pledging or selling client
securities in margin accounts. When an advisor'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's margin loan balance, that collateralize those margin
accounts. As of December 31, 2016, we had approximately $219.1 million of client margin loans, collateralized with
securities having a fair value of approximately $306.7 million that we can repledge, loan, or sell. Of these securities,
approximately $37.6 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, 2016 there were no restrictions that
materially limited our ability to repledge, loan, or sell the remaining $269.1 million of client collateral.
Our other working capital needs are primarily related to advisor loans and timing associated with receivables
and payables, which we have satisfied in the past from internally generated cash flows.
Notwithstanding the self-funding nature of our operations, we 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 on our uncommitted lines of credit at our broker-dealer subsidiary LPL Financial LLC, or under our
revolving credit facility.
54
Our registered broker-dealer, LPL Financial LLC, is subject to the SEC’s Net Capital Rule, which requires the
maintenance of minimum net capital. LPL Financial LLC 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%
of aggregate debit balances arising from client transactions. At December 31, 2016, LPL Financial LLC had net
capital of $116.2 million with a minimum net capital requirement of $6.4 million.
LPL Financial LLC's ability to pay dividends greater than 10% of its excess net capital during any 35 day
rolling period requires approval from FINRA. In addition, payment of dividends is restricted if LPL Financial LLC's
net capital would be less than 5.0% of aggregate customer debit balances.
LPL Financial LLC also acts as an introducing broker for commodities and futures. Accordingly, its trading
activities are subject to the NFA's financial requirements and it is required to maintain net capital that is in excess of
or equal to the greatest of NFA's minimum financial requirements. The NFA was designated by the CFTC as LPL
Financial LLC's primary regulator for such activities. Currently, the highest NFA requirement is the minimum net
capital calculated and required pursuant to the SEC's Net Capital Rule.
Our subsidiary, PTC, is also subject to various regulatory capital requirements. Failure to meet the respective
minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC's operations.
Debt and Related Covenants
We are party to a credit agreement with our wholly-owned subsidiary, LPL Holdings, Inc., and the other
parties thereto (the "Credit Agreement"). See Note 10. Debt, within the notes to consolidated financial statements
for further detail.
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain
exceptions, our ability to:
•
incur additional indebtedness;
• create liens;
• enter into sale and leaseback transactions;
• engage in mergers or consolidations;
• sell or transfer assets;
• pay dividends and distributions or repurchase our capital stock;
• make investments, loans, or advances;
• prepay certain subordinated indebtedness;
• engage in certain transactions with affiliates;
• amend material agreements governing certain subordinated indebtedness; and
• change our lines of business.
Credit Agreement EBITDA, a non-GAAP measure, is defined in, and calculated by management in
accordance with, the Credit Agreement as “Consolidated EBITDA”, which is Consolidated Net Income (as defined in
the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and adjusted to exclude
certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains. We
present 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 in which companies operate, and capital investments.
55
Set forth below is a reconciliation from our net income to Credit Agreement EBITDA for the twelve months
ended December 31, 2016 (in thousands):
Net income
Non-operating interest expense
Provision for income taxes
Depreciation and amortization
Amortization of intangible assets
EBITDA
Credit Agreement Adjustments:
Employee share-based compensation expense(1)
Advisor share-based compensation expense(2)
Other(3)
Credit Agreement EBITDA(4)
$
191,931
96,478
105,585
75,928
38,035
507,957
20,352
4,544
19,619
$
552,472
(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 other items that are adjustable in accordance with our Credit Agreement to arrive at Credit
Agreement EBITDA including employee severance costs, employee signing costs, employee retention or
completion bonuses, and other non-recurring costs.
(4) 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 prohibits us from paying dividends and distributions or repurchasing our capital stock
except for limited purposes. In addition, our financial covenants consist of a total leverage ratio test and an interest
coverage ratio test. Under our total leverage ratio test, we covenant not to allow the ratio of our consolidated total
debt (as defined in the Credit Agreement) to our consolidated Credit Agreement EBITDA exceed certain prescribed
levels set forth in the Credit Agreement. Under our interest coverage ratio test, we covenant not to allow the ratio of
our consolidated EBITDA to our consolidated interest expense (as defined in the Credit Agreement) to be less than
certain prescribed levels set forth in the Credit Agreement. Each of our financial ratios is measured at the end of
each fiscal quarter.
As of December 31, 2016 we were in compliance with both of our financial covenants. The maximum
permitted ratios under our financial covenants and actual ratios were as follows:
Financial Ratio
Leverage Test (Maximum)
Interest Coverage (Minimum)
* Beginning 01/01/2017 our leverage test covenant requirement is 4.75.
Off-Balance Sheet Arrangements
December 31, 2016
Covenant
Requirement*
5.0
3.0
Actual
Ratio
3.43
6.05
We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet
the needs of our advisors’ clients. These arrangements include Company commitments to extend credit. For
information on these arrangements, see Note 12. Commitments and Contingencies and Note 19. Financial
Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk, within the notes to consolidated
financial statements.
56
Contractual Obligations
The following table provides information with respect to our commitments and obligations as of December 31,
2016:
Payments Due by Period
Total
< 1 Year
1-3 Years
(In thousands)
95,198 $
Leases and other obligations(1)(2)
$
518,914 $
57,935 $
Senior secured credit facilities(3)
Variable interest payments(4)
Commitment and other fees(5)
2,197,360
375,953
6,191
26,290
89,481
2,277
893,323
160,688
3,836
4-5 Years
> 5 Years
64,060 $
301,721
619,747
97,422
63
658,000
28,362
15
Total contractual cash obligations
$ 3,098,418 $
175,983 $ 1,153,045 $
781,292 $
988,098
____________________
(1) Includes a long-term contractual obligation with a third-party service provider for the outsourcing of certain
functions. The table above includes the minimum payments due over the duration of the contract. The
contractual obligation may be canceled, subject to a termination penalty that is approximately equal to the initial
annual minimum payment. The amount of the termination penalty steps down ratably through the passage of
time. Future minimum payments have not been reduced by this termination penalty.
(2) Future minimum payments for applicable leases have not been reduced by minimum sublease rental income of
$8.6 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, within the notes to
consolidated financial statements for further detail.
(4) Represents variable interest payments under our Credit Agreement. Variable interest payments assume the
applicable interest rates at December 31, 2016 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, 2016, we have a liability for unrecognized tax benefits of $39.8 million, which we have
included in income taxes payable 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.
Fair Value of Financial Instruments
We use fair value measurements to record certain financial assets and liabilities at fair value and to determine
fair value disclosures. See Note 3. Fair Value Measurements, within the notes to consolidated financial statements
for a detail discussion regarding our fair value measurements.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which require management to
make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. We believe that of our critical accounting policies, the following are
noteworthy because they 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:
57
• Revenue Recognition
• Commitments and Contingencies
• Valuation of Goodwill and Other Intangible Assets
•
Income Taxes
• Share-Based Compensation
See 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.
58
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. These securities could include mutual funds, debt securities issued by the
United States government, money market funds, corporate debt securities, certificates of deposit, and equity
securities.
Changes in the value of our trading inventory may result from fluctuations in interest rates, credit ratings of
the issuer, equity prices and the correlation among these factors. We manage our trading inventory by product type.
Our activities to facilitate client transactions generally involve mutual fund activities, including dividend
reinvestments. The balances are based upon pending client activities 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 States
government securities. The amount of securities deposited depends upon the requirements of the clearing
organization. The level of securities deposited is monitored by the settlement area within our STO department. Our
research department develops model portfolios that are used by advisors in developing client portfolios. We
currently maintain approximately 216 accounts based on model portfolios. At the time a portfolio is developed, we
purchase the securities in that model portfolio in an amount equal to the account minimum for a client. Account
minimums vary by product and can range from $5,000 to $250,000 per model. We utilize these positions to track
the performance of the research department. The limits on this activity are based at the inception of each new
model.
At December 31, 2016, the fair value of our trading securities owned was $11.4 million. Securities sold, but
not yet purchased were $183 thousand at December 31, 2016. The fair value of securities included within other
assets was $142.0 million at December 31, 2016. See Note 3. 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 4. Held to
Maturity Securities, within the notes to consolidated financial statements for information regarding the fair value of
securities held to maturity.
We do not enter into contracts involving derivatives or other similar financial instruments for trading or
proprietary purposes.
In addition, we have market risk resulting from system incidents and human error, which can require trade
corrections for our customers. We also have market risk on the fees we earn that are based on the market value of
advisory and brokerage assets, assets on which trail commissions are paid, and assets eligible for sponsor
payments.
Interest Rate Risk
We are exposed to risk associated with changes in interest rates. As of December 31, 2016, all of the
outstanding debt under our Credit Agreement, $2.2 billion, was subject to floating interest rate risk. While our senior
secured term loans are 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 income before taxes given assets owned, which are subject to the same,
but off-setting interest rate risk
59
The following table summarizes the impact of increasing interest rates on our interest expense from the
variable portion of our debt outstanding at December 31, 2016 (in thousands):
Senior Secured Term Loans
Term Loan A
Term Loan B
Variable Rate Debt Outstanding
Outstanding at
Variable Interest
Rates
Annual Impact of an Interest Rate Increase of
10 Basis
Points
25 Basis
Points
50 Basis
Points
100 Basis
Points
$
$
459,375 $
457 $
1,737,985
1,732
1,143 $
4,328
2,286 $
8,657
4,572
17,314
2,197,360 $
2,189 $
5,471 $ 10,943 $ 21,886
See Note 10. Debt, within the notes to consolidated financial statements for additional information.
As of December 31, 2016, we offer our advisors and their clients three primary cash sweep vehicles that are
interest rate sensitive: our insured cash account ("ICA") for individuals, trusts and sole proprietorships, an insured
deposit cash account ("DCA") for advisory IRAs, and a money market sweep vehicle involving multiple money
market fund providers. While clients earn interest for balances on deposit in ICA and DCA, we earn a fee. Our fees
from ICAs are based on prevailing interest rates in the current interest rate environment. Changes in interest rates
and fees for the two insured bank deposit sweep vehicles are monitored by our Rate Setting Committee (the
"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 vehicle relative to other products into which clients may move cash balances. The
fees that we receive from the DCA vehicle are calculated as a per account fee; such fees increase as the federal
funds target rate increases, subject to a cap.
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. Credit risk includes the risk that loans we extend to
advisors to facilitate their transition to our platform or to fund their business development activities are not repaid in
full or on time. Credit risk also includes the risk that collateral posted with LPL by clients to support margin lending
or derivative trading is insufficient to meet client’s contractual obligations to LPL. 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' clients collateralized by securities
in the client’s account. Under many of these agreements, we are permitted to sell, re-pledge, 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 account is insufficient to fully cover losses from such investments,
and our advisors fail to reimburse us for such losses. Our loss on margin accounts did not exceed $0.3 million
during any of the years ended December 31, 2016, 2015, and 2014. 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
carefully monitored. We seek to limit this risk through careful review of the underlying business and the use of limits
established by senior management, taking into consideration factors including 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.
60
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 technology 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 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
enables assessment and reporting on operational risk across the firm. This framework helps 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 section within Part I, “Item 1A. Risk Factors” for more information about the risks associated with our
technology, including risks related to security, 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
Section” 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 regulators broaden the scope, frequency, and depth of their examinations to
include greater emphasis on the quality and consistency of the industry’s execution of policies and procedures.
Please consult the Risks Related to Our Regulatory Environment section within Part I, “Item 1A. Risk Factors” for
more information about the risks associated with operating within our regulatory environment, 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 and responsibility 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 departments within Governance, Risk, and Compliance
("GRC"), STO, Business Technology Services ("BTS"), 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 Internal Audit 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
61
Department and the GRC 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 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 Chief Risk Officer of LPL Financial serves as chair, and the Deputy Chief Risk Officer serves
as vice chair, of the ROC, which generally meets on a monthly basis with ad hoc meetings as necessary.
Membership is comprised of the firm's Management Committee and additional Managing Directors ("members") as
needed. Other members of the Company’s senior management team are also included as ex-officio members,
representing the key control areas of the Company. These individuals include, but are not limited to, the Chief
Compliance Officer, Brokerage; the Chief Compliance Officer, Advisory; the Chief Information Security Officer; and
the Chief Privacy Officer of LPL Financial. 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 chair of the ROC provides reports to the Audit Committee at each of the Audit Committee’s 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 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; whistle-blower and tips 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 GRC Department provides compliance oversight and guidance, and conducts various risk and other
assessments to address regulatory and Company-specific risks and requirements. The GRC Department reports to
the Chief Risk Officer, who reviews the results of the Company’s risk management process with the ROC, the Audit
62
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 GRC.
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 BTS, 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, Legal, BTS, and Human Capital Departments also execute certain control functions and report matters
to the ROC, Audit Committee, and Board as appropriate.
Policy Committee and Advisor Policies
In addition to the ERM framework, the Management Committee of LPL Financial has established a Policy
Committee to provide a centralized decision-making process for material policy issues that may arise on an ad hoc
basis. The membership of the Policy Committee consists of a subset of the Management Committee and currently
includes: the Chief Executive Officer and President, who serves as chair of the Policy Committee, and the
Managing Director, Chief Risk Officer. The Managing Director, Legal & Government Relations, serves as a non-
voting member. Among other issues, the Policy Committee addresses policy conflicts and potential conflicts that
may arise from time to time from legal and regulatory requirements, business proposals, and practices throughout
the Company as they relate to advisor-facing or public-facing issues. The Policy Committee is responsible for
analyzing such issues, and either facilitating the policy decision or conflict resolution, or making the policy decision.
The Policy Committee reports the results of its decisions or other resolutions to the Management Committee on an
ad hoc basis
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.
63
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and Supplementary Data are included as an annex to this Annual
Report on Form 10-K. See the Index to Consolidated Financial Statements and Supplementary Data on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9B. Other Information
On February 23, 2017, the Compensation and Human Resources Committee of the Board of Directors (the
“Compensation Committee”) adopted the Amended and Restated LPL Financial LLC Executive Severance Plan,
attached hereto as Exhibit 10.19 (the “Severance Plan”). Among other things, the Severance Plan includes revised
definitions of “Cause” and “Good Reason” and provides for post-employment severance benefits relating to
performance-based equity awards. The Compensation Committee also adopted on February 23, 2017 a form of
employee performance stock unit award agreement, attached hereto as Exhibit 10.21, for use in granting
performance share unit awards to executive officers beginning in 2017.
On February 24, 2017, the Board of Directors declared a cash dividend of $0.25 per share on the Company's
outstanding common stock to be paid on March 24, 2017 to all stockholders of record on March 10, 2017.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Disclosure Committee, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures as of the end of the period covered by this report were effective.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter
ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial
reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act as the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer,
and effected by our board of directors, management, and other personnel, to provide reasonable assurance
regarding the reliability of our financial reporting process and the preparation of our consolidated financial
statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as necessary to permit preparation of the consolidated
financial statements in accordance with accounting principles generally accepted in the United States, and that
receipts and expenditures are being made only in accordance with authorizations of management and the directors
of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on our consolidated
financial statements.
As of December 31, 2016, management conducted an assessment of the effectiveness of our internal control
over financial reporting based on the framework established in Internal Control – Integrated Framework (2013)
64
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management has determined that our internal control over financial reporting as of December 31, 2016 was
effective.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued an audit report
appearing on the following page on the effectiveness of our internal control over financial reporting as of
December 31, 2016.
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LPL Financial Holdings Inc.
Boston, Massachusetts
We have audited the internal control over financial reporting of LPL Financial Holdings Inc. and subsidiaries (the
"Company") as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying management’s annual
report on internal control over financial reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected
by the company's board of directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended December 31, 2016 of the
Company and our report dated February 24, 2017 expressed an unqualified opinion on those consolidated financial
statements.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 24, 2017
66
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
Other than the information relating to our executive officers provided below, the information required to be
furnished pursuant to this item is incorporated by reference to the Company’s definitive proxy statement for the
2017 Annual Meeting of Stockholders.
The following table provides certain information about each of the Company’s current 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
52 President and Chief Executive Officer
Matthew J. Audette
42 Chief Financial Officer
David P. Bergers
49 Managing Director, Legal and Government Relations, General Counsel
Tracy Calder
57 Managing Director, Deputy Chief Risk Officer
Victor P. Fetter
48 Managing Director, Chief Information Officer
Thomas Gooley
52 Managing Director, Service, Trading, and Operations
J. Andrew Kalbaugh
53 Managing Director, Divisional President, National Sales and Consulting
Sallie R. Larsen
63 Managing Director, Chief Human Capital Officer
William P. Morrissey, Jr.
52 Managing Director, Divisional President, Business Development
Michelle Oroschakoff
55 Managing Director, Chief Risk Officer
George B. White
47 Managing Director, Investor and Investment Solutions and Chief Investment Officer
Executive Officers
Dan H. Arnold — President and Chief Executive Officer
Mr. Arnold is our president and chief executive officer. He 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. In this role he led the Advisor and Institution Solutions business unit
that focuses on business development, existing advisor and institution growth, enhancing the client experience,
research and corporate strategy, and sponsor partnerships. Prior to that role, Mr. Arnold served as our chief
financial officer from November 2012 to March 2015 and was responsible for formulating financial policy, leading
the company’s 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 business. Mr. Arnold joined our Company in January 2007 following
our acquisition of UVEST. 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
Mr. Audette is our chief financial officer. He is responsible for the Company’s core financial functions
including: financial planning and analysis, controllership, tax, internal audit, treasury, corporate development, and
investor relations. Prior to joining LPL in September 2015, he served as executive vice president and chief financial
officer of E*TRADE Financial Corporation ("E*Trade") from January 2011 until June 2015. During his 16 years with
E*TRADE, he led the formation of the firm’s Finance department and 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.
67
David P. Bergers — Managing Director, Legal and Government Relations
Mr. Bergers is general counsel of LPL Financial Holdings Inc. and managing director of legal and government
relations at LPL Financial. Mr. Bergers has more than 20 years of experience as a practicing attorney, corporate
counsel and government regulator. He joined us in August 2013 from the Securities and Exchange Commission,
where he served 13 years, including as director of the SEC’s Boston regional office from 2006 to 2013. During
2013 he also served as acting deputy director of the SEC's enforcement division in Washington, DC. Previously, Mr.
Bergers was vice president and assistant general counsel at Tucker Anthony, an independent investment banking
and brokerage firm that was later acquired by Royal Bank of Canada, and counsel to Freedom Capital
Management, an affiliated investment adviser. He also was a litigator for several years with law firms in the Boston
and Philadelphia areas. Mr. Bergers earned a B.A. in history from Eastern Nazarene College in Massachusetts and
a J.D. from Yale Law School.
Tracy Calder - Managing Director, Deputy Chief Risk Officer
Ms. Calder is managing director, deputy chief risk officer, with oversight of the compliance and operational
market and credit risk management functions. She joined us in January 2016 and is responsible for furthering our
efforts to foster an environment that identifies and mitigates risk for LPL and our clients. Ms. Calder worked most
recently at J.P. Morgan Securities LLC, where she served as managing director, chief compliance officer from May
2015 until December 2015. At J.P. Morgan, she led a compliance program that spanned the firm’s institutional and
private client broker/dealer and registered investment advisor (RIA) businesses. She joined J.P. Morgan as
managing director and head of brokerage and fiduciary compliance in August 2013. Prior to J.P. Morgan, she
served as senior vice president at Wells Fargo Advisors from March 2012 to July 2013, where she led the retail
compliance program for the firm’s broker/dealer. Previously, Ms. Calder spent 18 years with UBS Wealth
Management Americas in a variety of legal and compliance roles, including as head of legal for the Wealth
Management Advisor Group and as chief compliance officer and senior deputy general counsel for UBS Financial
Services Inc. Ms. Calder earned a Bachelor of Arts from Fordham University and a J.D. from the University of North
Carolina School of Law.
Victor P. Fetter — Managing Director, Chief Information Officer
Managing director and chief information officer since 2012, Mr. Fetter has oversight of our Business
Technology Services business unit. He is responsible for bringing to life our commitment to invest in the people and
processes necessary to deliver the best technologies in the industry for our advisors and employees. Mr. Fetter has
responsibility for product development, digital transformation and technology support, security, and innovation. He
also serves on the Management Committee and the Risk Oversight Committee for LPL and chairs the Technology
Investment and Strategy Committee. Combined, these efforts ensure alignment of technology initiatives with
strategic business priorities. Prior to joining us in December 2012, Mr. Fetter was vice president and chief
information officer for Dell Online from March 2007 to December 2012, where he led the digital transformation of
Dell's approach to providing global, multi-channel solutions for consumers and commercial customers. Earlier, Mr.
Fetter worked at Mercer Human Resource Consulting, where he served as director of global applications
development, chief information officer, and ultimately global chief information officer during his tenure. He held
previous positions at Hewitt Associates LLC and Electronic Data Systems. Mr. Fetter has a B.S. in computer
information systems from Spring Hill College in Mobile, AL.
Thomas Gooley — Managing Director, Service, Trading, and Operations
Mr. Gooley is the managing director of Service, Trading, and Operations at LPL Financial. In this role, he is
responsible for leading our service, trading, and client-facing operations organizations, while mitigating risk,
increasing efficiency, and improving the client experience. He also is responsible for driving the strategy,
governance, and execution of the firm’s business process outsourcing activities in India. Prior to joining us in June
2015, he was senior managing director and chief risk officer for the Retirement and Individual Financial Services
division at TIAA-CREF from August 2014 to June 2015. Previously, he worked as managing director and head of
Operations for the Global Wealth and Asset Management divisions of Morgan Stanley. Earlier in his career, Mr.
68
Gooley led equities and futures operations for Bank of America Securities after spending 12 years with Goldman
Sachs in a variety of leadership roles in equities operations. Mr. Gooley holds a B.A. in political economies of
industrial societies from the University of California at Berkeley and an M.B.A. from The Wharton School at the
University of Pennsylvania. Mr. Gooley is also a graduate and instructor of the Securities Industry and Financial
Markets Association (SIFMA) Wharton Program.
J. Andrew Kalbaugh — Managing Director, Divisional President, National Sales and Consulting
Mr. Kalbaugh has served as managing director and divisional president for national sales and consulting,
since January 2016. He is responsible for the long-term growth, satisfaction, and retention of financial advisors and
institutions and also oversees the teams supporting high net worth and registered investment advisor solutions.
Previously, Mr. Kalbaugh served as managing director and divisional president of Institution Services and led
business development and business consulting for all financial institutions from November 2011 to January 2016.
Prior to being named managing director in 2011, Mr. Kalbaugh served as executive vice president, business
consulting, for Independent Advisor Services, responsible for providing support to advisors and their practices. He
joined the Company in July 2007 following the acquisition of Mutual Service Corporation ("MSC") and served as
chief executive officer for MSC as well as for Associated Securities Corporation. Prior to that, he held senior
positions at several financial services firms. Mr. Kalbaugh is a Certified Financial Planner and has a B.A. in
business and economics from the University of Maryland.
Sallie R. Larsen — Managing Director, Chief Human Capital Officer
Ms. Larsen is our managing director, chief human capital officer. She is responsible for overseeing
compensation and benefits, corporate communication, corporate real estate, human resources operations, human
resources client consulting, and advisor and employee learning and development. Ms. Larsen joined us in May
2012 from the Federal Home Loan Bank/Office of Finance, where she served as the chief human resources officer
from November 2009 to April 2012. In earlier roles, Ms. Larsen was a managing vice president of human resources
for Capital One Financial Corporation, senior vice president of human resources for Marriott International, and vice
president of human resources and communications for TRW Inc. Ms. Larsen earned a M.A. in communications from
Purdue University, a B.A. in sociology from California Lutheran University, and a certificate in executive leadership
coaching from Georgetown University.
William P. Morrissey, Jr. — Managing Director, Divisional President, Business Development
Mr. Morrissey has served as managing director and divisional president since January 2016. In this role, he
has responsibility for attracting and recruiting new financial advisors and institutions to the firm and for driving the
exploration of new markets and capabilities for growth across client groups. He also oversees the process for
integrating new advisors into the firm. Prior to assuming this role, Mr. Morrissey served as managing director and
divisional president of Independent Advisor Services and led business development and business consulting for all
independent advisors and registered investment advisors from April 2014 to January 2016. Prior to being named
managing director, Mr. Morrissey served as executive vice president of business development, Independent Advisor
Services, responsible for recruiting new advisors and their practices from March 2004 to April 2014. He joined the
Company in March 2004 as senior vice president of Advisory Consulting Services, responsible for overseeing and
successfully building the sales, marketing, and development of LPL's advisory platforms. Before joining LPL
Financial, Mr. Morrissey worked at Fidelity Investments for 17 years, most recently as senior vice president of
institutional services. He received a B.A. in political science from Boston College.
Michelle Oroschakoff — Managing Director, Chief Risk Officer
Ms. Oroschakoff is managing director, chief risk officer for LPL Financial and serves as chair of our Risk
Oversight Committee. She is responsible for company-wide risk management processes and controls, manages
compliance and governance, and has a leading role in the Company's ongoing focus on enhancing its corporate
risk profile. Ms. Oroschakoff has more than 20 years of financial services industry experience deeply rooted in legal,
compliance, and risk management. She joined LPL Financial in September 2013 from Morgan Stanley, where she
69
most recently served as managing director and Global Chief Risk Officer of the firm’s Global Wealth Management
Group from 2011 to 2013. Previously, while with Morgan Stanley, she served as chief administrative officer from
2010 to 2011, as well as Chief Compliance Officer from 2006 to 2010. Earlier in her career, Ms. Oroschakoff spent
11 years in a variety of legal and compliance roles at Morgan Stanley, including associate general counsel and
head of the firm’s San Francisco litigation department. She also served as the general counsel for a large and
successful RIA firm, where she became familiar with the independent model. She also serves on a variety of
industry committees. Ms. Oroschakoff earned a B.A. in English literature from the University of Oregon and a J.D.
cum laude, Order of the Coif, from the University of Michigan.
George B. White — Managing Director, Investor and Investment Solutions and Chief Investment Officer
Mr. White has served as our managing director, investor and investment solutions and chief investment officer
since January 2017. He served as managing director, research, and chief investment officer from 2009 to
December 2016. He is responsible for the strategic direction and continued growth of LPL Financial's research,
marketing, products, and investment platforms and in 2015 he also became responsible for corporate strategy. His
role includes setting the vision for superior research capabilities and enabling the delivery of conflict-free, objective
investment advice for LPL Financial advisors. Prior to joining us in November 2007, Mr. White served as a
managing director and director of research for Wachovia Securities for 10 years. Mr. White also was an investment
analyst for Mercer Investment Consulting, where he provided investment advice to institutional clients. He started
his financial services career on the buy side of the business as a research analyst for Thompson, Siegel, and
Walmsley, a value-oriented asset manager. Mr. White received a B.B.A. from the College of William and Mary.
Items 11, 12, 13, and 14.
The information required by Items 11, 12, 13, and 14 is incorporated by reference from the Company’s
definitive proxy statement for the 2017 Annual Meeting of Stockholders, which the Company intends to file with the
SEC within 120 days of the end of the fiscal year end to which this report relates.
70
Item 15. Exhibits and Financial Statement Schedules
(a) Consolidated Financial Statements
PART IV
Our consolidated financial statements appearing on pages F-1 through F-33 are incorporated herein by
reference.
(b) Exhibits
Exhibit No.
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Description of Exhibit
Amended and Restated Certificate of Incorporation of LPL Investment Holdings Inc., dated
November 23, 2010. (1)
Certificate of Ownership and Merger Merging LPL Financial Holdings Inc. with and into LPL
Investment Holdings Inc., dated June 14, 2012. (2)
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of LPL Financial
Holdings Inc., dated May 8, 2014. (3)
Fifth Amended and Restated Bylaws of LPL Financial Holdings Inc. (4)
Stockholders’ Agreement, dated as of December 28, 2005, among LPL Investment Holdings Inc.,
LPL Holdings, Inc., and other stockholders party thereto. (5)
First Amendment to Stockholders’ Agreement dated December 28, 2005, among LPL Investment
Holdings Inc., LPL Holdings, Inc. and other stockholders party thereto, dated November 23, 2010.
(6)
Stockholders’ Agreement among the Company and Hellman & Friedman Capital Partners V, L.P.,
Hellman & Friedman Capital Partners V (Parallel), L.P., Hellman & Friedman Capital Associates V,
L.P., TPG Partners IV, L.P., and other parties thereto, dated November 23, 2010. (7)
First Amendment to Stockholders’ Agreement, entered into as of September 24, 2014, by and
between LPL Financial Holdings Inc., a Delaware corporation (f/k/a LPL Investment Holdings Inc.,
“LPL”), and TPG Partners IV, L.P., a Delaware limited partnership. (8)
Fifth Amended and Restated LPL Investment Holdings Inc. 2000 Stock Bonus Plan. (9)
Form of Indemnification Agreement. (1)
2005 LPL Investment Holdings Inc. Stock Option Plan for Incentive Stock Options. (10)
2005 LPL Investment Holdings Inc. Stock Option Plan for Non-Qualified Stock Options. (10)
LPL Investment Holdings Inc. 2008 Stock Option Plan. (11)
Form of LPL Investment Holdings Inc. Stock Option Agreement granted under the LPL Investment
Holdings Inc. 2008 Stock Option Plan. (12)
LPL Investment Holdings Inc. Advisor Incentive Plan. (13)
LPL Investment Holdings Inc. Financial Institution Incentive Plan. (11)
LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan. (14)
Form of Senior Executive Stock Option Award granted under the LPL Investment Holdings Inc. 2010
Omnibus Equity Incentive Plan. (15)
Form of Senior Management Stock Option Award granted under the LPL Investment Holdings Inc.
2010 Omnibus Equity Incentive Plan. (15)
Form of Senior Executive Restricted Stock Unit Award granted under the LPL Investment Holdings
Inc. 2010 Omnibus Equity Incentive Plan. (15)
Form of Senior Management Restricted Stock Unit Award granted under the LPL Investment
Holdings Inc. 2010 Omnibus Equity Incentive Plan. (15)
Form of Employee Stock Option Award granted under the LPL Financial Holdings Inc. Amended and
Restated 2010 Omnibus Equity Incentive Plan.*
Form of Employee Restricted Stock Unit Award granted under the LPL Financial Holdings Inc.,
Amended and Restated 2010 Omnibus Equity Incentive Plan.*
Form of Advisor Restricted Stock Unit Award granted under the LPL Financial Holdings Inc., 2010
Omnibus Equity Incentive Plan. (16)
Form of Financial Institution Restricted Stock Unit Award granted under the LPL Financial Holdings
Inc., 2010 Omnibus Equity Incentive Plan. (16)
71
Exhibit No.
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
Description of Exhibit
Amended and Restated LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan. (17)
Amended and Restated LPL Financial Holdings Inc. Corporate Executive Bonus Plan. (17)
LPL Financial LLC Executive Severance Plan, amended and restated as of February 23, 2017.*
Form of Supplemental Restricted Stock Unit Award granted under the 2010 LPL Financial Holdings
Inc. 2010 Omnibus Equity Incentive Plan. (16)
Form of Employee Performance Stock Unit Award granted under the LPL Financial Holdings Inc.
Amended and Restated 2010 Omnibus Equity Incentive Plan.*
LPL Financial Holdings Inc. Non-Employee Director Compensation Policy.*
LPL Financial Holdings Inc. Non-Employee Director Deferred Compensation Plan. (18)
Credit Agreement, dated as of March 29, 2012, by and among LPL Investment Holdings, Inc., LPL
Holdings, Inc., the several lenders from time to time party thereto, and Bank of America, N.A. as
Administrative Agent Collateral Agent, Letter of Credit Issuer, and Swingline Lender. (19)
First Amendment and Incremental Assumption Agreement, dated as of May 13, 2013, by and among
LPL Financial Holdings, Inc., LPL Holdings, Inc., certain subsidiaries, the several lenders from time
to time party thereto, and Bank of America, N.A. as Administrative Agent. (20)
Second Amendment and Incremental Assumption Agreement, dated as of October 1, 2014, by and
among LPL Financial Holdings, Inc., LPL Holdings, Inc., certain subsidiaries, the several lenders
from time to time party thereto
Third Amendment, Extension, and Incremental Assumption Agreement, dated as of November 20,
2015 by and among LPL Financial Holdings, Inc., LPL Holdings, Inc., certain subsidiaries, the
several lenders from time to time party thereto, and JPMorgan Chase Bank, N.A. as Administrative
Agent. (18)
Thomson Transaction Services Master Subscription Agreement dated as of January 5, 2009
between LPL Financial Corporation and Thomson Financial LLC. (21)†
First Amendment dated July 28, 2014 to Master Subscription Agreement dated as of January 5,
2009 between LPL Financial Corporation and Thomson Financial LLC(18)†
List of Subsidiaries of LPL Financial Holdings Inc.*
, and Bank of America, N.A. as Administrative Agent. (8)
y
Consent of Deloitte & Touche LLP, independent registered public accounting firm.*
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).*
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).*
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema*
101.CAL XBRL Taxonomy Extension Calculation*
101.DEF
101.LAB
XBRL Taxonomy Extension Definition*
XBRL Taxonomy Extension Label*
101.PRE XBRL Taxonomy Extension Presentation*
___________________
72
* Filed herewith.
† Confidential treatment granted by the Securities and Exchange Commission.
(1 ) Incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 filed on
July 9, 2010.
(2 ) Incorporated by reference to the Form 8-K filed on June 19, 2012.
(3 ) Incorporated by reference to the Form 8-K filed on May 9, 2014.
(4 ) Incorporated by reference to the Form 8-K filed on March 12, 2014.
(5 ) Incorporated by reference to Amendment No. 1 to the Registration Statement on Form 10 filed on
July 10, 2007.
(6 ) Incorporated by reference to the Form 10-K filed on March 9, 2011.
(7 ) Incorporated by reference to the Form 10-K filed on February 27, 2012.
(8 ) Incorporated by reference to the Form 10-Q filed on October 30, 2014.
(9 ) Incorporated by reference to the Form 8-K filed on December 18, 2008.
(10) Incorporated by reference to the Registration Statement on Form 10 filed on April 30, 2007.
(11) Incorporated by reference to the Form 8-K filed on February 21, 2008.
(12) Incorporated by reference to the Registration Statement on Form S-1 filed on June 4, 2010.
(13) Incorporated by reference to the Form S-8 filed on June 5, 2008.
(14) Incorporated by reference to Amendment No. 4 to the Registration Statement on Form S-1 filed on
November 3, 2010.
(15) Incorporated by reference to the Form 10-K filed on February 26, 2013.
(16) Incorporated by reference to the Form 10-K filed on February 25, 2014.
(17) Incorporated by reference to the Form 8-K filed on May 15, 2015.
(18) Incorporated by reference to the Form 10-K filed on February 26, 2016
(19) Incorporated by reference to the Form 8-K filed on April 2, 2012.
(20) Incorporated by reference to the Form 8-K filed on May 13, 2013.
(21) Incorporated by reference to Amendment No. 1 to the Registration Statement on Form S-1 filed on
June 22, 2010.
Item 16. Form 10-K Summary
None.
73
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
SIGNATURES
LPL Financial Holdings Inc.
By:
/s/ Dan H. Arnold
Dan H. Arnold
President and Chief Executive Officer
Dated: February 24, 2017
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Dan H. Arnold
Dan H. Arnold
/s/ Matthew J. Audette
Matthew J. Audette
/s/ John J. Brennan
John J. Brennan
/s/ Mark S. Casady
Mark S. Casady
/s/ Viet D. Dinh
Viet D. Dinh
/s/ Paulett Eberhart
Paulett Eberhart
/s/ Marco W. Hellman
Marco W. Hellman
/s/ Anne M. Mulcahy
Anne M. Mulcahy
/s/ James S. Putnam
James S. Putnam
/s/ James S. Riepe
James S. Riepe
/s/ Richard P. Schifter
Richard P. Schifter
President, Chief Executive Officer, and Director
(Principal Executive Officer)
February 24, 2017
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
February 24, 2017
Director
y
February 24, 2017
Director
y
February 24, 2017
Director
y
February 24, 2017
Director
y
February 24, 2017
Director
y
February 24, 2017
Director
y
February 24, 2017
Director
y
February 24, 2017
Director
y
February 24, 2017
Director
February 24, 2017
y
74
75
LPL FINANCIAL HOLDINGS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of LPL Financial Holdings Inc. are included in response to
Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016,
2015, and 2014
Consolidated Statements of Financial Condition as of December 31, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016,
2015, and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and
2014
Notes to Consolidated Financial Statements
Page
2
3
4
5
6
7
9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LPL Financial Holdings Inc.
Boston, Massachusetts
We have audited the accompanying consolidated statements of financial condition of LPL Financial Holdings Inc.
and subsidiaries (the "Company") as of December 31, 2016 and 2015 and the related consolidated statements of
income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2016 and 2015, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of December 31, 2016, based on the
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 24, 2017 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 24, 2017
F-2
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
REVENUES:
Commission
Advisory
Asset-based
Transaction and fee
Interest income, net of interest expense
Other
Total net revenues
EXPENSES:
Commission and advisory
Compensation and benefits
Promotional
Depreciation and amortization
Amortization of intangible assets
Professional services
Occupancy and equipment
Brokerage, clearing, and exchange
Communications and data processing
Restructuring charges
Other
Total operating expenses
Non-operating interest expense
Loss on extinguishment of debt
INCOME BEFORE PROVISION FOR INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
EARNINGS PER SHARE (NOTE 15)
Earnings per share, basic
Earnings per share, diluted
Weighted-average shares outstanding, basic
Weighted-average shares outstanding, diluted
Years Ended December 31,
2016
2015
2014
$
1,737,435 $
1,976,845 $
2,118,494
1,289,681
1,352,454
1,337,959
556,475
415,715
21,282
28,795
493,687
401,948
19,192
30,928
476,595
369,821
18,982
51,811
4,049,383
4,275,054
4,373,662
2,600,624
2,864,813
2,998,702
436,557
148,612
75,928
38,035
67,128
92,956
54,509
44,453
—
96,587
440,049
139,198
73,383
38,239
64,522
84,112
52,516
46,871
11,967
421,829
124,677
57,977
38,868
62,184
82,430
49,015
43,823
34,652
117,693
109,327
3,655,389
3,933,363
4,023,484
96,478
—
297,516
105,585
59,136
—
282,555
113,771
191,931 $
168,784 $
2.15 $
2.13 $
89,072
90,013
1.77 $
1.74 $
95,273
96,786
51,538
3,943
294,697
116,654
178,043
1.78
1.75
99,847
101,651
$
$
$
See notes to consolidated financial statements.
F-3
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
NET INCOME
Other comprehensive income, net of tax:
Years Ended December 31,
2016
2015
2014
$
191,931 $
168,784 $
178,043
Unrealized gain on cash flow hedges, net of tax expense of $95, $132, and
$722 for the years ended December 31, 2016, 2015, and 2014, respectively
Reclassification adjustment for realized gain on cash flow hedges included in
professional services in the consolidated statements of income, net of tax
expense (benefit) of $252, $353, and $198 for the years ended December 31,
2016, 2015, and 2014, respectively
Total other comprehensive income, net of tax
150
179
1,137
(388)
(238)
(563)
(384)
(315)
822
TOTAL COMPREHENSIVE INCOME
$
191,693 $
168,400 $
178,865
See notes to consolidated financial statements.
F-4
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except par value)
ASSETS
Cash and cash equivalents
Cash and securities segregated under federal and other regulations
Restricted cash
Receivables from:
Clients, net
Product sponsors, broker-dealers, and clearing organizations
Advisor loans, net
Others, net
Securities owned:
Trading — at fair value
Held-to-maturity
Securities borrowed
Fixed assets, net
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Drafts payable
Payables to clients
Payables to broker-dealers and clearing organizations
Accrued commission and advisory expenses payable
Accounts payable and accrued liabilities
Income taxes payable
Unearned revenue
Securities sold, but not yet purchased — at fair value
Senior secured credit facilities, net
Leasehold financing obligation
Deferred income taxes, net
Total liabilities
Commitments and contingencies (Note 12)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value; 600,000,000 shares authorized; 119,917,854 shares
and 119,572,352 shares issued at December 31, 2016 and 2015, respectively
Additional paid-in capital
Treasury stock, at cost — 30,621,270 shares and 30,048,027 shares at December 31,
2016 and 2015, respectively
Accumulated other comprehensive income
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
F-5
December 31,
2016
2015
$ 747,709 $ 724,529
671,339
27,839
768,219
42,680
341,199
175,122
194,526
189,632
339,089
161,224
148,978
180,161
11,404
8,862
5,559
387,368
1,365,838
353,996
11,995
9,847
6,001
275,419
1,365,838
392,031
242,812
206,771
$ 4,834,926 $ 4,521,061
$ 198,839 $ 189,083
747,421
48,032
129,512
332,492
8,680
65,480
268
2,188,240
863,765
63,032
128,476
385,545
4,607
62,785
183
2,175,436
105,649
25,614
59,940
36,303
4,013,931
3,805,451
120
119
1,445,256
1,418,298
(1,194,645)
(1,172,490)
315
569,949
553
469,130
820,995
715,610
$ 4,834,926 $ 4,521,061
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands)
Common Stock
Shares Amount
Additional
Paid-In
Capital
Capital
y
Treasury Stock
Shares
Amount
Accumulated
Other
Comprehensive
)
Income (Loss)
I
(L
Retained
Earnings
Earnings
Total
Stockholders'
Equity
BALANCE — December 31, 2013
117,112 $
117 $ 1,292,374
15,216 $
(506,205) $
115 $ 313,570 $
1,099,971
Net income and other comprehensive
income, net of tax expense
Issuance of common stock to settle
restricted stock units
Treasury stock purchases
Cash dividends on common stock
50
1
17
(869)
5,899
(275,079 )
Stock option exercises and other
1,073
26,914
(42)
1,492
Excess tax benefits from share-based
compensation
Share-based compensation
8,218
27,579
822
178,043
178,865
(95,616)
124
(868)
(275,079)
(95,616)
28,530
8,218
27,579
BALANCE — December 31, 2014
118,235 $
118 $ 1,355,085
21,090 $
(780,661) $
937 $ 396,121 $
971,600
Net income and other comprehensive
loss, net of tax expense
Issuance of common stock to settle
restricted stock units
Treasury stock purchases
Cash dividends on common stock
184
1
68
(3,019)
8,947
(390,835 )
Stock option exercises and other
1,153
30,966
(57)
2,025
Excess tax benefits from share-based
compensation
Share-based compensation
3,034
29,213
(384)
168,784
168,400
(95,814)
39
(3,018)
(390,835)
(95,814)
33,030
3,034
29,213
BALANCE — December 31, 2015
119,572 $
119 $ 1,418,298
30,048 $ (1,172,490) $
553 $ 469,130 $
715,610
Net income and other comprehensive
loss, net of tax expense
Issuance of common stock to settle
restricted stock units
Treasury stock purchases
Cash dividends on common stock
154
1
—
53
635
(1,242)
(25,013)
Stock option exercises and other
192
—
4,796
(115)
4,100
Excess tax benefits from share-based
compensation
Share-based compensation
—
(2,734)
24,896
(238)
191,931
191,693
(89,081)
(2,031)
(1,241)
(25,013)
(89,081)
6,865
(2,734)
24,896
BALANCE — December 31, 2016
119,918 $
120 $ 1,445,256
30,621 $ (1,194,645) $
315 $ 569,949 $
820,995
See notes to consolidated financial statements.
F-6
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Noncash items:
Depreciation and amortization
Amortization of intangible assets
Amortization of debt issuance costs
Share-based compensation
Excess tax benefits related to share-based compensation
Provision for bad debts
Deferred income taxes
Loss on extinguishment of debt
Loan forgiveness
Other
Changes in operating assets and liabilities:
Cash and securities segregated under federal and other regulations
Deposit of restricted cash related to captive insurance subsidiary
Release of restricted cash related to captive insurance subsidiary
Receivables from clients
Receivables from product sponsors, broker-dealers, and clearing
organizations
Advisor Loans
Receivables from others
Securities owned
Securities borrowed
Other assets
Drafts payable
Payables to clients
Payables to broker-dealers and clearing organizations
Accrued commission and advisory expenses payable
Accounts payable and accrued liabilities
Income taxes receivable/payable
Unearned revenue
Securities sold, but not yet purchased
Net cash provided by operating activities
Years Ended December 31,
2016
2015
2014
$
191,931 $
168,784 $
178,043
75,928
38,035
5,752
24,896
(65)
4,057
73,383
38,239
3,405
29,213
(3,810)
2,542
57,977
38,868
3,973
27,579
(8,685)
2,432
(11,550 )
(30,153 )
(24,100)
—
45,163
(3,805)
(96,880 )
(20,628 )
4,407
(2,226)
(13,899 )
(91,866 )
(12,466 )
835
442
—
37,658
1,304
(102,409)
(32,139 )
6,550
26,081
16,247
(66,312 )
(10,514 )
144
(966 )
(30,013 )
(30,714 )
9,757
116,344
15,000
(1,036)
33,512
(4,008)
(2,695)
(85)
8,984
94,707
2,605
(16,992 )
50,077
12,574
998
(35)
3,943
28,409
594
(56,579)
—
—
7,628
(3,400)
(49,146)
(469)
(4,638)
2,067
(45,523)
(14,872)
87,510
2,270
11,355
(8,109)
4,281
(9,257)
91
274,837
279,451
232,242
Continued on following page
F-7
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
(Dollars in thousands)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Purchase of goodwill and other intangible assets
Proceeds from disposal of fixed assets
Purchase of securities classified as held-to-maturity
Proceeds from maturity of securities classified as held-to-maturity
Deposits of restricted cash
Release of restricted cash
Years Ended December 31,
2016
2015
2014
(127,646)
(72,565 )
(89,648)
—
—
(4,020)
5,000
(65)
1,445
—
10
(4,602)
3,350
(1,750)
609
(9,000)
7,123
(7,498)
5,750
(4,679)
4,820
Net cash used in investing activities
(125,286)
(74,948 )
(93,132)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility
Repayments of revolving credit facility
Repayment of senior secured term loans
Proceeds from senior secured term loans
Payment of debt issuance costs
Payment of contingent consideration
—
—
(17,677 )
—
—
—
456,000
150,000
(566,000)
(9,221)
693,000
(13,258 )
—
(40,000)
(10,838)
—
(4,876)
(3,300)
(868)
Tax payments related to settlement of restricted stock units
(1,241)
(3,018)
Repurchase of common stock
Dividends on common stock
Excess tax benefits related to share-based compensation
Proceeds from stock option exercises and other
Payment of leasehold financing obligation
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS — Beginning of year
(25,013 )
(390,835)
(275,079)
(89,081 )
(95,814 )
(95,616)
65
6,865
(289 )
(126,371)
23,180
724,529
3,810
33,030
—
107,694
312,197
412,332
8,685
28,530
—
(243,362)
(104,252)
516,584
CASH AND CASH EQUIVALENTS — End of year
$
747,709 $
724,529 $
412,332
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
Income taxes paid
NONCASH DISCLOSURES:
Capital expenditures included in accounts payable and accrued liabilities
Fixed assets acquired under build-to-suit lease
Finance Obligation related to real estate projects
Discount on proceeds from senior secured credit facilities recorded as debt
issuance costs
$
$
$
$
$
$
92,344 $
51,114 $
51,588
122,909 $
131,833 $
139,315
24,339 $
11,462 $
— $
— $
45,998 $
59,940 $
— $
7,000 $
8,184
8,114
—
—
See notes to consolidated financial statements.
F-8
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1.
Organization and Description of the Company
LPL Financial Holdings Inc. (“LPLFH”), a Delaware holding corporation, together with its consolidated
subsidiaries (collectively, the “Company”) provides an integrated platform of brokerage and investment advisory
services to independent financial advisors and financial advisors at financial institutions (collectively “advisors”) in
the United States. Through its custody and clearing platform, using both proprietary and third-party technology, the
Company provides access to diversified financial products and services, enabling its advisors to offer independent
financial advice and brokerage services to retail investors (their “clients”).
Description of Subsidiaries
LPL Holdings, Inc. (“LPLH”), a Massachusetts holding corporation, owns 100% of the issued and outstanding
common stock or other ownership interest in each of LPL Financial LLC, Fortigent Holdings Company, Inc.,
Independent Advisers Group Corporation (“IAG”), LPL Insurance Associates, Inc. (“LPLIA”), LPL Independent
Advisor Services Group LLC (“IASG”), and UVEST Financial Services Group, Inc. (“UVEST”). LPLH is also the
majority stockholder in PTC Holdings, Inc. (“PTCH”), and owns 100% of the issued and outstanding voting common
stock. Each member of PTCH's board of directors meets the direct equity ownership interest requirements that are
required by the Office of the Comptroller of the Currency. The Company has established a wholly-owned series
captive insurance entity that underwrites insurance for various legal and regulatory risks.
LPL Financial, with primary offices in Boston, Massachusetts; San Diego, California; and Fort Mill, South
Carolina, is a clearing broker-dealer and an investment adviser that principally transacts business as an agent for
its advisors and financial institutions on behalf of their clients in a broad array of financial products and services.
LPL Financial is licensed to operate in all 50 states, Washington D.C., Puerto Rico, and the U.S. Virgin Islands.
Fortigent Holdings Company, Inc. and its subsidiaries (“Fortigent”) provides solutions and consulting services
to registered investment advisors, banks, and trust companies serving high-net-worth clients.
PTCH is a holding company for The Private Trust Company, N.A. (“PTC”). PTC is chartered as a non-
depository limited purpose national bank, providing a wide range of trust, investment management oversight, and
custodial services for estates and families. PTC also provides Individual Retirement Account custodial services for
LPL Financial.
LPLIA operates as an insurance brokerage general agency that offers life, long-term care, and disability
insurance products and services for LPL Financial advisors.
2.
Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”), which require the Company to make estimates and assumptions regarding
the valuation of certain financial instruments, intangible assets, allowance for doubtful accounts, share-based
compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect
the consolidated financial statements and related disclosures. Actual results could differ from those estimates under
different assumptions or conditions and the differences may be material to the consolidated financial statements.
Consolidation
These consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany
transactions and balances have been eliminated. Equity investments in which the Company exercises significant
influence, but does not exercise control and is not the primary beneficiary, are accounted for using the equity
method.
F-9
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reportable Segment
Management has determined that our company operates in one segment, given the similarities in economic
characteristics between our operations and the common nature of our products and services, production and
distribution process, and regulatory environment.
Revenue Recognition
Substantially all of the Company's revenues are based on contractual arrangements. In determining the
appropriate recognition of commissions, the Company reviews the terms and conditions of the brokerage account
agreements between the Company and its advisors' clients, representative agreements with its advisors, which
include payout rates and terms, and selling agreements with product sponsors for packaged investment products
such as mutual funds, annuities, insurance, and alternative investments. In determining the appropriate recognition
of advisory revenues, the Company reviews the terms and conditions of the advisory agreements between the
advisors' clients and the applicable registered investment advisor (“RIA”), representative agreements with its
advisors, and agreements with third parties who provide specific investment management or investment strategies.
Revenues are recognized in the periods in which the related services are performed provided that persuasive
evidence of an arrangement exists, the fee is fixed or determinable, and collectability is reasonably assured.
Payments received by the Company in advance of the performance of service are deferred and recognized as
revenue when earned.
Management considers the nature of the Company's contractual arrangements in determining whether to
recognize certain types of revenue on the basis of the gross amount billed or net amount retained after payments
are made to providers of certain services related to the product or service offering.
The main factors the Company uses to determine whether to record revenue on a gross or net basis are
whether:
•
•
the Company is primarily responsible for the service to the advisor and their client;
the Company has discretion in establishing fees paid by the client and fees due to the third-party service
provider; and
•
the Company is involved in the determination of product or service specifications.
When client fees include a portion of charges that are paid to another party and the Company is primarily
responsible for providing the service to the client, revenue is recognized on a gross basis in an amount equal to the
fee paid by the client. The cost of revenues recognized is the amount due to the other party and is recorded as
commission and advisory expense in the consolidated statements of income.
In instances in which another party is primarily responsible for providing the service to the client, revenue is
recognized in the net amount retained by the Company. The portion of the fees that are collected from the client by
the Company and remitted to the other party are considered pass-through amounts and accordingly are not a
component of revenues or cost of revenues.
Commission Revenues
Commission revenues represent commissions generated by the Company's advisors for their clients'
purchases and sales of securities on exchanges and over-the-counter, as well as purchases of various investment
products such as mutual funds, variable and fixed annuities, alternative investments including non-traded real
estate investment trusts and business development companies, fixed income, insurance, group annuities, and
option and commodity transactions. The Company generates two types of commission revenues: transaction-based
sales commissions that occur at the point of sale, as well as trailing commissions for which the Company provides
ongoing support, awareness, and education to clients of its advisors.
F-10
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Transaction-based sales commissions are recognized as revenue on a trade-date basis, which is when the
Company's performance obligations in generating the commissions have been substantially completed. The
Company settles a significant volume of transactions that are initiated directly between its advisors and product
sponsors, particularly with regard to mutual fund, 529 education savings plan, fixed and variable annuity, and
insurance products. As a result, management must estimate a portion of its commission revenues earned from
clients for purchases and sales of these products for each accounting period for which the proceeds have not yet
been received. These estimates are based on the amount of commissions earned from transactions in these
products in prior periods.
Trailing commission revenues include mutual fund, 529 education savings plan, and fixed and variable
product trailing fees that are recurring in nature. These trailing fees are earned by the Company based on a
percentage of the current market value of clients' investment holdings in trail-eligible assets, and recognized over
the period during which services are performed. Because trailing commission revenues are generally paid in
arrears, management estimates the majority of trailing commission revenues earned during each period. These
estimates are based on a number of factors, including market levels and the amount of trailing commission
revenues received in prior periods. Commission revenue accruals are classified within receivables from product
sponsors, broker-dealers, and clearing organizations in the consolidated statements of financial condition.
A substantial portion of the commission revenue is ultimately paid to the advisors. The Company records an
estimate for commissions payable based upon average payout ratios for each product for which the Company has
accrued commission revenue. Such amounts are classified as accrued commission and advisory expenses payable
in the consolidated statements of financial condition and commission and advisory expense in the consolidated
statements of income.
Advisory Revenues
The Company records fees charged to clients as advisory revenues in advisory accounts where LPL
Financial is the RIA. A substantial portion of these advisory fees are paid to the related advisor and these payments
are classified as commission and advisory expense in the consolidated statements of income.
Certain advisors conduct their advisory business through separate entities by establishing their own RIA firm
pursuant to the Advisers Act or through their respective states' investment advisory licensing rules, rather than
using the Company's corporate RIA platform. These independent entities, or Hybrid RIAs, engage the Company for
clearing, regulatory, and custody services, as well as access to the Company's investment advisory platforms. The
advisory revenue generated by these Hybrid RIAs is earned by the advisors, and accordingly not included in the
Company's advisory revenues.
The Company charges separate fees to Hybrid RIAs for technology, custody, administrative, and clearing
services, primarily based on the value of assets within these advisory accounts, which are classified as advisory
revenues in the consolidated statements of income.
Asset-Based Revenues
Asset-based revenues are comprised of fees from cash sweep programs, financial product manufacturer
sponsorship programs, and omnibus processing and networking services and are recognized ratably over the
period in which services are provided.
F-11
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Transaction and Fee Revenues
The Company charges fees for executing certain transactions in client accounts. Transaction related charges
are recognized on a trade-date basis. Other fees relate to services provided and other account charges generally
outlined in agreements with clients, advisors, and financial institutions. Such fees are recognized as services are
performed or as earned, as applicable. In addition, the Company offers various services for which fees are charged
on a subscription basis and recognized over the subscription period.
Interest Income, Net of Interest Expense
The Company earns interest income from its cash equivalents and client margin balances, less interest
expense on related transactions. Because interest expense incurred in connection with cash equivalents and client
margin balances is completely offset by revenue on related transactions, the Company considers such interest to
be an operating expense. Interest expense from operations for the years ended December 31, 2016, 2015, and
2014 did not exceed $1.0 million.
Compensation and Benefits
The Company records compensation and benefits expense for all cash and deferred compensation, benefits,
and related taxes as earned by its employees. Compensation and benefits expense also includes fees earned by
temporary employees and contractors who perform similar services to those performed by the Company’s
employees, primarily software development and project management activities.
Share-Based Compensation
Certain employees, officers, directors, advisors, and financial institutions of the Company participate in
various long-term incentive plans that provide for granting stock options, warrants, restricted stock awards,
restricted stock units, and deferred stock units. Stock options and warrants generally vest in equal increments over
a three- to five-year period and expire on the tenth anniversary following the date of grant. Restricted stock awards,
restricted stock units, and deferred stock units generally vest over a one- to four-year period.
The Company recognizes share-based compensation for equity awards granted to employees, officers, and
directors as compensation and benefits expense on the consolidated statements of income. The fair value of stock
options is estimated using a Black-Scholes valuation model on the date of grant. The fair value of restricted stock
awards, restricted stock units, and deferred stock units is equal to the closing price of the Company’s stock on the
date of grant. Share-based compensation is recognized over the requisite service period of the individual awards,
which generally equals the vesting period.
The Company recognizes share-based compensation for equity awards granted to advisors and financial
institutions as commissions and advisory expense on the consolidated statements of income. The fair value of stock
options and warrants is estimated using a Black-Scholes valuation model on the date of grant and is revalued at
each reporting period. The fair value of restricted stock units is equal to the closing price of the Company’s stock on
the date of grant and on the last day of each reporting period. Share-based compensation is recognized over the
requisite service period of the individual awards, which generally equals the vesting period.
The Company must also make assumptions regarding the number of stock options, warrants, restricted stock
awards, restricted stock units, and deferred stock units that will be forfeited. The forfeiture assumption is ultimately
adjusted to the actual forfeiture rate. Therefore, changes in the forfeiture assumptions do not impact the total
amount of expense ultimately recognized over the vesting period. Rather, different forfeiture assumptions would
only impact the timing of expense recognition over the vesting period. See Note 14. Share-Based Compensation,
for additional information regarding share-based compensation for equity awards granted.
F-12
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common shareholders by the basic
weighted-average number of shares of common stock outstanding during the period. The computation of diluted
earnings per share is similar to the computation of basic earnings per share, except that the denominator is
increased to include the number of additional shares of common stock that would have been outstanding if dilutive
potential shares of common stock had been issued.
Income Taxes
In preparing the consolidated financial statements, the Company estimates income tax expense based on
various jurisdictions where it conducts business. The Company then must 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. When the Company establishes a valuation allowance or modifies the
existing allowance in a certain reporting period, it generally records a corresponding increase or decrease to tax
expense in the consolidated statements of income. Management makes significant judgments in determining the
provision for income taxes, the deferred tax assets and liabilities, and any valuation allowances recorded against
the deferred tax asset. Changes in the estimate of these taxes 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 the Company had previously taken certain tax positions, and newly enacted statutory, judicial, and
regulatory guidance. These changes could have a material effect on the Company’s consolidated statements of
income, financial condition, or cash flows in the period or periods in which they occur. Income tax credits are
accounted for using the flow-through method as a reduction of income tax in the years utilized.
The Company recognizes the tax effects of a position in the consolidated financial statements only if it is
more-likely-than-not to be sustained based solely on its technical merits; otherwise no benefits of the position are to
be recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support
continued recognition of a benefit. Moreover, each tax position meeting the recognition threshold is required to be
measured as the largest amount that is greater than 50 percent likely to be realized upon ultimate settlement with a
taxing authority that has full knowledge of all relevant information.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of 90 days or less that are not
required to be segregated under federal or other regulations. The Company's cash and cash equivalents are
composed of interest and noninterest-bearing deposits, money market funds, and United States government
obligations.
Cash and Securities Segregated Under Federal and Other Regulations
The Company's subsidiary, LPL Financial LLC, is subject to requirements related to maintaining cash or
qualified securities in a segregated reserve account for the exclusive benefit of its customers in accordance with
Rule 15c3-3 of the Security Exchange Act of 1934, as amended, and other regulations. Held within this account is
approximately $100,000 for the proprietary accounts of introducing brokers.
Restricted Cash
Restricted cash primarily represents cash held by and for use by the Company’s captive insurance subsidiary.
Receivables From and Payables to Clients
Receivables from clients include amounts due on cash and margin transactions. The Company extends credit
to clients of its advisors to finance their purchases of securities on margin and receives income from interest
charged on such extensions of credit. Payables to clients represent credit balances in client accounts arising from
F-13
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
deposits of funds, proceeds from sales of securities, and dividend and interest payments received on securities held
in client accounts at LPL Financial. At December 31, 2016 and 2015, $836.6 million and $747.4 million,
respectively, of the balance represent free credit balances that are held pending re-investment by the clients. The
Company pays interest on certain client payable balances.
To the extent that margin loans and other receivables from clients are not fully collateralized by client
securities, management establishes an allowance that it believes is sufficient to cover any probable losses. When
establishing this allowance, management considers a number of factors, including its ability to collect from the client
or the client’s advisor and the Company’s historical experience in collecting on such transactions.
The following schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts
due from clients (in thousands):
Beginning balance — January 1
Provision for doubtful accounts
Ending balance — December 31
December 31,
2016
2015
$
1,464 $
1,245
116
219
$
1,580 $
1,464
The Company periodically extends credit to its advisors in the form of recruiting loans, commission advances,
and other loans. The decisions to extend credit to advisors are generally based on the advisors’ credit history and
their ability to generate future commissions. Certain loans made in connection with recruiting are forgivable over
terms ranging from three to eight years provided that the advisor remains licensed through LPL Financial. At
December 31, 2016, $136.7 million of the advisor loan balance was forgivable. If an advisor terminates their
arrangement with the Company prior to the forgivable loan term date or repayment of another loan, an allowance
for uncollectible amounts is recorded using an analysis that takes into account the advisors’ registration status and
the specific type of receivable. The aging thresholds and specific percentages used represent management’s best
estimates of probable losses. Management monitors the adequacy of these estimates through periodic evaluations
against actual trends experienced.
The following schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts
for advisor loans (in thousands):
Beginning balance — January 1
Provision for doubtful accounts
Ending balance — December 31
December 31,
2016
2015
$
697 $
1,155
$
1,852 $
697
—
697
Receivables from others primarily consist of accrued fees from product sponsors and amounts due from
advisors. Management maintains an allowance for uncollectible amounts using an aging analysis that takes into
account the specific type of receivable. The aging thresholds and specific percentages used represent
management’s best estimates of probable losses. Management monitors the adequacy of these estimates through
periodic evaluations against actual trends experienced.
F-14
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts
due from others (in thousands):
Beginning balance — January 1
Provision for doubtful accounts
Charge-offs, net of recoveries
Ending balance — December 31
December 31,
2016
2015
$
9,856 $
2,786
209
8,379
2,322
(845)
$
12,851 $
9,856
Securities owned and securities sold, but not yet purchased include trading and held-to-maturity securities.
The Company generally classifies its investments in debt and equity instruments (including mutual funds, annuities,
corporate bonds, government bonds, and municipal bonds) as trading securities, except for United States
government notes held by PTC, which are classified as held-to-maturity securities. The Company has not classified
any investments as available-for-sale. Investment classifications are subject to ongoing review and can change.
Securities classified as trading are carried at fair value, while securities classified as held-to-maturity are
carried at amortized cost. The Company uses prices obtained from independent third-party pricing services to
measure the fair value of its trading securities. Prices received from the pricing services are validated using various
methods including comparison to prices received from additional pricing services, comparison to available quoted
market prices, and review of other relevant market data including implied yields of major categories of securities. In
general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in
active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets
and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For certificates
of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest
rates that correspond to the remaining maturities or the next interest reset dates. At December 31, 2016, the
Company did not adjust prices received from the independent third-party pricing services.
Interest income is accrued as earned. Premiums and discounts are amortized using a method that
approximates the effective yield method over the term of the security and are recorded as an adjustment to the
investment yield. The Company makes estimates about the fair value of investments and the timing for recognizing
losses based on market conditions and other factors. If these estimates change, the Company may recognize
additional losses. Both unrealized and realized gains and losses on trading securities are recognized in other
revenue on a net basis in the consolidated statements of income.
Securities Borrowed
The Company borrows securities from other broker-dealers to make deliveries or to facilitate customer short
sales. Securities borrowed are accounted for as collateralized financings and are recorded at contract value,
representing the amount of cash provided for securities borrowed transactions (generally in excess of market
values). The adequacy of the collateral deposited, which is determined by comparing the market value of the
securities borrowed to the cash loaned, is continuously monitored and is adjusted when considered necessary to
minimize the risk associated with this activity.
The Company borrows securities from other broker-dealers to make deliveries or to facilitate customer short
sales. As of December 31, 2016, the contract and collateral market values of borrowed securities were $5.6 million
and $5.4 million, respectively. As of December 31, 2015, the contract and collateral market values of borrowed
securities were $6.0 million and $5.8 million, respectively.
F-15
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fixed Assets
Internally developed software, leasehold improvements, computers and software, and furniture and
equipment are recorded at historical cost, net of accumulated depreciation and amortization. Depreciation is
recognized using the straight-line method over the estimated useful lives of the assets. The Company charges
software development costs to operations as incurred during the preliminary project stage, while capitalizing costs
at the point at which the conceptual formulation, design, and testing of possible software project alternatives are
complete and management authorizes and commits to funding the project. The costs of internally developed
software that qualify for capitalization are capitalized as fixed assets and subsequently amortized over the
estimated useful life of the software, which is generally three years. The Company does not capitalize pilot projects
and projects for which it believes that the future economic benefits are less than probable. Leasehold improvements
are amortized over the lesser of their useful lives or the terms of the underlying leases. Computers and software, as
well as furniture and equipment, are depreciated over a period of three to seven years. Land is not depreciated.
Management reviews fixed assets for impairment whenever events or changes in circumstances indicate the
carrying amount of the assets may not be recoverable. No material impairment occurred for the years ended
December 31, 2016, 2015, and 2014.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived assets are not amortized; however, intangible assets that are deemed to
have definite lives are amortized over their useful lives, generally ranging from 5 - 20 years. See Note 7. Goodwill
and Other Intangible Assets, for additional information regarding the Company's goodwill and other intangible
assets.
Goodwill and other indefinite-lived intangible assets are tested annually for impairment in the fourth fiscal
quarter and between annual tests if certain events occur indicating that the carrying amounts may be impaired. If a
qualitative assessment is used and the Company determines that the fair value of a reporting unit or indefinite-lived
intangible asset is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a
quantitative impairment test will be performed. If goodwill or other indefinite-lived assets are quantitatively assessed
for impairment, a two-step approach is applied. First, the Company compares the estimated fair value of the
reporting unit in which the asset resides to its carrying value. The second step, if necessary, measures the amount
of such impairment by comparing the implied fair value of the asset to its carrying value. No impairment of goodwill
or other indefinite-lived intangible assets was recognized during the years ended December 31, 2016, 2015, or
2014.
Long-lived assets, such as intangible assets subject to amortization, are reviewed for impairment when there
is evidence that events or changes in circumstances indicate that the carrying amount of an asset or asset group
may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying
amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the
asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds
the estimated fair value of the asset or asset group. Long-lived assets to be disposed of by sale are reported at the
lower of their carrying amounts or their estimated fair values less costs to sell and are not depreciated. There was
No material impairment of definite-lived intangible assets recognized during the years ended December 31, 2016,
2015, and 2014, respectively.
F-16
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Debt Issuance Costs
Debt issuance and amendment costs have been capitalized and are being amortized as additional interest
expense over the expected terms of the related debt agreements. Debt issuance costs are presented as a direct
deduction from the carrying amount of the related debt liability. Costs incurred while obtaining the revolving credit
facility are included in other assets and subsequently amortized ratably over the term of the revolving credit facility,
regardless of whether there are any outstanding borrowings on the revolving credit facility.
Derivative Financial Instruments
The Company uses derivative financial instruments, primarily consisting of non-deliverable foreign currency
forward contracts, to mitigate foreign currency exchange rate risk related to operating expenses that are subject to
repricing. The Company has designated these derivative financial instruments as cash flow hedges, all of which
qualify for hedge accounting. The Company assesses the ongoing effectiveness of its cash flow hedges. Changes
in the fair value for the effective portion of the Company's cash flow hedges are presented in other comprehensive
income and reclassified into earnings to match the timing of the underlying hedged item. Hedge ineffectiveness is
measured at the end of each fiscal quarter, with any gains or losses realized into earnings in the current period. See
Note 8. Derivative Financial Instruments, for additional information regarding the Company's derivative financial
instruments.
Fair Value of Financial Instruments
The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their
short-term nature, approximate current fair value, with the exception of its held-to-maturity securities and
indebtedness, which are carried at amortized cost. The Company measures the implied fair value of its debt
instruments using trading levels obtained from a third-party service provider. Accordingly, the debt instruments
qualify as Level 2 fair value measurements. See Note 3. Fair Value Measurements, for additional information
regarding the Company's fair value measurements. As of December 31, 2016, the carrying amount and fair value of
the Company’s indebtedness was approximately $2,197.4 million and $2,218.9 million, respectively. As of
December 31, 2015, the carrying amount and fair value was approximately $2,215.0 million and $2,200.0 million,
respectively.
Commitments and Contingencies
The Company recognizes a liability with regard to loss contingencies when it believes it is probable a liability
has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the
time to be a better estimate than any other amount within the range, the Company accrues that amount. When no
amount within the range is a better estimate than any other amount, however, the Company accrues the minimum
amount in the range.
The Company has established an accrual for those legal proceedings and regulatory matters for which a loss
is both probable and the amount can be reasonably estimated, except as otherwise covered by third-party
insurance or self-insurance through the Company's Captive Insurance subsidiary.
Leasehold Financing Obligation
The Company was involved in a build-to-suit lease arrangement in Fort Mill, South Carolina, under which it
served as the construction agent on behalf of the landlord and bore substantially all of the risks and rewards of
ownership as measured under GAAP. The Company were therefore required to report the landlord's costs of
construction as a fixed asset during the construction period as if the Company owned such asset and an equal and
off-setting leasehold financing obligation on our consolidated statements of financial condition. The construction
was completed in October 2016 and it was determined that the asset did not qualify for sale-leaseback accounting
treatment. As such, the Company account for this arrangement as a capital lease in which the asset is depreciated
F-17
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and the lease payments are recognized as a reduction of the financing obligation and interest expense over the
lease term on our consolidated statements of income.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update("ASU") 2014-09, Revenue from Contracts with Customers: Topic 606, to supersede nearly all existing
revenue recognition guidance under GAAP. In August 2015, the FASB issued ASU 2015-14, Revenue from
Contracts with Customers: Deferral of the Effective Date, which deferred the effective date for implementation of
ASU 2014-09 by one year and is now effective for annual reporting periods beginning after December 15, 2017,
with early adoption permitted but not earlier than the original effective date. The Company expects to adopt the
provisions of this guidance on January 1, 2018 using the modified retrospective approach; however, the adoption is
expected to have no material impact on its consolidated financial statements but will impact the Company's
disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases, which establishes a right-of-use model that
requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the statement of operations. The Company expects to adopt the provisions of this
guidance on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its
consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment
Accounting. The ASU is designed to identify areas for simplification involving several aspects of accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as
they occur, as well as certain classifications on the statement of cash flows. The Company adopted the new rule on
January 1, 2017. The adoption of ASU 2016-09 is expected to have no material impact on its consolidated financial
statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326)”, which
requires entities to measure all expected credit losses for financial assets held at the reporting date based on
historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-
looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help
financial statement users better understand significant estimates and judgments used in estimating credit losses, as
well as the credit quality and underwriting standards of an entity’s portfolio. The Company expects to adopt the
provisions of this guidance on January 1, 2020. The Company is currently evaluating the impact of the adoption on
its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash
receipts and cash payments in the statement of cash flows. The Company expects to adopt the provisions of this
guidance on January 1, 2018. The Company is currently evaluating the impact the new rule will have on its
consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18, Statements of Cash Flows (Topic 230): Classification and
Presentation of Restricted Cash in the Statements of Cash Flows, which requires that restricted cash and restricted
cash equivalents be included as components of total cash and cash equivalents in the statement of cash flows. The
Company expects to adopt the provisions of this guidance on January 1, 2018. The adoption is not expected to
have a material impact on its consolidated financial statements but will impact the presentation of the cash flow
statement and the Company's disclosures.
F-18
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. Inputs used to measure fair value are prioritized within a
three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar
assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow
methodologies, and similar techniques that use significant unobservable inputs.
There have been no transfers of assets or liabilities between these fair value measurement classifications
during the years ended December 31, 2016 and 2015.
The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of
inputs used to determine the fair value at the measurement date. At December 31, 2016, the Company had the
following financial assets and liabilities that are measured at fair value on a recurring basis:
Cash Equivalents — The Company’s cash equivalents include money market funds, which are short term in
nature with readily determinable values derived from active markets.
Securities Owned and Securities Sold, But Not Yet Purchased — The Company’s trading securities consist of
house account model portfolios established and managed for the purpose of benchmarking the performance
of its fee-based advisory platforms and temporary positions resulting from the processing of client
transactions. Examples of these securities include money market funds, United States treasury obligations,
mutual funds, certificates of deposit, and traded equity and debt securities.
d
The Company uses prices obtained from independent third-party pricing services to measure the fair
value of its trading securities. Prices received from the pricing services are validated using various methods
including comparison to prices received from additional pricing services, comparison to available quoted
market prices, and review of other relevant market data including implied yields of major categories of
securities. In general, these quoted prices are derived from active markets for identical assets or liabilities.
When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices
are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either
directly or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based
inputs, including observable market interest rates that correspond to the remaining maturities or the next
interest reset dates. At December 31, 2016, the Company did not adjust prices received from the independent
third-party pricing services.
Other Assets — The Company’s other assets include: (1) deferred compensation plan assets that are
invested in money market and other mutual funds, which are actively traded and valued based on quoted
market prices; (2) certain non-traded real estate investment trusts and auction rate notes, which are valued
using quoted prices for identical or similar securities and other inputs that are observable or can be
corroborated by observable market data; and (3) cash flow hedges, which are measured using quoted prices
for similar cash flow hedges, taking into account counterparty credit risk and the Company's own non-
performance risk.
F-19
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounts Payable and Accrued Liabilities — The Company's accounts payable and accrued liabilities include
hedges that are measured using Level 2 inputs and contingent consideration liabilities that are measured
using Level 3 inputs.
Level 3 Recurring Fair Value Measurements
The Company determines the fair value for its contingent consideration obligations using an income approach
whereby the Company assesses the expected future performance of the acquired assets. The contingent payment
is estimated using a discounted cash flow of the expected payment amount to calculate the fair value as of the
valuation date. The Company's management evaluates the underlying projections and other related factors used in
determining fair value each period and makes updates when there have been significant changes in management's
expectations.
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value
on a recurring basis at December 31, 2016 (in thousands):
Assets
Cash equivalents
Securities owned — trading:
Money market funds
Mutual funds
Equity securities
Debt securities
U.S. treasury obligations
Total securities owned — trading
Other assets
Total assets at fair value
Liabilities
Equity securities
Debt securities
Total securities sold, but not yet purchased
Accounts payable and accrued liabilities
Total liabilities at fair value
Level 1
Level 2
Level 3
Total
$
168,320 $
— $
— $
168,320
474
7,585
35
—
2,996
—
—
—
314
—
—
—
—
—
—
474
7,585
35
314
2,996
11,090
134,914
314,324 $
314
7,105
7,419 $
—
—
— $
11,404
142,019
321,743
168 $
—
168
—
168 $
— $
15
15
86
101 $
— $
—
—
527
527 $
168
15
183
613
796
$
$
$
F-20
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a
recurring basis at December 31, 2015 (in thousands):
Assets
Cash equivalents
Securities owned — trading:
Money market funds
Mutual funds
Equity securities
Debt securities
U.S. treasury obligations
Total securities owned — trading
Other assets
Total assets at fair value
Liabilities
Mutual funds
Equity securities
Total securities sold, but not yet purchased
Accounts payable and accrued liabilities
Total liabilities at fair value
4.
Held-to-Maturity Securities
Level 1
Level 2
Level 3
Total
$
252,393 $
— $
— $
252,393
261
7,267
56
—
4,308
—
—
—
103
—
—
—
—
—
—
261
7,267
56
103
4,308
11,892
99,962
364,247 $
103
3,350
3,453 $
—
—
— $
11,995
103,312
367,700
1 $
267
268
—
268 $
— $
—
—
—
— $
— $
—
—
527
527 $
1
267
268
527
795
$
$
$
The Company holds certain investments in securities, primarily United States government notes, which are
recorded at amortized cost because the Company has both the intent and the ability to hold these investments to
maturity. Interest income is accrued as earned. Premiums and discounts are amortized using a method that
approximates the effective yield method over the term of the security and are recorded as an adjustment to the
investment yield.
The amortized cost, gross unrealized loss, and fair value of securities held-to-maturity were as follows (in
thousands):
Amortized cost
Gross unrealized loss
Fair value
December 31,
2016
2015
$
$
8,862 $
(31)
8,831 $
9,847
(26)
9,821
U.S. government notes — at amortized cost
U.S. government notes — at fair value
$
$
3,000 $
3,000 $
5,362 $
5,335 $
500 $
496 $
8,862
8,831
Within one
year
After one but
within five
years
After five but
within ten
years
Total
F-21
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5.
Receivables from Product Sponsors, Broker-Dealers, and Clearing Organizations and Payables to
Broker-Dealers and Clearing Organizations
Receivables from product sponsors, broker-dealers, and clearing organizations and payables to broker-
dealers and clearing organizations were as follows (in thousands):
Receivables:
Commissions receivable from product sponsors and others
$
116,218 $
115,413
December 31,
2016
2015
Receivable from clearing organizations
Receivable from broker-dealers
Securities failed-to-deliver
Total receivables
Payables:
Payable to clearing organizations
Payable to broker-dealers
Securities failed-to-receive
Total payables
The components of fixed assets were as follows (in thousands):
Internally developed software
Leasehold improvements
Computers and software
Real estate development
Buildings
Furniture and equipment
Land
Construction in progress
Total fixed assets
Accumulated depreciation and amortization
Fixed assets, net
50,656
1,309
6,939
35,991
4,719
5,101
$
175,122 $
161,224
$
26,517 $
32,065
4,450
17,046
27,455
3,531
$
63,032 $
48,032
December 31,
2016
2015
$
293,997 $
266,899
86,171
122,442
—
105,939
74,492
4,678
55,568
77,473
102,909
59,940
—
47,111
4,678
45,289
743,287
(355,919)
604,299
(328,880)
$
387,368 $
275,419
December 31, 2016, 2015, and 2014, respectively.
The Company has classified certain assets as construction in process to more accurately describe the status
of those assets.The prior period amounts have been reclassified to conform to the current period presentation. The
reclassification has no impact in the net fixed asset balance presented in the consolidated statements of financial
condition.
22
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7.
Goodwill and Other Intangible Assets
A summary of the activity in goodwill is presented below (in thousands):
Balance at December 31, 2014
Goodwill acquired
Balance at December 31, 2015
Goodwill acquired
Balance at December 31, 2016
$
1,365,838
—
$
1,365,838
—
$
1,365,838
The components of intangible assets were as follows at December 31, 2016 (dollars in thousands):
Definite-lived intangible assets:
Advisor and financial institution relationships
Product sponsor relationships
Client relationships
Trade names
Weighted-
Average Life
Remaining
(in years)
Gross
Carrying
Value
Accumulate
d
Amortization
Net
Carrying
Value
9.0
9.1
7.7
5.3
$
440,533 $
(244,540) $
234,086
19,133
1,200
(125,620)
(10,055)
(560)
195,993
108,466
9,078
640
Total definite-lived intangible assets
$
694,952 $
(380,775) $
314,177
Indefinite-lived intangible assets:
Trademark and trade name
Total intangible assets
39,819
$
353,996
The components of intangible assets were as follows at December 31, 2015 (dollars in thousands):
Definite-lived intangible assets:
Advisor and financial institution relationships
Product sponsor relationships
Client relationships
Trade names
Weighted-
Average Life
Remaining
(in years)
Gross
Carrying
Value
Accumulate
d
Amortization
Net
Carrying
Value
10.0
10.1
8.6
6.3
$
440,533 $
(220,214) $
220,319
234,086
19,133
1,200
(113,530)
(8,556)
(440)
120,556
10,577
760
Total definite-lived intangible assets
$
694,952 $
(342,740) $
352,212
Indefinite-lived intangible assets:
Trademark and trade name
Total intangible assets
39,819
$
392,031
Total amortization expense of intangible assets was $38.0 million, $38.2 million, and $38.9 million for the
years ended December 31, 2016, 2015, and 2014, respectively. Future amortization expense is estimated as
follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
$
37,218
34,786
34,750
34,358
34,201
138,864
$
314,177
F-23
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8.
Derivative Financial Instruments
In May 2013, in conjunction with its Service Value Commitment initiative, the Company entered into a long-
term contractual obligation (the “Agreement”) with a third-party provider to enhance the quality, speed, and cost of
its processes by outsourcing certain functions. The Agreement provides that on each annual anniversary date of the
signing of the Agreement, the price for services (denominated in U.S. dollars) is to be adjusted for the then-current
exchange rate between the U.S. dollar (“USD”) and the Indian rupee (“INR”). The Company bears the risk of
currency movement at each of the annual reset dates.
To mitigate foreign currency risk arising from these annual anniversary events, the Company entered into four
non-deliverable foreign currency contracts, all of which have been designated as cash flow hedges. The first two
cash flow hedges settled in 2014 and 2015 and have been fully recognized in net income. The third cash flow
hedge, with a notional amount of 560.4 million INR, or $7.8 million, settled in June 2016. The Company received a
settlement of $0.6 million, which will be reclassified out of accumulated other comprehensive income and
recognized in net income ratably over a 12-month period ending May 31, 2017 to match the timing of the underlying
hedged item.
The details related to the non-deliverable foreign currency contract at December 31, 2016 are as follows:
Cash flow hedge #4
Total hedged amount
Settlement
Date
6/2/2017
Hedged Notional
Amount (INR)
)s
(in millions
((
560.4
Contractual INR/USD
Foreign Exchange
Rate
Hedged Notional
Amount (USD)
)s
(in millions
((
74.20
$
7.5
7.5
The fair value of the derivative instrument, included in other assets in the consolidated statements of financial
condition, was as follows (in thousands):
Cash flow hedge
9.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were as follows (in thousands):
Advisor deferred compensation plan liability
Accrued compensation
Deferred rent
Accounts payable
Other accrued liabilities
Total accounts payable and accrued liabilities
Senior Secured Credit Facilities
December 31,
2016
2015
$
466 $
741
December 31,
2016
2015
$
133,632 $
63,741
43,817
23,284
98,828
61,468
45,003
19,883
121,071
107,310
$
385,545 $
332,492
In November 2015, LPLFH and LPLH entered into a third amendment, extension, and incremental
assumption agreement with respect to its existing credit agreement (as amended, the "Credit Agreement") for
purposes of raising capital, increasing the leverage allowable under the Credit Agreement and extending the
maturity of a portion of the existing Term Loan B.
F-24
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company’s outstanding borrowings were as follows (dollars in thousands):
Senior Secured Credit Facilities
Term Loan A
Existing Term Loan B
Extended Term Loan B
New Term Loan B
Total borrowings
Less: Unamortized Debt Issuance Cost
Long-term borrowings — net of unamortized debt
issuance cost
December 31,
2016
2015
Maturity
9/30/2019 $
3/29/2019
3/29/2021
11/20/2022
Principal
459,375
420,309
624,676
693,000
Interest
Rate
3.27 % (1) $
3.25 % (2)
4.25 % (3)
4.80 % (4)
2,197,360
21,924
Interest
Rate
2.74 %
3.25 %
4.25 %
4.75 %
Principal
459,375
424,676
630,986
700,000
2,215,037
26,797
$ 2,175,436
$ 2,188,240
(1) The variable interest rate per annum is either (a) 150 bps over the base rate or (b) 250 bps over the LIBOR rate (subject to
a leverage based grid)
(2) The variable interest rate per annum is either (a) 150 bps over the base rate or (b) 250 bps over the LIBOR rate (subject to
a LIBOR floor of 75 bps)
(3) The variable interest rate per annum is either (a) 250 bps over the base rate or (b) 350 bps over the LIBOR rate (subject to
a LIBOR floor of 75 bps)
(4) The variable interest rate per annum is either (a) 300 bps over the base rate or (b) 400 bps over the LIBOR rate (subject to
a LIBOR floor of 75 bps)
The Company is required to make quarterly payments on Term Loan B, with a payment of the remaining
balance due at maturity.
The Company also has a revolving credit facility, with borrowing capacity of $400.0 million maturing on
September 30, 2019.
As of December 31, 2016, the Borrower had $14.6 million of irrevocable letters of credit, with an applicable
interest rate margin of 2.50%, which were supported by the credit facility.
The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of
December 31, 2016, the Company was in compliance with such covenants.
Bank Loans Payable
The Company maintains three uncommitted lines of credit. Two of the lines have unspecified limits, which are
primarily dependent on the Company’s ability to provide sufficient collateral. The third line has a $200.0 million limit
and allows for both collateralized and uncollateralized borrowings. During the year ended December 31, 2016, the
Company drew a total of $105.0 million on one of the lines of credit, which was outstanding for one day at a
weighted average interest rate of 1.59%. During the year ended December 31, 2015, the Company drew $55.0
million on one of the line of credit, which was outstanding for one day at an interest rate of 1.50%. The lines were
not otherwise utilized in 2016 and 2015. There were no balances outstanding at December 31, 2016 or 2015.
F-25
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The minimum calendar year payments and maturities of the senior secured borrowings as of December 31,
2016 are as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
$
26,290
52,130
841,193
13,310
606,437
658,000
$
2,197,360
11.
Income Taxes
The Company’s provision for income taxes was as follows (in thousands):
Current provision:
Federal
State
Total current provision
Deferred benefit:
Federal
State
Total deferred benefit
Provision for income taxes
2016
December 31,
2015
2014
$
102,133 $
123,633 $
15,002
117,135
20,291
143,924
(10,767)
(783)
(11,550)
105,585 $
(24,972)
(5,181)
(30,153)
113,771 $
$
120,995
19,759
140,754
(20,800)
(3,300)
(24,100)
116,654
A reconciliation of the United States federal statutory income tax rates to the Company’s effective income tax
rates is set forth below:
Years Ended December 31,
2015
2014
2016
Federal statutory income tax rates
State income taxes, net of federal benefit
Non-deductible expenses
Share-based compensation
Contingent consideration obligations
Domestic production activities deduction
Research & development credits
Other
Effective income tax rates
35.0 %
3.5
0.3
0.1
—
(2.2)
(1.1)
(0.1)
35.5 %
35.0 %
3.6
0.7
—
—
—
—
1.0
40.3 %
35.0 %
3.6
0.7
(0.1)
(0.1)
—
—
0.5
39.6 %
primarily due to tax benefits associated with internally developed software that we determined in 2016.
The increase in the Company's effective tax rate and income tax expense in 2015 compared to 2014 was
primarily due to change in estimates in unrecognized tax positions.
F-26
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of the net deferred income taxes included in the consolidated statements of financial
condition were as follows (in thousands):
Deferred tax assets:
Accrued liabilities
Share-based compensation
State taxes
Deferred rent
Provision for bad debts
Net operating losses
Forgivable loans
Captive Insurance
Other
Total deferred tax assets
Deferred tax liabilities:
Amortization of intangible assets
Depreciation of fixed assets
Other
Total deferred tax liabilities
Deferred income taxes, net
December 31,
2016
2015
$
75,907 $
66,750
31,715
9,345
49,544
7,520
(10 )
9,381
1,689
956
26,774
8,387
4,755
5,316
404
8,741
1,590
3,126
186,047
125,843
(122,482)
(128,646)
(88,960 )
(33,125)
(219)
(375)
(211,661)
(162,146)
$
(25,614) $
(36,303)
gross unrecognized tax benefits, including interest and penalties (in thousands):
Balance — Beginning of year
Increases for tax positions taken during the current year
Reductions as a result of a lapse of the applicable statute of limitations
Balance — End of year
December 31,
2016
2015
2014
$
24,747 $
20,987 $
19,522
17,787
(2,768)
4,404
(644)
4,656
(3,191)
$
39,766 $
24,747 $
20,987
At December 31, 2016 and 2015, the gross unrecognized tax benefits included $31.4 million and $17.6
million (net of the federal benefit on state issues), respectively, that if recognized would favorably affect the effective
income tax rate in any future periods. Increases for tax positions taken during the current year increased compared
to the prior year primarily because of tax benefits associated with our internally developed software.
The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income
taxes within the consolidated statements of financial condition. At December 31, 2016 and 2015, the liability for
unrecognized tax benefits included accrued interest of $3.9 million and $3.0 million, respectively, and penalties of
$4.5 million and $4.3 million, respectively.
The Company and its subsidiaries file income tax returns in the federal jurisdiction, as well as most state
jurisdictions, and are subject to routine examinations by the respective taxing authorities. The Company has
concluded all federal income tax matters for years through 2011 and all state income tax matters for years through
2006.
The tax years of 2012 to 2016 remain open to examination in the federal jurisdiction. The tax years of 2007 to
2016 remain open to examination in the state jurisdictions. In the next 12 months, it is reasonably possible that the
F-27
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Company expects a reduction in unrecognized tax benefits of $4.4 million primarily related to the statute of
limitations expiration in various state jurisdictions.
12. Commitments and Contingencies
Leases
The Company leases office space and equipment under various operating leases. These leases are generally
subject to scheduled base rent and maintenance cost increases, which are recognized on a straight-line basis over
the period of the leases. Total rental expense for all operating leases was approximately $24.7 million, $25.6 million,
and $30.1 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Service and Development Contracts
The Company is party to certain long-term contracts for systems and services that enable back office trade
processing and clearing for its product and service offerings.
Future minimum payments under leases, lease commitments, service, development, and agency contracts,
and other contractual obligations with initial terms greater than one year were as follows at December 31, 2016 (in
thousands):
2017
2018
2019
2020
2021
Thereafter
Total(1)
_____________________
$
57,935
56,840
38,358
33,201
30,859
301,721
$
518,914
(1) Future minimum payments have not been reduced by minimum sublease rental income of $8.6 million due in
the future under noncancellable subleases.
Guarantees
The Company occasionally enters into certain types of contracts that contingently require it to indemnify
certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is
not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it
could be obligated to pay under such contracts.
The Company’s subsidiary, LPL Financial LLC, provides guarantees to securities clearing houses and
exchanges under their standard membership agreements, which require a member to guarantee the performance
of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing
houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under
these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral.
However, the potential requirement for the Company to make payments under these agreements is remote.
Accordingly, no liability has been recognized for these transactions.
Loan Commitments
From time to time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in
the transition process, which may be forgivable. Due to timing differences, LPL Financial may make commitments to
issue such loans prior to actually funding them. These commitments are generally contingent upon certain events
occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no significant unfunded
commitments at December 31, 2016.
F-28
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Legal & Regulatory Matters
The Company is subject to extensive regulation and supervision by United States federal and state agencies
and various self-regulatory organizations. The Company and its advisors periodically engage with such agencies
and organizations, in the context of examinations or otherwise, to respond to inquiries, informational requests, and
investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution
of which can include fines and other remediation. Assessing the probability of a loss occurring and the amount of
any loss related to a legal proceeding or regulatory matter is inherently difficult. While the Company exercises
significant and complex judgments to make certain estimates presented in its consolidated financial statements,
there are particular uncertainties and complexities involved when assessing the potential outcomes of legal
proceedings and regulatory matters. The Company's assessment process considers a variety of factors and
assumptions, 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. The
Company monitors these factors and assumptions for new developments and re-assesses the likelihood that a loss
will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. The
Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both
probable and the amount can be reasonably estimated, except as otherwise covered by third-party insurance or
self-insurance through the captive insurance subsidiary, as discussed below.
A putative class action lawsuit has been filed against the Company and certain of its executive officers in
federal district court alleging certain misstatements and omissions related to the Company’s share repurchases and
financial performance in late 2015.
Third-Party Insurance
The Company maintains third-party insurance coverage for certain potential legal proceedings, including
those involving client claims. With respect to client claims, the estimated losses on many of the pending matters are
less than the applicable deductibles of the insurance policies.
Self-Insurance
The Company has self-insurance for certain potential liabilities, including various errors and omissions
liabilities, through a wholly-owned captive insurance subsidiary. Liabilities associated with the risks that are retained
by the Company are not discounted and are estimated by considering, in part, historical claims experience, severity
factors, and other actuarial assumptions. The estimated accruals for these potential liabilities could be significantly
affected if future occurrences and claims differ from such assumptions and historical trends. As of December 31,
2016, these self-insurance liabilities are included in accounts payable and accrued liabilities in the consolidated
statements of financial condition. Self-insurance related charges are included in other expenses in the consolidated
statements of income for the year ended December 31, 2016.
Other Commitments
As of December 31, 2016, the Company had approximately $219.1 million of client margin loans that were
collateralized with securities having a fair value of approximately $306.7 million that it can repledge, loan, or sell. Of
these securities, approximately $37.6 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, 2016 there
were no restrictions that materially limited the Company's ability to repledge, loan, or sell the remaining $269.1
million of client collateral.
Trading securities on the consolidated statements of financial condition includes $3.0 million and $4.3 million
pledged to clearing organizations at December 31, 2016 and 2015, respectively.
F-29
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. Stockholders' Equity
Dividends
The payment, timing and amount of any dividends are subject to approval by the Board of Directors as well as
certain limits under the Company's credit facilities. Cash dividends per share of common stock and total cash
dividends paid on a quarterly basis were as follows (in millions, except per share data):
First quarter
Second quarter
Third quarter
Fourth quarter
Share Repurchases
2016
2015
Dividend per
Share
Total Cash
Dividend
Dividend per
Share
Total Cash
Dividend
$
$
$
$
0.25 $
0.25 $
0.25 $
0.25 $
22.2 $
22.3 $
22.3 $
22.3 $
0.25 $
0.25 $
0.25 $
0.25 $
24.2
24.1
23.8
23.8
The Company engages in share repurchase programs, which are approved by the Board of Directors,
pursuant to which the Company may repurchase its issued and outstanding shares of common stock from time to
time. Repurchased shares are included in treasury stock on the consolidated statements of financial condition.
Purchases may be effected in open market or privately negotiated transactions, including transactions with affiliates,
with the timing of purchases and the amount of stock purchased generally determined at the discretion of the
Company's management within the constraints of the Credit Agreement and general liquidity needs.
On October 25, 2015 the Board of Directors authorized an increase to the share repurchase program of up to
$500.0 million of shares of common stock. During the year ended December 31, 2016 the Company purchased a
total of 634,651 shares of its common stock at a weighted-average price of $39.41, for a total cost of $25.0 million.
As of December 31, 2016, the Company was authorized to purchase up to an additional $225.0 million of shares
pursuant to share repurchase programs approved by the Board of Directors.
14. Share-Based Compensation
Certain employees, advisors, institutions, officers, and directors of the Company participate in various long-
term incentive plans, which provide for granting stock options, warrants, restricted stock awards, restricted stock
units, and deferred stock units. Stock options and warrants outstanding generally vest in equal increments over a
three- to five-year period and expire on the tenth anniversary following the date of grant. Restricted stock awards,
restricted stock units, and deferred stock units generally vest over a one- to four-year period.
In November 2010, the Company adopted the 2010 Omnibus Equity Incentive Plan (as amended and
restated in May 2015, the “2010 Plan”), which provides for the granting of stock options, warrants, restricted stock
awards, restricted stock units, deferred stock units, and other equity-based compensation. The 2010 Plan serves as
the successor to the 2005 Stock Option Plan for Incentive Stock Options, the 2005 Stock Option Plan for Non-
qualified Stock Options, the 2008 Advisor and Institution Incentive Plan, the 2008 Stock Option Plan, and the
Director Restricted Stock Plan (collectively, the “Predecessor Plans”). Upon adoption of the 2010 Plan, awards
were no longer made under the Predecessor Plans; however, awards previously granted under the Predecessor
Plans remain outstanding until exercised or forfeited.
As of December 31, 2016, there are 20,055,945 shares authorized for grant under the 2010 Plan. There were
8,364,542 shares reserved for exercise or conversion of outstanding awards granted, and 9,696,652 shares
remaining available for future issuance, under the 2010 plan as of December 31, 2016.
F-30
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Options and Warrants
The following table presents the weighted-average assumptions used in the Black-Scholes valuation model
by the Company in calculating the fair value of its employee and officer stock options that have been granted during
the year ended December 31, 2016:
Expected life (in years)
Expected stock price volatility
Expected dividend yield
Risk-free interest rate
Fair value of options
Years Ended December 31,
2016
2015
2014
5.26
33.38 %
2.87 %
1.16 %
5.30
25.78 %
2.30 %
1.58 %
6.02
44.25%
1.77%
2.17%
$
4.60
$
8.81
$
20.51
The fair value of each stock option or warrant awarded to advisors and financial institutions is estimated on
the date of grant and revalued at each reporting period using the Black-Scholes valuation model with the following
weighted-average assumptions used during the year ended December 31, 2016:
Expected life (in years)
Expected stock price volatility
Expected dividend yield
Risk-free interest rate
Fair value of options
Years Ended December 31,
2016
2015
2014
5.90
35.19 %
2.87 %
2.13 %
5.25
25.91 %
2.35 %
1.84 %
6.82
25.87%
2.24%
1.96%
$
11.72
$
12.12
$
15.12
The following table summarizes the Company’s stock option and warrant activity as of and for the year ended
December 31, 2016:
Number of
Shares
Weighted-
Average
Exercise Price
Outstanding — December 31, 2015
Granted
Exercised
Forfeited
Outstanding — December 31, 2016
Exercisable — December 31, 2016
5,716,488 $
2,116,199 $
(180,832) $
(497,873) $
7,153,982 $
4,035,892 $
Exercisable and expected to vest — December 31, 2016
6,991,691 $
34.31
20.01
26.53
32.56
30.40
31.97
30.56
Weighted-
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
(In thousands)
6.27 $
4.54 $
6.20 $
53,404
22,135
51,252
F-31
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes information about outstanding stock options and warrants as of
December 31, 2016:
Range of Exercise Prices
$18.04 - $23.02
$23.41 - $30.00
$31.60 - $32.33
$34.01 - $39.60
$42.60 - $54.81
Outstanding
Weighted-
Average
Remaining
Life
(Years)
Weighted-
Average
Exercise
Price
7.10 $
4.23 $
5.68 $
4.22 $
7.89 $
6.27 $
20.32
28.09
31.88
34.60
48.26
30.40
Exercisable
Number of
Shares
854,123 $
1,037,106 $
743,002 $
781,538 $
620,123 $
4,035,892 $
Weighted-
Average
Exercise
Price
21.36
28.26
31.89
34.54
49.68
31.97
Total
Number of
Shares
2,763,985
1,176,879
972,024
797,642
1,443,452
7,153,982
The Company recognizes share-based compensation for stock options awarded to employees and officers
based on the grant date fair value over the requisite service period of the award, which generally equals the vesting
period. The Company recognized share-based compensation related to the vesting of these awards of $10.7
million, $14.5 million, and $14.7 million during the years ended December 31, 2016, 2015, and 2014, respectively,
which is included in compensation and benefits expense in the consolidated statements of income. As of
December 31, 2016, total unrecognized compensation cost related to non-vested stock options granted to
employees, officers, and directors was $7.7 million, which is expected to be recognized over a weighted-average
period of 1.72 years.
During 2011 and 2012, the Company granted stock options and warrants to its advisors and financial
institutions. Share-based compensation for these awards is based on the fair value of the awards at each reporting
period. The Company recognized share based compensation of $1.8 million, $3.4 million, and $5.3 million during
the years ended December 31, 2016, 2015, and 2014, respectively, related to the vesting of stock options and
warrants awarded to its advisors and financial institutions, which is classified within commission and advisory
expense on the consolidated statements of income. As of December 31, 2016, total unrecognized compensation
cost related to non-vested stock options and warrants granted to advisors and financial institutions was $0.8 million,
which is expected to be recognized over a weighted-average period of 0.92 years.
Restricted Stock
The following summarizes the Company’s activity in its restricted stock awards and stock units, which include
restricted stock units and deferred stock units, for the year ended December 31, 2016:
Nonvested — December 31, 2015
Granted
Vested
Forfeited
Nonvested — December 31, 2016
Expected to vest — December 31, 2016
Restricted Stock Awards
Stock Units
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
41,476 $
13,872 $
(41,759 ) $
(3,185) $
10,404 $
10,404 $
43.99
35.85
43.56
40.81
35.85
35.85
636,701 $
592,766 $
(162,653) $
(84,561 ) $
982,253 $
930,720 $
43.32
20.64
42.70
33.17
30.61
30.97
The Company grants restricted stock awards and deferred stock units to its directors and restricted stock
units to its employees and officers. Restricted stock awards, restricted stock units, and deferred stock units must
F-32
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
vest or else are subject to forfeiture; however, restricted stock awards are included in our shares outstanding upon
grant and have the same dividend and voting rights as our common stock. Share-based compensation is based on
the grant date fair value and recognized over the requisite service period of the award, which generally equals the
vesting period. The Company recognized $8.9 million, $8.3 million, and $6.1 million of share-based compensation
related to the vesting of these restricted stock awards, restricted stock units, and deferred stock units during the
years ended December 31, 2016, 2015, and 2014, respectively, which is included in compensation and benefits
expense on the consolidated statements of income. As of December 31, 2016, total unrecognized compensation
cost for restricted stock awards and deferred stock units granted to directors and restricted stock units granted to
employees and officers was $10.3 million, which is expected to be recognized over a weighted-average remaining
period of 1.65 years.
The Company also grants restricted stock units to its advisors and to financial institutions. Share-based
compensation is based on the fair value of the awards at each reporting period. The Company recognized share-
based compensation of $2.7 million, $2.5 million and $1.0 million related to the vesting of these awards during the
years ended December 31, 2016, 2015, and 2014 respectively, which is classified within commission and advisory
expense on the consolidated statements of income. As of December 31, 2016, total unrecognized compensation
cost for restricted stock units granted to advisors and financial institutions was $5.5 million, which is expected to be
recognized over a weighted-average remaining period of 1.89 years.
15. Earnings per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the
weighted-average number of shares of common stock outstanding during the period. The computation of diluted
earnings per share is similar to the computation of basic earnings per share, except that the denominator is
increased to include the number of additional shares of common stock that would have been outstanding if dilutive
potential shares of common stock had been issued. The calculation of basic and diluted earnings per share for the
years noted was as follows (in thousands, except per share data):
Net income
Basic weighted-average number of shares outstanding
Dilutive common share equivalents
Diluted weighted-average number of shares outstanding
Diluted earnings per share
Years Ended December 31,
2016
2015
2014
$
191,931 $
168,784 $
178,043
89,072
941
90,013
95,273
1,513
96,786
99,847
1,804
101,651
$
$
2.15 $
2.13 $
1.77 $
1.74 $
1.78
1.75
The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units
that are anti-dilutive. For the years ended December 31, 2016, 2015, and 2014, stock options, warrants, and
restricted stock units representing common share equivalents of 4,054,972 shares, 2,223,886 shares, and
864,488 shares, respectively, were anti-dilutive.
16. Employee and Advisor Benefit Plans
The Company participates in a 401(k) defined contribution plan sponsored by LPL Financial. All employees
meeting minimum age and length of service requirements are eligible to participate. The Company has an employer
matching program whereby employer contributions are made to the 401(k) plan, and employees are eligible for
matching contributions after completing one year of service. The Company's contributions were made in an amount
equal to 65% of the first 8% of an employee's designated deferral of their eligible compensation. The Company’s
total cost related to the 401(k) plan was $10.1 million, $9.9 million, and $8.7 million for the years ended
F-33
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016, 2015, and 2014, respectively, which is classified as compensation and benefits expense in the
consolidated statements of income.
In August 2012, the Company established the 2012 Employee Stock Purchase Plan (the “ESPP”) as a
benefit to enable eligible employees to purchase common stock of LPLFH at a discount from the market price
through payroll deductions, subject to limitations. Eligible employees may elect to participate in the ESPP only
during an open enrollment period. The offering period immediately follows the open enrollment window, upon which
time ESPP contributions are withheld from the participant's regular paycheck. The ESPP provides for a 15%
discount on the market value of the stock at the lower of the grant date price (first day of the offering period) and the
purchase date price (last day of the offering period).
In January 2008, the Company adopted a non-qualified deferred compensation plan for the purpose of
attracting and retaining advisors who operate, for tax purposes, as independent contractors, by providing an
opportunity for participating advisors to defer receipt of a portion of their gross commissions generated primarily
from commissions earned on the sale of various products. The deferred compensation plan has been fully funded to
date by participant contributions. Plan assets are invested in mutual funds, which are held by the Company in a
Rabbi Trust. The liability for benefits accrued under the non-qualified deferred compensation plan totaled $133.6
million at December 31, 2016, which is included in accounts payable and accrued liabilities in the consolidated
statements of financial condition. The cash values of the related trust assets was $133.4 million at December 31,
2016, which is measured at fair value and included in other assets in the consolidated statements of financial
condition.
Certain employees and advisors of the Company’s subsidiaries participated in non-qualified deferred
compensation plans (the “Plans”) that permitted participants to defer portions of their compensation and earn
interest on the deferred amounts. The Plans have been closed to new participants and no contributions have been
made since the acquisition date. Plan assets are held by the Company in a Rabbi Trust and accounted for in the
manner described above. As of December 31, 2016, the Company has recorded assets of $2.9 million and liabilities
of $1.5 million, which are included in other assets and accounts payable and accrued liabilities, respectively, in the
consolidated statements of financial condition.
17. Related Party Transactions
The Company has related party transactions with certain portfolio companies of TPG Capital, a 3.7%
shareholder of the Company's common stock and a firm of which one of our directors previously served as a
partner. Additionally, through its subsidiary LPL Financial LLC, the Company provides services and charitable
contributions to the LPL Financial Foundation, an organization that provides volunteer and financial support within
the Company's local communities. During the years ended December 31, 2016, 2015, and 2014, the Company
recognized revenue for services provided to these related parties of $0.1 million, $0.6 million, and $1.0 million,
respectively. The Company incurred expenses for the services provided by certain of the TPG portfolio companies
and the LPL Foundation of $1.5 million, $6.8 million, and $4.2 million, during the years ended December 31, 2016,
2015, and 2014 respectively. As of December 31, 2016 and 2015, receivables and payables to related parties were
not material.
18. Net Capital and Regulatory Requirements
The Company’s registered broker-dealer, LPL Financial LLC, is subject to the SEC’s Net Capital Rule
(Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital, as defined. Under
the alternative method permitted by the rules, LPL Financial LLC must maintain minimum net capital equal to the
greater of $250,000 or 2% of aggregate debit items arising from client transactions. The net capital rules also
provide that the broker-dealer's capital may not be withdrawn if resulting net capital would be less than minimum
requirements. Additionally, certain withdrawals require the approval of the SEC and FINRA to the extent they
exceed defined levels, even though such withdrawals would not cause net capital to be less than minimum
F-34
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
requirements. Net capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial LLC
is a clearing broker-dealer and, as of December 31, 2016, had net capital of $116.2 million with a minimum net
capital requirement of $6.4 million.
The Company's subsidiary, PTC, also operates in a highly regulated industry and is subject to various
regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that if undertaken, could have substantial monetary and non-
monetary impacts to PTC's operations.
As of December 31, 2016 and 2015, LPL Financial LLC and PTC met all capital adequacy requirements to
which they were subject.
19. Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk
LPL Financial’s client securities activities are transacted on either a cash or margin basis. In margin
transactions, LPL Financial extends credit to the advisor's client, subject to various regulatory and internal margin
requirements, collateralized by cash and securities in the client’s account. As clients write options contracts or sell
securities short, LPL Financial may incur losses if the clients do not fulfill their obligations and the collateral in the
clients’ accounts is not sufficient to fully cover losses that clients may incur from these strategies. To control this
risk, LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce
positions, when necessary.
LPL Financial is obligated to settle transactions with brokers and other financial institutions even if its
advisors' clients fail to meet their obligation to LPL Financial. Clients are required to complete their transactions on
the settlement date, generally three business days after the trade date. If clients do not fulfill their contractual
obligations, LPL Financial may incur losses. In addition, the Company occasionally enters into certain types of
contracts to fulfill its sale of when, as, and if issued securities. When, as, and if issued securities have been
authorized but are contingent upon the actual issuance of the security. LPL Financial has established procedures to
reduce this risk by generally requiring that clients deposit cash or securities into their account prior to placing an
order.
LPL Financial may at times hold equity securities on both a long and short basis that are recorded on the
consolidated statements of financial condition at market value. While long inventory positions represent LPL
Financial’s ownership of securities, short inventory positions represent obligations of LPL Financial to deliver
specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of
the transaction. Accordingly, both long and short inventory positions may result in losses or gains to LPL Financial
as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked-to-
market daily and are continuously monitored by LPL Financial.
20. Selected Quarterly Financial Data (Unaudited)
2016
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net revenues
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
$ 1,005,305 $ 1,019,181 $ 1,017,440 $ 1,007,457
41,736
$
50,392 $
47,849 $
51,954 $
$
$
$
0.57 $
0.56 $
0.25 $
0.54 $
0.53 $
0.25 $
0.58 $
0.58 $
0.25 $
0.47
0.46
0.25
35
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2015
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 1,109,302 $ 1,090,661 $ 1,054,745 $ 1,020,346
26,812
$
50,678 $
50,242 $
41,052 $
$
$
$
0.52 $
0.52 $
0.25 $
0.52 $
0.52 $
0.25 $
0.43 $
0.43 $
0.25 $
0.29
0.28
0.25
Net revenues
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
21. Subsequent Event
On February 24, 2017, the Board of Directors declared a cash dividend of $0.25 per share on the Company's
outstanding common stock to be paid on March 24, 2017 to all stockholders of record on March 10, 2017.
******
36
LPL 2016 Annual Report
CORPORATE INFORMATION
BOARD OF DIRECTORS (AS OF 03/31/17)
Dan H. Arnold
President & CEO
LPL Financial Holdings Inc.
John J. Brennan
Chair Emeritus & Senior Advisor
The Vanguard Group, Inc.
Viet D. Dinh
Partner
Kirkland & Ellis LLP
H. Paulett Eberhart
Chair & Chief Executive Officer
HMS Ventures
Marco W. Hellman
Founder & Managing Partner
HMI Capital, LLC
Anne M. Mulcahy
Former Chair and Chief Executive Officer
Xerox Corporation
James S. Putnam
Chair of the Board of Directors
LPL Financial Holdings Inc.
James S. Riepe
Senior Advisor & Retired Vice Chair
of the Board
T. Rowe Price Group, Inc.
Richard P. Schifter
Senior Advisor
TPG Capital
INVESTOR RELATIONS
Send Requests For Financial Information To:
Chris Koegel
Senior Vice President, Investor Relations
LPL Financial
75 State Street, Floor 22 Boston, MA 02019
(617) 897.4574 | investor.relations@lpl.com
TRANSFER AGENT
Computershare
P.O. Box 30170
College Station, TX 77845
ACCOUNTING FIRM
Deloitte & Touche LLP
San Diego, CA
LEGAL COUNSEL
Ropes & Gray LLP
Boston, MA
STOCK LISTING & TRADING SYMBOL
LPL Financial Holdings Inc.’s common stock is listed on
the NASDAQ Global Select Market under the trading
symbol “LPLA.”
FORM 10-K
A copy of our annual report on Form 10-K, filed with
the Securities and Exchange Commission,
is available without charge by contacting our
Investor Relations department.
ANNUAL MEETING
LPL Financial Holdings Inc.’s annual meeting of
the stockholders will be held at:
12:00 p.m. ET on May 17, 2017
LPL Financial
75 State Street, Floor 22
Boston, MA 02109
BOSTON
LPL Financial
75 State Street
Floor 22
Boston, MA 02109
CAROLINAS
LPL Financial
1055 LPL Way
Fort Mill, SC 29715
SAN DIEGO
LPL Financial
4707 Executive Dr.
San Diego, CA 92121
(800) 877.7210 | lpl.com
LPL Financial. A Registered Investment Advisor. Member FINRA/SIPC. Insurance products offered through
LPL Financial or its licensed affiliates.
Not FDIC/NCUA Insured
Not Bank/Credit Union Guaranteed
May Lose Value
Not Guaranteed by any Government Agency
Not a Bank/Credit Union Deposit
CM-00493-0317
Tracking #1-587536