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LPL Financial Holdings Inc.
ANNUAL REPORT
LPL 2018 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
core focus of our business, and we believe no one does it better.
LPL has been ranked the #1 independent broker-dealer for the 23rd consecutive
year (as reported by Financial Planning magazine, June 1996-2018, 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.
We are one team on one mi(cid:2)ion.
We take care of our advisors so
they can take care of their clients.
A Message from the
President & CEO
DEAR FELLOW SHAREHOLDER,
We delivered another solid year of business and
financial growth at LPL in 2018 by remaining
focused on our strategic priorities of growing our
core business and executing with excellence. We
believe this focus continues to position us well to
serve our advisors and to drive profitable growth
for our shareholders.
GROSS PROFIT*
[$ millions]
$1,948
$1,326
$1,358
$1,394
$1,555
LPL 2018 Annual Report
2018 PERFORMANCE
Looking at our financial results, gross profit
increased 25% year-over-year to $1.9 billion,
driven by growth across all our major revenue
lines. We also stayed disciplined on our expenses
while increasing investment in organic growth. As
a result, earnings per share increased 87% year-
over-year to $4.85. Net income also increased
84% year-over-year to $439 million.
Turning to our business results, we ended the
year with $628 billion in total brokerage and
advisory assets, up 2% year-over-year. This was
primarily driven by organic growth and assets
from our acquisition of the National Planning
Holdings, Inc. broker-dealer network, partially
offset by lower equity market levels. As for our
asset mix, advisors continue to increase their use
of our advisory, corporate, and centrally managed
solutions, which enhance our return on assets.
TOTAL ADVISORY
& BROKERAGE ASSETS*
[$ billions]
$615
$628
$475
$476
$509
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
Member FINRA/SIPC
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LPL 2018 Annual Report
NUMBER OF ADVISORS*
14,036
14,054
14,377
16,109
15,210
2014
2015
2016
2017
2018
to provide a curated choice for our advisors. In
combination, we believe our digital workflows will
help advisor practices to drive efficiency in the
delivery of personalized and scalable advice which
in turn will help them grow.
PRIORITIES FOR 2019
As we look ahead, one of our top priorities
remains making it easier to do business with
LPL by keeping our advisors at the center of all
we do. We will continue to embrace change and
continuously innovate to help our advisors manage
their practices and grow their business.
We intend to evolve our current service model
to more of a customer care model, and that work
will begin in 2019. Our vision is to deliver a multi-
channel service experience where our advisors
can get answers to their questions using a variety
of different service channels and methods.
Recruiting new advisors is an important driver of
our organic growth, and we recorded $27.3 billion
in recruited assets in 2018, which was the highest
annual total we have recorded. The primary
drivers of our improved outcomes were enhancing
the performance of our business development
team as well as aligning our transition assistance
with financial returns. We believe these types
of structural changes will drive sustainable and
repeatable results moving forward.
Across these efforts, we remained disciplined on
our expenses. We also increased our investments
in new capabilities, technology, and service to
support our advisors’ growth.
After investing for organic growth, we returned
significant capital to our shareholders. For the
year, we returned $506 million of capital to
shareholders, translating to $5.59 per share. This
was primarily driven by $418 million of share
repurchases and $88 million of dividends.
ADVISORYWORLD ACQUISITION
In December, we announced our acquisition of
AdvisoryWorld, an award-winning provider of
digital solutions designed to help financial advisors
attract and serve client assets. By acquiring
AdvisoryWorld, we gained three important
capabilities for our advisors: proposal generation,
investment analytics, and portfolio modeling.
We intend to integrate other leading third-party
solutions into our main ClientWorks platform
The new service model will leverage artificial
intelligence and other digital solutions to ensure
Member FINRA/SIPC
2
LPL 2018 Annual Report
our advisors get the right information in a
consistent and more accessible way. This gives
us the flexibility to improve the use of our human
resources. Instead of a call center model, we
can shift to a case management model, where
highly skilled and highly trained professionals are
accountable for managing our advisors’ inquiries
from start to finish.
We also believe evolving our culture is
instrumental to executing our strategy in 2019.
NET INCOME*
[$ thousands]
Earnings
Per Share
$ 4.85
“we take care of our advisors so they can take
care of their clients.” We wanted to make it
simple and clear to all of our employees that
we are here to serve and support our advisors.
We trust our efforts to enhance our culture will
instill the mindset and capabilities that will set the
foundation for success for many years to come.
We made great strides in 2018, to put our
advisors at the center of everything we do. I
want to thank our employees for embracing
this new mission. I look forward to the year
ahead, in which we plan to stay focused on our
strategic priorities of growth and execution,
which we believe position us well to grow our
business and create long-term shareholder value.
$1.75
$1.74
$2.13
$2.59
$439,459
Sincerely,
$178,043
$168,784
$191,931
$238,863
DAN ARNOLD
President & CEO
2014
2015
2016
2017
2018
We are taking a structured approach, by instilling
a client-centric mindset, logic-based thinking, and
mission-driven alignment. We took an important
step in this journey at the end of 2018 when we
introduced our new mission statement, which is
Member FINRA/SIPC
*Amounts shown are for or as of the indicated year ended
3
LPL 2018 Annual Report
2018 FINANCIAL HIGHLIGHTS
CONSOLIDATED STATEMENTS OF INCOME DATA:
2018
2017
2016
2015
2014
Net revenues (in thousands) (1)
$5,188,400
$ 4,281,481
$ 4,049,383
$ 4,275,054
$ 4,373,662
Total operating expenses (in thousands) (1)
$4,470,740
$ 3,787,479
$ 3,655,389
$ 3,933,363
$ 4,023,484
Total expenses (in thousands) (1)
$4,595,763
$ 3,916,911
$ 3,751,867
$ 3,992,499
$ 4,078,965
Income from operations (in thousands) (1)
$717,660
$ 494,002
$ 393,994
$ 341,691
$ 350,178
Income before provision for income taxes (in thousands) (1)
$592,637
$ 364,570
$ 297,516
$ 282,555
$ 294,697
$439,459
$ 238,863
$ 191 ,931
$ 168,784
$ 178,043
Net income (in thousands) (1)
PER SHARE DATA:
Earnings per diluted share (1)
Weighted average diluted shares outstanding (in thousands) (1)
90,619
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DATA:
$4.85
$ 2.59
92,115
$ 2.13
$ 1.74
$ 1.75
90,013
96,786
101,651
Cash and cash equivalents (in thousands) (2)
Total assets (in thousands) (2)
Total debt, net (in thousands) (2) (3)
OTHER FINANCIAL AND OPERATING DATA
Gross profit (in thousands) (1) (4)
EBITDA (1) (5)
Number of advisors (2)
Total brokerage and advisory assets (in billions) (2)
Advisory assets under custody (in billions) (2)
Average number of full-time employees (1)
(1) Amounts shown are for the indicated year ended.
(2) Amounts shown are as of the indicated year ended.
$511,096
$5,477,468
$2,371,808
$1,947,670
$865,568
16,109
$628.1
$282.0
4,007
$ 811,136
$ 747,709
$ 724,529
$ 412,332
$ 5,358,751
$ 4,834,926
$ 4,521,061
$ 4,041,930
$ 2,385,022
$ 2,175,436
$ 2,188,240
$ 1,625,195
$ 1,554,835
$ 1,394,250
$ 1,357,725
$ 1,325,945
$ 616,366
$ 507,957
$ 453,313
$ 443,080
15,210
14,377
14,054
14,036
$ 615.1
$ 509.4
$ 475.6
$ 475.1
$ 273.0
$ 211.6
$ 187.2
$ 175.8
3,469
3,320
3,382
3,337
(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, and unamortized premium.
(4) 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 financial 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, amortization, and loss on extinguishment of debt. We present EBITDA because we believe that it can be a useful
financial metric in understanding our earnings from operations. 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 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.
You can find additional related information, including a reconciliation of net income to EBITDA (a non-GAAP financial measure) for the year ended December 31, 2018 within this Annual Report in our Form
10-K for the year ended December 31, 2018. For a reconciliation of net income to EBITDA for the years ended December 31, 2017 and 2016, please consult our Annual Reports on Form 10-K for the years ended
December 31, 2017 and 2016, respectively. For a reconciliation of net income to EBITDA for the years ended December 31, 2015 and 2014, please consult our Annual Report on Form 10-K for the year ended
December 31, 2015.
Member FINRA/SIPC
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LPL Financial Holdings Inc.
FORM 10-K
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, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to
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
No
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
No
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
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes
No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
As of June 30, 2018, the aggregate market value of the voting stock held by non-affiliates of the registrant was $5.8 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 19, 2019 was 84,450,439.
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
TABLE OF CONTENTS
PART I
Item 1
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3
Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
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
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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"). Our SEC filings are available to the public from the SEC’s internet site at SEC.gov.
On our internet site, 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 (617) 897-4574, 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," “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, programs and/or
acquisitions, 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 26, 2019. 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; changes in interest rates and fees payable by banks participating in the Company's cash sweep
programs, including the Company's success in negotiating agreements with current or additional counterparties; the
Company's success and strategy in managing cash sweep program fees; fluctuations in the levels of brokerage and
advisory assets, including net new assets, and the related impact on revenue; effects of competition in the financial
services industry; the success of the Company in attracting and retaining financial advisors and institutions, and
their ability to market effectively financial products and services; whether retail investors served by newly-recruited
advisors choose to move their respective assets to new accounts at the Company; changes in growth and
profitability of the Company’s fee-based business, including the Company's centrally managed advisory platform;
the effect of current, pending, and future legislation, regulation, and regulatory actions, including disciplinary actions
imposed by federal and state regulators and self-regulatory organizations; the cost of settling and remediating
issues related to regulatory matters or legal proceedings, including actual costs of reimbursing customers for losses
in excess of our reserves; changes made to the Company's services and pricing, including in response to current,
pending, and future legislation, regulation, and regulatory actions, 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 and the indenture governing its senior notes; 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
synergies, expense savings, service improvements or efficiencies expected to result from its initiatives and
programs, including its acquisitions of AdvisoryWorld and the broker-dealer network of National Planning Holdings,
Inc. and its expense plans and technology initiatives; the performance of third-party service providers to which
business processes are transitioned; 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-
ii
looking statements as a result of developments occurring after the date of this Annual Report on Form 10-K, 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 on Form 10-K.
iii
Item 1. Business
General Corporate Overview
PART I
We are a leader in the retail financial advice market and the nation's largest independent broker-dealer. We
serve independent financial advisors and financial institutions, providing them with the technology, research,
clearing and compliance services, and practice management programs they need to create and grow their
practices. We enable them to provide objective financial guidance to millions of American families seeking wealth
management, retirement planning, financial planning and asset management solutions.
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 we are the only company that offers advisors the unique combination of an integrated
technology platform, comprehensive self-clearing services, and open architecture access to a wide range of non-
proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing,
underwriting, and market-making.
We believe investors achieve better outcomes when working with a financial advisor. We strive to make it
easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting
independence and choice through access to a wide range of diligently evaluated non-proprietary products.
We began operations through LPL Financial LLC, our broker-dealer subsidiary (“LPL Financial”), in 1989. LPL
Financial Holdings Inc., which is the parent company of our collective businesses, was incorporated in Delaware in
2005. LPL Financial 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. 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.
Through our subsidiary AdvisoryWorld, we offer technology products, including proposal generation, investment
analytics and portfolio modeling, to both our advisors and external clients in the wealth management industry.
Fortigent Holdings Company, Inc. and its subsidiaries (“Fortigent”) provide solutions and consulting services to
registered investment advisors, banks, and trust companies serving high-net-worth clients. Our subsidiary, LPL
Insurance Associates, Inc. (“LPLIA”), operates as a brokerage general agency that offers life 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
through the complexities of investment decisions, retirement solutions, financial planning, and wealth management.
Our advisors support approximately 5.4 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.
1
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 generally allows us to focus on supporting
and enhancing our advisors’ businesses without needing to provide basic training or subsidizing advisors who are
new to the industry. Our flexible business platform allows our advisors to choose the most appropriate business
model to support their clients, whether they conduct brokerage business, offer brokerage and fee-based services on
our corporate registered investment advisor (“RIA”) platform, or provide fee-based services through their own RIA
practices.
The majority of our advisors are entrepreneurial independent contractors who are primarily located in rural
and suburban areas and, as such, are viewed as local providers of independent advice. Many of our advisors
operate under their own business name, and we may assist these advisors with their own branding, marketing and
promotion, and regulatory review.
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 compliance
history, among other factors. Approved advisors become registered with LPL Financial and enter into a
representative agreement that establishes the duties and responsibilities of each party. Pursuant to the
representative agreement, each advisor makes a series of representations, including that the advisor will disclose to
all clients and prospective clients that the advisor is acting as LPL Financial's 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 5,000 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 2,500 financial advisors at approximately
800 banks and credit unions nationwide. The core capabilities of these institutions may not include investment and
financial planning services, or they may find the technology, infrastructure, and regulatory requirements of
supporting such services to be cost-prohibitive. For these institutions, we provide their financial advisors with the
infrastructure and services they need to be successful, allowing the institutions to focus more attention and capital
on their core businesses.
We also provide support to approximately 3,600 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, consultative practice
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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, and seek to offer a
simplified and streamlined advisor experience and expedited processing capabilities. Our self-clearing platform
enables us to control client data, more efficiently process and report trades, facilitate platform development, reduce
costs, and ultimately enhance the service experience for our advisors and their clients. Our self-clearing platform
also enables us to serve a wide range of advisors, including those associated with Hybrid RIAs.
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
advisors ethically and well. We have made a long-term commitment to enhancing our risk management and
compliance structure, as well as our technology-based compliance and risk management tools, in order to further
enhance the overall effectiveness and scalability of our control environment.
Our team of risk and compliance employees assists our advisors through:
•
•
•
•
•
training and advising advisors on new products, new regulatory guidelines, compliance and risk
management tools, security policies and procedures, and best practices;
advising on sales practice activities and facilitating the supervision of activities by branch managers;
conducting technology-enabled surveillance of trading activities and sales practices;
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.
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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, available through our turnkey advisory asset management platforms. Our research team actively
works with our product risk management 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
risk management group conducts a review on substantially all of our product offerings.
The sales and administration of these products are facilitated through our technology solutions 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
business development companies, retirement and 529 education savings plans, fixed income, and insurance. As of
December 31, 2018, the total brokerage assets in our commission-based products were $346.0 billion. We regularly
review the structure and fees of our commission-based products in the context of retail investor preferences and the
changing regulatory environment.
Fee-Based Advisory Platforms and Support
LPL Financial 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, including wrap-fee
programs, mutual fund asset allocation programs, an advisor-enhanced digital advice program, advisory programs
offered by third-party investment advisor firms, financial planning services, and retirement plan consulting services.
The fee structure of our platforms enables our advisors to provide their clients with higher levels of service, while
establishing a recurring revenue stream for the advisor and for us. Our fee-based platforms provide access to
mutual funds, exchange-traded funds, stocks, bonds, certain option strategies, unit investment trusts, and
institutional money managers and no-load multi-manager variable annuities. As of December 31, 2018, the total
advisory assets under custody in these platforms, through both our corporate RIA platform and Hybrid RIAs, were
$282.0 billion.
Cash Sweep Programs
We assist our advisors in managing their clients’ cash balances through three primary cash sweep programs:
a money market sweep vehicle involving money market fund providers and two insured sweep vehicles involving
banks. As of December 31, 2018, the total assets in our cash sweep programs, which are held within brokerage and
advisory accounts, were approximately $34.9 billion. The balance in insured cash account vehicles was $24.8
billion, deposit cash account vehicles was $5.1 billion and money market vehicles was $4.9 billion.
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. We also offer retirement solutions for commission- and fee-based services that allow advisors to
provide brokerage services, consultation, and advice to retirement plan sponsors using LPL Financial. Finally, we
offer proposal generation, investment analytics and portfolio modeling capabilities to both our advisors and external
clients in the wealth management industry through our subsidiary AdvisoryWorld.
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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, 2018, 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.
• 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.
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 — 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 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.
Comprehensive Solutions
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.
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.
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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 or their client base. Our
business model provides advisors with a multitude of customizable service and technology offerings that allow them
to increase their efficiency, focus on their clients, and grow their practice.
Our Sources of Growth
We believe we can increase our revenue and profitability by benefiting from favorable industry trends and by
executing strategies to accelerate our growth beyond that of the broader markets in which we operate.
Favorable Industry Trends
Growth in Investable Assets
Over the past five years assets serviced in the market segments in the United States that we address grew
9.9% per year, while retirement assets are expected to grow 4.7% 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 $9.8 trillion as of 2018 to $12.6 trillion by
2022.
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(1)
(2)
The Cerulli Report: The State of U.S. Retail and Institutional Asset Management 2018.
The Cerulli Report: U.S. Retirement Markets 2018.
Increasing Demand for Independent Financial Advice
Retail investors, particularly in the mass-affluent market, are increasingly seeking financial advice from
independent sources. We are highly focused on helping independent advisors meet the needs of the mass-affluent
market, which constitutes a significant and underserved portion of investable assets.
Advisor Migration to Independent Channels
Independent channels continue to gain market share from captive channels. We believe that we are not just a
beneficiary of this secular shift, but an active catalyst in the movement to independence. There is an increased shift
towards advisors seeking complete independence by forming an RIA firm and registering directly with the SEC or
state securities regulators. This shift has led to significant growth in the number of advisors associated with Hybrid
RIAs and independent RIA firms.
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Macroeconomic Trends
Our business has benefited from recent interest rate increases, and we expect that it will benefit from growth
in advisory and brokerage assets as well as any additional increase in interest rates.
Executing Our Growth Strategies
Increasing Productivity of Existing Advisor Base
We believe the productivity of our advisors has the potential to increase over time as we continue to develop
solutions designed to enable them to add new clients, manage more of their clients’ investable assets, and expand
their existing practices with additional advisors. We expect to facilitate these productivity improvements by helping
our advisors better manage their practices in an increasingly complex external environment, which we believe has
the potential to result in the assets per advisor growing over time.
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 311,927 financial
advisors in the United States, of which we have a 5.2% market share, and we believe 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
60,564
75,863
46,402
40,896
36,852
23,373
27,977
19.4%
24.3%
14.9%
13.1%
11.8%
7.5%
9.0%
311,927
100.0%
(1) The 27,977 advisors classified as "Hybrid RIAs" are advisors who are both licensed through independent broker-dealers
and registered as investment advisors. The Hybrid RIAs are excluded from the Independent Broker-Dealer and
Independent RIA categories in the table above.
Competition
We compete with a variety of financial firms to attract and retain experienced and productive advisors:
• Within the independent broker-dealer channel, the industry is highly fragmented and 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:
Commonwealth Financial Network
Cetera Financial Group
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:
Morgan Stanley
Bank of America Merrill Lynch
UBS Financial Services Inc.
Wells Fargo Advisors, LLC
• Competition for advisors also includes regional firms, such as Edward D. Jones & Co., L.P., Ameriprise
Financial Services Inc. and Raymond James Financial Services, Inc.
• Independent RIA firms, which are registered with the SEC or through 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:
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Charles Schwab & Co.
Fidelity Brokerage Services LLC
TD Ameritrade
Those competitors that do not offer a complete clearing solution for advisors are frequently supported by
third-party clearing and custody oriented firms. Pershing LLC, a subsidiary of Bank of New York Mellon; National
Financial Services LLC, a subsidiary of Fidelity Investments; and J.P. Morgan Clearing Corp., a subsidiary of J.P.
Morgan Chase & Co., offer custodial services and technology solutions to independent firms and RIAs that are not
self-clearing. These clearing firms and their affiliates and other providers also offer an array of service, technology
and reporting tools. Albridge Solutions, a subsidiary of Bank of New York Mellon, Advent Software, Inc., Envestnet,
Inc., and Morningstar, Inc., provide an array of research, analytics, and reporting solutions.
Our advisors compete for clients with financial advisors of brokerage firms, banks, insurance companies,
asset management, and investment advisory firms. In addition, they also compete with a number of firms offering
direct-to-investor online financial services and discount brokerage services, such as Charles Schwab & Co,
E*TRADE, and Fidelity Brokerage Services LLC.
Employees
As of December 31, 2018, we had 4,229 full-time employees. None of our employees are 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. Compliance with all applicable laws and regulations, only some of which are described below, involves a
significant investment in time and resources. Any new laws or regulations applicable to our business, any changes
to existing laws or regulations, or any changes to the interpretations or enforcement of those laws or regulations,
may affect our operations and/or financial condition.
Broker-Dealer Regulation
LPL Financial is a 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 is registered as a broker-dealer in each of the 50 states, the District of
Columbia, Puerto Rico, and the U.S. Virgin Islands. The rules of the Municipal Securities Rulemaking Board, which
are enforced by the SEC and FINRA, apply to the municipal securities activities of LPL Financial.
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
trade. Broker-dealers are also subject to state securities laws and regulated by state securities administrators in
those jurisdictions where they do business. Applicable laws, rules and regulations may be subject to varying
interpretations and change from time to time.
Regulators make periodic examinations and inquiries of us, and review annual, monthly, and other reports on
our operations, track record, and financial condition. Regulatory actions brought against us alleging violations of
applicable laws, rules and regulations could result in censures, penalties and fines, settlements, disgorgement of
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profits, restitution to customers, remediation, or the issuance of cease-and-desist orders. Such actions could also
result in the restriction, suspension, or expulsion from the securities industry of us or our financial advisors, officers
or employees. We also may incur substantial expenses, damage to our reputation, or similar adverse
consequences in connection with any such actions by the SEC, FINRA, the U.S. Department of Labor ("DOL") or
state securities regulators, regardless of the outcome.
LPL Financial's margin lending is regulated by the Federal Reserve Board’s restrictions on lending in
connection with client purchases and short sales of securities, and FINRA rules also require LPL Financial to
impose maintenance requirements based on the value of securities contained in margin accounts. In many cases,
our margin policies are more stringent than these rules.
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 and the potential establishment of
a new self-regulatory organization (“SRO”) for investment advisors. Compliance with these provisions could require
us to review our product and service offerings for potential changes and would likely result in increased compliance
costs. 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 or other new rules or regulations 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 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.
The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and
associated regulations. 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, censures, penalties and fines, settlements, disgorgement of profits, restitution to customers,
remediation, the issuance of cease-and-desist orders or the termination of an investment advisor’s registration. We
also may incur substantial expenses, damage to our reputation, or similar adverse consequences in connection with
such actions, regardless of the outcome.
Retirement Plan Services Regulation
Certain subsidiaries, including LPL Financial, 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 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.
These regulations were significantly broadened and became more onerous under the DOL rule on conflicts of
interest (Definition of the Term "Fiduciary", Conflicts of Interest Rule-Retirement Investment Advice (“DOL Rule”)),
which became applicable in June 2017. The DOL Rule was retroactively invalidated in June 2018, however, as a
result of a mandate issued by the U.S. Court of Appeals for the Fifth Circuit. Although the DOL Rule no longer
applies, we expect the DOL will remain engaged in its regulation of accounts subject to ERISA and the Code,
including continued focus on enforcement with respect to ERISA plans and the possibility of future rulemaking. The
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DOL’s actions could result in legal, compliance, information technology, and other costs and could lead to a greater
risk of client lawsuits and enforcement activity by the DOL. The effect of DOL regulation on our retirement plan
business cannot now be anticipated or planned for, but may have further impacts on our products and services, and
results of operations.
Commodities and Futures Regulation
LPL Financial is registered as an introducing broker with the Commodity Futures Trading Commission
(“CFTC”) and is a member of the National Futures Association (“NFA”). LPL Financial introduces commodities and
futures products to ADM Investor Services, Inc. (“ADM”), and all commodities accounts and related client positions
are held by ADM. LPL Financial is regulated by the CFTC and the NFA. Violations of the rules of the CFTC and the
NFA could result in remedial actions including fines, registration terminations, or revocations of exchange
memberships.
Trust Regulation
Through our subsidiary, PTC, we offer trust, investment management oversight, and custodial services for
estates and families. PTC is chartered as a non-depository national banking association. As a limited purpose
national bank, PTC is regulated and regularly examined by the Office of the Comptroller of the Currency (“OCC”).
PTC files reports with the OCC within 30 days after the conclusion of each calendar quarter. Because the powers of
PTC are limited to providing fiduciary services and investment advice, it does not have the power or authority to
accept deposits or make loans. For this reason, trust assets under PTC’s management are not insured by the FDIC.
Because of its limited purpose, PTC is not a “bank” as defined under the Bank Holding Company Act of 1956.
Consequently, neither its immediate parent, PTC Holdings, Inc., nor its ultimate parent, LPLFH, is regulated by the
Board of Governors of the Federal Reserve System as a bank holding company. However, PTC is subject to
regulation by the OCC and to various laws and regulations enforced by the OCC, such as capital adequacy, change
of control restrictions and regulations governing fiduciary duties, conflicts of interest, self-dealing, and anti-money
laundering. For example, the Change in Bank Control Act of 1978, as implemented by OCC supervisory policy,
imposes restrictions on parties who wish to acquire a controlling interest in a limited purpose national bank such as
PTC or the holding company of a limited purpose national bank such as LPLFH. In general, an acquisition of 10%
or more of our common stock, or another acquisition of “control” as defined in OCC regulations, may require OCC
approval. These laws and regulations are designed to serve specific bank regulatory and supervisory purposes and
are not meant for the protection of PTC, PTC Holdings, Inc., LPLFH, or their stockholders.
Regulatory Capital Requirements
The SEC, FINRA, the CFTC, and the NFA have stringent rules and regulations with respect to the
maintenance of specific levels of net capital by regulated entities. Generally, a broker-dealer’s net capital is
calculated as net worth plus qualified subordinated debt less deductions for certain types of assets. The net capital
rule under the Exchange Act requires a broker-dealer to maintain a minimum net capital, and applies certain
discounts to the value of its assets based on the liquidity of such assets. LPL Financial is also subject to the NFA'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 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, the CFTC, and the NFA impose rules that require notification when net capital falls below
certain predefined criteria. These broker-dealer capital rules also dictate the ratio of debt to equity in regulatory
capital composition and constrain the ability of a broker-dealer to expand its business under certain circumstances.
If a broker-dealer fails to maintain the required net capital, then certain notice requirements to the regulators are
required and the broker-dealer may be subject to suspension or revocation of registration by the applicable
regulatory agency, and suspension or expulsion by these regulators ultimately could lead to the broker-dealer’s
liquidation. Additionally, the net capital rule and certain FINRA rules impose requirements that may have the effect
of prohibiting a broker-dealer from distributing or withdrawing capital, and require prior notice to the SEC and FINRA
for certain capital withdrawals. LPL Financial, which is subject to net capital rules, has been and currently is in
compliance with those rules and has net capital in excess of the minimum requirements.
Anti-Money Laundering and Sanctions Compliance
The USA PATRIOT Act of 2001 (the “PATRIOT Act”), which amended the Bank Secrecy Act, contains anti-
money laundering and financial transparency laws and mandates the implementation of various regulations
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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 but
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 federal and state information-
related laws and regulations in the United States, including the Gramm-Leach-Bliley Act of 1999, SEC
Regulation S-P, the Fair Credit Reporting Act of 1970, as amended, and Regulation S-ID, as well as the California
Consumer Protection Act and further potential federal and state requirements.
Financial Information about Geographic Areas
Our revenues for the periods presented were derived from our operations in the United States.
Trademarks
Access Overlay®, BranchNet®, CLIENTWORKS®, Fortigent®, LPL®, LPL Career Match®, LPL Financial (&
Design)®, Manager Access Network®, Manager Access Select®, OMP®, and SPONSORWORKS® are our registered
trademarks, and ADVISORYWORLD, CLIENTWORKS CONNECTED and THE PRIVATE TRUST COMPANY, N.A.
(& Design) are 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.
In 2017, certain wire houses announced their withdrawal as signatories to an industry broker recruiting
protocol, compliance with which protects financial advisors who move from one brokerage firm to another from risk
of legal action from their prior brokerage firm. As firms withdraw from the protocol, we could become engaged in
more litigation related to our recruiting of advisors from firms which are not signatories to the protocol. In addition,
financial advisors from such firms may be more reluctant to consider joining us and, if they do, they may be less
successful in transitioning their clients’ assets to our platforms than financial advisors who join us from firms that are
signatories to the protocol. As a result, developments with regard to the protocol could negatively impact our
recruiting results or could lead to increased litigation.
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:
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•
•
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, trailing
commissions 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 generally based on prevailing interest rates. Our revenue from
our cash sweep programs has declined in the past as a result of a low interest rate environment, and our revenue
may decline in the future due to decreases in interest rates, decreases in cash sweep balances or mix shifts among
the current or future cash sweep and money market vehicles that we offer. Although the Federal Reserve has
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incrementally raised the federal funds rate in recent years, there can be no assurance that it will continue to do so,
and a reversal of this trend would adversely affect our results. Our revenue from our cash sweep programs also
depends on our success in negotiating favorable terms in current and future agreements with banks and money
market fund providers participating in our programs, as well as our success in offering competitive products,
program fees and interest rates payable to clients. The expiration of contracts with favorable pricing terms, less
favorable terms in future contracts with participants in our cash sweep programs or changes in the cash sweep or
money market vehicles that we offer, could result in declines in our revenue. A sustained low interest rate
environment may also have a negative impact upon our ability to negotiate contracts with new banks or renegotiate
existing contracts on comparable terms with banks participating in our cash sweep programs. If interest rates do not
rise in accordance with management and market expectations, or if balances or yields in our cash sweep programs
decrease, future revenues from our cash sweep programs may be lower than expected.
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 client service, which is built upon our
support for our advisors through: enabling technology, comprehensive clearing and compliance services, practice
management programs and training, and independent research. Our ability to attract and retain advisors and
employees is highly dependent upon external perceptions of our level of service, business practices, and financial
condition. Damage to our reputation could cause significant harm to our business and prospects and may arise from
numerous sources, including:
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•
•
litigation or regulatory actions;
failing to deliver acceptable standards of service and quality;
compliance failures; and
unethical behavior and the misconduct of employees, advisors, or counterparties.
Negative perceptions or publicity regarding these matters could damage our reputation among existing and
potential advisors and employees, and could lead advisors to terminate their agreements with us, which they
generally have the right to do unilaterally upon short notice. Adverse developments with respect to our industry may
also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation
against us. These occurrences could lead to loss of revenue and net income.
Our business is subject to risks related to litigation, arbitration claims, and regulatory actions.
From time to time, we have been subjected to and are currently subject to legal and regulatory proceedings
arising out of our business operations, including lawsuits, arbitration claims, governmental subpoenas, and
regulatory, governmental and SRO inquiries, investigations, and enforcement proceedings, as well as other actions
and claims. Many of our legal claims are initiated by clients of our advisors and involve the purchase or sale of
investment securities, but other claims and proceedings may be, and have been, initiated by state-level and federal
regulatory authorities and SROs, including the SEC, FINRA, and state securities regulators.
The outcomes of any such legal or regulatory proceedings, including inquiries, investigations and
enforcement proceedings by the SEC, FINRA, DOL and state securities regulators, are difficult to predict. A
negative outcome in such a matter could result in substantial legal liability, censures, penalties and fines,
disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders, or injunctive
or other equitable relief against us. Further, such negative outcomes individually or in the aggregate may cause us
significant reputational harm and could have a material adverse effect on our ability to recruit or retain financial
advisors, or our results of operations, cash flows, or financial condition.
We may face liabilities for deficiencies or failures in our compliance systems and programs, as well as actual
or alleged breaches of legal duties to our advisors' clients, including in respect of issues related to the suitability of
the financial products we make available in our open architecture product platform or the investment advice of our
advisors based on their clients' investment objectives (including, for example, alternative investments or exchange-
traded funds) and certain fiduciary obligations for advice and recommendations made to our advisory clients.
Moreover, new and developing state and federal regulatory requirements with respect to standards of care
and other obligations, as discussed under "Risks Related to Our Regulatory Environment" below, may introduce
new grounds for legal claims or enforcement actions against us in the future, including, in particular with respect to
our brokerage services. 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.
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There are risks inherent in the independent broker-dealer business model.
Compared to wire houses and other employee model broker-dealers, we generally offer advisors wider choice
in operating their businesses with regard to product offerings, outside business activities, office technology and
supervisory model. Our approach may make it more challenging for us to comply with our supervisory and
regulatory compliance obligations, particularly in light of our limited on-site supervision and the complexity of certain
advisor business models.
Misconduct and errors by our employees and our advisors could be difficult for us to detect and could result in
violations of law by us, regulatory sanctions, or serious reputational or financial harm. Although we have designed
policies and procedures to comply with applicable laws, rules, regulations and interpretations, we cannot always
prevent misconduct and errors by our employees and our advisors, and the precautions we take to prevent and
detect these activities may not be effective in all cases. Prevention and detection among our advisors, who are
typically not our direct employees and some of whom tend to be located in small, decentralized offices, present
additional challenges, particularly in the case of complex products or supervision of outside business activities. In
addition, although we provide our advisors with requirements and recommendations for their office technology, we
cannot fully control or monitor the extent of their implementation of our requirements and recommendations.
Accordingly, we cannot assure that our advisors’ technology meets our standards, including with regard to
information security and cybersecurity. We also cannot assure that misconduct or errors by our employees or
advisors will not lead to a material adverse effect on our business, or that our errors and omissions insurance will be
sufficient to cover such misconduct or errors.
Our insurance coverage may be inadequate or expensive.
We are subject to claims in the ordinary course of business. These claims may involve substantial amounts of
money and involve significant defense costs. It is not always possible to prevent or detect activities giving rise to
claims, and the precautions we take may not be effective in all cases.
We maintain voluntary and required insurance coverage, including, among others, general liability, property,
director and officer, excess-SIPC, business interruption, cyber and data breach, errors and omissions, and fidelity
bond insurance. We have self-insurance for certain potential liabilities through a wholly-owned captive insurance
subsidiary. While we endeavor to self-insure and purchase coverage that is appropriate to our assessment of our
risk, we are unable to predict with certainty the frequency, nature, or magnitude of claims for direct or consequential
damages. Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory
matter or a legal proceeding is inherently difficult, and there are particular uncertainties and complexities involved
when assessing the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance
subsidiary. In addition, certain types of potential claims for damages cannot be insured. Our business may be
negatively affected if in the future some or all of our insurance proves to be inadequate or unavailable to cover our
liabilities related to legal or regulatory matters. Such negative consequences could include additional expense and
financial loss, which could be significant in amount. In addition, insurance claims may harm our reputation or divert
management resources away from operating our business.
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 effective and may not be adapted quickly enough to respond effectively to
changed circumstances. Some of our compliance and risk evaluation functions depend upon information provided
by others and public information regarding markets, clients, or other matters that are otherwise accessible by us. In
some cases, however, that information may not be available, accurate, complete, or up-to-date. Also, because our
advisors work in decentralized offices, additional risk management challenges may exist, including with regard to
advisor office technology and information security practices. In addition, our existing policies and procedures and
staffing levels may be insufficient to support a significant increase in our advisor population; such an increase may
require us to increase our costs in order to maintain our compliance and risk management obligations or put a strain
on our existing policies and procedures as we evolve to support a larger advisor population. If our policies and
procedures are not effective or if we are not successful in capturing risks to which we are or may be exposed, we
may suffer harm to our reputation or be subject to litigation or regulatory actions that could have a material adverse
effect on our business and financial condition.
14
The securities settlement process exposes us to risks that may expose our advisors and us to adverse
movements in price.
LPL Financial 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.
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:
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illiquid or volatile markets;
diminished access to debt or capital markets;
unforeseen cash or capital requirements;
regulatory penalties or fines, settlements, customer restitution or other remediation costs; or
adverse legal settlements or judgments.
The capital and credit markets continue to experience varying degrees of volatility and disruption. In some
cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for businesses
similar to ours. Without sufficient liquidity, we could be required to limit or curtail our operations or growth plans, and
our business would suffer.
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. 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;
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•
•
•
•
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 as a result of industry- or company-specific considerations. Similarly, our access to funds may be
impaired if regulatory authorities or rating organizations take negative actions against us.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital
required to operate our business. Such market conditions may limit our ability to satisfy statutory capital
requirements, generate commission, fee and other market-related revenue to meet liquidity needs and access the
capital necessary to grow our business. As such, we may be forced to delay raising capital, issue different types of
capital than we would otherwise, less effectively deploy such capital, or bear an unattractive cost of capital, which
could decrease our profitability and significantly reduce our financial flexibility.
A loss of our marketing relationships with manufacturers of financial products could harm our relationship
with our advisors and, in turn, their clients.
We operate on an open 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
of fixed and variable annuities and mutual funds that, subject to the survival of certain terms and conditions, may be
15
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. We can provide no assurances that advisors who join LPL Financial through acquisitions or
investments in advisor practices will remain at LPL Financial. Moreover, we may not be able to successfully
integrate acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an
acquisition. We may have a lack of experience in new markets, products or technologies brought on by the
acquisition and we may have an initial dependence on unfamiliar supply or distribution partners. An acquisition may
create an impairment of relationships with customers or suppliers of the acquired business or our advisors or
suppliers. All of these and other potential risks may serve as a diversion of our management's attention from other
business concerns, and any of these factors could have a material adverse effect on 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 Our Regulatory Environment
Any failure to comply with applicable federal or state laws or regulations exposes us to litigation and
regulatory actions, which could increase our costs or negatively affect our reputation.
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, is:
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•
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;
regulated by the DOL relative to its servicing of retirement plan accounts subject to ERISA and the Code;
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 is FINRA. LPL Financial is also subject to state laws, including
state “blue sky” laws, and the rules of Municipal Securities Rulemaking Board for its municipal securities activities.
The CFTC has designated the NFA as LPL Financial’s primary regulator for futures and commodities trading
activities.
The SEC, FINRA, DOL, the CFTC, the 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 be no assurance that other
federal or state agencies will not attempt to further regulate our business or that specific interactions with foreign
countries or foreign nationals will not trigger regulation in non-U.S. law in particular circumstances. These legislative
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and regulatory initiatives may affect the way in which we conduct our business and may make our business model
less profitable.
Our ability to conduct business in the jurisdictions in which we currently operate depends on our compliance
with the laws, rules, and regulations promulgated by federal regulatory bodies and the regulatory authorities in each
of the states and other jurisdictions in which we do business. Our ability to comply with all applicable laws, rules and
regulations, and interpretations, is largely dependent on our establishment and maintenance of compliance, audit,
and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit,
supervisory, and risk management personnel. We cannot assure you that our systems and procedures are, or have
been, effective in complying with all applicable laws, rules and regulations, and interpretations. In particular, the
diversity of information security environments in which our services are offered makes it difficult to ensure a
uniformly robust level of compliance. Regulators have in the past, and may in the future, raise concerns with respect
to the quality, consistency or oversight of our compliance systems and programs, and our past or future compliance
with applicable laws, rules and regulations. As of the date of this Annual Report on Form 10-K, we have a number of
pending regulatory matters.
Violations of laws, rules or regulations and settlements in respect of alleged violations have in the past and
could in the future result in legal liability, censures, penalties and fines, disgorgement of profits, restitution to
customers, remediation, the issuance of cease-and-desist orders or injunctive or other equitable relief against us,
which individually or in the aggregate could negatively impact our financial results or adversely affect our ability to
attract or retain financial advisors and institutions. Depending on the nature of the violation, we may be required to
offer restitution or remediation to customers, and the costs of doing so could exceed our loss reserves.
We have established a captive insurance subsidiary that underwrites insurance for various regulatory and
legal risks, although self-insurance coverage is not available for all matters. The availability of coverage depends on
the nature of the claim and the adequacy of reserves, which depends in part on historical claims experience,
including the actual timing and costs of resolving matters that begin in one policy period and are resolved in a
subsequent period. Assessing the probability of a loss occurring and the timing and amount of any loss related to a
regulatory matter or a legal proceeding is inherently difficult and requires significant and complex judgments, which
may include the procedural status of the matter and any recent developments; prior experience and the experience
of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact
discovery; the opinions of counsel and experts; potential opportunities for settlement and the status of any
settlement discussions; as well as the potential for insurance coverage and indemnification, if available. There are
particular uncertainties and complexities involved when assessing the adequacy of loss reserves for potential
liabilities that are self-insured by our captive insurance subsidiary. As a result, actual self-insurance liabilities could
exceed our loss reserves, in which case coverage may not be available and we could incur material additional
expense.
Regulatory developments could adversely affect our business by increasing our costs or making our
business less profitable.
Our profitability could be affected by rules and regulations that impact the business and financial communities
generally and, in particular, our advisors and their clients, including changes to the interpretation or enforcement of
laws governing standards of care applicable to investment advice and recommendations, taxation, the classification
of our independent advisors as independent contractors rather than our employees, trading, electronic commerce,
privacy, data protection, and anti-money laundering. Failure to comply with these rules and regulations could subject
us to regulatory actions or litigation and it could have a material adverse effect on our business, results of
operations, cash flows, or financial condition.
New laws, rules and regulations, or changes to the interpretation or enforcement of existing laws, rules or
regulations, could also result in limitations on the lines of business we conduct or plan to conduct, modifications to
our current or future business practices, compressed margins, increased capital requirements, and additional costs.
For example, Nevada has enacted, and other state legislatures (including New Jersey and Maryland) are
considering, statutes that impose fiduciary standards and other obligations on broker-dealers and investment
advisers operating in their states. Additionally, the SEC and Nevada have proposed regulations that would impose
enhanced or additional standards of care and other obligations on broker-dealers and investment advisers, and
New York recently adopted a best interest standard that will become applicable to the sale of certain annuity and
insurance products beginning August 1, 2019. We expect that these laws and proposals, once finalized, could
negatively impact our results, including by increasing our expenditures related to legal, compliance, information
technology, and could result in other costs, including greater risks of client lawsuits and enforcement activity by
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regulators. These changes may also affect the array of products and services we offer to clients and the
compensation that we and our advisors receive in connection with such products and services.
It is also unclear how and whether other regulators, including FINRA, the DOL, banking regulators, and other
state securities and insurance regulators may respond to, or enforce elements of, these new regulations, or develop
their own similar laws and regulations. The impacts, degree and timing of the effect of these laws and future
regulations on our business cannot now be anticipated or planned for, and may have further impacts on our
products and services, and the results of operations. Please consult the Retirement Plan Services Regulation
section within Part I, "Item 1. Business" for specific information about risks associated with DOL regulations and
related exemptions and their potential impact on our operations.
In addition, the Dodd-Frank Act enacted wide-ranging changes in the supervision and regulation of the
financial industry designed to provide for greater oversight of financial industry participants, reduce risk in banking
practices and in securities and derivatives trading, enhance public company corporate governance practices and
executive compensation disclosures, and provide for greater protections to individual consumers and investors.
Certain elements of the Dodd-Frank Act remain subject to implementing regulations that are yet to be adopted by
the applicable regulatory agencies. Provisions of the Dodd-Frank Act that have not been implemented, but yet 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 and the potential establishment of a new SRO for investment advisors.
Compliance with these provisions could require us to review our product and service offerings for potential changes
and would likely result in increased compliance costs. 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 sum, our profitability may be adversely affected by current and future rulemaking and enforcement activity
by the various federal, state and self-regulatory organizations to which we are subject. The effect of these regulatory
developments on our business cannot now be anticipated or planned for, but may have further impacts on our
products and services, and results of operations.
We are subject to various regulatory requirements, which, if not complied with, could result in the
restriction of the conduct or growth of our business.
The business activities that we may conduct are limited by various regulatory agencies. Our membership
agreement with FINRA may be amended by application to include additional business activities. This application
process is time-consuming and may not be successful. As a result, we may be prevented from entering 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, the CFTC, the OCC, and the NFA have extensive rules and regulations with
respect to capital requirements. As a registered broker-dealer, LPL Financial is subject to Rule 15c3-1 (“Net Capital
Rule”) under the Exchange Act, and related requirements of SROs. The CFTC and the NFA also impose net capital
requirements. The Net Capital Rule specifies minimum capital requirements that are intended to ensure the general
soundness and liquidity of broker-dealers. Because our holding companies are not registered broker-dealers, they
are not subject to the Net Capital Rule. However, the ability of our holding companies to withdraw capital from our
broker-dealer 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.
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The requirement to ensure accessibility of our websites and web-based applications to persons with rights
under the Americans with Disabilities Act and other state or federal laws may result in increased cost and
difficulty of compliance with evolving regulatory standards.
The Americans with Disabilities Act is a federal law that prohibits discrimination on the basis of disability in
public accommodations and employment. As federal and state standards evolve to require an increasing number of
public spaces, including web-based applications, to be made accessible to the disabled, we could be required to
make modifications to our internet-based applications or to our other client- or advisor-facing technologies, including
our website, to provide enhanced or accessible service to, or make reasonable accommodations for, disabled
persons. This adaptation of our websites and web-based applications and materials could result in increased costs
and may affect the products and services we provide. 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
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 also imposes excise
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 advisors and their assets,
thereby reducing our revenues and net income.
We are subject to competition in all aspects of our business, including competition for our advisors and their
clients, from:
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brokerage and investment advisory firms, including national and regional firms, as well as independent RIA
firms;
asset management firms;
commercial banks and thrift institutions;
insurance companies;
other clearing/custodial technology companies; and
investment firms offering so-called “robo” advice solutions.
Many of our competitors have substantially greater resources than we do and may offer a broader range of
services and financial products across more markets. Some operate in a different regulatory environment than we
do, which may give them certain competitive advantages in the services they offer. For example, certain of our
competitors only provide clearing services and consequently would not have any supervision or oversight liability
relating to actions of their financial advisors. We believe that competition within our industry will intensify as a result
of consolidation and acquisition activity and because new competitors face few barriers to entry, which could
adversely affect our ability to recruit new advisors and retain existing advisors.
If we fail to continue to attract highly qualified advisors, or if advisors licensed with us leave us to pursue other
opportunities, we could face a significant decline in market share, commission and fee revenues or net income. We
could face similar consequences if current or potential clients of ours, including current clients that use our
outsourced customized clearing, advisory platforms or technology solutions, decide to use one of our competitors
rather than us. If we are required to increase our payout of commissions and fees to our advisors in order to remain
competitive, our net income could be significantly reduced.
19
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 have control over their assets that are served under our platforms. Poor service or
performance of the financial products that we offer, the emergence of new financial products or services from
others, harm to our reputation or competitive pressures on pricing of such services or products may result in the
loss of accounts. In addition, we must monitor the pricing of our services and financial products in relation to
competitors and periodically may need to adjust commission and fee rates, interest rates on deposits and margin
loans, and other fee structures to remain competitive. Competition from other financial services firms, such as
reduced commissions to attract clients or trading volume, direct-to-investor online financial services, including so-
called “robo” advice, or higher deposit rates to attract client cash balances, could adversely impact our business.
The decrease in revenue that could result from such an event could have a material adverse effect on our business.
We face competition in attracting and retaining key talent.
Our success and future growth depends upon our ability to attract and retain qualified employees. There is
significant competition for qualified employees in the broker-dealer industry. Each of our executive officers is an
employee at will and none has an employment agreement. We may not be able to retain our existing employees or
fill new positions or vacancies created by expansion or turnover. The loss or unavailability of these individuals could
have a material adverse effect on our business.
Moreover, our success depends upon the continued services of our key senior management personnel,
including our executive officers and senior managers. The loss of one or more of our key senior management
personnel, and the failure to recruit a suitable replacement or replacements, could have a material adverse effect on
our business.
Risks Related to Our Technology
We rely on technology in our business, and technology and execution failures could subject us to losses,
litigation, and regulatory actions.
Our business relies extensively on electronic data processing, storage and communications systems. In
addition to better serving our advisors and their clients, the effective use of technology increases efficiency and
enables firms like ours to reduce costs and support our regulatory compliance and reporting functions. Our
continued success will depend, in part, upon:
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our ability to continue to invest significant resources on our technology systems in order to meet industry
and regulatory standards and consumer preferences;
our ability successfully maintain and upgrade the capabilities 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 and securely to support our regulatory compliance and reporting
functions;
our ability to comply with the changing landscape of laws and regulations that govern protection of
personally identifiable information; and
our ability to retain skilled information technology employees.
Extraordinary trading volumes, malware, ransomware or attempts by hackers to introduce large volumes of
fraudulent transactions into our systems, beyond reasonably foreseeable spikes in volumes, could cause our
computer systems to operate at an unacceptably slow speed or even fail. Failure of our systems, which could result
from these or other events beyond our control, or an inability or failure to effectively upgrade those systems or
implement new technology-driven products or services, could result in financial losses, unanticipated disruptions in
our service, liability to our advisors or advisors' clients, compliance failures, 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, as
well as our employees. Although we take protective measures and endeavor to modify them as circumstances
warrant, our computer systems, software, and networks are to some degree vulnerable to unauthorized access,
human error, computer viruses, denial-of-service attacks, malicious code, spam attacks, phishing, ransomware or
other forms of social engineering and other events that could impact the security, reliability, confidentiality, integrity
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and availability of our systems. To the extent third parties, such as product sponsors, also retain similarity sensitive
information about our advisors or their clients, their systems may face similar vulnerabilities. We are not able to
protect against these events completely given the rapid evolution of new vulnerabilities, the complex and distributed
nature of our systems, our interdependence on the systems of other companies and the increased sophistication of
potential attack vectors and methods against our systems. If one or more of these events occur, they 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. As a result,
we could be subject to litigation, client loss, reputational harm, regulatory sanctions, and financial losses that are
either not insured or are not fully covered through any insurance we maintain. If any person, including any of our
employees or advisors, negligently disregards or intentionally breaches our established controls with respect to
client data, or otherwise mismanages or misappropriates that data, we could also be subject to significant monetary
damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions.
Our information technology systems may be vulnerable to security risks.
The secure transmission of confidential information, including personally identifiable information, over public
networks is a critical element of our operations. As part of our normal operations, we maintain and transmit
confidential information about clients of our advisors, our advisors and our employees, as well as proprietary
information relating to our business operations. The risks related to transmitting data and using service providers
outside of and storing or processing data within our network are increasing based on escalating and malicious cyber
activity, including activity that originates outside of the United States from criminal elements and hostile nation-
states.
Cybersecurity requires ongoing investment and diligence against evolving threats and is subject to federal
and state regulation relating to the protection of confidential information. We may be required to expend significant
additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other
exposures, to make required notifications, or to update our technologies, websites and web-based applications to
comply with industry and regulatory standards, but we may not have adequate personnel, financial or other
resources to fully meet these standards. We will also be required to effectively and efficiently govern, manage and
ensure timely evolutions in our systems, including in their design, architecture and interconnections as well as their
organizational and technical protections. 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, which sometimes conflict, governing handling of confidential
information by companies within their jurisdiction. Several states, including California, Colorado, Connecticut,
Michigan, New York, South Carolina and Vermont, have promulgated cybersecurity requirements that impact our
compliance obligations. Compliance with these regulations also could be costly and disruptive to our operations,
and we cannot provide assurance that the impact of these regulations would not, either individually or collectively,
be material to our business.
Our application service provider systems maintain and process confidential data on behalf of advisors and
their clients, some of which is critical to our advisors’ business operations. If our application service provider
systems are disrupted or fail for any reason, or if our systems or facilities are infiltrated or damaged by unauthorized
persons or malicious computer code, we or our advisors could experience data loss, financial loss, harm to
reputation, regulatory violations, class action and commercial litigation, and significant business interruption or loss.
In addition, vulnerabilities of our external service providers could pose security risks to client information. If any such
disruption or failure, real or perceived, 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. Further, any actual or perceived breach or cybersecurity attack directed at other financial
institutions or financial services companies, whether or not we are targeted, could lead to a general loss of
customer confidence in the use of technology to conduct financial transactions, which could negatively impact us,
including the market perception of the effectiveness of our security measures and technology infrastructure. The
occurrence of any of these events may have a material adverse effect on our business or results of operations.
Our own information technology systems are to some degree vulnerable to unauthorized access and other
security risks. 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, either
intentionally or unintentionally, could result in the loss or wrongful use of their clients’ confidential information or
other sensitive information. In addition, even if we and our advisors comply with our policies and procedures,
persons who circumvent security measures could infiltrate or damage our systems or facilities and wrongfully use
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our confidential information or clients’ confidential information or cause interruptions or malfunctions in our
operations. Cyber-attacks can be designed to collect information, manipulate, destroy or corrupt data, applications,
or accounts, and to disable the functioning or use of applications or technology assets. Such activity could, among
other things:
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seriously damage our reputation;
allow competitors or hackers access to our proprietary business information;
subject us to liability for a failure to safeguard client data;
result in the termination of relationships with our advisors;
subject us to regulatory sanctions or obligations, based on state law or the authority of the SEC and FINRA
to enforce regulations regarding business continuity planning or cybersecurity;
subject us to litigation by consumers, advisors, or other business partners that may suffer damages as a
result of such activity;
result in inaccurate financial data reporting; and
require significant capital and operating expenditures to investigate and remediate 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
does not cover certain types of potential losses and, for covered losses, may not be sufficient in amount to protect
us against all such losses.
In the course of operations, we share sensitive corporate and personal data with vendors, third parties and
other financial institutions. Although we conduct due diligence before sharing data with third parties, this due
diligence may not uncover administrative, technical or electronic gaps or flaws in their processes or systems. In
2018, we experienced a limited breach of information security at a vendor, which led to notification costs and
potential reputational harm with regulators, current and potential advisors and advisors’ clients. We also
experienced an incident at another financial institution which held advisor data in the normal course of operations.
Similar incidents in the future could lead to litigation involving other financial institutions, class actions, regulatory
investigations or other harm.
In light of the high volume of transactions we process, the large number of our advisors and their clients, the
diversity of our advisors' security environments and the increasing sophistication of malicious actors, a cyber-attack
could occur and persist for an extended period of time without detection. We expect that any investigation of a
cyber-attack could take substantial amounts of time, and that there may be extensive delays before we obtain full
and reliable information. In some cases, the nature of the attack may be such that full and reliable information may
never be available. During such time we would not necessarily know the extent of the harm or how best to
remediate it, and certain errors or actions could be repeated or compounded before they are discovered and
remediated, all of which would further increase the costs and consequences of such an attack.
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:
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securities trading and custody;
portfolio management;
performance reporting;
customer service;
accounting and internal financial processes and controls; and
regulatory compliance and reporting.
Our continued success depends on our ability to effectively adopt new or adapt existing technologies to meet
changing client, industry, and regulatory demands. The emergence of new industry standards and practices could
render our existing systems obsolete or uncompetitive. There cannot be any assurance that another company will
not design a similar or better platform that renders our technology less competitive.
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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 resources to adequately update and
expand our information technology systems or capabilities, or offer our services on the personal and mobile
computing devices that may be preferred by our advisors and/or their clients, nor can there be any assurance that
any upgrade or expansion efforts will be sufficiently timely, successful, secure and accepted by our current and
prospective advisors or their clients. The process of upgrading and expanding our systems has at times caused,
and may in the future cause, us to suffer system degradations, outages and failures. If our technology systems were
to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which
could lead to a loss of advisors and could harm our reputation. A technological breakdown could also interfere with
our ability to comply with financial reporting and other regulatory requirements, exposing us to disciplinary action
and to liability to our advisors and their clients. Security, stability, and regulatory risks also exist because parts of our
infrastructure and software are beyond their manufacturer’s stated end of life. We are working to mitigate such risks
through additional controls and increased modernization spending, although we cannot provide assurance that our
risk mitigation efforts will be effective, in whole or in part.
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, human error, loss of power, computer and/or telecommunications failure, or other natural or man-made
events. A catastrophic event could have a direct negative impact on us by adversely affecting our advisors,
employees, or facilities, or an indirect impact on us by adversely affecting the financial markets or the overall
economy. While we have implemented business continuity and disaster recovery plans and maintain business
interruption insurance, it is impossible to fully anticipate and protect against all potential catastrophes. In addition,
we depend on the adequacy of the business continuity and disaster recovery plans of our third-party service
providers, including off-shore service providers, in order to prevent or mitigate service interruptions. If our business
continuity and disaster recovery plans and procedures, or those of our third-party service providers, were disrupted
or unsuccessful in the event of a catastrophe, we could experience a material adverse interruption of our
operations.
We rely on outsourced service providers, including off-shore providers, to perform technology, processing,
and support functions.
We rely on outsourced service providers to perform certain technology, processing and support functions. For
example, we have an agreement with Thomson Reuters BETA Systems, a division of Thomson Reuters ("BETA
Systems"), under which they provide us key operational support, including data processing services for securities
transactions and back office processing support. Our use of third-party service providers may decrease our ability to
control operating risks and information technology systems risks.
Any significant failures by BETA Systems or our other service providers could cause us to sustain serious
operational disruptions and incur losses and could harm our reputation. These third-party service providers are also
susceptible to operational and technology vulnerabilities, including cyber-attacks, security breaches, fraud, phishing
attacks and computer virus, which could result in unauthorized access, misuse, loss or destruction of data, an
interruption in service or other similar events that may impact our business.
We cannot assure that our third-party service providers will be able to continue to provide their services in an
efficient, cost effective manner, if at all, or that they will be able to adequately expand their services to meet our
needs and those of our advisors. An interruption in or the cessation of service by a third-party service provider and
our inability to make alternative arrangements in a timely manner could cause a disruption to our business and
could have a material impact on our ability to serve our advisors and their clients. In addition, we cannot predict the
costs or time that would be required to find an alternative service provider.
We have transitioned certain business and technology processes to off-shore providers, which has increased
the related risks described above. For example, we rely on several off-shore service providers, operating in multiple
locations, for functions related to cash management, account transfers, information technology infrastructure and
support, and document indexing, among others. To the extent third-party service providers are located in foreign
jurisdictions, we are exposed to risks inherent in such providers conducting business outside of the United States,
including international economic and political conditions, and the additional costs associated with complying with
foreign laws and fluctuations in currency values.
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We expect that our regulators would hold us responsible for any deficiencies in our oversight and control of
our third-party relationships and for the performance of such third parties. If there were deficiencies in the oversight
and control of our third-party relationships, and if our regulators held us responsible for those deficiencies, our
business, reputation, and results of operations could be adversely affected.
Risks Related to Our 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, 2018, we had total indebtedness of $2.4 billion of which $1.5 billion is subject to floating
interest rates. Our level of indebtedness could increase our vulnerability to general adverse economic and industry
conditions. It could also require us to dedicate a substantial portion of our cash flow from operations to payments on
our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures,
and other general corporate purposes. In addition, our level of indebtedness may limit our flexibility in planning for
changes in our business and the industry in which we operate, and limit our ability to borrow additional funds. If
interest rates increase our interest expense would increase because borrowings under our senior secured credit
agreement (“Credit Agreement”) are based on variable interest rates.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face
substantial liquidity problems and could be forced to sell assets, seek additional capital or seek to restructure or
refinance our indebtedness. These alternative measures may not be successful or feasible. Our Credit Agreement
restricts our ability to sell assets. Even if we could consummate those sales, the proceeds that we realize from them
may not be adequate to meet any debt service obligations then due. Furthermore, if an event of default were to
occur with respect to our Credit Agreement or other future indebtedness, our creditors could, among other things,
accelerate the maturity of our indebtedness.
Our Credit Agreement and the indenture (as supplemented, “Indenture”) governing our senior unsecured
notes (as defined further below, the “Notes”) permit us to incur additional indebtedness. Under our Credit
Agreement and Indenture, we have the right to request additional commitments for new term loans, new revolving
credit commitments and increases to then-existing term loans and revolving credit commitments, subject to certain
limitations. Although the Credit Agreement and the Indenture contain restrictions on the incurrence of additional
indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the
indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions do not
prevent us from incurring obligations that do not constitute “indebtedness” as defined in the Credit Agreement or the
Indenture. To the extent new debt or other obligations are added to our currently anticipated debt levels, the
substantial indebtedness risks described above would increase.
A credit rating downgrade would not impact the terms of our repayment obligations under the Credit
Agreement or the Indenture. However, any such downgrade would negatively impact our ability to obtain
comparable rates and terms on any future refinancing of our debt and could restrict our ability to incur additional
indebtedness.
Restrictions under our Credit Agreement and the Indenture governing our Notes may prevent us from
taking actions that we believe would be in the best interest of our business.
Our Credit Agreement and the Indenture contain customary restrictions on our activities, including covenants
that may restrict us from:
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incurring additional indebtedness or issuing disqualified stock or preferred stock;
declaring dividends or other distributions to shareholders;
repurchasing equity interests;
redeeming indebtedness that is subordinated in right of payment to certain debt instruments;
• making investments or acquisitions;
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creating liens;
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selling assets;
guaranteeing indebtedness;
engaging in certain transactions with affiliates;
entering into agreements that restrict dividends or other payments from subsidiaries; and
consolidating, merging, or transferring all or substantially all of our assets.
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Our revolving credit facility requires us to meet specified leverage ratio and interest coverage ratio tests.
These restrictions may prevent us from taking actions that we believe would be in the best interest of our
business. Our ability to comply with these restrictive covenants will depend on our future performance, which may
be affected by events beyond our control. If we violate any of these covenants and are unable to obtain waivers, we
would be in default under our Credit Agreement or the Indenture, as applicable, and payment of the indebtedness
could be accelerated. Acceleration of our indebtedness under our Credit Agreement or the Indenture may permit
acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions. If
our indebtedness is accelerated, we may not be able to repay that indebtedness or borrow sufficient funds to
refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on
terms that are acceptable to us. If our indebtedness is in default for any reason, our business could be materially
and adversely affected. In addition, complying with these covenants may also cause us to take actions that are not
favorable to holders of our common stock and may make it more difficult for us to successfully execute our business
strategy and compete against companies that are not subject to such restrictions.
Provisions of our Credit Agreement and the Indenture could discourage an acquisition of us by a third-
party.
Certain provisions of our Credit Agreement and the Indenture could make it more difficult or more expensive
for a third-party to acquire us, and any of our future debt agreements may contain similar provisions. Upon the
occurrence of certain transactions constituting a change of control, all indebtedness under our Credit Agreement
may be accelerated and become due and payable and noteholders will have the right to require us to repurchase
the Notes at a purchase price equal to 101% of the principal amount of the Notes plus accrued and unpaid interest,
if any, to but not including the purchase date. A potential acquirer may not have sufficient financial resources to
purchase our outstanding indebtedness in connection with a change of control.
Risks Related to Ownership of Our Common Stock
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial
losses for our investors.
The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to the
following factors (in addition to the other risk factors described in this Item 1A):
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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 arbitration proceedings;
the commencement or outcome of regulatory actions, including settlements with the SEC, FINRA, DOL or
state securities regulators;
changes in market valuation or earnings of our competitors;
the trading volume of our common stock;
future 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 "best interest"
and "fiduciary" standards of care;
political developments; and
general economic conditions.
In addition, the equity markets in general have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of the particular companies affected. These
broad market and industry factors may materially harm the market price of our common stock irrespective of our
operating performance. In addition, in the past, following periods of volatility in the overall market and the market
price of a company’s securities, securities class action litigation has often been instituted against the affected
company. A putative class action lawsuit has been filed against us and certain of our executive officers in federal
25
district court alleging certain misstatements and omissions related to our share repurchases and financial
performance in late 2015. This type of litigation could result in substantial costs and a diversion of our
management’s attention and resources.
We are a holding company and rely on dividends, distributions, and other payments, advances, and
transfers of funds from our subsidiaries to meet our debt service and other obligations.
We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our
operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions
to meet any existing or future debt service and other obligations. The deterioration of the earnings from, or other
available assets of, our subsidiaries for any reason could limit or impair their ability to pay dividends or other
distributions to us. In addition, FINRA regulations restrict dividends in excess of 10% of a member firm’s excess net
capital without FINRA’s prior approval. Compliance with this regulation may impede our ability to receive dividends
from our broker-dealer subsidiary.
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 limited by our ability to generate sufficient
earnings and cash flows.
Our board of directors declared quarterly cash dividends on our outstanding common stock in 2018 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 our
Credit Agreement, the Indenture and 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 Credit Agreement and the Indenture. 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:
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the sole ability of the board of directors to fill a vacancy created by the expansion of the board of directors;
advance notice requirements for stockholder proposals and director nominations;
limitations on the ability of stockholders to call special meetings and to take action by written consent;
the approval of holders of at least two-thirds of the shares entitled to vote generally on the making,
alteration, amendment, or repeal of our certificate of incorporation or bylaws will be required to adopt,
amend, or repeal our bylaws, or amend or repeal certain provisions of our certificate of incorporation;
the required approval of holders of at least two-thirds of the shares entitled to vote at an election of the
directors to remove directors; and
the ability of our board of directors to designate the terms of and issue new series of preferred stock,
without stockholder approval, which could be used to institute a rights plan, or a poison pill, that would work
to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been
approved by our board of directors.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors
might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our
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company, thereby reducing the likelihood that you could receive a premium for your common stock in the
acquisition.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate offices are located in San Diego, California where we lease approximately 420,000 square feet
of office space under a lease agreement that expires on April 30, 2029; in Fort Mill, South Carolina where we lease
approximately 452,000 square feet of office space under a lease agreement that expires on October 31, 2036; and
in Boston, Massachusetts where we lease approximately 69,000 square feet of space under a lease agreement that
expires on June 30, 2023.
We also lease smaller administrative and operational offices in various locations throughout the United
States. We believe that our existing properties are adequate for the current operating requirements of our business
and that additional space will be available as needed.
Item 3. Legal Proceedings
From time to time, we have been subjected to and are currently subject to legal and regulatory proceedings
arising out of our business operations, including lawsuits, arbitration claims, and inquiries, investigations and
enforcement proceedings initiated by the SEC, FINRA, and state securities regulators, as well as other actions and
claims.
A putative class action lawsuit has been filed against the Company and certain 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 13. Commitments and Contingencies, within the notes to
consolidated financial statements in this Annual Report on Form 10-K. Please also see “Risk Factors - Any failure to
comply with applicable federal or state laws or regulations exposes us to litigation and regulatory actions, which
could increase our costs or negatively affect our reputation” and “Risk Factors – Our business is subject to risks
related to litigation, arbitration claims, and regulatory actions” within Part I, “Item 1A. Risk Factors”.
Item 4. Mine Safety Disclosures
Not applicable.
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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 Global Select Market under the symbol “LPLA.” The closing sale
price as of December 31, 2018 was $61.08 per share. As of that date there were 1,602 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.
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, and the Dow Jones
U.S. Financial Services Index for the last five years. The graph assumes a $100 investment at the closing price on
December 31, 2013 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.
29
Dividend Policy
The payment, amount and timing of any future dividends will be subject to 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 Credit Agreement and the Indenture governing
the Notes contain 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 and Related Covenants”. In addition, FINRA regulations restrict dividends in excess of 10% of a member firm’s
excess net capital without FINRA’s prior approval, potentially impeding our ability to receive dividends from LPL
Financial.
Securities Authorized for Issuance Under Equity Compensation Plans
The table below sets forth information on compensation plans under which our equity securities are
authorized for issuance as of December 31, 2018:
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
Weighted-average
exercise price of
outstanding options,
warrants, and rights
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))(1)
(a)
(b)
(c)
3,572,209
15,858
3,588,067
$
$
$
35.44
21.32
35.38
6,444,180
—
6,444,180
(1)
Includes shares available for future issuance under our amended and restated 2010 Omnibus Equity Incentive Plan.
As of December 31, 2018, we had 15,858 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.
Purchases of Equity Securities by the Issuer
The table below sets forth information regarding repurchases on a monthly basis during the fourth quarter of
2018 (dollars in millions, except per share data):
Period
October 1, 2018 through October 31, 2018
November 1, 2018 through November 30, 2018
December 1, 2018 through December 31, 2018
Total
_____________________
Total Number
of Shares
Purchased
Weighted-
Average Price
Paid per Share
348,726
855,613
720,787
$
$
$
1,925,126
59.18
63.56
59.35
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
348,726
855,613
720,787
$
$
$
1,925,126
179.4
125.0
1,000.0
(1)
See Note 14. Stockholders’ Equity, within the notes to consolidated financial statements for additional information.
30
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, 2018, 2017, and 2016
and the consolidated statements of financial condition data as of December 31, 2018 and 2017 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, 2015 and 2014 and consolidated statements of financial condition
data as of December 31, 2016, 2015, and 2014 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,
2018
2017
2016
2015
2014
Consolidated statements of income data (In thousands, except per share data):
Net revenues
Total expenses
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
$ 5,188,400
$ 4,281,481
$ 4,049,383
$ 4,275,054
$ 4,373,662
$ 4,595,763
$ 3,916,911
$ 3,751,867
$ 3,992,499
$ 4,078,965
$
$
$
$
$
$
592,637
153,178
439,459
4.99
4.85
1.00
$
$
$
$
$
$
364,570
125,707
238,863
2.65
2.59
1.00
$
$
$
$
$
$
297,516
105,585
191,931
2.15
2.13
1.00
$
$
$
$
$
$
282,555
113,771
168,784
1.77
1.74
1.00
$
$
$
$
$
$
294,697
116,654
178,043
1.78
1.75
0.96
2018
2017
2016
2015
2014
December 31,
Consolidated statements of financial condition data (In thousands):
Cash and cash equivalents
$
511,096
$
811,136
$
747,709
$
724,529
$
412,332
Total assets
$ 5,477,468
$ 5,358,751
$ 4,834,926
$ 4,521,061
$ 4,041,930
Total long-term borrowings, net
$ 2,371,808
$ 2,385,022
$ 2,175,436
$ 2,188,240
$ 1,625,195
31
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 Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks
and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this
Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking
statements. Please also refer to the section under heading "Special Note Regarding Forward-Looking Statements."
Overview
We are a leader in the retail financial advice market and the nation's largest independent broker-dealer. We
serve independent financial advisors and financial institutions, providing them with the technology, research,
clearing and compliance services, and practice management programs they need to create and grow their
practices. We enable them to provide objective financial guidance to millions of American families seeking wealth
management, retirement planning, financial planning and asset management solutions.
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 we are the only company that offers advisors the unique combination of an integrated
technology platform, comprehensive self-clearing services, and open architecture access to a wide range of non-
proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing,
underwriting, and market-making.
We believe investors achieve better outcomes when working with a financial advisor. We strive to make it
easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting
independence and choice through access to a wide range of diligently evaluated non-proprietary products.
Executive Summary
Financial Highlights
Results for the year ended December 31, 2018 included net income of $439.5 million, or $4.85 per share,
which compares to $238.9 million, or $2.59 per share, for the year ended 2017.
Asset Growth Trends
Total brokerage and advisory assets served were $628.1 billion as of December 31, 2018, up 2.1% from
$615.1 billion as of December 31, 2017. Total net new assets were $51.6 billion for the year ended December 31,
2018, compared to $43.4 billion for the same period in 2017.
Net new advisory assets were $27.6 billion for the year ended December 31, 2018, compared to $32.8 billion
in 2017. As of December 31, 2018, our advisory assets had grown to $282.0 billion from the prior year end balance
of $273.0 billion and represented 44.9% of total advisory and brokerage assets served.
Net new brokerage assets totaled $24.1 billion for the year ended December 31, 2018, compared to $10.6
billion in 2017. As of December 31, 2018, our brokerage assets had grown to $346.0 billion from the prior year end
balance of $342.1 billion.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, of $1,947.7 million for the year ended December 31, 2018,
increased 25.3% from $1,554.8 million for the year ended December 31, 2017. Management presents gross profit,
which is calculated as net revenues less commission and advisory expenses and brokerage, clearing, and
exchange fees, because we believe that measure may be useful to investors in evaluating the Company’s core
operating performance before indirect costs that are general and administrative in nature. See footnote 8 to the
Financial Metrics table within the "How We Evaluate Our Business" section for additional information on gross profit.
Shareholder Capital Returns
We returned $506.3 million of capital to shareholders during the year, including $88.4 million of dividends and
$417.9 million of share repurchases, representing 6,533,146 shares.
32
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 we provide to a variety of product
providers with the following product lines:
• Alternative Investments
• Annuities
• Exchange Traded Products
• Insurance Based Products
• Mutual Funds
• Retirement Plan Products
• 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.
We regularly review various aspects of our operations and service offerings, including our policies,
procedures, and platforms, in response to marketplace developments. We seek to continuously improve and
enhance aspects of our operations and service offerings in order to position our advisors for long-term growth and
to align with competitive and regulatory developments. For example, we regularly review the structure and fees of
our advisory programs, including related disclosures, in the context of the changing regulatory environment for
retirement accounts.
33
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:
Operating Metrics (balances may not foot due to rounding)
2018
2017
2016
December 31,
Advisory assets (in billions)(1)(2)
Brokerage assets (in billions)(1)(3)
Total Brokerage and Advisory Assets served (in billions)(1)
Net new advisory assets (in billions)(4)
Net new brokerage assets (in billions)(5)
Total Brokerage and Advisory Net New Assets (in billions)
Insured cash account balances (in billions)(1)
Deposit cash account balances (in billions)(1)
Money market account balances (in billions)(1)
Total Cash Sweep Balances
Advisors
Financial Metrics
Total net revenues (in millions)
Recurring gross profit rate (trailing twelve months)(6)
Pre-Tax income (in millions)
Net income (in millions)
Earnings per share, diluted
Non-GAAP Financial Measures(7)
Gross profit (in millions)(8)
Gross profit growth from prior period(8)
Gross profit as a % of net revenue(8)
____________________
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
282.0
346.0
628.1
27.6
24.1
51.6
24.8
5.1
4.9
$
$
$
$
$
273.0
342.1
615.1
32.8
10.6
43.4
22.9
4.2
2.7
34.9
$
29.8
$
211.6
297.8
509.4
13.7
(7.8)
5.9
22.8
4.4
4.1
31.3
16,109
15,210
14,377
Years Ended December 31,
2018
5,188.4
86.7%
592.6
439.5
4.85
$
$
$
$
2017
4,281.5
82.6%
364.6
238.9
2.59
$
$
$
$
2016
4,049.4
81.2%
297.5
191.9
2.13
$
1,947.7
$
1,554.8
$
1,394.3
25.3%
37.5%
11.5%
36.3%
2.7%
34.4%
(1)
(2)
(3)
(4)
(5)
(6)
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 deposit cash account balances are also included in brokerage
and advisory assets served.
Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiary, LPL Financial LLC ("LPL
Financial"), consisting of total assets on LPL Financial's corporate advisory platform serviced by investment advisor
representatives of LPL Financial and total assets on LPL Financial's independent advisory platform serviced by
investment advisor representatives of separate investment advisor firms (“Hybrid RIAs”) rather than of LPL Financial. See
“Results of Operations” for a tabular presentation of advisory assets.
Brokerage assets consist of assets serviced by advisors licensed with LPL Financial.
Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from
custodied advisory accounts. We consider conversions from and to brokerage accounts as deposits and withdrawals,
respectively.
Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from
brokerage accounts. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively.
Recurring gross profit rate refers to the percentage of our gross profit, a non-GAAP financial measure, that was recurring
for the period presented. We track recurring gross profit, a characterization of gross profit and a statistical measure, which
is defined to include our revenues from asset-based fees, advisory fees, trailing commissions, cash sweep programs, and
34
certain other fees that are based upon the number of client accounts and advisors, less the expenses associated with
such revenues and certain other recurring expenses not specifically associated with a revenue line. We allocate such
other recurring expenses, such as non-gross dealer concessions ("GDC") sensitive production expenses, on a pro-rata
basis against specific revenue lines at our discretion. Because certain sources of recurring gross profit are associated with
asset balances, they will fluctuate depending on the market values and current interest rates. Accordingly, our recurring
gross profit can be negatively impacted by adverse external market conditions. However, we believe that recurring gross
profit is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-
based revenues, which are more difficult to predict, particularly in declining or volatile markets.
(7) We believe that presenting certain non-GAAP financial measures by excluding or including certain items can be helpful to
investors and analysts who may wish to use some or all of this information to analyze our current performance, prospects,
and valuation. Our management uses this non-GAAP information internally to evaluate operating performance and in
formulating the budget for future periods. We believe that the non-GAAP financial measures and metrics presented above
and discussed below are appropriate for evaluating the performance of the Company.
(8)
Set forth below is a calculation of gross profit (in millions), calculated as net revenues less commission and advisory
expenses and brokerage, clearing, and exchange fees. All other expense categories, including depreciation and
amortization of fixed assets and amortization of intangible assets, are considered general and administrative in nature.
Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit
amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe
that gross profit amounts can provide investors with useful insight into our core operating performance before indirect
costs that are general and administrative in nature.
Gross Profit (in millions)
Total net revenues
Commission and advisory expense
Brokerage, clearing, and exchange fees
Gross profit
Legal & Regulatory Matters
Years Ended December 31,
2018
2017
2016
$
5,188.4
$
4,281.5
$
4,049.4
3,177.6
63.2
2,669.6
57.1
2,600.6
54.5
$
1,947.7
$
1,554.8
$
1,394.3
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. We review these items in the ordinary course of business in our effort to adhere to legal and
regulatory requirements applicable to our operations. Nevertheless, the environment of additional regulation,
increased regulatory compliance obligations, and enhanced regulatory enforcement has resulted, and may result in
the future, in additional operational and compliance costs, as well as increased costs in the form of penalties and
fines, investigatory and settlement costs, customer restitution, and remediation related to regulatory matters. For
additional information, see the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our
Business and Industry” sections within Part I, “Item 1A. Risk Factors”. In the ordinary course of business, we
periodically identify or become aware of purported inadequacies, deficiencies, and other issues. It is our policy to
evaluate these matters for potential securities law or regulatory violations, and other potential compliance issues. It
is also our policy to self-report known violations and issues as required by applicable law and regulation. When
deemed probable that matters may result in financial losses, we accrue for those losses based on an estimate of
possible fines, customer restitution, and losses related to the repurchase of sold securities and other losses, as
applicable. Certain regulatory and other legal claims and losses may be covered through our wholly-owned captive
insurance subsidiary, which is chartered with the insurance commissioner in the state of Tennessee. For more
information, see Note 2. Summary of Significant Accounting Policies - Commitments and Contingencies, within the
notes to the consolidated financial statements.
Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory
matter or a legal proceeding, whether or not covered by the Company's captive insurance subsidiary, is inherently
difficult and requires judgments based on a variety of factors and assumptions. There are particular uncertainties
and complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured
by our captive insurance subsidiary, which depends in part on historical claims experience, including the actual
timing and costs of resolving matters that begin in one policy period and are resolved in a subsequent period.
Our accruals, including those established through the captive insurance subsidiary at December 31, 2018,
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. For example, on May 1, 2018, we agreed to a settlement structure with the North American
35
Securities Administrators Association related to our historical compliance with certain state “blue sky” laws (the
"Blue Sky Settlement"). We have entered in separate administrative orders with 21 jurisdictions and expect to enter
into separate administrative orders with the remaining 32 jurisdictions in 2019, which will result in aggregate fines of
approximately $26.4 million. As part of the settlement structure, we agreed to engage independent third party
consultants to conduct a historical review of certain equity and fixed income securities transactions, as well as an
operational review of our systems for complying with blue sky securities registration requirements. We also agreed
to offer customers who purchased certain equity and fixed income securities since October 2006 remediation in the
form of reimbursement for any actual losses, plus interest. Our captive insurance subsidiary has adequate loss
reserves to cover the aggregate fines and has loss reserves that are available to cover the costs of remediation. As
of the date of this Annual Report on Form 10-K, however, the historical review of transactions has not been
completed and, as a result, the scope and costs of potential customer remediation cannot be estimated at this time.
The actual costs of reimbursing customers for losses could exceed our reserves.
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 13. Commitments and Contingencies, within the notes to the consolidated financial statements.
In June 2018, the U.S. Court of Appeals for the Fifth Circuit issued a mandate invalidating regulations
previously enacted by the U.S. Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would
have resulted in significant new restrictions on our servicing of certain retirement plan accounts subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and individual retirement accounts
(“IRAs”), including compliance with expanded prohibited transaction requirements under section 4975 of the Internal
Revenue Code (the “DOL Rule”). Because ERISA plans and IRAs comprise a significant portion of our business, we
continue to expect that compliance with current and future laws and regulations with respect to retail retirement
savings and reliance on prohibited transaction exemptions under such laws and regulations 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 April 2018, the SEC introduced a proposal for a best interest standard for retail brokerage accounts (the
“SEC Rule”). Certain state securities and insurance regulators have adopted or are considering adopting similar
laws and regulations. In addition, it is unclear how and whether other regulators - including FINRA, banking
regulators, and the state securities and insurance regulators - may respond to or attempt to enforce similar issues
addressed by the former DOL Rule and the proposed SEC Rule.
Uncertainty regarding pending and future laws and regulations, including the SEC Rule and state rules,
relating to the standards of conduct applicable to both retirement and non-retirement accounts, may have impacts
on our business in ways which cannot be anticipated or planned for, and which may have further impact on our
products and services, and results of operations.
Acquisitions, Integrations, and Divestitures
From time to time we undertake acquisitions or divestitures based on opportunities in the competitive
landscape. These activities are part of our overall growth strategy, but can distort comparability when reviewing
revenue and expense trends for periods presented.
On August 15, 2017, LPL Financial paid $325 million to acquire certain assets and rights of National Planning
Holdings, Inc. ("NPH") and its four broker-dealer subsidiaries, including business relationships with financial
advisors (the "NPH Acquisition"). We completed the onboarding of NPH advisors and client assets in the first
quarter of 2018. We incurred increased costs related to this transaction, including compensation and benefits
expense related to the additional staffing, as well as contingent labor costs, needed to support the onboarding of
NPH advisors and their clients to our systems, and fees for account closure and transfers that we agreed to pay on
behalf of NPH advisors.
On December 3, 2018, we acquired all of the outstanding common stock of AdvisoryWorld, a technology
company, for a total purchase price of $28.1 million. AdvisoryWorld provides proposal generation, investment
analytics and portfolio modeling capabilities in the wealth management industry.
See Note 4. Acquisitions, within the notes to the consolidated financial statements for further detail.
36
Economic Overview and Impact of Financial Market Events
Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the U.S.
financial markets. In the United States, economic data continued to point to steady economic growth in 2018.
According to the most recent estimate by the Bureau of Economic Analysis, real gross domestic product (“GDP”)
grew at an annualized rate of 3.4% in the third quarter of 2018 and 2.8% over the one year period since the third
quarter of 2017. Both numbers compare positively to the expansion average of 2.3%. Data received in the fourth
quarter suggested continued steady growth with a healthy labor market, stable consumer spending, and continued
low interest rates. Wage growth picked up in 2018 as labor markets tightened further but inflation remained well
contained. Business investment and manufacturing activity slowed but still grew at a rate consistent with continued
economic expansion. However, fourth quarter declines in consumer sentiment pointed to increased sensitivity to
fourth quarter market declines, on-going trade friction, slower global growth and concerns about the path of Federal
Reserve (“Fed”) policy. The Fed’s most recent median projection for 2019 puts expected growth at 2.3%, a decline
from its previous set of projections and a meaningful decline from recent trends, but still in line with the expansion
average.
Financial markets reflected a sharp increase in concerns about downside risk to the U.S. and global
economies in the fourth quarter, amidst on-going trade uncertainty and slower earnings growth. The S&P 500
decreased 13.5% during the quarter, while international markets saw smaller but still meaningful declines after
underperforming U.S. markets for the bulk of the year. The volatile environment saw an increased demand for the
relative safety of U.S. Treasuries, supporting gains in the Bloomberg Barclays Aggregate Bond Index and helping to
push the 10-year Treasury yield lower. Market volatility contributed to general investor anxiety as investors endured
the worst quarter for the S&P 500 since 2011.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by
Fed policy. Please consult the "Risks Related to Our Business and Industry" section within Part I, “Item 1A. Risk
Factors” for more information about the risks associated with significant interest rate changes, and the potential
related effects on our profitability and financial condition. The Fed increased its policy rate four times in 2018, with
the final hike occurring at its December meeting, at which the target range for the federal funds rate was raised to
2.25 - 2.5%. Following the Fed's policy statement, projection materials and commentary from Fed Chair Jerome
Powell, the S&P 500 declined nearly 20% from its all-time high on December 24. Mr. Powell subsequently
reinforced the Fed’s flexibility and sensitivity to current financial conditions. At its January 2019 meeting, the Fed
removed language from its policy statement that gradual rate increases would be consistent with economic
conditions, and added language that the Fed would be patient in considering future rate changes.
37
Results of Operations
The following discussion presents an analysis of our results of operations for the years ended December 31,
2018, 2017, and 2016.
Years Ended December 31,
Percentage Change
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
14.9 %
27.3 %
37.3 %
11.0 %
64.3 %
(120.1)%
21.2 %
19.0 %
10.9 %
21.5 %
4.3 %
57.3 %
18.8 %
19.9 %
10.7 %
3.1 %
24.0 %
18.0 %
16.8 %
(3.8)%
9.3 %
27.3 %
2.2 %
15.0 %
52.6 %
5.7 %
2.7 %
4.7 %
15.5 %
10.7 %
0.7 %
4.7 %
6.4 %
4.7 %
1.1 %
(0.4)%
3.6 %
10.9 %
62.6 %
21.9 %
84.0 %
22.5 %
19.1 %
24.5 %
—
(100.0)%
100.0 %
(In thousands)
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
Occupancy and equipment
Professional services
Brokerage, clearing, and exchange
Communications and data processing
Other
$ 1,919,694
$ 1,670,824
$ 1,737,435
1,793,493
1,409,247
1,289,681
972,515
471,299
40,210
(8,811)
708,333
424,667
24,473
43,937
556,475
415,715
21,282
28,795
5,188,400
4,281,481
4,049,383
3,177,576
2,669,599
2,600,624
506,650
208,603
87,656
60,252
115,598
85,651
63,154
46,322
119,278
456,918
171,661
84,071
38,293
97,332
71,407
57,047
44,941
96,210
436,557
148,612
75,928
38,035
92,956
67,128
54,509
44,453
96,587
Total operating expenses
4,470,740
3,787,479
3,655,389
Non-operating interest expense
Loss on extinguishment of debt
INCOME BEFORE PROVISION FOR
INCOME TAXES
PROVISION FOR INCOME TAXES
125,023
—
592,637
153,178
107,025
22,407
364,570
125,707
96,478
297,516
105,585
NET INCOME
$
439,459
$
238,863
$
191,931
38
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 accounting principles generally accepted in the United States ("GAAP"). We adopted
the provisions of this guidance on January 1, 2018 using the modified retrospective approach. The adoption did not
have a material impact on the timing or amounts of our revenue recognition but impacted 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 when 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, commissions that
are paid over time, are recurring in nature and are earned based on the market value of investment holdings in trail-
eligible assets. We earn trailing commission revenues primarily on mutual funds and variable annuities held by
clients of our advisors. See Note 3. Revenues, within the notes to the consolidated financial statements for further
detail regarding our commission revenue by product category.
The following table sets forth our commission revenue, by sales-based and trailing commission revenue,
included in our consolidated statements of income (dollars in thousands):
Sales-based
Trailing
Total commission revenue
Years Ended December 31,
2018 vs. 2017
2017 vs. 2016
2018
$ 776,776
1,142,918
$ 1,919,694
2017
$ 702,570
968,254
$ 1,670,824
2016
$ 818,387
919,048
$ 1,737,435
$ Change
74,206
$
174,664
$ 248,870
%
Change
$ Change
10.6% $(115,817)
18.0%
49,206
14.9% $ (66,611)
%
Change
(14.2)%
5.4 %
(3.8)%
The increase in sales-based commission revenue in 2018 compared with 2017 was primarily due to the
impact of the NPH Acquisition. The increase was also attributable to growth in the demand for variable and fixed
annuities and fixed income products as a result of market volatility and rising interest rates.
The increase in trailing revenues in 2018 compared with 2017 was due to additional assets onboarded from
NPH advisors and improved investor engagement.
The decrease in sales-based commission revenue in 2017 compared with 2016 was primarily due to a
decrease in activity for fixed and variable annuities, partially offset by an increase in fixed income commissions that
were primarily driven by the anticipation of the federal funds rate increases announced in March, June and
December 2017. Fixed and variable annuities commissions were primarily affected by marketplace uncertainties in
response to the former DOL Rule.
Trailing revenues are recurring in nature and the slight increase in 2017 revenue compared with 2016 reflects
an increase in the market value of the underlying assets.
The following table summarizes activity in brokerage assets 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,
2018
2017
2016
$
$
342.1
$
297.8
$
288.4
24.1
(20.2)
10.6
33.7
(7.8)
17.2
346.0
$
342.1
$
297.8
(1) Market impact is the difference between the beginning and ending asset balance less the net new asset amounts,
representing the implied growth or decline in asset balances due to market changes over the same period of time.
39
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 immediately preceding 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 advisory platform are proposed by the advisor
and agreed to by the client and average 1.0% of the underlying assets with a maximum of 3.0% of the underlying
assets as of December 31, 2018.
We also support Hybrid RIAs, through our independent advisory platform, which allows advisors to engage us
for technology, clearing, and custody services, as well as access to the capabilities of our investment platforms. The
assets held under a Hybrid RIA's investment advisory accounts custodied with LPL Financial are included in our
brokerage and advisory assets, net new advisory assets, and advisory assets metrics. The advisory revenue
generated by a Hybrid RIA is not included in our advisory revenues, although we charge separate fees to Hybrid
RIAs for technology, clearing, administrative, oversight, and custody services. The administrative fees collected on
our independent advisory platform vary and can reach a maximum of 0.6% of the underlying assets as of
December 31, 2018.
The following table summarizes the composition of total advisory assets for the periods presented (in billions):
December 31,
2018 vs. 2017
2017 vs. 2016
2018
2017
2016
$ Change % Change
$ Change % Change
Corporate platform advisory assets
$ 172.3
$ 160.0
$ 127.0
$
12.3
7.7 % $
Hybrid platform advisory assets
109.7
113.0
84.6
Total advisory assets
$ 282.0
$ 273.0
$ 211.6
$
(3.3)
9.0
(2.9)%
3.3 % $
33.0
28.4
61.4
26.0%
33.6%
29.0%
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 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,
2018
2017
2016
$
$
273.0
$
211.6
$
187.2
27.6
(18.6)
32.8
28.6
13.7
10.7
282.0
$
273.0
$
211.6
(1) Market impact is the difference between the beginning and ending asset balance less the net new asset amounts,
representing the implied growth or decline in asset balances due to market changes over the same period of time.
Net new advisory assets for the years ended December 31, 2018, 2017, and 2016 had a limited impact on
advisory fee revenue for those respective periods. Rather, net new advisory assets are a primary driver of future
advisory fee revenue. The revenue for any particular quarter is primarily driven by each of the prior quarter's month-
end advisory assets.
The growth in advisory revenue from 2017 to 2018 was due to net new advisory assets resulting from our
recruiting efforts, the NPH Acquisition, and strong advisor productivity.
The growth in advisory revenue from 2016 to 2017 was due to net new advisory assets resulting from our
recruiting efforts and strong advisor productivity, as well as market gains. The higher levels of the S&P 500 index,
brokerage to advisory account conversions and the NPH Acquisition all contributed to the growth in our advisory
assets during 2017.
Asset-Based Revenues
Asset-based revenues are comprised of our sponsorship programs with financial product manufacturers,
omnibus processing and networking services, collectively referred to as recordkeeping, and fees from our cash
40
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, 2018 increased by $264.2 million compared to the
same period in 2017, primarily due to increases in revenues from our cash sweep, recordkeeping and sponsorship
programs. Cash sweep revenues for the year ended December 31, 2018 increased compared to the same period in
2017 due to the impact of increases in the target range for the federal funds effective rate and an increase in cash
sweep balances. For the year ended December 31, 2018, our average cash sweep balances increased to $29.4
billion compared to $28.7 billion for the year ended December 31, 2017. Revenues for our recordkeeping and
sponsorship programs for the year ended December 31, 2018, which are largely based on the market value of the
underlying assets, increased compared to the same period in 2017 due to additional assets onboarded from NPH
advisors.
Asset-based revenues for the year ended December 31, 2017 increased by $151.9 million compared to the
same period in 2016. The increase was due primarily to increased revenues from our cash sweep programs. Cash
sweep revenues for the year ended December 31, 2017 increased compared to the same period in 2016 due to the
impact of the increase in the target range for the federal funds effective rate, partially offset by lower cash sweep
balances. For the year ended December 31, 2017, our average cash sweep balances decreased to $28.7 billion
compared to $29.9 billion for the year ended December 31, 2016.
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 for the year ended December 31, 2018 increased by $46.6 million compared to
the same period in 2017, primarily due to a higher volume of fixed income transactions related to the federal funds
rate increases and higher transaction volumes in advisory accounts that generate transaction-based revenue, which
resulted from an increase in brokerage to advisory conversions by our existing advisors as well as the impact from
the NPH Acquisition.
Transaction and fee revenues for the year ended December 31, 2017 increased by $9.0 million compared to
the same period in 2016, primarily due to a new fee announced in 2017 for alternative investments, which was
effective for 2016 but billed and recorded in 2017, and a higher volume of fixed income transactions related to the
federal funds rate increases in March, June and December 2017, partially offset by a decrease in account
termination fees that resulted from an institutional client departure in 2016 that did not repeat in 2017.
Interest Income, Net of Interest Expense
We earn interest income from client margin accounts and cash equivalents, net of operating expense. Period-
over-period variances correspond to changes in the average balances of assets in margin accounts and cash
equivalents as well as changes in interest rates.
Interest Income, net of interest expense for the year ended December 31, 2018 increased by $15.7 million
compared to the same period in 2017, primarily due to the impact of rising interest rates.
Interest Income, net of interest expense for the year ended ended December 31, 2017 remained relatively flat
compared to the same period in 2016.
Other Revenues
Other revenues primarily include mark-to-market gains or losses on assets held by us in our advisor non-
qualified deferred compensation plan and model research portfolios, marketing allowances received from certain
41
financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate
investment trusts and business development companies, and other miscellaneous revenues.
Other revenues for the year ended December 31, 2018 decreased by $52.7 million compared to the same
period in 2017, primarily due to unrealized losses 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, offset by increases in dividend income on assets held in the plan.
Other revenues for the year ended December 31, 2017 increased by $15.1 million compared to the same
period in 2016, primarily due to an increase of $14.2 million in realized and unrealized gains on assets held in our
advisor nonqualified deferred compensation plan, partially offset by a decrease in alternative investment marketing
allowances.
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.
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
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
82.84 %
82.87%
82.77%
3.04 %
2.66%
2.64%
85.88 %
85.53%
85.41%
(0.30)%
1.14%
0.50%
85.58 %
86.67%
85.91%
(3) bps
38 bps
35 bps
(144) bps
(109) bps
10 bps
2 bps
12 bps
64 bps
76 bps
(1) Our base 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, decreased for the year ended December 31, 2018
compared with the same period in 2017 primarily due to a decrease in non-GDC sensitive payout, which includes
advisor deferred compensation and advisor share-based compensation.
Our total payout ratio, a statistical or operating measure, increased for the year ended December 31, 2017
compared with the same period in 2016 primarily due to an increase in non-GDC sensitive payout, which includes
advisor deferred compensation and advisor share-based compensation.
Compensation and Benefits Expense
Compensation and benefits expense includes salaries and wages and related benefits and taxes for our
employees (including share-based compensation), as well as compensation for temporary employees and
consultants.
Average number of employees
Years Ended December 31,
Change
2018
4,007
2017
3,469
2016
3,320
2018 vs. 2017
2017 vs. 2016
15.5%
4.5%
42
Compensation and benefits for the year ended December 31, 2018 increased by $49.7 million compared to
the same period in 2017, primarily due to an increase in salary and employee benefit expenses resulting from an
increase in headcount.
Compensation and benefits for the year ended December 31, 2017 increased by $20.4 million compared to
the same period in 2016, primarily due to higher recruiter compensation pursuant to incentive compensation plans,
an increase in contingent labor for implementation efforts related to the former DOL Rule and to support the NPH
Acquisition and an increase in salary expense as a result of an increase in headcount and annual merit pay
increases, partially offset by an increase in capitalized salary and benefits associated with technology projects.
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.
Promotional expense for the year ended December 31, 2018 increased by $36.9 million compared to the
same period in 2017, primarily due to increases in costs associated with advisor transition assistance, recruiter and
advisor promotions related to the onboarding of NPH advisors, and increases in business development expenses
associated with broker training and education.
Promotional expense for the year ended December 31, 2017 increased by $23.0 million compared to the
same period in 2016, primarily driven by an increase in costs associated with advisor transition assistance and
recruiter promotions related to NPH advisor onboarding, partially offset by a decrease in amounts paid as advisor
referral bonuses.
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.
Depreciation and amortization for the year ended December 31, 2018 increased by $3.6 million compared to
the same period in 2017, primarily due to increases in internally developed software, partially offset by decreases in
leasehold improvements depreciation.
Depreciation and amortization for the year ended December 31, 2017 increased by $8.1 million compared to
the same period in 2016, primarily due to increases in purchased hardware and internally developed software and a
full year of depreciation expense associated with our office buildings in Fort Mill, South Carolina, which were
completed in October 2016.
Amortization of Intangible Assets
Amortization of intangible assets represents the benefits received for using long-lived assets, which consist of
intangible assets established through our acquisitions.
Amortization of intangible assets for the year ended December 31, 2018 increased by $22.0 million compared
to the same period in 2017, primarily due to the intangible assets recorded as part of the NPH Acquisition.
Amortization of intangible assets for the year ended December 31, 2017 remained relatively flat compared to
the same period in 2016.
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.
Occupancy and equipment expense for the year ended December 31, 2018 increased by $18.3 million
compared to the same period in 2017, primarily due to an increase in costs related to non-capitalized software and
software licensing fees in support of our service and technology investments.
Occupancy and equipment expense for the year ended December 31, 2017 increased by $4.4 million
compared to the same period in 2016, primarily due to an increase in costs related to repairs and maintenance of
computer hardware and equipment as well as an increase in non-capitalized software costs in support of our
service and technology investments, partially offset by a decrease in rent expense and software licensing fees.
43
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.
Professional services for the year ended December 31, 2018 increased by $14.2 million compared to the
same period in 2017, primarily due to an increase in costs related to our service and technology projects, offset by
decreases in the number of outsourced service and technology projects during the period.
Professional services for the year ended December 31, 2017 increased by $4.3 million compared to the same
period in 2016, primarily due to an increase in costs related to outsourced service and technology enhancement
projects.
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.
The increase in brokerage, clearing, and exchange fees was relatively consistent with the increase in the
volume of sales and trading activity for the year ended December 31, 2018 compared to the same period in 2017,
and for the year ended December 31, 2017 compared to the same period in 2016.
Communications and Data Processing
Communications expense consists primarily of the cost of voice and data telecommunication lines supporting
our business, including connectivity to data centers, exchanges, and markets. Data processing expense consists
primarily of customer statement processing and postage costs.
Communications and data processing expenses remained relatively flat for the year ended December 31,
2018 compared to the same period in 2017, and for the year ended December 31, 2017 compared to the same
period in 2016.
Other Expenses
Other expenses include the estimated costs of the investigation, settlement and resolution of regulatory
matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulator fees,
and other miscellaneous expenses. Our other expenses in 2019 will depend in part on the size and timing of
resolving regulatory matters and the availability of self-insurance coverage, which depends in part on the amount
and timing of resolving historical claims. There are particular uncertainties and complexities involved when
assessing the potential costs and timing of regulatory matters, including the adequacy of loss reserves for potential
liabilities that are self-insured by our captive insurance subsidiary. For example, as of the date of this Annual Report
on Form 10-K, the scope and costs of potential customer remediation related to the Blue Sky Settlement cannot be
estimated, and the actual costs of reimbursing customers for losses could exceed our loss reserves.
Other expenses for the year ended December 31, 2018 increased by $23.1 million compared to the same
period in 2017, primarily driven by higher costs associated with the investigation, settlement, and resolution of
regulatory matters.
Other expenses remained relatively flat for the year ended December 31, 2017 compared to the same period
in 2016.
Non-Operating Interest Expense
Non-operating interest expense represents expense for our senior secured credit facilities and senior
unsecured notes issued in March and September 2017 (the "Notes"). Period over period increases correspond to
higher LIBOR rates and the issuance of the Notes during 2017.
Loss on Extinguishment of Debt
On September 21, 2017, we entered into a second amendment (the "Amendment”), which amended and
restated the credit agreement of our subsidiary, LPL Holdings, Inc. In connection with the execution of the
Amendment, we accelerated the recognition of $1.3 million of unamortized debt issuance costs as a loss on
extinguishment of debt.
44
In March 2017, we closed a refinancing of our senior secured credit facilities with a new seven year Term
Loan B facility. The refinancing led to the extinguishment of the previous Term Loan A and B facilities, which
required that we accelerate the recognition of $21.1 million of related unamortized debt issuance costs as a loss on
extinguishment of debt.
Provision for Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (H.R. 1), the tax reform bill (the "Tax Act"), was
signed into law. The Tax Act provided a permanent reduction in our federal corporate income tax rate from 35% to
21%, effective January 1, 2018.
Our effective income tax rate was 25.8%, 34.5%, and 35.5% for 2018, 2017, and 2016, respectively.
The decrease in our effective income tax rate for the year ended December 31, 2018 compared to the same
period in 2017 was due to the tax benefit associated with the federal rate reduction under the Tax Act.
The decrease in our effective income tax rate for they year ended December 31, 2017 compared to the same
period in 2016 was primarily due to the tax benefit associated with the adoption of ASU 2016-09, Improvements to
Employee Share-Based Payment Accounting on January 1, 2017 and the revaluation of our deferred tax assets and
liabilities under the Tax Act, partially offset by tax benefits recorded during 2016 associated with internally developed
software that was not repeated in 2017.
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. The objectives of these policies are to support our
corporate business strategies while ensuring ongoing and sufficient liquidity.
A summary of changes in cash flow data is provided as follows (in thousands):
Net cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Net (decrease)/increase in cash and cash equivalents
Years Ended December 31,
2018
2017
2016
$
581,580
$
453,306
$
388,933
(161,753)
(437,688)
(126,666)
(483,363)
(63,536)
51,429
67,047
(127,366)
134,901
Cash, cash equivalents and restricted cash — beginning of year
1,625,655
1,558,608
1,423,707
Cash, cash equivalents and restricted cash — end of year
$ 1,562,119
$ 1,625,655
$ 1,558,608
Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our
capacity for additional borrowing.
Net cash provided by operating activities includes changes in operating assets and liabilities, including
balances related to the 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.
The increase in cash flows provided by operating activities for 2018 compared to 2017 was primarily due to
increases in cash provided by drafts payable, income taxes payable, payables to broker-dealers and clearing
organizations, and receivables from product sponsors, broker-dealers and clearing organizations, partially offset by
changes in receivables from clients, receivables from advisor loans and payables to clients.
The increase in cash flows provided by operating activities for 2017 compared to 2016 was primarily due to
increases in cash provided by accrued commission and advisory expenses payable, accounts payable and accrued
45
liabilities, cash and securities segregated under federal and other regulations and a decrease in cash used by
advisor loans, partially offset by an increase in cash used by payables to broker-dealers and clearing organizations.
The decrease in cash flows used in investing activities for 2018 compared to 2017 was primarily attributable
to the $325 million payment made at the closing of the NPH Acquisition. The increase in cash flows used in
investing activities for 2017 compared to 2016 was also primarily attributable to this payment.
The increase in cash flows used in financing activities for 2018 compared to 2017 was primarily attributable to
an increase in repurchases of our common stock. Financing activities provided cash in 2017 due to proceeds
received from our senior secured term loans and senior notes.
The increase in cash flows provided by financing activities for 2017 compared to 2016 was primarily
attributable to proceeds from our September 2017 debt refinancing and an increase in proceeds from stock option
exercises, partially offset by an increase in repurchases of our common stock and debt issuance costs incurred in
connection with our debt refinancings completed in March and September 2017.
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 (the "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 related
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
We engage in share repurchase programs, which are approved by our board of directors (the "Board"),
pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time.
Purchases may be effected in open market or privately negotiated transactions, including transactions with our
affiliates, with the timing of purchases and the amount of stock purchased generally determined at our discretion
within the constraints of our Credit Agreement, the indenture governing our Notes (the "Indenture"), and general
liquidity needs. See Note 14. Stockholders’ Equity, within the notes to the consolidated financial statements for
additional information regarding our share repurchases.
Dividends
The payment, timing, and amount of any dividends are subject to approval by the Board of Directors as well
as certain limits under our Credit Agreement and the Indenture. See Note 14. Stockholders’ Equity, within the notes
to the 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
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, 2018, we had approximately $298.0 million of client margin loans, collateralized with securities
having a fair value of approximately $417.2 million that we can repledge, loan, or sell. Of these securities,
approximately $50.8 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, 2018 there were no restrictions that
materially limited our ability to repledge, loan, or sell the remaining $366.4 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.
46
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, or under our revolving credit facility.
Our registered broker-dealer, LPL Financial, is subject to the SEC’s Uniform Net Capital Rule, which requires
the maintenance of minimum net capital. LPL Financial 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, 2018, LPL Financial had net capital of
$108.1 million with a minimum net capital requirement of $8.0 million.
LPL Financial's ability to pay dividends greater than 10% of its excess net capital during any 35 day rolling
period requires approval from the Financial Industry Regulatory Authority ("FINRA"). In addition, payment of
dividends is restricted if LPL Financial's net capital would be less than 5.0% of aggregate customer debit balances.
LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities
are subject to the National Futures Association's ("NFA") 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 Commodity Futures Trading Commission as LPL Financial'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, The Private Trust Company, N.A. ("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
See Note 11. Debt, within the notes to consolidated financial statements for further detail regarding the Credit
Agreement.
The Credit Agreement and the Indenture governing the Notes contain a number of covenants that, among
other things, restrict, subject to certain exceptions, our ability to:
•
•
•
•
incur additional indebtedness or issue disqualified stock or preferred stock;
declare dividends, or other distributions to shareholders;
repurchase equity interests;
redeem indebtedness that is subordinated in right of payment to certain debt instruments;
• make investments or acquisitions;
•
•
•
•
•
•
create liens;
sell assets;
guarantee indebtedness;
engage in certain transactions with affiliates;
enter into agreements that restrict dividends or other payments from subsidiaries; and
consolidate, merge or transfer all or substantially all of our assets.
Credit Agreement EBITDA, a non-GAAP financial 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 further adjusted to
exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains,
and to include future expected cost savings, operating expense reductions or other synergies from certain
transactions, including the NPH Acquisition. We 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 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, capital
investments, and types of adjustments made by such companies.
47
Set forth below is a reconciliation from our net income to Credit Agreement EBITDA for the twelve months
ended December 31, 2018 (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)
NPH run-rate EBITDA accretion(3)
Realized NPH EBITDA Offset(4)
NPH onboarding costs
Other(5)
Credit Agreement EBITDA(6)
____________________
$
$
439,459
125,023
153,178
87,656
60,252
865,568
23,108
6,054
92,000
(75,500)
41,789
16,269
969,288
(1)
(2)
(3)
(4)
(5)
(6)
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.
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.
Represents estimated potential future cost savings, operating expense reductions or other synergies included in Credit
Agreement EBITDA in accordance with the Credit Agreement relating to the NPH Acquisition. Such amounts do not
represent actual performance and there can be no assurance that any such cost savings, operating expense reductions or
other synergies will be realized.
Represents the portion of Credit Agreement EBITDA that management estimates to be attributable to the NPH Acquisition,
which is added back to offset NPH run-rate EBITDA accretion, in accordance with the Credit Agreement.
Represents items that are adjustable in accordance with the Credit Agreement to calculate Credit Agreement EBITDA,
including employee severance costs, employee signing costs, employee retention or completion bonuses, and other non-
recurring costs.
In calculating Credit Agreement EBITDA for a twelve month period at the end of each quarter, management may make
adjustments to prior quarters.
Our Credit Agreement and the Indenture governing the Notes prohibit us from paying dividends and
distributions or repurchasing our capital stock except for limited purposes or in limited amounts. In addition, our
revolving credit facility requires compliance with a maximum Consolidated Total Debt to Consolidated EBITDA Ratio
("Leverage Test," as defined in the Credit Agreement) and a minimum Consolidated EBITDA to Consolidated
Interest Expense Ratio ("Interest Coverage," as defined in the Credit Agreement), tested as of the last day of each
fiscal quarter. The breach of this covenant would be subject to certain equity cure rights.
As of December 31, 2018 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)
December 31, 2018
Covenant
Requirement
Actual
Ratio
5.0
3.0
2.15
8.19
48
Off-Balance Sheet Arrangements
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 13. Commitments and Contingencies and Note 20. Financial
Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk, within the notes to consolidated
financial statements.
Contractual Obligations
The following table provides information with respect to our commitments and obligations as of December 31,
2018:
Payments Due by Period
(In thousands)
Total
< 1 Year
1-3 Years
4-5 Years
> 5 Years
Leases and other obligations(1)(2)
Long-term borrowings(3)
Interest payments(4)
Commitment and other fees(5)
Total contractual cash obligations
____________________
$
467,638
$
69,182
$
93,199
$
65,224
$
240,033
2,381,250
753,843
5,697
15,000
121,538
1,554
30,000
240,948
3,017
30,000
238,110
1,126
2,306,250
153,247
—
$ 3,608,428
$
207,274
$
367,164
$
334,460
$ 2,699,530
(1)
(2)
(3)
(4)
(5)
Includes long-term contractual obligations with third-party service providers. The table above includes the minimum due
over the duration of the contract.
Future minimum payments for applicable leases have not been reduced by minimum sublease rental income of $11.8
million due in the future under noncancelable subleases. See Note 13. Commitment and Contingencies, within the notes
to consolidated financial statements for further detail on operating lease obligations and obligations under noncancelable
service contracts.
Represents principal payments under our Credit Agreement. See Note 11. Debt, within the notes to consolidated financial
statements for further detail.
Represents interest payments under our Credit Agreement, which includes a variable interest payment for our senior
secured credit facilities and a fixed interest payment for senior unsecured notes. Variable interest payments assume the
applicable interest rates at December 31, 2018 remain unchanged. See Note 11. Debt, within the notes to consolidated
financial statements for further detail.
Represents commitment fees for unused borrowings on the revolving credit facility under our Credit Agreement and
interest payments for our letters of credit. See Note 11. Debt, within the notes to consolidated financial statements for
further detail.
As of December 31, 2018, we have a liability for unrecognized tax benefits of $46.3 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 5. Fair Value Measurements, within the notes to the consolidated financial
statements for a detail discussion regarding our fair value measurements.
Critical Accounting Policies and 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:
• Revenue Recognition
• Commitments and Contingencies
• Valuation of Goodwill and Other Intangible Assets
•
Income Taxes
49
See Note 2. Summary of Significant Accounting Policies, within the notes to the 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 the consolidated financial
statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that
are of significance, or potential significance, to us.
50
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, and equity
securities. Changes in the value of our trading securities may result from fluctuations in interest rates, credit ratings
of the issuer, equity prices, or a combination of these factors.
In facilitating client transactions, our securities owned and securities sold, but not yet purchased generally
involve mutual funds, including dividend reinvestments. Our positions held are based upon the settlement of client
transactions, which are monitored by our Service, Trading, and Operations (“STO”) department.
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 settlements group within our STO department.
Our Research department develops model portfolios that are used by advisors in developing client portfolios.
We maintain securities owned in internal accounts based on these model portfolios to track the performance of our
Research department. At the time a portfolio is developed, we purchase the securities in that model portfolio in an
amount equal to the account minimum, which varies by product.
In addition, we are subject to market risk resulting from system incidences or interruptions and human error,
which can require customer trade corrections. We also have market risk on the fees we earn that are based on the
market value of brokerage and advisory assets along with assets on which trailing commissions are paid, and
assets eligible for sponsor payments.
At December 31, 2018, the fair value of our trading securities owned was $29.3 million. Securities sold, but
not yet purchased were $0.2 million at December 31, 2018. The fair value of securities included within other assets
was $191.4 million at December 31, 2018. See Note 5. 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 6. Held to Maturity Securities,
within the notes to consolidated financial statements for information regarding the fair value of securities held to
maturity.
Interest Rate Risk
We are exposed to risk associated with changes in interest rates. As of December 31, 2018, $1.5 billion of our
outstanding debt under our Credit Agreement was subject to floating interest rate risk. While our senior secured
term loan is subject to increases in interest rates, we do not believe that a short-term change in interest rates would
have a material impact on our income before taxes given assets owned, which are generally subject to the same,
but off-setting interest rate risk.
The following table summarizes the impact of increasing interest rates on our interest expense from the
variable portion of our debt outstanding, calculated using the projected average outstanding balance over the
subsequent twelve month period (in thousands):
Senior Secured Term Loans
Term Loan B
Revolving Credit Facility
Variable Rate Debt Outstanding
Outstanding
Variable Interest
Rates at
December 31, 2018
Annual Impact of an Interest Rate Increase of
10 Basis
25 Basis
50 Basis
100 Basis
Points
Points
Points
Points
$
$
1,481,250
$
1,476
$
3,689
$
7,378
$ 14,756
—
—
—
—
—
1,481,250
$
1,476
$
3,689
$
7,378
$ 14,756
See Note 11. Debt, within the notes to consolidated financial statements for additional information.
Our interest rate for Term Loan B is locked in for one, two, three, six, or twelve months as allowed under the
Credit Agreement. At the end of the selected periods the rates will be locked in at the then current rate. The effect of
these interest rate locks are not included in the table above.
As of December 31, 2018, 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, and entities
51
organized or operated to make a profit, such as corporations, partnerships, associations, business trusts, and other
organizations, an insured deposit cash account ("DCA") for advisory individual retirement accounts, 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. 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. The fees we receive on cash balances in
our advisors’ client accounts in money market funds, including administrative and recordkeeping fees based on
account type and the invested balances, are also sensitive to prevailing interest rates. Changes in interest rates and
fees for the 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.
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 Financial by clients to support margin
lending or derivative trading is insufficient to meet client’s contractual obligations to LPL Financial. We bear credit
risk on the activities of our advisors’ clients, including the execution, settlement, and financing of various
transactions on behalf of these clients.
These activities are transacted on either a cash or margin basis. Our credit exposure in these transactions
consists primarily of margin accounts, through which we extend credit to advisors' 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 losses on margin accounts were immaterial during the
years ended December 31, 2018, 2017, and 2016. We monitor exposure to industry sectors and individual
securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our
margin requirements if we believe our risk exposure is not appropriate based on market conditions.
We are subject to concentration risk if we extend large loans to or have large commitments with a single
counterparty, borrower, or group of similar counterparties or borrowers (e.g., in the same industry), or if we accept a
concentrated position as collateral for a margin loan. Receivables from and payables to clients and stock borrowing
and lending activities are conducted with a large number of clients and counterparties and potential concentration is
monitored. We seek to limit this risk through review of the underlying business and the use of limits established by
senior management, taking into consideration factors including the financial strength of the counterparty, the size of
the position or commitment, the expected duration of the position or commitment, and other positions or
commitments outstanding.
Operational Risk
Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems,
actions by people, or external events. We operate in diverse markets and are reliant on the ability of our employees
and information technology systems, as well as third-party service providers and their systems, to manage a large
volume of transactions and confidential information, including personally identifiable information, effectively and
securely. 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, malicious cyber activity or improper action by
employees, advisors, or third-party service providers, we could suffer business disruptions, financial loss, data loss,
regulatory sanctions, and damage to our reputation. Although we have developed business continuity and disaster
recovery plans, those plans could be inadequate, disrupted, or otherwise unsuccessful in maintaining the
competitiveness, stability, security, or continuity of critical systems as a result of, among other things, obsolescence,
improper operation, or other limitations of our current technology.
52
In order to assist in the mitigation and control of operational risk, we have an operational risk framework that
is designed to enable assessment and reporting on operational risk across the firm. This framework aims to ensure
policies and procedures are in place and appropriately designed to identify and manage operational risk at
appropriate levels throughout our organization and within various departments. These control mechanisms attempt
to ensure that operational policies and procedures are being followed and that our employees and advisors operate
within established corporate policies and limits. Notwithstanding the foregoing, please consult the “Risks Related to
Our Technology” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A. Risk
Factors” for more information about the risks associated with our technology, including risks related to security, our
risk management policies and procedures, and the potential related effects on our operations.
Regulatory and Legal Risk
The regulatory environment in which we operate is discussed in detail within Part I, “Item 1. Business” of this
Annual Report on Form 10-K. In recent years, and during the period presented in this Annual Report on Form 10-K,
we have observed the SEC, FINRA, DOL and state regulators broaden the scope, frequency, and depth of their
examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance
systems and programs. Please consult the “Risks Related to Our Regulatory Environment” and the “Risks Related
to Our Business and Industry” sections within Part I, “Item 1A. Risk Factors” for more information about the risks
associated with operating within our regulatory environment, pending regulatory matters and the potential related
effects on our operations.
Risk Management
We employ an enterprise risk management framework ("ERM") that is intended to address key risks and
responsibilities, enable us to execute our business strategy, and protect our Company and its franchise. Our
framework is designed to promote clear lines of risk management accountability and a structured escalation
process for key risk information and events.
We operate a three lines of defense model whereby the primary ownership for risk and control processes is
the responsibility of business and control owners who are the "first line" of defense in effectively managing risks.
The first line is responsible for risk process ownership and is comprised of the business units, whose primary
responsibility is for day-to-day compliance and risk management, including execution of desktop and supervisory
procedures. These business owners and certain control owners implement and execute controls to manage risk,
execute risk assessments, identify emerging risks, and comply with risk management policies. The second line of
defense is comprised of certain departments within Compliance, Legal and Risk (“CLR”), STO, Technology,
Finance, and Human Capital, and this second line of defense provides risk and control assessment and
oversight. The third line of defense is independent verification of the effectiveness of internal controls and is
conducted by the Internal Audit department or in third-party reviews.
Our risk management governance approach includes the Board and certain of its committees; the Risk
Oversight Committee of LPL Financial (the “ROC”) and its subcommittees; the Internal Audit department and the
CLR department of LPL Financial; and business line management. We regularly reevaluate and, when necessary,
modify our processes to improve the identification and escalation of risks and events.
Audit Committee of the Board
In addition to its other responsibilities, the Audit Committee of the Board (the “Audit Committee”) reviews our
policies with respect to risk assessment and risk management, as well as our major financial risk exposures and the
steps management has undertaken to control them. The Audit Committee generally provides reports to the Board at
each of the Board’s regularly scheduled quarterly meetings.
Compensation and Human Resources Committee of the Board
In addition to its other responsibilities, the Compensation and Human Resources Committee of the Board
assesses whether our compensation arrangements encourage inappropriate risk-taking, and whether risks arising
from our compensation arrangements are reasonably likely to have a material adverse effect on the Company.
Risk Oversight Committee of LPL Financial
The Audit Committee has mandated that the ROC oversee our risk management activities, including those of
our subsidiaries. The Chief Risk Officer of LPL Financial serves as chair of the ROC, which generally meets on a
monthly basis with ad hoc meetings as necessary. The members of the ROC include certain Managing Directors of
LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex-officio
53
members and represent key control areas of the Company. These individuals include, but are not limited to, the
Chief Compliance Officer; the Chief Information Security Officer; and the Chief Anti-Money Laundering Officer.
Participation in the ROC by senior officers is intended to ensure that the ROC covers the key risk areas of the
Company, including its subsidiaries, and that the ROC thoroughly reviews significant matters relating to risk
priorities, policies, control procedures and related exceptions, certain new and complex products and business
arrangements, transactions with significant risk elements, and identified emerging risks.
The Audit Committee receives reports on the ROC at each of the Audit Committee'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 immediately preceding report. If warranted, matters of material risk are escalated
to the Audit Committee or Board more frequently.
Subcommittees of the Risk Oversight Committee
The ROC has established multiple subcommittees that cover key areas of risk. The subcommittees meet
regularly and are responsible for keeping the ROC informed and escalating issues in accordance with the
Company’s escalation policies. The responsibilities of such subcommittees include, for example, oversight of the
approval of new and complex investment products offered to advisors’ clients; oversight of the firm's technology;
issues and trends related to advisor compliance and examination findings; LPL’s integrity hotline allegations.
Internal Audit Department
As the third line of defense, the Internal Audit department provides independent and objective assurance of
the effectiveness of the Company’s governance, risk management and internal controls by conducting risk
assessments and audits designed to identify and cover important risk categories. Internal Audit reports directly to
the Audit Committee, which provides oversight of Internal Audit's activities and approves its annual plan. The
Internal Audit department provides regular updates to the ROC and reports to the Audit Committee at least as often
as quarterly.
Control Groups
The CLR department provides compliance oversight and guidance, and conducts various risk and other
assessments to address regulatory and Company-specific risks and requirements. The CLR department includes
the Chief Legal Officer and the Chief Risk Officer, who review the results of the Company’s risk management
process with the ROC, the Audit Committee, and the Board as necessary. Another key control group is the STO
Risk Management team. This team identifies, defines, and remediates risk-related items within STO and acts as the
liaison between STO and CLR. We also consider the Internal Audit department to be a control group.
Business Line Management
Each business line is responsible for managing its risk, and business line management is responsible for
keeping senior management, including the members of the ROC, informed of operational risk and escalating risk
matters (as defined by the Company’s escalation policies). We have conducted Company-wide escalation training
for our employees. Certain business lines, including STO and Technology, have dedicated personnel with
responsibilities for monitoring and managing risk-related matters. Business lines are subject to oversight by the
control groups, and the Finance, CLR, Technology, and Human Capital departments also execute certain control
functions and report matters to the ROC, Audit Committee, and Board as appropriate.
Advisor Policies
In addition to the ERM framework, we also have written policies and procedures that govern the conduct of
business by our advisors, employees, and the terms and conditions of our relationships with product manufacturers.
Our client and advisor policies address the extension of credit for client accounts, data and physical security,
compliance with industry regulations, and codes of conduct and ethics to govern employee and advisor conduct,
among other matters.
54
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 January 30, 2019, the Board declared a cash dividend of $0.25 per share on the Company's outstanding
common stock to be paid on March 29, 2019 to all stockholders of record on March 15, 2019.
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 Exchange Act, 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, 2018, 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 assurance 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, 2018, 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)
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, 2018 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, 2018.
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LPL Financial Holdings Inc.
Boston, Massachusetts
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of LPL Financial Holdings Inc. and subsidiaries (the
"Company") as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by
COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the
Company and our report dated February 26, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 26, 2019
56
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
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
2019 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
54 President and Chief Executive Officer
Matthew J. Audette
44 Chief Financial Officer
Tracy Calder
Thomas Gooley(1)
J. Andrew Kalbaugh
59 Managing Director, Chief Risk Officer
54 Managing Director, Service, Trading, and Operations
55 Managing Director, Divisional President, National Sales and Consulting
Sallie R. Larsen
65 Managing Director, Chief Human Capital Officer
Michelle Oroschakoff
57 Managing Director, Chief Legal Officer
Scott Seese
49 Managing Director, Chief Information Officer
Richard Steinmeier
45 Managing Director, Divisional President, Business Development
George B. White
50 Managing Director, Investor and Investment Solutions and Chief Investment Officer
(1)
Mr. Gooley will be retiring from the Company in March 2019.
Executive Officers
Dan H. Arnold — President and Chief Executive Officer
Mr. Arnold has served as our chief executive officer since January 2017. He has served as our president
since March 2015, with responsibility for our primary client-facing functions and long-term strategy for growth. Mr.
Arnold served as our chief financial officer from June 2012 to March 2015 and was responsible for formulating
financial policy, leading our capital management efforts, and ensuring the effectiveness of the organization’s
financial functions. Prior to 2012, he was managing director, head of strategy, with responsibility for long-term
strategic planning for the firm, product and platform development, and strategic investments, including acquisitions.
He has also served as divisional president of our Institution Services. Mr. Arnold joined our Company in January
2007 following our acquisition of UVEST Financial Services Group, Inc. ("UVEST"). Prior to joining us, Mr. Arnold
worked at UVEST for 13 years, serving most recently as president and chief operating officer. From April 2015 to
July 2018, he served on the Board of Directors of the Securities Industry and Financial Markets Association.
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.
Tracy Calder — Managing Director, Chief Risk Officer
Ms. Calder is managing director, chief risk officer at LPL Financial, with oversight of the compliance, financial
crimes, national supervision, regulatory exams and enterprise 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
Financial and its advisors. Ms. Calder worked most recently at J.P. Morgan Securities LLC (“J.P. Morgan”), where
she served as managing director, chief compliance officer from May 2015 until January 2016. At J.P. Morgan, she
57
led a compliance program that spanned the firm’s institutional and private client broker-dealer and registered
investment advisor 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.
Thomas Gooley — Managing Director, Service, Trading, and Operations
Mr. Gooley is managing director, 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.
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 of national sales and consulting of
LPL Financial, since January 2016. He is responsible for the long-term growth, satisfaction, and retention of
financial advisors and institutions. In addition, he leads the strategy for national sales and consulting support teams
across LPL Financial's retirement planning services, high-net-worth and private client solutions, financial planning,
insurance operations, and the Private Trust Company. 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 earned a B.A. in
business and economics from the University of Maryland.
Sallie R. Larsen — Managing Director, Chief Human Capital Officer
Ms. Larsen is managing director, chief human capital officer at LPL Financial. She is responsible for
overseeing executive communication, human resources, talent development, corporate real estate, total rewards
and talent acquistion, advisor and employee learning and development, and diversity and inclusion. 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.
Michelle Oroschakoff — Managing Director, Chief Legal Officer
Ms. Oroschakoff is chief legal officer of LPL Financial Holdings Inc. and managing director, chief legal officer
of LPL Financial. She is responsible for company-wide legal and government relations matters, risk management
processes and controls, compliance, and governance, and has a leading role in the company’s ongoing focus on
enhancing the 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 as managing
director, chief risk officer in September 2013 from Morgan Stanley, and was promoted to chief legal and risk officer
in June 2017. She became chief legal officer in June 2018. At Morgan Stanley, she most recently served as
managing director and Global Chief Risk Officer of the firm’s Global Wealth Management Group from 2011 to 2013.
58
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.
Scott Seese — Managing Director, Chief Information Officer
Mr. Seese is managing director, chief information officer of LPL Financial, responsible for managing all
aspects of the firm’s technology and systems applications. He leads our Technology department, which is
responsible for delivering technology solutions and market-leading platforms that enable positive, compelling
experiences for LPL Financial advisors and employees. Prior to joining LPL Financial in 2017, Mr. Seese served as
CIO of American Express’s global consumer business unit, from November 2014 to June 2016, where he was
responsible for leveraging technology for revenue growth, gaining new customers and lowering costs. From August
2010 to October 2014, he served as CIO and vice president, information technology, at eBay, Inc. Prior to joining
eBay, he served in a variety of senior technology roles at Bank of America and, before that, spent the first 12 years
of his career at General Electric, where he helped the company start three different businesses. Mr. Seese earned
his B.S. in Electrical Engineering from Ohio State University.
Richard Steinmeier — Managing Director, Divisional President, Business Development
Mr. Steinmeier has served as managing director and divisional president, business development of LPL
Financial since August 2018. In this role, he has responsibility for recruiting new financial advisors and institutions to
LPL Financial and to existing advisor practices, as well as exploring new markets and merger and acquisition
opportunities. Prior to joining LPL Financial, Mr. Steinmeier served as managing director, head of digital strategy
and platforms for UBS Wealth Management Americas from September 2017 to August 2018 and as managing
director, head of the Emerging Affluent Segment and Wealth Advice Center from August 2012 to September 2017.
Prior to UBS, Mr. Steinmeier held a variety of leadership roles at Merrill Lynch, most recently as managing director
of the Merrill Edge Advisory Center from February 2009 to August 2012. Prior to joining Merrill Lynch, he served as
an engagement manager at McKinsey & Company from 2002 to 2006. Mr. Steinmeier earned a B.S. in Economics
from the Wharton School at the University of Pennsylvania and an M.B.A. from Stanford University.
George B. White — Managing Director, Investor and Investment Solutions and Chief Investment Officer
Mr. White has served as managing director, investor and investment solutions and chief investment officer of
LPL Financial since January 2017. He served as managing director, research, and chief investment officer from
2009 to December 2016. Mr. White is responsible for the strategic direction and continued growth of LPL Financial's
research, marketing, products, and investment platforms. 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 was also 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 2019 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.
59
Item 15. Exhibits and Financial Statement Schedules
(a) Consolidated Financial Statements
PART IV
Our consolidated financial statements appearing on pages F-1 through F-37 are incorporated herein by
reference.
(b) Exhibits
Exhibit No.
2.1
3.1
3.2
3.3
3.4
4.1
4.2
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
10.17
10.18
10.19
10.20
Description of Exhibit
Asset Purchase Agreement, by and among National Planning Holdings, Inc., SII Investments, Inc.,
National Planning Corporation, IFC Holdings, Inc., Investment Centers of America, Inc., LPL
Financial LLC and Brooke Holdings LLC, dated as of August 15, 2017. (1)
Amended and Restated Certificate of Incorporation of LPL Investment Holdings Inc., dated
November 23, 2010. (2)
Certificate of Ownership and Merger Merging LPL Financial Holdings Inc. with and into LPL
Investment Holdings Inc., dated June 14, 2012. (3)
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of LPL Financial
Holdings Inc., dated May 8, 2014. (4)
Fifth Amended and Restated Bylaws of LPL Financial Holdings Inc. (5)
Indenture, dated as of March 10, 2017, by and among LPL Holdings, Inc., the Guarantors listed
thereto and U.S. Bank National Association, as Trustee. (6)
First Supplemental Indenture, dated as of September 21, 2017, among LPL Holdings, Inc., certain
subsidiaries of the Company as Guarantors and U.S. Bank National Association, as Trustee. (7)
Form of Indemnification Agreement. (2)
2005 LPL Investment Holdings Inc. Stock Option Plan for Incentive Stock Options. (8)
2005 LPL Investment Holdings Inc. Stock Option Plan for Non-Qualified Stock Options. (8)
LPL Investment Holdings Inc. 2008 Stock Option Plan. (9)
Form of LPL Investment Holdings Inc. Stock Option Agreement granted under the LPL Investment
Holdings Inc. 2008 Stock Option Plan. (10)
LPL Investment Holdings Inc. Advisor Incentive Plan. (11)
LPL Investment Holdings Inc. Financial Institution Incentive Plan. (10)
LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan. (2)
Form of Senior Management Stock Option Award granted under the LPL Investment Holdings Inc.
2010 Omnibus Equity Incentive Plan. (12)
Form of Senior Management Restricted Stock Unit Award granted under the LPL Investment
Holdings Inc. 2010 Omnibus Equity Incentive Plan. (12)
Form of Employee Stock Option Award granted under the LPL Financial Holdings Inc. Amended and
Restated 2010 Omnibus Equity Incentive Plan. (13)
Form of Employee Restricted Stock Unit Award granted under the LPL Financial Holdings Inc.
Amended and Restated 2010 Omnibus Equity Incentive Plan. (13)
Form of Advisor Restricted Stock Unit Award granted under the LPL Financial Holdings Inc., 2010
Omnibus Equity Incentive Plan. (14)
Form of Financial Institution Restricted Stock Unit Award granted under the LPL Financial Holdings
Inc. 2010 Omnibus Equity Incentive Plan. (14)
Amended and Restated LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan. (15)
LPL Financial LLC Executive Severance Plan, amended and restated as of February 23, 2017. (13)
Form of Supplemental Executive Restricted Stock Unit Award granted under the 2010 LPL Financial
Holdings Inc. 2010 Omnibus Equity Incentive Plan. (14)
Form of Employee Performance Stock Unit Award granted under the LPL Financial Holdings Inc.
Amended and Restated 2010 Omnibus Equity Incentive Plan. (13)
LPL Financial Holdings Inc. Non-Employee Director Compensation Policy. (13)
LPL Financial Holdings Inc. Non-Employee Director Deferred Compensation Plan. (16)
60
Exhibit No.
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Description of Exhibit
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. (17)
First Amendment and Incremental Assumption Agreement, dated as of May 13, 2013, by and
among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the Company, as
Guarantors, the several lenders from time to time party thereto, and Bank of America, N.A. as
Administrative Agent. (18)
Second Amendment, Extension and Incremental Assumption Agreement, dated as of October 1,
2014, by and among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the
Company as Guarantors, the lenders and additional lenders party thereto, Bank of America, N.A. as
Administrative Agent and Current Agent and JP Morgan Chase Bank, N.A., as Future Agent. (19)
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 of the
Company, as Guarantors, the lenders and additional lenders party thereto, and JPMorgan Chase
Bank, N.A. as Administrative Agent. (16)
Fourth Amendment Agreement, dated as of March 10, 2017, among LPL Financial Holdings Inc.,
LPL Holdings, Inc., certain subsidiaries of the Company, as Guarantors, the lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., JPMorgan Chase
bank, N.A. and Morgan Stanley Bank, N.A., as Letter of Credit Issuers and JPMorgan Chase Bank,
N.A. and Morgan Stanley Bank, N.A., as Swingline Lenders. (6)
Amendment Agreement, dated June 20, 2017, among LPL Holdings, Inc., LPL Financial Holdings
Inc. and JPMorgan Chase Bank, N.A. as Administrative Agent. (20)
Second Amendment, dated as of September 21, 2017, among LPL Financial Holdings Inc., LPL
Holdings Inc., certain subsidiaries of the Company, as Guarantors, the incremental lenders party
thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., JPMorgan
Chase bank, N.A. and Morgan Stanley Bank, N.A., as Letter of Credit Issuers and JPMorgan Chase
Bank, N.A., Morgan Stanley Bank, N.A. and Goldman Sachs Bank USA, as Swingline Lenders. (7)
10.28
Thomson Transaction Services Master Subscription Agreement dated as of January 5, 2009
between LPL Financial Corporation and Thomson Financial LLC, as amended. *†
21.1
23.1
31.1
31.2
32.1
32.2
List of Subsidiaries of LPL Financial Holdings Inc.*
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.*
101.INS
XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema*
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Extension Calculation*
XBRL Taxonomy Extension Definition*
XBRL Taxonomy Extension Label*
XBRL Taxonomy Extension Presentation*
___________________
61
* Filed herewith.
† Confidential treatment requested from the Securities and Exchange Commission.
(1) Incorporated by reference to the Form 8-K filed on August 15, 2017 (File No. 001-34963).
(2) Incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 filed on
July 9, 2010 (File No. 333-167325).
(3) Incorporated by reference to the Form 8-K filed on June 19, 2012 (File No. 001-34963).
(4) Incorporated by reference to the Form 8-K filed on May 9, 2014 (File No. 001-34963).
(5) Incorporated by reference to the Form 8-K filed on March 12, 2014 (File No. 001-34963).
(6) Incorporated by reference to the Form 8-K filed on March 10, 2017 (File No. 001-34963).
(7) Incorporated by reference to the Form 8-K filed on September 21, 2017 (File No. 001-34963).
(8) Incorporated by reference to the Registration Statement on Form 10 filed on April 30, 2007 (File No.
000-52609).
(9) Incorporated by reference to the Form 8-K filed on February 21, 2008 (File No. 000-52609).
(10) Incorporated by reference to the Registration Statement on Form S-1 filed on June 4, 2010 (File No.
333-167325).
(11) Incorporated by reference to the Form S-8 filed on June 5, 2008 (File No. 333-151437).
(12) Incorporated by reference to the Form 10-K filed on February 26, 2013 (File No. 001-34963).
(13) Incorporated by reference to the Form 10-K filed on February 24, 2017 (File No. 001-34963).
(14) Incorporated by reference to the Form 10-K filed on February 26, 2014 (File No. 001-34963).
(15) Incorporated by reference to the Form 8-K filed on May 15, 2015 (File No. 001-34963).
(16) Incorporated by reference to the Form 10-K filed on February 25, 2016 (File No. 001-34963).
(17) Incorporated by reference to the Form 8-K filed on April 2, 2012 (File No. 001-34963).
(18) Incorporated by reference to the Form 8-K filed on May 13, 2013 (File No. 001-34963).
(19) Incorporated by reference to the Form 10-Q filed on October 30, 2014 (File No. 001-34963).
(20) Incorporated by reference to the Form 10-Q filed on August 1, 2017 (File No. 001-34963).
Item 16. Form 10-K Summary
None.
62
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 26, 2019
Pursuant to the requirements of the Securities 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/ Paulett Eberhart
Paulett Eberhart
/s/ William F. Glavin Jr.
William F. Glavin Jr.
/s/ Allison Mnookin
Allison Mnookin
/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 26, 2019
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
February 26, 2019
Director
February 26, 2019
Director
February 26, 2019
Director
February 26, 2019
Director
February 26, 2019
Director
February 26, 2019
Director
February 26, 2019
Director
February 26, 2019
63
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, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018,
2017, and 2016
Consolidated Statements of Financial Condition as of December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017,
and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements
1. Organization and Description of the Company
2. Summary of Significant Accounting Practices
3. Revenues
4. Acquisitions
5. Fair Value Measurements
6. Held-to-Maturity Securities
7. Receivables and Payables
8. Fixed Assets
9. Goodwill and Other Intangible Assets
10. Accounts Payable and Accrued Liabilities
11. Debt
12. Income Taxes
13. Commitments and Contingencies
14. Stockholders' Equity
15. Share-based Compensation
16. Earnings per Share
17. Employee and Advisor Benefit Plans
18. Related Party Transactions
19. Net Capital and Regulatory Requirements
20. Financial Instruments with Off-Balance-Sheet Credit Risk and Concentration of Credit Risk
21. Selected Quarterly Financial Data
22. Subsequent Event
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-9
F-9
F-16
F-21
F-21
F-23
F-24
F-25
F-25
F-26
F-26
F-28
F-30
F-32
F-33
F-35
F-35
F-36
F-36
F-36
F-37
F-37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LPL Financial Holdings Inc.
Boston, Massachusetts
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of LPL Financial Holdings Inc.
and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of
income, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period
ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States
of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 26, 2019 , expressed an unqualified
opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 26, 2019
We have served as the Company's auditor since 2001.
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
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 16)
Earnings per share, basic
Earnings per share, diluted
Weighted-average shares outstanding, basic
Weighted-average shares outstanding, diluted
Years Ended December 31,
2018
2017
2016
$
1,919,694
$
1,670,824
$
1,737,435
1,793,493
1,409,247
1,289,681
972,515
471,299
40,210
(8,811)
708,333
424,667
24,473
43,937
556,475
415,715
21,282
28,795
5,188,400
4,281,481
4,049,383
3,177,576
2,669,599
2,600,624
506,650
208,603
87,656
60,252
85,651
115,598
63,154
46,322
119,278
4,470,740
125,023
—
592,637
153,178
456,918
171,661
84,071
38,293
71,407
97,332
57,047
44,941
96,210
436,557
148,612
75,928
38,035
67,128
92,956
54,509
44,453
96,587
3,787,479
3,655,389
107,025
22,407
364,570
125,707
96,478
—
297,516
105,585
191,931
2.15
2.13
89,072
90,013
$
$
$
439,459
$
238,863
$
4.99
4.85
$
$
88,119
90,619
2.65
2.59
$
$
90,002
92,115
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,
2018
2017
2016
$
439,459
$
238,863
$
191,931
Unrealized gain on cash flow hedges, net of tax expense of $0, $187, and $95
for the years ended December 31, 2018, 2017, and 2016, respectively
Reclassification adjustment for realized gain on cash flow hedges included in
professional services in the consolidated statements of income, net of tax
expense of $0, $406, and $252 for the years ended December 31, 2018,
2017, and 2016, respectively
Total other comprehensive loss, net of tax
—
—
—
293
150
(608)
(315)
(388)
(238)
TOTAL COMPREHENSIVE INCOME
$
439,459
$
238,548
$
191,693
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 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
National Planning Holdings acquisition
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
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
Long-term borrowings, net
Leasehold financing and capital lease obligations
Deferred income taxes, net
Total liabilities
Commitments and contingencies (Note 13)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value; 600,000,000 shares authorized; 124,909,796 shares and
123,030,383 shares issued at December 31, 2018 and 2017, respectively
Additional paid-in capital
Treasury stock, at cost — 39,820,646 shares and 33,262,115 shares at December 31, 2018
and 2017, respectively
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
F-5
December 31,
2018
2017
$
$
511,096
985,195
65,828
412,944
166,793
298,821
248,711
29,267
13,001
4,829
461,418
1,490,247
811,136
763,831
50,688
344,230
196,207
219,157
228,986
17,879
11,833
12,489
412,684
1,427,769
484,171
—
305,147
$ 5,477,468
414,093
162,500
285,269
$ 5,358,751
$
225,034
950,946
76,180
164,211
478,644
32,990
80,524
169
2,371,808
104,564
18,325
4,503,395
$
185,929
962,891
54,262
147,095
461,149
469
72,222
1,182
2,385,022
107,518
16,004
4,393,743
125
1,634,337
123
1,556,117
(1,730,535)
1,070,146
974,073
$ 5,477,468
(1,309,568)
718,336
965,008
$ 5,358,751
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Treasury Stock
Shares
Amount
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders'
Equity
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
income, 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
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
Stock option exercises and other
Share-based compensation
366
—
—
2,746
—
3
—
82,339
28,522
84
2,620
(3,461)
(113,728)
(63)
2,266
(315)
238,863
238,548
(90,273)
(203)
(3,461)
(113,728)
(90,273)
84,405
28,522
BALANCE — December 31, 2017
123,030
$
123
$ 1,556,117
33,262
$ (1,309,568) $
— $ 718,336
$
965,008
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
Stock option exercises and other
Share-based compensation
369
—
—
1,511
—
2
—
49,058
29,162
75
6,533
(4,843)
(417,891)
(49)
1,767
—
439,459
439,459
(88,360)
711
(4,843)
(417,891)
(88,360)
51,538
29,162
BALANCE — December 31, 2018
124,910
$
125
$ 1,634,337
39,821
$ (1,730,535) $
— $ 1,070,146
$
974,073
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
Non-cash interest and other operating activities
Changes in operating assets and liabilities:
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
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
National Planning Holdings acquisition
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured term loans
Proceeds from senior secured term loans and senior notes
Payment of debt issuance costs
F-7
Years Ended December 31,
2018
2017
2016
$
439,459
$
238,863
$
191,931
87,656
60,252
4,118
29,162
—
6,113
(1,754)
—
71,520
5,447
84,071
38,293
4,304
28,522
—
2,789
(9,391)
22,407
53,660
(8,295)
75,928
38,035
5,752
24,896
(65)
4,057
(11,550)
—
45,163
(2,810)
(68,888)
(1,916)
(2,226)
29,414
(152,227)
(20,894)
(13,741)
7,660
(51,708)
39,105
(11,945)
21,918
17,116
43,987
32,521
8,302
(1,013)
581,580
(132,688)
(27,928)
—
(6,137)
5,000
—
(161,753)
(21,085)
(79,703)
(32,618)
(5,276)
(6,930)
(23,156)
(12,910)
99,126
(8,770)
18,619
66,404
(4,138)
9,437
999
453,306
(111,910)
(160,321)
12
(5,969)
3,000
(162,500)
(437,688)
(15,000)
—
—
(2,405,360)
2,611,593
(23,798)
(13,899)
(91,866)
(12,466)
835
442
(30,013)
9,757
116,344
15,000
(1,036)
33,512
(4,008)
(2,695)
(85)
388,933
(127,646)
—
—
(4,020)
5,000
—
(126,666)
(17,677)
—
—
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
(Dollars in thousands)
Tax payments related to settlement of restricted stock units
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 and capital lease obligations
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of year
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
Income taxes paid
NONCASH DISCLOSURES:
Capital expenditures included in accounts payable and accrued liabilities
Finance and capital lease obligations
Discount on proceeds from senior secured credit facilities recorded as debt
issuance costs
Years Ended December 31,
2018
2017
2016
(4,843)
(417,891)
(88,360)
—
51,538
(8,807)
(483,363)
(3,461)
(113,728)
(90,273)
—
84,405
(7,949)
51,429
(1,241)
(25,013)
(89,081)
65
6,865
(1,284)
(127,366)
(63,536)
1,625,655
$ 1,562,119
67,047
1,558,608
$ 1,625,655
134,901
1,423,707
$ 1,558,608
$
$
$
$
$
123,623
122,215
$
$
92,650
139,200
20,634
$
— $
16,096
3,906
— $
5,040
$
$
$
$
$
92,344
122,909
24,339
45,998
—
The following table provides a reconciliation of cash, cash equivalent, and restricted cash reported within the
consolidated statements of financial condition that sum to the total of the same such amounts shown in the
consolidated statements of cash flows.
Cash and cash equivalents
Cash segregated under federal and other regulations
Restricted cash
December 31,
2017
2016
2018
$ 511,096
985,195
$ 811,136
763,831
$ 747,709
768,219
65,828
50,688
42,680
Total cash, cash equivalents, and restricted cash shown in the consolidated
statements of cash flows
$ 1,562,119
$ 1,625,655
$ 1,558,608
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 ("LPL Financial"), AW Subsidiary, Inc.
Fortigent Holdings Company, Inc. and LPL Insurance Associates, Inc. (“LPLIA”), as well as a series captive
insurance subsidiary (the "Captive Insurance Subsidiary") that underwrites insurance for various legal and
regulatory risks of the Company. 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.
LPL Financial, with primary offices in San Diego, California; Fort Mill, South Carolina; and Boston,
Massachusetts, 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.
AW Subsidiary, Inc. is a holding company for AdvisoryWorld, which offers technology products, including
proposal generation, investment analytics and portfolio modeling, to both the Company's advisors and external
clients in the wealth management industry.
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 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.
Certain reclassifications were made to previously reported amounts in the consolidated statements of cash flows to
make them consistent with the current period presentation.
Consolidation
These consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany
transactions and balances have been eliminated.
F-9
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Reportable Segment
Management has determined that the Company operates in one segment, given the similarities in economic
characteristics between its operations and the common nature of its products and services, production and
distribution process, and regulatory environment.
Revenue Recognition
Revenues are recognized when control of the promised services is transferred to customers, in an amount
that reflects the consideration the Company expects to be entitled to in exchange for those services.
See Note 3. Revenues, for further discussion of revenues.
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, deferred stock units and performance stock units. Stock options, warrants and restricted stock
units generally vest in equal increments over a three year period and expire on the tenth anniversary following the
date of grant. Restricted stock awards and deferred stock units generally vest over a one year period, and
performance stock units generally vest in full at the end of a three-year performance 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. The fair value of performance stock units is estimated using a Monte-Carlo simulation model 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
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 also makes assumptions regarding the number of stock options, warrants, restricted stock
awards, restricted stock units, deferred stock units and performance 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 15. Share-
Based Compensation, for additional information regarding share-based compensation for equity awards granted.
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
F-10
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 Segregated Under Federal and Other Regulations
The Company's subsidiary, LPL Financial, is required to maintain 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 (the "Exchange Act"), and other regulations. Held within this account is approximately
$100,000 for the proprietary accounts of broker dealers.
Restricted Cash
Restricted cash primarily represents cash held by and for use by the 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
deposits of funds, proceeds from sales of securities, and dividend and interest payments received on securities held
in client accounts at LPL Financial. The Company pays interest on certain client payable balances. At December 31,
2018 and 2017, $935.5 million and $920.1 million, respectively, of the balance represent free credit balances that
are held pending re-investment by the clients.
Receivables from clients are generally fully secured by securities held in the clients' account. 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.
F-11
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 clients (in thousands):
Beginning balance — January 1
Provision for bad debts, net of recoveries
Charge-offs
Ending balance — December 31
Advisor Loans
December 31,
2018
2017
$
$
466
174
—
$
1,580
(15)
(1,099)
640
$
466
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, 2018, $233.3 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 bad debts, net of recoveries
Charge-offs
Reclassification from receivables from others
Ending balance — December 31
December 31,
2018
2017
$
3,264
$ 1,852
2,206
951
(390)
(2,914)
—
3,375
$
5,080
$ 3,264
The Company reclassified the provision for bad debt for advisor loans out of the provision for bad debt for
receivables from others.
Receivables From Others
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.
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 bad debts, net of recoveries
Charge-offs
Reclassification to advisor loans
Ending balance — December 31
F-12
December 31,
2018
2017
$
6,115
$ 12,851
3,733
(1,749)
—
1,853
(5,214)
(3,375)
$
8,099
$
6,115
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Securities Owned and Securities Sold, But Not Yet Purchased
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, 2018, 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.
As of December 31, 2018, the contract and collateral market values of borrowed securities were $4.8 million
and $5.0 million, respectively. As of December 31, 2017, the contract and collateral market values of borrowed
securities were $12.5 million and $12.1 million, respectively.
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, 2018, 2017, and 2016.
F-13
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Acquisitions
When acquiring companies, the Company recognizes separately from goodwill the assets acquired and the
liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the
excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the
liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price
allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, these
estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which
may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and
liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or
final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the consolidated statements of income.
Accounting for business combinations requires the Company's management to make significant estimates
and assumptions, especially at the acquisition date with respect to intangible assets, support liabilities assumed,
and pre-acquisition contingencies. These assumptions are based in part on historical experience, market data, and
information obtained from the management of the acquired companies and are inherently uncertain.
Examples of critical estimates in valuing certain of the intangible assets the Company has acquired include,
but are not limited to: (i) future expected cash flows from assets and advisor relationships; and (ii) discount rates.
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 9. 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 intangible assets are quantitatively
assessed for impairment, a two-step approach is applied. For goodwill, the Company first compares the estimated
fair value of the reporting unit in which the asset resides to its carrying value. For indefinite-lived intangible assets,
the Company first compares the estimated fair value of the indefinite-lived intangible asset 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, 2018, 2017, or 2016.
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 impairment of definite-lived intangible assets recognized during the years ended December 31, 2018, 2017, or
2016.
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.
F-14
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 5. Fair Value Measurements, for additional information
regarding the Company's fair value measurements. As of December 31, 2018, the carrying amount and fair value of
the Company’s indebtedness was approximately $2,381.3 million and $2,271.9 million, respectively. As of
December 31, 2017, the carrying amount and fair value was approximately $2,396.3 million and $2,422.0 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.
The Company also accrues for losses at its Captive Insurance Subsidiary for those matters covered by self-
insurance. The Captive Insurance Subsidiary records losses and loss reserve liabilities based on actuarially
determined estimates of losses incurred, but not yet reported to the Company as well as specific reserves for
proceedings and matters that are probable and estimable. The Captive Insurance Subsidiary is funded by payments
from the Company's other subsidiaries and has cash reserves to cover losses. Assessing the probability of a loss
occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently
difficult and requires management to make significant judgments. For additional information, Note 13. Commitments
and Contingencies - Legal & Regulatory Matters.
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 was 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 accounts for this arrangement as a capital lease in which the asset is depreciated
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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“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 new standard also requires disclosures that provide additional information on recorded
lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements, which
provides an optional transition method that allows entities to initially apply the new lease standard at the adoption
date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. The Company adopted the provisions of this guidance, including the optional transition method, on
January 1, 2019. Right of use assets and corresponding lease liabilities will be recognized on the Company's
consolidated statements of financial condition and is in the range of $120 million to $160 million. The Company
does not expect a material impact to its consolidated statements of income.
In June 2018, FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Non-employee
Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payments
granted to non-employees. Consistent with the requirement for employee share-based payment awards, non-
F-15
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
employee share-based payment awards within the scope of Topic 718 will be measured at grant-date fair value of
the equity instruments. The Company adopted the provisions of this guidance on January 1, 2019, and will no
longer mark-to-market advisor and financial institution equity awards in the consolidated statements of income.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-
Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes or modifies certain
current disclosures, and adds additional disclosures. The changes are meant to provide more relevant information
regarding valuation techniques and inputs used to arrive at measures of fair value, uncertainty in the fair value
measurements, and how changes in fair value measurements impact an entity's performance and cash flows.
Certain disclosures in ASU 2018-13 will need to be applied on a retrospective basis and others on a prospective
basis. Early adoption is permitted. The Company expects to adopt the provisions of this guidance on January 1,
2020, and is currently evaluating the impact that ASU 2018-13 will have on its related disclosures.
Recently Adopted Accounting Pronouncements
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606, to supersede
nearly all existing revenue recognition guidance under GAAP. ASU 2014-09 also requires new qualitative and
quantitative disclosures, including disaggregation of revenues and descriptions of performance obligations. The
Company adopted the provisions of this guidance on January 1, 2018 using the modified retrospective approach.
The Company has performed an assessment of its revenue contracts as well as worked with industry participants
on matters of interpretation and application and has not identified any material changes to the timing or amount of
its revenue recognition under ASU 2014-09. The Company's accounting policies did not change materially as a
result of applying the principles of revenue recognition from ASU 2014-09 and are largely consistent with existing
guidance and current practices applied by the Company. Refer to Note 3. Revenues, for additional disaggregation
of revenue in accordance with ASU 2014-09.
In August 2016, the FASB issued ASU 2016-15, Statements 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 adopted the provisions of this guidance
on January 1, 2018 and the adoption had no impact on its consolidated financial statements.
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 adopted the provisions of this guidance on January 1, 2018, and began presenting cash segregated for
regulatory purposes and restricted cash activity as a component of cash and cash equivalents on the consolidated
statements of cash flows using a retrospective transition method for each period presented.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting (Topic 718), which
amends the scope of modification accounting for share-based payment arrangements. ASU 2017-09 provides
guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity
would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply
modification accounting if the fair value, vesting conditions, and classification of the awards are the same
immediately before and after the modification. The Company adopted ASU 2017-09 on January 1, 2018. The
adoption of the ASU had no impact on the Company's consolidated financial statements and related disclosures.
3. Revenues
Adoption of ASC Topic 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (“Topic
606”) using the modified retrospective method applied to those contracts which were not completed as of January 1,
2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with historic accounting under Topic
605.
There was no impact to retained earnings as of January 1, 2018, or to revenue for the year ended
December 31, 2018, after adopting Topic 606, as revenue recognition and timing of revenue did not change as a
result of implementing Topic 606.
F-16
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenue Recognition
Revenues are recognized when control of the promised services is transferred to customers, in an amount
that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues are
analyzed to determine whether the Company is the principal (i.e., reports revenues on a gross basis) or agent (i.e.,
reports revenues on a net basis) in the contract. Principal or agent designations depend primarily on the control an
entity has over the product or service before control is transferred to a customer. The indicators of which party
exercises control include primary responsibility over performance obligations, inventory risk before the good or
service is transferred and discretion in establishing the price.
Commission Revenue
Commission revenue represents sales commissions generated by advisors for their clients’ purchases and
sales of securities on exchanges and over-the-counter, as well as purchases of other investment products. The
Company views the selling, distribution and marketing, or any combination thereof, of investment products to such
clients as a single performance obligation to the product sponsors.
The Company is the principal for commission revenue, as it is responsible for the execution of the clients’
purchases and sales, and maintains relationships with the product sponsors. Advisors assist the Company in
performing its obligations. Accordingly, total commission revenues are reported on a gross basis.
The following table presents our total commission revenue disaggregated by investment product category (in
thousands):
Variable annuities
Mutual funds
Alternative investments
Fixed annuities
Equities
Fixed income
Insurance
Group annuities
Other
Years Ended December 31,
2018
2017
2016
$
786,052
$
672,236
$
616,445
24,016
178,095
84,823
122,569
71,225
35,542
927
534,639
27,112
141,290
79,180
104,037
71,352
40,437
541
686,667
538,490
34,927
185,060
83,696
86,364
74,910
46,526
795
Total commission revenue
$
1,919,694
$
1,670,824
$
1,737,435
The Company generates two types of commission revenue: sales-based commission revenue that is
recognized at the point of sale on the trade date and trailing commission revenue that is recognized over time as
earned. Sales-based commission revenue varies by investment product and is based on a percentage of an
investment product's current market value at the time of purchase. Trailing commission revenue is generally based
on a percentage of the current market value of clients' investment holdings in trail-eligible assets, and is recognized
over the period during which services, such as on-going support, are performed. As trailing commission revenue is
based on the market value of clients' investment holdings, this variable consideration is constrained until the market
value is determinable.
F-17
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents our sales-based and trailing commission revenues disaggregated by product
category (in thousands):
Sales-based
Variable annuities
Mutual funds
Alternative investments
Fixed annuities
Equities
Fixed income
Insurance
Group annuities
Other
Total sales-based revenue
Trailing
Variable annuities
Mutual funds
Alternative investments
Fixed annuities
Fixed income
Insurance
Group annuities
Total trailing revenue
Total commission revenue
Advisory Revenue
Years Ended December 31,
2018
2017
2016
$
223,231
$
201,626
$
141,597
7,506
151,453
84,823
98,091
64,580
4,568
927
134,327
14,289
121,697
79,180
80,919
65,426
4,565
541
245,393
144,199
28,304
174,271
83,696
66,647
69,162
5,920
795
$
$
776,776
$
702,570
$
818,387
562,821
$
470,610
$
474,848
400,312
16,510
26,642
24,478
6,645
30,974
12,823
19,593
23,118
5,926
35,872
441,274
394,291
6,623
10,789
19,717
5,748
40,606
$
$
1,142,918
1,919,694
$
$
968,254
1,670,824
$
$
919,048
1,737,435
Advisory revenue represents fees charged to advisors' clients' accounts on the Company's corporate advisory
platform. The Company provides ongoing investment advice and acts as a custodian, providing brokerage and
execution services on transactions, and performs administrative services for these accounts. This series of
performance obligations transfers control of the services to the client over time as the services are performed. This
revenue is recognized ratably over time to match the continued delivery of the performance obligations to the client
over the life of the contract. The advisory revenue generated from the Company's corporate advisory platform is
based on a percentage of the market value of the eligible assets in the clients' advisory accounts. As such, the
consideration for this revenue is variable and an estimate of the variable consideration is constrained due to
dependence on unpredictable market impacts on client portfolio values. The constraint is removed once the portfolio
value can be determined.
The Company provides advisory services to clients on its corporate advisory platform through the advisor.
The Company is the principal in these arrangements and recognizes advisory revenue on a gross basis, as the
Company is responsible for satisfying the performance obligations, carries the inventory risk and has control over
determining the fees. Advisors assist the Company in performing its obligations.
Asset-Based Revenue
Asset-based revenue is comprised of fees from the Company's cash sweep programs, which consist of fees
from its money market cash sweep vehicle and insured cash sweep vehicles, sponsorship programs, and
recordkeeping.
F-18
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash Sweep Fees
Cash sweep fees are generated based on advisors’ clients’ cash sweep accounts. Uninvested cash balances
are swept into either insured cash accounts at various banks or third-party money market funds for which the
Company receives fees for administration and recordkeeping, which are based on account type and the invested
balances. These fees are paid and recognized over time.
Sponsorship Programs
The Company receives fees from product sponsors, primarily mutual fund and annuity companies, for
marketing support and sales force education and training efforts. Compensation for these performance obligations
is generally calculated as a fixed fee, or as a percentage of the average annual amount of product sponsor assets
held in advisors' clients' accounts, or as a percentage of new sales, or a combination. As the value of product
sponsor assets held in advisor's clients' accounts is susceptible to unpredictable market changes, this revenue
includes variable consideration and is constrained until the date that the fees are determinable. The Company is the
principal in these arrangements as it is responsible for and determines the level of servicing and marketing support
it provides to the product sponsors.
Recordkeeping
The Company generates this revenue by providing recordkeeping, account maintenance, reporting and other
related services to product sponsors. This includes revenue from omnibus processing in which the Company
establishes and maintains sub-account records for its clients to reflect the purchase, exchange and redemption of
mutual fund shares, and consolidates clients' trades within a mutual fund. Omnibus processing fees are paid to the
Company by the mutual fund or its affiliates and are based on the value of mutual fund assets in accounts for which
the Company provides omnibus processing services and the number of accounts in which the related mutual fund
positions are held. Recordkeeping revenue also includes revenues from networking recordkeeping services.
Networking revenues on brokerage assets are correlated to the number of positions or value of assets that the
Company administers and are paid by mutual fund and annuity product manufacturers. These recordkeeping
revenues are recognized over time as the Company fulfills its performance obligations. As recordkeeping fees are
susceptible to unpredictable market changes that influence market value and fund positions, these revenues include
variable consideration and are constrained until the date that the fees are determinable, such as the last date of the
contract period in which the market value of the respective product sponsor assets for the period is available.
Depending on the contract, the Company is both principal and agent for recordkeeping revenue. In instances
in which the Company is providing services to financial product manufacturers on behalf of third parties and does
not have ultimate control of the service before transfer to the customer, the Company is considered to be an agent
and reports revenues on a net basis. In other cases, where the Company uses a sub-contractor to provide services
and is responsible for unperformed services, the Company is considered principal and reports revenues on a gross
basis.
F-19
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth asset-based revenue at a disaggregated level (dollars in thousands):
Asset-based revenue
Cash sweep fees
Sponsorship programs
Recordkeeping
Total asset-based revenue
Transaction and Fee Revenue
Years Ended December 31,
2018
2017
2016
$ 500,418
$ 301,448
$ 173,716
224,726
247,371
193,190
213,695
181,453
201,306
$ 972,515
$ 708,333
$ 556,475
Transaction revenue primarily includes fees the Company charges to advisors and their clients for executing
certain transactions in brokerage and fee-based advisory accounts. Transaction revenue is recognized at the point-
in-time that a transaction is executed, which is generally the trade-date. Fee revenue may be generated from
advisors or their clients. Fee revenues primarily include individual retirement account ("IRA") custodian fees,
contract and licensing fees, and other client account fees. In addition, the Company hosts certain advisor
conferences that serve as training, education, sales, and marketing events, for which a fee is charged for
attendance. Fee revenue is recognized when the Company satisfies its performance obligations. Recognition varies
from point-in-time to over time depending on whether the service is provided once at an identifiable point-in-time or
if the service is provided continually over the contract life.
The following table sets forth transaction and fee revenue disaggregated by recognition pattern (dollars in
thousands):
Transaction and Fee Revenue
Point-in-time(1)
Over time(2)
Total transaction and fee revenue
____________________
Years Ended December 31,
2018
2017
2016
$
221,265
$
187,655
$
188,058
250,034
237,012
227,657
$
471,299
$
424,667
$
415,715
(1)
(2)
Transaction and fee revenue recognized point-in-time includes revenue such as transaction fees, IRA termination fees,
and conference service fees.
Transaction and fee revenue recognized over time includes revenue such as error and omission insurance fees, IRA
custodian fees, and licensing fees.
The Company is the principal and recognizes transaction and fee revenue on a gross basis as it is primarily
responsible for delivering the respective services being provided, which is demonstrated by the Company's ability to
control the fee amounts charged to customers.
Interest Income, Net of Interest Expense
The Company earns interest income from client margin accounts and cash equivalents, less interest expense
on related transactions. This revenue is not within the scope of Topic 606 as it is not generated from contracts with
customers. Interest expense incurred in connection with cash equivalents and client margin balances is completely
offset by revenue on related transactions, therefore, the Company considers such interest to be an operating
expense. Interest expense from operations for the years ended December 31, 2018, 2017, and 2016 did not exceed
$1.0 million.
Other Revenue
Other revenue primarily includes mark-to-market gains and losses on assets held by the Company for its
advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received
from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded
F-20
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
real estate investment trusts and business development companies, and other miscellaneous revenues. These
revenues are not in scope for Topic 606 as they are not generated from contracts with customers.
Arrangement with Multiple Performance Obligations
The Company's contracts with customers may include multiple performance obligations. Contracts with
customers that include multiple performance obligations have performance obligations that follow the same revenue
recognition pattern and are recorded in the same financial statement line item.
Unearned Revenue
The Company records unearned revenue when cash payments are received or due in advance of the
Company's performance obligations, including amounts which are refundable. The increase in the unearned
revenue balance for the year ended December 31, 2018 is primarily driven by cash payments received or due in
advance of satisfying our performance obligations, offset by $72.2 million of revenues recognized that were included
in the unearned revenue balance as of December 31, 2017.
The Company receives cash revenues for advisory services not yet performed and conferences not yet held.
For advisory services, revenue is recognized as the Company provides the administration, brokerage and execution
services over time to satisfy the performance obligations. For conference revenue, the Company recognizes
revenue as the conferences are held.
Practical Expedients and Exemptions
The Company has applied Topic 606’s practical expedient that permits for the non-disclosure of the value of
unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii)
contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services
performed.
The Company also applied Topic 606’s practical expedient that allows for no adjustment to consideration
due to a significant financing component if the expectation at contract inception is such that the period between
payment by the customer and the transfer of the promised goods or service to the customer will be one year or less.
4.
Acquisitions
On August 15, 2017, the Company entered into an asset purchase agreement with National Planning
Holdings, Inc. (“NPH”) and its four broker-dealer subsidiaries to acquire certain assets and rights, including
business relationships with financial advisors. In accordance with ASC 805, Business Combinations, control
transferred when the Company onboarded NPH advisors and client assets onto its platform, which occurred in two
waves. The first wave was completed in the fourth quarter of 2017 and the second wave was completed in the first
quarter of 2018.
The Company paid $325 million at closing, which occurred on August 15, 2017 and was included in the
National Planning Holdings acquisition line on the consolidated statements of financial condition. The Company
recorded intangible assets of $98.4 million in advisor relationships and $61.9 million in goodwill in the fourth quarter
of 2017, following the completion of wave one and intangible assets of $112.7 million in advisor relationships and
$49.0 million goodwill in the first quarter of 2018, following the completion of wave two.
On December 3, 2018, the Company acquired all of the outstanding common stock of AdvisoryWorld, to
enhance its technology capabilities. The Company paid $28.1 million at the closing of the transaction and allocated
the purchase price primarily to intangible assets and goodwill in the consolidated statements of financial condition.
5.
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:
F-21
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2018 and 2017.
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, 2018 and December 31, 2017,
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.
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, 2018 and December 31, 2017, 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.
F-22
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value
on a recurring basis at December 31, 2018 (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
Securities sold, but not yet purchased:
Equity securities
Debt securities
Total securities sold, but not yet purchased
Total liabilities at fair value
Level 1
Level 2
Level 3
Total
$
26,657
$
— $
— $
26,657
194
7,434
1,931
—
19,707
29,266
181,974
237,897
163
—
163
163
$
$
$
$
$
$
—
—
—
1
—
1
9,420
9,421
$
— $
6
6
6
$
—
—
—
—
—
—
—
— $
— $
—
—
— $
194
7,434
1,931
1
19,707
29,267
191,394
247,318
163
6
169
169
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a
recurring basis at December 31, 2017 (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
Securities sold, but not yet purchased:
Mutual funds
Equity securities
Debt securities
Total securities sold, but not yet purchased
Total liabilities at fair value
6.
Held-to-Maturity Securities
Level 1
Level 2
Level 3
Total
$
147,034
$
— $
— $
147,034
288
10,850
201
—
6,480
17,819
180,377
345,230
3
67
—
70
70
$
$
$
$
$
$
—
—
—
60
—
60
9,282
9,342
$
— $
—
1,112
1,112
1,112
$
—
—
—
—
—
—
—
— $
— $
—
—
—
— $
288
10,850
201
60
6,480
17,879
189,659
354,572
3
67
1,112
1,182
1,182
The Company holds certain investments in securities, primarily U.S. 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.
F-23
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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,
2018
2017
$
$
13,001
$
11,833
(56)
(86)
12,945
$
11,747
At December 31, 2018, the securities held-to-maturity were scheduled to mature as follows (in thousands):
Within one
year
After one but
within five
years
After five but
within ten
years
Total
U.S. government notes — at amortized cost
U.S. government notes — at fair value
$
$
4,992
4,959
$
$
8,009
7,986
$
$
— $
— $
13,001
12,945
7.
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
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
December 31,
2018
2017
$
135,161
$
125,891
20,281
2,065
9,286
62,561
1,389
6,366
$
166,793
$
196,207
$
24,818
$
37,583
13,779
13,316
31,869
9,077
$
76,180
$
54,262
F-24
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8.
Fixed Assets
The components of fixed assets were as follows (in thousands):
Internally developed software
Leasehold improvements
Computers and software
Buildings
Furniture and equipment
Land
Construction in progress
Total fixed assets
Accumulated depreciation and amortization
Fixed assets, net
December 31,
2018
2017
$
260,957
$
346,029
83,339
147,163
105,939
73,955
4,678
93,542
82,413
160,400
105,939
73,767
4,678
66,802
769,573
840,028
(308,155)
(427,344)
$
461,418
$
412,684
Depreciation and amortization expense was $87.7 million, $84.1 million, and $75.9 million for the years ended
December 31, 2018, 2017, and 2016, respectively.
9.
Goodwill and Other Intangible Assets
A summary of the activity in goodwill is presented below (in thousands):
Balance at December 31, 2016
Goodwill acquired
Balance at December 31, 2017
Goodwill acquired (1)
Balance at December 31, 2018
____________________
$
$
$
1,365,838
61,931
1,427,769
62,478
1,490,247
(1) Goodwill acquired during 2018 included $49.0 million from the NPH acquisition and $13.5 million from the AdvisoryWorld
acquisition.
The components of intangible assets were as follows at December 31, 2018 (dollars in thousands):
Definite-lived intangible assets:
Advisor and financial institution relationships
Product sponsor relationships
Client relationships
Technology
Trade names
Weighted-
Average Life
Remaining
(in years)
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
7.1
7.1
7.0
10.0
3.3
$
651,642
$
(316,153) $
335,489
234,086
21,233
15,510
1,200
(149,525)
(12,841)
—
(800)
84,561
8,392
15,510
400
Total definite-lived intangible assets
$
923,671
$
(479,319) $
444,352
Indefinite-lived intangible assets:
Trademark and trade name
Total intangible assets
39,819
$
484,171
F-25
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of intangible assets were as follows at December 31, 2017 (dollars in thousands):
Definite-lived intangible assets:
Advisor and financial institution relationships
Product sponsor relationships
Client relationships
Trade names
Total definite-lived intangible assets
Indefinite-lived intangible assets:
Trademark and trade name
Total intangible assets
Weighted-
Average Life
Remaining
(in years)
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
8.0
8.1
6.8
4.3
$
538,921
$
(269,294) $
269,627
234,086
19,133
1,200
(137,615)
(11,477)
(680)
96,471
7,656
520
$
793,340
$
(419,066) $
374,274
39,819
$
414,093
Total amortization expense of intangible assets was $60.3 million, $38.3 million, and $38.0 million for the
years ended December 31, 2018, 2017, and 2016, respectively. Future amortization expense is estimated as
follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
10. 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
11. Debt
$
$
64,449
64,058
63,901
63,101
59,005
129,838
444,352
December 31,
2018
2017
$
182,351
$
177,652
70,093
40,772
53,077
64,728
41,629
47,125
132,351
130,015
$
478,644
$
461,149
On September 21, 2017, LPLFH and LPLH entered into a second amendment (the “Amendment”) to the
Company's amended and restated credit agreement, dated March 10, 2017 (as amended by that certain
amendment agreement, dated as of June 20, 2017, the Amendment, and as further amended to date, the “Credit
Agreement”), and repriced its existing $500.0 million senior secured revolving credit facility and $1,695.8 million
senior secured Term Loan B facility ("Term Loan B"). Additionally, LPLH raised $400.0 million in aggregate principal
amount of notes (the “Additional Notes”), which were issued above par at 103.0% as an add-on to the Original
Notes (as defined below).
On March 10, 2017, LPLFH and LPLH entered into a fourth amendment agreement, which amended and
restated LPLH’s then-existing credit agreement and refinanced LPLH’s then-outstanding senior secured credit
facilities. The proceeds of the new Term Loan B, together with the proceeds from the offering of $500.0 million
aggregate principal amount of 5.75% senior notes (the “Original Notes” and, together with the Additional Notes, the
F-26
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
“Notes”) and cash, were used to repay LPLH’s then-existing senior secured credit facilities and to pay accrued
interest and related fees and expenses.
Issuance of 5.75% Senior Notes due 2025
The Original Notes were issued in March 2017 pursuant to an indenture, dated March 10, 2017, among
LPLH, U.S. Bank National Association, as trustee, and certain of the Company’s subsidiaries as guarantors (as
supplemented, the “Indenture”).
The Additional Notes were issued in September 2017 pursuant to a supplemental indenture, dated
September 21, 2017, among LPLH, U.S. Bank National Association, as trustee, and certain of the Company’s
subsidiaries as guarantors.
The Notes are unsecured obligations that will mature on September 15, 2025, and bear interest at the rate of
5.75% per year, with interest payable semi-annually, beginning on September 15, 2017 with respect to the
Additional Notes. The Company may redeem all or part of the Notes at any time prior to March 15, 2020 (subject to
a customary “equity claw” redemption right) at 100% of the principal amount redeemed plus a “make-whole”
premium. Thereafter the Company may redeem all or part of the Notes at annually declining redemption premiums
until March 15, 2023, at and after which date the redemption price will be equal to 100% of the principal amount
redeemed.
Senior Secured Credit Facilities
Borrowings under the Term Loan B facility bear interest at a rate per annum of 225 basis points over the
Eurodollar Rate or 125 basis point over the base rate (as defined in the Credit Agreement), and have no leverage or
interest coverage maintenance covenants. Borrowings under the revolving credit facility bear interest at a rate per
annum ranging from 125 to 175 basis points over the Eurodollar Rate or 25 to 75 basis points over the base rate,
depending on the Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement).
The Eurodollar Rate option is the one-, two-, three-, or six-month LIBOR rate, as selected by LPLH, or, with the
approval of the applicable lenders, twelve month LIBOR rate or the LIBOR rate for another period acceptable to the
Administrative Agent (including a shorter period).
The Company’s outstanding borrowings were as follows (dollars in thousands):
December 31, 2018
December 31, 2017
Long-Term Borrowings
Balance
Applicable
Margin
Interest
Rate
Balance
Applicable
Margin
Interest
Rate
Maturity
Revolving Credit Facility
$
— LIBOR+125bps
— $
— LIBOR+125bps
— 9/21/2022
Senior Secured Term Loan B(1)
1,481,250
LIBOR+225 bps
4.73% 1,496,250
LIBOR+225 bps
3.81% 9/21/2024
Senior Unsecured Notes(1)(2)
900,000
Fixed Rate
5.75%
900,000
Fixed Rate
5.75% 9/15/2025
Total long-term borrowings
2,381,250
Plus: Unamortized Premium
10,083
Less: Unamortized Debt
Issuance Cost
Net Carrying Value
_____________________
(19,525)
$2,371,808
2,396,250
11,584
(22,812)
$2,385,022
(1)
(2)
No leverage or interest coverage maintenance covenants.
The Senior Unsecured Notes were issued in two separate transactions; $500.0 million in Original Notes were issued in
March 2017 at par; $400.0 million in Additional Notes were issued in September 2017 and priced at 103.0% of the
aggregate principal amount.
The Company is required to make quarterly payments on the Term Loan B facility (commencing with the fiscal
quarter ending December 31, 2017), each equal to 0.25% of the original principal amount of the loans under the
Term Loan B facility.
As of December 31, 2018, the Company had $10.6 million of irrevocable letters of credit, with an applicable
interest rate margin of 1.25%, which were supported by the credit facility.
The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of
December 31, 2018, the Company was in compliance with such covenants.
F-27
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2018, the
Company drew $160.0 million on one of the lines of credit at a weighted average interest rate of 2.99%. During the
year ended December 31, 2017, the Company drew $239.0 million on one of the lines of credit at an interest rate of
2.61%. There were no balances outstanding at December 31, 2018 or 2017.
The minimum calendar year payments and maturities of the long-term borrowings as of December 31, 2018
are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
12.
Income Taxes
The Company’s provision for income taxes was as follows (in thousands):
$
15,000
15,000
15,000
15,000
15,000
2,306,250
$
2,381,250
Current provision:
Federal
State
Total current provision
Deferred benefit:
Federal
State
Total deferred benefit
Provision for income taxes
December 31,
2018
2017
2016
$
$
120,211
34,721
154,932
(1,874)
120
(1,754)
153,178
$
$
117,745
17,353
135,098
(8,951)
(440)
(9,391)
125,707
$
$
102,133
15,002
117,135
(10,767)
(783)
(11,550)
105,585
A reconciliation of the United States federal statutory income tax rates to the Company’s effective income tax
rates is set forth below:
Federal statutory income tax rates
State income taxes, net of federal benefit
Non-deductible expenses
Share-based compensation
Tax Cuts and Jobs Act of 2017
Domestic production activities deduction
Research & development credits
Other
Effective income tax rates
Years Ended December 31,
2018
2017
2016
21.0%
4.6
1.7
(1.4)
—
—
(0.3)
0.2
25.8%
35.0%
3.0
0.6
(0.9)
(2.4)
(0.9)
(0.4)
0.5
34.5%
35.0%
3.5
0.3
0.1
—
(2.2)
(1.1)
(0.1)
35.5%
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (H.R. 1), the tax reform bill (the "Tax Act"), was
signed into law. The Tax Act provided a permanent reduction in the Company's federal corporate income tax rate
from 35% to 21% effective January 1, 2018. During the quarter ended December 31, 2018, the Company finalized
its accounting of the Tax Act pursuant to SEC Staff Accounting Bulletin No. 118. No significant impacts were
recorded by the Company as a result of finalizing the accounting.
F-28
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company’s effective income tax rate differs from the federal corporate tax rate of 21.0%, primarily as a
result of state taxes, settlement contingencies, tax credits and other permanent differences in tax deductibility of
certain expenses. These items resulted in effective tax rates of 25.8% ,34.5%, and 35.5% for the years ended
December 31, 2018, 2017, and 2016, respectively.
The decrease in the Company's effective income tax rate in 2018 compared to 2017 was due to the tax
benefit associated with the federal rate reduction under the Tax Act.
The decrease in the Company's effective income tax rate and income tax expense in 2017 compared to 2016
was primarily due to tax benefits associated with the adoption of ASU 2016-09, Improvements to Employee Share-
Based Payment Accounting, on January 1, 2017, and the revaluation of its deferred tax assets and liabilities under
the Tax Cuts and Jobs Act 2017, partially offset by tax benefits recorded during 2016 associated with internally
developed software that was not repeated in 2017.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
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
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,
2018
2017
$
58,265
$
16,832
7,044
32,376
3,919
9,938
1,968
4,788
59,422
17,122
5,630
32,457
2,956
7,643
1,355
—
135,130
126,585
(77,037)
(76,418)
—
(75,043)
(63,213)
(4,333)
(153,455)
(142,589)
$
(18,325) $
(16,004)
The following table reflects a reconciliation of the beginning and ending balances of the total amounts of 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,
2018
2017
2016
$
42,657
$
39,766
$
24,747
10,042
(6,412)
7,815
(4,924)
17,787
(2,768)
$
46,287
$
42,657
$
39,766
At December 31, 2018 and 2017, there were $40.7 million and $37.6 million, respectively, of unrecognized tax
benefits that if recognized, would favorably affect the effective income tax rate in any future periods.
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, 2018 and 2017, the liability for
unrecognized tax benefits included accrued interest of $5.1 million and $4.5 million, respectively, and penalties of
$4.3 million and $4.4 million, respectively.
F-29
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
2007.
The tax years of 2012 to 2017 remain open to examination in the federal jurisdiction. The tax years of 2008 to
2017 remain open to examination in the state jurisdictions. In the next 12 months, it is reasonably possible that the
Company expects a reduction in unrecognized tax benefits of $2.4 million primarily related to the statute of
limitations expiration in various state jurisdictions.
13. 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 $19.0 million, $20.1 million,
and $24.7 million for the years ended December 31, 2018, 2017, and 2016, 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, 2018 (in
thousands):
2019
2020
2021
2022
2023
Thereafter
Total(1)
_____________________
$
$
69,182
52,476
40,723
34,240
30,984
240,033
467,638
(1)
Future minimum payments have not been reduced by minimum sublease rental income of $11.8 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, 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 could 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
F-30
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no significant unfunded
commitments at December 31, 2018.
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 has in the past and may in the future include fines, customer restitution and other remediation. Assessing
the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory
matter is inherently difficult. 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.
On May 1, 2018 the Company agreed to a settlement structure with the North American Securities
Administrators Association (NASAA) related to the Company's historical compliance with certain state “blue sky”
laws. The Company has entered in separate administrative orders with 21 jurisdictions and expects to enter into
separate administrative orders with the remaining 32 jurisdictions in 2019, which will result in aggregate fines of
approximately $26.4 million. As part of the settlement structure, the Company agreed to engage independent third
party consultants to conduct a historical review of certain equity and fixed income securities transactions, as well as
an operational review of the Company's systems for complying with blue sky securities registration requirements.
The Company also agreed to offer customers who purchased certain equity and fixed income securities since
October 2006 remediation in the form of reimbursement for any actual losses, plus interest. The Captive Insurance
Subsidiary has adequate loss reserves to cover the aggregate fines and has loss reserves that are available to
cover the costs of remediation. As of the date of this annual report, however, the historical review of transactions
has not been completed and, as a result, the scope and costs of potential customer remediation cannot be
estimated at this time. The actual costs of reimbursing customers for losses could exceed the Company's reserves.
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 certain client claims. With respect to such 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 through the 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, so there are particular complexities and uncertainties involved when assessing
the adequacy of loss reserves for potential liabilities that are self-insured. As of December 31, 2018 and 2017,
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 years ended December 31, 2018, 2017, and 2016.
F-31
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other Commitments
As of December 31, 2018, the Company had approximately $298.0 million of client margin loans that were
collateralized with securities having a fair value of approximately $417.2 million that it can repledge, loan, or sell. Of
these securities, approximately $50.8 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, 2018, there
were no restrictions that materially limited the Company's ability to repledge, loan, or sell the remaining $366.4
million of client collateral.
Trading securities on the consolidated statements of financial condition includes $4.7 million and $6.5 million
pledged to clearing organizations at December 31, 2018 and 2017, respectively.
14. Stockholders' Equity
Dividends
The payment, timing and amount of any dividends are subject to approval by the Company's board of
directors (the "Board of Directors") as well as certain limits under the Credit Agreement and Indenture. 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):
2018
2017
2016
Dividend
per Share
Total
Cash
Dividend
Dividend
per Share
Total
Cash
Dividend
Dividend
per Share
Total
Cash
Dividend
$
$
$
$
0.25
0.25
0.25
0.25
$
$
$
$
22.6
22.3
21.9
21.5
$
$
$
$
0.25
0.25
0.25
0.25
$
$
$
$
22.6
22.6
22.5
22.5
$
$
$
$
0.25
0.25
0.25
0.25
$
$
$
$
22.2
22.3
22.3
22.3
First quarter
Second quarter
Third quarter
Fourth quarter
Share Repurchases
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.
On November 13, 2018, the Board of Directors authorized an increase to the Company’s existing share
repurchase program, enabling the Company to repurchase its issued and outstanding common stock from time to
time. As of December 31, 2018, the Company had $1.0 billion remaining under the existing share repurchase
program. Future share repurchases 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 within the constraints of the Credit Agreement, the Indenture, and the Company’s
general working capital needs.
The Company had the following activity under its approved share repurchase programs (dollars in millions,
except per share data):
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
_____________________
(1)
Included in the total cost of shares purchased is a commission fee of $0.02 per share.
F-32
2018
Total
Number of
Shares
Purchased
Weighted-
Average
Price Paid
Per Share
Total
Cost(1)
967,500
1,791,493
1,849,027
1,925,126
6,533,146
$
$
$
$
$
62.84
$
60.8
65.20
$ 116.8
66.24
$ 122.5
61.19
$ 117.8
63.96
$ 417.9
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
15. 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, deferred stock units and performance stock units.
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, performance stock units, and other equity-based compensation.
Since its adoption, awards have been and are only made out of the 2010 Plan.
As of December 31, 2018, there were 20,055,945 shares authorized for grant under the 2010 Plan. There
were 6,444,335 shares reserved for exercise or conversion of outstanding awards granted, and 6,444,180 shares
remaining available for future issuance, under the 2010 Plan as of December 31, 2018.
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:
Expected life (in years)
Expected stock price volatility
Expected dividend yield
Risk-free interest rate
Fair value of options
Years Ended December 31,
2018
2017
2016
5.43
5.43
5.26
34.80%
35.27%
33.38%
1.71%
2.66%
2.61%
2.14%
$
19.86
$
10.63
$
2.87%
1.16%
4.60
The following table summarizes the Company’s stock option and warrant activity as of and for the year ended
December 31, 2018:
Outstanding — December 31, 2017
Granted
Exercised
Forfeited and Expired
Outstanding — December 31, 2018
Exercisable — December 31, 2018
Exercisable and expected to vest — December 31, 2018
Number of
Shares
Weighted-
Average
Exercise Price
4,866,499
478,824
$
$
(1,504,069) $
(253,187) $
3,588,067
2,402,708
3,547,347
$
$
$
31.73
65.55
32.60
38.90
35.38
31.58
35.11
Weighted-
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
(In thousands)
5.62
4.33
5.58
$
$
$
94,102
70,869
93,863
F-33
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, 2018:
Range of Exercise Prices
$18.01 - $25.00
$25.01 - $30.00
$30.01 - $35.00
$35.01 - $45.00
$45.01 - $55.00
$55.01 - $71.00
Outstanding
Weighted-
Average
Remaining
Life
(Years)
Exercisable
Weighted-
Average
Exercise
Price
Number of
Shares
Weighted-
Average
Exercise
Price
5.26
3.47
2.83
8.01
5.82
9.16
5.62
$
$
$
$
$
$
$
20.48
28.94
33.10
39.65
48.74
65.55
35.38
761,994
389,498
653,869
216,266
381,081
$
$
$
$
$
— $
2,402,708
$
20.67
28.94
33.10
39.99
48.74
—
31.58
Total
Number of
Shares
1,107,094
391,572
653,869
633,412
381,081
421,039
3,588,067
The Company recognized share-based compensation related to the vesting of stock options awarded to
employees and officers of $8.1 million, $7.2 million, and $10.7 million during the years ended December 31, 2018,
2017, and 2016, respectively. As of December 31, 2018, total unrecognized compensation cost related to non-
vested stock options granted to employees and officers was $7.6 million, which is expected to be recognized over a
weighted-average period of 1.80 years.
Restricted Stock and Stock Units
The following summarizes the Company’s activity in its restricted stock awards and stock units, which include
restricted stock units, deferred stock units, and performance stock units, for the year ended December 31, 2018:
Outstanding — December 31, 2017
Granted
Vested
Forfeited
Nonvested — December 31, 2018
Expected to vest — December 31, 2018
Restricted Stock Awards
Stock Units
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
12,796
7,057
$
$
(12,796) $
— $
7,057
7,057
$
$
39.73
70.26
39.73
—
70.26
70.26
957,123
375,447
$
$
(374,231) $
(83,951) $
874,388
824,382
$
$
32.81
68.24
34.56
39.45
46.63
45.70
The Company grants restricted stock awards and deferred stock units to its directors, restricted stock units to
its employees and officers, and performance stock units to its officers. Restricted stock awards and stock units must
vest or 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. The Company recognized $13.8 million, $11.5
million, and $8.9 million of share-based compensation related to the vesting of these restricted stock awards, and
stock units during the years ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018,
total unrecognized compensation cost for restricted stock awards and stock units was $18.5 million, which is
expected to be recognized over a weighted-average remaining period of 2.09 years.
The Company also grants restricted stock units to its advisors and to financial institutions. The Company
recognized share-based compensation of $6.1 million, $7.3 million and $2.7 million related to the vesting of these
awards during the years ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018, total
unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $4.4
million, which is expected to be recognized over a weighted-average remaining period of 1.66 years.
F-34
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
16. 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
Basic earnings per share
Diluted earnings per share
Years Ended December 31,
2018
2017
2016
$
439,459
$
238,863
$
191,931
88,119
2,500
90,619
90,002
2,113
92,115
89,072
941
90,013
$
$
4.99
4.85
$
$
2.65
2.59
$
$
2.15
2.13
The computation of diluted earnings per share excludes stock options, warrants, and stock units that are anti-
dilutive. For the years ended December 31, 2018, 2017, and 2016, stock options, warrants, and stock units
representing common share equivalents of 391,632 shares, 1,909,288 shares, and 4,054,972 shares, respectively,
were anti-dilutive.
17. 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 six month of service. The Company's contributions were made during the
year ended December 31, 2018 in an amount equal to 75% 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 $13.1 million, $10.5 million,
and $10.1 million for the years ended December 31, 2018, 2017, and 2016, 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 $182.4
million at December 31, 2018, 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 $178.7 million at December 31,
2018, which is measured at fair value and included in other assets in the consolidated statements of financial
condition.
Certain employees of the Company participate in a non-qualified deferred compensation plan that permits
participants to defer portions of their compensation and earn interest on the deferred amounts. Plan assets are held
by the Company in a Rabbi Trust and accounted for in the manner described above. As of December 31, 2018, the
F-35
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Company has recorded assets of $3.2 million and liabilities of $3.3 million, which are included in other assets and
accounts payable and accrued liabilities, respectively, in the consolidated statements of financial condition.
18. Related Party Transactions
The Company has related party transactions with certain beneficial owners of more than ten percent of the
Company's outstanding common stock. Additionally, through its subsidiary LPL Financial, 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, 2018, 2017, and 2016, the Company recognized revenue for services
provided to these related parties of $3.5 million, $3.1 million, and $0.1 million, respectively. The Company incurred
expenses for the services provided by these related parties of $2.9 million, $1.9 million, and $1.5 million, during the
years ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018 and 2017, receivables
and payables to related parties were not material.
19. Net Capital and Regulatory Requirements
The Company’s registered broker-dealer, LPL Financial, is subject to the SEC’s Net Capital Rule
(Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital. 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
requirements. Net capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial is a
clearing broker-dealer and, as of December 31, 2018, had net capital of $108.1 million with a minimum net capital
requirement of $8.0 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, 2018 and 2017, LPL Financial and PTC met all capital adequacy requirements to which
they were subject.
20. 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 two 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 mark-to-market
daily and are continuously monitored by LPL Financial.
F-36
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
21. Selected Quarterly Financial Data (Unaudited)
Net revenues
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Net revenues
Net income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
22. Subsequent Event
2018
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 1,241,557
$ 1,298,804
$ 1,330,997
$ 1,317,042
$
$
$
$
93,530
1.04
1.01
0.25
$
$
$
$
118,766
1.33
1.30
0.25
$
$
$
$
106,865
1.22
1.19
0.25
$
$
$
$
120,298
1.40
1.36
0.25
2017
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 1,035,427
$ 1,065,504
$ 1,064,108
$ 1,116,442
$
$
$
$
48,189
0.54
0.52
0.25
$
$
$
$
68,434
0.76
0.74
0.25
$
$
$
$
58,142
0.65
0.63
0.25
$
$
$
$
64,098
0.71
0.69
0.25
On January 30, 2019, 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 29, 2019 to all stockholders of record on March 15, 2019.
******
F-37
LPL 2018 Annual Report
CORPORATE INFORMATION
BOARD OF DIRECTORS (AS OF 03/25/19)
Dan H. Arnold
President & CEO
LPL Financial Holdings Inc.
H. Paulett Eberhart
Chair & Chief Executive Officer
HMS Ventures
William F. Glavin, Jr.
Former Chair and Chief Executive Officer
OppenheimerFunds, Inc.
Allison H. Mnookin
Former Chief Executive Officer
QuickBase, Inc.
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
INVESTOR RELATIONS
Send Requests For Financial Information To:
Chris Koegel
Senior Vice President, Investor Relations
LPL Financial
75 State Street, Floor 22, Boston, MA 02109
(617) 897.4574 | investor.relations@lpl.com
TRANSFER AGENT
Computershare
P.O. Box 505000
Louisville, KY 40233
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
stockholders will be held at:
12:00 p.m. ET on May 8, 2019
LPL Financial
1055 LPL Way, Park Building
Fort Mill, SC 29715
SAN DIEGO
LPL Financial
4707 Executive Drive
San Diego, CA 92121
CAROLINAS
LPL Financial
1055 LPL Way
Fort Mill, SC 29715
BOSTON
LPL Financial
75 State Street, Floor 22
Boston, MA 02109
(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 #1-831986