LPL Financial Annual Report 2019

FY2019 Annual Report · LPL Financial

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2019 Annual Report

LPL Financial Holdings Inc.

LPL

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.*

At LPL, we strive to make it easy for our advisors to do what is best for their
clients, while protecting them both, 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.

In 2019, LPL was again ranked the #1 independent broker-dealer for the 24th
consecutive year (as reported by Financial Planning magazine, 1996–2019,
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.

* Throughout this Annual Report, “financial advisors” or “advisors” include registered representatives and/or investment

adviser representatives affiliated with LPL Financial LLC, an SEC registered broker-dealer and investment adviser.

LPL

Annual Report

A Message from the

President & CEO

Dear Fellow Shareholder,

We delivered another year of solid business and
financial growth at LPL in 2019, driven by a continued
focus on our strategic priorities, combined with
thoughtful execution and a mission-driven culture.
We believe this focus continues to position us well
as we serve our advisors and drive profitable growth
for our shareholders.

$764 billion, up 22% year-over-year. Total organic
net new assets were $23.8 billion, translating to
a 3.8% annualized growth rate, up from 2.3% in
2018. In 2019, we returned $583 million of capital
to our shareholders, translating to $6.89 per share.
This was primarily driven by $500 million of share
repurchases and $83 million of dividends.

2019 Performance
Looking at our financial results, we continued to
drive top-line growth in 2019, with gross profit up
12% year-over-year. We also remained focused on
investing in our business while staying disciplined on
expenses to drive operating leverage. As a result, net
income increased 27% year-over-year to $560 million
and earnings per share prior to amortization of
intangible assets grew 35% year-over-year to $7.17.

Turning to our business results, organic growth,
combined with higher equity markets, drove total
brokerage and advisory assets to a new high of

GROSS PROFIT*

($ millions)

$2,172

$1,948

$1,358 $1,394

$1,555

2015

2016

2017

2018

2019

TOTAL ADVISORY &
BROKERAGE ASSETS*

($ billions)

$764

$615

$628

$509

$476

2015

2016

2017

2018

2019

Market Context
Looking at the marketplace more broadly, we
continue to operate in a large and growing market
with favorable secular trends towards independence
and advisory solutions. While the strength of our
balance sheet and business model positions us well
to continue investing to drive organic growth, we
understand the importance of remaining flexible in
the event of changes in the macro environment. With
that in mind, I’d like to share our strategic framework
to provide more color on where we are investing.

LPL

Annual Report

Positioning Our Model Across the
Entire Wealth Management Market

Helping Our Advisors Run
Successful Businesses

We are focused on winning in our traditional
independent and institutional markets, while also
continuing to invest in capabilities and pricing to
support our advisors. In 2019, our differentiated
capabilities drove solid recruited assets, bringing
our full-year total to $35 billion, the strongest year
in LPL’s history. Additionally, we supported our
advisors by lowering advisory transaction prices and
enhancing our centrally managed platforms, while
also introducing new affiliation models that make it
easier for new advisors to join LPL.

As we look ahead, we are focused on helping our
clients in the independent market enhance how
advisors grow, protect, and operate their businesses.
In that spirit, we are helping them with innovations,
such as outsourced business solutions, digitized
workflows, and advisor-focused capital solutions.

NET INCOME*

($ millions)

EPS Prior to Amortization
of Intangible Assets
$7.17

NUMBER OF ADVISORS*

14,054 14,377

15,210

16,109 16,464

$5.33

$560

$2.38

$1.98

$2.84

$439

$239

$192

$169

2015

2016

2017

2018

2019

2015

2016

2017

2018

2019

Creating an Industry-Leading
Service Experience, at Scale

As a firm, we are working to create an industry-
leading service experience, which includes
enhancing and differentiating ClientWorks,
making continuous improvements to the advisor
experience, and transforming our service offering
into a client care model. We recognize the
importance of listening to and applying advisor
feedback as we work to deliver an offering that
is unique to the wealth management space, and
further enhances our ability to attract and retain
our advisors.

*Amounts shown in all charts are as of or for the indicated year ended

We are pleased to have delivered another year of
business and financial growth. I’d like to thank our
employees for remaining focused on combining
strategy, execution, and culture to serve our
advisors, drive profitable growth, and create long-
term shareholder value.

Sincerely,

Dan Arnold,
President & CEO

LPL

Annual Report

2019 FINANCIAL HIGHLIGHTS

CONSOLIDATED STATEMENTS OF INCOME DATA

Net revenues (in thousands) 1

Total operating expenses (in thousands) 1

Total expenses (in thousands) 1

Income from operations (in thousands) 1

2019

2018

2017

2016

2015

$ 5,624,856

$ 5,188,400 $ 4,281,481

$ 4,049,383 $ 4,275,054

$ 4,749,864

$ 4,470,740 $ 3,787,479

$ 3,655,389 $ 3,933,363

$ 4,883,021

$ 4,595,763

$ 3,916,911

$ 3,751,867

$ 3,992,499

$ 874,992

$ 717,660

$ 494,002

$ 393,994

$ 341,691

Income before provision for income taxes (in thousands) 1

$ 741,835

$ 592,637

$ 364,570

$ 297,516

$ 282,555

$ 559,880

$ 439,459

$ 238,863

$ 191 ,931

$ 168,784

Net income (in thousands) 1
PER SHARE DATA

Earnings per diluted share 1

EPS prior to amortization of intangible assets 2

Weighted average diluted shares outstanding (in thousands) 1 84,624
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DATA

$ 6.62

$ 7.17

$ 4.85

$ 5.33

90,619

$ 2.59

$ 2.84

92,115

$ 2.13

$ 2.38

$ 1.74

$ 1.98

90,013

96,786

Cash and cash equivalents (in thousands) 3

Total assets (in thousands) 3

Total debt, net (in thousands) 3, 4
OTHER FINANCIAL AND OPERATING DATA

Gross profit (in thousands) 1, 5

EBITDA (in thousands) 1, 6

Number of advisors 3

Total brokerage and advisory assets (in billions) 3

Advisory assets under custody (in billions) 3

Average number of full-time employees 1

$ 590,209

$ 511,096

$ 811,136

$ 747,709

$ 724,529

$ 5,880,238

$ 5,477,468

$ 5,358,751

$ 4,834,926 $ 4,521,061

$ 2,398,818

$ 2,371,808

$ 2,385,022 $ 2,175,436

$ 2,188,240

$ 2,172,225

$ 1,947,670 $ 1,554,835

$ 1,394,250 $ 1,357,725

$ 1,036,105

$ 865,568

$ 616,366

$ 507,957

$ 453,313

16,464

$ 764.4

$ 365.8

4,327

16,109

$ 628.1

$ 282.0

4,007

15,210

$ 615.1

$ 273.0

3,469

14,377

$ 509.4

$ 211.6

3,320

14,054

$ 475.6

$ 187.2

3,382

1 Amounts shown are for the indicated year ended.

2 EPS prior to amortization of intangible assets is defined as GAAP earnings per share (“EPS”) plus the

per share impact of amortization of intangible assets. The per share impact is calculated as amortization
of intangible assets expense, net of applicable tax benefit, divided by the number of shares outstanding
for the applicable period. We present EPS prior to amortization of intangible assets because we believe
the metric can provide investors with useful insight into our core operating performance by excluding non-
cash items that we do not believe impact our ongoing operations. EPS prior to amortization of intangible
assets is not a measure of our financial performance under GAAP and should not be considered as an
alternative to GAAP EPS or any other performance measure derived in accordance with GAAP.

-p The following is a reconciliation of EPS prior to amortization of intangible assets to earnings per diluted

share for the periods presented above:

GAAP EPS

Amortization of intangible assets ($ millions)

Tax expense ($ millions)

Amortization of intangible assets net of tax ($ millions)

Diluted share count (millions)

EPS Impact

2019

2018

2017

2016

2015

$6.62

$4.85

$2.59

$2.13

$1.74

(18)

(17)

(15)

0.56

0.48

0.25

0.26

0.24

EPS prior to amortization of intangible assets

$7.17

$5.33

$2.84

$2.38

$1.98

3 Amounts shown are as of the indicated year ended.

4 Total debt, net consists of our senior secured term loan, senior unsecured subordinated notes, revolving

credit facility, and bank loans payable, net of debt issuance costs and unamortized premium.

5 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. The following is a calculation of gross profit for the periods presented above:

$ in millions

2019

2018

2017

2016

2015

Total net revenue

$5,625

$5,188

$4,281

$4,049

$4,275

Commission and advisory expense

3,388

3,178

2,670

2,601

2,865

Brokerage, clearing, and exchange

Gross profit

$2,172

$1,948

$1,555

$1,394

$1,358

6 EBITDA is defined as net income plus interest and other expense, income tax expense, depreciation
and amortization, amortization of intangible assets 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.

The following is a reconciliation of net income to EBITDA for the periods presented above:

$ in millions

Net income

2019

$560

Non-operating interest expense and other 130

Provision for income taxes

Depreciation and amortization

Amortization of intangible assets

Loss on extinguishment of debt

182

2018

$439

125

153

2017

$239

107

126

2016

$192

106

2015

$169

114

EBITDA

$1,036

$866

$616

$508

$453

Form 10-K

Form
10-K

LPL Financial Holdings Inc.

UNITED STATT TES 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, 2019

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission file number 001-34963

LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

20-3717839
(I.R.S. Employer Identification No.)

4707 Executive Drive, San Diego, California
(Address of principal executive offices)

92121
(zip code)

(800) 877-7210

rr
(Registrant’s telephone number
, including area code)

’

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

( )
Trading Symbol(s)
g y

g
Name of Each Exchange on Which Registered

Common Stock — $0.001 par value per share

LPLA

The 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 YY

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. YesYY

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 YY

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 YY

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

Non-accelerated filer

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

As of June 30, 2019, the aggregate market value of the voting stock held by non-affiliates of the registrant was $6.7 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 14, 2020 was 79,619,485.

Y
DOCUMENTS INCORPORATED BY

REFERENCE

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.

TT
TABLE OF CONTENTS

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PP
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Information about our Executive Officers

PP
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PP
PART III

Item 10 Directors, Executive Officers, and Corporate Governance
. . . . . . . . . . . . . . . . . . . . . . . . . .
ff
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PP
PART IV
Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EXHIBIT INDEX

Item 16 Form 10-K Summary
AA
SIGNATURES

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.

We post the following filings to LPL.com 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.

@ p

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 STATT TEMENTS

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 and future share repurchases, including
statements regarding future resolution of regulatory matters, legal proceedings and related costs, future revenue
and expenses, future affiliation models and capabilities, market and macroeconomic trends, and projected savings
and anticipated improvements to the Company’s operating model, services, and technologies as a result of its
investments, 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 21, 2020. 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 client cash programs, including the Company’s success in negotiating agreements
with current or additional counterparties; the Company’s strategy and success in managing client cash 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, and
the implementation of Regulation BI (Best Interest); 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 competitive developments and
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 indentures 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
investments, initiatives and programs, including its acquisitions of Allen & Company of Florida, LLC and
AdvisoryWorld 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-
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

PP
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
ff
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.

LPL Financial Holdings Inc., which is the parent company of our collective businesses, was incorporated in

Delaware in 2005. Our business subsidiaries include the following:

•

LPL Financial LLC (“LPL
settles customer transactions

Financial”) is a clearing broker-dealer and an investment adviser that clears and

Fortigent Holdings Company, Inc. and its subsidiaries (“Fortigent”) provide solutions and consulting services
to registered investment advisers (“RIAs”), banks, and trust companies serving high-net-worth clients

LPL Insurance
disability insurance products and services

Associates, Inc. (“LPLIA”) operates as a brokerage general agency that offers life and

AdvisoryWorld provides technology products, including proposal generation, investment analytics, and
portfolio modeling

The Private Trust Company, N.A. (“PTC”) provides trust administration, investment management oversight,
and Individual Retirement Account (“IRA”) custodial services

LPL Employee Services, LLC is a holding company for
Company”), a broker-dealer and RIA that we acquired in 2019.

Allen & Company of Florida, LLC (“Allen &

Our Business

Our Advisor Relationships

ff
Our business is dedicated exclusively to our advisors; we are not a market-maker nor do we offer investment
ff
fer proprietary
banking or underwriting services. We offer no proprietary products of our own. Because we do not of
products, we enable the independent financial advisors, banks, and credit unions that we support to offer their
ff
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 5.7 million client accounts. Our services are designed to support the evolution
of our advisors’ businesses over time and to adapt as our advisors’ needs change.

We believe we offer a compelling economic value proposition to independent advisors, which is a key factor

in our ability to attract and retain advisors and their practices. The independent channels pay advisors a greater
share of brokerage commissions and advisory fees than the captive channels — generally 80-90% compared to

30-50%. Through our scale and operating efficiencies, we are able to offer our advisors what we believe are the
highest average payout ratios among the five largest U.S. broker-dealers, ranked by number of advisors.

Furthermore, we believe that our technology and service platforms enable our advisors to operate their
practices with a greater focus on serving investors 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 approximately 16,500 advisors average approximately 20 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 RIA platform, or provide fee-based services through their own
RIA practices.

The majority of our advisors are 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 450 independent RIA firms that conduct their business through separate entities

(“Hybrid RIAs”) with approximately 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 over 3,000 additional financial advisors who are affiliated and licensed with
insurance companies. These arrangements allow us to provide outsourced customized clearing, advisory platforms,
and technology solutions that enable the financial advisors at these insurance companies to offer a breadth of
services to their client base in an efficient manner.

Our Value Proposition

We are dedicated to making it easy for advisors to do what is best for their clients. Our scale and self-clearing

platform enable us to provide advisors with the capabilities they need, and the service they expect, at a compelling
price. We are dedicated to continuously improving the processes, systems, and resources we leverage to meet
these needs.

We support our advisors by providing front-, middle-, and back-office solutions through our distinct value
proposition: integrated technology solutions, comprehensive clearing and compliance services, consultative practice
management programs and training, and independent research. The comprehensive and increasingly automated
nature of our offering enables our advisors to focus on their clients while successfully and efficiently managing the
complexities of running their own practice.

Integrated Technology Solutions

We provide our technology and service to advisors through an integrated technology platform that is server-
based and web-accessible. Our technology offerings are designed to permit our advisors to effectively manage all
critical aspects of their businesses in an efficient manner while remaining responsive to their clients’ needs. We
continue to automate time-consuming processes, such as account opening and management, document imaging,
transaction execution, and account rebalancing, in an effort to improve our advisors’ efficiency and accurac

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 advisors is of utmost importance to us. As the financial
industry and regulatory environment evolve and become more complex, 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
ff
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
ff
assist advisors serving high-net-worth clients with comprehensive estate, tax, philanthropic, and financial
planning processes;

• marketing strategies, including campaign templates, to enable advisors to build awareness of their services

•

and capitalize on opportunities in their local markets;
succession planning and an advisor loan program for advisors looking to either sell their own or buy
another practice;

transition services to help advisors establish independent practices and migrate client accounts to us; and

in-person and virtual training and educational programs on topics including technology, use of advisory
platforms, and business development.

Independent Research

We provide our advisors with integrated access to comprehensive research on a broad range of investments

and market analysis on macro-economic events, capital markets assumptions, and strategic and tactical asset
allocation. Our research team provides advice that is designed to empower our advisors to provide their clients with
thoughtful advice in a timely manner, including the creation of discretionary portfolios for which we serve as a
portfolio manager, 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. We
regularly review the structure and fees of our commission-based products in the context of retail investor
preferences and the changing regulatory environment, as well as the competitive landscape. As of December 31,
2019, the total brokerage assets in commission-based products were $398.6 billion.

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, 2019, the total
advisory assets under custody in these platforms, through both our corporate RIA platform and Hybrid RIAs, were
$365.8 billion.

Client Cash Programs

We assist our advisors in managing their clients’ cash balances through money market programs and insured

cash sweep vehicles at various banks. As of December 31, 2019, the total assets in our client cash programs,
which are held within brokerage and advisory accounts, were approximately $33.7 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 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.

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 sponsors, recordkeeping, networking services, client cash
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, 2019, 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
A
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 —
management support, which further improves the productivity of our advisors.

t We actively reinvest in our comprehensive technology platform and practice

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 sponsors.

Payout Ratios to Advisors — Among the largest U.S. 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

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.

, risk management, and
ff

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 of
ff
fer it. For example, because we do
not have any proprietary manufactured financial products, we do not view firms that manufacture asset
management products and other financial products as direct competitors.

We provide comprehensive solutions to financial institutions, such as regional banks, credit unions, and

insurers that seek to provide a broad array of services for their clients. We believe many institutions find the
technology, infrastructure, and regulatory requirements associated with delivering financial advice to be cost-
prohibitive. The solutions we provide enable financial advisors at these institutions to deliver their services on a
cost-effective basis.

Flexibility of Our Business Model

Our business model allows our advisors the freedom to choose how they conduct their business, subject to
certain regulatory parameters, which has helped us attract and retain advisors from multiple channels, including
wire houses, regional broker-dealers, and other independent broker-dealers. Our platform can accommodate a
variety of independent advisor business models, including independent financial advisors and Hybrid RIAs. The
flexibility of our business model enables our advisors to transition among the independent advisor business models
and product mix as their business evolves and preferences change within the market 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

From 2014 to 2018, the U.S. retail investment market averaged 7% annual growth. The chart below shows

the historical growth of assets in the U.S. retail investment market (in trillions):

____________________
Source: The Cerulli Report: U.S. Advisor Metrics 2019.

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.

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 Assets to Our Platform

We intend to grow the assets served by our platform. Cerulli Associates, a research and consulting firm
specializing in the financial services industry, estimates there are $19.9 trillion advisor-mediated assets in the
United States, of which we have a 3.8% market share, and we believe we are positioned to attract assets from any
channel.

Channel (dollars in billions)

Independent Channels

Wirehouses

Other Employee Channels

TT
Total

Competition

Advisor-mediated
Assets

% of Market

$7,602

6,777

5,562

$19,941

38.1%

34.0%

27.9%

100.0%

We compete with a variety of financial firms to attract and retain experienced and productive advisors. These

financial firms operate in various channels and markets:

• 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.

• Wirehouses tend to consist of large nationwide firms with multiple lines of business that have a focus on the

highly competitive high-net-worth investor market.

•

Competition for advisors also includes regional firms that primarily focus on specific client niches or
geographic areas.

Independent RIA firms, which are registered with the SEC or through their respective states’
advisory regulator and not through a broker-dealer, may choose from a number of third-party firms to
provide custodial services.

investment

Competitors within these various channels and markets generally do not offer a complete clearing solution for

advisors and are frequently supported by third-party clearing and custody-oriented firms. These clearing firms and
their affiliates and other providers also of
ff
fer an array of service, technology and reporting tools, while retaining a
portion of the economics for the offerings utilized by their clients.

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.

Employees

As of December 31, 2019, we had 4,343 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 U.S. 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
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. For example, in June 2019, the SEC adopted a new

standard of conduct applicable to retail brokerage accounts (“Regulation BI”), with a compliance date of June 30,
2020. Regulation BI requires that broker-dealers act in the best interest of retail customers without placing their own
financial or other interests ahead of the customer’s and imposes new obligations related to disclosure, duty of care,
conflicts of interest and compliance. Certain state securities and insurance regulators have also adopted, proposed
or are considering adopting similar laws and regulations. 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 new rules or regulations affect the operations, financial condition, liquidity, and capital
requirements of financial institutions with which we do business, those institutions may seek to pass on increased
costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us. The ultimate
impact that new rules or regulations will have on us, the financial industry, and the economy cannot be known until
such rules and regulations 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.

The DOL is currently expected to release a new rule in 2020 that may change the definition of fiduciary under

ERISA and Section 4975 of the Code, and this 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 any future
DOL regulation on our retirement plan business cannot 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. 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 NFAFF ’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 PAPP TRIOT Act of 2001 (the “P

APP TRIOT Act”), which amended the Bank Secrecy Act, contains anti-

money laundering and financial transparency laws and mandates the implementation of various regulations
applicable to broker-dealers, futures commission merchants, and other financial services companies. Financial
institutions subject to these requirements generally must have an anti-money laundering program in place, which
includes monitoring for and reporting suspicious activity, implementing specialized employee training programs,
designating an anti-money laundering compliance officer, and annually conducting an independent test of the
effectiveness of its program. In addition, sanctions administered by the United States Office of Foreign Asset
Control prohibit U.S. persons from doing business with blocked persons and entities or certain sanctioned
countries. We have established policies, procedures, and systems designed to comply with these regulations but
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 and general concerns about the security of that information. To the extent they are applicable to
us, we must comply with federal and state information-related laws and regulations in the United States, including
the Gramm-Leach-Bliley Act of 1999, SEC Regulation S-P, the Fair Credit Reporting Act of 1970, as amended, and
Regulation S-ID, 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, ALLEN & COMPANY OF FLORIDA, LLC,
and THE PRIVAVV TE AA

TRUST COMPANY, N.A. (& Design) are among our service marks.

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 slows, our business may suffer.

The market for experienced and productive advisors is highly competitive, and we devote significant
resources to attracting and retaining the most qualified advisors. In attracting and retaining advisors, we compete
directly with a variety of financial institutions such as wire houses, regional broker-dealers, banks, insurance
companies, and other independent broker-dealers. If we are not successful in retaining highly qualified advisors, we
may not be able to recover the expense involved in attracting and training these individuals. There can be no
assurance that we will be successful in our efforts to attract and retain the advisors needed to achieve our growth
objectives.

Our financial condition and results of operations may be adversely affected by market fluctuations and
other economic factors.

Significant downturns and volatility in equity and other financial markets have had and could continue to have

an adverse effect on our financial condition and results of operations.

General economic and market factors can affect our commission and fee revenue. For example, a decrease

in market levels or market volatility can:

•

reduce new investments by both new and existing clients in financial products that are linked to the equity
markets, such as variable life insurance, variable annuities, mutual funds, and managed accounts;

reduce trading activity, thereby affecting our brokerage commissions and our transaction revenue;

reduce the value of advisory and brokerage assets, thereby reducing advisory fee revenue, 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 client cash programs, which are generally based on prevailing interest rates. Our revenue from
our client cash programs has declined in the past as a result of a low interest rate environment, and our revenue
may decline in the future due to decreases in interest rates, decreases in client cash balances or mix shifts among
the current or future cash sweep vehicles and money market programs that we offer
decreased the federal funds rate in 2019 and there can be no assurance that it will not continue to do so. Our
revenue from our client cash 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 client cash
programs or changes in the cash sweep vehicles or money market programs that we offer
in our revenue. A sustained low interest rate environment may also have a negative impact upon our ability to
negotiate contracts with new banks or renegotiate existing contracts on comparable terms with banks participating
in our client cash programs. If interest rates do not rise in accordance with management and market expectations,

, could result in declines

. The Federal Reserve

or if balances or yields in our client cash programs decrease, future revenues from our client cash 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:

•

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 self regulatory organization (“SRO”) inquiries, investigations, and enforcement
proceedings, as well as other actions and claims. Many of our legal claims are initiated by clients of our advisors
and involve the purchase or sale of investment securities, but other claims and proceedings may be, and have
been, initiated by state-level and federal regulatory authorities and SROs, including the SEC, FINRA, and state
securities regulators.

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.
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.

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

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in operating their businesses with regard to product offerings, outside business activities, of
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fice technology and
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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 or detect 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, propertytt ,
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 identifyff , 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.

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:

•

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
ff
similar to ours. Without sufficient liquidity
.
our business would suffer

, we could be required to limit or curtail our operations or growth plans, and

ff
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, the
committed revolving credit facility at our broker-dealer subsidiary, LPL Financial, or uncommitted lines of credit. W
may also need access to capital in connection with the growth of our business, through acquisitions or otherwise.

In the event current resources are insufficient to satisfy our needs, we may need to rely on financing sources

such as bank debt. The availability of additional financing will depend on a variety of factors such as:

• market conditions;

•

the general availability of credit;

the volume of trading activities;

the overall availability of credit to the financial services industry;

our credit ratings and credit capacity; and

the possibility that our lenders could develop a negative perception of our long- or short-term financial
prospects 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
ff
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.

TT
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
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 U.S. 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 U.S. federal income tax law. Changes in U.S. federal income tax law, in particular with
respect to variable annuity products, or with respect to tax rates on capital gains or dividends, could make some of
these products less attractive to clients and, as a result, 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, rules and regulations. Our broker-dealer subsidiary, LPL Financial, is:

•

registered as a broker-dealer with the SEC, each of the 50 states, 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 NFAFF as LPL
L
activities.

s primary regulator for futures and commodities trading

Financial’

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
and regulatory initiatives may affect the way in which we conduct our business and may make our business model
less profitable.

Our ability to conduct business in the jurisdictions in which we currently operate depends on our compliance

with the laws, rules, and regulations promulgated by federal regulatory bodies and the regulatory authorities in each
of the states and other jurisdictions in which we do business. Our ability to comply with all applicable laws, rules and
regulations, and interpretations, is largely dependent on our establishment and maintenance of compliance, audit,
and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit,

supervisory, and risk management personnel. We cannot assure you that our systems and procedures are, or have
been, effective in complying with all applicable laws, rules and regulations, and interpretations. In particular, the
diversity of information security environments in which our services are offered makes it difficult to ensure a
uniformly robust level of compliance. Regulators have in the past raised, and may in the future raise, concerns with
respect to the quality, consistency or oversight of 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

resulted in, and could in the future result in, legal liability, censures, penalties and fines, disgorgement of profits,
restitution to customers, remediation, the issuance of cease-and-desist orders or injunctive or other equitable relief
against us, which individually or in the aggregate could negatively impact our financial results or adversely affect our
ability to attract or retain financial advisors and institutions. Depending on the nature of the violation, we may be
required to offer restitution or remediation to customers, and the costs of doing so could exceed our loss reserves.

We have established a captive insurance subsidiary that underwrites insurance for various regulatory and
legal risks, although self-insurance coverage is not available for all matters. The availability of coverage depends on
the nature of the 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, in June 2019, the SEC adopted new Regulation BI, which imposes an overarching standard of
conduct that requires broker-dealers and their associated persons to act in the best interest of their retail customers
when making securities recommendations and imposes a number of new compliance and disclosure obligations on
broker-dealers. Nevada has enacted, and other state legislatures (including New Jersey, Massachusetts and
Maryland) are considering, statutes that impose fiduciary standards and other obligations on broker-dealers and
investment advisers operating in their states. New York recently adopted a best interest standard that became
applicable to the sale of certain annuity and insurance products beginning August 1, 2019. We expect that these
laws and proposals 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 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. 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. FINRA Rule 1017 generally provides, among other things, that
FINRA approval must be obtained in connection with any transaction resulting in a 25% or more change in our
ownership that results in one person or entity directly or indirectly owning or controlling 25% or more of us. 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.

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:

•

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
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.

. For example, certain of our

If we fail to continue to attract highly qualified advisors, or if advisors licensed with us leave us to pursue other
opportunities, we could face a significant decline in market share, commission and fee revenues or net income. We
could face similar consequences if current or potential clients of ours, including current clients that use our
outsourced customized clearing, advisory platforms or technology solutions, decide to use one of our competitors
rather than us. If we are required to increase our payout of commissions and fees to our advisors in order to remain
competitive, our net income could be significantly reduced.

Poor service or performance of the financial products that we offer or competitive
such services or products may cause clients of our advisors to withdraw their assets on short notice.

pressures on pricing of

Clients of our advisors have control over their assets that are served under our platforms. Poor service or

, the emergence of new financial products or services from

performance of the financial products that we offer
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 or zero commissions to attract clients or trading volume, direct-to-investor online financial services,
including so-called “robo” advice, or higher deposit rates to attract client cash balances, could 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:

•

our ability to continue to invest significant resources on our technology systems in order to meet industry
and regulatory standards, consumer preferences and the efforts of threat actors to penetrate our systems;

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 while ensuring the security of the data involving those products and
services;

our ability to use technology effectively and securely to support our regulatory compliance and reporting
functions;

our ability to comply with the changing landscape of laws and regulations that govern protection of
personally identifiable information; and

our ability to retain skilled information technology employees.

Extraordinary trading volumes, malware, ransomware or attempts by hackers to introduce large volumes of

fraudulent transactions into our systems, beyond reasonably foreseeable spikes in volumes, could cause our
computer systems to operate at an unacceptably slow speed or even fail. Failure of our systems, which could result
from these or other events beyond our control, or an inability or failure to effectively upgrade those systems or
implement new technology-driven products or services, 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
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. In particular, advisors work in a wide variety of
environments, and although we require minimum security by policy, we cannot ensure the consistent compliance
with these policies across all of our advisors, or that our policy will be adequate to address the evolving threat
environment. If one or more of these events occur, they could jeopardize our own, our advisors’ or their clients’, or
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, Nevada, 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
our confidential information or clients’ confidential information or cause interruptions or malfunctions in our
operations. Cyber-attacks can be designed to collect information, manipulate, destroy or corrupt data, applications,
or accounts, and to disable the functioning or use of applications or technology assets. Such activity could, among
other things:

•

seriously damage our reputation;

allow competitors or hackers access to our proprietary business information;

subject us to liability for a failure to safeguard client data;

result in the termination of relationships with our advisors;

•

subject us to regulatory sanctions or obligations, based on state law or the authority of the SEC and FINRA
to enforce regulations regarding business continuity planning or cybersecurity;

subject us to litigation by consumers, advisors, or other business partners that may suffer damages as a
result of such activity;

result in inaccurate financial data reporting; and

require significant capital and operating expenditures to investigate and remediate 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 some level of 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,yy 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 and their clients. We depend on highly
specialized and, in many cases, proprietary technology to support our business functions, including among others:

•

securities trading and custody;

portfolio management;

performance reporting;

customer service;

accounting and internal financial processes and controls; and

regulatory compliance and reporting.

ff
Our continued success depends on our ability to effectively adopt new or adapt existing technologies to meet
changing client, industry, and regulatory demands. The emergence of new industry standards and practices could
render our existing systems obsolete or uncompetitive. There cannot be any assurance that another company will
not design a similar or better platform that renders our technology less competitive.

Maintaining competitive technology requires us to make significant capital expenditures, 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 suf
, successful, secure and accepted by our current and
ff
ficiently timely
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
systems could have similar
could lead to a loss of advisors and could harm our reputation. A breakdown in advisors’

effects.
A technological breakdown could also interfere with our ability to comply with financial reporting and other
regulatory requirements, exposing us to disciplinary action and to liability to our advisors and their clients. Security,
stability, and regulatory risks also exist because parts of our infrastructure and software are beyond their
manufacturer’s stated end of life. We are working to mitigate such risks through additional controls and increased
modernization spending, although we cannot provide assurance that our risk mitigation efforts will be effective, in
whole or in part.

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 Refinitiv US LLC, under which it provides us key operational support,
including data processing services for securities transactions and back office processing support (“BETAHost”). Our
use of third-party service providers may decrease our ability to control operating risks and information technology
systems risks.

Any significant failures by BETAHost or our other service providers could cause us to sustain serious

operational disruptions and incur losses and could harm our reputation. These third-party service providers are also
susceptible to operational and technology vulnerabilities, including cyber-attacks, security breaches, 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.

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, 2019, we had total indebtedness of $2.4 billion of which $1.1 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 indentures (as supplemented, “Indentures”) governing our senior unsecured

notes (as defined further below, the “Notes”) permit us to incur additional indebtedness. Under our Credit
Agreement, we have the right to request additional commitments for new term loans, new revolving credit
commitments and increases to then-existing term loans and revolving credit commitments, subject to certain
limitations. Although the Credit Agreement and the Indentures 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
Indentures. To the extent new debt or other obligations are added to our currently anticipated debt levels, the
substantial indebtedness risks described above would increase.

A credit rating downgrade would not impact the terms of our repayment obligations under the Credit
Agreement or the Indentures. However, 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 Indentures 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 Indentures contain customary restrictions on our activities, including covenants

that may restrict us from:

•

incurring additional indebtedness or issuing disqualified stock or preferred stock;

declaring dividends or other distributions to shareholders;

repurchasing equity interests;

redeeming indebtedness that is subordinated in right of payment to certain debt instruments;

• making investments or acquisitions;

•

creating liens;

selling assets;

guaranteeing indebtedness;

engaging in certain transactions with affiliates;

entering into agreements that restrict dividends or other payments from subsidiaries; and

consolidating, merging, or transferring all or substantially all of our assets.

Our revolving credit facility requires us to meet specified leverage ratio and interest coverage ratio tests.

These restrictions may prevent us from taking actions that we believe would be in the best interest of our

business. Our ability to comply with these restrictive covenants will depend on our future performance, which may

be affected by events beyond our control. If we violate any of these covenants and are unable to obtain waivers, we
would be in default under our Credit Agreement or the Indentures, as applicable, and payment of the indebtedness
could be accelerated. Acceleration of our indebtedness under our Credit Agreement or the Indentures 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 Indentures could discourage an acquisition of us by a third-
party.

Certain provisions of our Credit Agreement and the Indentures could make it more difficult or more expensive

for a third-party to acquire us, and any of our future debt agreements may contain similar provisions. Upon the
occurrence of certain transactions constituting a change of control, all indebtedness under our Credit Agreement
may be accelerated and become due and payable and 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 may fluctuate substantially due to the following factors (in addition to

the other risk factors described in this Item 1A):

•

actual or anticipated fluctuations in our results of operations, including with regard to interest rates or
revenues associated with our client cash 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
These

often been unrelated or disproportionate to the operating performance of the particular companies affected.
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. 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 2019 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 Indentures 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 Indentures. Our broker-dealer
subsidiary is subject to requirements of the SEC, FINRA, the CFTC, and other regulators relating to liquidity, capital
standards, and the use of client funds and securities, which may limit funds available for the payment of dividends
to us.

Anti-takeover provisions in our certificate of incorporation and bylaws could prevent or delay a change in
control of our company.

Our certificate of incorporation and our bylaws contain certain provisions that may discourage, delay, or

prevent a change in our management or control over us that stockholders may consider favorable, including the
following:

•

the sole ability of the board of directors to fill a vacancy created by the expansion of the board of directors;

advance notice requirements for stockholder proposals and director nominations;

limitations on the ability of stockholders to call special meetings and to take action by written consent;

the approval of holders of at least two-thirds of the shares entitled to vote generally on the making,
alteration, amendment, or repeal of our certificate of incorporation or bylaws will be required to adopt,
amend, or repeal our bylaws, or amend or repeal certain provisions of our certificate of incorporation;

the required approval of holders of at least two-thirds of the shares entitled to vote at an election of the
directors to remove directors; and

the ability of our board of directors to designate the terms of and issue new series of preferred stock,
without stockholder approval, which could be used to institute a rights plan, or a poison pill, that would work
to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been
approved by our board of directors.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors
might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our
company, thereby reducing the likelihood that you could receive a premium for your common stock in the
acquisition.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate offices are located in San Diego, California where we lease approximately 420,000 square feet
April 30, 2029; in Fort Mill, South Carolina where we lease
of office space under a lease agreement that expires on
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 office 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.

For a discussion of legal proceedings, see Note 14. 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.

Information about our Executive Officers

The following table provides certain information about each of the Company’s executive officers as of the date

this Annual Report on Form 10-K has been filed with the SEC:

Name

Dan H. Arnold

Matthew J. Audette

Matthew Enyedi

J. Andrew Kalbaugh

Sallie R. Larsen

Michelle Oroschakoffff

Scott Seese

Dayton Semerjian

Richard Steinmeier

George B. White

Executive Officers

Ageg

Position

President and Chief Executive Officer

Chief Financial Officer

Managing Director, National Sales

Managing Director, Divisional President, National Sales and Consulting

Managing Director, Chief Human Capital Officer

Managing Director, Chief Legal Officer

Managing Director, Chief Information Officer

Managing Director, Chief Customer Care Officer

Managing Director, Divisional President, Business Development

Managing Director, Investor and Investment Solutions and Chief Investment Officer

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
ff
s
fectiveness of the organization’
ff
financial policy, leading our capital management efforts, and ensuring the ef
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
. From April 2015 to
worked at UVEST for 13 years, serving most recently as president and chief operating officer
July 2018, he served on the board of directors of the Securities Industry and Financial Markets Association
(“SIFMA”). 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
of
relations. Prior to joining LPL in September 2015, he served as executive vice president and chief financial officer
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.

Matthew Enyedi — Managing Director, National Sales

Mr. Enyedi has served as managing director, national sales of LPL Financial since January 2020. He
oversees an integrated group of product and platform sales consultants focused on helping financial advisors and
institutions navigate and grow in an increasingly complex financial services landscape. Prior to his promotion to
managing director, Mr. Enyedi served as executive vice president, national sales from March 2015 to January 2020.
In that role, he led the firm’s data analytics and business intelligence efforts, and oversaw a team focused on
providing front and middle office capabilities
to help advisors grow their businesses and reach new segments of
clients. He was also previously responsible for teams supporting LPL Financial’s RIA custody and high-net-worth
solutions. Mr. Enyedi joined LPL Financial in 2003 and has also served as senior vice president, vice president,
corporate strategy and assistant vice president of advisory consulting. Prior to joining the firm, he worked as a
financial advisor with UBS PaineWebber. Mr. Enyedi received a B.A. in speech communication and business

administration from the University of San Diego. He also holds the Certified Investment Management Analyst®
designation from the Haas School of Business at the University of California, Berkeley.

J. Andrew Kalbaugh — Managing Director, Divisional President, National Sales and Consulting

Mr. Kalbaugh has served as managing director and divisional president, 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 and
insurance services. 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 of LPL Financial. She is responsible for
overseeing executive communication, human resources, talent development, corporate real estate, total rewards
and talent acquisition, 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 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. 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 the SIFMA Compliance and Legal Executive Committee. Ms. Oroschakoff earned a B.A. in English
literature from the University of Oregon and a J.D., with honors, 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 start three different businesses. Mr. Seese earned his B.S. in
electrical engineering from Ohio State University.

Dayton Semerjian — Managing Director, Chief Customer Care Officer

Mr. Semerjian has served as managing director, chief customer care officer of LPL Financial since February

2019. He is responsible for LPL Financial’s customer satisfaction and client-centric efforts and leads Service,
Trading, and Operations, LPL Financial’s largest business unit. Before joining LPL Financial, Mr. Semerjian was
general manager and senior vice president for Global Customer Success at CA Technologies Inc., which he joined
in 2005 when the firm acquired Concord Communication Inc. At Concord, he was executive vice president of
Marketing and Strategic Alliances. Mr. Semerjian also gained experience leading firms in adopting new service
models that focus on improving the customer experience at scale through leadership roles at Intel Corp., Nation
Street Inc. and Corente Inc., which was acquired by Oracle. Mr. Semerjian received a B.B.A. in marketing and
management from the University of Massachusetts and an M.B.A. from Harvard Business School. He was also
awarded an advanced certificate of executive management by the MIT Sloan School of Management.

Richard Steinmeier — Managing Director, Divisional President, Business Development

Mr. Steinmeier has served as managing director and divisional president, business development of LPL
Financial since August 2018. In this role, he has responsibility for recruiting new 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 Maryrr .

Item 5. Market for Registrant’s Common Equitytt , Related Stockholder Matters, and Issuer Purchases of

PP
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, 2019 was $92.25 per share. As of that date, there were 1,356 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, 2014 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.

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 Indentures
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 FINRARR ’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, 2019:

Plan category

Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights

Weighted-average
exercise price of
outstanding options,
warrants, and rights

Number of securities
remaining available
for future issuance
under equity
compensation plans

Equity compensation plans approved by security holders

2,705,241

43.81

5,231,656

Equity compensation plans not approved by security

holders

TT
Total

Purchases of Equity Securities by the Issuer

—

2,705,241

—

43.81

—

5,231,656

The table below sets forth information regarding repurchases on a monthly basis during the fourth quarter of

2019 (dollars in millions, except per share data):

Period

October 1, 2019 through October 31, 2019

November 1, 2019 through November 30, 2019

December 1, 2019 through December 31, 2019

TT
Total
____________________

Total Number
TT
of Shares
Purchased

Weighted-
AA
Average Price

528,062

461,680

421,429

1,411,171

75.77

88.80

92.59

Total Number of
TT
Shares Purchased
as Part of Publicly
Announced
Programs(1)

Approximate Dollar
Value of Shares
VV
That May Yet Be
Purchased Under
the Programs

528,062

461,680

421,429

1,411,171

579.8

538.8

499.8

(1)

See Note 15. Stockholders’ Equity

,yy within the notes to consolidated financial statements for additional information.

’

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, 2019, 2018, and 2017
and the consolidated statements of financial condition data as of December 31, 2019 and 2018 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, 2016 and 2015 and consolidated statements of financial condition
data as of December 31, 2017, 2016, and 2015 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.

YY
Years Ended December 31,

2019

2018

2017

2016

2015

Consolidated statements of income data (In thousands, except per share data):

Net revenues

TT
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

$ 5,624,856

$ 5,188,400

$ 4,281,481

$ 4,049,383

$ 4,275,054

$ 4,883,021

$ 4,595,763

$ 3,916,911

$ 3,751,867

$ 3,992,499

741,835

181,955

559,880

6.78

6.62

1.00

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

2019

2018

2017

2016

2015

December 31,

Consolidated statements of financial condition data (In thousands):

Cash and cash equivalents

590,209

511,096

811,136

747,709

724,529

TT
Total assets

$ 5,880,238

$ 5,477,468

$ 5,358,751

$ 4,834,926

$ 4,521,061

TT
Total long-term borrowings, net

$ 2,398,818

$ 2,371,808

$ 2,385,022

$ 2,175,436

$ 2,188,240

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

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

Executive Summary

Financial Highlights

Results for the year ended December 31, 2019 included net income of $559.9 million, or $6.62 per share,

which compares to $439.5 million, or $4.85 per share, for the year ended December 31, 2018.

Asset Growth Trends

TT
Total brokerage and advisory assets served were $764.4 billion as of December 31, 2019, up 21.7%
$628.1 billion as of December 31, 2018. Total net new assets were $26.6 billion for the year ended December 31,
2019, compared to $51.6 billion for the same period in 2018.

from

Net new advisory assets were $30.0 billion for the year ended December 31, 2019, compared to $27.6 billion
in 2018. As of December 31, 2019, our advisory assets had grown to $365.8 billion from the prior year end balance
of $282.0 billion and represented 47.8% of total advisory and brokerage assets served.

Net new brokerage assets totaled outflows of $3.4 billion for the year ended December 31, 2019, compared to
inflows of $24.1 billion in 2018, driven by the onboarding of assets from our acquisition of the broker-dealer network
of National Planning Holdings, Inc. (“NPH”). As of December 31, 2019, our brokerage assets had grown to $398.6
billion from the prior year end balance of $346.0 billion.

Gross Profit Trends

Gross profit, a non-GAAP financial measure, of $2,172.2 million for the year ended December 31, 2019,
increased 11.5% from $1,947.7 million for the year ended December 31, 2018. 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 provide useful insight in evaluating the Company’s core
operating performance before indirect costs that are general and administrative in nature. See footnote 9 to the
Financial Metrics table within the “How We Evaluate Our Business” section for additional information on gross profit.

Stockholder Capital Returns

We returned $583.0 million of capital to stockholders during the year, including $82.6 million of dividends and

$500.4 million of share repurchases, representing 6,418,542 shares.

Our Sources of Revenue

Our revenues are derived primarily from fees and commissions from products and advisory services offered
by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive
from our advisors for the use of our technology, custody, clearing, trust, and reporting platforms. We also generate
asset-based revenues through our cash sweep vehicles and money market 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 sponsors 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 products and services, including related disclosures, in the context of the changing regulatory environment and
competitive landscape for brokerage and advisory accounts.

How We Evaluate Our Business

We focus on several key metrics in evaluating the success of our business relationships and our resulting
financial position and operating performance. Our key operating, business and financial metrics are as follows:

Operating and Business Metrics (dollars in billions)

Advisory assets(1)(2)
Brokerage assets(1)(3)

TT
Total Brokerage and

Advisory Assets served(1)(4)

Net new advisory assets(5)
Net new brokerage assets(6)

TT
Total Brokerage and

Advisory Net New Assets(4)

Insured cash account balances(1)
Deposit cash account balances(1)
TT
Total Insured Sweep Balances

(4)

Money market account balances(1)
Purchased money market fund balances(1)

TT
Total Client Cash Balances

(4)

Advisors

Financial Metrics (dollars in millions, except per share data)

TT
Total net revenues

Recurring gross profit rate (trailing twelve months)(7)
Pre-tax income

Net income

Earnings per share, diluted

Non-GAAP Financial Measures(8)

Gross profit(9)
Gross profit growth from prior period(9)
Gross profit as a % of net revenue(9)

____________________

December 31,

2019

2018

365.8

398.6

764.4

30.0

(3.4)

26.6

24.4

5.0

29.4

1.9

2.4

33.7

282.0

346.0

628.1

27.6

24.1

51.6

24.8

5.1

29.9

4.9

—

34.9

16,464

16,109

YY
Years Ended December 31,

2019

5,624.9

85.9%

741.8

559.9

6.62

2018

5,188.4

86.7%

592.6

439.5

4.85

2,172.2

1,947.7

11.5%

38.6%

25.3%

37.5%

(1)

(2)

(3)

(4)

(5)

(6)

(7)

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, deposit cash
account balances, money market account balances and purchased money market fund 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
L
Results of Operations for a tabular presentation of advisory assets.

Financial”). See

Brokerage assets consists of assets serviced by advisors licensed with LPL Financial.

Balances may not foot due to rounding.

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 asset-
based revenues, advisory revenues, trailing commission revenues, and certain other fee revenues 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 other recurring 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.

(8)

(9)

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.

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)

T
Total net revenues

Commission and advisory expense

Brokerage, clearing, and exchange fees

Gross profit(1)

____________________

(1)

Balances may not foot due to rounding.

Legal & Regulatory Matters

YY
Years Ended December 31,

2019

2018

5,624.9

3,388.2

64.4

5,188.4

3,177.6

63.2

2,172.2

1,947.7

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.
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.

There are particular uncertainties

Our accruals, including those established through the captive insurance subsidiary at December 31, 2019,

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
Securities Administrators Association that related to our historical compliance with certain state “blue sky” laws and
resulted in aggregate fines of $26.4 million, all of which were covered by our captive insurance subsidiary loss
reserves. As part of the settlement structure, we engaged independent third party consultants to conduct a historical
review of securities transactions and an operational review of our systems for complying with blue sky securities
registration requirements, each of which has been completed. We also agreed to offer customers remediation in the

form of reimbursement for any actual losses, plus interest. As of the date of this annual report, customer
remediation remains in process, although the cost is not expected to be material.

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 14. 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”). The DOL has indicated that it may propose a new fiduciary rule with regard to
such accounts. 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 June 2019, the SEC adopted a new standard of conduct applicable to retail brokerage accounts
(“Regulation BI”), with a compliance date of June 30, 2020. Regulation BI requires that broker-dealers act in the
best interest of retail customers without placing their own financial or other interests ahead of the customer’s and
imposes new obligations related to disclosure, duty of care, conflicts of interest and compliance. Certain state
securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and
regulations. In addition, it is unclear how and whether other regulators - 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 Regulation BI.

Uncertainty regarding pending and future laws and regulations, including with regard to the implementation of

Regulation BI, a potential new rule proposed by the DOL 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.

In August 2019, we acquired all of the outstanding equity interests of Allen & Company of Florida, LLC (“Allen
& Company”), a broker-dealer and registered investment adviser, for a total purchase price of $34.9 million. Allen &
Company advisors and staff became employees of the Company.

In December 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.

During 2017, LPL Financial paid $325.0 million to acquire certain assets and rights of NPH, including
business relationships with financial advisors. We completed the onboarding of NPH advisors and client assets in
the first quarter of 2018.

See Note 4. Acquisitions, within the notes to the consolidated financial statements for further detail.

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. According to the most recent estimate by the Bureau of Economic Analysis, real gross domestic
product (“GDP”) grew at an annualized rate of 2.1% in the third quarter of 2019, with fourth quarter data consistent
with continued growth at a similar rate, numbers that are roughly in line with the expansion average of 2.3%. Growth
has generally moderated over the last several quarters from growth of over 3% in mid-2018, due in part to
headwinds from slower global growth, uncertainty around trade policy, and the declining impact of fiscal stimulus.
Forward expectations point to modest slowing in 2020: the Federal Reserve’s (“Fed”) most recent median GDP
projections, released following its December 10-11, 2019 policy meeting, put expected U.S. growth at 2% in 2020,
compared to 2.2% in 2019 (including fourth quarter projections). The U.S. economy continues to be supported by
strong household spending, healthy labor markets, and low interest rates. Business investment, however, has
remained soft amid trade uncertainty and manufacturing has slowed. Global growth, which has weakened over the
past two years, has started to stabilize, while trade tensions have deescalated following the successful completion
of an initial trade agreement between the United States and China.

Equity markets posted solid gains in the fourth quarter. The S&P 500 Index returned 9.1% over the quarter,
pushing its total return for the year to 31.5%. The MSCI Emerging Markets Index outpaced the S&P 500 over the
fourth quarter, while the MSCI EAFE Index, a broad index of stocks in foreign developed economies, trailed the
United States. Both international developed and emerging market stocks participated in a strong year overall for
equities, but trailed U.S. stocks by a wide margin, posting gains of 22.7% and 18.9%, respectively. Bonds were near
flat over the quarter hindered by a modest rise in yields, the benchmark 10-year Treasury yield climbing about 0.2%
to just over 1.9% (bond prices rise when yields falls). The broad Bloomberg Barclays U.S. Aggregate Bond Index
posted just a 0.2% gain over the fourth quarter, bringing its total return for the year to 8.7%.

Our business is also sensitive to current and expected short-term interest rates, which are largely driven by

Fed policy. The Fed held the target range for federal funds rate steady at 1.5% - 1.75% at its December 2019
meeting after lowering the range by 0.25% at each of its previous three meetings. The policy statement released at
the meeting’s conclusion characterized growth as rising at a moderate pace while removing language that appeared
in the October 2019 statement that had highlighted uncertainty around the Fed’s outlook, signaling some decrease
in concerns about downside risks. While signaling an intention not to reduce rates further, at his press conference
following the meeting Fed Chair Jerome Powell indicated he would want to see a rise in inflation that is “significant”
and “persistent” before considering a rate increase in the future. 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.

Results of Operations

A discussion of changes in our results of operations during the year ended December 31, 2018 compared to
the year ended December 31, 2017 has been omitted from this Annual Report on Form 10-K, but may be found in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 26, 2019.

The following discussion presents an analysis of our results of operations for the years ended December 31,

2019 and 2018.

(Dollars in thousands)

REVENUES

Commission

Advisory

Asset-based

Transaction and fee

Interest income, net of interest expense

Other

TT
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

TT
Total operating

expenses

Non-operating interest expense

Loss on extinguishment of debt

INCOME BEFORE PROVISION FOR INCOME TAXES

PROVISION FOR INCOME TAXES

NET INCOME

Years Ended December 31,

2019

2018

Percentage
Change

$ 1,892,407

$ 1,919,694

1,982,869

1,793,493

1,165,979

480,328

46,508

56,765

972,515

471,299

40,210

(8,811)

5,624,856

5,188,400

3,388,186

3,177,576

556,128

205,537

95,779

65,334

506,650

208,603

87,656

60,252

136,163

115,598

73,887

64,445

49,859

85,651

63,154

46,322

114,546

119,278

4,749,864

4,470,740

130,001

125,023

(1.4)%

10.6 %

19.9 %

1.9 %

15.7 %

744.3 %

8.4 %

6.6 %

9.8 %

(1.5)%

9.3 %

8.4 %

17.8 %

(13.7)%

2.0 %

7.6 %

(4.0)%

6.2 %

4.0 %

3,156

—

100.0 %

741,835

181,955

592,637

153,178

559,880

439,459

25.2 %

18.8 %

27.4 %

Revenues

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

TT
Total commission revenue

Years Ended December 31,

2019

2018

$ Change % Change

782,852

776,776

6,076

1,109,555

1,142,918

(33,363)

$ 1,892,407

$ 1,919,694

$ (27,287)

0.8 %

(2.9)%

(1.4)%

The increase in sales-based commission revenue in 2019 compared with 2018 was driven by market volatility

that led to an increase in sales of mutual funds and fixed income, partially offset by a decrease in equities.

The decrease in trailing revenues in 2019 compared with 2018 was primarily due to market volatility impacting

the underlying market value of mutual funds.

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(2)

Ending balance at December 31
____________________

YY
Years Ended December 31,

2019

2018

346.0

(3.4)

56.0

342.1
24.1 (1)
(20.2)

398.6

346.0

(1)

(2)

Includes assets attributable to the NPH acquisition.

Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the
implied growth or decline in asset balances due to market changes over the same period of time.

Advisory Revenues

Advisory revenues primarily represent fees charged on our corporate RIA platform provided to clients of our
advisors based on the value of their advisory assets. Advisory fees are billed to clients in advance, on a quarterly
basis, and are recognized as revenue ratably during the quarter. The majority of our accounts are on a calendar
quarter and are billed using values as of the last business day of the preceding quarter. The value of the 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 2.5% of the
underlying assets as of December 31, 2019.

We also support separate investment adviser firms (“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’AA 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
0.2% of the underlying assets as of December 31, 2019.

The following table summarizes the composition of advisory assets for the periods presented (dollars in

billions):

Corporate platform advisory assets

Hybrid platform advisory assets

TT
Total advisory assets

December 31,

2019

2018

$ Change % Change

228.3

172.3

137.5

109.7

365.8

282.0

56.0

27.8

83.8

32.5%

25.3%

29.7%

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(2)

Ending balance at December 31
____________________

YY
Years Ended December 31,

2019

2018

282.0

30.0

53.8

273.0
27.6 (1)
(18.6)

365.8

282.0

(1)

(2)

Includes assets attributable to the NPH acquisition.

Net new advisory assets in a particular quarter drive advisory revenue in future quarters, due to our advanced

quarterly billings. Therefore, the full impact of net new advisory assets to advisory revenue is not realized in the
same period.

The growth in advisory revenue from 2018 to 2019 was due to net new advisory assets resulting from our

recruiting efforts and strong advisor productivity
500 index.

, as well as market gains as represented by higher levels of the S&P

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 client
cash 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. Client cash-based revenues are generated on advisors’ clients’ cash balances in
insured sweep accounts and money market programs at various banks. Pursuant to contractual arrangements, we
receive fees based on account type and invested balances for administration and recordkeeping.

Asset-based revenues for the year ended December 31, 2019 increased by $193.5 million compared to the

same period in 2018, primarily due to increased revenues from our client cash programs, sponsorship programs
and recordkeeping revenues.

Client cash revenues for the year ended December 31, 2019 increased compared to the same period in 2018

due to an increase in cash balances and the impact of a higher federal funds effective rate during the first half of
2019 offset by a decrease in the second half of
2019. For the year ended December 31, 2019, our average client
cash balances increased to $31.0 billion compared to $29.4 billion for the year ended December 31, 2018.
Revenues for our recordkeeping and sponsorship programs for the year ended December 31, 2019, which are
largely based on the market value of the underlying assets, increased compared to the same period in 2018 due to
the impact of market appreciation on the value of the underlying assets.

TT
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, 2019 increased by $9.0 million compared to
the same period in 2018, primarily due to the expansion of advisor and client-based fee revenue driven by advisor
growth, offset by a decrease in revenue generating trade volumes.

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, 2019 increased by $6.3 million
compared to the same period in 2018, primarily due to the increased client cash balances and higher average
interest rates in 2019.

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
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, 2019 increased by $65.6 million compared to the same
period in 2018, primarily due to unrealized gains on assets held in our advisor non-qualified deferred compensation
plan, which are based on the market performance of the underlying investment allocations chosen by advisors in
the plan, and increases in dividend income on assets held in our advisor non-qualified deferred compensation plan.

Expenses

Commission and Advisory Expenses

Commission and advisory expenses are comprised of the following: base payout amounts that are earned by

and paid out to advisors and institutions based on commission and advisory revenues earned on each client’s
account; production based 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 payout ratio, which is a statistical or operating measure:

Base payout rate(1)

Production based bonuses

TT
Total payout ratio

____________________

Years Ended December 31,

2019

2018

Change

83.05%

3.22%

86.27%

83.00 %

3.04 %

86.04 %

5 bps

18 bps

23 bps

(1)

Our base payout rate is calculated as commission and advisory expenses less production based bonuses and mark-to-market gains or
losses on the non-qualified deferred compensation plan, divided by commission and advisory revenues.

Our total payout ratio, a statistical or operating measure, increased for the year ended December 31, 2019

compared with the same period in 2018, primarily due to an increase in production based bonuses, driven by
broader price reductions on our corporate advisory platform.

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.

AA
Average number of employees

Years Ended December 31,

2019

4,327

2018

4,007

% Change

8.0%

Compensation and benefits for the year ended December 31, 2019 increased by $49.5 million compared to

the same period in 2018, primarily due to an increase in salary and employee benefit expenses resulting from an
increase in headcount.

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 and retention,
such as transition assistance and expenses associated with loans issued to advisors.

Promotional expense for the year ended December 31, 2019 decreased by $3.1 million compared to the
same period in 2018, primarily due to higher 2018 recruiter and advisor costs related to the onboarding of advisors
from NPH, offset by an increase in expense associated with advisor loans.

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, 2019 increased by $8.1 million compared to
the same period in 2018, primarily due to increases in internally developed software and computers, partially offset
by decreases in building depreciation.

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, 2019 increased by $5.1 million compared
to the same period in 2018, primarily due to the intangible assets recorded as part of the AdvisoryWorld and Allen &
Company acquisitions.

Occupancy and Equipment Expense

Occupancy and equipment expense includes the costs of leasing and maintaining our office spaces, software

licensing and maintenance costs, and maintenance expenses on computer hardware and other equipment.

Occupancy and equipment expense for the year ended December 31, 2019 increased by $20.6 million

compared to the same period in 2018, primarily due to an increase in costs related to software licensing fees in
support of our service and technology investments.

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, 2019 decreased by $11.8 million compared to the
same period in 2018, primarily due to a decrease in non-capitalized costs related to our service and technology
projects during the period.

Brokerage, Clearing, and Exchange Fees

Brokerage, clearing, and exchange fees include expenses originating from trading or clearing operations as

well as any exchange membership fees. Changes in brokerage, clearing and exchange fees fluctuate largely in line
with the volume of sales and trading activity.

Brokerage, clearing, and exchange fees remained relatively flat for the year ended December 31, 2019

compared to the same period in 2018.

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 expense remained relatively flat for the year ended December 31, 2019

compared to the same period in 2018.

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. Other expenses 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.

Other expenses for the year ended December 31, 2019 decreased by $4.7 million compared to the same

period in 2018, primarily driven by lower costs associated with investigation and settlements and lower insurance
costs.

Non-Operating Interest Expense and Other

Non-operating interest expense and other represents expense from our senior secured credit facilities, senior

unsecured notes, finance leases and other non-operating expenses. Period over period increases correspond to
higher LIBOR rates.

Loss on Extinguishment of Debt

On November 12, 2019, we closed a refinancing transaction pursuant to which we increased the borrowing
capacity of our existing senior revolving credit facility, issued senior unsecured high yield notes and paid down a
portion of our senior secured term loan B (“Term Loan B”). In connection with the refinancing, we accelerated the
recognition of $3.2 million of unamortized debt issuance costs as a loss on extinguishment of debt.

Provision for Income Taxes

Our effective income tax rate was 24.5% and 25.8% for 2019 and 2018, respectively.

The decrease in our effective income tax rate for the year ended December 31, 2019 compared to the same

period in 2018 was mainly due to a decrease in non-deductible expenses.

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 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
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 in cash and cash equivalents

Cash, cash equivalents and restricted cash — beginning of year

Cash, cash equivalents and restricted cash — end of year

YY
Years Ended December 31,

2019

2018

623,871

581,580

(180,987)

(533,225)

(90,341)

(161,753)

(483,363)

(63,536)

1,562,119

1,625,655

$ 1,471,778

$ 1,562,119

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 net income and adjustments for non-cash expenses,
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 2019 compared to 2018 was primarily due to

increases in net income, cash provided by payables to client, receivables from clients and accounts payable and
accrued liabilities, partially offset by an increase in outflows from advisor loans.

The increase in cash flows used in investing activities for 2019 compared to 2018 was primarily attributable to

an increase in capital expenditures.

The increase in cash flows used in financing activities for 2019 compared to 2018 was primarily attributable to

an increase in repurchases of our common stock, offset by proceeds from our revolving line of credit.

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, the revolving credit
facility established through our senior secured credit agreement (the “Credit Agreement”) and the committed
revolving credit facility of LPL Financial, 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 of
Directors”), pursuant to which we may repurchase our issued and outstanding shares of common stock from time to
time. Purchases may be effected in open market or privately negotiated transactions, including transactions 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 indentures governing our senior unsecured notes (the
“Indentures”), and general liquidity needs. See Note 15. Stockholders’ Equity
financial statements for additional information regarding our share repurchases.

, within the notes to the consolidated

’

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 Indentures. See Note 15. Stockholders’ Equity
notes to the consolidated financial statements for additional information regarding our dividends.

’

, within the

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, the committed revolving credit facility of LPL Financial and
proceeds from repledging 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.

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.

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 LPL
Financial or under one of our revolving credit facilities.

LPL Financial is subject to the Securities and Exchange Commission’s (“SEC”) 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, 2019, LPL
Financial had net capital of $109.7 million with a minimum net capital requirement of $9.3 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 NFAFF ’s minimum financial requirements. The NFA
AA
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.

was

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 the consolidated financial statements for further detail regarding the

Credit Agreement and the Indentures.

The Credit Agreement and the Indentures 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 stockholders;

repurchase equity interests;

redeem indebtedness that is subordinated in right of payment to certain debt instruments;

• make investments or acquisitions;

•

create liens;

sell assets;

guarantee indebtedness;

engage in certain transactions with affiliates;

enter into agreements that restrict dividends or other payments from subsidiaries; and

•

consolidate, merge or transfer all or substantially all of our assets.

Our Credit Agreement and the Indentures 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 certain financial covenants as of the last day of each fiscal quarter. The financial covenants require
the calculation of Credit Agreement EBITDA, 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.

As of December 31, 2019 we were in compliance with both of our financial covenants, a maximum

Consolidated Total Debt to Consolidated EBITDA
A
minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (“Interest Coverage,” as defined in the
Credit Agreement). The breach of these financial covenants would be subject to certain equity cure rights. The
required ratios under our financial covenants and actual ratios were as follows:

TT
Test,” as defined in the Credit

Ratio (“Leverage

Agreement) and a

Financial Ratio

Leverage Test (Maximum)

Interest Coverage (Minimum)

Off-Balance Sheet Arrangements

December 31, 2019
Covenant
Requirement

Actual
Ratio

5.0

3.0

2.05

8.89

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 14. Commitments and Contingencies and Note 21. 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,

2019 (in thousands):

Operating leases(1)
Finance leases(2)
Purchase obligations(3)
Long-term borrowings(4)
Interest payments(5)
Commitment and other fees(6)
Total contractual cash obligations

____________________

Payments Due by Period

Total

< 1 YearYY

YY
1-3 Years

YY
3-5 Years

YY
> 5 Years

197,304

19,973

41,637

41,191

94,503

279,071

77,282

2,415,000

698,728

14,409

9,592

45,272

55,700

108,174

3,012

18,537

29,874

21,400

214,877

6,005

17,303

1,634

21,400

213,362

5,392

233,639

502

2,316,500

162,315

—

$ 3,681,794

241,723

332,330

300,282

$ 2,807,459

(1)

(2)

(3)

(4)

(5)

(6)

Represents future payments under operating leases. See Note 12. Leases within the notes to the consolidated financial statements for
further detail.

Represents future payments under finance leases. See Note 12. Leases, within the notes to the consolidated financial statements for
further detail.

Includes future minimum payments under service, development, and agency contracts, and other contractual obligations. See Note 14.
Commitments and Contingencies, within the notes to consolidated financial statements for further detail on obligations under
noncancelable service contracts.

Represents principal payments under our Credit Agreement. This also includes $45.0 million borrowings under the revolving credit facility.
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
VV
December 31, 2019 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, 2019, we have a liability for unrecognized tax benefits of $52.1 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 detailed discussion regarding our fair value measurements.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires 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

VV
Valuation of Goodwill and Other Intangible

Assets

Income Taxes

See Note 2. Summary of Significant Accounting Policies, within the notes to the consolidated financial

statements for discussion of each of these accounting policies.

Recently Issued 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.

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 U.S. 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.

As of December 31, 2019, the fair value of our trading securities owned was $46.4 million. Securities sold, but

not yet purchased were $0.2 million as of December 31, 2019. The fair value of securities included within other
assets was $278.1 million as of December 31, 2019. 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, 2019, $1.1 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 Credit Facilities

Term Loan B

Revolving Credit Facility

VV
Variable Rate Debt Outstanding
____________________
(1)

Balances may not foot due to rounding.

(1)

Outstanding
Variable Interest
Rates at
December 31, 2019

Annual Impact of an Interest Rate Increase of

10 Basis

25 Basis

50 Basis

100 Basis

Points

1,070,000

1,066

2,665

5,330

$ 10,660

45,000

113

225

450

1,115,000

1,111

2,777

5,555

$ 11,110

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, 2019, we offered our advisors and their clients two primary cash sweep vehicles that are
interest rate sensitive: our insured cash account (“ICA”) for individuals, trusts and sole proprietorships, and entities
organized or operated to make a profit, such as corporations, partnerships, associations, business trusts, and other
organizations, and an insured deposit cash account (“DCA”) for advisory individual retirement accounts. In addition,
we offered our advisors and their clients a money market program, including money market accounts and
purchased money market funds. 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’ clients’ accounts in our
money market program, 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 vehicles
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, repledge, or loan these securities
held as collateral and use these securities to enter into securities lending arrangements or to deliver to
counterparties to cover short positions.

As our advisors execute margin transactions on behalf of their clients, we may incur losses if clients do not

fulfill their obligations, the collateral in the client’s 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, 2019 and 2018. 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.

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 of Directors (the “Board”) and certain of its
committees; the Risk Oversight Committee of LPL Financial (the “ROC”) and its subcommittees; the Internal Audit
department and the CLR department of LPL Financial; and business line management. We regularly reevaluate
and, when necessary, modify our processes to improve the identification and escalation of risks and events.

Audit Committee of the Board

In addition to its other responsibilities, the Audit Committee of the Board (the “Audit Committee”) reviews our

policies with respect to risk assessment and risk management, as well as our major financial risk exposures and the
steps management has undertaken to control them. The Audit Committee generally provides reports to the Board at
each of the Board’s regularly scheduled quarterly meetings.

Compensation and Human Resources Committee of the Board

In addition to its other responsibilities, the Compensation and Human Resources Committee of the Board

assesses whether our compensation arrangements encourage inappropriate risk-taking, and whether risks arising
from our compensation arrangements are reasonably likely to have a material adverse effect on the Company.

Risk Oversight Committee of LPL Financial

The Audit Committee has mandated that the ROC oversee our risk management activities, including those of
our subsidiaries. The Chief Compliance Officer of LPL Financial serves as chair of the ROC, which generally meets
on a monthly basis with ad hoc meetings as necessary
Directors of LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex-
officio members and represent key control areas of the Company. Participation in the ROC by senior officers is
intended to ensure that the ROC covers the key risk areas of the Company, including its subsidiaries, and that the
ROC thoroughly reviews significant matters relating to risk priorities, policies, control procedures and related
exceptions, certain new and complex products and business arrangements, transactions with significant risk
elements, and identified emerging risks.

. The members of the ROC include certain Managing

The Chief Legal Officer provides updates on pertinent ROC discussions to the Audit Committee on a regular

basis and, if necessary or requested, to the Board.

Subcommittees of the Risk Oversight Committee

The ROC has established multiple subcommittees 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
operational risk; oversight of the approval of new and complex investment products offered to advisors’ clients;
oversight of the firm’s technology; and issues and trends related to advisor compliance.

Internal Audit Department

As the third line of defense, the Internal Audit department provides independent and objective assurance of

the effectiveness of the Company’s governance, risk management and internal controls by conducting risk
assessments and audits designed to identify and cover important risk categories. Internal Audit reports directly to
the 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, who reviews the results of the Company’s risk management process with the ROC, the Audit
Committee, and the Board as necessary. STO and Technology each have risk management teams that identify,
define, and remediate risk-related items within their respective groups. Additionally, the Internal Audit department is
a control group.

Business Line Management

Each business line is responsible for managing its risk, and business line management is responsible for

keeping senior management, including the members of the ROC, informed of operational risk and escalating risk
matters (as defined by the Company’s escalation policies). We have conducted Company-wide escalation training
for our employees. Certain business lines, including STO and Technology, have dedicated personnel with
responsibilities for monitoring and managing risk-related matters. Business lines are subject to oversight by the
control groups, and the Finance, CLR, Technology, and Human Capital departments also execute certain control
functions and report matters to the ROC, Audit Committee, and Board as appropriate.

Advisor Policies

In addition to the ERM framework, we also have written policies and procedures that govern the conduct of

business by our advisors, employees, and the terms and conditions of our relationships with product manufacturers.
Our client and advisor policies address the extension of credit for client accounts, data and physical security,
compliance with industry regulations, and codes of conduct and ethics to govern employee and advisor conduct,
among other matters.

Item 8. Financial Statements and Supplementary Data

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 27, 2020, the Board declared a cash dividend of $0.25 per share on the Company’s outstanding

common stock to be paid on March 31, 2020 to all stockholders of record on March 18, 2020.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, 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, 2019, 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, 2019, 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, 2019 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, 2019.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TT
To the stockholders and the Board of Directors of
LPL Financial Holdings Inc.
San Diego, California

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, 2019, 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,
2019, 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, 2019, of the
Company and our report dated February 21, 2020, 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 21, 2020

PP
PART III

Item 10. Directors, Executive Officers, and Corporate Governance

Other than the information relating to our executive officers provided in Part I of this Annual Report on Form
10-K, the information required to be furnished pursuant to this item is incorporated by reference to the Company’s
definitive proxy statement for the 2020 Annual Meeting of Stockholders.

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 2020 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.

Item 15. Exhibits and Financial Statement Schedules

(a) Consolidated Financial Statements

PP
PART IV

Our consolidated financial statements appearing on pages F-1 through F-39 are incorporated herein by

reference.

(b) Exhibits

Exhibit No.
2.1

3.1

3.2

3.3

3.4

4.1

4.2

4.3

4.4

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

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)
Indenture, dated as of November 12, 2019, among LPL Holdings, U.S. Bank National Association,
as trustee, and certain subsidiaries of LPL Holdings, as guarantors. (8)

Description of Registrant’s Securities.*

Form of Indemnification Agreement. (2)

LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan.

(2)

Form of Senior Management Stock Option Award granted under the LPL
2010 Omnibus Equity Incentive Plan.

(9)

Investment Holdings Inc.

Form of Employee Stock Option Award granted under the LPL
Restated 2010 Omnibus Equity Incentive Plan

. (10)

Financial Holdings Inc. Amended and

Form of Employee Restricted Stock Unit Award granted under the LPL
Amended and Restated 2010 Omnibus Equity Incentive Plan

. (10)

Financial Holdings Inc.

Form of Employee Performance Stock Unit Award granted under the LPL
Amended and Restated 2010 Omnibus Equity Incentive Plan. (10)

Financial Holdings Inc.

Form of Employee Stock Option Award granted under the LPL
Restated 2010 Omnibus Equity Incentive Plan (11)
Form of Employee Restricted Stock Unit Award granted under the LPL
Amended and Restated 2010 Omnibus Equity Incentive Plan (11)
Form of Advisor Restricted Stock Unit Award granted under the LPL
Omnibus Equity Incentive Plan. (11)

Financial Holdings Inc.

Financial Holdings Inc. 2010

Financial Holdings Inc. Amended and

Form of Financial Institution Restricted Stock Unit Award granted under the LPL
Inc. 2010 Omnibus Equity Incentive Plan. (11)

Financial Holdings

Amended and Restated LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan. (12)

LPL Financial LLC Executive Severance Plan, amended and restated as of February 23, 2017.

(10)

LPL Financial Holdings Inc. Non-Employee Director Compensation Policy

LPL Financial Holdings Inc. Non-Employee Director Deferred Compensation Plan.

(13)

Credit Agreement, dated as of March 29, 2012, by and among LPL Investment Holdings Inc., LPL
y
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. (14)

Exhibit No.
10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

10.24

21.1

23.1

31.1

31.2

32.1

32.2

Description of Exhibit

p
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
Guarantors, the several lenders from time to time party thereto, and Bank of America, N.A. as
Administrative Agent. (15)
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. (16)

, as

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. (13)

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. (17)

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)

Third Amendment, dated as of April 25, 2019, 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. (18)

Fourth Amendment, dated as of November 12, 2019, 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. (8)

BETAHost Master Subscription
Corporation and Refinitiv US LLC (f/k/a Thomson Financial LLC), as amended.*†

Agreement dated as of January 5, 2009 between LPL Financial

List of Subsidiaries of LPL Financial Holdings Inc.*

P
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.SCH XBRL Taxonomy Extension Schema*

101.CAL

101.DEF

101.LAB

101.PRE

104

___________________

XBRL Taxonomy Extension Calculation*

XBRL Taxonomy Extension Definition*

XBRL Taxonomy Extension Label*

XBRL Taxonomy Extension Presentation*

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

† Pursuant to 17 C.F.R. §§230.406 and 230.83, the confidential portions of this exhibit have been

omitted and are marked accordingly.

(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 Form 8-K filed on November 12, 2019 (File No. 001-34963).

(9) Incorporated by reference to the Form 10-K filed on February 26, 2013 (File No. 001-34963).

(10) Incorporated by reference to the Form 10-K filed on February 24, 2017 (File No. 001-34963).

(11) Incorporated by reference to the Form 10-K filed on February 26, 2014 (File No. 001-34963).

(12) Incorporated by reference to the Form 8-K filed on May 15, 2015 (File No. 001-34963).

(13) Incorporated by reference to the Form 10-K filed on February 25, 2016 (File No. 001-34963).

(14) Incorporated by reference to the Form 8-K filed on April 2, 2012 (File No. 001-34963).

(15) Incorporated by reference to the Form 8-K filed on May 13, 2013 (File No. 001-34963).

(16) Incorporated by reference to the Form 10-Q filed on October 30, 2014 (File No. 001-34963).

(17) Incorporated by reference to the Form 10-Q filed on August 1, 2017 (File No. 001-34963).

(18) Incorporated by reference to the Form 10-Q filed on July 30, 2019 (File No. 001-34963).

Item 16. Form 10-K Summary

None.

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 21, 2020

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.rr
William F. Glavin Jr.rr

/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

/s/ Corey E. Thomas
Corey E. Thomas

President, Chief Executive Officer

, and Director

(Principal Executive Officer)

February 21, 2020

ff
Chief Financial Officer (Principal Financial Of
ficer

and Principal Accounting Officer)

February 21, 2020

Director

February 21, 2020

Director

February 21, 2020

Director

February 21, 2020

Director

February 21, 2020

Director

February 21, 2020

Director

February 21, 2020

Director

February 21, 2020

Director

February 21, 2020

LPL FINANCIAL HOLDINGS INC.

INDEX TO CONSOLIDATED FINANCIAL

STATT TEMENTS

AND SUPPLEMENTARTT YRR DAY

TAA ATT

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, 2019, 2018, and 2017

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019,
2018, and 2017

Consolidated Statements of Financial Condition as of December 31, 2019 and 2018

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018,
and 2017

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017

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. Leases

13. Income Taxes

14. Commitments and Contingencies

15. Stockholders’ Equity

16. Share-based Compensation

17. Earnings per Share

18. Employee and Advisor Benefit Plans

19. Related Party Transactions

20. Net Capital and Regulatory Requirements

21. Financial Instruments with Off-Balance-Sheet Credit Risk and Concentration of Credit Risk

22. Selected Quarterly Financial Data

23. Subsequent Event

F-1

Page

F-2

F-4

F-5

F-6

F-7

F-8

F-10

F-17

F-21

F-23

F-24

F-25

F-26

F-28

F-30

F-32

F-34

F-36

F-37

F-38

F-39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of
TT
LPL Financial Holdings Inc.
San Diego, California

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, 2019 and 2018, the related consolidated statements of income,
comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended
December 31, 2019, 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,
2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2019, 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, 2019, 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 21, 2020, 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenues - Trailing Commission Revenue Accrual - Refer to Note 3 to the financial statements

Critical Audit Matter Description

The Company’s trailing commission revenues are generally received in arrears and therefore estimated and accrued
at year-end. The estimate is based on commission revenues received in prior periods, adjusted using change factors
based on market performance and the payment frequency for each investment product type and sponsor. Because of
the volume of investment product types and sponsors and variability in the corresponding payment frequencies, the
Company performs manual calculations and exercises judgment in determining the revenue estimate.

F-2

We identified the Company’s trailing commission revenue accrual as a critical audit matter because of the judgments
necessary for management to estimate the revenue accrual. This required an increased extent of audit effort and a
high degree of auditor judgment when performing audit procedures to evaluate the inputs and judgments related to
the revenue accrual and evaluating the results of those procedures.

How the Critical Audit Matter Was WW Addressed in the Audit

Our audit procedures related to the inputs and judgments used by management to estimate the year-end accrual for
trailing commission revenues included the following, among others:

• We tested the effectiveness

of internal controls over the accrual for trailing commission revenues, including those
over the inputs and judgments used by management in the calculation of the accrual and the historical lookback
analysis comparing monthly accruals to subsequent cash receipts

• We compared management’s market performance data to external sources and challenged their methodology for

potential management bias by evaluating the sensitivity of changes in market factors on the accrual

• We compared the accrual to actual trailing commission revenue received subsequent to year-end
• We tested the historical cash receipts used to estimate the year-end accrual by comparing them to bank statements
• We evaluated the payment frequency assumption used by management in the estimation of the accrual for a
sample of investment product types and sponsors by comparing the assumption to the actual cash receipts
frequency

• We tested the mathematical accuracy of the accrual

/s/ DELOITTE & TOUCHE LLP

San Diego, California
February 21, 2020

We have served as the Company's auditor since 2001.

F-3

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

TT
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

TT
Total operating expenses

Non-operating interest expense and other

Loss on extinguishment of debt

INCOME BEFORE PROVISION FOR INCOME TAXES

PROVISION FOR INCOME TAXES

NET INCOME

EARNINGS PER SHARE (Note 17)

Earnings per share, basic

Earnings per share, diluted

Weighted-average shares outstanding, basic

Weighted-average shares outstanding, diluted

Years Ended December 31,

2019

2018

2017

1,892,407

1,919,694

1,670,824

1,982,869

1,165,979

480,328

46,508

56,765

1,793,493

1,409,247

972,515

471,299

40,210

(8,811)

708,333

424,667

24,473

43,937

5,624,856

5,188,400

4,281,481

3,388,186

3,177,576

2,669,599

556,128

205,537

95,779

65,334

136,163

73,887

64,445

49,859

114,546

4,749,864

130,001

3,156

741,835

181,955

506,650

208,603

87,656

60,252

115,598

85,651

63,154

46,322

119,278

4,470,740

125,023

—

592,637

153,178

559,880

439,459

456,918

171,661

84,071

38,293

97,332

71,407

57,047

44,941

96,210

3,787,479

107,025

22,407

364,570

125,707

238,863

6.78

6.62

82,552

84,624

4.99

4.85

88,119

90,619

2.65

2.59

90,002

92,115

See notes to consolidated financial statements.

F-4

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

NET INCOME

Other comprehensive income, net of tax:

YY
Years Ended December 31,

2019

2018

2017

559,880

439,459

238,863

Unrealized gain on cash flow hedges, net of tax expense of $0, $0, and $187
for the years ended December 31, 2019, 2018, and 2017, 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, $0, and $406 for the years ended December 31, 2019, 2018,
and 2017, respectively

TT
Total other comprehensive loss, net of tax

—

293

(608)

(315)

TOTALTT COMPREHENSIVE INCOME

559,880

439,459

238,548

See notes to consolidated financial statements.

F-5

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(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
Operating lease assets
Goodwill

Intangible assets, net
Other assets
TT
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
Operating lease liabilities
Finance lease liabilities
Leasehold financing and capital lease obligations
Deferred income taxes, net

TT
Total liabilities

Commitments and contingencies (Note 14)
STOCKHOLDERS’ EQUITY:

Common stock, $0.001 par value; 600,000,000 shares authorized; 126,494,028 shares and

124,909,796 shares issued at December 31, 2019 and 2018, respectively

Additional paid-in capital

Treasury stock, at cost — 46,259,989 shares and 39,820,646 shares at December 31, 2019

and 2018, respectively

Retained earnings

TT
Total stockholders’

equity

TT
Total liabilities and stockholders’

equity

See notes to consolidated financial statements.

F-6

December 31,

2019

2018

590,209
822,697
58,872

433,986
177,654
441,743
298,790

46,447
11,806
17,684
533,044
102,477
1,503,648

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

439,838
401,343
$ 5,880,238

484,171
305,147
$ 5,477,468

218,636
1,058,873
92,002
174,330
557,969
20,129
82,842
176
2,398,818

141,900
108,592
—
2,098
4,856,365

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

126
1,703,973

125
1,634,337

(2,234,793)
1,554,567
1,023,873
$ 5,880,238

(1,730,535)
1,070,146
974,073
$ 5,477,468

(3,461)

(113,728)

(90,273)

84,405

28,522

965,008

439,459

(4,843)

(417,891)

(88,360)

51,538

29,162

974,073

559,880

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands)

Common Stock

Amount

Additional
Paid-In
Capital

Treasury Stock

Amount

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

TT
Total
Stockholders’
Equity

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

(315)

238,863

238,548

366

—

(3,461)

2,746

—

82,339

28,522

2,620

(113,728)

(63)

2,266

(90,273)

(203)

BALANCE — December 31, 2017

123,030

123

$1,556,117

33,262

$ (1,309,568) $

— $ 718,336

Net income, 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

—

(4,843)

1,511

—

49,058

29,162

6,533

(417,891)

(49)

1,767

—

439,459

(88,360)

711

BALANCE — December 31, 2018

124,910

125

$1,634,337

39,821

$ (1,730,535) $

— $1,070,146

Net income, net of tax expense

Cumulative effect of accounting

change

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

—

(5,863)

1,218

—

36,772

32,864

6,419

(500,370)

(55)

1,975

—

559,880

5,724

(82,597)

1,414

(5,863)

(500,370)

(82,597)

40,162

32,864

BALANCE — December 31, 2019

126,494

126

$1,703,973

46,260

$ (2,234,793) $

— $1,554,567

1,023,873

See notes to consolidated financial statements.

F-7

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

YY
Years Ended December 31,

2019

2018

2017

559,880

439,459

238,863

95,779
65,334
4,672
32,864
6,698
(18,615)
3,156
92,502
(11,421)

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)

(20,602)

(68,888)

(1,916)

(7,180)
(235,499)
(52,365)
(16,848)
(12,855)
(1,446)
(62,670)
(6,398)
107,927
15,822
8,462
87,210
(12,861)
2,318
7
623,871

(156,389)
(25,853)
—
(3,745)
5,000
—
(180,987)

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)

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
Provision for bad debts
Deferred income taxes
Loss on extinguishment of debt
Loan forgiveness
Other

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
Operating leases
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
Acquisitions, net of cash acquired
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

Continued on following page

F-8

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from revolving credit facility

Repayments of revolving credit facility
Repayment of senior secured term loans
Proceeds from senior secured term loans and senior notes
Payment of debt issuance costs
Tax payments related to settlement of restricted stock units
Repurchase of common stock
Dividends on common stock
Proceeds from stock option exercises and other
Principal payment of finance leases and obligations
Net cash (used in) provided by financing activities
VV

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
RESTRICTED CASH
VV
CASH, CASH EQUIVALENTS
CASH, CASH EQUIVALENTS
VV
AA
SUPPLEMENTALTT DISCLOSURES OF CASH FLOW INFORMA

AND RESTRICTED CASH — Beginning of year
AND RESTRICTED CASH — End of year

TION:

AND

Interest paid
Income taxes paid

NONCASH DISCLOSURES:

Capital expenditures included in accounts payable and accrued liabilities

Finance and capital lease obligations
Lease assets obtained in exchange for operating lease liabilities

Fixed assets obtained in exchange for finance lease liabilities
Discount on proceeds from senior secured credit facilities recorded as debt

issuance costs

YY
Years Ended December 31,

2019

2018

2017

523,000

(478,000)
(411,250)
400,000
(17,615)
(5,863)
(500,370)
(82,597)
40,162
(692)
(533,225)

—

—
(15,000)
—
—
(4,843)
(417,891)
(88,360)
51,538
(8,807)
(483,363)

—
(2,405,360)
2,611,593
(23,798)
(3,461)
(113,728)
(90,273)
84,405
(7,949)
51,429

(90,341)
1,562,119
$ 1,471,778

(63,536)
1,625,655
$ 1,562,119

67,047
1,558,608
$ 1,625,655

$
$

126,949
213,339

13,736

$
$

— $
$

108,879

1,453

123,623
122,215

20,634

$
$

— $
— $

— $

92,650
139,200

16,096

3,906
—

—

— $

5,040

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

TT
Total cash, cash equivalents, and restricted cash shown in the

consolidated statements of cash flows

2019

590,209
822,697

58,872

December 31,
2018

511,096
985,195

65,828

2017

811,136
763,831

50,688

$ 1,471,778

$ 1,562,119

$ 1,625,655

See notes to consolidated financial statements.

F-9

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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
Employee Services, LLC, Fortigent Holdings Company, Inc. and LPL Insurance
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.

, Inc., LPL
Associates, Inc. (“LPLIA”), as well

ff
LPL Financial, with primary of
fices 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.

Fortigent Holdings Company, Inc. and its subsidiaries provide solutions and consulting services to registered

investment advisers, banks, and trust companies serving high-net-worth clients.

ff
LPLIA operates as an insurance brokerage general agency that of
fers life and disability insurance products

and services for LPL Financial advisors.

AA
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.

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 (“IRA”) custodial
services for LPL Financial.

LPL Employee Services, LLC is a holding company for

Allen & Company of Florida, LLC (“Allen & Company”),

a broker-dealer and registered investment adviser.

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
ff
the consolidated financial statements and related disclosures. Actual results could differ from those estimates under
ff
different assumptions or conditions and the dif
ferences may be material to the consolidated financial statements.

Consolidation

These consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany

transactions and balances have been eliminated.

F-10

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. For additional
information, see Note 3. 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
r
units generally vest in equal increments over a three-year period and expire on the tenth
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.

anniversary following the

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. 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 16. 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-11

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 U.S. 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 Securities
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,
2019 and 2018, $1,014.7 million and $935.5 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.

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-offsff

Ending balance — December 31

F-12

December 31,

2019

2018

2017

640

130

(655)

466

174

—

$ 1,580

(15)

(1,099)

115

640

466

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Advisor Loans

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 of up to ten years provided that the advisor remains licensed through LPL Financial. At December 31, 2019,
$338.0 million of the advisor loan balance was forgivable. If an advisor terminates their arrangement with the
Company prior to the forgivable loan term date, the remaining balance becomes due immediately. 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-offsff

Reclassification from receivables from others

Ending balance — December 31

December 31,

2019

2018

2017

$ 5,080

$ 3,264

$ 1,852

1,500

2,206

951

(2,606)

(390)

(2,914)

—

3,375

$ 3,974

$ 5,080

$ 3,264

For the year ended December 31, 2017, 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-offsff

Reclassification to advisor loans

Ending balance — December 31

December 31,

2019

2018

2017

$ 8,099

$ 6,115

$ 12,851

3,671

3,733

1,853

(1,478)

(1,749)

(5,214)

—

(3,375)

$ 10,292

$ 8,099

$ 6,115

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 U.S. 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

F-13

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 2019, 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, 2019, the contract and collateral market values of borrowed securities were $17.7 million

and $17.2 million, respectively. As of December 31, 2018, the contract and collateral market values of borrowed
securities were $4.8 million and $5.0 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
or 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 impairment occurred for the years ended December 31,
2019, 2018, and 2017.

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.

F-14

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 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 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. The Company first compares the estimated fair value of
the reporting unit or 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 for the years ended December 31, 2019, 2018,
or 2017.

Intangible assets that are deemed to have definite lives are amortized over their useful lives, generally

ranging from 5 to 20 years. They are reviewed for impairment when there is evidence that events or changes in
circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and
used is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to
be generated. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value. There was
no impairment of definite-lived intangible assets recognized for the years ended December 31, 2019, 2018, or 2017.
See Note 9. Goodwill and Other Intangible Assets, for additional information regarding the Company’s goodwill and
other intangible assets.

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.

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
regarding the Company’s fair value measurements. As of December 31, 2019, the carrying amount and fair value of
the Company’s indebtedness was approximately $2,415.0 million and $2,476.0 million, respectively. As of
December 31, 2018, the carrying amount and fair value was approximately $2,381.3 million and $2,271.9 million,
respectively.

, for additional information

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.

F-15

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, see Note 14.
Commitments and Contingencies - “Legal & Regulatory Matters.”

Leases

Lease assets and lease liabilities are recognized based on the present value of the future lease payments

over the lease term at the lease commencement date. The Company estimates its incremental borrowing rate
based on information available at the commencement date in determining the present value of future payments. For
additional information, see Note 12. Leases.

Prior to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), 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. The
Company was 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 the
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 accounted
for this arrangement as a capital lease in which the asset was depreciated and the lease payments were
recognized as a reduction of the financing obligation and interest expense over the lease term on the consolidated
statements of income.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires
entities to measure all expected credit losses for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires additional
disclosures regarding significant estimates and judgments used in estimating credit losses, as well as the credit
quality and underwriting standards of an entity’s portfolio. The Company adopted the provisions of this guidance on
January 1, 2020. The adoption had no material impact on the Company’s recognition of credit losses but will impact
the Company’s disclosures.

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 requires 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. The Company adopted the provisions of this guidance on January 1, 2020. The adoption will not have a
material impact on the Company’s related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic

350): Customer’s ’ Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract, which aligns the accounting for costs to implement a cloud computing arrangement that is a
service with the guidance on capitalizing costs for developing or obtaining internal-use software. The Company
prospectively adopted the provisions of this guidance on January 1, 2020. The adoption had no material impact on
the Company’s consolidated financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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

F-16

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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. Operating lease assets and corresponding lease liabilities were
recognized on the Company’s consolidated statements of financial condition. There was no material impact to its
consolidated statements of income. Refer to Note 12. Leases, for additional disclosure and significant accounting
policies affecting leases.

In June 2018, the 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-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 no longer
adjusts the fair value of advisor and financial institution equity awards in the consolidated statements of income.

Revenues

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 total commission revenue disaggregated by investment product category (in

thousands):

Commission revenue

Annuities

Mutual funds

Fixed income

Equities

Other

YY
Years Ended December 31,

2019

2018

2017

1,000,806

999,689

589,411

126,127

79,446

96,617

616,445

122,569

84,823

96,168

853,963

534,639

104,037

79,180

99,005

TT
Total commission revenue

1,892,407

1,919,694

1,670,824

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 ongoing support, are performed. As trailing commission revenue is
based on the market value of clients’ investment holdings, the consideration is variable and an estimate of the

F-17

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

variable consideration is constrained due to dependence on unpredictable market impacts. The constraint is
removed once the investment holdings value can be determined.

The following table presents sales-based and trailing commission revenues disaggregated by product

category (in thousands):

Commission revenue

Sales-based

Annuities

Mutual funds

Fixed income

Equities

Other

Total sales-based revenue

Trailing

Annuities

Mutual funds

Fixed income

Other

Total trailing revenue

TT
Total commission revenue

Advisory Revenue

YY
Years Ended December 31,

2019

2018

2017

380,317

379,252

146,695

102,391

79,446

74,003

141,597

98,091

84,823

73,013

327,888

134,327

80,919

79,180

80,256

782,852

776,776

702,570

620,489

620,437

442,716

23,736

22,614

474,848

24,478

23,155

526,075

400,312

23,118

18,749

1,109,555

1,892,407

1,142,918

1,919,694

968,254

1,670,824

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 and has control over determining the fees.

Asset-Based Revenue

Asset-based revenue is comprised of fees from the Company’s client cash programs, which consist of fees

from its money market programs and insured cash sweep vehicles, sponsorship programs, and recordkeeping.

Client Cash Revenue

Client cash revenues are generated based on advisors’ clients’ cash balances in insured sweep accounts and

money market programs at various banks. The Company receives fees based on account type and invested
balances for administration and recordkeeping. These fees are paid and recognized over time.

F-18

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’
accounts, a percentage of new sales, or some 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.

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.

Depending on the contract, the Company is either principal or 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.

The following table sets forth asset-based revenue at a disaggregated level (in thousands):

Asset-based revenue

Client cash

Sponsorship programs

Recordkeeping

TT
Total asset-based revenue

TT
Transaction and Fee Revenue

YY
Years Ended December 31,

2019

2018

2017

652,793

500,418

251,899

261,287

224,726

247,371

1,165,979

972,515

301,448

193,190

213,695

708,333

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 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.

F-19

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table sets forth transaction and fee revenue disaggregated by recognition pattern (in

thousands):

Transaction and fee revenue

Point-in-time(1)
Over time(2)

TT
Total transaction and fee revenue

____________________

YY
Years Ended December 31,

2019

2018

2017

215,234

221,265

265,094

250,034

480,328

471,299

187,655

237,012

424,667

(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
technology 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 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, 2019, 2018, and 2017 was not material.

Other Revenue

Other revenue primarily includes unrealized 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 real
estate investment trusts and business development companies, and other miscellaneous revenues. These
revenues are not generated from contracts with customers.

Arrangements 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, 2019 is primarily driven by cash payments received or due in
advance of satisfying the Company’s performance obligations, offset by
were included in the unearned revenue balance as of December 31, 2018.

$80.4 million of revenues recognized that

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.

F-20

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Acquisitions

On August 1, 2019, the Company acquired all of the outstanding equity interests of Allen & Company. Under
ff

the transaction structure, Allen & Company advisors and staff became employees of the Company
Company will maintain its operations and brand. The Company paid approximately $24.9 million at closing and also
agreed to a potential contingent payment of up to $10.0 million (“Contingent Payment”), payable approximately six
months after the closing date based on the percentage of assets retained by Allen & Company advisors. The fair
value of the Contingent Payment is included in accounts payable and accrued liabilities on the consolidated
statements of financial condition. See Note 5. Fair Value Measurements

, for additional information.

, and Allen &

On December 3, 2018, the Company acquired all of the outstanding common stock of AdvisoryWorld, to

enhance the Company’s 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.

During 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 Company
recorded intangible assets of $112.7 million in advisor relationships and $49.0 million in goodwill in the first quarter
of 2018, following the completion of the second wave.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability

(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. Inputs used to measure fair value are prioritized within a
three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar
assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow
methodologies, and similar techniques that use significant unobservable inputs.

There have been no transfers of assets or liabilities between these fair value measurement classifications

during the years ended December 31, 2019 and 2018.

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, 2019 and December 31, 2018,
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
d
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, U.S. treasury obligations, mutual
funds, certificates of deposit, and traded equity and debt securities.

The Company’s trading securities consist of

—

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

F-21

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 2019 and December 31, 2018, 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; and (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.

Accounts Payable and Accrued Liabilities — The Company’s accounts payable and accrued liabilities include
contingent consideration liabilities that are measured using Level 3 inputs.

Level 3 Recurring Fair Value Measurements

The Company determines the fair value for its contingent consideration obligations using a scenario based

approach whereby the Company assesses the expected retention percentage of the acquired assets under
management. The contingent payment is estimated by applying a discount rate to the expected payment to
calculate the fair value as of the valuation date. The Company’s management evaluates the underlying projections
and other related factors used in determining fair value each period and makes updates when there have been
significant changes in management’s expectations.

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value

on a recurring basis at December 31, 2019 (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
TT
Other assets

TT
Total assets at fair value
Liabilities

Securities sold, but not yet purchased:

Equity securities
Debt securities

Total securities sold, but not yet purchased
TT
Accounts payable and accrued liabilities

TT
Total liabilities at fair value

Level 1

Level 2

Level 3

TT
Total

17,426

— $

17,426

92
25,202
556
—
20,446
46,296
267,740
331,462

153
—
153
—
153

—
—
—
151
—
151
10,393
10,544

—
—
—
—
—
—
—
— $

— $
23
23
—
23

— $
—
—
10,000
10,000

92
25,202
556
151
20,446
46,447
278,133
342,006

153
23
176
10,000
10,176

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
TT
Total securities owned — trading
Other assets

TT
Total assets at fair value
Liabilities

Securities sold, but not yet purchased:

Equity securities
Debt securities

TT
Total securities sold, but not yet purchased

TT
Total liabilities at fair value

Held-to-Maturity Securities

Level 1

Level 2

Level 3

TT
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 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.

The amortized cost, gross unrealized gain (loss), and fair value of securities held-to-maturity were as follows

(in thousands):

Amortized cost

Gross unrealized gain (loss)

Fair value

December 31,

2019

2018

11,806

13,001

(56)

11,889

12,945

At December 31, 2019, the securities held-to-maturity were scheduled to mature as follows (in thousands):

U.S. government notes — at amortized cost

U.S. government notes — at fair value

5,074

5,096

6,732

6,793

— $

11,806

11,889

Within one
year

After one but
within five
years

After five but
within ten
years

TT
Total

F-23

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

TT
Total receivables

Payables:

Payable to clearing organizations

Payable to broker-dealers

Securities failed-to-receive

TT
Total payables

Fixed Assets

December 31,

2019

2018

138,258

135,161

28,140

1,020

10,236

20,281

2,065

9,286

177,654

166,793

15,264

58,130

18,608

92,002

24,818

37,583

13,779

76,180

The components of fixed assets were as follows at December 31, 2019 (in thousands):

Internally developed software

Computers and software

Buildings

Leasehold improvements

Furniture and equipment

Land

Construction in progress(1)

TT
Total fixed assets

____________________

Gross
Carrying
Value

Accumulated
Depreciation
and
Amortization

Net
Carrying
VV
Value

327,585

(187,494) $

140,091

171,099

107,895

83,543

79,970

4,678

146,629

(124,248)

(3,877)

(25,655)

(47,081)

—

921,399

(388,355) $

46,851

104,018

57,888

32,889

4,678

146,629

533,044

(1)

Construction in progress includes internal software in development of $133.3 million at December 31, 2019.

The components of fixed assets were as follows at December 31, 2018 (in thousands):

Internally developed software

Computers and software

Buildings

Leasehold improvements

Furniture and equipment

Land

Construction in progress(1)

TT
Total fixed assets

____________________

Gross
Carrying
Value

Accumulated
Depreciation
and
Amortization

Net
Carrying
VV
Value

260,957

(147,330) $

113,627

147,163

105,939

83,339

73,955

4,678

93,542

(90,655)

(11,868)

(20,982)

(37,320)

—

56,508

94,071

62,357

36,635

4,678

93,542

769,573

(308,155) $

461,418

(1)

Construction in progress includes internal software in development of $85.0 million at December 31, 2018.

F-24

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Depreciation and amortization expense was $95.8 million, $87.7 million, and $84.1 million for the years ended

December 31, 2019, 2018, and 2017, respectively.

Goodwill and Other Intangible Assets

A
A summary of the activity in goodwill is presented below (in thousands):

Balance at December 31, 2017

Goodwill acquired (1)

Balance at December 31, 2018

Goodwill acquired

Balance at December 31, 2019
____________________

1,427,769

62,478

1,490,247

13,401

1,503,648

(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, 2019 (dollars in thousands):

Definite-lived intangible assets:

Advisor and financial institution relationships

Product sponsor relationships

Client relationships

Technology

Trade names

TT
Total definite-lived intangible assets

Indefinite-lived intangible assets:

Trademark and trade name

TT
Total intangible assets

Weighted-
AA
Average Life
Remaining
(in years)

Gross
Carrying
VV
Value

Accumulated
Amortization

Net
Carrying
VV
Value

6.1

8.7

9.0

2.3

651,642

(365,470) $

286,172

234,086

42,234

15,510

1,200

(161,435)

(15,277)

(1,551)

(920)

72,651

26,957

13,959

280

944,672

(544,653) $

400,019

39,819

439,838

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

TT
Total definite-lived intangible assets

Indefinite-lived intangible assets:

Trademark and trade name

TT
Total intangible assets

Weighted-
AA
Average Life
Remaining
(in years)

Gross
Carrying
VV
Value

Accumulated
Amortization

Net
Carrying
VV
Value

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

923,671

(479,319) $

444,352

39,819

484,171

F-25

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

TT
Total amortization expense of intangible assets was

$65.3 million, $60.3 million, and $38.3 million for the

years ended December 31, 2019, 2018, and 2017, respectively. Future amortization expense is estimated as
follows (in thousands):

2020

2021

2022

2023

2024

Thereafter

TT
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

66,139

65,982

65,182

61,086

60,314

81,316

400,019

December 31,

2019

2018

269,289

182,351

77,202

—

68,436

143,042

70,093

40,772

53,077

132,351

TT
Total accounts payable and accrued liabilities

557,969

478,644

11. Debt

On November 12, 2019, LPLFH and LPLH entered into a fourth amendment agreement (the “Amendment”) to
the Company’s amended and restated credit agreement (“Credit Agreement”), and repriced its senior secured Term
Loan B facility (“Term Loan B”), increased the size of its senior secured revolving credit facility from
$500.0 million
to $750.0 million, extended the maturity dates applicable to its Term Loan B and its senior secured revolving credit
facility, and made certain other changes to its credit agreement. Additionally, LPLH raised $400.0 million in
aggregate principal amount of 4.625% senior unsecured notes which were issued at par (“2027 Notes”). The
proceeds from the 2027 Notes were used to pay down the Term Loan B principal balance to
connection with the execution of the Amendment, the Company incurred $13.5 million in costs which are capitalized
as debt issuance costs in the consolidated statements of financial condition, and accelerated the recognition of $3.2
million of unamortized debt issuance costs as a loss on extinguishment of debt in the consolidated statements of
income.

$1,070.0 million. In

Issuance of 4.625% Senior Notes due 2027

The 2027 Notes are unsecured obligations, governed by an indenture, that will mature on November 15,

2027, and bear interest at the rate of 4.625% per year, with interest payable semi-annually, beginning on May 15,
2020. The Company may redeem all or part of the 2027 Notes at any time prior to November 15, 2022 (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 2027 Notes at annually declining redemption premiums until
November 15, 2024, at and after which date the redemption price will be equal to 100% of the principal amount
redeemed plus any accrued and unpaid interest thereon.

Issuance of 5.75% Senior Notes due 2025

LPLH issued $500.0 million aggregate principal amount of 5.75% senior notes on March 10, 2017 (the

“Original Notes”) and $400.0 million aggregate principal amount of 5.75% senior notes on September 21, 2017
(together with the Original Notes, the “2025 Notes”). The 2025 Notes are unsecured obligations, governed by an
indenture, that will mature on September 15, 2025, and bear interest at the rate of 5.75% per year, with interest
payable semi-annually, beginning September 15, 2017. The Company may redeem all or part of the 2025 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 2025

F-26

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

The Company’s outstanding borrowings were as follows (dollars in thousands):

December 31, 2019

December 31, 2018

Long-Term Borrowings

Balance

Applicable
Margin

Interest
Rate

Balance

Applicable
Margin

Interest
Rate

Maturity

Revolving Credit Facility(1)

45,000

ABR+25bps

5.00% $

— LIBOR+125bps

— 11/12/2024

Senior Secured Term Loan B

(2)

1,070,000

LIBOR+175 bps

3.54% 1,481,250

LIBOR+225 bps

4.73% 11/12/2026

Senior Unsecured Notes(2)(3)

900,000

Fixed Rate

Senior Unsecured Notes(2)(4)

400,000

Fixed Rate

5.75%

4.63%

900,000

Fixed Rate

5.75% 9/15/2025

—

— 11/15/2027

TT
Total long-term borrowings

2,415,000

Plus: Unamortized Premium

8,583

Less: Unamortized Debt
Issuance Cost

Net Carrying ValueVV

____________________

(24,765)

$ 2,398,818

2,381,250

10,083

(19,525)

$ 2,371,808

(1)

(2)

(3)

The alternate base rate (ABR) was the effective PRIME rate on December 31, 2019, the date of the borrowing.

No leverage or interest coverage maintenance covenants.

The 2025 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.

(4)

The 2027 Notes were issued in November 2019 at par.

The Company is required to make quarterly payments on the Term Loan B facility equal to
TT

.
aggregate principal amount of the loans under the Term Loan B facility

0.25% of the

Borrowings under the Term Loan B facility bear interest at a rate per annum of

175 basis points over the

Eurodollar Rate or 75 basis points 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
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 LIBOR rate, on which the Eurodollar Rate is based, is
expected to be discontinued by the end of 2021. The Credit Agreement permits LPLH to agree with the
administrative agent for the Credit Agreement on a replacement benchmark rate subject to certain conditions
(including that a majority of the lenders do not object to such replacement rate within a specified period of time
following notice thereof from the administrative agent).

Agreement).

As of December 31, 2019, the Company had $3.7 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, 2019, the Company was in compliance with such covenants.

Broker-Dealer Credit Facility

On July 31, 2019, LPL Financial, the Company’

s broker-dealer subsidiary, entered into a committed,

unsecured revolving credit facility that matures on July 31, 2024 and allows for a maximum borrowing of up to
$300.0 million (the “LPL Financial Credit Facility”). LPL
issuance costs. Borrowings under the LPL Financial Credit Facility bear interest at a rate per annum ranging from
112.5 to 137.5 basis points over the Federal Funds Rate or Eurodollar Rate, depending on the Parent Leverage
Ratio (each as defined in the credit agreement related to the LPL Financial Credit Facility). The credit agreement
related to the LPL Financial Credit Facility subjects LPL
Financial to certain financial and non-financial covenants.
LPL Financial was in compliance with such covenants, and there were
facility, as of December 31, 2019.

Financial incurred approximately $1.5 million in debt

no borrowings outstanding on this credit

F-27

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank Loans Payable

The Company maintained three uncommitted lines of credit as of December 31, 2019. Two of the lines have
The third

unspecified limits, which are primarily dependent on the Company’s ability to provide sufficient collateral.
line has a $150.0 million limit and allows for both collateralized and uncollateralized borrowings. There were no
balances outstanding as of December 31, 2019 or December 31, 2018.

The minimum calendar year payments and maturities of the long-term borrowings as of December 31, 2019

are as follows (in thousands):

2020

2021

2022

2023

2024

Thereafter

TT
Total

12.

Leases

TT
Adoption of ASC Topic 842, Leases

55,700

10,700

2,316,500

2,415,000

TT
On January 1, 2019, the Company adopted ASC Topic 842, Leases (“T

TT
periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted
and continue to be reported in accordance with historic accounting guidance, ASC Topic 840.

opic 842”). Results for reporting

The Company previously recorded a build-to-suit related asset and liability for a lease in Fort Mill, South

Carolina. The asset and liability were derecognized and reevaluated as a result of the adoption. The Fort Mill lease
was determined to be a finance lease under Topic 842 and the changes in values from the derecognition and
reevaluation were recorded to retained earnings under cumulative effect of accounting change in the consolidated
statements of stockholders’ equity.

Lease Recognition

The Company determines if an arrangement is a lease or contains a lease at inception. The Company has

operating and finance leases for corporate offices and equipment with remaining lease terms of
some of which include options to extend the lease for up to 20 years. For leases with renewal options, the lease
term is extended to reflect renewal options the Company is reasonably certain to exercise.

2 years to 17 years,

Operating lease assets and operating lease liabilities are recognized based on the present value of the future
lease payments over the lease term at the commencement date. As most of the Company’s leases do not provide
an implicit rate, the Company estimates its incremental borrowing rate based on information available at the
commencement date in determining the present value of future payments. Lease expense for net present value of
payments is recognized on a straight-line basis over the lease term.

Finance lease assets are included in fixed assets in the consolidated statements of financial condition and at

December 31, 2019 were $107.4 million.

The components of lease expense were as follows (in thousands):

Operating lease cost

Finance lease cost:

Amortization of right-of-use assets

Interest on lease liabilities

TT
Total finance lease cost

F-28

YY
Year Ended December 31,

2019

17,610

4,786

8,387

13,173

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Supplemental cash flow information related to leases was as follows (in thousands):

YY
Year Ended December 31,

2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Operating cash flows from finance leases

Financing cash flows from finance leases

Supplemental weighted-average information related to leases was as follows:

Weighted-average remaining lease term (years):

Finance leases

Operating leases

Weighted-average discount rate:

Finance leases

Operating leases

Maturities of lease liabilities as of December 31, 2019 were as follows (in thousands):

December 31,

2019

19,117

8,387

692

26.2

9.1

7.75%

7.27%

2020
2021
2022
2023
2024
Thereafter
T
Total lease payments

Less imputed interest

TT
Total

Operating Leases

Finance Leases

19,973
20,553
21,084
20,706
20,485
94,503
197,304
55,404
141,900

9,592
9,735
8,802
8,576
8,727
233,639
279,071
170,479
108,592

Maturities of lease liabilities as of December 31, 2018 under ASC Topic 840 were as follows (in thousands):

2019
2020
2021
2022
2023
Thereafter
TT
Total
____________________

(1)

30,010
30,731
30,590
31,238
30,265
239,118
391,952

(1) Amounts above exclude $75.7 million related to non-lease commitments from the schedule included in Note 13. Commitments and

Contingencies, in the Company’s audited consolidated financial statements and the related notes in the 2018 Annual Report on Form 10-K.

F-29

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

13.

Income Taxes

The Company’s provision for income taxes was as follows (in thousands):

Current provision:

Federal
State
TT
Total current provision

Deferred benefit:

Federal
State
TT
Total deferred benefit
Provision for income taxes

December 31,

2019

2018

2017

156,378
44,192
200,570

(13,971)
(4,644)
(18,615)
181,955

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

A
A reconciliation of the U.S. federal statutory income tax rates to the Company’
set forth below:

s effective income tax rates is

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

YY
Years Ended December 31,

2019

2018

2017

21.0%
4.1
0.4
(1.4)
—

—
(0.3)
0.7
24.5%

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%

ff
The Company’s effective income tax rate dif
fers 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 24.5%, 25.8%, and 34.5%
ff
December 31, 2019, 2018, and 2017, respectively.

for the years ended

The decrease in the Company’s effective income tax rate in 2019 compared to 2018 was due to decreases in

non-deductible expenses.

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 corporate income tax rate reduction from 35% to 21% under the Tax Cuts and
Jobs Act of 2017.

On December 22, 2017, the Tax Cuts and Jobs

Act of 2017 (H.R. 1), the tax reform bill (the "Tax TT Act"), was
signed into law. The Tax TT 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 TT Act pursuant to SEC Staff ff Accounting Bulletin No. 118. No significant impacts were
recorded by the Company as a result of finalizing the accounting.

ff
Deferred income taxes reflect the net tax effects of temporary dif
ferences between the carrying amounts of

ff
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

F-30

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The components of the net deferred income taxes included in the consolidated statements of financial

condition were as follows (in thousands):

Deferred tax assets:

Accrued liabilities

Share-based compensation

State taxes

Operating lease liabilities

Finance lease liabilities

Deferred rent

Provision for bad debts

Forgivable loans

Captive insurance

Other

TT
Total deferred tax assets

Deferred tax liabilities:

Amortization of intangible assets

Depreciation of fixed assets

Operating lease assets

Other

TT
Total deferred tax liabilities

Deferred income taxes, net

December 31,

2019

2018

82,105

14,823

6,932

37,580

28,350

58,265

16,832

7,044

—

32,376

4,077

10,845

1,773

—

3,919

9,938

1,968

4,788

186,485

135,130

(70,953)

(87,739)

(27,189)

(2,702)

(77,037)

(76,418)

—

(188,583)

(153,455)

(2,098) $

(18,325)

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,

2019

2018

2017

46,287

42,657

39,766

9,314

(3,503)

10,042

(6,412)

7,815

(4,924)

52,098

46,287

42,657

At December 31, 2019 and 2018, there were $46.1 million and $40.7 million, respectively, of unrecognized
ff
fective income tax rate in any future periods.
tax benefits that if recognized, would favorably affect the ef

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, 2019 and 2018, the liability for
unrecognized tax benefits included accrued interest of $6.4 million and $5.1 million, respectively, and penalties of
$4.4 million and $4.3 million, respectively.

The Company and its subsidiaries file income tax returns in the federal jurisdiction, as well as most state

jurisdictions, and are subject to routine examinations by the respective taxing authorities. The Company has
concluded all federal income tax matters for years through 2011 and all state income tax matters for years through
2007.

The tax years of 2012 to 2018 remain open to examination in the federal jurisdiction. The tax years of 2008 to

2018 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 $3.7 million primarily related to the statute of
limitations expiration in various state jurisdictions.

F-31

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

14. Commitments and Contingencies

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 service, development, and agency contracts, and other contractual
obligations with initial terms greater than one year were as follows at December 31, 2019 (in thousands):

2020

2021

2022

2023

2024

Thereafter

TT
Total

Guarantees

45,272

20,375

9,499

1,118

516

502

77,282

The Company occasionally enters into 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.

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
Financial may make commitments to

the transition process, which may be forgivable. Due to timing differences, LPL
issue such loans prior to actually funding them. These commitments are generally contingent upon certain events
occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no significant unfunded
commitments at December 31, 2019.

Legal & Regulatory Matters

The Company is subject to extensive regulation and supervision by U.S. 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,

F-32

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 that related to the Company’s historical compliance with certain state “blue sky” laws
and resulted in aggregate fines of approximately $26.4 million, all of which were covered by the Captive Insurance
Subsidiary’s loss reserves. As part of the settlement structure, the Company engaged independent third party
consultants to conduct a historical review of securities transactions and an operational review of the Company’s
systems for complying with blue sky securities registration requirements, each of which has been completed. The
Company also agreed to offer customers remediation in the form of reimbursement for any actual losses, plus
interest. As of the date of this annual report, customer remediation remains in process, although the cost is not
expected to be material.

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, 2019 and 2018,
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, 2019, 2018, and 2017.

Other Commitments

As of December 31, 2019, the Company had approximately $347.9 million of client margin loans that were

collateralized with securities having a fair value of approximately $487.1 million that it can repledge, loan, or sell. Of
these securities, approximately $71.8 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, 2019, there
were no restrictions that materially limited the Company’s ability to repledge, loan, or sell the remaining $415.3
million of client collateral.

Trading securities on the consolidated statements of financial condition includes $5.5 million and $4.7 million
pledged to the Options Clearing Corporation at December 31, 2019 and 2018, respectively, and $15.0 million and
$14.9 million pledged to the National Securities Clearing Corporation at December 31, 2019 and December 31,
2018, respectively.

F-33

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

15. 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 indentures. 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):

2019

2018

2017

Dividend
per Share

Total
Cash
Dividend

Dividend
per Share

Total
Cash
Dividend

Dividend
per Share

Total
TT
Cash
Dividend

0.25

21.1

20.8

20.5

20.2

0.25

22.6

22.3

21.9

21.5

0.25

22.6

22.5

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, 2019, the Company had $499.8 million 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 indentures, 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

____________________

2019

Total
Number of
Shares
Purchased

Weighted-
Average
AA
Price Paid
Per Share

Total
TT
Cost(1)(2)

1,747,116

1,591,950

1,668,305

1,411,171

6,418,542

71.57

$ 125.0

78.54

$ 125.0

78.09

$ 130.3

85.06

$ 120.0

77.96

$ 500.4

(1)
(2)

Included in the total cost of shares purchased is a commission fee of $0.02 per share.
TT
Total may not foot due to rounding.

16. 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.

F-34

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Since its adoption, awards have been and are only made out of the 2010 Plan. As of December 31, 2019, there
were 20,055,945 shares authorized for grant and 5,231,656 shares remaining available for future issuance.

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

YY
Years Ended December 31,

2019

2018

2017

5.43

35.80%

34.80%

35.27%

1.49%

2.47%

1.71%

2.66%

2.61%

2.14%

24.41

19.86

10.63

The following table summarizes the Company’s stock option and warrant activity as of and for the year ended

December 31, 2019:

Outstanding — December 31, 2018

Granted

Exercised

Forfeited and Expired

Outstanding — December 31, 2019

Exercisable — December 31, 2019

Exercisable and expected to vest — December 31, 2019

Number of
Shares

Weighted-
AA
Average
Exercise Price

3,588,067

422,397

(1,209,299) $

(95,924) $

2,705,241

1,870,845

2,655,996

35.38

77.53

30.38

46.37

43.81

34.08

43.27

Weighted-
Average
AA
Remaining
Contractual
TermTT
YY
(Years)

Aggregate
Intrinsic
VV
Value
(In thousands)

5.92

4.80

5.86

131,051

108,821

130,081

The following table summarizes information about outstanding stock options and warrants as of

December 31, 2019:

Range of Exercise Prices

$18.04 - $25.00
$

$25.01 - $35.00

$35.01 - $45.00
$

$45.01 - $65.00

$65.01 - $75.00
$

$75.01 - $80.00

Outstanding

Weighted-
Average
AA
Remaining
Life
YY
(Years)

Exercisable

Weighted-
AA
Average
Exercise
Price

Number of
Shares

Weighted-
AA
Average
Exercise
Price

6.14

2.17

7.06

4.78

8.10

9.16

5.92

20.01

31.06

39.61

48.76

65.54

77.53

43.81

548,831

616,939

268,755

336,062

100,258

— $

1,870,845

20.01

31.06

39.70

48.76

65.50

—

34.08

TT
Total
Number of
Shares

548,831

616,939

451,196

336,062

351,343

400,870

2,705,241

The Company recognized share-based compensation related to the vesting of stock options awarded to

employees and officers of $9.8 million
2018, and 2017, respectively. As of December 31, 2019, total unrecognized compensation cost related to non-
vested stock options granted to employees and officers was $7.9 million
weighted-average period of 1.81 years.

, $8.1 million, and $7.2 million during the years ended December 31, 2019,

, which is expected to be recognized over a

F-35

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, 2019:

Outstanding — December 31, 2018

Granted

Vested

Forfeited

Nonvested — December 31, 2019

Expected to vest — December 31, 2019
____________________

Restricted Stock Awards

Stock Units

Number of
Shares

Weighted-
Average
AA
Grant-Date
VV
Fair Value

Number of
Shares

Weighted-
Average
AA
Grant-Date
VV
Fair Value

7,057

9,366

(8,127) $

— $

8,296

70.26

81.99

71.81

—

81.99

910,720

290,797

(365,567)

(43,765)
$
792,185 (1) $
$
701,108

52.38

82.04

44.84

60.93

66.28

67.30

(1)

Includes 50,765 vested and undistributed deferred stock units.

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 of
ff
ficers. Restricted stock awards and stock units must
vest or are subject to forfeiture; however, restricted stock awards are included in shares outstanding upon grant and
have the same dividend and voting rights as the Company’s common stock. The Company recognized $18.2
million, $13.8 million, and $11.5 million of share-based compensation related to the vesting of these restricted stock
awards and stock units during the years ended December 31, 2019, 2018, and 2017, respectively. As of
December 31, 2019, total unrecognized compensation cost for restricted stock awards and stock units was $22.5
million, which is expected to be recognized over a weighted-average remaining period of 1.86 years.

The Company also grants restricted stock units to its advisors and to financial institutions. The Company

recognized share-based compensation of $3.0 million, $6.1 million and $7.3 million related to the vesting of these
awards during the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, 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 2.08 years.

17. 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

YY
Years Ended December 31,

2019

2018

2017

559,880

439,459

238,863

82,552

2,072

84,624

88,119

2,500

90,619

90,002

2,113

92,115

6.78

6.62

4.99

4.85

2.65

2.59

The computation of diluted earnings per share excludes stock options, warrants, and stock units that are anti-

dilutive. For the years ended December 31, 2019, 2018, and 2017, stock options, warrants, and stock units

F-36

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

representing common share equivalents of 407,059 shares, 391,632 shares, and 1,909,288 shares, respectively,
were anti-dilutive.

18. 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 months of service. For eligible employees, the Company matches up 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 $16.2 million, $13.1 million, and $10.5 million for the years ended December 31,
2019, 2018, and 2017, respectively, which is classified as compensation and benefits expense in the consolidated
statements of income.

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. 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 of
ff
fering
period).

The Company maintains 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 $269.3 million at
December 31, 2019, 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 $264.1 million at December 31, 2019, 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, 2019, the
Company has recorded assets of $4.9 million and liabilities of $5.3 million, which are included in other assets and
accounts payable and accrued liabilities, respectively, in the consolidated statements of financial condition.

19. Related Party Transactions

In the ordinary course of business, the Company has related party transactions with a beneficial owner 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, 2019, 2018, and 2017, the Company recognized revenue for services
provided to these related parties of $4.1 million, $3.5 million, and $3.1 million, respectively. The Company incurred
expenses for the services provided by these related parties of $3.2 million, $2.9 million, and $1.9 million, during the
years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019 and 2018, receivables
and payables to related parties were not material.

20. 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, 2019, had net capital of $109.7 million with a minimum net capital
requirement of $9.3 million.

F-37

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company’s subsidiaryrr , 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, 2019 and 2018, LPL Financial and PTC met all capital adequacy requirements to which

they were subject.

21.

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.
LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce
positions, when necessary.

TT
To control this risk,

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
ff
the transaction. Accordingly, both long and short inventory positions may result in losses or gains to LPL Financial
as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked-to-
market daily and are continuously monitored by LPL Financial.

22. 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

2019

(In thousands, except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$ 1,371,679

$ 1,389,757

$ 1,415,525

$ 1,447,895

155,398

1.84

1.79

0.25

146,092

1.75

1.71

0.25

131,714

1.61

1.57

0.25

126,676

1.57

1.53

0.25

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

F-38

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

23. Subsequent Event

On January 27, 2020, 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 31, 2020 to all stockholders of record on March 18, 2020.

******

F-39

LPL

Annual Report

CORPORATE INFORMATION

Board of Directors (AS OF 03/23/20)

Investor Relations

Dan H. Arnold

Send requests for financial information to:

President and Chief Executive Officer
LPL Financial Holdings Inc.

H. Paulett Eberhart

Chair and Chief Executive Officer
HMS Ventures

William F. Glavin, Jr.

Former Chair and Chief Executive Officer
OppenheimerFunds, Inc.

Allison H. Mnookin

Former Chief Executive Officer
Quick Base, 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

Former Vice Chair of the Board
T. Rowe Price Group, Inc.

Richard P. Schifter

Senior Advisor
TPG

Corey E. Thomas

Chair and Chief Executive Officer
Rapid7, Inc.

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.

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

Securities and advisory services offered through LPL Financial (LPL), a

registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the

If your financial professional is located at a bank or credit union, please note
that the bank/credit union is not registered as a broker-dealer or investment
advisor. Registered representatives of LPL may also be employees of the

extent you are receiving investment advice from a separately registered

bank/credit union. These products and services are being offered through LPL

independent investment advisor that is not an LPL Financial affiliate, please

or its affiliates, which are separate entities from, and not affiliates of, the

note LPL Financial makes no representation with respect to such entity.

bank/credit union.

Securities and insurance offered through LPL or its affiliates are:

Not Insured by FDIC/NCUA or
Any Other Government Agency

Not Bank/Credit Union
Guaranteed

Not Bank/Credit Union Deposits
or Obligations

May Lose Value

Member FINRA/SIPC

FIN-51239-0120 Tracking #1-960744