2020 ANNUAL REPORT LPL Financial Holdings Inc. AT LPL FINANCIAL, WE EXIST TO SERVE FINANCIAL ADVISORS. THEIR GREATNESS IS OUR GOAL. Founded on the principle that the firm should work for the advisor, and not the other way around, we continue to believe that advisors are driving the future of financial advice. And we’re committed to advancing the industry by keeping those advisors at the forefront. At LPL, independence means that advisors have the freedom they deserve to choose the business model, services, and technology resources that allow them to run the perfect practice. And they have the freedom to manage their client relationships, because they know their clients best. With access to LPL’s expertise and support, advisors across the nation are empowered to run successful businesses and deliver objective financial advice for American investors. Simply put, we take care of our advisors, so they can take care of their clients. * Throughout this Annual Report, the terms “financial advisors” and “advisors” are used to refer to registered representatives and/or investment advisor representatives affiliated with LPL Financial LLC. A Message from the PRESIDENT & CEO Dear Fellow Shareholder, Throughout 2020, in the face of a volatile operating environment, we delivered solid business and financial outcomes at LPL. These results were driven by the combination of a good strategy, extraordinary execution, and alignment with a mission-driven culture. We believe this foundation continues to position us well to serve our clients and drive long-term profitable growth and shareholder value. First, I want to acknowledge the essential roles our advisors are playing by providing much-needed financial advice to millions of Americans, while at the same time pivoting their own practices to adjust to the changes brought on by the current environment. I also want to thank our employees for their ongoing commitment and dedication to our mission of taking care of advisors, so they can take care of their clients. 2020 Performance Looking at our business results, continued organic growth and equity market appreciation drove total advisory and brokerage assets to a new high of $903 billion, up 18% from a year ago. Total organic net new assets were $56 billion, translating to a 7.4% annualized growth rate, up from 5.3% in 2019. This increase was driven by continued strength across new store GROSS PROFIT* ($ millions) $2,172 $2,103 $1,948 $1,555 $1,394 2016 2017 2018 2019 2020 sales, same store sales, and retention. Finally, Net Promoter Scores were up by more than 15 points year-over-year, and more than 60 points in three years. Turning to our financial results, we continued to drive solid outcomes in an eventful year through a combination of organic growth and expense discipline. As a result, earnings per share prior to amortization of intangible assets was $6.46. TOTAL ADVISORY & BROKERAGE ASSETS* ($ billions) $903 $764 $615 $628 $509 2016 2017 2018 2019 2020 Strategic Context Looking at the marketplace more broadly, we continue to operate in a large and growing market with favorable secular trends toward independence and advisory solutions. The pandemic has only shined a brighter light on the importance of having a financial professional, and industry forecasts project that demand for advice is expected to accelerate in the future. 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 framework across our four strategic plays to provide more color on where we are investing. A Message from the President & CEO, continued STRATEGIC PLAY 1 Meeting advisors where they are in the evolution of their practices service model transformation, and we will continue to seek their input as we work to deliver an offering that is unique to the wealth management space. We are focused on winning in our traditional independent and institutional markets, while also leveraging new affiliation models to expand our addressable markets from $6 trillion to $26 trillion. In addition, the continued evolution of our digital capabilities, within the sales process and for advisor onboarding, has proven to be an increasing source of competitive advantage. As a result, our recruited assets in 2020 reached a new high of $41 billion, up 50% over the past two years. NUMBER OF ADVISORS* 16,109 16,464 14,377 15,210 17,287 NET INCOME* ($ millions) EPS Prior to Amortization of Intangible Assets $7.17 $6.46 $5.33 $560 $473 $2.84 $439 $2.38 $239 $192 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 STRATEGIC PLAY 4 STRATEGIC PLAY 2 Providing capabilities that help advisors differentiate and win We are also focused on the need to provide advisors with the capabilities they need to differentiate and win with their clients by providing a tech stack that helps with efficiency and scalability, a wealth management platform that gives them a variety of ways to solve their clients’ needs, and end- investor solutions that give advisors unique ways to engage with their clients. STRATEGIC PLAY 3 Creating an industry-leading service experience, at scale With respect to the advisor service experience, we have been able to pull forward solid outcomes as we focus on transforming our service model into a client care model that enables advisors to engage with us efficiently and effectively. Additional differentiators for us in this area include our straight-through processing via robotics and AI, and our personalized service pods that are familiar with the unique needs of our advisors’ businesses. As a result, our retention was approximately 98% for the year, up from 96.5% a year ago. Our advisors have shared positive feedback on our Amounts shown in all charts are as of or for the indicated year ended Helping advisors run successful businesses The final area we are investing in is helping advisors run the most successful businesses in the independent marketplace. One of the key components of this play is our portfolio of Business Solutions, including virtual CFO and CMO offerings, as well as our M&A Solutions platform. We believe this portfolio of solutions can help advisors drive scalability, growth, and efficiency in their practices. As a result, we have been able to expand and evolve the value proposition of the portfolio and scale our subscription base, finishing the fourth quarter with about 1,400 monthly subscriptions, which is more than double the level a year ago. As we look ahead, we remain focused on executing our strategy while also evolving our long-term vision of how we deliver on our mission. We aspire to push past our old vision of extending our leadership in the independent space and become the leader across the entire advisor-centered marketplace. We believe that continuing to execute on our strategy can help us make progress toward this goal and create long-term shareholder value. Sincerely, Sincerely Dan Arnold, President & CEO 2020 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 Income before provision for income taxes (in thousands) 1 Net income (in thousands) 1 PER SHARE DATA Earnings per diluted share 1 EPS prior to amortization of intangible assets 1, 2 Weighted average diluted shares outstanding (in thousands) 1 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DATA 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 advisory and brokerage assets (in billions) 3 Advisory assets (in billions) 3 Average number of full-time employees 1 2020 2019 2018 2017 2016 $ 5,871,640 $ 5,139,802 $ 5,245,567 $ 731,838 $ 626,073 $ 472,640 $ 5,624,856 $ 5,188,400 $ 4,281,481 $ 4,049,383 $ 4,749,864 $ 4,470,740 $ 3,787,479 $ 3,655,389 $ 4,883,021 $ 4,595,763 $ 3,916,911 $ 3,751,867 $ 874,992 $ 717,660 $ 494,002 $ 393,994 $ 741,835 $ 592,637 $ 364,570 $ 559,880 $ 439,459 $ 238,863 $ 297,516 $ 191 ,931 $ 5.86 $ 6.46 80,702 $ 6.62 $ 7.17 $ 4.85 $ 5.33 $ 2.59 $ 2.84 $ 2.13 $ 2.38 $ 84,624 $ 90,619 $ 92,115 $ 90,013 $ 808,612 $ 6,523,571 $ 2,345,414 $ 2,103,308 $ 908,929 17,287 $ 903.1 $ 461.2 4,560 $ 590,209 $ 511,096 $ 811,136 $ 747,709 $ 5,880,238 $ 5,477,468 $ 5,358,751 $ 4,834,926 $ 2,398,818 $ 2,371,808 $ 2,385,022 $ 2,175,436 $ 2,172,225 $ 1,947,670 $ 1,554,835 $ 1,394,250 $ 1,036,105 $ 865,568 $ 616,366 $ 507,957 16,464 $ 764.40 $ 365.80 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 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 2020 2019 2018 2017 2016 $5.86 $6.62 $4.85 $2.59 $2.13 67 (19) 48 81 65 (18) 47 85 60 (17) 43 91 38 (15) 23 92 38 (15) 23 90 $0.60 $0.56 $0.48 $0.25 $0.26 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 facilities, 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 Total Net Revenue Commission and advisory expense Brokerage, clearing, and exchange Gross profit 2020 2019 2018 2017 2016 $5,872 $5,625 $5,188 $4,281 $4,049 3,697 3,388 71 64 3,178 63 2,670 57 2,601 55 $2,103 $2,172 $1,948 $1,555 $1,394 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 Provision for income taxes Depreciation and amortization Amortization of intangible assets Loss on extinguishment of debt 2020 $473 2019 $560 2018 $439 106 153 110 67 - 130 182 96 65 3 125 153 88 60 - 2017 $239 107 126 84 38 22 2016 $192 96 106 76 38 - EBITDA $909 $1,036 $866 $616 $508 EPS prior to amortization of intangible assets $6.46 $7.17 $5.33 $2.84 $2.38 Non-operating interest expense and other FORM 10-K LPL Financial Holdings Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ☒ ☐ Commission file number 001-34963 LPL Financial Holdings Inc. (Exact name of registrant as specified in its charter) (State or othett r jurisdiction of incoii rporation or organiza rr n tion) Delaware 20-3717839 (( ( I.R.S. Employer Identification No.) 4707 Executive Drive, San Diego, California dd (Address of prinrr cipal executive offices) ff 92121 (zip code) (800) 877-7210 (Registrant rr ’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 g 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 x No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x 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 forff b subject to such filing requirements for the past 90 days. Yes x No o such shorter period that the registrant was required to file such reports), and (2) has been 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 forff to submit such files). Yes x No o such shorter period that the registrant was required 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 x o Accelerated filer o 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. o Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes x No As of June 30, 2020, the aggregate market value of the voting stock held by non-affiliates of the registrant was $6.2 billion. For purposes of of the registrant were deemed to be shares this information, the outstanding shares of Common Stock owned by directors and executive officers of the voting stock held by affiliates. ff The number of shares of common stock, par value $0.001 per share, outstanding as of February 16, 2021 was 79,680,099. Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders are incorporated by reference into Part III. DOCUMENTS INCORPORATED BY REFERENCE TABLE OF CONTENTS PART I Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2 Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information about our Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . Item 8 Item 9 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . Item 14 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16 Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Page 1 12 30 30 30 30 31 34 35 36 56 61 98 98 98 100 100 100 100 100 101 101 103 104 i WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly, and current reports, proxy statements and other inforff mation 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.govg . 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 @ p Street, 22nd Floor, Boston, MA 02109). The informat this Annual Report on Form 10-K. ion contained or incorporated on our website is not a part of ff We may use our website as a means of disclosing material informat ff ion and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor Relations” or “Press Releases” sections. Accordingly, investors should monitor these portions of our website, in addition to following the Company’s press releases, SEC filings, public conference calls and webcasts. When we use the termsrr “LPLFH”, “LPL”, “we”, “us”, “our” and the “Company”, we mean LPL Financial ii Holdings Inc., a Delaware corporation, otherwise indicates. tt and its consolidated subsidiaries, taken as a whole, unless the context SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS ff and its plans, estimates and 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 revenues and expenses; future affiff liation models and capabilities; market and macroeconomic trends; 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; and expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company’s businesses, 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 expectations as of February 23, 2021. 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 differe that could cause or contribute to such diffeff 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 advisory and brokerage assets, including net new assets, and the related impact on revenues; effect s 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 effecti 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 actions, including disciplinary actions imposed by federal and state regulators and self-regulat 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 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 and trading volumes of shares of of current, pending and future legislation, regulation and regulatory ory organizations; the that such changes may have on the Company’s gross profit streams and costs; rences include: changes in general economic and financial market nt than those expressed or implied by forward-looking vely financial products and services; whether statements. Important factors rr ff ff ff ff ff ff ii ff ff the timing and size of future share repurchases by the Company, if encies expected to result from its investments, initiatives and acquisitions, including its the Company’s common stock, which will affect any; execution of the Company’s plans and its success in realizing the synergies, expense savings, service improvements or effici pending acquisition involving the wealth management business of Waddell & Reed Financial, Inc., expense plans and technology initiatives; the performance ff transitioned; the Company’s ability to control operating risks, informff risks and sourcing risks; the effect 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 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. of third-party service providers to which business processes have been statements as a result of developments occurring after the date of this ation technology systems risks, cybersecurity s of the COVID-19 pandemic, including effoff rts to contain it; and the other factors rr ff iii Item 1. Business General Corporate Overvirr ew 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 object b ive 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-officeff advice. We believe that we are the only company that offers technology platform, comprehensive self-clearing proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting and market-making. support they need to serve the large and growing market for independent investment advisors the unique combination of an integrated services and open architecture access to a wide range of non- ff ff f 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 business, was incorporated in Delaware in 2005. The Company’s most significant, wholly owned subsidiaries are described below: • • • • • • • • LPL Holdings, Inc. is a direct subsidiary of LPL Financial Holdings Inc. and is an intermediate holding company of our business. LPL Financial LLC (“LPL Financial”) is a clearing broker-dealer and an investment adviser that clears and settles customer transactions. 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 Associates, Inc. (“LPLIA”) operates as a brokerage general agency that offers disability insurance products and services. ff 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 Allen & Company of Florida, LLC (“Allen & Company”), an RIA that we acquired in 2019. Blaze Portfolio Systems LLC (“Blaze”), which we acquired in 2020, provides an advisor-facing trading and portfolio rebalancing platform. Our Business Our Advisor Relationshipsii Our business is dedicated exclusively to our advisors; we are not a market-maker nor do we offer r no proprietary products of our own. Because we do not offer banking or underwriting services. We offeff products, we enable the independent financial advisors, banks and credit unions that we support to offer lower-conflict advice. ff ff ff investment proprietary their clients 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 effiff ciency 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. 1 Our advisors support approximately 6.0 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 offeff r 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 advisory fees and brokerage commissions than the captive channels — generally 80-90% compared to 30-50%. 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. Finally, as business owners, our independent financial advisors, unlike captive advisors, also have the opportunity to build equity in their own businesses. Our approximately 17,300 advisors average about 20 years in the industry, 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 fee-based services on our corporate RIA platform or provide fee-based services through their own RIA practices. brokerage and ff 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. We also support advisors who are our employees through our independent employee advisor affiliat ion model, which we introduced in 2020. ff Advisors licensed with LPL Financial as registered representatives and as investment advisory representatives are able to conduct both commission-based business on our brokerage platform and fee-based business on our corporate RIA platform. In order to be licensed with LPL Financial, advisors must be approved through our assessment process, which includes a review of each advisor’s education, experience and compliance history, among other factors. Approved advisors become registered with LPL Financial and enter into a representative agreement that establishes the duties and responsibilities of each party. Pursuant to the representative agreement, each advisor makes a series of representations, including that the advisor will disclose to all clients and prospective clients that the advisor is acting as LPL Financial’s registered representative or investment advisory representative, that all orders for securities will be placed through LPL Financial, that the advisor will sell only products that LPL Financial has approved, and that the advisor will comply with LPL Financial policies and procedures as well as securities rules and regulations. These advisors also agree not to engage in any outside business activity without prior approval from us and not to act in competition with us. LPL Financial also supports over 450 independent RIA firms that conduct their business through separate entities (“Hybrid RIAs”) with over 5,000 advisors who conduct their advisory business through these separate entities, rather than through LPL Financial. Hybrid RIAs operate pursuant to the Investment Advisers Act of 1940, as amended (the “Advisers Act”), or their respective states’ investment advisory licensing rules. These Hybrid RIAs engage us for technology, clearing and custody services, as well as access to our investment platforms. Advisors associated with Hybrid RIAs retain 100% of their advisory fees, and 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. We believe we are the market leader in providing support to over 2,500 financial advisors at approximately 800 banks and credit unions nationwide. The core capabilities of these institutions may not include investment and financial planning services, or they may find the technology, infrastructure and regulatory requirements of supporting such services to be cost-prohibitive. For these institutions, we provide their financial advisors with the infrastructure and services they need to be successful, allowing the institutions to focus more attention and capital on their core businesses. We also provide support to approximately 3,000 additional financial advisors who are affiliat ff ed 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 offeff r a breadth of services to their client base in an effiff cient manner. Our Value Proprr osition We are dedicated to making it easy for advisors to do what is best for their clients. Our scale and self-clearing ff platform enable us to provide advisors with the capabilities they need, and the service they expect, at a compelling 2 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-offiff ce 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 offeri complexities of running their own practice. ng enables our advisors to focus on their clients while successfully and effiff ciently managing the ff Integrated Technology Solutions tt We provide our technology and service to advisors through an integrated technology platform that is cloud- ively manage all based and web-accessible. Our technology offeri critical aspects of their businesses in an effici continue to automate time-consuming processes, such as account opening and management, document imaging, transaction execution and account rebalancing, in an effort ff ent manner while remaining responsive to their clients’ needs. We to improve our advisors’ effiff ciency and accuracy. ngs are designed to permit our advisors to effect ff ff ff Comprehensive Clearing and Complill anii ce Services We provide custody and clearing services for the majority of our advisors’ transactions, and seek to offeff r a simplified and streamlined advisor experience and expedited processing capabilities. Our self-clearing enables us to control client data, more effiff ciently 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. platform ff 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 effect iveness and scalability of our control environment. ff 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; • monitoring of registered investment advisory activities for advisors on our corporate RIA platform; and • inspecting branch officeff s and advising on how to strengthen compliance procedures. Practice Management Programs rr 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: • • ff of their businesses; personalized business consulting that helps eligible advisors and program leadership enhance the value and operational efficiency advisory and brokerage consulting and financial planning to support advisors in growing their businesses as well as wealth management services, to through our broad range of products and fee-based offerings, assist advisors serving high-net-worth clients with comprehensive estate, tax, philanthropic and financial planning processes; ff • 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 3 • 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 platforms. 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 not providing proprietary products or investment banking services better enables us to provide research that is unbiased and objective. ff Our Prorr duct 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. 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 Productstt 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 fixed annuities, mutual funds, equities, fixed income, alternative investments, retirement and 529 education savings plans and insurance. We regularly review the structure and fees of our commission-based products in the context of retail investor preferences December 31, 2020, the total brokerage assets in commission-based products were $441.9 billion. and the changing regulatory environment, as well as the competitive landscape. As of include variable and ff ff Fee-Based Advisory Platforms t and Support LPL Financial has various fee-based advisory platforms that provide centrally managed or customized ff solutions from which advisors can choose to meet the investment needs of their clients, including wrap-feeff 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, 2020, the total advisory assets under custody in these platforms, through both our corporate RIA platform and Hybrid RIAs, were $461.2 billion. Client Cash Programs We assist our advisors in managing their clients’ cash balances through money market programs and insured bank sweep vehicles. As of December 31, 2020, the total assets in our client cash programs, which are held within advisory and brokerage accounts, were approximately $48.9 billion. tt 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 r retirement solutions for commission- and fee-based services that allow advisors to provide by PTC. We also offeff brokerage services, consultation and advice to retirement plan sponsors using LPL Financial. We offeff generation, investment analytics and portfolio modeling capabilities to both our advisors and external clients in the wealth management industry through our subsidiary AdvisoryWorld. Finally, through our subsidiary Blaze, we offer an advisor-facing trading and portfolio rebalancing platform. r proposal ff 4 Our Financial Model Our overall financial performance ff is a function of the following dynamics of our business: • Our revenues stem from diverse sources, including advisor-generated advisory and commission 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, 2020, no single relationship with our independent advisor practices, banks, credit unions or insurance companies accounted for more than 7% of our net revenues, and no single advisor accounted for more than 2% of our net revenues. • • The largest variable component of our cost base, advisor payout percentages, is directly linked to revenues generated by our advisors. A portion of our revenues, such as software licensing and account and client fees, are not correlated with the equity financial markets. • Our operating model is scalable and is capable of delivering expanding profit margins over time. • We have managed our capital requirements and expenditures such that we have been able to invest in our business as well as return capital to shareholders. Our Competitive Strengths Market Leadersh dd ip 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: • • • tt Continual management support, which further improves the productivity of our advisors. — We actively reinvest in our comprehensive technology platform and practice Reinvestment tt 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 ff 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. ff Comprehensive Solutions We differentiate through the combination of our capabilities across research, technology, risk management and practice management. LPL makes meaningful investments to support the growth, productivity and efficiency 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. ff of We believe we offeff r a compelling value proposition to independent financial advisors and financial institutions. This value proposition is built upon the delivery of our services through our scale, independence and integrated technology, the sum of which we believe is not replicated in the industry. As a result, we believe that we do not have any direct competitors that offer our business model at the scale at which we offer ff not have any proprietary manufactu management products and other financial products as direct competitors. red financial products, we do not view firms that manufacture it. For example, because we do asset ff ff ff 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. 5 ii Flexiee bilit y ot f Our Busineii ss 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 wirehouses, 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, as well as employee advisors. The flexibility of our business model enables our advisors to select their preferred affiff liation model 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 s on their clients and grow their practice. , focuff ff ff Our Sources of Growth We believe we can increase our revenues 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 i tt n I ii nvestable tt Assets From 2016 to 2019, the U.S. retail investment market averaged 10% annual growth. The chart below shows the historical growth of assets in the U.S. retail investment market (in trillions): $24$24 $18 $6 2016 $31$31 $23 $8 2019 Advisor-mediated Discount/Direct ______ ____ ____ ____ ____ ____ ____ ____ ____ Source: The Cerulli Report: U.S. Advisor Metrics 2020. Increasing Demand for Independent FinaFF ncial Advice Retail investors, particularly in the mass-afflff uent market, are increasingly seeking financial advice from independent sources. We are highly focused market, which constitutes a significant and underserved portion of investable assets. on helping independent advisors meet the needs of the mass-afflff uent ff Advisor Migrationtt 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,ff but an active catalyst in the movement to independence. There is an increased shiftff 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 rr Strateg tt ies Increasing Productivit tt y ot f Existing EE 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 6 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. Attractingtt New Assets to Our Platformff We intend to grow the assets served by our platforff m. There is an estimated $22.7 trillion in advisor-mediated assets in the United States, of which we have a 4.0% market share, and we believe we are positioned to attract assets from any channel. Channel (dollars in billions) Independent Channels Wirehouses Other Employee Channels Total ______ ____ ____ ____ ____ ____ ____ ____ ____ Source: The Cerulli Report: U.S. Advisor Metrics 2020. Competition Advisor-mediated Assets % of Market $8,469 7,850 6,412 $22,731 37.3% 34.5% 28.2% 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 focff us 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’ investment advisory regulator and not through a broker-dealer, may choose from a number of third-party firms to provide custodial services. Competitors within these various channels and markets generally do not offer ff a complete clearing solution for advisors and are frequently supported by third-party clearing and custody-oriented firms. These clearing firms and their affilff portion of the economics for the offeri an array of service, technology and reporting tools, while retaining a iates and other providers also offer ngs utilized by their clients. ff ff Our advisors compete forff 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. ff Human Capital Our success depends on our ability to attract, hire, retain and develop highly-skilled professionals in a variety of specialties, including finance, technology, compliance, business development, cybersecurity and management. As of December 31, 2020, we had 4,756 full-time employees. Due to the complexity of our business, we compete for talent with other companies, both inside and outside of our industry, and in multiple geographical areas in the United States. In 2020, our human capital efforts taking care of our advisors, so they can take care of their clients. To that end, we seek employees who are approachable, proactive, collaborative, agile and innovative, and who share our commitment to excellence, integrity and service. focused on establishing a culture of service that emphasizes ff To maintain a high-caliber, values-driven workforce ff that is committed to our culture, we strive to offer ff total rewards, including compensation, benefits and recognition programs that position our company as an employer of choice. We design our compensation to be competitive in the markets in which we compete, and closely monitor industry trends and practices to ensure we are able to attract and retain the personnel who are critical to our success. We also monitor internal pay equity to make sure that our compensation practices are fair and equitable across our organization. Our company’s senior leaders have an opportunity to receive a portion of their compensation in company equity, and, subject to a cap, we match the contributions of all of our employees to our retirement savings plan that supports their long-term financial goals. We also offer an employee stock purchase plan that enables eligible employees to acquire an ownership interest in our company at a discount to prevailing market 7 prices. To support our employees’ health and well-being, we offeff benefits, as well as access to free resources such as fitness classes and an online wellness portal. r competitive medical, dental and vision plan We believe in our employees’ potential and provide training and development opportunities intended to ff maximize their performance and professional growth. To ensure that new employees integrate into our culture and their daily work, we provide a robust new-hire experience, as well as extensive ongoing training for our employees to acquaint them with our business. We require all of our employees to complete courses in key regulatory areas, such as insider trading and anti-money laundering compliance, and we offer development through training sessions and cross-departmental workshops. In addition, we have a mentorship program that pairs younger employees with more experienced professionals, giving mentees access to experience, expertise and guidance as they chart their career paths. opportunities for professional ff We aim to provide a safe, inclusive environment for our employees, where they feel engaged in our business, supported in who they are and empowered to succeed. We are committed to providing a workplace that is free from violence, harassment and other unsafe or disruptive conditions, and require our personnel to attend regular training sessions and workshops on those topics. To promote safety during the COVID-19 pandemic, starting in March 2020, we implemented a work-from-home policy that enables our employees to work remotely. For our essential locations to workers, we introduced additional hospital-grade disinfectants and modified workspaces in our officeff ensure social distancing. We believe that well-being is more than just physical safety, and that our employees should feel welcome and supported as who they are. We seek to foster diversity and a culture of inclusivity through our employee resource groups, which are employee-run resource teams that focus on the needs, concerns and experiences of various diverse groups. In addition, our recruitment efforts our employee population, including through targeted outreach to and collaborations with organizations that serve diverse populations. have focused on improving the diversity of ff ff Continuous improvement is a pillar of our culture, and we regularly solicit our employees’ feedback on the iveness and quality of our support programs and their engagement with our business. We use this feedback to effect improve our programming and informf turnover, both in the aggregate and in key subcategories such as executive leadership and diversity, to evaluate our effeff ctiveness in retaining critical personnel. decisions about our business. In addition, we closely monitor employee Regulation The financial services industry is subject to extensive regulation by U.S. federal, state and international ff government agencies as well as various self-regulat 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 enforcf our operations and/or financial condition. ory organizations. We take an active leadership role in the ement of those laws or regulations, may affeff ct Broker-Dealer Regulatioll n 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 ff are enforced by the SEC and FINRA, apply to the municipal securities activities of LPL Financial. ff Broker-dealers are subject to rules and regulations covering all aspects of the securities business, including publication of research reports, use and safekeeping of clients’ funds sales and trading practices, public offerings, and securities, capital adequacy, recordkeeping and reporting, the conduct of directors, offiff cers 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 informat 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. ion, limitations on extensions of credit in securities transactions, clearance and settlement ff 8 Regulators make periodic examinations and inquiries of us, and review annual, monthly and other reports on our operations 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 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. or ff 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. 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 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, implemented and enforced. regulators and state securities and insurance regulators, may respond to or attempt to enforce addressed by Regulation BI. As of June 30, 2020, we implemented new procedures in accordance with Regulation BI. the operations, financial condition, liquidity and capital requirements of financial institutions with In addition, it is unclear how and whether other regulators, including banking similar issues ff ff ff ff ff Investment Advisovv ll r 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.ff Such requirements relate to, among other things, fiduciary duties to clients, performance maintaining an effecti ve 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. fees, ff ff 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. Retiremen ii t Planll Services Regulatioll n 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, insofarf 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 affect ed 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. as the subsidiaries ff 9 In December 2020, the DOL issued a new rule that expanded the definition of “fiduciary” under ERISA and ation technology and other costs Section 4975 of the Code, which we expect to result in legal, compliance, informff and could lead to a greater risk of client lawsuits and enforcff regulation on our retirement plan business cannot be anticipated or planned forff our products and services and results of operations. ement activity by the DOL. The effect of any future DOL , but may have further impacts on Commodities and Futuresrr Regulatioll n 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”)FF . 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.FF Violations of the rules of the CFTC and the NFAFF could result in remedial actions including fines, registration terminations or revocations of exchange memberships. Trust Regulation Through our subsidiary, PTC, we offer ff 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 Officeff 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. of the Comptroller of the Currency (“OCC”). 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 of control restrictions and regulations governing fiduciary duties, conflicts of interest, self-dealing 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. by the OCC, such as capital adequacy, change and anti-money ff ff ll Regulatory Capital Requirements The SEC, FINRA, the CFTC and the NFAFF 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 NFAFF ’s financial requirements and is required to maintain net capital that is in excess of or equal to the greatest of the NFA’FF 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 NFAFF 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 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 ff 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. to suspension or revocation of registration by the applicable b of Anti-Money Launderinrr g and Sanctions Complianll ce The USA PATRIOT Act of 2001, 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, 10 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 veness of its program. In addition, sanctions administered by the United States Offiff ce 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 and work continuously to improve and strengthen our regulatory compliance mechanisms. and annually conducting an independent test of the effecti ff ff Securitrr yt and Privacyc 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 informat ion. To the extent they are applicable to us, we must comply with federal and state informat ion-related laws and regulations in the United States, including the Gramm-Leach-Bliley Act of 1999, SEC Regulation S-P,P the Fair Credit Reporting Act of 1970, as amended, and Regulation S-ID, as well as the California requirements. Consumer Protection Act and further potential federal and state ff ff ff Financial Information about Geographic Areas Our revenues for the periods presented were derived from our operations in the United States. Trademarks Access Overlay®, BlazePortfolio®, BranchNet®, CLIENTWORKS®, Fortigent®, LPL®, LPL Career Match®, LPL Financial (& Design)®, Manager Access Network®, Manager Access Select®, OMP® and SPONSORWORKS® are our registered trademarks, and ADVISORYWO FLORIDA, LLC, and THE PRIVATVV E TRUST COMPANYPP RLD, CLIENTWORKS CONNECTED, ALLEN & COMPANYPP ,YY N.A. (& Design) are among our service marks. OF RR 11 Item 1A. Risk Factors Risk Factor Summary Our business, operations and financial results are subject b to varying degrees of risk and uncertainty. We are providing the following summary of the risk factors to enhance readability of our risk factor disclosure. Material risks that may adversely affect our business and operating results include, but are not limited to, the following: ff Risks Related to Our Business and Industryy • We depend on our ability to attract and retain experienced and productive advisors, and we are subject to competition in all aspects of our business. • Our financial condition and results of operations may be adversely affect ff ed by market fluctuations and other economic factors. • • Significant interest rate changes could affect ff our profitability and financial condition. Any damage to our reputation could harm our business and lead to a loss of revenues and net income. • Our business is subject to risks related to litigation, arbitration claims and regulatory actions. There are risks inherent in the independent broker-dealer business model. • • We rely on third-party service providers, including off-shore ff providers, to performff technology, processing and support functions, and our operations are dependent on financial intermediaries that we do not control. • Lack of liquidity or access to capital could impair our business and financial condition. • Our business could be materially adversely affecte ff d as a result of the risks associated with acquisitions and investments. • Our risk management policies and procedures may not be fully effecti ff ve in mitigating our risk exposure in all market environments or against all types of risks. • We face competition in attracting and retaining key talent. • The securities settlement process exposes us to risks related to adverse movements in price. • Our indebtedness could adversely affect ff our financial health and may limit our ability to use debt to fund future capital needs. • • 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. Provisions of our Credit Agreement and the Indentures could discourage an acquisition of us by a third- party. • Our insurance coverage may be inadequate or expensive. • • • • Poor service or performance such services or products may cause clients of our advisors to withdraw their assets on short notice. of the financial products that we offeff r or competitive pressures on pricing of ff A loss of our marketing relationships with manufactu with our advisors and, in turn, their clients. ff rers of financial products could harm our relationship Changes in U.S. federal income tax law could make some of the products distributed by our advisors less attractive to clients. s of the outbreak of the novel coronavirus (COVID-19) have negatively affecte ff The effect economy, U.S. economy and global financial markets, and may disrupt our operations and our advisors' operations, which could have a material adverse effect ff operations. on our business, financial condition and results of d the global ff Risks Related to Our Regulatory Environment g y • • 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. ff Regulatory developments could adversely affect business less profitable. ff our business by increasing our costs or making our • 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. 12 • Failure to comply with ERISA regulations and certain retirement plan regulations could result in penalties against us. Risks Related to Our Technologygy • We rely on technology in our business, and technology and execution failures could subject us to losses, litigation and regulatory actions. • Our informat ff ion technology systems may be vulnerable to security risks. • • Failure to maintain technological capabilities, flaws in existing technology, difficult ies in upgrading our technology platform or the introduction of a competitive platform could have a material adverse effect business. ff ff on our Inadequacy or disruption of our business continuity and disaster recovery plans and procedures in the event of a catastrophe could adversely affect our business. ff Risks Related to Ownership of Our Common Stock p • The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our investors. • 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. • Our future ability to pay regular dividends to holders of our common stock or repurchase shares are subject earnings and to the discretion of our board of directors and will be limited by our ability to generate sufficient cash flows. ff Risks Related to Our Business and Industry We depend e competition in allll aspects of our busines on our abilityll to attract and retain exper s. xx ii ienrr ced and prodrr uctivevv advisors, and we are subject to 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 wirehouses 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 well-qualified advisors. In attracting and retaining advisors, we compete directly with a variety of financial institutions such as wirehouses, 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 effort s to attract and retain the advisors needed to achieve our growth objectives. ff More broadly, we are subject to competition in all aspects of our business 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 offeri ng so-called “robo” advice solutions. ff Many of our competitors have substantially greater resources than we do and may offer ff services and financial products across more markets. Some operate in a different 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 intensifyff as a result ff ff a broader range of regulatory environment than we . For example, certain of our 13 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. ff 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. Our finanii other economic factors. cial condition and results of operatiorr ns may be adversel vv yl affeff cted by market fluctuations and Significant downturns and volatility in equity and other financial markets have had and could continue to have an adverse effect ff on our financial condition and results of operations. General economic and market factors can affect ff our commission and fee revenues. For example, a decrease in market levels or market volatility can: • • • reduce new investments by advisors’ 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 affect ff ing our brokerage commission revenues and our transaction revenues; reduce the value of advisory and brokerage assets, thereby reducing advisory fee revenues, trailing commission revenues and asset-based fee revenues; and • motivate clients to withdraw funds from their accounts, reducing advisory and brokerage assets, advisory fee revenues and asset-based fee revenues. 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. ff f 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. Significff ant interesrr t rate changes could affeff ct our profrr itff abtt ilityt and financialii 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 revenues from our client cash programs have declined in the past as a result of a low interest rate environment, and our revenues may decline in the future due to decreases in interest rates, decreases in client cash balances or mix shiftsff among the current or future bank sweep vehicles and money market programs that we offer decreased the federal funds rate in 2020 and there can be no assurance that it will not to do so again or maintain a low-interest rate environment for a significant period of time. Our revenues from our client cash programs also depend 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 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 bank sweep vehicles or money market programs that we offer 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, or if balances or yields in our client cash programs decrease, future revenues from our client cash programs may be lower than expected. , could result in declines in our revenues. A sustained low interest . The Federal Reserve competitive products, ff ff ff 14 Any damage to our reputatiott n could harm our busines ii s 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, including technology or cybersecurity failures; 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 revenues and net income. Our busines ii s is subject to risksii related ll i to litigatio n, arbirr tration claimll s 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. ff ff The outcomes of any such legal or regulatory proceedings, including inquiries, investigations and proceedings by the SEC, FINRA, DOL and state securities regulators, are difficult enforcement 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 advisors, or our results of operations, cash flows or financial condition. on our ability to recruit or retain financial ff ff to predict. A negative 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 object recommendations made to our advisory clients. ives and certain fiduciary obligations for advice and b 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 our brokerage services. We may also become subject to claims, allegations and legal proceedings related to employment matters, including wage and hour, discrimination or harassment claims, or matters involving others’ intellectual property or other proprietary rights, including infringement or misappropriation claims. actions against us in the future, including, in particular with respect to ff There are risks inherent rr in the indepee ndentdd broker-d ealdd rr er business model. Compared to wirehouses and other employee model broker-dealers, we generally offer ff advisors wider choice in operating their businesses with regard to product offeri ff supervisory models. 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. ngs, outside business activities, offiff ce technology and Misconduct and errors by our employees and our advisors could be diffiff cult 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 15 ff ive in all cases. Prevention and detection among our advisors, who are 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 effect typically not our direct employees and some of whom tend to be located in small, decentralized offices, 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 officeff 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 informat advisors will not lead to a material adverse effect sufficient ion security and cybersecurity. We also cannot assure that misconduct or errors by our employees or ff to cover such misconduct or errors. on our business, or that our errors and omissions insurance will be present ff ff ff We rely on third-party service providvv ers, and support functions, and our operations are dependentdd includingii off-shor dd err provid rr on financialii ers, dd ff to perform technology, processingii intermediaridd .ll es that we do not controlrr 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 officeff use of third-party service providers may decrease our ability to control operating risks and informat systems risks. processing support (“BETAHost ff TT ion technology ”). Our 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 viruses, 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 ff ff , cost-effecti ve manner, if at all, or that they will be able to adequately expand their services to meet our efficient 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 ff the related risks described above. For example, we rely on several off-sho 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. ff providers, which has increased re service providers, operating in multiple 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 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 affecte of such third parties. If there were deficiencies in the oversight d. ff ff In addition, certain aspects of our operations are dependent on third-party financial institutions that we do not control, such as clearing agents, securities exchanges, clearing houses and other financial intermediaries. Any failure of these intermediaries, or any interruption in their operations, either on a widespread or individual basis, could adversely affect event of such failure or interruption, there is no guarantee that we would be able to find adequate and cost-effecti replacements on a timely basis, if at all. our ability to execute transactions, service our clients and manage our exposure to risk. In the ve ff ff Like us, these intermediaries are exposed to risks related to fluctuations and volatility in the financial markets and broader economy, as well as specific operational risks related to their business, such as those related to technology, security and the prevailing regulatory environment. Because we rely on these intermediaries, we share indirect exposure to these risks. If these risks were to materialize, or if there was a widespread perception that they could materialize, our business and results of operations could be adversely affecte d. ff 16 Lack of liquidityt or access to capital could impair our business and finii ancialii 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: ff ff • • • • • illiquid or volatile markets; diminished access to debt or capital markets; unforeseen cash or capital requirements; regulatory penalties or fines, settlements, customer restitution or other remediation costs; or adverse legal settlements or judgments. The capital and credit markets continue to experience varying degrees of volatility and disruption. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for businesses similar to ours. Without sufficient ff . our business would suffer liquidity, 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. We may also need access to capital in connection with the growth of our business, through acquisitions or otherwise. ff In the event current resources are insuffici ff ent to satisfyff 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 revenues 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 effeff ctively deploy such capital, or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility. rr Our business could be materially adverselyl affeff cted as a result of the risks associated withtt acquisiii and invesvv tments. tions 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. ff ff In December 2020, our wholly owned subsidiary LPL Holdings, Inc. (“LPL Holdings”) entered into a stock and asset purchase agreement (the “Purchase Agreement”) with Macquarie Management Holdings, Inc. (“Macquarie”). Pursuant to the Agreement, LPL Holdings will acquire the wealth management business of Waddell & Reed 17 Financial, Inc. (“Waddell & Reed”), upon completion of Macquarie’s acquisition of all of the issued and outstanding common shares of Waddell & Reed. b The transaction is expected to close in the middle of 2021, subject to satisfaction of closing conditions. There can be no assurance that the transaction will be completed timely or at all due to several factors, including, but not limited to: the failure of the parties to satisfy the closing conditions in the Purchase Agreement in a timely manner or at all, including the completion of the acquisition of Waddell & Reed by Macquarie, obtaining the required stockholder and regulatory approvals and the retention by Waddell & Reed of minimum assets prior to closing. Further, several factors could negatively affect other expected benefits of the transaction, including, but not limited to: difficult Reed financial advisors or onboarding the clients or businesses of Waddell & Reed financial advisors to our platforms, challenges in separating the operations of Waddell & Reed’s wealth management business from the operations to be retained by Macquarie and disruptions to our or Waddell & Reed’s businesses as a result of the announcement and pendency of the transactions. our ability to fully realize the revenue or expense synergies or the ies and delays in recruiting Waddell & ff ff Our risk management policies and procedures may not be fullyl effeff ctive in mitigatin allll markrr ekk t envirovv nmentstt or against allll types of risks. ii i g our risk exposure in We have adopted policies and procedures to identify, monitor and manage our operational risk. These policies ff ff and procedures, however, may not be effeff ctive and may not be adapted quickly enough to respond effecti vely to changed circumstances. Some of our compliance and risk evaluation functions depend upon informat ion technology systems, information provided by others and public informat otherwise accessible by us. In some cases, however, that informat up-to-date. Also, because many of our advisors work in decentralized offiff ces, additional risk management challenges may exist, including with regard to advisor officeff addition, our existing systems, policies and procedures, and staffiff ng levels may be insufficient significant increase in our advisor population. Any such increase could require us to increase our costs, including informat ion technology costs, in order to maintain our compliance and risk management obligations, or strain our existing policies and procedures as we evolve to support a larger advisor population. If our systems, policies and ive, or if we are not successful in capturing risks to which we are or may be exposed, we procedures are not effect may suffer effect ion regarding markets, clients or other matters that are ion may not be available, accurate, complete or ff harm to our reputation or be subject to litigation or regulatory actions that could have a material adverse on our business and financial condition. ation security practices. In technology and informf to support a ff ff ff ff ff ff We face competititt on in attractingii and retaini ii ngii key talent. Our success depends upon the continued services of our key senior management personnel, including our ff executive officers employment agreement. 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 and senior managers. Each of our executive officers is an employee at will, and none has an on our business. ff ff Moreover, 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, and 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. ff The securirr ties settlement process rr exposes us to risks related ll vv to adverse movements in price. rr 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 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 liabilities 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. clearing ff Our indebtedness could adverselyl affect our financialii health and may limit future capital needs.dd ii our abilityll to use debt to fund At December 31, 2020, we had total indebtedness of $2.3 billion, of which $1.1 billion is subject b 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 18 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. ff 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. In addition, if such downgrade were to occur, or if ratings agencies indicated that a downgrade may occur, perceptions of our financial strength could be damaged, which could affect decrease the number of investors, clients and counterparties that do business with us. our client relationships and ff Restrictions under our Creditdd Agreement and the Indenturesrr takingii actions that we believe would be in the best interest of our business. governing our Notes may prevent us from 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 ff stock; declaring dividends or other distributions to stockholders; 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 affiliat ff es; entering into agreements that restrict dividends or other payments from subsidiaries; and consolidating, merging or transferring all or substantially all of our assets. 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, be affect ed by events beyond our control. If we violate any of these covenants and are unable to obtain waivers, we ff 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 suffiff cient 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 which may ff 19 ff and adversely affect favorable to holders of our common stock and may make it more difficult strategy and compete against companies that are not subject ed. In addition, complying with these covenants may also cause us to take actions that are not ff for us to successfully execute our business to such restrictions. b sioii ns of our Credit Agreement and the Indentures could discourarr ge an acquisition of us by a third-dd Provi rr rr party. Certain provisions of our Credit Agreement and the Indentures could make it more difficult ff 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 suffiff cient financial resources to purchase our outstanding indebtedness in connection with a change of control. Our insurance coverag vv e 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 claims, and the precautions we take may not be effect ff ff ive in all cases. costs. It is not always possible to prevent or detect activities giving rise to ff ff and purchase coverage that is appropriate based on our assessment We maintain voluntary and required insurance coverage, including, among others, general liability, property, director and offiff cer, 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 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 ff 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 affect 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. ed if in the future some or all of our insurance proves to be inadequate or , and there are particular uncertainties and ff ff Poor service or performance of the finanii such services or products may cause clients of our advisovv cial products that we offer rs to withdrawdd ff or competitivevv pressu rr res on pricrr ing of their assets on short notice. Clients of our advisors have control over their assets that are served under our platforms. Poor service or ff ff of the financial products that we offer , the emergence of new financial products or services from performance others, harm to our reputation or competitive pressures on pricing of such services or products may result in the loss of clients. 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 result in pricing pressure or otherwise adversely impact our business. The decrease in revenues that could result from such an event could have a material adverse effect on our business. ff A loss of our markrr ekk tingii with our advisovv rs and, in turn, their clienll ts. relationshipsii with manufacturers of financial prorr ducts could harm our relation ll ship We operate on an open architecture product platformff offeff ring no proprietary financial products. To help our advisors meet their clients’ needs with suitable investment options, we have relationships with many of the industry- leading providers of financial and insurance products. We have sponsorship agreements with some manufacturers of fixed and variable annuities and mutual funds that, subject to the survival of certain terms and conditions, may be 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 affecte d. 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 revenues currently generated from the sale of such products. In addition, certain features of such contracts have been eliminated by variable annuity product ff ff 20 sponsors. If this trend continues, the attractiveness of these products would be reduced, potentially reducing the revenues we currently generate from the sale of such products. Changes in U.S. federal income tax law could make some of the produ attractive to clients. rr ii cts distri buii ted by our advisors less 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 results of operations, cash flows, or financial condition. on our business, ff The effects of the outbreak of the novel coronavirus (COVID-19) have negatively affected the global economy, U.S. economy and global financial markets, and may disrupt our operations and our advisors' operations, which could have a material adverse effect on our business, financial condition and results of operations. The ongoing COVID-19 pandemic has caused significant disruption in the international and U.S. economies and financial markets. The spread of COVID-19 and effort cancellation of events and travel, business shutdowns, reduction in business activity and financial transactions, labor shortages, increased unemployment, supply chain interruptions and overall economic and financial market instability. Impacts on our business could be wide-ranging, and material impacts are possible, including the following: s to contain it have resulted in illness, quarantines, ff • • • • • • • • Employees contracting COVID-19, including unavailability of key personnel necessary to conduct our business operations A prolonged downturn in equity and other financial markets, which would adversely affect asset-based and trailing commission revenues ff our advisory, A sustained low interest rate environment, which would reduce revenues from our client cash programs included in asset-based revenues Reductions in our service levels or operating effect working remotely in response to the pandemic ff iveness as a substantial majority of our employees are ff Failure of our informat securities clearing and custody functions, as a result of extraordinary trading volumes, malware, ransomware or malicious cyber activity ion technology systems, which could result in interruptions or errors in performing ff Disruptions in technology, processing or support functions as our outsourced service providers or other vendors, including off-shore providers, experience disruptions in their business operations ff Reduction in our ability to recruit advisors or otherwise execute our growth plans due to travel restrictions, limitations on interpersonal contact and challenging macro economic conditions Closure of our offices ff or the offices ff of our advisors The COVID-19 pandemic and efforts to contain it have also resulted in increased volatility. The further spread of COVID-19 and attempts to curtail it by limiting interpersonal activity, including business activity, may increase instability in domestic and international financial markets and materially disrupt general economic and financial activity. Significant disruptions in financial markets could result in a decline in demand for the products and services offered by our advisors to their clients, or their ability to provide them, which would negatively impact our and their financial results and growth strategy. In addition, an overall decline in equity market prices will generally reduce the value of advisory and brokerage assets, which has previously resulted and may in the future result in a reduction in the advisory fees, asset-based fees and trailing commissions we are entitled to receive. Moreover, in response to the economic fallout from the COVID-19 pandemic, the Federal Reserve reduced the federal funds rate by 150 basis points in March 2020 and there is a substantial likelihood that interest rates will remain low while global economic activity is suppressed. The reduction in prevailing interest rates has in turn reduced, and will continue to reduce, our revenues from our client cash programs and may affect our ability to negotiate favorable terms in future agreements with banks and money market fund providers that participate in our programs. The COVID-19 pandemic could also jeopardize our ability to rely on our outsourced service providers, including those that operate off-shore. As COVID-19 has spread, governments in the United States and around the 21 world, including in jurisdictions where our service providers have operations, have from time to time imposed or encouraged varying degrees of limitations on travel and social interaction. In many cases this has resulted in the partial or complete closure of businesses, including some that we rely on. While we have taken steps to minimize the disruptions that these closures have caused, and are seeking to avoid interruptions to our critical operations, there can be no guarantee that they will be effective, or, if they are effective, that such effect will be sustained or cost-effective. In addition, if business closures are prolonged or become more widespread, our ability to modify our operations to avoid interruption may become more limited or costly. Any interruption to our operations could have a negative effect on our reputation and results of operations. In response to the COVID-19 pandemic, we have implemented significant elements of our business continuity plans, and have begun relying on capabilities that we previously put into place to support these plans. While we believe that these plans and their implementation have helped avoid significant interruptions to our critical services, there can be no assurance that they will be able to do so on a sustained or uninterrupted basis, and reliance on such plans could expose our business to other operational risks. For example, while we have taken steps to ensure that our remote-work solutions are reliable and secure, especially those related to the handling, transmission, storage and disposal of sensitive personal or confidential informat solutions will be used or function as intended, or that they will be completely effecti our services or cybersecurity incidents. In addition, there can be no assurance that the third parties that provide and maintain some of these solutions will be able to do so on a sustained and uninterrupted basis. Because we do not control these third parties, we are subject to the limitations, deficiencies and vulnerabilities of their services, products, and operations. Any compromise, failure, or interruption in the availability of the solutions that support our remote-work operations could directly or indirectly result in cybersecurity incidents, interruptions to our business, and negative effect s on our reputation and results of operations. ion, there can be no assurance that these ve in preventing interruptions in ff ff ff Risks Related to Our Regulatory Environment Any failure to comply with applicall ll regulatory actions, which could increase our costs or negatively affect our reputation. ble federalrr or state laws or regulations expos xx es us to litigatio i n and Our business, including securities and investment advisory services, is subject b 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-regulat ory organizations, and a participant in various clearing organizations, including the Depository Trust Company, the National Securities Clearing Corporation and the Options Clearing Corporation; ff regulated by the DOL relative to its servicing and rr of retirement plan accounts subject to ERISA and the Code; regulated by the CFTC with respect to the futures and commodities trading activities it conducts as an introducing broker. The primary self-regulat ff or 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 Financial’s primary regulator for futures and commodities trading activities. The SEC, FINRA, DOL, the CFTC, the OCC, various securities and futures exchanges and other United States and state-level governmental or regulatory authorities continuously review legislative and regulatory initiatives and may adopt new or revised laws, regulations or interpretations. There can be no assurance that other federal or state agencies will not attempt to further regulate our business or that specific interactions with foreign countries or foreign nationals will not trigger regulation in non-U.S. law in particular circumstances. These legislative and regulatory initiatives may affect less profitable. the way in which we conduct our business and may make our business model ff 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 22 ive in complying with all applicable laws, rules and regulations and interpretations. In particular, the diversity of ff 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, ff effect informat robust ff 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. ion security environments in which our services are offered makes it difficult to ensure a uniformly ff 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 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. ff ff our We have established a captive insurance subsidiary that underwrites insurance for various regulatory and ff coverage is not available for all matters. The availability of coverage depends on legal risks, although self-insurance 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 exceed our loss reserves, in which case coverage may not be available and we could incur material additional expense. liabilities could ff ff Regulatory ll business less profita rr ble. developments could adverselyl affecff t our business by increasingii our costs or makingii our Our profitability could be affecte ff d 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 operations, cash flows or financial condition. on our business, results of ff ff New laws, rules and regulations, or changes to the interpretation or enforcement ff 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 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, ion technology, and could result in other costs, including greater risks of client lawsuits and compliance, informat to the array of products and services we offer enforcement clients and the compensation that we and our advisors receive in connection with such products and services. activity by regulators. These changes may also affect ff ff ff ff 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 of these laws and future their own similar laws and regulations. The impacts, degree and timing of the effect regulations on our business cannot now be anticipated or planned for, and may have further impacts on our ff 23 products and services and the results of operations. Please consult the Retirement Plan Services Regulation section within Part I, “Item 1. Business” for specific informf related exemptions and their potential impact on our operations. ation about risks associated with DOL regulations and 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 offeri the Dodd-Frank Act affect institutions with which we do business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present ineffici encies 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. ngs for potential changes and would likely result in increased compliance costs. Moreover, to the extent s the operations, financial condition, liquidity and capital requirements of financial ff ff ff Likewise, ffederal and state standards prohibit ging discrimination on the basis fof disabilityy in public employment, includingg those related to the Americans with Disabilities Act, are evolving to fof public spaces, includingg web-based applications, to be made accessible to the accommodations and y require an increasing number g disabled. AAs a result, we could be required to make modifications to our internet-based applications or to our other client- or nologies, includingg our website, to provide enhanced or accessible service to, or make reasonable accommodations ffor, disabled persons. This adaptation fof our websites and web-based applications and materials could result in increased costs and with ffederal or state standards could result in li gtigation, in ymay fafffefff ct the products and services we provide. Failure to co cluding class action lawsuits. acing tech f g advisor-f ymply g g g In sum, our profitability may be adversely affect ff ff by the various federal, state and self-regulatory organizations to which we are subject. The effect developments on our business cannot now be anticipated or planned forff products and services and results of operations. ed by current and future rulemaking and enforcement , but may have further impacts on our ff of these regulatory activity We are subjecb restriction of the conduct or growrr t to various regulator requireme yrr rr ii th of our busines ll s. ntstt , whicww h, if not compliedll with, could result in the 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 additional capital may be delayed or prohibited. to sell shares or raise ff In addition, the SEC, FINRA, the CFTC, the OCC and the NFAFF 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 NFAFF 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. b ff 24 to comply withtt ERISA regulatll iontt s and certain retirtt emrr Failurerr against us. tt ent plan regulatll ions could result in penalties 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 affecte “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 ff extent to which we could act as fiduciaries for or provide services to these plans). d plan. Section 4975 of the Code prohibits certain transactions involving on our business (or, in a worst case, severely limit the ff 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. ll Our business relies extensively on electronic data processing, storage and communications systems. In and addition to better serving our advisors and their clients, the effecti ve use of technology increases efficiency 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: ff ff • • • • • • continue to invest significant resources on our technology systems in order to meet industry and regulatory standards, consumer preferences and the effort s of threat actors to penetrate our systems; ff successfully maintain and upgrade the capabilities of our systems; 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; use technology effect ff ively and securely to support our regulatory compliance and reporting functions; comply with the changing landscape of laws and regulations that govern protection of personally identifiable informat ion; and ff retain skilled informat ff ion 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 effect 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. ively upgrade those systems or ff ff ff ff ff Our operations rely on the secure processing, storage and transmission of confidential and other informat ion in our computer systems and networks, including personally identifiable informat ion of advisors and their clients, as them as circumstances well as our employees. Although we take protective measures and endeavor to modifyff 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 informat 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 informff systems and networks, or otherwise cause interruptions or malfunctions in our own, our advisors’ or their clients’, ion about our advisors or their clients, their systems may face similar vulnerabilities. We are not able to ation processed, stored in and transmitted through our computer 25 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. ff Our information technology systems yy may be vulnerable to security risks. The secure transmission of confidential informat ff ion, including personally identifiable informat ff ion, over public ff ff ion about clients of our advisors, our advisors and our employees, as well as proprietary networks is a critical element of our operations. As part of our normal operations, we maintain and transmit confidential informat informat 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. ion relating to our business operations. The risks related to transmitting data and using service providers Cybersecurity requires ongoing investment and diligence against evolving threats and is subject to federal ff ion. We may be required to expend significant and state regulation relating to the protection of confidential informat additional resources to modifyff 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 effeff ctively and efficient ly 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 informat 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. ion by companies within their jurisdiction. Several states, including California, Colorado, Connecticut, ff ff ff 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 informat 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 effecti of any of these events may have a material adverse effect veness of our security measures and technology infrastructure. The occurrence on our business or results of operations. ion. If any such ff ff ff ff Our own informat ff ion 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 ion or intentionally or unintentionally, could result in the loss or wrongful use of their clients’ confidential informat other sensitive informat persons who circumvent security measures could infiltrate or damage our systems or facilities and wrongfully use our confidential informat 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: ion. In addition, even if we and our advisors comply with our policies and procedures, ion or cause interruptions or malfunctions in our ion or clients’ confidential informat ff ff ff ff • • seriously damage our reputation; allow competitors or hackers access to our proprietary business informat ff ion; 26 • • • • • • 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 ff to enforce regulations regarding business continuity planning or cybersecurity; subject us to litigation by consumers, advisors or other business partners that may suffer result of such activity; ff damages as a 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.ff While we maintain cyber liability insurance, this insurance does not cover certain types of potential losses and, for covered losses, may not be sufficient us against all such losses. in amount to protect ff 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 beforf e 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 informat 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. ion security at a vendor, which led to notification costs ff 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 beforeff and reliable information. In some cases, the nature of the attack may be such that full and reliable infoff rmation 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 beforeff remediated, all of which would further increase the costs and consequences of such an attack. they are discovered and we obtain full ii re to maintain Failuii technology platfoll our business. technological capabiliii ties, flawsww in existinii g technology, difficulties in upgradindd g our rm or the introdrr uction of a competitive platform ll could have a materiarr l adverse effect on 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; portfolioff management; performance reporting; customer service; accounting and internal financial processes and controls; and regulatory compliance and reporting. Our continued success depends on our ability to effeff ctively 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 platforff m that renders our technology less competitive. Maintaining competitive technology requires us to make significant capital expenditures, both in the near term ff and longer-term. There cannot be any assurance that we will have sufficient expand our informat computing devices that may be preferred by our advisors and/or their clients, nor can there be any assurance that any upgrade or expansion effort prospective advisors or their clients. The process of upgrading and expanding our systems has at times caused, ly timely, successful, secure and accepted by our current and ion technology systems or capabilities, or offer our services on the personal and mobile resources to adequately update and s will be sufficient ff ff ff ff 27 ff ff system degradations, outages and failures. If our technology systems were s. A technological breakdown could also interfere with our ability to comply with financial reporting and other and may in the future cause, us to suffer to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of advisors and could harm our reputation. A breakdown in advisors’ systems could have similar effect 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 ve, in modernization spending, although we cannot provide assurance that our risk mitigation efforts whole or in part. will be effecti ff ff Inadequacy or disrii uprr event of a catastrophe could advevv rsrr ely affeff ct our busines tion of our busines ii s contitt nuity and disaster rerr covevv ryrr plans ii s. ii ll rr and proced uresrr in the 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 affecti employees or facilities, or an indirect impact on us by adversely affect 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-sho re 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. ng our advisors, ing the financial markets or the overall ff ff ff Risks Related to Ownership of Our Common Stock The pricerr losses for our investors.rr of our common stock may be volatil ll e and fluctuate substantially, ll which could result in substantial 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 ff 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 sales 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 d. These ff often been unrelated or disproportionate to the operating performance 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 affecte of the particular companies affecte d ff ff ff 28 company. This type of litigation could result in substantial costs and a diversion of our management’s attention and resources. We arerr a holding company and relyl on dividenddd of funds from our subsidiari ii s,dd distri es to meet our debt service and other obligatio buii ii i ns. tions and other payments, advances and transfers 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’sAA prior approval. Compliance with this regulation may impede our ability to receive dividends from our broker-dealer subsidiary. Our future abilityll subject to the discreti ii earnings and cash flows.ww to pay regularll dividendsdd to holdersdd on of our board of directo chase rr of our common stock or repur to generate sufficient by our abilityll shares are rs and willii be limited e ii ii Our board of directors declared quarterly cash dividends on our outstanding common stock in 2020 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 ff and cash flows. If we are unable to generate sufficient 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. earnings and cash flows from our business, we may not be 29 Item 1B. Unresolved Staff Cff omments None. Item 2. Properties A summary of our significant locations at December 31, 2020 is shown in the following table. Location San Diego, California Fort Mill, South Carolina Boston, Massachusetts Austin, Texas Approximate Square Footage Lease Expiration 420,000 452,000 69,000 29,000 2029 2036 2023 2027 We also lease smaller administrative and operational offiff ces in various locations throughout the United States. the current operating requirements of our business and that We believe that our existing properties are adequate forff 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 ff claims. proceedings initiated by the SEC, FINRA and state securities regulators, as well as other actions and For a discussion of legal proceedings, see Note 14 - Commitments and Contingencies, within the notes to the consolidated financial statements in this Annual Report on Form 10-K. Please also see “Risk Factors - Any failure to comply with applicable federal could increase our costs or negatively affect related to litigation, arbitration claims and regulatory actions” within Part I, “Item 1A. Risk Factors”. or state laws or regulations exposes us to litigation and regulatory actions, which our reputation” and “Risk Factors – Our business is subject to risks ff ff Item 4. Mine Safety Disclosures Not applicable. 30 Information about our Executive Offiff cers The following table provides certain information about each of the Company’s executive offiff cers 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 Edward Fandrey J. Andrew Kalbaugh(1) Sallie R. Larsen Michelle Oroschakoff ff Scott Seese(2) Dayton Semerjian Richard Steinmeier George B. White ______ ____ ____ ____ ____ ____ ____ ____ ____ Ageg Position 56 46 47 45 57 67 5 9 51 55 47 52 President and Chief Executive Officer ff Chief Financial Officer ff Managing Director, Business Solutions Managing Director, Divisional President, Advisor Solutions Managing Director, Divisional President, National Sales and Consulting Managing Director, Chief Human Capital Officer ff Managing Director, Chief Legal Officer ff Managing Director, Chief Information Officer ff Managing Director, Chief Customer Care Officer ff Managing Director, Divisional President, Business Development Managing Director, Investor and Investment Solutions and Chief Investment Officer ff (1) (2) Mr. Kalbaugh will be retiring from the Company in March 2021. Mr. Seese is on a leave of absence as of the date of this Annual Report on Form 10-K. Executive Office ff rs Dan H. Arnold — Presi rr dent and Chief Executive Officer ff Mr. Arnold has served as our chief executive offiff cer since January 2017. He has served as our president since ff ff s and ensuring the effect from June 2012 to March 2015 and was responsible for formulating financial March 2015, with responsibility for our primary client-facing functions and long-term strategy for growth. Mr. Arnold served as our chief financial officer policy, leading our capital management effort functions. Prior to 2012, he was managing director, head of strategy, with responsibility for long-term strategic planning for the firm, product and platforff m development and strategic investments, including acquisitions. He has also served as divisional president of our Institution Services. Mr. Arnold joined our Company in January 2007 following our acquisition of UVEST Financial Services Group, Inc. (“UVEST”). Prior to joining us, Mr. Arnold worked at UVEST for 13 years, serving most recently as president and chief operating officer . From April 2015 to July 2018, he served on the board of directors of the Securities Industry and Financial Markets Association (“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. iveness of the organization’s financial ff ff Matthew J. Audette — Chief Finanii cial Officer ff Mr. Audette is our chief financial officer . He is responsible for the Company’s core financial functions including: financial planning and analysis, controllership, tax, internal audit, treasury, corporate development and investor relations. Prior to joining LPL in September 2015, he served as executive vice president and chief financial officer of E*TRADE Financial Corporation (“E*Trade”) from January 2011 until June 2015. During his 16 years with E*TRADE, he led the formation of the firm’s Finance department and was a key contributor in the growth of the franchise, leading a variety of corporate transactions and capital activities. Mr. Audette began his career in the financial services practice at KPMG. Mr. Audette earned a B.S. in accounting from Virginia Polytechnic Institute and State University, popularly known as Virginia Tech. ff Matthew Enyedi yy — Managingii Directo rr r, Business Solutions Mr. Enyedi has served as managing director, business solutions of LPL Financial since November 2020. He is responsible for developing and deploying a suite of automated professional services to LPL advisors, and aligning them with the firm’s other programs that support advisors as business owners. From January to November 2020, Mr. Enyedi served as managing director, national sales of LPL Financial, overseeing an integrated group of product 31 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 effoff rts, and oversaw a team focused on providing front- and middle-officeff 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. ff Edwardrr Fandrey — Managingii Director, Divisional Presi rr dent, Advisor Solutions Mr. Fandrey has served as managing director, divisional president, advisor solutions of LPL Financial since January 2021. In this role, he is responsible for leading the company’s strategic plan to expand engagement with advisors, partnering with them to utilize the firm’s evolving affiff liation models, optimally leverage its tools and capabilities, and fully support their growth initiatives and other business needs. Prior to joining LPL, he served from 2016 to 2021 as vice president of the Financial Services business at Microsoftff Corporation, where he led an organization of sales, support, technology and customer success professionals driving client-centric digital transformation across leading banks, insurance companies, hedge funds and capital markets firms. Mr. Fandrey joined Microsoftff in 2000 and held various leadership roles including Chief of Staff for Worldwide Sales and Marketing. He earned his bachelor’s degree in psychology from the State University of New York at Albany and has multiple technology and developer certifications. J. Andrewdd Kalbaugh — Managingii Directo ii r, Divisivv onal Presi rr dent, 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 offiff cer 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. Salliell R. Larsenrr — Managingii Directo ii r r, Chief Human Capital Office ff Ms. Larsen is managing director, chief human capital officeff r 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 r from November 2009 to April 2012. In earlier roles, Ms. Larsen was a managing vice president of resources officeff 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 executive leadership coaching from Georgetown University. Lutheran University and a certificate in ff Michelle Oroscha rr koff — Managingii Directo ii r, Chief Legal Officer Ms. Oroschakoffff is managing director, chief legal officeff r 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. Oroschakoffff has more than 20 years of financial services industry experience deeply rooted in legal, compliance r in September 2013 from and risk management. She joined LPL Financial as managing director, chief risk officeff r in Morgan Stanley, and was promoted to chief legal and risk offiff cer in June 2017. She became chief legal officeff 32 June 2018. At Morgan Stanley, she most recently served as managing director and Global Chief Risk Offiff cer of the firm’s Global Wealth Management Group from 2011 to 2013. Previously, while with Morgan Stanley, she served as chief administrative offiff cer from 2010 to 2011, as well as Chief Compliance Offiff cer from 2006 to 2010. Earlier in her career, Ms. Oroschakoffff 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. Oroschakoffff 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 — Managingii Directo ii r r, Chief Information Office ff Mr. Seese is managing director, chief information offiff cer 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 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, informat 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 electrical engineering from Ohio State University. ion technology, at eBay, Inc. Prior to joining businesses. Mr. Seese earned his B.S. in that enable positive, compelling ff ff ff Dayton Semerjianjj — Managing Director, Chief Customer Care Officer Mr. Semerjian has served as managing director, chief customer care officer 2019. He is responsible for LPL Financial’s customer satisfaction and client-centric efforts 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. of LPL Financial since February and leads Service, ff ff Richard Steinmeier — Managingii Director, Divisional Presi rr dent, 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 Segment and Wealth Advice Center from August 2012 to September 2017. director, head of the Emerging Affluent 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 Stanfordff University. ff George B. White — ManaM ging Direii ctor, Invesvv tor and Invesvv tment Solutions tt and Chief Invesvv tment Offiff cer Mr. White has served as managing director, investor and investment solutions and chief investment officer ff from LPL Financial since January 2017. He served as managing director, research, and chief investment officer 2009 to December 2016. Mr. White is responsible for the strategic direction and continued growth of LPL Financial’s research, marketing, products and investment platforms. Prior to joining us in November 2007, Mr. White served as a managing director and director of research for Wachovia Securities for 10 years. Mr. White was also an investment analyst for Mercer Investment Consulting, where he provided investment advice to institutional clients. He started his financial services career on the buy side of the business as a research analyst for Thompson, Siegel, and Walmsley, a value-oriented asset manager. Mr. White received a B.B.A. from the College of William and Mary. of ff ff 33 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of PART II Equity Securities Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol “LPLA.” The closing sale price as of December 31, 2020 was $104.22 per share. As of that date, there were 1,172 common stockholders of record based on informat 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. ion provided by our transferf ff 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, 2015 and reinvestment of the dividends on the respective dividend payment dates without commissions. This graph does not forecast future perforr rmance of the Company’s stock. e u l a V $250 $200 $150 $100 $50 $0 12/31/15 03/31/16 06/30/16 09/30/16 12/30/16 03/31/17 06/30/17 09/30/17 12/31/17 03/31/18 06/30/18 09/30/18 12/31/18 03/31/19 06/30/19 09/30/19 12/31/19 03/31/20 06/30/20 09/30/20 12/31/20 Date LPLA Dow Jones U.S. Financial Services Index S&P 500 Financial Sector Index 34 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 FINRA’s prior approval, potentially impeding our ability to receive dividends from LPL Financial. Securities Authorized for Issuance Under Equity Compensation Plans The table below sets forth information on compensation plans under which our equity securities are authorized for issuance as of December 31, 2020: 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 2,000,383 $ Equity compensation plans not approved by security holders Total — 2,000,383 $ 45.57 — 45.57 3,531,003 — 3,531,003 Purchases of Equity Securities by the Issuer The Company suspended share repurchases in early 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic. As of December 31, 2020, the Company had $349.8 million remaining under the existing share repurchase program. Item 6. Selected Financial Data Omitted. 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The followinww g discussion ii ii of our financial conditiontt and resultstt of operations tt should be read in conjunctiontt withtt ii Statett mentstt and Supplementary statett mentstt and the notes to those consolidated financial our consolidated financial Financial forward-lookingii those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K,KK our actual resultstt may diffii erff materially from those anticipat heading “Special ii Data” of thisii Annual Report on Form 10-K.KK This discussion contains As a result of many factors, such as ed in these forward-looking statements.tt Please also refer to the sectiontt u that involve significant Note Regarding Forward-Looking Statements.” included in “Item 8. t tt risks and uncertaint ies. statementstt statett mentstt under S tt ff tt t Overview We are a leader in the retail financial advice market and the nation’s largest independent broker-dealer. We serve independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services and practice management programs they need to create and grow their practices. We enable them to provide objective financial guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions. Please consult Part I, “Item 1. Business” for additional informat ion related to our business activities. ff Executive Summary Financial Highlights Results for the year ended December 31, 2020 included net income of $472.6 million, or $5.86 per share, which compares to $559.9 million, or $6.62 per share, for the year ended December 31, 2019. Asset Growth Trends Total advisory and brokerage assets served were $903.1 billion as of December 31, 2020, up 18.1% from $764.4 billion as of December 31, 2019. Total net new assets were $60.2 billion for the year ended December 31, 2020, compared to $36.3 billion for the same period in 2019. Net new advisory assets were an inflow of $52.1 billion for the year ended December 31, 2020, compared to $34.3 billion in 2019. As of December 31, 2020, our advisory assets had grown to $461.2 billion from the prior year end balance of $365.8 billion, an increase of 26.1%, and represented 51.1% of total advisory and brokerage assets served. Net new brokerage assets were an inflow of $8.1 billion for the year ended December 31, 2020, compared to $2.0 billion in 2019. As of December 31, 2020, our brokerage assets were $441.9 billion, up from $398.6 billion as of December 31, 2019, an increase of 10.9%. Gross Profit rr Trends rr Gross profit, a non-GAAP financial measure, of $2,103.3 million for the year ended December 31, 2020, decreased 3.2% from $2,172.2 million for the year ended December 31, 2019. Gross profit is calculated as total net revenues, less advisory and commission expenses and brokerage, clearing and exchange fees. Management presents gross profit because we believe that measure may provide useful insight to investors in evaluating the Company’s core operating performance 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 informat ion on gross profit. beforeff ff ff Shareholder Capitaltt Returns We returned $229.1 million of capital to shareholders during the year ended December 31, 2020, including $79.1 million of dividends and $150.0 million of share repurchases, representing 1,809,553 shares. VV COVID-19 Response In response to the coronavirus disease 2019 (“COVID-19”) pandemic, we have taken measures to protect the health and safety of our employees, as well as the stability and continuity of our operations. For example, we have equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices, ff maintain service continuity throughout the increased market volatility and operational volumes that occurred during the year. We also made extra support available to our advisors by extending service hours and providing additional and have worked closely with our vendors to 36 resources to enable them to deliver differe Business and Industry” section within Part I, “Item 1A. Risk Factors” for more informat with COVID-19. ff ff ntiated services to their clients. Please consult the “Risks Related to our ion about the risks associated Our Sources of Revenue Our revenues are derived primarily from fees and commissions from products and advisory services offered ff 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 bank 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 ff 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, ff including our policies, procedures and platforms, in response to marketplace developments. We seek to continuously improve and enhance aspects of our operations and service offeri ngs 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 advisory and brokerage accounts. ff 37 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. figures more comparable with other companies. Our updated definition now includes dividends and interest, and subtracts advisory fees. All net new asset figures below align with our new definition. Our key operating, business and financial metrics are as follows: In April 2020, we updated our definition of net new assets to make our ff Operating Metrics (dollars in billions)(1) Assets Advisory assets(2)(3) Brokerage assets(2)(4) Total Advisory and Brokerage Assets(2) Advisory Assets % of TotTT al Advisory and Brokerage Assets Net New Assets Net new advisory assets(5) Net new brokerage assets(6) Total Net New Assets Organic Net New Assets g (7) Net new advisory assets Net new brokerage assets Total Organic Net New Assets Total Organic Net New Assets Annualized Growth Rate(8) Client Cash Balances(2) Insured cash account balances Deposit cash account balances Total Bank Sweep Balances Money market account balances Purchased money market fund balances Total Client Cash Balances Net Buy (Sell) Activity(9) Business and Financial Metrics (dollars in millions, except per share data) Advisors Average Total Assets per Advisor(10) Employees Share Repurchases Dividends % of Capital Returned to Shareholders(11) Leverage Ratio(12) 38 As of and for the Years Ended December 31, 2020 2019 461.2 441.9 903.1 51.1% 52.1 8.1 60.2 49.6 6.6 56.2 7.4% 37.3 8.2 45.5 1.5 1.9 48.9 34.3 $ $ $ $ $ $ $ $ $ 365.8 398.6 764.4 47.8% 34.3 2.0 36.3 33.3 0.2 33.5 5.3% 24.4 5.0 29.4 1.9 2.4 33.7 41.4 As of and for the Years Ended December 31, 2020 17,287 52.2 $ 4,756 2019 16,464 46.4 4,343 150.0 79.1 $ $ 500.4 82.6 44.0% 96.1% 2.16 2.05 $ $ $ $ $ $ $ $ $ $ $ $ Total net revenues Net income Earnings per share (“EPS”), diluted EPS prior to amortization of intangible assets(13) Gross Profit(14) EBITDA(15) EBITDA as a % of Gross Profit Core G&A(16) ______ ____ ____ ____ ____ ____ ____ ____ ____ For the Years Ended December 31, 2020 2019 $ 5,871.6 $ 5,624.9 $ $ $ 472.6 5.86 6.46 $ $ $ 559.9 6.62 7.17 $ 2,103.3 $ 2,172.2 $ $ 908.9 $ 1,036.1 43.2% 47.7% 925.1 $ 868.4 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) Totals may not foot due to rounding. Advisory and brokerage assets consists 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 total advisory and brokerage assets. Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”). Please consult the “Results of Operations” section forff a tabular presentation of advisory assets. Brokerage assets consists of brokerage assets serviced by advisors licensed with LPL Financial. Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. Figures forf interest or subtract advisory fees. The figure previously reported forff net new advisory assets reported prior to April 2020 did not include dividends and the year ended December 31, 2019 was an inflow of $30.0 billion. Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. Figures for net new brokerage assets reported prior to April 2020 did not include dividends and interest. The figure previously reported the year ended December 31, 2019 was an outflow of $3.4 billion. Consists of net new assets excluding the acquisitions of Lucia Securities, LLC and E.K. Riley Investments, LLC. Acquired assets include $2.5 billion of net new assets related to E.K. Riley Investments, LLC in November 2020, $1.5 billion of net new assets from Lucia Securities, LLC in October 2020 and $2.8 billion of net new assets from Allen & Company in August 2019. Calculated as annualized current period organic net new assets divided by preceding period total advisory and brokerage assets. Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial. Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid. Calculated based on the end-of-period total advisory and brokerage assets divided by end-of-period advisor count. Percentage of capital returned to shareholders is calculated as the ratio of total shareholder capital returns per diluted share count to EPS prior to amortization of intangible assets. EPS prior to amortization of assets is a non-GAAP financial measure. For a reconciliation of EPS prior to amortization of intangible assets to the Company’s GAAP EPS for the periods presented, see footnote 13. A financial covenant from our credit agreement calculated as consolidated total debt to consolidated EBITDA. Please consult the “Debt and Related Covenants” section forf more information. EPS prior to amortization of intangible assets is a non-GAAP financial measure defined as GAAP 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 the applicable period. The Company presents EPS prior to amortization of benefit, divided by the number of shares outstanding forff intangible assets because management believes that the metric can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items which do not directly affect prior to amortization of intangible assets is not a measure of the Company's financial perforff mance under GAAP and should not be considered as an alternative to GAAP EPS or any other performance measure derived in accordance with GAAP. Below is a reconciliation of EPS prior to amortization of intangible assets to the Company’s GAAP EPS for the periods presented: our ongoing operating perforff mance. EPS ff EPS Reconciliation (in millions, except per share data) GAAPA EPS Amortization of intangible assets Tax benefit Amortization of intangible assets, net of tax benefit Diluted share count EPS impact EPS prior to amortization of intangible assets Years Ended December 31, 2020 2019 $ $ $ $ $ $ 5.86 67.4 $ $ (18.9) $ 48.5 80.7 0.60 6.46 $ $ $ 6.62 65.3 (18.3) 47.0 84.6 0.56 7.17 39 (14) Set forth below is a calculation of gross profit, calculated as total net revenues less advisory and commission 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 by management to be general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature. Gross Profit (in millions) Total net revenues Advisory and commission expense Brokerage, clearing and exchange fees Gross Profit(†) ______ ____ ____ ____ ____ ____ ____ ____ ____ (†) Totals may not foof t due to rounding. Years Ended December 31, 2020 2019 $ $ 5,871.6 $ 3,697.1 71. 2 5,624.9 3,388.2 6 4.4 2,103.3 $ 2,172.2 (15) EBITDA is a non-GAAP financial measure defined as net income plus interest and other expense, income tax expense, depreciation and amortization, and amortization of intangible assets. The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other perforr rmance measure derived in accordance with GAAP, oP r as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, the Company’s EBITDA can diffeff regarding capital structure, the tax jurisdictions in which companies operate, and capital investments. Below is a reconciliation of EBITDA to net income for the periods presented: r significantly from EBITDA calculated by other companies, depending on long-term strategic decisions EBITDA Reconciliation (in millions) Net income Non-operating interest expense and other Provision forf income taxes Depreciation and amortization Amortization of intangible assets Loss on extinguishment of debt EBITDA Years Ended December 31, 2020 2019 $ 472.6 $ 105.8 153.4 109.7 67.4 — 559.9 130.0 182.0 95.8 65.3 3.2 $ 908.9 $ 1,036.1 (16) Core G&A is a non-GAAP financial measure. Core G&A consists of total operating expenses, excluding the following expenses: advisory and commission, regulatory charges, promotional, employee share-based compensation, depreciation and amortization, amortization of intangible assets, and brokerage, clearing and exchange. Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expenses, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance. Core G&A is not a measure of the Company’s total operating expenses as calculated in accordance with GAAP. Below is a reconciliation of Core G&A against the Company’s total operating expenses for the periods presented: Operating Expense Reconciliation (in millions) Core G&A Regulatory charges Promotional Employee share-based compensation Total G&A Advisory and commission Depreciation and amortization Amortization of intangible assets Brokerage, clearing and exchange Total operating expenses Years Ended December 31, 2020 2019 $ 925.1 $ 29.4 208.3 31.6 1,194.4 3,697.1 109.7 67.4 71.2 868.4 32.3 205.5 29.9 1,136.1 3,388.2 95.8 65.3 64.4 $ 5,139.8 $ 4,749.9 Legal and Regulatory Matters As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision and reporting. We review these items in the ordinary course of business in our effort regulatory requirements applicable to our operations. Nevertheless, additional regulation 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 to adhere to legal and ff ff 40 ff ion, see the “Risks Related to Our Regulatory remediation related to regulatory matters. For additional informat 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 legal or regulatory violations, and other potential compliance issues. It is also our policy to self-report ff 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 informat Contingencies,” within the notes to the consolidated financial statements. known violations and issues as required by applicable ff ion, see Note 2 - Summary of Signif icant Policies - “C““ ommitments and Accountingtt ff i Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory and matter or legal proceeding, whether or not covered by our captive insurance subsidiary, is inherently difficult requires judgments based on a variety of factors and assumptions. There are particular uncertainties and by complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured 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. ff ff Our accruals, including those established through our captive insurance subsidiary at December 31, 2020, include estimated costs for significant regulatory matters or legal proceedings, 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, the majority 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. We also agreed to offeff form of reimbursement for any actual losses, plus interest, and these costs were not material. r customers remediation in the The outcome of regulatory or legal proceedings could result in legal liability, regulatory fines or monetary on our business, ion on management’s loss contingency penalties in excess of our accruals and insurance, which could have a material adverse effect results of operations, cash flows or financial condition. For more informat policies, see Note 14 - Commitment stt and Continii gencies, within the notes to the consolidated financial statements. tt ff ff In June 2018, the U.S. Court of Appeals for the Fifth Circuit invalidated regulations previously enacted by the U.S. Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would have resulted in significant new prohibited transaction exemption requirements for 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”). In December 2020, the DOL finalized a new investment advice fiduciary prohibited transaction exemption with regard to such accounts that became effect comprise a significant portion of our business and 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, informat and could lead to a greater risk of class action lawsuits and other litigation. ive on February 16, 2021. Because ERISA plans and IRAs ion technology and other costs ff ff 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, including banking regulators and state securities and insurance regulators, may respond to or attempt to enforce proposed DOL Rule and Regulation BI. As of June 30, 2020, we implemented new procedures in accordance with Regulation BI. similar issues addressed by the newly ff Future laws and regulations, including the new rule proposed by the DOL and state rules relating to the standards of conduct applicable to both retirement and non-retirement accounts, may affect our business in ways that cannot be anticipated or planned for, and may have negative impacts on our products, services and results of operations. ff 41 Acquisitions, Integrations and Divestitures We continuously assess the competitive landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented. Our recent acquisitions are as follows: • Waddell & Reed Financial, Inc. (“Waddell & Reed”) - In December 2020, we entered into an agreement with Macquarie Management Holdings, Inc. (“Macquarie”) to acquire the wealth management business of Waddell & Reed upon completion of Macquarie’s acquisition of all of the issued and outstanding common shares of Waddell & Reed. The transaction is expected to close in the middle of 2021, subject to satisfaction of closing conditions. • • • • • Blaze Portfolioff provides an advisor-facing trading and portfolio rebalancing platform. Systems LLC (“Blaze”) - In October 2020, we acquired Blaze, a technology company that E.K. Riley Investments, LLC (“E.K. Riley”) - In August 2020, we acquired business relationships with advisors from E.K. Riley, a broker-dealer and registered investment adviser (“RIA”). Lucia Securities, LLC (“Lucia”) - In August 2020, we acquired business relationships with advisors from Lucia, a broker-dealer and RIA firm. Allen & Company of Florida, LLC (“Allen & Company”) - In August 2019, we acquired Allen & Company, an RIA. Allen & Company advisors and staffff became employees of the Company. AdvisoryWorld - In December 2018, we acquired AdvisoryWorld, a technology company that provides proposal generation, investment analytics and portfolio modeling capabilities in the wealth management industry. See Note 4 - Acquisitions tt , within the notes to the consolidated financial statements for further detail. Economic Overvrr iew 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. Global economic conditions in the fourth quarter of 2020 continued to be dominated by the COVID-19 pandemic and the economic impact of containment effort supportive central bank policy (monetary stimulus) and government spending (fiscal stimulus) have helped the global and U.S. economies take meaningful steps toward recovery, but the results have been uneven and uncertainty remains elevated in the near term. The fall / winter surge in cases slowed fourth quarter growth after strong rebound in the U.S. economy in the third quarter, but the start of vaccine distribution increases the prospects of a more durable recovery emerging by the middle of 2021. s. Significant mitigation efforts through a ff ff ff According to the most recent estimate by the U.S. Bureau of Economic Analysis, the U.S. economy contracted an annualized 31.4% in the second quarter of 2020, extending the recession that began in the first quarter, but then rebounded strongly, growing at an annualized 33.4% in the third quarter of 2020. Data received during the fourth quarter of 2020 suggests that the U.S. economy continued to expand, but at a much slower rate. Despite growth slowing, there are continued signs of progress. The unemployment rate, which had spiked to 14.8% in April 2020, has declined steadily to 6.7% in December 2020. Consumer spending on goods has rebounded sharply, although spending on the services industries most impacted by COVID-19 remains depressed. Business investment has continued to rebound and industrial production has strengthened but remains below pre-pandemic levels. The Federal Reserve’s (“Fed”) most recent median gross domestic product projections, released following its December 15-16, 2020 policy meeting, saw the economy contracting 2.4% for all of 2020, a meaningful improvement from its September projection of a 3.7% contraction, followed by 4.2% growth in 2021. Equity markets posted solid gains in the fourth quarter. The S&P 500 Index returned 12.2% for the quarter, ff bringing the full-year return to 18.4%. Small cap stocks had a particularly strong quarter, as the Russell 2000 Index returned 31.4%. Non-U.S. stocks outperformed markets’ 19.8% return compared to 16.1% for developed international equities, based on the MSCI EM and MSCI EAFE Indexes. The Bloomberg Barclays U.S. Aggregate Bond Index returned 0.7% during the quarter, with rising interest rates weighing on returns but narrowing credit spreads helping corporate bonds. The 10-year Treasury yield rose 0.24% over the fourth quarter, to end the quarter at 0.93%. Nevertheless, 2020 was a solid year for bonds overall, with the U.S. Aggregate Bond Index climbing 7.5%. More economically sensitive bonds were rewarded in the fourth quarter, with the Bloomberg Barclays U.S. High Yield Index climbing 6.5%. their U.S. counterparts in the fourth quarter, led by emerging 42 Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. During the fourth quarter, Fed policymakers maintained the target range for the federal funds rate at 0.0 to 0.25%. According to projection materials released following the conclusion of the December 15-16, 2020 policy meeting, the median expectation among meeting participants was that the Fed will not begin raising rates until after 2023, although one participant projected the Fed raising rates as early as 2022 and several in 2023. The Fed also enhanced guidance on how long it would continue its bond purchase program at current levels, highlighting the need for “substantial further progress” toward inflation and unemployment goals. The updated language signaled extended potential support for the economy. Please consult the “Risks Related to Our Business and Industry” section within Part I, “Item 1A. Risk Factors” for more informat effects ff ff on our profitability and financial condition. ion about the risks associated with significant interest rate changes, and the potential related 43 Results of Operations A discussion dd of changes in our results ott the year ended December 31, 2018 has been omitted fromrr “Item 7. Management’s Discussion and Analysis of Financial ii fiscal Report on Form 10-K for thett ii year ended December 31, 2019, filedii Conditiontt f operatrr iott ns duringii this Aii the yeayy r ended December 31, 2019 compared to nnual Report on Form 10-K, bKK ut may be found in tt f Operat ions” SEC on February 21, 2020. and Results ott tt hett in our Annual with t O The following discussion presents an analysis of our results of operations for the years ended December 31, 2020 and 2019. Years Ended December 31, (Dollars in thousands) 2020 2019 % Change REVENUES Advisory Commission Asset-based Transaction and fee Interest income, net of interest expense Other Total net revenues EXPENSES Advisory and commission 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 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 $ 2,327,519 $ 1,982,869 1,906,560 1,892,407 1,044,517 1,165,979 506,071 480,328 29,412 57,561 46,508 56,765 5,871,640 5,624,856 3,697,147 3,388,186 609,257 208,250 109,732 67,358 166,389 57,067 71,185 52,399 556,128 205,537 95,779 65,334 136,163 73,887 64,445 49,859 101,018 114,546 5,139,802 4,749,864 105,765 130,001 — 3,156 626,073 153,433 741,835 181,955 $ 472,640 $ 559,880 17.4 % 0.7 % (10.4)% 5.4 % (36.8)% (1.4)% 4.4 % 9.1 % 9.6 % 1.3 % 14.6 % 3.1 % 22.2 % (22.8)% 10.5 % 5.1 % (11.8)% 8.2 % (18.6)% 100.0 % (15.6)% (15.7)% (15.6)% 44 Revenues Advisory Advisory revenues primarily represent fees charged to clients of our advisors for the use of our corporate RIA advisory platform, and are 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 client 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 averaged 1.0% of the underlying assets forff December 31, 2020. the year ended We also support separate investment adviser firms (“Hybrid RIAs”), through our hybrid 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’sAA investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services, which are included in our transaction and fee revenues in our consolidated statements of income. The administrative fees collected on our hybrid advisory platform vary and can reach a maximum of 0.2% of the underlying assets as of December 31, 2020. ff The following table summarizes the composition of advisory assets forff the periods presented (dollars in billions): Corporate platform advisory assets Hybrid platform advisory assets Total advisory assets December 31, 2020 2019 $ Change % Change $ $ 291.9 $ 228.3 $ 169.3 137.5 461.2 $ 365.8 $ 63.6 31.8 95.4 27.9 % 23.1 % 26.1 % Net new advisory assets in a particular quarter drive advisory revenues in future quarters, due to billing quarterly in advance. Therefore, the same period. The folff lowing table summarizes activity in advisory assets forff the full impact of net new advisory assets to advisory revenues is not realized in the periods presented (in billions): ff Beginning balance at January 1 Net new advisory assets(1) Market impact(2) Ending balance at December 31 ______ ____ ____ ____ ____ ____ ____ ____ ____ Years Ended December 31, 2020 2019 $ $ 365.8 $ 52.1 43.3 461.2 $ 282.0 34.3 49.5 365.8 (1) (2) Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. Previously reported figures for net new advisory assets did not include dividends and interest or subtract advisory fees. The figure previously reported forff the year ended December 31, 2019 was an inflow of $30.0 billion. Market impact is the diffeff implied growth or decline in asset balances due to market changes over the same period of time. rence between the beginning and ending asset balance less the net new asset amounts, representing the The growth in advisory revenues from 2019 to 2020 was due to net new advisory assets resulting from the s and strong advisor productivity, as well as market gains as represented by acquisitions and our recruiting effort higher levels of the S&P 500 Index. ff Commission 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, which are paid over time, are recurring in nature and are earned based on the market value of investment holdings in trail-eligible 45 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 forff regarding our commission revenues by product category. further detail The following table sets forth our commission revenues included in our consolidated statements of income (dollars in thousands): Sales-based Trailing Total commission revenues Years Ended December 31, 2020 2019 $ Change % Change $ 770,764 $ 782,852 $ (12,088) 1,135,796 1,109,555 26,241 $ 1,906,560 $ 1,892,407 $ 14,153 (1.5)% 2.4 % 0.7 % The decrease in sales-based commission revenues in 2020 compared to 2019 was primarily driven by the low interest rate environment impacted by the COVID-19 pandemic, which led to a decrease in sales of annuities, partially offset by an increase in sales of equities. ff The increase in trailing commission revenues in 2020 compared to 2019 was primarily due to the increase in value of annuities as a result of the market increases during the second half of the year, partially offset by the decline in value of other trail eligible assets as a result of the market downturn during the first quarter of 2020. ff The following table summarizes activity in brokerage assets forff the periods presented (in billions): Beginning balance at January 1 Net new brokerage assets(1) Market impact(2) Ending balance at December 31 ______ ____ ____ ____ ____ ____ ____ ____ ____ Years Ended December 31, 2020 2019 $ $ 398.6 $ 8.1 35.2 441.9 $ 346.0 2.0 50.6 398.6 (1) (2) Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. Previously reported figures for net new brokerage assets did not include dividends and interest or subtract advisory fees. The figure previously reported forff the year ended December 31, 2019 was an outflow of $3.4 billion. Market impact is the diffeff implied growth or decline in asset balances due to market changes over the same period of time. rence between the beginning and ending asset balance less the net new asset amounts, representing the We are uncertain, as of the date of this Annual Report on Form 10-K, of the effect of the COVID-19 pandemic on our future commission revenues. We cannot predict how the ongoing COVID-19 pandemic and foreign and domestic responses to it will impact our future sales-based or trailing commission revenues. While domestic equity markets have started to recover, COVID-19 cases remain widespread in the United States and many other parts of the world, and significant market disruptions and volatility remain possible. Asset-Based Asset-based revenues consist of fees from omnibus processing and networking services (collectively referred to as “recordkeeping”), our sponsorship programs with financial product manufacturers cash programs. 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. financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training effort s. Client cash-based revenues are generated on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs. Pursuant to contractual arrangements, we receive fees based on account type and invested balances for administration and recordkeeping. We receive fees from certain and fees from our client ff ff f Asset-based revenues for the year ended December 31, 2020 decreased by $121.5 million compared to 2019, primarily due to decreased revenues from our client cash programs, partially offset recordkeeping revenues and sponsorship programs. ff by an increase in 46 Revenues for our recordkeeping and sponsorship programs for the year ended December 31, 2020, which are largely based on the market value of the underlying assets, increased compared to 2019 due to the impact of market appreciation on the value of the underlying assets. Client cash revenues for the year ended December 31, 2020 decreased compared to 2019 due to the impact of a lower federal funds effeff ctive rate, partially offset by higher average client cash balances. For the year ended December 31, 2020, our average client cash balances increased to $44.7 billion compared to $31.0 billion for the year ended December 31, 2019. ff Transactiontt and Fee 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, 2020 increased by $25.7 million compared to 2019, primarily due to increased transaction volume in response to the market volatility caused by the COVID-19 pandemic, partially offset being cancelled or held in a virtual format in 2020 in response to the COVID-19 pandemic. by a decrease in conference service revenues as a result of advisor-related conferences ff Interest Income, Net of Interest Expense xx We earn interest income from client margin loans and cash equivalents, net of interest expense. Period-over- period variances correspond to changes in the average balances of margin loans and cash equivalents as well as changes in interest rates. Interest income, net of interest expense for the year ended December 31, 2020 decreased by $17.1 million compared to 2019, primarily due to lower average interest rates. tt Other 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 offeff r 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, 2020 increased by $0.8 million compared to 2019, primarily due to realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance partially offset plan. by decreases in dividend income on assets held in our advisor non-qualified deferred compensation of the underlying investment allocations chosen by advisors in the plan, ff ff Expenxx ses Advisory and Commission Advisory and commission expenses consist of the following: base payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission revenues earned on each client’s account; production based bonuses earned by advisors and institutions based on the levels of advisory and commission 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 grant date; and the deferred advisory and commissions fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors. ff 47 The folff lowing table shows the components of our payout ratio, which is a statistical or operating measure: Base payout rate(1) Production based bonuses Total payout ratio(2) ______ ____ ____ ____ ____ ____ ____ ____ ____ Years Ended December 31, 2020 2019 Change 82.22 % 3.90 % 86.12 % 83.05 % 3.22 % 86.27 % (83) bps 68 bps (15) bps (1) Our base payout rate is calculated as advisory and commission expenses less production based bonuses and mark-to-market gains or losses on the non-qualified deferred compensation plan, divided by advisory and commission revenues. (2) TotaTT ls may not foot due to rounding. Our total payout ratio decreased slightly for the year ended December 31, 2020 compared to 2019, primarily due to a decrease in base payout rate, which was driven by increases in the sale of equities and a shift fff brokerage to advisory business, each of which results in lower payouts, partially offset based bonuses, which was driven by broader price reductions on our corporate advisory platform. ff by an increase in production rom Compensationtt and Benefitsff Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary employees and contractors. The followin our average number of employees for the year ended December 31, 2020 as compared to 2019. ff g table sets forth Average number of employees Years Ended December 31, 2020 4,560 2019 4,327 % Change 5.4% Compensation and benefits for the year ended December 31, 2020 increased by $53.1 million compared to 2019, primarily due to an increase in salary and employee benefit expenses resulting from an increase in headcount. tt Promotional Promotional expenses include business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events and other costs that support advisor business growth. For the year ended December 31, 2020 promotional expenses increased by $2.7 million compared to 2019, primarily due to an increase in costs associated with advisor loans, which are driven by larger recruitment and retention, partially offset conferences being cancelled or held in a virtual format by a decrease in advisor conference expenses due to in 2020 in response to the COVID-19 pandemic. ff ff Depreciationtt and Amortizati ii on Depreciation and amortization relates to the use of fixed assets, which include internally developed software, ff hardware, leasehold improvements and other equipment. Depreciation and amortization for the year ended December 31, 2020 increased by $14.0 million compared to 2019, primarily due to an increase in internally developed software. Amortizati ii t on of Intangible Assets Amortization of intangible assets relates to intangible assets established through our acquisitions. Amortization of intangible assets for the year ended December 31, 2020 remained relatively flat compared to 2019. Occupancy and Equipment Occupancy and equipment expenses include the costs of leasing and maintaining our officeff spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment. For the year ended December 31, 2020 occupancy and equipment expenses increased by $30.2 million compared to 2019, primarily due to an increase in costs related to software licensing fees in support of our service and technology investments. 48 Profrr esff sional Services rr Professional services expenses include 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 expenses for the year ended December 31, 2020 decreased by $16.8 million compared to 2019, primarily due to the Company temporarily bringing certain services in-house as a result of the COVID-19 pandemic. Brokrr erkk agrr e, Clearing and Exchange Fees Brokerage, clearing and exchange fees include expenses originating from trading or clearing operations as well as any exchange membership fees. These fees fluctuate largely in line with the volume of sales and trading activity. Brokerage, clearing and exchange fees increased by $6.7 million for the year ended December 31, 2020 compared to 2019, primarily due to an increase in the volume of sales and trading activity. Communications tt and Datat Processing rr Communications and data processing expenses consist primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges and markets as well as customer statement processing and postage costs. Communications and data processing expenses remained relatively flat for the year ended December 31, 2020 compared to 2019. tt Other Other expenses include the costs of the investigation, settlement and resolution of regulatory matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulator fees, travel- related expenses 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 ff 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, 2020 decreased by $13.5 million compared to 2019, primarily due to a decrease in travel expenses as a result of the COVID-19 pandemic and lower costs associated with the investigation of regulatory matters. coverage, which depends in part on the amount O Non-Operat ingtt Interest Expense xx and Other tt Non-operating interest expense and other represents expenses from our senior secured credit facilities, senior unsecured notes, finance leases and other non-operating expenses. Non-operating interest expense and other for the year ended December 31, 2020 decreased by $24.2 million compared to 2019, primarily due to a lower outstanding principal balance and a lower interest rate on our senior secured term loan, partially offset issuance of additional senior unsecured notes in 2019. by the ff ii Loss on Extinguishmen t of Debt On November 12, 2019, we closed a refinancing transaction and accelerated the recognition of $3.2 million of unamortized debt issuance costs as a loss on extinguishment of debt. There were no refinancing transactions during the year ended 2020. Provrr isvv ion forff Income Taxes ff Our effect ive income tax rate remained consistent at 24.5% for the year ended December 31, 2020 and 2019. VV COVID-19 Impact On March 11, 2020, the World Health Organization designated the spread of the COVID-19 as a pandemic. As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor its effect s on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue, there could be a material and adverse financial impact to our results of operations. Please consult the “Risks Related to our Business and Industry” section within Part I, “Item 1A. Risk Factors” for more informat COVID-19 pandemic. ion about the risks associated with the ff ff 49 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 forff 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 sufficff ient liquidity. A summary of changes in cash flow data is provided as follows (in thousands): Net cash flows provided by (used in): Operating activities Investing activities Financing activities Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash — beginning of year Cash, cash equivalents and restricted cash — end of year Years Ended December 31, 2020 2019 $ 789,941 $ 623,871 (187,499) (275,186) 327,256 (180,987) (533,225) (90,341) 1,471,778 1,562,119 $ 1,799,034 $ 1,471,778 Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity forff additional borrowing. Net cash flows provided by operating activities includes net income and adjustments forff 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 advisory and commission expenses due to our advisors. In addition to net income, 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 2020 compared to 2019 was primarily due to increases in inflows to receivables from and payables to clients, partially offset ff by a decrease in net income. The increase in cash flows used in investing activities for 2020 compared to 2019 was primarily attributable to increases in acquisition costs and purchases of held-to-maturity securities. The decrease in cash flows used in financing activities for 2020 compared to 2019 was primarily attributable to the suspension of repurchases of our common stock, partially offset ff by repayments of our revolving line of credit. We actively monitor changes to our liquidity needs caused by general business volumes and price volatility, including higher margin requirements of clearing corporations and exchanges, and stress scenarios involving a sustained market downturn and the persistence of current interest rates, which include the impacts of the COVID-19 pandemic. We believe that based on current levels of operations and anticipated growth, our cash flow from operations, together with other available sources of funds, which include six 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 provide us with adequate liquidity to satisfy our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future. 50 The folff lowing table presents our external lines of credit at December 31, 2020 (dollars in millions): Description Borrower Maturity Date Outstanding Available Senior secured, revolving credit facility LPL Holdings, Inc. November 2024 Broker-dealer revolving credit facility LPL Financial LLC July 2024 Secured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Secured, uncommitted lines of credit LPL Financial LLC Secured, uncommitted lines of credit LPL Financial LLC March 2022 September 2021 September 2021 None None None $ $ $ $ $ $ $ $ — $ — $ — $ — $ — $ — $ — — 750 300 75 75 50 75 unspecified unspecified We regularly evaluate our existing indebtedness, including potential refinancing opportunities, 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. The earliest principal maturity date forff borrowings is 2025 and our revolving credit facilities mature in 2024, which makes us less dependent on capital markets in the near-term. our long-term We have certain capital adequacy requirements related to our registered broker-dealer subsidiary and bank trust subsidiary. As of December 31, 2020, we were in compliance with all such requirements. Share Repue rchases 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 effecff repurchases in early 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic. The resumption, timing and amount of future share repurchases, if any, will be determined at our discretion within the constraints of our Credit Agreement, the indentures governing our senior unsecured notes (the “Indentures”) and consideration of our general liquidity needs. See Note 15 - Stockholders’ Equityt , within the notes to the consolidated financial statements forff ted in open market or privately negotiated transactions. We suspended share ion regarding our share repurchases. additional informat ff Dividenddd sdd 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’ Equityt , within the notes ff to the consolidated financial statements forff ion regarding our dividends. additional informat Operatingii Capital Requiremen ii ts trading Our primary requirement forff working capital relates to funds we loan to our advisors’ clients forff 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 differe ff associated with the settlement of client transactions in securities markets. These timing differences either with internally generated cash flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or under one of our revolving credit facilities. nces arising from the delayed receipt of client funds are funded ff LPL Financial is subjeb ct to the Securities and Exchange Commission’s (“SEC”) Uniforff m Net Capital Rule, which requires the maintenance of minimum net capital. LPL Financial computes net capital requirements under the 51 alternative method, which requires firms to maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions. At December 31, 2020, LPL Financial had net capital of $119.0 million with a minimum net capital requirement of $11.1 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% of aggregate customer debit balances. LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the National Futures Association’s (“NFA”) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’FF s minimum financial requirements. The NFA was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities. Currently, the highest NFA rFF equirement is the minimum net capital calculated and required pursuant to the SEC’s Net Capital Rule. Our subsidiary, The Private Trust Company, N.A. (“PTC”), is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations. Debt and Related Covenants 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 ff 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 allow us to pay dividends and distributions or repurchase our capital stock only when certain conditions are met. In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, as defined in, and calculated by management in accordance with, the Credit Agreement. The Credit Agreement defines Credit Agreement EBITDA 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, 2020, we were in compliance with both financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”. 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: Financial Ratio Leverage Ratio (Maximum) Interest Coverage (Minimum) 52 December 31, 2020 Covenant Requirement Actual Ratio 5.0 3.0 2.16 9.81 See Note 11 - Long-term arr nd Othett r Borrowings rr , within the notes to the consolidated financial statements forff further detail regarding the Credit Agreement and the Indentures. Off-Balance Sheet Arrangements We enter into various off-ba ff lance-sheet arrangements in the ordinary course of business, primarily to meet ff the needs of our advisors’ clients. These arrangements include Company commitments to extend credit. For al informat Instrument ithww Off-Bff tt consolidated financial statements. ion on these arrangements, see Note 14 - Commitment and Concentrati i nd Contingencies and Note 21 - Financi ons of Credit Risk, within the notes to the alance-Sheet Credit Riskii s wtt s att rr tt tt ii Contractual Obligations The following table provides informat ff ion with respect to our commitments and obligations as of December 31, 2020 (in thousands): Operating leases(1) Finance leases(2) Purchase obligations(3) Long-term borrowings(4) Interest payments(5) Commitment and other fees(6) Payments Due by Period Total < 1 Year 1-3 Years 3-5 Years > 5 Years $ 185,905 $ 22,025 $ 44,799 $ 43,748 $ 75,333 269,480 105,528 2,359,300 502,855 11,397 9,735 47,187 10,700 90,279 3,002 17,379 44,755 21,400 179,950 6,005 17,606 13,258 921,400 179,137 2,390 224,760 328 1,405,800 53,489 — Total contractual cash obligations $ 3,434,465 $ 182,928 $ 314,288 $ 1,177,539 $ 1,759,710 ______ ____ ____ ____ ____ ____ ____ ____ ____ (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 att noncancelable service contracts. nd Contingencies, within the notes to the consolidated financial statements for further detail on obligations under Represents principal payments under our Credit Agreement. See Note 11 - Long-term and Other Borrorr wingii consolidated financial statements for further detail. s, within the notes to the Represents interest payments under our Credit Agreement, which include a variable interest payment for our senior secured credit facilities and a fixed interest payment forff December 31, 2020 remain unchanged. See Note 11 - Long-term and Other Borrowings, within the notes to the consolidated financial statements for further detail. senior unsecured notes. Variable interest payments assume the applicable interest rates at Represents commitment fees for unused borrowings on the revolving credit facility under our Credit Agreement. See Note 11 - Long-term and Other Borrorr wingii s, within the notes to the consolidated financial statements for further detail. As of December 31, 2020, we have a liability for unrecognized tax benefits of $54.4 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 Vii statements forff a detailed discussion regarding our fair value measurements. alueVV Measurements,tt within the notes to the consolidated financial 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 followin noteworthy because they require management to make estimates regarding matters that are uncertain and g are ff 53 susceptible to change where such change may result in a material adverse impact on our financial position and reported financial results. Revenue Recognitiontt Revenues are recognized when control of the promised service is transferred to customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. Management exercises judgment to estimate revenue accruals. In particular, our trailing commission revenues, included in commission revenues on the consolidated statements of income, are generally received in arrears and therefore require our management to estimate accrued amounts based on revenues received in prior periods, market performance payment frequency of each product type or sponsor. See Note 2 - Summary of Signif ff icant Note 3 - Revenues, within the notes to the consolidated financial statements for more details on our policies and disclosures related to revenues. ff Accountingtt and Policies and i tt Commitment stt and Continii gencies Liabilities related to loss contingencies, are recognized when we believe it is probable a liability has occurred and the amount can be reasonably estimated by management. We have established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. We also accrue for losses at our captive insurance subsidiary for those matters covered by self-insurance. ff Our captive insurance subsidiary records losses and loss reserve liabilities based on actuarially determined estimates of losses incurred, as well as specific reserves for proceedings and matters that are probable and estimable. 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 ff additional informat Contingencie and requires management to make significant judgments. For ff s - “Legal & Regulatory Matters,” within the notes to the consolidated financial statements. Policies and Note 14 - Commitmentstt and ion, see Note 2 - Summary of Significant Accountingtt tt ff Valuation of Goodwilww lll and Other Intangible Assets Goodwill is recognized as a result of business combinations and is measured as the excess of the purchase price over the fair value of the net assets acquired. The valuation of goodwill and other intangible assets requires management to apply judgment and assumptions when estimating future earnings and performance. Management also applies judgment when testing for impairment of goodwill and other indefinite-lived intangible assets, including estimating fair values. 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. ff Intangible assets that are deemed to have definite lives are amortized over their useful lives, or the estimated period the intangible asset will provide economic benefit. Definite-lived intangible assets are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount may not be recoverable. For additional informat intangible assets, see Note 2 - Summary of Signif ff icant Intangible Assets, within the notes to the consolidated financial statements. ion on our policies and disclosures related to goodwill and other Policies and Note 9 - Goodwill and Other Accountingtt ff tt tt i Income Taxes In preparing the consolidated financial statements, we estimate income tax expense based on various ff nces result in deferred tax assets and liabilities, which we must then assess the between the financial statement carrying amounts and the tax basis of assets and jurisdictions where we conduct business. This requires management to estimate current tax obligations and to assess temporary differences liabilities. These temporary differe ff likelihood that the deferred tax assets will be realized. A valuation allowance is established to the extent that it is more likely than not that such deferred tax assets will not be realized. Changes in the estimate of tax assets and liabilities 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 we had previously taken certain tax positions and newly enacted statutory, judicial and regulatory guidance. For more informat ff disclosures related to taxes, see Note 2 - Summary of Signif icant i within the notes to the consolidated financial statements. Policies and Note 13 - Income Taxes, ion on our policies and Accountingtt ff 54 Recently Issued Accounting Pronouncements ff Refer to Note 2 - Summary of Signif icant 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. Accountingtt i 55 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. rr 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. ff In addition, we are subject b to market risk resulting from system incidents 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 advisory and brokerage assets along with assets on which trailing commissions are paid, and assets eligible for sponsor payments. As of December 31, 2020, the fair value of our trading securities owned was $29.3 million, and securities sold, but not yet purchased were immaterial. The fair value of securities included within other assets was $380.2 million as of December 31, 2020. See Note 5 - Fair Vii statements forff and other assets associated with our client facilitation activities. See Note 6 - Held-to-Maturitrr y St notes to the consolidated financial statements forff , within the ation regarding the fair value of securities held to maturity. ation regarding the fair value of trading securities owned, securities sold, but not yet purchased Measurementstt , within the notes to the consolidated financial ecuritiestt informf informff alueVV Interest Rate Risk We are exposed to risk associated with changes in interest rates. As of December 31, 2020, $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 beforeff ff but off-set taxes given assets owned, which are generally subject ting, interest rate risk. to the same, b 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 Facility Term Loan B ______ ____ ____ ____ ____ ____ ____ ____ ____ Outstanding Balance at December 31, 2020 Annual Impact of an Interest Rate (†) Increase of 100 Basis 10 Basis 50 Basis 25 Basis Points Points Points Points $ 1,059,300 $ 1,055 $ 2,638 $ 5,276 $ 10,553 (†) Our interest rate for TermTT of the selected periods the rates will be locked in at the then current rate. The effect table above. ff Loan B is locked in for one, two, three, six or twelve months as allowed under the Credit Agreement. At the end of these interest rate locks are not included in the See Note 11 - Long-term and Other tt Borrowings, within the notes to the consolidated financial statements forff additional informat ff ion. As of December 31, 2020, we offeff red our advisors and their clients two primary bank sweep vehicles that are interest rate sensitive: (1) our insured cash account (“ICA”) for individuals, trusts, sole proprietorships and entities organized or operated to make a profit, such as corporations, partnerships, associations, business trusts and other organizations; and (2) an insured deposit cash account (“DCA”) for advisory individual retirement accounts. In 56 ff our advisors and their clients a money market program, including money market accounts as well addition, we offer as the ability to participate in purchased money market funds. While clients earn interest on deposits in ICA and DCA, we earn a fee. The fees we earn from cash held in ICAs are based on prevailing interest rates in the current interest rate environment. The fees we earn from DCAs are calculated as a per account fee, and such fees increase as the federal funds target rate increases, subject to a cap. The fees we earn 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 risk on the activities of our advisors’ clients, including the execution, settlement and financing of various transactions on behalf of these clients. to meet clients’ contractual obligations to LPL Financial. We bear credit ff 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 clients’ accounts. 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 clients’ accounts is insufficient and our advisors fail to reimburse us for such losses. Our losses on margin accounts were immaterial during the years ended December 31, 2020 and 2019. We monitor exposure to industry sectors and individual securities and performff 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. to fully cover losses from such investments ff 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 ff ion, including personally identifiable informat 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 informat ion technology systems, as well as third-party service providers and their systems, to manage a large ff volume of transactions and confidential informat ively 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, 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, third-party dependencies or limitations of our current technology. as well as third-party service providers. In the event of ff ion, effect ff ff ff 57 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 informat risk management policies and procedures, and the potential related effects ion about the risks associated with our technology, including risks related to security, our ff on our operations. ff Our senior management is monitoring developments in the COVID-19 pandemic and has implemented changes to our policies, procedures and operations to protect the integrity and continuity of our business and the health and safety of our employees. For example, we equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that occurred from time to time during the pandemic. There can be no guarantee that our s to manage the business implications of COVID-19 will be effecti business continuity plans and the other effort that there will not be material adverse effect s on our results of operations. Please consult Part I, “Item 1A. Risk Factors” for more informat ion about the risks associated with the COVID-19 pandemic. ff ff ff ff ff ve, or 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 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 informat ion about the risks associated with operating within our regulatory environment, pending regulatory matters and the potential related effect s on our operations. ff ff Risk Management We employ an enterprise risk management (“ERM”) framework 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 ff model whereby the primary ownership for risk and control processes is vely managing risks. The first line with the business and control owners who are the “first line” of defense in effecti is responsible for risk process ownership and consists 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 consists of certain departments within Compliance, Legal and Risk (“CLR”), Technology, Finance and Human Capital, and provides risk and control assessment and oversight. The third line of defense is independent verification of the effect iveness of internal controls and is conducted by the Internal Audit department. ff ff Our risk management governance approach includes the Board of Directors (the “Board”) and certain of its committees; our Risk Oversight Committee (the “ROC”) and its subcommittees; and our three-lines-of-defense. We regularly reevaluate and, when necessary, modifyff our processes to improve the identification and escalation of risks and events. Audit Committee of the Boardrr 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. 58 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. ff Risk Oversi vv ghi t Committee of LPL Finaii ncial The Audit Committee has mandated that the ROC oversee our risk management activities, including those of r of LPL Financial serves as chair of the ROC, which generally meets our subsidiaries. The Chief Compliance Officeff on a monthly basis with additional ad hoc meetings as necessary. The members of the ROC include certain Managing Directors of LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex-officio members and represent key control areas of the Company. Participation in the ROC by senior officeff 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. rs is intended to ensure that the ROC covers the key risk areas of the Company, including its subsidiaries, and The Chief Legal Officeff r 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 Riskii Oversi vv ghi t 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 oversight of the firm’s technology; and issues and trends related to advisor compliance. to advisors’ clients; ff Internal Audit Departmtt ent As the third line of defense, the Internal Audit department provides independent and objective assurance of iveness of the Company’s governance, risk management and internal controls by conducting risk the effect ff 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 ofteff n as quarterly. Controlrr Group rr s 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 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. , who reviews the results of the Company’s risk management process with the ROC, the Audit ff Business Lineii 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 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. of operational risk and escalating risk ff 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, ff 59 compliance with industry regulations and codes of conduct and ethics to govern employee and advisor conduct, among other matters. 60 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Financial Condition as of December 31, 2020 and 2019 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 Notes to Consolidated Financial Statements Note 1 - Organization and Description of the Company Note 2 - Summary of Significant Accounting Practices Note 3 - Revenues Note 4 - Acquisitions Note 5 - Fair Value Measurements Note 6 - Held-to-Maturity Securities Note 7 - Receivables and Payables Note 8 - Fixed Assets Note 9 - Goodwill and Other Intangible Assets Note 10 - Accounts Payable and Accrued Liabilities Note 11 - Long-term and Other Borrowings Note 12 - Leases Note 13 - Income Taxes Note 14 - Commitments and Contingencies Note 15 - Stockholders’ Equity Note 16 - Share-based Compensation Note 17 - Earnings per Share Note 18 - Employee and Advisor Benefit Plans Note 19 - Related Party Transactions Note 20 - Net Capital and Regulatory Requirements Note 21 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentration of Credit Risk Note 22 - Subsequent Event Page 62 64 65 66 67 69 69 69 76 79 80 82 83 83 84 85 86 87 89 90 93 93 95 96 96 97 97 97 61 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of LPL Financial Holdings Inc. San Diego, California ff 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, 2020 and 2019, the related consolidated statements of income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in ff conformit y 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, 2020, 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 23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. tt 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 performff 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. ff 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 tt Critical Audit Matter Descriptiontt The Company’s trailing commission revenues are generally received in arrears and thereforeff 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 62 payment frequencies, the Company performs revenue estimate. ff manual calculations and exercises judgment in determining the the We identified the Company’s trailing commission revenue accrual as a critical audit matter because of judgments necessary for management to estimate the revenue accrual. This required an increased extent of audit effoff audit procedures to evaluate the inputs and judgments related to the revenue accrual and evaluating the results of those procedures. rt and a high degree of auditor judgment when performing ff How the Critical tt Audit Matter Was 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 effect ff iveness 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 ff 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 23, 2021 ff We have served as the Company's auditor since 2001. 63 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data) REVENUES Advisory Commission Asset-based Transaction and fee Interest income, net of interest expense Other Total net revenues EXPENSES Advisory and commission 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 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, 2020 2019 2018 $ 2,327,519 $ 1,982,869 $ 1,793,493 1,906,560 1,044,517 506,071 29,412 57,561 1,892,407 1,165,979 480,328 46,508 56,765 1,919,694 972,515 471,299 40,210 (8,811) 5,871,640 5,624,856 5,188,400 3,697,147 3,388,186 3,177,576 609,257 208,250 109,732 67,358 166,389 57,067 71,185 52,399 101,018 5,139,802 105,765 — 626,073 153,433 556,128 205,537 95,779 65,334 136,163 73,887 64,445 49,859 114,546 4,749,864 130,001 3,156 741,835 181,955 472,640 $ 559,880 $ 506,650 208,603 87,656 60,252 115,598 85,651 63,154 46,322 119,278 4,470,740 125,023 — 592,637 153,178 439,459 5.96 5.86 $ $ 79,244 80,702 6.78 6.62 $ $ 82,552 84,624 4.99 4.85 88,119 90,619 $ $ $ See notes to consolidated financial statements. 64 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition (In thousands, except share data) 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 — at amortized cost Securities borrowed Fixed assets, net Operating lease assets Goodwill Intangible assets, net Deferred income taxes, net Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Drafts payable Payables to clients Payables to broker-dealers and clearing organizations Accrued advisory and commission expenses payable Accounts payable and accrued liabilities Income taxes payable Unearned revenue Securities sold, but not yet purchased — at fair valu e Long-term and other borrowings, net Operating lease liabilities Finance lease liabilities Deferred income taxes, net Total liabilities Commitments and contingencies (Note 14) STOCKHOLDERS’ EQUITY: December 31, 2020 2019 $ $ 808,612 923,158 67,264 405,106 233,192 547,372 306,640 29,252 13,235 30,130 582,868 101,921 1,513,866 397,486 24,112 539,357 6,523,571 178,403 1,356,083 89,743 187,040 681,554 28,145 95,328 06 2 2,345,414 139,377 107,424 — 5,208,717 $ $ $ $ 590,209 822,697 58,872 433,986 177,654 441,743 298,790 46,447 11,806 17,684 533,044 102,477 1,503,648 439,838 — 401,343 5,880,238 218,636 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 Common stock, $0.001 par value; 600,000,000 shares authorized; 127,585,764 shares and 126,494,028 shares issued at December 31, 2020 and 2019, respectively Additional paid-in capital Treasury stock, at cost — 48,115,037 shares and 46,259,989 shares at December 31, 2020 and 2019, respectively Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity 127 1,762,770 126 1,703,973 (2,391,062) 1,943,019 1,314,854 6,523,571 $ (2,234,793) 1,554,567 1,023,873 5,880,238 $ See notes to consolidated financial statements. 65 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (In thousands) Common Stock Shares Amount Additional Additional Paid-In Capital p T reasury Stock S hares Amount Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Stockholders’ Equity 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 — — 75 (4,843) 1,511 — 2 — 49,058 29,162 6,533 (417,891) (49) 1,767 — 439,459 (88,360) 711 965,008 439,459 (4,843) (417,891) (88,360) 51,538 29,162 BALANCE — December 31, 2018 124,910 $ 125 $1,634,337 39,821 $ (1,730,535) $ — $1,070,146 $ 974,073 Cumulative effecff change t of accounting 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 366 — — 75 (5,863) 1,218 — 1 — 36,772 32,864 6,419 (500,370) (55) 1,975 5,724 — 559,880 (82,597) 1,414 5,724 559,880 (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 Cumulative effeff ct of accounting change 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 417 — — 675 — 1 — 24,822 33,975 134 1,810 (9,420) (150,036) (89) 3,187 BALANCE — December 31, 2020 127,586 $ 127 $1,762,770 48,115 $ (2,391,062) $ ) ) ( ( (7,317) — 472,640 (79,097) 2,226 (7,317) 472,640 (9,420) (150,036) (79,097) 30,236 33,975 — $1,943,019 $ 1,314,854 See notes to consolidated financial statements. 66 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2020 2019 2018 $ 472,640 $ 559,880 $ 439,459 109,732 67,358 5,384 33,975 5,824 (23,684) — 113,126 (12,673) 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 28,475 (20,602) (68,888) ( ( 55,538) (225,518) (11,090) 16,072 12,446) (1,967) (103,925) (40,233) 297,210 (2,259) 12,710 96,521 8,016 12,201 0 789,941 3 (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) CASH FLOWS FROM OPERATINGAA 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 d organization s Advisor loans Receivables from others Securities owned Securities borrowe Operating leases Other assets Drafts payable Payables to clients Payables to broker-dealers and clearing organizations Accrued advisory and commission expenses payable Accounts payable and accrued liabilities Income taxes receivable/payable Unearned revenue d Securities sold, but not yet purchase Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures Acquisitions, net of cash acquired Purchase of securities classified as held-to-maturity Proceeds from maturity of securities classified as held-to-maturity Net cash used in investing activities (155,532) (30,556) (6,511) 5,100 (187,499) Continued on following page 67 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2020 2019 2018 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities 1,806,000 523,000 Repayments of revolving credit facilities Repayment of senior secured term loans Proceeds from senior secured term loans and senior notes Payment of debt issuance costs Payment of contingent consideration 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) financing activities (1,851,000) (10,700) — — (10,000) (9,420) (150,036) (79,097) 30,236 (1,169) (275,186) (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) NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS RESTRICTED CASH VV CASH, CASH EQUIVALENTS CASH, CASH EQUIVALENTS VV SUPPLEMENTALTT DISCLOSURES OF CASH FLOW INFORMATION: AND RESTRICTED CASH — Beginning of year AND RESTRICTED CASH — End of year AND AA VV Interest paid Income taxes paid NONCASH DISCLOSURES: Capital expenditures included in accounts payable and accrued liabilities Lease assets obtained in exchange for operating lease liabilities Fixed assets obtained in exchange for finance lease liabilities 327,256 1,471,778 $ 1,799,034 (90,341) 1,562,119 $ 1,471,778 (63,536) 1,625,655 $ 1,562,119 $ $ $ $ $ 106,879 169,237 12,186 7,968 $ $ $ $ 126,949 213,339 13,736 108,879 — $ 1,453 $ $ $ $ $ 123,623 122,215 20,634 — — The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated statements of financial condition that sum to the total of the same such amounts shown in the consolidated statements of cash flows. Cash and cash equivalents Cash segregated under federal and other regulations Restricted cash December 31, 2020 2019 2018 $ $ 808,612 923,158 67,264 $ 590,209 822,697 58,872 511,096 985,195 65,828 Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 1,799,034 $ 1,471,778 $ 1,562,119 See notes to consolidated financial statements. 68 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 - ORGANIZATION AND DESCRIPTION OF THE COMPANY LPL Financial Holdings Inc. (“LPLFH”), a Delaware holding corporation, together with its consolidated subsidiaries (collectively, the “Company”), provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively, “advisors”) in the United States. Through its custody and clearing platform, using both proprietary and third-party technology, the Company provides access to diversified financial products and services, enabling its advisors to offeff r independent financial advice and brokerage services to retail investors (their “clients”). The Company’s most significant, wholly owned subsidiaries are described below: • • • • • • • LPL Holdings, Inc. (“LPLH”), a Massachusetts holding corporation, owns 100% of the issued and outstanding common stock or other ownership interest in each of LPL Financial LLC (“LPL Financial”), AW Subsidiary, Inc., LPL Employee Services, LLC, Fortigent Holdings Company, Inc. and LPL Insurance Associates, Inc. (“LPLIA”), as well as a 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 Officeff of the Comptroller of the Currency. ff LPL Financial, with primary offices ff 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. Fort Mill, South Carolina; and Boston, in San Diego, California; Fortigent Holdings Company, Inc. and its subsidiaries provide solutions and consulting services to registered investment advisers (“RIAs”), banks, and trust companies serving high-net-worth clients. LPLIA operates as an insurance brokerage general agency that offers and services for LPL Financial advisors. ff life and disability insurance products AWAA Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolio Systems LLC (“Blaze”). AdvisoryWorld offers modeling, to both the Company’s advisors and external clients in the wealth management industry. Blaze offers a trading and rebalancing platform to both the Company’s advisors and external clients. technology products, including proposal generation, investment analytics and portfolio ff ff 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”), an RIA. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basisii of Presen rr tation 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 different ff may be material to the consolidated financial statements. assumptions or conditions and the differences from those estimates under ff ff Consolidll ation dd These consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. 69 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Reportabl tt e 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 service 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 informat ion, see Note 3 - Revenvv ues. ff 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 performff employees, primarily software development and project management activities. similar services to those performed by the Company’s ff Share-Based Compensation Certain employees, officers, ff 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 stock units. Stock options, warrants and restricted stock units generally units, deferred stock units and performance vest in equal increments over a three-year period and expire on the tenth anniversary following the date of grant. Restricted stock awards and deferred stock units generally vest over a one-year period, and performance units generally vest in full at the end of a three-year performance period. stock ff ff ff The Company recognizes share-based compensation for equity awards granted to employees, officers 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. and ff The Company recognizes share-based compensation for equity awards granted to advisors and financial institutions as advisory and commission 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 perfrr orff mance 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 Compensationtt ion regarding share-based compensation for equity awards granted. , for additional informat ff Earningii s Per Share Basic earnings per share is computed by dividing net income available to common stockholders 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 needs to estimate current tax obligations and to 70 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ff ff nces result in deferred tax assets and liabilities. The Company then must assess nces between the financial statement carrying amounts and the tax basis of assets and assess temporary differe liabilities. These temporary differe the likelihood that the deferred tax assets will be realized. A valuation allowance is established to the extent that it is more likely than not that such deferred tax assets will not be realized. When the Company establishes a valuation allowance or modifies the existing allowance in a certain reporting period, it generally records a corresponding increase or decrease to tax expense in the consolidated statements of income. Management makes significant judgments in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowances recorded against the deferred tax asset. Changes in the estimate of these taxes occur periodically due to changes in the tax rates, changes in the business operations, implementation of tax planning strategies, resolution with taxing authorities of issues where the Company had previously taken certain tax positions, and newly enacted statutory, judicial and regulatory guidance. These changes could have a material effect 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. on the Company’s ff The Company recognizes the tax effeff cts 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 Underdd Federal and Other tt ll Regulation s 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. Receivables from clients are generally fully secured by securities held in the clients’ accounts. 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. 71 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The folff lowing schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts due from clients (in thousands): Beginning balance — January 1 Impact of ASU 2016-13 adoption Provision for bad debts Charge-offs, ff net of recoveries Ending balance — December 31 vv Advisor Loans December 31, 2020 2019 2018 $ 115 $ 640 $ 466 — 432 (27) — 130 (655) — 174 — $ 520 $ 115 $ 640 The Company periodically extends credit to its advisors in the form of recruiting loans, commission advances and other loans. The decision to extend credit to an advisor is generally based on the advisor’s credit history and their ability to generate future revenues. Loans made in connection with recruiting can be either repayable or forgivable over terms generally up to ten years provided that the advisor remains licensed through LPL Financial. Forgivable loans are not repaid in cash and are amortized over the term of the loan. If an advisor terminates their arrangement with the Company prior to the loan maturity date, the remaining balance becomes repayable immediately. An allowance for uncollectible amounts is recorded at the inception of repayable loans and upon advisor termination for forgivable loans using estimates and assumptions based on historical lifetime loss experience and expectations of future loss rates based on current facts. Advisor repayable loans totaled $128.2 million and advisor forgivable loans that have become repayable upon advisor termination totaled $3.0 million as of December 31, 2020. Included in the table below is a $1.2 million allowance for advisor forgivable loans that have become repayable. 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 Impact of ASU 2016-13 adoption Provision for bad debts Charge-offs, ff net of recoveries Ending balance — December 31 Receivables from Othersrr December 31, 2020 2019 2018 $ 3,974 $ 5,080 $ 3,264 6,227 1,694 — — 1,500 2,206 (5,132) (2,606) (390) $ 6,763 $ 3,974 $ 5,080 Receivables from others primarily consist of accrued fees from product sponsors and other fees due from advisors. An allowance for uncollectible amounts is recorded at inception using estimates and assumptions based on historical experience, current facts and other factors. Management monitors the adequacy of these estimates through periodic evaluations against actual trends experienced. 72 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The folff lowing schedule reflects the Company’s activity in providing for an allowance for uncollectible amounts due from others (in thousands): Beginning balance — January 1 Impact of ASU 2016-13 adoption Provision for bad debts Charge-offs, ff net of recoveries Ending balance — December 31 December 31, 2020 2019 2018 $10,292 $ 8,099 $ 6,115 3,617 3,559 — — 3,671 3,733 (14,367) (1,478) (1,749) $ 3,101 $10,292 $ 8,099 Securitirr es Ownedww 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 may change. Securities classified as trading are carried at fair value, while securities classified as held-to-maturity are carried at amortized cost. The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices and review of other relevant market data including implied yields of majora categories of securities. In general, these quoted prices are derived from active markets forff active markets forff 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. identical assets or liabilities. When quoted prices in identical assets and liabilities are not available, the quoted prices are based on similar assets and 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 revenues on a net basis in the consolidated statements of income. Securities Borrowrr edww 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, 2020, the contract and collateral market values of borrowed securities were $30.1 million and $29.1 million, respectively. As of December 31, 2019, the contract and collateral market values of borrowed securities were $17.7 million and $17.2 million, respectively. Fixedii 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 expenses software development costs 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 f ff orff o 73 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 project 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. s or projects for which it o 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, 2020, 2019 or 2018. Acquisiti ii ons 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. ff Accounting for business combinations requires the Company’s management to make significant estimates and assumptions with respect to intangible assets, liabilities assumed and pre-acquisition contingencies. These assumptions are based in part on historical experience, market data and informat management of the acquired companies. ion obtained from the ff The Company also enters into asset acquisitions for single identifiable assets. Accounting for asset acquisitions requires the Company’s management to make significant estimates and assumptions with respect to the useful life of the asset purchased. These assumptions are based in part on historical experience and market data. 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; and (ii) discount rates. Goodwillii and Other Intangibl ii e 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. amount exceeds its fair value, to the extent that it does not exceed the total carrying amount of goodwill. No impairment of goodwill or other indefinite-lived intangible assets was recognized for the years ended December 31, 2020, 2019 or 2018. An impairment loss will be recognized if a reporting unit’s carrying ff 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, 2020, 2019 or 2018. ion regarding the Company’s goodwill and Assets, for additional informat See Note 9 - Goodwill and Other other intangible assets. Intangible t tt ff 74 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Debt Issuance Costs Debt issuance and amendment costs are capitalized and amortized as additional interest expense over the expected term of the related debt agreement. 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 Instrumen rr ts 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 ion qualifyff as Level 2 fair value measurements. See Note 5 - Fair Value Measurementstt , for additional informat regarding the Company’s fair value measurements. As of December 31, 2020, the carrying amount and fair value of the Company’s indebtedness was approximately $2,359.3 million and $2,402.4 million, respectively. As of December 31, 2019, the carrying amount and fair value was approximately $2,415.0 million and $2,476.0 million, respectively. ff Commitments and Contingii encies The Company recognizes a liability for loss contingencies when it believes it is probable a liability has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, the Company accrues that amount. When no amount within the range is a better estimate than any other amount, however, the Company accrues the minimum amount in the range. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. The Company also accrues for losses at its Captive Insurance Subsidiary for those matters covered by self-ff 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 and requires management to make significant judgments. For additional informat difficult tt Commitment stt and Continii gencies - “Legal & Regulatory Matters.” ion, see Note 14 - ff ff 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 informat additional informat ion available at the commencement date in determining the present value of future payments. For ion, see Note 12 - Leases. ff ff Recently Issued Accountingii Pronrr ouncements There are no recently issued accounting pronouncements that would materially impact the Company’s consolidated financial statements and related disclosures. Recently Adopted Accounting Pronrr ouncements In June 2016, the Financial Accounting Standards Board (“FASFF B”) issued ASU 2016-13, Financial ii tt TT Losses (Topic 326): Measurement of Credit Instrument tt s-Credit 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. January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and adjustment to the opening balance of retained earnings in the period of adoption. recognized a cumulative-effect Losses on Financial Instrumentstt , which requires The Company adopted the provisions of this guidance on rr ff ff 75 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Results for reporting periods beginning after January 1, 2020 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAPAA . The adoption had no material impact on the Company’s recognition of credit losses. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic TT ii 820): Disclosure Framework- ii ff Requirements for Fairii Value Measurement. ASU 2018-13 removes or modifies certain Changes to the Disclosure current disclosures, and requires additional disclosures. The changes are meant to provide more relevant informat value measurements and how changes in fair value measurements impact an entity’s performance 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 had no material impact on the Company’s related disclosures. ion regarding valuation techniques and inputs used to arrive at measures of fair value, uncertainty in the fair and cash flows. ff In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other for Implementation (Topic 350): Customer’s Accountingtt 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. Incurred in a Cloud Computingtt – Internal-Use Software ff Arrangement That Is Coststt tt tt tt NOTE 3 - 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 beforeff exercises control include primary responsibility over performance service is transferred and discretion in establishing the price. control is transferred to a customer. The indicators of which party the good or obligations, inventory risk beforeff ff Advisory Advisory revenues represent fees charged to advisors’ clients’ accounts on the Company’s corporate advisory ff s administrative services for these accounts. This series of obligations transfers control of the services to the client over time as the services are performed. platform. The Company provides ongoing investment advice and acts as a custodian, providing brokerage and execution services on transactions, and perfrr ormff performance These revenues are recognized ratably over time to match the continued delivery of the performance the client over the life of the contract. The advisory revenues generated from the Company’s corporate advisory platform are based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. As such, the consideration for these revenues are variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts on client portfolioff portfolio value can be determined. values. The constraint is removed once the ff obligations to ff 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 revenues on a gross basis, as the Company is responsible for satisfying the performance obligations and has control over determining the fees. ff Commissi ii on Commission revenues represent 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. ff The Company is the principal for commission revenues, 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 its obligations. Accordingly, total commission revenues are reported on a gross basis. performing ff 76 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The folff lowing table presents total commission revenues disaggregated by investment product category (in thousands): Commission revenues Annuities Mutual funds Fixed income Equities Other Years Ended December 31, 2020 2019 2018 $ 976,357 $ 1,000,806 $ 590,074 88,714 126,920 124,495 589,411 102,391 79,446 120,353 999,689 616,445 98,091 84,823 120,646 Total commission revenues $ 1,906,560 $ 1,892,407 $ 1,919,694 The Company generates two types of commission revenues: sales-based commissions that are recognized at the point of sale on the trade date and trailing commissions that are recognized over time as earned. Sales-based commission revenues vary by investment product and are based on a percentage of an investment product’s current market value at the time of purchase. Trailing commission revenues are generally based on a percentage of the current market value of clients’ investment holdings in trail-eligible assets, and are recognized over the period during which services, such as ongoing support, are performed. ff market value of clients’ investment holdings, the consideration is variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts. The constraint is removed once the investment holdings value can be determined. As trailing commission revenues are based on the The following table presents sales-based and trailing commission revenues disaggregated by product category (in thousands): Commission revenues Sales-based Annuities Mutual funds Fixed income Equities Other Total sales-based revenues Trailing Annuities Mutual funds Other Total trailing revenues Total commission revenues Asset-Based Years Ended December 31, 2020 2019 2018 $ 327,412 $ 380,317 $ 145,836 88,714 126,920 81,882 146,695 102,391 79,446 74,003 379,252 141,597 98,091 84,823 73,013 $ $ $ $ 770,764 $ 782,852 $ 776,776 648,945 $ 620,489 $ 444,238 42,613 442,716 46,350 620,437 474,848 47,633 1,135,796 1,906,560 $ $ 1,109,555 1,892,407 $ $ 1,142,918 1,919,694 Asset-based revenues consist of fees from the Company’s client cash programs, which consist of fees from its money market programs and insured bank sweep vehicles, sponsorship programs, and recordkeeping. Client Cash Revenvv ues Client cash revenues are generated based on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs. The Company receives fees based on account type and invested balances for administration and recordkeeping. These fees are paid and recognized over time. 77 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Sponsorship rr Programs The Company receives fees from product sponsors, primarily mutual fund and annuity companies, for ff marketing support and sales force 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 advisors’ clients’ accounts is susceptible to unpredictable market changes, these revenues include variable consideration and are constrained until the date that the fees are determinable. Compensation for these performance education and training efforts. ff ff Recordkeeping The Company generates revenues from fees it collects forff providing recordkeeping, account maintenance, reporting and other related services to product sponsors. This includes revenues 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 affiliat accounts forff which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held. Recordkeeping revenues also include 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. es and are based on the value of mutual fund assets in f ff Depending on the contract, the Company is either principal or agent for recordkeeping revenues. In instances on behalf of third parties and does in which the Company is providing services to financial product manufacturers not have ultimate control of the service beforeff 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 forff unperfrr orff med services, the Company is considered principal and reports revenues on a gross basis. f The following table sets forth asset-based revenues at a disaggregated level (in thousands): Years Ended December 31, 2020 2019 2018 Asset-based revenues Client cash Sponsorship programs Recordkeeping $ 481,388 $ 652,793 $ 272,935 290,194 251,899 261,287 Total asset-based revenues $ 1,044,517 $ 1,165,979 $ 500,418 224,726 247,371 972,515 Trans rr action and FeeFF Transaction revenues primarily include fees the Company charges to advisors and their clients forff certain transactions in brokerage and fee-based advisory accounts. Transaction revenues are recognized at the point-in-time that a transaction is executed, which is generally the trade date. Fee revenues 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 the Company collects a fee for attendance. Fee revenues are recognized when the Company satisfies its performance 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. obligations. Recognition varies from point-in-time to over time executing ff 78 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The folff lowing table sets forth transaction and fee revenues disaggregated by recognition pattern (in thousands): Transaction and fee revenues Point-in-time(1) Over time(2) Total transaction and fee revenues ______ ____ ____ ____ ____ ____ ____ ____ ____ Years Ended December 31, 2020 2019 2018 $ $ 228,744 $ 215,234 $ 277,327 265,094 506,071 $ 480,328 $ 221,265 250,034 471,299 (1) (2) Transaction and fee revenues recognized point-in-time include revenues such as transaction fees, IRA termination fees and technology fees. Transaction and fee revenues recognized over time include revenues such as error and omission insurance fees, IRA custodian fees and technology fees. The Company is the principal and recognizes transaction and fee revenues on a gross basis as it is primarily responsible forff control the fee amounts charged to customers. delivering the respective services being provided, which is demonstrated by the Company’s ability to Interest Income, Net of Interest Expenxx se The Company earns interest income from client margin accounts and cash equivalents, net of interest expense. Interest expense from operations for the years ended December 31, 2020, 2019 and 2018 was not material. Other Other revenues primarily include 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 estate investment trusts and business development companies, and other miscellaneous revenues. These revenues are not generated from contracts with customers. alternative investments, such as non-traded real ff Unearnedrr Revenue The Company records unearned revenue when cash payments are received or due in advance of the Company’s perforf mance obligations, including amounts which are refundable. The increase in the unearned revenue balance for the year ended December 31, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company’s perforff mance obligations, offset were included in the unearned revenue balance as of December 31, 2019. by $82.8 million of revenues recognized that ff 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 as the conferences are held. revenue, the Company recognizes ff NOTE 4 - ACQUISITIONS On December 2, 2020, the Company entered into an agreement with Macquarie Management Holdings, Inc. (“Macquarie”) to acquire the wealth management business of Waddell & Reed Financial, Inc. (“Waddell & Reed”) for $300.0 million upon completion of Macquarie’s acquisition of all of the issued and outstanding common shares of Waddell & Reed. The transaction is expected to close in the middle of 2021, subject to satisfaction of closing conditions. On October 26, 2020, the Company acquired Blaze Portfolioff Systems LLC, a technology company that provides an advisor-facing trading and portfolio rebalancing platform. The Company paid $11.6 million at closing and agreed to a potential contingent payment of up to $4.0 million. 79 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On August 18, 2020, the Company acquired business relationships with advisors from E.K. Riley Investments, LLC (“E.K. Riley”) and Lucia Securities, LLC (“Lucia”), two unrelated broker-dealers and RIAs, for a combined $18.4 million. Both transactions have potential contingent payments. On August 1, 2019, the Company acquired Allen & Company, and under the transaction structure Allen & Company advisors and staffff became employees of the Company. The Company paid approximately $24.9 million at closing and made an additional contingent payment of $10.0 million in February 2020. On December 3, 2018, the Company acquired AdvisoryWorld, a technology company that provides proposal generation, investment analytics and portfolio modeling capabilities in the wealth management industry, for $28.1 million. NOTE 5 - FAIR VALUE MEASUREMENTS Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are prioritized within a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: 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, 2020 and 2019. 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, 2020 and 2019, 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. Securitirr es Owned and Securitiestt 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 equity and debt securities. Sold, But Not Yet Purchased — The Company’s trading securities consist of ff 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 majora 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, 2020 and 2019, the Company did not adjust prices received from the independent third-party pricing services. Assets — The Company’s other assets include: (1) deferred compensation plan assets that are Other tt 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 80 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements valued using quoted prices for identical or similar securities and other inputs that are observable or can be corroborated by observable market data. r Accounts Ptt contingent consideration liabilities that are measured using Level 3 inputs. ayable and Accrued Liabilities — The Company’s accounts payable and accrued liabilities include Levelvv 3 Recurringii Fair Value Measurementstt The Company determines the fair value for its contingent consideration obligations using a scenario-based approach whereby the Company assesses the expected number of future transactions. 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, 2020 (in thousands): Assets Cash equivalents Securities owned — trading: Money market funds Mutual funds Equity securities U.S. treasury obligations Total securities owned — trading Other assets Total assets at fair value Liabilities Securities sold, but not yet purchased: Equity securities Debt securities Total securities sold, but not yet purchased Accounts payable and accrued liabilities Total liabilities at fair value Level 1 Level 2 Level 3 Total $ 6,205 $ — $ — $ 6,205 125 9,137 492 19,498 29,252 371,202 406,659 203 — 203 — 203 $ $ $ $ $ $ — — — — — 8,953 8,953 $ — — — — — — — $ 125 9,137 492 19,498 29,252 380,155 415,612 — $ 3 3 — 3 $ — $ — — 3,228 3,228 $ 203 3 206 3,228 3,434 81 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The folff lowing 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 Other assets Total assets at fair value Liabilities Securities sold, but not yet purchased: Equity securities Debt securities Total securities sold, but not yet purchased Accounts payable and accrued liabilities Total liabilities at fair value NOTE 6 - HELD-TO-MATURITY SECURITIES Level 1 Level 2 Level 3 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 The Company holds 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 and fair value of held-to-maturity securities were as follows (in thousands): Amortized cost Gross unrealized gain Fair value December 31, 2020 2019 $ $ 13,235 $ 11,806 159 83 13,394 $ 11,889 At December 31, 2020, the held-to-maturity securities were scheduled to mature as follows (in thousands): U.S. government notes — at amortized cost U.S. government notes — at fair value $ $ 4,995 5,048 $ $ 8,240 8,346 $ $ — $ — $ 13,235 13,394 Within one year Afteff r one but within five years After five but within ten years Total 82 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7 - RECEIVABLES FROM PRODUCT SPONSORS, BROKER-DEALERS AND CLEARING ORGANIZATIONS AND PAYABL YY ES 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 $ 135,991 $ 138,258 December 31, 2020 2019 Receivables from clearing organizations Receivables from broker-dealers Securities failed-to-deliver Total receivables Payables: Payables to clearing organizations Payables to broker-dealers Securities failed-to-receive Total payables NOTE 8 - FIXED ASSETS 89,794 2,550 4,857 233,192 $ 28,140 1,020 10,236 177,654 19,117 $ 15,264 50,528 20,098 89,743 $ 58,130 18,608 92,002 $ $ $ The components of fixed assets were as follows at December 31, 2020 (in thousands): Internally developed software Computers and software Buildings Leasehold improvements Furniture and equipment Land Construction in progress(1) Total fixed assets ______ ____ ____ ____ ____ ____ ____ ____ ____ Gross Carrying Value Accumulated Depreciation and Amortization Net Carrying Value $ 418,018 $ (241,390) $ 176,628 195,800 107,895 88,135 83,365 4,678 174,974 (151,792) (7,753) (31,202) (57,860) — — $ 1,072,865 $ ( (489,997) $ ( ) ) 44,008 100,142 56,933 25,505 4,678 174,974 582,868 (1) Construction in progress includes internal software in development of $161.3 million at December 31, 2020. 83 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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) Total fixed assets ______ ____ ____ ____ ____ ____ ____ ____ ____ Gross Carrying Value Accumulated Depreciation and Amortization Net Carrying 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. Depreciation and amortization was $109.7 million, $95.8 million and $87.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS For the year ended December 31, 2020, the Company recorded $10.2 million in goodwill in connection with the acquisition of Blaze and $18.9 million in advisor relationships, $1.4 million in client relationships, and $3.5 million in technology in connection with the acquisitions of Blaze, E.K. Riley and Lucia. A summary of the activity in goodwill is presented below (in thousands): Balance at December 31, 2018 Goodwill acquired Balance at December 31, 2019 Goodwill acquired Balance at December 31, 2020 $ 1,490,247 13,401 1,503,648 10,218 $ 1,513,866 The components of intangible assets were as follows at December 31, 2020 (dollars in thousands): Definite-lived intangible assets: Advisor and financial institution relationships Product sponsor relationships Client relationships Technology Trade names Total definite-lived intangible assets Indefinite-lived intangible assets: Trademark and trade name Total intangible assets Weighted- Average Life Remaining (in years) Gross Carrying Value Accumulated Amortization Net Carrying Value 5.4 5.1 7.9 7.3 1.3 $ 670,542 $ (415,169) $ 255,373 234,086 44,810 19,040 1,200 (173,345) (19,237) (3,220) (1,040) 60,741 25,573 15,820 160 $ 969,678 $ ( (612,011) $ ( ) ) 357,667 39,819 $ 397,486 84 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 Total definite-lived intangible assets Indefinite-lived intangible assets: Trademark and trade name Total intangible assets Weighted- Average Life Remaining (in years) Gross Carrying Value Accumulated Amortization Net Carrying Value 6.1 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 Total amortization of intangible assets was $67.4 million, $65.3 million and $60.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Future amortization is estimated as follows ff (in thousands): 2021 2022 2023 2024 2025 Thereafter Total NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities were as follows (in thousands): Advisor deferred compensation plan liability Accrued compensation Accounts payable Other accrued liabilities Total accounts payable and accrued liabilities $ 69,090 68,290 64,194 63,422 55,049 37,622 $ 357,667 December 31, 2020 2019 $ 372,395 $ 269,289 104,069 60,984 144,106 77,202 68,436 143,042 $ 681,554 $ 557,969 85 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 11 - LONG-TERM AND OTHER BORROWINGS The Company’s outstanding borrowings were as follows (dollars in thousands): Long-Term Borrowings Balance Applicable Margin Interest Rate Balance Applicable Margin Interest rate Maturity December 31, 2020 December 31, 2019 Senior Secured Term Loan B(1) Senior Unsecured Notes(1)(2) Senior Unsecured Notes(1)(3) Total long-term borrowings Plus: Unamortized Premium Less: Unamortized Debt Issuance Cost Net Carrying Value Other Borrowings Revolving Credit Facility(4) Broker-Dealer Revolving Credit Facility $ 1,059,300 LIBOR+175 bps 1.90 % $ 1,070,000 LIBOR+175 bps 3.54 % 11/12/2026 900,000 400,000 2,359,300 7,083 (20,969) $ 2,345,414 Fixed Rate Fixed Rate 5.75 % 4.63 % 900,000 400,000 2,370,000 8,583 (24,765) $ 2,353,818 Fixed Rate Fixed Rate 5.75 % 9/15/2025 4.63 % 11/15/2027 $ — ABR+25 bps — FFR+125 bps — — $ 45,000 ABR+25 bps 5.00 % 11/12/2024 — FFR+125 bps — 7/31/2024 Total borrowings $ 2,345,414 $ 2,398,818 ________ (1) _____ _____ _____ _____ _____ _____ _____ _____ No leverage or interest coverage maintenance covenants. ___ (2) (3) (4) The 2025 Notes were issued in two separate transactions: $500.0 million in original notes were issued in March 2017 at par and $400.0 million in additional notes were issued in September 2017 and priced at 103.0% of the aggregate principal amount. The 2027 Notes were issued in November 2019 at par. The alternate base rate (ABR) was the PRIME rate, and reflects the interest rate incurred on the senior secured revolving credit facility on the outstanding balances as of December 31, 2019. 2019 Credit Agreement Amendment ff y (“TermTT 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 facilit Loan B”), increased the size of its senior secured revolving credit facility to $750.0 million and extended the maturity dates applicable to its TermTT 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. The Credit Agreement subject December 31, 2020, the Company was in compliance with such covenants. s the Company to certain financial and non-financial covenants. As of Loan B and its senior secured revolving credit facility. In b Issuance of 2027 Senior Notes LPLH raised $400.0 million in aggregate principal amount of 4.625% senior notes on November 12, 2019, which were issued at par (“2027 Notes”). 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. 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. ff Issuance of 2025 Senior Notes LPLH issued $500.0 million aggregate principal amount of 5.75% senior notes on March 10, 2017 and $400.0 million aggregate principal amount of 5.75% senior notes on September 21, 2017 (together, 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. The Company may redeem all or part of the 2025 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. 86 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Term Loan B 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. 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 June 30, 2023. 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). The Company is required to make quarterly payments on the Term Loan B facilit ff y equal to 0.25% of the aggregate principal amount of the loans under the Term Loan B facilit ff y. Revolving Credit Facilityt Borrowings under the revolving credit facility bear interest at a rate per annum ranging from 125 to 175 basis points over the Eurodollar Rate or 25 to 75 basis points over the base rate, depending on the Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement). Broker-Dealer Revolving Credit Facilityt 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. LPL Financial incurred approximately $1.5 million in debt issuance costs. Borrowings 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 broker-dealer credit agreement). The broker-dealer credit agreement subjects LPL Financial to certain financial and non-financial covenants. LPL Financial was in compliance with such covenants as of December 31, 2020. The minimum calendar year payments and maturities of the long-term borrowings as of December 31, 2020 were as follows (in thousands): 2021 2022 2023 2024 2025 Thereafter Total $ 10,700 10,700 10,700 10,700 910,700 1,405,800 $ 2,359,300 tt Other External Lines of Credit LPL Financial maintained six uncommitted lines of credit as of December 31, 2020. Two of the lines have collateral. The other four lines unspecified limits, which are primarily dependent on their ability to provide sufficient have a total limit of $275.0 million, one of which allows for collateralized borrowings while the other three allow for uncollateralized borrowings. There were no balances outstanding as of December 31, 2020 or December 31, 2019. ff NOTE 12 - LEASES 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 1 to 16 years, 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. 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 87 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements an implicit rate, the Company estimates its incremental borrowing rate based on informat 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. ion available at the ff Finance lease assets are included in fixed assets in the consolidated statements of financial condition and at December 31, 2020 were $102.2 million. The components of lease expense were as follows (in thousands): Years Ended December 31, 2020 2019 18,757 $ 17,610 Operating lease cost Finance lease cost: Amortization of right-of-use assets Interest on lease liabilities Total finance lease cost $ $ $ 5,141 $ 8,423 13,564 $ Supplemental cash flow informat ff ion related to leases was as follows (in thousands): 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 $ $ $ 21,368 8,423 1,169 $ $ $ Supplemental weighted-average information related to leases was as follows: Years Ended December 31, 2020 2019 Weighted-average remaining lease term (years): Finance leases Operating leases Weighted-average discount rate: Finance leases Operating leases December 31, 2020 2019 25.3 7.9 7.82 % 7.07 % Maturities fof lease liabilities as fof December 31, 2020 were a fs follows ff usands): (in(in thousands): 4,786 8,387 13,173 19,117 8,387 692 26.2 9.1 7.75 % 7.27 % 2021 2022 2023 2024 2025 Thereafter Total lease payments Less imputed interest Total Operating Leases Finance Leases $ $ 22,025 22,577 22,222 22,024 21,724 75,333 185,905 46,528 139,377 $ $ 9,735 8,802 8,577 8,727 8,879 224,760 269,480 162,056 107,424 88 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 13 - INCOME TAXES The Company’s provision for income taxes was as follows (in thousands): Current provision: Federal State Total current provision Deferred expense (benefit): Federal State Total deferred benefit Provision for income taxes December 31, 2020 2019 2018 $ $ 137,360 39,757 177,117 (17,991) (5,693) (23,684) 153,433 $ $ 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 A reconciliation of the U.S. federal statutory income tax rates to the Company’s effective income tax rates is set forth below: Federal statutory income tax rates State income taxes, net of federal benefit Non-deductible expenses Share-based compensation Research & development credits Other Effective income tax rates ff Years Ended December 31, 2020 2019 2018 21.0 % 4.4 0.3 (1.0) (0.3) 0.1 24.5 % 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 % The Company’s effect ff ive income tax rate differs from the federal corporate tax rate of 21.0%, primarily as a result of state taxes, settlement contingencies, tax credits and other permanent differences certain expenses. These items resulted in effect December 31, 2020, 2019 and 2018, respectively. ive tax rates of 24.5%, 24.5% and 25.8% forff ff ff in tax deductibility of 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. Deferred income taxes reflect the net tax effects of temporary differences ff between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 89 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 Provision for bad debts Forgivable loans Other Total deferred tax assets Deferred tax liabilities: Amortization of intangible assets Depreciation of fixed assets Operating lease assets Other Total deferred tax liabilities Deferred income taxes, net December 31, 2020 2019 $ 120,638 $ 15,890 5,537 37,632 28,519 2,810 13,158 2,024 82,105 14,823 6,932 37,580 28,350 4,077 10,845 1,773 226,208 186,485 (64,907) (97,612) (27,681) (11,896) (70,953) (87,739) (27,189) (2,702) (202,096) (188,583) $ 24,112 $ ) (2,098) ( ) ( 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 and decreases in prior-year tax positions Balance — End of year December 31, 2020 2019 2018 $ 52,098 $ 46,287 $ 42,657 8,053 9,314 10,042 (5,716) (3,503) (6,412) $ 54,435 $ 52,098 $ 46,287 At December 31, 2020 and 2019, there were $48.1 million and $46.1 million, respectively, of unrecognized tax benefits that if recognized, would favorably affect ff the effective income tax rate in any future periods. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes within the consolidated statements of financial condition. At December 31, 2020 and 2019, the liability for unrecognized tax benefits included accrued interest of $7.3 million and $6.4 million, respectively, and penalties of $4.4 million. 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 forff 2007. years through 2011 and all state income tax matters for years through The tax years of 2012 to 2019 remain open to examination in the federal jurisdiction. The tax years of 2008 to 2019 remain open to examination in the state jurisdictions. In the next 12 months, it is reasonably possible that the Company may realize a reduction in unrecognized tax benefits of $2.7 million primarily related to the statute of limitations expiration in various state jurisdictions. 90 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 14 - COMMITMENTS AND CONTINGENCIES Service and Development Contracts The Company is party to certain long-term contracts for systems and services that enable back offiff ce 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, 2020 (in thousands): 2021 2022 2023 2024 2025 Thereafter Total Guarantees $ 47,187 33,338 11,417 7,733 5,525 328 $ 105,528 The Company occasionally enters into contracts that contingently require it to indemnify cff ertain 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. quantifiable and could exceed the cash and securities it has posted as collateral. However, the potential requirement forff been recognized for these transactions. the Company to make payments under these agreements is remote. Accordingly, no liability has The Company’s liability under these arrangements is not ff Loan Commitments From time to time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in LPL Financial may make commitments to the transition process, which may be forgivable. Due to timing differences, 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 loan commitments at December 31, 2020. ff Legal and Regulatory Matters The Company is subject to extensive regulation and supervision by U.S. federal and state agencies and ff ory organizations. The Company and its advisors periodically engage with such agencies and various self-regulat organizations, in the context of examinations or otherwise, to respond to inquiries, inforff mational 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 facto 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 rs and assumptions, which may include: the procedural status of ff 91 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. On May 1, 2018 the Company agreed to a settlement structure with the North American Securities Administrators Association that related to the Company’s historical compliance with certain state “blue sky” laws and resulted in aggregate fines of approximately $26.4 million, the majority 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. The Company also agreed to offer customers remediation in the form of reimbursement for any actual losses, plus interest, and these costs were ff not 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-Insurarr nce The Company has self-insurance ff 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 affecte 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, 2020 and 2019, these self-insurance liabilities were $51.5 million and $40.1 million, respectively, and are included in accounts payable and accrued liabilities in the consolidated statements of financial condition. Self-insurance in other expenses in the consolidated statements of income for the years ended December 31, 2020, 2019 and 2018. d if future occurrences and claims differ related charges are included from such ff ff ff ff Other Commitments As of December 31, 2020, the Company had approximately $338.5 million of client margin loans that were collateralized with securities having a fair value of approximately $473.9 million that LPL Financial can repledge, loan or sell. Of these securities, approximately $69.9 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, 2020, there were no restrictions that materially limited the Company’s ability to repledge, loan or sell the remaining $404.0 million of client collateral. Securities owned, trading, on the consolidated statements of financial condition includes $4.5 million and $5.5 million pledged to the Options Clearing Corporation at December 31, 2020 and 2019, respectively, and $15.0 million pledged to the National Securities Clearing Corporation at December 31, 2020 and 2019. 92 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 15 - STOCKHOLDERS’ EQUITY Dividenddd sdd 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): 2020 2019 2018 Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend $ $ $ $ 0.25 0.25 0.25 0.25 $ $ $ $ 19.7 19.7 19.8 19.8 $ $ $ $ 0.25 0.25 0.25 0.25 $ $ $ $ 21.1 20.8 20.5 20.2 $ $ $ $ 0.25 0.25 0.25 0.25 $ $ $ $ 22.6 22.3 21.9 21.5 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, 2020, the Company had $349.8 million remaining under the existing share repurchase program. Future share repurchases may be effect 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. During the first quarter of 2020, the Company repurchased 1.8 million shares of common stock at a weighted-average price of $82.91 for a total of $150.0 million. The Company suspended share repurchases in early 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic. ed in open market or privately negotiated transactions, including ff NOTE 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. ff ff 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 Since its adoption, awards have been and are only made out of the 2010 Plan. stock units and other equity-based compensation. ff As of December 31, 2020, there were 20,055,945 shares authorized for grant and 3,531,003 shares remaining available for future issuance. 93 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Stock OptO ions tt and WarWW rarr ntstt The Company did not grant stock options or warrants during the year ended December 31, 2020. 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: ff Expected life (in years) Expected stock price volatility Expected dividend yield Risk-free interest rate Fair value of options Years Ended December 31, 2019 2018 5.43 35.80 % 1.49 % 2.47 % 5.43 34.80 % 1.71 % 2.66 % $ 24.41 $ 19.86 The following table summarizes the Company’s stock option and warrant activity as of and for the year ended December 31, 2020: Outstanding — December 31, 2019 Granted Exercised Forfeited and Expired Outstanding — December 31, 202 0 Exercisable — December 31, 2020 Exercisable and expected to vest — December 31, 202 0 Number of Shares Weighted- Average Exercise Price 2,705,241 $ — $ (664,644) $ (40,214) $ 2 ,000,383 1,651,036 1 ,989,975 $ $ $ 43.81 — 37.24 64.47 45.57 39.61 45.41 Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands) 5.28 $ 4.74 $ 5.27 $ 117,315 106,676 117,026 The following table summarizes informat ff ion about outstanding stock options and warrants as of December 31, 2020: Range of Exercise Prices $19.85 - $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 Remaining Life (Years) Weighted- Average Exercise Price 5.09 $ 1.39 $ 6.07 $ 3.73 $ 6.97 $ 8.01 $ 5.28 $ 19.85 30.31 39.64 48.89 65.52 77.53 45.57 Exercisable Number of Shares 409,909 346,442 372,146 216,835 190,759 114,945 1,651,036 $ $ $ $ $ $ $ Weighted- Average Exercise Price 19.85 30.31 39.64 48.89 65.50 77.53 39.61 Total Number of Shares 409,909 346,442 372,146 216,835 300,689 354,362 2,000,383 The Company recognized share-based compensation related to the vesting of stock options awarded to ff of $4.4 million, $9.8 million and $8.1 million during the years ended December 31, 2020, employees and officers 2019 and 2018, respectively. As of December 31, 2020, total unrecognized compensation cost related to non-vested stock options granted to employees and officers weighted-average period of 1.07 years. was $2.8 million, which is expected to be recognized over a ff 94 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 perforr rmance stock units, for the year ended December 31, 2020: Restricted Stock Awards Stock Units Number of Shares Weighted- Average Grant-Date Fair Value Number of Shares Weighted- Average Grant-Date Fair Value 8,296 9,865 $ $ (12,601) $ — $ 5,560 5,560 $ $ 81.99 64.74 76.10 — 64.74 64.74 792,185 567,335 (417,227) (37,848) $ $ $ $ 904,445 (1) $ $ 806,479 66.40 77.32 55.29 77.62 77.90 79.38 Outstanding — December 31, 2019 Granted Vested Forfeited Nonvested — December 31, 2020 Expected to vest — December 31, 2020 ______ ____ ____ ____ ____ ____ ____ ____ ____ (1) Includes 53,055 vested and undistributed deferred stock units. stock units to its employees and officers. The Company grants restricted stock awards and deferred stock units to its directors and restricted stock units Restricted stock awards and stock units must vest or are and performance ff 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 $25.1 million, $18.2 million and $13.8 million of share-based compensation related to the vesting of these restricted stock awards and stock units during the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, total unrecognized compensation cost for restricted stock awards and stock units was $32.7 million, which is expected to be recognized over a weighted-average remaining period of 1.92 years. ff The Company also grants restricted stock units to its advisors and to financial institutions. The Company recognized share-based compensation of $2.3 million, $3.0 million and $6.1 million related to the vesting of these awards during the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $4.7 million, which is expected to be recognized over a weighted-average remaining period of 2.18 years. NOTE 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 95 Years Ended December 31, 2020 2019 2018 $ 472,640 $ 559,880 $ 439,459 79,244 1,458 80,702 82,552 2,072 84,624 88,119 2,500 90,619 $ $ 5.96 5.86 $ $ 6.78 6.62 $ $ 4.99 4.85 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti- dilutive. For the years ended December 31, 2020, 2019 and 2018, stock options, warrants and stock units representing common share equivalents of 376,598 shares, 407,059 shares and 391,632 shares, respectively, were anti-dilutive. NOTE 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 $18.8 million, $16.2 million and $13.1 million for the years ended December 31, 2020, 2019 and 2018, 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 offering period). ff ff 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 $372.4 million at December 31, 2020, 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 $361.1 million at December 31, 2020, 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, 2020, the Company has recorded assets of $10.1 million and liabilities of $10.1 million, which are included in other assets and accounts payable and accrued liabilities, respectively, in the consolidated statements of financial condition. NOTE 19 - RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has related party transactions with beneficial owners of more than ten percent of the Company’s outstanding common stock. Additionally, through its subsidiary LPL Financial, the Company provides services and charitable contributions to the LPL Financial Foundation, an organization that provides volunteer and financial support within the Company’s local communities. The Company recognized revenues for services provided to these related parties of $4.8 million, $4.1 million and $3.5 million, during the years ended December 31, 2020, 2019 and 2018, respectively. The Company incurred expenses for the services provided by these related parties of $3.8 million, $3.2 million and $2.9 million, during the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020 and 2019, receivables from and payables to related parties were not material. 96 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 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 the 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, 2020, had net capital of $119.0 million with a minimum net capital requirement of $11.1 million. The Company’s subsidiary, PTC, also operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non- monetary impacts on PTC’s operations. As of December 31, 2020 and 2019, LPL Financial and PTC met all capital adequacy requirements to which they were subject. NOTE 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 LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions, when necessary. to fully cover losses that clients may incur from these strategies. To control this risk, ff 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-issued securities. When-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 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. from market prices prevailing at the time of completion of NOTE 22 - SUBSEQUENT EVENT On February 1, 2021, 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 30, 2021 to all stockholders of record on March 16, 2021. 97 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9B. Other Information None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures ff Management, with the participation of our Chief Executive Officff er and Chief Financial Offiff cer, evaluated the effect iveness 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 Offiff cer and Chief Financial Offiff cer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effect ive. ff 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, 2020, that have materially affect control over financial reporting. ff ed, or are reasonably likely to materially affect ff , our internal 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 effect ff 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. ed by our board of directors, management and other personnel, to provide reasonable assurance and Chief Financial Offiff cer, ff 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 on our consolidated acquisition, use or disposition of the Company’s assets that could have a material effect financial statements. ff As of December 31, 2020, management conducted an assessment of the effecti ff veness of our internal control over financial reporting based on the framework established in Internal Control 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, 2020 was effect – Integrated Framework (2013) ive. ff tt Deloitte & Touche LLP,P our independent registered public accounting firm, has issued an audit report appearing on the following page on the effect December 31, 2020. ff iveness of our internal control over financial reporting as of 98 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of LPL Financial Holdings Inc. San Diego, California ff 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, 2020, 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, reporting as of ff in all material the Company maintained, financial December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. ive internal control over respects, effect tt tt 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, 2020, of the Company and our report dated February 23, 2021, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effect ive internal control over financial reporting and for its assessment of the effeff ctiveness 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. ff the audit to obtain reasonable assurance about whether effect We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and performff ive 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 such other procedures as we operating effect considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. iveness of internal control based on the assessed risk, and performing ff ff ff 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. ff Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. iveness to future periods are subject to the risk that controls may Also, projections of any evaluation of effect become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. ff /s/ DELOITTE & TOUCHE LLP San Diego, California ff February 23, 2021 99 Item 10. Directors, Executive Offiff cers and Corporate Governance PART III Other than the information relating to our executive officeff 10-K, the information required to be furnished pursuant to this item is incorporated by reference definitive proxy statement for the 2021 Annual Meeting of Stockholders. rs provided in Part I of this Annual Report on Form to the Company’s ff 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 2021 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. 100 Item 15. Exhibits and Financial Statement Schedules (a)a Consolidated Financial Statements and Schedules PART IV Our consolidated financial statements are included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Other financial statement schedules have been omitted because they are not applicable, not material, or the information is otherwise included. (b) Exhixx bi ii ts Exhibit No. 3.1 p Amended and Restated Certificate of Incorporation of LPL Investment Holdings Inc., dated November 23, 2010 (incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 filed on July 9, 2010, File No. 333-167325). Description of Exhibit Certificate of Ownership and Merger Merging LPL Financial Holdings Inc. with and into LPL Investment Holdings Inc., dated June 14, 2012 (incorporated by reference to the Form 8-K filed on June 19, 2012, File No. 001-34963). Certificate of Amendment to the Amended and Restated Certificate of Incorporation of LPL Financial Holdings Inc., dated May 8, 2014 (incorporated by reference to the Form 8-K filed on May 9, 2014, File No. 001-34963). Fifth Amended and Restated Bylaws of LPL Financial Holdings Inc. (incorporated by reference to the Form 8-K filed on March 12, 2014, File No. 001-34963). 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 (incorporated by reference to the Form 8-K filed on March 10, 2017, File No. 001-34963). 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 (incorporated by reference to the Form 8-K filed on September 21, 2017, File No. 001-34963). 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 (incorporated by reference to the Form 8-K filed on November 12, 2019, File No. 001-34963). Description of Registrant’s Securities (incorporated by reference to the Form 10-K filed on February 21, 2020 File No. 001-34963). Form of Indemnification Agreement (incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 filed on July 9, 2010, File No. 333-167325). LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 filed on July 9, 2010, File No. 333-167325). Form of Senior Management Stock Option Award granted under the LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 26, 2013, File No. 001-34963). Form of Employee Stock Option Award granted under the LPL Financial Holdings Inc. Amended and Restated 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 24, 2017, File No. 001-34963). Form of Employee Restricted Stock Unit Award granted under the LPL Financial Holdings Inc. Amended and Restated 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 24, 2017, File No. 001-34963). Form of Employee Performance Stock Unit Award granted under the LPL Financial Holdings Inc. Amended and Restated 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 24, 2017, File No. 001-34963). Form of Employee Stock Option Award granted under the LPL Financial Holdings Inc. Amended and Restated 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 26, 2014, File No. 001-34963). Form of Employee Restricted Stock Unit Award granted under the LPL Financial Holdings Inc. Amended and Restated 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 26, 2014, File No. 001-34963). 3.3 4.1 4.3 4.4 10.1 2 10.3 10.4 10.5 10.6 10.7 10.8 101 Exhibit No. 10.9 10.10 10.11 10.12 10.13 10.14 15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 Description of Exhibit p Form of Advisor Restricted Stock Unit Award granted under the LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 26, 2014, File No. 001-34963). Form of Financial Institution Restricted Stock Unit Award granted under the LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 26, 2014, File No. 001-34963). Amended and Restated LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 8-K filed on May 15, 2015, File No. 001-34963). LPL Financial LLC Executive Severance Plan, amended and restated as of February 23, 2017 (incorporated by reference to the Form 10-K filed on February 24, 2017, File No. 001-34963). LPL Financial Holdings Inc. Non-Employee Director Compensation Policy (incorporated by reference to the Form 10-K filed on February 21, 2020 File No. 001-34963). LPL Financial Holdings Inc. Non-Employee Director Deferred Compensation Plan (incorporated by reference to the Form 10-K filed on February 25, 2016, File No. 001-34963). Credit Agreement, dated as of March 29, 2012, by and among LPL Investment Holdings Inc., LPL Holdings, Inc., the several lenders from time to time party thereto, and Bank of America, N.A. as Administrative Agent Collateral Agent, Letter of Credit Issuer, and Swingline Lender (incorporated by reference to the Form 8-K filed on April 2, 2012, File No. 001-34963). First Amendment and Incremental Assumption Agreement, dated as of May 13, 2013, by and among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the Company, as Guarantors, the several lenders from time to time party thereto, and Bank of America, N.A. as Administrative Agent (incorporated by reference to the Form 8-K filed on May 13, 2013, File No. 001-34963). 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 (incorporated by reference to the Form 10-Q filed on October 30, 2014, File No. 001-34963). 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 (incorporated by reference to the Form 10-K filed on February 25, 2016, File No. 001-34963). 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 (incorporated by reference to the Form 8-K filed on March 10, 2017, File No. 001-34963). Amendment Agreement, dated June 20, 2017, among LPL Holdings, Inc., LPL Financial Holdings Inc. and JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to the Form 10-Q filed on August 1, 2017, File No. 001-34963). 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 (incorporated by reference to the Form 8-K filed on September 21, 2017, File No. 001-34963). 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 (incorporated by reference to the Form 10-Q filed on July 30, 2019, File No. 001-34963). 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 (incorporated by reference to the Form 8-K filed on November 12, 2019, File No. 001-34963). 102 Exhibit No. 10.24 10.25 21.1 23.1 1 2 32.1 32.2 Description of Exhibit p BETAHost Master Subscription Agreement dated as of January 5, 2009 between LPL Financial Corporation and Refinitiv US LLC (f/k/a Thomson Financial LLC), as amended. (incorporated by reference to the Form 10-K filed on February 23, 2021 File No. 001-34963).* LPL Financial Holdings Inc. 2012 Employee Stock Purchase Plan, as amended and restated, effective as of October 29, 2019.* List of Subsidiaries of LPL Financial Holdings Inc.* Consent of Deloitte & Touche LLP, independent registered public accounting firm.* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).* Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.SCH Inline XBRL Taxonomy Extension Schema* 101.CAL 101.DEF 101.LAB 101.PRE 104 Inline XBRL Taxonomy Extension Calculation* Inline XBRL Taxonomy Extension Definition* Inline XBRL Taxonomy Extension Label* Inline XBRL Taxonomy Extension Presentation* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) ______ ____ ____ ____ ____ ____ ____ ____ ___ * Filed herewith. ** Furnished 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. Item 16. Form 10-K Summaryrr None. 103 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 ff Dated: February 23, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed lowing persons on behalf of the Registrant and in the capacities and on the dates indicated. below by the folff Signature g Title Date /s/ Dan H. Arnold Dan H. Arnold /s/ Matthew J. Audette Matthew J. Audette /s/ Brent B. Simonich Brent B. Simonich /s/ Edward Bernard Edward Bernard /s/ Paulett Eberhart Paulett Eberhart /s/ William F. Glavin Jr. William F. Glavin Jr. /s/ Allison Mnookin Allison Mnookin /s/ Anne M. Mulcahy Anne M. Mulcahy /s/ James S. Putnam James S. Putnam /s/ Richard P. Schifter Richard P. Schifter /s/ Corey E. Thomas Corey E. Thomas President, Chief Executive Officer ff , and Director (Principal Executive Officff er) February 23, 2021 Chief Financial Officff er (Principal Financial Officeff r) February 23, 2021 Chief Accounting Officeff r (Principal Accounting Officeff r) February 23, 2021 Director February 23, 2021 Director February 23, 2021 Director February 23, 2021 Director February 23, 2021 Director February 23, 2021 Director February 23, 2021 Director February 23, 2021 Director February 23, 2021 104 CORPORATE INFORMATION Board of Directors (AS OF 03/22/21) Dan H. Arnold President and Chief Executive Officer LPL Financial Holdings Inc. Edward C. Bernard Former Vice Chair and Vice President T. Rowe Price Group, 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. Richard P. Schifter Senior Advisor TPG Corey E. Thomas Chair and Chief Executive Officer Rapid7, Inc. Investor Relations Send requests for financial information to: Chris Koegel Senior Vice President, Investor Relations LPL Financial 75 State Street, Floor 22 Boston, MA 02109 (617) 897-4574 | investor.relations@lpl.com Transfer Agent Computershare P.O. Box 505000 Louisville, KY 40233 Accounting Firm Deloitte & Touche LLP San Diego, CA Legal Counsel Ropes & Gray LLP Boston, MA Stock Listing & Trading Symbol LPL Financial Holdings Inc.’s common stock is listed on the Nasdaq Global Select Market under the trading symbol “LPLA.” Form 10-K A copy of our annual report on Form 10-K, filed with the Securities and Exchange Commission, is available without charge by contacting our Investor Relations department. Annual Meeting In light of COVID-19, LPL Financial Holdings Inc.’s 2021 Annual Meeting of Stockholders will be held as a virtual-only meeting. Date: May 5, 2021 Time: 10:30 a.m. ET Virtual Meeting: www.virtualshareholdermeeting.com/LPLA2021 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 extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL Financial affiliate, please note LPL Financial makes no representation with respect to such entity. 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 bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the 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 IIS-51816-0121 Tracking #1-05118526 LPL.COM