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Fines Eat Into LPL's Q2 Earnings

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LPL Financial (LPLA) reported Wednesday morning that its net income fell about 4.4% from a year ago to $43.09 million in second-quarter 2014 — mostly related to unforeseen regulatory costs that increased expenses.

Earnings per share remained flat year-over-year at $0.42 per diluted share, or adjusted earnings of $0.61 per share, for the quarter. Analysts polled by Thomson Reuters expected the company to report profit per share of $0.61 for the quarter.

Earnings per share benefited from a net revenue increase of 7.2%, reporting $1.09 billion in second quarter 2014 compared to $1.01 billion in second quarter 2013.

“We are focused on creating a smarter, simpler more personal LPL to drive productivity and efficiency in our expense structure,” LPL Financial’s chief financial officer, Dan Arnold, stated in a press release. “This quarter we continued to make progress implementing this strategy despite the sequential increase in core [general and administrative] expense primarily related to the resolution of regulatory issues. For the year we remain positioned to lower our overall expense growth rate compared to the prior two years while investing in the company.”

The independent broker-dealer’s core general and administrative expenses were $106 million for second quarter 2014, up 26.4% year over year.

Roughly 80% of the regulatory fines were rounding errors in transactions that primarily use paper-based products, said Chairman and CEO Mark Casady during the firm’s earnings call Wednesday morning. In an effort to mitigate future regulatory costs, Casady added that the company has grown its legal and compliance department by 41%.

Advisor Results

Advisory and brokerage assets rose 17.3% year-over-year to a record $465.4 billion, which Casady said in a press release was a result of “positive trends in advisor productivity and asset accumulation.”

“In addition, our higher-margin advisory business continued to attract retail assets under custody and expand at a faster pace than our brokerage business, increasing 26% year over year to $167 billion,” added Casady in a press release. “We believe we are strategically positioned to capitalize on the ongoing shift toward fee-based business with our unique fully integrated platform to drive outsized growth.”

Average yearly fees and commissions per rep are about $251,000 vs. $252,000 in the prior period and $241,000 a year earlier. Commissions per rep are about $155,000 for second-quarter 2014.

The company has 13,840 affiliated advisors, up from 13,409 a year ago.

Assets under custody on LPL Financial’s Independent RIA platform grew 56.6% to $78 billion as of June 30. These results represent 282 independent RIA firms, compared with $49.8 billion and 215 independent RIA firms a year ago.

According to LPL, strong investment activity reduced cash sweep balances. The company reported that its average cash sweep balances decreased to $23.4 billion from $23.7 billion a year ago. “Continued growth from deposits was offset primarily by increasing investment activity as investors put cash to work,” the company statement said.

Also, due to “fee compression in bank contracts over the last 12 months and a decline in the federal funds effective rate,” the insured cash account program fee fell to 58 basis points from 76 basis points a year ago.

As a result, revenue generated from the LPL’s cash sweep programs declined 20.1% to $24.8 million in the second quarter of 2014 compared with $31.0 million in the year before.

Related on ThinkAdvisor:

LPL Financial Earnings Hurt by Costs, Slower Recruiting


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