LPL Financial Holdings Inc. (LPLA) said late Tuesday that it expects third-quarter regulatory charges of $23 million, about $18 million more than initially anticipated. The charges, which will lower earnings by $0.11 per share, are related to issues involving its “systems, policies and procedures.”
The independent broker-dealer’s Q3’14 revenue should be about $1.1 billion, while net income should be about $33 million, or $0.33 per share, it said in an earnings update filed with the Securities and Exchange Commission. Adjusted earnings should be about $0.48 per share based on net income of $109 million; analysts polled by Yahoo! Finance were expecting the company to earn $0.58 per share.
In a statement, Chairman and CEO Mark Casady said LPL had “made progress towards the resolution of certain regulatory matters.” Casady also explained that “the nature of these matters makes it challenging to identify and evaluate the exact timing and magnitude of their resolution, but we are now able to estimate the potential costs associated with addressing these regulatory matters.”
One financial analyst following LPL Financial says the company’s regulatory costs have been on the rise and may not “return to historic norms.”
“We are increasingly cautious as regulatory expenses have been steadily rising and have proven difficult to predict,” said the analyst, Steven Chubak of Nomura Securities in a report issued early Wednesday. “We have no basis on which to suggest that these costs should begin to decline.”
In Q2, LPL Financial executives said its full-year regulatory costs should be $19 million for the current fiscal year. Tuesday’s announcement pushed this figure up to $32 million.
The company is scheduled to announce its third-quarter results on Oct. 30.
In the first half of 2014, LPL expensed $9 million in charges. Before Tuesday, the company expected, “based on consideration for the overall regulatory environment,” that these costs would average $5 million in charges in both the third and fourth quarters.
LPL says it will “continue to re-engineer our risk management and compliance capabilities,” and that “the strength of our fundamental growth drivers remain intact,” according to Casady.
After Tuesday’s announcement, Nomura Securities downgraded LPL Investment from Buy to Neutral (with a price target of $45 vs. an early price of $55). LPL’s stock traded down about 7% at $40.16 per share midday Wednesday.
“Management’s inability to guide effectively on expenses (and regulatory costs in particular) has been a recurring problem in 2014,” Chubak said. “While we empathize with management given the seemingly difficult task of predicting regulatory fines, we expect shareholders to be less forgiving, and to likely remain on the sidelines barring visible progress in this area.”
Annuity, Regulatory Issues
As of year-end 2013, according to Investment Advisor’s annual directory of independent broker-dealers, LPL had 13,673 producing reps and $4.05 billion in gross revenue, of which about 21% of sales came from variable annuities.