CEO Mark Casady of LPL.

LPL Financial (LPLA) is having a Jimmy Cliff moment: “The bigger they come, the harder they fall.”

Its shares fell over 34% to $16.50 at market close on Friday, one day after it reported a 45% decline in profits for the fourth quarter. (The markets overall moved in the opposite direction, gaining 1.2%.)

That news of its Q4 profit drop prompted Credit Suisse equity analysts to lower their price target for LPL shares from $44 to $28, which it has certainly surpassed on the downside. Wells Fargo analysts, meanwhile, downgraded the stock to market perform from outperform.

The independent broker-dealer’s latest gross profit of $322 million “was $12 million below our estimate ($0.07 EPS impact) due to a combination of items but particularly lower alternative investment revenues,” said William Blair equity analysts in a note issued early Friday. 

“The fourth quarter brought greater challenges,” said Chairman & CEO Mark Casady on a call with analysts late Thursday. “Brokerage sales were the slowest for the year and advisory fees were down due to the equity market decline at the end of the third quarter. Alternative investments were a large factor, as commissions were down by about 75% from a year ago.”

Total advisor commissions were $464 million, down 12% from the year-ago quarter and 4% from the prior period. Advisory fees fell 5% from both Q4’14 and Q3’15 to $324 million, and asset-based fees grew 2% from a year ago but were flat sequentially at $124 million. Transaction and fee revenues, though, grew 5% from last year while decreasing about 8% from the prior quarter to $97 million.

Anemic Advisor Activity

The independent broker-dealer saw two of its performance measures weaken sharply in Q4 and 2015.

Total affiliated advisor headcount was 14,054 as of Dec. 31, representing a net gain of just 18 advisors for the year. In 2014, by contrast, 540 reps signed on with the IBD. It added a net 321 FAs in 2013, net 505 in 2012 and net 549 in 2011.

Further, average fees and commissions per advisor declined in 2015 to $236,000 from $250,000 in 2014 and $242,000 in 2013.

“Management noted the recruiting pipeline looks better than the last couple of years, but market weakness could delay some advisor moves,” the Blair analysts explained.

On the upside, LPL did boost the level of assets on its hybrid RIA platform year over year to $118.7 billion from $90.8 billion.

Mixed Messages

LPL executives were clear that market mayhem is hurting results. “Like many of our peers, we saw a drop in brokerage sales activity across products throughout the year as volatile markets led to uncertainty. We would expect to see cash from retail investors build up, and we did. We believe this lower level of brokerage sales is likely to continue,” Casady explained on the conference call.

However, he says the IBD is upbeat on the move of clients from commission-based accounts to ones that are fee-based.

“Our advisory assets have doubled in the last five years and are now nearly 40% of our total assets. This transition is very good for the long-term stability and profitability of our business, but also makes the DOL fiduciary rule transition easier for us,” he stated.

The chairman & CEO added: “So while the slowdown in brokerage has been challenging, our transition to advisory continues to increase our long-term value.”

Clearly, LPL is seeing the impact bad news can have on its shares. And like rival Raymond James (RJF) and others, it is going to report such news on a more regular basis.

“This is not something we’ve done in the past, but we recognize that it can be helpful to provide intra-quarter updates,” said CFO Matthew Audette on the call. “So we plan to release monthly metrics going forward, and we’ll start next week by releasing January metrics.”

— Check out LPL Makes Top-Level Push in Biz Development, Sales on ThinkAdvisor.