UPDATE 2-LPL profit tumbles 13 pct, shares dive

Tue Jul 31, 2012 12:10pm EDT

* Profit tumbles 13 pct as expenses surge

* 2nd-qtr adjusted EPS 49 cents vs analyst view 56 cents

* LPL shares dive 25 pct early, down 13 pct midday

* Company declares initial 12 cents/shr dividend

By Joseph A. Giannone

July 31 (Reuters) - LPL Financial Holdings Inc second-quarter earnings tumbled 13 percent, far short of analyst expectations, as aggressive recruiting and a series of expansion efforts pushed expenses higher.

Shares of LPL, the largest U.S. independent brokerage, were down 13 percent in midday trade on the Nasdaq. They slid as much as 25 percent earlier, hitting their lowest since September.

Boston-based LPL said net income fell to $39.5 million, or 35 cents a share, for the quarter that ended June 30, from $45.5 million, or 40 cents s share, a year earlier. Excluding certain charges and other adjustments, LPL earned 49 cents a share.

Analysts on average had forecast much higher earnings of 56 cents per share, according to Thomson Reuters I/B/E/S.

"Underperformance was driven entirely by higher than estimated expenses," said Sandler O'Neill analyst Devin Ryan in a client note. "Revenues and the production ratio were right in line with our expectations."

LPL said net revenue for the quarter rose 1.5 percent to $907.8 million, slightly exceeding expectations of $913.6 million, even as choppy markets reduced investors' confidence.

Commission revenue in the quarter fell 2.7 percent from the year-ago period, though overall revenue rose due to the addition of new brokers and increased advisory fee income. LPL declared its first quarterly cash dividend of 12 cents a share.

"Investors are exhibiting more cautious behavior in light of the uncertain market conditions, which manifests itself in lower investment activity and reduced trading," LPL Chief Executive Mark Casady said in a statement.

LPL sells technology, clearing and other services to self-employed brokers, who retain the lion's share of the fees and commissions they generate but pay their own overhead expenses. LPL and other independent brokerages have grown in recent years as thousands of advisers have left traditional brokers and banks to form their own practices.

During the second quarter, LPL increased its ranks of advisers by 223 to 13,185 by the end of June. Client assets in fee-based advisory programs rose almost 8 percent to $111.4 billion, while overall client assets at the brokerage rose 3.6 percent to $353 billion.

But expenses rose at a faster pace, reflecting LPL's recent acquisitions, expansion of its retirement services and launch of a new mass-market business. LPL executives said they are pursuing steps, such as outsourcing, to cut expenses that have risen as the company supports larger, more complex practices.

President Robert Moore stressed that LPL is making acquisitions and investments to boost growth later. This year LPL paid about $38 million to buy Fortigent LLC, a firm that provides investment management and consulting service to advisers who serve high net-worth people.

He declined to comment on LPL's sinking stock price. "We will deal with the volatility that happens in our business and that happens in our share price. Those are transitory things; We are here to make sure we have sustainable growth," Moore said in a brief telephone interview.

The company also launched a mass-market financial planning business, NestWise, that began with the takeover this month of a small firm called Veritat Advisors.

Moore said these takeovers and expansion efforts will reduce earnings by 3 to 5 cents a share in each of the next two quarters. NestWise, moreover, is not expected to break even until 2014. LPL said.