CORRECTED-UPDATE 1-LPL Financial profit falls as regulatory expenses jump

Wed Jul 30, 2014 2:05pm EDT

(In paragraph 5, corrects spelling of CEO Mark Casady)

By Jed Horowitz

NEW YORK, July 30 (Reuters) - LPL Financial Holdings Inc , whose almost 14,000 financial advisers make it the third largest U.S. brokerage firm, said a big jump in regulatory expenses led to a 4.4 percent drop in second-quarter profit.

Expecting regulatory and legal issues to continue this year, LPL raised its estimate of operational expense growth for the rest of 2014 to 7.5 percent, or $15 million, from its estimate of 4.5 percent at the beginning of the year.

"We don't expect the regulatory environment we operate in today to change," Chief Financial Officer Dan Arnold told Reuters.

Net income fell to $43.1 million, or 42 cents a share, from $45.1 million, or 42 cents a share, a year earlier. Net revenue grew 7.2 percent from a year earlier to $1.09 billion while total operating expenses jumped 8.9 percent to $1.0 billion.

"We are not happy with these results," Chief Executive Mark Casady told analysts in a conference call. But he said that investments LPL is making in systems and personnel to improve its regulatory and compliance issues will in the long run help clients while also raising profit margins.

"The fundamentals of the business are looking as good as I've seen in my 12 years here," Casady said. "Our goal is to get those fines to go away."

In recent years, LPL has been hit with fines and rebukes from the Financial Industry Regulatory Authority (FINRA) and state regulators over failure to supervise sale of so-called alternative products such as non-traded Real Estate Investment Trusts, oil and gas partnerships and annuities.

Last month, the Illinois Securities Department fined LPL $2 million for failing to adequately maintain books and records relating to variable annuity exchanges and ordered the firm to return $820,000 to clients.

Excluding this and other regulatory and legal charges, the firm had a relatively strong quarter, analysts and executives said. New client assets, new broker hiring and retention of brokers "are all pointed in a good direction," Arnold said.

On an adjusted basis, LPL's second-quarter earnings translated to 61 cents a share, matching the average analyst estimate, according to Thomson Reuters I/B/E/S.

"Growth in the core platform was a positive," Christopher Harris, an analyst at Wells Fargo wrote to clients, focusing on LPL's 17 percent growth in client assets to $465 billion and 114 net new advisers added during the quarter.

LPL is an "independent" broker that does not directly employ its advisers, who keep an average of 87 percent of the fees and commissions they produce. This pinches profit margins for firms like LPL compared with traditional firms, whose brokers generally retain 30-45 percent of the revenue they produce.

Shares of LPL, which bought back $25 million of its stock during the quarter, were down 6 cents to $49.53 in mid-morning trading. Over the past 12 months they are up 36.7 percent, including dividend payments. (Additional reporting by Amrutha Gayathri in Bangalore; Editing by Joyjeet Das and David Gregorio)

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