(In paragraph 5, corrects spelling of CEO Mark Casady)
By Jed Horowitz
NEW YORK, July 30 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
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)