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Regulatory Bills Dent LPL Profits Again

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Regulatory costs once again took a bite out of LPL Financial's bottom line for its fiscal first quarter.

The giant independent broker-dealer reported a 4.6% year-over-year drop in net income for the period -- falling to about $51 million from $53 million for the year-ago period -- even as revenues edged up to $1.1 billion from $1.087 billion.

That 2% increase was driven in part by advisory revenue, which rose 4.5% year-over-year to $342 million.

Yet LPL also had $11 million in regulatory and legal bills during the first quarter, the company said in its earnings statement -- noting that it expected those costs to remain elevated through the rest of the year, but that it didn't anticipate costs to top those of this quarter.

LPL paid over $36 million in regulatory charges in 2014, about four times what it averaged in 2013 and 2012. CEO Mark Casady recently told Financial Planning that although the firm was still cleaning up "historical items," he expected the firm to wrap up its legal woes in 2015.

LPL Financial President Dan Arnold said on Thursday that most of this quarter's legal bills were associated with issues lingering from last year, and that management expects to return to normal levels in 2016.

"We think we've made great progress going through those items and we believe that will solve most of them this year," he says.

Arnold also says that the firm has been investing heavily in improving its risk management capabilities, and that management thinks that by year-end "we will be in a good place in completing much of that work."


The firm saw strong growth in its advisory and brokerage assets, which jumped 8.6% to reach $485 billion; of those, custodied assets rose 16.3% to almost $184 billion.

Those fee-based assets, Casady noted during a call with analysts, are "more profitable for LPL and for the advisor."

LPL's recruiting efforts also grew its advisor ranks, which stood at 14,098 at the quarter's end, up from 13,726 for the year-ago period. The firm has one of the largest advisor forces in the industry; by comparison, Merrill Lynch recently reported that had 14,085 advisors.

LPL's earnings per share dropped to $0.51 from $0.52 for the same period a year ago.


As during other recent earnings calls involving wealth management executives, analysts asked Casady repeatedly about how the Department of Labor's fiduciary rule proposal could affect LPL's business.

Casady said that the firm was still in the process of evaluating the proposed rule's impact, but he added that he was in favor of a new rule, as it would potentially create more transparency for the client.

He also added that he preferred that a single regulator issued and oversaw the rule.

"We effectively had a third regulator enter the discussion" -- with the Department of Labor joining SEC and FINRA -- "and by definition that will add costs to the industry and confusion to the investor," Casady said.

He also predicted more consolidation among LPL's smaller competitors, saying that these smaller wealth management firms do not have the scale to handle the higher regulatory costs to come.

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