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Amid Regulatory Charges, LPL Tries to Regain Trust

Amid Regulatory Charges, LPL Tries to Regain Trust

LPL Financial’s third quarter profit fell 11.6 percent to $33.3 million, as the independent broker/dealer announced a $23 million in regulatory charges related to issues with its systems, policies and procedures. CEO and Chairman Mark Casady said the firm is focused on regaining the trust of shareholders and regulators, as well as changing its processes. The firm's stock price was down 4.5 percent Thursday, as of 11:30 a.m. eastern time.

“We’re in a highly elevated period of regulatory issues,” Casady said. “These are substantive charges related to issues that are known to us and obviously something we can take from accounting charge, and our attempt from this point forward is to regain the trust of our shareholders and prospective shareholders and our regulators in terms of getting on the right foot going forward.”

The regulatory charges were $18 million above expectations, and reduced LPL’s earnings by $0.11 a share. Year-to-date, the company has recorded $32 million in regulatory-related expenses, twice the level of charges in the prior two years combined, said Dan Arnold, chief financial officer. The company expects another $20 million in regulatory charges for 2015.

On a conference call Thursday morning, Casady would not elaborate on what the regulatory fines are or which regulators they’re working with. The problems are not related to a product’s underlying efficacy or appropriateness for an investor, he said.

“The problem is those things which are manually processed versus those things which are done automatically,” he said. “If you look at alternative investments, if you look at variable annuities, they are all manually processed, and they’re in different states of automation.”

In March, FINRA fined the firm $950,000 for its failure to supervise sales of non-traded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid investments. This summer, Illinois Securities Department ordered the firm to pay $2.8 million in fines and restitution for failing to maintain adequate records for its variable annuity exchange business and failing to enforce its supervisory system related to variable annuity exchange activities.  

“We offer literally in our case thousands of choices of products; that is better for the investor; that is better for the advisor,” Casady said. “What it does introduce is complexity. We’ve been on roughly a two-year journey across the entire organization to reduce that complexity, not by reducing choice—critical to understand—but by increasing automation and increasing controls across the environment.”

Casady said the firm is about 60 percent of the way through the process of replacing its systems in risk management and adding new systems to the legal team.

“It is a multi-year process of change and transformation in the way we approach risk management and compliance oversight,” he said.

The company’s net revenue during the quarter grew 3.4 percent from a year ago to $1.09 billion. Advisory and brokerage assets were up 12.1 percent on the year to $464.8 billion, with a record $4.8 billion in net new advisory assets.

The firm added 70 new advisors during the quarter, bringing total headcount to 13,910. That compares to 13,840 in the second quarter and 13,563 in the third quarter 2013.

“We can’t predict new issues that will come up; we can’t predict the regulatory environment,” Casady said. “What we can predict and control is our own expense profile, our revenue growth, our recruiting. The fundamentals of the business remain strong, and that’s something we needed to talk to you about on a going forward basis.”

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