10-Q 1 lpla-20210930.htm 10-Q lpla-20210930
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File Number: 001-34963
LPL Financial Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
20-3717839
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
4707 Executive Drive,
San Diego,
California
92121
(Address of Principal Executive Offices) (Zip Code)
(800)
877-7210
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock - par value $0.001 per share
LPLA
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes   o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes   o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerxAccelerated Filer
Non-accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Yes   x No
The number of shares of Common Stock, par value $0.001 per share, outstanding as of October 26, 2021 was 80,147,365.



TABLE OF CONTENTS
Page
ii
ii
Note 1 - Organization and Description of the Company
Note 2 - Summary of Significant Accounting Policies
Note 4 - Acquisitions
Note 5 - Fair Value Measurements
Note 6 - Held-to-Maturity Securities
Note 7 - Goodwill and Other Intangible Assets
Note 8 - Long-term and Other Borrowings
Note 9 - Commitments and Contingencies
Note 10 - Stockholders’ Equity
Note 11 - Share-based Compensation
Note 12 - Earnings per Share
Note 13 - Income Taxes
Note 14 - Related Party Transactions
Note 15 - Net Capital and Regulatory Requirements
Note 16 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentration of Credit Risk
Note 17 - Subsequent Events

i

WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (“Exchange Act), with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public on the SEC’s internet site at SEC.gov.
We post the following filings to LPL.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Copies of all such filings are available free of charge by request via email (investor.relations@lpl.com), telephone ((617) 897-4574) or mail (LPL Financial Investor Relations at 75 State Street, 22nd Floor, Boston, MA 02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.
We may use our website as a means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor Relations” or “Press Releases” sections. Accordingly, investors should monitor these portions of our website in addition to following the Company’s press releases, SEC filings, public conference calls and webcasts.
When we use the terms “LPLFH”, “LPL”, “we”, “us”, “our” and “the Company”, we mean LPL Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q regarding:
the Company’s future financial and operating results, outlook, growth, plans, business strategies, liquidity and future share repurchases, including statements regarding future resolution of regulatory matters, legal proceedings and related costs;
the Company’s future revenues and expenses;
future affiliation models and capabilities;
market and macroeconomic trends;
projected savings and anticipated improvements to the Company’s operating model, services and technologies as a result of its investments, initiatives, programs and acquisitions;
expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company’s business; and
any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements.

These forward-looking statements are based on the Company’s historical performance and its plans, estimates and expectations as of November 2, 2021. The words “anticipates,” “believes,” “expects,” “may,” “plans,” “predicts,” “will” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees that the future results, plans, intentions or expectations expressed or implied by the Company will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive and other factors, which may cause actual financial or operating results, levels of activity or the timing of events to be materially different from those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include:
changes in general economic and financial market conditions, including retail investor sentiment;
changes in interest rates and fees payable by banks participating in the Company’s client cash programs, including the Company’s success in negotiating agreements with current or additional counterparties;
the Company’s strategy and success in managing client cash program fees;
fluctuations in the levels of advisory and brokerage assets, including net new assets, and the related impact on revenues;
effects of competition in the financial services industry;
the success of the Company in attracting and retaining financial advisors and institutions, and their ability to market effectively financial products and services;
ii

whether retail investors served by newly-recruited advisors choose to move their respective assets to new accounts at the Company;
changes in growth and profitability of the Company’s fee-based offerings;
the effect of current, pending and future legislation, regulation and regulatory actions, including disciplinary actions imposed by federal and state regulators and self-regulatory organizations;
the cost of settling and remediating issues related to regulatory matters or legal proceedings, including actual costs of reimbursing customers for losses in excess of our reserves;
changes made to the Company’s services and pricing, including in response to competitive developments and current, pending and future legislation, regulation and regulatory actions, and the effect that such changes may have on the Company’s gross profit streams and costs;
execution of the Company’s capital management plans, including its compliance with the terms of the Company’s amended and restated credit agreement (“Credit Agreement”) and the indentures governing the Company’s senior unsecured notes (the “Indentures”);
the price, availability and trading volumes of shares of the Company’s common stock, which will affect the timing and size of future share repurchases by the Company, if any;
execution of the Company’s plans and its success in realizing the synergies, expense savings, service improvements or efficiencies expected to result from its investments, initiatives and acquisitions, including its acquisition involving the wealth management business of Waddell & Reed Financial, Inc., expense plans and technology initiatives;
the performance of third-party service providers to which business processes have been transitioned;
the Company’s ability to control operating risks, information technology systems risks, cybersecurity risks and sourcing risks;
the effects of the COVID-19 pandemic, including efforts to contain it; and
the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company’s 2020 Annual Report on Form 10-K, as may be amended or updated in the Company’s Quarterly Reports on Form 10-Q.

Except as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this Quarterly Report on Form 10-Q, even if its estimates change, and you should not rely on statements contained herein as representing the Company’s views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

iii

PART I — FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview
LPL is a leader in the markets we serve, supporting more than 19,000 financial advisors, and approximately 800 institution-based investment programs and 450 registered investment adviser (“RIA”) firms nationwide. We are steadfast in our commitment to the advisor-centered model and the belief that Americans deserve access to objective guidance from a financial advisor. At LPL, independence means that advisors have the freedom they deserve to choose the business model, services, and technology resources that allow them to run their perfect practice. And they have the freedom to manage their client relationships, because they know their clients best. Our mission is to take care of our advisors, so they can take care of their clients.
We do that through a singular focus on providing our advisors with the front-, middle- and back-office support they need to serve the large and growing market for comprehensive financial advice from an advisor. We believe that we are the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services and open architecture access to a wide range of non-proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting and market-making.
We believe investors achieve better outcomes when working with a financial advisor. We strive to make it easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting freedom and choice through access to a wide range of diligently evaluated non-proprietary products.

Executive Summary
Financial Highlights
Results for the third quarter of 2021 included net income of $103.1 million, or $1.26 per diluted share, which compares to $103.8 million, or $1.29 per diluted share, for the third quarter of 2020.
Asset Growth Trends
Total advisory and brokerage assets were $1.1 trillion at September 30, 2021, up 40% from $810.4 billion at September 30, 2020. Total net new assets were $29.0 billion for the three months ended September 30, 2021, compared to $11.1 billion for the same period in 2020.
Net new advisory assets were $21.7 billion for the three months ended September 30, 2021, compared to $10.4 billion for the same period in 2020. Advisory assets were $594.0 billion, or 52% of total advisory and brokerage assets served, at September 30, 2021, up 46% from $405.9 billion at September 30, 2020.
Net new brokerage assets were $7.3 billion for the three months ended September 30, 2021, compared to $0.7 billion for the same period in 2020. Brokerage assets were $538.6 billion at September 30, 2021, up 33% from $404.4 billion at September 30, 2020.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, was $631.1 million for the three months ended September 30, 2021, and increased 25% from $505.7 million for the three months ended September 30, 2020. Gross profit is calculated as total revenue, less advisory and commission expense and brokerage, clearing and exchange fees. We believe that gross profit can provide investors with useful insight into the Company’s core operating performance before indirect costs that are general and administrative in nature. See the “How We Evaluate Our Business” section for additional information on gross profit.
Common Stock Dividends and Share Repurchases
During the three months ended September 30, 2021, we paid shareholders a cash dividend of $20.1 million and repurchased 276,800 of our outstanding shares for a total of $40.0 million.


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COVID-19 Response
In response to the COVID-19 pandemic, we have taken measures to protect the health and safety of our employees, as well as the stability and continuity of our operations. For example, we have equipped and enabled a substantial majority of employees to work remotely, enhanced cleaning protocols throughout our corporate offices, and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that occurred from time to time during the pandemic. We also made extra support available to our advisors by extending service hours and providing additional resources to enable them to deliver differentiated services to their clients. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.

Our Sources of Revenue
Our revenue is derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust and reporting platforms. We also generate asset-based revenue through our bank sweep vehicles and money market programs and the access we provide to a variety of product providers with the following product lines:
• Alternative Investments
• Retirement Plan Products
• Annuities
• Separately Managed Accounts
• Exchange Traded Products
• Structured Products
• Insurance Based Products
• Unit Investment Trusts
• Mutual Funds
Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing and ongoing account management. In return for these services, mutual funds, insurance companies, banks and other financial product sponsors pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.
We regularly review various aspects of our operations and service offerings, including our policies, procedures and platforms, in response to marketplace developments. We seek to continuously improve and enhance aspects of our operations and service offerings in order to position our advisors for long-term growth and to align with competitive and regulatory developments. For example, we regularly review the structure and fees of our products and services, including related disclosures, in the context of the changing regulatory environment and competitive landscape for advisory and brokerage accounts.














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How We Evaluate Our Business
We focus on several key metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our key operating, business and financial metrics are as follows:
As of and for the Three Months Ended
September 30,June 30,September 30,
Operating Metrics (dollars in billions)(1)
202120212020
Advisory and Brokerage Assets
Advisory assets(2)(3)
$594.0 $577.6 $405.9 
Brokerage assets(2)(4)
538.6 534.7 404.4 
Total Advisory and Brokerage Assets(2)
$1,132.6 $1,112.3 $810.4 
Advisory assets as a % of total Advisory and Brokerage Assets52.4 %51.9 %50.1 %
Net New Assets
Net new advisory assets(5)
$21.7 $54.9 $10.4 
Net new brokerage assets(6)
7.3 51.1 0.7 
Total Net New Assets(7)
$29.0 $106.0 $11.1 
Organic Net New Assets(7)
Organic net new advisory assets$21.1 $21.4 $10.4 
Organic net new brokerage assets5.6 15.6 0.7 
Total Organic Net New Assets$26.7 $37.1 $11.1 
Organic advisory net new assets annualized growth(7)(8)
15.6%17.3%11.0%
Total organic net new assets annualized growth(7)(8)
10.2%15.5%5.8%
Client Cash Balances(2)
Insured cash account balances$30.5 $34.1 $34.7 
Deposit cash account balances8.6 7.6 8.0 
Total Bank Sweep Balances39.0 41.7 42.7 
Money market account balances9.9 5.0 1.5 
Purchased money market fund balances1.8 1.7 2.3 
Total Client Cash Balances$50.7 $48.4 $46.6 
Net buy (sell) activity(9)
$17.6 $18.1 $9.3 
As of and for the Three Months Ended
September 30,June 30,September 30,
Business and Financial Metrics (dollars in millions)202120212020
Advisors - period end19,627 19,114 17,168 
Average total assets per advisor(10)
$57.7 $58.2 $47.2 
Employees - period end5,457 5,344 4,658 
Share repurchases$40.0 $— $— 
Dividends$20.1 $20.0 $19.8 
Leverage ratio(11)
2.18 2.26 2.15 
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Three Months Ended September 30,Nine Months Ended September 30,
Financial Metrics (dollars in millions, except per share data)2021202020212020
Total revenue$2,020.8 $1,460.3 $5,626.6 $4,290.4 
Net income$103.1 $103.8 $351.8 $361.1 
Earnings per share (“EPS”), diluted$1.26 $1.29 $4.30 $4.48 
Non-GAAP Financial Metrics (dollars in millions, except per share data)
EPS prior to amortization of intangible assets and acquisition costs(12)
$1.77 $1.44 $5.38 $4.93 
Gross profit(13)
$631.1 $505.7 $1,812.1 $1,569.5 
EBITDA(14)
$225.0 $204.9 $711.6 $692.2 
EBITDA as a % of Gross profit35.6 %40.5 %39.3 %44.1 %
Core G&A(15)
$270.9 $227.1 $758.8 $672.7 
_______________________________
(1)Totals may not foot due to rounding.
(2)Advisory and brokerage assets consist of assets that are custodied, networked and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Client cash balances are also included in total advisory and brokerage assets.
(3)Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiaries, LPL Financial LLC (“LPL Financial”) and Waddell & Reed, LLC (“Waddell & Reed”). Please consult the “Results of Operations” section for a tabular presentation of advisory assets.
(4)Brokerage assets consists of brokerage assets serviced by advisors licensed with LPL Financial and Waddell & Reed.
(5)Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.
(6)Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively.
(7)Total net new assets includes $68.9 billion of assets during the three months ended June 30, 2021 and $2.3 billion of assets during the three months ended September 30, 2021 related to the acquisition of the wealth management business of Waddell & Reed Financial, Inc. Organic net new assets and related growth rates exclude these assets.
(8)Calculated as annualized current period net new assets divided by preceding period total advisory and brokerage assets.
(9)Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial and Waddell & Reed. Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid.
(10)Calculated based on the end-of-period total advisory and brokerage assets divided by the end-of-period advisor count.
(11)Leverage ratio is related to a financial covenant from our Credit Agreement and is calculated by dividing Credit Agreement net debt, which equals consolidated total debt plus corporate cash, by Credit Agreement EBITDA. Please consult the “Debt and Related Covenants” section for more information.
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(12)EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as adjusted net income, a non-GAAP measure defined as net income plus the after-tax impact of amortization of intangible assets and acquisition costs, divided by the weighted average number of diluted shares outstanding for the applicable period. The Company presents adjusted net income and EPS prior to amortization of intangible assets and acquisition costs because management believes that these metrics can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items and acquisition costs that management does not believe impact the Company’s ongoing operations. Adjusted net income and EPS prior to amortization of intangible assets and acquisition costs are not measures of the Company's financial performance under GAAP and should not be considered as an alternative to net income, earnings per diluted share or any other performance measure derived in accordance with GAAP. Below is a reconciliation of net income and earnings per diluted share to adjusted net income and EPS prior to amortization of intangible assets and acquisition costs for the periods presented (in millions, except per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs ReconciliationAmountPer ShareAmountPer ShareAmountPer ShareAmountPer Share
Net income / earnings per diluted share$103.1 $1.26 $103.8 $1.29 $351.8 $4.30 $361.1 $4.48 
Amortization of intangible assets21.5 0.26 16.8 0.21 58.9 0.72 50.1 0.62 
Acquisition costs(16)
35.9 0.44 — — 62.1 0.76 — — 
Tax benefit(15.4)(0.19)(4.7)(0.06)(32.4)(0.40)(14.0)(0.17)
Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs$145.1 $1.77 $115.9 $1.44 $440.4 $5.38 $397.2 $4.93 
Diluted share count81.8 80.6 81.8 80.6 
(13)Gross profit is a non-GAAP financial measure defined as total revenue less advisory and commission expense and brokerage, clearing and exchange fees. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered by management to be general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature. Below is a reconciliation of gross profit for the periods presented (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
Gross Profit2021202020212020
Total revenue$2,020.8 $1,460.3 $5,626.6 $4,290.4 
Advisory and commission expense1,366.8 936.8 3,748.9 2,667.4 
Brokerage, clearing and exchange fees22.8 17.8 65.7 53.4 
Gross profit(†)
$631.1 $505.7 $1,812.1 $1,569.5 
_______________________________
(†)    Totals may not foot due to rounding.
(14)EBITDA is a non-GAAP financial measure defined as net income plus non-operating interest and other expense, income tax expense, depreciation and amortization, and amortization of intangible assets. During the third quarter of 2021, the Company changed its definition of EBITDA to include the loss on extinguishment of debt and has updated prior period disclosures to reflect this change as applicable. The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP. Below is a reconciliation of EBITDA to net income for the periods presented (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
EBITDA Reconciliation2021202020212020
Net income$103.1 $103.8 $351.8 $361.1 
Non-operating interest expense and other27.1 25.2 77.3 80.8 
Provision for income taxes34.9 31.5 113.0 119.1 
Depreciation and amortization38.4 27.5 110.6 81.1 
Amortization of intangible assets21.5 16.8 58.9 50.1 
EBITDA(†)
$225.0 $204.9 $711.6 $692.2 
         _______________________________
(†)    Totals may not foot due to rounding.

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(15)Core G&A is a non-GAAP financial measure defined as total operating expense, excluding the following expenses: advisory and commission; depreciation and amortization; amortization of intangible assets; brokerage, clearing and exchange; promotional; acquisition costs; employee share-based compensation and regulatory charges. Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expenses, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance. Core G&A is not a measure of the Company’s total operating expense as calculated in accordance with GAAP. Below is a reconciliation of Core G&A against the Company’s total operating expense for the periods presented (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
Core G&A Reconciliation2021202020212020
Total operating expense$1,855.7 $1,299.8 $5,060.2 $3,729.3 
Advisory and commission1,366.8 936.8 3,748.9 2,667.4 
Depreciation and amortization38.4 27.5 110.6 81.1 
Amortization of intangible assets21.5 16.8 58.9 50.1 
Brokerage, clearing and exchange22.8 17.8 65.7 53.4 
Total G&A406.2 300.9 1,076.1 877.3 
Promotional (ongoing)(17)
83.6 58.0 201.9 159.9 
Acquisition costs(17)
35.9 — 62.1 — 
Employee share-based compensation9.8 7.4 32.3 24.1 
Regulatory charges6.0 8.3 21.0 20.6 
Core G&A(†)
$270.9 $227.1 $758.8 $672.7 
_______________________________
(†)    Totals may not foot due to rounding.
(16)Acquisition costs include the cost to setup, onboard and integrate acquired entities and primarily include $14.8 million of compensation and benefits expenses, $12.4 million of promotional expenses, $5.8 million of professional services expenses, and other expenses during the three months ended September 30, 2021. Acquisition costs for the nine months ended September 30, 2021 also includes $13.9 million of compensation and benefits expenses, $6.3 million of professional services expenses, $1.6 million of occupancy and equipment expenses, $1.2 million of communications expenses, and other expenses that were incurred during the three months ended June 30, 2021 that are included in the respective line items in the condensed consolidated statements of income.

Legal and Regulatory Matters
As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision and reporting. We review these items in the ordinary course of business in our effort to adhere to legal and regulatory requirements applicable to our operations. Nevertheless, additional regulation and enhanced regulatory enforcement has resulted, and may result in the future, in additional operational and compliance costs, as well as increased costs in the form of penalties and fines, investigatory and settlement costs, customer restitution and remediation related to regulatory matters. In the ordinary course of business, we periodically identify or become aware of purported inadequacies, deficiencies and other issues. It is our policy to evaluate these matters for potential legal or regulatory violations, and other potential compliance issues. It is also our policy to self-report known violations and issues as required by applicable law and regulation. When deemed probable that matters may result in financial losses, we accrue for those losses based on an estimate of possible fines, customer restitution and losses related to the repurchase of sold securities and other losses, as applicable. Certain regulatory and other legal claims and losses may be covered through our wholly-owned captive insurance subsidiary, which is chartered with the insurance commissioner in the state of Tennessee.
Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or legal proceeding, whether or not covered by our captive insurance subsidiary, is inherently difficult and requires judgments based on a variety of factors and assumptions. There are particular uncertainties and complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary, which depends in part on historical claims experience, including the actual timing and costs of resolving matters that begin in one policy period and are resolved in a subsequent period.
Our accruals, including those established through our captive insurance subsidiary at September 30, 2021, include estimated costs for significant regulatory matters or legal proceedings, generally relating to the adequacy of our compliance and supervisory systems and procedures and other controls, for which we believe losses are both probable and reasonably estimable.
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The outcome of regulatory or legal proceedings could result in legal liability, regulatory fines or monetary penalties in excess of our accruals and insurance, which could have a material adverse effect on our business, results of operations, cash flows or financial condition. For more information on management’s loss contingency policies, see Note 9 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements.
In June 2018, the U.S. Court of Appeals for the Fifth Circuit invalidated regulations previously enacted by the U.S. Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would have resulted in significant new prohibited transaction exemption requirements for our servicing of certain retirement plan accounts subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and individual retirement accounts (“IRAs”). In December 2020, the DOL finalized a new investment advice fiduciary prohibited transaction exemption with regard to such accounts that became effective on February 16, 2021 (the “DOL Investment Advice Fiduciary Exemption”). ERISA plans and IRAs comprise a significant portion of our business and we continue to expect that compliance with current and future laws and regulations with respect to retail retirement savings and reliance on prohibited transaction exemptions under such laws and regulations will require increased legal, compliance, information technology and other costs and could lead to a greater risk of class action lawsuits and other litigation.
In June 2019, the SEC adopted a new standard of conduct applicable to retail brokerage accounts (“Regulation BI”) with a compliance date of June 30, 2020. Regulation BI requires that broker-dealers act in the best interest of retail customers without placing their own financial or other interests ahead of the customer’s and imposes new obligations related to disclosure, duty of care, conflicts of interest and compliance. Certain state securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and regulations. In addition, it is unclear how and whether other regulators, including banking regulators and state securities and insurance regulators, may respond to or attempt to enforce similar issues addressed by the DOL Investment Advice Fiduciary Exemption and Regulation BI. As of June 30, 2020, we implemented new procedures in accordance with Regulation BI.
Future laws and regulations, including new and future rulemaking by the DOL and state rules relating to the standards of conduct applicable to both retirement and non-retirement accounts, may affect our business in ways that cannot be anticipated or planned for, and may have negative impacts on our products, services and results of operations.

Acquisitions, Integrations and Divestitures
We continuously assess the competitive landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented. Our recent acquisitions are as follows:
Waddell & Reed Financial, Inc. - In April 2021, we acquired the wealth management business of Waddell & Reed Financial, Inc.
Blaze Portfolio Systems LLC (“Blaze”) - In October 2020, we acquired Blaze, a technology company that provides an advisor-facing trading and portfolio rebalancing platform.
E.K. Riley Investments, LLC (“E.K. Riley”) - In August 2020, we acquired business relationships with advisors from E.K. Riley, a broker-dealer and RIA.
Lucia Securities, LLC (“Lucia”) - In August 2020, we acquired business relationships with advisors from Lucia, a broker-dealer and RIA.
See Note 4 - Acquisitions, within the notes to the unaudited condensed consolidated financial statements for further detail.
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Economic Overview and Impact of Financial Market Events
Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the United States financial markets. According to the most recent estimate from the U.S. Bureau of Economic Analysis, the U.S. economy grew at an annualized pace of 6.7% in the second quarter of 2021 after growing at an annualized pace of 6.3% in the first quarter. The minutes of the September 2021 meeting of the Federal Open Market Committee suggest that growth has likely slowed substantially, largely due to the impact of the Delta variant of COVID-19. The S&P 500 Index was near flat in the third quarter, rising just 0.6% on a total return basis, while smaller stocks lagged. Non-U.S. stocks trailed their U.S. counterparts during the third quarter while fixed income markets were nearly flat.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Federal Reserve (“Fed”) policy. During the third quarter, Fed policymakers maintained the target range for the federal funds rate at 0 to 0.25 percent. According to projection materials released following the conclusion of the September 2021 policy meeting, the median expectation among meeting participants was evenly divided between expectations that the Fed would raise rates in 2022 versus 2023, earlier than previous projections. The Fed continues to emphasize its belief that any near-term increase in inflation is likely temporary, although upside risks have increased. At the September 2021 meeting Fed officials discussed starting to reduce the rate of bond purchases, a process they projected could begin in 2021 and be completed by mid-2022 if the economy remains on track.
Please consult the “Risks Related to Our Business and Industry” section within Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with significant interest rate changes, and the potential related effects on our profitability and financial condition.
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Results of Operations
The following discussion presents an analysis of our results of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
20212020% Change20212020% Change
REVENUE
Advisory$959,733 $586,941 63.5 %$2,528,092 $1,689,338 49.6 %
Commission610,384 472,643 29.1 %1,765,846 1,403,540 25.8 %
Asset-based301,701 253,551 19.0 %846,027 786,124 7.6 %
Transaction and fee140,362 119,747 17.2 %418,406 376,321 11.2 %
Interest income7,365 6,623 11.2 %20,797 22,705 (8.4)%
Other1,218 20,796 (94.1)%47,470 12,329 n/m
Total revenue    
2,020,763 1,460,301 38.4 %5,626,638 4,290,357 31.1 %
EXPENSE
Advisory and commission1,366,832 936,766 45.9 %3,748,933 2,667,408 40.5 %
Compensation and benefits185,980 151,271 22.9 %531,373 441,393 20.4 %
Promotional96,012 57,970 65.6 %214,542 159,908 34.2 %
Depreciation and amortization38,409 27,548 39.4 %110,612 81,082 36.4 %
Amortization of intangible assets21,531 16,829 27.9 %58,887 50,088 17.6 %
Occupancy and equipment52,695 41,874 25.8 %137,731 124,486 10.6 %
Professional services16,722 12,301 35.9 %54,847 40,526 35.3 %
Brokerage, clearing and exchange22,828 17,834 28.0 %65,651 53,423 22.9 %
Communications and data processing17,824 12,547 42.1 %44,747 37,743 18.6 %
Other36,888 24,852 48.4 %92,852 73,274 26.7 %
Total operating expense    
1,855,721 1,299,792 42.8 %5,060,175 3,729,331 35.7 %
Non-operating interest expense and other27,063 25,179 7.5 %77,293 80,786 (4.3)%
Loss on extinguishment of debt— — — %24,400 — 100 %
INCOME BEFORE PROVISION FOR INCOME TAXES
137,979 135,330 2.0 %464,770 480,240 (3.2)%
PROVISION FOR INCOME TAXES
34,915 31,541 10.7 %112,985 119,148 (5.2)%
NET INCOME
$103,064 $103,789 (0.7)%$351,785 $361,092 (2.6)%
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Revenue
Advisory
Advisory revenues represent fees charged to advisors’ clients’ advisory accounts on our corporate RIA advisory platform, and are based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. We provide ongoing investment advice and act as a custodian, providing brokerage and execution services on transactions, and perform administrative services for these accounts. Advisory fees are primarily billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The majority of our client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three-month period. Advisory revenues collected on our corporate advisory platform are proposed by the advisor and agreed to by the client and averaged 1.0% of the underlying assets for the nine months ended September 30, 2021.
We also support separate investment adviser firms (“Hybrid RIAs”) through our hybrid advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access to the capabilities of our investment platforms. The assets held under a Hybrid RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services, which are included in our transaction and fee revenues in our unaudited condensed consolidated statements of income.
The following table summarizes the composition of advisory assets for the periods presented (in billions):
September 30,Change
20212020Amount%
Corporate platform advisory assets$395.6 $253.9 $141.7 55.8 %
Hybrid platform advisory assets
198.4 152.0 46.4 30.5 %
Total advisory assets(1)
$594.0 $405.9 $188.1 46.3 %
_______________________________
(1)Totals may not foot due to rounding.
Net new advisory assets are generated throughout the quarter, therefore, the full impact of net new advisory assets to advisory revenues is not realized in the same period. The following table summarizes activity impacting advisory assets for the periods presented (in billions):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Balance - Beginning of period$577.6 $375.3 $461.2 $365.8 
Net new advisory assets(1)
21.7 10.4 99.3 33.7 
Market impact(2)
(5.3)20.2 33.5 6.4 
Balance - End of period$594.0 $405.9 $594.0 $405.9 
_______________________________
(1)Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.
(2)Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.
The growth in advisory revenues for the three and nine months ended September 30, 2021 compared to 2020 was due to increases in net new advisory assets resulting from acquisitions, recruiting efforts and advisor productivity, as well as market gains as represented by higher levels of the S&P 500 Index.
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Commission
We generate two types of commission revenues: (1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions that are recognized over time as earned and are generally based on the market value of investment holdings in trail-eligible assets. Sales-based commission revenues, which occur when clients trade securities or purchase various types of investment products, primarily represent gross commissions generated by our advisors, and can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors’ clients. We earn trailing commission revenues primarily on mutual funds and variable annuities held by clients of our advisors. See Note 3 - Revenue, within the notes to the unaudited condensed consolidated financial statements for further detail regarding our commission revenues by product category.
The following table sets forth the components of our commission revenues (in thousands):
Three Months Ended September 30,ChangeNine Months Ended September 30,Change
20212020Amount%20212020Amount%
Sales-based$239,804 $180,357 $59,447 33.0 %$725,673 $568,260 $157,413 27.7 %
Trailing
370,580 292,286 78,294 26.8 %1,040,173 835,280 204,893 24.5 %
Total commission revenues
$610,384 $472,643 $137,741 29.1 %$1,765,846 $1,403,540 $362,306 25.8 %
The increase in sales-based commission revenues for the three and nine months ended September 30, 2021 compared to 2020 was primarily driven by increases in sales of annuities, mutual funds and fixed income products. The increase in trailing commission revenues for the three and nine months ended September 30, 2021 compared to 2020 was primarily due to the increase in value of annuities and mutual funds as a result of market increases.
The following table summarizes activity impacting brokerage assets for the periods presented (in billions):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Balance - Beginning of period$534.7 $386.4 $441.9 $398.6 
Net new brokerage assets(1)
7.3 0.7 64.6 4.7 
Market impact(2)
(3.4)17.3 32.1 1.1 
Balance - End of period$538.6 $404.4 $538.6 $404.4 
_______________________________
(1) Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively.
(2) Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.
Asset-Based
Asset-based revenues consist of fees from our client cash programs, fees from our sponsorship programs with financial product manufacturers, and fees from omnibus processing and networking services (collectively referred to as “recordkeeping”). Client cash-based revenues are generated on advisors’ clients’ cash balances in bank sweep accounts and money market programs. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales force education and training efforts. Compensation for these performance obligations are either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or a combination. Omnibus processing revenues are paid to us by mutual fund product sponsors or their affiliates and are based on the value of mutual fund assets in accounts for which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund product sponsors and annuity product manufacturers.
Asset-based revenues for the three and nine months ended September 30, 2021 increased compared to 2020 primarily due to increased revenues from recordkeeping and sponsorship programs, partially offset by a decrease in client cash revenues.
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Revenues for our recordkeeping and sponsorship programs for the three and nine months ended September 30, 2021, which are largely based on the market value of the underlying assets, increased compared to 2020 due to the impact of market appreciation on the value of the underlying assets.
Client cash revenues for the three and nine months ended September 30, 2021 decreased compared to 2020 due to the impact of a lower federal funds effective rate, partially offset by higher average client cash balances. For the three months ended September 30, 2021, our average client cash balances increased to $49.6 billion compared to $45.6 billion in 2020. For the nine months ended September 30, 2021, our average client cash balances increased to $48.7 billion compared to $43.4 billion in 2020.
Transaction and Fee
Transaction revenues primarily include fees we charge to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Fee revenues primarily include IRA custodian fees, contract and licensing fees and other client account fees. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services which may vary. In addition, we host certain advisor conferences that serve as training, education, sales and marketing events, for which we charge a fee for attendance. Transaction and fee revenues for the three and nine months ended September 30, 2021 increased compared to 2020 primarily due to an increase in licensing fee, IRA custodian fee, and technology fee revenues.
Interest Income
We earn interest income from client margin loans, advisor loans, cash segregated under federal and other regulations and cash equivalents. Period-over-period variances correspond to changes in the average balances of margin loans and cash balances as well as changes in interest rates.
Interest income for the three months ended September 30, 2021 increased compared to 2020, primarily due to an increase in interest earned on advisor and margin loans, partially offset by lower average interest rates. Interest income for the nine months ended September 30, 2021 decreased compared to 2020, primarily due to lower average interest rates, partially offset by an increase in interest earned on advisor and margin loans.
Other
Other revenues primarily include unrealized gains and losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, and other miscellaneous revenues which are not generated from contracts with customers. Other revenues for the three months ended September 30, 2021 decreased compared to 2020, primarily due to a decrease in unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which assets are based on the market performance of the underlying investment allocations chosen by advisors in the plan.
Other revenues for the nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which assets are based on the market performance of the underlying investment allocations chosen by advisors, partially offset by a decrease in dividend income on assets held in our advisor non-qualified deferred compensation plan.
Expense
Advisory and Commission
Advisory and commission expenses consist of the following: payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission revenues earned on each client’s account; production- based bonuses earned by advisors and institutions based on the levels of advisory and commission revenues they produce; the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at grant date; and the deferred advisory and commissions fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.
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The following table sets forth our payout rate, which is a statistical or operating measure:
Three Months Ended September 30,Nine Months Ended September 30,
20212020Change20212020Change
Payout rate87.15 %86.62 %53 bps86.43 %85.96 %47 bps
Our payout rate for the three and nine months ended September 30, 2021 increased compared to 2020 primarily due to higher production bonus payouts and changes in product mix.
Compensation and Benefits
Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary workers and contractors. The following table sets forth our average number of employees for the three and nine months ended September 30, 2021, compared to 2020.
Three Months Ended September 30,Nine Months Ended September 30,
20212020Change20212020Change
Average number of employees5,4274,63417.1%5,1174,50413.6%
Compensation and benefits for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to an increase in salary and employee benefit expenses resulting from an increase in headcount.
Promotional
Promotional expenses include business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events and other costs that support advisor business growth. Promotional expenses for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to an increase in costs associated with advisor recruitment and advisor loans.
Depreciation and Amortization
Depreciation and amortization relates to the use of fixed assets, which include internally developed software, hardware, leasehold improvements and other equipment. Depreciation and amortization for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to our continued investment in technology to improve our advisor platform and end-client experience.
Amortization of Intangible Assets
Amortization of intangible assets represents the benefits received for the use of long-lived intangible assets established through our acquisitions. Amortization of intangible assets for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in intangible assets resulting from the acquisition of the wealth management business of Waddell & Reed Financial, Inc. on April 30, 2021, as well as an acquisition during the fourth quarter of 2020. See Note 4 - Acquisitions and Note 7 - Goodwill and Other Intangible Assets for additional information.
Occupancy and Equipment
Occupancy and equipment expense includes the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment. Occupancy and equipment expense for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in expenses related to software licenses and our technology portfolio.
Professional Services
Professional services expenses include costs paid to outside firms for assistance with legal, accounting, technology, regulatory and general corporate matters, as well as non-capitalized costs related to service and technology enhancements. Professional services expenses for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in non-capitalized costs related to our service and technology projects.

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Brokerage, Clearing and Exchange Fees
Brokerage, clearing and exchange fees include expenses originating from trading or clearing operations as well as any exchange membership fees. These fees fluctuate largely in line with the volume of sales and trading activity. Brokerage, clearing and exchange fees for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to an increase in the volume of sales and trading activity.
Communications and Data Processing
Communications and data processing expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges and markets, as well as customer statement processing and postage costs. Communications and data processing expense for the three and nine months ended September 30, 2021 increased compared to 2020, primarily due to increases in costs associated with client statement production.
Loss on Extinguishment of Debt
On March 15, 2021, we increased our borrowing capacity under and extended the maturity date of our existing senior revolving credit facility, issued senior unsecured notes due in 2029 and redeemed our existing senior unsecured notes due in 2025. In connection with these transactions, we incurred a $24.4 million loss on extinguishment of debt in the three months ended March 31, 2021.
Provision for Income Taxes
Our effective income tax rate was 25.3% and 23.3% for the three months ended September 30, 2021 and 2020, respectively. The increase in our effective income tax rate for the three months ended September 30, 2021 compared to 2020 was primarily due to the release of unrecognized tax benefits in the prior year.
Our effective income tax rate was 24.3% and 24.8% for the nine months ended September 30, 2021 and 2020, respectively.
COVID-19 Impact
On March 11, 2020, the World Health Organization designated the spread of COVID-19 as a pandemic. As of the date of this Quarterly Report on Form 10-Q, the COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue, there could be a material and adverse financial impact to our results of operations. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.

Liquidity and Capital Resources
We have established liquidity and capital policies intended to support the execution of strategic initiatives, while meeting regulatory capital requirements and maintaining ongoing and sufficient liquidity. We believe liquidity is of critical importance to the Company and, in particular, to LPL Financial, our primary broker-dealer subsidiary. The objective of our policies is to ensure that we can meet our strategic, operational and regulatory liquidity and capital requirements under both normal operating conditions and under periods of stress in the financial markets.
Liquidity
Our liquidity needs are primarily driven by capital requirements at LPL Financial, interest due on our corporate debt and other capital returns to shareholders. Our liquidity needs at LPL Financial are driven primarily by the level and volatility of our client activity. Management maintains a set of liquidity sources and monitors certain business trends and market metrics closely in an effort to ensure we have sufficient liquidity. We believe that based on current levels of cash flows from operations and anticipated growth, together with available external liquidity sources, we have adequate liquidity to satisfy our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future.
Parent Company Liquidity
LPL Holdings, Inc. (“Parent”), the direct holding company of our operating subsidiaries, considers its primary source of liquidity to be corporate cash. We define corporate cash as the sum of cash and cash equivalents from the following: (1) cash held at the Parent, (2) excess cash at LPL Financial per the Credit Agreement, which is the net
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capital held at LPL Financial in excess of 10% of its aggregate debits, or five times the net capital required in accordance with Exchange Act Rule 15c3-1, and (3) other available cash, which includes cash and cash equivalents held at The Private Trust Company, N.A. (“PTC”), in excess of Credit Agreement capital requirements, excess cash held at Waddell & Reed per the Credit Agreement, or the net capital held in excess of 10% of its aggregate indebtedness, and cash and cash equivalents held at non-regulated subsidiaries.
We believe corporate cash is a useful measure of the Parent’s liquidity as it is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. The following table presents the components of corporate cash (in thousands):
September 30, 2021December 31, 2020
Corporate Cash
Cash at Parent$181,061 $201,385 
Excess cash at LPL Financial per Credit Agreement62,637 67,574 
Other available cash$21,953 $10,960 
Total Corporate Cash$265,651 $279,919 
Corporate cash is monitored as part of our liquidity risk management. We target maintaining $200.0 million in corporate cash, which covers approximately 24 months of principal and interest due on our corporate debt. The Company maintains additional liquidity through a $1.0 billion secured committed revolving credit facility. The Parent has the ability to borrow against the credit facility for working capital and general corporate purposes. Dividends from and excess capital generated by LPL Financial are the primary sources of liquidity. Subject to regulatory approval or notification, capital generated by LPL Financial can be distributed to the Parent to the extent the capital levels exceed both regulatory requirements and internal capital thresholds. As of September 30, 2021, LPL Financial maintained excess regulatory capital of $62.6 million over Credit Agreement requirements. During the three and nine months ended September 30, 2021, LPL Financial paid dividends of $115.0 million and $390.0 million to the Parent, respectively.
Share Repurchases
We engage in share repurchase programs, which are approved by our Board of Directors, pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effected in open market or privately negotiated transactions. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate, and returning excess capital to shareholders. In the first half of 2021, the majority of our capital deployment was focused on supporting organic growth and acquisitions. While we continue to see opportunities to deploy capital in this manner, we resumed share repurchases in the third quarter of 2021 with the initial focus on an amount to offset dilution. We repurchased $40.0 million, representing 276,800 shares, and expect to continue repurchases with a similar focus while maintaining our ability to reassess capital deployment opportunities over time. The timing and amount of share repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, the Indentures, applicable laws and consideration of our general liquidity needs. See Note 10 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchases.
Common Stock Dividends
The payment, timing and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under our Credit Agreement and the Indentures. See Note 10 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.

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LPL Financial Liquidity
LPL Financial relies primarily on customer payables to fund margin lending. LPL Financial maintains additional liquidity through external lines of credit totaling $575.0 million at September 30, 2021. LPL Financial also maintains a line of credit with the Parent.
External Liquidity Sources
The following table presents our external lines of credit at September 30, 2021 (in millions):
DescriptionBorrowerMaturity DateOutstandingAvailable
Senior secured, revolving credit facilityLPL Holdings, Inc.March 2026$— $1,000 
Broker-dealer revolving credit facilityLPL Financial LLCJuly 2024$— $300 
Secured, uncommitted lines of creditLPL Financial LLCMarch 2022$— $75 
Unsecured, uncommitted lines of creditLPL Financial LLCSeptember 2022$— $75 
Unsecured, uncommitted lines of creditLPL Financial LLCSeptember 2022$— $50 
Unsecured, uncommitted lines of creditLPL Financial LLCNone$— $75 
Secured, uncommitted lines of creditLPL Financial LLCNone$— unspecified
Secured, uncommitted lines of creditLPL Financial LLCNone$— unspecified
Capital Resources
The Company seeks to manage capital levels in support of our business strategy of generating and effectively deploying capital for the benefit of our shareholders.
Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds we are required to maintain for regulatory capital and reserves based on the requirements of our regulators and clearing organizations, which also consider client balances and trading activities. We have several sources of funds that enable us to meet increases in working capital requirements that relate to increases in client margin activities and balances. These sources include cash and cash equivalents on hand, cash segregated under federal and other regulations, the committed revolving credit facility of LPL Financial and proceeds from repledging or selling client securities in margin accounts. When an advisor’s client purchases securities on margin or uses securities as collateral to borrow from us on margin, we are permitted, pursuant to the applicable securities industry regulations, to repledge, loan or sell securities, up to 140% of the client’s margin loan balance, that collateralize those margin accounts.
Our other working capital needs are primarily related to loans we are making to advisors and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.
We may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets. These timing differences are funded either with internally generated cash flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or one of our revolving credit facilities.
LPL Financial is subject to the SEC’s Uniform Net Capital Rule, which requires the maintenance of minimum net capital. LPL Financial computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions. At September 30, 2021, LPL Financial had net capital of $133.3 million with a minimum net capital requirement of $14.1 million.
LPL Financial’s ability to pay dividends greater than 10% of its excess net capital during any 35-day rolling period requires approval from the Financial Industry Regulatory Authority (“FINRA”). In addition, payment of dividends is restricted if LPL Financial’s net capital would be less than 5% of aggregate customer debit balances.
LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the National Futures Association’s (“NFA”) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements. The NFA was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities. Currently, the highest NFA requirement is the minimum net capital calculated and required pursuant to the SEC’s Net Capital Rule.
In April 2021, the Company acquired a broker-dealer as part of the Waddell & Reed acquisition (“Waddell & Reed broker-dealer”). The Waddell & Reed broker-dealer is required to maintain net capital of $250,000, which represents
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the greater of 2% of its aggregate debits or the minimum net capital requirement of $250,000. At September 30, 2021, the Waddell & Reed broker-dealer had net capital of $8.2 million. The Company expects to dissolve the Waddell & Reed broker-dealer during the fourth quarter of 2021.
Our subsidiary PTC is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.
Debt and Related Covenants
The Credit Agreement and the Indentures contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
incur additional indebtedness or issue disqualified stock or preferred stock;
declare dividends, or other distributions to stockholders;
repurchase equity interests;
redeem indebtedness that is subordinated in right of payment to certain debt instruments;
make investments or acquisitions;
create liens;
sell assets;
guarantee indebtedness;
engage in certain transactions with affiliates;
enter into agreements that restrict dividends or other payments from subsidiaries; and
consolidate, merge or transfer all or substantially all of our assets.
Our Credit Agreement and the Indentures allow us to pay dividends and distributions or repurchase our capital stock only when certain conditions are met. In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, as defined in, and calculated by management in accordance with, the Credit Agreement. The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and is further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.
As of September 30, 2021, we were in compliance with both financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”. The breach of these financial covenants would be subject to certain equity cure rights. The required ratios under our financial covenants and actual ratios were as follows:
September 30, 2021
Financial RatioCovenant RequirementActual Ratio
Leverage Ratio (Maximum)5.002.18
Interest Coverage (Minimum)3.0012.42
See Note 8 - Long-term and Other Borrowings, within the notes to the unaudited condensed consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.

Off-Balance Sheet Arrangements
We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our advisors’ clients. These arrangements include Company commitments to extend credit. For information on these arrangements, see Note 9 - Commitments and Contingencies and Note 16 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk, within the notes to the unaudited condensed consolidated financial statements.
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Contractual Obligations
During the nine months ended September 30, 2021, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2020 Annual Report on Form 10-K. See Note 8 - Long-term and Other Borrowings and Note 9 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements, as well as the Contractual Obligations section within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K, for further detail.

Fair Value of Financial Instruments
We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures. See Note 5 - Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for a detailed discussion regarding our fair value measurements.

Critical Accounting Policies and Estimates
In the notes to our consolidated financial statements and in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2020 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no changes to those policies that we consider to be material since the filing of our 2020 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.
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Item 1. Financial Statements (unaudited)
LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
REVENUE
 Advisory$959,733 $586,941 $2,528,092 $1,689,338 
 Commission610,384 472,643 1,765,846 1,403,540 
Asset-based301,701 253,551 846,027 786,124 
Transaction and fee140,362 119,747 418,406 376,321 
Interest income7,365 6,623 20,797 22,705 
Other1,218 20,796 47,470 12,329 
Total revenue2,020,763 1,460,301 5,626,638 4,290,357 
EXPENSE 
Advisory and commission1,366,832 936,766 3,748,933 2,667,408 
Compensation and benefits185,980 151,271 531,373 441,393 
Promotional96,012 57,970 214,542 159,908 
Depreciation and amortization38,409 27,548 110,612 81,082 
Amortization of intangible assets21,531 16,829 58,887 50,088 
Occupancy and equipment52,695 41,874 137,731 124,486 
Professional services16,722 12,301 54,847 40,526 
Brokerage, clearing and exchange22,828 17,834 65,651 53,423 
Communications and data processing17,824 12,547 44,747 37,743 
Other36,888 24,852 92,852 73,274 
Total operating expense1,855,721 1,299,792 5,060,175 3,729,331 
Non-operating interest expense and other27,063 25,179 77,293 80,786 
Loss on extinguishment of debt  24,400  
INCOME BEFORE PROVISION FOR INCOME TAXES137,979 135,330 464,770 480,240 
PROVISION FOR INCOME TAXES34,915 31,541 112,985 119,148 
NET INCOME$103,064 $103,789 $351,785 $361,092 
EARNINGS PER SHARE (Note 12) 
Earnings per share, basic$1.29 $1.31 $4.40 $4.56 
Earnings per share, diluted$1.26 $1.29 $4.30 $4.48 
Weighted-average shares outstanding, basic80,182 79,176 79,981 79,207 
Weighted-average shares outstanding, diluted81,849 80,550 81,772 80,612 
See notes to unaudited condensed consolidated financial statements.
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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(In thousands, except share data)
ASSETSSeptember 30, 2021December 31, 2020
Cash and cash equivalents$977,789 $808,612 
Cash segregated under federal and other regulations811,716 923,158 
Restricted cash
85,381 67,264 
Receivables from:
Clients, net of allowance of $800 at September 30, 2021 and $520 at December 31, 2020
592,170 405,106 
Product sponsors, broker-dealers and clearing organizations
257,742 233,192 
Advisor loans, net of allowance of $9,124 at September 30, 2021 and $6,763 at December 31, 2020
814,514 547,372 
Others, net of allowance of $3,026 at September 30, 2021 and $3,101 at December 31, 2020
453,245 306,640 
Securities owned:
Trading — at fair value32,085 29,252 
Held-to-maturity — at amortized cost11,183 13,235 
Securities borrowed10,217 30,130 
Fixed assets, net of accumulated depreciation and amortization of $598,921 at September 30, 2021 and $489,997 at December 31, 2020
624,529 582,868 
Operating lease assets
96,716 101,921 
Goodwill1,641,238 1,513,866 
Intangible assets, net of accumulated amortization of $670,898 at September 30, 2021 and $612,011 at December 31, 2020
470,989 397,486 
Deferred income taxes, net24,489 24,112 
Other assets651,803 539,357 
Total assets$7,555,806 $6,523,571 
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable$190,451 $178,403 
Payables to clients1,419,889 1,356,083 
Payables to broker-dealers and clearing organizations148,193 89,743 
Accrued advisory and commission expenses payable224,438 187,040 
Accounts payable and accrued liabilities815,632 681,554 
Income taxes payable8,082 28,145 
Unearned revenue168,331 95,328 
Securities sold, but not yet purchased — at fair value170 206 
Long-term and other borrowings, net2,725,691 2,345,414 
Operating lease liabilities132,394 139,377 
Finance lease liabilities106,146 107,424 
Total liabilities5,939,417 5,208,717 
Commitments and contingencies (Note 9)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value; 600,000,000 shares authorized; 128,602,814 shares issued at September 30, 2021 and 127,585,764 shares issued at December 31, 2020
128 127 
Additional paid-in capital1,826,247 1,762,770 
Treasury stock, at cost — 48,475,390 shares at September 30, 2021 and 48,115,037 shares at December 31, 2020
(2,447,933)(2,391,062)
Retained earnings2,237,947