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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 June 30, 2020
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 class
Trading 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 Filer
x
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller 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 July 28, 2020 was 79,089,899.

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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 from 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. Hard 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.
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, future revenue 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/or acquisitions, as well as expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company's businesses, 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 August 4, 2020. 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 than 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 brokerage and advisory assets, including net new assets, and the related impact on revenue; 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; 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 business, including the Company’s centrally managed advisory platform; 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, and the implementation of Regulation BI (Best Interest); 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 its credit agreement and the indentures governing its senior notes; the price, the availability of shares, and trading volumes 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 programs, including its acquisitions, 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

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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 2019 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.

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PART I — FINANCIAL INFORMATION
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We are a leader in the retail financial advice market and the nation’s largest independent broker-dealer. We serve independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services and practice management programs they need to create and grow their practices. We enable them to provide objective financial guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions.
We believe that objective financial guidance is a fundamental need for everyone. We enable our advisors to focus on what they do best—create the personal, long-term relationships that are the foundation for turning life’s aspirations into financial realities. 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 independent investment advice. 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 independence and choice through access to a wide range of diligently evaluated non-proprietary products.
Executive Summary
Financial Highlights
Results for the second quarter of 2020 included net income of $101.7 million, or $1.27 per share, which compares to $146.1 million, or $1.71 per share, for the second quarter of 2019.
Asset Growth Trends
Total brokerage and advisory assets served were $761.7 billion as of June 30, 2020, up 8% from $706.0 billion as of June 30, 2019. Total net new assets were $13.0 billion for the three months ended June 30, 2020, compared to $6.2 billion for the same period in 2019.
Net new advisory assets were $10.2 billion for the three months ended June 30, 2020, compared to $7.5 billion for the same period in 2019. As of June 30, 2020, our advisory assets had grown to $375.3 billion, compared to $327.3 billion as of June 30, 2019, an increase of 15%, and represented 49% of total brokerage and advisory assets served.
Net new brokerage assets were an inflow of $2.8 billion for the three months ended June 30, 2020, compared to an outflow of $1.3 billion for the same period in 2019. As of June 30, 2020, our brokerage assets were $386.4 billion, up from $378.7 billion as of June 30, 2019, an increase of 2%.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, of $488.2 million for the three months ended June 30, 2020, decreased 9% from $535.7 million for the quarter ended June 30, 2019. Gross profit is calculated as net revenues, less commission and advisory expenses and brokerage, clearing and exchange fees. Management presents gross profit because we believe that measure may provide useful insight to investors in evaluating the Company’s core operating performance before indirect costs that are general and administrative in nature. See footnote 9 to the Financial Metrics table within the “How We Evaluate Our Business” section for additional information on gross profit.
Stockholder Capital Returns
We returned $19.7 million of capital, in the form of dividends, to stockholders during the three months ended June 30, 2020.
COVID-19 Response
In response to the coronavirus disease 2019 (“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, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices, and have worked closely with our vendors to

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maintain service continuity throughout the increased market volatility and operational volumes that occurred during the first six months of the year. We have also made extra support available to our advisors by extending service hours and providing additional resources to enable them to deliver differentiated service to their clients. For information about the risks associated with COVID-19, see Part II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.
Our Sources of Revenue
Our revenues are 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 revenues through our cash 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 brokerage and advisory 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. Starting in April 2020, we updated our definition of net new assets to make our figures more comparable with other companies. Our updated definition now includes dividends and interest, and subtracts advisory fees. All net new asset figures below align with our new definition. Our key operating, business and financial metrics are as follows:
 
Six Months Ended June 30,
 
 
Operating and Business Metrics (dollars in billions)(1)
2020
 
2019
 
% Change
Advisory assets(2)(3)
$
375.3

 
$
327.3

 
15
%
Brokerage assets(2)(4)
386.4

 
378.7

 
2
%
Total Brokerage and Advisory Assets served(2)
$
761.7

 
$
706.0

 
8
%
 
 
 
 
 
 
Net new advisory assets(5)
$
23.4

 
$
12.7

 
n/m

Net new brokerage assets(6)
4.0

 
(0.8
)
 
n/m

Total Brokerage and Advisory Net New Assets
$
27.3

 
$
11.9

 
n/m

 
 
 
 
 
 
Insured cash account balances(2)
$
33.1

 
$
21.3

 
55
%
Deposit cash account balances(2)
7.7

 
4.3

 
79
%
Total Insured Sweep Balances
40.8

 
25.5

 
60
%
Money market account balances(2)
1.6

 
3.5

 
(54
%)
Purchased money market fund balances(2)
2.8

 
1.0

 
n/m

Total Client Cash Balances
$
45.3


$
30.1

 
50
%
 
 
 
 
 
 
Advisors
16,973

 
16,161

 
5
%
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Financial Metrics (dollars in millions, except per share data)
2020
 
2019
 
2020
 
2019
Total net revenues
$
1,366.7

 
$
1,389.8

 
$
2,830.1

 
$
2,761.4

Recurring gross profit rate (trailing twelve months)(7)
86.8
 %
 
86.5
%
 
86.8
 %
 
86.5
%
Pre-tax income
$
137.3

 
$
195.1

 
$
344.9

 
$
398.9

Net income
$
101.7

 
$
146.1

 
$
257.3

 
$
301.5

Earnings per share, diluted
$
1.27

 
$
1.71

 
$
3.19

 
$
3.50

 
 
 
 
 
 
 
 
Non-GAAP Financial Measures(8)
 
 
 
 
 
 
 
Gross profit(9)
$
488.2

 
$
535.7

 
$
1,063.8

 
$
1,091.6

Gross profit (decrease)/increase from prior period(9)
(8.9
%)
 
11.0
%
 
(2.5
%)
 
15.3
%
Gross profit as a % of net revenue(9)
35.7
%
 
38.5
%
 
37.6
%
 
39.5
%
_______________________________
(1)
Totals may not foot due to rounding.
(2)
Brokerage and advisory assets consists 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. Insured cash account balances, deposit cash account balances, money market account balances and purchased money market fund balances are also included in brokerage and advisory assets served.
(3)
Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”). See Results of Operations for a tabular presentation of advisory assets.
(4)
Brokerage assets consists of assets serviced by advisors licensed with LPL Financial.
(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. The previously reported figures for net new advisory assets did not include dividends and interest or subtract advisory fees. The figure previously reported for the six months ended June 30, 2019 was an inflow of $11.2 billion.
(6)
Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to advisory accounts as deposits and withdrawals,

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respectively. The previously reported figures for net new brokerage assets did not include dividends and interest or subtract advisory fees. The figure previously reported for the six months ended June 30, 2019 was an outflow of $3.2 billion.
(7)
Recurring gross profit rate refers to the percentage of our gross profit, a non-GAAP financial measure, that was recurring for the period presented. We track recurring gross profit, a characterization of gross profit and a statistical measure, which is defined to include asset-based revenues, advisory revenues, trailing commission revenues and certain other fee revenues that are based upon the number of client accounts and advisors, less the expenses associated with such revenues and certain other recurring expenses not specifically associated with a revenue line. We allocate other recurring expenses on a pro-rata basis against specific revenue lines at our discretion. Because certain sources of recurring gross profit are associated with asset balances, they will fluctuate depending on the market values and current interest rates. Accordingly, our recurring gross profit can be negatively impacted by adverse external market conditions. However, we believe that recurring gross profit is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
(8)
We believe that presenting certain non-GAAP financial measures by excluding or including certain items can be helpful to investors and analysts who may wish to use some or all of this information to analyze our current performance, prospects, and valuation. Our management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. We believe that the non-GAAP financial measures and metrics presented above and discussed below are appropriate for evaluating the performance of the Company.
(9)
Set forth below is a calculation of gross profit, calculated as net revenues less commission and advisory expenses and brokerage, clearing and exchange fees. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered 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.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Gross Profit (in millions)
2020
 
2019
 
2020
 
2019
Total net revenues
$
1,366.7

 
$
1,389.8

 
$
2,830.1

 
$
2,761.4

Commission and advisory expense
859.8

 
838.0

 
1,730.6

 
1,637.7

Brokerage, clearing and exchange fees
18.6

 
16.0

 
35.6

 
32.1

Gross profit(1)
$
488.2


$
535.7


$
1,063.8


$
1,091.6

_______________________________
(1)
Totals may not foot due to rounding.
Legal & 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, the environment of additional regulation, increased regulatory compliance obligations 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 securities law 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 June 30, 2020, 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. For example, on May 1, 2018, we agreed to a settlement structure with the North American Securities Administrators Association that related to our historical compliance with certain state

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“blue sky” laws and resulted in aggregate fines of $26.4 million, all of which were covered by our captive insurance subsidiary loss reserves. As part of the settlement structure, we engaged independent third party consultants to conduct a historical review of securities transactions and an operational review of our systems for complying with blue sky securities registration requirements, each of which has been completed. We also agreed to offer customers remediation in the form of reimbursement for any actual losses, plus interest. As of the date of this Quarterly Report on Form 10-Q, customer remediation is substantially complete and the cost is not expected to be material.
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 10. 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 issued a mandate invalidating regulations previously enacted by the U.S. Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would have resulted in significant new restrictions on 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”), including compliance with expanded prohibited transaction requirements under section 4975 of the Internal Revenue Code. The DOL has proposed a new fiduciary rule with regard to such accounts (the “DOL Rule”). Because ERISA plans and IRAs comprise a significant portion of our business, 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 newly proposed DOL Rule and Regulation BI. As of June 30, 2020, we implemented new procedures in accordance with Regulation BI.
Future laws and regulations, including the new rule proposed 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
From time to time we undertake acquisitions or divestitures based on opportunities in the competitive landscape. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented.
On August 1, 2019, we acquired all of the outstanding equity interests of Allen & Company of Florida, LLC (“Allen & Company”), a broker-dealer and registered investment adviser (“RIA”), for a total purchase price of $34.9 million. Allen & Company advisors and staff became employees of the Company. See Note 4. Acquisitions, within the notes to the unaudited condensed consolidated financial statements for further detail.
During the three-months ended June 30, 2020 we entered into asset purchase agreements with Lucia Securities, LLC, a broker-dealer and RIA firm headquartered in San Diego, California, and E.K. Riley Investments, LLC, a broker-dealer and RIA headquartered in Seattle, Washington. Both transactions are expected to close in the second half of 2020.

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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 domestic and international financial markets. Global economic conditions in the second quarter of 2020 continued to be dominated by the consequences of efforts to contain the COVID-19 pandemic. According to the most recent available estimate from the U.S. Bureau of Economic Analysis, the U.S. economy contracted at an annualized rate of 5% in the first quarter of 2020. The National Bureau of Economic Research, which identifies U.S. recessions, announced in June 2020 that U.S. economic growth had peaked in February 2020 and that the ensuing slowdown in economic activity met its criteria for a recession, ending the economic expansion that began in June 2009.
Data received during the second quarter of 2020 suggests that U.S. gross domestic product (“GDP”) has likely seen a historic contraction over the quarter. Several key economic reports suggested that a modest stabilization occurred during the second half of the quarter, although overall economic activity remained at depressed levels. In particular, the unemployment rate, which had spiked to 14.7% in April 2020, declined in both May and June 2020, as consumer spending rebounded, while survey-based data implied both the manufacturing and services sectors expanded in June 2020. In addition, Congress has passed significant fiscal stimulus, highlighted by the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, a more than $2 trillion fiscal stimulus package aimed at supporting consumers and businesses, and is considering additional stimulus measures. In addition, the Federal Reserve (“Fed”) has acted aggressively to stimulate the economy. In addition to keeping the target range for the federal funds rate at 0.0 - 0.25% and continuing its bond purchases, known as quantitative easing, the Fed has enacted a range of programs to increase liquidity, strengthen credit markets and support lending.
Ultimately, the pace of the recovery will depend on the success of efforts to limit the spread of COVID-19; progress on testing, treatment and vaccine development; and policy efforts to mitigate the impact of the economic downturn. The Fed’s most recent median GDP projection, released following its June 9-10, 2020 policy meeting, suggests the economy will contract 6.5% for all of 2020 followed by 5.0% growth in 2021. Despite the forecast for contraction in 2020, many economists expect the economy to return to growth sequentially in the second half of the year.
Equity markets bounced back in the second quarter of 2020 from sharp declines in the first quarter related to the COVID-19 pandemic, helped by significant fiscal and monetary policy support, the gradual reopening of the U.S. economy and improving economic data. The S&P 500 Index hit its bear market low on March 23, 2020, and then reversed into a rally that extended over the course of the second quarter. The S&P 500 posted a total return of 20.5% in the second quarter, the second best quarter in the last thirty years. The strong rally off of lows left the S&P 500 down 3.1% for the year as of the end of the quarter. The broad MSCI indexes for both developed international and emerging market equities also rallied but still trailed the S&P 500, returning 15.1% and 18.2%, respectively, during the second quarter. Despite the strong stock market rally, U.S. Treasuries saw solid demand with the 10-year Treasury yield dipping 0.04% (4 basis points) over the second quarter to 0.66% on June 30, 2020. Steady Treasury yields and strength in investment-grade corporate bonds as credit spreads recovered from distressed levels helped the broad Bloomberg Barclays U.S. Aggregate Bond Total Return Index advance 2.9% over the quarter. High-yield bond credit spreads also narrowed significantly, supporting prices and lifting the Bloomberg Barclays U.S. Corporate Total Return Index to a 10.2% gain, although credit spreads still remained well above typical expansion norms.
Our business is sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. During the second quarter of 2020, Fed policymakers maintained the target range for the federal funds rate at 0.0 - 0.25%. In the policy statement released at the conclusion of its June 9-10, 2020 policy meeting, the Fed emphasized that it did not expect to raise rates until it was clear the economy had effectively navigated the COVID-19 pandemic crisis and was on a stable path to recovery. Projections released at the meeting’s conclusion showed a median expectation that the Fed would not raise rates until after 2022. The minutes to the meeting also indicated that the Fed is actively exploring expanding the policy tools available to support the economy despite a policy rate near zero, including forward guidance to maintain credible expectations that rates will remain low for some time, the continued or expanded use of asset purchases and yield curve control, which would put a target cap on rates at longer maturities than the federal funds rate, which only directly impacts overnight lending. While these expanded policies are only in the discussion stage, they signal the Fed’s intent to deploy additional policy tools.
Please consult the “Risks Related to Our Business and Industry” section within Part I, “Item 1A. Risk Factors” in our 2019 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 six months ended June 30, 2020 and 2019. Where appropriate, we have identified specific events and changes that affect comparability or trends, and where possible and practical, have quantified the impact of such items.
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(Dollars in thousands)
2020
 
2019
 
% Change
 
2020
 
2019
 
% Change
REVENUES
 
 
 
 
 
 
 
 
 
 
 
Commission
$
427,453

 
$
479,135

 
(10.8
)%
 
$
930,897

 
$
940,494

 
(1.0
)%
Advisory
523,370

 
481,309

 
8.7
 %
 
1,102,397

 
935,247

 
17.9
 %
Asset-based
247,067

 
288,551

 
(14.4
)%
 
532,573

 
584,914

 
(8.9
)%
Transaction and fee
119,478

 
118,335

 
1.0
 %
 
256,574

 
240,815

 
6.5
 %
Interest income, net of interest expense
6,540

 
11,690

 
(44.1
)%
 
16,082

 
24,011

 
(33.0
)%
Other
42,751

 
10,737

 
298.2
 %
 
(8,467
)
 
35,955

 
(123.5
)%
Total net revenues    
1,366,659

 
1,389,757

 
(1.7
)%
 
2,830,056

 
2,761,436

 
2.5
 %
EXPENSES
 
 
 
 

 
 
 
 
 
 
Commission and advisory
859,847

 
838,022

 
2.6
 %
 
1,730,642

 
1,637,720

 
5.7
 %
Compensation and benefits
143,320

 
131,788

 
8.8
 %
 
290,122

 
268,700

 
8.0
 %
Promotional
44,540

 
41,423

 
7.5
 %
 
101,938

 
92,772

 
9.9
 %
Depreciation and amortization
26,890

 
22,584

 
19.1
 %
 
53,534

 
46,054

 
16.2
 %
Amortization of intangible assets
16,689

 
16,249

 
2.7
 %
 
33,259

 
32,417

 
2.6
 %
Occupancy and equipment
43,066

 
33,320

 
29.2
 %
 
82,612

 
66,426

 
24.4
 %
Professional services
13,620

 
18,837

 
(27.7
)%
 
28,225

 
38,449

 
(26.6
)%
Brokerage, clearing and exchange
18,565

 
15,994

 
16.1
 %
 
35,589

 
32,138

 
10.7
 %
Communications and data processing
14,361

 
12,532

 
14.6
 %
 
25,196

 
24,859

 
1.4
 %
Other
22,194

 
29,975

 
(26.0
)%
 
48,422

 
56,378

 
(14.1
)%
Total operating expenses    
1,203,092

 
1,160,724

 
3.7
 %
 
2,429,539

 
2,295,913

 
5.8
 %
Non-operating interest expense and other
26,289

 
33,957

 
(22.6
)%
 
55,607

 
66,673

 
(16.6
)%
INCOME BEFORE PROVISION FOR INCOME TAXES
137,278

 
195,076

 
(29.6
)%
 
344,910

 
398,850

 
(13.5
)%
PROVISION FOR INCOME TAXES
35,616

 
48,984

 
(27.3
)%
 
87,607

 
97,360

 
(10.0
)%
NET INCOME
$
101,662

 
$
146,092

 
(30.4
)%
 
$
257,303

 
$
301,490

 
(14.7
)%

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Revenues
Commission Revenues
We generate two types of commission revenues: sales-based commissions and trailing commissions. 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. The levels of sales-based commission revenues 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. Trailing commission revenues, which are paid over time, are recurring in nature and are earned based on the market value of investment holdings in trail-eligible assets. We earn trailing commission revenues primarily on mutual funds and variable annuities held by clients of our advisors. See Note 3. Revenues, within the notes to the unaudited condensed consolidated financial statements for further detail regarding our commission revenue by product category.
The following table sets forth our commission revenue, by sales-based and trailing commission revenue, included in our unaudited condensed consolidated statements of income (dollars in thousands):
 
Three Months Ended June 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
Sales-based
$
159,512

 
$
203,531

 
$
(44,019
)
 
(21.6
)%
Trailing
267,941

 
275,604

 
(7,663
)
 
(2.8
)%
Total commission revenue
$
427,453

 
$
479,135

 
$
(51,682
)
 
(10.8
)%
The decrease in sales-based commission revenue for the three months ended June 30, 2020, compared with the same period in 2019 was primarily driven by the low interest rate environment caused by the COVID-19 pandemic, which led to a decrease in sales of annuities, mutual funds and fixed income products, partially offset by an increase in sales of equities.
The decrease in trailing revenues for the three months ended June 30, 2020, compared with the same period in 2019 was primarily due to the recent market downturn that caused a decrease in the market value of mutual funds.
The following table sets forth our commission revenue, by sales-based and trailing commission revenue, included in our unaudited condensed consolidated statements of income (dollars in thousands):
 
Six Months Ended June 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
Sales-based
$
387,903

 
$
394,530

 
$
(6,627
)
 
(1.7
)%
Trailing
542,994

 
545,964

 
(2,970
)
 
(0.5
)%
Total commission revenue
$
930,897

 
$
940,494

 
$
(9,597
)
 
(1.0
)%
The decrease in sales-based commission revenue for the six months ended June 30, 2020, compared with the same period in 2019 was primarily driven by the low interest rate environment caused by the COVID-19 pandemic, which led to a decrease in sales of annuities, slightly offset by an increase in sales of equities.
The decrease in trailing revenues for the six months ended June 30, 2020, compared with the same period in 2019 was primarily due to the decline in value of mutual funds and other trail-eligible assets as a result of the market downturn during the first quarter of 2020.

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The following table summarizes activity in brokerage assets for the periods presented (in billions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Balance - Beginning of period
$
347.6

 
$
372.1

 
$
398.6

 
$
346.0

Net new brokerage assets(1)
2.8

 
(1.3
)
 
4.0

 
(0.8
)
Market impact(2)
36.0

 
7.9

 
(16.2
)
 
33.5

Balance - End of period
$
386.4

 
$
378.7

 
$
386.4

 
$
378.7

_______________________________
(1)
Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. Previously reported figures for net new brokerage assets did not include dividends and interest or subtract advisory fees. The figures previously reported for the three and six months ended June 30, 2019 were an outflow of $2.6 billion and $3.2 billion, 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.
We are uncertain, as of the date of this Quarterly Report on Form 10-Q, of the effect of the COVID-19 pandemic on our future commission revenues. While equity markets have started to recover, COVID-19 cases continue to rise in the United States and many other parts of the world, and significant market disruptions and volatility remain possible. We cannot predict how the ongoing COVID-19 pandemic and foreign and domestic responses to it will impact our future sales-based or trailing commissions.
Advisory Revenues
Advisory revenues primarily represent fees charged on our corporate RIA platform provided to clients of our advisors based on the value of their advisory assets. Advisory fees are billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The majority of our 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 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 average 1.0% of the underlying assets with a maximum of 2.5% of the underlying assets as of June 30, 2020.
We also support separate investment adviser firms (“Hybrid RIAs”) through our independent 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 our brokerage and advisory assets, net new advisory assets, and advisory assets metrics. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues, although we charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services. The administrative fees collected on our independent advisory platform vary and can reach a maximum of 0.2% of the underlying assets as of June 30, 2020.
The following table summarizes the composition of advisory assets for the periods presented (dollars in billions):
 
June 30,
 
 
 
 
 
2020
 
2019
 
$ Change

 
% Change

Corporate platform advisory assets
$
233.5

 
$
201.9

 
$
31.6

 
15.7
%
Hybrid platform advisory assets
141.9

 
125.4

 
16.5

 
13.2
%
Total advisory assets(1)
$
375.3

 
$
327.3

 
$
48.1

 
14.7
%
_______________________________
(1)
Totals may not foot due to rounding.
Furthermore, we support certain financial advisors at broker-dealers affiliated with insurance companies through our customized advisory platforms and charge fees to these advisors based on the value of assets within these advisory accounts.

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The following table summarizes activity in advisory assets for the periods presented (in billions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Balance - Beginning of period
$
322.3

 
$
311.9

 
$
365.8

 
$
282.0

Net new advisory assets(1)
10.2

 
7.5

 
23.4

 
12.7

Market impact(2)
42.8

 
7.9

 
(13.9
)
 
32.6

Balance - End of period
$
375.3

 
$
327.3

 
$
375.3

 
$
327.3

_______________________________
(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. Previously reported figures for net new advisory assets did not include dividends and interest or subtract advisory fees. The figures previously reported for the three and six months ended June 30, 2019 were an inflow of $6.6 billion and $11.2 billion, 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.
Net new advisory assets in a particular quarter drive advisory revenue in future quarters, due to billing quarterly in advance. Therefore, the full impact of net new advisory assets to advisory revenue is not realized in the same period.
The growth in advisory revenue for the three months ended June 30, 2020 compared to the same period in 2019 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity, offset by the market downturn during the first quarter of 2020.
The growth in advisory revenue for the six months ended June 30, 2020 compared to the same period in 2019 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity.
Asset-Based Revenues
Asset-based revenues consist of omnibus processing and networking services (collectively referred to as “recordkeeping”), our sponsorship programs with financial product manufacturers, and fees from our client cash programs. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training efforts. Omnibus processing revenues are paid to us by mutual fund product sponsors and are based on the value of custodied assets in advisory accounts and the number of brokerage 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 and annuity product manufacturers. Client cash-based revenues are generated on advisors’ clients’ cash balances in insured sweep accounts and money market programs at various banks. Pursuant to contractual arrangements, we receive fees based on account type and invested balances for administration and recordkeeping.
Asset-based revenues for the three months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to decreased revenues from our client cash programs.
Asset-based revenues for the six months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to decreased revenues from our client cash programs, offset by an increase in recordkeeping revenues.
Client cash revenues for the three and six months ended June 30, 2020 decreased compared to the same periods in 2019 primarily due to the impact of a lower federal funds effective rate during the first two quarters of 2020, offset by higher average client cash balances. For the three months ended June 30, 2020, our average client cash balances increased to $46.1 billion compared to $29.9 billion for the same period in 2019. For the six months ended June 30, 2020, our average client cash balances increased to $42.3 billion compared to $30.6 billion for the same period in 2019.
The declines in client cash revenues we experienced in the second quarter are likely to continue through the remainder of the year due to low interest rates.
Revenues for our recordkeeping programs for the three and six months ended June 30, 2020, which are largely based on the market value of the underlying assets, increased compared to the same periods in 2019.
Revenues for our sponsorship programs remained relatively flat for the three and six months ended June 30, 2020 compared with the same periods in 2019.

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Transaction and Fee Revenues
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. 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 increased for the three and six months ended June 30, 2020 compared to the same periods in 2019 primarily due to increased transaction volume in response to the market volatility caused by the COVID-19 pandemic, partially offset by a decrease in conference service revenue due to the cancellation of advisor-related conferences.
Interest Income, Net of Interest Expense
We earn interest income from client margin accounts and cash equivalents, net of operating expense. Period-over-period variances correspond to changes in the average balances of assets in margin accounts and cash equivalents as well as changes in interest rates.
Interest income, net of interest expense decreased for the three and six months ended June 30, 2020, compared to the same periods in 2019 primarily due to lower average interest rates.
Other Revenues
Other revenues primarily include mark-to-market gains or losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, and other miscellaneous revenues.
Other revenues increased for the three months ended June 30, 2020 compared to the same period in 2019 primarily due to unrealized gains on assets held in our advisor non-qualified deferred compensation plan due to the rapid market recovery from the first quarter of 2020 downturn.
Other revenues decreased for the six months ended June 30, 2020 compared to the same period in 2019 primarily due to unrealized losses on assets held in our advisor non-qualified deferred compensation plan caused by the market downturn during the first quarter of 2020.
Expenses
Commission and Advisory Expenses
Commission and advisory expenses consist of the following: base payout amounts that are earned by and paid out to advisors and institutions based on commission and advisory revenues earned on each client’s account; production based bonuses earned by advisors and institutions based on the levels of commission and advisory 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 each reporting period; and the deferred commissions and advisory fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.
The following table shows the components of our payout ratio, which is a statistical or operating measure:
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Base payout rate(1)
82.64
%
 
83.39
%
 
(75 bps)
 
82.67
%
 
83.17
%
 
(50 bps)
Production based bonuses
3.59
%
 
3.15
%
 
44 bps
 
2.94
%
 
2.61
%
 
33 bps
Total payout ratio(2)
86.24
%
 
86.54
%
 
(30 bps)
 
85.61
%
 
85.78
%
 
(17 bps)
_______________________________
(1)
Our base payout rate is calculated as commission and advisory expenses less production based bonuses and mark-to-market gains or losses on the non-qualified deferred compensation plan, divided by commission and advisory revenues.
(2)
Totals may not foot due to rounding.
Our total payout ratio decreased for the three and six months ended June 30, 2020 compared with the same periods in 2019, primarily due to a decrease in base payout rate, which was driven by a spike in the sale of equities and a shift from brokerage to advisory business, each of which result in lower payouts, offset by an increase in production based bonuses, which was driven by broader price reductions on our corporate advisory platform.

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Compensation and Benefits Expense
Compensation and benefits expense includes salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary employees and consultants.

The following table sets forth our average number of employees for the three and six months ended June 30, 2020, as compared with the same periods in 2019.
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Average number of employees
4,530
 
4,331
 
4.6%
 
4,440
 
4,299
 
3.3%
Compensation and benefits expense increased for the three and six months ended June 30, 2020 compared with the same periods in 2019 due to an increase in salary and discretionary bonus expenses resulting from an increase in headcount.
Promotional Expense
Promotional expense includes costs related to our hosting of certain advisor conferences that serve as training, sales and marketing events, business development costs related to advisor recruitment and retention, and other costs that support advisor business growth.
The increase in promotional expense for the three and six months ended June 30, 2020 compared with the same periods in 2019 was primarily driven by an increase in costs associated with advisor loans and promotions, offset by a decrease in advisor conference expense due to conference cancellations in response to the COVID-19 pandemic.
Depreciation and Amortization Expense
Depreciation and amortization expense represents the benefits received for using long-lived assets. Those assets consist of fixed assets, which include internally developed software, hardware, leasehold improvements, and other equipment.
The increase in depreciation and amortization expense for the three and six months ended June 30, 2020 compared with the same periods in 2019 was primarily due to an increase in internally developed software.
Amortization of Intangible Assets
Amortization of intangible assets represents the benefits received for using long-lived assets, which consist of intangible assets established through our acquisitions.
Amortization of intangible assets remained relatively flat for the three and six months ended June 30, 2020 compared with the same periods in 2019.
Occupancy and Equipment Expense
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.
The increase in occupancy and equipment expense for the three and six months ended June 30, 2020 compared with the same periods in 2019 was primarily due to an increase in costs related to software licensing fees in support of our service and technology investments.
Professional Services
Professional services includes costs paid to outside firms for assistance with legal, accounting, technology, regulatory, marketing, and general corporate matters, as well as non-capitalized costs related to service and technology enhancements.
The decrease in professional services for the three and six months ended June 30, 2020 compared with the same periods in 2019 was primarily due to decreases in costs related to outsourced services.

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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. Changes in brokerage, clearing and exchange fees fluctuate largely in line with the volume of sales and trading activity.
The increase in brokerage, clearing and exchange fees was consistent with the increase in the volume of sales and trading activity for the three and six months ended June 30, 2020 compared with the same periods in 2019.
Communications and Data Processing
Communications expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges and markets. Data processing expense consists primarily of customer statement processing and postage costs.
The increase in communications and data processing expense for the three months ended June 30, 2020 compared with the same period in 2019 was primarily due to an increase in client statement costs.
Communications and data processing expense remained relatively flat for the six months ended June 30, 2020 compared with the same period in 2019.
Other Expenses
Other expenses includes the estimated costs of the investigation, settlement and resolution of regulatory matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulator fees, and other miscellaneous expenses. Other expenses will depend in part on the size and timing of resolving regulatory matters and the availability of self-insurance coverage, which depends in part on the amount and timing of resolving historical claims. There are particular uncertainties and complexities involved when assessing the potential costs and timing of regulatory matters, including the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary.
The decrease in other expenses for the three and six months ended June 30, 2020 compared with the same periods in 2019 was primarily due to a decrease in travel expenses as a result of the COVID-19 pandemic and lower costs associated with the investigation of regulatory matters.
Non-Operating Interest Expense and Other
Non-operating interest expense and other represents expense from our senior secured credit facilities, senior unsecured notes, finance leases and other non-operating expenses.
The decrease in non-operating interest expense and other for the three and six months ended June 30, 2020 compared with the same periods in 2019 was primarily due to a lower outstanding principal balance, and a lower interest rate on our senior secured term loan, partially offset by an increase in balance from issuing additional senior unsecured notes in 2019.
Provision for Income Taxes
We estimate our full-year effective income tax rate at the end of each reporting period. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the quarter in which resolution of a particular item occurs. The effective income tax rates reflect the impact of state taxes, settlement contingencies, tax credits and other permanent differences in tax deductibility of certain expenses.
Our effective tax rate was 25.9% and 25.1% for the three months ended June 30, 2020 and 2019, respectively. The increase in our effective tax rate for the three months ended June 30, 2020 compared with the same period in 2019 was primarily due to a reduction in tax benefits associated with stock option exercises under Accounting Standards Codification (“ASC”) Topic 718.
Our effective tax rate was 25.4% and 24.4% for the six months ended June 30, 2020 and 2019, respectively. The increase in our effective tax rate for the six months ended June 30, 2020 compared with the same period in 2019 was primarily due to a reduction in tax benefits associated with stock option exercises under ASC Topic 718.


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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, COVID-19 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 for an extended period, there could be a material and adverse financial impact to our results of operations. For more information about the risks associated with COVID-19, see Part II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
Senior management establishes our liquidity and capital policies. These policies include senior management’s review of short- and long-term cash flow forecasts, review of capital expenditures and daily monitoring of liquidity for our subsidiaries. Decisions on the allocation of capital are based upon, among other things, projected profitability and cash flow, risks of the business, regulatory capital requirements and future liquidity needs for strategic activities. Our Treasury department assists in evaluating, monitoring and controlling the business activities that impact our financial condition, liquidity and capital structure. The objectives of these policies are to support our corporate business strategies while ensuring ongoing and sufficient liquidity.
A summary of changes in cash flow data is provided as follows (in thousands):
 
Six Months Ended June 30,
 
2020
 
2019
Net cash flows provided by (used in):
 
 
 
Operating activities
$
338,148

 
$
(54,405
)
Investing activities
(74,491
)
 
(62,242
)
Financing activities
(245,727
)
 
(284,140
)
Net increase (decrease) in cash, cash equivalents and restricted cash
17,930

 
(400,787
)
Cash, cash equivalents and restricted cash — beginning of period
1,471,778

 
1,562,119

Cash, cash equivalents and restricted cash — end of period
$
1,489,708

 
$
1,161,332

Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing.
Net cash flows provided by (used in) operating activities includes net income and adjustments for non-cash expenses, changes in operating assets and liabilities, including balances related to the settlement and funding of client transactions, receivables from product sponsors and accrued commission and advisory expenses due to our advisors. Operating assets and liabilities that arise from the settlement and funding of transactions by our advisors’ clients are the principal cause of changes to our net cash from operating activities and can fluctuate significantly from day to day and period to period depending on overall trends and clients’ behaviors.
The increase in cash flows provided by operating activities for the six months ended June 30, 2020 compared to the same period in 2019 was primarily attributable to a decrease in outflows from payables to clients, an increase in income taxes payable and a decrease in receivables from clients, due to the timing of payments made, partially offset by a decrease in net income.
The increase in cash flows used in investing activities for the six months ended June 30, 2020 compared to the same period in 2019 was primarily attributable to an increase in capital expenditures and purchases of held-to-maturity securities.
The decrease in cash flows used in financing activities for the six months ended June 30, 2020 compared to the same period in 2019 was primarily attributable to the suspension of repurchases of our common stock, partially offset by repayments of our revolving lines of credit.
We have actively monitored any changes to our liquidity needs caused by the COVID-19 pandemic. We believe that based on current levels of operations and anticipated growth, our cash flow from operations, together with other available sources of funds, which include four uncommitted lines of credit, the revolving credit facility established through our senior secured credit agreement (the “Credit Agreement”) and the committed revolving credit facility of LPL Financial, will be adequate to satisfy our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future. We believe that this will remain the case in reasonably likely stress scenarios involving a sustained market downturn and the persistence of

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current interest rates. We note that the earliest principal maturity date for our long-term borrowings is 2025 and our revolving credit facilities mature in 2024, which makes us less dependent on capital markets in the near-term.
We have certain capital adequacy requirements related to our registered broker-dealer subsidiary and bank trust subsidiary and have met all such requirements and expect to continue to do so for the foreseeable future. In particular, we believe that our liquidity planning has positioned us to meet reasonably foreseeable liquidity needs resulting from higher transaction volumes and price volatility, including higher margin requirements of clearing corporations and exchanges. For short-term liquidity needs we have the ability to draw on the committed revolving credit facility of LPL Financial and our senior secured revolving credit facility for a combined available amount of up to $1.1 billion.
We regularly evaluate our existing indebtedness, including refinancing thereof, based on a number of factors, including our capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms and general market conditions.
Share Repurchases
We engage in share repurchase programs, which are approved by our board of directors (the “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. See Note 11. Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchases. We suspended share repurchases in mid-March 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic. The resumption, timing and amount of future share repurchases will generally be determined at our discretion within the constraints of our Credit Agreement, the indentures governing our senior unsecured notes (the “Indentures”) and consideration of our general liquidity needs.
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 11. Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.
Operating Capital Requirements
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 advisor loans 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 flow or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or under 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 2.0% of aggregate debit balances arising from client transactions. At June 30, 2020, LPL Financial had net capital of $121.5 million with a minimum net capital requirement of $9.6 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 5.0% 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

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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.
Our subsidiary, The Private Trust Company, N.A. (“PTC”), is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.
Debt and Related Covenants
See Note 8. Borrowings, within the notes to the unaudited condensed consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.
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 prohibit us from paying dividends and distributions or repurchasing our capital stock except for limited purposes or in limited amounts. In addition, our revolving credit facility requires compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, defined in, and calculated by management in accordance with, the Credit Agreement as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and 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 June 30, 2020, we were in compliance with both of our financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (“Leverage Test,” as defined in the Credit Agreement) and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (“Interest Coverage,” as defined in the Credit Agreement). 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:
Financial Ratio
Covenant Requirement
 
Actual
Ratio
Leverage Test (Maximum)
5.00
 
2.03
Interest Coverage (Minimum)
3.00
 
9.24
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 10. Commitments and Contingencies and Note 17. 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 six months ended June 30, 2020, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2019 Annual Report on Form 10-K. See Note 8. Borrowings and Note 10. 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 2019 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 2019 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 other material changes to those policies that we consider to be significant since the filing of our 2019 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.
Recently Issued Accounting Pronouncements
Refer to Note 2. Summary of Significant Accounting Policies, within the notes to the unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.

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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 June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
REVENUES
 
 
 
 
 
 
 
 
Commission
 
$
427,453

 
$
479,135

 
$
930,897

 
$
940,494

Advisory
 
523,370

 
481,309

 
1,102,397

 
935,247

Asset-based
 
247,067

 
288,551

 
532,573

 
584,914

Transaction and fee
 
119,478

 
118,335

 
256,574

 
240,815

Interest income, net of interest expense
 
6,540

 
11,690

 
16,082

 
24,011

Other
 
42,751

 
10,737

 
(8,467
)
 
35,955

Total net revenues
 
1,366,659

 
1,389,757

 
2,830,056

 
2,761,436

EXPENSES
 
 
 
 
 
 
 
 

Commission and advisory
 
859,847

 
838,022

 
1,730,642

 
1,637,720

Compensation and benefits
 
143,320

 
131,788

 
290,122

 
268,700

Promotional
 
44,540

 
41,423

 
101,938

 
92,772

Depreciation and amortization
 
26,890

 
22,584

 
53,534

 
46,054

Amortization of intangible assets
 
16,689

 
16,249

 
33,259

 
32,417

Occupancy and equipment
 
43,066

 
33,320

 
82,612

 
66,426

Professional services
 
13,620

 
18,837

 
28,225

 
38,449

Brokerage, clearing and exchange
 
18,565

 
15,994

 
35,589

 
32,138

Communications and data processing
 
14,361

 
12,532

 
25,196

 
24,859

Other
 
22,194

 
29,975

 
48,422

 
56,378

Total operating expenses
 
1,203,092

 
1,160,724

 
2,429,539

 
2,295,913

Non-operating interest expense and other
 
26,289

 
33,957

 
55,607

 
66,673

INCOME BEFORE PROVISION FOR INCOME TAXES
 
137,278

 
195,076

 
344,910

 
398,850

PROVISION FOR INCOME TAXES
 
35,616

 
48,984

 
87,607

 
97,360

NET INCOME
 
$
101,662

 
$
146,092

 
$
257,303

 
$
301,490

EARNINGS PER SHARE (Note 13)
 
 
 
 
 
 
 
 

Earnings per share, basic
 
$
1.29

 
$
1.75

 
$
3.25

 
$
3.59

Earnings per share, diluted
 
$
1.27

 
$
1.71

 
$
3.19

 
$
3.50

Weighted-average shares outstanding, basic
 
78,940

 
83,247

 
79,223

 
83,869

Weighted-average shares outstanding, diluted
 
80,127

 
85,350

 
80,659

 
86,052

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)
ASSETS
June 30,
2020
 
December 31, 2019
Cash and cash equivalents
$
845,228

 
$
590,209

Cash segregated under federal and other regulations
574,429

 
822,697

Restricted cash
70,051

 
58,872

Receivables from:
 
 
 
Clients, net of allowance of $395 at June 30, 2020 and $115 at December 31, 2019
385,894

 
433,986

Product sponsors, broker-dealers and clearing organizations
177,752

 
177,654

Advisor loans, net of allowance of $6,583 at June 30, 2020 and $3,974 at December 31, 2019
474,718

 
441,743

Others, net of allowance of $3,334 at June 30, 2020 and $10,292 at December 31, 2019
314,856

 
298,790

Securities owned:
 
 
 
Trading — at fair value
35,327

 
46,447

Held-to-maturity — at amortized cost
14,406

 
11,806

Securities borrowed
10,944

 
17,684

Fixed assets, net of accumulated depreciation and amortization of $440,935 at June 30, 2020 and $388,355 at December 31, 2019
556,490

 
533,044

Operating lease assets
101,741

 
102,477

Goodwill
1,503,648

 
1,503,648

Intangible assets, net of accumulated amortization of $577,912 at June 30, 2020 and $544,653 at December 31, 2019
406,740

 
439,838

Deferred income taxes, net
751

 
—

Other assets
432,758

 
401,343

Total assets
$
5,905,733

 
$
5,880,238

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
Drafts payable
$
206,084

 
$
218,636

Payables to clients
1,034,445

 
1,058,873

Payables to broker-dealers and clearing organizations
87,706

 
92,002

Accrued commission and advisory expenses payable
162,620

 
174,330

Accounts payable and accrued liabilities
521,088

 
557,969

Income taxes payable
88,376

 
20,129

Unearned revenue
100,377

 
82,842

Securities sold, but not yet purchased — at fair value
71

 
176

Long-term and other borrowings, net
2,349,619

 
2,398,818

Operating lease liabilities
140,293

 
141,900

Finance lease liabilities
107,548

 
108,592

Deferred income taxes, net
—

 
2,098

Total liabilities
4,798,227

 
4,856,365

Commitments and contingencies (Note 10)
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $.001 par value; 600,000,000 shares authorized; 127,238,822 shares issued at June 30, 2020 and 126,494,028 shares issued at December 31, 2019
127

 
126

Additional paid-in capital
1,733,334

 
1,703,973

Treasury stock, at cost — 48,154,472 shares at June 30, 2020 and 46,259,989 shares at December 31, 2019
(2,391,961
)
 
(2,234,793
)
Retained earnings
1,766,006

 
1,554,567

Total stockholders’ equity
1,107,506

 
1,023,873

Total liabilities and stockholders’ equity
$
5,905,733

 
$
5,880,238

See notes to unaudited condensed consolidated financial statements.

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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)

 
Three Months Ended June 30, 2019
 
 
 
 
 
Additional
Paid-In
Capital
 
 
 
 
 
Accumulated Other
Comprehensive
Income (loss)
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Common Stock
 
 
Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
BALANCE — March 31, 2019
125,648

 
$
126

 
$
1,658,631

 
41,612

 
$
(1,859,484
)
 
$
—

 
$
1,210,422

 
$
1,009,695

Net income, net of tax expense
 
 
 
 
 
 
 
 
 
 
—

 
146,092

 
146,092

Issuance of common stock to settle restricted stock units, net
9

 
—

 
—

 
2

 
(179
)
 
 
 
 
 
(179
)
Treasury stock purchases
 
 
 
 
 
 
1,592

 
(125,033
)
 
 
 
 
 
(125,033
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(20,827
)
 
(20,827
)
Stock option exercises and other
314

 
—

 
6,425

 
(13
)
 
473

 
 
 
372

 
7,270

Share-based compensation
—

 
—

 
8,099

 
 
 
 
 
 
 
 
 
8,099

BALANCE — June 30, 2019
125,971

 
$
126

 
$
1,673,155

 
43,193

 
$
(1,984,223
)
 
$
—

 
$
1,336,059

 
$
1,025,117

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2020
 
 
 
 
 
Additional
Paid-In
Capital
 
 
 
 
 
Accumulated Other
Comprehensive
Income (loss)
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Common Stock
 
 
Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
BALANCE — March 31, 2020
127,036

 
$
127

 
$
1,720,276