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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, 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 October 27, 2020 was 79,288,558.

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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.
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; future revenue and expenses; future affiliation models and capabilities; market and macroeconomic trends; and 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 the date of this Quarterly Report on Form 10-Q. 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 advisory and brokerage 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

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senior notes; 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 programs, including its acquisitions involving Lucia Securities, LLC, E.K. Riley Investments, LLC and Blaze Portfolio Systems LLC, 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 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 third quarter of 2020 included net income of $103.8 million, or $1.29 per share, which compares to $131.7 million, or $1.57 per share, for the third quarter of 2019.
Asset Growth Trends
Total advisory and brokerage assets served were $810.4 billion as of September 30, 2020, up 13% from $719.3 billion as of September 30, 2019. Total net new assets were $11.1 billion for the three months ended September 30, 2020, compared to $11.9 billion for the same period in 2019.
Net new advisory assets were an inflow of $10.4 billion for the three months ended September 30, 2020, compared to $10.1 billion for the same period in 2019. As of September 30, 2020, our advisory assets were $405.9 billion, up from $338.0 billion as of September 30, 2019, an increase of 20%, and represented 50% of total advisory and brokerage assets served.
Net new brokerage assets were an inflow of $0.7 billion for the three months ended September 30, 2020, compared to $1.8 billion for the same period in 2019. As of September 30, 2020, our brokerage assets were $404.4 billion, up from $381.3 billion as of September 30, 2019, an increase of 6%.
Gross Profit Trends
Gross profit, a non-GAAP financial measure, of $505.7 million for the three months ended September 30, 2020, decreased 7% from $542.5 million for the three months ended September 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 $19.8 million of capital, in the form of dividends, to stockholders during the three months ended September 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

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enhanced cleaning protocols throughout our corporate offices, and have worked closely with our vendors to maintain service continuity throughout the increased market volatility and operational volumes that occurred during the year. We 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 advisory and brokerage accounts.

2
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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. 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:
 
As of and for the Nine Months Ended September 30,
 
 
Operating and Business Metrics (dollars in billions)(1)
2020
 
2019
 
% Change
Advisory assets(2)(3)
$
405.9

 
$
338.0

 
20
%
Brokerage assets(2)(4)
404.4

 
381.3

 
6
%
Total Advisory and Brokerage Assets served(2)
$
810.4

 
$
719.3

 
13
%
 
 
 
 
 
 
Net new advisory assets(5)
$
33.7

 
$
22.8

 
n/m

Net new brokerage assets(6)
4.7

 
1.0

 
n/m

Total Advisory and Brokerage Net New Assets
$
38.4

 
$
23.8

 
n/m

 
 
 
 
 
 
Insured cash account balances(2)
$
34.7

 
$
22.2

 
56
%
Deposit cash account balances(2)
8.0

 
4.6

 
74
%
Total Insured Sweep Balances
42.7

 
26.8

 
59
%
Money market account balances(2)
1.5

 
2.6

 
(42
%)
Purchased money market fund balances(2)
2.3

 
1.8

 
28
%
Total Client Cash Balances
$
46.6


$
31.2

 
49
%
 
 
 
 
 
 
Advisors
17,168

 
16,349

 
5
%
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Financial Metrics (dollars in millions, except per share data)
2020
 
2019
 
2020
 
2019
Total net revenues
$
1,460.3

 
$
1,415.5

 
$
4,290.4

 
$
4,177.0

Recurring gross profit rate (trailing twelve months)(7)
86.1
 %
 
87.1
%
 
86.1
 %
 
87.1
%
Pre-tax income
$
135.3

 
$
178.0

 
$
480.2

 
$
576.8

Net income
$
103.8

 
$
131.7

 
$
361.1

 
$
433.2

Earnings per share, diluted
$
1.29

 
$
1.57

 
$
4.48

 
$
5.07

 
 
 
 
 
 
 
 
Non-GAAP Financial Measures(8)
 
 
 
 
 
 
 
Gross profit(9)
$
505.7

 
$
542.5

 
$
1,569.5

 
$
1,634.1

Gross profit (decrease)/increase from prior period(9)
(6.8
%)
 
10.0
%
 
(4.0
%)
 
13.5
%
Gross profit as a % of net revenues(9)
34.6
%
 
38.3
%
 
36.6
%
 
39.1
%
_______________________________
(1)
Totals may not foot due to rounding.
(2)
Advisory and brokerage 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 advisory and brokerage 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. Figures for net new advisory assets reported prior to April 2020 did not include dividends and interest or subtract advisory fees. The figure previously reported for the nine months ended September 30, 2019 was an inflow of $20.4 billion.

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(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. Figures for net new brokerage assets reported prior to April 2020 did not include dividends and interest. The figure previously reported for the nine months ended September 30, 2019 was an outflow of $2.6 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 September 30,
 
Nine Months Ended September 30,
Gross Profit (in millions)
2020
 
2019
 
2020
 
2019
Total net revenues
$
1,460.3

 
$
1,415.5

 
$
4,290.4

 
$
4,177.0

Commission and advisory expense
936.8

 
856.6

 
2,667.4

 
2,494.4

Brokerage, clearing and exchange fees
17.8

 
16.4

 
53.4

 
48.5

Gross profit(1)
$
505.7


$
542.5


$
1,569.5


$
1,634.1

_______________________________
(1)
Totals may not foot due to rounding.
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, 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, 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

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North American Securities Administrators Association that related to our historical compliance with certain state “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.
On August 18, 2020, we closed the asset acquisitions of both 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. 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. Global economic conditions in the third quarter continued to be dominated by consequences of efforts to contain the COVID-19 pandemic. Significant mitigation efforts through supportive central bank policy (monetary stimulus) and government spending (fiscal stimulus) have helped the global and U.S. economy take meaningful steps toward recovery, but the results have been uneven and uncertainty remains elevated.
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 31.4% in the second quarter of 2020, after contracting 5% in the first quarter of 2020. The National Bureau of Economic Research, which dates U.S. recessions, announced in June 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 third quarter suggests that U.S. gross domestic product (“GDP”) has seen significant growth over the quarter. The unemployment rate, which had spiked to 14.7% in April, has declined steadily since and was 7.9% in September. Consumer spending has rebounded sharply, although spending on the services industries most impacted by COVID-19 remains depressed. Business investment has also started to rebound, and business activity has strengthened but remains below pre-pandemic levels. The Federal Reserve’s (“Fed”) most recent median GDP projection, released following its September 15-16, 2020 policy meeting, saw the economy contracting 3.7% for all of 2020, a substantial improvement from its June projection of a 6.5% contraction, followed by 4.0% growth in 2021.
In the third quarter, the S&P 500 Index extended its second quarter rebound following its March 23, 2020 low, climbing 8.9% on a total return basis. At the end of the quarter, the index had fully recovered losses from the bear market declines and was up 5.6% for the year. The broad MSCI indexes for both developed international and emerging market equities also pushed higher, returning 4.9% and 9.7%, respectively, during the third quarter. The 10-year Treasury yield was near flat for the quarter despite improved economic activity, rising 0.03% (3 basis points) over the third quarter to 0.69%. Steady Treasury yields and modest strength in investment grade corporate bonds as credit spreads continued to narrow, helped the broad Bloomberg Barclays U.S. Aggregate Bond Total Return Index advance 0.6% over the quarter. High-yield bond credit spreads also narrowed, supporting prices and lifting the Bloomberg Barclays U.S. High Yield Total Return Index to a 4.6% gain.
Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. During the third quarter Fed policymakers maintained the target range for the federal funds rate at 0.0 - 0.25%. The policy statement released at the conclusion of the September 15-16, 2020 policy meeting incorporated the conclusions of the Fed’s recent review of its policy framework, released on August 27, 2020. The updated framework raises the Fed’s inflation target above 2% if inflation has run below target for some time, as is the case now. A higher inflation target gives the Fed additional leeway to keep rates lower for a longer period of time, even upon achieving full employment. Projections released at the meeting’s conclusion showed a median expectation that the Fed would not raise rates until after 2023.
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 nine months ended September 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 September 30,
 
 
 
Nine Months Ended September 30,
 
 
(Dollars in thousands)
2020
 
2019
 
% Change
 
2020
 
2019
 
% Change
REVENUES
 
 
 
 
 
 
 
 
 
 
 
Commission
$
472,643

 
$
474,993

 
(0.5
)%
 
$
1,403,540

 
$
1,415,487

 
(0.8
)%
Advisory
586,941

 
514,363

 
14.1
 %
 
1,689,338

 
1,449,610

 
16.5
 %
Asset-based
253,551

 
292,140

 
(13.2
)%
 
786,124

 
877,054

 
(10.4
)%
Transaction and fee
119,747

 
121,222

 
(1.2
)%
 
376,321

 
362,037

 
3.9
 %
Interest income, net of interest expense
6,623

 
11,531

 
(42.6
)%
 
22,705

 
35,542

 
(36.1
)%
Other
20,796

 
1,276

 
1,529.8
 %
 
12,329

 
37,231

 
(66.9
)%
Total net revenues    
1,460,301

 
1,415,525

 
3.2
 %
 
4,290,357

 
4,176,961

 
2.7
 %
EXPENSES
 
 
 
 

 
 
 
 
 
 
Commission and advisory
936,766

 
856,635

 
9.4
 %
 
2,667,408

 
2,494,355

 
6.9
 %
Compensation and benefits
151,271

 
138,300

 
9.4
 %
 
441,393

 
407,000

 
8.5
 %
Promotional
57,970

 
61,715

 
(6.1
)%
 
159,908

 
154,487

 
3.5
 %
Depreciation and amortization
27,548

 
24,062

 
14.5
 %
 
81,082

 
70,116

 
15.6
 %
Amortization of intangible assets
16,829

 
16,286

 
3.3
 %
 
50,088

 
48,703

 
2.8
 %
Occupancy and equipment
41,874

 
34,417

 
21.7
 %
 
124,486

 
100,843

 
23.4
 %
Professional services
12,301

 
17,666

 
(30.4
)%
 
40,526

 
56,115

 
(27.8
)%
Brokerage, clearing and exchange
17,834

 
16,380

 
8.9
 %
 
53,423

 
48,518

 
10.1
 %
Communications and data processing
12,547

 
12,535

 
0.1
 %
 
37,743

 
37,394

 
0.9
 %
Other
24,852

 
27,599

 
(10.0
)%
 
73,274

 
83,977

 
(12.7
)%
Total operating expenses    
1,299,792

 
1,205,595

 
7.8
 %
 
3,729,331

 
3,501,508

 
6.5
 %
Non-operating interest expense and other
25,179

 
31,944

 
(21.2
)%
 
80,786

 
98,617

 
(18.1
)%
INCOME BEFORE PROVISION FOR INCOME TAXES
135,330

 
177,986

 
(24.0
)%
 
480,240

 
576,836

 
(16.7
)%
PROVISION FOR INCOME TAXES
31,541

 
46,272

 
(31.8
)%
 
119,148

 
143,632

 
(17.0
)%
NET INCOME
$
103,789

 
$
131,714

 
(21.2
)%
 
$
361,092

 
$
433,204

 
(16.6
)%

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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 September 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
Sales-based
$
180,357

 
$
194,342

 
$
(13,985
)
 
(7.2
)%
Trailing
292,286

 
280,651

 
11,635

 
4.1
 %
Total commission revenue
$
472,643

 
$
474,993

 
$
(2,350
)
 
(0.5
)%
The decrease in sales-based commission revenue for the three months ended September 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 and fixed income products, partially offset by an increase in sales of equities.
The increase in trailing revenues for the three months ended September 30, 2020 compared with the same period in 2019 was primarily due to the market increase that caused an increase in the market value of annuities.
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):
 
Nine Months Ended September 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
Sales-based
$
568,260

 
$
588,872

 
$
(20,612
)
 
(3.5
)%
Trailing
835,280

 
826,615

 
8,665

 
1.0
 %
Total commission revenue
$
1,403,540

 
$
1,415,487

 
$
(11,947
)
 
(0.8
)%
The decrease in sales-based commission revenue for the nine months ended September 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, partially offset by an increase in sales of equities.
The increase in trailing revenues for the nine months ended September 30, 2020 compared with the same period in 2019 was primarily due to the increase in value of annuities as a result of the market recovery during the second quarter, partially offset by 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 September 30,
 
Nine Months Ended September 30,
 
2020
 
2019
 
2020
 
2019
Balance - Beginning of period
$
386.4

 
$
378.7

 
$
398.6

 
$
346.0

Net new brokerage assets(1)
0.7

 
1.8

 
4.7

 
1.0

Market impact(2)
17.3

 
0.8

 
1.1

 
34.3

Balance - End of period
$
404.4

 
$
381.3

 
$
404.4

 
$
381.3

_______________________________
(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. Previously reported figures for net new brokerage assets did not include dividends and interest. The figures previously reported for the three and nine months ended September 30, 2019 were an inflow of $0.6 billion and an outflow of $2.6 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. 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. While domestic equity markets have recovered, 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.
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 September 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 advisory and brokerage 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 September 30, 2020.
The following table summarizes the composition of advisory assets for the periods presented (dollars in billions):
 
September 30,
 
 
 
 
 
2020
 
2019
 
$ Change

 
% Change

Corporate platform advisory assets
$
253.9

 
$
209.4

 
$
44.5

 
21.3
%
Hybrid platform advisory assets
152.0

 
128.6

 
23.4

 
18.2
%
Total advisory assets(1)
$
405.9

 
$
338.0

 
$
67.9

 
20.1
%
_______________________________
(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 September 30,
 
Nine Months Ended September 30,
 
2020
 
2019
 
2020
 
2019
Balance - Beginning of period
$
375.3

 
$
327.3

 
$
365.8

 
$
282.0

Net new advisory assets(1)
10.4

 
10.1

 
33.7

 
22.8

Market impact(2)
20.2

 
0.6

 
6.4

 
33.2

Balance - End of period
$
405.9

 
$
338.0

 
$
405.9

 
$
338.0

_______________________________
(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 nine months ended September 30, 2019 were an inflow of $9.2 billion and $20.4 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 and nine months ended September 30, 2020 compared to the same periods in 2019 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity, as well as market gains represented by higher levels of the S&P 500 index.
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 and nine months ended September 30, 2020 decreased compared to the same periods in 2019 primarily due to decreased revenues from our client cash programs, partially offset by an increase in recordkeeping and sponsor revenues.
Client cash revenues for the three and nine months ended September 30, 2020 decreased compared to the same periods in 2019 primarily 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, 2020, our average client cash balances increased to $45.6 billion compared to $30.7 billion for the same period in 2019. For the nine months ended September 30, 2020, our average client cash balances increased to $43.4 billion compared to $30.6 billion for the same period in 2019.
The declines in client cash revenues we experienced in the third quarter are likely to continue through the remainder of the year due to low interest rates.
Revenues for our recordkeeping and sponsorship programs for the three and nine months ended September 30, 2020, which are largely based on the market value of the underlying assets, increased compared to the same periods in 2019 due to the impact of market appreciation on the value of those underlying assets.
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.

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Transaction and fee revenues decreased for the three months ended September 30, 2020 compared to the same period in 2019 primarily due to a decrease in conference service revenue as a result of advisor-related conferences being cancelled or held in a virtual format in 2020 in response to the COVID-19 pandemic.
Transaction and fee revenues increased for the nine months ended September 30, 2020 compared to the same period 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 as a result of advisor-related conferences being cancelled or held in a virtual format in 2020 in response to the COVID-19 pandemic.
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 nine months ended September 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 September 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 resulting from market appreciation.
Other revenues decreased for the nine months ended September 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 September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Base payout rate(1)
82.97
%
 
83.05
%
 
(8 bps)
 
82.78
%
 
83.13
%
 
(35 bps)
Production based bonuses
3.65
%
 
3.61
%
 
4 bps
 
3.18
%
 
2.96
%
 
22 bps
Total payout ratio(2)
86.62
%
 
86.66
%
 
(4 bps)
 
85.96
%
 
86.09
%
 
(13 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 nine months ended September 30, 2020 compared with the same periods in 2019, primarily due to a decrease in base payout rate, which was driven by increases in the sale of equities and a shift from brokerage to advisory business, each of which result in lower payouts, partially 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 nine months ended September 30, 2020, as compared with the same periods in 2019.
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Average number of employees
4,634
 
4,376
 
5.9%
 
4,504
 
4,323
 
4.2%
Compensation and benefits expense increased for the three and nine months ended September 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 decrease in promotional expense for the three months ended September 30, 2020 compared with the same period in 2019 was primarily driven by a decrease in advisor conference expense due to conferences being cancelled or held in a virtual format in 2020 in response to the COVID-19 pandemic, partially offset by an increase in costs associated with advisor loans.
The increase in promotional expense for the nine months ended September 30, 2020 compared with the same period in 2019 was primarily driven by an increase in costs associated with advisor loans, partially offset by a decrease in advisor conference expense due to conferences being cancelled or held in a virtual format in 2020 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 Expense
Professional services expense 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.

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The decrease in professional services expense for the three and nine months ended September 30, 2020 compared with the same periods in 2019 was primarily due to the Company temporarily bringing certain services in-house as a result of the COVID-19 pandemic.
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 nine months ended September 30, 2020 compared with the same periods in 2019.
Communications and Data Processing Expense
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 remained flat for the three and nine months ended September 30, 2020 compared with the same periods 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 nine months ended September 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 nine months ended September 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 23.3% and 26.0% for the three months ended September 30, 2020 and 2019, respectively. The decrease was primarily due to a benefit from a positive decision on an expense that was previously considered non-deductible and changes in unrecognized tax benefits in the period.
Our effective tax rate for the nine months ended September 30, 2020 and 2019 remained substantially unchanged at 24.8% and 24.9%, respectively.

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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):
 
Nine Months Ended September 30,
 
2020
 
2019
Net cash flows provided by (used in):
 
 
 
Operating activities
$
463,667

 
$
509,769

Investing activities
(132,092
)
 
(129,129
)
Financing activities
(260,138
)
 
(434,076
)
Net increase (decrease) in cash, cash equivalents and restricted cash
71,437

 
(53,436
)
Cash, cash equivalents and restricted cash — beginning of period
1,471,778

 
1,562,119

Cash, cash equivalents and restricted cash — end of period
$
1,543,215

 
$
1,508,683

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 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. In addition to net income, 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 decrease in cash flows provided by operating activities for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily attributable to a decrease in net income and a decrease in inflows from payables to clients, partially offset by a decrease in outflows from drafts payable.
The increase in cash flows used in investing activities for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily attributable to an increase in capital expenditures, partially offset by a decrease in acquisition costs.
The decrease in cash flows used in financing activities for the nine months ended September 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 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.

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We have certain capital adequacy requirements related to our registered broker-dealer subsidiary and bank trust subsidiary. As of September 30, 2020, we were in compliance with all such requirements and expect to continue to be so for the foreseeable future. In particular, we believe that our liquidity planning has positioned us to meet reasonably foreseeable increases in the demand for liquidity that are caused by 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 potential refinancing opportunities, 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 flows 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% of aggregate debit balances arising from client transactions. At September 30, 2020, LPL Financial had net capital of $129.4 million with a minimum net capital requirement of $10.7 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.

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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 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
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 September 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
 
2.15
Interest Coverage (Minimum)
3.00
 
9.4
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 nine months ended September 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 changes to those policies that we consider to be material 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 September 30,
 
Nine Months Ended September 30,
 
 
2020
 
2019
 
2020
 
2019
REVENUES
 
 
 
 
 
 
 
 
Commission
 
$
472,643

 
$
474,993

 
$
1,403,540

 
$
1,415,487

Advisory
 
586,941

 
514,363

 
1,689,338

 
1,449,610

Asset-based
 
253,551

 
292,140

 
786,124

 
877,054

Transaction and fee
 
119,747

 
121,222

 
376,321

 
362,037

Interest income, net of interest expense
 
6,623

 
11,531

 
22,705

 
35,542

Other
 
20,796

 
1,276

 
12,329

 
37,231

Total net revenues
 
1,460,301

 
1,415,525

 
4,290,357

 
4,176,961

EXPENSES
 
 
 
 
 
 
 
 

Commission and advisory
 
936,766

 
856,635

 
2,667,408

 
2,494,355

Compensation and benefits
 
151,271

 
138,300

 
441,393

 
407,000

Promotional
 
57,970

 
61,715

 
159,908

 
154,487

Depreciation and amortization
 
27,548

 
24,062

 
81,082

 
70,116

Amortization of intangible assets
 
16,829

 
16,286

 
50,088

 
48,703

Occupancy and equipment
 
41,874

 
34,417

 
124,486

 
100,843

Professional services
 
12,301

 
17,666

 
40,526

 
56,115

Brokerage, clearing and exchange
 
17,834

 
16,380

 
53,423

 
48,518

Communications and data processing
 
12,547

 
12,535

 
37,743

 
37,394

Other
 
24,852

 
27,599

 
73,274

 
83,977

Total operating expenses
 
1,299,792

 
1,205,595

 
3,729,331

 
3,501,508

Non-operating interest expense and other
 
25,179

 
31,944

 
80,786

 
98,617

INCOME BEFORE PROVISION FOR INCOME TAXES
 
135,330

 
177,986

 
480,240

 
576,836

PROVISION FOR INCOME TAXES
 
31,541

 
46,272

 
119,148

 
143,632

NET INCOME
 
$
103,789

 
$
131,714

 
$
361,092

 
$
433,204

EARNINGS PER SHARE (Note 13)
 
 
 
 
 
 
 
 

Earnings per share, basic
 
$
1.31

 
$
1.61

 
$
4.56

 
$
5.20

Earnings per share, diluted
 
$
1.29

 
$
1.57

 
$
4.48

 
$
5.07

Weighted-average shares outstanding, basic
 
79,176

 
81,833

 
79,207

 
83,315

Weighted-average shares outstanding, diluted
 
80,550

 
83,844

 
80,612

 
85,421

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
September 30, 2020
 
December 31, 2019
Cash and cash equivalents
$
800,799

 
$
590,209

Cash segregated under federal and other regulations
667,121

 
822,697

Restricted cash
75,295

 
58,872

Receivables from:
 
 
 
Clients, net of allowance of $399 at September 30, 2020 and $115 at December 31, 2019
424,131

 
433,986

Product sponsors, broker-dealers and clearing organizations
205,508

 
177,654

Advisor loans, net of allowance of $6,324 at September 30, 2020 and $3,974 at December 31, 2019
509,124

 
441,743

Others, net of allowance of $3,246 at September 30, 2020 and $10,292 at December 31, 2019
306,952

 
298,790

Securities owned:
 
 
 
Trading — at fair value
28,215

 
46,447

Held-to-maturity — at amortized cost
13,058

 
11,806

Securities borrowed
23,510

 
17,684

Fixed assets, net of accumulated depreciation and amortization of $467,659 at September 30, 2020 and $388,355 at December 31, 2019
570,592

 
533,044

Operating lease assets
99,565

 
102,477

Goodwill
1,503,648

 
1,503,648

Intangible assets, net of accumulated amortization of $594,741 at September 30, 2020 and $544,653 at December 31, 2019
409,427

 
439,838

Deferred income taxes, net
744

 
—

Other assets
453,038

 
401,343

Total assets
$
6,090,727

 
$
5,880,238

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES:
Drafts payable
$
176,916

 
$
218,636

Payables to clients
1,153,014

 
1,058,873

Payables to broker-dealers and clearing organizations
84,405

 
92,002

Accrued commission and advisory expenses payable
175,278

 
174,330

Accounts payable and accrued liabilities
586,432

 
557,969

Income taxes payable
14,619

 
20,129

Unearned revenue
99,694

 
82,842

Securities sold, but not yet purchased — at fair value
337

 
176

Long-term and other borrowings, net
2,347,517

 
2,398,818

Operating lease liabilities
137,569

 
141,900

Finance lease liabilities
107,498

 
108,592

Deferred income taxes, net
—

 
2,098

Total liabilities
4,883,279

 
4,856,365

Commitments and contingencies (Note 10)
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $.001 par value; 600,000,000 shares authorized; 127,409,741 shares issued at September 30, 2020 and 126,494,028 shares issued at December 31, 2019
127

 
126

Additional paid-in capital
1,748,310

 
1,703,973

Treasury stock, at cost — 48,134,535 shares at September 30, 2020 and 46,259,989 shares at December 31, 2019
(2,391,449
)
 
(2,234,793
)
Retained earnings
1,850,460

 
1,554,567

Total stockholders’ equity
1,207,448

 
1,023,873

Total liabilities and stockholders’ equity
$
6,090,727

 
$
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 September 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 — June 30, 2019
125,971

 
$
126

 
$
1,673,155

 
43,193

 
$
(1,984,223
)
 
$
—

 
$
1,336,059

 
$
1,025,117

Net income, net of tax expense
 
 
 
 
 
 
 
 
 
 
—

 
131,714

 
131,714

Issuance of common stock to settle restricted stock units, net
26

 
—

 
—

 
10

 
(759
)
 
 
 
 
 
(759
)
Treasury stock purchases
 
 
 
 
 
 
1,668

 
(130,274
)
 
 
 
 
 
(130,274
)
Cash dividends on common stock
 
 
 
 
 
 
 
 
 
 
 
 
(20,485
)
 
(20,485
)
Stock option exercises and other
190

 
—

 
5,942

 
(13
)
 
442

 
 
 
329

 
6,713

Share-based compensation
—

 
—

 
7,924

 
 
 
 
 
 
 
 
 
7,924

BALANCE — September 30, 2019
126,187

 
$
126

 
$
1,687,021

 
44,858

 
$
(2,114,814
)
 
$
—

 
$
1,447,617

 
$
1,019,950

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2020
 
 
 
 
 
Additional
Paid-In
Capital
 
 
 
 
 
Accumulated Other
Comprehensive
Income (loss)