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 March 31, 2021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File Number: 001-34963

LPL Financial Holdings Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-3717839
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4707 Executive Drive, San Diego, California 92121

(Address of Principal Executive Offices) (Zip Code)

(800) 877-7210

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each 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 April 27, 2021 was 79,943,183.

TABLE OF CONTENTS	Page
WHERE YOU CAN FIND MORE INFORMATION	ii
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	ii
PART I — FINANCIAL INFORMATION	1
1. Financial Statements (unaudited)	18
Condensed Consolidated Statements of Income (unaudited)	18
Condensed Consolidated Statements of Financial Condition (unaudited)	19
Condensed Consolidated Statements of Stockholders’ Equity (unaudited)	20
Condensed Consolidated Statements of Cash Flows (unaudited)	21
Notes to Condensed Consolidated Financial Statements (unaudited)	23
Note 1 - Organization and Description of the Company	23
Note 2 - Summary of Significant Accounting Policies	23
Note 3 - Revenues	24
Note 4 - Acquisitions	28
Note 5 - Fair Value Measurements	28
Note 6 - Held-to-Maturity Securities	30
Note 7 - Goodwill and Other Intangible Assets	31
Note 8 - Long-term and Other Borrowings	31
Note 9 - Leases	33
Note 10 - Commitments and Contingencies	34
Note 11 - Stockholders’ Equity	35
Note 12 - Share-based Compensation	36
Note 13 - Earnings per Share	37
Note 14 - Income Taxes	38
Note 15 - Related Party Transactions	38
Note 16 - Net Capital and Regulatory Requirements	38
Note 17 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentration of Credit Risk	39
Note 18 - Subsequent Events	39
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
Business Overview	1
Executive Summary	1
Our Sources of Revenue	2
How We Evaluate Our Business	3
Legal & Regulatory Matters	6
Acquisitions, Integrations and Divestitures	7
Economic Overview and Impact of Financial Market Events	8
Results of Operations	9
Liquidity and Capital Resources	14
Debt and Related Covenants	16
Off-Balance Sheet Arrangements	17
Contractual Obligations	17
Fair Value of Financial Instruments	17
Critical Accounting Policies and Estimates	17
3. Quantitative and Qualitative Disclosures About Market Risk	40
4. Controls and Procedures	42
PART II — OTHER INFORMATION	43
1. Legal Proceedings	43
1A. Risk Factors	43
2. Unregistered Sales of Equity Securities and Use of Proceeds	43
3. Defaults Upon Senior Securities	43
4. Mine Safety Disclosures	43
5. Other Information	43
6. Exhibits	44
SIGNATURES	45

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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. Copies of all such filings are available free of charge by request via email (investor.relations@lpl.com), telephone ((617) 897-4574) or mail (LPL Financial Investor Relations at 75 State Street, 22nd Floor, Boston, MA 02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.

We may use our website as a means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor Relations” or “Press Releases” sections. Accordingly, investors should monitor these portions of our website, in addition to following the Company’s press releases, SEC filings, public conference calls and webcasts.

When we use the terms “LPLFH”, “LPL”, “we”, “us”, “our” and “the Company”, we mean LPL Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q regarding:

•the Company’s future financial and operating results, outlook, growth, plans, business strategies, liquidity and future share repurchases, including statements regarding future resolution of regulatory matters, legal proceedings and related costs;

•the Company’s future revenues and expenses;

•future affiliation models and capabilities;

•market and macroeconomic trends;

•projected savings and anticipated improvements to the Company’s operating model, services and technologies as a result of its investments, initiatives, programs and acquisitions;

•expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company’s 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 May 4, 2021. The words “anticipates,” “believes,” “expects,” “may,” “plans,” “predicts,” “will” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees that the future results, plans, intentions or expectations expressed or implied by the Company will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive and other factors, which may cause actual financial or operating results, levels of activity or the timing of events to be materially different 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 revenues;

•effects of competition in the financial services industry;

•the success of the Company in attracting and retaining financial advisors and institutions, and their ability to market effectively financial products and services;

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•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;

•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 and trading volumes of shares of the Company’s common stock, which will affect the timing and size of future share repurchases by the Company, if any;

•execution of the Company’s plans and its success in realizing the synergies, expense savings, service improvements or efficiencies expected to result from its investments, initiatives and acquisitions, including its acquisition involving the wealth management business of Waddell & Reed Financial, Inc., expense plans and technology initiatives;

•the performance of third-party service providers to which business processes have been transitioned;

•the Company’s ability to control operating risks, information technology systems risks, cybersecurity risks and sourcing risks;

•the effects of the COVID-19 pandemic, including efforts to contain it; and

•the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company’s 2020 Annual Report on Form 10-K, as may be amended or updated in the Company’s Quarterly Reports on Form 10-Q.

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

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PART I — FINANCIAL INFORMATION

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

LPL is a leader in the markets we serve, supporting more than 17,000 financial advisors nationwide. We are steadfast in our commitment to the advisor-centered model and the belief that Americans deserve access to objective guidance from a financial advisor. At LPL, independence means that advisors have the freedom they deserve to choose the business model, services, and technology resources that allow them to run their perfect practice. And they have the freedom to manage their client relationships, because they know their clients best. Our mission is to take care of our advisors, so they can take care of their clients.

We do that through a singular focus on providing our advisors with the front-, middle- and back-office support they need to serve the large and growing market for comprehensive financial advice from an advisor. We believe that we are the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services and open architecture access to a wide range of non-proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting and market-making.

We believe investors achieve better outcomes when working with a financial advisor. We strive to make it easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting freedom and choice through access to a wide range of diligently evaluated non-proprietary products.

Executive Summary

Financial Highlights

Results for the first quarter of 2021 included net income of $129.6 million, or $1.59 per share, which compares to $155.6 million, or $1.92 per share, for the first quarter of 2020.

Asset Growth Trends

Total advisory and brokerage assets were $958.3 billion as of March 31, 2021, up 43% from $669.9 billion as of March 31, 2020. Total net new assets were $28.9 billion for the three months ended March 31, 2021, compared to $14.3 billion for the same period in 2020.

Net new advisory assets were $22.7 billion for the three months ended March 31, 2021, compared to $13.2 billion for the same period in 2020. As of March 31, 2021, our advisory assets were $496.7 billion, up from $322.3 billion as of March 31, 2020, an increase of 54%, and represented 52% of total advisory and brokerage assets served.

Net new brokerage assets were $6.2 billion for the three months ended March 31, 2021, compared to $1.2 billion for the same period in 2020. As of March 31, 2021, our brokerage assets were $461.6 billion, up from $347.6 billion as of March 31, 2020, an increase of 33%.

Gross Profit Trends

Gross profit, a non-GAAP financial measure, of $579.4 million for the three months ended March 31, 2021, increased 1% from $575.6 million for the three months ended March 31, 2020. Gross profit is calculated as total 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.

Shareholder Capital Returns

We returned $20.0 million of capital, in the form of dividends, to shareholders during the three months ended March 31, 2021.

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COVID-19 Response

In response to the COVID-19 pandemic, we have taken measures to protect the health and safety of our employees, as well as the stability and continuity of our operations. For example, we have equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and 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 services to their clients. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.

Our Sources of Revenue

Our 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 bank sweep vehicles and money market programs and the access we provide to a variety of product providers with the following product lines:

• Alternative Investments	• Retirement Plan Products
• Annuities	• Separately Managed Accounts
• Exchange Traded Products	• Structured Products
• Insurance Based Products	• Unit Investment Trusts
• Mutual Funds

Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing and ongoing account management. In return for these services, mutual funds, insurance companies, banks and other financial product sponsors pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.

We regularly review various aspects of our operations and service offerings, including our policies, procedures and platforms, in response to marketplace developments. We seek to continuously improve and enhance aspects of our operations and service offerings in order to position our advisors for long-term growth and to align with competitive and regulatory developments. For example, we regularly review the structure and fees of our products and services, including related disclosures, in the context of the changing regulatory environment and competitive landscape for advisory and brokerage accounts.

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How We Evaluate Our Business

We focus on several key metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. 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 Three Months Ended March 31,
Operating Metrics (dollars in billions)(1)	2021			2020
Advisory and Brokerage Assets
Advisory assets(2)(3)	$	496.7		$	322.3
Brokerage assets(2)(4)	461.6			347.6
Total Advisory and Brokerage Assets(2)	$	958.3		$	669.9
Advisory Assets % of Total Advisory and Brokerage Assets	51.8		%	48.1		%
Net New Assets
Net new advisory assets(5)	$	22.7		$	13.2
Net new brokerage assets(6)	6.2			1.2
Total Net New Assets(7)	$	28.9		$	14.3
Total Net New Assets Annualized Growth Rate(8)	12.8		%	7.5%
Client Cash Balances(2)
Insured cash account balances	$	37.4		$	34.5
Deposit cash account balances	7.9			8.7
Total Bank Sweep Balances	45.3			43.2
Money market account balances	1.3			1.8
Purchased money market fund balances	1.6			2.8
Total Client Cash Balances	$	48.3		$	47.8
Net Buy (Sell) Activity(9)	$	17.4		$	0.2

	As of and for the Three Months Ended March 31,
Business and Financial Metrics (dollars in millions, except per share data)	2021			2020
Advisors	17,672			16,763
Average Total Assets per Advisor(10)	$	54.2		$	40.0
Employees - period end	4,815			4,358
Share Repurchases	$	—		$	150.0
Dividends	$	20.0		$	19.7
% of Capital Returned to Shareholders(11)	14.0		%	101.3		%
Leverage Ratio(12)	2.11			2.07

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	Three Months Ended March 31,
	2021			2020
Total revenues	$	1,707.6		$	1,463.4
Net Income	$	129.6		$	155.6
Earnings per share (“EPS”), diluted	$	1.59		$	1.92
EPS prior to amortization of intangible assets and acquisition costs(13)	$	1.77		$	2.06
Gross Profit(14)	$	579.4		$	575.6
EBITDA(15)	$	267.5		$	280.2
EBITDA as a % of Gross Profit	46.2		%	48.7		%
Core G&A(16)	$	236.3		$	223.2

_______________________________

(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 total advisory and brokerage assets.

(3)Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”). Please consult the “Results of Operations” section for a tabular presentation of advisory assets.

(4)Brokerage assets consists of brokerage assets serviced by advisors licensed with LPL Financial.

(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 three months ended March 31, 2020 was an inflow of $12.5 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. 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 three months ended March 31, 2020 was $0.0 billion.

(7)Includes $11.8 billion of assets that transitioned onto our platform from BMO Harris, during the three months ended March 31, 2021.

(8)Calculated as annualized current period net new assets divided by preceding period total advisory and brokerage assets.

(9)Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial. Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid.

(10)Calculated based on the end-of-period total advisory and brokerage assets divided by the end-of-period advisor count.

(11)Percentage of capital returned to shareholders is calculated as dividends plus share repurchases, divided by net income plus amortization of intangible assets, net of tax.

(12)A financial covenant from our credit agreement calculated as consolidated total debt to consolidated EBITDA. Please consult the “Debt and Related Covenants” section for more information.

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(13)EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as GAAP EPS plus the per share impact of amortization of intangible assets and acquisition costs. The per share impact is calculated as amortization of intangible assets expense and acquisition costs, net of applicable tax benefit, divided by the number of shares outstanding for the applicable period. Acquisition costs are the one-time costs to setup, onboard and integrate acquired entities. The Company presents EPS prior to amortization of intangible assets and acquisition costs because management believes that the metric can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items which do not directly affect our ongoing operating performance. EPS prior to amortization of intangible assets and acquisition costs is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to GAAP EPS or any other performance measure derived in accordance with GAAP. Below is a reconciliation of EPS prior to amortization of intangible assets and acquisition costs to the Company’s GAAP EPS for the periods presented:

	Three Months Ended March 31,
EPS Reconciliation (in millions, except per share data)	2021		2020
GAAP EPS	$	1.59	$	1.92
Amortization of intangible assets	$	17.4	$	16.6
Acquisition costs	$	2.4	$	—
Tax benefit	$	(5.3)	$	(4.6)
Amortization of intangible assets and acquisition costs, net of tax benefit	$	14.5	$	11.9
Diluted share count	81.6		81.2
EPS impact	$	0.18	$	0.15
EPS prior to amortization of intangible assets and acquisition costs	$	1.77	$	2.06

(14)Set forth below is a calculation of gross profit, calculated as total revenues less advisory and commission 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 by management to be general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature.

	Three Months Ended March 31,
Gross Profit (in millions)	2021		2020
Total revenues	$	1,707.6	$	1,463.4
Advisory and commission expense	1,108.9		870.8
Brokerage, clearing and exchange fees	19.4		17.0
Gross profit(†)	$	579.4	$	575.6

_______________________________

(†)    Totals may not foot due to rounding.

(15)EBITDA is a non-GAAP financial measure defined as net income plus interest and other expense, income tax expense, depreciation and amortization, and amortization of intangible assets. The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company’s financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, the Company’s EBITDA can differ significantly from EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Below is a reconciliation of EBITDA to net income for the periods presented:

	Three Months Ended March 31,
EBITDA Reconciliation (in millions)	2021		2020
Net income	$	129.6	$	155.6
Non-operating interest expense and other	25.1		29.3
Provision for income taxes	35.5		52.0
Depreciation and amortization	35.5		26.6
Amortization of intangible assets	17.4		16.6
Loss on extinguishment of debt	24.4		—
EBITDA	$	267.5	$	280.2

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(16)Core G&A is a non-GAAP financial measure. Core G&A consists of total operating expenses, excluding the following expenses: advisory and commission, regulatory charges, promotional, employee share-based compensation, depreciation and amortization, amortization of intangible assets, and brokerage, clearing and exchange. Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expenses, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance. Core G&A is not a measure of the Company’s total operating expenses as calculated in accordance with GAAP. Below is a reconciliation of Core G&A against the Company’s total operating expenses for the periods presented:

	Three Months Ended March 31,
Operating Expense Reconciliation (in millions)	2021		2020
Core G&A	$	236.3	$	223.2
Regulatory charges	7.6		6.2
Promotional	54.2		57.4
Acquisition costs	2.4		—
Employee share-based compensation	11.4		8.6
Total G&A	311.8		295.4
Advisory and commission	1,108.9		870.8
Depreciation and amortization	35.5		26.6
Amortization of intangible assets	17.4		16.6
Brokerage, clearing and exchange	19.4		17.0
Total operating expenses	$	1,493.0	$	1,226.4

Legal and Regulatory Matters

As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision and reporting. We review these items in the ordinary course of business in our effort to adhere to legal and regulatory requirements applicable to our operations. Nevertheless, additional regulation and enhanced regulatory enforcement has resulted, and may result in the future, in additional operational and compliance costs, as well as increased costs in the form of penalties and fines, investigatory and settlement costs, customer restitution and remediation related to regulatory matters. In the ordinary course of business, we periodically identify or become aware of purported inadequacies, deficiencies and other issues. It is our policy to evaluate these matters for potential legal or regulatory violations, and other potential compliance issues. It is also our policy to self-report known violations and issues as required by applicable law and regulation. When deemed probable that matters may result in financial losses, we accrue for those losses based on an estimate of possible fines, customer restitution and losses related to the repurchase of sold securities and other losses, as applicable. Certain regulatory and other legal claims and losses may be covered through our wholly-owned captive insurance subsidiary, which is chartered with the insurance commissioner in the state of Tennessee.

Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or legal proceeding, whether or not covered by our captive insurance subsidiary, is inherently difficult and requires judgments based on a variety of factors and assumptions. There are particular uncertainties and complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary, which depends in part on historical claims experience, including the actual timing and costs of resolving matters that begin in one policy period and are resolved in a subsequent period.

Our accruals, including those established through our captive insurance subsidiary at March 31, 2021, include estimated costs for significant regulatory matters or legal proceedings, generally relating to the adequacy of our compliance and supervisory systems and procedures and other controls, for which we believe losses are both probable and reasonably estimable.

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 invalidated regulations previously enacted by the U.S. Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would have resulted in significant new

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prohibited transaction exemption requirements for our servicing of certain retirement plan accounts subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and individual retirement accounts (“IRAs”). In December 2020, the DOL finalized a new investment advice fiduciary prohibited transaction exemption with regard to such accounts that became effective on February 16, 2021. ERISA plans and IRAs comprise a significant portion of our business and we continue to expect that compliance with current and future laws and regulations with respect to retail retirement savings and reliance on prohibited transaction exemptions under such laws and regulations will require increased legal, compliance, information technology and other costs and could lead to a greater risk of class action lawsuits and other litigation.

In June 2019, the SEC adopted a new standard of conduct applicable to retail brokerage accounts (“Regulation BI”) with a compliance date of June 30, 2020. Regulation BI requires that broker-dealers act in the best interest of retail customers without placing their own financial or other interests ahead of the customer’s and imposes new obligations related to disclosure, duty of care, conflicts of interest and compliance. Certain state securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and regulations. In addition, it is unclear how and whether other regulators, including banking regulators and state securities and insurance regulators, may respond to or attempt to enforce similar issues addressed by the 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

We continuously assess the competitive landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented. Our recent acquisitions are as follows:

•Waddell & Reed Financial, Inc. (“Waddell & Reed”) - In December 2020, we entered into an agreement with Macquarie Management Holdings, Inc. (“Macquarie”) to acquire the wealth management business of Waddell & Reed. The transaction closed on April 30, 2021.

•Blaze Portfolio Systems LLC (“Blaze”) - In October 2020, we acquired Blaze, a technology company that provides an advisor-facing trading and portfolio rebalancing platform.

•E.K. Riley Investments, LLC (“E.K. Riley”) - In August 2020, we acquired business relationships with advisors from E.K. Riley, a broker-dealer and registered investment adviser (“RIA”).

•Lucia Securities, LLC (“Lucia”) - In August 2020, we acquired business relationships with advisors from Lucia, a broker-dealer and RIA firm.

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 U.S. financial markets. The global economy in general continued to show improvement in the first quarter of 2021, supported by additional fiscal stimulus, accommodative central bank policy and accelerating vaccine distribution. Despite clear progress, efforts to contain the COVID-19 pandemic continue to play a significant role in the global economy and the recovery has been uneven, with progress in some regions delayed by the impact of new COVID-19 variants as well as varying policy responses.

The outlook for the U.S. economy, in particular, has improved substantially over the first quarter of 2021. The Federal Reserve’s (“Fed”) most recent median GDP projection for 2021, released following its March 16-17, 2021 policy meeting, saw the economy growing 6.5% in 2021, a large upgrade from a median projection of 4.2% just three months earlier. According to the most recent estimate by the U.S. Bureau of Economic Analysis, the U.S. economy expanded at an annualized rate of 4.3% in the fourth quarter of 2020 after a dramatic rebound in the third quarter. Data received during the first quarter of 2021 suggests that growth has likely accelerated further from fourth quarter 2020 levels. The unemployment rate, which had spiked to 14.8% in April 2020 has declined steadily to 6.0% in March 2021, according to the Fed. The Fed also reports that consumer spending has increased, supported by an additional fiscal stimulus passed in March 2021, high savings levels and the gradual reopening of the economy. Business investment has continued to rebound and readings on both manufacturing and service sector activity are showing strong acceleration, although off of weak levels for those sectors most impacted by the pandemic.

The S&P 500 Index returned 6.2% during the first quarter of 2021. Smaller stocks significantly outperformed the larger stocks represented in the S&P 500 Index for the second straight quarter, as the Russell 2000 Index returned 12.7%. Value-style stocks performed better than their growth counterparts as leading value sectors energy and financials outperformed while the growth-heavy technology sector lagged. Non-U.S. stocks trailed their U.S. counterparts during the quarter as the U.S. dollar strengthened. Developed international equities returned 3.6% while emerging markets (“EM”) returned 2.3%, based on the MSCI EAFE and MSCI EM indexes. Most fixed income sectors fell as interest rates rose sharply, with the 10-year Treasury yield climbing from 0.93% at year-end 2020 to 1.74% at the end of the first quarter 2021. The Bloomberg Barclays U.S. Aggregate Bond Index lost 3.4% over the quarter.

Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. During the first quarter of 2021, Fed policymakers maintained the target range for the federal funds rate at 0.0 to 0.25%. According to projection materials released following the conclusion of the March 16-17, 2021 policy meeting, the median expectation among meeting participants remains that the Fed will not begin raising rates until after 2023, although a few participants projected the Fed raising rates as early as 2022 and several in 2023. Federal Reserve Chair Jerome Powell continues to emphasize the Fed’s belief that any near-term increase in inflation is likely to be transitory and that the Fed would like to see realized inflation moderately above 2.0% for a meaningful period of time before it would raise interest rates.

Please consult the “Risks Related to Our Business and Industry” section within Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with significant interest rate changes, and the potential related effects on our profitability and financial condition.

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Results of Operations

The following discussion presents an analysis of our results of operations for the three months ended March 31, 2021 and 2020.

	Three Months Ended March 31,
(Dollars in thousands)	2021		2020		% Change
REVENUES
Advisory	$	722,046	$	579,027	24.7	%
Commission	557,229		503,444		10.7	%
Asset-based	264,706		285,506		(7.3)	%
Transaction and fee	140,944		137,096		2.8	%
Interest income	6,518		9,542		(31.7)	%
Other	16,174		(51,218)		(131.6)	%
Total revenues	1,707,617		1,463,397		16.7	%
EXPENSES
Advisory and commission	1,108,899		870,795		27.3	%
Compensation and benefits	161,540		146,802		10.0	%
Promotional	54,181		57,398		(5.6)	%
Depreciation and amortization	35,499		26,644		33.2	%
Amortization of intangible assets	17,431		16,570		5.2	%
Occupancy and equipment	43,584		39,546		10.2	%
Professional services	15,625		14,605		7.0	%
Brokerage, clearing and exchange	19,364		17,024		13.7	%
Communications and data processing	11,993		10,835		10.7	%
Other	24,900		26,228		(5.1)	%
Total operating expenses	1,493,016		1,226,447		21.7	%
Non-operating interest expense and other	25,059		29,318		(14.5)	%
Loss on extinguishment of debt	24,400		—		100.0	%
INCOME BEFORE PROVISION FOR INCOME TAXES	165,142		207,632		(20.5)	%
PROVISION FOR INCOME TAXES	35,522		51,991		(31.7)	%
NET INCOME	$	129,620	$	155,641	(16.7)	%

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Revenues

Advisory

Advisory revenues primarily represent fees charged to clients of our advisors for the use of our corporate RIA advisory platform, and are 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 client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three-month period. Advisory revenues collected on our corporate advisory platform are proposed by the advisor and agreed to by the client and averaged 1.0% of the underlying assets for the three months ended March 31, 2021.

We also support separate investment adviser firms (“Hybrid RIAs”), through our hybrid advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access to the capabilities of our investment platforms. The assets held under a Hybrid RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services, which are included in our transaction and fee revenues in our unaudited condensed consolidated statements of income. The administrative fees collected on our hybrid advisory platform vary and can reach a maximum of 0.2% of the underlying assets as of March 31, 2021.

The following table summarizes the composition of advisory assets for the periods presented (dollars in billions):

	March 31,
	2021		2020		$ Change		% Change
Corporate platform advisory assets	$	317.5	$	200.7	$	116.8	58.2	%
Hybrid platform advisory assets	179.2		121.6		57.6		47.4	%
Total advisory assets(1)	$	496.7	$	322.3	$	174.4	54.1	%

_______________________________

(1)Totals may not foot due to rounding.

Net new advisory assets are generated throughout the quarter, therefore, the full impact of net new advisory assets to advisory revenues is not realized in the same period. The following table summarizes activity in advisory assets for the periods presented (in billions):

	Three Months Ended March 31,
	2021		2020
Balance - Beginning of period	$	461.2	$	365.8
Net new advisory assets(1)	22.7		13.2
Market impact(2)	12.8		(56.7)
Balance - End of period	$	496.7	$	322.3

_______________________________

(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 figure previously reported for the three months ended March 31, 2020 was an inflow of $12.5 billion.

(2)Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.

The growth in advisory revenues for the three months ended March 31, 2021 compared to 2020 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity, as well as market gains as represented by higher levels of the S&P 500 Index.

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Commission

We generate two types of commission revenues: 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 revenues by product category.

The following table sets forth our commission revenues included in our unaudited condensed consolidated statements of income (dollars in thousands):

	Three Months Ended March 31,
	2021		2020		$ Change		% Change
Sales-based	$	236,273	$	228,391	$	7,882	3.5	%
Trailing	320,956		275,053		45,903		16.7	%
Total commission revenues	$	557,229	$	503,444	$	53,785	10.7	%

The increase in sales-based commission revenues for the three months ended March 31, 2021 compared to 2020 was primarily driven by rising long-term interest rates that led to an increase in sales of annuities and fixed income products.

The increase in trailing commission revenues for the three months ended March 31, 2021 compared to 2020 was primarily due to the increase in value of annuities and mutual funds as a result of market increases.

The following table summarizes activity in brokerage assets for the periods presented (in billions):

	Three Months Ended March 31,
	2021		2020
Balance - Beginning of period	$	441.9	$	398.6
Net new brokerage assets(1)	6.2		1.2
Market impact(2)	13.5		(52.2)
Balance - End of period	$	461.6	$	347.6

_______________________________

(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 or subtract advisory fees. The figure previously reported for the three months ended March 31, 2020 was $0.0 billion.

(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.

While there has been a COVID-19 vaccine roll out and the number of cases in the United States is decreasing, that could change and we cannot predict how the ongoing COVID-19 pandemic and foreign and domestic responses to it will impact our future sales-based or trailing commission revenues. While domestic equity markets have recovered, COVID-19 cases remain widespread in many parts of the world, and significant market disruptions and volatility remain possible.

Asset-Based

Asset-based revenues consist of fees from omnibus processing and networking services (collectively referred to as “recordkeeping”), our sponsorship programs with financial product manufacturers and fees from our client cash programs. 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. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training efforts. Client cash-based revenues are generated on advisors’ clients’ cash balances in

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insured bank sweep accounts and money market programs. 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 March 31, 2021 decreased compared to 2020 primarily due to decreased client cash revenues, partially offset by an increase in recordkeeping revenues and sponsorship programs.

Revenues for our recordkeeping and sponsorship programs for the three months ended March 31, 2021, which are largely based on the market value of the underlying assets, increased compared to 2020 due to the impact of market appreciation on the value of the underlying assets.

Client cash revenues for the three months ended March 31, 2021 decreased compared to 2020 due to the impact of a lower federal funds effective rate, partially offset by higher average client cash balances. For the three months ended March 31, 2021, our average client cash balances increased to $48.4 billion compared to $38.5 billion in 2020.

Transaction and Fee

Transaction revenues primarily include fees we charge to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Fee revenues primarily include IRA custodian fees, contract and licensing fees and other client account fees. 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 months ended March 31, 2021 compared to 2020 primarily due to an increase in technology fee revenues, partially offset by a decrease in transaction fees due to trading volatility in 2020 caused by the COVID-19 pandemic.

Interest Income

We earn interest income from client margin loans, cash segregated under federal and other regulations and cash equivalents. Period-over-period variances correspond to changes in the average balances of margin loans and cash balances as well as changes in interest rates.

Interest income for the three months ended March 31, 2021 decreased compared to 2020, primarily due to lower average interest rates.

Other

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 for the three months ended March 31, 2021 increased compared to 2020, primarily due to realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan, partially offset by a decrease in dividend income on assets held in our advisor non-qualified deferred compensation plan.

Expenses

Advisory and Commission

Advisory and commission expenses consist of the following: payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission revenues earned on each client’s account; production based bonuses earned by advisors and institutions based on the levels of advisory and commission revenues they produce; the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at grant date; and the deferred advisory and commissions fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.

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The following table sets forth our payout ratio, which is a statistical or operating measure:

	Three Months Ended March 31,
	2021		2020		Change
Payout ratio	85.62	%	85.07	%	55 bps

Our payout ratio for the three months ended March 31, 2021 increased compared to 2020, primarily due to price reductions on our corporate advisory platform.

Compensation and Benefits

Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary workers and contractors. The following table sets forth our average number of employees for the three months ended March 31, 2021, compared to 2020.

	Three Months Ended March 31,
	2021	2020	Change
Average number of employees	4,787	4,350	10.0%

Compensation and benefits for the three months ended March 31, 2021 increased compared to 2020, primarily due to an increase in salary and employee benefit expenses resulting from an increase in headcount.

Promotional

Promotional expenses include business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events and other costs that support advisor business growth. The decrease in promotional expenses for the three months ended March 31, 2021 compared to 2020 was primarily driven by a decrease in advisor conference expenses due to conferences being cancelled or held in a virtual format in response to the COVID-19 pandemic, partially offset by an increase in costs associated with advisor loans.

Depreciation and Amortization

Depreciation and amortization relates to the use of fixed assets, which include internally developed software, hardware, leasehold improvements and other equipment. Depreciation and amortization for the three months ended March 31, 2021 increased compared to 2020, primarily due to our continued investment in technology to improve our advisor platform and end-client experience.

Occupancy and Equipment

Occupancy and equipment expenses include the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment. Occupancy and equipment expenses for the three months ended March 31, 2021 increased compared to 2020, primarily due to an increase in costs related to software maintenance and licensing fees in support of our service and technology investments.

Non-Operating Interest Expense and Other

Non-operating interest expense and other include expenses from our senior secured credit facilities, senior unsecured notes, finance leases and other non-operating expenses. Non-operating interest expense and other for the three months ended March 31, 2021 decreased compared to 2020, primarily due to a lower outstanding principal balance on our senior secured term loan.

Loss on Extinguishment of Debt

On March 15, 2021, we closed debt transactions in which we increased the borrowing capacity and extended the maturity date of our existing senior revolving credit facility to 2026, issued senior unsecured notes due in 2029 and redeemed our existing senior unsecured notes due in 2025. In connection with these transactions, we incurred $24.4 million as a loss on extinguishment of debt.

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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 income tax rate was 21.5% and 25.0% for the three months ended March 31, 2021 and 2020, respectively. The decrease in our effective income tax rate for the three months ended March 31, 2021 compared to 2020 was primarily due to an increase in tax benefits associated with stock compensation under Accounting Standards Codification (“ASC”) Topic 718, and a reduction in unrecognized tax benefits related to the statute of limitations.

COVID-19 Impact

On March 11, 2020, the World Health Organization designated the spread of COVID-19 as a pandemic. As of the date of this Quarterly Report on Form 10-Q, the COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue, there could be a material and adverse financial impact to our results of operations. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.

Liquidity and Capital Resources

We have established liquidity and capital policies intended to support the execution of strategic initiatives, while meeting regulatory capital requirements and maintaining ongoing and sufficient liquidity. We believe liquidity is of critical importance to the Company and, in particular, to LPL Financial, our broker-dealer subsidiary. The objective of our policies is to ensure that we can meet our strategic, operational and regulatory liquidity and capital requirements under both normal operating conditions and under periods of stress in the financial markets.

Liquidity

Our liquidity needs are primarily driven by capital requirements at LPL Financial, interest due on our corporate debt and capital returns to holders of our common stock. Our liquidity needs at LPL Financial are driven primarily by the level and volatility of our client activity. Management maintains a set of liquidity sources and monitors certain business trends and market metrics closely in an effort to ensure we have sufficient liquidity. We believe that based on current levels of cash flows from operations and anticipated growth, together with available external liquidity sources, we have adequate liquidity to satisfy out working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future.

Parent Company Liquidity

LPL Holdings, Inc. (“Parent”), the direct holding company of our operating subsidiaries, considers its primary source of liquidity to be corporate cash. We define corporate cash as the sum of (1) cash held at the Parent and its non-regulated subsidiaries, (2) cash held at The Private Trust Company, N.A. (“PTC”) in excess of our senior secured credit agreement (the “Credit Agreement”) capital requirements and (3) cash held at LPL Financial in excess of 10 percent of its aggregate debits, which represents five times the net capital LPL Financial is required to maintain under the terms of the Credit Agreement. We believe corporate cash is a useful measure of the Parent’s liquidity as it is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. Corporate cash is monitored as part of our liquidity risk management. We target maintaining close to $200 million in corporate cash to cover approximately 24 months of principal and interest due on our corporate debt. The Company maintains additional liquidity through a $1 billion secured committed revolving credit facility. The Parent has the ability to borrow against the credit facility for working capital and general corporate purposes. Dividends from and excess capital generated by LPL Financial are the primary sources of corporate cash. Subject to regulatory approval or notification, capital generated by LPL Financial can be distributed to the Parent to the extent the capital levels exceed both regulatory requirements and internal capital thresholds. As of March 31, 2021, LPL Financial maintained excess regulatory capital of $42 million over Credit Agreement requirements. During the three months ended March 31, 2021, LPL Financial paid dividends of $175 million to the Parent.

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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. We suspended share repurchases in early 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic, which have since diminished. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate, and returning excess capital to shareholders. In the near term we are focused on allocating capital to organic growth and acquisitions, and will reassess capital deployment opportunities, including share repurchases over time. If we have excess capital to deploy beyond organic growth and acquisitions, we would consider restarting share repurchases. Also, the resumption, timing and amount of future share repurchases, if any, will 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. See Note 11 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchases.

Common Stock Dividends

The payment, timing and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under our Credit Agreement and the Indentures. See Note 11 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.

LPL Financial Liquidity

LPL Financial relies primarily on customer payables to provide liquidity and to fund margin lending. LPL Financial maintains additional liquidity through external lines of credit totaling approximately $575 million. LPL Financial also maintains a line of credit with the Parent.

External Liquidity Sources

The following table presents our external lines of credit at March 31, 2021 (dollars in millions):

Description	Borrower	Maturity Date	Outstanding		Available
Senior secured, revolving credit facility	LPL Holdings, Inc.	March 2026	$	—	$	1,000
Broker-dealer revolving credit facility	LPL Financial LLC	July 2024	$	—	$	300
Secured, uncommitted lines of credit	LPL Financial LLC	March 2022	$	—	$	75
Unsecured, uncommitted lines of credit	LPL Financial LLC	September 2021	$	—	$	75
Unsecured, uncommitted lines of credit	LPL Financial LLC	September 2021	$	—	$	50
Unsecured, uncommitted lines of credit	LPL Financial LLC	None	$	—	$	75
Secured, uncommitted lines of credit	LPL Financial LLC	None	$	—	unspecified
Secured, uncommitted lines of credit	LPL Financial LLC	None	$	—	unspecified

Capital Resources

The Company seeks to manage capital levels in support of our business strategy of generating and effectively deploying capital for the benefit of our shareholders.

Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds we are required to maintain for regulatory capital and reserves based on the requirements of our regulators and clearing organizations, which also consider client balances and trading activities. We have several sources of funds that enable us to meet increases in working capital requirements that relate to increases in client margin activities and balances. These sources include cash and cash equivalents on hand, cash segregated under federal and other regulations, the committed revolving credit facility of LPL Financial and proceeds from repledging or selling client securities in margin accounts. When an advisor’s client purchases securities on margin or uses securities as collateral to borrow from us on margin, we are permitted, pursuant to the applicable securities industry regulations, to repledge, loan or sell securities, up to 140% of the client’s margin loan balance, that collateralize those margin accounts.

Our other working capital needs are primarily related to loans we are making to advisors and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.

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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 Securities and Exchange Commission’s (“SEC”) 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 March 31, 2021, LPL Financial had net capital of $98.9 million with a minimum net capital requirement of $11.5 million.

LPL Financial’s ability to pay dividends greater than 10% of its excess net capital during any 35-day rolling period requires approval from the Financial Industry Regulatory Authority (“FINRA”). In addition, payment of dividends is restricted if LPL Financial’s net capital would be less than 5% of aggregate customer debit balances.

LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the National Futures Association’s (“NFA”) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements. The NFA was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities. Currently, the highest NFA requirement is the minimum net capital calculated and required pursuant to the SEC’s Net Capital Rule.

Our subsidiary, PTC, is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.

Debt and Related Covenants

The Credit Agreement and the Indentures contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:

•incur additional indebtedness or issue disqualified stock or preferred stock;

•declare dividends, or other distributions to stockholders;

•repurchase equity interests;

•redeem indebtedness that is subordinated in right of payment to certain debt instruments;

•make investments or acquisitions;

•create liens;

•sell assets;

•guarantee indebtedness;

•engage in certain transactions with affiliates;

•enter into agreements that restrict dividends or other payments from subsidiaries; and

•consolidate, merge or transfer all or substantially all of our assets.

Our Credit Agreement and the Indentures allow us to pay dividends and distributions or repurchase our capital stock only when certain conditions are met. In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, as defined in, and calculated by management in accordance with, the Credit Agreement. The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and 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.

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As of March 31, 2021, we were in compliance with both financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”. The breach of these financial covenants would be subject to certain equity cure rights. The required ratios under our financial covenants and actual ratios were as follows:

	March 31, 2021
Financial Ratio	Covenant Requirement	Actual Ratio
Leverage Ratio (Maximum)	5.00	2.11
Interest Coverage (Minimum)	3.00	10.24

See Note 8 - Long-term and Other Borrowings, within the notes to the unaudited condensed consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.

Off-Balance Sheet Arrangements

We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our advisors’ clients. These arrangements include Company commitments to extend credit. For information on these arrangements, see Note 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.

Contractual Obligations

During the three months ended March 31, 2021, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2020 Annual Report on Form 10-K. See Note 8 - Long-term and Other Borrowings and Note 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 2020 Annual Report on Form 10-K, for further detail.

Fair Value of Financial Instruments

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

Critical Accounting Policies and Estimates

In the notes to our consolidated financial statements and in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2020 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no changes to those policies that we consider to be material since the filing of our 2020 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.

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Item 1. Financial Statements (unaudited)

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data)

	Three Months Ended March 31,
	2021		2020
REVENUES
Advisory	$	722,046	$	579,027
Commission	557,229		503,444
Asset-based	264,706		285,506
Transaction and fee	140,944		137,096
Interest income	6,518		9,542
Other	16,174		(51,218)
Total revenues	1,707,617		1,463,397
EXPENSES
Advisory and commission	1,108,899		870,795
Compensation and benefits	161,540		146,802
Promotional	54,181		57,398
Depreciation and amortization	35,499		26,644
Amortization of intangible assets	17,431		16,570
Occupancy and equipment	43,584		39,546
Professional services	15,625		14,605
Brokerage, clearing and exchange	19,364		17,024
Communications and data processing	11,993		10,835
Other	24,900		26,228
Total operating expenses	1,493,016		1,226,447
Non-operating interest expense and other	25,059		29,318
Loss on extinguishment of debt	24,400		—
INCOME BEFORE PROVISION FOR INCOME TAXES	165,142		207,632
PROVISION FOR INCOME TAXES	35,522		51,991
NET INCOME	$	129,620	$	155,641
EARNINGS PER SHARE (Note 13)
Earnings per share, basic	$	1.63	$	1.96
Earnings per share, diluted	$	1.59	$	1.92
Weighted-average shares outstanding, basic	79,697		79,507
Weighted-average shares outstanding, diluted	81,622		81,166

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	March 31, 2021		December 31, 2020
Cash and cash equivalents	$	839,144	$	808,612
Cash segregated under federal and other regulations	839,428		923,158
Restricted cash	73,507		67,264
Receivables from:
Clients, net of allowance of $615 at March 31, 2021 and $520 at December 31, 2020	453,132		405,106
Product sponsors, broker-dealers and clearing organizations	240,465		233,192
Advisor loans, net of allowance of $7,362 at March 31, 2021 and $6,763 at December 31, 2020	558,144		547,372
Others, net of allowance of $3,238 at March 31, 2021 and $3,101 at December 31, 2020	351,443		306,640
Securities owned:
Trading — at fair value	47,964		29,252
Held-to-maturity — at amortized cost	11,972		13,235
Securities borrowed	13,565		30,130
Fixed assets, net of accumulated depreciation and amortization of $524,766 at March 31, 2021 and $489,997 at December 31, 2020	588,736		582,868
Operating lease assets	99,306		101,921
Goodwill	1,513,866		1,513,866
Intangible assets, net of accumulated amortization of $629,442 at March 31, 2021 and $612,011 at December 31, 2020	383,794		397,486
Deferred income taxes, net	24,246		24,112
Other assets	576,699		539,357
Total assets	$	6,615,411	$	6,523,571
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable	$	151,397	$	178,403
Payables to clients	1,294,664		1,356,083
Payables to broker-dealers and clearing organizations	125,563		89,743
Accrued advisory and commission expenses payable	195,044		187,040
Accounts payable and accrued liabilities	655,787		681,554
Income taxes payable	58,546		28,145
Unearned revenue	123,152		95,328
Securities sold, but not yet purchased — at fair value	1,316		206
Long-term and other borrowings, net	2,332,809		2,345,414
Operating lease liabilities	136,419		139,377
Finance lease liabilities	106,393		107,424
Total liabilities	5,181,090		5,208,717
Commitments and contingencies (Note 10)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value; 600,000,000 shares authorized; 128,136,874 shares issued at March 31, 2021 and 127,585,764 shares issued at December 31, 2020	128		127
Additional paid-in capital	1,787,095		1,762,770
Treasury stock, at cost — 48,210,851 shares at March 31, 2021 and 48,115,037 shares at December 31, 2020	(2,406,221)		(2,391,062)
Retained earnings	2,053,319		1,943,019
Total stockholders’ equity	1,434,321		1,314,854
Total liabilities and stockholders’ equity	$	6,615,411	$	6,523,571

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 March 31, 2020
				Additional Paid-In Capital					Accumulated Other Comprehensive Income (loss)		Retained Earnings		Total Stockholders’ Equity
	Common Stock					Treasury Stock
	Shares	Amount				Shares	Amount
BALANCE — December 31, 2019	126,494	$	126	$	1,703,973	46,260	$	(2,234,793)	$	—	$	1,554,567	$	1,023,873
Cumulative effect of accounting change											(7,317)		(7,317)
Net income, net of tax expense									—		155,641		155,641
Issuance of common stock to settle restricted stock units, net	315	—		—		122	(8,370)						(8,370)
Treasury stock purchases						1,810	(150,036)						(150,036)
Cash dividends on common stock											(19,713)		(19,713)
Stock option exercises and other	227	1		6,971		(14)	487				488		7,947
Share-based compensation	—			9,332									9,332
BALANCE — March 31, 2020	127,036	$	127	$	1,720,276	48,178	$	(2,392,712)	$	—	$	1,683,666	$	1,011,357
	Three Months Ended March 31, 2021
				Additional Paid-In Capital					Accumulated Other Comprehensive Income (loss)		Retained Earnings		Total Stockholders’ Equity
	Common Stock					Treasury Stock
	Shares	Amount				Shares	Amount
BALANCE — December 31, 2020	127,586	$	127	$	1,762,770	48,115	$	(2,391,062)	$	—	$	1,943,019	$	1,314,854
Net income, net of tax expense									—		129,620		129,620
Issuance of common stock to settle restricted stock units, net	296	—		—		120	(16,030)						(16,030)
Cash dividends on common stock											(19,980)		(19,980)
Stock option exercises and other	255	1		12,348		(24)	871				660		13,880
Share-based compensation				11,977									11,977
BALANCE — March 31, 2021	128,137	$	128	$	1,787,095	48,211	$	(2,406,221)	$	—	$	2,053,319	$	1,434,321

See notes to unaudited condensed consolidated financial statements.

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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
	Three Months Ended March 31,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	129,620	$	155,641
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	35,499		26,644
Amortization of intangible assets	17,431		16,570
Amortization of debt issuance costs	1,306		1,348
Share-based compensation	11,977		9,332
Provision for bad debts	1,977		2,691
Deferred income taxes	(133)		(89)
Loss on extinguishment of debt	24,400		—
Loan forgiveness	29,966		25,714
Other	(2,624)		(1,841)
Changes in operating assets and liabilities:
Receivables from clients	(48,120)		73,192
Receivables from product sponsors, broker-dealers and clearing organizations	(7,273)		(41,036)
Advisor loans	(41,337)		(48,013)
Receivables from others	(45,002)		(56,089)
Securities owned	(18,399)		15,221
Securities borrowed	16,565		1,757
Operating leases	(343)		(371)
Other assets	(39,205)		(51,675)
Drafts payable	(27,006)		(68,804)
Payables to clients	(61,419)		270,009
Payables to broker-dealers and clearing organizations	35,820		25,858
Accrued advisory and commission expenses payable	8,004		(18,970)
Accounts payable and accrued liabilities	(20,629)		(27,763)
Income taxes receivable/payable	30,401		45,153
Unearned revenue	27,824		26,578
Securities sold, but not yet purchased	1,110		119
Net cash provided by operating activities	60,410		381,176
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(41,109)		(33,973)
Purchase of securities classified as held-to-maturity	—		(3,793)
Proceeds from maturity of securities classified as held-to-maturity	1,250		1,250
Net cash used in investing activities	(39,859)		(36,516)
Continued on following page

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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
	Three Months Ended March 31,
	2021		2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities	225,000		616,000
Repayments of revolving credit facilities	(225,000)		(545,000)
Repayment of senior unsecured notes	(900,000)		—
Repayment of senior secured term loans	(2,675)		(2,675)
Proceeds from senior unsecured notes	900,000		—
Payment of debt issuance costs	(12,150)		—
Make-whole premium on redemption of senior unsecured notes	(25,875)		—
Payment of contingent consideration	(3,645)		(10,000)
Tax payments related to settlement of restricted stock units	(16,030)		(8,370)
Repurchase of common stock	—		(150,036)
Dividends on common stock	(19,980)		(19,713)
Proceeds from stock option exercises and other	13,880		7,947
Principal payment of finance leases and obligations	(1,031)		(996)
Net cash used in financing activities	(67,506)		(112,843)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(46,955)		231,817
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period	1,799,034		1,471,778
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of period	$	1,752,079	$	1,703,595
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	33,729	$	37,842
Income taxes paid	$	5,101	$	6,928
NONCASH DISCLOSURES:
Capital expenditures included in accounts payable and accrued liabilities	$	11,535	$	15,031
Lease assets obtained in exchange for operating lease liabilities	$	—	$	3,447

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial condition that sum to the total of the same such amounts shown in the statement of cash flows.

	March 31,
	2021		2020
Cash and cash equivalents	$	839,144	$	418,202
Cash segregated under federal and other regulations	839,428		1,217,692
Restricted cash	73,507		67,701
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	1,752,079	$	1,703,595

See notes to unaudited condensed consolidated financial statements.

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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - ORGANIZATION AND DESCRIPTION OF THE COMPANY

LPL Financial Holdings Inc. (“LPLFH”), a Delaware holding corporation, together with its consolidated subsidiaries (collectively, the “Company”), provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively, “advisors”) in the United States. Through its custody and clearing platform, using both proprietary and third-party technology, the Company provides access to diversified financial products and services, enabling its advisors to offer objective financial advice and brokerage services to retail investors (their “clients”). The Company’s most significant, wholly owned subsidiaries are described below:

•LPL Holdings, Inc. (“LPLH” or “Parent”), a Massachusetts holding corporation, is an intermediate holding company and directly or indirectly owns 100% of the issued and outstanding common stock of all of LPLFH’s indirect subsidiaries, including a captive insurance subsidiary (the “Captive Insurance Subsidiary”) that underwrites insurance for various legal and regulatory risks of the Company.

•LPL Financial LLC (“LPL Financial”), with primary offices in San Diego, California; Fort Mill, South Carolina; Boston, Massachusetts; and Austin, Texas, is a clearing broker-dealer and an investment adviser that principally transacts business as an agent for its advisors and financial institutions on behalf of their clients in a broad array of financial products and services. LPL Financial is licensed to operate in all 50 states, Washington D.C., Puerto Rico and the U.S. Virgin Islands.

•Fortigent Holdings Company, Inc. and its subsidiaries provide solutions and consulting services to registered investment advisers (“RIAs”), banks and trust companies serving high-net-worth clients.

•LPL Insurance Associates, Inc. operates as an insurance brokerage general agency that offers life and disability insurance products and services for LPL Financial advisors.

•AW Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolio Systems LLC (“Blaze”). AdvisoryWorld offers technology products, including proposal generation, investment analytics and portfolio modeling, to both the Company’s advisors and external clients in the wealth management industry. Blaze offers a trading and rebalancing platform to both the Company’s advisors and external clients.

•PTC Holdings, Inc. (“PTCH”) is a holding company for The Private Trust Company, N.A. (“PTC”). PTC is chartered as a non-depository limited purpose national bank, providing a wide range of trust, investment management oversight, and custodial services for estates and families. PTC also provides Individual Retirement Account (“IRA”) custodial services for LPL Financial. Each member of PTCH’s board of directors meets the direct equity ownership interest requirements that are required by the Office of the Comptroller of the Currency.

•LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC (“Allen & Company”), an RIA.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which require the Company to make estimates and assumptions regarding the valuation of certain financial instruments, intangible assets, allowance for doubtful accounts, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect the consolidated financial statements and related disclosures. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results for the interim periods presented. Actual results could differ from those estimates under different assumptions or conditions and the differences may be material to the consolidated financial statements.

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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated.

The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2020, contained in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).

Recently Issued Accounting Pronouncements

There are no recently issued accounting pronouncements that would materially impact the Company’s consolidated financial statements and related disclosures.

NOTE 3 - REVENUES

Revenues are recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues are analyzed to determine whether the Company is the principal (i.e., reports revenues on a gross basis) or agent (i.e., reports revenues on a net basis) in the contract. Principal or agent designations depend primarily on the control an entity has over the product or service before control is transferred to a customer. The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred and discretion in establishing the price.

Advisory

Advisory revenues represent fees charged to advisors’ clients’ accounts on the Company’s corporate advisory platform. The Company provides ongoing investment advice and acts as a custodian, providing brokerage and execution services on transactions, and performs administrative services for these accounts. This series of performance obligations transfers control of the services to the client over time as the services are performed. These revenues are recognized ratably over time to match the continued delivery of the performance obligations to the client over the life of the contract. The advisory revenues generated from the Company’s corporate advisory platform are based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. As such, the consideration for these revenues are variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts on client portfolio values. The constraint is removed once the portfolio value can be determined.

The Company provides advisory services to clients on its corporate advisory platform through the advisor. The Company is the principal in these arrangements and recognizes advisory revenues on a gross basis, as the Company is responsible for satisfying the performance obligations and has control over determining the fees.

Commission

Commission revenues represent sales commissions generated by advisors for their clients’ purchases and sales of securities on exchanges and over-the-counter, as well as purchases of other investment products. The Company views the selling, distribution and marketing, or any combination thereof, of investment products to such clients as a single performance obligation to the product sponsors.

The Company is the principal for commission revenues, as it is responsible for the execution of the clients’ purchases and sales, and maintains relationships with the product sponsors. Advisors assist the Company in performing its obligations. Accordingly, total commission revenues are reported on a gross basis.    

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LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents total commission revenues disaggregated by investment product category (in thousands):

	Three Months Ended March 31,
	2021		2020
Commission revenues
Annuities	$	280,776	$	245,662
Mutual funds	173,150		156,156
Fixed income	32,162		29,125
Equities	38,911		37,421
Other	32,230		35,080
Total commission revenues	$	557,229	$	503,444

The Company generates two types of commission revenues: sales-based commissions that are recognized at the point of sale on the trade date and trailing commissions that are recognized over time as earned. Sales-based commission revenues vary by investment product and are based on a percentage of an investment product’s current market value at the time of purchase. Trailing commission revenues are generally based on a percentage of the current market value of clients’ investment holdings in trail-eligible assets, and are recognized over the period during which services, such as ongoing support, are performed. As trailing commission revenues are based on the market value of clients’ investment holdings, the consideration is variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts. The constraint is removed once the investment holdings value can be determined.

The following table presents sales-based and trailing commission revenues disaggregated by product category (in thousands):