LPL’s Earnings Down, But Above Estimates; Firm To Pay $2 Million Restitution Over Non-Traded REITs

LPL Financial announced lower fourth quarter 2012 profits, but the news was overshadowed by a consent order by the Massachusetts Securities Division to pay $2 million in restitution to clients.

The order, released today, said LPL Financial violated prospectus requirements for concentration limits by selling seven non-traded REITs, including Inland American, Cole Credit Property Trust II, Cole Credit Property Trust III, Cole Credit Property 1031 Exchange, Wells Real Estate Investment Trust II, W.P. Carey Corporate Property Associates, and Dividend Capital Total Realty.

Not only does the company have to shell out more than $2 million to clients for alleged improper sales, LPL also owes Massachusetts $500,000 in administrative fines. On the earnings call this morning, CFO Dan Arnold said the company's first quarter results will include the fine and any potential restitution. “We work to promptly and appropriately resolve all of the issues in this matter and we remain committed to ensuring investors are well served.”

While fourth quarter earnings were down 6.4 percent from the year-ago period to $36.9 million, there were some bright spots: Net revenue was $944.2 million, up 13.9 percent year over year; Net new advisory assets for the quarter were $2.7 billion, excluding market movement. LPL's stock price was up 1.5% in afternoon trading.

Average advisor productivity grew 4 percent from the third quarter to $140,000, although productivity in the full-year 2012 was muted, executives said. The quarter was also strong for recruiting, with the firm adding 182 net new advisors, bringing its total advisor count to 13,352.

Overall, LPL had a strong recruiting year in 2012, adding 505 net new advisors. But productivity was muted, said Mark Casady, chairman and CEO. In the second quarter, average production fell to $137,000 and then dropped to $134,000 in the third quarter of last year. Casady attributed the drop to near-term market uncertainty related to the general election and ongoing budget negotiations.

The agreement to avert the fiscal cliff did provide some relief to investors, however, and Casady said clients are starting to invest cash deposits and increase trading activity this year.

The firm also gave more details about its Service Value Commitment program, in which it will transition some of its non-advisor-facing back-office functions to an outside company. In the second quarter, they’ll start outsourcing some of these functions, including commissions processing, account opening, document imaging, and processing work within compliance and finance. The firm expects this to save them $2 to $3 million in the latter half of this year, and $30 to $35 million in 2015.

The move is not just a cost-savings initiative, Casady stressed. They want their other employees to focus on their consultative work with advisors.

LPL posted record net revenue for the year of $3.7 billion, a 5 percent jump from 2011. The growth was driven by gains in the equity markets and superior business development activity, offset by sluggish advisor productivity and lower interest rates. Net income for the year was $151.9 million, versus $170 million for 2011.

But in a normal rate environment—where rates are 2 percent or more, 2012 earnings would have been higher by $170 million, Arnold said.

“The suppressed interest rates and fee compression resulted in 460 basis points lost operating margin benefit on revenue of $3.7 billion,” he said.