LPL posts 13% drop in commission revenue in second quarter as DOL fiduciary rule takes its toll

Revenue tied to alternative investments such as nontraded REITs plunged 72% year-over-year

Jul 28, 2016 @ 6:40 pm

By Christine Idzelis

LPL Financial Holdings Inc. reported a drop in commission revenue during the second quarter as it continues to adapt to heightened regulatory scrutiny of fees.

Commission revenue fell 13% to $446 million in the second quarter from the same period last year, with the biggest drops seen in alternative investments, variable annuities and mutual funds, according to an earnings statement Thursday. Revenue plunged 72% for alternative investments, primarily nontraded real estate investment trusts, while tumbling 15% for variable annuities and 14% for mutual funds.

LPL Financial Holdings operates the nation's largest independent broker-dealer and is considered a bellwether for the industry.

The Labor Department's fiduciary rule, issued in April, is prompting brokerage firms to review their mix of investment products as regulators seek to prevent conflicts of interests that hurt individual investors. High-commission products such as nontraded REITs are of particular concern as advisers will need to demonstrate that their retirement account recommendations are in their clients' best interests.

LPL has reduced upfront commissions on alternative investments and variable annuities, partly due to the DOL's new regulation, Mark Casady, chairman and CEO, said during the firm's earnings call Thursday evening. He called the cost of implementing the new rule “manageable.”

"We continue to invest in service, technology, and other capabilities to help our advisers and their clients,” Mr. Casady said in the earnings statement. “We are committed to being a source of strength for our advisers and supporting them through these changing times."

LPL Financial added 100 new advisers in the second quarter and a $2.8 billion net increase in new advisory assets that represents a 6% annualized growth rate, according to the earnings statement. The brokerage firm had 14,193 advisers and $488 billion of brokerage and advisory assets at the end of June.

“Recruiting was strong,” Mr. Casady said during the earnings call.

While commissions saw a relatively large drop from the first half of 2015, there was a small recovery compared with the first quarter of this year.

LPL commission revenue was up 2% from the first three months of 2016, mostly driven by higher trailing commissions, the earnings report shows. Advisory fees rose 1% to $323 million from the first quarter.

Core operating expenses fell $7 million from the previous quarter to $168 million, as LPL kept most costs flat amid a seasonal decline in compensation-related expenses, according to the earnings report.

“We are staying disciplined on expenses," Matt Audette, chief financial officer, said in the earnings statement.

Mr. Audette said during the earnings call that LPL's cost of implementing the DOL rule will be concentrated in the second half of 2016, which will lead to lower earnings.

The firm produced net income of $48 million in the second quarter, down from $50 million during the same quarter last year, according to the earnings report.

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