After a tumultuous week for broker-dealers facing higher yields on client cash, one securities analyst on Friday said that higher interest rates on clients' cash held in advisory accounts may cost LPL Financial Holdings Inc. as much as $380 million, shaving off $3.80 per share on the company's earnings in the future.
The analyst, Jeff Schmitt of William Blair Equity Research, wrote the note about LPL in the wake of the company being sued by a client on Wednesday in federal court in San Diego, with the claim alleging that LPL’s cash sweep program allows the company to unjustly enrich itself, which potentially constitutes a breach of fiduciary duty.
Last Friday, Wells Fargo & co. said it expected to take a hit to spread income this year after recently raising sweep rates in client advisory accounts. Morgan Stanley on Tuesday said that, like Wells Fargo, it was raising rates on clients’ cash in advisory sweep accounts.
With LPL, Raymond James Financial Inc. and Ameriprise Financial Inc. all set to report earnings for the quarter ending in June next week, one senior industry executive expressed his concern over how significant the impact the repricing of clients' cash could be for each firm. "We're waiting for the other shoe to drop," said the executive, who asked not to be named.
Shares of LPL Financial Holdings, with the ticker LPLA, declined almost 20% for the week as of trading at 12:30 on Friday, with shares trading at close to $210.
A company spokesperson on Friday did not return a call to comment about Schmitt's analysis in the wake of this week's lawsuit.
"We make no claims on the validity of the lawsuit at this stage and await additional information from the company during its earnings call next Thursday," Schmitt wrote. "However, to the extent LPL does have to increase sweep rates on advisory accounts, we wanted to provide our initial thoughts on the company’s potential exposure."
He estimated that LPL had about $23 billion of client cash in advisory accounts.
"Assuming the sweep rate on exposed client cash is increased from 0.85% to 2.5%, this would reduce the company’s spread income by around $380 million," he wrote. "This represents roughly $3.80 per share of earnings, which would reduce our 2025 adjusted [earning per share] estimate from $19.75 to $15.95. This would effectively be a reset in earnings, after which the company’s long-term growth algorithm would take over again."
"LPL allocates uninvested client cash to third-party banks to generate higher yields than it pays out to clients through sweep accounts," he wrote. "Current sweep rates average around 0.85%, including under 0.80% for accounts with less than $1.5 million of assets. These rates are materially lower than yields on money market funds available to clients in the market."
A $141M judgment and a federal asset freeze collide over one shrinking pool
The firm's CFO and EVP of Wealth Management Solutions are the latest executives to exit the broker-dealer.
Clients are saying they would consider switching advisors if another professional offered estate planning services, according to a new Trust & Will survey.
CEO Laurel Taylor says the fintech's composable AI stack helps workers optimize dollars across Trump Accounts, 529s, 401(k)s, and other employee benefits.
The bank has swiped three private banking veterans from BNY as the city climbs the ranks of America's fastest-growing wealth hubs.
Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income
Direct indexing is on pace to outgrow ETFs and mutual funds. Northern Trust's Ken Lassner explains why the advisors who get it wish they had started sooner.
