Printer FriendlyLPL Financial Stability Letter
Business model
LPL Financial provides our practice with technology, brokerage, and investment advisory services. We are their customers, and we, in turn, serve you as our client. LPL Financial offers our practice access to a broad array of financial products and services to support us in providing financial advice and brokerage services to retail investors. Financial advisors and institutions are their only customers, and LPL Financial does not market directly to investors.
Unlike traditional brokerage firms, which combine product distribution and product manufacturing, LPL Financial operates on a conflict-free open architecture product platform with no proprietary investment products. Their research department provides financial advisors with objective analysis on financial products, asset allocation strategies, and economic conditions. As a result, we are able to recommend products selected on the basis of our clients' financial needs and objectives, without being influenced by any product manufacturing bias.
In addition, LPL Financial does not engage in the business practices of investment banks or provide other alternative financial services. LPL Financial does not engage in market-making activities trading out of its own inventory, which means the firm does not hold any securities on its balance sheet that are open to market risk. It does not have exposure to mortgage-related investments or securities, nor does it provide loans to hedge funds or other speculators.
Financial performance and liquidity position
Because the vast majority of LPL Financial advisors are independent contractors rather than employees, LPL Financial does not have a high degree of fixed costs. A significant portion of their expenses is directly tied to revenue performance, which means that much of the firm's expense base automatically adjusts to any reductions in revenue that may occur. The firm's revenue is derived through over 7,000 business relationships, including relationships with financial advisors, banks, credit unions, investment companies, insurance carriers, and other financial institutions. No single financial advisor accounts for more than 2% of LPL Financial revenue.
The Financial Industry Regulatory Authority (FINRA), our industry's regulatory body, mandates that all broker/dealers must maintain net capital equal to or in excess of the minimum regulatory requirement to provide a level of comfort in our ability to meet our financial obligations and support their business. As of September 30, 2009, LPL Financial was required to have a minimum net capital of $8.3 mm. At quarter end, it had $153.9 mm in net capital, resulting in excess capital of $145.6 mm, or 18.5 times our requirement.
Like many financial services firms, LPL Financial carries debt on its balance sheet. LPL Financial is currently in compliance with all of its lender debt covenants. In addition, due to the growth of the firm and decline in its credit risk since incurring the debt, LPL Financial received two ratings upgrades in the last four months of 2008.
LPL Financial has two operating lines of credit, which provide liquidity to the firm. This is in addition to cash assets held on the balance sheet. Therefore, LPL Financial believes the total liquidity of the firm is sufficient for its capital needs. As a result, LPL Financial has had no need for any capital infusions to maintain its business functions, and the firm has not participated in any federal relief programs related to recent financial events, including the Troubled Asset Relief Program (TARP).
Client account protection
LPL Financial is a member firm of the Securities Investor Protection Corporation (SIPC). Membership provides account protection up to a maximum of $500,000 per client, of which $100,000 may be claims for cash. For an explanatory brochure, please visit www.sipc.org . Additionally, through London Insurers, LPL Financial accounts have additional securities protection to cover the net equity of client accounts up to an overall aggregate firm limit of $575,000,000, subject to conditions and limitations. The account protection applies when a SIPC member firm fails financially and is unable to meet its obligations to securities clients, but it does not protect against losses from the rise and fall in the market value of investments. This extensive coverage reflects a strong commitment to serving your investment needs.
Regulation
The financial services industry is subject to extensive regulation by U.S. federal and state regulatory agencies and securities exchanges, as well as by non-government agencies, regulatory bodies, and securities exchanges. LPL Financial takes an active leadership role in the development of the rules and regulations that govern our industry. Given the recent turmoil in the financial services industry, we anticipate continued heightened scrutiny and significant modifications in these rules and regulations, and we expect LPL Financial to be at the forefront of this change. Throughout our history, LPL Financial has invested heavily, with the benefit of its scale, in compliance capabilities to monitor our compliance with the numerous legal and regulatory requirements applicable to our business.
Counter-party risk assessment
LPL Financial utilizes its enterprise risk management group to routinely examine the health of business partners with which LPL Financial has relationships in order to assess risk to both the firm and its advisors. This process includes extensive research, due diligence, financial analysis, and forward-looking measures of financial strength and sustainability. When necessary, business partners have been removed from the LPL Financial "approved" list until such time as they can effectively demonstrate a return to good standing.
I hope this information addresses any questions or concerns you may have about our organization. Thank you for the opportunity to serve your financial needs.
This letter was prepared by LPL Financial. Tracking #523547 Exp. 04/11
This statement includes certain forward-looking statements provided by LPL Financial with respect to the anticipated future performance of the Company. Such forward-looking statements reflect various assumptions of management concerning the future performance of the Company and are subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the control of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. There can be no assurance that such forward-looking statements will be realized. The actual results may vary from the anticipated results and such variations may be material. No representations or warranties are made as to the accuracy or reasonableness of such assumptions or forward-looking statements based thereon.