What changed in this filing

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Item 1. Business

2021-02-23 compared with 2020-02-21 · 77 added, 51 removed, 241 unchanged (35% of the section changed)

9 unchanged sentences

We strive to make it easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting independence and choice through access to a wide range of diligently evaluated non-proprietary products.

LPL Financial Holdings Inc., which is the parent company of our collective businesses, was incorporated in Delaware in 2005.

Our business subsidiaries include the following:

LPL Financial Holdings Inc., which is the parent company of our business, was incorporated in Delaware in 2005.

The Company’s most significant, wholly owned subsidiaries are described below:

• LPL Holdings, Inc.

is a direct subsidiary of LPL Financial Holdings Inc.

and is an intermediate holding company of our business.

• LPL Financial LLC (“LPL Financial”) is a clearing broker-dealer and an investment adviser that clears and settles customer transactions.

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(“PTC”) provides trust administration, investment management oversight and Individual Retirement Account (“IRA”) custodial services.

LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC (“Allen & Company”), a broker-dealer and RIA that we acquired in 2019.

• LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC (“Allen & Company”), an RIA that we acquired in 2019.

• Blaze Portfolio Systems LLC (“Blaze”), which we acquired in 2020, provides an advisor-facing trading and portfolio rebalancing platform.

Our Advisor Relationships

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We believe we offer a compelling economic value proposition to independent advisors, which is a key factor in our ability to attract and retain advisors and their practices.

The independent channels pay advisors a greater share of brokerage commissions and advisory fees than the captive channels — generally 80-90% compared to

Through our scale and operating efficiencies, we are able to offer our advisors what we believe are the highest average payout ratios among the five largest U.S.

broker-dealers, ranked by number of advisors.

The independent channels pay advisors a greater share of advisory fees and brokerage commissions than the captive channels — generally 80-90% compared to 30-50%.

Furthermore, we believe that our technology and service platforms enable our advisors to operate their practices with a greater focus on serving investors at a lower cost than other independent advisors.

As a result, we believe that our advisors who own practices earn more pre-tax profit than practice owners affiliated with other independent brokerage firms.

Finally, as business owners, our independent financial advisors, unlike captive advisors, also have the opportunity to build equity in their own businesses.

Our approximately 16,500 advisors average approximately 20 years of industry experience, which generally allows us to focus on supporting and enhancing our advisors’ businesses without needing to provide basic training or subsidizing advisors who are new to the industry.

Our approximately 17,300 advisors average about 20 years in the industry, which generally allows us to focus on supporting and enhancing our advisors’ businesses without needing to provide basic training or subsidizing advisors who are new to the industry.

Our flexible business platform allows our advisors to choose the most appropriate business model to support their clients, whether they conduct brokerage business, offer brokerage and fee-based services on our corporate RIA platform or provide fee-based services through their own RIA practices.

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Many of our advisors operate under their own business name, and we may assist these advisors with their own branding, marketing and promotion and regulatory review.

We also support advisors who are our employees through our independent employee advisor affiliation model, which we introduced in 2020.

Advisors licensed with LPL Financial as registered representatives and as investment advisory representatives are able to conduct both commission-based business on our brokerage platform and fee-based business on our corporate RIA platform.

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These advisors also agree not to engage in any outside business activity without prior approval from us and not to act in competition with us.

LPL Financial also supports 450 independent RIA firms that conduct their business through separate entities (“Hybrid RIAs”) with approximately 5,000 advisors who conduct their advisory business through these separate entities, rather than through LPL Financial.

LPL Financial also supports over 450 independent RIA firms that conduct their business through separate entities (“Hybrid RIAs”) with over 5,000 advisors who conduct their advisory business through these separate entities, rather than through LPL Financial.

Hybrid RIAs operate pursuant to the Investment Advisers Act of 1940, as amended (the “Advisers Act”), or their respective states’ investment advisory licensing rules.

These Hybrid RIAs engage us for technology, clearing and custody services, as well as access to our investment platforms.

Advisors associated with Hybrid RIAs retain 100% of their advisory fees.

In return, we charge separate fees for custody, trading, administrative, and support services.

In addition, most financial advisors associated with Hybrid RIAs carry their brokerage license with LPL Financial and access our fully-integrated brokerage platform under standard terms, although some financial advisors associated with Hybrid RIAs do not carry a brokerage license with us.

Advisors associated with Hybrid RIAs retain 100% of their advisory fees, and in return, we charge separate fees for custody, trading, administrative and support services.

In addition, most financial advisors associated with Hybrid RIAs carry their brokerage license with LPL Financial and access our fully-integrated brokerage platform under standard terms.

We believe we are the market leader in providing support to over 2,500 financial advisors at approximately 800 banks and credit unions nationwide.

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For these institutions, we provide their financial advisors with the infrastructure and services they need to be successful, allowing the institutions to focus more attention and capital on their core businesses.

We also provide support to over 3,000 additional financial advisors who are affiliated and licensed with insurance companies.

We also provide support to approximately 3,000 additional financial advisors who are affiliated and licensed with insurance companies.

These arrangements allow us to provide outsourced customized clearing, advisory platforms and technology solutions that enable the financial advisors at these insurance companies to offer a breadth of services to their client base in an efficient manner.

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We are dedicated to making it easy for advisors to do what is best for their clients.

Our scale and self-clearing platform enable us to provide advisors with the capabilities they need, and the service they expect, at a compelling price.

Our scale and self-clearing platform enable us to provide advisors with the capabilities they need, and the service they expect, at a compelling

We are dedicated to continuously improving the processes, systems and resources we leverage to meet these needs.

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Integrated Technology Solutions

We provide our technology and service to advisors through an integrated technology platform that is server-based and web-accessible.

We provide our technology and service to advisors through an integrated technology platform that is cloud-based and web-accessible.

Our technology offerings are designed to permit our advisors to effectively manage all critical aspects of their businesses in an efficient manner while remaining responsive to their clients’ needs.

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• conducting technology-enabled surveillance of trading activities and sales practices;

for advisors on our corporate RIA platform, monitoring of registered investment advisory activities;

• monitoring of registered investment advisory activities for advisors on our corporate RIA platform;

• inspecting branch offices and advising on how to strengthen compliance procedures.

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Our research team provides advice that is designed to empower our advisors to provide their clients with thoughtful advice in a timely manner, including the creation of discretionary portfolios for which we serve as a portfolio manager, available through our turnkey advisory asset management platforms.

Our research team actively works with our product risk management group to review the financial products offered through our platform.

Our research team actively works with our product risk management group to review the financial products offered through our platforms.

This includes third-party asset manager search, selection and monitoring services for both traditional and alternative strategies across all investment access points (exchange-traded funds, mutual funds, separately managed accounts, unified managed accounts and other products and services).

We believe our lack of proprietary products or investment banking services better enables us to provide research that is unbiased and objective.

We believe not providing proprietary products or investment banking services better enables us to provide research that is unbiased and objective.

Our Product and Solution Access

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Instead, we provide our advisors with open architecture access to a broad range of commission, fee-based, cash and money market products and services.

Our product risk management group conducts a review on substantially all of our product offerings.

The sales and administration of these products are facilitated through our technology solutions that allow our advisors to access client accounts, product information, asset allocation models, investment recommendations and economic insight as well as to perform trade execution.

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Commission-based products are those for which we and our advisors receive an upfront commission and, for certain products, a trailing commission, or a mark-up or mark-down.

Our brokerage offerings include variable and fixed annuities, mutual funds, equities, alternative investments such as non-traded real estate investment trusts and business development companies, retirement and 529 education savings plans, fixed income, and insurance.

Our brokerage offerings include variable and fixed annuities, mutual funds, equities, fixed income, alternative investments, retirement and 529 education savings plans and insurance.

We regularly review the structure and fees of our commission-based products in the context of retail investor preferences and the changing regulatory environment, as well as the competitive landscape.

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Client Cash Programs

We assist our advisors in managing their clients’ cash balances through money market programs and insured cash sweep vehicles at various banks.

As of December 31, 2019 , the total assets in our client cash programs, which are held within brokerage and advisory accounts, were approximately $33.7 billion .

We assist our advisors in managing their clients’ cash balances through money market programs and insured bank sweep vehicles.

As of December 31, 2020, the total assets in our client cash programs, which are held within advisory and brokerage accounts, were approximately $48.9 billion.

Other Services

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We also offer retirement solutions for commission- and fee-based services that allow advisors to provide brokerage services, consultation and advice to retirement plan sponsors using LPL Financial.

Finally, we offer proposal generation, investment analytics and portfolio modeling capabilities to both our advisors and external clients in the wealth management industry through our subsidiary AdvisoryWorld.

We offer proposal generation, investment analytics and portfolio modeling capabilities to both our advisors and external clients in the wealth management industry through our subsidiary AdvisoryWorld.

Finally, through our subsidiary Blaze, we offer an advisor-facing trading and portfolio rebalancing platform.

Our Financial Model

Our overall financial performance is a function of the following dynamics of our business:

Our revenues stem from diverse sources, including advisor-generated commission and advisory fees, as well as other asset-based fees from product sponsors, recordkeeping, networking services, client cash balances, and transaction and other fees for other ancillary services that we provide.

• Our revenues stem from diverse sources, including advisor-generated advisory and commission fees, as well as other asset-based fees from product sponsors, recordkeeping, networking services, client cash balances and transaction and other fees for other ancillary services that we provide.

Revenues are not concentrated by advisor, product or geography.

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• Our operating model is scalable and is capable of delivering expanding profit margins over time.

We have been able to operate with low capital expenditures and limited capital requirements, and as a result have been able to invest in our business as well as return value to shareholders.

• We have managed our capital requirements and expenditures such that we have been able to invest in our business as well as return capital to shareholders.

Our Competitive Strengths

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Comprehensive Solutions

Our differentiator is the combination of our capabilities across research, technology, risk management, and practice management.

We differentiate through the combination of our capabilities across research, technology, risk management and practice management.

LPL makes meaningful investments to support the growth, productivity and efficiency of advisors across a broad spectrum of models as their practices evolve.

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Flexibility of Our Business Model

Our business model allows our advisors the freedom to choose how they conduct their business, subject to certain regulatory parameters, which has helped us attract and retain advisors from multiple channels, including wire houses, regional broker-dealers, and other independent broker-dealers.

Our platform can accommodate a variety of independent advisor business models, including independent financial advisors and Hybrid RIAs.

The flexibility of our business model enables our advisors to transition among the independent advisor business models and product mix as their business evolves and preferences change within the market or their client base.

Our business model allows our advisors the freedom to choose how they conduct their business, subject to certain regulatory parameters, which has helped us attract and retain advisors from multiple channels, including wirehouses, regional broker-dealers and other independent broker-dealers.

Our platform can accommodate a variety of independent advisor business models, including independent financial advisors and Hybrid RIAs, as well as employee advisors.

The flexibility of our business model enables our advisors to select their preferred affiliation model and product mix as their business evolves and preferences change within the market or their client base.

Our business model provides advisors with a multitude of customizable service and technology offerings that allow them to increase their efficiency, focus on their clients and grow their practice.

Our Sources of Growth

We believe we can increase our revenue and profitability by benefiting from favorable industry trends and by executing strategies to accelerate our growth beyond that of the broader markets in which we operate.

We believe we can increase our revenues and profitability by benefiting from favorable industry trends and by executing strategies to accelerate our growth beyond that of the broader markets in which we operate.

Favorable Industry Trends

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We believe the productivity of our advisors has the potential to increase over time as we continue to develop solutions designed to enable them to add new clients, manage more of their clients’ investable assets and expand their existing practices with additional advisors.

We expect to facilitate these productivity improvements by helping our advisors better manage their practices in an increasingly complex external environment, which we believe has the potential to result in the assets per advisor growing over time.

We expect to facilitate these productivity improvements by helping

our advisors better manage their practices in an increasingly complex external environment, which we believe has the potential to result in the assets per advisor growing over time.

Attracting New Assets to Our Platform

We intend to grow the assets served by our platform.

Cerulli Associates, a research and consulting firm specializing in the financial services industry, estimates there are $19.9 trillion advisor-mediated assets in the United States, of which we have a 3.8% market share, and we believe we are positioned to attract assets from any channel.

Channel (dollars in billions)

Advisor-mediated Assets

There is an estimated $22.7 trillion in advisor-mediated assets in the United States, of which we have a 4.0% market share, and we believe we are positioned to attract assets from any channel.

Channel (dollars in billions) Advisor-mediated Assets % of Market

Independent Channels $8,469 37.3%

Wirehouses 7,850 34.5%

Other Employee Channels 6,412 28.2%

$22,731 100.0%

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The Cerulli Report:

Advisor Metrics 2020.

We compete with a variety of financial firms to attract and retain experienced and productive advisors.

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In addition, they also compete with a number of firms offering direct-to-investor online financial services and discount brokerage services.

Human Capital

Our success depends on our ability to attract, hire, retain and develop highly-skilled professionals in a variety of specialties, including finance, technology, compliance, business development, cybersecurity and management.

As of December 31, 2020, we had 4,756 full-time employees.

None of our employees are subject to collective bargaining agreements governing their employment with us.

We build deep expertise by attracting talented employees from a variety of fields and developing that talent into future leaders of our business and our industry.

Our continued growth is dependent, in part, on our ability to be an employer of choice and an organization that recruits and retains talented employees who best fit our culture and business needs.

We offer ongoing learning opportunities and programs that empower employees to grow in their professional development and careers.

We provide comprehensive compensation and benefits packages, as well as financial education tools to assist our employees as they plan for their future.

Due to the complexity of our business, we compete for talent with other companies, both inside and outside of our industry, and in multiple geographical areas in the United States.

In 2020, our human capital efforts focused on establishing a culture of service that emphasizes taking care of our advisors, so they can take care of their clients.

To that end, we seek employees who are approachable, proactive, collaborative, agile and innovative, and who share our commitment to excellence, integrity and service.

To maintain a high-caliber, values-driven workforce that is committed to our culture, we strive to offer total rewards, including compensation, benefits and recognition programs that position our company as an employer of choice.

We design our compensation to be competitive in the markets in which we compete, and closely monitor industry trends and practices to ensure we are able to attract and retain the personnel who are critical to our success.

We also monitor internal pay equity to make sure that our compensation practices are fair and equitable across our organization.

Our company’s senior leaders have an opportunity to receive a portion of their compensation in company equity, and, subject to a cap, we match the contributions of all of our employees to our retirement savings plan that supports their long-term financial goals.

We also offer an employee stock purchase plan that enables eligible employees to acquire an ownership interest in our company at a discount to prevailing market

To support our employees’ health and well-being, we offer competitive medical, dental and vision plan benefits, as well as access to free resources such as fitness classes and an online wellness portal.

We believe in our employees’ potential and provide training and development opportunities intended to maximize their performance and professional growth.

To ensure that new employees integrate into our culture and their daily work, we provide a robust new-hire experience, as well as extensive ongoing training for our employees to acquaint them with our business.

We require all of our employees to complete courses in key regulatory areas, such as insider trading and anti-money laundering compliance, and we offer opportunities for professional development through training sessions and cross-departmental workshops.

In addition, we have a mentorship program that pairs younger employees with more experienced professionals, giving mentees access to experience, expertise and guidance as they chart their career paths.

We aim to provide a safe, inclusive environment for our employees, where they feel engaged in our business, supported in who they are and empowered to succeed.

We are committed to providing a workplace that is free from violence, harassment and other unsafe or disruptive conditions, and require our personnel to attend regular training sessions and workshops on those topics.

To promote safety during the COVID-19 pandemic, starting in March 2020, we implemented a work-from-home policy that enables our employees to work remotely.

For our essential workers, we introduced additional hospital-grade disinfectants and modified workspaces in our office locations to ensure social distancing.

We believe that well-being is more than just physical safety, and that our employees should feel welcome and supported as who they are.

We seek to foster diversity and a culture of inclusivity through our employee resource groups, which are employee-run resource teams that focus on the needs, concerns and experiences of various diverse groups.

In addition, our recruitment efforts have focused on improving the diversity of our employee population, including through targeted outreach to and collaborations with organizations that serve diverse populations.

Continuous improvement is a pillar of our culture, and we regularly solicit our employees’ feedback on the effectiveness and quality of our support programs and their engagement with our business.

We use this feedback to improve our programming and inform decisions about our business.

In addition, we closely monitor employee turnover, both in the aggregate and in key subcategories such as executive leadership and diversity, to evaluate our effectiveness in retaining critical personnel.

The financial services industry is subject to extensive regulation by U.S.

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Applicable laws, rules and regulations may be subject to varying interpretations and change from time to time.

Regulators make periodic examinations and inquiries of us, and review annual, monthly, and other reports on our operations, track record, and financial condition.

Regulators make periodic examinations and inquiries of us, and review annual, monthly and other reports on our operations and financial condition.

Regulatory actions brought against us alleging violations of applicable laws, rules and regulations could result in censures, penalties and fines, settlements, disgorgement of profits, restitution to customers, remediation or the issuance of cease-and-desist orders.

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In many cases, our margin policies are more stringent than these rules.

Significant new rules and regulations continue to arise.

For example, 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.

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.

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Moreover, to the extent new rules or regulations affect the operations, financial condition, liquidity and capital requirements of financial institutions with which we do business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us.

The ultimate impact that new rules or regulations will have on us, the financial industry, and the economy cannot be known until such rules and regulations have been finalized and implemented.

The ultimate impact that new rules or regulations will have on us, the financial industry and the economy cannot be known until such rules and regulations have been finalized, implemented and enforced.

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 Regulation BI.

As of June 30, 2020, we implemented new procedures in accordance with Regulation BI.

Investment Advisor Regulation

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Failure to comply with the Advisers Act or other federal and state securities laws and regulations could result in investigations, censures, penalties and fines, settlements, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders or the termination of an investment advisor’s registration.

also may incur substantial expenses, damage to our reputation, or similar adverse consequences in connection with such actions, regardless of the outcome.

We also may incur substantial expenses, damage to our reputation or similar adverse consequences in connection with such actions, regardless of the outcome.

Retirement Plan Services Regulation

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Section 4975 imposes excise taxes for violations of these prohibitions.

The DOL is currently expected to release a new rule in 2020 that may change the definition of fiduciary under ERISA and Section 4975 of the Code, and this could result in legal, compliance, information technology, and other costs and could lead to a greater risk of client lawsuits and enforcement activity by the DOL.

In December 2020, the DOL issued a new rule that expanded the definition of “fiduciary” under ERISA and Section 4975 of the Code, which we expect to result in legal, compliance, information technology and other costs and could lead to a greater risk of client lawsuits and enforcement activity by the DOL.

The effect of any future DOL regulation on our retirement plan business cannot be anticipated or planned for, but may have further impacts on our products and services and results of operations.

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The net capital rule under the Exchange Act requires a broker-dealer to maintain a minimum net capital, and applies certain discounts to the value of its assets based on the liquidity of such assets.

LPL Financial is also subject to the NFA ’ s financial requirements and is required to maintain net capital that is in excess of or equal to the greatest of the NFA’s minimum financial

requirements.

LPL Financial is also subject to the NFA ’ s financial requirements and is required to maintain net capital that is in excess of or equal to the greatest of the NFA’s minimum financial requirements.

Under these requirements, LPL Financial is currently required to maintain minimum net capital that is in excess of or equal to the minimum net capital calculated and required pursuant to the SEC ’ s Net Capital Rule.

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Anti-Money Laundering and Sanctions Compliance

The USA PATRIOT Act of 2001 (the “PATRIOT Act”), which amended the Bank Secrecy Act, contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker-dealers, futures commission merchants, and other financial services companies.

The USA PATRIOT Act of 2001, which amended the Bank Secrecy Act, contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker-dealers,

futures commission merchants and other financial services companies.

Financial institutions subject to these requirements generally must have an anti-money laundering program in place, which includes monitoring for and reporting suspicious activity, implementing specialized employee training programs, designating an anti-money laundering compliance officer and annually conducting an independent test of the effectiveness of its program.

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persons from doing business with blocked persons and entities or certain sanctioned countries.

We have established policies, procedures, and systems designed to comply with these regulations but

we work continuously to improve and strengthen our regulatory compliance mechanisms.

We have established policies, procedures and systems designed to comply with these regulations and work continuously to improve and strengthen our regulatory compliance mechanisms.

Security and Privacy

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Our revenues for the periods presented were derived from our operations in the United States.

Access Overlay ® , BranchNet ® , CLIENTWORKS ® , Fortigent ® , LPL ® , LPL Career Match ® , LPL Financial (& Design) ® , Manager Access Network ® , Manager Access Select ® , OMP ® , and SPONSORWORKS ® are our registered trademarks, and ADVISORYWORLD, CLIENTWORKS CONNECTED, ALLEN & COMPANY OF FLORIDA, LLC, and THE PRIVATE TRUST COMPANY, N.A.

Access Overlay ® , BlazePortfolio ® , BranchNet ® , CLIENTWORKS ® , Fortigent ® , LPL ® , LPL Career Match ® , LPL Financial (& Design) ® , Manager Access Network ® , Manager Access Select ® , OMP ® and SPONSORWORKS ® are our registered trademarks, and ADVISORYWORLD, CLIENTWORKS CONNECTED, ALLEN & COMPANY OF FLORIDA, LLC, and THE PRIVATE TRUST COMPANY, N.A.

(& Design) are among our service marks.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business