What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-23 · 364 added, 370 removed, 262 unchanged (74% of the section changed)

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Please also refer to the section under heading “Special Note Regarding Forward-Looking Statements.”

Business Overview

We are a leader in the retail financial advice market and the nation’s largest independent broker-dealer.

We serve independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services and practice management programs they need to create and grow their practices.

We enable them to provide objective financial guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions.

We enable them to provide personalized financial guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions.

Please consult Part I, “Item 1.

Business” for additional information related to our business activities.

Executive Summary

Financial Highlights

Results for the year ended December 31, 2020 included net income of $472.6 million, or $5.86 per share, which compares to $559.9 million, or $6.62 per share, for the year ended December 31, 2019.

Asset Growth Trends

Total advisory and brokerage assets served were $903.1 billion as of December 31, 2020, up 18.1% from $764.4 billion as of December 31, 2019.

Total net new assets were $60.2 billion for the year ended December 31, 2020, compared to $36.3 billion for the same period in 2019.

Net new advisory assets were an inflow of $52.1 billion for the year ended December 31, 2020, compared to $34.3 billion in 2019.

As of December 31, 2020, our advisory assets had grown to $461.2 billion from the prior year end balance of $365.8 billion, an increase of 26.1%, and represented 51.1% of total advisory and brokerage assets served.

Net new brokerage assets were an inflow of $8.1 billion for the year ended December 31, 2020, compared to $2.0 billion in 2019.

As of December 31, 2020, our brokerage assets were $441.9 billion, up from $398.6 billion as of December 31, 2019, an increase of 10.9%.

Gross Profit Trends

Gross profit, a non-GAAP financial measure, of $2,103.3 million for the year ended December 31, 2020, decreased 3.2% from $2,172.2 million for the year ended December 31, 2019.

Gross profit is calculated as total net revenues, less advisory and commission expenses and brokerage, clearing and exchange fees.

Management presents gross profit because we believe that measure may provide useful insight to investors in evaluating the Company’s core operating performance before indirect costs that are general and administrative in nature.

See footnote 9 to the Financial Metrics table within the “How We Evaluate Our Business” section for additional information on gross profit.

Shareholder Capital Returns

We returned $229.1 million of capital to shareholders during the year ended December 31, 2020, including $79.1 million of dividends and $150.0 million of share repurchases, representing 1,809,553 shares.

COVID-19 Response

In response to the coronavirus disease 2019 (“COVID-19”) pandemic, we have taken measures to protect the health and safety of our employees, as well as the stability and continuity of our operations.

For example, we have equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices, and have worked closely with our vendors to maintain service continuity throughout the increased market volatility and operational volumes that occurred during the year.

We also made extra support available to our advisors by extending service hours and providing additional

resources to enable them to deliver differentiated services to their clients.

Please consult the “Risks Related to our Business and Industry” section within Part I, “Item 1A.

Risk Factors” for more information about the risks associated with COVID-19.

Our Sources of Revenue

Our revenues are derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust and reporting platforms.

We also generate asset-based revenues through our bank sweep vehicles and money market programs and the access we provide to a variety of product providers with the following product lines:

Our revenue is derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust and reporting platforms.

We also generate asset-based revenue through our insured bank sweep vehicles, money market programs and the access we provide to a variety of product providers with the following product lines:

• Alternative Investments

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We also earn interest from margin loans made to our advisors’ clients.

A portion of our revenue is not asset-based or correlated with the equity financial markets.

We regularly review various aspects of our operations and service offerings, including our policies, procedures and platforms, in response to marketplace developments.

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For example, we regularly review the structure and fees of our products and services, including related disclosures, in the context of the changing regulatory environment and competitive landscape for advisory and brokerage accounts.

How We Evaluate Our Business

Significant Events

Completed the acquisition of Waddell & Reed Financial, Inc.

and surpassed $1.0 trillion in assets

On April 30, 2021 we completed the acquisition of the wealth management business of Waddell & Reed Financial Inc.

(the “Waddell & Reed Acquisition”).

Concurrent with the closing of the Waddell & Reed Acquisition, we surpassed $1.0 trillion in total advisory and brokerage assets.

We completed the onboarding of $71.2 billion of client assets representing 99% of assets from the Waddell & Reed Acquisition during the third quarter of 2021.

Generated $118.8 billion of organic net new assets

We generated $118.8 billion of organic net new assets during 2021, which included the onboarding of approximately $35.0 billion of combined total assets from M&T Bank and BMO Harris to our platform.

This translated to an annual organic net new asset growth rate of 13.2%.

We also signed an agreement with CBSI to join our platform.

supports over 500 advisors serving approximately $32 billion in brokerage and advisory assets, which we expect to onboard during 2022.

Business Solutions subscriptions more than doubled, driving revenue of approximately $28 million on an annualized run rate basis

Total active and contracted Business Solutions subscriptions more than doubled to end the year at 3,022, driving revenue of approximately $28 million on an annualized run rate basis.

Refinanced our highest cost debt, increased capacity under our Credit Agreement, and issued senior notes

On March 15, 2021, we took advantage of the low interest rate environment to issue $900.0 million in aggregate principal amount of 4.00% senior unsecured notes due in 2029 (“2029 Senior Notes”).

We used the proceeds from the 2029 Senior Notes to redeem our existing 5.75% senior unsecured notes due in 2025 (“2025 Senior Notes”), reduced our annual interest expense by $13.0 million, and created additional borrowing capacity under our Credit Agreement, which was increased to $1.0 billion.

Additionally, on May 18, 2021, we issued $400.0 million in aggregate principal amount of 4.375% senior unsecured notes due in 2031 (“2031 Senior Notes”).

Proceeds from the 2031 Senior Notes were used to repay borrowings under the Credit Agreement, which were used to finance the Waddell & Reed Acquisition.

Earned a spot on the Fortune 500 list

In June 2021 the Company earned a spot in the Fortune 500 ranking for 2021 based on our revenue of $5.9 billion for the year ended December 31, 2020, placing us on the list of largest U.S.

companies as ranked by revenue.

Resumed share repurchases during the third quarter of 2021 and repurchased $90.0 million of shares

We resumed share repurchases during the third quarter of 2021 with an initial focus on repurchasing amounts to offset dilution.

We repurchased 579,771 shares during the third and fourth quarters of 2021 for a total of $90.0 million.

Executive Summary

Financial Highlights

Results for the year ended December 31, 2021 included net income of $459.9 million, or $5.63 per diluted share, which compares to $472.6 million, or $5.86 per diluted share, for the year ended December 31, 2020.

Asset Growth Trends

Total advisory and brokerage assets served were $1.2 trillion at December 31, 2021, up 33.6% from $903.1 billion at December 31, 2020.

Total net new assets were $190.0 billion for the year ended December 31, 2021, compared to $60.2 billion for the same period in 2020.

Net new advisory assets were an inflow of $123.5 billion for the year ended December 31, 2021, compared to $52.1 billion in 2020.

Advisory assets were $643.2 billion, or 53.3% of total advisory and brokerage assets served, at December 31, 2021, up 39.5% from $461.2 billion at December 31, 2020.

Net new brokerage assets were an inflow of $66.6 billion for the year ended December 31, 2021, compared to $8.1 billion in 2020.

Brokerage assets were $563.2 billion at December 31, 2021, up 27.4% from $441.9 billion at December 31, 2020.

Gross Profit Trends

Gross profit, a non-GAAP financial measure, was $2,454.7 million for the year ended December 31, 2021, an increase of 16.7% from $2,103.3 million for the year ended December 31, 2020.

See the “Key Performance Metrics” section for additional information on gross profit.

Common Stock Dividends and Share Repurchases

During the year ended December 31, 2021, we paid shareholders cash dividends of $80.1 million and repurchased 579,771 of our outstanding shares for a total of $90.0 million.

COVID-19 Response

In response to the COVID-19 pandemic, we have taken measures to protect the health and safety of our employees, as well as the stability and continuity of our operations.

For example, we have equipped and enabled a

substantial majority of employees to work remotely, enhanced cleaning protocols throughout our corporate offices, and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that have occurred from time to time during the pandemic.

We also made extra support available to our advisors by extending service hours and providing additional resources to enable them to deliver differentiated services to their clients.

Please consult the “Risks Related to our Business and Industry” section within Part I, “Item 1A.

Risk Factors” for more information about the risks associated with COVID-19.

Key Performance Metrics

We focus on several key metrics in evaluating the success of our business relationships and our resulting financial position and operating performance.

In April 2020, we updated our definition of net new assets to make our figures more comparable with other companies.

Our updated definition now includes dividends and interest, and subtracts advisory fees.

All net new asset figures below align with our new definition.

Our key operating, business and financial metrics are as follows:

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Operating Metrics (dollars in billions) (1)

Advisory and Brokerage Assets

Advisory assets (2)(3)

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$ 1,206.4 $ 903.1

Advisory Assets % of Total Advisory and Brokerage Assets 51.1 % 47.8 %

Advisory assets as a % of total Advisory and Brokerage Assets 53.3 % 51.1 %

Net New Assets

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Total Net New Assets (7)

$ 190.0 $ 60.2

Organic Net New Assets (7)

Net new advisory assets $ 49.6 $ 33.3

Net new brokerage assets 6.6 0.2

Net new organic advisory assets $ 89.4 $ 49.6

Net new organic brokerage assets 29.4 6.6

Total Organic Net New Assets $ 118.8 $ 56.2

Total Organic Net New Assets Annualized Growth Rate (8)

Organic advisory net new assets annualized growth (7)(8)

19.4 % 13.6 %

Total organic net new assets annualized growth (7)(8)

Client Cash Balances (2)

Insured cash account balances $ 37.3 $ 24.4

Deposit cash account balances 8.2 5.0

Insured cash account $ 30.0 $ 37.3

Deposit cash account 9.3 8.2

Total Bank Sweep Balances 39.3 45.5

Money market account balances 1.5 1.9

Purchased money market fund balances 1.9 2.4

Money market account 16.1 1.5

Purchased money market funds 1.9 1.9

Total Money Market Balances 18.0 3.4

Total Client Cash Balances $ 57.3 $ 48.9

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As of and for the Years Ended December 31,

Business and Financial Metrics (dollars in millions, except per share data) 2020 2019

Advisors 17,287 16,464

Business and Financial Metrics (dollars in millions)

Advisors - period end 19,876 17,287

Average total assets per advisor (10)

$ 60.7 $ 52.2

Employees 4,756 4,343

Employees - period end 5,919 4,756

Share repurchases $ 90.0 $ 150.0

Dividends $ 80.1 $ 79.1

% of Capital Returned to Shareholders (11)

44.0 % 96.1 %

Leverage ratio (11)

For the Years Ended December 31,

Total net revenues $ 5,871.6 $ 5,624.9

Years Ended December 31,

Financial Metrics (dollars in millions, except per share data) 2021 2020

Total revenue $ 7,720.8 $ 5,871.6

Net income $ 459.9 $ 472.6

Earnings per share (“EPS”), diluted $ 5.63 $ 5.86

EPS prior to amortization of intangible assets (13)

Non-GAAP Financial Metrics (dollars in millions, except per share data)

EPS prior to amortization of intangible assets and acquisition costs (12)

$ 7.02 $ 6.46

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(1) Totals may not foot due to rounding.

(2) Advisory and brokerage assets consists of assets that are custodied, networked and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition.

Insured cash account balances, deposit cash account balances, money market account balances and purchased money market fund balances are also included in total advisory and brokerage assets.

(3) Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”).

(2) Advisory and brokerage assets consist of assets that are custodied, networked and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition.

Client cash balances are also included in total advisory and brokerage assets.

(3) Advisory assets consist of total advisory assets under custody at LPL Financial and Waddell & Reed, LLC (“Waddell & Reed”).

Please consult the “Results of Operations” section for a tabular presentation of advisory assets.

(4) Brokerage assets consists of brokerage assets serviced by advisors licensed with LPL Financial.

(5) Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees.

(4) Brokerage assets consist of brokerage assets serviced by advisors licensed with LPL Financial.

(5) Net new advisory assets consist of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees.

We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.

Figures for net new advisory assets reported prior to April 2020 did not include dividends and interest or subtract advisory fees.

The figure previously reported for the year ended December 31, 2019 was an inflow of $30.0 billion.

(6) Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest.

(6) Net new brokerage assets consist of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest.

We consider conversions from and to advisory accounts as deposits and withdrawals, respectively.

Figures for net new brokerage assets reported prior to April 2020 did not include dividends and interest.

The figure previously reported the year ended December 31, 2019 was an outflow of $3.4 billion.

(7) Consists of net new assets excluding the acquisitions of Lucia Securities, LLC and E.K.

Riley Investments, LLC.

Acquired assets include $2.5 billion of net new assets related to E.K.

Riley Investments, LLC in November 2020, $1.5 billion of net new assets from Lucia Securities, LLC in October 2020 and $2.8 billion of net new assets from Allen & Company in August 2019.

(8) Calculated as annualized current period organic net new assets divided by preceding period total advisory and brokerage assets.

(9) Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial.

(7) Total net new assets include $71.2 billion of assets related to the Waddell & Reed Acquisition during the year ended December 31, 2021.

Total net new assets during the year ended December 31, 2020 include $2.5 billion of net new assets related to the acquisition of E.K.

Riley Investments, LLC (“E.K.

Riley”) and $1.5 billion of net new assets related to the acquisition of Lucia Securities, LLC (“Lucia”).

Organic net new assets and related growth rates exclude these assets in both periods.

(8) Calculated as annualized current period organic net new assets divided by preceding period assets in their respective categories of advisory assets or total advisory and brokerage assets.

(9) Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial and Waddell & Reed.

Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid.

(10) Calculated based on the end-of-period total advisory and brokerage assets divided by end-of-period advisor count.

(11) Percentage of capital returned to shareholders is calculated as the ratio of total shareholder capital returns per diluted share count to EPS prior to amortization of intangible assets.

EPS prior to amortization of assets is a non-GAAP financial measure.

For a reconciliation of EPS prior to amortization of intangible assets to the Company’s GAAP EPS for the periods presented, see footnote 13.

(12) A financial covenant from our credit agreement calculated as consolidated total debt to consolidated EBITDA.

(11) The leverage ratio is a financial metric from our Credit Agreement and is calculated by dividing Credit Agreement net debt, which equals consolidated total debt plus corporate cash, by Credit Agreement EBITDA.

Credit Agreement EBITDA, a non-GAAP measure, is defined by the Credit Agreement as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles, and is further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions .

Please consult the “Debt and Related Covenants” section for more information.

(13) EPS prior to amortization of intangible assets is a non-GAAP financial measure defined as GAAP EPS plus the per share impact of amortization of intangible assets.

The per share impact is calculated as amortization of intangible assets expense, net of applicable tax benefit, divided by the number of shares outstanding for the applicable period.

The Company presents EPS prior to amortization of intangible assets because management believes that the metric can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items which do not directly affect our ongoing operating performance.

EPS prior to amortization of intangible assets is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to GAAP EPS or any other performance measure derived in accordance with GAAP.

Below is a reconciliation of EPS prior to amortization of intangible assets to the Company’s GAAP EPS for the periods presented:

Below is a reconciliation of corporate debt and other borrowings to Credit Agreement net debt and net income to EBITDA and Credit Agreement EBITDA (in millions):

Credit Agreement Net Debt Reconciliation 2021 2020

Corporate debt and other borrowings $ 2,838.6 $ 2,359.3

Corporate cash (237.0) (279.9)

Credit Agreement Net Debt (†)

$ 2,601.6 $ 2,079.4

Years Ended December 31,

EPS Reconciliation (in millions, except per share data) 2020 2019

GAAP EPS $ 5.86 $ 6.62

Amortization of intangible assets $ 67.4 $ 65.3

EBITDA and Credit Agreement EBITDA Reconciliation 2021 2020

Net income $ 459.9 $ 472.6

Interest expense on borrowings 104.4 105.8

Provision for income taxes 141.5 153.4

Depreciation and amortization 151.4 109.7

Amortization of other intangibles 79.3 67.4

$ 936.4 $ 908.9

Credit Agreement Adjustments:

Employee share-based compensation expense $ 41.8 $ 31.7

Advisor share-based compensation expense 2.3 2.3

M&A accretion (16)

Loss on extinguishment of debt 24.4 —

Acquisition costs and other 92.1 18.3

Credit Agreement EBITDA (†)

$ 1,150.7 $ 961.2

Leverage Ratio 2.26 2.16

(†) Totals may not foot due to rounding.

(12) EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as adjusted net income, a non-GAAP financial measure defined as net income plus the after-tax impact of amortization of other intangibles and acquisition costs, divided by the weighted average number of diluted shares outstanding for the applicable period.

The Company presents adjusted net income and EPS prior to amortization of intangible assets and acquisition costs because management believes that these metrics can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items and acquisition costs that management does not believe impact the Company’s ongoing operations.

Adjusted net income and EPS prior to amortization of intangible assets and acquisition costs are not measures of the Company's financial performance under GAAP and should not be considered as alternatives to net income, earnings per diluted share or any other performance measure derived in accordance with GAAP.

Below is a reconciliation of net income and earnings per diluted share to adjusted net income and EPS prior to amortization of intangible assets and acquisition costs for the periods presented (in millions, except per share data):

Years Ended December 31,

Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs Reconciliation Amount Per Share Amount Per Share

Net income / earnings per diluted share $ 459.9 $ 5.63 $ 472.6 $ 5.86

Amortization of other intangibles 79.3 0.97 67.4 0.83

Acquisition costs (17)

76.4 0.93 — —

Tax benefit (41.4) (0.51) (18.9) (0.23)

Amortization of intangible assets, net of tax benefit $ 48.5 $ 47.0

Diluted share count 80.7 84.6

EPS impact $ 0.60 $ 0.56

EPS prior to amortization of intangible assets $ 6.46 $ 7.17

(14) Set forth below is a calculation of gross profit, calculated as total net revenues less advisory and commission expenses and brokerage, clearing and exchange fees.

All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered by management to be general and administrative in nature.

Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs (†)

$ 574.1 $ 7.02 $ 521.1 $ 6.46

Weighted-average shares outstanding, diluted 81.7 80.7

(†) Totals may not foot due to rounding.

(13) Gross profit is a non-GAAP financial measure defined as total revenue less advisory and commission expense and brokerage, clearing and exchange expense.

All other expense categories, including depreciation and amortization of property and equipment and amortization of other intangibles, are considered by management to be general and administrative in nature.

Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry.

We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature.

Below is a reconciliation of gross profit for the periods presented (in millions):

Years Ended December 31,

Gross Profit (in millions) 2020 2019

Total net revenues $ 5,871.6 $ 5,624.9

Gross Profit 2021 2020

Total revenue $ 7,720.8 $ 5,871.6

Advisory and commission expense 5,180.1 3,697.1

Brokerage, clearing and exchange fees 71.2 64.4

Brokerage, clearing and exchange expense 86.0 71.2

Gross Profit (†)

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(†) Totals may not foot due to rounding.

(15) EBITDA is a non-GAAP financial measure defined as net income plus interest and other expense, income tax expense, depreciation and amortization, and amortization of intangible assets.

(14) EBITDA is a non-GAAP financial measure defined as net income plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles.

The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations.

EBITDA is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity.

In addition, the Company’s EBITDA can differ significantly from EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, and capital investments.

Below is a reconciliation of EBITDA to net income for the periods presented:

Below is a reconciliation of EBITDA to net income for the periods presented (in millions):

Years Ended December 31,

EBITDA Reconciliation (in millions) 2020 2019

EBITDA Reconciliation 2021 2020

Net income $ 459.9 $ 472.6

Non-operating interest expense and other 105.8 130.0

Interest expense on borrowings 104.4 105.8

Provision for income taxes 141.5 153.4

Depreciation and amortization 151.4 109.7

Amortization of intangible assets 67.4 65.3

Amortization of other intangibles 79.3 67.4

$ 936.4 $ 908.9

____________________

(†) Totals may not foot due to rounding.

(15) Core G&A is a non-GAAP financial measure defined as total expense less the following expenses:

advisory and commission;

depreciation and amortization;

interest expense on borrowings;

brokerage, clearing and exchange;

amortization of other intangibles;

loss on extinguishment of debt;

EBITDA $ 908.9 $ 1,036.1

(16) Core G&A is a non-GAAP financial measure.

Core G&A consists of total operating expenses, excluding the following expenses:

advisory and commission, regulatory charges, promotional, employee share-based compensation, depreciation and amortization, amortization of intangible assets, and brokerage, clearing and exchange.

Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expenses, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance.

Core G&A is not a measure of the Company’s total operating expenses as calculated in accordance with GAAP.

Below is a reconciliation of Core G&A against the Company’s total operating expenses for the periods presented:

Years Ended December 31,

Operating Expense Reconciliation (in millions) 2020 2019

Core G&A $ 925.1 $ 868.4

Regulatory charges 29.4 32.3

Promotional 208.3 205.5

acquisition costs;

employee share-based compensation;

Total G&A 1,194.4 1,136.1

and regulatory charges.

Management presents Core G&A because it believes Core G&A reflects the corporate expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expense, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance.

Core G&A is not a measure of the Company’s total expense as calculated in accordance with GAAP.

Below is a reconciliation of Core G&A against the Company’s total expense for the periods presented (in millions):

Years Ended December 31,

Core G&A Reconciliation 2021 2020

Total expense $ 7,119.5 $ 5,245.6

Advisory and commission 5,180.1 3,697.1

Depreciation and amortization 151.4 109.7

Amortization of intangible assets 67.4 65.3

Interest expense on borrowings 104.4 105.8

Brokerage, clearing and exchange 86.0 71.2

Total operating expenses $ 5,139.8 $ 4,749.9

Legal and Regulatory Matters

As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision and reporting.

We review these items in the ordinary course of business in our effort to adhere to legal and regulatory requirements applicable to our operations.

Nevertheless, additional regulation and enhanced regulatory enforcement has resulted, and may result in the future, in additional operational and compliance costs, as well as increased costs in the form of penalties and fines, investigatory and settlement costs, customer restitution and

remediation related to regulatory matters.

For additional information, see the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A.

Risk Factors”.

In the ordinary course of business, we periodically identify or become aware of purported inadequacies, deficiencies and other issues.

It is our policy to evaluate these matters for potential legal or regulatory violations, and other potential compliance issues.

It is also our policy to self-report known violations and issues as required by applicable law and regulation.

When deemed probable that matters may result in financial losses, we accrue for those losses based on an estimate of possible fines, customer restitution and losses related to the repurchase of sold securities and other losses, as applicable.

Certain regulatory and other legal claims and losses may be covered through our wholly-owned captive insurance subsidiary, which is chartered with the insurance commissioner in the state of Tennessee.

For more information, see Note 2 - Summary of Significant Accounting Policies - “ Commitments and Contingencies,” within the notes to the consolidated financial statements.

Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or legal proceeding, whether or not covered by our captive insurance subsidiary, is inherently difficult and requires judgments based on a variety of factors and assumptions.

There are particular uncertainties and complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary, which depends in part on historical claims experience, including the actual timing and costs of resolving matters that begin in one policy period and are resolved in a subsequent period.

Our accruals, including those established through our captive insurance subsidiary at December 31, 2020, include estimated costs for significant regulatory matters or legal proceedings, generally relating to the adequacy of our compliance and supervisory systems and procedures and other controls, for which we believe losses are both probable and reasonably estimable.

For example, on May 1, 2018, we agreed to a settlement structure with the North American Securities Administrators Association that related to our historical compliance with certain state “blue sky” laws and resulted in aggregate fines of $26.4 million, the majority of which were covered by our captive insurance subsidiary loss reserves.

As part of the settlement structure, we engaged independent third party consultants to conduct a historical review of securities transactions and an operational review of our systems for complying with blue sky securities registration requirements.

We also agreed to offer customers remediation in the form of reimbursement for any actual losses, plus interest, and these costs were not material.

The outcome of regulatory or legal proceedings could result in legal liability, regulatory fines or monetary penalties in excess of our accruals and insurance, which could have a material adverse effect on our business, results of operations, cash flows or financial condition.

For more information on management’s loss contingency policies, see Note 14 - Commitments and Contingencies, within the notes to the consolidated financial statements.

In June 2018, the U.S.

Court of Appeals for the Fifth Circuit invalidated regulations previously enacted by the U.S.

Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would have resulted in significant new prohibited transaction exemption requirements for our servicing of certain retirement plan accounts subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and individual retirement accounts (“IRAs”).

In December 2020, the DOL finalized a new investment advice fiduciary prohibited transaction exemption with regard to such accounts that became effective on February 16, 2021.

Because ERISA plans and IRAs comprise a significant portion of our business and we continue to expect that compliance with current and future laws and regulations with respect to retail retirement savings and reliance on prohibited transaction exemptions under such laws and regulations will require increased legal, compliance, information technology and other costs and could lead to a greater risk of class action lawsuits and other litigation.

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.

Certain state securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and regulations.

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 the newly proposed DOL Rule and Regulation BI.

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

Future laws and regulations, including the new rule proposed by the DOL and state rules relating to the standards of conduct applicable to both retirement and non-retirement accounts, may affect our business in ways that cannot be anticipated or planned for, and may have negative impacts on our products, services and results of operations.

Amortization of other intangibles 79.3 67.4

Loss on extinguishment of debt 24.4 —

Total G&A 1,493.9 1,194.4

Promotional (ongoing) (17)

Acquisition costs (17)

Employee share-based compensation 41.8 31.6

Regulatory charges 29.4 29.4

$ 1,058.2 $ 925.1

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(†) Totals may not foot due to rounding.

(16) M&A accretion is an adjustment to reflect the annualized expected run rate EBITDA of an acquisition as permitted by the Credit Agreement for up to eight fiscal quarters following the close of the transaction.

(17) Acquisition costs include the cost to setup, onboard and integrate acquired entities and primarily include $36.4 million of compensation and benefits expense, $18.7 million of professional services expense, $14.3 million of promotional expense, and other expenses that were incurred during the year ended December 31, 2021 that are included in the respective line items in the consolidated statements of income.

Acquisitions, Integrations and Divestitures

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These activities are part of our overall growth strategy but can distort comparability when reviewing revenue and expense trends for periods presented.

Our recent acquisitions are as follows:

Our recent acquisitions include the following:

• Waddell & Reed Financial, Inc.

(“Waddell & Reed”) - In December 2020, we entered into an agreement with Macquarie Management Holdings, Inc.

(“Macquarie”) to acquire the wealth management business of Waddell & Reed upon completion of Macquarie’s acquisition of all of the issued and outstanding common shares of Waddell & Reed.

The transaction is expected to close in the middle of 2021, subject to satisfaction of closing conditions.

• Blaze Portfolio Systems LLC (“Blaze”) - In October 2020, we acquired Blaze, a technology company that provides an advisor-facing trading and portfolio rebalancing platform.

Riley Investments, LLC (“E.K.

Riley”) - In August 2020, we acquired business relationships with advisors from E.K.

Riley, a broker-dealer and registered investment adviser (“RIA”).

• Lucia Securities, LLC (“Lucia”) - In August 2020, we acquired business relationships with advisors from Lucia, a broker-dealer and RIA firm.

• Allen & Company of Florida, LLC (“Allen & Company”) - In August 2019, we acquired Allen & Company, an RIA.

Allen & Company advisors and staff became employees of the Company.

• AdvisoryWorld - In December 2018, we acquired AdvisoryWorld, a technology company that provides proposal generation, investment analytics and portfolio modeling capabilities in the wealth management industry.

- In April 2021, we acquired the wealth management business of Waddell & Reed Financial, Inc.

• Blaze Portfolio Systems LLC - In October 2020, we acquired Blaze, a technology company that provides an advisor-facing trading and portfolio rebalancing platform.

Riley Investments, LLC - In August 2020, we acquired business relationships with advisors from E.K.

Riley, a broker-dealer and RIA.

• Lucia Securities, LLC - In August 2020, we acquired business relationships with advisors from Lucia, a broker-dealer and RIA.

See Note 4 - Acquisitions , within the notes to the consolidated financial statements for further detail.

Economic Overview and Impact of Financial Market Events

Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the U.S.

financial markets.

Global economic conditions in the fourth quarter of 2020 continued to be dominated by the COVID-19 pandemic and the economic impact of containment efforts.

Significant mitigation efforts through supportive central bank policy (monetary stimulus) and government spending (fiscal stimulus) have helped the global and U.S.

economies take meaningful steps toward recovery, but the results have been uneven and uncertainty remains elevated in the near term.

The fall / winter surge in cases slowed fourth quarter growth after a strong rebound in the U.S.

economy in the third quarter, but the start of vaccine distribution increases the prospects of a more durable recovery emerging by the middle of 2021.

According to the most recent estimate by the U.S.

Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the United States financial markets.

According to the most recent estimate from the U.S.

Bureau of Economic Analysis, the U.S.

economy contracted an annualized 31.4% in the second quarter of 2020, extending the recession that began in the first quarter, but then rebounded strongly, growing at an annualized 33.4% in the third quarter of 2020.

Data received during the fourth quarter of 2020 suggests that the U.S.

economy continued to expand, but at a much slower rate.

Despite growth slowing, there are continued signs of progress.

The unemployment rate, which had spiked to 14.8% in April 2020, has declined steadily to 6.7% in December 2020.

Consumer spending on goods has rebounded sharply, although spending on the services industries most impacted by COVID-19 remains depressed.

Business investment has continued to rebound and industrial production has strengthened but remains below pre-pandemic levels.

The Federal Reserve’s (“Fed”) most recent median gross domestic product projections, released following its December 15-16, 2020 policy meeting, saw the economy contracting 2.4% for all of 2020, a meaningful improvement from its September projection of a 3.7% contraction, followed by 4.2% growth in 2021.

Equity markets posted solid gains in the fourth quarter.

The S&P 500 Index returned 12.2% for the quarter, bringing the full-year return to 18.4%.

Small cap stocks had a particularly strong quarter, as the Russell 2000 Index returned 31.4%.

stocks outperformed their U.S.

counterparts in the fourth quarter, led by emerging markets’ 19.8% return compared to 16.1% for developed international equities, based on the MSCI EM and MSCI EAFE Indexes.

The Bloomberg Barclays U.S.

Aggregate Bond Index returned 0.7% during the quarter, with rising interest rates weighing on returns but narrowing credit spreads helping corporate bonds.

The 10-year Treasury yield rose 0.24% over the fourth quarter, to end the quarter at 0.93%.

Nevertheless, 2020 was a solid year for bonds overall, with the U.S.

Aggregate Bond Index climbing 7.5%.

More economically sensitive bonds were rewarded in the fourth quarter, with the Bloomberg Barclays U.S.

High Yield Index climbing 6.5%.

Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy.

During the fourth quarter, Fed policymakers maintained the target range for the federal funds rate at 0.0 to 0.25%.

According to projection materials released following the conclusion of the December 15-16, 2020 policy meeting, the median expectation among meeting participants was that the Fed will not begin raising rates until after 2023, although one participant projected the Fed raising rates as early as 2022 and several in 2023.

The Fed also enhanced guidance on how long it would continue its bond purchase program at current levels, highlighting the need for “substantial further progress” toward inflation and unemployment goals.

The updated language signaled extended potential support for the economy.

economy grew at an annualized pace of 6.9% in the fourth quarter of 2021 after growing at an annualized pace of 2.3% in the third quarter of 2021.

The equity markets were generally strong in 2021 with the S&P 500 and Russell 2000 and 3000 indices gaining year over year.

stocks continued to trail their U.S.

counterparts and rising interest rates made it a challenging year for fixed income markets, contributing to a near flat return for the Bloomberg U.S.

Aggregate Bond Index for the fourth quarter and a 1.6% loss for the year.

Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Federal Reserve (“Fed”) policy.

At the January 2022 policy meeting, Fed policymakers maintained the target range for the federal funds rate at 0% to 0.25%.

Fed officials also signaled they would make a decision on whether to raise the federal funds rate at the March 2022 meeting and announced an intent to end net asset purchases in early March.

Please consult the “Risks Related to Our Business and Industry” section within Part I , “Item 1A.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 23, 2021.

The following discussion presents an analysis of our results of operations for the years ended December 31, 2020 and 2019.

The following discussion presents an analysis of our results of operations for the years ended December 31, 2021 and 2020 (in thousands):

Years Ended December 31,

(Dollars in thousands) 2020 2019 % Change

2021 2020 % Change

Advisory $ 3,525,430 $ 2,327,519 51.5 %

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Asset-based 1,148,067 1,044,517 9.9 %

Transaction and fee 506,071 480,328 5.4 %

Interest income, net of interest expense 29,412 46,508 (36.8) %

Service and fee 411,761 357,722 15.1 %

Transaction 156,336 148,349 5.4 %

Interest income 28,577 29,412 (2.8) %

Other 71,976 57,561 25.0 %

Total net revenues

Total revenue

7,720,830 5,871,640 31.5 %

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Promotional 302,285 208,250 45.2 %

Depreciation and amortization 109,732 95,779 14.6 %

Amortization of intangible assets 67,358 65,334 3.1 %

Occupancy and equipment 185,531 166,389 11.5 %

Professional services 57,067 73,887 (22.8) %

Depreciation and amortization 151,428 109,732 38.0 %

Interest expense on borrowings 104,414 105,765 (1.3) %

Brokerage, clearing and exchange 86,023 71,185 20.8 %

Amortization of other intangibles 79,260 67,358 17.7 %

Professional services 73,231 57,067 28.3 %

Communications and data processing 60,296 52,399 15.1 %

Loss on extinguishment of debt 24,400 — 100.0 %

Other 131,540 101,018 30.2 %

Total operating expenses

Total expense

7,119,501 5,245,567 35.7 %

Non-operating interest expense and other 105,765 130,001 (18.6) %

Loss on extinguishment of debt — 3,156 100.0 %

INCOME BEFORE PROVISION FOR INCOME TAXES

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$ 459,866 $ 472,640 (2.7) %

Advisory revenues primarily represent fees charged to clients of our advisors for the use of our corporate RIA advisory platform, and are based on the value of their advisory assets.

Advisory fees are billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter.

Advisory revenue represents fees charged to advisors’ clients’ advisory accounts on our corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts.

We provide ongoing investment advice and act as a custodian, providing brokerage and execution services on transactions, and perform administrative services for these accounts.

Advisory fees are primarily billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter.

The performance obligation for advisory fees is considered a series of distinct services that are substantially the same and are satisfied daily.

As the value of the eligible assets in an advisory account is susceptible to changes due to customer activity, this revenue includes variable consideration and is constrained until the date that the fees are determinable.

The majority of our client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter.

The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three-month period.

Advisory revenues collected on our corporate advisory platform are proposed by the advisor and agreed to by the client and averaged 1.0% of the underlying assets for the year ended December 31, 2020.

We also support separate investment adviser firms (“Hybrid RIAs”), through our hybrid advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access to the capabilities of our investment platforms.

The value of the eligible assets in an advisory account on the billing date is adjusted for estimates of contributions and withdrawals to determine the amount billed, and accordingly, the revenue earned in the following three-month period.

Advisory revenue collected on our corporate advisory platform is proposed by the advisor and agreed to by the client and averaged 1% of the underlying assets for the year ended December 31, 2021.

We also support Hybrid RIAs through our hybrid advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access to the capabilities of our investment platforms.

The assets held under a Hybrid RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets.

The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues.

We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services, which are included in our transaction and fee revenues in our consolidated statements of income.

The administrative fees collected on our hybrid advisory platform vary and can reach a maximum of 0.2% of the underlying assets as of December 31, 2020.

The following table summarizes the composition of advisory assets for the periods presented (dollars in billions):

The advisory revenue generated by a Hybrid RIA is not included in our advisory revenue.

We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services, which may vary and are included in our service and fee revenue in our consolidated statements of income.

Advisory revenue is generated from advisory assets.

The following table summarizes the composition of advisory assets for the periods presented (in billions):

2021 2020 $ Change % Change

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$ 429.6 $ 291.9 $ 137.7 47.2 %

Hybrid platform advisory assets

169.3 137.5 31.8 23.1 %

RIA platform advisory assets 213.6 169.3 44.3 26.2 %

Total advisory assets

$ 643.2 $ 461.2 $ 182.0 39.5 %

Net new advisory assets in a particular quarter drive advisory revenues in future quarters, due to billing quarterly in advance.

Therefore, the full impact of net new advisory assets to advisory revenues is not realized in the same period.

The following table summarizes activity in advisory assets for the periods presented (in billions):

Net new advisory assets are generated throughout the quarter, therefore, the full impact of net new advisory assets to advisory revenue is not realized in the same period.

The following table summarizes activity impacting advisory assets for the periods presented (in billions):

Years Ended December 31,

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____________________

(1) Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees.

We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.

Previously reported figures for net new advisory assets did not include dividends and interest or subtract advisory fees.

The figure previously reported for the year ended December 31, 2019 was an inflow of $30.0 billion.

(1) Net new advisory assets consist of total client deposits into custodied advisory accounts less total client withdrawals from advisory accounts, plus dividends, plus interest, minus advisory fees.

We consider conversions from and to advisory accounts as deposits and withdrawals, respectively.

(2) Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.

The growth in advisory revenues from 2019 to 2020 was due to net new advisory assets resulting from the acquisitions and our recruiting efforts and strong advisor productivity, as well as market gains as represented by higher levels of the S&P 500 Index.

We generate two types of commission revenues:

sales-based commissions and trailing commissions.

Sales-based commission revenues, which occur when clients trade securities or purchase various types of investment products, primarily represent gross commissions generated by our advisors.

The levels of sales-based commission revenues can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors’ clients.

Trailing commission revenues, which are paid over time, are recurring in nature and are earned based on the market value of investment holdings in trail-eligible

We earn trailing commission revenues primarily on mutual funds and variable annuities held by clients of our advisors.

See Note 3 - Revenues, within the notes to the consolidated financial statements for further detail regarding our commission revenues by product category.

The following table sets forth our commission revenues included in our consolidated statements of income (dollars in thousands):

The growth in advisory revenue from 2020 to 2021 was due to increases in net new advisory assets resulting from our recruiting efforts, advisor productivity and acquisitions, as well as market gains as represented by higher levels of the S&P 500 Index.

We generate two types of commission revenue:

(1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions that are recognized over time as earned and are generally based on the

market value of investment holdings in trail-eligible assets.

Sales-based commission revenue, which occurs when clients trade securities or purchase various types of investment products, primarily represents gross commissions generated by our advisors and can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors’ clients.

We earn trailing commission revenue primarily on mutual funds and variable annuities held by clients of our advisors.

See Note 3 - Revenue, within the notes to the consolidated financial statements for further detail regarding our commission revenue by product category.

The following table sets forth the components of our commission revenue (dollars in thousands):

Years Ended December 31,

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1,404,628 1,135,796 268,832 23.7 %

Total commission revenues

Total commission revenue

$ 2,378,683 $ 1,906,560 $ 472,123 24.8 %

The decrease in sales-based commission revenues in 2020 compared to 2019 was primarily driven by the low interest rate environment impacted by the COVID-19 pandemic, which led to a decrease in sales of annuities, partially offset by an increase in sales of equities.

The increase in trailing commission revenues in 2020 compared to 2019 was primarily due to the increase in value of annuities as a result of the market increases during the second half of the year, partially offset by the decline in value of other trail eligible assets as a result of the market downturn during the first quarter of 2020.

The following table summarizes activity in brokerage assets for the periods presented (in billions):

The increase in sales-based commission revenue in 2021 compared to 2020 was primarily driven by increases in sales of annuities, mutual funds and fixed income products.

The increase in trailing commission revenue in 2021 compared to 2020 was primarily due to the increase in value of annuities and mutual funds as a result of market increases.

Commission revenue is generated from brokerage assets.

The following table summarizes activity impacting brokerage assets for the periods presented (in billions):

Years Ended December 31,

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(1) Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest.

We consider conversions from and to advisory accounts as deposits and withdrawals, respectively.

Previously reported figures for net new brokerage assets did not include dividends and interest or subtract advisory fees.

The figure previously reported for the year ended December 31, 2019 was an outflow of $3.4 billion.

(1) Net new brokerage assets consist of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest.

We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively.

We are uncertain, as of the date of this Annual Report on Form 10-K, of the effect of the COVID-19 pandemic on our future commission revenues.

We cannot predict how the ongoing COVID-19 pandemic and foreign and domestic responses to it will impact our future sales-based or trailing commission revenues.

While domestic equity markets have started to recover, COVID-19 cases remain widespread in the United States and many other parts of the world, and significant market disruptions and volatility remain possible.

Asset-based revenues consist of fees from omnibus processing and networking services (collectively referred to as “recordkeeping”), our sponsorship programs with financial product manufacturers and fees from our client cash programs.

Omnibus processing revenues are paid to us by mutual fund product sponsors and are based on the value of custodied assets in advisory accounts and the number of brokerage accounts in which the related mutual fund positions are held.

Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund and annuity product manufacturers.

We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training efforts.

Client cash-based revenues are generated on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs.

Pursuant to contractual arrangements, we receive fees based on account type and invested balances for administration and recordkeeping.

Asset-based revenues for the year ended December 31, 2020 decreased by $121.5 million compared to 2019, primarily due to decreased revenues from our client cash programs, partially offset by an increase in recordkeeping revenues and sponsorship programs.

Revenues for our recordkeeping and sponsorship programs for the year ended December 31, 2020, which are largely based on the market value of the underlying assets, increased compared to 2019 due to the impact of market appreciation on the value of the underlying assets.

Client cash revenues for the year ended December 31, 2020 decreased compared to 2019 due to the impact of a lower federal funds effective rate, partially offset by higher average client cash balances.

Asset-based revenue consists of fees from our client cash programs, fees from our sponsorship programs with financial product manufacturers, and fees from omnibus processing and networking services (collectively referred to as “recordkeeping”).

Client cash revenue is generated on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs.

We also receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales force education and training efforts.

Compensation for these performance obligations are either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or a combination.

Omnibus processing revenue is paid to us by mutual fund product sponsors or their affiliates and is based on the value of mutual fund assets in accounts for which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held.

Networking revenue on brokerage assets is correlated to the number of positions we administer and is paid to us by mutual fund product sponsors and annuity product manufacturers.

Asset-based revenue for the year ended December 31, 2021 increased by $103.6 million compared to 2020, primarily due to increases in revenue from recordkeeping and sponsorship programs, partially offset by a decrease in client cash revenue.

Revenue for our recordkeeping and sponsorship programs for the year ended December 31, 2021, which is largely based on the market value of the underlying assets, increased compared to 2020 due to organic growth in our assets under management and the impact of market appreciation on the value of the underlying assets.

Client cash revenue for the year ended December 31, 2021 decreased compared to 2020 due to the impact of a lower federal funds effective rate, partially offset by higher average client cash balances.

For the year ended December 31, 2021, our average client cash balances increased to $49.8 billion compared to $44.7 billion for the year ended December 31, 2020.

Transaction and Fee

Transaction revenues primarily include fees we charge to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts.

Fee revenues primarily include IRA custodian fees, contract and licensing fees and other client account fees.

In addition, we host certain advisor conferences that serve as training, education, sales and marketing events, for which we charge a fee for attendance.

Transaction and fee revenues for the year ended December 31, 2020 increased by $25.7 million compared to 2019, primarily due to increased transaction volume in response to the market volatility caused by the COVID-19 pandemic, partially offset by a decrease in conference service revenues as a result of advisor-related conferences being cancelled or held in a virtual format in 2020 in response to the COVID-19 pandemic.

Interest Income, Net of Interest Expense

We earn interest income from client margin loans and cash equivalents, net of interest expense.

Period-over-period variances correspond to changes in the average balances of margin loans and cash equivalents as well as changes in interest rates.

Interest income, net of interest expense for the year ended December 31, 2020 decreased by $17.1 million compared to 2019, primarily due to lower average interest rates.

Other revenues primarily include mark-to-market gains or losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies and other miscellaneous revenues.

Other revenues for the year ended December 31, 2020 increased by $0.8 million compared to 2019, primarily due to realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan, partially offset by decreases in dividend income on assets held in our advisor non-qualified deferred compensation plan.

Service and Fee

Service and fee revenue is generated from advisor and retail investor services, including technology, insurance, conferences, licensing, Business Solutions, IRA custodian, and other client account fees.

We charge separate fees to RIAs for technology, clearing, administrative, oversight and custody services, which may vary.

We host certain advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee.

Service and fee revenue for the year ended December 31, 2021 increased by $54.0 million compared to 2020, primarily due to increases in contract and licensing fees, Business Solutions subscription fees, IRA custodian fees, conference fees, and other client account fees.

Transaction revenue includes transaction charges generated in both advisory and brokerage accounts from products including mutual funds, ETFs, and fixed income products.

Transaction revenue for the year ended December 31, 2021 increased by $8.0 million compared to 2020, primarily due to increased transaction volume related to fixed income trading.

Other revenue primarily includes unrealized gains and losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios and other miscellaneous revenue, which is not generated from contracts with customers.

Other revenue for the year ended December 31, 2021 increased by $14.4 million compared to 2020, primarily due to increases in realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which assets are based on the market performance of the underlying investment allocations chosen by advisors in the plan, partially offset by a decrease in dividend income on assets held in our advisor non-qualified deferred compensation plan.

Advisory and Commission

Advisory and commission expenses consist of the following:

base payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission revenues earned on each client’s account;

production based bonuses earned by advisors and institutions based on the levels of advisory and commission revenues they produce;

Advisory and commission expense consists of the following:

payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission revenue earned on each client’s account;

production based bonuses earned by advisors and institutions based on the levels of advisory and commission revenue they produce;

the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at grant date;

and the deferred advisory and commissions fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.

The following table shows the components of our payout ratio, which is a statistical or operating measure:

and the deferred advisory and commission fee expense associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.

The following table sets forth our payout rate, which is a statistical or operating measure:

Years Ended December 31,

2021 2020 Change

Base payout rate (1)

82.22 % 83.05 % (83) bps

Production based bonuses 3.90 % 3.22 % 68 bps

Total payout ratio (2)

86.12 % 86.27 % (15) bps

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(1) Our base payout rate is calculated as advisory and commission expenses less production based bonuses and mark-to-market gains or losses on the non-qualified deferred compensation plan, divided by advisory and commission revenues.

(2) Totals may not foot due to rounding.

Our total payout ratio decreased slightly for the year ended December 31, 2020 compared to 2019, primarily due to a decrease in base payout rate, which was driven by increases in the sale of equities and a shift from brokerage to advisory business, each of which results in lower payouts, partially offset by an increase in production based bonuses, which was driven by broader price reductions on our corporate advisory platform.

Payout rate 86.74 % 86.12 % 62 bps

Our payout rate increased slightly for the year ended December 31, 2021 compared to 2020, primarily due to higher production bonus payouts and the impact of onboarding large financial institutions.

Compensation and Benefits

Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary employees and contractors.

Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary workers and contractors.

The following table sets forth our average number of employees for the year ended December 31, 2021 as compared to 2020:

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Compensation and benefits for the year ended December 31, 2021 increased by $131.7 million compared to 2020, primarily due to an increase in salary and employee benefit expenses resulting from an increase in headcount.

Promotional expenses include business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events and other costs that support advisor business growth.

For the year ended December 31, 2020 promotional expenses increased by $2.7 million compared to 2019, primarily due to an increase in costs associated with advisor loans, which are driven by larger recruitment and retention, partially offset by a decrease in advisor conference expenses due to conferences being cancelled or held in a virtual format in 2020 in response to the COVID-19 pandemic.

Depreciation and Amortization

Depreciation and amortization relates to the use of fixed assets, which include internally developed software, hardware, leasehold improvements and other equipment.

Depreciation and amortization for the year ended December 31, 2020 increased by $14.0 million compared to 2019, primarily due to an increase in internally developed software.

Amortization of Intangible Assets

Amortization of intangible assets relates to intangible assets established through our acquisitions.

Amortization of intangible assets for the year ended December 31, 2020 remained relatively flat compared to 2019.

Promotional expense includes business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events and other costs that support advisor business growth.

For the year ended December 31, 2021 promotional expense increased by $94.0 million compared to 2020, primarily due to increases in recruited assets and advisors that led to higher costs to support transition assistance and retention, as well as increases in conference spend as we returned to in-person events.

Occupancy and Equipment

Occupancy and equipment expenses include the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment.

For the year ended December 31, 2020 occupancy and equipment expenses increased by $30.2 million compared to 2019, primarily due to an increase in costs related to software licensing fees in support of our service and technology investments.

Professional Services

Professional services expenses include costs paid to outside firms for assistance with legal, accounting, technology, regulatory, marketing and general corporate matters, as well as non-capitalized costs related to service and technology enhancements.

Professional services expenses for the year ended December 31, 2020 decreased by $16.8 million compared to 2019, primarily due to the Company temporarily bringing certain services in-house as a result of the COVID-19 pandemic.

Brokerage, Clearing and Exchange Fees

Occupancy and equipment expense includes the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment.

Occupancy and equipment expense for the year ended December 31, 2021 increased by $19.1 million compared to 2020, primarily due to increases in expenses related to software licenses and our technology portfolio.

Depreciation and Amortization

Depreciation and amortization relates to the use of property and equipment, which includes internally developed software, hardware, leasehold improvements and other equipment.

Depreciation and amortization for the year ended December 31, 2021 increased by $41.7 million compared to 2020, primarily due to our continued investment in technology to support the integration of Waddell & Reed, enhance our advisor platform and end-client experience and support large financial institution onboarding.

Brokerage, Clearing and Exchange

Brokerage, clearing and exchange fees include expenses originating from trading or clearing operations as well as any exchange membership fees.

These fees fluctuate largely in line with the volume of sales and trading activity.

Brokerage, clearing and exchange fees increased by $6.7 million for the year ended December 31, 2020 compared to 2019, primarily due to an increase in the volume of sales and trading activity.

Brokerage, clearing and exchange fees increased by $14.8 million f or the year ended December 31, 2021 compared to 2020, primarily due to an increase in the volume of sales and trading activity.

Amortization of Other Intangibles

Amortization of other intangibles represents the benefits received for the use of long-lived intangible assets established through our acquisitions.

Amortization of other intangibles for the year ended December 31, 2021 increased by $11.9 million compared to 2020, primarily due to increases in intangible assets resulting from the Waddell & Reed Acquisition on April 30, 2021, as well as amortization related to an acquisition during the fourth quarter of 2020.

See Note 4 - Acquisitions and Note 9 - Goodwill and Other Intangibles, Net for additional information.

Professional Services

Professional services expense includes costs paid to outside firms for assistance with legal, accounting, technology, regulatory, and general corporate matters, as well as non-capitalized costs related to service and technology enhancements.

Professional services expense for the year ended December 31, 2021 increased by $16.2 million compared to 2020, primarily due to increases in non-capitalized costs related to the use of consultants.

Communications and Data Processing

Communications and data processing expenses consist primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges and markets as well as customer statement processing and postage costs.

Communications and data processing expenses remained relatively flat for the year ended December 31, 2020 compared to 2019.

Other expenses include the costs of the investigation, settlement and resolution of regulatory matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulator fees, travel-related expenses and other miscellaneous expenses.

Other expenses will depend in part on the size and timing of resolving regulatory matters and the availability of self-insurance coverage, which depends in part on the amount and timing of resolving historical claims.

There are particular uncertainties and complexities involved when assessing the potential costs and timing of regulatory matters, including the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary.

Other expenses for the year ended December 31, 2020 decreased by $13.5 million compared to 2019, primarily due to a decrease in travel expenses as a result of the COVID-19 pandemic and lower costs associated with the investigation of regulatory matters.

Non-Operating Interest Expense and Other

Non-operating interest expense and other represents expenses from our senior secured credit facilities, senior unsecured notes, finance leases and other non-operating expenses.

Non-operating interest expense and other for the year ended December 31, 2020 decreased by $24.2 million compared to 2019, primarily due to a lower outstanding principal balance and a lower interest rate on our senior secured term loan, partially offset by the issuance of additional senior unsecured notes in 2019.

Communications and data processing expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges and markets, as well as customer statement processing and postage costs.

Communications and data processing expenses for the year ended December 31, 2021 increased by $7.9 million compared to 2020, primarily due to increases in costs associated with client statement production due to growth in our advisors, which led to an increase in the customer base.

Loss on Extinguishment of Debt

On November 12, 2019, we closed a refinancing transaction and accelerated the recognition of $3.2 million of unamortized debt issuance costs as a loss on extinguishment of debt.

There were no refinancing transactions during the year ended 2020.

On March 15, 2021, we issued the 2029 Senior Notes and redeemed the 2025 Senior Notes.

In connection with these transactions, we incurred a $24.4 million loss on extinguishment of debt for the year ended December 31, 2021.

Other Expense

Other expense includes the costs of the investigation, settlement and resolution of regulatory matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulator fees, travel-related expenses and other miscellaneous expenses.

Other expense will depend in part on the size and timing of resolving regulatory matters and the availability of self-insurance coverage, which depends in part on the amount and timing of resolving historical claims.

Other expense for the year ended December 31, 2021 increased by $30.5 million compared to 2020 primarily due to costs related to Waddell & Reed transitional support and an increase in licensing fees.

Provision for Income Taxes

Our effective income tax rate remained consistent at 24.5% for the year ended December 31, 2020 and 2019.

Our effective income tax rate was 23.5% and 24.5% for the years ended December 31, 2021 and 2020.

The decrease in our effective tax rate for the year ended December 31, 2021 was primarily due to an increased benefit from share-based compensation recognized during the year.

COVID-19 Impact

On March 11, 2020, the World Health Organization designated the spread of the COVID-19 as a pandemic.

On March 11, 2020, the World Health Organization designated the spread of COVID-19 as a pandemic.

As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations.

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Please consult the “Risks Related to our Business and Industry” section within Part I, “Item 1A.

Risk Factors” for more information about the risks associated with the COVID-19 pandemic.

Risk Factors” for more information about the risks associated with COVID-19.

Liquidity and Capital Resources

Senior management establishes our liquidity and capital policies.

These policies include senior management’s review of short- and long-term cash flow forecasts, review of capital expenditures and daily monitoring of liquidity for our subsidiaries.

Decisions on the allocation of capital are based upon, among other things, projected profitability and cash flow, risks of the business, regulatory capital requirements and future liquidity needs for strategic activities.

Our Treasury department assists in evaluating, monitoring and controlling the business activities that impact our financial condition, liquidity and capital structure.

The objectives of these policies are to support our corporate business strategies while ensuring ongoing and sufficient liquidity.

A summary of changes in cash flow data is provided as follows (in thousands):

Years Ended December 31,

Net cash flows provided by (used in):

Operating activities $ 789,941 $ 623,871

Investing activities (187,499) (180,987)

Financing activities (275,186) (533,225)

Net increase (decrease) in cash, cash equivalents and restricted cash

327,256 (90,341)

Cash, cash equivalents and restricted cash — beginning of year 1,471,778 1,562,119

Cash, cash equivalents and restricted cash — end of year $ 1,799,034 $ 1,471,778

We have established liquidity and capital policies intended to support the execution of strategic initiatives, while meeting regulatory capital requirements and maintaining ongoing and sufficient liquidity.

We believe liquidity is of critical importance to the Company and, in particular, to LPL Financial, our primary broker-dealer subsidiary.

The objective of our policies is to ensure that we can meet our strategic, operational and regulatory liquidity and capital requirements under both normal operating conditions and under periods of stress in the financial markets.

Our liquidity needs are primarily driven by capital requirements at LPL Financial, interest due on our corporate debt and other capital returns to shareholders.

Our liquidity needs at LPL Financial are driven primarily by the level and volatility of our client activity.

Management maintains a set of liquidity sources and monitors certain business trends and market metrics closely in an effort to ensure we have sufficient liquidity.

We believe that based on current levels of cash flows from operations and anticipated growth, together with available external liquidity sources, we have adequate liquidity to satisfy our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future.

Parent Company Liquidity

LPL Holdings, Inc.

(“Parent”), the direct holding company of our operating subsidiaries, considers its primary source of liquidity to be corporate cash.

We define corporate cash as the sum of cash and equivalents from the following:

(1) cash held at the Parent, (2) excess cash at LPL Financial per the Credit Agreement, which is the net capital held at LPL Financial in excess of 10% of its aggregate debits, or five times the net capital required in accordance with Exchange Act Rule 15c3-1, and (3) other available cash, which includes cash and equivalents held at PTC, in excess of Credit Agreement capital requirements, and cash and equivalents held at non-regulated subsidiaries.

We believe corporate cash is a useful measure of the Parent’s liquidity.

The following table presents the components of corporate cash (in thousands):

Corporate Cash December 31, 2021 December 31, 2020

Cash at Parent $ 202,407 $ 201,385

Excess cash at LPL Financial per Credit Agreement 15,903 67,574

Other available cash 18,677 10,960

Total Corporate Cash $ 236,987 $ 279,919

Corporate cash is monitored as part of our liquidity risk management.

We target maintaining $200.0 million in corporate cash, which covers approximately 24 months of principal and interest due on our corporate debt.

The Company maintains additional liquidity through a $1.0 billion secured committed revolving credit facility.

The Parent has the ability to borrow against the credit facility for working capital and general corporate purposes.

Dividends from and excess capital generated by LPL Financial are the primary sources of liquidity.

Subject to regulatory approval or notification, capital generated by LPL Financial can be distributed to the Parent to the extent the capital levels exceed both regulatory requirements and internal capital thresholds.

As of December 31, 2021, LPL Financial maintained excess regulatory capital of $15.9 million over Credit Agreement requirements.

During the twelve months ended December 31, 2021 and 2020, LPL Financial paid dividends of $465.0 million and $635.0 million to the Parent, respectively.

Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing.

Net cash flows provided by operating activities includes net income and adjustments for non-cash expenses;

changes in operating assets and liabilities, including balances related to the settlement and funding of client transactions;

receivables from product sponsors;

and accrued advisory and commission expenses due to our advisors.

In addition to net income, operating assets and liabilities that arise from the settlement and funding of transactions by our advisors’ clients are the principal cause of changes to our net cash from operating activities and can fluctuate significantly from day to day and period to period depending on overall trends and clients’ behaviors.

The increase in cash flows provided by operating activities for 2020 compared to 2019 was primarily due to increases in inflows to receivables from and payables to clients, partially offset by a decrease in net income.

The increase in cash flows used in investing activities for 2020 compared to 2019 was primarily attributable to increases in acquisition costs and purchases of held-to-maturity securities.

The decrease in cash flows used in financing activities for 2020 compared to 2019 was primarily attributable to the suspension of repurchases of our common stock, partially offset by repayments of our revolving line of credit.

We actively monitor changes to our liquidity needs caused by general business volumes and price volatility, including higher margin requirements of clearing corporations and exchanges, and stress scenarios involving a sustained market downturn and the persistence of current interest rates, which include the impacts of the COVID-19 pandemic.

We believe that based on current levels of operations and anticipated growth, our cash flow from operations, together with other available sources of funds, which include six uncommitted lines of credit, the revolving credit facility established through our senior secured credit agreement (the “Credit Agreement”) and the committed revolving credit facility of LPL Financial, will provide us with adequate liquidity to satisfy our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future.

The following table presents our external lines of credit at December 31, 2020 (dollars in millions):

Description Borrower Maturity Date Outstanding Available

We believe that based on current levels of operations and anticipated growth, our cash flow from operations, together with other available sources of funds, which include six uncommitted lines of credit, the revolving credit facility established through our Credit Agreement and the committed revolving credit facility of LPL Financial, will provide us with adequate liquidity to satisfy our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future.

We regularly evaluate our existing indebtedness, including potential refinancing opportunities, based on a number of factors, including our capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms and general market conditions.

The earliest principal maturity date for our corporate debt is in 2026 and our revolving credit facilities mature between 2022 and 2026, which makes us less dependent on capital markets in the near-term.

Share Repurchases

We engage in share repurchase programs, which are approved by our Board of Directors, pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time.

Purchases may be effected in open market or privately negotiated transactions.

Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate, and returning excess capital to shareholders.

In the first half of 2021, the majority of our capital deployment was focused on supporting organic growth and acquisitions.

While we continue to see opportunities to deploy capital in this manner, we resumed share repurchases in the third quarter of 2021 with the initial focus on an amount to offset dilution.

We repurchased $90.0 million, representing 579,771 shares, during the year ended December 31, 2021.

The timing and amount of share repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, the Indentures, applicable laws and consideration of our general liquidity needs.

See Note 15 - Stockholders’ Equity , within the notes to the consolidated financial statements for additional information regarding our share repurchases.

Common Stock Dividends

The payment, timing and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under our Credit Agreement and the Indentures.

See Note 15 - Stockholders’ Equity , within the notes to the consolidated financial statements for additional information regarding our dividends.

LPL Financial Liquidity

LPL Financial relies primarily on client payables to fund margin lending.

LPL Financial maintains additional liquidity through external lines of credit totaling $575.0 million at December 31, 2021.

LPL Financial also maintains a line of credit with the Parent.

External Liquidity Sources

The following table presents amounts outstanding and available under our external lines of credit at December 31, 2021 (in millions):

Description Borrower Maturity Date Outstanding (1)

Senior secured, revolving credit facility LPL Holdings, Inc.

November 2024 $ — $ 750

March 2026 $ 55 $ 945

Broker-dealer revolving credit facility LPL Financial LLC July 2024 $ — $ 300

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Secured, uncommitted lines of credit LPL Financial LLC None $ — unspecified

The earliest principal maturity date for our long-term borrowings is 2025 and our revolving credit facilities mature in 2024, which makes us less dependent on capital markets in the near-term.

We have certain capital adequacy requirements related to our registered broker-dealer subsidiary and bank trust subsidiary.

As of December 31, 2020, we were in compliance with all such requirements.

Share Repurchases

We engage in share repurchase programs, which are approved by our board of directors (the “Board of Directors”), pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time.

Purchases may be effected in open market or privately negotiated transactions.

We suspended share repurchases in early 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic.

The resumption, timing and amount of future share repurchases, if any, will be determined at our discretion within the constraints of our Credit Agreement, the indentures governing our senior unsecured notes (the “Indentures”) and consideration of our general liquidity needs.

See Note 15 - Stockholders’ Equity , within the notes to the consolidated financial statements for additional information regarding our share repurchases.

The payment, timing and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under our Credit Agreement and the Indentures.

See Note 15 - Stockholders’ Equity , within the notes to the consolidated financial statements for additional information regarding our dividends.

Operating Capital Requirements

(1) Outstanding balances were repaid in January 2022.

Capital Resources

The Company seeks to manage capital levels in support of its business strategy of generating and effectively deploying capital for the benefit of our shareholders.

Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds we are required to maintain for regulatory capital and reserves based on the requirements of our regulators and clearing organizations, which also consider client balances and trading activities.

We have several sources of funds that enable us to meet increases in working capital requirements that relate to increases in client margin activities and balances.

These sources include cash and cash equivalents on hand, cash segregated under federal and other regulations, the committed revolving credit facility of LPL Financial and proceeds from repledging or selling client securities in margin accounts.

These sources include cash and equivalents on hand, cash segregated under federal or other regulations, the committed revolving credit facility of LPL Financial and proceeds from repledging or selling client securities in margin accounts.

When an advisor’s client purchases securities on margin or uses securities as collateral to borrow from us on margin, we are permitted, pursuant to the applicable securities industry regulations, to repledge, loan or sell securities, up to 140% of the client’s margin loan balance, that collateralize those margin accounts.

Our other working capital needs are primarily related to advisor loans and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.

Our other working capital needs are primarily related to loans we are making to advisors and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.

We may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets.

These timing differences are funded either with internally generated cash flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or under one of our revolving credit facilities.

LPL Financial is subject to the Securities and Exchange Commission’s (“SEC”) Uniform Net Capital Rule, which requires the maintenance of minimum net capital.

LPL Financial computes net capital requirements under the

alternative method, which requires firms to maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions.

These timing differences are funded either with internally generated cash flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or one of our revolving credit facilities.

LPL Financial is subject to the SEC’s Uniform Net Capital Rule, which requires the maintenance of minimum net capital.

LPL Financial computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions.

At December 31, 2021, LPL Financial had net capital of $87.5 million with a minimum net capital requirement of $14.3 million.

LPL Financial’s ability to pay dividends greater than 10% of its excess net capital during any 35-day rolling period requires approval from the Financial Industry Regulatory Authority (“FINRA”).

LPL Financial’s ability to pay dividends greater than 10% of its excess net capital during any 35-day rolling period requires approval from FINRA.

In addition, payment of dividends is restricted if LPL Financial’s net capital would be less than 5% of aggregate customer debit balances.

LPL Financial also acts as an introducing broker for commodities and futures.

Accordingly, its trading activities are subject to the National Futures Association’s (“NFA”) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements.

Accordingly, its trading activities are subject to the NFA financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements.

The NFA was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities.

Currently, the highest NFA requirement is the minimum net capital calculated and required pursuant to the SEC’s Net Capital Rule.

Our subsidiary, The Private Trust Company, N.A.

(“PTC”), is also subject to various regulatory capital requirements.

In April 2021, the Company acquired a broker-dealer as part of the Waddell & Reed Acquisition (the “Waddell & Reed broker-dealer”).

The Waddell & Reed broker-dealer was required to maintain net capital of $250,000, which represents the greater of 2% of its aggregate debits or the minimum net capital requirement of $250,000.

In December 2021 the SEC and FINRA approved the Form BDW filed by the Waddell & Reed broker-dealer, which terminated its broker-dealer registration with FINRA, all other self-regulatory organizations, the SEC and all jurisdictions on such date.

Our subsidiary, PTC, is also subject to various regulatory capital requirements.

Failure to meet the respective minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.

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The financial covenants require the calculation of Credit Agreement EBITDA, as defined in, and calculated by management in accordance with, the Credit Agreement.

The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.

The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and is further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.

As of December 31, 2021, we were in compliance with both financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”.

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Interest Coverage (Minimum) 3.0 12.40

See Note 11 - Long-term and Other Borrowings , within the notes to the consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.

Off-Balance Sheet Arrangements

We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our advisors’ clients.

These arrangements include Company commitments to extend credit.

For information on these arrangements, see Note 14 - Commitments and Contingencies and Note 21 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk, within the notes to the consolidated financial statements.

See Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.

Contractual Obligations

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174,705 75,452 88,145 10,947 161

Long-term borrowings (4)

Corporate debt and other borrowings, net (4)

2,838,600 45,700 21,400 1,071,500 1,700,000

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(3) Includes future minimum payments under service, development and agency contracts, and other contractual obligations.

See Note 14 - Commitments and Contingencies , within the notes to the consolidated financial statements for further detail on obligations under noncancelable service contracts.

(4) Represents principal payments under our Credit Agreement.

See Note 11 - Long-term and Other Borrowings , within the notes to the consolidated financial statements for further detail.

See Note 14 - Commitments and Contingencies , within the notes to the consolidated financial statements for further detail on obligations under non-cancelable service contracts.

(4) Represents principal payments on our corporate debt and other borrowings.

The Company repaid $90.0 million in January 2022, which related to amounts outstanding under our external lines of credit at December 31, 2021.

See Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for further detail.

(5) Represents interest payments under our Credit Agreement, which include a variable interest payment for our senior secured credit facilities and a fixed interest payment for senior unsecured notes.

Variable interest payments assume the applicable interest rates at December 31, 2021 remain unchanged.

See Note 11 - Long-term and Other Borrowings , within the notes to the consolidated financial statements for further detail.

See Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for further detail.

(6) Represents commitment fees for unused borrowings on the revolving credit facility under our Credit Agreement.

See Note 11 - Long-term and Other Borrowings , within the notes to the consolidated financial statements for further detail.

As of December 31, 2020, we have a liability for unrecognized tax benefits of $54.4 million, which we have included in income taxes payable in the consolidated statements of financial condition.

See Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for further detail.

As of December 31, 2021, we have a liability for unrecognized tax benefits of $57.0 million, which we have included in other liabilities in the consolidated statements of financial condition.

This amount has been excluded from the contractual obligations table because we are unable to reasonably predict the ultimate amount or timing of future tax payments.

Fair Value of Financial Instruments

We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures.

See Note 5 - Fair Value Measurements, within the notes to the consolidated financial statements for a detailed discussion regarding our fair value measurements.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

We believe that of our critical accounting policies, the following are noteworthy because they require management to make estimates regarding matters that are uncertain and

susceptible to change where such change may result in a material adverse impact on our financial position and reported financial results.

We believe that of our critical accounting policies, the following are noteworthy because

they require management to make estimates regarding matters that are uncertain and susceptible to change where such change may result in a material adverse impact on our financial position and reported financial results.

Revenue Recognition

Revenues are recognized when control of the promised service is transferred to customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services.

Revenue is recognized when control of the promised service is transferred to customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those services.

Management exercises judgment to estimate revenue accruals.

In particular, our trailing commission revenues, included in commission revenues on the consolidated statements of income, are generally received in arrears and therefore require our management to estimate accrued amounts based on revenues received in prior periods, market performance and payment frequency of each product type or sponsor.

See Note 2 - Summary of Significant Accounting Policies and Note 3 - Revenues , within the notes to the consolidated financial statements for more details on our policies and disclosures related to revenues.

In particular, our trailing commission revenue, included in commission revenue on the consolidated statements of income, is generally received in arrears and therefore requires our management to estimate accrued amounts based on revenue received in prior periods, market performance and payment frequency of each product type or sponsor.

See Note 2 - Summary of Significant Accounting Policies and Note 3 - Revenue , within the notes to the consolidated financial statements for more details on our policies and disclosures related to revenue.

Commitments and Contingencies

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For additional information, see Note 2 - Summary of Significant Accounting Policies and Note 14 - Commitments and Contingencies - “Legal & Regulatory Matters,” within the notes to the consolidated financial statements.

Valuation of Goodwill and Other Intangible Assets

Valuation of Goodwill and Other Intangibles, Net

Goodwill is recognized as a result of business combinations and is measured as the excess of the purchase price over the fair value of the net assets acquired.

The valuation of goodwill and other intangible assets requires management to apply judgment and assumptions when estimating future earnings and performance.

The valuation of goodwill and other intangibles, net requires management to apply judgment and assumptions when estimating future earnings and performance.

Management also applies judgment when testing for impairment of goodwill and other indefinite-lived intangible assets, including estimating fair values.

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Definite-lived intangible assets are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount may not be recoverable.

For additional information on our policies and disclosures related to goodwill and other intangible assets, see Note 2 - Summary of Significant Accounting Policies and Note 9 - Goodwill and Other Intangible Assets , within the notes to the consolidated financial statements.

For additional information on our policies and disclosures related to goodwill and other intangibles, net, see Note 2 - Summary of Significant Accounting Policies and Note 9 - Goodwill and Other Intangibles, Net within the notes to the consolidated financial statements.

In preparing the consolidated financial statements, we estimate income tax expense based on various jurisdictions where we conduct business.

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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 7. Management’s Discussion and Analysis