What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-22 · 278 added, 228 removed, 398 unchanged (56% of the section changed)

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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 are a leader in the advisor-mediated marketplace as the nation’s largest independent broker-dealer, a leading investment advisory firm, and a top custodian.

We serve independent financial advisors and enterprises, providing them with the technology solutions, brokerage and advisory platforms, clearing services, compliance services, consultative practice management programs and training, business services and planning and advice services, and in-house research they need to run successful businesses.

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

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Business” for additional information related to our business activities.

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Our Sources of Revenue

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:

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

• Alternative Investments

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In return for these services, mutual funds, insurance companies, banks and other financial product sponsors pay us fees based on asset levels or number of accounts managed.

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

We also earn interest from margin loans made to our advisors’ clients, cash and equivalents segregated under federal or other regulations, advisor repayable loans and operating cash, which is included in Interest income, net in the consolidated statements of income.

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

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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.

Closed on the acquisition of Financial Resources Group Investment Services

On November 2, 2022, we entered into a definitive purchase agreement to acquire FRGIS, an independent branch office and broker-dealer supporting approximately 800 advisors and 85 financial institutions, serving approximately $40 billion of brokerage and advisory assets, for an initial payment of approximately $140 million with potential contingent payments over the three years following the closing .

The transaction closed on January 31, 2023.

The Board approved a $2 billion increase to the Company’s existing share repurchase authorization beginning in 2023

On September 21, 2022, the Board authorized a $2.1 billion increase to the amount available for repurchases of the Company’s issued and outstanding common shares, with $2.0 billion available for repurchases beginning in 2023.

As of December 31, 2022, the Company had $2.0 billion remaining under its existing share repurchase program.

Implemented client cash account (“CCA”) as primary sweep overflow vehicle

During the third quarter of 2022, the Company implemented CCA, its cash product held at LPL Financial, as the primary sweep overflow vehicle for funds in excess of capacity in its third-party sweep program.

The Company places sweep overflow that cannot be allocated to its insured cash account (“ICA”) product into the CCA.

These deposits are either used to fund client margin lending or placed in third-party bank or investment accounts, both of which are segregated under federal or other regulations, where they are held as cash or invested in short-term U.S.

treasury bills.

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Executive Summary

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Results for the year ended December 31, 2022 included net income of $845.7 million, or $10.40 per diluted share, which compares to $459.9 million, or $5.63 per diluted share, for the year ended December 31, 2021.

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 advisory and brokerage assets served were $1.1 trillion at December 31, 2022, compared to $1.2 trillion at December 31, 2021.

Total net new assets were $95.9 billion for the year ended December 31, 2022, compared to $190.0 billion for the same period in 2021.

Net new advisory assets were an inflow of $52.4 billion for the year ended December 31, 2022, compared to $123.5 billion in 2021.

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.

Advisory assets were $583.1 billion, or 52.5% of total advisory and brokerage assets served, at December 31, 2022, down 9% from $643.2 billion at December 31, 2021.

Net new brokerage assets were an inflow of $43.5 billion for the year ended December 31, 2022, compared to $66.6 billion in 2021.

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

Brokerage assets were $527.7 billion at December 31, 2022, down 6% from $563.2 billion at December 31, 2021.

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.

Gross profit, a non-GAAP financial measure, was $3.2 billion for the year ended December 31, 2022, an increase of 30% from $2.5 billion for the year ended December 31, 2021.

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.

During the year ended December 31, 2022, we paid stockholders cash dividends of $79.8 million and repurchased 1,566,527 of our outstanding shares for a total of $325.0 million.

The Company has increased its quarterly cash dividend by 20% to $0.30 per share beginning in the first quarter of 2023.

Key Performance Metrics

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Advisory assets $ 583.1 $ 643.2

$ 643.2 $ 461.2

Brokerage assets 527.7 563.2

Total Advisory and Brokerage Assets $ 1,110.8 $ 1,206.4

$ 1,206.4 $ 903.1

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

Advisory as a % of total Advisory and Brokerage Assets 52.5 % 53.3 %

Net New Assets (3)

Net new advisory assets $ 52.4 $ 123.5

$ 123.5 $ 52.1

Net new brokerage assets 43.5 66.6

Total Net New Assets $ 95.9 $ 190.0

$ 190.0 $ 60.2

Organic Net New Assets

Net new organic advisory assets $ 89.4 $ 49.6

Net new organic brokerage assets 29.4 6.6

Organic net new advisory assets $ 52.4 $ 89.4

Organic net new brokerage assets 43.5 29.4

Total Organic Net New Assets $ 95.9 $ 118.8

Organic advisory net new assets annualized growth (4)

19.4 % 13.6 %

Total organic net new assets annualized growth (4)

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As of and for the Years Ended December 31,

Client Cash Balances (5)

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 16.1 1.5

Purchased money market funds 1.9 1.9

Total Money Market Balances 18.0 3.4

Insured cash account sweep $ 46.8 $ 30.0

Deposit cash account sweep 11.5 9.3

Total Bank Sweep 58.4 39.3

Money market sweep 3.0 16.1

Total Client Cash Sweep Held by Third Parties 61.4 55.4

Client cash account 2.7 1.7

Total Client Cash Balances $ 64.1 $ 57.1

Client Cash Balances as a % of Total Assets 5.8% 4.7%

Net buy (sell) activity (6)

$ 61.6 $ 69.1

As of and for the Years Ended December 31,

Business and Financial Metrics (dollars in millions)

Advisors - period end 19,876 17,287

Advisors 21,275 19,876

Average total assets per advisor (7)

$ 52.2 $ 60.7

Employees - period end 5,919 4,756

Share repurchases $ 325.0 $ 90.0

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$ 1,525.3 $ 936.4

EBITDA as a % of Gross profit 38.1 % 43.2 %

Core G&A (12)

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(1) Totals may not foot due to rounding.

(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 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.

(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.

(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.

(2) Consists of total advisory and brokerage assets under custody at the Company’s broker-dealer subsidiary, LPL Financial.

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

(3) Consists of total client deposits into advisory or brokerage accounts less total client withdrawals from advisory or brokerage accounts, plus dividends, plus interest, minus advisory fees.

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

(4) 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) 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.

(5) During the second quarter of 2022, the Company updated its definition of client cash balances to include CCA and exclude purchased money market funds.

CCA balances include cash that clients have deposited with LPL Financial that is included in Client payables in the consolidated statements of financial condition.

Prior period disclosures have been updated to reflect this change as applicable.

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

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

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(8) 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 less 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.

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):

Below are reconciliations of corporate debt and other borrowings to Credit Agreement net debt as of the dates below and net income to EBITDA and Credit Agreement EBITDA for the periods presented below (in millions):

Credit Agreement Net Debt Reconciliation 2022 2021

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Corporate Cash (13)

(459.4) (237.0)

Credit Agreement Net Debt (†)

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Credit Agreement Adjustments:

Employee share-based compensation expense $ 41.8 $ 31.7

Advisor share-based compensation expense 2.3 2.3

Acquisition costs and other $ 50.7 $ 92.1

Employee share-based compensation 50.1 41.8

M&A accretion (14)

Advisor share-based compensation 2.5 2.3

Loss on extinguishment of debt — 24.4

Acquisition costs and other 92.1 18.3

Credit Agreement EBITDA (†)

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Leverage Ratio 1.39 2.26

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(†) Totals may not foot due to rounding.

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Weighted-average shares outstanding, diluted 81.3 81.7

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(†) Totals may not foot due to rounding.

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

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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):

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

Years Ended December 31,

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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.

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

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

Years Ended December 31,

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loss on extinguishment of debt;

promotional (ongoing);

acquisition costs;

employee share-based compensation;

and regulatory charges.

regulatory charges;

and employee share-based compensation.

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):

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

Years Ended December 31,

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Interest expense on borrowings 126.2 104.4

Brokerage, clearing and exchange 86.0 71.2

Amortization of other intangibles 87.6 79.3

Brokerage, clearing and exchange 86.1 86.0

Loss on extinguishment of debt — 24.4

Total G&A (†)

1,664.7 1,493.9

Promotional (ongoing) (15)(16)

Acquisition costs (17)

Employee share-based compensation 50.1 41.8

Acquisition costs (15)

Regulatory charges 32.6 29.4

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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.

(13) See the “Liquidity and Capital Resources” section for additional information about Corporate Cash.

(14) 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 such acquisition.

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(15) Acquisition costs include the costs to setup, onboard and integrate acquired entities.

The below table summarizes the primary components of acquisition costs for the periods presented (in millions):

Years Ended December 31,

Acquisition costs 2022 2021

Compensation and benefits $ 20.6 $ 36.4

Professional services 12.0 18.7

Promotional (16)

Other 1.3 7.0

Acquisition costs $ 36.2 $ 76.4

(16) Promotional (ongoing) for the year ended December 31, 2022 includes $16.1 million of support costs related to full-time employees that are classified within Compensation and benefits expense in the consolidated statements of income.

Promotional (ongoing) for the year ended December 31, 2022 excludes $2.3 million of expenses incurred as a result of acquisitions, which are included in the Acquisition costs line item.

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 include the following:

• Waddell & Reed Financial, Inc.

- 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.

Our recent acquisition activity includes the following:

• On November 2, 2022, we entered into a definitive purchase agreement to acquire FRGIS, an independent branch office and broker-dealer supporting approximately 800 advisors and 85 financial institutions, serving approximately $40 billion of brokerage and advisory assets, for an initial payment of approximately $140 million with potential contingent payments over the three years following the closing.

The transaction closed on January 31, 2023.

• We acquired customer relationship intangible assets of $54.1 million as a result of acquisitions under our Liquidity & Succession solution, under which we buy advisor practices, during the year ended December 31, 2022.

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

(“Waddell & Reed”).

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 United States financial markets.

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

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

Bureau of Economic Analysis, the U.S.

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.

economy grew 2.1% in 2022, and at an annualized pace of 2.7% in the fourth quarter of 2022 after growing at an annualized pace of 3.2% in the third quarter of 2022.

Growth was mainly concentrated in the beginning of the fourth quarter as the economy slowed down in December from weaker consumer spending power, rising geopolitical uncertainty and slower business activity.

Although inflation, rising interest rates and volatile global markets were all headwinds, the U.S.

economy is projected to have added approximately 874,000 jobs in the fourth quarter of 2022, while the unemployment rate averaged 3.6% in the fourth quarter, consistent with the average during the third quarter of 2022.

The equity markets experienced volatility from an increasingly hawkish Federal Reserve (“Fed”) yet the S&P 500 appreciated 7% and Bloomberg Barclays U.S.

Aggregate Bond Index rose 1.85% during the fourth quarter.

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

During the fourth quarter of 2022, Fed policymakers increased the target range for the federal funds rate to 4.25% to 4.50%.

The Fed anticipates that ongoing increases to the target range will continue to be appropriate.

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 significant interest rate changes and the potential related effects on our profitability and financial condition.

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Results of Operations

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Advisory $ 3,875,154 $ 3,525,430 10 %

Commission 2,378,683 1,906,560 24.8 %

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

Trailing 1,292,358 1,404,628 (8 %)

Sales-based 1,033,806 974,055 6 %

Total commission 2,326,164 2,378,683 (2 %)

Client cash 953,624 360,847 164 %

Other asset-based 806,649 787,220 2 %

Total asset-based 1,760,273 1,148,067 53 %

Service and fee 467,381 411,761 14 %

Transaction 181,260 156,336 16 %

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

Other 71,976 57,561 25.0 %

Interest income, net 77,126 28,577 170 %

Other (86,533) 71,976 n/m

Total revenue

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Interest expense on borrowings 126,234 104,414 21 %

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

Amortization of other intangibles 87,560 79,260 10 %

Brokerage, clearing and exchange 86,063 86,023 — %

Professional services 72,519 73,231 (1 %)

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$ 845,702 $ 459,866 84 %

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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.

Advisory fees are primarily billed to clients on a quarterly basis in advance, 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 majority of these 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 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 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.

Advisory revenue collected on our corporate RIA advisory platform is proposed by the advisor and agreed to by the client and was approximately 1% of the underlying assets for the year ended December 31, 2022.

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

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

However, the advisory revenue generated by an Independent RIA is not included in our advisory revenue.

We charge separate fees to Independent 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.

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

2022 2021 $ Change % Change

Corporate platform advisory assets

$ 429.6 $ 291.9 $ 137.7 47.2 %

RIA platform advisory assets 213.6 169.3 44.3 26.2 %

Corporate advisory assets $ 389.1 $ 429.6 $ (40.5) (9) %

Independent RIA advisory assets 194.0 213.6 (19.6) (9) %

Total advisory assets

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(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.

(1) 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.

(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 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.

Advisory revenue increased during the year ended December 31, 2022 as compared to the same period in 2021.

The increase during the year ended December 31, 2022 was driven primarily by continued organic growth and the full year impact of Waddell & Reed assets, partially offset by a decline in advisory asset balances due to market changes.

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

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market value of investment holdings in trail-eligible assets.

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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):

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

Years Ended December 31,

2022 2021 $ Change % Change

Trailing $ 1,292,358 $ 1,404,628 $ (112,270) (8) %

Sales-based 1,033,806 974,055 59,751 6 %

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

Total commission revenue

$ 2,326,164 $ 2,378,683 $ (52,519) (2) %

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 decrease in trailing commission revenue in 2022 compared to 2021 was primarily due to volatility-driven declines in trail-eligible assets.

The increase in sales-based commission revenue in 2022 compared to 2021 was primarily driven by increases in sales of annuities, partially offset by a decrease in sales of mutual funds.

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

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

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.

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

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.

Compensation for these performance obligations is 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.

Asset-based revenue for the year ended December 31, 2022 increased b y $612.2 million compared to 2021, primarily due to an increase in client cash revenue.

Client cash revenue for the year ended December 31, 2022 increased compared to 2021 due to increases to the federal funds effective rate and higher average client cash balances.

For the year ended December 31, 2022, our average client cash balances increased to $61.9 billion compared to $47.5 billion for the year ended December 31, 2021.

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.

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

We charge separate fees to RIAs on our Independent RIA advisory platform for technology, clearing, administrative, oversight and custody services, which may vary.

We also 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, 2022 increased by $55.6 million compared to 2021, primarily from increases in

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conference fees, increases in IRA custodian fees driven by growth in accounts, and increases in business services and planning and advice services fees due to growth in subscriptions.

Conference fees were higher in 2022 as all conferences were held in person compared to 2021, where one of our larger conferences was held virtually and several conferences were cancelled due to the COVID-19 pandemic.

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

Transaction revenue for the year ended December 31, 2022 increased by $24.9 million compared to 2021, primarily due to increases in the number of transactions and transaction charges for managed assets, mutual funds and fixed income products.

Interest Income, net

We earn interest income primarily from client margin loans, CCA balances segregated under federal or other regulations and advisor repayable loans.

Interest income, net for the year ended December 31, 2022 increased compared to 2021, primarily due to higher interest earned on margin loans, bank deposits and short-term U.S.

treasury bills, partially offset by interest paid on CCA balances.

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.

Other revenue for the year ended December 31, 2022 decreased by $158.5 million compared to 2021, primarily due to realized and unrealized losses 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.

Advisory and Commission

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 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:

payout amounts that are earned by and paid out to advisors and enterprises based on advisory and commission revenue earned on each client’s account, production-based bonuses earned by advisors and enterprises based on the levels of advisory and commission revenue they produce, compensation and benefits paid to employee advisors, the recognition of share-based compensation expense from equity awards granted to advisors and enterprises based on the fair value of the awards at grant date 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, for the periods presented:

Years Ended December 31,

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Payout rate 87.32 % 86.74 % 58 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.

Our payo ut rate increased for the year ended December 31, 2022 compared to 2021 due to increases in sales of higher-payout products and the impact of onboarding of enterprises during the year.

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 workers and contractors.

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

Compensation and benefits expense includes 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 periods presented :

Years Ended December 31,

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Average number of employees 6,524 5,283 23%

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.

Compensation and benefits expense for the year ended December 31, 2022 increased by $79.7 million compared to 2021, primarily due to an increase in headcount.

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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.

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Occupancy and Equipment

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.

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

Occupancy and equipment expense for the year ended December 31, 2022 increased by $34.3 million compared to 2021, primarily due to increased expense related to software licenses.

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 $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.

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

Depreciation and amortization expense for the year ended December 31, 2022 increased by $48.4 million compared to 2021, primarily due to our continued investment in technology to support the integrations, enhance our advisor platform and experience, and support onboarding of enterprises.

Interest Expense on Borrowings

Interest expense on borrowings includes the interest associated with the Company’s senior notes, senior secured Term Loan B (“Term Loan B”), amortization of debt issuance costs and fees associated with the Company’s revolving lines of credit.

Interest expense on borrowings for the year ended December 31, 2022 increased by $21.8 million compared to 2021, primarily due to increases in interest rates associated with our Term Loan B.

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

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 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.

Amortization of other intangibles for the year ended December 31, 2022 increased by $8.3 million compared to 2021, primarily due to increases in intangible assets resulting from acquisitions.

See Note 4 - Acquisitions and Note 9 - Goodwill and Other Intangibles, Net within the notes to the consolidated financial statements for further detail.

Loss on Extinguishment of Debt

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

On March 15, 2021, we issued senior unsecured notes due in 2029 and redeemed our existing senior unsecured notes due in 2025.

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

There was no loss on extinguishment of debt for the year ended December 31, 2022.

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 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.

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

Other expense for the year ended December 31, 2022 increased by $12.4 million compared to 2021, primarily due to increases in legal fees and travel-related costs, partially offset by decreases in costs related to Waddell & Reed transitional support.

COVID-19 Impact

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.

We are not yet able to determine the full impact of the pandemic;

however, should it continue, there could be a material and adverse financial impact to our results of operations.

The COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor for developments that could have a material effect on our operations.

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.

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Liquidity and Capital Resources

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

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.

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

Parent Company Liquidity

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(“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.

Corporate Cash, a component of cash and equivalents, is the sum of cash and equivalents from the following:

(1) cash and equivalents held at the Parent, (2) cash and equivalents held at regulated subsidiaries as defined by the Credit Agreement, which include LPL Financial and PTC, in excess of the capital requirements of the Credit Agreement (which, in the case of LPL Financial, is net capital 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) cash and equivalents held at non-regulated subsidiaries.

We believe Corporate Cash is a useful measure of the Parent’s liquidity as it represents the capital available for use in excess of the amount we are required to reserve pursuant to the Credit Agreement.

The following table presents the components of Corporate Cash (in thousands):

Corporate Cash December 31, 2021 December 31, 2020

December 31, 2022 December 31, 2021

Cash and equivalents $ 847,519 $ 495,246

Cash at regulated subsidiaries (392,571) (284,105)

Excess cash at regulated subsidiaries per the Credit Agreement 4,439 25,846

Corporate Cash $ 459,387 $ 236,987

Corporate Cash

Cash at Parent $ 448,180 $ 202,407

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

Excess cash at regulated subsidiaries per the Credit Agreement 4,439 25,846

Cash at non-regulated subsidiaries 6,768 8,734

Corporate Cash $ 459,387 $ 236,987

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.

We target maintaining approximately $200.0 million in Corporate Cash, which covers approximately 18 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.

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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.

Subject to regulatory approval or notification, capital generated by regulated subsidiaries can be distributed to the Parent to the extent the capital levels exceed regulatory requirements, Credit Agreement requirements and internal capital thresholds.

During the twelve months ended December 31, 2022 and 2021, LPL Financial paid dividends of $1.1 billion and $465.0 million to the Parent, respectively.

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

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 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 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 five 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 short-term and long-term working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures.

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.

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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.

We engage in a share repurchase program that was approved by our Board, 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.

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

While we continue to see opportunities to deploy capital in support of organic growth and acquisitions, we resumed share repurchases in the third quarter of 2021 with the initial focus on an amount to offset dilution.

We repurchased $325.0 million, representing 1,566,527 shares, during the year ended December 31, 2022.

Additionally, on September 21, 2022, the Board authorized a $2.1 billion increase to the amount available for repurchases of our issued and outstanding common shares, with $2.0 billion available for repurchases beginning in 2023.

We currently plan to complete the repurchases over approximately two years.

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.

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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.

The payment, timing and amount of any dividends are subject to approval by the Board 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.

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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 maintains additional liquidity through external lines of credit totaling $1.2 billion at December 31, 2022.

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

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The following table presents amounts outstanding and available under our external lines of credit at December 31, 2022 (in millions):

Description Borrower Maturity Date Outstanding (1)

Description Borrower Maturity Date Outstanding Available

Senior secured, revolving credit facility LPL Holdings, Inc.

March 2026 $ — $ 1,000

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

Secured, uncommitted lines of credit LPL Financial LLC March 2022 $ — $ 75

Broker-dealer revolving credit facility LPL Financial LLC August 2023 $ — $ 1,000

Unsecured, uncommitted lines of credit LPL Financial LLC September 2023 $ — $ 75

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

(1) Outstanding balances were repaid in January 2022.

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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.

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

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 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.

These sources include cash and equivalents on hand, 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 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.

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 and cash sweep balances held at third-party banks.

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.

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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.

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

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.

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.

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

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

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• consolidate, merge or transfer all or substantially all of our assets.

Our Credit Agreement and the Indentures allow us to pay dividends and distributions or repurchase our capital stock only when certain conditions are met.

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Our Credit Agreement and the Indentures allow us to pay dividends and distributions or repurchase our common stock only when certain conditions are met.

In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter.

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 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”.

The breach of these financial covenants would be subject to certain equity cure rights.

The Credit Agreement defines Credit Agreement EBITDA 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.

As of December 31, 2022, we were in compliance with our Credit Agreement financial covenants, which include 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.” The breach of these financial covenants would be subject to certain equity cure rights.

The required ratios under our financial covenants and actual ratios were as follows:

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Interest Coverage (Minimum) 3.0 14.44

The broker-dealer credit agreement subjects LPL Financial to certain financial and non-financial covenants.

As of December 31, 2022, LPL Financial’s net capital was 8% of its aggregate debits, below the 10% aggregate debits required by a financial covenant.

The agreement allows 5 days to cure non-compliance with this financial covenant, and it was cured within that allowable time period.

LPL Financial was in compliance with all other covenants as of December 31, 2022.

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.

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____________________

(1) Represents future payments under operating leases.

See Note 12 - Leases, within the notes to the consolidated financial statements for further detail.

(2) Represents future payments under finance leases.

(1) Represents future payments under operating or finance leases, respectively.

See Note 12 - Leases, within the notes to the consolidated financial statements for further detail.

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(3) 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.

(4) 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 our senior unsecured notes.

Variable interest payments assume the applicable interest rates at December 31, 2022 remain unchanged.

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As of December 31, 2022, we have a liability for unrecognized tax benefits of $52.3 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.

This amount has been excluded from the

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

Risk Management

In order to assist in the mitigation and control of operational risk, we have an enterprise risk management (“ERM”) framework that is designed to enable assessment and reporting on operational risk across the firm.

This framework aims to ensure policies and procedures are in place and appropriately designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments.

These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees and advisors operate within established corporate policies and limits.

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

Risk Factors” for more information about the risks associated with our technology, including risks related to security, our risk management policies and procedures, and the potential related effects on our operations.

We employ an ERM framework that is intended to address key risks and responsibilities, enable us to execute our business strategy and protect our Company and its franchise.

Our framework is designed to promote clear lines of risk management ownership and accountability while providing a structured escalation process for key risk information and events.

Additionally, risk is managed and monitored within business units by embedded risk groups providing guidance on governance, controls, policies and other risk management activities.

We operate a three lines of defense model to manage risk throughout the organization.

Primary ownership for risk and control processes is with the business units and control owners, who are the first line of defense in effectively managing risks, and who are responsible for day-to-day compliance and risk management, including execution of operating and supervisory procedures, as well as training manuals (desktop procedures).

These business units and certain control owners implement and execute controls to manage risk, execute risk assessments, identify emerging risks and comply with risk management policies.

Within these business units a risk management function monitors, provides guidance and works with the business units and control owners to deploy risk management ownership within the first line of defense.

The second line of defense consists of certain functions within our Finance and Business Operations department, which provides risk oversight and compliance, and Legal department, which provides related legal counsel.

The third line of defense is independent verification of the effectiveness of risk management practices and internal controls and is conducted by the Internal Audit department.

Our risk management governance approach includes the Board and certain of its committees;

our Risk Oversight Committee (the “ROC”) and its subcommittees;

and our three lines of defense model.

We regularly reevaluate and, when necessary, modify our processes to improve the identification and escalation of risks and events.

In addition to the ERM framework, we also have written policies and procedures that govern the conduct of business by our advisors, employees and the terms and conditions of our relationships with product manufacturers.

Our client and advisor policies address the extension of credit for client accounts, data, cyber and physical security, compliance with industry regulations and codes of conduct and ethics to govern employee and advisor conduct, among other emerging risk types.

Audit and Risk Committee of the Board

In addition to its other responsibilities, the Audit and Risk Committee of the Board reviews our policies with respect to risk assessment and risk management, as well as our major financial risk exposures and the steps management has undertaken to control them.

The Audit and Risk Committee generally provides reports to the Board at each of the Board’s regularly scheduled quarterly meetings.

Compensation and Human Resources Committee of the Board

In addition to its other responsibilities, the Compensation and Human Resources Committee of the Board assesses whether our compensation arrangements encourage inappropriate risk-taking, and whether risks arising from our compensation arrangements are reasonably likely to have a material adverse effect on the Company.

Risk Oversight Committee of LPL Financial

The Audit and Risk Committee has mandated that the ROC oversee our risk management activities, including those of our subsidiaries.

The Chief Risk Officer of LPL Financial serves as chair of the ROC, which generally meets on a quarterly basis with additional ad hoc meetings as necessary.

The members of the ROC include certain Managing Directors of LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex-

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officio members and represent key control areas of the Company.

Participation in the ROC by senior officers is intended to ensure that the ROC covers the key risk areas of the Company, including its subsidiaries, and that the ROC thoroughly reviews significant matters relating to risk priorities, policies, control procedures and related exceptions, certain new and complex products and business arrangements, transactions with significant risk elements and identified emerging risks.

The Chief Risk Officer provides updates on pertinent ROC discussions to the Audit and Risk Committee on a regular basis and, if necessary or requested, to the Board.

Subcommittees of the Risk Oversight Committee

The ROC has established multiple subcommittees that cover key areas of risk.

The subcommittees meet regularly and are responsible for keeping the ROC informed and escalating issues in accordance with the Company’s escalation policies.

The responsibilities of such subcommittees include, for example, oversight of operational risk;

oversight of the approval of new and complex investment products offered to advisors’ clients;

oversight of the firm’s technology;

and issues and trends related to advisor compliance.

Internal Audit Department

As the third line of defense, the Internal Audit department provides independent and objective assurance of the effectiveness of the Company’s governance, risk management and internal controls by conducting risk assessments and audits designed to identify and cover important risk categories.

Internal Audit reports directly to the Audit and Risk Committee, which provides oversight of Internal Audit’s activities and approves its annual plan.

The Internal Audit department provides regular updates to the ROC and reports to the Audit and Risk Committee at least quarterly.

Operational Risk

Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems, actions by people or external events.

We operate in diverse markets and are reliant on the ability of our employees and information technology systems, as well as third-party service providers and their systems, to manage a large volume of transactions and confidential information, including personally identifiable information, effectively and securely.

Managing these risks is critical, particularly in a rapidly changing operating environment with increasing transaction volumes and in light of increasing reliance on systems capabilities and performance, as well as third-party service providers.

In the event of the breakdown, obsolescence or improper operation of systems, malicious cyber activity or improper action by employees, advisors or third-party service providers, we could suffer business disruptions, financial loss, data loss, regulatory sanctions and damage to our reputation.

Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted or otherwise unsuccessful in maintaining the competitiveness, stability, security or continuity of critical systems as a result of, among other things, obsolescence, improper operation, third-party dependencies or limitations of our current technology.

Regulatory and Legal Risk

The regulatory environment in which we operate is discussed in detail within Part I, “Item 1.

Business” of this Annual Report on Form 10-K.

In recent years, and during the period presented in this Annual Report on Form 10-K, we have observed the SEC, FINRA, DOL and state regulators broaden the scope, frequency and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance systems and programs.

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

Risk Factors” for more information about the risks associated with operating within our regulatory environment, pending regulatory matters and the potential related effects on our operations.

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 consider the following critical accounting policies to be most significant because they involve a higher degree of judgment and complexity and 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 condition or results of operations.

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Revenue Recognition

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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.

See Note 2 - Summary of Significant Accounting Policies and Note 3 - Revenue , within the notes to the consolidated financial statements for further detail.

Commitments and Contingencies

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Assessing the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently difficult and requires management to make significant judgments.

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.

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

Valuation of Goodwill and Other Intangibles, Net

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

Goodwill and other indefinite-lived intangible assets are tested annually for impairment in the fourth fiscal quarter and between annual tests if certain events occur indicating that the carrying amounts may be impaired.

Goodwill and other indefinite-lived intangible assets are evaluated annually for impairment in the fourth fiscal quarter and between annual tests if certain events occur indicating that the carrying amounts may be impaired.

Intangible assets that are deemed to have definite lives are amortized over their useful lives or the estimated period the intangible asset will provide economic benefit.

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 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.

For additional information, 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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Changes in the estimate of tax assets and liabilities occur periodically due to changes in the tax rates, changes in the business operations, implementation of tax planning strategies, resolution with taxing authorities of issues where we had previously taken certain tax positions and newly enacted statutory, judicial and regulatory guidance.

For more information on our policies and disclosures related to taxes, see Note 2 - Summary of Significant Accounting Policies and Note 13 - Income Taxes , within the notes to the consolidated financial statements.

For more information, see Note 2 - Summary of Significant Accounting Policies and Note 13 - Income Taxes , within the notes to the consolidated financial statements.

Recently Issued Accounting Pronouncements

Refer to Note 2 - Summary of Significant Accounting Policies, within the notes to the consolidated financial statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.

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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