LPL FINANCIAL HOLDINGS INC.
Business Overview
LPL is a leader in the markets we serve, supporting more than 19,000 financial
advisors, and approximately 800 institution-based investment programs and 450
registered investment adviser ("RIA") firms nationwide. We are steadfast in our
commitment to the advisor-centered model and the belief that Americans deserve
access to objective guidance from a financial advisor. At LPL, independence
means that advisors have the freedom they deserve to choose the business model,
services, and technology resources that allow them to run their perfect
practice. And they have the freedom to manage their client relationships,
because they know their clients best. Our mission is to take care of our
advisors, so they can take care of their clients.
We do that through a singular focus on providing our advisors with the front-,
middle- and back-office support they need to serve the large and growing market
for comprehensive financial advice from an advisor. We believe that we are the
only company that offers advisors the unique combination of an integrated
technology platform, comprehensive self-clearing services and open architecture
access to a wide range of non-proprietary products, all delivered in an
environment unencumbered by conflicts from product manufacturing, underwriting
and market-making.
We believe investors achieve better outcomes when working with a financial
advisor. We strive to make it easy for advisors to do what is best for their
clients, while protecting advisors and investors and promoting freedom and
choice through access to a wide range of diligently evaluated non-proprietary
products.
Executive Summary
Financial Highlights
Results for the third quarter of 2021 included net income of $103.1 million , or
$1.26 per diluted share, which compares to $103.8 million , or $1.29 per diluted
share, for the third quarter of 2020.
Asset Growth Trends
Total advisory and brokerage assets were $1.1 trillion at September 30, 2021 , up
40% from $810.4 billion at September 30, 2020 . Total net new assets were $29.0
billion for the three months ended September 30, 2021 , compared to $11.1 billion
for the same period in 2020.
Net new advisory assets were $21.7 billion for the three months ended
September 30, 2021 , compared to $10.4 billion for the same period in 2020.
Advisory assets were $594.0 billion , or 52% of total advisory and brokerage
assets served, at September 30, 2021 , up 46% from $405.9 billion at
September 30, 2020 .
Net new brokerage assets were $7.3 billion for the three months ended
September 30, 2021 , compared to $0.7 billion for the same period in 2020.
Brokerage assets were $538.6 billion at September 30, 2021 , up 33% from $404.4
billion at September 30, 2020 .
Gross Profit Trends
Gross profit, a non-GAAP financial measure, was $631.1 million for the three
months ended September 30, 2021 , and increased 25% from $505.7 million for the
three months ended September 30, 2020 . Gross profit is calculated as total
revenue, less advisory and commission expense and brokerage, clearing and
exchange fees. We believe that gross profit can provide investors with useful
insight into the Company's core operating performance before indirect costs that
are general and administrative in nature. See the "How We Evaluate Our Business"
section for additional information on gross profit.
Common Stock Dividends and Share Repurchases
During the three months ended September 30, 2021 , we paid shareholders a cash
dividend of $20.1 million and repurchased 276,800 of our outstanding shares for
a total of $40.0 million .
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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 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 Part I, "Item 1A. Risk Factors" in our 2020 Annual Report on Form
10-K for more information about the risks associated with COVID-19.
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 bank sweep vehicles
and money market programs and the access we provide to a variety of product
providers with the following product lines:
• Alternative Investments • Retirement Plan Products
• Annuities • Separately Managed Accounts
• Exchange Traded Products • Structured Products
• Insurance Based Products • Unit Investment Trusts
• Mutual Funds
Under our self-clearing platform, we custody the majority of client assets
invested in these financial products, for which we provide statements,
transaction processing and ongoing account management. 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 regularly review various aspects of our operations and service offerings,
including our policies, procedures and platforms, in response to marketplace
developments. We seek to continuously improve and enhance aspects of our
operations and service offerings in order to position our advisors for long-term
growth and to align with competitive and regulatory developments. 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.
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How We Evaluate Our Business
We focus on several key metrics in evaluating the success of our business
relationships and our resulting financial position and operating performance.
Our key operating, business and financial metrics are as follows:
As of and for the Three Months Ended
September 30, June 30, September 30,
Operating Metrics (dollars in billions)(1) 2021 2021 2020
Advisory and Brokerage Assets
Advisory assets(2)(3) $ 594.0 $ 577.6 $ 405.9
Brokerage assets(2)(4) 538.6 534.7 404.4
Total Advisory and Brokerage Assets(2) $ 1,132.6 $ 1,112.3 $ 810.4
Advisory assets as a % of total Advisory and
Brokerage Assets 52.4 % 51.9 % 50.1 %
Net New Assets
Net new advisory assets(5) $ 21.7 $ 54.9 $ 10.4
Net new brokerage assets(6) 7.3 51.1 0.7
Total Net New Assets(7) $ 29.0 $ 106.0 $ 11.1
Organic Net New Assets(7)
Organic net new advisory assets $ 21.1 $ 21.4 $ 10.4
Organic net new brokerage assets 5.6 15.6 0.7
Total Organic Net New Assets $ 26.7 Organic advisory net new assets annualized growth(7)(8) 15.6% 17.3% 11.0% Total organic net new assets annualized growth(7)(8) 10.2% 15.5% 5.8% Client Cash Balances(2) Insured cash account balances$ 30.5 $ 34.1 $ 34.7 Deposit cash account balances 8.6 7.6 8.0 Total Bank Sweep Balances 39.0 41.7 42.7 Money market account balances 9.9 5.0 1.5 Purchased money market fund balances 1.8 1.7 2.3 Total Client Cash Balances$ 50.7
Net buy (sell) activity(9)$ 17.6 $ 18.1 $ 9.3 As of and for the Three Months Ended September 30, June 30, September 30, Business and Financial Metrics (dollars in millions) 2021 2021 2020 Advisors - period end 19,627 19,114 17,168 Average total assets per advisor(10)$ 57.7 $ 58.2 $ 47.2 Employees - period end 5,457 5,344 4,658 Share repurchases$ 40.0 $ - $ - Dividends$ 20.1 $ 20.0 $ 19.8 Leverage ratio(11) 2.18 2.26 2.15 3
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Three Months Ended September 30, Nine Months Ended September 30,
Financial Metrics (dollars in millions, except per
share data) 2021 2020 2021 2020
Total revenue $ 2,020.8 $ 1,460.3 $ 5,626.6 $ 4,290.4
Net income $ 103.1 $ 103.8 $ 351.8 $ 361.1
Earnings per share ("EPS"), diluted $ 1.26 $ 1.29 $ 4.30 $ 4.48
Non-GAAP Financial Metrics (dollars in millions,
except per share data)
EPS prior to amortization of intangible assets and
acquisition costs(12) $ 1.77 $ 1.44 $ 5.38 $ 4.93
Gross profit(13) $ 631.1 $ 505.7 $ 1,812.1 $ 1,569.5
EBITDA(14) $ 225.0 $ 204.9 $ 711.6 $ 692.2
EBITDA as a % of Gross profit 35.6 % 40.5 % 39.3 % 44.1 %
Core G&A(15) $ 270.9 $ 227.1 $ 758.8 $ 672.7 _______________________________
(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 consists of total advisory assets under custody at our broker-dealer subsidiaries,LPL Financial LLC ("LPL Financial") andWaddell & 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 withLPL Financial and Waddell & Reed. (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. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. (6)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. (7)Total net new assets includes$68.9 billion of assets during the three months endedJune 30, 2021 and$2.3 billion of assets during the three months endedSeptember 30, 2021 related to the acquisition of the wealth management business of Waddell & Reed Financial, Inc. Organic net new assets and related growth rates exclude these assets. (8)Calculated as annualized current period 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 withLPL 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 the end-of-period advisor count. (11)Leverage ratio is related to a financial covenant 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. Please consult the "Debt and Related Covenants" section for more information. 4
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(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 measure
defined as net income plus the after-tax impact of amortization of intangible
assets 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 an alternative
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):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Adjusted net income / EPS
prior to amortization of
intangible assets and
acquisition costs
Reconciliation Amount Per Share Amount Per Share Amount Per Share Amount Per Share
Net income / earnings per
diluted share $ 103.1 $ 1.26 $ 103.8 $ 1.29 $ 351.8 $ 4.30 $ 361.1 $ 4.48
Amortization of intangible
assets 21.5 0.26 16.8 0.21 58.9 0.72 50.1 0.62
Acquisition costs(16) 35.9 0.44 - - 62.1 0.76 - -
Tax benefit (15.4) (0.19) (4.7) (0.06) (32.4) (0.40) (14.0) (0.17)
Adjusted net income / EPS
prior to amortization of
intangible assets and
acquisition costs $ 145.1 $ 1.77 $ 115.9 $ 1.44 $ 440.4 $ 5.38 $ 397.2 $ 4.93
Diluted share count 81.8 80.6 81.8 80.6
(13)Gross profit is a non-GAAP financial measure defined as total revenue less
advisory and commission expense 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. 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):
Three Months Ended September 30, Nine Months Ended September 30,
Gross Profit 2021 2020 2021 2020
Total revenue $ 2,020.8 $ 1,460.3 $ 5,626.6 $ 4,290.4
Advisory and commission expense 1,366.8 936.8 3,748.9 2,667.4
Brokerage, clearing and exchange fees 22.8 17.8 65.7 53.4
Gross profit(†) $ 631.1 $ 505.7 $ 1,812.1 $ 1,569.5 _______________________________
(†) Totals may not foot due to rounding.
(14)EBITDA is a non-GAAP financial measure defined as net income plus
non-operating interest and other expense, income tax expense, depreciation and
amortization, and amortization of intangible assets. During the third quarter of
2021, the Company changed its definition of EBITDA to include the loss on
extinguishment of debt and has updated prior period disclosures to reflect this
change as applicable. 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. Below is a
reconciliation of EBITDA to net income for the periods presented (in millions):
Three Months Ended September Nine Months Ended September
30, 30,
EBITDA Reconciliation 2021 2020 2021 2020
Net income $ 103.1 $ 103.8 $ 351.8 $ 361.1
Non-operating interest expense and other 27.1 25.2 77.3 80.8
Provision for income taxes 34.9 31.5 113.0 119.1
Depreciation and amortization 38.4 27.5 110.6 81.1
Amortization of intangible assets 21.5 16.8 58.9 50.1
EBITDA(†) $ 225.0 $ 204.9 $ 711.6 $ 692.2 _______________________________
(†) Totals may not foot due to rounding.
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(15)Core G&A is a non-GAAP financial measure defined as total operating expense,
excluding the following expenses: advisory and commission; depreciation and
amortization; amortization of intangible assets; brokerage, clearing and
exchange; promotional; acquisition costs; employee share-based compensation and
regulatory charges. 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 expense as calculated
in accordance with GAAP. Below is a reconciliation of Core G&A against the
Company's total operating expense for the periods presented (in millions):
Three Months Ended September 30, Nine Months Ended September 30,
Core G&A Reconciliation 2021 2020 2021 2020
Total operating expense $ 1,855.7 $ 1,299.8 $ 5,060.2 $ 3,729.3
Advisory and commission 1,366.8 936.8 3,748.9 2,667.4
Depreciation and amortization 38.4 27.5 110.6 81.1
Amortization of intangible assets 21.5 16.8 58.9 50.1
Brokerage, clearing and exchange 22.8 17.8 65.7 53.4
Total G&A 406.2 300.9 1,076.1 877.3
Promotional (ongoing)(17) 83.6 58.0 201.9 159.9
Acquisition costs(17) 35.9 - 62.1 -
Employee share-based compensation 9.8 7.4 32.3 24.1
Regulatory charges 6.0 8.3 21.0 20.6
Core G&A(†) $ 270.9 $ 227.1 $ 758.8 $ 672.7 _______________________________
(†) Totals may not foot due to rounding. (16)Acquisition costs include the cost to setup, onboard and integrate acquired entities and primarily include$14.8 million of compensation and benefits expenses,$12.4 million of promotional expenses,$5.8 million of professional services expenses, and other expenses during the three months endedSeptember 30, 2021 . Acquisition costs for the nine months endedSeptember 30, 2021 also includes$13.9 million of compensation and benefits expenses,$6.3 million of professional services expenses,$1.6 million of occupancy and equipment expenses,$1.2 million of communications expenses, and other expenses that were incurred during the three months endedJune 30, 2021 that are included in the respective line items in the condensed consolidated statements of income. 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. 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 ofTennessee . 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 atSeptember 30, 2021 , 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. 6
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Table of Contents 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 9 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements. InJune 2018 , theU.S. Court of Appeals for the Fifth Circuit invalidated regulations previously enacted by theU.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"). InDecember 2020 , the DOL finalized a new investment advice fiduciary prohibited transaction exemption with regard to such accounts that became effective onFebruary 16, 2021 (the "DOL Investment Advice Fiduciary Exemption"). 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. InJune 2019 , theSEC adopted a new standard of conduct applicable to retail brokerage accounts ("Regulation BI") with a compliance date ofJune 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 theDOL Investment Advice Fiduciary Exemption and Regulation BI. As ofJune 30, 2020 , we implemented new procedures in accordance with Regulation BI. Future laws and regulations, including new and future rulemaking 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. Acquisitions, Integrations and Divestitures We continuously assess the competitive landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures. 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: •Waddell & Reed Financial, Inc. - InApril 2021 , we acquired the wealth management business of Waddell & Reed Financial, Inc. •Blaze Portfolio Systems LLC ("Blaze") - InOctober 2020 , we acquired Blaze, a technology company that provides an advisor-facing trading and portfolio rebalancing platform. •E.K. Riley Investments, LLC ("E.K. Riley") - InAugust 2020 , we acquired business relationships with advisors fromE.K. Riley , a broker-dealer and RIA. •Lucia Securities, LLC ("Lucia") - InAugust 2020 , we acquired business relationships with advisors from Lucia, a broker-dealer and RIA. See Note 4 - Acquisitions, within the notes to the unaudited condensed consolidated financial statements for further detail. 7
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Table of Contents Economic Overview and Impact of Financial Market Events Our business is directly and indirectly sensitive to several macroeconomic factors and the state ofthe United States financial markets. According to the most recent estimate from theU.S. Bureau of Economic Analysis , theU.S. economy grew at an annualized pace of 6.7% in the second quarter of 2021 after growing at an annualized pace of 6.3% in the first quarter. The minutes of theSeptember 2021 meeting of theFederal Open Market Committee suggest that growth has likely slowed substantially, largely due to the impact of the Delta variant of COVID-19. The S&P 500 Index was near flat in the third quarter, rising just 0.6% on a total return basis, while smaller stocks lagged. Non-U.S. stocks trailed theirU.S. counterparts during the third quarter while fixed income markets were nearly flat. Our business is also sensitive to current and expected short-term interest rates, which are largely driven byFederal Reserve ("Fed") policy. During the third quarter, Fed policymakers maintained the target range for the federal funds rate at 0 to 0.25 percent. According to projection materials released following the conclusion of theSeptember 2021 policy meeting, the median expectation among meeting participants was evenly divided between expectations that the Fed would raise rates in 2022 versus 2023, earlier than previous projections.The Fed continues to emphasize its belief that any near-term increase in inflation is likely temporary, although upside risks have increased. At theSeptember 2021 meeting Fed officials discussed starting to reduce the rate of bond purchases, a process they projected could begin in 2021 and be completed by mid-2022 if the economy remains on track. Please consult the "Risks Related to Our Business and Industry" section within Part I, "Item 1A. Risk Factors" in our 2020 Annual Report on Form 10-K for more information about the risks associated with significant interest rate changes, and the potential related effects on our profitability and financial condition. 8
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Table of Contents Results of Operations The following discussion presents an analysis of our results of operations for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 % Change 2021 2020 % Change REVENUE Advisory$ 959,733 $ 586,941 63.5 %$ 2,528,092 $ 1,689,338 49.6 % Commission 610,384 472,643 29.1 % 1,765,846 1,403,540 25.8 % Asset-based 301,701 253,551 19.0 % 846,027 786,124 7.6 % Transaction and fee 140,362 119,747 17.2 % 418,406 376,321 11.2 % Interest income 7,365 6,623 11.2 % 20,797 22,705 (8.4) % Other 1,218 20,796 (94.1) % 47,470 12,329 n/m Total revenue 2,020,763 1,460,301 38.4 % 5,626,638 4,290,357 31.1 % EXPENSE Advisory and commission 1,366,832 936,766 45.9 % 3,748,933 2,667,408 40.5 % Compensation and benefits 185,980 151,271 22.9 % 531,373 441,393 20.4 % Promotional 96,012 57,970 65.6 % 214,542 159,908 34.2 % Depreciation and amortization 38,409 27,548 39.4 % 110,612 81,082 36.4 % Amortization of intangible assets 21,531 16,829 27.9 % 58,887 50,088 17.6 % Occupancy and equipment 52,695 41,874 25.8 % 137,731 124,486 10.6 % Professional services 16,722 12,301 35.9 % 54,847 40,526 35.3 % Brokerage, clearing and exchange 22,828 17,834 28.0 % 65,651 53,423 22.9 % Communications and data processing 17,824 12,547 42.1 % 44,747 37,743 18.6 % Other 36,888 24,852 48.4 % 92,852 73,274 26.7 % Total operating expense 1,855,721 1,299,792 42.8 % 5,060,175 3,729,331 35.7 % Non-operating interest expense and other 27,063 25,179 7.5 % 77,293 80,786 (4.3) % Loss on extinguishment of debt - - - % 24,400 - 100 % INCOME BEFORE PROVISION FOR INCOME TAXES 137,979 135,330 2.0 % 464,770 480,240 (3.2) % PROVISION FOR INCOME TAXES 34,915 31,541 10.7 % 112,985 119,148 (5.2) % NET INCOME$ 103,064 $ 103,789 (0.7) % $ 351,785$ 361,092 (2.6) % 9
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Table of Contents Revenue Advisory Advisory revenues represent fees charged to advisors' clients' advisory accounts on our corporate RIA advisory platform, and are 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 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 eligible 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 nine months endedSeptember 30, 2021 . 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 assets held under a Hybrid RIA's investment advisory accounts custodied withLPL 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 unaudited condensed consolidated statements of income. The following table summarizes the composition of advisory assets for the periods presented (in billions):September 30 ,
Change
2021 2020 Amount %
Corporate platform advisory assets
55.8 %
Hybrid platform advisory assets 198.4 152.0 46.4 30.5 %
Total advisory assets(1) $ 594.0 $ 405.9 $ 188.1 46.3 %
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(1)Totals may not foot due to rounding.
Net new advisory assets are generated throughout the quarter, therefore, the
full impact of net new advisory assets to advisory revenues is not realized in
the same period. The following table summarizes activity impacting advisory
assets for the periods presented (in billions):
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 2021 2020
Balance - Beginning of period $ 577.6 $ 375.3 $ 461.2 $ 365.8
Net new advisory assets(1) 21.7 10.4 99.3 33.7
Market impact(2) (5.3) 20.2 33.5 6.4
Balance - End of period $ 594.0 $ 405.9 $ 594.0 $ 405.9 _______________________________
(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. (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 for the three and nine months endedSeptember 30, 2021 compared to 2020 was due to increases in net new advisory assets resulting from acquisitions, recruiting efforts and advisor productivity, as well as market gains as represented by higher levels of the S&P 500 Index. 10
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Commission
We generate two types of commission revenues: (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 revenues, which occur when clients
trade securities or purchase various types of investment products, primarily
represent 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 revenues primarily on mutual funds and variable annuities
held by clients of our advisors. See Note 3 - Revenue, within the notes to the
unaudited condensed consolidated financial statements for further detail
regarding our commission revenues by product category.
The following table sets forth the components of our commission revenues (in
thousands):
Three Months Ended September 30, Change Nine Months Ended September 30, Change
2021 2020 Amount % 2021 2020 Amount %
Sales-based $ 239,804 $ 180,357 $ 59,447 33.0 % $ 725,673 $ 568,260 $ 157,413 27.7 %
Trailing 370,580 292,286 78,294 26.8 % 1,040,173 835,280 204,893 24.5 %
Total commission revenues $ 610,384 $ 472,643 $ 137,741 29.1 % $ 1,765,846 $ 1,403,540 $ 362,306 25.8 %
The increase in sales-based commission revenues for the three and nine months
ended September 30, 2021 compared to 2020 was primarily driven by increases in
sales of annuities, mutual funds and fixed income products. The increase in
trailing commission revenues for the three and nine months ended September 30,
2021 compared to 2020 was primarily due to the increase in value of annuities
and mutual funds as a result of market increases.
The following table summarizes activity impacting brokerage assets for the
periods presented (in billions):
Three Months Ended September Nine Months Ended September
30, 30,
2021 2020 2021 2020
Balance - Beginning of period $ 534.7 $ 386.4 $ 441.9 $ 398.6
Net new brokerage assets(1) 7.3 0.7 64.6 4.7
Market impact(2) (3.4) 17.3 32.1 1.1
Balance - End of period $ 538.6 $ 404.4 $ 538.6 $ 404.4 _______________________________
(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. (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. Asset-Based Asset-based revenues consist 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-based revenues are generated on advisors' clients' cash balances in bank sweep accounts and money market programs. We 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 revenues are paid to us by mutual fund product sponsors or their affiliates and are 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 revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund product sponsors and annuity product manufacturers. Asset-based revenues for the three and nine months endedSeptember 30, 2021 increased compared to 2020 primarily due to increased revenues from recordkeeping and sponsorship programs, partially offset by a decrease in client cash revenues. 11
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Table of Contents Revenues for our recordkeeping and sponsorship programs for the three and nine months endedSeptember 30, 2021 , which are largely based on the market value of the underlying assets, increased compared to 2020 due to the impact of market appreciation on the value of the underlying assets. Client cash revenues for the three and nine months endedSeptember 30, 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 three months endedSeptember 30, 2021 , our average client cash balances increased to$49.6 billion compared to$45.6 billion in 2020. For the nine months endedSeptember 30, 2021 , our average client cash balances increased to$48.7 billion compared to$43.4 billion in 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. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services which may vary. 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 three and nine months endedSeptember 30, 2021 increased compared to 2020 primarily due to an increase in licensing fee, IRA custodian fee, and technology fee revenues. Interest Income We earn interest income from client margin loans, advisor loans, cash segregated under federal and other regulations and cash equivalents. Period-over-period variances correspond to changes in the average balances of margin loans and cash balances as well as changes in interest rates. Interest income for the three months endedSeptember 30, 2021 increased compared to 2020, primarily due to an increase in interest earned on advisor and margin loans, partially offset by lower average interest rates. Interest income for the nine months endedSeptember 30, 2021 decreased compared to 2020, primarily due to lower average interest rates, partially offset by an increase in interest earned on advisor and margin loans. Other Other revenues primarily include unrealized gains and losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, and other miscellaneous revenues which are not generated from contracts with customers. Other revenues for the three months endedSeptember 30, 2021 decreased compared to 2020, primarily due to a decrease in 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. Other revenues for the nine months endedSeptember 30, 2021 increased 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, partially offset by a decrease in dividend income on assets held in our advisor non-qualified deferred compensation plan. ExpenseAdvisory and Commission Advisory and commission expenses consist of the following: 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; 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. 12
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The following table sets forth our payout rate, which is a statistical or
operating measure:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Payout rate 87.15 % 86.62 % 53 bps 86.43 % 85.96 % 47 bps
Our payout rate for the three and nine months ended September 30, 2021 increased
compared to 2020 primarily due to higher production bonus payouts and changes in
product mix.
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 three and nine months ended September 30, 2021 ,
compared to 2020.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
Average number of employees 5,427 4,634 17.1% 5,117 4,504 13.6%
Compensation and benefits for the three and nine months endedSeptember 30, 2021 increased compared to 2020, primarily due to an increase in salary and employee benefit expenses resulting from an increase in headcount. Promotional 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. Promotional expenses for the three and nine months endedSeptember 30, 2021 increased compared to 2020, primarily due to an increase in costs associated with advisor recruitment and advisor loans. 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 three and nine months endedSeptember 30, 2021 increased compared to 2020, primarily due to our continued investment in technology to improve our advisor platform and end-client experience. Amortization of Intangible Assets Amortization of intangible assets represents the benefits received for the use of long-lived intangible assets established through our acquisitions. Amortization of intangible assets for the three and nine months endedSeptember 30, 2021 increased compared to 2020, primarily due to increases in intangible assets resulting from the acquisition of the wealth management business of Waddell & Reed Financial, Inc. onApril 30, 2021 , as well as an acquisition during the fourth quarter of 2020. See Note 4 - Acquisitions and Note 7 -Goodwill and Other Intangible Assets for additional information. 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 three and nine months endedSeptember 30, 2021 increased compared to 2020, primarily due to increases in expenses related to software licenses and our technology portfolio. Professional Services Professional services expenses include 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 expenses for the three and nine months endedSeptember 30, 2021 increased compared to 2020, primarily due to increases in non-capitalized costs related to our service and technology projects. 13
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Table of Contents Brokerage, Clearing and Exchange Fees 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 for the three and nine months endedSeptember 30, 2021 increased compared to 2020, primarily due to an increase in the volume of sales and trading activity. 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 expense for the three and nine months endedSeptember 30, 2021 increased compared to 2020, primarily due to increases in costs associated with client statement production. Loss on Extinguishment of Debt OnMarch 15, 2021 , we increased our borrowing capacity under and extended the maturity date of our existing senior revolving credit facility, 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 in the three months endedMarch 31, 2021 . Provision for Income Taxes Our effective income tax rate was 25.3% and 23.3% for the three months endedSeptember 30, 2021 and 2020, respectively. The increase in our effective income tax rate for the three months endedSeptember 30, 2021 compared to 2020 was primarily due to the release of unrecognized tax benefits in the prior year. Our effective income tax rate was 24.3% and 24.8% for the nine months endedSeptember 30, 2021 and 2020, respectively. COVID-19 Impact OnMarch 11, 2020 , theWorld Health Organization designated the spread of COVID-19 as a pandemic. As of the date of this Quarterly Report on Form 10-Q, 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. Please consult Part I, "Item 1A. Risk Factors" in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19. Liquidity and Capital Resources 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, toLPL 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. Liquidity Our liquidity needs are primarily driven by capital requirements atLPL Financial , interest due on our corporate debt and other capital returns to shareholders. Our liquidity needs atLPL 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 LiquidityLPL 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 cash equivalents from the following: (1) cash held at the Parent, (2) excess cash atLPL Financial per the Credit Agreement, which is the net 14
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Table of Contents capital held atLPL 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 cash equivalents held atThe Private Trust Company, N.A. ("PTC"), in excess of Credit Agreement capital requirements, excess cash held at Waddell & Reed per the Credit Agreement, or the net capital held in excess of 10% of its aggregate indebtedness, and cash and cash equivalents held at non-regulated subsidiaries. We believe corporate cash is a useful measure of the Parent's liquidity as it is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. The following table presents the components of corporate cash (in thousands): September 30, 2021 December 31, 2020 Corporate Cash Cash at Parent $ 181,061 $ 201,385 Excess cash at LPL Financial per Credit Agreement 62,637 67,574 Other available cash $ 21,953 $ 10,960 Total Corporate Cash $ 265,651 $ 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 byLPL Financial are the primary sources of liquidity. Subject to regulatory approval or notification, capital generated byLPL Financial can be distributed to the Parent to the extent the capital levels exceed both regulatory requirements and internal capital thresholds. As ofSeptember 30, 2021 ,LPL Financial maintained excess regulatory capital of$62.6 million over Credit Agreement requirements. During the three and nine months endedSeptember 30, 2021 ,LPL Financial paid dividends of$115.0 million and$390.0 million to the Parent, respectively. 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$40.0 million , representing 276,800 shares, and expect to continue repurchases with a similar focus while maintaining our ability to reassess capital deployment opportunities over time. 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 10 - Stockholders' Equity, within the notes to the unaudited condensed 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 10 - Stockholders' Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends. 15
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Table of Contents LPL Financial LiquidityLPL Financial relies primarily on customer payables to fund margin lending.LPL Financial maintains additional liquidity through external lines of credit totaling$575.0 million atSeptember 30, 2021 .LPL Financial also maintains a line of credit with the Parent. External Liquidity Sources The following table presents our external lines of credit atSeptember 30, 2021 (in millions): Description Borrower Maturity Date Outstanding Available Senior secured, revolving credit facility LPL Holdings, Inc. March 2026 $ -$ 1,000
Broker-dealer revolving credit facility
$ - $ 300
Secured, uncommitted lines of credit
$ - $ 75
Unsecured, uncommitted lines of credit
$ - $ 75
Unsecured, uncommitted lines of credit
$ - $ 50
Unsecured, uncommitted lines of credit
$ - $ 75
Secured, uncommitted lines of credit
$ - unspecified
Secured, uncommitted lines of credit
$ - unspecified
Capital Resources
The Company seeks to manage capital levels in support of our 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. 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. 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 September 30, 2021 , LPL Financial
had net capital of $133.3 million with a minimum net capital requirement of
$14.1 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"). 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. 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 ("Waddell & Reed broker-dealer"). The Waddell & Reed
broker-dealer is required to maintain net capital of $250,000 , which represents
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Table of Contents the greater of 2% of its aggregate debits or the minimum net capital requirement of$250,000 . AtSeptember 30, 2021 , the Waddell & Reed broker-dealer had net capital of$8.2 million . The Company expects to dissolve the Waddell & Reed broker-dealer during the fourth quarter of 2021. 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. Debt and Related Covenants The Credit Agreement and the Indentures contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: •incur additional indebtedness or issue disqualified stock or preferred stock; •declare dividends, or other distributions to stockholders; •repurchase equity interests; •redeem indebtedness that is subordinated in right of payment to certain debt instruments; •make investments or acquisitions; •create liens; •sell assets; •guarantee indebtedness; •engage in certain transactions with affiliates; •enter into agreements that restrict dividends or other payments from subsidiaries; and •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. 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 ofSeptember 30, 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 required ratios under our financial covenants and actual ratios were as follows:September 30, 2021 Financial Ratio Covenant Requirement
Actual Ratio
Leverage Ratio (Maximum) 5.00 2.18
Interest Coverage (Minimum) 3.00 12.42
See Note 8 - Long-term and Other Borrowings, within the notes to the unaudited
condensed 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 9 - Commitments and Contingencies and Note 16 -
Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of
Credit Risk, within the notes to the unaudited condensed consolidated financial
statements.
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Table of Contents Contractual Obligations During the nine months endedSeptember 30, 2021 , there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2020 Annual Report on Form 10-K. See Note 8 - Long-term and Other Borrowings and Note 9 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements, as well as the Contractual Obligations section within Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K, for further detail. 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 unaudited condensed consolidated financial statements for a detailed discussion regarding our fair value measurements. Critical Accounting Policies and Estimates In the notes to our consolidated financial statements and in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2020 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no changes to those policies that we consider to be material since the filing of our 2020 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP. 18
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