Regulatory Fines Continue to Hammer LPL Financial's Bottom Line | Cold Spring Advisory Group

Regulatory Fines Continue to Hammer LPL Financial's Bottom Line

July 8, 2015

Allegations of regulatory violations continue to mount for LPL Financial as FINRA announced today that the firm failed to waive mutual fund sales charges for certain charitable and retirement accounts. LPL Financial, Wells Fargo and Raymond James were ordered to collectively pay more than $30 million in restitution to affected customers who paid sales charges on shares of Class A mutual funds on numerous occasions since June of 2009. This violation is just the tip of the iceberg for LPL Financial, a profitable company that operates in a way that primarily benefits its brokers at the expense of their investors.

LPL Financial is the largest organization of independent financial advisors in the nation, with 13,300 brokers, 6,500 branch locations and 13 million customers According to a report from the New York Times, LPL brokers basically act as loosely-affiliated contractors under a uniform name that operate independently of one another. LPL-affiliated brokers are responsible for footing the bill for their office space and their staff. The company’s low overhead costs allow LPL to pass as much as 80% in commission and fees back to its brokers. 

Its tremendous growth and low-cost business model has allowed the company to profit considerably, but do the investors benefit?

The short answer is –no. The New York Times report indicates that many LPL brokers register as their own supervisors, and the company has faced numerous allegations of failing to have a supervisory system in place. There are 106 regulatory events are listed on LPL Financial’s FINRA BrokerCheck report and since its inception in 1989, LPL Financial has faced numerous allegations of violations of FINRA rules and securities industry laws. It has been sanctioned by a number of state securities departments, including Illinois, Montana, Oregon, and Pennsylvania and it has amassed tens of millions of dollars in fines and restitutions as a result of these sanctions. 

For example, in May of 2015, FINRA imposed a $10 million fine on LPL Financial for broad supervisory failures, and another $1.7 million in restitution to customers as a result of a failure to supervise the sale of non-traditional exchange-traded funds (ETFs). The firm was censured and consented to the regulator’s conclusions without admitting or denying its findings. In July of 2014, LPL Financial consented to FINRA allegations that the firm’s WSPS were inadequate. It is anticipated that LPL Financial will incur up to $23 million in charges; $18 million more than previously anticipated.

LPL’s business model, by design, makes establishing, maintaining and enforcing supervisory systems near impossible. This latest incident is a reminder that investors should never assume that there are oversight procedures set in place at brokerage firms. The repercussions of this assumption hits investors where it hurts the most: their wallets.