September 18, 2014 / 7:32 PM / 3 years ago

CORRECTED-LPL broker hiring strong, Q4 share buybacks possible

(Changes seventh paragraph to say LPL has paid millions of dollars in regulatory fines, not hundreds of millions of dollars)

By Jed Horowitz

NEW YORK, Sept 16 (Reuters) - LPL Financial Holdings, the fourth largest U.S. brokerage firm with more than 13,800 brokers, said Tuesday it expects be at the high end of its hiring targets for 2014.

That means it is likely to end the year with more than 14,000 brokers, given its goal of hiring 400 to 500 net new advisers a year. Winter storms retarded LPL's hiring earlier this year but it should reach the upper end of the target despite "moderate" growth through August, according to a presentation prepared for clients of Goldman Sachs Group.

Slides of the presentation, which was made by Chief Financial Officer Dan Arnold, were filed with the U.S. Securities and Exchange Commission.

Broker growth is crucial for LPL, a so-called independent broker-dealer that sells products, marketing and regulatory services to financial advisers who contract with the firm. Brokers at independent firms pay for many of their overhead costs but retain about 85 percent of commissions and fees. That requires LPL to operate on thin profit margins and to rely on high sales volume.

Employer-model brokerage firms such as Morgan Stanley , the world's largest with almost 17,000 advisers, pick up many of their brokers' expenses but also keep about 50-75 percent of the revenue they produce.

LPL's profit margin should grow annually by .50 percent to .95 percent as fee revenue grows and expense growth tightens through outsourcing and moderately lower investment spending, the firm said.

LPL repeated an earlier warning, however, that its regulatory expenses are growing as it installs new technology and develops procedures to combat poor sales practices and controls that have led to millions of dollars of fines from state and federal regulators in recent years.

Its total operating expenses in the second quarter soared almost 9 percent to $1 billion, and regulatory costs will grow 2.5 percent over the rest of the year.

LPL also said it will ask its banks for a larger revolving credit facility, which it may use in part to repurchase shares in the fourth quarter, according to the slides. LPL repurchased $125 million of its shares and paid out $48 million in dividends in the first half of 2014, compared with $219 million of repurchases and $68 million of dividends in all of 2013.

Highly profitable sales of annuities remain "soft" because of interest-rate uncertainty among investors but fee-generating accounts that are more lucrative than those that generate commissions are growing. Fee-based sales represent 35 percent of LPL clients' assets but comprise more than 50 percent of new sales, the presentation said.

Bank contracts signed in 2008 are paying above-market interest rates on cash the firm sweeps from customer accounts to the banks, but the rates are falling and will continue to decline as contracts reset through the end of 2016.

Shares of LPL, up 26.4 percent over the past 12 months, fell 1.7 percent Tuesday to $46.90. (Editing by Grant McCool)

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