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LPL FINANCIAL HOLDINGS INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.
The following discussion of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and the
notes to those consolidated financial statements included in Item 8 of this
Form 10-K. This discussion contains forward-looking statements that involve
significant risks and uncertainties. As a result of many factors, such as those
set forth under "Risk Factors" and elsewhere in this Form 10-K, our actual
results may differ materially from those anticipated in these forward-looking
statements. Please also refer to the section under heading "Special Note
Regarding Forward-Looking Statements."

Overview

We are the nation's largest independent broker-dealer, a top custodian for
registered investment advisors ("RIAs"), and a leading independent consultant to
retirement plans. We provide an integrated platform of brokerage and investment
advisory services to more than 13,300 independent financial advisors including
financial advisors at approximately 700 financial institutions (our "advisors")
across the country, enabling them to provide their retail investors (their
"clients") with objective, conflict-free financial advice. We also support
approximately 4,500 financial advisors who are affiliated and licensed with
insurance companies with customized clearing services, advisory platforms and
technology solutions.
In addition, through our subsidiary companies, we support a diverse client base.
Fortigent Holdings Company, Inc. is a leading provider of solutions and
consulting services to RIAs, banks and trust companies servicing high-net-worth
clients, while The Private Trust Company N.A. manages trusts and family assets
for high-net-worth clients in all 50 states. Our newest subsidiary, NestWise
LLC, supports the recruitment and development of new-to-the-industry financial
advisors dedicated to serving mass market clients under the fee-based,
independent model.
Our singular focus is to provide our advisors with the front-, middle- and
back-office support they need to serve the large and growing market for
independent investment advice. We believe 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 leading
financial products, all delivered in an environment unencumbered by conflicts
from product manufacturing, underwriting or market making.
For over 20 years, we have served the independent advisor market. We currently
support the largest independent advisor base and we believe we have the fourth
largest overall advisor base in the United States based on the information
available as of the date this Annual Report on Form 10-K has been issued.
Through our advisors, we are also one of the largest distributors of financial
products in the United States. Our scale is a substantial competitive advantage
and enables us to more effectively attract and retain advisors. Our unique
business model allows us to invest in more resources for our advisors,
increasing their revenues and creating a virtuous cycle of growth. We have
approximately 2,900 employees with primary offices in Boston, Charlotte and
San Diego.
Our Sources of Revenue
Our revenues are derived primarily from fees and commissions from products and
advisory services offered by our advisors to their clients, a substantial
portion of which we pay out to our advisors, as well as fees we receive from our
advisors for the use of our technology, custody, clearing, trust and reporting
platforms. We also generate asset-based revenues through our platform of over
8,900 financial products from a broad range of product manufacturers. 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 manufacturers 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 track recurring revenue, a characterization of net revenue and a statistical
measure, which we define to include our revenues from asset-based fees, advisory
fees, trailing commissions, cash sweep programs and certain other fees that are
based upon accounts and advisors. Because certain recurring revenues are
associated with asset balances, they will fluctuate depending on the market
values and current interest rates. These asset balances, specifically related to
advisory revenues and asset-based revenues, have a correlation of approximately
60% to the fluctuations of the overall market, as measured by the S&P 500.
Accordingly, our recurring revenue can be negatively impacted by adverse
external market conditions. However, recurring revenue is meaningful to us
despite these fluctuations because it is not dependent upon transaction volumes
or other activity-based revenues,

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which are more difficult to predict, particularly in declining or volatile
markets.
The table below summarizes the sources of our revenue, the primary drivers of
each revenue source and the percentage of each revenue source that represents
recurring revenue, a characterization of revenue and a statistical measure:
                                                               For the Year Ended
                                                                December 31, 2012
                                                                      % of
                                                                     Total
                                                           Total      Net
               Sources of Revenue     Primary Drivers    (millions) Revenue  % Recurring
Advisor-driven Commission           - Transactions
 revenue with                       - Brokerage asset      $1,821     50%        39%
   ~85%-90%                         levels
 payout ratio  Advisory             - Advisory asset       $1,062     29%        99%
                                    levels
               Asset-Based          - Cash balances
               - Cash Sweep Fees    - Interest rates
               - Sponsorship Fees   - Number of accounts    $403      11%       100%
               - Record Keeping     - Client asset
                                    levels
               Transaction and      - Client activity
  Attachment   Other                - Number of clients

revenue - Transactions - Number of advisors

International Travel Means Big Opportunities for Producers this Summer.

retained by - Client (Investor) - Number of accounts $322 9%

     64%
      us       Accounts             - Premium technology
               - Advisor Seat and   subscribers
               Technology
               Interest and Other   - Margin accounts
               Revenue              - Alternative           $53        1%        43%
                                    investment
                                    transactions
               Total Net Revenue                           $3,661     100%       65%
               Total Recurring Revenue                     $2,395     65%


• Commission and Advisory Revenues. Commission and advisory revenues both

     represent advisor-generated revenue, generally 85-90% of which is paid to
     advisors.



Commission Revenues. We generate two types of commission revenues: front-end
sales commissions that occur at the point of sale and trailing commissions.
Transaction-based commission revenues primarily represent gross commissions
generated by our advisors, primarily from commissions earned on the sale of
various financial products such as mutual funds, variable and fixed annuities,
alternative investments, general securities, fixed income, insurance, group
annuities and options and commodities. The levels of transaction-based
commissions 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 (a
commission that is paid over time, such as 12(b)-1 fees) on mutual funds and
variable annuities held by clients of our advisors. Trailing commissions are
recurring in nature and are earned based on the current market value of
investment holdings in trail-eligible assets.

Advisory Revenues. Advisory revenues represent fees charged on our corporate RIA
platform to clients of our advisors based on the value of advisory assets.
Advisory fees are typically billed to clients quarterly, in advance, and are
recognized as revenue ratably during the quarter. The value of the assets in the
advisory account on the billing date determines the amount billed, and
accordingly, the revenues earned in the following three month period. The
majority of our accounts are billed using values as of the last business day of
each calendar quarter. Generally, the advisory revenues collected on our
corporate RIA platform range from 0.5% to 3.0% of the underlying assets.


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In addition, we support independent RIAs who conduct their advisory business
through separate entities by establishing their own RIA ("Independent RIAs")
pursuant to the Investment Advisers Act of 1940, rather than using our corporate
RIA. The assets held under these investment advisory accounts custodied with LPL
Financial LLC ("LPL Financial") are included in our advisory and brokerage
assets, net new advisory assets and advisory assets under custody metrics. The
advisory revenue generated by an Independent RIA is earned by the Independent
RIA, and accordingly is not included in our advisory revenue. However, there are
administrative fees charged to Independent RIAs including custody and clearing
fees, based on the value of assets within these advisory accounts. The
administrative fees collected on our Independent RIA platform vary, and can
reach a maximum of 0.6% of the underlying assets.

Furthermore, we support certain financial advisors at broker-dealers affiliated
with insurance companies through our customized advisory platforms and charge
fees to these advisors based on the value of assets within these advisory
accounts.

• Asset-Based Revenues. Asset-based revenues are comprised of fees from cash

International Travel Means Big Opportunities for Producers this Summer.

sweep programs, our sponsorship programs with financial product

manufacturers, and omnibus processing and networking services. Pursuant to

contractual arrangements, uninvested cash balances in our advisors' client

accounts are swept into either insured deposit accounts at various banks or

third-party money market funds, for which we receive fees, including

administrative and record-keeping fees based on account type and the

invested balances. In addition, we receive fees from certain financial

product manufacturers in connection with sponsorship programs that support

our marketing and sales-force education and training efforts. Our omnibus

and networking revenues represent fees paid to us in exchange for

administrative and record-keeping services that we provide to clients of our

advisors. Omnibus revenues, paid to us by mutual fund manufacturers, are

generally correlated to assets served while networking revenues, paid to us

by mutual fund and annuity product manufacturers, are correlated to the

number of positions we administer.

• Transaction and Other Revenues. Revenues earned from transactions and other

services provided primarily consist of transaction fees and ticket charges,

subscription fees, Individual Retirement Account ("IRA") custodian fees,

contract and license fees, conference fees and other client account fees. We

     charge fees to our advisors and their clients for executing certain
     transactions in brokerage and fee-based advisory accounts. We earn
     subscription fees for various services provided to our advisors and on IRA

custodial services that we provide for their client accounts. We charge

monthly administrative fees to our advisors and fees to advisors who

subscribe to our reporting services. We charge fees to financial product

manufacturers for participating in our training and marketing conferences.

International Travel Means Big Opportunities for Producers this Summer.

In addition, we host certain advisor conferences that serve as training,

sales and marketing events, for which we charge an attendance fee.

• Other Revenue. Other revenue includes marketing re-allowance fees from

certain financial product manufacturers, primarily those who offer

alternative investments, mark-to-market gains or losses on assets held by us

for the advisors' non-qualified deferred compensation plan and our model

portfolios, revenues from our retirement partner program, as well as

interest income from client margin accounts and cash equivalents, net of

operating interest expense and other items.

Our Operating Expenses

• Production Expenses. Production expenses are comprised of the following:

     base payout amounts that are earned by and paid out to advisors based on
     commission and advisory revenues earned on each client's account
     (collectively, commission and advisory revenues earned are referred to as

gross dealer concessions, or "GDC"); production bonuses earned by advisors

based on the levels of commission and advisory revenues they produce; the

recognition of share-based compensation expense from stock options and

warrants granted to advisors and financial institutions based on the fair

value of the awards at each interim reporting period; a mark-to-market gain

or loss on amounts designated by advisors as deferred commissions in a

non-qualified deferred compensation plan at each interim reporting period;

and brokerage, clearing and exchange fees. Our production payout ratio is

calculated as production expenses excluding brokerage, clearing and exchange

     fees, divided by GDC.



We characterize production payout, which includes all production expenses except brokerage, clearing and exchange fees, as either GDC sensitive or non-GDC sensitive. Base payout amounts and production bonuses earned by and paid to advisors are GDC sensitive because they are variable and highly correlated

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to the level of our commission and advisory revenues in a particular reporting
period. Non-GDC sensitive payout includes share-based compensation expense from
stock options and warrants granted to advisors and financial institutions based
on the fair value of the awards at each interim reporting period, and
mark-to-market gains or losses on amounts designated by advisors as deferred
commissions in a non-qualified deferred compensation plan. Non-GDC sensitive
payout is correlated to market movement in addition to the value of our stock.
We believe that production payout, viewed in addition to, and not in lieu of,
our production expenses, provides useful information to investors regarding our
payouts to advisors.
The following table is presented as an illustration of how the aforementioned
production expenses impact our production payout ratio for the year ended
December 31, 2012:
Base payout rate         84.16 %
Production based bonuses  2.68 %
GDC sensitive payout     86.84 %
Non-GDC sensitive payout  0.22 %
Total Payout Ratio       87.06 %


________________________________

See "Results of Operations" for comparative 2011 and 2010 periods' analyses of production payout ratio.

• Compensation and Benefits Expense. Compensation and benefits expense

includes salaries and wages and related employee benefits and taxes for our

employees (including share-based compensation), as well as compensation for

     temporary employees and consultants.


• General and Administrative Expenses. General and administrative expenses

include promotional fees, occupancy and equipment, communications and data

processing, regulatory fees, travel and entertainment, professional services

     and other expenses. We host certain advisor conferences that serve as
     training, sales and marketing events.


• Depreciation and Amortization Expense. Depreciation and amortization expense

represents the benefits received for using long-lived assets. Those assets

represent significant intangible assets established through our

acquisitions, as well as fixed assets which include internally developed

     software, hardware, leasehold improvements and other equipment.


• Restructuring Charges. Restructuring charges represent expenses incurred as

a result of our 2011 consolidation of UVEST Financial Services Group, Inc.

("UVEST") and our 2009 consolidation of Mutual Service Corporation,

Associated Financial Group, Inc., Associated Securities Corp., Associated

Planners Investment Advisory, Inc. and Waterstone Financial Group, Inc.

     (collectively referred to herein as the "Affiliated Entities").




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How We Evaluate Our Business


We focus on several business and key financial metrics in evaluating the success
of our business relationships and our resulting financial position and operating
performance. Our key metrics as of and for the years ended December 31, 2012,
2011 and 2010 are as follows:

                                                          As of and for the Year Ended December 31,
                                                          2012                 2011              2010

Business Metrics
Advisors(1)                                                 13,352               12,847          12,444
Advisory and brokerage assets (in billions)(2)      $        373.3       $        330.3       $   315.6
Advisory assets under custody (in billions)(3)(4)   $        122.1       $        101.6       $    93.0
Net new advisory assets (in billions)(5)            $         10.9       $         10.8       $     8.5
Insured cash account balances (in billions)(4)      $         16.3       $         14.4       $    12.2
Money market account balances (in billions)(4)      $          8.4       $  

8.0 $ 6.9


Financial Metrics
Revenue growth from prior year                                 5.2 %               11.8 %          13.2 %
Recurring revenue as a % of net revenue(6)                    65.4 %               62.7 %          60.7 %
Net income (loss) (in millions)                     $        151.9       $        170.4       $   (56.9 )
Earnings (loss) per share (diluted)                 $         1.37       $         1.50       $   (0.64 )
Non-GAAP Measures:
Gross margin (in millions)(7)                       $      1,112.3       $      1,031.0       $   937.9
Gross margin as a % of net revenue(7)                         30.4 %               29.6 %          30.1 %
Adjusted EBITDA (in millions)                       $        454.5       $        459.7       $   413.1
Adjusted EBITDA as a % of net revenue                         12.4 %               13.2 %          13.3 %
Adjusted EBITDA as a % of gross margin(7)                     40.9 %               44.6 %          44.0 %
Adjusted Earnings (in millions)                     $        225.0       $        218.6       $   172.7
Adjusted Earnings per share (diluted)               $         2.03       $  

1.95 $ 1.71

____________

(1) Advisors are defined as those independent financial advisors and financial

advisors at financial institutions who are licensed to do business with

the Company's broker-dealer subsidiary. During 2012, an institutional

client's parent company consolidated its operations onto the broker-dealer

platform of an affiliate within its organization, which resulted in a loss

of 181 advisors. Excluding the attrition of the institutional client's

advisors, we added 686 net new advisors during the twelve months ended

December 31, 2012. We consolidated the operations of UVEST with LPL

Financial which resulted, as expected, in the attrition of 146 advisors

during the year ended December 31, 2011. Excluding attrition from the

integration of the UVEST platform, we added 549 net new advisors during

the twelve months ended December 31, 2011.

(2) Advisory and brokerage assets are comprised 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. Such

totals do not include the market value of certain other client assets as

of December 31, 2012, comprised of $46.4 billion held in retirement plans

supported by advisors licensed with LPL Financial, $12.0 billion of trust

assets supported by Concord Capital Partners ("Concord"), and $59.1

billion of assets supported by Fortigent Holdings Company, Inc. Data

regarding certain of these assets was not available at December 31, 2011.

In addition, reported retirement plan assets represent assets that are

custodied with 26 third-party providers of retirement plan administrative

services who provide reporting feeds. We estimate the total assets in

retirement plans served to be between $70.0 billion and $85.0 billion. If

we receive reporting feeds in the future from providers for whom we do not

currently receive feeds, we intend to include and identify such additional

assets in this metric. During the fourth quarter of 2012, we began

receiving a reporting feed from one such provider, which accounted for

$4.1 billion of the $4.8 billion increase to $46.4 billion from the $41.6

       billion of assets reported at September 30, 2012.


(3)    In reporting our financial and operating results for the year ended

December 31, 2012, we have renamed this business metric as advisory assets

       under custody (formerly known as advisory assets under



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management). Advisory assets under custody are comprised of advisory assets
under management in our corporate RIA platform, and Independent RIA assets in
advisory accounts custodied by us. See "Results of Operations" for a tabular
presentation of advisory assets under custody.
(4)    Advisory assets under custody, insured cash account balances and money

market account balances are components of advisory and brokerage assets.

(5) Represents net new advisory assets consisting of funds from new accounts

       and additional funds deposited into existing advisory accounts that are
       custodied in our fee-based advisory platforms.

(6) Recurring revenue, a characterization of net revenue and a statistical

measure, is derived from sources such as advisory revenues, asset-based

revenues, trailing commission revenues, revenues related to our cash sweep

programs, interest earned on margin accounts and technology and service

       revenues, and is not meant as a substitute for net revenues.



(7)    Gross margin is calculated as net revenues less production expenses.
       Production expenses consist of the following expense categories from our
       consolidated statements of operations: (i) commission and advisory and
       (ii) brokerage, clearing and exchange. All other expense categories,
       including depreciation and amortization, are considered general and

administrative in nature. Because our gross margin amounts do not include

any depreciation and amortization expense, we consider our gross margin

       amounts to be non-GAAP measures that may not be comparable to those of
       others in our industry.


Adjusted EBITDA


Adjusted EBITDA is defined as EBITDA (net income plus interest expense, income
tax expense, depreciation and amortization), further adjusted to exclude certain
non-cash charges and other adjustments set forth below. We present Adjusted
EBITDA because we consider it an important measure of our performance. Adjusted
EBITDA is a useful financial metric in assessing our operating performance from
period to period by excluding certain items that we believe are not
representative of our core business, such as certain material non-cash items and
other adjustments.

We believe that Adjusted EBITDA, viewed in addition to, and not in lieu of, our
reported GAAP results, provides useful information to investors regarding our
performance and overall results of operations for the following reasons:

• because non-cash equity grants made to employees, officers and non-employee

directors at a certain price and point in time do not necessarily reflect

     how our business is performing at any particular time, share-based
     compensation expense is not a key measure of our operating performance and


• because costs associated with acquisitions and the resulting integrations,

     debt refinancing, restructuring and conversions and equity issuance and
     related offering costs can vary from period to period and transaction to

transaction, expenses associated with these activities are not considered a

key measure of our operating performance.

We use Adjusted EBITDA:

• as a measure of operating performance;

• for planning purposes, including the preparation of budgets and forecasts;

• to allocate resources to enhance the financial performance of our business;

• to evaluate the effectiveness of our business strategies;

• in communications with our board of directors concerning our financial

     performance and



• as a factor in determining employee and executive bonuses.

Adjusted EBITDA is a non-GAAP measure and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Adjusted

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EBITDA is not a measure of net income, operating income or any other performance measure derived in accordance with GAAP.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

• Adjusted EBITDA does not reflect all cash expenditures, future requirements

for capital expenditures or contractual commitments;

• Adjusted EBITDA does not reflect changes in, or cash requirements for,

     working capital needs;



• Adjusted EBITDA does not reflect the significant interest expense, or the

     cash requirements necessary to service interest or principal payments, on
     our debt; and


• Adjusted EBITDA can differ significantly from company to company depending

on long-term strategic decisions regarding capital structure, the tax

jurisdictions in which companies operate and capital investments, limiting

its usefulness as a comparative measure.

Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in our business. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA as supplemental information.


Set forth below is a reconciliation from our net income (loss) to Adjusted
EBITDA, a non-GAAP measure, for the years ended December 31, 2012, 2011 and 2010
(in thousands):
                                                       For the Year Ended December 31,
                                                     2012             2011           2010
Net income (loss)                               $   151,918       $  170,382     $  (56,862 )
Interest expense                                     54,826           68,764         90,407
Income tax expense (benefit)                         98,673          112,303        (31,987 )
Amortization of purchased intangible assets and
software(1)                                          39,542           38,981         43,658
Depreciation and amortization of all other
fixed assets                                         32,254           33,760         42,379
EBITDA                                              377,213          424,190         87,595
EBITDA Adjustments:
Employee share-based compensation expense(2)         17,544           14,978         10,429
Acquisition and integration related expenses(3)      20,474           (3,815 )       12,569
Restructuring and conversion costs(4)                 6,146           22,052         22,835
Debt amendment and extinguishment costs(5)           16,652                -         38,633
Equity issuance and related offering costs(6)         4,486            2,062        240,902
Other(7)                                             11,967              253            150
Total EBITDA Adjustments                             77,269           35,530        325,518
Adjusted EBITDA                                 $   454,482       $  459,720     $  413,113


____________

(1) Represents amortization of intangible assets and software as a result of

       our purchase accounting adjustments from our merger transaction in 2005
       and our various acquisitions.

(2) Represents share-based compensation expense for equity awards granted to

employees, officers and directors. Such awards are measured based on the

grant-date fair value and share-based compensation is recognized over the

requisite service period of the individual grants, which generally equals

       the vesting period.


(3)    Represents acquisition and integration costs resulting from various

acquisitions, including changes in the estimated fair value of future

payments, or contingent consideration, required to be made to former

shareholders of certain acquired entities. During the year ended

December 31, 2012, approximately $11.4 million was recognized as a charge

against earnings due to a net increase in the estimated fair value of

contingent consideration. As previously disclosed, we have been involved

in a legal dispute with a third-party indemnitor under a purchase and sale

       agreement with respect to the indemnitor's refusal to make



                                       43
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indemnity payments that we believed were required under the purchase and sale
agreement. Included in the year ended December 31, 2010, is $11.4 million of
expenditures related to the legal dispute with the third-party indemnitor that
has been classified within general and administrative expenses and included in
the presentation of Adjusted EBITDA, a non-GAAP measure. We settled our legal
dispute with the third-party indemnitor in the fourth quarter of 2011.
Accordingly in 2011, we received a $10.5 million cash settlement, $9.8 million
of which has been excluded from the presentation of Adjusted EBITDA, a non-GAAP
measure. See Note 14 - Commitments and Contingencies, within the notes to
consolidated financial statements for additional information.
(4)    Represents organizational restructuring charges and conversion and other

related costs incurred resulting from the 2011 consolidation of UVEST and

the 2009 consolidation of the Affiliated Entities. As of December 31,

2012, approximately 89% and 98%, respectively, of costs related to these

two initiatives have been recognized. The remaining costs largely consist

of the amortization of transition payments that have been made in

connection with these two conversions for the retention of advisors and

financial institutions that are expected to be recognized into earnings by

December 2014.


(5)    For the year ended December 31, 2012, represents expenses incurred
       resulting from the early extinguishment and repayment of amounts

outstanding under the prior senior secured credit facilities, including

the write-off of $16.5 million of unamortized debt issuance costs that

have no future economic benefit, as well as various other charges incurred

in connection with the establishment of the new senior secured credit

facilities. For the year ended December 31, 2010, represents debt

amendment costs incurred in 2010 for amending and restating our senior

       secured credit agreement to establish a new term loan tranche and to
       extend the maturity of an existing tranche on our senior credit
       facilities.

(6) Represents equity issuance and offering costs incurred in the years ended

December 31, 2012, 2011 and 2010, related to the closing of a secondary

offering in the second quarter of 2012, the closing of a secondary

offering in the second quarter of 2011 and our initial public offering

("IPO") in the fourth quarter of 2010, respectively. In addition, results

for the year ended December 31, 2012, include a $3.9 million charge for

the late deposit of withholding taxes related to the exercise of certain

non-qualified stock options in connection with our 2010 IPO. See Note 14 -

Commitments and Contingencies, within the notes to consolidated financial

       statements for additional information.


(7)    Results for the year ended December 31, 2012 include approximately $7.0
       million for consulting services and technology development aimed at
       enhancing the Company's performance in support of its advisors while
       operating at a lower cost. In addition, results for the year ended

December 31, 2012, include an asset impairment charge of $4.0 million for

       certain fixed assets related to internally developed software that were
       determined to have no estimated fair value. Remaining costs include
       certain excise and other taxes.


Adjusted Earnings and Adjusted Earnings per share


Adjusted Earnings represents net income before: (a) employee share-based
compensation expense, (b) amortization of intangible assets and software, a
component of depreciation and amortization resulting from our merger transaction
in 2005 and our various acquisitions, (c) acquisition and integration related
expenses, (d) restructuring and conversion costs, (e) debt amendment and
extinguishment costs, (f) equity issuance and related offering costs and
(g) other. Reconciling items are tax effected using the income tax rates in
effect for the applicable period, adjusted for any potentially non-deductible
amounts.

In reporting our financial and operating results for the years ended December 31, 2012, 2011 and 2010, we renamed our non-GAAP performance measures to Adjusted Earnings and Adjusted Earnings per share.

Adjusted Earnings per share represents Adjusted Earnings divided by weighted average outstanding shares on a fully diluted basis.

We prepared Adjusted Earnings and Adjusted Earnings per share to eliminate the effects of items that we do not consider indicative of our core operating performance.

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We believe that Adjusted Earnings and Adjusted Earnings per share, viewed in addition to, and not in lieu of, our reported GAAP results provide useful information to investors regarding our performance and overall results of operations for the following reasons:

• because non-cash equity grants made to employees, officers and non-employee

directors at a certain price and point in time do not necessarily reflect

how our business is performing, share-based compensation expense is not a

key measure of our operating performance;

• because costs associated with acquisitions and related integrations, debt

refinancing, restructuring and conversions, and equity issuance and related

offering costs can vary from period to period and transaction to

transaction, expenses associated with these activities are not considered a

     key measure of our operating performance; and


• because amortization expenses can vary substantially from company to company

and from period to period depending upon each company's financing and

accounting methods, the fair value and average expected life of acquired

     intangible assets and the method by which assets were acquired, the
     amortization of intangible assets obtained in acquisitions are not
     considered a key measure in comparing our operating performance.


Since 2010, we have used Adjusted Earnings for internal management reporting and
evaluation purposes. We also believe Adjusted Earnings and Adjusted Earnings per
share are useful to investors in evaluating our operating performance because
securities analysts use them as supplemental measures to evaluate the overall
performance of companies, and our investor and analyst presentations include
Adjusted Earnings and Adjusted Earnings per share.
Adjusted Earnings and Adjusted Earnings per share are not measures of our
financial performance under GAAP and should not be considered as an alternative
to net income or earnings per share or any other performance measure derived in
accordance with GAAP, or as an alternative to cash flows from operating
activities as a measure of our profitability or liquidity.

We understand that, although Adjusted Earnings and Adjusted Earnings per share
are frequently used by securities analysts and others in their evaluation of
companies, they have limitations as analytical tools, and you should not
consider Adjusted Earnings and Adjusted Earnings per share in isolation, or as
substitutes for an analysis of our results as reported under GAAP. In particular
you should consider:

• Adjusted Earnings and Adjusted Earnings per share do not reflect our cash

expenditures, or future requirements for capital expenditures or contractual

     commitments;


• Adjusted Earnings and Adjusted Earnings per share do not reflect changes in,

     or cash requirements for, our working capital needs; and


• Other companies in our industry may calculate Adjusted Earnings and Adjusted

     Earnings per share differently than we do, limiting their usefulness as
     comparative measures.



Management compensates for the inherent limitations associated with using
Adjusted Earnings and Adjusted Earnings per share through disclosure of such
limitations, presentation of our financial statements in accordance with GAAP
and reconciliation of Adjusted Earnings to the most directly comparable GAAP
measure, net income.


                                       45
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The following table sets forth a reconciliation of net income (loss) to non-GAAP
measures Adjusted Earnings and Adjusted Earnings per share for the years ended
December 31, 2012, 2011 and 2010 (in thousands, except per share data):
                                                       For the Year Ended December 31,
                                                     2012            2011           2010
                                                                 (unaudited)
Net income (loss)                                $   151,918     $  170,382     $  (56,862 )
After-Tax:
EBITDA Adjustments(1)
Employee share-based compensation expense(2)          13,161         11,472 

8,400

Acquisition and integration related expenses(3) 11,106 (2,354 ) 7,638 Restructuring and conversion costs

                     3,792         13,606 

13,877

Debt amendment and extinguishment costs               10,274              - 

23,477

Equity issuance and related offering costs(4) 4,262 1,272

       149,568
Other                                                  7,384            156             91
Total EBITDA Adjustments                              49,979         24,152        203,051
Amortization of purchased intangible assets and
software(1)                                           24,397         24,051 

26,531

Acquisition related benefit for a net operating
loss carry-forward(5)                                 (1,265 )            -              -
Adjusted Earnings                                $   225,029     $  218,585     $  172,720
Adjusted Earnings per share(6)                   $      2.03     $     1.95     $     1.71
Weighted average shares outstanding - diluted(7)     111,060        112,119 

100,933

____________

(1)    EBITDA Adjustments and amortization of purchased intangible assets and
       software have been tax effected using a federal rate of 35.0% and the
       applicable effective state rate which was 3.30%, net of the federal tax
       benefit, for the periods presented.

(2) Represents the after-tax expense of non-qualified stock options for which

we receive a tax deduction upon exercise, restricted stock awards for

which we receive a tax deduction upon vesting, and the full expense impact

of incentive stock options granted to employees that have vested and

qualify for preferential tax treatment and conversely, for which we do not

receive a tax deduction. Share-based compensation for vesting of incentive

       stock options was $6.1 million, $5.8 million and $5.3 million,
       respectively, for the years ended December 31, 2012, 2011 and 2010.


(3)    Represents the after-tax expense of acquisition and related costs for

which we receive a tax deduction. In addition, the results for the twelve

months ended December 31, 2012 include a $5.7 million reduction of expense

       relating to the fair value of contingent consideration for the stock
       acquisition of Concord, that is not deductible for tax purposes and that
       we do not consider to be indicative of our core performance.


(4)    Represents after-tax equity issuance and offering costs incurred in the
       years ended December 31, 2012, 2011 and 2010, related to the closing of a
       secondary offering in the second quarter of 2012, the closing of a

secondary offering in the second quarter of 2011 and the full expense

impact of $8.1 million of offering costs incurred in the fourth quarter of

       2010 for which we do not receive a tax deduction, respectively. In
       addition, results for the year ended December 31, 2012 include a $3.9
       million charge in other expenses in the consolidated statements of
       operations for the late deposit of withholding taxes related to the
       exercise of certain non-qualified stock options in connection with our
       2010 IPO, that is not deductible for tax purposes. See Note 14 -

Commitments and Contingencies, within the notes to consolidated financial

statements for additional information.

(5) Represents the expected tax benefit available to us from the accumulated

       net operating losses of Concord that arose prior to our acquisition; such
       benefits were recorded in the third quarter of 2012.



                                       46
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(6) Represents Adjusted Earnings, a non-GAAP measure, divided by weighted

average number of shares outstanding on a fully diluted basis. Set forth

is a reconciliation of earnings (loss) per share on a fully diluted basis

       as calculated in accordance with GAAP to Adjusted Earnings per share:


                                                                For the Year Ended
                                                                   December 31,
                                                           2012        2011        2010
                                                                    (unaudited)
Earnings (loss) per share - diluted                      $  1.37     $  

1.50 $ (0.64 ) Adjustment to include dilutive shares, not included in GAAP earnings (loss) per share

                                 -           -        0.08
Adjustment for allocation of undistributed earnings to
stock units                                                    -        0.02           -
After-Tax:
EBITDA Adjustments per share                                0.45       

0.22 2.01 Amortization of purchased intangible assets and software per share

                                                   0.22        0.21        0.26
Acquisition related benefit for a net operating loss
carry-forward per share                                    (0.01 )         -           -
Adjusted Earnings per share                              $  2.03     $  1.95     $  1.71



(7)    Included within the weighted average share count for the year ended
       December 31, 2012, is approximately 850,000 shares resulting from the
       distribution pursuant to the 2008 Nonqualified Deferred Compensation Plan
       in February 2012 that were not included in the weighted average share

count for the year ended December 31, 2011. See Note 15 - Stockholders'

Equity, within the notes to consolidated financial statements for

additional information.



The following table reflects pro-forma Adjusted Earnings per share, a non-GAAP
measure, and growth in pro-forma Adjusted Earnings per share, assuming weighted
average shares outstanding on a fully diluted basis as of December 31, 2012 were
also outstanding as of December 31, 2011 (in thousands, except per share data):
                                             For the Year Ended
                                                December 31,                          % Change
                                     2012          2011          2010        '12 vs. '11     '11 vs. '10
                                                (unaudited)
Adjusted Earnings                 $ 225,029     $ 218,585     $ 172,720
Weighted average shares
outstanding - diluted as of
December 31, 2012                   111,060       111,060       111,060
Pro-forma Adjusted Earnings per
share                             $    2.03     $    1.97     $    1.56           3.0 %          26.3 %


Acquisitions, Integrations and Divestitures


From time to time we undertake acquisitions and/or divestitures based on
opportunities in the competitive landscape. These activities are part of our
overall growth strategy, but can distort comparability when reviewing revenue
and expense trends for periods presented. The following describes significant
acquisition and divestiture activities that have impacted our 2010, 2011 and
2012 results.

Consolidation of the Affiliated Entities


On September 1, 2009, we consolidated the operations of the Affiliated Entities
with those of LPL Financial. The consolidation involved the transfer of
securities licenses of certain registered representatives associated with the
Affiliated Entities and their client accounts. Following the consolidation, the
registered representatives and client accounts that were transferred are
associated with LPL Financial. The consolidation of the Affiliated Entities was
effected to enhance service offerings to our advisors while also generating
efficiencies.

While our acquisition of the Affiliated Entities has contributed to the overall
growth of our base of advisors and related revenue and market position, the
consolidation into LPL Financial resulted in restructuring costs in the form of
personnel costs, system costs and professional fees, as well as restructuring
charges including severance and one-time termination benefits, lease and
contract termination fees, asset impairments and transfer and conversion costs.
See Note 4 - Restructuring, within the notes to consolidated financial
statements for additional information.

                                       47
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Acquisition of National Retirement Partners, Inc.


On February 9, 2011, we acquired certain assets of National Retirement Partners,
Inc. ("NRP"). As part of the acquisition, 206 advisors previously registered
with NRP transferred their securities and advisory licenses and registrations to
LPL Financial. We may be required to pay future consideration to former
shareholders of NRP that is contingent upon the achievement of certain
revenue-based milestones in the third year following the acquisition. We
estimated the fair value of the remaining contingent consideration at the close
of the transaction and we re-measure contingent consideration at fair value at
each interim reporting period with changes recognized in earnings. There is no
maximum amount of contingent consideration; however, based on our current
estimate, we expect to make a cash payment of an amount between $20.0 million
and $30.0 million in the first quarter of 2014.

Consolidation of UVEST Financial Services Group, Inc.


On March 14, 2011, we committed to a corporate restructuring plan to enhance our
service offering, while generating operating efficiencies. The restructuring
plan included the consolidation of the operations of our subsidiary, UVEST, with
those of LPL Financial. In connection with the consolidation of UVEST, certain
registered representatives formerly associated with UVEST moved to LPL Financial
through a transfer of their licenses. The transfers began in July 2011 and were
completed in December 2011. Following the transfer, all registered
representatives and client accounts that transferred are now associated with LPL
Financial. UVEST has withdrawn its registration with the Financial Industry
Regulatory Authority ("FINRA") effective July 16, 2012, and is no longer subject
to net capital filing requirements.

Based on current estimates, we expect to improve pre-tax profitability by approximately $10.0 million per year upon the completion of the UVEST integration activities by creating operational efficiencies and revenue opportunities. See Note 4 - Restructuring, within the notes to consolidated financial statements for additional information.

Acquisition of Concord Capital Partners


On June 22, 2011, we acquired all of the outstanding common stock of Concord.
Concord provides open architecture investment management solutions for trust
departments of financial institutions. As of December 31, 2012, $0.5 million
remained in an escrow account to be paid to former shareholders of Concord in
accordance with the terms of the stock purchase agreement. We may be required to
pay future consideration that is contingent upon the achievement of certain
gross margin-based milestones for the year ending December 31, 2013. We
estimated the fair value of the contingent consideration at the close of the
transaction and re-measure contingent consideration at fair value at each
interim reporting period with changes recognized in earnings. The maximum amount
of contingent consideration is $15.0 million; however, based on our current
estimate, we expect any payment to range between $0.0 million and $12.0 million
in 2014.

Acquisition of Fortigent Holdings Company, Inc.
On April 23, 2012, we acquired all of the outstanding common stock of Fortigent
Holdings Company, Inc. and its wholly owned subsidiaries Fortigent, LLC, a
registered investment advisory firm, Fortigent Reporting Company, LLC and
Fortigent Strategies Company, LLC (together, "Fortigent"). Fortigent is a
leading provider of solutions and consulting services to RIAs, banks and trust
companies servicing high-net-worth clients. This strategic acquisition further
enhances our capabilities and offers an extension of our existing services for
wealth management advisors.
Total purchase price consideration at the closing of the transaction was $38.8
million. As of December 31, 2012, $8.1 million remained in an escrow account to
be paid to former shareholders of Fortigent in accordance with the terms of the
stock purchase agreement.

Acquisition of Veritat Advisors, Inc.
On July 10, 2012, we acquired all of the outstanding common stock of Veritat
Advisors, Inc. ("Veritat"). Veritat was a registered investment advisory firm
that developed and utilized a proprietary online financial planning platform
designed to support advisors who serve the mass market. This strategic
acquisition will enhance our technological capabilities and increase the
flexibility of our service offering in light of our recently announced
initiative to serve mass market clients through the formation of NestWise LLC.

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At the closing of the transaction we paid $4.9 million, net of cash acquired. We
may be required to pay future consideration to the former Veritat shareholders
that is contingent upon the achievement of certain financial targets and
retention of key employees. The maximum aggregate amount of contingent payments
is $20.9 million to be paid over the following measurement dates: December 31,
2013, June 30, 2015, June 30, 2017 and December 31, 2017 (together, the
"Performance Measurement Dates"), if such financial targets are fully achieved
and key employees are retained. Based on our current estimate, we expect to make
cash payments in an aggregate amount between $5.0 million and $18.0 million at
the Performance Measurement Dates.

Economic Overview and Impact of Financial Market Events


In 2012, valuations in the United States equity markets generally improved with
the S&P 500 closing the year at 1,426, up 13.4% from its closing level on
December 31, 2011. Notwithstanding the general upward trend of the equity
markets, 2012 had periods of weakness, such as the period from May 1st to June
1st, when the S&P 500 declined by 9.1%. The overall equity market levels
improved despite lingering economic concerns about US and global growth rates, a
persistent high unemployment level, and sovereign debt concerns in certain
countries in the European Union. These continuing concerns have led to lack of
retail investor engagement throughout the year, as illustrated by relatively
soft trading volumes in the equity markets and consistent outflows from equity
mutual funds.
In response to the economic concerns, central banks including the Federal
Reserve have continued to maintain interest rates at historically low levels.
The average Federal Funds effective rate was 0.14% in 2012, a slight increase
from the average of 0.10% in 2011. The prolonged low interest rate environment
pressured our revenues from our cash sweep programs. The low interest rate
environment continued to impact investor demand for fixed income securities and
fix annuities. In its September meeting, the Board of Governors of the Federal
Reserve System announced that it expected to support low short-term interest
rates into 2015.
Beginning in the second half of 2012, investors generally became more cautious
as United States elections approached and as investors became more focused on
the uncertainty over the direction of fiscal and tax policies in the United
States, as a number of tax provisions were slated to expire on December 31,
2012, and other tax provisions were scheduled to begin on January 1, 2013. A
number of these uncertain tax topics included the rates of taxation applicable
to dividends and capital gains. The impending increase in the 2013 tax rates was
referred to as the "fiscal cliff". As the end of the year approached, we
generally saw investor activity slow in light of the continued uncertainty of
fiscal policy.
In November and December, we saw a substantial increase in the balances held by
clients in our cash sweep products, which increased by 13.3% from October 31,
2012 to December 31, 2012. We also saw substantial increases in cash held in
client accounts (shown as payables to clients in our consolidated statement of
financial condition), which increased from $388.0 million at October 31, 2012 to
$749.5 million at December 31, 2012. We believe these trends arose as our
advisors' clients realized capital gains and companies and mutual funds
increased dividend payout rates before tax rates were expected to increase. We
also believe clients increased the cash component of their asset allocations
awaiting resolution of the fiscal cliff.
Despite the economic challenges faced during 2012, our business continued to
grow, largely based on the addition of net new advisors and the offering of new
products and services, as we reported record levels of both commission and
advisory revenues. With a partial resolution in early January 2013 of some of
the issues that gave rise to the fiscal cliff concerns, we remain cautiously
optimistic and will continue to attempt to manage the impact of financial
markets on our earnings.

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Results of Operations


The following discussion presents an analysis of our results of operations for
the years ended December 31, 2012, 2011 and 2010. Where appropriate, we have
identified specific events and changes that affect comparability or trends, and
where possible and practical, have quantified the impact of such items.
                                         Year Ended December 31,                   Percentage Change
                                  2012            2011            2010        '12 vs. '11     '11 vs. '10
                                             (In thousands)

Revenues
Commission                    $ 1,820,517     $ 1,754,435     $ 1,620,811          3.8  %         8.2  %
Advisory                        1,062,490       1,027,473         860,227          3.4  %        19.4  %
Asset-based                       403,067         359,724         317,505         12.0  %        13.3  %
Transaction and other             321,558         292,207         274,148         10.0  %         6.6  %
Other                              53,456          45,536          40,795         17.4  %        11.6  %
Net revenues                    3,661,088       3,479,375       3,113,486          5.2  %        11.8  %
Expenses
Production                      2,548,837       2,448,424       2,397,535          4.1  %         2.1  %
Compensation and benefits         362,705         322,126         308,656         12.6  %         4.4  %
General and administrative        350,212         263,228         267,799         33.0  %        (1.7 )%
Depreciation and amortization      71,796          72,741          86,037         (1.3 )%       (15.5 )%
Restructuring charges               5,597          21,407          13,922        (73.9 )%        53.8  %
Total operating expenses        3,339,147       3,127,926       3,073,949          6.8  %         1.8  %
Non-operating interest
expense                            54,826          68,764          90,407        (20.3 )%       (23.9 )%
Loss on extinguishment of
debt                               16,524               -          37,979            *              *
Total expenses                  3,410,497       3,196,690       3,202,335          6.7  %        (0.2 )%
Income (loss) before
provision for (benefit from)
income taxes                      250,591         282,685         (88,849 )      (11.4 )%           *
Provision for (benefit from)
income taxes                       98,673         112,303         (31,987 )      (12.1 )%           *
Net income (loss)             $   151,918     $   170,382     $   (56,862 )      (10.8 )%           *


____________
* Not Meaningful


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Revenues

Commission Revenues
The following table sets forth our commission revenue, by product category
included in our consolidated statements of operations for the periods indicated
(dollars in thousands):
                                                       Year Ended December 31,
                                2012        % Total        2011        % Total        2010        % Total
Variable annuities          $   764,502       41.9 %   $   731,770       41.7 %   $   636,128       39.3 %
Mutual funds                    498,239       27.3 %       472,466       26.9 %       457,947       28.2 %
Alternative investments         142,996        7.9 %       113,589        6.5 %        97,606        6.0 %
Equities                         99,380        5.5 %        97,882        5.6 %        93,961        5.8 %
Fixed annuities                  98,976        5.4 %       136,020        7.8 %       138,753        8.6 %
Fixed income                     83,235        4.6 %        84,568        4.8 %        85,250        5.2 %
Insurance                        81,124        4.5 %        70,060        4.0 %        72,297        4.5 %
Group variable annuities(1)      50,891        2.8 %        45,579        2.6 %        36,241        2.2 %
Other                             1,174        0.1 %         2,501        0.1 %         2,628        0.2 %
Total commission revenue    $ 1,820,517      100.0 %   $ 1,754,435      100.0 %   $ 1,620,811      100.0 %


____________________

(1) In 2012, we began to present group variable annuities as a separate

component of commission revenues. Previously, group variable annuities had

       been presented within variable annuities. Accordingly, amounts have been
       reclassified for the years ended December 31, 2011 and 2010 to make them
       consistent with the current period presentation.


Commission revenues increased by $66.1 million, or 3.8%, for 2012 compared with
2011. The 4.5% growth in revenues from variable annuities is based on an
increase in trail-based commissions partially offset by a decrease in
sales-based commissions. The combination of low interest rates and market
uncertainty impacted sales commissions for variable annuities due to its impact
on product design, which lowered demand for these products. In addition,
insurers have lowered the amount of risk they are willing to retain on variable
annuity products by reducing certain insurance benefits, thereby making the
products less attractive to investors. Group variable annuities increased due to
growth in our retirement business.
Mutual fund commission revenues increased for the year ended December 31, 2012
compared to the year ended December 31, 2011 as a result of increases in both
sales-based commissions and in trail-based commissions due to improving market
conditions and growth of the underlying assets.
The increase in alternative investments is reflective of investor preferences
for diversification and opportunities to earn return outside of the traditional
equity and fixed income markets. Income producing alternative strategies
continue to grow in popularity as the needs of investors shift toward
diversification. Insurance commission revenues increased on improved universal
life and whole life sales, which was partially offset by a decrease in term life
sales.
The continued low interest rate environment, which has reduced investor demand
for fixed annuities and fixed income securities, is reflected in the decline in
commission revenues for these two products.
Commission revenues increased by $133.6 million, or 8.2%, for 2011 compared to
2010. In 2011, the product mix reflects the volatility of the financial markets
in the latter half of the year as retail investors sought protection from
downside risk while maintaining their upside potential with investment products
such as variable annuities with minimum guarantee options. Mutual fund
commission revenues were bolstered by increasing levels of trail-based
commissions due to strong growth of the underlying assets. The increase in
alternative investments is reflective of more product availability and investor
preferences for diversification. Insurance commissions declined as term life
insurance experienced reduced sales.


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Advisory Revenues
The following table summarizes the activity within our advisory assets under
custody for the periods ended December 31, 2012, 2011 and 2010 (in billions):
                                 2012       2011       2010

Beginning balance at January 1$ 101.6$ 93.0$ 77.2 Net new advisory assets

           10.9       10.8        8.5
Market impact and other            9.6       (2.2 )      7.3

Ending balance at December 31$ 122.1$ 101.6$ 93.0



Net new advisory assets for the years ended December 31, 2012, 2011 and 2010
have a limited impact on advisory fee revenue for those respective periods.
Rather, net new advisory assets are a primary driver of future advisory fee
revenue. Net new advisory assets were $10.9 billion for the year ended
December 31, 2012 as a result of strong new business development coupled with
the continued shift by our existing advisors toward more advisory business.
Advisory fee revenue increased by $35.0 million, or 3.4%, in 2012 compared to
2011. Advisory revenue for a particular quarter is predominately driven by the
prior quarter-end advisory assets under custody. The growth in advisory fee
revenue is due to both net new advisory assets in prior periods and higher
levels of the S&P 500 on the applicable billing dates in 2012 compared to 2011.
The average of the S&P 500 on the close of the four prior quarter-end dates,
September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011, was
1,367, which is an 8.6% increase over the average of 1,259 for the prior year
corresponding dates. The continued shift of advisors to the Independent RIA
platform and a re-pricing in one of our significant agreements have caused the
rate of revenue growth to lag behind the rate of advisory asset growth.
Advisory revenues increased by $167.2 million, or 19.4%, for 2011 compared to
2010. The increase was the effect of an improving market, which resulted in an
increase in the value of clients assets in advisory programs combined with net
new advisory assets. The growth in advisory fee revenue is due to both higher
levels of the S&P 500 on the applicable billing dates in 2011 compared to 2010
and net new advisory assets in prior periods. The average of the S&P 500 on the
close of the four prior quarter-end dates, September 30, 2011, June 30, 2011,
March 31, 2011 and December 31, 2010, was 1,259, which is a 13.0% increase over
the average of 1,114 for the prior year corresponding dates. Net new asset flows
in 2011 were $10.8 billion, a $2.3 billion increase over 2010 as a result of
strong new business development and a shift by our existing advisors towards
more advisory business.
The following table summarizes the makeup within our advisory assets under
custody for the periods ended December 31, 2012, 2011 and 2010 (in billions):
                                               As of December 31,                 Percentage Change
                                          2012        2011        2010       '12 vs. '11    '11 vs. '10
Advisory assets under management        $ 100.7     $  90.3     $  86.7          11.5 %             4.2 %
Independent RIA assets in advisory
accounts custodied by LPL Financial        21.4        11.3         6.3          89.4 %            79.4 %

Total advisory assets under custody $ 122.1$ 101.6$ 93.0

      20.2 %             9.2 %


Growth of the Independent RIA assets in advisory accounts custodied by LPL Financial has outpaced the growth in advisory assets under management. This growth is consistent with the industry trend as more advisors shift their business toward the Independent RIA model.


Asset-Based Revenues
Asset-based revenues increased by $43.3 million, or 12.0%, to $403.1 million for
2012 compared with 2011. Revenues from product sponsors and for record-keeping
services, which are largely based on the underlying asset values, increased due
to the impact of the higher average market indices on the value of those
underlying assets and net new sales of eligible assets. The average S&P 500
index for 2012 was 1,379, an increase of 8.8% over the 2011 average. In
addition, revenues from our cash sweep programs increased by $11.4 million, or
9.0%, to $138.1 million for year ended December 31, 2012 from $126.7 million for
the year ended December 31, 2011. This was driven by an increase in the assets
in our cash sweep programs, which averaged $22.3 billion and $20.9 billion for
2012 and 2011, respectively, as investors and advisors were wary of the
volatility in the financial markets and the impending fiscal cliff at the end of
2012.

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Asset-based revenues increased by $42.2 million, or 13.3%, to $359.7 million for
2011 compared with 2010. Revenues for record-keeping services and from product
sponsors, which are largely based on the underlying asset values, increased due
to the impact of the higher average market indices on the value of those
underlying assets and net new sales of eligible assets. The average S&P 500
index for 2011 was 1,268, an increase of 11.2% over the 2010 average. In
addition, revenues from our cash sweep programs increased by $7.0 million, or
5.8%, to $126.7 million for year ended December 31, 2011 from $119.7 million for
the year ended December 31, 2010. This was driven by an increase in the assets
in our cash sweep programs, which averaged $20.9 billion and $18.5 billion for
2011 and 2010, respectively, as investors and advisors were wary of the
volatility in the financial markets.

Transaction and Other Revenues
Transaction and other revenues increased by $29.4 million, or 10.0%, for 2012
compared with 2011. Transaction and other revenues increased in 2012 due to fee
revenues of $10.5 million from the acquired Fortigent business. Transaction
revenues also increased due to a 3.6% increase in the average number of advisors
for the year ended December 31, 2012 compared to 2011, increases in revenues
earned from those advisors and institutions who converted to the LPL Financial
platform from UVEST during 2011 and increases due to repricing of certain
services. Lower trade volumes in certain advisory accounts reduced transaction
revenues, which partially offset these increases.
Transaction and other revenues increased by $18.1 million, or 6.6%, for 2011
compared with 2010. Transactional revenues increased by $7.9 million due to
increased transaction volumes in investment activities, including advisory
products, general securities and fixed income products. The average number of
advisors increased 5.0% in 2011 compared to 2010, which led to the increase in
other revenues, specifically advisor based, technology and conference revenues.

Other Revenue
Other revenue increased $7.9 million, or 17.4%, to $53.5 million for 2012
compared to 2011. The primary contributor to this increase in 2012 was
alternative investment marketing allowance fees received from product sponsors,
which increased by $5.7 million compared to the same period in 2011, largely
based on increased sales of alternative investments. An additional contributor
to the increase was growth in retirement sponsorship programs of $2.2 million,
as a result of growth based on our synergies with NRP.
Other revenue increased $4.7 million, or 11.6%, to $45.5 million for 2011
compared to 2010. The primary contributor to this increase in 2011 is growth in
retirement sponsorship programs of $1.9 million, an effect of our acquisition of
NRP. Also in 2011, direct investment marketing allowances received from product
sponsor programs increased by $1.7 million compared to the same period in 2010,
largely based on increased sales of alternative investments.


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Expenses

Production Expenses
The following table shows our production payout ratio and our adjusted payout
ratio, a non-GAAP measure, for the years ended December 31, 2012, 2011 and 2010:
                                          Year ended December 31,                    Change
                                       2012        2011         2010       '12 vs. '11     '11 vs. '10
Base payout rate                      84.16 %      84.15 %     83.86  %        0.01 %         0.29  %
Production based bonuses               2.68 %       2.37 %      2.19  %        0.31 %         0.18  %
GDC sensitive payout                  86.84 %      86.52 %     86.05  %        0.32 %         0.47  %
Non-GDC sensitive payout(1)            0.22 %       0.12 %      9.19  %        0.10 %        (9.07 )%
Total Payout Ratio                    87.06 %      86.64 %     95.24  %        0.42 %        (8.60 )%
IPO related share-based
compensation charge(1)                    -            -       (8.95 )%           -           8.95  %
Adjusted Payout Ratio                 87.06 %      86.64 %     86.29  %        0.42 %         0.35  %


__________________________

(1) Upon closing of our IPO in the fourth quarter of 2010, the restriction on

approximately 7.4 million shares of common stock issued to advisors under

the Fifth Amended and Restated 2000 Stock Bonus Plan was released.

Accordingly, we recorded a share-based compensation charge of $222.0 million

    in 2010, representing the offering price of $30.00 per share multiplied by
    7.4 million shares. This charge has been shown separately for 2010 for
    consistency and comparability to other periods presented.


Production expenses increased by $100.4 million, or 4.1%, for 2012 compared with
2011. This increase is correlated with our commission and advisory revenues,
which increased by 3.6% during the same period. Our GDC sensitive production
payout was 86.84% for the year ended December 31, 2012, compared to 86.52% for
2011. The increase in our payout ratio was driven by the increase in our
production based bonuses, which reflect our advisors' trend of attaining higher
payout tiers earlier in the year and graduating to larger advisor practices. The
0.10% increase in non-GDC sensitive payout is primarily attributable to
mark-to-market gains for the advisor non-qualified deferred compensation plan
for the year ended December 31, 2012.
Production expenses increased by $50.9 million, or 2.1%, for 2011 compared with
2010. Excluding a $222.0 million share-based compensation charge which was
recorded in 2010 related to our IPO, production expenses increased $272.9
million or 12.5% for 2011 compared to 2010. This increase is correlated with our
commission and advisory revenues, which increased by 12.1% during the same
period. Our production payout was 86.64% for 2011, compared to an adjusted
production payout, a non-GAAP measure, of 86.29% for 2010 which excludes the
$222.0 million share-based compensation charge resulting from our IPO. The
increase in payout ratios is driven by a change in the product mix of our
commission revenues as well as our production based bonus incentive structures,
which increase throughout the year as our advisors achieve higher production
levels. As a result of greater advisor activity, more advisors reached higher
payout tiers than in the prior year.

Compensation and Benefits Expense
Compensation and benefits increased by $40.6 million, or 12.6%, for 2012
compared with 2011. This was primarily based on the fact that our average number
of full-time employees increased 6.6% from 2,687 in 2011 to 2,865 in 2012, due
to our acquisitions of Fortigent and Concord, and due to increases in staffing
to support higher levels of advisor and client activities.
Compensation and benefits increased by $13.5 million, or 4.4%, for 2011 compared
with 2010. The increase was driven by increases in staffing to support higher
levels of advisor and client activities. Our average number of full-time
employees increased 6.8% from 2,517 in 2010 to 2,687 in 2011, partially due to
our acquisitions of NRP and Concord. Underlying this increase is a 5.7% increase
in wages offset by flat employee benefits and other compensation year over year.
In addition, employee related share-based compensation increased $4.5 million
for the year ended December 31, 2011 compared to the prior year, primarily due
to equity grants issued in December 2010.


                                       54
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General and Administrative Expenses
General and administrative expenses increased by $87.0 million, or 33.0%, to
$350.2 million for 2012 compared with 2011. The primary drivers behind the
increase were increases of $24.2 million for business development and
promotional expenses and $19.7 million of expenses related to our acquisitions
of Fortigent and Concord. Another primary driver was an increase of $20.7
million for professional fees, which was partially due to $10.5 million of
indemnification payment collections in 2011 associated with the resolution of a
legal dispute with a third-party indemnitor. Refer to the Litigation section in
Note 14 - Commitments and Contingencies, within the notes to consolidated
financial statements for additional information regarding this matter.
Additional contributors to the increase were a $10.1 million charge due to a
change in the fair value of our contingent consideration obligations and a $3.9
million charge for the late deposit of withholding taxes related to the exercise
of certain non-qualified stock options in connection with the 2010 IPO.

General and administrative expenses decreased by $4.6 million, or 1.7%, to
$263.2 million for 2011 compared with 2010. The decrease is primarily due to
$10.5 million of indemnification payment collections associated with the
resolution of a legal dispute with a third-party indemnitor. Refer to the
Litigation section in Note 14 - Commitments and Contingencies, within the notes
to consolidated financial statements for additional information regarding this
matter. Advisor growth of 549 net new advisors excluding attrition related to
UVEST in 2011, fueled a 20.1% increase in business development and other
promotional expenses. Further, we had a $3.8 million increase in expenditures on
non-depreciable equipment, licensing fees and other costs year over year.

Depreciation and Amortization Expense
For the year ended December 31, 2012, depreciation and amortization decreased by
$0.9 million, or 1.3% compared to the prior year period. This decrease is
primarily due to a reduction in depreciation incurred in 2012, attributed to
assets that became fully depreciated in 2011.
For the year ended December 31, 2011, depreciation and amortization decreased by
$13.3 million, or 15.5% compared to the prior year. This decrease is primarily
attributed to a $27.9 million reduction in depreciation incurred in 2011,
attributed to assets that became fully depreciated in 2010 and 2011. This was
partially offset by an increase of $7.5 million of depreciation on assets placed
in service during 2010 and 2011, and depreciation of $2.7 million on assets for
our acquisitions of NRP and CCP.

Restructuring Charges


Restructuring charges represent expenses incurred as a result of our 2011
consolidation of UVEST and our 2009 consolidation of the Affiliated Entities.
Restructuring charges were $5.6 million in 2012. These charges relate primarily
to technology costs and other expenditures incurred for the conversion and
transfer of advisors and their client accounts from UVEST to LPL Financial.
Refer to Note 4 - Restructuring, within the notes to consolidated financial
statements for additional information.
Restructuring charges were $21.4 million in 2011. These charges relate primarily
to technology costs and other expenditures incurred for the conversion and
transfer of advisors and their client accounts from UVEST to LPL Financial.
Additionally, impairment charges of $2.8 million related to advisor intangible
assets are included for the year ended December 31, 2011.

Interest Expense


Interest expense represents non-operating interest expense for our senior
secured credit facilities.
Interest expense decreased $13.9 million, or 20.3%, for 2012 compared with 2011.
The reduction in interest expense for 2012 is due to a lowered interest rate on
our debt as a result of its refinancing in March 2012 and the maturity of an
interest rate swap agreement with a notional value of $65.0 million on June 30,
2012, which resulted in a combined decrease of $13.7 million to interest expense
for the year ended December 31, 2012.
Interest expense decreased $21.6 million, or 23.9%, for 2011 compared with 2010.
The reduction in interest expense for 2011 is primarily attributed to our debt
refinancing in the second quarter of 2010, which included the redemption of our
senior unsecured subordinated notes, resulting in a lower cost of borrowing and
$8.7 million of

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savings in 2011 compared to 2010. Interest rate swap agreements with notional
values of $190.0 million and $145.0 million matured on June 30, 2010 and 2011,
respectively, reducing our comparative interest expense by $7.2 million for the
year ended December 31, 2011 compared to 2010. Additionally, we repaid
$40.0 million of term loans under our senior secured credit facilities using net
proceeds received in our IPO, as well as cash on hand, which resulted in
interest savings of $1.5 million in 2011.

Loss on Extinguishment of Debt
Loss on extinguishment of debt was $16.5 million for the year ended December 31,
2012. In March 2012, we refinanced and replaced our credit agreement primarily
to extend the maturities on our borrowings and wrote off $16.5 million of
unamortized debt issuance costs related to the previous credit agreement. For
the year ended December 31, 2010, loss on extinguishment of debt was $38.0
million which represents debt amendment costs incurred in 2010 for amending and
restating our credit agreement to establish a new term loan tranche and to
extend the maturity of an existing tranche on our senior credit facilities, and
debt extinguishment costs to redeem our subordinated notes, as well as certain
professional fees incurred.
Provision for Income Taxes
For the year ended December 31, 2012, we recorded income tax expense of $98.7
million, compared with an income tax expense of $112.3 million in 2011. Our
effective income tax rate was 39.4% and 39.7% for 2012 and 2011, respectively.
For the year ended December 31, 2011, we recorded income tax expense of $112.3
million, compared with an income tax benefit of $32.0 million recorded in 2010.
The 2010 tax benefit was a result of the net loss due to charges incurred
related to our IPO. Our effective income tax rate was 39.7% and 36.0% for 2011
and 2010, respectively.

Liquidity and Capital Resources


Senior management establishes our liquidity and capital policies. These policies
include senior management's review of short- and long-term cash flow forecasts,
review of monthly capital expenditures and daily monitoring of liquidity for our
subsidiaries. Decisions on the allocation of capital are based upon, among other
things, projected profitability and cash flow, risks of the business, regulatory
capital requirements and future liquidity needs for strategic activities. Our
Treasury Department assists in evaluating, monitoring and controlling the
business activities that impact our financial condition, liquidity and capital
structure and maintains relationships with various lenders. The objectives of
these policies are to support executive business strategies while ensuring
ongoing and sufficient liquidity.
A summary of changes in cash flow data is provided as follows:
                                                           For the Year Ended December 31,
                                                         2012            2011           2010
                                                                   (In thousands)
Net cash flows provided by (used in):
Operating activities                                 $   254,268     $  442,378     $  (22,914 )
Investing activities                                     (91,669 )      (65,558 )      (39,192 )
Financing activities                                    (417,110 )      (75,256 )      102,720
Net (decrease) increase in cash and cash equivalents    (254,511 )      301,564         40,614
Cash and cash equivalents - beginning of year            720,772        419,208        378,594
Cash and cash equivalents - end of year              $   466,261     $  

720,772 $ 419,208



Cash requirements and liquidity needs are primarily funded through our cash flow
from operations and our capacity for additional borrowing.
Net cash provided by (used in) operating activities includes net income adjusted
for non-cash expenses such as depreciation and amortization, restructuring
charges, share-based compensation, amortization of debt issuance costs, deferred
income tax provision and changes in operating assets and liabilities. Operating
assets and liabilities include balances related to settlement and funding of
client transactions, receivables from product sponsors and accrued commission
and advisory expenses due to our advisors. Operating assets and liabilities that
arise from the settlement and funding of transactions by our advisors' clients
are the principal cause of changes to our net cash from operating activities and
can fluctuate significantly from day to day and period to period depending on
overall

                                       56
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trends and client behaviors.
Net cash provided by operating activities for 2012 and 2011 was $254.3 million
and $442.4 million, respectively, compared to net cash used in operating
activities in 2010 of $22.9 million. The change between 2012 and 2011 is
primarily due to a decrease of $155.4 million in income taxes receivable as the
results for 2011 include the collection of $202.5 million of tax receivables
that arose primarily from tax benefits related to our IPO in November 2010. Due
to substantial client activity at the end of 2012, our cash flows from operating
activities fluctuated significantly, which is reflected by a use of $194.5
million for cash and securities segregated under federal and other regulations
and a provision of $292.8 million in payables to clients. Our 2012 operating
activities also include net income of $151.9 million and a collection of $47.2
million in tax receivables offset by $53.3 million of excess tax benefits
related to share-based compensation.
Cash flows from operating activities increased in 2011 when compared to 2010
primarily due to an increase of $227.2 million in net income from the loss
position in 2010. Net cash provided by operating activities in 2011 also
increased due to the collection of $202.5 million of tax receivables, which was
offset by $57.6 million of excess tax benefits resulting from share-based
compensation that primarily occurred in May 2011 at the expiration of the IPO
lock-up.
Net cash used in investing activities for 2012, 2011 and 2010, totaled $91.7
million, $65.6 million and $39.2 million, respectively. Net cash used in 2012
increased in comparison to 2011 due to an increase of $18.4 million in capital
expenditures in addition to reduction in restricted cash releases of $14.7
million. Net cash used in 2012 primarily consists of $43.7 million for the
acquisitions of Fortigent and Veritat and $54.8 million in capital expenditures
partially offset by $7.6 million of restricted cash releases.
The increase in net cash used in investing activities for 2011 as compared to
2010 primarily consisted of $42.0 million used in 2011 for the acquisitions of
NRP and Concord. Net cash used in 2011 also included $36.3 million in capital
expenditures partially offset by $22.2 million of restricted cash releases.
Net cash used in financing activities for 2012 and 2011 was $417.1 million and
$75.3 million, respectively. Net cash provided by financing activities for 2010
was $102.7 million. Cash flows used in financing activities in 2012 increased in
comparison to 2011 as a result of a $110.1 million increase in repurchases of
outstanding common stock and $248.8 million of cash dividends paid in 2012. Cash
flows used in financing activities in 2012 also include $1.4 billion of
repayments on our senior secured credit facilities offset by $1.3 billion of
proceeds from our senior secured credit facilities, as well as $53.3 million in
cash generated from excess tax benefits arising from share-based compensation.
Net cash used in financing activities in 2011 increased in comparison to a
provision of cash flows from financing activities in 2010 as a result of $89.0
million of cash used to repurchase outstanding common stock in 2011, a $41.4
million increase in cash used to repay senior credit facilities, a $35.9 million
decrease in cash from excess tax benefits arising from share-based compensation
and a decrease of $41.8 million for the issuance of common stock.
We believe that based on current levels of operations and anticipated growth,
cash flow from operations, together with other available sources of funds, which
include three uncommitted lines of credit available, will be adequate to satisfy
our working capital needs, the payment of all of our obligations and the funding
of anticipated capital expenditures for the foreseeable future. In addition, we
have certain capital requirements due to our registered broker-dealer and have
met all capital adequacy requirements for our registered broker dealer and
expect this to also continue for the foreseeable future. We regularly evaluate
our existing indebtedness, including refinancing thereof, 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.
Share Repurchases
The Board of Directors has approved several share repurchase programs pursuant
to which we may repurchase issued and outstanding shares of our common stock.
Purchases may be effected in open market or privately negotiated transactions,
including transactions with our affiliates, with the timing of purchases and the
amount of stock purchased generally determined at our discretion within the
constraints of our credit agreement and general operating needs.

                                       57
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For the years ended December 31, 2012 and 2011, the Company had the following
activity under its approved share repurchase plans (in millions, except share
and per share data):
                                                                       2012                                             2011
                                      Amount
                                   Remaining at                  Weighted Average                                Weighted Average
  Approval        Authorized       December 31,      Shares       Price Paid Per        Total        Shares       Price Paid Per
    Date       Repurchase Amount       2012         Purchased          Share           Cost(1)      Purchased          Share          Total Cost
May 25, 2011   $          80.0     $         -             -     $             -     $       -     2,297,723     $         34.84     $      80.0
August 16,
2011           $          70.0     $         -     1,891,072     $         32.27     $    61.0       319,906     $         28.11     $       9.0
May 25, 2012   $          75.0     $         -     2,611,022     $         28.74     $    75.1             -     $             -     $         -
September
27, 2012       $         150.0     $      86.9     2,309,558     $         27.34     $    63.1             -     $             -     $         -
                                   $      86.9     6,811,652     $         29.25     $   199.2     2,617,629     $         34.01     $      89.0


___________________

(1) Included in the total cost of shares purchased is a commission fee of $0.02

per share.



Issuance Under 2008 Nonqualified Deferred Compensation Plan
On February 22, 2012, we distributed 1,673,556 shares, net of shares withheld to
satisfy withholding tax requirements of the participants, pursuant to the terms
of our 2008 Nonqualified Deferred Compensation Plan. Distributions to
participants were made in the form of whole shares of common stock equal to the
number of stock units allocated to the participant's account (fractional shares
were paid out in cash). Participants authorized us to withhold shares from their
distribution of common stock to satisfy their withholding tax obligations. On
February 22, 2012 we repurchased 1,149,896 shares and made the related
withholding tax payment of approximately $37.5 million. See "Item 5 - Market for
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities".
In calculating earnings per share and diluted earnings per share using the
two-class method, we were required to allocate a portion of our earnings to
employees that held stock units that contained non-forfeitable rights to
dividends or dividend equivalents under our 2008 Nonqualified Deferred
Compensation Plan. After the distribution of shares under the 2008 Nonqualified
Deferred Compensation Plan, the two-class method is no longer applicable. This
distribution of shares did not have a material impact on earnings per share or
diluted earnings per share. However, the distribution increased the weighted
average share count for the year ended December 31, 2012 by approximately
850,000 shares.
Dividends
In April 2012, we announced that our Board of Directors had approved a one-time
special dividend of $2.00 per share, which was paid in May 2012. In July 2012,
we announced an initial quarterly cash dividend of $0.12 per share.
The payment of any dividends permitted under our credit facilities are subject
to approval by our Board of Directors, including both timing and amount. Cash
dividends per share of common stock and total cash dividends paid during each
quarter for the year ended December 31, 2012 were as follows (in millions,
except per share data):
                Dividend per Share      Total Cash Dividend
Second quarter $               2.00    $               222.6
Third quarter  $               0.12    $                13.2
Fourth quarter $               0.12    $                13.0


On February 05, 2013, the Board of Directors declared a cash dividend of $0.135
per share on our outstanding common stock to be paid on March 4, 2013 to all
stockholders of record on February 18, 2013.
Regulatory
On July 20, 2012, the Internal Revenue Service ("IRS") issued a Notice of
Proposed Adjustment (the "Notice") asserting we are subject to a penalty with
respect to an alleged untimely deposit of withholding taxes related to the
exercise of certain non-qualified stock options in connection with our IPO in
2010. We have been engaged in discussions with the IRS regarding the Notice. As
a result of these discussions, we believe the outcome will not be material to
our financial position and we have recorded an estimate of the probable loss in
the results of operations

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for the year ended December 31, 2012.
Service Value Commitment
On February 5, 2013, we committed to an expansion of our Service Value
Commitment, an ongoing effort to position us for sustainable long-term growth by
improving the service experience of our financial advisors and delivering
efficiencies in our operating model.
With the assistance of Accenture LLP, we have assessed opportunities to enhance
the quality, speed and cost of processes that support our clients by outsourcing
certain functions to firms that specialize in such processes. In addition, with
the assistance of Bain & Company, we have assessed our information technology
delivery, governance, organization and strategy. As a result, acting pursuant to
a delegation of authority by our Board of Directors, we committed to undertake a
course of action (the "Program") to reposition our labor force and invest in
technology, human capital, marketing and other key areas to enable future
growth. The Program is expected to be completed in 2015.
We expect total charges in connection with the Program to be approximately $70
million to $75 million. Pre-tax charges of $11 million were incurred in the
second half of 2012, which consisted of $7 million of cash expenditures and $4
million for an asset impairment charge for certain fixed assets related to
internally developed software that were determined to have no estimated fair
value. These 2012 expenses are not considered restructuring charges under GAAP,
but are excluded in reporting certain non-GAAP measures, including Adjusted
EBITDA, Adjusted Earnings and Adjusted Earnings per share.
We estimate that we will incur pre-tax restructuring charges of approximately
$60 million to $65 million in connection with the Program, including
approximately $24 million to $26 million in outsourcing and other related costs,
approximately $21 million to $23 million in technology transformation costs,
approximately $13 million to $14 million in employee severance obligations and
other related costs and approximately $1 million in non-cash impairment charges.
We expect to incur approximately $58 million to $63 million of future cash
expenditures in connection with the Program.
Operating Capital Requirements
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 at clearing organizations to support these clients' trading activities.
We have several sources of funds to enable us to meet increased working capital
requirements related to increased client margin activities and balances. These
sources include cash and cash equivalents on hand, cash and securities
segregated under federal and other regulations, and proceeds from re-pledging or
selling client securities in margin accounts. When a 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
re-pledge or sell securities, which collateralize those margin accounts. As of
December 31, 2012, we had received collateral in connection primarily with
client margin loans with a fair value of approximately $375.8 million, which can
be re-pledged or sold. Of this amount, approximately $22.2 million has been
pledged to the Options Clearing Corporation as collateral to secure certain
client obligations related to options positions, and approximately $19.3 million
was loaned to the National Securities Clearing Corporation through participation
in the Stock Borrow Program. Additionally, approximately $40.3 million are held
at banks in connection with uncommited lines of credit, which were unutilized at
December 31, 2012; these securities may be used as collateral for loans from
these banks. The remainder of $294.0 million has not been re-pledged or sold.
There are no restrictions that materially limit our ability to re-pledge or sell
the remaining $334.3 million of client collateral.
Our other working capital needs are primarily related to regulatory capital
requirements at our broker-dealer and bank trust subsidiaries and software
development, which we have satisfied in the past from internally generated cash
flows.
Notwithstanding the self-funding nature of our operations, 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 flow or, if needed, with funds drawn on our uncommitted lines of credit at
our broker-dealer subsidiary LPL Financial, and/or under our revolving credit
facility.
Our registered broker-dealer, 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

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method, which requires firms to maintain minimum net capital, as defined, equal
to the greater of $250,000 or 2.0% of aggregate debit balances arising from
client transactions.
LPL Financial is also subject to the National Futures Association's ("NFA")
financial requirements and is required to maintain net capital that is in excess
of or equal to the greatest of its minimum financial requirements. Currently the
highest NFA requirement is the minimum net capital calculated pursuant to the
SEC's Uniform Net Capital Rule.
In addition to the minimum net capital requirements, the SEC and FINRA have
established "early warning" capital requirements for broker-dealers that when
exceeded, limit certain activities of the broker-dealer. Early warning
requirements provide advance warning that a firm's net capital is dropping
toward its minimum requirement, allowing time for initiation of corrective
action. For LPL Financial, an early warning level is reached if its ratio of
aggregate customer debit balances falls below 5.0% of net capital. At
December 31, 2012, LPL Financial's net capital was $58.5 million and its early
warning requirement was $18.6 million. LPL Financial typically maintains net
capital in excess of the early warning level to maintain its ability to grow its
business, demonstrate the stability of its operations and provide a safeguard in
the event of sustained levels of market volatility, as experienced by the
securities industry in 2008. At December 31, 2012, LPL Financial's excess net
capital was $51.1 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 FINRA. In
addition, payment of dividends is restricted if LPL Financial's net capital
would be less than 5.0% of aggregate customer debit balances.
Prior to July 16, 2012, UVEST was also a registered broker-dealer and computed
net capital requirements under the aggregate indebtedness method, which requires
firms to maintain minimum net capital, as defined, of not less than 6.67% of
aggregate indebtedness. In connection with the consolidation of UVEST with LPL
Financial, UVEST's registration with FINRA was withdrawn effective July 16, 2012
and is no longer subject to net capital filing requirements.
Our subsidiary, PTC, is subject to various regulatory capital requirements.
Failure by any of our subsidiaries to meet their respective minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on our consolidated financial statements.
Liquidity Assessment
Our ability to meet our debt service obligations and reduce our total debt will
depend upon our future performance, which, in turn, will be subject to general
economic, financial, business, competitive, legislative, regulatory and other
conditions, many of which are beyond our control. In addition, our operating
results, cash flow and capital resources may not be sufficient for repayment of
our indebtedness in the future. Some risks that could materially adversely
affect our ability to meet our debt service obligations include, but are not
limited to, general economic conditions and economic activity in the financial
markets. The performance of our business is correlated with the economy and
financial markets, and a slowdown in the economy or financial markets could
adversely affect our business, results of operations, cash flows or financial
condition.
If our cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay investments, seek
additional capital or restructure or refinance our indebtedness. These measures
may not be successful and may not permit us to meet our scheduled debt service
obligations. In the absence of sufficient cash flows and capital resources, we
could face substantial liquidity constraints and might be required to dispose of
material assets or operations to meet our debt service and other obligations.
However, our senior secured credit agreement will restrict our ability to
dispose of assets and the use of proceeds from any such dispositions. We may not
be able to consummate those dispositions, and even if we could consummate such
dispositions, to obtain the proceeds that we could realize from them and, in any
event, the proceeds may not be adequate to meet any debt service obligations
then due.

Indebtedness

On March 29, 2012, we entered into a Credit Agreement (the "Credit Agreement")
with LPL Holdings, Inc., the other Credit Parties signatory thereto, the Several
Lenders signatory thereto, and Bank of America, N.A. as Administrative Agent,
Collateral Agent, Letter of Credit Issuer, and Swingline Lender. The Credit
Agreement refinanced and replaced our Third Amended and Restated Credit
Agreement, dated as of May 24, 2010 (the "Original Credit Agreement"). Pursuant
to the Credit Agreement, we established a Term Loan A tranche of $735.0 million
maturing at March 29, 2017 (the "Term Loan A") and a Term Loan B tranche of
$615.0 million maturing at

                                       60
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March 29, 2019 (the "Term Loan B"). In connection with the Credit Agreement, we
capitalized certain debt issuance costs totaling $23.7 million. Additionally, we
accelerated the recognition of $16.5 million debt issuance costs related to
borrowings under the Original Credit Agreement in the year ended December 31,
2012. As of December 31, 2012, we estimated interest savings of approximately
$10.9 million through the first twelve months of operations following execution
of the Credit Agreement.
The Credit Agreement also refinanced and replaced our then existing revolving
credit facility, increasing our capacity from $163.5 million to $250.0 million
("Revolving Credit Facility"). The Revolving Credit Facility will mature on
March 29, 2017. There were no outstanding borrowings on the Revolving Credit
Facility at December 31, 2012.
As of December 31, 2012, the Revolving Credit Facility was being used to support
the issuance of $21.3 million of irrevocable letters of credit for the
construction of our future San Diego office building and other items.
In addition, we maintain three uncommitted lines of credit. Two of the lines
have unspecified limits, and are primarily dependent on our ability to provide
sufficient collateral. The other line has a $150.0 million limit and allows for
both collateralized and uncollateralized borrowings. The lines were utilized in
2012 and 2011; however, there were no balances outstanding at December 31, 2012
or 2011.
We also were party to an interest rate swap agreement, in a notional amount of
$65.0 million, to mitigate interest rate risk by hedging the variability of a
portion of our floating-rate senior secured term loan. This agreement expired on
June 30, 2012.

Interest Rate and Fees
Borrowings under the Credit Agreement bear interest at a base rate equal to the
one, two, three, six, nine or twelve-month LIBOR (the "Eurodollar Rate") plus
our applicable margin, or an alternative base rate ("ABR") plus our applicable
margin. The ABR is equal to the greatest of (a) the prime rate in effect on such
day, (b) the effective federal funds rate in effect on such day plus 0.50%,
(c) the Eurodollar Rate plus 1.00% and (d) solely in the case of the Term Loan
B, 2.00%.
The applicable margin for borrowings (a) with respect to the Term Loan A is
currently 1.50% for base rate borrowings and 2.50% for LIBOR borrowings, and
(b) with respect to the Term Loan B is currently 2.00% for base rate borrowings
and 3.00% for LIBOR borrowings, and (c) with respect to the Revolving Credit
Facility is currently 1.50% for base rate borrowings and 2.50% for LIBOR
borrowings. The applicable margin on our term loans and Revolving Credit
Facility could change depending on our total leverage ratio. The LIBOR rate with
respect to Term Loan B shall in no event be less than 1.00%.
In addition to paying interest on outstanding principal under the Credit
Agreement, we are required to pay a commitment fee to the lenders under the
Revolving Credit Facility in respect of the unutilized commitments thereunder.
The commitment fee rate at December 31, 2012 was 0.50% for our Revolving Credit
Facility, but is subject to change depending on our leverage ratio. Prior to the
closing of the Credit Agreement on March 29, 2012, the commitment fee was 0.75%
on our previous revolving credit facility. We must also pay customary letter of
credit fees.
Prior to the repayment on March 29, 2012, the Original Credit Agreement
consisted of three term loan tranches: a $302.5 million term loan facility with
a maturity of June 18, 2013 (the "2013 Term Loans"), a $476.9 million term loan
facility with a maturity of June 25, 2015 (the "2015 Term Loans") and a $553.2
million term loan facility with a maturity of June 28, 2017 (the "2017 Term
Loans"). The applicable margin for borrowings (a) with respect to the 2013 Term
Loans was 0.75% for base rate borrowings and 1.75% for LIBOR borrowings,
(b) with respect to the 2015 Term Loans was 1.75% for base rate borrowings and
2.75% for LIBOR borrowings and (c) with respect to the 2017 Term Loans was 2.75%
for base rate borrowings and 3.75% for LIBOR borrowings. The $163.5 million
revolver tranche had an applicable margin of 2.50% for base rate borrowings and
3.50% for LIBOR borrowings. The LIBOR rate with respect to the 2015 Term Loans
and the 2017 Term Loans had a floor of 1.50%.

Prepayments

The Credit Agreement (other than the Revolving Credit Facility) requires us to
prepay outstanding amounts under our senior secured term loan facility subject
to certain exceptions, with:
•    50% (percentage will be reduced to 0% if our total leverage ratio is 3.00 to

1.00 or less) of our annual excess cash flow (as defined in the Credit

Agreement) adjusted for, among other things, changes in our net working

capital (as of December 31, 2012 our total leverage ratio was 2.38 to 1.00);



•    100% of the net cash proceeds of all nonordinary course asset sales or other
     dispositions of property



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(including insurance recoveries), if we do not reinvest or commit to reinvest
those proceeds in assets to be used in our business or to make certain other
permitted investments within 15 months as long as such reinvestment is completed
within 180 days and
•    100% of the net cash proceeds of any incurrence of debt, other than proceeds

from debt permitted under the Credit Agreement.



Mandatory prepayments in respect of the incurrence of any debt can be applied by
us to scheduled installments of principal of the Term Loan A and Term Loan B in
any order at our direction. Any other mandatory prepayments described above will
be applied to scheduled installments of principal of the Term Loan A and Term
Loan B in direct order.
We may voluntarily repay outstanding term loans under the Credit Agreement at
any time without premium or penalty, other than customary "breakage" costs with
respect to LIBOR loans, and with the exception of certain repricing transactions
in respect to the Term Loan B consummated before March 29, 2013, which will be
subject to a premium of 1.0% of the principal amount of Term Loan B subject to
such repricing transaction.

Amortization

Quarterly repayments of the principal for Term Loan A will total 5.0% per year
for years one and two and 10.0% per year for years three, four and five, with
the remaining principal due upon maturity. Quarterly repayments of the principal
for Term Loan B will total 1.0% per year with the remaining principal due upon
maturity. Any outstanding principal under the Revolving Credit Facility will be
due upon maturity.

Guarantee and Security
The loans under the Credit Agreement are secured primarily through pledges of
the capital stock in certain of our subsidiaries.

Certain Covenants and Events of Default
The Credit Agreement contains a number of covenants that, among other things,
restrict, subject to certain exceptions, our ability to:
• incur additional indebtedness;


• create liens;

• enter into sale and leaseback transactions;

• engage in mergers or consolidations;

• sell or transfer assets;

• pay dividends and distributions or repurchase our capital stock;

• make investments, loans or advances;

• prepay certain subordinated indebtedness;

• engage in certain transactions with affiliates;

• amend material agreements governing certain subordinated indebtedness and

• change our lines of business.



Our Credit Agreement prohibits us from paying dividends and distributions or
repurchasing our capital stock except for limited purposes, including, but not
limited to payments in connection with: (i) redemption, repurchase, retirement
or other acquisition of our equity interests from present or former officers,
managers, consultants, employees and directors upon the death, disability,
retirement, or termination of employment of any such person or otherwise in
accordance with any stock option or stock appreciate rights plan, any management
or employee stock ownership plan, stock subscription plan, employment
termination agreement or any employment agreements or stockholders' agreement,
in an aggregate amount not to exceed $10.0 million in any fiscal year plus the
amount of cash proceeds from certain equity issuances to such persons, and the
amount of certain key-man life insurance proceeds, (ii) franchise taxes, general
corporate and operating expenses not to exceed $3.0 million in any fiscal year,
and fees and expenses related to any unsuccessful equity or debt offering
permitted by the Credit Agreement, (iii) tax liabilities to the extent
attributable to our business and our subsidiaries and (iv) dividends and other
distributions in an aggregate amount not to exceed the sum of (a) the greater of
(i) $250,000,000 and (ii) 6.75% of our consolidated total assets, (b) the
available amount (as defined in the Credit Agreement) and (c) the available
equity amount (as defined in the Credit Agreement). Notwithstanding the
foregoing, we may make unlimited dividends and distributions provided that after
giving pro forma effect thereto, our total leverage ratio does not

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exceed 2.0 to 1.0.
The share repurchase programs approved in May 2012 and September 2012 were
authorized by the Board of Directors pursuant to item (iv) above. Our special
dividend was authorized by the Board of Directors pursuant to a one-time
exception to the restriction on dividends. Any future declarations of quarterly
cash dividends will be authorized pursuant to item (iv) above.
In addition, our financial covenant requirements include a total leverage ratio
test and an interest coverage ratio test. Under our total leverage ratio test,
we covenant not to allow the ratio of our consolidated total debt (as defined in
our Credit Agreement) to an adjusted EBITDA reflecting financial covenants in
our Credit Agreement ("Credit Agreement Adjusted EBITDA") to exceed certain
prescribed levels set forth in the Credit Agreement. Under our interest coverage
ratio test, we covenant not to allow the ratio of our Credit Agreement Adjusted
EBITDA to our consolidated interest expense (as defined in our Credit Agreement)
to be less than certain prescribed levels set forth in the Credit Agreement.
Each of our financial ratios is measured at the end of each fiscal quarter.
Our Credit Agreement provides us with a right to cure in the event we fail to
comply with our leverage ratio test or our interest coverage test. We must
exercise this right to cure within ten days of the delivery of our quarterly
certificate calculating the financial ratios for that quarter.
If we fail to comply with these covenants and are unable to cure, we could face
substantial liquidity problems and could be forced to sell assets, seek
additional capital or seek to restructure or refinance our indebtedness. These
alternative measures may not be successful or feasible. Our Credit Agreement
restricts our ability to sell assets. Even if we could consummate those sales,
the proceeds that we realize from them may not be adequate to meet any debt
service obligations then due. Furthermore, if an event of default were to occur
with respect to our Credit Agreement, our creditors could, among other things,
accelerate the maturity of our indebtedness. See "Risk Factors - Our
indebtedness could adversely affect our financial health and may limit our
ability to use debt to fund future capital needs".
As of December 31, 2012 and 2011 we were in compliance with all of our covenant
requirements. Our covenant requirements and actual ratios as of December 31,
2012 and 2011 are as follows:
                                                               December 31,
                                                     2012                          2011
                                          Covenant                       Covenant
Financial Ratio                          Requirement    Actual Ratio    Requirement   Actual Ratio
Leverage Test (Maximum)                     4.00               2.38        3.00           1.77
Interest Coverage (Minimum)                 3.00               9.03        3.00           7.10



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Set forth below is a reconciliation from EBITDA, Adjusted EBITDA and Credit
Agreement Adjusted EBITDA to our net income for the years ending December 31,
2012 and 2011 (in thousands):
                                                             For the Year Ended December 31,
                                                                   2012              2011
Net income                                                  $        151,918     $  170,382
Interest expense                                                      54,826         68,764
Income tax expense                                                    98,673        112,303
Amortization of purchased intangible assets and software(1)           39,542         38,981
Depreciation and amortization of all other fixed assets               32,254         33,760
EBITDA                                                               377,213        424,190
EBITDA Adjustments:
Employee share-based compensation expense(2)                          17,544         14,978
Acquisition and integration related expenses(3)                       20,474         (3,815 )
Restructuring and conversion costs(4)                                  6,146         22,052
Debt extinguishment costs(5)                                          16,652              -
Equity issuance and related offering costs(6)                          4,486          2,062
Other(7)                                                              11,967            253
Total EBITDA Adjustments                                              77,269         35,530
Adjusted EBITDA                                                      454,482        459,720
  Advisor and financial institution share-based
compensation expense(8)                                                3,807              -
Other(9)                                                               4,190              -
Credit Agreement Adjusted EBITDA                            $        

462,479 $ 459,720

____________________

(1) Represents amortization of intangible assets and software as a result of

       our purchase accounting adjustments from our merger transaction in 2005
       and various acquisitions.

(2) Represents share-based compensation expense for equity awards granted to

employees, officers, and directors. Such awards are measured based on the

grant-date fair value and share-based compensation is recognized over the

requisite service period of the individual grants, which generally equals

       the vesting period.


(3)    Represents acquisition and integration costs resulting from various

acquisitions, including changes in the estimated fair value of future

payments, or contingent consideration, required to be made to former

shareholders of certain acquired entities. During the years ended

December 31, 2012 and 2011, approximately $11.4 million was recognized as

       a charge against earnings due to a net increase in the estimated fair
       value of contingent consideration and $1.3 million was recognized as a
       charge against earnings representing the accretion of contingent

consideration as we approached the future expected payment, respectively.

Also included in the year ended December 31, 2011 is a cash settlement of

$10.5 million for certain legal settlements that were resolved with an

indemnifying party in the fourth quarter of 2011. Of this settlement, $9.8

million has been excluded from the presentation of Adjusted EBITDA, a

non-GAAP measure. See the Litigation section of Note 14 - Commitments and

       Contingencies, within the notes to consolidated financial statements for
       additional information.

(4) Represents organizational restructuring charges and conversion and other

related costs incurred resulting from the 2011 consolidation of UVEST and

the 2009 consolidation of the Affiliated Entities. As of December 31,

2012, approximately 89% and 98%, respectively, of costs related to these

two initiatives have been recognized. The remaining costs largely consist

of the amortization of transition payments that have been made in

connection with these two conversions for the retention of advisors and

financial institutions that are expected to be recognized into earnings by

December 2014.


(5)    Represents expenses incurred resulting from the early extinguishment and

repayment of amounts outstanding under our Original Credit Agreement,

including the write-off of $16.5 million in 2012 of unamortized debt

issuance costs that have no future economic benefit, as well as various

       other charges incurred in connection with the establishment of the new
       Credit Agreement.


(6)    Represents equity issuance and offering costs incurred in the years ended

December 31, 2012 and 2011, related to the closing of a secondary offering

       in the second quarter of 2012, and the closing of a secondary



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offering in the second quarter of 2011. In addition, results for the year ended
December 31, 2012 include a $3.9 million charge for the late deposit of
withholding taxes related to the exercise of certain non-qualified stock options
in connection with the 2010 IPO. See Note 14 - Commitments and Contingencies,
within the notes to consolidated financial statements for additional
information.
(7)    Results for the year ended December 31, 2012 include approximately $7.0
       million for consulting services and technology development aimed at
       enhancing the Company's performance in support of its advisors while
       operating at a lower cost. In addition, results for the year ended

December 31, 2012, include an asset impairment charge of $4.0 million for

       certain fixed assets related to internally developed software that were
       determined to have no estimated fair value. Remaining costs include
       certain excise and other taxes.

(8) Credit Agreement Adjusted EBITDA excludes the recognition of share-based

compensation expense from stock options and warrants granted to advisors

and financial institutions based on the fair value of the awards at each

interim reporting period under the Black-Scholes valuation model, as

defined under the terms of the Credit Agreement. Pro-forma disclosure has

been made for the year ended December 31, 2011, to exclude the recognition

       of share-based compensation expense from stock options and warrants
       granted to advisors and financial institutions, as if the terms of the
       Credit Agreement were in effect as of January 1, 2011.

(9) Represents other items that are adjustable in accordance with our Credit

Agreement to arrive at Credit Agreement Adjusted EBITDA including employee

severance costs, employee signing costs, and employee retention or

completion bonuses.



Interest Rate Swap
An interest rate swap is a financial derivative instrument whereby two parties
enter into a contractual agreement to exchange payments based on underlying
interest rates. Prior to its expiration on June 30, 2012, we used an interest
rate swap agreement to hedge the variability on our floating interest rate for
$65.0 million of our Term Loan A under our Credit Agreement. We were required to
pay the counterparty to the agreement fixed interest payments on a notional
balance and in turn received variable interest payments on that notional
balance. Payments were settled quarterly on a net basis. While our term loan is
unhedged as of December 31, 2012, the risk of variability on our floating
interest rate is partially mitigated by the client margin loans, which carry
floating interest rates, as well as fees received from the cash sweep programs.
At December 31, 2012, our receivables from our advisors' clients for margin loan
activity were approximately $268.4 million, and the balance of deposits in the
cash sweep programs was $24.7 billion.

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 firm commitments to extend credit. For information on these
arrangements, see Note 14 - Commitments and Contingencies and Note 20 -
Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of
Credit Risk, within the notes to consolidated financial statements.


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Contractual Obligations
The following table provides information with respect to our commitments and
obligations as of December 31, 2012:
                                                       Payments Due by Period
                                Total         < 1 Year       1-3 Years       4-5 Years       > 5 Years
                                                           (In thousands)
Leases and other
obligations(1)              $   390,084     $   31,137     $    62,634     $    51,280     $   245,033
Senior secured term loan
facilities(2)                 1,317,825         42,900         150,113         545,175         579,637
Commitment fee on revolving
line of credit(3)                 4,926          1,159           2,319           1,448               -
Variable interest
payments(4):
Term Loan A                      69,761         19,063          33,766          16,932               -
Term Loan B                     149,825         24,659          48,571          47,639          28,956
Total contractual cash
obligations                 $ 1,932,421     $  118,918     $   297,403     $   662,474     $   853,626


____________________

(1) Included in the payments due by period is a fifteen year lease commitment

that was executed in December 2011 for the Company's future San Diego

office building with a lease commencement date of May 1, 2014. Future

minimum payments for this lease commitment are $24.4 million, $31.4

million and $220.8 million for the periods 1-3 Years, 4-5 Years and > 5

Years, respectively. Minimum payments have not been reduced by minimum

sublease rental income of $4.9 million due in the future under

noncancelable subleases. Note 14 - Commitment and Contingencies, within

our notes to consolidated financial statements provides further detail on

operating lease obligations and obligations under noncancelable service

       contracts.


(2)    Represents principal payments under our Credit Agreement. See Note 12 -
       Indebtedness, within our notes to consolidated financial statements for
       further detail.

(3) Represents commitment fees for unused borrowings on our Revolving Credit

Facility. See Note 12 - Indebtedness, within our notes to consolidated

financial statements for further detail.

(4) Our senior secured term loan facilities bear interest at floating rates.

Variable interest payments are shown assuming the applicable LIBOR rates

at December 31, 2012 remain unchanged. See Note 12 - Indebtedness, within

       our notes to consolidated financial statements for further detail.


Our acquisitions of NRP, Concord and Veritat involve the potential payment of
contingent consideration dependent upon the achievement of certain revenue,
gross-margin and assets under management milestones. The table above does not
reflect any such obligation, as the amounts are uncertain. See Note 3 -
Acquisitions and Note 5 - Fair Value Measurements, within our notes to
consolidated financial statements for further discussion of the maximum amount
of future contingent consideration we could be required to pay in connection
with these acquisitions.
As of December 31, 2012, we reflect a liability for unrecognized tax benefits of
$19.9 million, which we have included in income taxes receivable in the
consolidated statements of financial condition. This amount has been excluded
from the contractual obligations table because we are unable to reasonably
predict the ultimate amount or timing of future tax payments.

Fair Value of Financial Instruments
We use fair value measurements to record certain financial assets and
liabilities at fair value and to determine fair value disclosures.
We use prices obtained from an independent third-party pricing service to
measure the fair value of our trading securities. We validate prices received
from the pricing service using various methods including, comparison to prices
received from additional pricing services, comparison to available market prices
and review of other relevant market data including implied yields of major
categories of securities.
At December 31, 2012, we did not adjust prices received from the independent
third-party pricing service. For certificates of deposit and treasury
securities, we utilize market-based inputs including observable market interest
rates that correspond to the remaining maturities or next interest reset dates.


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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP,
which require 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.

Revenue Recognition
Substantially all of our revenues are based on contractual arrangements. In
determining the appropriate recognition of commissions, we review the terms and
conditions of the brokerage account agreements between us and our advisors'
clients, representative agreements with our advisors, which include payout rates
and terms, and selling agreements with product sponsors for packaged investment
products such as mutual funds, annuities, insurance and alternative investments.
In determining the appropriate recognition of advisory revenues, we review the
terms and conditions of the advisory agreements between the advisors' clients
and the applicable RIA, representative agreements with its advisors, and
agreements with third parties who provide specific investment management or
investment strategies.
Revenues are recognized in the periods in which the related services are
performed provided that persuasive evidence of an arrangement exists, the fee is
fixed or determinable and collectability is reasonably assured. Payments
received by us in advance of the performance of service are deferred and
recognized as revenue when earned.
Management considers the nature of our contractual arrangements in determining
whether to recognize certain types of revenue on the basis of the gross amount
billed or net amount retained after payments are made to providers of certain
services related to the product or service offering.
The main factors we use to determine whether to record revenue on a gross or net
basis are whether:
• we are primarily responsible for the service to the advisor and its client;


• we have discretion in establishing fees paid by the client and fees due to

the third party service provider and

• we are involved in the determination of product or service specifications.



When client fees include a portion of charges that are paid to another party and
we are primarily responsible for providing the service to the client, we
recognize revenue on a gross basis in an amount equal to the fee paid by the
client. The cost of revenues recognized by us is the amount due to the other
party and is recorded as production expense.
In instances in which another party is primarily responsible for providing the
service to the client, we only recognize the net amount retained by us. The
portion of the fees that are collected from the client by us and remitted to the
other party are considered pass through amounts and accordingly are not a
component of revenues or cost of revenues.
Commission revenue represents gross commissions generated by our advisors for
their clients' purchases and sales of securities, and various other financial
products such as mutual funds, variable and fixed annuities, alternative
investments, fixed income, insurance, group annuities, and option and commodity
transactions. We generate two types of commission revenues: front-end sales
commissions that occur at the point of sale, as well as trailing commissions for
which we provide ongoing support, awareness, and education to clients of our
advisors.
We recognize front-end sales commissions as revenue on a trade-date basis, which
is when our performance obligations in generating the commissions have been
substantially completed. We earn commissions on a significant volume of
transactions that are placed by our advisors directly with product sponsors,
particularly with regard to mutual fund, 529 plan, and fixed and variable
annuity and insurance products. As a result, management must estimate a portion
of its commission revenues earned from clients for purchases and sales of these
products for each accounting period for which the proceeds have not yet been
received. These estimates are based on the amount of commissions earned from
transactions relating to these products in prior periods.
Commission revenue includes mutual fund, 529 plan and fixed and variable product
trailing fees which are recurring in nature. These trailing fees are earned by
us, based on a percentage of the current market value of clients' investment
holdings in trail-eligible assets, and recognized over the period during which
services are performed. Because trail commission revenues are generally paid in
arrears, management estimates the majority of

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trail commission revenues earned during each period. These estimates are based
on a number of factors including market levels and the amount of trail
commission revenues received in prior periods.
The amount of such accruals are shown as commissions receivable from product
sponsors and others, and are classified within receivables from product
sponsors, broker-dealers and clearing organizations in the consolidated
statements of financial condition.
A substantial portion of our commission revenue is ultimately paid to our
advisors. We record an estimate for commissions payable based upon payout ratios
for each product for which we have accrued commission revenue. Such amounts are
recorded by us as production expense.
We record fees charged to clients as advisory fee revenue in advisory accounts
where LPL Financial or Independent Advisers Group Corporation ("IAG") is the
RIA. A substantial portion of these advisory fees are paid to the related
advisor; such payments are recorded as production expense.
Certain advisors conduct their advisory business through separate entities by
establishing their own RIA pursuant to the Investment Advisers Act of 1940,
rather than using our corporate RIA. These stand-alone RIAs ("Independent RIA")
engage us for clearing, regulatory and custody services, as well as access to
our investment advisory platforms. The advisory revenue generated by these
Independent RIAs is earned by the advisors, and accordingly not included in our
advisory fee revenue.
We charge administrative fees based on the value of assets within these advisory
accounts, and classify such fees as advisory revenues and transaction and other
revenues.

Legal Reserves
We record reserves for legal proceedings in accounts payable and accrued
liabilities in our consolidated statements of financial condition. The
determination of these reserve amounts requires significant judgment on the part
of management. We consider many factors including, but not limited to, the
amount of the claim, the amount of the loss in the client's account, the basis
and validity of the claim, the possibility of wrongdoing on the part of an
advisor, likely insurance coverage, previous results in similar cases, legal
precedents and case law. Each legal proceeding is reviewed with counsel in each
accounting period and the reserve is adjusted as deemed appropriate by
management. Any change in the reserve amount is recorded as professional
services in our consolidated statements of operations.

Valuation of Goodwill and Other Intangibles
We test intangible assets determined to have indefinite useful lives, including
trademarks, trade names and goodwill, for impairment annually, or more
frequently if events or circumstances indicate that assets might be impaired. We
perform annual impairment reviews as of the first day of the fourth quarter
(October 1). We use a variety of methodologies in conducting impairment
assessments of indefinite-lived intangible assets, including, but not limited
to, discounted cash flow models, which are based on the assumptions we believe
hypothetical marketplace participants would use. Impairment exists when the
carrying amount of goodwill exceeds its implied fair value, resulting in an
impairment charge for the excess. For indefinite-lived intangible assets, other
than goodwill, if the carrying amount exceeds the fair value, an impairment
charge is recognized in an amount equal to that excess.
When facts and circumstances indicate that the carrying value of definite-lived
intangible assets may not be recoverable, we assess the recoverability of the
carrying value by preparing estimates of future cash flows. We recognize an
impairment loss if the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount. The impairment loss
recognized is the amount by which the carrying amount exceeds the fair value. We
use a variety of methodologies to determine the fair value of these assets,
including discounted cash flow models, which are consistent with the assumptions
we believe hypothetical marketplace participants would use.
We perform a goodwill assessment using a more-likely-than-not approach to
determine whether there is a greater than 50 percent chance that the fair value
of the reporting unit is less than its carrying values. If, after performing the
qualitative assessment, management determines there is a less than a 50 percent
chance that the fair value of a reporting unit is less than its carrying amount,
then performing the two-step test is unnecessary.
If we determine the two-step test is necessary, the first step is to compare the
fair value of a reporting unit to its carrying value, including goodwill. We
typically use income approach methodology to determine the fair value of a
reporting unit, which includes the discounted cash flow method and the market
approach methodology that includes the use of market multiples. The assumptions
used in these models are consistent with those we believe hypothetical
marketplace participants would use. If the fair value of the reporting unit is
less than its carrying value,

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the second step of the impairment test must be performed in order to determine
the amount of impairment loss, if any. The second step compares the implied fair
value of the reporting unit goodwill with the carrying amount of that goodwill.
If the carrying amount of the reporting unit's goodwill exceeds its implied fair
value, an impairment charge is recognized in an amount equal to that excess. The
loss recognized cannot exceed the carrying amount of goodwill.
As part of our qualitative assessment, we considered macroeconomic conditions
such as general deterioration in economic conditions, limitations on accessing
capital, debt rating changes and other developments in equity and credit
markets. We evaluated industry and market considerations for any deterioration
in the environment in which we operate, the increased competitive environment, a
decline in market-dependent multiples or metrics (considered in both absolute
terms and relative to peers), any change in the market for products or services
and regulatory and political developments. We assessed our overall financial
performance, cost factors that would have a negative effect on earnings and
prior quantitative assessments.

Income Taxes
We estimate income tax expense based on the various jurisdictions where we
conduct business. We must then assess the likelihood that the deferred tax
assets will be realized. A valuation allowance is established to the extent that
it is more-likely-than-not that such deferred tax assets will not be realized.
When we establish a valuation allowance or modify the existing allowance in a
certain reporting period, we generally record a corresponding increase or
decrease to the provision for income taxes in the consolidated statements of
operations. We make significant judgments in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowances recorded against the deferred tax asset. Changes in the estimate of
these taxes 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 have previously taken certain tax
positions and newly enacted statutory, judicial and regulatory guidance. These
changes, when they occur, affect accrued taxes and can be material to our
operating results for any particular reporting period.
Additionally, we account for uncertain tax positions in accordance with GAAP.
The application of income tax law is inherently complex. We are required to make
many subjective assumptions and judgments regarding our income tax exposures.
Interpretations of and guidance surrounding income tax laws and regulations
change over time. As such, changes in our subjective assumptions and judgments
can materially affect amounts recognized in our consolidated financial
statements.

Share-Based Compensation


Certain employees, advisors, institutions, executive officers and non-employee
directors participate in various long-term incentive plans, which provide for
granting stock options, warrants, restricted stock awards and restricted stock
units. Stock options and warrants generally vest in equal increments over a
three- to five-year period and expire on the tenth anniversary following the
date of grant. Restricted stock awards, and restricted stock units granted in
2012, generally cliff vest after a two-year period.
We recognize share-based payments awarded to employees, officers and directors
as compensation and benefits expense, based on the grant-date fair value over
the requisite service period of the individual grants, which generally equals
the vesting period. We account for share-based payments awarded to our advisors
and financial institutions as commissions and advisory expense based on the fair
value of the award at each interim reporting period. If the value of our common
stock increases over a given period, this accounting treatment results in
additional commissions and advisory expense.
As there are no observable market prices for identical or similar instruments,
we estimate the fair value of stock options and warrants using a Black-Scholes
valuation model.
We must make assumptions regarding the number of share-based awards that will be
forfeited. The forfeiture assumption is ultimately adjusted to the actual
forfeiture rate. Therefore, changes in the forfeiture assumptions do not impact
the total amount of expense ultimately recognized over the vesting period.
Rather, different forfeiture assumptions would only impact the timing of expense
recognition over the vesting period.
The risk-free interest rates are based on the implied yield available on
U.S. Treasury constant maturities in effect at the time of the grant with
remaining terms equivalent to the respective expected terms of the stock options
and warrants. Stock options and warrants granted during the three months ended
March 31, 2012 and in periods prior were granted before the declaration of our
special dividend and announcement of our intention, subject in each instance to
board approval, to pay regular quarterly dividends. Therefore, those stock
options and warrants

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had an expected dividend yield of zero. For any stock options or warrants
granted after the March 30, 2012 announcement regarding regular quarterly
dividends, the dividend yield is based on an expected dividend per share per
year as a percentage of our stock price on the valuation date. We estimate the
expected term for our stock options awarded to employees, officers and directors
using the simplified method in accordance with Staff Accounting Bulletin 110,
Certain Assumptions Used in Valuation Methods, because we do not have sufficient
relevant historical information to develop reasonable expectations about future
exercise patterns. We estimate the expected term for stock options and warrants
awarded to our advisors using the contractual term. Beginning in the first
quarter of 2012, we base our assumptions about stock-price volatility not only
on the stock-price volatility of comparable companies, but also on the
historical trading data for the period of time there was a public market for our
stock and the implied volatility to buy and sell our stock. We will continue to
use peer group volatility information until our historical volatility is
sufficient to measure expected volatility for future grants. In the future, as
we gain historical data for volatility of our stock and the actual term over
which stock options and warrants are held, expected volatility and the expected
term may change, which could substantially change the grant-date fair value of
future awards of stock options and warrants and, ultimately, compensation
expense recorded on future grants.
We recognized $15.9 million, $14.7 million and $10.3 million of share-based
compensation related to the vesting of employee, officer and director stock
option awards during the years ended December 31, 2012, 2011 and 2010
respectively. These amounts may not be representative of future share-based
compensation expense since the estimated fair value of stock options is
amortized over the requisite service period using the straight-line method and
additional options may be granted in future years. The following table presents
the weighted-average assumptions used in calculating the fair value of our
employee stock options with the Black-Scholes valuation model that have been
granted during the years ended December 31, 2012, 2011 and 2010:
                                  2012        2011        2010
Expected life (in years)           6.49        6.50        6.50
Expected stock price volatility   45.73 %     48.82 %     49.22 %
Expected dividend yield            0.29 %         - %         - %
Fair value of options           $ 14.43     $ 15.99     $ 17.42
Risk-free interest rate            1.34 %      2.20 %      2.70 %



We recognized $3.8 million, $3.3 million and $4.7 million of share-based
compensation related to the vesting of stock options and warrants awarded to our
advisors and financial institutions, during the years ended December 31, 2012,
2011 and 2010, respectively. These amounts may not be representative of future
share-based compensation expense since additional options may be granted in
future years, our stock price is subject to market fluctuations and the
estimated fair value of stock options is amortized over the requisite service
period using the straight-line method. The fair value of each stock option or
warrant awarded to advisors and financial institutions is estimated on the date
of the grant and revalued at each interim reporting period using the
Black-Scholes valuation model with the following weighted-average assumptions
used as of December 31, 2012, 2011 and 2010:
                                  2012        2011        2010
Expected life (in years)           7.61        8.30        8.23
Expected stock price volatility   43.97 %     48.24 %     48.77 %
Expected dividend yield            1.70 %         - %         - %
Fair value of options           $ 11.46     $ 17.74     $ 24.91
Risk-free interest rate            1.28 %      1.67 %      2.96 %



We have assumed an annualized forfeiture rate for our stock options and warrants
based on a combined review of industry and turnover data, as well as an
analytical review performed of historical pre-vesting forfeitures occurring over
the previous year. We record additional expense if the actual forfeiture rate is
lower than estimated and record a recovery of prior expense if the actual
forfeiture is higher than estimated.

                                       70
--------------------------------------------------------------------------------

Acquisitions

When we acquire companies, we recognize separately from goodwill the assets
acquired and the liabilities assumed at their acquisition date fair values.
Goodwill as of the acquisition date is measured as the excess of consideration
transferred and the net of the acquisition date fair values of the assets
acquired and the liabilities assumed. While we use our best estimates and
assumptions as a part of the purchase price allocation process to accurately
value assets acquired and liabilities assumed at the acquisition date, our
estimates are inherently uncertain and subject to refinement. As a result,
during the measurement period, which may be up to one year from the acquisition
date, we record adjustments to the assets acquired and liabilities assumed, with
the corresponding offset to goodwill. Upon the conclusion of the measurement
period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded to our
consolidated statements of operations.
Accounting for business combinations requires our management to make significant
estimates and assumptions, especially at the acquisition date with respect to
intangible assets, liabilities assumed, and pre-acquisition contingencies.
Although we believe the assumptions and estimates we have made in the past have
been reasonable and appropriate, they are based in part on historical
experience, market data and information obtained from the management of the
acquired companies and are inherently uncertain.
Examples of critical estimates in valuing certain of the intangible assets we
have acquired include but are not limited to: (i) future expected cash flows
from client relationships, advisor relationships and product sponsor
relationships; (ii) estimates to develop or use software; and (iii) discount
rates.
If we determine that a pre-acquisition contingency is probable in nature and
estimable as of the acquisition date, we record our best estimate for such a
contingency as a part of the preliminary purchase price allocation. We continue
to gather information for and evaluate our pre-acquisition contingencies
throughout the measurement period and if we make changes to the amounts recorded
or if we identify additional pre-acquisition contingencies during the
measurement period, such amounts will be included in the purchase price
allocation during the measurement period and, subsequently, in our results of
operations.

Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies, within the notes
to consolidated financial statements for a discussion of recent accounting
standards and pronouncements.
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