LPL Financial Holdings, Inc. - Managing The Incoming Yield Compression

Jun. 25, 2019 8:38 AM ETLPL Financial Holdings Inc. (LPLA)
Joseph Allan Sinay profile picture
Joseph Allan Sinay


  • The market is expecting the Fed to cut rates, cutting into spreads earned by financial institutions.
  • LPL Financial Holdings, Inc. has anticipated this and has the means to mitigate the earnings impact.
  • However, impact to valuations can still be meaningful: investors should be prepared.

On June 19 the Federal Open Market Committee (OTCPK:FOMC) kept the Fed funds rate steady and announced a pivot towards a more dovish stance. You can find more details about that particular Fed meeting in this article. Consequently we expect the financial services firms (e.g., banks, insurance companies, asset managers, etc.) to face yield compression as the spread between low-cost funding sources (i.e., deposits) and interest-earning assets (e.g., loans, investment securities, etc.) narrows. LPL Financial Holdings, Inc. (NASDAQ:NASDAQ:LPLA), a company we actively cover, is impacted by this event. In this article we hope to give investors a better idea of how meaningful the impact could be and how that would affect the valuations for LPLA.

An expectation of rate cuts

According to the CME FedWatch Tool (seen in the chart below), the market probabilities for the July FOMC meeting are 68% for a 25 bps cut and 32% for a 50 bps cut. No room for keeping rates steady and definitely no expectations of a rate hike.

CME FedWatch toolSource: CME FedWatch tool

These probabilities were in sharp contrast to those prior to the June FOMC meeting which displayed a 16% chance of keeping rates steady for July. Furthermore, the Financial reporting industry has jumped on this issue and published articles such as this which solidifies the notion of an impending rate cut in July. As a result it becomes very difficult for the Fed to fight the market on this issue and may be forced to let monetary policy take the path already laid out by the traders.

So given the inevitability of rate cuts - what does that mean for LPLA?

Fed funds rate matters for cash sweep

As described by LPLA in its 1Q19 10Q filing:

Cash sweep fees are generated based on advisors’ clients’ cash sweep accounts. Uninvested cash balances are

This article was written by

Joseph Allan Sinay profile picture
Ex-McKinsey consultant with experience in the Financial sector. Ex-investment analyst for a $10b fund based in Southeast Asia. Summer Analyst at T. Rowe Price. Graduating MBA student at Columbia Business School. CFA Charterholder and Certified Public Accountant (CPA). Leverages experience in strategy consulting and private equity to generate unique, non-consensus, and primary research-backed investment ideas. Deeply paranoid about financial companies’ balance sheets and risk appetite.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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