Higher rates on cash could cost LPL $380 million: analyst

After a tumultuous week for broker-dealers facing higher yields on client cash, one securities analyst on Friday said that higher interest rates on clients' cash held in advisory accounts may cost LPL Financial Holdings Inc. as much as $380 million, shaving off $3.80 per share on the company's earnings in the future.

The analyst, Jeff Schmitt of William Blair Equity Research, wrote the note about LPL in the wake of the company being sued by a client on Wednesday in federal court in San Diego, with the claim alleging that LPL’s cash sweep program allows the company to unjustly enrich itself, which potentially constitutes a breach of fiduciary duty.

Last Friday, Wells Fargo & co. said it expected to take a hit to spread income this year after recently raising sweep rates in client advisory accounts. Morgan Stanley on Tuesday said that, like Wells Fargo, it was raising rates on clients’ cash in advisory sweep accounts.

With LPL, Raymond James Financial Inc. and Ameriprise Financial Inc. all set to report earnings for the quarter ending in June next week, one senior industry executive expressed his concern over how significant the impact the repricing of clients' cash could be for each firm. "We're waiting for the other shoe to drop," said the executive, who asked not to be named.

Shares of LPL Financial Holdings, with the ticker LPLA, declined almost 20% for the week as of trading at 12:30 on Friday, with shares trading at close to $210.

A company spokesperson on Friday did not return a call to comment about Schmitt's analysis in the wake of this week's lawsuit.

"We make no claims on the validity of the lawsuit at this stage and await additional information from the company during its earnings call next Thursday," Schmitt wrote. "However, to the extent LPL does have to increase sweep rates on advisory accounts, we wanted to provide our initial thoughts on the company’s potential exposure."

He estimated that LPL had about $23 billion of client cash in advisory accounts.

"Assuming the sweep rate on exposed client cash is increased from 0.85% to 2.5%, this would reduce the company’s spread income by around $380 million," he wrote. "This represents roughly $3.80 per share of earnings, which would reduce our 2025 adjusted [earning per share] estimate from $19.75 to $15.95. This would effectively be a reset in earnings, after which the company’s long-term growth algorithm would take over again."

"LPL allocates uninvested client cash to third-party banks to generate higher yields than it pays out to clients through sweep accounts," he wrote. "Current sweep rates average around 0.85%, including under 0.80% for accounts with less than $1.5 million of assets. These rates are materially lower than yields on money market funds available to clients in the market."