The potential expiration of the so-called Bush tax cuts was the driving force behind LPL Financial's decision to do its initial public offering in 2010, LPL CEO Mark Casady said in an interview on Thursday.
At the time of the IPO last November, some observers were wondering why the vast majority of the IPO was being sold by insiders and management. The reason was personal financial planning arising from the exercise of stock options, according to Casady.
Most insiders sold just a little more than enough shares to satisfy their tax obligations associated with exercising stock options. About 70% of the net proceeds went to the federal government and various states, he explained. Nearly "90% of my proceeds went to help reduce the deficits" of the U.S. government and the state of Massachusetts, Casady joked, explaining that he exercised all his options. "We're doing our patriotic duty."
Unlike stocks which are taxed at the 15% capital gains rate if held for more than one year, options are taxed at ordinary income rates. Both the option grant and any appreciation are considered ordinary income.
LPL filed for the IPO on June 4. Even in late November, "no one knew what was going to happen [with taxes]," Casady said. "We were thrilled that the president and Congress" reached a compromise to extend the Bush tax cuts, but it wasn't clear for most of 2010 that any deal would happen.
Some rivals in the industry speculated that the IPO was a chance for insiders to cash out, but Casady said 80% of his net worth remains in LPL stock and added that many others at the firm are in the same position. Significantly, LPL's two biggest shareholders, private equity firms Hellman & Friedman and TPG, sold none of their shares.
There was speculation that TPG, which had invested more than $1 billion to rescue Wamu only months before it failed in 2008, had pushed for the IPO to demonstrate to institutional investors it could make successful investments in financial services companies. Casady said that simply wasn't the case and that, despite the Wamu disappointment, TPG had an enviable record.
Some observers have predicted that LPL would use its equity as a currency to acquire other brokerages and financial companies. Casady said this was unlikely and that LPL would prefer to use cash for acquisitions.
The IPO did give LPL increased financial flexibility and the firm plans to increase its capital spending almost 50% this year. Over the last decade, Chief Financial Officer Robert Moore estimates the firm has invested about $650 million in technology.
On February 7, LPL will report its 2010 for the first time as a public company. But because it has more 500 shareholders, including more than 1,000 advisors, it has been compliant with Sarbanes-Oxley and reporting to the SEC since 2007. Other private companies like Facebook with more than 500 shareholders are required to do so.
Although LPL's revenues declined 12% in 2009, the firm's profits actually rose. The firm attracted 750 net new advisors that year. While it also lost a lot of advisors-many of whom left the industry altogether-Moore says the fees and commissions of those who joined the firm were five times that of those who left.
Moore would not comment about the fourth quarter except to say he felt good about "the trajectory" of the firm's business. Over the summer when the stock market was much lower, LPL conducted a national survey of all its reps and found their optimism to be at an all-time high.