36% Undervalued, This Upgraded Stock Is a Buy

We recently upgraded LPL Financial’s economic moat rating to wide from narrow, reflecting our view that the company is poised to emerge as a long-term winner in the quickly growing independent broker/dealer channel within US wealth management. This wide-moat company has led the industry in advisor recruiting over each of the past eight years, and we now expect nearly 12% annual growth in client assets over the next decade. With its shares trading 36% below our $504 fair value estimate, LPL is one of the most undervalued stocks we cover in the otherwise pricey financial-services sector today. In fact, the attractive stock lands on Morningstar analysts’ 33 Undervalued Stocks to Buy in Q4 2025. It’s also among Morningstar Chief US Market Strategist Dave Sekera’s 4 New Stocks to Buy Now and Hold for the Long Term.

In recent years, LPL has prioritized growth in advisory headcount by expanding its affiliation models and broadening its array of higher-touch services and its product shelf, allowing it to better serve advisors with higher-net-worth clientele, and by engaging in strategic mergers and acquisitions. This, in turn, has allowed the company to generate scale over relatively fixed trading and back-office costs, strengthening its cost advantage over smaller independent competitors. Simultaneously, LPL has invested in a liquidity and succession program to help retiring advisors sell their practices while retaining assets in the company’s ecosystem. We take a positive view of LPL’s strategy and expect its advantages to become even more entrenched as the industry continues to consolidate.

Key Morningstar Metrics for LPL

• Fair Value Estimate: $504
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: High

Economic Moat Rating

We believe that LPL has a wide economic moat derived from switching costs and a durable cost advantage over smaller independent broker/dealer peers. We point to the company’s sky-high retention ratios, market positioning, and increasing provision of services like marketing support, bookkeeping, paraplanning, and administrative solutions, which reduce advisors’ incentives to leave the platform. We also consider LPL’s competitive expense on client assets ratio relative to industry peers, as well as its ability to generate compelling economic profits despite paying out nearly 90% of advisor-generated revenue as wages—leaps and bounds above the 30%-50% payouts common in the employee-advisor model. LPL has averaged an annual return on invested capital of 26.2% (including goodwill) over the past 10 years, which we expect to remain relatively consistent over the decade to come.

Read more about LPL’s moat rating.

Fair Value Estimate for LPL Stock

Our $504 fair value estimate implies a 2025 price/earnings multiple of 36 times and enterprise value/adjusted EBITDA of 16.2 times. Our forecasts include 10-year compound annual growth rates of 11.8% for revenue, 11.3% for gross profit, 14.5% for operating profit, and 16.8% for diluted earnings per share. Underpinning our assumptions is an 11.9% CAGR in client assets. We expect clients to hold just 3.2% of their assets in cash, roughly half of the rate seen in the 2010s. Despite our expectations for near-term interest rate cuts, we expect net interest income from client cash to grow at a 10% annual clip over the next decade. We expect operating margin to equilibrate in the low teens, around 14.3% at midcycle.

Read more about LPL’s fair value estimate.

Risk and Uncertainty

As a wealth manager, LPL is sensitive to interest rates and asset levels, which affect its earnings through cash sweeps and advisory, commission, recordkeeping, and transaction fees. The company earns around a third of its gross profit from client cash sweeps, with that income stream growing during periods of high interest rates and declining during periods of low rates. Competitive and regulatory dynamics can also affect cash sweep income. While recently acquired businesses were generally attractive and directly related to core operations, the ability to retain advisors, merge brokerage and clearing platforms, and extract expected synergies adds a degree of cash flow uncertainty. Competition for advisor talent remains intense, but LPL’s platform is uniquely positioned to attract talent organically.

Read more about LPL’s risk and uncertainty.

LPL Bulls Say

• Expansion into the employee channel could significantly boost LPL’s advisor acquisition, enabling the company to play in one of the largest wealth management niches.
• Its scale, integration prowess, and self-clearing capabilities could allow LPL to emerge as the buyer of choice for even large competitors like Osaic and Cetera.
• The company’s rollout of higher-touch services like estate planning and tax management, in tandem with a broader suite of investment options, could allow LPL to compete ably for high-net-worth clients and their advisors.

LPL Bears Say

• More-stringent regulation regarding rates paid on client cash could significantly dent LPL’s net interest income.
• A foray into RIA affiliate models by well-capitalized competitors could substantially alter the competitive landscape and LPL’s growth prospects.
• A prolonged period of low interest rates could severely diminish the earnings potential of LPL’s business.

This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of Oct. 14, 2025, close unless otherwise noted.