FOCUS Report Lincoln Financial Advisors Corporation

X-17A-5 [Paper] - FOCUS Report

Published: 2016-03-28 15:26:21
Submitted: 2016-03-01
Period Ending In: 2015-12-31
scanned.pdf Scanned paper document


                                                                               16013486                                OMB APPROVAL
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                                           ANNUAL AUDITED REPORT
                                               FORM X-1 7A-5                                                                 SEC FILE NUMBER
                                                  PART III                                                                   8-140185

                                                          FACING PAGE
                  Information Required of Brokers and Dealers Pursuant to Section 17 of the
                         Securities Exchange Act of 1934 and Rule 17a-5 Thereunder

    REPORT FOR THE PERIOD BEGINNING                             01/01/15               AND ENDING                       12/3115
                                                                MM/DD/YY                                                MM/DD/YY

                                        A. REGISTRANT IDENTIFICATION

    NAME OF BROKER-DEALER: Lincoln Financial Advisors Corporation                                                       OFFICIAL USE ONLY

w   ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.)                                                        FIRM I.D. NO.


                                                             (No. and Street)

                     Fort Wayne,                                   Indiana                                       46802
                       (City)                                        (State)                                    (Zip Code)

    NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT
               Carl R Pawsat                                                (336)691-3486
                                                                                                                  (Area Code — Telephone Number)

I                                      B. ACCOUNTANT IDENTIFICATION

    INDEPENDENT PUBLIC.ACCOUNTANT whose opinion is contained in this Report*

                                                   Ernst & Young LLP
                                                 (Name — ifindividual, state last,first, middle nacre)

      One Commerce Square, Suite 700, 2005 Market Street                                      Philadelphia.P                            0
         (Address)                                     (City)                                        (Sta       alb p             (Zip Code)
                                                                                                                 ~       cessln9
    CHECK ONE:                                                                                                          tiorl
              ® Certified Public Accountant                                                                 BAR 17 1
                                                                                                                          1016
              ❑ Public Accountant                                                                           ashin9ton
              ❑ Accountant not resident in United States or any of its possessions.                              411
                                                                                                                              C
                                                  FOR OFFICIAL USE ONLY




    *Claimsfor exemptionfrom the requirement that the annual report be covered by the opinion ofan independent public accountant
    must be supported by a statement offacts and circumstances relied on as the basisfor the exemption. See Section 240.17a-5(e)(2)


                                   Potential persons who are to respond to the collection of
                                   information contained in thisform are not required to respond
I      SEC 1410 (06-02)            unlesstheform displays a currently valid OMB control number.

I


                                                    OATH OR AFFIRMATION

     I,        Carl R. Pawsat                                                             , swear (or affirm) that, to the best of
     my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of
               Lincoln Financial Advisors Corporation                                                                         , as
     of        December 31                                  P 2015       , are true and correct. 1 further swear (or affirm) that
     neither the company nor any partner, proprietor, principal officer or director has any proprietary interest in any account
     classified solely as that of a customer, except as follows:




                                                                                          Signature

                                                                     Interim Financial and Operations Principal
                                                                                         Title

                                                                                        1

                                                                                                                  tiS




                                                                                                          _
                   Notary Public                                           ti               _        -.
                                                                                                y.
     This report ** contains(check all applicable boxes):                                  QTPrr
                                                                                      North Carolina
                                                                                                  "'
        (a) Facing   Page.
     ®
     N (b) Statement of Financial Condition.
        (c) Statement of Income (Loss).
     ®
        (d) Statement of Changes in Financial Condition.

                                                                                                              '
     ®
        (e) Statement of Changes in Stockholders' Equity or Partners' or Sole Proprietors' Capital.
     ®
        (f) Statement of Changes in Liabilities Subordinated to Claims of Creditors.
     ❑
        (g) Computation of Net Capital.
     ®
        (h) Computation for Determination of Reserve Requirements Pursuant to Rule 15c3-3.
     ❑
        (i) Information Relating to the Possession or Control Requirements Under Rule 150-3.
     ❑
         0) A Reconciliation,including appropriate explanation ofthe Computation ofNet Capital Under Rule 15c3-1 and the
     ❑
             Computation for Determination of the Reserve Requirements Under Exhibit A of Rule 150-3.
        (k) A Reconciliation between the audited and unaudited Statements of Financial Condition with respect to methods of
     ❑
             consolidation.
        (1) An Oath or Affirmation.
     ®
        (m)A copy of the SIPC Supplemental Report.
     ❑
        (n) A report describing any material inadequacies found to exist or found to have existed since the date ofthe previous audit.
     ❑
     **For conditions ofconfidential treatment ofcertain portions ofthisfiling, see section 240.t7a-S(e)(3).




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                                         Lincoln Financial Advisors Corporation

                 Consolidated Financial Statements and Supplementary Information

                                            Years Ended December 31, 2015 and 2014




                                                                    Contents

Report of Independent Registered Public Accounting Firm.......................................................................1

Audited Consolidated Financial Statements

Consolidated Statements of Financial Condition........;,................................................................................2
Consolidated Statements of Income ...............................................................................................................3
Consolidated Statements of Changes in Stockholder's Equity ...................................................................4
Consolidated Statements of Cash Flows.....................5
                                         ....................................................................................
Notes to Consolidated Financial Statements.................................................................................................6

Supplementary Information

Schedule I — Computation of Net Capital Pursuant to Rule 15c3-1 under the Securities
  Exchange Act of 1934 .................................................................................................................................18
Schedule II — Statement Regarding Reserve Requirements Pursuant to Rule 15c3-3 under
  the Securities Exchange Act of 1934.........................................................................................................19


                                             Ernst & Young LLP        Tel: +1215 448 5000

     Ey
     Building a better
                                             One Commerce Square
                                             Suite 700
                                             2005 Market Street
                                                                      Fax: +1215 448 4069


                                             Philadelphia, PA 19103
     working world




                                        Report ofIndependent Registered Public Accounting Firm


             The Board of Directors
             Lincoln Financial Advisors Corporation

             We have audited the accompanying consolidated statements of financial condition of Lincoln
             Financial Advisors Corporation (an indirect, wholly owned subsidiary of Lincoln National
             Corporation)(the Company), as of December 31, 2015 and 2014, and the related consolidated
             statements,of income, changes in stockholder's equity and cash flows for the years then ended
             that are filed pursuant to Rule 17a-5 under the Securities Exchange Act of 1934. These financial
             statements are the responsibility of the Company's management. Our responsibility is to express
             an opinion on these financial statements based on our audits.


             We conducted our audits in accordance with the standards of the Public Company Accounting
             Oversight Board (United States). Those standards require that we plan and perform the audit to
             obtain reasonable assurance about whether the financial statements are fiee of material
             misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
             disclosures in the financial statements. An audit also includes assessing the accounting principles
             used and significant estimates made by management, as well as evaluating the overall financial
             statement presentation. We believe that our audits provide a reasonable basis for our opinion.


             In our opinion, the financial statements referred to above present fairly, in all material respects,
             the consolidated financial position of Lincoln Financial Advisors Corporation at December 31,
             2015 and 2014, and the consolidated results ofits operations and its cash flows for the years then
             ended in conformity with U.S. generally accepted accounting principles.

W
             The accompanying information contained in Schedules I and II has been .subjected to audit
3P           procedures performed in conjunction with the audit of the Company's consolidated financial
             statements. Such information is the responsibility of the Company's management. Our audit
             procedures included determining whether the information reconciles to the financial statements
             or the underlying accounting and other records, as applicable, and performing procedures to test
             the completeness and accuracy ofthe information. In forming our opinion on the information, we
             evaluated whether such information, including its form and content, is presented in conformity
             with Rule 17a-5 under the Securities Exchange Act of 1934. In our opinion, the information is
             fairly stated, in all material respects, in relation to the financial statements as a whole.

                                                                                                   01P
              February 25,2016
                                                                                            ~~ J

     A member firm of Ernst 8 Young Global Limited


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                                    Lincoln Financial Advisors Corporation

                                 Consolidated Statements of Financial Condition


                                                                             December 31
:X
                                                                          2015         2014
       Assets
       Cash and invested cash                                        $ 68,608,576 $     47,486,875
M.     Cash segregated for regulatory purposes                                  —       13,000,000
       Commissions and fees receivable                                 55,374,538       56,762,351
       Due from affiliates                                                916,378        2,738,816
:X     Deferred tax asset                                               1,090,240        2,080,383
       Prepaid expenses                                                 1,308,795        1,380,767
X      Other assets, cash invested with affiliate                       9,471,093        8,047,589
:X     Other assets                                                    34,356,065       33,304,638
       Net property and equipment (accumulated depreciation:
         2015 - $5,521,224; 2014 — $4,775,842)                           6460,283      5,607,767
       Total assets                                                  $ 177,285,968 $ 170,409,186
M
I
       Liabilities and stockholder's equity
       Liabilities:
         Payable to vendors                                          $    2,737,722 $    1,703,404
         Due to affiliates                                               21,619,650     20,698,094
         Deferred revenue                                                 3,228,066      3,241,985
         Accrued commissions                                             35,588,077     35,745,922
         Accrued compensation and benefits                                4,303,962      4,023,804
M        Other liabilities                                               20,472,041     23,636,748
-in    Total liabilities                                                 87,949,518     89,049,957

       Stockholder's equity:
         Common stock — $100 par value; 5,000 shares
           authorized, issued, and outstanding                             500,000       500,000
         Additional paid-in capital                                     21,852,465    20,757,547
         Retained earnings                                              66,983,985    60,101,682
       Total stockholder's equity                                       89,336,450    81,359,229
       Total liabilities and stockholder's equity                    $ 177,285,968 $ 170,409,186

       See accompanying notes.
~




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                                                                                                 Oil
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                          Lincoln Financial Advisors Corporation

                            Consolidated Statements of Income


                                                              Year Ended December 31
                                                                2015          2014
Revenues:
  Commissions and fees from third parties                     359,630,593       331,522,848




                                                          $
                                                                            $
  Commissions and fees from affiliates                        125,338,566       131,329,456
  Other                                                         2,058,503         2,053,480
  Interest                                                         80,849            65,418
Total revenues                                                487,108,511       464,971,202

Expenses:
  Commissions and agency expenses                             332,509,102       310,355,262
  Service charges from affiliates                              78,335,983        81,497,454
  Salaries, wages, and benefits                                26,441,493        24,181,706
  Licenses and fees                                             1,625,178         1,911,387
  Professional and legal                                        2,138,905         1,643,290
  Office expenses                                               7,282,348         6,816,924
  Other general and administrative expenses                     3,149,674         3,270,033
Total expenses                                                451,482,683       429,676,056
Income before income tax expense                               35,625,828        35,295,146

Income tax expense                                             13,743,525        13,895,454
Net income                                               $     21,882,303 $      21,399,692

See accompanying notes.




                                                                                          3


                          Lincoln Financial Advisors Corporation

               Consolidated Statements of Changes in Stockholder's Equity


                                                              Year Ended December 31
                                                                2015          2014
Common stock:
 Balance as of beginning and end of year                  $      500,000 $     500,000

Additional paid-in capital:
  Balance as of beginning of year                              20,757,547    19,923,598
    Share-based payment expense                                 1,094,918       833,949
  Balance as of end of year                                    21,852,465    20,757,547

Retained earnings:
  Balance as of beginning of year                          60,101,682    48,701,990
    Net income                                             21,882,303    21,399,692
    Dividends paid                                        (15,000,000)  (10,000,000)
  Balance as of end of year                                66,983,985    60,101,682
Total stockholder's equity as of end of year             $ 89,336,450 $ 81,359,229

See accompanying notes.




                                                                                       0


                                    Lincoln Financial Advisors Corporation

                                     Consolidated Statements of Cash Flows


                                                                           Year Ended December 31
                                                                             2015          2014
         Cash flows from operating activities
         Net income                                                    $    21,882,303 $   21,399,692
         Adjustments to reconcile net income to net cash provided by
           (used in) operating activities:
             Change in deferred tax asset                                    1,295,353       5,066,971
             Depreciation on property and equipment                            745,382         299,826
             Share-based payment expense                                       789,708         733,131
-
    -
                                            _
             Change in cash segregated for regulatory purposes              13,000,000      (3,000,000)
             Change in commissions and fees receivable                       1,387,813      (8,696,522)
             Change iii due from affiliates                                  1,822,438       2,166,135
             Change in prepaid expenses                                         71,972         (28,690)
             Change in other assets, cash invested with affiliate           (1,423,504)      2,621,763
             Change in other assets                                         (1,051,427)     (5,199,805)
             Change in payable to vendors                                    1,034,318         696,852
             Change in due to affiliates                                       921,556      (1,406,209)
             Change in deferred revenue                                        (13,919)        534,260
             Change in accrued commissions                                    (157,845)      5,948,175
             Change in accrued compensation and benefits                       280,158      (7,034,569)
             Change in other liabilities                                    (3,164,707)       (813,496)
         Net cash provided by (used in) operating activities                37,419,599      13,287,514

         Cash flows from investing activities
         Purchase of property and equipment                                 (1,297,898)     (1,616,235)
         Net cash used in investing activities                              (1,297,898)     (1,616,235)

         Cash flows from financing activities
         Dividends paid to stockholder                                     (15,000,000)    (10,000,000)
         Net cash used in financing activities                             (15,000,000)    (10,000,000)

         Net increase (decrease) in cash and invested cash                   21,121,701     1,671,279
         Cash and invested cash as of beginning of year                     47,486,875     45,815,596
         Cash and invested cash as of end of year                      $    68,608,576 $   47,486,875

    -"   Supplemental disclosure of cash flow information
         Income tax payments                                           $     9,0562334 $     8,582,101

         Noncash transactions
         Executive stock option tax (expense) benefit                  $      305,210 $       100,818

         See accompanying notes


                                                                                                          R


F]

                                   Lincoln Financial Advisors Corporation

-.                                Notes to Consolidated Financial Statements

                                              December 31, 2015

K]
     1. Nature of Operations, Basis of Presentation, Summary of Significant Accounting Policies
        and New Accounting Standards

     Nature of Operations

     Lincoln Financial Advisors Corporation ("LFA" or the "Company," which also may be referred to
     as "we," "our" or "us") is a registered broker-dealer and investment advisor engaged principally in
     the distribution of securities, including certain mutual funds, variable insurance products, fee-based
     investment advisory services, and equity and fixed income securities. LFA is licensed to engage in
     broker-dealer and investment advisor activity throughout the United States. Our wholly owned
     subsidiary, LFA Management Corporation ("LFAMC") is a management company incorporated in
     2004 for the purpose of providing LFA with executive management services and corporate
     governance. LFA is a wholly owned subsidiary of The Lincoln National Life Insurance Company
     ("LNL"), which is a wholly owned subsidiary of Lincoln National Corporation ("LNC").

     Basis of Presentation

     The accompanying,consolidated financial statements are prepared in accordance with United States
     of America generally accepted accounting principles ("GAAP"). Certain GAAP policies, which
     significantly affect the determination of financial position, results of operations and cash flows, are
     summarized below.

     Summary of Significant Accounting Policies

     Principles ofConsolidation

     The accompanying consolidated financial statements include the accounts of LFA and its wholly
     owned subsidiary, LFAMC. All intercompany accounts and transactions have been eliminated in
     consolidation.

     The Company and other affiliated entities that provide services to the Company are under common
     ownership and management control. The existence of this control could result in the Company's
     operating results or financial position being significantly different from those that would have been
     obtained if the Company were autonomous.




                                                                                                          0


X
a
                                              Lincoln Financial Advisors Corporation

X                                Notes to Consolidated Financial Statements (continued)

X


             1. Nature of Operations, Basis of Presentation, Summary of Significant Accounting Policies
                and New Accounting Standards (continued)

             Accounting Estimates andAssumptions

             The preparation of financial statements in conformity with GAAP requires management to make
             estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures
             of contingent assets and liabilities as of the date of the financial statements and the reported
             amounts of revenues and expenses for the reporting period. Those estimates are inherently subject
             to change and actual results could differ from those estimates.

             Cash and Invested Cash

             Cash and invested cash is carried at cost and includes all highly liquid investments purchased with an
             original maturity of three months or less.

             Effective November 24, 2015, LFA claimed an exemption from Rule 15c3-3 of the Securities
             Exchange Act of 1934 ("Rule 156-3") pursuant to the exemption provisions in paragraphs (k)(2)(i)
             and (k)(2)(ii) of that rule. As such, there is no requirement to segregate cash at December 31, 2015.
             Cash of $0 and $13,000,000 as of December 31, 2015 and 2014, respectively, has been segregated in
             a special restricted bank account for the benefit of customers under Rule 156-3.
    a
             Cash Invested 1llith Affiihate

             In order to manage capital more efficiently, the Company participates in an intercompany cash
    A        management program where LNC can lend to or borrow from the Company to meet short-term
             borrowing needs. The cash management program is essentially a series of demand loans among
             LNC and its affiliates that reduces the overall borrowing costs by allowing LNC and its affiliates to
             access internal resources instead of incurring third-party transaction costs. Invested cash with LNC
             was $9,471,093 and $8,047,589 at December 31, 2015 and 2014, respectively, and is included in
             other assets, cash invested with affiliate on the Consolidated Statements of Financial Condition.

        M    Commission Revenue .and Expense

    IR       Commission revenue for customer securities transactions and related commission expenses are
             recorded on a trade-date basis. Advisory fee income, asset-based revenue and corresponding
             commission expenses are recorded as earned based on a contractual percentage of customer
             deposits.

        IN
        IR
                                                                                                                 7
        14


                                  Lincoln Financial Advisors Corporation

                        Notes to Consolidated Financial Statements (continued)




     1. Nature of Operations, Basis of Presentation, Summary of Significant Accounting Policies
        and New Accounting Standards (continued)

     Income Taxes

     LNC files a U.S. consolidated income tax return that includes all eligible subsidiaries, including LFA
     and LNL. Pursuant to an intercompany tax-sharing agreement with LNL,LFA provides for income
     taxes on a separate return filing basis. The tax-sharing agreement also provides that LFA will receive
     benefit for net operating losses, capital losses, and tax credits, which may not be usable on a separate
     return basis to the extent such items may be utilized in the consolidated federal income,tax'returns
     of LNC.

     Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have
     different values for financial statement and tax reporting purposes. A valuation allowance is
     recorded to the extent required. Considerable judgment and the use of estimates are required in
39
     determining whether a valuation allowance is necessary and, if so, the amount of such valuation
     allowance. See Note 3 for additional information.

     Revenues, Expenses, OtberAssets and Otber Liabilities related to AdviceNexism

M    As discussed in Note 2, the Company entered into an agreement with the Company's clearing
     provider to launch AdviceNexim. The agreement provides for business development credits that are
     received by the Company from the clearing provider upon execution of the contract and
     achievement of certain time or performance milestones, as specified in the contract. The business
     development credits are recorded as deferred revenue and are being recognized over the contract
     period in other income on the Consolidated Statements of Income.

     The launch of AdviceNext5m results in incremental and identifiable costs that are directly related to
     the acquisition of the agreement with the clearing provider. These costs have been capitalized and
M    will be amortized over the contract period in other general and administrative expenses on the
     Consolidated Statements of Income.




M,
M


■
■
■
                                          Lincoln Financial Advisors Corporation
■
■                               Notes to Consolidated Financial Statements (continued)

I


■           1. Nature of Operations, Basis of Presentation, Summary of Significant Accounting Policies
               and New Accounting Standards (continued).

            Properly and Equipment
■
            Property and equipment owned for company use is carried at cost less allowances for depreciation.
            Provisions for depreciation are computed on the straight-line method over the estimated useful lives
■           of the assets, which include furniture and fixtures, leasehold improvements, data processing
            equipment, and computer software.

            Deferred revenue
■
            Cash received in advance for financial planning contracts is recorded as deferred revenue until
            delivery of the financial plan to the respective customer.

            Deferred Compensation

            Certain LFA employees participate in a deferred compensation plan sponsored and administered by
f           LNC.LFA is allocated appropriate expenses related to the plan by LNC. LFA reports current period
■           expense in salaries, wages, and benefits on the Consolidated Statements of Income with the liability
            in accrued compensation and benefits on the Consolidated Statements of Financial Condition.

            Stock-Based Compensation

            Certain LFA employees participate in stock-based compensation programs sponsored and
            administered by LNC. LFA is allocated appropriate expenses related to the program by LNC. LFA
            reports current period expense in salaries, wages, and benefits on the Consolidated Statements of
    A       Income with the nonexercised portion in accrued compensation and benefits on the Consolidated
            Statements of Financial Condition.

    ■       Loans to registered representatives

            LFA has a loan program to attract top-producing representatives to join the sales network.
            Assuming the producers can generate gross dealer concessions ("GDC") in excess of a contracted
    A       amount,LFA will advance the representative a specified dollar amount that will be forgiven over the
            life of the loan (typically three to seven years). The executed contract for each loan stipulates annual
            GDC requirements that must be met in order for that year's proportion of the loan to be waived.
            Alternatively, if at the end of the contract period, the cumulative GDC production is equal to or in
    IN
            excess of the aggregate contract requirement, the entire balance of the loan will be waived. The net
            loan receivable is reported in other assets on the Consolidated Statements of Financial Condition.
    s
        ,
                                                                                                                  W
9


                           Lincoln Financial Advisors Corporation

                  Notes to Consolidated Financial Statements (continued)




1. Nature of Operations, Basis of Presentation, Summary of Significant Accounting Policies
   and New Accounting Standards (continued)

New Accounting Standards

Future Adoption ofNew Accounting Standard — Revenuefrom Contracts with Customers

In May 2014, the FASB issued guidance to clarify the principles for recognizing revenue and to
develop a common revenue standard for U.S. GAAP. Revenue must be recognized when the
transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services, has occurred.
Implementation of this guidance will require the Company to identify contracts with customers,
identify the performance obligations in the contracts, determine the transaction prices, allocate the
transaction prices to the performance obligations in the contracts, and recognize revenue when or as
the entity satisfies the performance obligations. The guidance becomes effective for the December
31, 2018 annual reporting period. The Company is assessing the effect of this guidance on the
consolidated financial statements.




                                                                                                  10


                                Lincoln Financial Advisors Corporation

                       Notes to Consolidated Financial Statements (continued)




     2. Launch of AdviceNextw

     Effective September 30, 2013, Lincoln Financial Network ("LFN"), the retail wealth management
a
     affiliate of LNC and the marketing name for LFA and Lincoln Financial Securities Corporation
     ("LFS"), a broker-dealer affiliate, entered into an agreement with LFN's clearing provider to launch
     AdviceNext m, a new integrated offering that optimizes the delivery of the firm's practice resources,
     tools and technology to advisors. This initiative requires a significant, multi-year investment and is
     also being supported by significant platform investment by the Company's clearing provider.

     The agreement provides for business development credits that are received by the Company from
     the clearing provider upon execution of the contract and achievement of certain time or
     performance milestones, as specified in the contract. The agreement also provides for the repayment
     of the business development credits under certain circumstances, including if LFN does not meet
a
     minimum client account asset levels or if LFN terminates the contract prior to its contractual end
     date, September 30, 2025. LFN allocated the business development credits to LFA and LFS
     accordingly. LFA was allocated $23,610,000 in business development credits and received
     $10,200,000 in 2013. LFA reported $13,410,000 in business development credits receivable in other
     assets on the Consolidated Statements of Financial Condition as of December 31, 2015 and 2014.
     The business development credits are recorded as deferred revenue and will be recognized over the
     contract period. LFA recognized $2,053,750 in revenue related to the business development credits
     each year in 2015 and 2014, and reported $19,173,637 and $21,142,387 of deferred.revenue in other
     liabilities on the Consolidated Statements of Financial Condition as of December 31, 2015 and 2014,
     respectively.

     The launch of AdviceNextrM results in incremental and identifiable costs that are directly related to
M    the acquisition of the agreement, with the clearing provider, that would not have been incurred but
     for the acquisition of the agreement and qualify for capitalization. LFA reported capitalized costs,
     net of amortization, of $16,770,600 and $13,488,597 as of December 31, 2015 and 2014,
     respectively. During 2015 and 2014, LFA amortized costs of $1,514,020 and $977,953, respectively.
     LFA expects the total incremental and identifiable costs incurred to launch AdviceNextrM to
     approximate the business development credits provided by the Company's clearing provider.

     In addition to the capitalized costs described above, the Company reported capitalized internal use
     software development costs, related to AdviceNexlsm of $5,009,357 and $4,308,807 as of December
     31, 2015 and 2014, respectively, and reported $539,987 and $177,379 of accumulated depreciation in
     2015 and 2014, respectively.




M
                                                                                                       11
IN


                            Lincoln Financial Advisors Corporation

                  Notes to Consolidated Financial Statements (continued)




3. Income Taxes

The income tax expense was as follows:

                                                                     Year Ended December 31
                                                                       2015         2014
    Federal income tax expense:
      Current                                                    $        9,788,721 $    7,502,856
      Deferred                                                            19986,510      4,060,557
    Federal income tax expense                                           11,775,231     11,563,413

   State income tax expense (benefit):
     Current                                                              2,408,831      1,325,627
     Deferred                                                              (440,537)     1,006,414
   State income tax expense                                               1,968,294      2,332,041
   Total income tax expense                                      $       13,743,525 $   13,895,454

A reconciliation of the effective tax rate differences was as follows:

                                                                     Year Ended December 31
                                                                       2015          2014

    Tax rate times pretax income                                 $       12,469,040 $   12,353,301
    Effect of:
      State tax expenses                                                  1,279,391      1,515,827
      Other items                                                            (4,906)        26,326
    Income tax expense                                           $       13,743,525 $   13,895,454

    Effective tax rate                                                      38.6%           39.4%

The effective tax rate is the ratio of tax expense over pretax income (loss). Other items include
permanent adjustments.




                                                                                                     12


                             Lincoln Financial Advisors Corporation

                   Notes to Consolidated Financial Statements (continued)




3. Income Taxes (continued)

The income tax asset was as follows:

                                                                     Year Ended December 31
                                                                       2015         2014
   Federal income tax asset (liability):
     Current                                                            224,673          2,157,676




                                                                 $
                                                                                     $
     Deferred                                                          (240,580)         1,430,680
   Federal income tax asset (liability)                                 (15,907)         3,588,356

   State income tax asset (liability):
     Current                                                           (423,544)           797,595
     Deferred                                                          1,090,240          649,703
   State income tax asset                                                666,696         1,447,298

   Total current income tax asset (liability)                           (198,871)        2,955,271
   Total deferred income tax asset                                       849,660         2,080,383
                                                                 $
                                                                                     $
Significant components of our deferred tax assets and liabilities were as follows:

                                                                      Year Ended December 31
                                                                         2015        2014
   Deferred tax assets
   Employee compensation plans                                       $ 2,423,853 $ 2,703,248
   Accrued liabilities                                                   917,529     174,136
   Other                                                               1,387,316 - 1,460,124
   Total deferred tax assets                                           4,728,698   4,337,508

    Deferred tax liabilities
    AdviceNext'm                                                      3,879,038  2,257,125
    Total deferred tax liabilities                                    3,879,038  2,257,125
    Net deferred tax asset                                           $ 849,660 $ 2,080,383




                                                                                                     13


a
                                   Lincoln Financial Advisors Corporation

                          Notes to Consolidated Financial Statements (continued)

A

        3. Income Taxes (continued)

        Current federal income taxes receivable is included in due from affiliates on the Consolidated
        Statements of Financial Condition. Current state income taxes payable is included in other liabilities
        on the Consolidated Statements of Financial Condition.

X       The Company is required to establish a valuation allowance for any gross deferred tax assets that are
        unlikely to reduce taxes payable in future years' tax returns. At December 31, 2015 and 2014, the
A       Company concluded that it was more likely than not that its gross deferred tax assets will reduce
        taxes payablein future years; therefore, no valuation allowance was necessary.

        The LNC consolidated group is subject to examination by U.S. federal, state, local and non-U.S.
        income authorities. The Internal Revenue Service examination for tax years 2009 through 2011 was
    -   closed in 2015. However, LNC has filed a protest for these years with the IRS Appeals Division.
        The Company is currently not under examination by the IRS. A protest for tax years 2005 through
X11
I
        2008 was previously filed with Appeals and all years from 2005 to 2011 for the Company remain
        open. All protested items have been resolved for all open years but are subject-to review by the U.S.
        Joint Committee on Taxation before a final settlement is reached. The Company does not expect
        any adjustments that would be material to its consolidated results of operations or its financial
        condition.
u
am      There are no uncertain tax positions related to the Company in the current year.

        4. Agreements and Transactions With Affiliates

        In order to be compliant with the Financial Industry Regulatory Authority ("FINRA") rules regarding
        proper expense recognition and expense-sharing agreements, LFA has entered into various cost-
        sharing agreements with affiliates. Additionally, costs are allocated to LFA by certain affiliates under
        common LNC control for corporate and administrative services and for certain securities-related and
        product-specific expenses pursuant to Master Services Agreements. Costs include, but are not limited
        to, expenses related to broker-dealer management and operations, home and field office, human
        resource administration, print and distribution, legal services, compliance, administrative expenses,
X       information technology, and. communication services. Total allocations were $96,190,754 and
        $91,511,232 in 2015 and 2014, respectively, which is reported in general and administrative expenses,
        including salaries, wages, and benefits, professional and legal, office expenses, service charges from
        affiliates and other general and administrative expenses on the Consolidated Statements of Income.


X
Al

                                                                                                            14
X


0
0

                                 Lincoln Financial Advisors Corporation
■
                       Notes to Consolidated Financial Statements (continued)
■
■
0   4. Agreements and Transactions With Affiliates (continued)

    LFA also has a similar Master Service Agreement with LNL's Retirement Planning Services ("RPS")
    division. Costs related to the sale of RPS products that result in LFA revenue are identified and
    allocated to LFA as service charges on a monthly basis by RPS. LFA incurred $2,752,303 and
■   $2,131,444 of RPS-related service charges in 2015 and 2014, respectively, which is reported in service
    charges from affiliates on the Consolidated Statements of Income.

■   Settlements under the above agreements are represented in due from affiliates and due to affiliates on
    the Consolidated Statements of Financial Condition.

    5. Contingencies and Commitments

    Contingencies

    Regulatory and Litigation Matters

    Regulatory bodies, such as the Securities and Exchange Commission ("SEC") and FINRA, regularly
    make inquiries and conduct examinations or investigations concerning our compliance with, among
    other things, securities laws, laws governing the activities of broker-dealers, and registered
    investment advisors.

    LFA is involved in various pending or threatened legal or regulatory proceedings arising from the
N   conduct of business both in the ordinary course and otherwise. In some of the matters, very large
    and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading
    practice in the U.S. permits considerable variation in the assertion of monetary damages or other
■   relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit
    claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial
■   court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well
    exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in
    pleadings, together with our actual experiences in litigating or resolving through settlement
    numerous claims over an extended period of time, demonstrates to management that the monetary
M   relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition
    value.

    Due to the unpredictable nature of litigation, the outcome of a litigation matter and the amount or
    range of potential loss at particular points in time is normally difficult to ascertain. Uncertainties can
    include how fact finders will evaluate documentary evidence and the credibility and effectiveness of
    witness testimony, and how trial and appellate courts will apply the law in the context of the



                                                                                                          15


                                Lincoln Financial Advisors Corporation

                       Notes to Consolidated Financial Statements (continued)


M
     5. Contingencies and Commitments (continued)

:M   pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition
     valuations are also subject to the uncertainty of how opposing parties and their counsel will
     themselves view the relevant evidence and applicable law.

     We establish liabilities for litigation and regulatory loss contingencies when information related to
     the loss contingencies shows both that it is probable that a loss has been incurred and the amount of
     the loss can be reasonably estimated. It is possible that some matters could require us to pay
     damages or make other expenditures or establish accruals in amounts that could 'hot be
     estimated as of December 31, 2015. While the potential future charges could be material in the
     particular quarterly or annual periods in which they are recorded, based on information currently
     known by management, management does not believe any such charges are likely to have a material
     adverse effect on LFA's financial position.

     For some matters, the Company is able to estimate a reasonably possible range of loss. For such
     matters in which a loss is probable, an accrual has been made. For such matters where a loss is
     believed to be reasonably possible, but not probable, no accrual has been made. For other matters,
     we are not currently able to estimate the reasonably possible loss or range of loss. We are often
     unable to estimate the possible loss or range of loss until developments in such matters have
     provided sufficient information to support an assessment of the range of possible loss, such as
     quantification of a damage demand from plaintiffs, discovery from other parties and investigation of
     factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress
     of settlement negotiations. On a quarterly and annual basis, we review relevant information with
     respect to litigation contingencies and update our accruals, disclosures and estimates of reasonably
     possible losses or ranges of loss based on such reviews.

     Commitments

     LFA has entered into loan agreements with select groups of registered representatives in which the
     principal balances loaned are determined by specific, agreed-upon operating expenses incurred by
     the groups while conducting business over a period specified within each agreement. Under these
     agreements, the borrowers may obtain advances to pay for expenses incurred up to but not
     exceeding agreed upon amounts. The total principal balance of these loans is $6,419,381 and
     $6,387,334 at December 31, 2015 and 2014, respectively, which is reported in other assets on the
     Consolidated Statements of Financial Condition. There was no remaining commitment by LFA to
     advance funds at December 31, 2015. The remaining commitment by LFA to advance funds at
     December 31,2014 was $380,902.




                                                                                                       16


                          Lincoln Financial Advisors Corporation

                 Notes to Consolidated Financial Statements (continued)




6. Net Capital Requirements

Effective November 24, 2015, LFA elected to operate under the alternative standard provisions of
the SEC Uniform Net Capital Rule (Rule 156-1), which requires the minimum net capital to be the
greater of $250,000 or 2% of aggregate debit items computed in accordance with the SEC Customer
Protection Rule (Rule 15c3-3) reserve requirements. Prior to November 2015,LFA operated under
the aggregate indebtedness standard, which requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net capital, both as defined by Rule 156-1, may
not exceed 15 to 1.

                                                                    Year Ended December 31.
                                                                       2015        2014

   Minimum net capital requirement                              $    250,000 $ 5,761,140
   Net capital                                                    33,042,530   25,526,651
   Excess net capital                                           $ 32,792,530 $ 19,765,511

   Aggregate indebtedness                                             N/A       $ 86,417,056

   Ratio of aggregate indebtedness to net capital                     N/A            3.39 to 1

7. Capital

During 2015, LFA declared and paid dividends to its parent, LNL,of $15,000,000.

8. Subsequent Events

The Company has evaluated subsequent events for recognition and disclosure through the date the
financial statements were issued.




                                                                                                 17


Supplementary Information


                                    Lincoln Financial Advisors Corporation

                                Schedule I — Computation of Net Capital
                   Pursuant to Rule 15c3-1 under the Securities Exchange Act of 1934

                                                  December 31, 2015
a
        Computation of net capital
        Consolidated stockholder's equity                                                   $ 89,336,450
        Deduct subsidiary's stockholder's equity                                               9,972,211
        Total stockholder's equity qualified for net capital                                  79,364,239

        Less non-allowable assets:
          Commissions and fees receivable                                                      17,480,378
          Receivables from affiliates                                                             580,586
          Prepaid expenses                                                                      1,308,795
          Other assets                                                                         20,726,252
          Property and equipment                                                                5,986,767
          Total non-allowable assets                                                           46,082,778
        Other deductions                                                                            6,395
        Net capital before haircuts on securities positions                                    33,275,066
        Haircuts on securities                                                                    232,536
        Net capital                                                                            33,042,530

        Computation of alternate net capital requirements
        2% of combined aggregate debit items as shown in Formula for Reserve
          Requirements pursuant to Rule 15c3-3
        Greater of $250,000 or 2% of combined aggregate debit items                        $      250,000

        Excess net capital                                                                 $ 32,792,530

        Excess net capital at 120% of minimum net capital requirement                      $ 32,742,530


        The audited financial statements are presented on a consolidated basis; however, the accompanying
        net capital calculation is presented based on LFA's unconsolidated financial information. No
        material differences exist between the audited financial statement computation of net capital and the
        computation included in the Company's corresponding amended unaudited Form X-17A-5, Part II
    ■
        filing as of December 31,2015, submitted February 24, 2016.




                                                                                                          IV


                               Lincoln Financial Advisors Corporation

                    Schedule II — Statement Regarding Reserve Requirements
                Pursuant to Rule 15c3-3 under the Securities Exchange Act of 1934

                                            December 31, 2015



4     Lincoln Financial Advisors Corporation is exempt from Rule 15c3-3 under the Securities Exchange
 -~   Act of 1934 under paragraphs (k)(2)(i) and (k)(2)(ii) of that Rule.




                                                                                                    19


            Lincoln
            Financial Advisors®
            A member of Lincoln Financial Group

       You're In Charge®




    Lincoln Financial Advisors
1300 South Clinton Street, Suite 150
      Fort Wayne,IN 46802


0




4


n
U


                    Lincoln Financial Investment Services Corporation

                                  Exemption Report
           Pursuant to Rule 17a-5 under the Securities Exchange Act of 1934

                                       December 31, 2015


Lincoln Financial Investment Services Corporation (the "Company') is a registered broker-dealer
subject to Rule 17a-5 promulgated by the Securities and Exchange Commission (17 C.F.R. §240.17a-
5,"Reports to be made by certain brokers and dealers"). This Exemption Report was prepared as
required by 17 C.F.R. § 240.17a-5(d)(1) and (4). To the best of its knowledge and belief, the
Company states the following:

    I. The Company claimed an exemption from 17 C.F.R. § 240.15c3-3 under the following
       provisions of 17 C.F.R. §.240.15c3-3 (k)(1).

   2. The Company met the identified exemption provisions in 17 C.F.R. § 240.15c3-3(k)(1)
      throughout the most recent fiscal year without exception.

I, Carl R. Pawsat, certify that, to my best knowledge and belief, this Exemption Report is true and
correct.



Dated: February 25,2016                           C'
                                             Name: Carl R. awsat
                                             Title: Interim Financial and Operations Principal


        '                               Ernst & Young LLP        Tel: +1 215 448 5000
                                        One Commerce Square      fax: +1 215448 4069
                                        Suite 700
                                        2005 Market Street
Building a be                           Philadelphia, PA 19103
working world




                                  Report ofIndependent Registered Public Accounting Firin



 We have reviewed management's statements, included in the accompanying Lincoln Financial
 Investment Services Corporation Exemption Report, in which (1) Lincoln Financial Investment Services
 Corporation (the Company) identified the following provisions of 17 C.F.R. § 156-3(k) under which
 the Company claimed an exemption from 17 C.F.R. § 240.15c3-3: (k)(1)(the "exemption provision")
 and (2) the Company stated that it met the identified exemption provision throughout the most recent
 fiscal year ended December 31,2015 without exception. Management ofthe Company is responsible for
 compliance with the exemption provision and its statements.

 Our review was conducted in accordance with the standards of the Public Company Accounting
 Oversight Board (United States) and, accordingly, included inquiries and other required procedures to
 obtain evidence about the Company's compliance with the exemption provisions. A review is
 substantially less in scope than an examination, the objective of which is the expression of an opinion on
 management's statements. Accordingly, we do not express such an opinion.

 Based on our review, we are not aware of any material modifications that should be made to
 management's statements referred to above for them to be fairly stated, in all material respects, based on
 the provisions set forth in paragraph (k)(1)of Rule 15c3-3 under the Securities Exchange Act of 1934.

 This report is intended solely for the information and use of the Board of Directors, management, the
 SEC, the Financial Industry Regulatory Authority, other regulatory agencies that rely on Rule 17a-5
 under the Securities Exchange Act of 1934 in their regulation of registered brokers and dealers, and
 other recipients specified by Rule 17a-5(d)(6) and is not intended to be and should not be used by
 anyone other than these specified parties.



 February 25,2016.




A member Ilan of Ernst & Young Global Limited


onl o oo e nnene ce e en en en uy s en e



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