Raymond James Financial, Inc.

Welcome to the earnings call for Raymond James Financial's biblical second quarter of 2019. My name is Tiffany, and I will be your conference facilitator today. This call is being recorded and will be available on the company's website. Now I will turn it over to Paul Shukri, Treasurer and Head of Investor Relations at Raymond James Financial. Please go ahead.

Thank you, Tiffany. Good morning. Good morning. And thank you all for joining us on the call this morning. After I read the following disclosure, I'll turn the call over to Paul Riley, our Chairman and Chief Executive Officer, and Jeff Julian, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions. Certain statements majoring in this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation or regulatory developments or general economic conditions. In addition to words such as believes, expects, plans, will, could, and would, as well as any other statement that necessarily depends on future events or intended to identify forward-looking statements. Please note there can be no assurance that actual results will not differ materially from those expressed in those statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q, which are available on our website. During today's call, we'll also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance, so reconciliation of these measures to the most comparable GAAP measures may be found in the schedule accompanying our press release. With that, I'll turn the call over to Paul Riley, Chairman and CEO of Raymond James Financial.

Paul? Thanks, Paul, and good morning, everyone, and welcome. Thanks for joining us. I'm going to start, as usual, with a brief summary of the fiscal second quarter of 2019. I'm going to turn it over to Jeff. who will provide some more details on the financials and some line items, and then I'll discuss outlook before turning it over for questions. So following a challenging market during the December quarter, I am pleased with a solid performance in a number of key areas during the fiscal second quarter. These include quarterly net revenues of $1.86 billion, an increase of 3% over the prior year's second quarter, but a calling of 4%, to the preceding quarter. As we discussed on the last call and at our recent conferences, asset management and related administrative fees were the primary drivers to sequential decline in net revenues, as the vast majority of these fees are billed based on the beginning of the period fee-based asset levels, which were down with the market in December quarter. This quarter also had fewer billable days than the December quarter, which negatively impacts both asset management fees and net interest income. But despite the fewer billable days this quarter and the seasonal expenses related to year-end mailings and reset and FICA taxes, we generated quarterly net earnings per share of $1.81, lifted by record investment banking revenues and higher net of Raymond James Bank, which experienced improvement in its net income margin during the quarter, driving record quarterly net revenues and pre-tax income in the segment. We ended the period, importantly, with records for client assets under administration of $796 billion, total private client group financial advisors of $7,862, and record net loans at RJ Bank of $20.1 billion. Annualized total return on equity for the quarter was 16.7%. We want to remind everyone, a lot of people report on tangible equity, but this is total equity, which is a terrific result, particularly given our strong capital levels, which I'll speak about a little bit later. Stepping back, if you look at the first six months, the first half of this fiscal year, we generated record net revenues of $3.79 billion, which were up 7%, and net income of $510 million, which was up 41%, or adjusted net income of $525 million, which was up 9% over the first half of fiscal 18. And notably, all four of our core segments generated record net revenue during the first six months of the fiscal year. This is really a fantastic result, particularly given the challenging market environment during the December quarter. Now turning to the segments. In the private client group, we generated net revenue of $1.27 billion and pre-tax net income of $132 million during the quarter. The segment's results were negatively impacted by the market downturn in December, which caused fees-based assets, which are billed on balances at the beginning of the period, to start lower this quarter than the starting balance in the immediately preceding quarter. Moreover, once again, there were fewer billable days this quarter than the preceding quarter. Partially offsetting the lower asset management fees, fees from third-party banks increased substantially during the quarter due to higher spreads following the December rate increase, and higher client cash balances at the beginning of the quarter. However, these cash balances have been declining due to clients increasing their allocations to other investments, primarily as a result of improvement in equity markets, as well as tax-related seasonality. The trend has continued into April. Fortunately, PCGC-based assets under administration which now represent nearly 50% of the private client group's total client assets, grew 16% over March of 2018 and 12% over December 2018, and achieved a new record, ending March at $378.4 billion. Again, driven by equity market appreciation, increased utilization of fee-based accounts, and net additional financial advisors. Our financial advisor retention and recruiting remained solid, resulting in a healthy net increase of 47 financial advisors during the quarter to a record of 7,862. Our client-focused culture, mobile affiliation options, and robust service and solution offerings continue to resonate well with existing and prospective advisors. In the capital market segment, we generated net revenue of $277 million in pre-tax income of $41 million for the quarter, both representing significant increases over prior years, fiscal second quarter and the preceding quarter. We achieved record investment banking revenues in this segment of $156 million for the quarter. The strong results were driven primarily by record M&A revenues of $118 million, which also included our largest fee in history. This more than offset the industry-wide weakness in equity underwriting in the first quarter due to government shutdown. Fixed income and brokerage revenues improved largely due to a spike in interest volatility during the month of March. However, institutional equity brokerage revenues continue to be challenged by structural and cyclical headwinds. In the asset management segment, we generated net revenue of $162 million and pre-tax income of $55 million during the quarter. These were negatively impacted by the starting of the quarter with lower billable asset levels, given the decline in the equity markets in December, as well as net outflows for Carillon Tower Advisors. Financial assets under management ended the quarter at $138 million. $2.5 billion, an increase of 5% over March of 2018, and 9% over December 2018. Overall, the growth in financial assets under management continues to be largely driven by equity market appreciation, positive inflows with increased utilization of management accounts in the private client group, which we believe will continue going forward. Raymond James Bank generated record quarterly net revenue of $212 million, during the fiscal second quarter. We ended the quarter with record net loans at 20.1 billion, which were up 11% year-over-year and 1% sequentially. The growth in loans during the quarter was driven by the C&I portfolio and residential mortgages to our private clients. Raymond James Bank net interest margin expanded to 3.35% in the second quarter, up 14 basis points over a year ago, second quarter, and 10 basis points over the preceding quarter. Importantly, the credit quality of the bank's loan portfolio remains strong, resulting in a decrease in our loan loss provision. So overall, strong quarter. I believe an excellent first half of the fiscal year. So with that, I'll turn it over to Jeff before I provide some comment on the outlook. Jeff? Thanks, Paul.

I'm going to run down some of the line items and add a little color. On the revenue side, although total revenues were reasonably close to the consensus model, it's the net effect of two pretty significant variations. One is in the asset management related fees. The actual decline in that revenue line versus the December quarter was pretty much in line with the drop in the related fee-based assets. If you remember, if you look at the December release, you can see those various asset categories declined between 8% and 10% in December, given the 14% drop in the S&P that quarter. So it's not a surprise that that revenue line item would be down 9% sequentially, but apparently the street underestimated that a little bit. So that drop was a little more severe than the consensus model would show. Looking forward to Q3, again, billings, which we have already done in April here, were up a percentage similar to what you would see in terms of the growth in fee-based assets in the March quarter for that particular line item. Granted, a small portion of that line is based on average assets or end-of-period assets, but, again, the vast majority, 90% type range, Brokerage revenues, PCG commissions, and equity institutional both declined. They continue to struggle as we shift more toward a fee-based model here in the private client group. That was offset this particular quarter by a nice uptick in the fixed income institutional business in the principal transactions, both in commissions and what used to be called Looking forward, the higher equity markets will certainly help some of the PCG trail revenues and things like that going forward. So there may be at least a flattening of the PCG-related portion of that line. And fixed income, although they had a really good March month, may regress a little bit back toward the levels they were at. And we're starting to see a little bit of that already. So we wouldn't necessarily... anticipate a continuation of the level they're running at at the end of the quarter. The account and service fee line, which is largely fees from unaffiliated banks that are in our suite program waterfall. As you can see on page seven of the release, client cash balances continue to decline subsequent to December when the market started recovering and So we have seen that all the way up, as Paul mentioned, all the way up through today. We continue to see clients seeking either higher yielding cash alternatives or going to risk assets. But that decline throughout the March quarter was more than offset by the increased spread that we earned as we had not passed through any of the December Fed hike declines throughout that quarter. that caused the net impact to actually have an uptick in the account and service fee line item in the March quarter. Going forward, assuming no additional Fed moves, the spread may hold up in the current range of about 200 basis points, but the balances may continue to run off for the quarter. We'll have to wait and see how that plays out. The other offsetting variation or fluctuation from the consensus model was in investment banking, and again, a really strong close to the quarter. Generally, these have been happening almost too late for us to signal anything in our monthly releases, but we came in with record investment banking revenues driven by record M&A fees for the quarter of $118 million, so we've had two really good quarters in a row in M&A fees, and Looking forward in that line item, you know, while the pipeline is still pretty active, it seems like it will be difficult to meet or beat the first six months on that particular line, but it should still be a very good year overall. That interest income was just slightly above consensus. The Nimit Raymond James Bank, you can see on page 17 of the release, actually grew 10 basis points to 3.35%. Again, as we – some of the assets repriced from the Fed rate hike in December and very little impact on the cost of funds to the bank. For quarter three and four going forward at least, for now, we would think it would stay somewhat in the same range. We'll have to – we can see as the bank continues to grow probably in that 8% to 10% a year type range. So we should continue to see some increase in outstanding loan balances, which helps drive the NIM up. But it's a matter of how much cash and securities they have on average during the quarter and other factors. So for now, I think in that range is probably a good estimate for the next quarter at least. And the other revenues is the only other one that came in under consensus, and that was a little bit slower quarter for the tax credit funds in terms of closings. This particular quarter, which now falls in this line item, it used to be in the old investment banking line item, but now it's in other revenues. In this particular quarter, there were no significant closings. impacts either direction from valuations on private equity holdings. So that came in slightly lower. Turning to the expense side, comp expense, the comp ratio came in dead on expectations. The ratio is 65.9 for the quarter and 65.7 for the year to date. They're both well under our 66.5% guideline. And that's despite the fact that the current quarter has an $8 to $10 million impact from the FICA reset that happens every beginning of each calendar year and impacts us in the March quarter. So no real surprises with comp. We've talked about communication, info processing. It was up slightly from last quarter, but still under our guidance for the quarterly average for the year. But we're not really going to change our quarterly guidance for the year of running in the mid to high 90s on average for the year, which kind of means that we are expecting a little bit of an uptrend in the back half of the year here in that particular line item based on what we know today. Some of those things certainly are controllable and subject to delays and other things, but At this point in time, based on what we know, we still think the mid-90s on average for the year is probably a good number for that line. Business development is running also below guidance. We've talked about maybe mid-40s for the first two quarters. It's actually running the low 40s for the first two quarters. Some of that had to do maybe with a little bit slower recruiting times. which is one of the big costs that goes in there. And also we did no branding or advertising of any kind during the first half. As we've mentioned on prior calls, the last two quarters of the year we anticipate will be higher than the first two quarters based on the timing of our large conferences and our reward trips, both of which are important to preserving our culture and morale within our sales force. We also have some modest image advertising planned. So, you know, we'll be, my guess is at this point in time, again, some of that is controllable, but at this point in time we would think it would be more in the high 40s to 50 million type range per quarter for the next two quarters. Paul mentioned the bank loan loss provision. It went back to what we call a more normal level this quarter after a series of downgrades within the past category generally in the prior quarter. So we're back to what we call a more normal level, which is more correlated with the overall loan growth of $247 million during the quarter. And that growth this quarter was largely within the CNI and CRE portfolios, which led to a little bit higher than that. the 1% overall provision reserve that we have related to outstanding loan balances. And the other expense line, again, we think maybe this has regressed back to what we call a more normal run rate that we talked about really actually last summer when we were experiencing some elevated legal and regulatory costs. In this particular quarter, as noted in at least one report, there was a catch-up valuation adjustment of about $9 million for the one tax credit fund that we consolidate because we have guaranteed the tax credits will flow to the buyer. We've had this on our books for years and years, so as a result of that, their expenses flow through our P&L, and we own a very small fraction of this fund, of our to our own interest, so virtually all of the impact comes out to the non-controlling interest. So, you know, $9 million of that $12 million in non-controlling interest is all related to that, but that did inflate other expenses by that amount. So, heck, that factor, you can see it was a fairly low quarter for the other expense line item. And again, we think that somewhere around where it is now is a little bit more indicative of what we would call an ongoing run rate. A couple other metrics. The pre-tax margin was 18.7% for the quarter. I've been getting a lot of questions about whether we have additional leverage to increase that, whether we're at a maximum point in the cycle on that, etc., You know, what happened this quarter, of course, we had lower revenues from the fee billings and we had, you know, some higher interest earnings and account and service fees and things that are very high margin type revenues, including investment banking, M&A fees. Those are more profitable marginal revenues than the PCG-related fee income. which has a high attendant payout. So as a result, it drove the margin up this particular quarter and also helped the comp ratio. Going forward, we have, as you know, for Q3, we had higher fee billings, which again will be a little bit lower margin revenue and will drive some higher compensation with the FAA payouts, particularly in the independent contractor space. And lower cash balances point to a possible decline in the margin for next quarter when you add those two things together, but it will be on higher revenues. So it's not to say that earnings or earnings per share will necessarily be impacted dramatically, but it'll just be a different mix, more like it was in the December quarter perhaps. Then Paul mentioned the ROE coming in at 16.7 and also for the quarter and also for the adjusted number for the year to date when you take out the impact in the first quarter of the sale of the European equity sales and trading operations. So we're, again, well above our long-term target of 15%, but again, still trying to make up for the many years we ran along at 11 and 12% when we had no interest earnings to speak of. Capital ratios, they all remain well above regulatory minimums, multiples of regulatory minimums, actually. And a little bit up from the preceding quarter, because we only had modest buybacks this particular quarter of 603,000 shares. I will say, however, the record EPS that we had during the quarter, even though we did not have record income, pre-tax or otherwise, we had record EPS, which really reflects the full impact of the over 6 million shares that we repurchased in the December quarter. All in all, a pretty satisfying quarter given the headwind of the lower fees that we started with and the continued runoff of client cash balances. But that's what I have, and I'll turn it back now to Paul.

Great. Thanks, Joe. So let me touch on this segment quickly, and then we'll open it up for questions. In the private client group segment, we enter the third quarter with assets and fee-based accounts up 12% on a sequential basis. And remember, these are built substantially, you know, based on the beginning balances. So it's kind of the reverse of last quarter. When they were down, this quarter they're up. Also, last quarter we had two fewer days. This quarter we have one more day than last quarter. So those will both be positive on the – a tailwind for us going into the quarter. Offsetting some of those benefits, the decline in cash balances, as Jeff has mentioned. Overall, we continue to experience very good financial advisor recruiting and retention, so we're really optimistic on this segment and where it's headed. In the capital market segment, while the timing of closings are always difficult in the M&A business, the pipeline for M&A remains very strong. It'd be hard to match last year, the first six months' closings. But on the other hand, activity levels for equity underwritings are increasing. Although it'll be still difficult, I think, to match the first half, but we expect good results. Unfortunately, on the fixed income side of the business, we had a really strong March and a reasonable April, but you can see it's slowing back down a little bit. So If rate volatility remains low, given a flat yield curve and low long-term rates, it will still be challenging for that division. The asset management segment entered third quarter with assets under management up 5% year-over-year and 9% sequentially. So, again, this should help the billing. Increased utilization of fee-based accounts in the private client group, as well as a good return performance in Carillon Towers, should also help us with financial assets under management over time. Raymond James Bank started the third quarter with record loan balances and attractive net interest margins. The bank remains very disciplined in growing the loan portfolio, and the credit metrics, we believe, will continue to be healthy. So I thought I would touch on our capital levels, because we obviously have excess capital with our total capital ratio now around 25%. But the story remains consistent as it's always been. We continue to deliberately deploy our capital. after repurchasing 6.1 million shares in the December quarter for $458 million, or an average price of $75.70 per share. In the first quarter, we purchased nearly 603,000 shares for $47 million, or an average price of $78. This leaves us with $458 million of availability under the $505 million share repurchase authorizations. repurchase authorization, which was increased by the Board of Directors in March of 2019, will continue to be proactive in offsetting shareholder compensation dilution while remaining opportunistic with increased repurchases. We have also closed on two investments in April, including Silver Lane Advisors, a high-quality M&A platform with expertise in asset management and the wealth industries. And we bought out the remaining 55% interest in Claribus, an asset manager with over $7 billion in financial assets under management, that we first purchased at a minority stake in 2012. While these were not huge uses of capital, they do represent our strategic investments that we are continuing to make to augment our strong organic growth. We have been and will continue to look I'm pursuing larger acquisitions, but again, only if they meet our criteria of being a strong cultural fit, a good strategic fit, and something we can integrate at a price that generates attractive returns to our shareholders. We also get a lot of questions of whether or not we'd be willing to grow the bank more rapidly. If we found assets that could generate good risk returns, we would. So we are growing our loan portfolio at a rate we are comfortable with, given our conservative parameters and discipline focus. And while the bank has grown our agency MBS portfolio over the past three years, with a flat yield curve, it doesn't make a lot of sense to take three- to four-year risk duration for maybe 25 or 30 basis points, given the incremental spread pickup over the floating rate we earn off balances from third-party banks. which offer much more flexibility and more FDIC insurance for our clients. We have focused on deploying capital to generate good returns for our shareholders, as we did this quarter with a 16.7 annualized return on total equity. We want our balance sheet not only to remain on the defensive side, but also allow us to be opportunistic when we see opportunities. So overall, we entered the second half of 2019 with a lot of tailwinds. with record number of private client group financial advisors, fee-based assets up 12% in the preceding quarter, record high spreads on our cash balances, record net loans at Raymond James Bank, and a healthy investment banking pipeline. But we also had some headwinds, including declining cash balances and some expenses as communications and info processing, as Jeff spoke about, and business development for conferences. For example, we have our largest conference occurring next week with over 4,500 people attending, which will impact the business development line. So with that, I think we're in great shape. And Tiffany, I'll turn it over to you to open the line for questions.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Your first question comes from the line of Steven Chuback from Wolf Research.

Hey, good morning. Good morning, Steve. So I wanted to start off with a question on the operating margin outlook. You cited a number of sources of record revenue balances, and just given the strong revenue talents in the second half and the growth in higher margin NII, how should we think about the outlook for operating margins? Should we think that some expansion in 2019 versus 18 is achievable even with the absorption of some of the higher non-coms as part of your investment plans?

There's multiple layers to this, but revenue mix does impact the margin and the comp ratio. So it's great that our fee billings will start 12% higher, but we pay advisors on that revenue. And if interest rates where we pay, we don't pay anybody, it really almost floats 100% to the bottom line in that interest. Obviously, impact, both the comp ratio will be higher and the margin will be lower given the same mix of other activities. So the revenue mix has been driving some of that margin in this quarter. And if we think what happens, happens, the comp ratio should be up and the margin should be down slightly. I think that's right.

I think, Steve, if we can keep the pre-tax margin in this 18% type range, That's a very acceptable long-term margin, in our opinion. The way we would like to see growth happen over time is to grow revenues, control expenses at about the same level. So we continue to see this 18% margin, but on an increasing revenue base going forward and then controlling the share count through the repurchases, which we've been doing. That's sort of long-term how we would see it, not so much through concentrating our business in such a way that we optimize the pre-tax margin. I mean, remember, PCG is our core business, and if you look at the margin in the segments, it's actually the lowest margin of our businesses, but it beats all the other businesses. So through attribution, it's an integral part of that 18% margin. But I wouldn't look for a lot of margin expansion personally if that's not how we intend to grow earnings per share going forward. It's more growing revenues and holding the share count flat.

Got it. Being for what it's worth, I think expectations reflect margin contractions anyway, so it doesn't feel like the bar there is particularly high. But comments about keeping it stable at 18 is certainly quite encouraging. Just one question for me on the non-comps. I certainly can appreciate the fact that you guys continue to invest in the business. It was nice to see also that the other expense line came in a bit better. Jeff, you indicated that the core number for that was somewhere sub-60 million this quarter, but at the same time also noted that 67 million may actually be indicative of a more normalized level. I'm just trying to unpack how we should be thinking about that line item going forward.

I mean, it's hard to pick a number on that one. There's a lot of, you know, I hate to overuse the word lumpy, but there's a lot of costs, particularly on the legal side, you know, that can come in or go out of that any particular quarter. But, again, if we can keep it somewhere in the $60 million to $65 million range for that line now that we've taken professional fees out and established a separate line item, If we can keep the other expense in that $60 million to $65 million range, I think that's indicative of some ongoing legal costs. In this business, we're never going to be without some litigation from clients or other sources. But in terms of all the other costs, items that fall into that particular category, you know, that would be an acceptable long-term run rate at our current level of operations.

And just one final one for me on the private client asset management fee yield. We're clearly well-positioned to benefit from higher AUM levels in private client as we approach the back half, but the calculated fee yield continues to contract, albeit at a fairly modest pace. I was hoping you could speak to what's driving that fee dynamic and how we should think about the trajectory for the CEO going forward.

The only shift that you could really see is there's more of a movement to fee-based accounts. We're not seeing big pressure at all on advisors when advisors are charging clients. Those have held in pretty well. I know there's been a lot of commentary about compression there We don't see the compression in the fees the advisors are charging. There's normal compression on any asset management fee in our industry. But in terms, the advisor fees have held up very, very well. So I think it's more of a mix than any fee compression we see.

It's a mix in average size of account. Over time, our client base average account size has grown, and larger accounts typically can command a slightly better fee.

Great, thanks for taking my questions.

Your next question comes from the line of Bill Katz from Citi.

Hi, good morning. This is Kendall Marthaler actually on for Bill Katz. So I know you guys talked a little bit about the client cash into April, but I was wondering if you could give more of an update on the pace of that relative to the last few months and how we should think about the economic tradeoff between that elevated retail engagement and the lower cash balances.

You know, we've been spending a lot of time on this over the last four to five months with our sales force. I mean, it's gotten to where the rate that people earn on what we'll call sweep balances compared to what they can earn in what we'll call positional cash, such as an investment in the money market fund, The differential is large enough now that advisors and clients are actually bifurcating their cash into what we'll call operating cash and what we'll call investment cash. And so what we're seeing is it used to be all just amorphously one into this big sweep balance, and now what we're seeing is additional runoff, if you want to use that word, of cash balances into what we'll call positional type of, At some point in time, it'll hit what we'll call a stasis where the investment cash is in its investment vehicle and what's left in the sweep program will be the operational cash. I don't know at what point we hit that inflection point. We continue to recruit new advisors and our client assets continue to grow, so there's an incoming flow from that process. But at this point in time, at least through today, we've continued to see a net runoff of some of that cash. Again, what percent of assets it ends up being is a little hard to predict now at this point in time. So we'll just have to wait and see.

Okay, great. And then just a quick follow-up, kind of going back to the previous question. So as PCG client AUA shifts more towards the fee-based, how do you see that impacting just the overall margin for Ray J?

Historically, on average, fee-based revenues as a percentage of assets have been a little bit higher for us than commission-based revenues as a percent of the related assets. But, you know, there's a lot of a lot of assumptions and all that go into making a statement as broad as that. I don't think it will have a material negative impact, and if anything, it could have a slightly positive impact. The good news about it is it creates a very predictable stream of revenues, and it makes us a little bit more modelable company, if that's a word, going forward. And I know that people in your seat appreciate that, and Our advisors have been kind of encouraged over the years to use professional management and other sources of fee-based revenues to eliminate some of the old conflicts that arose with commission-based accounts. And that was obviously accelerated with DOL and some of these other potential regulatory changes and maybe will again, depending on what regulatory changes come out with BI and other things that may be on the docket. But at this point in time, we still see a continuous shift. Plus, we recruit advisors that have a practice that is largely focused on fee-based because it fits with our model better. So I think profitability-wise, it will be our best long-term economic history shows it's a slight positive.

Okay, great. Thanks for taking the questions.

Your next question comes from the line of Chris Harris with Wells Fargo.

Thanks. Hey, guys. On the two acquisitions you just closed, how should we be thinking about the financial impact of those deals? And if you happen to have a revenue number for us, that would be helpful.

Well, Silver Lane is an M&A firm, so I'm trying to determine that. But, yeah, how those revenues fall is as difficult as trying to determine how our own M&A falls, but it certainly will help augment our M&A revenue stream going forward. It's not an overly material part, as Paul mentioned. Neither one of these are transformational acquisitions. And on the ClaraVest side, you know, they've been – consolidated into our numbers all along. And then, you know, the portion we didn't own came out through minority interest. So, given the size of minority interest over the last several years, since 2012, when we purchased our initial 45% stake, I mean, you can see about what will no longer be coming out. Again, that won't be a huge or transformational number.

Got it. Okay. That's helpful. And then... I guess the follow-up question I had was on PCG recruiting. You know, you guys continue to have great success there. Just wondering if there's been any kind of change with respect to where you guys are seeing interest among advisors. And then maybe if you can elaborate a little bit more on how the pipeline looks, whether it's better or worse or about the same as to how things were maybe 12 or 24 months ago.

Yeah. I'd say that interest still remains high. Pipeline is strong. We started off with a slower quarter at the first quarter. Part of that was due just to also when we reported net number, we had a lot of retirements. We had some retirements this quarter, but we are lower than last year in our pace of recruiting so far on average, but the pipeline is very good, very strong, and I would say similar to 12 months ago. Maybe a little bit less, but not a lot. But given that we're behind on the first six months, I would expect us to be under last year's all-time record, but still a very strong recruiting base. Great. Thank you.

The next question comes from the line of Jim Mitchell from Buckingham Research.

Hey, good morning. Maybe just talking a little bit about recruiting expenses. How do we think if we're looking at FAA headcount growth and recruiting off a record year, I think you had three record years in a row this year, a little bit starting to, I guess the second derivative is starting to slow. Would we expect recruiting expenses to also slow in terms of the growth or is it not really that impactful because the bigger numbers, amortization, and that takes time? Just help me think through the recruiting expense dynamic from this year and next if we're kind of at these levels.

First of all, last year's record was a record above 2009, so we didn't have three years in a row. 2009 was our all-time record, and then we beat it for last year. So... So although recruiting is still very strong, it's just not as good as last year's all-time record. And certainly if recruiting is slower, the expense is slower. Those ACAT fees when we transfer client assets and outside recruiting fees if we have to pay them. So those costs, those transfer costs certainly hit the P&L when people move over. So Our goal is not to have it slow down, but if it's slower, the expenses will be lower.

And the amortization of all the transition assistance related to that does have an impact on the comp ratio. Right.

I'm just trying to get a sense of does this help the margin if these expenses slide out and the revenues continue to come on? It seems like it would be naturally. It helps the margin over time.

It doesn't in the year or maybe the two years following the year you recruit the person, but once they... have their business substantially over and have started using our other platforms, the bank, the asset management platforms, et cetera, and it radiates throughout the rest of the firm. They become incrementally profitable within a couple years. Okay. Thanks for that.

And then maybe just a question on just sort of the progress on the West Coast. I know that's been an area of focus. It seems like you've had very good success in West Coast. On the East Coast, just any help in thinking about the progress on the West Coast would be great.

Yeah, the progress that we continue to recruit, the pace is higher, but we've got a long way to go because we're just starting, really, in that market, being aggressively recruiting. So we're having more and more success. But we've got a lot of territory and opportunity there. We've continued to be very focused on it. We've increased our support at Out West. And so we still view it as a big opportunity for us.

Do you think it needs sort of like an Alex Brown type deal to help jumpstart it, or do you feel you can still kind of trade pretty well without that?

You know, we have a number of independent – we have many independent – employee offices out there now, and almost all of our affiliation options are represented in the West. So if there was something out there that made sense, we, you know, I don't know what it would be. If you know of one, please call us. But, you know, we're long-term, and I think our pace is picking up. A number of advisors are on a percentage basis. The growth is good, but, again, it's a small pace. So we're continuing to work at it. All right, thank you.

Your next question comes from the line of Alex Blasting from Goldman Sachs.

Great. Hi, good morning, everybody. So, Joe, back to your point around the margin, I guess when you talk about 15% being an acceptable margin, I guess, over time and what clearly interest rate dynamic and markets will fluctuate, and I get the fact that it's obviously going to impact margin-ending quarter. But big picture, why is there structural reason that your model can't have margin extension over time?

Only because our mix of businesses, and this is back to me talking again, I don't think interest spreads are necessarily sustainable at these levels, particularly if the Fed is done with their rate hikes, and I think there'll be continued pressure on client deposit rates for us to maintain any kind of acceptable level of client cash balances. I think that if we see some spread contraction there, even though we're growing the overall revenue base of the PCG business, that's not just acceptable. That's excellent. I'd love to stay at 18% for the rest of our careers, but given our mix of businesses and that dynamic with interest rates that I foresee going forward at some point in time, I may be right. I haven't been yet for the last three or four years, but at some point it may happen that way. I'd be surprised if there's much room for market expansion in the near term.

It's a challenge when you have whatever the number is, 65, two-thirds of your revenues and compensation expense, and you add 18% margin, and you've got less than 15% to operate the whole rest of your business. And expenses, real estate, people, support. So, you know, you can always speak out a little, but there's not a lot of room in there. And, you know, in our private client group business, our second biggest corporate expense is real estate. So, you know, you add that to put the people in and the people cost. those are hard to move in the short term. You can move them in the short term, but there's a lot of consequences on service levels and everything else if you do that. You can change payouts, but that has consequences also. And we pay competitively, not at the highest, and we think we pay fairly, and we're able to keep people because of the support. So the mix is tough to move that number a lot.

That's helpful. Thanks for that. And then the second question around is the current dynamic. So obviously you guys talked about cash balances coming down in April. Any 80 cents where they stand today? And then more specifically, looks like the bulk of the kind of cash outflows took place from third-party banks over the course of the quarter. Is that the dynamic you guys expect to continue where kind of Ray J Bank balances remain fairly stable?

Again, it's continued through today, but at some point in time, we think it'll level off. We don't really know where that is, and we're looking at doing some things that'll help stem the tide that don't involve just purely raising rates to try to keep deposits here. So I don't know where that's going to bottom. It's continued to flow out a little bit, a little bit every day, not every day, but a little bit on average every day since the end of the quarter. But, again, at some point we'll reach that level at which people that, you know, are going to move this investment cash to another location have done so, and the money that's there is money awaiting investment.

I think your comment about it, well, you see it flow out of third party, we feed the bank first. So you're going to see the delta, really, in that cash.

Yeah, it's going to be an account and service fee. That'll be the line impact. Raymond James Bank is, you know, we accommodate its growth. It's the first one in that waterfall stack.

Right. Yep. So cash is kind of fungible. Got it. All right. One more, guys, for you just on fixed income trading. Obviously, you know, a quarter improvement for the first time in a while. I understand that the backdrop sounds like kind of a little bit softer, but to what degree is the recovery in the community market is helping you guys? And if there's any sort of sustainability issues in that business. How should we think about that affecting your overall fixed income franchise within cap markets?

Again, I think it's really more rate expectation. We do have a big part of that business is unique oriented, but I think, again, the volatility is going to drive that more than anything else, the continued movement or rate expectation. So you see in March, two things, that volatility went up, but also People's mind shift changed about investing long. As the Fed announced, they were considering slowing down at a non-given rate. So there are a lot of people that went long that have been holding off going long, a lot of clients. So that certainly increased the appetite and certainly the volume for us. On the other hand, I mean, not just on the revenue side, on the profit side, we have adjusted significantly. you know, Salesforce and have taken cost actions there, where even in a downscaled business from a revenue standpoint, we are profitable. So I think a lot of firms aren't experiencing that. We are, but not certainly the margins that we enjoyed a few years ago. But we do have it scaled for profitability and yet have kept the main part of our group so that if there is a market increase, we'll be able to take advantage of it.

Great. Thanks for taking all my questions, guys.

Your next question comes from the line of Devin Ryan from JMP Securities.

All right, great. Good morning, guys. How are you? Good. I hopped on a minute late here, but I don't think you touched on this. Just on M&A opportunities, I know you guys have interest in doing deals that can augment organic growth. But the question is, is there really anything out there in wealth management today? Are there any targets, meaning specific companies that you're in touch with that might be a good fit? But really, I get it. The timing needs to be right for them, and the price needs to be right for you. But I'm just curious, really, if there is anything out there. And then would you actually look at something on the independent advisor side, or is the strong preference an employee advisor model?

So there are certainly a handful of companies we think are strategically and culturally good fits. They're just not for sale, so we stay in touch with them. And, you know, if a point comes that they're interested, whether they're independent or employed or both, you know, we're ready, willing, and able. There are also a lot of things we're looking at outside of the private client group. There's probably more opportunities in M&A and asset management. in terms of certainly number of companies and there are, uh, the private client group side is, you know, that, that group has just gotten much smaller. It's much more consolidated. Uh, so it's not the numbers, uh, same number of firms, certainly that, uh, you know, there has been historically. So I think of the 60 companies that took us public, I think eight names are still alive, including Alex Brown, which we kept alive. So there's just, uh, You know, there's just fewer opportunities. So we're in touch. We're in dialogue. You know, we have a corporate development department that's active. And, again, it just has to line up.

Okay. That's helpful. Thank you. And then just one on the ClearVest. the kind of full acquisition. I know it's a relatively small transaction, but can you just remind us how moving the ownership to 100% from 45% is going to impact the P&L, and then just whether that's contemplated in the expense commentary you laid out?

It'll impact our pre-tax income by a couple million dollars a quarter, and that's the amount that was flowing through NCI. related to the part we didn't own. And the revenues and the expenses were already in our numbers because it's been consolidated because of our control, not our majority ownership, but our control on the board and other things over some of the operations. We've been consolidating it since that. So the revenue and expense numbers, you won't see any change. You'll just see lower NCI. Yeah, got it. Okay, great.

Thank you, guys.

And your last question comes from the line of Craig Siegenthaler.

Hey, Devin, we hear you still.

And your final question comes from the line of Craig Siegenthaler with Credit Suisse. Please go ahead.

Craig? On the private client group fees, that you really aren't seeing any fee pressure. Can you share with us your internal estimate for the PCG advisory theory in the quarter and how this compares to historicals? Because we're back into a large decline sequentially and on a year-over-year basis. And, you know, if the driver really is just mixed shift, can you help us better understand what you mean by mixed shift there?

We didn't hear the first part of your question. You just came in late.

I can repeat it if that's okay.

Yes, please do.

All right, cool. Earlier in the call, you responded to a question on private client group fees, and I just wanted to understand what your fee rate is in the quarter for PCG advisory fees and how that compares to historicals, just because we're back into a decline there. And then I think you said to the response to the earlier question that the driver really was McShift. I just wanted to better understand what you guys meant by McShift.

It's hard to say, and you can pick one big average rate. You can just take the revenue line off the PCG financial and divide it by the assets, and that's probably what you're doing to see this decline. But it has to do with which types of programs they're in. We have a whole range of different types of fee-based programs. A mix really has to do more with are they heading more toward fixed income versus equity? which do have some impact on some of the programs, particularly in the managed programs. And then, as I mentioned earlier, the average account size makes a big difference as well, as we've seen the average account size of our accounts within the managed programs increase over time, which, again, usually engender a smaller fee as you go up the scale. We're not seeing it within any particular program or within any of our particular objectives or within our management programs, our managed programs. We're not necessarily seeing a whole lot of fee pressure in the client. It's been a slow dribble for several years, but it's not been the pressure that it has been in years past.

And then just as my follow-up, I heard your response to Alex's question on third-party bank deposits. But can you help us on the account and service fee line? You know, what is the outlook for this line the next couple quarters?

Yeah, as I said at the very beginning of my comments, and that line item we're going to see, at least so far, we've seen continued decline in the assets that are in those third-party banks, I think our spread could hold up. It's just a matter of whether the balance decline stops or reverses or continues. If it froze everything today, it would be slightly lower probably next quarter than it was this past quarter because even though we have the same spread, the asset balances are slightly lower. That's strictly a combination of balance and spread-driven And at this point in time, the spread's constant and the balances are slightly lower. So, again, if we froze it today, it would probably be down slightly in that particular aspect of account and service fees. There are some other fees and things that fall in that line item, but that's the primary one.

Jeff, thank you. Sure.

Okay, well. I understand that's the last question. So we appreciate you all joining us this morning, and we'll talk to you again soon. Thank you.

Thank you for joining. You may now disconnect.