Raymond James Swallows Expense Rise to Propel Private Client Growth: CEO
Raymond James Financial will take the tradeoff between short-term pain and future growth by continuing to add advisors in its core retail brokerage business, executives said Thursday after reporting fiscal first-quarter earnings that trailed analysts’ estimates.
RayJay added 49 advisors, net, in the October-December quarter to its independent and employee channels, and 245 over the past year. The new advisors helped fuel a 24% jump in client assets under administration. The increase came despite the retirement or industry departures of 69 Raymond James advisors in the past three months.
“We have been consistently adding financial advisors on a net basis, whereas most larger firms have consistently been losing advisors,” Chairman and Chief Executive Paul Reilly said on a conference call with analysts. “That creates a very different dynamic for our expense trajectory as we are adding to our transition assistance and retention amortization.”
Boasting that the firm’s advisor-centric culture overcomes recruiting deals that trail many of its regional and boutique rivals, Reilly also championed growth in client assets and fee-paying advisory accounts that he said beat competitors that have reported this earnings season.
Private client group assets were up 24% to $855.2 billion as of the end of year from 12 months earlier, and 7% higher than at the end of the fourth quarter. The firm said that 52% of client assets were in fee-based accounts that firms cherish, bettering the 47% ratio Morgan Stanley posted last week.
Raymond James has no immediate plans to lower payout formulas, as it did two years ago to offset rising regulatory, compliance and technology costs, but could use that lever if it has to, Reilly said. Meanwhile, it and other regional firms maintain an edge over wirehouses that tightened broker payouts in 2020, he said. (Morgan Stanley and UBS Wealth Management USA raised hurdles across the board on their payout grids.)
The quality of advisors RayJay is adding also is rising, propelled by hiring from wirehouses, Reilly said. Brokers producing more than $300 million annually on books totaling $40 billion at their former firms joined Raymond James in the past year.
“We don’t see any slowdown in the backlog,” the executive said of the recruiting pipeline.
The pace of growth was strongest in the employee channel—up by 165, or 5% from December 31, 2018—while the larger independent contractor channel grew a net 2%, or 80 advisors. Raymond James ended the year with 8,060 brokers, up 3%.
Compensation expenses, including headhunter fees and reimbursement of client account transfer fees, have grown at a slower pace than technology and other infrastructure costs that Raymond James amassed in recent years. They centered largely on preparing for fiduciary-care obligations from regulators and remediating weak compliance monitoring systems, but Reilly said those expenses should fall and provide better support for advisors going forward.
Interest income across Raymond James’s businesses fell 6% in its fiscal first quarter from a year earlier due to three Fed rate cuts since the summer that sliced net interest margin and fees collected from third-party banks for cash sweeps from client investment accounts.
Raymond James expects the rate cut effects to linger, lowering revenue throughout the rest of its September 30 fiscal year by about $140 million, or 10% of its adjusted pretax 2019 income. In a move that will affect retail investors, the firm this week will lower rates on sweep accounts by about five basis points to 1.6%, Chief Financial Officer Paul Shoukry told analysts.
The company as a whole reported a 4% jump in net revenue and a 3% rise in noninterest expenses during the December quarter, fueling an 8% rise in net income to $268 million.
The private client group contributed 42.6% of Raymond James Financial’s pretax income of $359 million and 69.0% of its total quarterly revenue of $2.1 billion.
Shares of Raymond James were off $7.05, or 7.25%, to $90.19 in late morning trading, as investors reacted to lower 2020 revenue forecasts given by executives on the earnings call. The quarter’s earnings per share of $1.89 missed analysts’ consensus estimate by a penny, according to Zacks.
In addition to its retail brokerage, or private client, business, Raymond James operates a bank and capital markets and asset management units.