雷蒙詹姆斯金融 (RJF) 2017 Q2 法說會逐字稿

Good morning, and welcome to the earnings call for Raymond James Financial's Fiscal Second Quarter of 2017.

My name is Kayla, 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 Shoukry, Head of Investor Relations at Raymond James Financial.

Thank you, Kayla, and good morning.

Thank all of you for joining us on the call.

As always, we appreciate your time and interest in Raymond James Financial.

After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chairman and Chief Executive Officer; and Jeff Julien, our Chief Financial Officer.

Following their prepared remarks, they will ask the operator to open the line for questions.

Certain statements made during 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, acquisitions, our ability to successfully recruit and integrate financial advisers, anticipated results of litigation and regulatory developments or general economic conditions.

In addition to words such as believes, expects, plans and future conditional verbs, such as will, could and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Please note that forward-looking statements are subject to risks, and 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 the most recent Form 10-K and subsequent Forms 10-Q, which is available on our website.

During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance.

These non-GAAP measures should be read in conjunction with and not as a replacement for the corresponding GAAP measures.

A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release.

So with that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial.

Paul?

Thanks, Paul, and good morning, everyone.

I'm still getting used to the Chairman and CEO title.

I was working with Tom so long but I assure you Tom's in the office every day still working away, and it's been a great partnership here at Raymond James.

Jeff Julien, Steve Raney and I are actually calling from Orlando, Florida.

We're hosting our RJFS, our Independent Contractors National Conference for Professional Development.

There's about 2,400 advisers, independent advisers from around the country here attending back-to-back educational sessions, networking and exchanging best practices.

I can tell you we're really proud to have such high quality client-focused advisers here with us at the firm.

I want to provide a summary of our results for the second quarter 2017 and turn the call over to Jeff, who will provide more financial details.

Before I get into the quarter, I'd really like to do a reflection on kind of the year-to-date results.

I believe they show the earnings power of the firm and kind of the model we have that certainly has been successful.

So the first 6 months of this fiscal year, we generated net revenues of $3.1 billion, which increased 18% over the first half of fiscal 2016 and represents a record start for the fiscal year.

Net income of $259.3 million, which increased 12% over the first half of fiscal 2016, and also represents a record start to the fiscal year.

This is particularly impressive as the first half of 2017 was negatively impacted by $130 million legal reserves associated with the previously announced legal settlement that I'll discuss later in the call.

Adjusted net income of $365.3 million jumped 54% over the first 6 months of 2016.

The adjusted net income for the first half of the year excludes $106 million of after-tax non-GAAP items, which are detailed in the release.

More importantly is we are well positioned for the second half of the fiscal year, as we finished March with record client assets under administration of $642.7 billion, record financial assets under management of $85.6 billion and record net loans at RJ Bank of $16 billion.

As Jeff will discuss later in the call, the second half of the year should also benefit from increases in short-term interest rates that were raised in December of 2016 in the March quarter, which haven't really come through the financials yet.

Now let me talk about the fiscal second quarter.

We had record net quarterly revenues of $1.6 billion, representing increases of 19% over the prior year and 5% over the preceding quarter.

Quarterly net income of $112.8 million, or $0.77 per diluted share, which declined both on a year-over-year and sequential basis primarily due to $100 million of legal reserves that I mentioned earlier.

Adjusted net quarter -- net income of $188.5 million, or $1.28 per diluted share.

Adjusted net quarterly income, which excludes $75.7 million of after-tax non-GAAP adjustments increased 45% over last year's net income for the same quarter adjusted and 7% over the preceding quarter.

We achieved quarterly net revenue records in Private Client Group, Asset Management and RJ Bank.

So overall, we're able to generate an annualized return on equity of 8.8% during the quarter or adjusted annualized return on equity of 14.4% on a non-GAAP basis.

We're particularly proud of this earnings power, especially when you consider how much capital we have and not as leveraged as many of our competitors.

As I've already explained, we entered the quarter with records for many of our business drivers.

These records are largely attributable to continued success in recruiting and retaining financial advisers.

Our total Private Client Group financial adviser count reached 7,222 in March which, what we believe, represents the best-in-class recruiting or retention in our industry.

So overall, I'm very satisfied with the results for the fiscal second quarter, especially since there are some seasonal headwinds that do impact us this quarter, such as a reset in payroll taxes, year-end mailings of statements and other expenses.

Before I discuss the segments' results, let me take a little bit of time to discuss our previously announced settlement associated with the Jay Peak EB-5 visa matter, as it did negatively impact our net pretax income for the quarter.

The settlement relates to an alleged fraudulent EB-5 investment program created in 2007 by third parties and offered directly to foreign investors seeking permanent residence in the U.S. Raymond James did not act as a placement agent or in any other capacity for the program, and none of the investors in the program purchased their investments through Raymond James.

We worked diligently with the SEC-appointed receiver to structure a settlement that would both ensure investors in this program are fairly compensated.

And in fact, the SEC-appointed receiver actually said that we were -- the people should follow our lead in treating investors and situations like this.

Again, this program was created in 2007 and since we've made significant enhancements to our supervision and AML infrastructure, which we've discussed in the past year or 2. Specifically, we hired a new chief AML officer with extensive experience, exponentially grew our AML team and implemented a new AML technology, called Mantas, which is the same system used by some of the largest banks in the world.

While we're still subject to court review, we believe this $150 million settlement is fair, and we look forward to having the issue resolved.

Now let me turn to the segment results before turning it over to Jeff.

In the Private Client Group, we generated record quarterly net revenues of $1.1 billion, but pretax income of only $29.4 million, as it was depressed due to the $100 million legal reserves that hit us during the quarter.

Record revenues were lifted by client assets under administration in this segment, which ended the quarter with a record $611 billion.

We also experienced a surge in fee-based assets during the quarter, which ended up to $261 billion, representing a 33% growth on a year-over-year basis and an 8% sequential basis.

The growth in fee-based assets was primarily driven by the DOL Fiduciary Rule, as advisers get ready for the rule, whether it's coming or not in June.

But right now, the rule will be effective June 9.

The segment results also benefit from increases in short-term interest rates, which will reflect in the account and service fees and interest income line items.

Capital Markets, we generated net revenues of $256 million and pretax income of $41 million.

The pretax income in the quarter increased 47% over the last year's fiscal second quarter, nearly doubled compared to the preceding quarter.

The largest driver of this certainly was M&A and equity underwritings, which enabled total investment banking revenues to surpass $100 million for the quarter.

The strong banking performance was driven by strength of many of our traditional industry verticals, but also a number of the significant investments we've made in diversifying our investment banking platform of last couple of years.

Results in the Fixed Income divisions were challenged this quarter by flattening yield curve and lower client trading volume, although the division was still able to generate a reasonable profit, given the difficult backdrop.

And Asset Management recorded net -- record net revenues of $116 million and pretax income of $38 million.

The revenue growth was attributed to continued increase in financial assets under management, which ended the quarter at a record $86 billion.

The growth in AUM was aided by both organic growth and market appreciation during the quarter.

Last week, we were excited to announce that Scout Investments and Reams Asset Management are joining the Raymond James family, which we believe will be an excellent addition to Carillon Tower Advisers.

As you all know, we've been talking for some time about making an acquisition in this space for several years.

With $27 billion of assets under management as of December 2016, of which approximately $23 billion are in fixed income, this addition will increase the scale and broaden our offerings to clients with complementary and high-quality products.

It's a great cultural fit, and assuming good retention of assets, we expect the acquisition to add roughly $70 million of revenue to this segment on an annual basis.

The acquisition is expected to close by the end of the calendar year.

And again, we look forward to welcoming Scout and Reams to the Raymond James family.

In Raymond James Bank, we generated record net revenues of $141 million and pretax income of $92 million, which was down from the record set in the preceding quarter.

Revenue growth was a result of continued growth in the loan portfolio as well as expansion of the securities portfolio.

Net loans at RJ Bank was $16 billion, which ended up at a record 11% on a year-over-year basis and 1% sequentially.

The bank's loan growth accelerated this quarter, with C&I loans actually declining 4% compared to the preceding quarter due to elevated payoffs.

Most of the growth came from synergies with our private client and capital markets clients, such as SBL portfolio and tax-exempt loans.

As we've always explained, we're perfectly content with the deceleration of loan growth, as the bank looks to opportunistically -- I think I could get that word out -- lend when we feel like we have good credit risk and reasonable return on those risks, and we're willing to go in and out of the market when those conditions exist or don't exist.

Conversely, the growth of the bank's securities portfolio accelerated during the quarter, reaching $1.6 billion.

The growth is being derived from investments in agency-backed MBS and CMOs, as the goal is to really limit credit risk exposure in the portfolio.

We have made a decision to continue to grow the securities portfolio, so our current plans, which can obviously change, is to add about $1.5 billion per year on a net basis to the securities portfolio over the next couple of years each year.

Growth in securities portfolio of the bank increases liquidity and stable funding metrics on our balance sheet in a capital efficient manner, while also increasing our yield on cash balances, although it does slightly increase duration risk and will change kind of the forward-looking NIM as Jeff will get into.

As for credit performance, the bank loan loss provision did increase this quarter following an unusual benefit in the preceding quarter, but the credit quality of the portfolio remains very good.

The bank's total nonperforming assets decreased 20% and credit size loans decreased 30% compared to last year's March.

Consequently, we also had to reduce our allowance for loan losses during the quarter.

So overall, I am pleased with our core business results and our positioning and momentum going forward.

And I will turn it over to Jeff for more line details before I get into the outlook.

Jeff?

Thank you, Paul.

First thing I'd like to talk about this quarter are the non-GAAP table on Page 12 of the press release.

As you know, we've been fairly judicious users of non-GAAP metrics, but this quarter particularly, we had the several items, just wanted to make sure everyone is clear on why we're doing that.

The acquisition-related expenses have been there for a long time.

They're just about through now with the 3Macs and Alex.

Brown acquisitions.

But now we're continuing to use that line item for the expenses going forward related to the Scout and Reams acquisitions that Paul just mentioned.

But those costs, we expect, will be somewhere in the $5 million to $6 million type range.

So there won't be particularly large numbers.

The extinguishment of senior notes in March that were issued in conjunction with the Morgan Keegan acquisition in 2012, if you remember, those were 30-year notes with our -- and we had the ability to call them at par any time after 5 years; 5 years was up in March.

And we took the opportunity to redeem that $350 million issue.

It was a 6.9% coupon.

And fortunately, we were in a liquidity position that we were able to do that.

But needless to say, as it was a 30-year issue, we had 25 years of remaining debt issuance cost yet to be amortized.

So that's what you see there as the write-off of the remaining or the accelerated amortization, if you will, of the remaining debt issuance costs.

And then Jay Peak settlement Paul has already talked about.

It was $100 million this quarter.

But significantly, we now have restated the December quarter.

If you remember, we talked more vaguely about a large legal matter.

It was a $30 million reserve taken in the December quarter related to that matter.

So we've sort of restated December non-GAAP numbers to reflect that as well.

And similarly going forward, we had $20 million and then actually a little bit more than that, because there was a small settlement to Vermont as well, the state of Vermont.

So when we go forward, you'll see on a comparative basis about $20 million, little over $20 million from 2016 that will fall in the June and September quarters of that year related to that same matter to get to a little over the $150 million or so.

A little bit noisier table than we're used to, but all very appropriate items we felt for non-GAAP disclosure.

Now I'll run down the P&L line items and add some color and attempt to explain any major variances to the expectation.

Securities commissions were actually a little below expectations, your expectations.

It wasn't really in Private Client Group.

I don't believe they did very well even sequentially.

Fee-based assets are a big driver of the Private Client Group revenues at this point and that should continue.

We have -- billings were up about 7% to 8% in April versus January.

So we'll see some tailwind from that going forward.

That's more than the market was up, but that's because it's not just market lift, it's also this movement to fee-based that Paul talked about.

It's been pretty dramatic over the last couple of quarters in the Private Client Group sector.

The shortfall in securities commissions and fees was on the institutional side, both equity capital markets, and more significantly, fixed income.

The latter, due to mainly the flattening yield curve, were down, and that caused overall shortfall in that line item.

In the investment banking world, once again, we pulled a third month -- rabbit out of the hat in the month of March.

We had that for several different quarters now.

It seems like through 2 quarters, we kind of guide you toward a challenging environment and then in the third month, there seems to be a lot of activity and that was the case again, both M&A and some better underwriting activity as well.

So that lumpy business did have a very, very good month of March, and consequently, a quarter of March as well.

Net interest income, I'll make a couple of comments about this.

Versus expectations, we're actually a little under.

But I think that some of you doing your models perhaps put all the spread enhancements from the rate increases into interest income, but in our accounting, the spread that we earned from unaffiliated banks in the bank sweep program goes into account and service fees.

That line item interestingly was almost exactly over expectation as much as interest was under.

So on a combined basis, I think it was right on, but it just has a little bit to do with geography on the statement.

The bank's obviously a big driver of net interest income.

Our net interest margin was fairly flat, down 1 basis point a little bit from last year, despite the rate increases.

So what's happened there is they have benefited from the rate increases, but offsetting that, we've had slower growth in the C&I sector and some bigger growth in the mortgage side, SBL and the securities portfolio, and securities portfolio, particularly, and elevated cash balances also during the quarter.

So the mix of the balance sheet sort of offset the benefit that the bank had had from the interest rate increase so far this year.

I will also say -- I was on -- I've been on record, as most of you know in prior years, saying that when we reach what I'll call normalized interest rate environments that we would expect the mix of the bank's portfolio, the way it was when we talked about it, to be -- that we would expect the NIM to be between 3.25% and 3.50%.

Well, if we're going to grow the securities portfolio at the rate that we're planning to and getting up to maybe a $5 billion or $6 billion type total in a few years, that's going to have a negative effect on the net interest margin, needless to say.

It will help earnings, it will help ROE, but it will hurt NIM.

So I'm going to say, our revised guidance is probably more like in the 3.10% to 3.20% range, with the securities portfolio at that kind of level.

So we're not far below that now.

We, obviously, have had another rate increase in March.

That's not reflected in our numbers yet.

So that's kind of where I think we'll shake out there.

On another going-forward statement, the rate hike that we had in March really didn't have much impact in our March quarter.

Based on what's happened to date, my best guess is for the month -- for the quarter -- sorry, the quarter ended June will probably see something between $15 million and $20 million additional pickup between account and service fees and interest income from that latest rate hike.

And it will stay there until we start more aggressively raising rates to clients, which we did a little bit of yesterday, by the way.

So I think on a go-forward basis, that will help at least in the immediate future.

Just so you know rough economics, it's very convenient for me, since our client assets are -- client cash balances are right around $40 billion.

So every basis point is $4 million a year or $1 million a quarter.

So that's going to be kind of the sensitivity that we look at as we raise client rates going forward.

And the other revenues, we did have another private equity pop this quarter, $7 million from a couple of investments.

I do want to mention that we still have about -- there's still about $200 million of private equity investments on our balance sheet.

About $50 million of that is attributable to noncontrolling interest, so $150 million that impacts our bottom line.

That may sound like a lot is down from where it used to be, but those that we have, we did apply and receive 5-year extensions on the vast majority of our covered fund holdings.

So you will continue to see some lumpiness and some private equity gains and/or losses on our -- in our P&L in the future, but they're somewhat muted from what they used to be in terms of magnitude.

On the expense side, compensation, the comp ratio for the quarter was 66.2, and it's 66.8 for the first half of the fiscal year.

If you remember in prior years, I've said that what's going to cause us to drift down from that 68 to set our target at a lower number will take revenue growth.

So we can actually leverage this big infrastructure that we've got here, because we have a lot of fixed salaries in this home office machine.

And so we're starting to see some of that revenue growth.

Certainly, interest rates have helped on that, but we've also seen revenue growth in all of our businesses.

So we're starting to see some of that leverage, and we'll be revisiting that target along with other targets at the Analyst Day coming up in June.

And we've had a chance to really look hard at what we expect going forward.

The communication and information processing was right in line with the $75 million to $80 million guidance that I gave you last quarter or even the quarter before for the fiscal year.

Looks like we'll stay within that range.

So not a lot to talk about there.

Business development was up a little bit from where people expected.

Perhaps you've seen our commercials being aired recently.

They use doors or Kevin, our 2 -- our recent flights of commercials that -- paying for those flights is about $3 million or $4 million in the March quarter, and it'll be, again, in the September quarter as the second wave of those ads.

So that accelerated just a little bit.

The bank loan loss provisions, kind of an interesting, a lot of moving parts to that.

But basically, as you'll see and I'll talk about in a minute, we had a higher than usual charge-offs in the bank, some of those beyond where we had reserved, which caused some provision expense.

And secondly, we also took the opportunities to secondary market to sell down some of our criticized positions.

We had a conducive secondary market to some extent relative to where we had reserved some of these credits and relative to their outlooks in our opinion.

So we did use the secondary market as an outlet for criticized loans, again.

And to the extent that we sold them at prices better than we had reserved them, that actually released reserves.

So we had lot of things going back and forth, but relative to the net loan growth for the quarter, the provision may look a little high.

But I would attribute it mainly to the charge-off that we had during the quarter.

For the year-to-date, the provision's still very modest relative to our loan growth, given the credit that we had in the preceding quarter.

And the other expense, that's where the noise is, it's on the non-GAAP table, $150 million Jay Peak settlement; $100 million is all in there, $100 million this quarter, $30 million the preceding quarter.

And then, obviously the $8 million of unamortized bond issuance costs that were accelerated this quarter are both in that other line item, which without those, it's fairly close to what I think people expected.

So net-net on a pretax, some other stats on a pretax margin basis, non-GAAP was 17.6% for the quarter.

Another one that we'll be relooking at in terms of setting a target for the balance of the year and then maybe for the start of the next year.

And then the next line item is tax rate.

Let me -- we're a little under 32% for the quarter.

This quarter was mainly driven by gains in our corporate-owned life insurance portfolio.

That swings the tax rate around a little bit.

And it has certainly had a positive effect long term on the company's taxes.

So perhaps our tax rate, since it was under 30% last quarter because of a change in the equity accounting that I discussed at that time that all -- and now it's 32%.

So perhaps we're just conditioning you for lower corporate income tax rates going forward if the current administration has their way.

Anyway, I don't think we can count on that recurring every time.

So until there's movement federally, then I would continue to counsel you to use the similar tax rate to what you had been using going forward.

Share count increased a little bit, had to do mainly with share-based comp levels.

We haven't been buying back any shares.

Recently, we did buy about 2 years’ worth of dilution last year.

We actually purchased about $150 million worth of stock at a price in the mid-40s.

So we will continue to be opportunistic in that regard.

And then on the balance sheet, assets almost $33 billion, shareholders' equity $5.2 billion, book value per share $36.28.

Capital ratio has all actually increased slightly from the preceding quarter as we had earnings, and our assets didn't grow particularly during the quarter.

So we were comfortable with all of our capital ratios.

And last one I'll talk about is ROE, which had a -- on a non-GAAP basis was 14.4%.

We've talked about in prior years that when we had the interest rate help that we had had historically that we thought that our ROE could drift back up toward that 15% level, and you're seeing that happen, and that will be yet another metric that we will be revisiting in terms of target going forward.

And then lastly for me on the last couple of pages of press release are some bank metrics.

So the bank had a little noisier quarter than the rest of the company this time, with those charge-offs that -- you can see that we did -- we have grown the securities portfolio up to $1.6 billion by the end of March, and that will probably continue as we can find appropriate investments going forward.

The credit metrics on the last page of the press release are all fairly positive.

You can see that nonperformers, criticized, et cetera, all down.

Some of that had to do with charging them off, and some of them had to do with selling them.

So it wasn't all upgrades.

It was us taking some proactive steps to control credit risk going forward.

So with that, I will turn it back over to Paul for some closing remarks.

Great, Jeff, and appreciate it.

I'd like to -- I think very, very pleased with the quarter, with 2 less trading days, a number of recurring items that I've mentioned before, payroll taxes and statement mailings have impacted the quarter.

I think overall, very good results.

I'd like to provide some comments really on the outlook.

We are well positioned for the second half of the fiscal year, with record really in our several of our key revenue drivers and significant tailwinds from increase in short-term interest rate.

In the Private Client Group, we continue to experience strong recruiting and retention results.

The integration of Alex.

Brown and 3Macs (inaudible) is largely complete.

Alex.

Brown and we've held on to about a 90% retention rate, and 3Macs, really 100%.

And those are excellent advisers, and I think, will be great long-term partners here at Raymond James.

During the quarter, we launched what we called Connected Advisor, but the traders wanted to call it our robo-adviser.

It's everything but our robo-adviser.

We have been a leader in technology on providing our advisers access and platforms on their iOS devices or iPads and cell phones.

And now we're rolling out the client piece of that.

The goal is not to go around to create a nonadvised channel, the goal is to create a better link 24/7 between our clients and advisers.

We will use it to connect to some of our freedom models initially, but the whole goal is really to connect the technology to the advisers' models also.

So this is a way of increasing the communication between our clients and advisers, not to disintermediate them.

I believe we're also investing heavily to augment our supervisory and compliance platforms and creating what I'm -- a goal I've put outside is not only driving world-class client-facing and adviser-facing systems, but to be leaders in our advisory and supervisory systems.

We're continuing our asset growth, particularly acceleration of our fee-based assets, which increased 8% over the quarter.

And with higher short-term interest rates should bode well for the Private Client Group results.

In Capital Markets, we're cautiously optimistic about the pipeline for both M&A and equity underwritings.

Although, as you know, those markets can go up and down depending what happens to the world and D.C., we think it's poised -- positioned at least for a good quarter.

Our Fixed Income business does best when rates are high and the yield curve is steep.

The yield curve has been flattening, and so that business has some headwind for it.

We are a leading middle market focused platform.

So even in challenging times, we've been able to generate really remarkable consistent profitability, but certainly, down from the levels we've seen kind of last year going into this fiscal year.

Until we get more clarity on tax reform, I think that in our Tax Credit business and Public Finance businesses will be somewhat dampening.

And Asset Management, that business will continue to benefit from record financial assets under management, which increased by 7% sequentially.

Growth has been driven by growth in our Private Client Group segment, both in recruiting, movement and utilization of our fee-based accounts.

Certainly, it's doing well and has had an impact on that.

They also should benefit from our Scout and Reams acquisition, but that shouldn't -- we're estimating that to close by calendar year-end.

And RJ Bank will continue to be disciplined and opportunistic with our loan growth, with a focus on growing our loan portfolio by lending to private clients and capital market clients, where we know the clients the best.

As we discussed earlier on the call, we're also planning to continue to grow our securities portfolio by approximately $1.5 billion per year, primarily with agency-backed MBS and CMO of shorter durations.

So as Jeff pointed out, this should increase our interest earnings.

It'll increase our ROE, but will dampen NIM due to the size of that portfolio as it grows.

I'll address the DOL Fiduciary Rule, which I know many of you're asking or thinking about.

It's been delayed its applicability 60 days to June 9. There is speculation if and when a -- Acosta has confirmed that he may delay it further.

But given the uncertainty, we're moving forward to make sure our advisers and clients are set, so that we are in compliance in June.

However, there is very -- as we said from the beginning, are concerned with the unintended consequences, limited choices and significant raise in costs to small clients.

And attending a conference and talking to so many advisers, I believe, although the rules is well intended, it's really going to harm.

Either clients are going to have to choose no advice to a cheaper platform or will pay more for their existing advisers, especially small clients.

We do plan on allowing our advisers to continue on both their fee-based and commission platforms, and more will come on that as this gets clarified over the next several months.

Before I open the line to questions, I also want to thank all our investors for your trust and confidence in Raymond James.

During the quarter, we were included in the S&P 500 Index.

Moody's also released a statement saying that we are under review for an upgrade.

And I think it's really a testament to the long-term success of the company, who's been conservatively long-term focused and still -- and started by Bob James and grown by Tom for so many years.

I can assure everyone my #1 objective as Chairman and CEO is to keep this great culture and upholding those values every day.

So with that, I'd like to open up to questions.

So Kayla, could you take questions?

(Operator Instructions) Your first question is from the line of Steve Chubak with Nomura.

Just wanted to ask a question regarding some of the trends we're seeing in fee-based account growth.

Clearly, Paul, as you noted, the DOL has accelerated the pace of growth in that channel.

I was hoping you could clarify some of the differences in economics that you see on fee-based versus brokerage, and also, clarify how much of the recent acceleration in fee-based assets is really due more to external money coming in versus internal conversions.

Yes, they're really both.

A lot of our recruiting does -- do bring in fee-based assets.

In fact, we kind of had a record month in March.

Our net growth in fee-based assets in Asset Management exceeded our growth this month.

And so it's both recruiting and it's also, I'd say, from a total numbers, even though it's significant internally, it's a little smaller, but it is people getting ready for DOL and trying to convert a lot of accounts, lot of the smaller accounts on to the fee-based platform.

So it's easier to comply without a (inaudible) and all the other requirements under DOL.

So a lot of the growth has been driven by, I would say, market and recruiting and then somewhat on the internal people transferring.

So it's all the factors.

I can't delineate the percentages.

And on the margins, we earn at least as good a return on fee-based assets as we do on commission-based assets.

Okay.

Can you give any numbers behind it?

I know that some of your competitors have talked about like a 40% higher ROA, some even noting that the revenue yield could be as much as double.

I think that sounds high, but I don't think we have...

I think it's higher, but I don't think it's higher to that magnitude.

But I don't have an exact -- I don't know, plus Paul Shoukry did some work on this, unless you have a better answer.

Yes, I mean, we do, I would say, the 30% to 40%, but it all, obviously, fluctuates from quarter-to-quarter based on trading activities on the commission side.

So we actually do provide that breakout in the MD&A in the queue in terms of which revenue line items come from fee-based versus commission-based, so you can kind of run your own math on that.

Okay.

And just a follow-up on the NII or spread revenue guidance, Jeff, that you had given earlier.

So you noted that $15 million or $20 million sequential increase we should expect from the March hike.

I was hoping you can specifically clarify what are your underlying assumptions on the positive data?

And does it incorporate or contemplate the benefit from the lower interest expense as well as planned growth in the securities book.

Yes, it incorporates all those, but if we delay this 25 basis points, if we kept it all, it's $100 million a year, and I guided you to something less than that.

Because right now, we're at a fairly high spread level, and what's going to eat into that is as we start raising, rates decline.

My guess is that -- and this is -- we've been so wrong on this.

It's almost -- I'm almost reluctant to be as conservative as we have been.

But I got to believe that at some point, there's going to be a little bit of a deposit war here and people are going to start being more generous to customers.

Right now, we're still at the top of the group, all the ones that we monitor, all the benchmarking we do.

But it's still giving us, what I would call, a higher than normal or higher than historic normal spread.

So what will eat into that over time, which is why I gave you a lower number, is how much we raise rates.

And I'm guessing in there that we raise rates maybe 10 basis points this quarter or something to that extent, maybe not, but maybe that won't happen.

So again, I try to be a little bit conservative in the guidance that we give.

We prefer to under-promise and over-deliver, but that's, I'm kind of assuming, 5 to 10 basis points additional this coming quarter and maybe more after that depending on what everyone else does.

All right.

And one final one for me just on some of the guidance you've given on the AFS growth that we should expect.

What's a reasonable timetable for you to build that securities book to $6 billion target.

The pace of growth over the last couple of quarters has actually been relatively healthy.

And what's the incremental spread that you guys are currently earning on securities versus the third-party banks' rate?

Well, we're currently earning about 100 basis points on a third-party bank sweep.

And we're earning about 190 to 200 or so.

211 was the average in the last quarter.

A little over 200 on the securities portfolio, so roughly a double.

But we are also taking a little bit of a duration risk in doing that.

Our securities portfolio average is about a little over 3 years, I think, in weighted average life.

So that's the trade-off we're making.

Your next question comes from the line of Ann Dai with KBW.

I was hoping to dig into the Scout acquisition a little bit.

Can you give us some color on what you saw in Scout that really fit the mandate that you talked about in the past around acquisition (inaudible) around being reflective, not wanting to do them unless there's a strong strategic benefit.

And also, could you talk a little bit about valuation of that acquisition?

Certainly, I'll address the first part of that.

We've been looking for many years to round out and broaden the Carillon Tower.

Formally, people called Eagle, but Carillon Tower is an asset management proprietary group.

And we're looking for first a strong cultural fit.

We believe that people have strong cultural ties both based in Kansas City and Columbus, Indiana, that they reflect our values and background.

They've been very good performing teams.

And particularly, a concern is this movement from active to passive that a big chunk of it is in fixed income kind of results-oriented platforms, which are less indexable, with good track records and good client retention and the same with their international equities platform.

So we felt the culture fit.

They played in spaces that we didn't play in.

And they broadened it.

And there were areas, I guess, everything in the world is indexable, that are less likely to be impacted by indexing in the short to midterm.

So we believe because of this critical math, there are lot of synergies in terms of sales forces, back-office compliance and other areas that we believe made it a good acquisition from a price standpoint.

So this is the first one where the culture fit, the strategic fit and the pricing parameters all came to fruition.

In terms of the multiple, et cetera, what we've, I think, stated that we expect somewhere between $70 million and $75 million of revenues from this acquisition once it closes, which will be somewhere near the end of this calendar year.

In terms of what we expect to realize, given when you acquire, you've got some of these costs that you need to amortize to the P&L for a number of years, it'll still be accretive to the company, but the margin will actually impair our overall asset management margin to some extent.

But it will -- we, on our modeling, expect it to come out higher than the overall firm pretax margin.

So it'll be accretive to the firm pretax margin, maybe a little dilutive to the Asset Management segment margin.

Okay.

That's great color.

The other thing I wanted to ask about was adviser recruitment.

So obviously, as an analyst, we kind of deal with imperfect information.

We see a lot of announcements, and we might not see them for adviser departures.

But it does feel like in the past few months, there has been an uptick in the number of announcements of sizable teams leaving wire houses and joining Raymond James.

And it looks like maybe there's some decent net adviser growth and asset growth for you guys outside of market.

So is this to some extent a seasonality to adviser movement?

Or is there anything that you might call out as to why the pace of when it has accelerated for you guys?

And if you could give us an update on recruitment pipeline also, that would be great.

Our recruitment pipeline remains very strong overall, I think, similar to last year, which again, we were, I think, by far the largest recruiters.

So we've continued to have very strong pipeline.

It does go up and down.

And part of it's the publicity and the announcements.

The biggest driver, though, is our retention remains exceptional.

I think, it gives us the biggest advantage that we last year of our 3 divisions, the highest, what we call, regretted losses, which are advisers over 300 who haven't left for death, retirement or compliance reasons, was 0.6%, and that was the highest of all 3 divisions.

So the retention remains excellent and the recruiting remains very, very strong.

A lot of it is driven by what happens at other firms, too.

It is a push-pull business.

I think people, especially if you look at our transition package, it's lower than most of our competitors.

So they have to want to leave some place, and they want a bigger check, they can go other places.

We think we pay them fairly, and we want them to come for the same reasons we want them here.

So pipeline's very strong.

The attrition is very low.

And even at this conference, we have 87 advisers from different firms kicking the tires and meeting our 2,400 partner firms here to get a feeling of the culture.

So I would expect recruiting to be continuing to be very strong this year.

Net recruiting.

Your next question comes from Chris Harris with Wells Fargo.

So now that you guys have a few quarters of Alex.

Brown integrated, hoping you can talk to us a little bit about your long-term growth plan for that business.

I know there's some new geographies it kind of gets you into or gets you into in a deeper way.

But any additional color you guys can share about your vision for that business?

And how quickly you think it can grow?

It's just like our other affiliations.

People wondered if it's a competition or we're trying to limit or increase that growth.

We do it is an affiliation option at Raymond James.

You can be a Raymond James -- an associate adviser.

You can be an independent adviser, with co-branding, be in our (inaudible) where we're custodian or you could be a Alex.

Brown Raymond James adviser.

And so we allow the channels to recruit, and we believe advisers will select where they're most comfortable in.

What I'm most proud of is how the divisions have helped each other.

We actually had people join Raymond James before Alex.

Brown closed, because they wanted to go to Alex.

Brown.

We've had people move from one to the other, although it's been very, very little.

And so we plan to grow that platform as a brand as we do our other brands.

And we also have a fifth division.

So we have really 4 main divisions and some derivatives thereof.

So Alex.

Brown and the whole firm had a strong focus to make sure we penetrate, start penetrating the Northeast and the West where we have the lowest market share.

So that goal hasn't changed.

It was part of the strategy of Alex.

Brown.

I think Alex.

Brown has also pushed us to be a much better provider of services to the ultra high net worth.

We have the capabilities, but not really the demand.

Today, we have the demand.

So we're continuing to upgrade and offer services to people that are very wealthy.

We're very comfortable from a risk management perspective to drive those services.

So far so good.

They're here.

They're integrating.

We're still working on the platform and tweak.

It takes a while, I think, a good year for people to really settle in.

And we're very, very pleased where we are, and we are recruiting in that channel, too.

We are seeing now advisers coming in, in a reasonable backlog too, to the Alex.

Brown channel.

Just one follow-up on that, if I may.

Do you think that deal really materially increases your opportunity set in private client?

Or would that be maybe overstating a little bit?

I think so.

I think it's 2 reasons.

One, there is a channel that I think people are proud of, but it's another alternative.

And it also just on its own increases our market presence and improves our commitment to those geographies both from in terms of having a presence there.

To recruit 200 advisers, primarily in the Northeast, takes a while.

It's that high end.

And so I think it shows our presence.

It also shows our commitment to the high-net-worth, ultra high-net-worth segment, and it certainly has helped flow.

So I can't tell you it's the panacea.

It's going to change our overall statistics drastically, but it's certainly a solid division.

And we've got other successes through our partners and independent affiliates have done a great job of growing the Northeast.

You see them in the press.

I saw one press publication that put us as the #1 recruiter and them as the #3 or #4, and they're part of the Raymond James family.

So we think the affiliation options do help their high-quality advisers, and we are committed to growing the Northeast and West.

We have a lot of opportunities and a lot of work to do.

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

This is Ben Herbert on for Bill.

Just wanted to ask on what we're seeing from manufacturers side.

If you're seeing any pressure related to that on your platform fees?

And any color, puts and takes around that dynamic?

Yes, I'd say the biggest challenge has been for certain firms to be DOL compliant.

And what that means to the products?

Number of firms had a solution of doing T shares.

Some have pulled out from it.

Some other firms have not offered, and we are not offering T shares.

There's been a clean share class filed by some.

So I think that the industry, because of the time frame, is kind of scrambling to say what do we offer that makes firms like ours and others comfortable with their DOL compliance kind of IRA accounts.

So I'd say that's been the biggest working with our partners in that area.

But I haven't seen really if you talk about their education, marketing and other fees really come down at this point.

And then maybe just one follow-up on commission fees and PCG and whether you're seeing any specific headwind around that ahead of DOL.

Not yet.

I think a lot of movements from commission-based accounts to manage platforms has been because of DOL and the complexity of it.

We still believe and are having the option that we believe that commission accounts are good for a lot of shareholders -- a lot of clients, because they offer lower cost alternatives.

So I think that follows more where clients are comfortable entering the equity markets and that kind of trading activity.

That's where we see commission accounts do better as clients get more comfortable.

And they kind of -- when clients are nervous, they call off.

So haven't seen any real impact except the shift has grown to fee-based.

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

Maybe a follow-up on just client behavior.

Has there been any kind of change in level of cash balances?

Are you putting more money to work, kind of shift into equities from fixed income or cash?

Just trying to get a sense of where we stand on sort of your average customers, asset allocation and other -- their activity levels.

There's actually -- there's been a shift to equities mainly because of valuation.

People haven't done a lot of rebalancing yet.

Cash balances have been pretty static despite the fact that we're growing overall assets.

And I think that's indicative of people getting a little more aggressive and putting more money to work in the markets than previously.

So our cash balances really have, I guess, declined as a percentage of total client assets a little bit.

But they've stayed pretty static over the last couple of months at least.

Do you have a percentage between equity and fixed income and cash?

It's about -- I think it's about 55% to 60% in equities now, maybe 30% to 35% in fixed income and the rest is cash and other type of asset classes.

There was 50% to 55% in equity.

So it's probably a 3% to 5% shift, again, mainly valuation driven.

Right.

And then maybe a quick question on the legal side.

That seems to have been -- that one settlement seems to have been creating a lot of noise over the last year, not that you can never say never and that there aren't other things further out.

But if we think about -- was that the primary source of noise over the last year?

And with that settlement done, we would at least in the near term -- given your short-term visibility, we would expect going forward at least much less noise.

At least for now, there's nothing else that you're currently concerned about?

First, I hope so, but you're right, you can never guarantee it.

That's why we put it in the non-GAAP items.

We certainly hope and expect that's not recurring.

I do think if you look at the 3 issues that have hit us in the last year, the last 2 being Vermont, and there is certainly Vermont and settlement is directly related to Jay Peak and the AML issue is somewhat related to.

So we think that's a theme.

There's always going to be some regulatory and legal costs.

It's just part of our cost of business.

We hope to minimize them.

And as we get bigger, there'll be lumpy things here and there.

But we can't point to anything that we're concerned about.

We tried -- I think we've done a good job of reserving ahead of these.

This one we got behind.

The magnitude just got big enough and instead of a 3-year or $30 million fight, we figured it's publicity.

We felt the best thing for everyone and investors was to settle it.

So hopefully, with the court approval date set for June 30, that will end the chapter.

And just to get this on the record, as anyone who's look at the press release can tell, we took the full tax deduction for this settlement.

There is no part of it that we think can be construed as any kind of fine.

It's basically all compensatory -- a compensatory settlement.

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

A quick follow-up here on deposit betas.

You mentioned that you raised yesterday.

I haven't seen that yet, but you're already on the higher end, as you mentioned.

And I know we're low in the absolute, but would you consider Raymond James a price setter or taker on this front?

And then what benefits do you see, if any, of just operating at a higher level than peers on what you're passing through to customers?

I think we're slightly ahead in all categories.

You can't say we're miles ahead.

Our last raise was just a segment to make sure we had -- that we were leading or at least as good as anyone else.

I wish we could say we were setters and that everyone followed us.

But certainly, we don't have that kind of pricing influence, because certainly, we haven't had a lot of followers.

So we believe in equity over a long period of time, we share this.

I do think there's a shift of some of the extra costs that are put in this industry where people are retaining more interest.

And so we want to be responsible and not give it away, but also just make a statement to clients.

So I don't know where that puts us, but if rates go -- at some point, rates will go up, and we will be in the mix.

But I think, historically, we haven't actually been leaders in interest rates, but certainly competitive.

And so we'll see, like Jeff says, we hate to give any guidance.

We've been so wrong on this for a while, but we're not just going to raise rates for the fun of it, because it is expensive.

Got it.

That's helpful.

Just wanted to get some thoughts around the philosophy.

Maybe a follow-up here as well just on the Scout and the Reams acquisition.

Just in Asset Management more broadly, can you remind us how much of the firm's AUM is from, I guess, the firm's private client customers?

And then is there any internal challenge of selling and how fund the customers, because I think like there could be some benefits to your Raymond James product line customers from this transaction, but not sure if it's complicated just because it's all internal?

I think it's only about 10% of our clients' AUM.

So it's not a big percentage.

And so the vast majority, I think, it's 20% of CTA sales.

20% within proprietary and only about 10% in the broader Asset Management segment.

So it's a minority.

Certainly, most of our sales come through institutions and other Private Client Group firms.

And there has been -- the reason -- I think there's -- 2 reasons for it is, we have no absolute direct or indirect influence on advisers.

There is no reward trips, quotas, anything that influences the decision.

We do have advisers, because they know the asset managers and they're close or probably invest in it.

We have some people that say, "I don't want to use any proprietary products at all." And even if they think they're better products, don't use them.

So it's a mixed bag.

And so I don't think this will probably have any different trends in our existing business.

Got it.

Okay.

Last one here.

It sounds like we're going to get a lot of detail at the Analyst Day, so look forward to that.

Just on the comp ratio, specifically, the mix of higher interest rate earnings, obviously, should help the outlook there.

Are there any other areas that are giving you leverage in that line where that can help drive the comp ratio structure lower outside of interest rates?

And then, on the interest rates piece, how are you thinking about -- just remind us how are you thinking about spending some of that and maybe investing back in people, so it doesn't all kind of drop through?

So there's 2 pieces to it.

Certainly, interest rates has the best top margin to it.

M&A was up, and our revenue is up.

So there is a fixed component of our comp that when revenue is up, the comp doesn't go up now.

In every business.

In every business.

And the one that's probably the least accretive to the comp ratio is the Private Client Group, the independent Private Client Group, because those payouts are pretty high.

And so a lot of that gets absorbed.

It gets paid right out.

So we're the bank and interest, in general, at the lowest.

So it depends on the mix.

A part of it's just size.

As we get this kind of revenue growth, we are getting some leverage, positive leverage on the margin.

And if we continue to grow, we should achieve positive leverage on the margin.

And that growth, I think, should be more than enough to fund what we've got as infrastructure improvements and things like that, that you see in some of our other line items without us having to make any shift in that allocation.

And we still support our growth.

So even with these good results, I mean, I just looked at our 4-year growth and ops support 33% headcount.

I mean, so not like where lot of firms can cut back.

Our growth has allowed us to continue to have what I think is world-class support.

It's always challenging, especially in times of DOL and other things where you have kind of sea changes.

But we've been able to fund that as a percent of revenue.

We still have positive operating leverage.

And my guess is our technology spend and our support spend will go up if we continue to grow.

But certainly, we should continue with positive leverage from that.

Your next question comes from the line of Conor Fitzgerald with Goldman Sachs.

Most have been answered, but just a couple of cleanups.

Just trying to get a sensitivity around the NII trade-off versus the deposit sweeps.

I think you said the securities portfolio duration was 3 years if we probably tie to a short-end rate.

So just all else equal, we should think about the economics doing better with this steeper yield curve?

It will help net interest earnings, but it won't necessarily -- it won't help the bank's net interest margin.

It looked better for the overall firm with this growth.

Right.

You kind of talked about the 2.10 as far as maturities yield and the 100 bps (inaudible) that 2.10 is tied to 3-year rates, right?

Yes, for the product, we're buying agency-backed 3- to 4-year average life type securities, yes.

Got it.

So if we would see a best steeper yield curve, just wondering if that would impact the pace you're trying to put those deposits to work on the balance sheet?

I don't think so.

I think we're going to be pretty ratable about this.

We've got commitments on the other side where we would be pulling the funds from, which is the bank sweep program.

We've got commitments and contracts with some of those banks as well.

So it's kind of us having to do this on a more thoughtful program on a ratable basis than us doing it in fits and starts.

And then on the Scout transaction, I think you said it was likely to be dilutive to the margins of the Asset Management business.

If you stripped out the deal charges and some of the integration charges, would that still be the case?

No, we would expect it would earn margin very comparable to our other proprietary asset management businesses, which is very attractive margin relative to the firm's overall margin.

As we're basically going to integrate to the extent possible some of the administrative functions, the compliance and trading and some of those things to get similar returns to our existing proprietary operations.

And just 2 quick clarifications.

I thought I heard you say you had about $40 billion of client cash in those $46 billion last quarter?

We had $40 billion roughly in the bank sweep in our bank, which I call the bank sweep program.

We have a few billion in the brokerage firm, in what we call our client interest program, and we have a few billion in money market funds that we offer as sweeps as well still.

So the total is around $46.5 billion.

At this them, there are no further questions.

Great.

Well, I know we went on a little more, because we wanted to give you detail.

I appreciate your attendance and support.

Good quarter, and we're looking forward to the coming future.

We still have some challenges.

Everyone in our industry is working with -- on DOL and those transitions.

So far so good.

And thank you for attending, and we'll see you at the Analyst Day or next call.

Thank you, Kayla.

Thank you.

Ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation and ask that you please disconnect your lines.