雷蒙詹姆斯金融 (RJF) 2018 Q2 法說會逐字稿

Good morning, and welcome to the earnings call for Raymond James Financial's Fiscal Second Quarter of 2018.

My name is Ashley, 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 the call over to Paul Shoukry, Treasurer and Head of Investor Relations at Raymond James Financial.

Thank you, Ashley.

Good morning, and thank you all for joining us on this call.

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 the 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, words such as believes, expects, plans, or future conditional verbs, as well as any other statement that necessarily depend 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 the forward-looking statements.

We urge you to describe -- 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.

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

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

Paul?

Great.

Thanks, Paul, and welcome to the call, and welcome here to the home of the Tampa Bay Lightnings.

I want to welcome all the Boston folks who are coming down.

It is in the 80s here all week, I don't know why the rest of the country is not quite warmed up yet, but look forward to the next week.

So let me start.

First, I'm really pleased with the overall results of the quarter, and I think that you need to reflect back on our first calendar quarter where we have a lot of seasonal factors that typically impact us, which we'll talk about a little bit later in the call.

Overall, we had record quarterly net revenue of $1.81 billion, up 16% over the prior year and 5% over the preceding quarter.

We had record quarterly net income of $242.8 million, up 15% -- 115% over the prior year's quarter.

But you have to remember we had an unusual legal expense item in that quarter.

And we're 5% -- 104% over the preceding quarter, but again then, we had the tax charge from the new tax act in the preceding quarter.

We had no non-GAAP adjustments in the quarter.

Some may use some comparisons of GAAP numbers versus our adjusted net income.

But our GAAP versus our adjusted net income was up 29% over the prior year and 2% over the preceding quarter.

So the seasonal factors that Jeff may get into a little bit, first, we had fewer days in the quarter, a couple of fewer days, and that impacts interest income and our fee billings.

So there's a couple of percent drag really on those items.

And expenses, we have our FICA reset that starts as we start paying FICA taxes starting this quarter.

We have our mailing expense on our year-end statements and we also ran a flight of advertising this quarter.

So those expenses are in this quarter, which usually are elevated over the rest of the year.

We had record quarterly net revenues for the Private Client Group Asset Management in Raymond James Bank.

And record quarters for the 2 biggest profit drivers, or pretax income for our Private Client Group and Raymond James Bank.

I think most impressively for the quarter, we had a 16.7% return on equity.

And our return on equity includes both tangible and intangible capital.

A lot of firms exclude intangible capital, which would significantly raise our ROE compared to our peers.

So if you look at that ROE adjusted, I think you'd find that we outperformed most of our competitors.

We also have no preferred equity.

We all have common equity, so there's no adjustment to the denominator either.

More importantly, maybe our key drivers, we ended up with records of client assets under administration of $729.5 billion.

We had financial assets at a record under management at the quarter end of $132.3 billion.

Our number of financial advisers, 7,604, were up 382 year-over-year and 67 sequentially.

Client assets grew even though the S&P index was down 1.2%.

So if you look so far for the year, the first half of our fiscal year, we had net revenues of $354 billion, up 16% year-over -- over versus last year's first 6 months and record net income of $481.7 million or 23% over last year's first 6 months.

So again, we think it's a very, very good quarter.

I'll give you a little color on the segments.

Private Client Group had record net revenue and pretax.

We've had great retention, which has really been the key to our growth.

We focused a lot on recruiting.

But our recruiting has trended up even over last year's recruiting levels.

So recruiting's extremely strong in all of our channels: our independent, our employee, our financial institution division, RIA divisions, all had recruiting growth.

The other thing that I think has really kicked in is Alex.

Brown is showing very well.

We closed the transaction, we retained 92% of the trailing 12s, which is extremely good compared to any transaction, especially the European bank private client groups.

But since then, we have 30 advisers who have joined or committed to join in the last 18 months, and a lot of those have been in the Northeast or West, which are target areas for expansion.

So after a year of selling they really had great traction and performing very well.

They've also helped bolster our ultra-high-net-worth platform as we've expanded our alternative investments, our private equity solutions and our lending to ultra-high-net-worth clients.

But still within our Raymond James kind of conservative underwriting, but we've been able to grow those types of products focused for those clients, not for the masses.

We've also had robust asset growth really over this time of period.

So the Private Client Group has done very, very well and continues on its steady trend of growth.

In Asset Management, we had record net revenues.

Financial assets under management of $132.3 billion, up 2% sequentially despite the S&P drop.

We had a successful integration of Scout and Reams.

They're a great fit into the family and off to a great start.

If you remember, that transaction added $27 billion in assets last November.

Our growth in financial assets under management is driven largely by increased utilization of managed accounts and PCG and we anticipate that continuing.

Raymond James Bank had a record quarter both on net revenues and pretax.

Loans ended up at $18.2 billion, 13% year-over-year and 3% sequentially and growth really in all of our major loan categories.

Bank NIM increased 3.21%, up 13 bps sequentially and over last year, driven by short term interest rates.

And even though the Fed funds rate is up 75% -- 75 basis points over the last year, LIBOR, if you look at 30 and 90-day, if you look at our mix of loans, they're up probably by average over 100%.

So that spread in growth has actually helped increase the bank's earning.

And we've had lower-than-expected deposit betas.

And this shows a little bit wide.

For some of who have asked why we didn't load up the bank balance sheet with fixed-rate securities, you can see the impact as rates go up that our balance sheet and the bank adjusted very, very quickly.

And had we loaded up over the last year, if you look at -- even though there's not an accounting charge, if you look at disclosures, a lot of those securities would be underwater if they were forced to be liquidated.

So we take kind of a long-term economic look, as we have any asset, to the bank's balance sheet.

Most importantly, the credit metrics continue to improve where we had declines in nonperforming asset as a percent of total assets and declining criticized loans as a percent of total loans.

And Capital Markets is the area that's been challenged.

We had a slow start in M&A, but we told you we felt the pipelines were good, and certainly in March, we had a big rebound, that did help investment banking revenues both year-over-year and sequentially.

However, the challenge industrywide, is I think you'll see as the nonbulge bracket firms certainly reported in institutional equities where the market has been weaker and MiFID II has had an impact for us less than 10%, probably about 8 percentage range.

But for a lot of people already, maybe 10% or more in over-the-desk commissions.

And fixed income commissions as the market has been quiet and a flattening yield curve and low rate volatility has certainly impacted those trading volumes.

So if you look at both institutional equities and fixed income commissions, they're down during the quarter.

That flat yield curve -- maybe with the movement in the last week maybe helped us going forward, but I think we're still cautious.

So given that, we're very pleased with our results for the second quarter and our key drivers look in good shape.

So with that, I'll turn it over to Jeff for some more color in the line items.

Jeff?

Thanks, Paul.

As usual, I'll only talk a little bit about some of the variations from the consensus model, although I would say this quarter they were relatively few, as most of your notes already reflected we came in pretty much very close to consensus on revenues and earnings both.

On the securities commissions and fees, it was a miss versus consensus.

Paul already mentioned the short quarter, which does impact fee billings to some extent.

But also, the bigger factor was the weak institutional commissions, both on the equity and fixed income side.

PCG, the transactional commissions continue to be a little weak, but the fees as you know, they were -- I think the fee-based assets were up 6% starting in the beginning of the quarter.

Looking forward on that line item, PCG, as you can see in the press release, PCG fee-based assets are up 3% versus where they were at the end of the preceding quarter.

So they get a little bit of a tailwind on the billings despite the drop off in the S&P for the quarter.

The investment banking line, I know we were guiding toward a lot of headwinds in our operating statistics releases throughout the quarter.

But we got to, once again, a late M&A surge in March that saved the quarter in terms of total investment banking revenues.

So that -- the beat on that particular line roughly offset the shortfall on the securities commissions and fees.

For the year, looking forward in that line, we -- as we mentioned last quarter, we're hopeful we can match last year's $400 million type outline of revenue for the investment banking line, although we've got some work to do in the second quarter, which has historically been a little -- the second half of the year, I'm sorry, which has historically been a little stronger for us.

So we've -- we're still optimistic that we can perhaps achieve that same level of revenues.

Paul mentioned the investment advisory fees.

Scout and Reams are performing as expected, the assets are still here.

We got a little bit hurt by the shorter quarter in terms of days.

Even though we bill things on a quarterly basis, it is prorated by days over the course of the year.

The other item that had an impact in that particular line item is -- bear in mind that for the investment advisory fee revenues, 60% of our fee-based assets are billed in advance.

Generally all the PCG-related fee-based assets, but all the institutional type accounts which are about 20% of the assets are billed based on average over the course of the quarter and 20% are billed in arrears, particularly the institutional -- individual institutional accounts.

And so if you're looking at billings at the end of March versus the end of December, the assets could actually have been down on per account basis.

So then the volatility in March, obviously, had an impact on the average assets.

So it wasn't quite as clean as just the change in total assets under administration or assets under management.

The net interest income line, we surpassed $200 million for the first time in a quarter.

A couple components to that.

Paul mentioned the bank NIM at 3.21%.

That was a combination of factors.

We put a page now in the press release, Page 12, which gives the details of the bank's net interest margin.

You can see on that page that it was driven partly by having less cash on the balance sheet, which is a somewhat lower earning asset.

And Paul mentioned the LIBOR increase versus fed funds.

The bank's loans are generally priced off of LIBOR, some off the 1 month, some off the 3 month.

And that has moved up faster than the fed funds rate on the deposit side.

So we enjoyed a little bit of a benefit from that.

We've been giving you guidance looking forward there of the 3.10% to 3.20% range.

I think that's probably still a good range, although it looks like we're trending toward the higher end of that range at the moment because of those factors.

But I think that's still probably a good range for now.

The other part of the net interest income is the general [cut] overall corporate results, which reflected the full impact of the December 2017 rate increase.

Deposit beta is a tough one to answer.

We're staying as competitive as we think we need to be with all of our peer groups.

We look at this every week in detail.

So far, for example, of the March rate increase, we passed through 45% of that to the clients.

But still deposit beta is very low relative to where we thought it would be at this time.

And unless we -- competition dictates that we move higher again here in the near future, the March increase will actually -- March rate increase will actually further assist earnings in the June quarter to the tune of $12 million to $13 million or so.

So it's a hard call on deposit beta.

It's historically low.

One of the related factors here, as we put in the press release now, are total client cash balances.

And you can see in there that's been on a fairly steady decline.

I wouldn't call it a rapid decline, but it's a steady decline as some clients who have cash that's a little more permanently allocated to cash, they find what we would call cash alternative products and CDs or purchasing money market funds that we don't sweep to and other things for better yields.

So it's something we have -- we keep an eye on as that cash balance, of course, is the primary financing source for our bank's growth.

On the comp side, the comp ratio came in at 66%, which is below our 66.5% to 67% target despite the FICA reset.

And I think that we could predominantly give credit for that to the benefits of the higher interest spreads, which have very little variable comp associated with it.

Communication info processing was a big jump from the preceding quarter as almost everyone noted, mainly some timing of projects coming online and consulting fees being incurred and things.

But year-to-date, we've averaged $90 million a quarter, which is kind of in line with our guidance of high 80s to 90.

This quarter, as Paul mentioned, was impacted to the tune of probably $2 million to $3 million by the seasonal factors of mailing of 1099s of our summary statement for all of our capital access which is our cash management account.

All those accounts get a 13th statement summarizing their activity for the year.

And then obviously, we had all shareholder mailings related to our annual meeting.

So those things all hit in this March quarter.

So that was somewhere between $2 million and $3 million in cost that is a seasonal factor.

Going forward, I think we're still comfortable with our high $80 million to $90 million a quarter type guidance for that line for the rest of this fiscal year.

The other line that took a little jump was business development.

That's going to be a little lumpier, a little lumpy when conferences hit.

We have virtually nothing of that sort between conferences and trips in the December quarter.

So when you look sequentially, it looks like a big increase, but we have conferences in each of the other quarters.

The other thing that we did was run some flights of commercials.

Those of you who watched the golf tournaments may have noticed them on the golf channel, that's where I happened to see them, most often.

So our guidance was of the $40 million a quarter, roughly for that line, I think it's still good for the rest of this fiscal year, at least.

We can probably won't be running flights of commercials every quarter.

So I think we're still in line there.

Just the December quarter was particularly light in that line item.

Bank loan loss provision was a little higher than one might expect given about the $450 million of net loan growth for the quarter.

And as we mentioned in the quote to the press release, aside from all the variety of activity with upgrades, downgrades, payoffs and sales and other things that we do during the quarter, we did also add some reserves related to the general interest-rate environment as an upward trending, particularly a rapidly upward trending.

And maybe don't think a 25-basis point hike every quarter is rapid, but it does add up when you get to 3- and 5-year loans.

So the impact that, that rate environment has on certain of our borrowers were it increases their debt service requirements as -- can be of concern.

So we added some reserves to -- for those credits that are particularly sensitive to the rising rate environment.

Tax rate was reasonably close.

There's still some factors that we don't totally have our arms around, and we still don't have answers on, and interpretations of it, et cetera.

But we are assuming about a 28%.

It did come in lower than that for a variety of factors.

But I think that the 27% to 28% range is probably still good for the rest of the year, plus or minus whatever impact corporate-owned life insurance has on that.

If you remember that kind of works in the opposite direction in a rising equity market, that will lower our tax rate and in a declining equity market environment, that will increase our tax rate related to the COLI.

A couple other metrics.

The segments which are on Page 7 of the press release, for PCG, we ended up with a margin of 12.4% for the quarter versus 12.6% in December.

So still both nicely above the 12% target that we had said as that segment continues to benefit from the interest-rate increases.

Paul mentioned the FA accounts and we would just continue to remind you that the increase in financial advisers and the resulted assets under administration really are what drive the majority of our growth in this firm as they fuel a lot of the other segments.

Capital Markets had a margin of only 7%, which is well below our 15% target, as all 3 divisions in that particular segment have been challenged for various reasons.

Equity Capital Markets, we talked about a slower underwriting environment, and that's partially contributed to the weak overall commissions in that division.

Fixed income, the flat yield curve has resulted in weaker commissions and also in weaker trading profits in this particular quarter.

And Tax Credit Funds, they're still in the process of rebuilding their pipeline and that business may or may not be repriced a little bit as tax credits are a little less valuable.

They may do an equivalent volume, but maybe slightly less lucrative to us in terms of the revenue side.

That remains to be seen for the rest of the year.

Asset Management, it was nice to see AUM up despite the S&P 500 decline for the quarter.

But remember, that's a point in time measurement.

We may have won a couple of big mandates late in the quarter that didn't really contribute much to revenues.

Those revenues I talked about were impacted somewhat by the March market volatility.

So you can't just draw a direct correlation between the revenues and assets, but it's largely in sync.

RJ Bank, we talked about the NIM loan growth there.

That gave them record revenues and pretax.

So from a segment basis, 3 of the 4 are performing very well, particularly when you look at the year-over-year comparisons.

You see nice double-digit growth in both revenues and pretax in 3 of the 4 segments.

Just a couple other comments.

The overall corporate pretax margin of 18.3% for the quarter and on an adjusted basis for the year-to-date as well is nicely above the 17% type target that we had set last year.

Again, we'll reset targets here this coming quarter as we get into budget season and hold analyst day, which is typically where we unveil sort of our new targets for the coming year.

And likewise, the 16.7% ROE for the quarter, 16.6% year-to-date adjusted also surpassing our 15% goal for the current environment.

And so lastly, I'll say that all our capital ratios climbed during the quarter.

The fact is we had a nice net income boost, which boosted equity and we had really very little in the way of total balance sheet growth.

So all the risk-weighted assets and total assets and things didn't really change particularly during the quarter.

So as a result, all of our capital ratios strengthened even a little bit further.

So that's it on a line item by line item basis, some better color.

Now I think Paul has got some comments looking forward.

Thanks, Jeff.

Just a few.

We've covered an awful lot so far in the call.

But really, we had, I think, a good quarter.

And our momentum based on our key business factors should continue.

We had near record levels on most all of our business drivers.

The interest rate hike in March as Jeff talked about, should continue to help.

So overall, we're in good position.

There are changes on the regulatory front.

As you know, the DOL fiduciary rule was overturned by the First Circuit, who vacated the whole rule.

The Department of Labor does have really until May 7 to appeal.

So -- to the Supreme Court -- we think that's unlikely, but who knows.

And there may be other challenges by other groups.

But we think most likely, that rule will disappear.

But you never know.

In the meantime, the SEC has introduced the best interest standard.

The standard is fairly short and is only a little over 1,000 pages in its release.

So as regulatory areas go, as we go through it, it seems workable.

There's not everything we love in it, but we think it's certainly more balanced.

But we will work with it.

The SEC will be taking comments over a comment period so that rule could change also.

But from a distance, it looks like a positive trend and a more balanced and more flexible ruling for investors.

Private Client Group, we talked about recruiting.

We're trending over last year, and the growth is happening in all of our divisions.

And once again, Alex.

Brown is really getting great traction.

So the retention of our financial advisers is focused.

One, we've got a great group, and as long as we do that and have good recruiting, I think we've got really a strong outlook.

We should -- quarter 3 -- we should benefit really from starting firm with higher assets and fee-based accounts, up about 3% in the cash spreads.

In capital markets, Jeff really hit this, is that the M&A business looks good.

The pipe -- and public finance and tax credits look like they're recovering, it should help.

Underwriting still looks a little challenged and the real headwinds are in the equity institutional commissions and fixed income markets.

Although hopefully, with the tenure moving up and getting a little more volatility, maybe we'll get some more action, but that remains to be seen.

Asset Management also benefiting from their starting assets for the quarter.

So it should be helpful.

And the bank continues to perform well.

So feeling good is the starting part going into this next quarter but certainly don't know what's going to happen in the markets.

I want to make one comment before I close really on capital deployment.

First, our strategy has not changed.

We have a long-term focus on utilizing and deploying our capital to grow our business.

Our comp is -- our retained comp is partially tied to return on equity.

So we're very focused on that to do the right thing, but we're focused on the long term, not the short-term.

So we want to grow our business first.

We do look at continuing to grow through niche acquisitions and investments and recruiting.

But any acquisition first has to fit our culture, be strategic and most importantly, also have a positive return to shareholders.

So we're very disciplined.

And a couple of years ago, we had a lot of pressure saying where are the acquisitions and then we announced 3 pretty close together, Alex.

Brown, 3Macs and Scout and Reams, which have so far been very good and very successful.

But we do them when we can do them.

Our dividend policy hasn't really changed, 15% to 25%.

And with the tax changes and earnings increase certainly is morphed to the lower end.

But the board, I'm sure, will be looking at that in the next meeting or meetings, but that strategy hasn't changed.

I think also, as we talk about even with the capital levels having a 16.7% return on total capital, not just intangible capital, that we're using our capital well for the long term and really for providing good returns to shareholders, which is really our focus in capital management.

So good quarter.

I think we're in a good position in the industry and in the markets.

And with that, I'll turn it over to questions.

So Ashley, why don't you open the lineup?

(Operator Instructions) And your first question comes from Jim Mitchell with Buckingham Research.

Maybe just a question on the recruiting and PCG.

It seems like you -- in an update on sort of on the West Coast -- seems like you've gotten better or you're ahead of the game a little bit on the Northeast, but West Coast maybe not quite as developed.

Can you just sort of update us on how the West Coast penetration is going?

And do you see sort of Alex.

Brown type opportunities there that could help jumpstart the penetration there?

Yes.

So first, we certainly have a lot of room, which is the good news to recruit both in the Northeast and the West.

And if we can get anywhere towards average market share and the rest of the country in those 2 states, we will be growing for a long, long time.

So it's our focus.

We've made good progress in the West, but we didn't have the kick starter of a big Alex.

Brown recruit.

Alex.

Brown really made a statement with significant presence in Baltimore, New York and Boston, so in the key areas.

So we haven't found that type of opportunity for the West Coast, whether that be L.A., San Fran and Seattle.

So we're doing it organically.

We're beefing up our recruiting resources, we are growing and recruiting there, but we certainly have a lot of room.

So if we found something that fit our culture, and was a good fit, we would do it.

But we're not going to do something just to do something.

So it looks like at least for the short to near term, it's -- we're focused on organic recruiting out West and look forward to the opportunity.

I think we've got a lot of opportunities to grow.

Certainly, do you feel like momentum there is improving?

It's improving, yes, but we've got a lot of opportunities still.

So we're still small.

But certainly, our recruits are growing.

And again, in all channels, both independent and employee and Alex.

Brown is adding commits in California also.

So we're focused on it.

Just had a meeting with [Scott and Tosh] that run those 2 divisions on recruiting out West.

So it's been a focus really for a number of years.

And we're making progress.

But again, we don't force numbers.

I mean, I could give them a challenge for numbers.

I'm sure they could hit them.

But we only want quality advisers and good business.

So we're deliberate and we're taking a long-term focus.

But we certainly have a lot of energy around recruiting out West.

Absolutely.

Maybe for Jeff, one question, in terms of cash levels at the bank, it did come down and it did help the NIM as you reinvest that cash.

Do you -- but it's still above $1 billion.

What is the right level of cash?

Do you still see reinvestment opportunities going forward from these levels?

Yes, we've got targets for how much liquid cash we need to keep on hand at the bank.

It's generally between $500 million and $1 billion just so they can be in a position to fund any loans that they're needed any day, et cetera, without having to borrow or us having to do some kind of machination with the sweeps or anything else.

So -- but it was just heavier than usual in the December quarter as we were reallocating some of the bank sweep assets out of other banks over to our bank in anticipation of their growth.

So we tried to stay ahead of it a little bit.

So I think the level that they've been running at in the March quarter on average is probably more realistic for where they need to be.

So the upper end of that range is probably a safe assumption?

Yes, probably if we -- as we try to stay ahead of their growth, that's correct.

Your next question comes from Steven Chubak with Nomura Instinet.

This is Julian Craitar filling in for Steven.

So just a question on capital, so I appreciate your commentary at the end.

But this quarter's strong earnings and significant capital build reinforce the challenge of not having a clear capital deployment strategy or the pace of capital build continues to exceed your organic growth needs.

And despite your reluctance to load up on securities, we would argue this has dampened your earnings potential and weighed on the earnings multiple.

When should we expect a more fulsome update and any change in your approach?

Well, we will update you as we make changes.

So our approach has been consistent.

It's been -- we can do a lot of things to bolster short-term earnings at the risk of longer-term economic issues.

Acquisitions tend not to be prorata.

They are lumpy by nature.

So we don't have a quarterly acquisition program to fill in our capital needs.

It's a long-term strategy.

And sometimes we get them, sometimes we don't.

So we will look at, again, a lot of people try to anticipate the tax act just because the tax act came in, effective really for us at the end of the year, one quarter ago, doesn't mean that we're just going to knee-jerk and say without looking at the impact of the running of our Public Finance business or tax credit business or muni business, a lot of other things.

So we could anticipate it or we could do what we always do here, is take off a longer-term, more measured approach.

And I think that's why we've had our 121st consecutive quarter of profitability and we're still, even with heavy capital by most people's standards, generating superior returns.

So yes, we could do things for short-term profits.

We don't do that here.

We do things for long-term profits, and we will analyze again both the impact of the tax law changes and of the business mix and make good longer-term decisions for the firm.

So we're one quarter in for the new tax regime.

Certainly, will be a topic of our May board meeting on capital allocation, but we try to be very clear on our capital deployment.

And we understand that we have pretty healthy capital ratios.

I would add to that, Julian, with respect to growing the securities portfolio at the bank, I mean, first of all, you're not getting paid much to do it.

It's a very flat yield curve.

We're very opposed to taking a lot of the duration risk, which you should have to do to get any kind of yield pickup right now.

And thirdly, we could grow that portfolio significantly and it really wouldn't use much capital because we hit the instruments we're buying, it only takes $25 million of capital to support a $1 billion of securities.

So we just -- it just doesn't seem the logical thing to do to get overly aggressive in that, at this point in time.

And on top of that, client cash balances aren't growing.

So...

(inaudible) the interest rates too (inaudible) environment.

And why would you -- actually again, want to take duration risk in the face of a rising rate environment, not in excess of the amount of duration risk.

What about in terms of like an annual buyback plan?

We've had a plan which we announced previously to kind of buyback on a dilutive basis.

We did it in 1 chunk.

And again, I said that the board will revisit the capital plan in May.

Again, our view was a lot of people took knee-jerk reactions when the tax law was announced.

We haven't because we wanted to analyze it and see the impact of our business and we're going to relook at it at the May board meeting.

Got you, okay.

And one last one for me but switching gears to capital markets, are you guys planning to take any actions on your [IB] trading businesses?

Just given some of the regulatory challenges that you cited such as MiFID within your trading business.

I think we have taken action, have trimmed costs and others.

The model for research is challenged across the industry right now, and certainly, it has been really for a decade.

And MiFID's probably accelerated a trend that had already started.

So we're being rational, we have no plans to exit the business.

Our focus for a number of years has been to grow M&A because the public markets have become increasingly private markets.

And the M&A business is reflecting that.

So we are taking, I think, what I call reasonable business approaches and watching costs on the one side and growing the part that we think will continue to grow.

But no plans to exit or anything drastic.

Your next question comes from Chris Harris with Wells Fargo.

So it sounds like Alex.

Brown has a lot of momentum.

Can you guys maybe comment a little bit about what's resonating there?

Well, I think that it -- it has momentum and certainly probably focused in more on the high-net-worth-- ultra-high-net-worth space.

But it's relative, the other divisions have a lot of momentum, too, right?

So I think each of the positions, whether it's our Raymond James employee channel, which has ultra-high-net-worth clients also, the Alex.

Brown, which is a brand that's been focused really on that area, the independent side are all growing.

So -- and one of the things for Raymond James that I didn't create but inherited, it's been great for us, is that we have AdvisorChoice -- that we have all these platforms that advisers can choose how they want to affiliate.

So it's been a real advantage as people move from an to employee to independent to RIA or RIA to employee to independent, whatever the movement is, that we have those options and certainly helps with the retention.

So Alex.

Brown is doing great.

We expect it to continue to do well as we do the other divisions.

Right now, we have positive momentum in every single one of our affiliation options, which is good news for us and hope it certainly continues.

It bodes well for us if it does.

A lot of people tend to think about all the regulatory changes that have happened on the financial adviser side as being universally bad.

But I didn't know if you guys maybe thought that, that actually might be helping you on the recruiting side.

Do you think that's been a factor or does that really not have anything to do with it, it's kind of all the other things that you mentioned?

No, I don't think it's -- the regulatory environment, I think for everyone, has gotten tougher.

I mean, that's just where it has.

I will say that it's, sans the elections, it has been more balanced.

That I think our worry a year ago with so many rules were coming out so quickly, it was hard to keep up with them.

And now there's -- I think people are looking both at existing rules and making sure they're balanced and we're not seeing a flood of new rules.

So that's been the positive on the regulatory side.

What's really driven recruiting is that we have just have a model where we have great respect for advisers and our -- whether it's our trust department, our bank or anything else doesn't compete with our advisers.

And many advisers feel that many institutions that they're trying to own their clients and they're competing with the different divisions.

So here, we have -- we tell the advisers they own their book and they can leave anytime they want.

So protocol wasn't even an issue for us because they could always leave and always could.

Second, we don't allow our trust department to call on a client, the bank.

They have to go at the invitation of an adviser.

Our bank doesn't solicit mortgages or credit cards, we don't put mailing stuffings in.

We don't do anything to compete with our adviser.

Maybe sometimes to economic detriment but certainly, we think, to our long-term benefit.

So I think we just offer a platform that has the technology and scale to offer advisers what they need.

And many are joining us because they feel like we're supporting them versus competing with them.

So I think that's been the secret to the recruiting.

Your next question comes from Conor Fitzgerald with Goldman Sachs.

Just -- first thanks for the new disclosure on your cash breakdown that's helpful.

Just digging into the $900 million quarter-over-quarter decline, it sounds like based on your comment, the decline is really being driven by your clients buying cash alternatives and not rotating into the equity [side], but was just hoping you could elaborate on that a little bit.

That's a true statement.

We track the growth of purchased money market fund positions in the firm.

We don't really -- we can track CDs, but that's a little harder to do.

But there's no question that people who have asset allocations that have 5% or 6% or 8% or whatever permanently allocated to cash are able to get a better yield than we're offering through our sweep program -- able to get a better yield by purchasing one of this short-term cash all taken by a 2-year T-bill or 1-year T-bill.

There's a lot of alternatives out there, and that's happening for those who have permanent allocations to cash.

Those who have temporary allocations are in the middle of an investing methodology, then they continue to want to use the sweep of vehicles that we've got which are FDIC insured, which is a benefit over purchasing money market funds or some of the other instruments.

But not all that movement was into cash.

So I mean, this is a fair chunk of it that's market related, too.

So $900 million didn't move out from cash to cash alternatives.

So -- but certainly, there's a fair chunk of that, that has and some that's moved into market as well.

So...

Got it, that's helpful.

Then on your account and service fees, can you just give us an updated understanding on how that breaks down between fees on your third-party deposits, money markets and other fees?

Yes, yes, we put that right down the Q, right?

Thank you.

We are looking for the (inaudible) at the moment.

For the quarter, so 1 91 for the quarter -- I can follow up with you on that.

Like I said, (inaudible) we got to break down but it would take a minute to do some of the math to give you percentages or anything else.

But the breakdown is in the Q each quarter, it probably hadn't changed dramatically from last quarter's percentage breakdown.

Got it, that's helpful.

And then Paul, appreciate your comments on capital.

I know M&A opportunities can kind of be sporadic in nature.

But my question is how long would you need to go without finding the right opportunity before you would reconsider your capital return policy?

Yes, so we -- first we examine it constantly.

We have the capital planning group inside and we certainly present to the board.

So it's always open.

We're not locked and we're not trying to hoard cash.

I mean, both the shareholders and where our POP is tied, are deferred, our [shares], half of them are tied to ROE.

We certainly, I think, are just concerned about getting a return on capital just like every other investor.

So we always look at it.

I don't know what the calling point was.

We resisted when the rule changed to instantly increase dividends because we wanted to do it measured, or instantly change capital.

We're being very thoughtful about it.

And so I just want to say that our policy on capital has been very much the same and the commitment we made is when we can't use it, we're going to return it.

And again, we know it grew this quarter and part of that because of the tax changes.

So we're looking at it and we'll talk to the board on it.

But I think our long-term strategy is the same.

I don't think that'll change dramatically.

The question is at what points do we think we have capital over accumulated we can't use.

And in that case, it would be to our benefit to return it to shareholders.

And we're not motivated to keep it for any reason.

(Operator Instructions) And your next question comes from Devin Ryan with JMP Securities.

So I guess first question here, just on some of the technology investments that you're making, I mean, it seems like it's been a bit of an arms race right now to add capabilities and there's a lot of innovation occurring around back-office functions and digitizing there and then adding the capabilities to help advisers maybe become more productive.

Can you maybe just talk about some of the investments that you're making into the system right now?

And then also how we should think about the related impact on spending over the next few years?

Because it seems like that's one kind of inflationary trend and you're trying to think about how that could flow from here.

I think that in the whole industry, the technology spend is certainly up and there's certainly a lot of uses to it -- uses for it.

So -- and where we've really focused is 2 things, one is making sure that we move from mobile platforms to first having one true source of data for 5 years.

What we haven't -- people don't recognize probably internally or externally the amount of money we've spent and with our last initiative going through, which is our automated client onboarding, that when we get through this, which has been a little painful to the field as we really collect the data -- we'll have one exact source of data across all of our platforms to be able to help clients and our advisers with a lot of data.

So that is that spent money and we spent money.

We started with first the adviser apps won awards on our mobile -- our mobility of all our adviser apps on our iPhones or iPads to make sure that they were up to date.

And I can tell you from a [prudent] that we're extremely competitive.

I never want to say we're the best but we're extremely competitive on those platforms.

We secondarily are now spending a lot on the client interface to those apps, so we've had on the boards, robo-like technology for our clients but we wanted to do the advisers first to make sure that there was an integrated communication.

And those are being rolled out now.

So a lot of the spend is really what I call into those client-facing apps right now.

And the other part is supervisory and compliance that we are going through a rewrite.

And we feel that we want to also have world-class supervisory and compliance systems that actually, instead of competing with the advisers, is help them make great decisions right at the point of entry and so we've been updating those systems, and we've added both the new chief compliance officer and new head of supervision recruited from outside.

We really beefed up kind of our capabilities in those areas.

So that's kind of the big back-office spend we've been going through right now.

And through the last few years, we've done things from cash movements and other things at the back office that -- to speed those up.

So we've kind of focused really a lot of our spend on our Private Client Group business although we've also invested in the bank systems, on monitoring systems and I can go through division by division.

But the biggest dollar spends has been PCG and adviser and client-facing systems.

And then maybe just a follow up here on kind of industry regulations.

So a couple of things.

We're approaching the end of the comment period for FINRA's rule proposal on outside business activity which could affect oversight requirements for some adviser activity away.

I know you Raymond James doesn't allow kind of outside custodians.

And so I'm just curious if you have any thoughts on that rule, if there's any implication on Raymond James or just kind of follow the industry more broadly?

And then also, kind of a similar kind of theme, the SEC's proposal that could require RIAs to have greater licensing and continuing education requirements and if that's actually maybe a good thing?

Yes, so first of all, we don't get paid on assets all the way.

We don't have any of those issues that I think they're worried about at other firms.

So the rule changes would have pros or cons.

It certainly would clarify the supervisory responsibilities.

They should be more clear than the rules though high level so a lot of our questions, what does that mean?

And what monitoring requirements will we have if assets are held away in RIA and we had commission-based assets on issues like client suitability, concentration and other things because we couldn't see them all?

So I think that in discussions with Robert Cook and FINRA, they are listening to kind of the issues and their pros and cons, I think, to that rule, we're not overly worried about it.

There are things we like about it.

We like certain outside business activities if you join a charitable org and you're an independent adviser, you become treasurer of your church.

Or it could mean really how much do we need to supervise that.

So those kind of areas are -- we think are good.

The supervisory ones are a little tricky is how do you supervise if you don't see the assets.

The proposed rule is voluntary.

So it's -- you can choose to have your own policy, but you're not required to.

So you ask about competition and all the implications.

And we've had a good open discussion with FINRA on it.

So I think that rule -- I don't know where it will go, but I think it's early to tell.

But I can't tell you I've been up the last month worrying about it too much, although we have provided feedback on it, so...

Got it.

And the SEC, just the looking for commentary around greater requirements for RIAs around licensing and continuing education which I know has kind of been may be one benefit to being an RIA so just curious is that potentially higher bar or something that would change the momentum there or you change oversight requirements et cetera, just trying to think about that.

In our view, has been first, we're supportive of the advisers in any channels but we think that both the requirements and the supervision should be similar no matter where you practice because at the end of the day, we're here to protect clients.

And to get them to invest.

So any rule that kind of makes sure that any adviser in any business is qualified, and that is both, whether that's a licensing or testing and then ongoing education, which we spend a lot of money helping our advisers and our advisers do on their own too is the continuing education, would be good.

So I think the trend of the rule is good.

We'd rather see one kind of federal rule apply to everybody, it'd certainly simplify our lives and make it a level playing field.

But I think this is a move in the positive direction.

And again, the devil's in the details.

We're going to spend a lot of time I think on that rule on what you can call an adviser or advisor which I think is a little bit weird in the way it's presented.

But I understand why it is and things like that.

But in general, I think the SEC rule is a good step forward that allows first adviser and client flexibility, pushes for full disclosure, which clients should have anyway.

And we've always thought we had a best interest standard with clients so we've been, as you know, advocates, although we publicly oppose the DOL rule and testified -- I think we're the largest firm to testify in Congress against it.

We have been advocates of the best interest standard and the SEC has stepped up to propose one and like any rule, we -- parts are good, there's parts we would tweak, but that's -- I'm sure every firm has a little different view but I think it's a really good move in the right direction and we'll see during the comment period what comes out.

(Operator Instructions) And there are no further questions at this time.

So great.

I'd just like to thank you all for joining the call, and I believe we had a good quarter.

Our assets show in positioning and advisers that we have good momentum.

And hopefully, the markets will be conducive over the next quarter.

So thanks for joining, and we'll talk to you soon.

Thank you, Ashley.

You're welcome.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.