雷蒙詹姆斯金融 (RJF) 2004 Q3 法說會逐字稿

Good afternoon, my name is Amber and I will be your conference facilitator today.

At this time I would like to welcome everyone to the analyst conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. James, you may begin your conference.

Thank you very much.

I would like to welcome all of you to our third quarter conference call.

It seems from my earlier presentations on CNBC and Bloomberg that focus was on the fact that we missed analysts' estimates.

I once again remarked concerning the difficulty of being able to make estimates in our business, largely as a result of the fact they're so directly related to market movement and market activity, which can change in very short periods of time.

And I described the rationale for this 8 cent short fall that apparently is the difference between the combined analysts' estimates and our own results and essentially I empathized with the analysts, as I did last time, because the second half of the quarter simply wasn't up to the levels of activity that occurred in the first half of the quarter.

Moreover, when earnings estimates were upgraded after last quarter, that was based on an extremely favorable quarterly number, with records and revenues and net income, and it also included some special additions to earnings from tax effect and some reversals in legal reserves, et cetera, that -- of a small nature, but still positive effect, so it was pretty hard to compete with the quarter, the level of investment banking activity, especially ECM-related, was at record levels, also.

So I really would not have forecast that we could come anywhere near that quarter in the succeeding quarter, especially if activity levels returned to more normal types of levels.

I would point out, however, that, you know, I view the results of the quarter very favorably.

If you reach back in time to a year ago, in the June quarter, you should recall that we actually had a very good market environment during that quarter.

We had ramp-ups in revenues and net income and dramatic rates and that the June quarter of last year was actually the first very good quarter that we have to compare with this year, so it did not surprise me that the rate of increment was reduced to 16% in revenues and 26% in net income during this quarter and we recorded 440 million of net revenues, up from 378, which -- that's 16% increase, and net income was 29.6 million, up from 23.6 million, which I would describe as a very good result, yielding 40 cents per share versus 32 in the prior period.

And I would say that even in the face of the fact that we did 58 cents in the prior quarter on 480 million in net revenues, and as you know, that 8% decline in revenues has a very large bottom line effect when expenses are generally being controlled extremely well.

As a matter of fact, you know, on almost all areas, except business development, expenses were below the immediately preceding quarter, although they increased from -- by 15% in total, including the commissions and compensation line as compared to last year.

As a result of that quarterly result -- of those quarterly results, we obviously had a very good ninth months and, you know, I didn't get much of a chance to talk about that this morning, but net revenues were up 27% to 1.334 billion and our profits were up to 97 million versus 53 million for the same period a year ago, which is an 82% increase.

So that demonstrates the leverage.

I will say a little more about, you know, where that originated, because some of the comparisons on a business line by business line basis are extraordinary and, of course, the diluted earnings per share were $1.30 versus 72 cents and as a result of the financial operating earnings that we achieved during these periods, our book value is now $14.01.

So we are -- I guess we're about 1.6 or 7 times book value.

So, you know, nearing the levels at which we think this stock is in our own buying range under our existing publicized policy for repurchase agreements.

So that's -- that's sort of the description of the numbers.

Now, underlying those numbers, I think it is important that you recognize that these increases were still pretty much across the board.

I mean, the fact is in the three month numbers we had a 17% increases in securities commissions and fees.

Investment advisory fees were up 20%.

Investment banking fees were up 41%.

Net trading profits were down 41% and that reflects the declines that have occurred, you know, here in recent times, in fixed income trading, as the volatility and rates as people anticipate and then tire of waiting of interest rate changes and we see pretty dramatic movements in the 10-year note rates obviously impacting corporates, mortgage-backed securities and all of the fixed income vehicles.

So we've seen a lot of activity there.

We do see an increase in margin balances outstanding finally beginning to take place as the market feel has been better over a longer period of time, but we don't really see much effect yet in the totality of net interest income earnings.

And, you know, I think we're going to begin to see that so long as this stock market doesn't fall out of bed, and in the past, that's been a major contributor to the increases as we continue to grow.

It's been quiescent as contrasted to normal behavior during this down period of three years as margin balances have declined even though we've grown bank loan balances on our asset side of the bank balance sheet.

So I --- I see some opportunity for upside on that front going forward.

And equity capital market activity during the quarter was still very vibrant.

I mean it was 22nd -- I mean 27 transactions versus 21 a year ago and 33 in the immediately preceding quarter, but the revenue lines weren't as high because we didn't have as large a percentage of the management fees generated in underwritings during the quarter, we didn't have the private placement volume, we didn't have the M&A revenues at the extraordinary levels, and that's how I would describe the prior quarter as contrasted to saying there was much unusual about this quarter, so.

And business volume continues very good in the pipeline and as long as the market is receptive to new issues, I'm quite comfortable that, you know, we can continue to process the business we have in the pipeline.

The growth in accounts we're up to $109 billion in assets under our control, up from 94 billion last year at this time.

That represents an increase, a small increase over last quarter's results reflecting the kind of nonevent that has been occurring in the marketplace during this period.

But, you know, we continue to grow assets.

I always point out to you that one of the two principal drivers in the private client group relates to the numbers of FAs that we have and I have been reporting to you now for several quarters that we have been able to continue growth in our total financial advisor counts, largely reflecting the fact that we are recruiting well at the gross level and in total net addition, but we've still been, in RJF, doing some pruning of below average producers with an intent of quality improvement and in order to do some risk management with respect to activities of people with low levels of income.

So that's continuing.

I still forecast that's going through calendar year-end, because a number of people were put on warning probation and consequently, if they don't substantially increase production, we terminate those financial advisors.

And when you look at the assets under management that we actually manage over the year, we're up from 18 billion to 22.1 billion.

There's been substantial growth there.

And in our wrap fee programs, the fee alternatives that are managed by our registered representatives, we're up from 10.4 billion to 14.2 billion.

So we continue to make great strides in terms of increasing fee income relative to transaction volume, in spite of the fact the regulators now seem to think that if somehow fee-based revenues are higher than their alternative on an execution basis would have been, that we're not entitled to payment, which is some wrong-headed thinking of a new variety that I'm wondering about the quality of our hires in the regulators.

So obviously, I still support the notion and clients obviously continue to support the notion that fee-based arrangements for compensating financial advisors is basically a more acceptable format from their point of view, not a less acceptable format.

Over time, like commissions, fees based on assets have come down in almost all of our wrap fee alternatives, but certainly, not nearly enough to offset the growth in assets under the fee-based programs.

And I think that you will find that the standards in the industry is, especially dealing with the professional financial planning type brokers, will continue this trend to fee-based compensation.

The -- all the businesses are in relatively good shape.

We have begun to see some addition to the nonproductive employee-base at the firm in terms of hiring.

We have been adding somewhat in the IT area.

We have added, surprisingly perhaps, in the fixed income institutional area where we've been building a high yield practice which I think will auger well for the business.

It tends to offset some of the other fixed income type revenue lines.

And we've added traders and I think we have 12 or 14 institutional salesmen now in high yield, mainly based in New Jersey and New York, but spread around our network in addition to that.

So that I think strengthens the platform in fixed income.

Traditional businesses I mentioned earlier in fixed income is not nearly up to the levels that one would anticipate because of this volatility and this expectation of rate increases.

So we're not surprised by that.

We expected to have a decline and actually made a conscious decision to take advantage of that as it developed to recruit some very high level producers in fixed income generally.

So it is an area that we're actually going to take advantage of the downturn in.

We also have added some people in equity capital markets and just to report on Canadian operations, business in Canada is doing well.

We are especially successful in recruiting in our independent contractor operations up there, as prospects become more familiar with this alternative in recruiting, and I think as you -- as you begin to make some inroads into the bank broker/dealers, that's where you're going to see the most dramatic improvement in terms of the quality of people we can recruit in Canada and that's going to begin to happen as more time passes as producers figure out the economics and the independent contractor alternative are superior when you control a lot of assets under management and you are a financial planning oriented, full-service financial advisor.

So we're actually very favorably disposed to that.

And the equity capital markets area in Canada, while it was slower, I think in this quarter, then as was our domestic activity, you know, the business is still good, we're still a good factor in that marketplace, which is our CEO there, Ken Shields, historical affiliation.

So I'm bullish everywhere.

We have seen a little bit of slowdown in the U.K. and we continue to have difficulty with the time of transition of our FAs in the U.K., the independent contractor model.

But that's really -- we don't have ACATs in the U.K.

Consequently, broker/dealers from which the FA's depart often can interfere with that process being a facile conduit to us.

And I think that the recruiting -- we seem to have picked up recruiting activity in the employee front domestically, also, in recent weeks, as a result of all this advertising we're doing.

So, you know, if you were asking me how I thought the advertising for recruiting was paying off, I would tell you that it is still too early to comment.

The activity levels are still higher than they have been traditionally, but sometimes this recruiting process is like a mating game and it can take a year or two to actually complete an affiliation.

So I think it is going to take a little time to really evaluate the return on investment.

But so far, we're happy with the increase in activity across the board.

I think with that I will open it up for questions to any of you and be glad to respond to any questions you might have.

At this time, I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from James Ellman.

Good afternoon, thanks for taking my question.

Could you please comment on how the environment might be affecting your business in that we have heard from companies such as Merrill Lynch and some other companies talking about each month has been progressively more difficult, particularly in fixed income businesses, could you discuss how and to what extent you're seeing the same trends?

Thank you.

With respect to fixed income, you know, of course the retail part of fixed income is actually pretty good, the institutional segment which would impact all of the major broker/dealers, ourselves included, is, you know, down considerably from last year's comparable results.

Investors are really sitting on -- institutional investors are really sitting on their hands, trying to assess the length of this market increase in rates and also the quantity of change that we're going to go through in the rate cycle, especially on the longer-term securities, and my guess is that, you know, this is going to be a 12 to 18 month process before people feel much more comfortable lengthening the durations of their commitments.

By that very decision, you're going to see lower commission levels on the institutional front, perhaps with the exception of new issue activity and with the exception of high yield bonds, where as long as corporate earnings are increasing and the quality is increasing, there still should be some pretty good activity on the high yield bond sector front, as various forms of -- various type of investors attempt to secure some kind of reasonable returns.

I'm glad you mentioned Merrill, because, you know, Merrill's results were up less than our results this quarter and I think that equally surprised analysts.

And I would say it is exactly the same rationale and when you go to the retail investors, assuming we have kind of a flat market environment, I don't see much of a change in terms of contributions from this quarterly rate going forward.

Again, this is almost impossible to comment on and I would consider anybody trying to as being very speculative, because, you know, we can also see a rally come out of nowhere, where we would, you know, increase activity levels.

There is no decline whatever in the activity that we see in terms of bringing in new money to our asset managers during this environment, which indicates that advisors and clients are still very positive on, you know, longer-term outlook in the markets and they don't foresee a major decline like that we've recently experienced from 2000 to 2003.

Very good.

Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, please press star and then the number one on your telephone keypad.

Your next question is from Casey Imbrett(ph).

Hi, good afternoon.

It's actually Jim Ougle with Millenium Partners in New York.

I was hoping you could discuss maybe the month to month trend in the securities commissions and fees as well as the daily average trades.

I actually don't even have those statistics in front of me.

I don't know if Jeff has them or not, month to month.

But I can tell you, generally speaking, that the first month of the quarter was probably the best month.

May was still a good month.

Not as good as the first month.

And June was the weakest month.

And I think that probably -- I, you know, I can't detect anything in the short run that would indicate any major change from the June rate going forward, but business is not bad.

Don't get that impression.

It is just not at the ebullient levels that we had experienced in prior periods.

And I actually think it is appropriate that we have a little digestion period in the market.

Both in terms of the direction of the stock market prices of individual securities and in terms of activity.

So I don't really consider this negative at all.

And we are into the summer doldrums.

You know, we don't see as much activity in the June, July, August time frame in PCG anyway, as we do normally in other seasonal time frames, unless there is a very unusually robust market.

So that's why I hesitate to comment on, you know, how well we are going to do relative to, you know, last year's results going forward.

I just don't have a clue.

Okay.

Can you maybe address -- if we do see sort of a slowdown in revenues from this point, like if we were to extrapolate June's numbers, even though you don't have them and we don't have them, we can make an assumption based on the quarterly trend, if you will, or the month to month trend, if were you to extrapolate June's numbers for the fourth quarter, your fiscal fourth quarter, right?

Uh-huh.

Do you have any sort of plans to rein in expenses if revenues, you know, are still good, but maybe down from just a couple of months ago?

I would say that expenses have still generally been very contained.

That only in the areas that I just described to you where we're making a -- the beginning of a substantial investment to convert our IT software platform from the system that we employ internally which is the old SIA -- S system, where we maintain it, to the CSS platform over the next couple of years.

And, you know, in a few areas, where we're still expanding, like the tax credit business, like the high yield fixed income business, I don't foresee much expense growth.

And as you know, about 65% of the expense numbers are really result of compensation directly and indirectly and as long as we don't have any massive additions in that area, I don't see much ramp-up in expense.

On the other hand, I don't forecast this as some major secular trend, saying that we're going to have major decline.

So I would not attempt to rein in, you know, intelligent spending.

We always try to reign in the unnecessary expenditures that can go on.

And I would not be inclined -- you have to understand that those revenues in the private client group in our sector data, if you look at that segment data that we publish, I mean, they -- those revenues were still up 18% and profits up 24% in that quarter-to-quarter comparison.

And, you know, I don't detect a large enough change or something that would indicate to me that it is going to be extended, period, in duration to think that I should do anything outside the scope of normal cost control.

Okay.

And then if I could just ask about the regulatory front right now.

Yeah, you could.

There seems to be, and you guys have been -- you guys have been, you know, honest and upright and you've avoided a lot of the negative regulatory headlines.

How are you -- what are you most afraid of?

I mean there was just a -- I think one of your competitors, a fine firm in the midwest, was just subpoenaed for variable annuity trading, something to do with that.

Yeah.

What worries you the most?

I mean is it dependence on any one customer?

You know, is it directed, you know, commissions, is it soft dollar type issues?

What worries you the most?

Well, you know, the first thing that bothers me the most is the generic level of scrutiny being applied by the regulators in what I like to describe as revisionist regulation.

Where by we are being held to standards that didn't exist in terms of practice.

And I really think that is unfortunate.

And so we're seeing a little overkill where the regulators are having some sort of race to see how many people they can find guilty of some infraction and then fining them at levels that are multiples of prior fining rates and actually causing a lot more damage with the negative publicity to firms that I consider to be well managed, well intended firms that are trying to follow the rules.

And I'll make that distinction to reflect some of the behavior that regulators have become upset about is certainly justified.

And in that same generic comment, I would tell you that the combined effects that this regulation and Sarbanes-Oxley are dramatic in terms of the impact not only on our industry, but on all public companies, and we're seeing increases in accounting fees, our audit fees have, you know, 40 to 120% as a result of the increased accounting activities and auditing activities, just in the out-of-pockets and, you know, that necessarily is increasing the cost of doing business for all of us, which is going to get passed on one way or another to others.

And from a public company perspective, may make prospective public companies think twice about IPOs as a vehicle for raising new capital.

And I think that is extremely unfortunate.

You know, there was an editorial not too long ago, co-written by, I think, Arthur Levitt and Bill Donaldson on, you know, how good all this change was and I have to disagree.

I'm much more in John Thane's camp, on the New York Stock Exchange on this one, while I would say that some of this expenditure yields somewhat of a positive impact, I would tell you far more benefit was just resulted from the publicity associated with changes that should be expected in best practices and things of that nature.

And I would have preferred that our regulators, and sudden you just go for now but goes to the past, would have assumed the role of the constructive architect in terms of modifying our systems to the new products that are developed, the new technologies that are developed to, you know, practice changes that they think are important.

I know the industry would be glad to join hand in hand with the SEC, the NASD, the NYSE, and the other exchanges, to try to conduct annual, biannual, however kind of reviews you would like to see, along all kinds of product lines to ensure that we really do bring our systems up to date and a lot of the problems in the mutual fund industry result from the lack of an industry utility that collected all the data that enabled sponsors and broker/dealers and clients alike to have an open information with respect to what they should be able to expect for commissions, et cetera.

The programs that sponsors use with respect to giving advantages like NAV transfers are all very different.

They should be standardized.

This is not competition in the sense of anything that makes very much difference.

It actually causes confusion for sales agents and for clients in terms of trying to evaluate what they should do.

And so I would tell you, we need -- we need to have somebody take the step back and take the long-term view towards improving our financial systems and this goes for worldwide, not just for domestic.

I see a much more proactive regulatory effort on the part of the banking regulators to do that, the financial reserve board is -- the Federal Reserve Board is much more responsive to trying to determine what systems they need in the marketplace, what intelligence they need to be able to run our systems better.

So I'm worried about that.

I think that's the real type of long-term solution we need.

Now when you get to specifics, you know, clearly the regulators are looking at rep fee programs, and as I indicated earlier, I think it is inappropriate, I think they're way off base.

Number two, I think they're looking at annuities, as you pointed out, there is both a lack of education on what benefits might be worth exchanging and what benefits would encourage investors to invest in annuities and I can understand that.

But I would also tell you on the other side, the compensation levels both on the recurring basis and on the front end need to be standardized or normalized with respect to all of the similar functionality that's provided by mutual funds.

The insurance part should have an incremental cost.

But there is no reason why you don't have A share equivalents on annuity sales.

People that buy large numbers of -- amounts of annuities deserve volume discounts.

They need to have discernible policies that they can understand about what they're paying for on some of the benefits that are offered, the product has become more and more complicated over time, and actually sometimes disclosure can become so complicated that you really don't get the messages across that are necessary to make the right decisions.

So I'm concerned about the annuity front.

But just as an example of some of these standards, as you're well aware, these regulators have come in with unreasonable requests for e-mail production.

I noticed that the SEC just reported that it has, you know, it is upgrading its own hardware and memory for e-mail retention, you know, they're a year behind us in our acceptance of that and we, you know, we at various times were charged with being dilatory in terms of providing e-mail requests in the millions, when the fact is they couldn't have come close to doing similar production requests themselves.

So, you know, that's unreasonable.

That's not the kind of regulation we need to make positive improvements.

We actually needed a study by the industry to tell us what systems we should have been employing.

There are plenty of small firms that didn't even have the knowledge to make the investments that some of the larger firms like us have made.

And some of this technology, it was not a lack of interest and, as a matter of fact, there were probably two generations of purchases in this area alone during the last couple of years to try to be able to provide instantaneous information to regulators.

So the thing that more intrigues me is what in the world people are doing with those things.

On the mutual fund front, to be frank, there was a great article in there with a totally wrong conclusion by John Bogle, who I respect as a great leader in the mutual fund industry and someone who certainly brought a lot of competition to the mutual fund business in terms of providing competitive annual expenses, absence of front-end expenses and those kinds of things, but he pointed out in his editorial that if you viewed mutual fund families as sponsors who were selling products that were highly competitive products, that you wouldn't think you needed some of the changes that regulators have taken, or if you agreed with his position, which I will describe, these aren't his words, but I would describe as quasi-public vehicles, that, you know, watch over investors' money, that you would prefer that you would have all these public bodies overseeing their activity.

And I happen to believe in the private enterprise system.

I believe the mutual fund system is generated immense amounts of competition.

That institutional commission rates in the last five years have probably gone down from 8 cents to 2 cents a share.

That operating expenses at the fund level have declined, that the options available for people who don't want to pay front-end loads to get the advice of a financial advisor or a wrap fee, have plenty of available product to buy on a no-load basis, that disclosure in mutual funds even before this last group of disclosure requirements is better than its ever been.

And to be frank, all these things that are being introduced today are going to increase the cost of managing mutual funds.

Having an outside chairman of the mutual fund, while that's a grand idea, I would tell you there is no way that an outside chairman can compete in the knowledge and the amount of dedication that they've got to make to run mutual fund family that the internal management can do and I think it is unreasonable for people to assume that any board of directors in a one or two day period a quarter can do the job that is necessary to really manage these funds.

So I think some unreasonable expectations have now been foisted upon directors which is going to increase the cost and availability, decrease the availability of directors, which is very unfortunate, and, you know, I for one take it as a personal affront because I've been a chairman of a fund group for a long period of time and nobody's got any more vested interest than I, as an owner of a sponsor, have in terms of ensuring that those funds are -- perform as well as they can, that our expenses are competitive, yet we still have a profit motive and I think we've done a good a job of that over the years and I think we have an excellent group of outside directors who are looking over my shoulder.

But I'll tell you what, you can't expect them to do the job of management and giving them independent staffs is only going to increase the cost of the mutual fund business.

So I'm disturbed, I would tell you, by some of these trends.

I think they're unfortunate.

I understand the objective.

We all share the same objectives, to increase the trust and confidence of the individual investor but I will remind people that when the market rally -- rallied off those three years of decline, that mutual funds sales reached new record levels.

The public is a lot smarter than the regulators are giving them credit for.

They know that they've gotten good results from mutual funds, whether they're no load or a load funds, and that they've been worthwhile things and vehicles for them to invest in, in spite of the fact they might have gotten a little too aggressive in that three year period in their allocations to technology.

Thank you.

That's probably more than you wanted to hear.

Your next question comes from Jonathan Castleman.

Hi, John.

Yes, good afternoon.

Can you talk about the investment banking backlog and to the extent that those high margin products comprise that backlog, the private placements and M&A transactions?

There -- as I indicated earlier, I would describe the pipeline as extremely active.

I measure this at the level of the commitment committee activity where, you know, we bring in people from all over the firm to evaluate recommended financings.

And certainly on the public offering side of the coin, we have a very large number of transactions in process.

I see no abatement whatever of that.

I think the opportunities to get them to market are still present.

We might have to work a little harder in a market that has no real upward direction, but I think the transactions can still get done.

We have some sizable underwritings that we're involved in as either lead manager or large co-managers, so that part of the business is good.

We're working on numerous M&A transactions.

Almost impossible -- that's a lumpy business.

And, you know, the only thing I can tell you is there does seem to be a great propensity for our investment bankers to complete transactions in the last fiscal quarter of the year.

They are bonused on an annual basis on performance and their level of activity really ramps up during this period, so I suspect that's going to be good.

I think the activity in things like pipes and private placements is going to be better than it was in the last quarter.

So I actually think they're going to continue to do well, even though the market might lead one to conclude otherwise.

So, you know, I don't know that the actual numbers in the pipeline, we don't tend to report those -- those things, but I -- but I can just give you general feels as I have in the past, that that pipeline continues to be good.

So could we see a $34 million number like we saw Q4 2003?

I don't think that the $34 million number, even if we did see it in the fourth quarter, is a reproducible kind of a number on a continuous basis, yet.

We have substantial opportunity to increase the productivity of our investment bankers which runs around $1 million per investment banker currently.

There is no reason why at today's capability levels and support staffs and relationship numbers, that in a good market we can't do between 1.5 million and 2 million now.

So we do have the opportunity to see that kind of result, but I can just tell you, the confluence of favorable factors in the March quarter, which I reported on at the time, was -- is not something that we should expect on a quarter-by-quarter basis in the absence of one of these run-away markets where, you know, everyone is rushing to get out the door.

So I'm not going to forecast -- I'm not saying it can't happen but I would tell if you it did happen it would take another -- another syzygy, which is the alignment, you know, of three heavenly bodies, but it is good.

And, you know, I don't know what our peer group is saying about this side of the business, but at least in our shop, because of the preponderance of fixed income related business, income oriented business we do here, there is a -- there is still a very high level of activity.

You spoke about pipes.

Have you received an inquiry from the SEC?

I know that there was a street sweep at the end of last week.

Were you mentioned in that?

You weren't in the "The Wall Street Journal" but I'm just wondering on the fringe if you received an inquiry from the regulators?

To my knowledge, we are not on any list of inquiry for Pipeshed.

It is probably because we haven't done enough of them, I don't know.

Right.

The -- you know, anybody who does business today, I think, can expect to be involved in sweeps of whatever type business they're doing.

I mean it is -- it really is a bit disquieting that we have this lack of confidence and, you know, I will admit that to some degree in some of these area, the industry has earned scrutiny, but I mean -- we've done everything we can in some cases to avoid these kinds of activities and still gotten caught up in some of the reviews and I can tell you in the mutual fund discounting front, as I reported in our quarterly reports and prior conversations here, I was embarrassed myself at the levels of errors that were made in discounting, but I will tell you what, after spending the length of time -- and our estimating procedures were also liberal as contrasted to our -- our peer group members, so that we tended to have reported more than actually occurred.

But the -- the complicated nature of trying to be able to go back and determine whether investors utilized their NAV exchange funds, privilege at no mark-up, when money was being converted from another mutual fund family and you didn't know the activities of reinvestment that they'd already taken advantage of at other funds, I mean the level of complexity here is almost beyond one's imagination.

And while we certainly in the industry has certainly dedicated a lot more effort now to building systems to be able to try to comply with all of these benefits and features that exist in the mutual fund industry, some of these things we can't do individually, they must be done on an industry utility basis and, you know, I don't have any other solution.

We knew this a long time ago.

What we didn't know was that there was -- this kind of an error factor was going on in the industry, which, you know, might have amounted, not to the 20 or 30% you heard, but in terms of the total activity, to as much as maybe 10% of transaction volume, you know, having some sort of an error.

It might have been small numbers, but some sort of an error.

So that's -- we're getting better and better but we've had to go back to manual processes, basically, to ensure that the numbers are better than they were before and, you know, we're still not finished with all of this.

We've done all that stuff during the three-year period, but we haven't finished all of the reviews for activity in this fiscal year.

And, apparently, what we've been more than adequately reserved as we reported before.

But I will tell you, this is just -- this is an unusual time.

It is an unusual time.

I will tell you, we are going to get some positive benefits out of this stuff because we are going to demand that, you know, that the standards in all of our activities, internally at the firm are very high, and we're also going to demand that the industry trade groups and the industry utilities cooperate to get better information collected that's beneficial to the whole system, collected by the system, as opposed to requiring each broker.

And certainly small firms have no way of -- they really have no -- I wonder how they're finding trying to comply with these kinds of requirements.

I mean if the bigger firms, the national firms, ourselves, you know, we -- we have the IT resources and the funds to be able to do this, but some of the small firms simply don't.

And you know, I -- they haven't gotten a lot of publicity about this and, you know, they were underneath the minimum levels that were set up for some of the discovery by the regulators because they recognized that this issue existed.

But that doesn't solve the problem for the clients of having errors and, you know, we've got to solve the problem for the clients.

And, you know, that's where, you know, my CEO peer group is spending a lot of time talking about these issues amongst ourselves, trying to get the industry utilities and trade groups to spend more time here.

Any whisper as to the next facet they might be reviewing?

Obviously, we've got to be forward looking, here, I mean, it is anti-capitalistic generally but I'm just wondering how far they're going to take it or does it just go on and on and on until - ?

I'm going to respond to that by giving you the words of Bob Glauber, when I went up to see him at the NASD last fall to talk about the mutual fund survey and some of our efforts and, as you know, we've had all of this disclosure and rights and responsibilities and even on our confirms, about how confusing this process of selection can be and how much work clients have to do to ascertain all this, where no one else was doing it, but the fact is, the clients didn't do it.

Some FAs did it impeccably well in terms of gathering information.

Others were less successful in collecting some of this data from clients.

But his response to me was, the last time that there was a major investigation, that it wasn't one product, it wasn't one year, it was a long-term event where, as part of a sort of regulation cycle, regulation got very intense.

You know, the industry voted to increase support and lobbied for increasing support of staff to the SEC.

We wanted some of these areas to be regulated better than they had been by higher quality people.

The complexity of the industry had grown so much there was no way for the SEC to carry out all of its mandates.

But I also want the SEC to take this role of helping the industry forecast some of the things you're talking about and try to identify issues.

I guess the only one I mentioned that I have a concern with is the fixed income side of the business, where there is still a lack of transparency, largely because the securities are not uniform.

You don't have -- you have a lot of individual years, a lot of individual issues in the securities, lots of different call features.

I mean it is extremely difficult for clients and even FAs to sometimes make the comparisons that are necessary to price the securities, much less to be able to determine what, you know, markups are, et cetera.

So, you know, we've imposed very strict rules in this area, but this is an imperfect science, too.

So, you know, my guess, you're going to see more scrutiny on that front, also.

One quick question on the cost side.

Business development was up to 15.3 million.

The only really ostensible cost item that was sort of, you know, out of its range, it has been up for two quarters now, I was just wondering where you see that going in Q4 and really what the composition of that expense is, sort of the incremental quarter-to-quarter?

I think we probably have it at the level where it is going to be for the next several quarters.

Okay.

I don't foresee much of a change.

I mean we have been spending more on the recruiting advertising front.

We're going to be spending more money on branding because branding expenditure here is -- this is basically client based advertising.

Right.

-- is a function of our revenues and profits, that's how we budget for it and since we've been basically depressed for the fiscal years from 2000 to 2003 and now we've seen an increment, you know, that means it will follow through in our budget process for 2005.

So I -- I -- I see some increases there, but basically, I think we're kind of at a level --

15.5 is --

Yeah, I actually think control has been pretty good, but, you know, I could see where you're going to get the major increase when it happens, is that -- is the unemployment numbers come down throughout industry, not just in our industry.

That, you know, labor costs will begin to inflate at levels above the 2 or 3% rates they've been over the last five years.

And that's going to happen just because there's going to be a shortage of labors and it is also going to happen because we're going to have increased inflation with the deficit spending levels we have.

Fair enough.

Thank you very much.

Your next question is from Lauren Smith.

Good afternoon.

Quick -- very quick question.

Just going back to the expense side, the continent revenue ratio jumped, it was much higher than I would have thought about by about a percentage point.

Was there anything in particular that went on during the quarter or should we be thinking about a higher run rate?

Or is the 71.5, 71% range more likely going forward?

I don't know of anything other than to tell you that productivity has gone up in the last year in our employee-based financial advisors and that raises payout levels because we adjust our payout rate quarterly based on 12 months of prior production.

So, someone who was doing, you know, 300 production might have qualified for the 400 level, and I'm not using actual numbers, I'm just giving you an example, as a result of some of these increases.

I don't -- we have not had a real structural change of any major magnitude.

And as a matter of fact, I think that the last change we had in the employee-based payouts would have offset some of this (inaudible) creep that I just described.

So -- registered rep was up 64% from -- 64.2 from 62.7 last year at this time.

And other than the factors I've just described to you, people qualifying for higher levels, I really don't have any -- oh, no, you know, we -- what's been happening traditionally -- you know, over --- over most of the prior periods, but won't has been as much for this comparison, I wouldn't think, is just over time, our financial advisor proportionality between employees and independent contractors is shifting more and more to the independent contractor front, which means that you shift more compensation into this area of pay but you also decrease, hopefully commensurately, the other areas of direct expense associated with branch costs and clearing costs and things of that nature that get passed on to them.

Lauren, we haven't dissected it totally but there was -- were no individual departments or anything that looked unusual.

Okay.

Then, that's helpful.

And then just two quick questions and I know it is getting late.

But on the Tower Four costs, there was going to be an incremental one million this quarter.

I just wanted to get -- make sure my numbers were right.

So the current occupancy and equipment costs would reflect that.

Is that correct?

All the costs of Tower Four are basically in the numbers now, with the exception of we've got several pockets of space in that tower that are not built out because the space is there for expansion space.

Right.

But the net change you see is the, you know, net of other things becoming fully depreciated, et cetera, net of the increase and remember, some of the costs of Tower Four aren't in occupancy line, they're in interest and personnel items as well.

Right.

You know, additional security guards and additional financing costs because of the increased mortgage and interest, et cetera, like that.

But the cost for the next -- the occupancy costs and other costs related to Tower Four are fully reflected in this June quarter.

Great.

And then just lastly, I know, Tom, in your opening comments, you made mention of a margin balances, you know, being higher and, you know, I guess it was about 15 -- 5%, excuse me, quarter-on-quarter.

And I'm just surprised by that, given, you know, the deterioration over the second half of the quarter and, I guess, sort of the question is were they up say more in the earlier part of the quarter and then they started to trend lower in the back half?

So, you know, should we be thinking about, you know, declines going forward is I guess what I'm trying to get at?

No, I would tell you that there's still -- while the direction is positive, there is no very meaningful rate of improvement and at the same time I haven't seen that the recent market has caused investors to become more concerned.

I will tell you this.

Our focus on advertising for Ready Access, our margin account name, is not based on investment purpose loans.

We encourage people to use margin for loans that they're going to get anyway, because of the low cost basis of the margin loans, especially where those loans are temporary.

So we really do not encourage any investors to use margin for the purpose of trying to get some leveraged play on their investment portfolios.

That doesn't mean that we don't have some speculators out there that do that, but the percentage of them is very low related to the net assets.

So when you look at this, you know, 1.1 billion type margin balance that we have versus the $110 billion in assets that we have here at the firm, I mean it is a very small percentage.

So I don't see that happening.

I do see, however, an effort to have a product manager that is in charge of trying to market margin loans for the purposes I mentioned as well as market, you know, -- the banking products and credit cards and all these other products that, you know, we now offer to clients to be able to combat the bank broker/dealer cross-market.

Okay, great.

Thank you very much.

At this time there are no further questions.

Well, thank you very much for attending.

I appreciate the depth of the questions.

We -- we will see you again next quarter.

I hope that results continue to have favorable comparisons and thank you very much for participating.

This concludes today's conference.

You may now disconnect.