雷蒙詹姆斯金融 (RJF) 2015 Q3 法說會逐字稿

Good morning, and welcome to the earnings call for Raymond James Financial fiscal third-quarter results. My name is Maria, and I will be your conference facilitator today. This call is being recorded and will be available on the Company's website. Now, I'll turn the call over to Paul Shoukry, Head of Investor Relations at Raymond James Financial.

Thanks, and good morning. Thank you for joining our fiscal third-quarter earnings call today. We do not take your time or interest in Raymond James Financial for granted. After I read the following disclosure, I will turn the call over to Paul Reilly, our 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 including information concerning future strategic objectives, business prospects, anticipated savings, financial results, industry or market conditions, demands for the products, acquisitions, anticipated results of litigation and regulatory development, or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, projects, forecasts, and future conditional verbs, such as will, may, could, should, and would, as well as any other statements that necessarily depends on future events are intended to identify forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Form 10-Qs, which are available on the SEC's website at SEC.gov.

With that, I'll turn the call over to Paul Reilly, CEO of Raymond James Financial.

Thanks, Paul. We're just back recently a few weeks ago from our summer development conference, which is our RJA employee advisor channel. Besides the great group of advisors, there were 700 kids in attendance under the age of 18 years old. If that's not a cultural differentiator from other firms, it's kind of a unique place, a unique culture, and just great people for training for the advisors and to see families together.

I want to start off with an overview of the quarter. First, I think we had a very solid quarter and that we are in great shape. It's really driven by a number of the key drivers that delivered this quarter and put us in good shape in the future. First is Private Client Group advisor. We reached 6,507 advisors, up from 123 over the preceding quarter, so that has to be near record recruiting for us in one quarter. We had growth in every advisor channel. More importantly than great recruiting, which we like to see, is the retention. We still have fantastic retention. It's the people that really choose to stay here that make the culture here at Raymond James. That recruiting and our advisors drove record assets under administration of just rounding to $0.5 trillion and assets under management of $70.2 billion. Loans at Raymond James Bank were essentially flat at $12.05 billion and very solid results there.

A quick overview of the financial results, is we had record quarterly net revenues of $1.32 billion, up 9% to last year's quarter and 3% sequentially. Quarterly we had net income of $133.2 million. It's up 9% from last year's quarter and17% sequentially. That quarter was our second best earnings quarter, just off from $3 million from our record -- that quarter where we had that record was an incredible investment banking quarter. I think we had solid results on the bottom line, which earned us $0.91 per diluted share, and we have an annualized ROE of 12%. Private Client Group, to get into the segments, had a record net revenue of $892.2 million, and up 9% from last year's quarter and 2% up sequentially. Quarterly pretax income was $86.4 million, up 6% over last year's quarter, 15% sequentially, and Private Client Group assets under administration, $475.4 billion is up 5% over last year's quarter. Our assets under fee-based accounts hit 39% of total client assets which really results in a 75% recurring revenue for this segment.

Capital Markets, quarterly net revenue of $233 million, flat from last year's quarter, and down 1% from the sequential quarter. Quarterly pretax profits of $18.3 million were off 35% from last year and 12% from the previous quarter. It's really a tale of two businesses. Fixed-income had a very good quarter as commissions were up, partly due to the volatility, and we have a great team in a very tough market. Public finance had a near record quarter. In fact, if we had not changed allocations in accounting since Morgan Keegan joined us, it would have been a record quarter for them, so very solid performance and very good backlog.

That was offset by the equity capital market's business, where there is headwinds. Over-the-desk commissions remain challenging this quarter, and also headwinds in our flagship practices of REITs and energy where the market has been tougher in terms of new issues. We've also made significant investments primarily in this quarter by adding bankers in our life science, financial services, energy, and government services practice. Just to put it in scale with 80 senior bankers, adding a dozen of them basically most of them this quarter is a big investment, but one where you get great people. You bring them on board.

Asset Management, the net revenues were $98.8 million, up 8% from last year, and 5% from the preceding quarter. Pretax was $31.6 million, and was up 1% from last year's quarter and 1% sequentially. The great results impacted by a successful closed-in fund distribution fee cost that impacted quarter, an investment, very, very good, and also highlighted by the acquisition of Cougar. We welcome the Cougar group and Dr. James Breech and his team to Raymond James. Because they have a [modulate] delivery program, their assets do not hit our financial assets under management, but a great group of people.

RJ Bank had record net revenues of $103.9 million, up 13% from last year's quarter and 1% sequentially. Pretax was $78 million, up 20% from last year's quarter and 9% sequentially. Total loans were down slightly, essentially flat. Both credit quality and our net income margins continue to improve, which Jeff will talk on. If you look at all of our business units, they all performed well, with the exception of a tough quarter for Equity Capital Markets. All are the drivers are in great shape, and I feel good about not only what they did this quarter, but where we are headed. With that I'm going to turn it over to Jeff.

Thanks, Paul. I'm just going to address some of the significant variances from the consensus model. First of all, I'll say there are fewer than normal which we view as a good thing. Either we had fewer surprises than normal or our covering analysts are getting very good at projections, and given the audience, I'll lean toward the latter. With respect to the revenue lines, except for the other revenue, virtually all revenue lines were within low-single digits of expectations. The other line as many of you have already pointed out in your comments really relates to the ARS gains that I mentioned at the Analyst Investor Day in May, as well as some P/E valuation gains slightly elevated. It's a little lower than last quarter, but higher than our normal quarters. Aside from that, revenues were all pretty much in line with expectations.

A couple more items in that on the expense side, I would characterize this quarter, on the expense side, generally as one of an above-average level of investment. A good portion of that was in people. We have seen 123 net FA increase. We've talked about that, as well as at least a dozen significant ECM hires year-to-date, most in the most recent quarter, coupled with we had higher commission revenues than projected. That increases comp. The commission growth in PCG came about [2.5 to 1], in favor of the independent contractor division, which elevates the payout level somewhat. All of that boils down to a comp ratio of about 68.2% for the quarter, a little bit above our 68% target. We are at 67.9% year-to-date. We are still running close to target in all of these periods, but this particular period, a little elevated as a lot of these people that we've hired obviously aren't yet producing the level of revenues that we expect in the future.

Another area of investment would be in IT. Unfortunately, that's not going to necessarily going to be an immediate revenue generator, particularly in some of the systems. There's a small spike this quarter related to some outsourced regulatory projects. When we have some of these projects that we think need to be done on a fairly timely basis, we don't necessarily want to add full-time headcount, and we don't have the bandwidth and sometimes even the expertise perhaps for some of the specialized regulatory projects in-house, so we outsource some of those projects. There's a couple million dollars related to consulting fees for outsourcing some of those projects that hit in this quarter. On a year-to-date basis though, the data communications expense is running right at $65 million a quarter which is right on top of where it was running in the prior year. On a year-to-date basis -- that one we told you is going to be lumpy over the course of the year, but on a year-to-date basis, it's still very much in line.

Another expense that I guess surprised a lot of people, ourselves included to some extent, is the loan-loss provision which is really the net of several items. Even though loans were flat for quarter versus the preceding quarter, the loan mix changed somewhat away from commercial industrial loans to securities based loans and mortgage loans which carry lower provisions. That was a net positive to the provision. Another net positive was the recovery that we talked about. You can see it in the press release at the end. The bank had a significant recovery in the quarter on a real estate loan that had been partially charged-off. That was a positive.

Then going in the other direction, we did get the SNC exam in the quarter, but it was a somewhat non-event. They reviewed 339 of our credits. They differed on 9 of them, 5 of them, they rated more harshly, 4 of them, they rated more softly then we did. As you know, we follow the practice of going with the lesser of the two in terms of ratings. It cost us a little under $2 million to the provision for the quarter. Some of those, by the way, were unfunded revolvers. Of the 5 they rated more harshly, 3 of those were unfunded revolvers. However the 2 that they rated more harshly plus a couple of other downgrades that we chose to make during the quarter, again I think we do a good job of trying to stay ahead of any potential problems. That's what led to the increase in criticized loans from the prior quarter, which was about the only negative stat I'd say in the bank's entire two pages of statistics there. Those downgrades we chose to make in the SNC exam results went the other way. When you net all of those things together, it came out to a net benefit of $3 million in the quarter.

In other expense, here's another investment that we've made. The only item of any consequence, there are lots of little items in that, as you can imagine other expense is a catch-all for anything that doesn't fit other places, but we did make some investments in some new products in Asset Management where again we expect to get some future Asset Management fees from. Tax rate was recalculated for the year to date, came to just under 37%, which required us to adjust it in this quarter down about 1% or 1.5% from where we had been running. It came in at 36% to get us to the correct year-to-date figure. Again, a number of items that impact that, we have steered towards 37% to 37.5% for the year. We are running pretty close to that on a year-to-date basis.

There was a slight jump in basic share count which is unusual in this quarter. That was really the result of some of the Morgan Keegan three-year RSU retention awards vesting in early April. The next and last tranche of those will be two years from this quarter, when some of the Capital Markets five-year retention awards vest. All that boils down to a pretax margin of 15.8% for the quarter, 15.3% year-to-date. It's above our 15% targets. ROE was 12% for the quarter, 11.5% for the year-to-date. We are running close to target. A couple other things that I'll mention just real quickly, net interest was a record, $109.4 million as the bank continues to grow. There are net interest margin stays at the level that it has been recently, at 3.09%. Cash balances really haven't increase that much. It's really been more of the bank generated and some spread that has led to that record. Lastly for those that didn't happen to see it, I know most of you did and made comments, we did file our stress test result in June which showed pretty strong capital ratios, even in stressed conditions, as I think most everyone expected them to show. Those are my comments on the things that varied from the consensus model. Paul?

Thanks Jeff. Before I turn it over to questions, I'd like to summarize first the Private Client Group business, from great recruiting, as I talked about before, more importantly the retention. With the record asset levels it bodes us well, and the recruiting momentum is still very solid. I wouldn't expect this number every quarter, but our pipeline is very good, and people are continuing to still visit the office. I'm still optimistic about future of recruiting.

In Capital Markets, we had a very solid backlog especially in public finance. The Equity Capital Markets backlog is good. I'd say it's exceptional in public finance right now. Of course, any time there's investment banking transactions, timing is always suspect of when the transactions happen, but I feel good about where we sit in that business also. Record assets under management, I think, will bode well for our Asset Management Group. The bank is, I think, in great shape and should continue to grow. We add loans where we have opportunities that meet our credit quality which we are very strict on. In quarters where we don't find them, we have payoffs. You don't see growth like this quarter but we're very, very comfortable with where the bank sits.

The [last time], I'm sure will come up. I will comment, its on the Department of Labor because there is so much press on it. I would say there was nothing new to report outside the Department of Labor has openly stated now in the last week that they are open to discussion and interpretation. I think there has been a lot of political and even regulatory, other agency pressure, saying the rules need to be modified. We will see what happens. The comment period is just closing. They will be some testimony. Hopefully, we will be in a place where there will be a modification where we are all very comfortable, which what I think is a good intent. But as published, it's not a very good way of achieving the result, especially since it would cut off access to advice to a lot of customers.

With that, I'll go ahead and turn it back to Maria to open up for questions.

(Operator Instructions)

Christian Bolu, Credit Suisse.

Firstly, on the fixed income business, the strength there was a clear positive and nicely outpaced what we've seen at the bigger banks. You've always said you have an [A team playing] in the D market. How would you describe the current environment? Is it C, B, A market? How sustainable is it?

I think for the quarter, you had a B market. You had enough volatility that people were doing things. Our platform is different from the big banks with our bank distribution channel and our muni origination business with public finance. This market certainly improved in terms of the volatility expectation, and commission volumes is just up. It's been up for a while and continues to stay up.

The trading profits have been about the same, but it has really been driven by increased commission volume. Our guys have stayed close to their clients, and I think when the opportunity came we got our fair share of more of the business. They are doing a good job, and I'm proud of what they accomplished.

That's helpful. Then just on the DOL proposal, I heard your comments earlier, but I just wanted to dig into two things you noted. In your [comment letter] that you filed about a week ago, one was the cost of compliance, and two was the impact of some product exclusions. My questions are, can you help us size or give us your framework for how you're thinking about compliance costs? Then two is, what is the revenue contribution of things like options, structured notes, and hedge funds to your business today? Thank you.

First on the latter, they are not a significant part of our product suite for clients. There is some high net worth clients. These are only affecting IRA accounts where typically those products aren't in, but they are in some. It's hard to estimate the impact especially when you have a rule that is not really written. Even if it passed as it is, the prohibited transaction exemption would have to be written. How it was written, the problem is, if you read the rule on face value, the disclosure and the estimating that you would have to do on every single product and how you disclosed it would take time from an IT perspective and be very costly.

We think there's much more cost-effective ways of displaying those types of fees which we already do in general terms, and we can get a lot more granular. Our clients see them, but what they are asking for is -- you'd have to be so precise, you'd be inaccurate on how all these costs and fees are allocated. That is the costly part. We have no idea until the final regulation is or what that cost would be, or frankly, if we could even afford to service some of the accounts where on the smaller accounts, frankly, where we don't really make money, we do them to service for clients, it may make them too costly or too risky to actually service. That's our concern with the rule as written.

That's helpful. Lastly for me, clearly the new advisor momentum is very strong. Help us think maybe how we should think about the economic contribution of these advisors coming on board. Is the productivity levels of these new guys you are bringing on board about the same or higher than the current average? How long does it take these advisors to ramp up to full productivity? Are there any additional costs we should be keeping in mind as the advisors ramp up?

Yes, I think in general they are slightly more productive. We certainly have some huge teams that are very productive. In terms of extra cost outside of [ACAT], to bring accounts in, there is not really a bunch of extra costs. There is certainly transition or depends where it is. If it is an independent advisor, we certainly don't have the real estate cost. If it is an employee, it depends if we are opening a new office or adding them to an existing office, where frankly, there is even more of an uplift if they're an existing office because we're leveraging existing costs in the real estate.

There is not unusual transition. We find that the advisors bring over their assets in about a year. It takes them a few months and then they get a lot of their assets, and the rest trickle in over the next year. Usually by two years out, they have more assets than they had when they joined us. What you see in the recruiting pipeline is really starting to impact the results because if they bring assets over as they bring their clients here, we get the growth. There's even a lag effect.

That's great. Then [comments] on the strong business momentum.

I'm sorry. We have great momentum. I don't know what to say. I tell our people, I think the culture that has been built by Tom and the team for many years now is paying off. We are in the right place at the right time. We have the technology and the products to support all advisors, and very high-end advisors have been joining us. We have a culture that they like. We're client centric and view our job is to help service and help the advisor, and very balanced in our approach on what's fair to clients, what's fair to the advisor, and what's fair to us.

Again, our existing advisors who have been here a long time are the ones that help us (technical difficulty) that culture and help us attract new advisors who [believe the same]. We are at the right place at the right time in this market. Momentum is very good right now.

I hear you. I was is congratulating you on that. Thanks, guys.

Hugh Miller, Macquarie.

I appreciate the color on the SNC review. I had a couple of other questions at the bank, one of which I guess, it looks like we have seen some softer economic conditions in Canada. Can you remind us the types of loans you are tending to extend there, and some detail on the comparison on the yields relative to the US loans, and what demand is looking like up in Canada for loans?

Hi, Hugh. It's Steve Raney. Good morning. Related to Canada, I would say the profile of the deals up there look very similar to the deals in the US with a couple of exceptions. I would say the structure of the C&I, the corporate loans up there, probably we don't see as many covenant light transactions. The banks tend to be more rigorous in terms of the structure, in terms of covenants. It's typically a little bit lower leverage, and actually slightly higher margins.

I would say the real estate transactions that we do up there look almost identical both to REITs and individual project finance business up there. I would say for the first six months of our fiscal year, things were a little bit slow up there. As you mentioned things have gotten a little bit soft. I think we've actually seen a pickup here. Recently our pipeline of deals in Canada has actually picked up over the last 60 days or so. Once again, I think it is a good counterbalance for us to have an opportunity to play in that market now, as a good counterbalance to everything else that we are involved in at the bank. We are very committed to Canada, and think that that's a good long-term business for us to be in.

Very helpful color. You obviously mentioned in the press release that C&I lending was a bit softer relative to some of the security based and other loans. You mentioned about the pipeline for Canada, looking like it was picking up a bit. Can you talk about in general the C&I loan pipeline and how that's trending recently?

Yes, I would say some of the reduction was self-imposed. We did see a higher runoff rate this last quarter. When I say self-imposed, there were deals that were repricing that we elected to exit. We just didn't think the risk return tradeoff was appropriate at the lower rates. We have actually seen an increase in our pipeline in our C&I domestic business as well here recently over the last 30 days or so. We continue to stay active in the space that we play in.

As Paul alluded to, on the higher end of the leverage spectrum in particular, we don't want to go down that path. To the extent that the market comes back to us, we will take advantage of this opportunity. We're pretty active in the secondary market, when we see higher-rated credits and better credits that the price comes down around par, maybe a little bit less. We take advantage of adding the positions on a selective basis as well. We can be pretty nimble in that way.

I would just say that relative to the pipeline that we've got in place today, even though we can never predict payoffs very accurately, I would anticipate a couple percentage point increase in the overall loan portfolio perhaps for the next quarter. It's dependent on a lot of things.

That's very helpful. Thank you. Paul, I guess you mentioned that the public finance backlog, you guys categorize it as exceptional. I was wondering that the feeling was that it is some opportunistic borrowing ahead of rates heading higher, or is it more a function of the economy likely getting stronger? Maybe municipalities are looking at doing more borrowing. Any thoughts there?

Probably a little of both. There's no doubt that any municipality has borrowing needs. The question is how is it going to pick up. A lot of the borrowing went to banks for a while just because it was quicker and cheaper to execute. We could do some for some very good credit that we like and clients we'll do some lending. There's just a pickup across the board right now. Maybe it's in anticipation of rates. I was looking at long-term financing, I would look to do something in this market. I think that is driving part of it.

Okay. Obviously, you guys had an exceptionally strong recruiting quarter. You did mention in the press release that you've seen very aggressive competition. We've certainly been hearing about that as well. I was wondering if you could give some comments about how that competition has changed over the last three to six months, and whether or not you guys are still sticking with your upfront recruiting packages? Have those changed at all? That would be great.

With our comments, we've had aggressive competition for a long time. This isn't a new phenomenon. For the last few years I would categorize that in the market. No, we've stuck to our packages. We have made no changes over the last year. We are very focused on making sure that it is a good economic deal to us. We're well aware we are lower than the Street.

In a way, it's a positive self selection criteria that people aren't coming here for the biggest check. They're coming here because they want to be here. It doesn't mean that we don't lose some teams we'd like to have because some of those checks are awfully big, but the people that like the culture and want to be prosperous over the long-term end up taking the deal and coming. We haven't made changes to that.

I would say it's a combination of technology and products that we are able to serve the high-end, even just an acknowledgment when you start landing a lot of these large teams. It's a signal to other people in the market to come in and ask, why did they come? What is Raymond James doing? Certainly recruiting momentum builds on itself. It is helping to tell our story.

Great color. Thank you.

Devin Ryan, JMP Securities.

At the recent Investor Day, you spoke to looking at expanding the advisory business in the UK, potentially through acquisitions or something that looks like Lane Berry in the US. I am just curious to get an update on this front. Are you still having dialogue there and thoughts around growing advisory in the UK?

We want to grow advisory in the UK. We haven't found anything that meets our culture first, price and integration criteria. We found some cultural fits, but not anything that we believe is attractive, so we stay close, like we do to firms here that we think fit Raymond James. It would be a great home for them, but we're just not willing to do things at a price that we think isn't a good return for shareholders.

I am sure short-term, the results look good but we treat the money like it's our money. We are shareholders. We haven't found that opportunity. We haven't done anything. We still have been pursuing some M&A firm opportunity in the UK and Europe, and that continues to be one of our strategic initiatives to grow our cross-border M&A business. That's stayed on our radar.

We're actively talking to a lot of firms, but we're just slow in doing something. This isn't about a short-term fit. It's about a long-term addition to the team that will help us to continue to grow the business. We will continue to be aggressive in looking, but very deliberate on executing.

Thanks for the update. Then maybe bigger picture on capital deployment, all of the ratios continue to build during the quarter. Obviously, you're looking at acquisitions. I understand that maybe there is some level that's [pegged] for that. Then you also believe in a strong liquidity position just for financial advisors. Is there any more discussion or contemplation around maybe moving some of the off-balance sheet customer cash into the bank to increase earnings? I know I've asked about this before, but I'm just trying to think about other ways to drive some incremental returns with a building capital position.

We look at all sorts of things. There's no doubt that we could put cash in the bank and grow it off its capital base. We don't really go out on securities. We can take securities positions that are a little longer to get income. We could do that in the holding company or in the bank. There's lots of things we could do. We could not hedge a lot of our rate risk which we do that cost us money. Frankly, we're just not going to take those risks. We tell our clients not to take a lot of rate risks. We just don't do it here at Raymond James either.

Yes, there's lots we could do, and we would look good for a while. We could cross our fingers and hope that we look good long-term, but we are more focused on the long-term execution not taking those kinds of risks. I'm not saying they are bad risks. Other people do them but it's just not in our nature. What you see is what you get here. We also know we can grow the bank. It's frustrating as we tried to hit double digit to be just under double digits, and we know we can do it. The bank could grow, but we are sticking to our discipline on loans, and we're sticking to our discipline on capital allocation for the bank.

I remind people that our executive team, that half of their restricted stock which is taken out of their bonuses every year is tied to ROE. We are as focused on ROE as you are, but we are more focused on that long-term return. We watch capital, discuss it every board meeting. We recognize that we do have some excess capital balances. We are not dismissing it. I'm sure we'll be discussing it in our November board meeting, but there's really no update on it.

With respect to liquidity, I'll just remind you that we do have a $250 million note issue that matures in April of 2016, and then a year after that in March of 2017, we have got the ability to call our 6.9% $350 million debt issue out there. Those are on the horizon as potential uses of liquidity.

Okay. I appreciate all the color. Lastly for me, for Steve, with respect to the net interest margin, should we maybe think that there was some upward pressure heading out of the quarter? I'm just trying to think about the go-forward on the NIM with all of the moving parts there. Then, there's a little bit of a tick up in criticized loans. I am just curious if there's any specific sector that drove that, or what is behind that?

Good morning. I would say there is pressure on them. We are trying to be disciplined, as I mentioned, in terms of the new loans that we are adding on. I think that there's likelihood that will see some nominal, small reduction in net interest margin over the next couple of quarters, but nothing too meaningful.

I would say on the criticized loan front that Jeff alluded to, there was no real sector. There were three loans, two of which were part of the downgrades in the Shared National Credit exam process, and one other term loan that we downgraded ourself during the quarter into criticized status. None of that was in any one industry. It was all over the board. There was a consumer-products company. There was a data center. It was all over the board.

Again, I think our [credit efforts] are very strong. You can look at the absolutes and the movements of it, what I call rounding. You move a loan into the category and it has a material percentage impact because really, the number's not that big to start with.

We were very encouraged by our nonperforming assets coming down. As Jeff mention before, we had a large real estate loan that we had actually partially written down that we actually got a full recovery on during the quarter, a full payoff that was a material improvement. We feel good about our asset quality still.

Yes. Nice quarter in the bank. I appreciate you taking the questions, and I'll talk to you guys soon.

Jim Mitchell, Buckingham Research.

I just wanted to maybe talk a little bit expenses, the comp ratio, if you exclude auction rate security gains, which I wouldn't think you would payout comp on. I would think the comp ratio in private equities also was a bit little lighter than what it is in the rest of the organization. It seems like you're probably closer to 69% comp ratio which would be one of your highest ratios in a few years. I'm just trying to get a sense. Obviously it's a great recruiting quarter. If recruiting continues at this pace, can you get that back to your target of 68%, or should we expect some elevated comp ratios for a little while until the growth offsets it?

I don't see a fundamental change. In this quarter, to the extent that we get heavy recruiting in the independent channel, it's going to drive that ratio. We certainly had elevated comp ratios in the equity capital markets because of the hiring and probably a little bit of the under performance in terms of growth in revenue and challenge over-the-desk commissions.

Hopefully, we'll see a continued drag from PCG recruiting because we would like to keep recruiting at a high level, even if it is a drag on current earnings. It certainly strengthens the platform for the next leg of the market. That happened even in 2009 when we were making significant investment in people, in that market environment. I hope that continues. You are right, it is a current drag on earnings. I doubt we'll see this level of hiring in equity capital markets recur, so that one is a matter of waiting for the people that we've hired to be productive.

The irony is when you grow organically, whether it's private client or capital markets, it has a short-term drag. You do acquisitions, you may have some costs in a quarter but the drag comes off. The same of the bank, we grow a loan portfolio we have the provision expense. We do have some short-term hits when we have high growth in one of the segments. I think that's most of the impact you're seeing this quarter.

Absolutely. I appreciate the color. Just maybe on the non-comp side, forgive me if I missed this, but I think last quarter we talked about communication and info processing was elevated as you accelerated some advertising. It was up even more this quarter. I think you highlighted some regulatory spending. I think you were assuming longer term closer to low to mid $60 million versus upper $60 million. Is that still a good run rate going forward, or is it going to remain elevated?

I think that current run rate is probably about right on for the year-to-date, in the probably maybe mid $60 million. By the way, the advertising and all was in business development expense, not in IT.

Okay, sorry.

If you look to the three quarters, we are right at $65 million. I think we've been guiding the quarterly run rate. This one was a little higher, but we think that run rate is a reasonable run rate.

Okay, thanks for taking my questions.

Joel Jeffrey, KBW.

I apologize if I missed this earlier, but I do want to follow up on the question of the comp expense. Jeff, did you say earlier that the commission revenue was primarily driven by independent contractor activity in that (inaudible) of the comp mix?

The increase in the quarter, in the PCG commissions, was about 2.5 to 1. It's about 11 point something in contractor versus 4 point something in the employee division which obviously drives higher comp associated with it. I think about an 80% payout versus a 50% type payout in the employees channel.

Is this something that could continue and be a bit of the headwind on comp, or is that type of something more one time?

Yes, they both had pretty good recruiting results. I'd say it may in the short run. Longer term, as people become productive, my guess is it will be about where it is because they are both recruiting at about the same rate right now. This particular quarter just had an abnormal imbalance.

I hope we continue the recruiting rate at the cost of that quarter's earnings. What we accomplished this quarter was an anomaly, not in terms of recruiting, but we had a lot of people come in one quarter.

Great. Thanks for taking my question.

(Operator Instructions)

Chris Harris, Wells Fargo.

A quick question on Department of Labor, I believe you guys and many, many others in the industry are fairly supportive of a uniform fiduciary standard as opposed to the bifurcated approach we have got now with the DOL on one side and the SEC on the other. I get it that having the uniform standard would really solve the interagency regulatory conflicts and reduce complexity. I'm also just wondering if you did have something like that, would it not really force the majority of your customers in the industry into the fee model as opposed to commission?

I'm just trying to square those two. Obviously, advantages in one hand, but on the other it might be disruptive if uniform fiduciary ends up driving a lot more people into the fee model.

We have always been, and I think our industry has (inaudible), we've always been, what's in the best interest of client? Whether you call it the client's best interest standard or fiduciary model, whatever, our job is to do good work for the clients, period. Being held to that standard is nothing. We think we are held to it now. Whether it is commission or fee-based depends. Someone has an IRA and they want to buy some Apple stock or some Walmart stock, and leave it there for five years, why should they be charged an asset management fee? They can go fee-based, but why should they pay every year for five years when they have a long-term hold asset?

Commission certainly has its place in compensation. I think what's more important is the clients' interest is put first and it's fully disclosed how they are being paid, and why they are doing things. I think there's oversimplification that fee is good and commission is bad. We went through a Madoff incident, and he was fee based. I think oversimplification of what is in the best interest of the client. That's what we're fighting. We are fighting for client choice.

Frankly, for economics, commission is good for a lot of accounts. The [equity] could be abused. So can fee be abused. You need to have good advisors that are looking after their clients.

Understood. Thank you.

I am showing no further questions at this time. I'll now turn the floor back over to Management for any additional or closing remarks.

All right, guys. I know there's a lot of earnings coming out last week and this week. Thanks for your thoughtful questions and your following us. I hope we can answer all your questions. I just characterize, I feel very good about the quarter, especially when you look at the key driver of assets, advisors, and the investments we are making.

I know sometimes quarter to quarter it is choppy, and that you have to look at sequential quarters, but if you look at the year as a whole, I think we are right on in expense. If you look at what is driving us forward, given any reasonable market going forward, I think we're in great shape. Thanks for joining the call. We'll talk to you soon.

Thank you. This concludes today's quarterly call. You may now disconnect, and have a wonderful day.