Raymond James Financial, Inc. (RJF) Earnings Call Transcript & Summary

So we've definitely seen a pickup in M&A for some adjacent verticals for you guys. But what does the Schwab-Ameritrade, what does the Morgan Stanley-E*TRADE mergers mean to you guys?

So I think that they're interesting moves and some big bets. The -- I think the Schwab-Ameritrade deal -- take Schwab, who's already the kind of the 900-pound gorilla in the RIA custody platform, and makes them a little larger. I think any time there's disruption, there's always opportunity. So I think we and others will be going after the RIAs, especially from the E*TRADE side and some of the Schwab things as changes are made. So it certainly will be, I think shorter term, any time there's disruption, an opportunity. And I use the analogy that when we acquired Alex. Brown, when they joined us from Deutsche Bank, 2 years later we were able to report we had 90% of the advisers. I really think we did a world-class job of integrating them. One other firm went to a competitor. A year later, they announced they had 40% of the advisers. And the third sale went to another competitor. They never announced because they know it was well south of 40%. So even when you do it perfectly, there's still 10% of the advisers in play. If you do a fair job, 60 -- 50% will at least listen to the story. So that's the opportunity, shorter term, with that. And so as -- E*TRADE, I'm not sure of the consequence. I think the corporate part of E*TRADE fit really well with Morgan Stanley's Solium bet on where they were focused. How they're going to use the E*TRADE part in their business to go direct. And you got to remember these self-directed platforms are generally people with less than $0.5 million of investable assets. Robo is less than $100,000 in investable assets. They're in a different place than their advisers. And I can tell you at another one of the firms who has their direct channel, it's actually -- and they put it out against their advisers, it helps people come to us. They've been one of our top firms in recruiting because they hate that they feel like they're competing with their firm for clients if it's direct. So if they use it indirect, I'm not sure how they'll use it. We'll see. I'm sure they're smart folks. They've got a plan. I just don't know that yet. So it depends how they use it, but I think the impact is that we're not worrying about that part of the business right now, so...

So we've seen 3 large transactions in about 3 months in both the broker and also the asset management vertical where you guys also play. What is your view on long-term industry consolidation? And also, what type of a role do you think M&A will play in the future? And this is more of an industry comment, then we can bring it more company specific.

I think that certainly, in this industry, as costs become under pressure, scale is always important. So I think some of those are our scale plays. You can certainly -- I think Schwab announced they're going to take a few hundred million out. Franklin announced they think they can take a few hundred million out of costs. And there you have 2 good reputational asset management firms and you're in the large-cap active space predominantly. It's a tough business. So I think scale is going to help them and help them diversify. So I think those plays are driven by that. The other is you would say markets at Goldman or E*TRADE are more strategic where that comes into our market. Market is a cash-raising vehicle. But today -- initially, it was making almost subprime loans to lower-income people was the asset side now. That may be able to adapt to a much broader market with their pool. We'll see. I'm not sure what -- exactly what their strategy is, and I think they're experimenting. So all these are interesting. There are long-term bets, but we feel pretty comfortable that in our space, as the -- we set out a goal 10 years ago. We called it to be the premier alternative to Wall Street. And that wasn't to say negative things about Wall Street, it was to say, we wanted to have a firm that felt like a small regional firm. You had all the products and services. So the technology, the banking products or things that advisers want for their clients that we could compete head on with them. And now that I think we're -- we have that positional space, it's -- where do we go from here? And it's much more complex as the big banks and JPMorgan announced they want to come down market. It's more complex than Schwab, Fidelities of the world, and the RIA space has gotten bigger. It's more complex that -- you have fintech firms that have apps that can compete, not maybe with the management but with certain asset classes. And you always wonder what the Amazons, Googles and Apples of the world are going to do in the space because they clearly don't want to be regulated, but how much are they going to come in at least short term? So it's an interesting and fascinating space, which makes it fun. The regulations got much more complex. It makes it less fun, but it's just kind of part of the business. And I think it's still an opportunity to define their niche like we did 10 years ago. We just spent 4 days with the Board redefining what the next 10 years look like for us. And I'm excited about the opportunity and less excited about all the work, but we'll have to do this in a very competitive business with a lot of well-capitalized, smart competitors.

And then bringing that topic down to sort of Raymond James specific. When I think of what you guys have said historically, transaction should be strategic, they should be financially accretive, but they should be transactions that make you better and not bigger. Maybe just update us to your priorities and walk us through the different businesses where you may be interested.

Yes. So I think that historically, we've always looked at transactions. Again, if you do something to get bigger, it may not really fit your culture in your business. Then you're bigger, then to grow you've got to do more. And so we've really focused on strategic businesses. Morgan Keegan a few years ago not only gave us a lot of great advisers and scale, it really made us a top 10 underwriter in the public finance business for the last -- since we've had -- we were 24th before. We've been 8 to 10 since. So we really -- our quality and our ability to deliver is way up. Our new muni business has made money every year, sometimes 30% margins, sometimes a few points depending on the market, but it's been a great business. We made and lost money before they were there in that business. So it really made us better. Alex. Brown, we had ultra and the high-net-worth clients, but we never really understood how to package and put those products and services together, how to use the bank in a conservative way. We were surprised how much extremely wealthy people borrow. But if you look at their balance sheet and their cash flow, maybe they had $1 billion of 0-based -- on a 0-basis of stock and it was liquid. Who wouldn't make a loan against that, right? They just didn't want the tax consequences part of their estate planning. So they've made us better. They really have helped us focus and helped us recruit other ultra-high-net-worth people. So as we go up, our core business is Private Client Group. We like things with our culture. Most of the firms that are a good fit have been private and not for sale. Some look like they were more for sale, and then as regulatory came, DOL. But then as interest rate spreads widened and the market was going up, everyone -- I mean, you couldn't be in our business. If you didn't make money in the last 5 years, you're in trouble in our business. So spreads have come in now. And if this is a market correction, I don't know if this is a flu or a major disease going on right now in terms of what's happening in the stock market. But if the market does correct, it's hard if you're subscale to invest in technology and the tools you need today. So we stay close to them. We're hoping, if they ever sell, that will go through a sale, that we'll be the only call. We're certainly right up there at the top calls, and we stay close. And that's both in -- that's in the U.S., Canada and in the U.K. So we've been focused on those relationships. The next is M&A. Our M&A business has grown tremendously. We bought...

Lane Berry.

Pardon?

Lane Berry.

Lane Berry, I'm sorry, I lost the name. I said it 10 times today [indiscernible] -- in '09. Today, not only is our Head of Equity Capital Markets from there, 2 of our 3 top producers by a wide margin in the firm came from there. So we are -- we've looked in the last 2 years at M&A firms that we felt that they were for sale at a peak cycle, at peak multiples and it's a cyclical business. So as much as we wanted them, we didn't transact. And those firms haven't transacted. So we're hoping during more normal times, that we'll get what we think is better long-term pricing.

And just maybe coming from the last comment made in terms of the -- is this a correction? There's just more conversations going on today about maybe what's the downside of the market here. Is there a potential for a bear market? How is Raymond James prepared for the next bear market, especially if we could have interest rates close to 0?

So it's certainly not going to be fun. I mean we all make less money in low interest rates market, but we lived that. People forget it was only 3 years ago when we weren't making much money off the cash. So we're prepared this way, is that we -- we've been clear on our call not only are we well capitalized, we're overcapitalized even by our conservative nature. So we've committed to buy back dilution irregardless and be more aggressive on opportunistic purchases. Even with that, we're well capitalized for acquisitions. We stay very liquid. And so in downturns, we have the ability to do things, to move. Our cost structure, most of our comp from our producers is all revenue-based, and some of it is an upwardly scaling grid. So if it falls down, it even cuts back more. We have very low comp. If you look at our 10-K, I'm the highest paid -- have the highest salary of $500,000, Executive Committee at $300,000 and most of the people $200,000 or less. Why? We want the flexibility in bonuses. We haven't been afraid to say we'll pay you very well in good markets and down markets. We'll cut the bonuses way back and have cut them to 0, and that leaves more comp flexibility. And we manage our costs. We're not afraid to -- we can look at conferences, trips, travel and all those types of things you do in a downturn. We have a balance sheet that's very flexible. So on the downside, we lose some interest rate flexibility. Some firms have locked in. I remember the firms that locked in, in '09 and it cost them the firm. So our view is we're going to stay flexible and liquid. And even if we earned a little less money because we didn't lock in more rates, we know we'll be flexible and be able to take advantage of things in downturns that we had. Our worst year since being public was '09. We had a 7.9% ROE, but we made money every quarter. So I think that, that same underlying discipline and underlying financials are still here with the firm. So '09 was our best recruiting year ever in terms of number of people. Last 2 years were better on total assets recruited, but the market was a lot higher, too, so...

Got it. At that point, I just want to see if there's any questions in the audience. Please raise your hand. We got one in the front.

How is your business positioned for the ESG opportunity in both your Asset Management and Capital Markets segments?

So we have a person full time on ESG, and I actually think we're catching up fast. We've operated -- if you look at both from our charitable, environmental, all the things we do very well, we were just late in packaging kind of our internal story. But today, if you look at Carillon Tower, almost all the managers have ESG filters on. I really believe, if you look at Europe, I think 76% of assets go through ESG filters. We're only 20-something here. And I think the world is just heading that way. Certainly, it's important even recruiting younger people today. So I think we're well positioned in a market that I think is going to be hard to individually stand out in. I wish I had our lead director's company, American Water. They are certified -- they're -- I think Davos put them in the top 100 ESG firms in the world, and they had 30% premium in the water business -- 30% multiples in the water business. And if you look at why a lot of their investors are European ESG investors, it's hard to find a clean utility, right? And it's very well run by Susan Story, like [indiscernible] and taking nothing away from Susan, who's retiring here in April. But -- so I do think ESG can both have an impact on -- even if it's a smaller pool of money, but it has to be in ESG, if you're compliant, you're going to get a premium for that. And it's the right thing to do anyways for us all to take a look at what we're doing and our investments are doing on the economy. We are committed to investor choice. Some don't care. Some say, I don't want any screens. Just give me the highest returns. Some say that's important to me, and you have to be able to customize for that.

I just have one more up here. What is your strategy in asset management now following the integration of Scout and Reams acquisition?

Well, I think our strategy has been we're never going to be a competitive large-cap active manager. And when BlackRock thinks they're not quite at scale, it's hard to imagine us getting to scale. So we've stayed in the alternatives part of the index space, Scout and Reams, which is great because they've added fixed-income products. We've looked at alternative types of managers to add to that platform, came close to doing a few things. But again, pricing -- there's a pricing gap to us. So that's where we'll invest. But it's a -- our primary business is still the Private Client Group. That's our #1 focus. But as we've been able to ask -- add good people and portfolio managers into that segment of Carillon Tower, we will continue to do it when we can.

One last follow-up on that. How do you define alternatives?

That's true. You can define them any way you want. So I would say for us, it's hard to index products and services, so...

Not necessarily private equity, [indiscernible]?

No. No. It could be credit or it could be real estate. It could be things that are just harder to index than certainly the Russell 500 or something in it, so...

With that, we are out of time. Paul, thank you so much for attending.

Okay. Thank you.

Thanks Paul. Thank you very much.