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

Good morning, everyone. Let's get started. This is Craig Siegenthaler from Credit Suisse, and it's my pleasure to introduce Raymond James' Chairman and CEO, Paul Reilly. We are also fortunate to have the firm's Chief Financial Officer, Paul Shoukry, joining us as well. Thank you both, guys.

Great.

Thank you.

So Paul Reilly has been a member of the Board since 2006 and joined the management team as CEO in 2009. Prior to Raymond James, Paul Reilly was the Executive Chairman of Korn Ferry, and also CEO at KPMG International. Before we begin the fireside, I just want to provide a quick background on Raymond James. The firm was founded in 1962. It went public in 1983, and Raymond James now manages more than 1 trillion of client assets. The firm has also been profitable for 132 consecutive quarters, which really illustrates the defensive qualities and the diversification of its business model plus strong risk management.

So let's begin. The U.S. wealth management industry experienced a strong migration to independent advice, and this has clearly benefited Raymond James. What inning do you think we're in, in this migration?

First, Craig, thanks. It's great being together. I wish we're in kind of in person in South Florida. I guess we have the advantage of being in Florida, so at least we get the weather part. But it would be great to see you all personally. Yes, so we've been kind of taking a stance in our industry a long time ago. So we wanted to provide a platform for any method an adviser feels like they want to run their business. So very early on, we were pioneers in the independent channels. We grew many, many years ago when we found having that employee an independent channel was important, as advisers may have changed how they wanted to operate their businesses. And also added an RIA channel and spent a lot of time over the last decade really investing in that. And again it was less in the news than it is today, but again allowing that path of independence. So we think all the channels are still important. There are a lot of people that love the employee channel. They like coming into an office that's supplied to them, having everything in place, and they can just focus 100% on their clients. There are others that want to be -- have their own firm, their own real estate, their own employees, yet still have all the advantages of the platform. And the RIA channel is probably the third channel of independents, but with that comes a lot of extra costs and responsibilities including supervision, including cybersecurity and systems and other things that are provided in the independent channel. So it's a choice of advisers to go through that kind of where do they feel more comfortable. So the movement to independent -- towards independents has been a trend, but there's still plenty of people and we continue to grow our employee channel. So I don't know where it ends up. It's for an adviser generally, the more independent channels in both markets, they're probably a little more profitable. But in down markets where you have all your overhead and all your expenses, they're less profitable. So we try to structure ourselves so we're indifferent and that the adviser can practice where they want to. And we believe over cycles that all the channels are contributors to the company as long as we keep the advisers, and that's the goal.

Got it. You guys put out a January report last night. And after reading it, it sounded like you're really not seeing any slowdown in either recruiting or retention from the strong trajectory last year. What is driving this resilience?

I think it's a number of things. I think that at the year-end, I mean at the quarter report, we gave some caution on recruiting was being more competitive. It was really in one channel. Our independent recruiting was extremely strong, our financial institution division, our RIA. We found a slowdown a little bit in the employee channel, still good recruiting and retention being excellent. And we give that, the retention really to our culture of being adviser focused of really helping advisers grow their business and being friendly; and offering, we think, from an adviser's standpoint, the best adviser desktop in the industry. So that's continued to help us with -- and great service, right? So that's really helped us with retention. The slowdown on the employee -- on the adviser count was really due to a number of reasons, which are complex. First of all, during COVID there was a natural slowdown in March everywhere. But the independent channels rebounded very quickly because they have their own office. They can control their own office. So the switching and having an office to go to that they manage was much easier, and we found that momentum pick up very quickly. On the employee channel where we had our offices closed in early part of COVID-19, March, April, May because we didn't know what the risks were, it was a lot harder for employees to come over. They didn't have an office that was open to come to. One of the things that we really sell is our culture. And we acquired people to come into the home office and meet the people to see how really adviser-centric and how helpful and friendly and how they really cared about the business. Well, we lost that opportunity during COVID because we don't -- we're not putting outside visitors into our home office. So... And then the third factor as it was returning is we realized that a lot of the other institutions increased their transition assistance significantly, that we -- we've always been below market, that we always prided ourselves of that in recruiting saying, "We're below everyone else. But long term you're going to be happier here. It's a better fit, and we believe we're the right platform to grow your business." As many other competitors, not all but many, significantly increased their transition assistance, the delta got to be too big where the check was twice as big to go somewhere else than us. And so as we looked at it very carefully. And this -- if you look at you say interest spreads are down, why would people do that? But when we looked at our rates of return, we felt we could increase 20% to 30% our transition assistance and still be under the market significantly; but close enough where people still had the same delta that they might have gotten a bigger check somewhere else, but it was worth the trade-off. And when we ran the IRRs even with today's interest rate spreads, they were still mid-teens-plus. And if interest rates come back and the gap comes back, it will be a better return. So we did increase it, and we've already seen a quick response. So we think that part will correct itself. That's been here over a decade, we've had higher or lower quarters, but our recruiting has always been strong and recovered. The other parts of the numbers are a little more complex. We canceled 2 of our training classes because in a COVID environment, we felt we had to really spend time -- more time with those advisers online to help them in a real tough environment. And those have been -- the results have been very good. So I think we're comfortable getting ready to up those classes again. And third is we did at year-end have some people move to the RIA channel. So for the people that wanted to go to RIA, that's fine. We're glad they came with us instead of going to competitors. But in our adviser count, we don't count advisers in our RIA channel. We just count assets. So a Schwab or Fidelity would report assets, not advisers because you have firms that you're a custodian of. So if a firm that had 5 advisers goes from employer or independent to the RIA channel, we don't count those 5 advisers anymore. So honestly I think the recruiting results were better than the numbers indicated. Traditionally, last quarter end is when people retire, and we have kind of a low point. Last year was an anomaly. The year before, you'd see it was pretty flat too. But recruiting is doing really, really well. Retention is doing really, really well. It's more competitive, but it's always been competitive. I think we're well positioned.

So sticking again with recruiting, Paul, focusing on the wirehouses and the big banks. Have you seen a pickup in competition from the big banks, from the wirehouses?

Not really. I think on the high -- very, very high end teams is where most of them have chosen to try to compete, which we compete into. It's hard to say because the changes have been so much. We had a couple of them that said they were stopping outside recruiting a little over a year ago, and they're recruiting again. So they're following their strategy and what's best for them. And certainly they are a viable option for advisers. But we like our position and the advisers we bring in. And there are competitors, no doubt. But I think all in all, we're still doing very, very well. And we've been on a -- even if this year isn't a record and last year is a little below 19, you still look at the run rate, it's been very, very good for us. So we're really happy with our recruiting. And we've always had competitors. And some people are more aggressive in 2- to 3-year periods and they drop back, or vice versa. But we've continued to grow advisers and bring on new advisers. So competition is always there. So it's hard to benchmark is it more competitive than less. Maybe you could say it by the month. Or if you lose a deal, you think it's more competitive that day. But I think it's similar.

So Paul, if you're not seeing a real pickup in competition from banks, what about other independent broker-dealers, large, midsize, public, private or even regional firms? Do you see any pickup from these segments?

There are a number of regional firms that have upped their deals too. And there's certainly -- there's some quality in high-quality regional firms. So there's competition all over. You're seeing RIA aggregators buy firms at very high prices compared to any benchmark we would have. There, competition now, right now interest rates, debt and equity are both available and cheap. So I don't know how long that trends. So there's certainly lots of competition, but again there's always been lots of competition. So I think we're good at recruiting and retaining advisers when we get them here. And it's going to be competitive. It's always been competitive, right? Is it a little -- are there more indifferent channels right now? Probably. But there's more advisers in motion too. So then our average recruit size keeps going up too. So even if the count goes down a little bit, the assets, and they are coming over, and the trailing 12s continues to be very, very robust.

It's good to hear. Let's pivot away from recruiting for a moment. Let's move into technology. And we've seen a lot of acceleration in adoption, especially last year with working from home and COVID. But as you evaluate kind of upgrading and adding new capabilities, how do you evaluate options to buy, rent, or even maybe build some capabilities internally?

Yes. So we do all of the above. We use outside third-party softwares that we think are best in class and they're better to rent or partner than to build. And we also have a very big proprietary platform that we believe that our proprietary systems are best in class. So we've been on a -- we are lucky on COVID in some ways. And for a different reason, we were already mobile. So 4 years ago, we rolled out and got [ out word ] for our advisers to be able to do everything on this device that they could do from their office. And no one had that. And why? We were doing all our investment on the adviser desktop, right, that where a lot of people were going to the end client. We've always said advisers are our clients, and we don't want them disadvantaged. And looking at the makeup of our clients, the wealth clients, we needed to arm the adviser with every tool they could grow the business and communicate with their clients. So when COVID hit, we were already mobile. We already had Zoom. It's as a standard offering with our own security around it. What it did was that accelerate the adoption of that and e-signature and a lot of other things. But we had them all in place and people trained on them. So as we go forward, what have we've been doing? We've been rolling out now the in client app to be competitive with I call it robo-like. We're not competing with the direct-to-retail robo. That's not our business. We're in the advice business. But to have that same connectivity with the adviser on their accounts, people be able to do things, see things, communicate with their adviser. And we could even turn on online trading on the app if we wanted to. We haven't made that decision yet, but again we would go through the adviser. So we continue to roll out those types of technologies. They've been very successful. And you never have the lead forever, but I think our desktop for wealth managers are second to none right now. And -- but time tells you got to stay competitive. You got to be smart. We have to focus. We can have -- big banks may use blockchain to figure out how they instantaneously do a wire across the world. We don't have to worry about those kind of technologies. That's not our business. Our business is to making sure that wealth platform for the adviser and that connection to the client, it is the best for that part of the business, because that's where we compete. And we view that still our market going forward, even though I'm sure that the clients will be -- and the client app will expand to continue and allow them to do more and more. But we're still an advice firm, and we're betting on advice.

Paul, sticking with technology, and I wanted -- you said something on robo and digital. So I wanted to hear what has been the feedback from your financial advisers in terms of maybe using robo digital technologies to help them with asset allocation, tax loss harvesting, these sort of tools? And are you seeing some adoption there? And alternatively are you seeing another subset of your advisers pushing back on that, on those sort of capabilities?

Yes. And the advisers aren't all homogenous, right? We at Raymond James don't push everybody into a box, the advisers. As long as they have a high-quality business and they're helping clients, they have some freedom. So we don't force everyone to use all the platforms. So if people want to use our rebalancing product to rebalance, that's fine. If they don't and they're doing it on their own or using even independents, some of their own third-party technologies to do that, that's fine also. So what we do is we roll out the technologies and educate them on how they can use it, how it can benefit them and benefit their clients. And hopefully take the burden off the advisers, so they can spend more time with their existing clients and signing up new clients. So the adoption you can say often for newer advisers is probably higher. But there's a lot of people who have been in this business a long time. I remember our top adviser has been here, #1 adviser in the independent for a long time. And he is one of the top innovators in technology, both in ours and his. So you can't put it in an age bracket, right? It's a propensity to want to use those types of things. But there are some people with client bases that are very specific that those tools really don't make a big difference to their practice, and they're probably slower in adopting. So we roll them out. We educate people on how to use them. And hopefully offer both that high-quality and the tool availability to help them grow their practice and use those tools.