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

Good morning, everybody. My name is Bill Katz. I cover the asset managers and the retail brokers for Credit Suisse. I'd like to thank everybody for coming out to the 24th Annual Conference here. On behalf of the firm, I'm excited to have the management team from Raymond James here today. So first of all, thank you, gentlemen, for coming in today. With us is Mr. Paul Reilly, who is the Chairman and Chief Executive Officer; and also Paul Shoukry, who is the firm's CFO; and in the audience is Kristie Waugh. So thank you for making the trip as well. And with that, I'd like to get started. And thank you again for making the trip. And I'm glad you brought the weather with you from St. Pete as well.

And maybe big picture first. I think you guys have done a very good job of executing, building out the platform over cycles. You've talked many times about the consistency and persistency of the footprint. It's very well diversified. You built a strong wealth management business. You have a strong banking business. You've been successful at building out the Capital Markets business and have a sort of a comment asset management footprint underneath that as well. As you look out over the next several years, 1 or 3 years, if you will, how do you see the model evolving?

I really think it's more of the same for a Private Client Group business that certainly drops, they can leave at any time. We tell them they're their clients, and we'll help them move as they're unhappy. So certainly, that makes it easier to grow when people aren't leaving. And secondly, is the leading recruiting in our space year after year after year. The biggest part of that channel is Wall Street banks but others. And having our 3 divisions are employee independent and RIA division certainly helps advisers no matter how they want to affiliate have a platform for doing that. So that's been very successful at keeping people if they want to change their business model, they don't have to go anywhere. So we see that as a cornerstone of the business. We're open to acquisitions, but there aren't a lot of companies that fit our culture in our space that are still independent. There's a handful of very good ones and they're private and not for sale. But if that changes, we certainly be interested. We've continued to grow the capital markets part of the business. Our fixed income franchise for the non-Wall Street firms has really been a leader. We've added to it this year. The one segment we weren't in or corporates when we acquired SumRidge, who has great computer-assisted trading capability, which we hope to use that platform and expand it to the rest of our fixed income business. The biggest growth area, probably in the last couple of years has been what we've done in investment banking really in the M&A space. Of course, isn't maybe the greatest time to be in M&A right now, but we've built a great team and continue to grow that. But I think overall, you may -- we hope to grow them all. So I don't think the mix change changes very much unless we find something unusual. We think we can grow in all of our businesses, including the asset management segment, but it's -- we're still on the same course.

Great. And that is my next question. It seems like you have a very strong focused strategy. But as you survey the business model and maybe look at how the business itself is migrating, any other businesses that you think you might be interested in terms of adjacencies that make sense. Obviously, you've been building out your non-U.S. footprint a little bit either in sort of Canada or into the U.K. As you think about that, is there anything else that you say, do I like to really try and get a little bit here?

We keep looking for those great perfect adjacencies that makes sense that we can grow and be competitive, and they're just really hard to find. And if you get into most of them, you'd have to do something of reasonable size so that you have a good up and running footprint. So we always ask ourselves that question. We always explore our competitive universe, we explore other opportunities, but we haven't really come up with anything, except near adjacencies to expand our platform. So banking was an expansion of an adjacency when we rolled it out. And even in the banking business, the movement into SBLs and mortgages was an expansion even what the bank did for the first decade with us as we focused on our client platforms. So again, I think we're in the same businesses and we're looking for businesses to improve them, like the SumRidge example, which brought computer-aided technology to our fixed income platform that we think is expandable across the whole platform. So I don't know, Paul, if you would add anything on that -- we've been pretty focused. We're curious. We're always looking at things, but haven't found that next magic business.

Got you. Okay. Maybe we could just dive into some of the segments, if you want, you gave some of it away in your opening remarks. Private Client been very successful. Each one of your quarterly updates, your monthly updates all speak to very good retention, recruitment trends, if you will. I wonder if you could unpack that a little bit and talk about what are some of the drivers that financial advisers or teams are choose - why they're choosing Raymond James and where, among your different affiliate models that you offer, where do you think the greatest rate of growth is? Or is it just sort of across the platform?

So I think the approach and as we've had is try to be the best of both worlds to have a firm that still feels small like the family business that we started with to keep that culture. It's very open. If you walk into our office pass the guard, you can walk into every office in the building without being stopped, even from mine to Tom James, who's still in the office every day. And that culture of openness, every time we do a conference, we open the floor to questions, and we get asked everything by our advisers, and we're just very straightforward and open with them. People really like that culture. And it's also a culture of 2 things, as we do not push any products directly or indirectly. People ask why our debt penetration is lower than other firms is we don't incent advisers to do it. The branch managers don't have quotas. The advisers don't have quotas. Our incentive systems, whether it's pay or trips or nothing, is tied to selling anything. And so they really like that they're not being pushed to do things that they don't feel is in the best interest of their client or thing like they'd be told what to do. Secondly, we don't compete. There's -- we don't compete in channels. Our bank cannot send the mortgage solicitation or credit card solicitation to clients. The most advisers approve it. We go way out of our way to show we're never competing with them that were on our side. So they really like that part of it. But that's -- it's nice to be in a place, but we're more than friends, right, in terms of our advisers. We also have to have the services and technology to compete. And we believe from what our advisers tell us today that we have the best desktop for financial planning advisers. And we know that from the recruits that we get from all firms. We're getting the industry awards and accolades. Our planning desktop it's been a journey that I think certainly leading today. It doesn't mean you can keep it forever. It's a competitive market. An example is our -- we've been mobile where you can do everything on your iPhone that you can do in the office for over 5 years now, where people are just starting to roll that out of our competitors. We've on-purposely delayed the client app. Our client app, which is adequate, you could check into it. But a lot of people put their investment there first, some of them because they wanted to compete with the clients directly. And our adviser app, which is being rolled out now. And so our client app is all based on how do we help clients attach communicate with their advisers. And it's being rolled out this quarter. And it's a -- I think it's kind of a game changer for us. And Phase 2, the capabilities it adds, I think, will make it a unique app in the industry. So the whole focus, it's a great place to be. You feel respected. You feel like a partner, yet you have all the technologies and tools that you could get anywhere and maybe you can only get them here right now. And they're developed with the advisers in mind. It's -- the priorities are set by an advisory a tech team, not by our technology group. They set the priorities, they sent the functionality. And even our IT team, it's all sitting, what does an adviser have to do at their desk every day? How do we make that easier, how do we make that more efficient, not how do we come out with the next cool app, and it's been kind of a decade in process and really come to fruition in the last few years, which has really been one of the keys to our recruiting too.

We hosted CFO from [indiscernible] just before we came in to speak with you. And one of the topics of conversation was a little bit of sort of an unfreeze of the opportunity set in the market as the market volatility has stabilized a little bit, a little bit less client handholding, if you will. Can you speak a little bit about what you're seeing in terms of -- at the right term is industry churn or the recruitment pipeline? Is there any sort of re-acceleration? And then maybe separately, any shift in pricing that you're seeing if that activity level is, in fact, picking up.

I remember when I -- this role 12 years ago and now, I guess I came to the CEO role, but people said -- ask me that very same question, right? And every year I get is recruiting can't keep up for all these reasons, getting too competitive. Every year, is it getting more competitive? First, we're a very competitive industry. We have good competitors. Everyone has a unique story and a unique culture. And despite that, we've continued to grow our recruiting. It's been an engine, I think, again, with industry-leading net new assets, either at the top or right at the top, most recently at the top, and what -- it's 2 functions, people staying. We have very little turnover. And we continue to recruit even with this excess competition and it's pricing in different segments of the market seems to shift. The RIA roll-up market has been people paying huge premiums for RIAs in that roll-up industry. We don't quite understand the math from our business, but that's probably the biggest recent change on the high-end advisers. But a lot of those teams want to be with a firm that is more employer or independent or even our RIA and run their own business. So that recruiting has stayed very, very good as it is across all of our affiliation options. It's interesting that year-on-year, the independent or the employee channel may be faster, but it swings back and forth. They're both in high demand. And certainly, RIA channel is the fastest-growing percentage-wise as it is in the industry. So we see good growth in all the channels. We expect it to continue to grow. I don't know if it goes on forever, but again, our backlog is very, very good, and we have very high-quality teams, the size of the teams that come in, keep getting bigger and bigger and bigger. And I think we've had a great progression. Part of that was helped honestly by the Alex. Brown platform. When it came in, it really helped us focused on high net worth, ultra-high net worth clients. We had plenty of them, but that was primarily their business, and it really helped us on our -- to grow our -- think through the growth of our alternatives platform, our private client desk where we actually put clients together to do deals back and forth with each other to develop a private lending capability for ultra-high net worth and high net worth clients which is actually pretty conservative in its lending and we really understood the need. So that again -- that's helped fuel the growth, and that platform continues to fuel the growth of that on those adviser segments. So, so far, all good.

Great. I know you mentioned that you're not incentivizing any of the financial advisers to cross-sell anything, but it does seem like an incremental opportunity nonetheless is to cross-sell banking or capital markets to do the platform broadly. When we look at some of the metrics I view versus your peers, you're still relatively under penetrated from a ratio of that service relative to client assets. I appreciate that the market backdrop, rate backdrops made a little different tea than it was 6 months, 12 months ago. But can you talk a little bit about how you sort of see that opportunity to build the wallet share nonetheless?

Yes. So both of those are great opportunities. Our penetration is less. And Tom James, we really grew the firm at a mantra. We're not here to sell debt. We're here to only use it when clients need it. So we've never had the push where some firms, if you open up an account, if you don't open up an SBL account, whether they're going to use it or not. You get a call saying, why don't you open that up, open it up? We don't do that. So we try to tell our advisers through wholesalers. We really have our own wholesalers like our third-party firms do that go out, show the products. We have teams that explain the SBL products, the high-net worth SBL modified products, the mortgage capabilities and let clients know and understand it. But we tell them, if they get a Bank of America mortgage, they think it's better for the clients use it. Now we'd like it when they use ours, but we don't push them. They don't get any more incentive to do those things. And it -- yes, so maybe we get less penetration, but we got a lot less turnover because advisers don't like to be told what they should sell. So over time, that penetration is going up. It takes us longer to get there. But I think the result is much better. We also have a group that we formed in our equity capital markets division that marries advisers who have businesses to our M&A teams and our capital markets teams. And again, it's not a force. So it's -- we started it about 3 years ago. Now it's really paying off as people are monetizing businesses as the advisers are getting much more comfortable to go into our banking teams. If we're not the right teams where we refer it out, if they may be too small in an area, we don't -- we're not specialized, we -- their job is to send it to somebody that is because we want the right outcome for clients. And we've got a lot of advisers who have grown a lot of books by doing that, and those were sales that may not have happened before we had this connection. So it's one of the hardest things to do. I think there's one firm in the industry that's done it well forever, and the rest of us have struggled, but we made a lot of headway and it's really, really taken off in the last year or 2. So we just need to keep it going and keep growing it and build the trust and confidence that people use us within our own advisers. And now when we have the conferences, we'd have 20 or 30 now we have hundreds and hundreds show up to see what's going on and to hear the story. So we're it is a good opportunity for us.

Great. Maybe staying within private client by shifting gears a little bit, Schwab management at their business update recently, sort of made the argument that client cash sorting should peak sometime this year, just to exhaust the rate sensitivity where we are in terms of the rate cycle, if you will. As you look at your client base, how do you think about or how do you foresee that potential for stabilization? Is that a calendar '23 event? And any sense when you've done any kind of stress test as well?

So Paul spends a lot of time on that. I would say that a year ago, we talked about sorting dynamics coming back and everybody thought we were kind of crazy. I mean -- and we've heard a lot of people call that sorting was going to level out or December it was done and it was going to flatten out. And now we hear -- I think we're uncharted territory that the only real benchmark we have is like the 2016 to '19 period, but rates went from really 0 to a little over 2%. Rates are already over 4% heading to 5%. So I think to take those models are dangerous. It has to be enough of a movement for clients and advisers to think it makes a difference. So for people that have either smaller clients or clients that have smaller pools of cash, it's like a checking account. It's less there for sorting. But once you start getting meaningful dollars, at 1%, you have $100,000 as well. So it's not that much money monthly. When it gets to 5%, it gets to be meaningful enough. And if you have $1 million of cash, it begins to be really meaningful. So I think to say it's over. I view that all cycles are -- there's early adopters that started moving when we started talking about it. And our cash call wasn't because we saw any sorting a year ago, I think on an earnings call when we talked about it, we saw big banks asking us for cash sweep money. If the big banks who are the deposit generators in our industry were asking for cash, we knew and we track -- we started tracking cash movement well before it hit us. So some early adopters started moving early and you get the rush when everyone is doing it, which I think we've been more and then there are the people that next year at the cocktail party, "Oh, I'm getting 5%, what are you getting?" So I think it continues a little longer. Where that ends? I don't know where the Fed quits ending rates. I don't know. The broker model historically before '09 was we would use sweep rates. I mean money market rates really in the sweep accounts, then it came where you bifurcated them and brokers look more like banks on the checking deposits, smaller accounts that don't pay and now the bigger ones, which are investment accounts. And that's a new -- that's new really for this industry, but '16 and '19, but didn't last very long. But now if that's the forward curve, you're going to have to -- we're going to have to think the same way which we do now that banks do is what are those stable checking deposits you don't have to charge and what are those you have to charge on your -- whether CDs or sweeps or something to keep and compete with money market fund rates. And they don't have to be dollar for dollar. We can offer FDIC insured products and others. But -- so to say it's at an end. I could claim that, that I don't think anyone really knows. So I'm not willing to make the call not because I'm pessimistic as I just could not be over. And all you spend a ton of time on this, I mean.

Yes. I think maybe the only thing I would add is that it served us well to have this level of humility. I mean I know the investor community likes some level of certainty for the models. But a year ago, when firms were putting sort of arbitrary bookends around what could happen with interest rates. And we were getting pressure to extend all of our cash balances to take on more duration on the balance sheet. The reason we did it wasn't because we anticipated this rapid rise in rates is because we just had -- we were respected the unknown, which was what would happen to rates. And so we stayed very flexible coming into this rate cycle, whereas -- many of our peers in the banking industry. And if you look at their securities and mark them to market, they're basically running at negative tangible equity in some places, if you adjust for the value of their securities, whereas we got a lot of criticism a year ago for keeping that cash on the sidelines, knowing that eventually it would get redeployed into higher-yielding alternatives, and that flexibility served us really well. Again, it's not that we knew it was going to happen. It's just that we respected the uncertainty, and that's kept us out of trouble throughout our history at Raymond James is just staying as nimble and flexible as possible. And that's what we're going to do now because we don't know whether -- I mean, the rest of the calendar year, that's a long time, 11 more months. So a lot can happen between now and the rest of the calendar year. But in the meantime, since we don't know what's going to happen with the funding situation, the most prudent thing we can do as an organization for our clients and our advisers and for our shareholders is make sure we diversify and strengthen our funding as much as we possibly can to prepare for the potential tail risk at funding deteriorating rates from here. And so that's what we're doing. We're looking at all different funding avenues. When we first had conversations with TriState, as you recall, Bill, 2019, it was really because we wanted to diversify our funding. Now we did that acquisition in a period where funding was most -- including us, most institutions had excess cash, and we were criticized a year ago were not quickly replacing all their funding with our cheaper funding. And the reason we did that was really twofold. One, we wanted to preserve their independence and they're independently chartered bank with independent clients, and we're going to respect that. But 2, we said at some point, their deposit gathering apparatus is going to become valuable again, just like it was when we first started talking to them in 2019. And so that's kind of -- I just wanted to give the investor community some insight on how we think about things and really don't try to create artificial and arbitrary bookends and really respect the unknown and stay for our shareholders and our clients, make sure that as a financial institution, we're staying as flexible as possible for any potential outcome.

Awesome. Let me ask one more question around this, and it beats into comes, both of you, gentlemen. On the last conference call, excuse me, you had mentioned that on average over time that you'd like to sort of keep your sort of the bank deposits roughly 75% of client cash. That number round numbers is around 70%, just some of the pro forma data you provided on the conference call, which was super helpful. To the extent that, that ratio was it drift a little bit higher, particularly in what you're sort of talking about the onshore and territory may all be in. How do you think about contingencies? I know you sort of introduced the enhanced money market fund. How do we think about, like the funding of the bank from here?

Yes. I mean we look at the diversification of the funding and really where can we find win-win situations for clients, financial advisers and the firm and enhanced yield savings is one we're starting to pilot it this week, where we're helping advisers essentially with a tool that helps them bring in new money from the outside. A lot of this cash is sitting at the big banks earning basis points, maybe 2 to 5 basis points in checking accounts and so they can go to their clients and say, "Hey, bring over that cash from your big bank" and you park it into enhanced yield savings program where you're really optimizing the return that to earning on your investible cash balances. So we're offering tools like that to diversify, and we're going to continue innovating around that. I think CDs as a product that a lot of clients like to get a little bit more yield for duration, although right now, that doesn't look attractive. That doesn't necessarily mean it won't be more attractive a year from now at the yield -- the shape of the yield curve changes a little bit. And so -- and then on the other end of the spectrum, we have TriState and they have a totally independent and diversified deposit source -- and the nice thing about that deposit source again is that it is totally separate from Raymond James and our client base. So it's not disruptive to the initiatives that we're talking about with our own client base at Raymond James. So we have a lot of different ways to raise deposits, and we're constantly, again, in this funding environment, looking for ways to further diversify that and strengthen that across both institutions.

I think, Bill, to your point to is that you have 75%, we said kind of is that target. It's -- there's no magic. We don't want to be caught where some institutions went and put 90% of their balance sheet in a very liquid environment and then what happens when it goes down, you got to react really quickly, you they got to start raising expensive deposits or slow down the growth of -- or do things that impact the business. So that's the target. It doesn't mean if we needed it in a cycle, we wouldn't continue put it drift above 75%, but what we do is take the actions for the other sources of fundings and all of our contingent funding is to make sure that we have plenty in reserve where we weren't -- we wouldn't be stuck and have to do something. That's when I think business models get in trouble. So the [ Slicin9 ], we kept that attitude, and we made it our worst year of being public. We had a 7.9% return on equity and made money every quarter when people were panicking on liquidity and survival and stuff. We - we had a pretty good year and really launched us into 2010, which was really the start of our growth cycle over this last decade. So we always will air on the conservative part to be liquid, making sure that we're in good shape. And if it costs us a little money short term, fine, but it will pay off long term because you're there, you're ready to go and the ability to have capital to do deals in a down market or to look at alternatives is very, very valuable. And if you look at our people say we have overcapitalized and we're too liquid, and we're we look at our ROE over a decade or any 1, 3, 5-year you pick it. We've done very, very well. And part of it is that conservatism has allowed us to really make leaps when we're able to make leaps. You don't want to go into this kind of market where the equity markets are not great at raising capital, and that's getting more expensive to have to raise money a year from now if things deteriorate, it needs to be very expensive.