Steve Chubak, lead analyst covering diversified banks, brokers, and alternative asset managers. I'm really excited to introduce our next speakers, Paul Shoukry, President and incoming CEO of Raymond James, Butch Oorlog, newly appointed CFO. Raymond James is really one of the premier franchises in wealth management, a unique culture and operating model, and it's really the only true or pure omnichannel player in the space, so it's the fourth year that we're hosting this conference. Paul has been here every year. This is Butch's first year, so welcome, Butch, and Paul, thank you for supporting the event.
Great to be here, and I want to congratulate you on this conference, starting from scratch four years ago and up to 240 people this week, so it's great to be here, and I'm happy to support your conference.
Thanks, Paul. Really appreciate it. Admittedly, as you noted, it's not your first time here, but it is your first time since becoming the incoming CEO. So congrats for that. Now, while you've noted the CEO appointment represents a continuation of the current strategy, just given Ray J has always been a conservative but growth-minded company, where do you see the most compelling opportunities for growth, and what are some of the risks that you're monitoring more closely here?
Yeah, I think we certainly have had a track record of generating solid growth across our businesses. And as we look forward, we're excited about the prospects for growth in all of our businesses. We're uniquely positioned in each one of our businesses where we have critical mass to make the investments, to be competitive, to provide the best platform we can possibly provide for each one of our financial professionals across our businesses. But at the same time, we still have significant headroom for growth, doing what we're currently doing in each one of our businesses. So what I mean by that is there's larger firms out there with the critical mass, but they don't have a lot of headroom for growth in their businesses. They are sort of at saturation, and so they're trying a lot of new things to try to grow the businesses.
There's also smaller competitors with plenty of headroom for growth, but they don't necessarily have the critical mass to make the investments necessary to provide the very best platform for their financial professionals and clients. We offer both with the value proposition of what we call the best of both worlds, which is providing a culture that's advisor and client-focused and really a family-focused culture, coupled with a robust platform with technologies, products, and services that the financial professionals coming from the biggest firms in the industry have become accustomed to. The value proposition is resonating across the businesses. Our business position gives us plenty of room for continued growth going forward across all of our businesses. We're really excited about the future. As far as risk goes, there's always risk in our business across the platform.
And so a lot of them are out of our control, whether they be market risk, regulatory risk, geopolitical risk. And so what we try to do is just we know that we're not smart enough to necessarily see all the risks that may come to us. And so we just try to keep a very strong and flexible balance sheet to try to be well-positioned in any type of market environment and give us not only flexibility to be defensive, but also to be opportunistic even in very challenging market environments.
Great. And maybe before, Paul, drilling down into the wealth management business specifically, I was hoping you could touch on the operating environment. I just want to get a sense in terms of the pulse of activity in both capital markets as well as the wealth management or private client group, especially given post-election. There's a lot of euphoria around the prospects for improved M&A as well as a more favorable regulatory backdrop.
Yeah, I mean, frankly, the M&A environment was starting to improve off of very low levels. I mean, capital markets were really challenged, as you all know, over the last couple of years as rates started increasing rapidly after record years during COVID. And that environment started improving before the election. It's just, I think, the marketplace started getting used to the current level of rates, and prices were sort of starting to adjust to the current level of rates. And I think that was really what was causing the disruption in M&A activity. And so I wouldn't necessarily ascribe that recovery to the election, but just to sort of the marketplace, buyers and sellers sort of adjusting to what was a huge shock in rates, going from near zero to 5.5% on the Fed Funds target.
And now with it coming down a little bit, the financing cost looks relatively attractive compared to where the high watermark was. And we're seeing the same thing. Our Private Client Group business, which is by far our biggest business, accounts for 70% of our revenues at the organization and even more of the revenues if you look at the indirect attribution. It's pretty steady. I mean, financial advisors do a great job keeping their, we're a long-term financial planning-oriented firm. So we're not in a day trading business. And so you don't see some of the huge fluctuations in our business. The equity exposure has remained remarkably consistent as advisors do a good job with portfolio allocation and diversification in clients' portfolios. When we look at it on an X-ray basis, it's about 55%-60% equity exposure with the $1.6 trillion of client assets that we have.
That's remained remarkably consistent in different market environments and interest rate environments.
Great. So maybe drilling down into the wealth management business. Historically, you've been a high single-digit organic grower, lowest regrettable attrition, arguably in the space. We have seen a moderation in organic growth, and we're hoping you could just speak to some of the factors that are driving that and any specificity you can speak to on employee versus independent channel.
Yeah, I would say across the industry, you've seen some moderation in the percentages of organic growth. Some of that's just, frankly, higher base. So equity markets appreciate and the base of assets appreciate. The same level of recruited assets or net new assets to the platform, just the math works out that it's a lower percentage. And then certainly, the industry had an uplift in net new assets during COVID, just as so much people were investing more, harder to spend the cash that they were getting during the COVID period. And so net new assets were really high across the entire industry on a same-store sales basis during COVID as well. But we've remained very consistent in our strong recruiting results across our various affiliation options. As you said, most deem it to be sort of best in class.
Really, the growth starts with the retention of the existing advisors. We focus on keeping the existing advisors, and our regrettable attrition is typically less than 1%. That's been a big area of focus for ours for a long time. On that foundation of strong retention, are we able to grow through recruiting high-quality advisors? Our pipelines and our activity levels remain very robust across our various affiliation options. The platform and the value proposition continues to resonate.
Maybe we can contextualize that a little bit more, Paul, specifically around the backlog for recruiting. What are you seeing across the three different affiliation options relative to, say, a year-ago levels, just to provide some context?
Yeah, and a year ago was a great recruiting year for us. We recruited last year advisors with their prior firms that had $335 million of trailing 12 production and just our employee and independent contractor channel and $57 billion of client assets. So if you step back and look at that, I mean, that's the size of a relatively good-sized firm in our industry. So it was a very strong recruiting year. And if you look forward, we're still seeing very strong pipelines. So last year was a record year in our employee affiliation option for recruiting. This year is starting off early on in the year. Our fiscal year starts October 1st, so very early on, but trending in a very strong direction relative to last year. And actually, in our independent contractor channel, the recruiting pipeline is picking up relative to last year. And so we're really optimistic.
The value proposition across all of our affiliation options, our RIA platform, what we call RCS, is resonating as well and seeing pretty good recruiting traction, so we feel very, very optimistic about the future as far as recruiting goes and, more importantly, retention. The retention of our existing advisors. Satisfaction is very high across the platform. I've been spending the last seven months or so since the announcement traveling across the country, and what's been most energizing to me is the number of advisors I've met across the country that have said the best professional decision they made in their career is affiliating with Raymond James three to five years ago, and the biggest regret that they have is they didn't do that three to five years earlier. That means we really have something special at Raymond James, and we're certainly committed to preserving that going forward.
Yeah, it does feel like a lot of the attrition that we've seen is really much more concentrated on the OSJ side, where I know the economics that accrue to Raymond James are less. Maybe you could speak to that dynamic, Paul. What's driving higher levels of attrition, at least among some of the OSJs?
Yeah, I think Scott Curtis touched on this at our Analysts Investor Day. First off, we're not anti-OSJ or pro-OSJ. We're sort of agnostic to the business structure, the business type. We just want to be the premier destination for financial professionals and their clients and a great partner. But no matter what the business structure type, there has to be alignment on both sides. There has to be a mutually beneficial relationship and partnership. And there are certain cases where, whether it's an OSJ or not, where that's not the case. Either we're not a good partner for them, or they're not a good partner for us, or sometimes both situations occur. And sometimes that occurs. Sometimes a perfectly good partner can have different priorities after getting outside investment from private equity.
And sometimes that creates a situation where it's best for us to move kind of in our separate ways. And so we've had some of those situations. You guys see the ones that are OSJs just because they're bigger in size. And so that catches the trade pubs' attention. But we're in a place now where a lot of the ones, most of the ones that are the OSJs that weren't good fits for us or we weren't good fits for them have made their transitions or have announced their intentions to transition to another firm or to our RIA channel. And so we're not seeing a lot of that type of activity occurring going forward.
Oh, that's good to hear. The other area I wanted to touch on, Paul, which is pretty unique as well as around international, you've talked about the global opportunities in wealth. You've put stakes in the ground in Canada and the U.K. Just speak to those growth efforts, how they're progressing, and really what's your North Star? What are your aspirations abroad?
Well, I think the biggest opportunity we have is in the U.S. I mean, that's where 90%+ of our client assets are today. And we still, if you look at our market share, well, in California and the Northeast, we have significant headroom to continue growing market share. But even in our backyard, I always bring up the example of just an hour away in Sarasota. We have a great presence there. But just two stories above us, there's a pretty big firm with about 100 advisors in the same building. And so we have a lot of room to continue gaining share in our strong markets and certainly more room in the out West and the Northeast and places where our market share is lower than our national average. But our international strategy, I mean, Canada, we've been in Canada for a very long time.
We're committed to the market. It's a profitable business for us. It's about the entire market in Canada is about 10% the size of the U.S., and so it's not as big of a market, but it's one that we feel like we have continued headroom to grow in both organically, and we're always looking for good acquisition opportunities there as well. And then the U.K., very different market, and we did an acquisition of a company called Charles Stanley there, which more than doubled our existing presence. We've been in the U.K. for 20+ years, but it gave us more critical mass. It gave us a stronger presence in the employee affiliation option there, and so we're still very early innings of sort of integrating that acquisition, but we think that that could be a good platform for us going forward.
Great. Well, Butch, I'm not going to let you off the hook. So I did want to ask some questions around sweep cash. I was hoping to get an update on what you're seeing in October, just as of month end. Are you seeing continued signs of stabilization? And then I was hoping to get some perspective on how you think about sweep cash growth from here with sorting pressures abating. People are trying to think about what that new normal looks like in terms of sweep cash inflection, given the expectation for sustained higher rates.
Well, thank you. First of all, I'd like to echo Paul's congratulations to you on the success of the conference and appreciate the opportunity to be here and talk about Raymond James. In terms of the sweep cash balances, as you noted, we have experienced stabilization of sweep cash balances. Looking back four quarters, especially very, very consistent levels of sweep cash balances in our program. We were pleased to see in the fourth quarter, we had 2% growth in those sweep cash balances in the fourth quarter. In terms of October, we have interquarter cyclicality within the quarter. So as we reported in our earnings call at the end of October, our cash sweep balances were down about $1.3 billion at that moment in time. Most of that, or all of that, was attributable to our quarterly fee billings, which come out of accounts early in the quarter.
And so that decline at that point in time in the quarter is really to be expected. As we look forward in October, we've seen continued stabilization of those balances. And I believe that the trend going forward leads to stability as far as we can see. In terms of the going forward look for those sweep balances, we would expect those sweep balances to continue to grow proportionally to our net new asset recruiting growth and over time.
That's great and Butch, I also know you gave guidance on spread revenues being down about 5% sequentially. Given some flexibility, you guys do have room to at least cut deposit costs to mitigate some of those pressures. You also have the benefit of a seasonal tailwind, at least as we approach year-end in terms of cash build. Why aren't you anticipating some greater resiliency in spread revenues versus that expectation?
Yeah, great question. And those who know us well know that we tend to be conservative. And as we make those sorts of projections, we guided to potentially a 5% decrease in the aggregate of our sweep fee revenue and net interest income for this upcoming quarter as a result of the late September Fed rate decrease, the Fed rate cut. But that calculation was a point in time. We looked at our balance sheet and our asset position as of the end of the quarter to project that decrease. What that calculation did not include is offsetting potential opportunities for growth that could mitigate the effect of that rate decline. So specifically, we could see growth in our securities-based loan portfolio as rates come down. Clients can get more comfortable with a lower rate and make additional borrowings for secured SBL loans.
We stand with the capacity to fund those loans. That would have an offsetting favorable impact on volume.
That's great. And one area that Paul and I have debated extensively over the years is balance sheet and duration management. And Paul has been on the right side of this trade. He has not leaned in and extended duration this rate cycle. But the curve is steepening. New administration. Are you considering at least extending duration just to lock in some of that potential NII here?
He says we've been on the right side of the trade. I think we just haven't made a bet one way or the other. We haven't been necessarily right or wrong. We just don't bet on interest rates or the direction of rates. The focus is really just keeping the balance sheet flexible. We're not smart enough to know where rates are going. Frankly, the Fed or the markets don't seem to be, at least over the last few years, the guidance and the curve hasn't pointed in the right direction either. We don't try to position our balance sheet one way or the other for where rates may or may not go. We just want to stay flexible. Our deposit costs are floating largely, especially the sweep accounts.
And so we just try to keep the assets as floating as possible, stay nimble, and not make a bet one way or the other. Our balance sheet is really not intended to be a place where we make bets to benefit the firm. Our balance sheet is there to accommodate client activity. And to the extent that we take risk on the balance sheet, we want it to be risk that supports and helps clients. And taking duration risk on the balance sheet and securities portfolio really doesn't help clients. And so that's kept us out of a lot of trouble just not using the balance sheet, whether it's a financial crisis or the regional banking crisis, just not taking bets to benefit the firm that has no client benefit. That's kept us out of a lot of trouble. And we're going to continue to pursue that approach.
That's great. And I had a question on deposit betas too that comes to mind. Just Butch, hearing you speak to some of the offsets or mitigating factors, is your expectation that deposit betas are going to be symmetrical on the way down? You do have considerable room to cut from here. Just wanted to get some perspective on how you're thinking about deposit beta trajectory over the course of a declining rate cycle.
Yep, right. The way we think about the deposit beta, we aggregate the deposits on balance sheet on our bank segment balance sheet with the off balance sheet portion of the sweep program. When you aggregate that total and then assess the portion of that total deposit that is priced at near money market rate type pricing, it's about half of that deposit portfolio, so about 50%, roughly 15% of our total deposits reflect what we expect to be high deposit beta activity going forward, and then about half the portfolio would be transactional-based brokerage sweep balances that would have a much lower beta applicable to them.
Paul, this is probably going to be the toughest question of the session. It's around advisory sweep cash given the saga and what we experienced this summer. I was hoping for some perspective on what you're hearing and expectations around regulatory and legal pressures or scrutiny around advisory sweep cash. The stocks have recovered, suggesting greater comfort that you and your peers have a lot of protections in place. Any perspective you can offer on that particular issue?
I mean, we offer a lot of options for clients and their advisors who are looking for higher yield on their cash balances. So we have the Enhanced Savings Program, which offers a very attractive rate, and FDIC insurance up to $50 million, five-zero balances, and so that is up to $14 billion of balances now. We have a very robust money market platform, and all clients can avail themselves of the institutional share class and the money market fund platform, which gives them a higher rate, and these are from other outside providers, which are the biggest in the industry, and then we have CD platform, and we have some opportunity rates within the sweep platform for new money and other sort of initiatives that we run, and you've seen that.
The client cash balances have declined substantially since rates started rising as advisors have helped their clients, as they should, reinvest the investable portion of the cash balances into the higher yielding alternatives, and therefore, if you look at the percentage of cash to total assets and fee-based accounts, it's very low in the kind of 2.5% range. If you look at the average dollar of cash in each account in the fee-based accounts, it's, again, I think it's $8,000-$12,000 depending on the account type, and so it's a relatively small portion. It's really there for transactional cash awaiting investment. Clients are buying and selling and putting cash aside to pay quarterly fees, as Butch touched on earlier, so we feel very good about the platform and the products that we offer for our advisors' clients who are looking for higher yields on their cash investments.
And so we feel good about the platform. We can't comment on rumors or speculate on why other firms have done what they've done or not done what they haven't done. All we know is that we feel good about the platform that we have.
That's great. Maybe just switching gears to operating margins and expenses. So it was encouraging that you maintained the more than 20% pre-tax margin target, even amid lower rates. I think, frankly, it just speaks to the fact that you guys have a much more diversified model that will benefit in different macro environments. With capital markets normalization and with higher equity markets, what do you see as the biggest risk to achieving or sustaining that north of 20% margin here?
I'd say there's always puts and takes in our business. We have wealth management, capital markets, asset management, and a bank. And within each one of the businesses, there's diversification. So for example, in capital markets, about half the business is equity. The other half is fixed income, public finance, roughly speaking. And so there's always puts and takes in different market environments. So we always caution investors and analysts to assume everything goes well in each one of the businesses and try to come up with a margin target based on that. Just our history is that there's always puts and takes in the model given the diversification of our business. Now, that's created very steady earnings growth over time. And so that's been one of the reasons we've been able to just we finished our fourth consecutive year of record results in very different market environments.
There's not a lot of other financial services firms that have been able to do that. But we've been able to do it because of our diversification and the complementary businesses that we have. So the biggest risk are interest rates, for example, have gone down. And we just had another 25 basis point cut last week. I don't know what rates are going to do going forward. But with lower rates, that hurts our earnings profile because of the floating rate assets. And Butch talked about the beta sensitivity. But it's not 100%, especially for the 50% of balances that are more transactional in nature. So that could be one of the headwinds to margin going forward because that goes straight to the bottom line. But to your point, capital markets look strong. The equity markets today look good.
And so in the bank, we are optimistic about loan growth at the bank going forward as well. So overall, we're still optimistic as we look forward.
Admittedly, one area that's a little bit tougher to model, Paul, but you've actually done a great job of managing recently is non-comps, particularly in an inflationary environment. Admittedly, we did see in the back half at least some ramp. I know on the earnings call, you were not yet ready to give any non-comp guidance. I was hoping you can provide some perspective on how we should be thinking about non-comp growth heading into this coming fiscal year and how much of it is fixed versus variable. Maybe offer some context around what businesses are going to be driving greater inflation or less.
Yeah, well, I always say over time, all expenses are variable. There might be a lag to some of them. But as we grow as an organization, those expenses that support the growth are going to grow as well. Some are directly variable. So sub-advisory fees, for example, that we pay to third-party managers, that grows with growth in fee-based assets, one-for-one. FDIC insurance expense grows to the extent that we grow the bank. That grows one-for-one and pretty immediately. But when you look at the office infrastructure and the branch infrastructure, that certainly grows as we bring on new advisors and we expand our space. That's all healthy growth as well. Then technology is an area that will continue to grow as well.
I would expect, if we look back 15 years from now, that technology will be the biggest area of continued investment and growth, just as it has been over the last 15 years because that's so critical to all of our businesses to remain competitive, to provide efficiencies for advisors so they can service their client in a more efficient way, and so technology will be a continued area of focus, but again, all of those investments are healthy investments that are absolutely necessary to support healthy and sustainable growth going forward.
That makes sense. And I guess maybe not the last question, but one topic that comes up quite often as it relates to Raymond James is excess capital and capital deployment. And you're running with significant excess relative to your 10% Tier 1 leverage target. But just thinking about potential attractive targets for M&A, speak to where you're focusing most of your attention. And are you finding it difficult to find attractive wealth targets given the more aggressive, at least, approach to PE in terms of some of these bids?
Yes. Our capital approach, when we look at what we call the capital prioritization framework, has really remained unchanged since our founding in 1962, and first and foremost, that is to invest in organic growth. We think that that generates the best risk-adjusted returns for shareholders. Recruiting one advisor, one banker at a time enables us to ensure a good cultural fit, and that's been really the key to our success over a long period of time, and then behind that would be acquisitions, but with acquisitions, we have a pretty strict filter. One, first and foremost, it has to be a very strong cultural fit because that value proposition I spoke to earlier, the foundation of that is the culture and the values that we have as an organization.
If it's not a good cultural fit, if the people don't feel like they're putting their clients first just as we put our clients first, et cetera, then we don't even pursue. We don't run numbers on it. Then if it's a good cultural fit, we look at the strategic fit. We say it's not worth going through the hassle of an acquisition and an integration unless 1 + 1 equals more than two. So it has to make both organizations better. We want to keep the people of the firms that we acquire because at the end of the day, in our business, you're acquiring people. It's really bringing in. We call it bringing in a new family to the Raymond James family. Then if it's a good strategic fit, then we run the numbers.
To your point, it's always competitive, whether it's private equity now or other strategics historically. But we really are leaning in. When we look at acquisition opportunities, maybe in the past, we've been more conservative on certain assumptions we're trying to make because there's so few firms in our industry that check the first two boxes of being a very good cultural fit and a very good strategic fit. When we find those firms, we're trying to be appropriately front-footed on the valuation. And so does that mean we're going to be able to beat private equity or the highest bidder every time? Not necessarily. But we do want our offers to be taken very seriously when they check the first two boxes.
Paul, sticking to this theme of capital return or capital deployment, the buyback, you've stepped it up in a pretty meaningful way in recent quarters. Historically, you've been a little bit more sensitive to valuation. It feels like some of those parameters are maybe less restrictive. And was hoping you could offer some perspective on how you think about the buyback, especially given the recent Trump bump now that we've made financials great again ?
Yeah, we've always been, no matter how we deploy capital, we're going to be sensitive to returns and valuation. I mean, we treat the capital like it's our money and like it's your money, and we want to make sure over time we generate very good returns. Now, with that being said, we have over $2 billion of excess capital over our very conservative target of 10%, which is twice the regulatory requirement, and so if we can't deploy the capital through organic growth or through acquisitions, which are by far our top priorities, then we do have to also lean into buybacks to return capital to shareholders, so it's a holistic approach. None of it's programmatic or formulaic or linear, and so we factor in a lot of different factors, whether it's the acquisition pipeline, the price of the stock, other sources and uses.
All of those things go into it. So whereas I know some other firms can be more programmatic on those type of things, that's just never been our approach. And we'll stay consistent with that going forward.
I know we only have one more minute here. I did want to just ask you on the dividend quickly. Now that you're becoming a much more scaled firm as you grow larger, I know you've historically had much more of a growth mindset, have maintained a lower dividend payout ratio. How's your thinking around that potentially evolving, especially given more interest from yield-seeking investors?
Our dividend target is 20%-30% of earnings, and we've grown that. Actually, it used to be 15%-25%, but we changed that, I think, in 2016 to 20%-30% of earnings, and so we think that's a healthy level to be at, and then that gives us plenty of flexibility to deploy capital in other ways, whether it's through acquisitions or through buybacks or other ways. Obviously, those are board decisions, but 20%-30% of earnings seems like it gives us plenty of flexibility going forward.
Well said, Paul. And yeah, we're right at 9:15 . So thanks so much for joining us, Butch, as well. It was a really great discussion.
Thank you. Appreciate it. And have a great week.
Thank you.