Thanks for joining. Pleased to say, joined by Paul Shoukry and Butch Oorlog, CEO - can I call you CEO yet?
Not until February 20th.
Couple weeks. Couple weeks. CEO designee, I guess, right? And Chief Financial Officer from Raymond James. Gentlemen, thanks for joining. Really happy to have you here. So I wanted to start with strategy. Here we are a couple weeks from the transition formally happening. You know, you're clearly very well understood by the street and investors. You've been part of the leadership for quite some time. So dramatic changes, probably not so likely. But still, are there any adjustments that you might have in mind? And when we look back, what's going to mark the Shoukry era?
Right, well, first, thank you, Brennan, for inviting us to the conference. The UBS conference here in Miami is one that we always look forward to each year. So I appreciate your hosting us here and all the investors that we have an opportunity to meet with while we're here. You know, the Shoukry era is not something I particularly like because I think in some ways it puts too much focus on one person and certainly gives one person way too much credit. At Raymond James, we have over 8,800 advisors and over 20,000 advisors and associates. Their collective impact in terms of what they can do for clients is really what adds value for those clients and ultimately for shareholders.
My role is to help those 8,800 advisors and our investment bankers and salespeople and associates just continue to provide best-in-class service and advice to their clients. To your point, coming off of four record years of results in very different market environments, which we don't see a lot of other financial services firms being able to do just because of the volatility of interest rates and capital markets results and even the equity markets to some extent, you know, really is a testament to having that stable Private Client Group business that we'll talk about in more detail. Again, reinforces there's no need for a massive transformation at Raymond James. I am taking over a very good situation. It'll be more about evolution and continuing to invest in our business and our advisors and their clients versus a major transformation.
Speaking of which, over the last 11 months since the announcement of my new role, I've been spending probably 70% of my time on the road meeting with as many advisors and clients and associates as I possibly can, and the very first question I asked them, amongst the first questions that I asked them, is, what do you love about Raymond James? What do you want to make sure we preserve? Because that's an important place to start given those strong results that I just described, and almost overwhelmingly, it's the culture of the firm where we really treat advisors like clients. We respect their relationship with their clients, not our clients, which is increasingly unique in our industry. The notion of book ownership where we say, if you leave to another firm on good standing, we'll help you move your clients to the next firm.
And that, Tom, that which Tom James really created decades ago acknowledges that they're all free agents, which makes us every morning and every day when we make decisions that keep the existing advisors happy and therefore they stay at the firm and keep the clients at the firm as well. And so that culture is what they really say, hey, Paul, please preserve this people-focused culture, this advisor-focused culture, this client-focused culture, because that is something that we lost at the prior firm that we were at. And almost with tears in people's eyes, a thing that I hear repeatedly from advisors and their sales assistants and other associates is the best decision that they ever made was joining Raymond James five years ago, seven years ago. And the biggest regret that they have is that they didn't do it five to ten years earlier.
And so when the board asked me, how are we going to measure success ten years from now, I say, when I go visit offices ten years from now, are advisors and their teams still saying that with the same level of emotion and sincerity as they're saying it now? Because that means that we've preserved the most important thing they told me to preserve, which is the culture of the organization. I also asked to your question, what can we do to improve the firm? How can we be better partners for you and your business and your clients? And the good news is there's not really a common theme that I hear across the board. A lot of it is sort of specific to the type of practice that the advisor runs, the type of clients that they serve.
So if they're heavy in the trust business, they might have a couple of suggestions for things that we can do to invest in the trust business or in alternative investments or those sorts of things. Our satisfaction rate amongst advisors now is 96%. Our goal is to make that even higher over time. We are getting a lot of questions around technology and particularly around AI. I think there's a lot of conviction both amongst advisors and amongst the leadership team at the firm that AI will be a game changer, not only for our industry, but for almost all industries. We also have a lot of conviction that we don't know exactly how that will play out yet. We're working on establishing a function.
While we've already used AI in the back office and middle office for certain functions, we're just still scratching the surface, I think, as an industry on the use cases down the road. And so we're going to establish a full-time function that's really dedicated to being kind of a lookout function for the developments and how things are changing in the world of AI and how AI could be used both at the back office, middle office, but directly by advisors to better support their clients.
Okay. I can scratch my AI question off my list, so on the private client group, right, which where you went initially and really it's your biggest business, it's central to, I feel like, what everybody thinks about RayJ, very strong track record of growth over history, right? I normally think of RayJ as a high single-digit, at times low double-digit grower on an organic basis, but you know, using net new as the metric. Recently, a bit below that pace, now the whole industry is a little below its pace, so some of it's clearly the environment, but you guys normally lead, so how do you plan to accelerate that net new from here?
Yeah. When we talk about net new assets, where we start is with retention. So our regrettable attrition is typically less than 1% if you look over the past several years. And off of that base of strong retention is a foundation that we can grow on on a better risk-adjusted return basis because we don't have to buy growth to replace the lost advisors. And so again, going back to keeping advisors happy, keeping the culture, and keeping Raymond James a good place for them to affiliate is where we start. And retention is something we look at actually more closely on an individual basis than recruiting results. But recruiting is really important too. And fortunately, we have very strong pipelines in all of our affiliation options.
I think that's another important thing for investors to understand is that we have multiple affiliation options, the traditional employee channel, the independent contractor channel, and the small for us, but growing RIA channel. And while other firms are sort of experimenting and trying to get into those different channels, we're really the only one that has a long history, critical mass, and scale in all of those channels. And so we have the largest addressable market amongst the largest in our industry, just given that we have the scale in all of those channels. And across all of those channels, the pipeline, recruiting pipelines are very strong. So it has come down in terms of net new assets across the industry. I mean, some of that's just a function of math.
You know, as asset levels go up with the markets, the same level of assets you recruit results in a smaller percentage. But it's also less transitions across the industry over the last couple of years. Again, markets are very good. And so advisors are focused on serving their clients. And the newest factor, I would say, over the last five years that we're dealing with as an industry is sort of the aggressive entry of private equity, throwing very large dollars to sort of roll up advisors and roll up firms. We've seen the roll up story play out in many different industries over the last two or three decades.
I think private equity has in the last five-to-seven years really gotten into the wealth space in a more aggressive way, which has been a new dynamic for us in, I would say, the last five years.
Yeah. Yeah. And it seems unclear how that's ultimately going to play out, but clearly some of them have pushed a little bit. I mean, that's usually what's going on with the OSJ developments, right? Yeah.
Yeah. I would say to the extent that an OSJ, which is just essentially an acronym to say a large firm of advisors, it's not an advisor team anymore. It's just a sort of a firm with multiple advisors in different geographies, usually. Typically, the alignment is there until we see usually a big difference when private equity money gets involved. And then all of a sudden, over time, even if the private equity firm says, we're going to be hands-off, we're going to not be disruptive, we're just going to give you capital to grow your business, as we all know, that typically changes. And over time, sometimes sooner rather than later, we start seeing that disruption and the misalignment of objectives and priorities. And so sometimes it's us going our separate ways.
Sometimes it's the firm going their separate ways just because, again, if the alignment's not there, it doesn't make a whole lot of sense for them to stay with us or for us to have them stay with us either.
Right. Okay. The RIA custody business, RCS, I believe is as you call it. It's grown a lot the last three years. 19% CAGR. It's pretty remarkable. What do you see as the primary drivers of that growth? And how much of that growth stems from a transition from a, of the same FA, but just from a different affiliation model versus a capture of market share?
Yeah. I think just stepping back, while the percentages are impressive, it's starting off of the lowest base out of our affiliation options, so if you look at the advisors and the assets that are coming on to our traditional employee channel or independent contractor channel, it really on an absolute basis dwarfs the growth in the RIA business, but it is a small and growing business for us. It's one that we've invested in to the extent that advisors want to insource their and handle compliance and supervision functions on their own versus tap into Raymond James for that, then the RIA channel can make sense for certain groups, certain firms, and so that is something that we hired a new leader several years ago, and Greg Bruce invested in technology and third-party partnerships and integrations.
We are now seeing more success over the last couple of years recruiting RIAs from the outside instead of just the internal transitions. I think at our analyst investor day, we said it's about 50% of the assets came from the outside, 50% are internal transitions. Our goal is over time to have that percentage be higher new growth from competitors.
Got it. It's, as you said, it's smaller, right? About 12% of assets. Is there any goal or ambition for how big you want that to be? Or is it more around offering just different ways to affiliate?
Yeah. I think the key to our success. I talked earlier about how not many firms have been able to have multiple affiliation options. I think one of the keys to our success in doing so for such a long time is we don't set goals or targets on which channel we want to grow faster than the other. We price them in such a way that we try to be as indifferent as possible between the affiliation options. Our goal is to meet with an advisor, and 80% of our advisors across all channels are coming from primarily the larger wirehouses.
And so our goal is to go to those advisors and sell them on the Raymond James culture and the Raymond James platform, the solutions, the technology, the fact that they will enjoy their work life much better at Raymond James than they will at their current place or at another option. And how they want to affiliate, we're indifferent to. We'll help you figure that out after you determine that Raymond James is the best long-term home for you and your business and your clients.
Great. Yeah. Well, one of the channels that you guys grow in is what's called the bank channel. You guys are a scale player. You're a very real competitor. And we've certainly seen competition ramping, right? I'd love to hear maybe how significant that business is for RayJ today and what differentiates your offering versus the major competitors.
Yeah. We're great partners to banks, not only in the Private Client Group business, but in investment banking, fixed income, affordable housing. You know, outside of the Private Client Group, the bank sector is our second biggest client base outside of individual clients across the country. And so the wealth platform, the broker-dealer platform that we can offer, we can partner with banks to offer has been important to us for a very long time. It represents roughly 10%, maybe just under 10% of most of our Private Client Group metrics. So it's a meaningful and important part of our Private Client Group offering. We've had a lot of success as of late. I just got an update this morning on the momentum we're having in that particular affiliation option. I would tell you that our strategy is different than almost all of our competitors in that channel.
Really, this applies to our independent contractor strategy versus most of our peer-play competitors in that channel, is that we really have a quality over quantity strategy. We're not looking to just add any type of advisor we can add just to get more revenues through the system. It's not a scale game to us. We're still trying to preserve a culture and a high-quality advisor both in our employee channel and our independent channel. That includes our bank channel. The way you could prove that out is just by looking at the average assets or production per advisor collectively in the independent channel. It's usually multiples of what our peer-play competitors operate at. That's just, again, not to say that their strategy is bad. It's just different. You know, that's been key to our success there.
So the success that we've seen in the last two or three years in growing that channel have been these high-quality teams that say, "Hey, we don't just want a platform to plug into. We want a consultative relationship and partnership that can help us grow our business." You know, oftentimes they come to us and say, "We have four-to-five advisors now. We want to grow to 15-20 in our markets, and we need a partner that can help us get there." And it's a very consultative relationship.
Because we focus on quality over quantity, we can provide that high level of service, the high-touch service to help them grow to achieve their long-term goals, which, you know, if we can help them grow to get to those goals, their financial outcome five to ten to fifteen years out is exponentially better than maybe getting the biggest check by going to another firm that can't help them with that. So that's the pitch is that if you want to grow at Raymond James, we'll be the best partner for you to help you grow. Maybe that doesn't mean you get the biggest check upfront, but over time, that will result in far superior financial outcomes for you. That's the pitch we have in all of our affiliation options. It's the same strategy, same product support and solutions and service.
We really try to stay, again, consistent and indifferent between the different affiliation options, and that's key to offering what we call Advisor C hoice.
Yeah, and from my perspective, it resonates. We do an FA survey every year. RayJ is always in the top tier of the platforms, you know, out there that FAs, ranked by FAs, right? Of course. Love the transition to the bank, NII loans. So securities-based loans have grown really, really nicely. You know, about 13% growth the last year or so. How integrated are SBLs with your broader offering and the wealth platform, the private client business? And you'd previously noted that something around two-thirds of advisors have at least one SBL. Is that still the case or has that ratio moved a bit? And where do you want to get that penetration?
I'll let Butch take this one on, but maybe first what I would say is that, again, we don't have quotas as a firm. We want to offer the solutions that make sense for advisors and their clients, but we don't push products in a way that many of our peers push products or change deferred comp programs to sell, cross-sell more products than the other. And that's really what makes us different. So we have to have all the solutions in case advisors want their clients to avail themselves to it. But I don't want to sit here and sound like we're trying to increase, being front-footed and trying to increase penetration in any product or solution at the firm where it doesn't make sense for the advisor or the client.
Yeah. That's great. And we have had outsized growth in our securities-based loan portfolio over time. This past quarter, as an example, we had 4% growth in our SBL loan portfolio, whereas our total loan book increased 3%. So that's a trend that we've seen over time and we expect to continue. How that happens is we've made investments in our technology. We've made investments in the education of our financial advisors so that they can educate themselves and then educate their clients. And then through the technology, we enable the advisor to conduct that transaction in a more efficient basis, both for the advisor as well as for the client.
Excellent. Capital Markets. So M&A revenues in the first fiscal quarter, so the December quarter marked the second best quarter in the firm's history. So how are you, and this has been thematic not only across the conference, but for the months leading in. Everybody's very excited about Capital Markets recovery. So, you know, how are you thinking about the outlook for the investment banking environment for the rest of this year? Another thing is that the volumes have kind of not started on the best foot with January. You know, I know a month doesn't make a trend, but what are your thoughts on this slower start we've had?
Yeah. I'm glad you're asking about our Capital Markets and advisory business because, you know, while Private Client Group business is 70% of our revenues almost and definitely the biggest part of our business, I do think outside of maybe the investor community that follows us very closely, the Capital Markets and particularly the investment banking part of our business is underappreciated. So that is something that I plan on spending more time talking about because we have a very robust platform. Again, it used to be unusual for us to have $3-$5 million fees not too long ago if you look back at history. And now we had a $43 million fee. It's not unusual for us to have $20 million-plus opportunities.
And so we are a major, as Jim Bunn has come on and really turned around and beefed up our investment banking business over the last several years. Now he, of course, is the president of our Capital Markets segment. He's done a tremendous job elevating the game of not only the existing bankers, but bringing on new bankers both through just organic recruiting and also through niche acquisitions to really make us sort of a preeminent player in the middle market growth space that we focus on. And again, 55%-60% of our M&A transactions have a financial sponsor involved either as a buyer or a seller. And so we are continuing to focus over the next few years on continuing to build out that platform. And we have a unique advantage.
While everyone had a strong last couple of quarters across the industry, one of the unique advantages we had over the last two years with capital market activity across the industry was, you know, near record low levels was that while several of the peer- plays had to cut back or reduce headcount or certainly not hire because of the stability of our other businesses, we were able to make very opportunistic additions to the platform. For example, our healthcare team we've increased substantially during that soft period over the last two years. And we're only able to do that because of the strength from our other businesses during that tough time for capital markets. So that's going to continue to be an area of focus. If you look at, listen, the last two quarters were very strong.
Last quarter was the third strongest quarter in our history for investment banking and the second strongest quarter in our history for M&A specifically. And I think a lot of the structurally, there's been a lot of pent-up demand built up over the last couple of years. Again, going back to 55%-60% of those transactions have a financial sponsor involved. They have a lot of portfolio companies that are even beyond the typical harvesting phase that they need to sell. And then on the other side of the equation, you have a lot of private equity capital, dry powder that needs to be deployed.
I think with sort of more regulatory clarity long term, I think, and interest rates settling out, more certainty around sort of the level of interest rates, which is really what caused the slowdown in M&A activity going from near zero to 5.5% and just being so volatile, uncertain. I think now with that stability, everyone's really optimistic about the outlook. Near, I would say intermediate term, it's still something that we're keeping a close eye on. For example, there's a lot of uncertainty out there. I mean, day to day now with talks around tariffs, that impacts particular industries.
So if you're an industrial company and you're importing a lot from a particular country or a particular type of import that's got a new tariff on it, then that could change the margin profile of your business pretty substantially, which could change the price expectation that the buyer or the seller in that conversation might have. And so I do think that there is potential for some additional postponement of time, I think, as some of this uncertainty for particular sectors gets figured out. But our outlook longer term, kind of intermediate to longer term, is still very strong just given the underlying drivers, particularly in the financial sponsor space.
Great. Yeah. All that's certainly fair. You had a 17% increase in your MD headcount within the capital markets business since 2021. And productivity reached $5 million per MD in last fiscal year. So how do you view banker productivity in what might be a more normalized environment as the activity picks up?
I mean, I would say MD productivity during the boom years during COVID when rates were near zero, you know, was up to $7 million-$8 million per year, I mean, per MD in those kind of two-year periods where we saw record results, and so now, again, we're not there yet in the markets. Interest rates were very low. It's sort of a perfect, the stars aligned for M&A during that period of time. Private equity was raising record amounts of capital to deploy, but it just shows you what the potential is, so we have, and we're continuing to recruit investment bankers that have higher and higher potential than the average, so we're really excited about the upside opportunity.
Again, that's why I said opening up on the discussion in capital markets is something we certainly want to highlight and talk about more outside just the investor community because rightly so, most people think of the private client group, which is our biggest business by far. It's a core business for us. But capital markets, I think sometimes gets overshadowed. And that's something we're going to talk more about externally as well.
Good. I mean, that was one of the things when we recently upgraded Raymond James was one of the things that we liked is the fact that basically you were breaking even in Capital Markets for a while and the incremental operating leverage should be quite good. So I'd love to talk about that a little bit because you mentioned on the call that about teens margin, how we should be thinking about that business. I covered some of those, you know, sort of M&A oriented firms. And they usually can get to more like a 25% margin when things are going well. So why is it that we can't get a higher level of profitability and pre-tax margin out of that business for RayJ?
Yeah. I think on a pure apples to apples basis when comparing to the peer- plays, I think our M&A part of the business can get there. But when you look at the overall capital markets profile, that includes equity sales and trading, includes research, includes our fixed income business as well. And so getting to the teens as a full service capital markets firm relative to the peer- play M&A firms is a relatively attractive place for us to get to, especially as we're continuing to invest in growth.
Got it. Okay. And do you think that it's reasonable? Of course, it's going to depend on how good the environment gets, right? But if we see a steady normal cyclical recovery, you know, could we get to that more normal level in a couple, three years?
Yeah. So I mean, if you look at just the last couple of quarters, I think, again, fixed income's results weren't as strong as they were during the COVID period, but the margins were pretty strong, pretty attractive just in the last couple of quarters in capital markets. So it peaked out, I think, at 27% during the COVID years. Again, that was with both the equity side and the fixed income side running at near record levels or at record levels. And so that usually isn't the case just given the countercyclical nature of those two businesses. But, you know, again, I think that the mid-teens is certainly achievable for us in our capital markets business given the platform that we have today.
Okay. Okay. Love to transition over to capital. I feel like it wouldn't be a conversation with you without talking about capital. Although pretty soon it's going to be Butch who I'm going to have to start thinking of, I guess. I'm going to hand that hot potato right over to Butch. So Tier 1 leverage ratio 13% right last quarter, well above your self-imposed target of 10%. So when you're thinking about the excess capital that you have, how are you thinking about deploying it? And are there any particular growth initiatives, M&A opportunities, or maybe special return shareholder type return opportunities that you're thinking of prioritizing?
Yeah. I mean, our capital prioritization matrix has really been pretty consistent. It's first and foremost to invest in organic growth, which is recruiting advisors and bankers and salespeople, investing in our associates, and also growing the balance sheet at the bank, which has been harder to do over the last couple of years just given the lack of demand, particularly for loans on both the SBL side of the business and the corporate side of the business, although we're starting to see SBLs pick up, and then after organic growth, it's acquisitions, which I'll touch on here in a second, and then after acquisitions, it's dividends, and then finally, the last priority is buybacks, but on the acquisition front, you know, we have been very active in looking for opportunities. As we said on the call, we're looking at several opportunities.
But as we also said on the call, given our criteria, that any acquisition we do has to be a good cultural fit, good strategic fit, and also make financial sense for shareholders, which is really important to remember. We're not going to do a deal just to do a deal to deploy the capital. It has to make, it has to give us a reasonable chance to get attractive returns for shareholders. And in this world, we talked about private equity. There are a handful of opportunities that can check the first two boxes, but private equity is being super aggressive and it's making the third box harder to check. But we're going to continue to lean in on opportunities, especially when they're good cultural fits and strategic fits, and try to make them work if we can.
But there's been cases even recently where certain private equity firms just made the deal too uneconomic for us. Now, maybe based on their model or their leverage profile that they're willing to take on, it would work for them, but that's not our strategy. And so when we look, when we get in sort of further stages of a due diligence process and looking at acquisitions, that's one of the many factors that we consider when we think about what level of buybacks we want to do, right? Because as I said on the earnings call, we don't want to go out and buy back a bunch of stock and then announce a deal or two and then have to go back and raise it again. That doesn't make sense for shareholders either.
Now, with that being said, if we can't get any of these deals across the finish line, then we do have excess capital to the tune of around $2.5 billion to get to our conservative target, and we will certainly be more front-footed and do, you know, other capital actions, including buybacks. We're not afraid of buybacks and we don't think our stock's too expensive for buybacks, frankly. I mean, if you look at our multiple, not that I like to talk about our multiple a lot, but it's an attractive use of capital, but we prefer to use capital to grow the top line, not to reduce shares to increase EPS. You know, that's never been our long-term strategy.
We think if we grow top line over time, grow revenue, it grows our capacity as a firm to continue investing in the business, which allows us to grow long term, and so that's our goal, but we have also acknowledged that we're well beyond our 10% Tier 1 leverage target, which is, you know, well above the 5% requirement to be well capitalized, so at 13% now, we acknowledge that we have more capital than we need. Again, high-quality problem to have, but something that we still want to make sure we address one way or the other.
Yeah, and you mentioned private equity being competitive. I'm guessing that means that the targets you're talking about are private client targets.
I mean, private equity is involved in every category. And as you know, they've started getting into traditional accounting firms and other spaces that they've never really played in before. So there's just a lot of going back to my Capital Markets commentary. There's just a lot of dry capital, dry powder to deploy, and they're looking to deploy it as they should. And they're great partners for us. I'm not negative on private equity. We sell a lot of private equity through our Private Client Group business and our advisors and clients. There's a high demand for it and it's a high growth area for us. And they're clients in our Capital Markets space. So, you know, nothing negative to say about them other than they do compete with us now and drive up pricing in certain cases.
Right, but historically, when you guys have done M&A, it's mostly, as I, from my recollection, it's either been maybe in the bank, like with TriState or, you know, one of the trading businesses within the cap markets business. Would you consider doing a regular way M&A into private client as well?
Oh, absolutely. And our biggest acquisition in history really was in 2012 with Morgan Keegan, which gave us a great franchise in the Private Client Group in the sort of Southeast region. And the retention for that transaction was two years after we closed the transaction was north of 90%, which is unheard of in our industry. That was such a great cultural fit. And now they're pretty much running our fixed income organization. The leadership team of our fixed income organization, almost all of them came from that Morgan Keegan transaction, you know, 12, 13 years ago now. And Alex. Brown is a transaction that joined Raymond James in 2016 from Deutsche Bank. And the retention of that transaction has been very strong as well. So when it makes sense, we pursue it.
I think what we get a lot of questions over the last several years has been some, you know, loosely defined Private Client Group transactions in the wealth space, and a lot of those transactions were not ones that we even looked at. They either weren't good cultural fits or they weren't, and or not good strategic fits. Their average production per advisor was much lower than even our floor for when we recruit advisors, so those are not the type of transactions we would pursue.
Okay. Got it. On expenses, you guys on the call mentioned that your non-comp is going to come in at around $2.1 billion for the year. So some continued growth there in expenses. Can you provide maybe a little understanding around what's driving this expense growth? Is it how much of it's inflation? How much of it is growth initiatives? And is there any portion of the expenses that are just tied to revenue?
Yeah. So we did announce that our target for non-comp expense is $2.1 billion for the upcoming year. And we continue to make disciplined investments in our platform and in our growth. The majority, the significant portion of the increase year over year is in technology. And our technology investments are in support of our financial advisors and our financial advisors' businesses. And that is the most significant portion. The second most significant portion are in elements of expenses that directly correlate with growth in other aspects of our business. So as an example, investment sub-advisory expense moves directly in proportion to increases in our assets and those programs. Recruiting expenses flex with our growth and as well as FDIC insurance premiums as an example increases the size of our bank balance sheet increases.
So a significant portion of that growth is also in those line items directly attributable to revenue growth. In total, those two, the two elements, technology and items directly related to our growth comprise about 60% of the total increase year over year.
Okay. Got it. That makes a lot of sense. Well, very, very helpful. Thanks a lot for your time, Paul and Butch.
Yeah. Thank you, Brennan. And again, thank you for inviting us down to sunny Miami, where it's a couple degrees warmer than where we woke up this morning in Tampa Bay. So really appreciate the UBS hosting us today.