Everyone, welcome to the thirty-fourth Annual Financial Services Conference at the Bank of America. This is Craig Siegenthaler. I run the North American Diversified Financials vertical, and I'm pleased to introduce Raymond James's CEO, Paul Shoukry. Paul's been with the firm for over 15 years in a variety of roles, including President and CFO. Paul, thank you for joining us.
Oh, it's my pleasure.
Raymond James competes really in three main businesses: wealth management, capital markets, and asset management. It's a leading private client business, and manages about $1.7 trillion in client assets, and it finished the year on a very strong note, with over $30 billion in net new assets. So Paul, first, congrats on the strong finish.
Thank you.
Let's get started with a big-picture question. On the macro front, we've entered year four of the bull market. IPOs and M&A are expected to accelerate, I hope. The Fed is cutting rates. How do you frame this current macro environment, and what is really the impact on Raymond James?
Well, great to be here, and want to welcome everyone to my home state of Florida. The Chamber of Commerce is doing its job with the great weather here. You said four years into a bull market. Some people say we're basically 16 years into a bull market. Obviously, there was a blip during COVID, but fortunately, with all the support that was provided, you know, the markets really responded and were extremely resilient during COVID. So, I am optimistic on the macro for all the reasons that you stated. Unemployment is still near historical lows. Inflation seems to be relatively under control. Consumer sentiment is strong. And so a lot of the key components to what creates a healthy economy exist.
There's always uncertainty, there's always things that are potential challenges and concerns, but overall, when you look at the economy, the market, the labor market, the consumer sentiment, the corporate earnings growth, I mean, our CIO, Larry Adam, at Raymond James, I think he's expecting 12% earnings growth this year, and he's on the low end of the consensus. I think 15% is where consensus is at. So earnings growth is very strong as well for the S&P 500. So I'm pretty optimistic long term with where we are in the U.S. economy.
As you put your strategy hat on and you think about your strategic priorities, what are the one, two, or three things you really want to do this year?
Well, the most important thing we do at Raymond James, have consistently done and are consistently focused on, is just continuing to reinforce the values and the culture that was set out by Bob James in 1962, which is to always put clients first, to make decisions for the long term, to have integrity in different market environments. Some people say integrity is what you do when no one's looking. I actually say integrity is what you do when everyone's asking you and rewarding you for doing something that's inconsistent with your values. And then respecting independence, independence that we still put in writing. It's called the Advisor Bill of Rights, that advisors own their book of business across all of the affiliation options, and if they want to leave in good standing, we'll help them move to their new firm.
And so growing larger while preserving and reinforcing and strengthening those values is so critical to our long-term success. What we really want to do at Raymond James is be the absolute best platform for financial professionals and their clients, not our clients, but their clients, and that's true across all of our affiliation options. And to do that, you have to have that strong culture I just described, driven by the values of the organization, which have not changed since our founding. But you also have to invest significantly in technologies and products and solutions to help financial professionals provide better advice and more holistic advice to their clients, which I know we'll talk about, throughout this discussion, all of those areas.
And so we're doing that with a newly unveiled value proposition that we came out with with our annual report, which was released several weeks ago, and it's called The Power of Personal. So in this world of technology and AI and transactions and returns, what people need more than ever now is human relationships, personal relationships, and we're doubling down on that. Why our advisors have such sticky relationships with their clients is 'cause the clients deeply trust their advisors. Raymond James was ranked the number one most trusted firm in the financial advice industry by clients, and that's really what wins the day, is the personal relationships. We call it the power of personal, and it's also the personal relationships we have with our financial professionals.
I just came in from a complex event in Charleston last night with 150 of our financial advisors. That's so important for me to understand what we can do to be better partners, for, for advisors. So those are really our priorities, a consistent year to year, because we have a 5-10-year horizon, so we don't really change our strategic initiatives or strategic focus or our priorities year to year. It's continuing to invest in the platform, but really focused on reinforcing the culture and the values of the organization.
So Paul, we've been in a multi-year bull market here. You've had private equity money enter the space, and I'm talking about the Private Client Group. You've also had OSJs. Yet through all that, you just put up a record or near record net new asset number in the fourth quarter. So my question is: What does the competitive landscape look like in the private client business?
Yeah, well, Craig, as you know, you've been following it, and you've been a big advocate for releasing the net new asset number for years now, and we have consistently been a leading recruiter in our business for years now. Last year was a record recruiting year, despite how competitive it was, and it was extremely competitive. It was a record recruiting year for us. We recruited advisors with over $400 million of production at their prior firm, which was up 21% from the prior year record. 21% increase from the prior year record to what we recruited last year, and it, it's because of all of those things that I just described around our culture and the platform. We don't aspire to be the highest upfront check.
We have a very different strategy than many of the other firms, some of the private equity-backed firms. We want to compete on the culture and the platform, and we don't want advisors to join us just for the highest upfront check. We want advisors to join us 'cause they're convinced that over a long period of time, they'll be able to grow their business more, develop better relationships with their clients, and make more money over the long term at Raymond James, and the longer they stay at Raymond James, the more money they'll make for the clients and for themselves and for the firm. And by pursuing that strategy, we are self-selecting advisors who are less likely to leave every seven or eight years to recapitalize for the highest check.
So it's a very different long-term strategy, but it's 'cause we have a long-term approach and view to the world, whereas some of the competitors that you mentioned have maybe 3-5-year exit time horizons, right? So their strategies are different. Not that one strategy is better or than the other, it's just for us, what makes sense is what makes sense for the next 5-10 years and beyond, not what makes sense for the next 5-10 quarters.
Well, I want to hit on guidance. At the last Investor Day, you provided several targets. Adjusted operating margin, about 20%, comp ratio, 65% or lower. Given recent KPIs, how do you feel about these targets today?
Yeah, well, we update our targets once a year at the Annual Investor Day, which we'll have again in May or June of this year in person. And we try not to deviate much from that intra year just because there's so many different things that change across our businesses, whether it's Private Client Group, Capital Markets, the Bank, et cetera. And so short-term rates have come down, which a lot of people rightly view as a headwind in that the spreads we earn on cash balances decline as rates, short-term rates come down, but there's a lot of offsetting tailwinds to that as well. So you saw that, for example, in the last quarter with record Securities-Based Lending growth.
As short-term rates come down, borrowers or clients are more comfortable borrowing on those floating-rate loans, against their securities portfolios, and that's certainly a tailwind that helps us grow earning assets. As rates come down, we saw this during COVID as well, M&A activity picked up because, financing was more readily available at cheaper rates, which was able to stimulate M&A activity. And so we always have puts and takes in our business. We're not prepared to change our metrics one way or our targets one way or the other right now, but just, but we're still feel like with our, with an improvement in M&A, in particular, last quarter, due to timing, largely due to timing, M&A was softer for us than, than many of our other competitors, but we still feel, feel very good about our pipelines in M&A.
We still have a lot of motivated buyers and sellers, and we feel good about the pipeline for the rest of the year, and so that's certainly helped the margins and the comp ratios. M&A hopefully rebounds from what was a weak fiscal first quarter for us.
So Paul, I want to come back to the Private Client Group recruiting backdrop. I want to talk about transition assistance, but I know, you know, you can't comment on numbers, but maybe some high-level commentary on how TA packages have trended across the industry over the last couple of years.
Well, certainly over the last couple of decades, too. I mean, transition assistance has continued to increase across all of the affiliation options. The market has continued to get more competitive, and that really puts a focus on two things. One, scale. We have to have scale in our business. The size really does matter in terms of being able to generate efficiencies and in the business and the support areas and the product areas, and then the technology that is required to be competitive. We spend over $1 billion a year in technology, and, you know, we're fortunate to have the size now to be able to invest over $1 billion a year, because I can't imagine being competitive in this highly competitive space if we had a fraction of that technology budget.
So that creates a moat for us relative to these new entrants coming in and the smaller players in the space. It also puts a focus on that value proposition, the culture, treating advisors like clients, respecting the book ownership, because that's highly differentiated in the space as well. Again, we don't want to be the highest upfront check on the street. We want to be the best long-term destination and the best long-term partner on the street. So while we still have to be competitive on the upfront check to be competitive, we want to be competitive on the full package and convince advisors that you'll make a lot more money here over the long term if you stay with us at Raymond James, 'cause we'll help you grow your business, and we'll help you support your clients.
So, when you look across segments, you know, more on the RIA side, smaller IBD side, kind of maybe core, or you look across geographies, you look across kind of, asset mix, maybe a, you know, advisory or brokerage, is there a type of advisor that you're really focused on recruiting now? And alternatively, is there a type that maybe you're not that interested in recruiting at this moment?
Yeah, we have the largest addressable market in the industry because we service all of the affiliation options, from W-2 employee to independent contractor to financial institution divisions, where we provide brokerage platforms to banks and credit unions, to RIAs. And we've been in those businesses for a long time, and we have critical masses in all of those businesses, so we have a very large addressable market. And our approach, which is relatively unique, is we just want advisors who are focused on serving their clients, who put their clients first, who are good cultural fits with Raymond James, who would be good representatives across the country.
The number one most energizing thing about my role as CEO over the last year, it's been almost exactly a year, is traveling the country and seeing how consistent the advisors are in terms of representing Raymond James, putting their clients first, being good stewards in their communities. That's energizing, you know, and that's. And we have to remind ourselves not to take it for granted, 'cause that doesn't exist everywhere else. And so I'm extremely proud of that, and that's who we're focused on. We don't try to hire one type of advisor or force all of the advisors to use one type of investment approach, or try to marginalize their business or force them to serve one type of client. Again, one of our four values is independence.
We want them to be entrepreneurs, run their business the way they feel that is best suited for their communities and for their clients. Every community is different. You know, our, we have a great group of advisors here on Brickell that do a great job for their clients. That's a very different market than where I was yesterday in Charleston, you know, and lots of advisors from the surrounding area, all the way out from Columbia, South Carolina. And so we want advisors to meet their clients where they're at or in the communities that they're in, and not try to require them to shift one way or the other based on what's best for the firm.
So Paul, do you have any specific initiatives in place today to help accelerate organic growth or productivity per advisor? So not on the recruiting side, but, on the same-source sales side, the existing advisor base.
Absolutely. We have dozens of initiatives that are focused on helping advisors better serve their clients, increasing the wallet share of their clients, and it, it ranges from providing education, training, development to the advisors. Coaches, we have coaches that help coach the advisors in running their business and running their practices and developing their teams. We have a lot of training that's not only targeted to the advisors, but education for their sales assistants and their teams as well, 'cause a lot of the organic growth, this is a team effort. It's not just focused on the advisors, it's focused on the entire team. And then also related to organic growth, this is not just investable assets and investments, it's also lending solutions, whether it's mortgages or securities-based loans, it's insurance solutions, it's donor-advised funds out of our trust company.
So having a full-service platform to be able to offer more holistic and deep advice to their clients is really helping them gain wallet share, again, not just of the investable assets, but on both sides of the balance sheet, and insurance, and trust planning, and estate planning as well.
Great. Let's flip it and talk about the bank for a moment. In my intro, I didn't actually include the bank as a fourth division, 'cause I kind of look at it as helping some of the other divisions. But, client cash sweep and ESP balances grew to $58 billion or kind of 3% last quarter. This represents, I think, about 3.7% of clients' assets at this moment. How do you see client cash behavior evolving across the Raymond James Bank, third-party banks, and the ESP as the Fed continues to cut rates, even though we maybe only have two this year?
I would say as we saw across the industry since rates started rising, you know, up to a peak of 5.5% for Fed Funds Target, clients have really, with the help of their advisors, invested the cash in higher-yielding alternatives, whether it's purchase money market funds, which have grown significantly over the last few years, the Enhanced Savings Program balances, which we offer up to $50 million of FDIC insurance at a very attractive rate, and a lot of other higher-yielding alternatives, to cash. So cash has come down across the industry, in terms of what's in the cash sweep program.
I think for us now it's around 3% of assets or something like this, 2.8% of assets, which historically is a low for us and for the entire industry. As that has stabilized as rates have come down, so the fervor around making sure you're earning the absolute highest rate on every last dollar of cash balance, I think between rates coming down and clients have invested most of their cash or almost all of the cash that's sensitive to price in those higher-yielding alternatives, the cash balances certainly have seemed to stabilize across the industry and for Raymond James as well.
Now, the flip side of that is the enhanced savings program balances have seen declines, and the reason for that is 'cause clients—the flip side of clients being less sensitive around placing every last dollar of cash—is that it's harder, more difficult to track cash balances and higher-yielding alternatives, 'cause they're just not as sensitive to it. And a lot of the cash, when rates come down, get reinvested into the markets, especially given consumer sentiment and confidence in the markets right now. So, we're seeing a lot of reinvestment into the market and it's a more difficult environment between lower rates and strong markets to raise cash in higher-yielding savings products.
So loan growth, I think, was 13% in the fourth quarter. So where do you see the strongest opportunities across SBL, securities-based lending, C&I, residential mortgage? Maybe I'm missing one, but as you think of that loan, loan portfolio continue to grow, what do you expect to be the leader?
Yeah, last quarter's growth was really driven by securities-based loans to Private Client Group clients, and that was where we expect continued growth. I mean, these are very well collateralized with marketable securities that reprice daily, so we like the credit risk associated with these. We like the risk-adjusted returns associated with securities-based loans. They help advisors to establish stronger, more holistic relationships with their clients. And to your point, our bank is really a utility bank to serve clients. We use our balance sheet to help deepen client relationships and to solve for client demand. So we would expect the securities-based loans and eventually residential mortgages to continue to take more of the balance sheet at the expense of corporate loans going forward.
... So, credit quality has remained very good across the banking industry. And the U.S. economy grew at 4.3% last quarter, so this might not be a big topic, but, what are you seeing on the credit quality front? Are there any early signs of stress in any parts of your portfolio?
No, we feel really good around the credit quality. We're not seeing kind of thematic early signs of stress. And again, our securities-based loan, which is the fastest growing part of the portfolio, is very well collateralized, and so we, we feel very good about the balance sheet and the credit quality.
Right. Now, no wealth manager is immune to what happens with- on the rate front, and the Fed is cutting here, although the ten-year has been a little more range-bound with long duration. What is the outlook for NIM as the Fed likely continues to cut rates a little bit?
Well, all else being equal, as NIM comes down, even though we have a large portion of our deposits that have about 100% deposit beta, so the enhanced savings program balances, even some of the balances in the sweep have 100% deposit beta. So that protects us, provides a cushion to a lower rate environment. But all else being equal and as rates come down, you would expect some level of compression on the NIM across the industry. But the flip side of that is, as rates come down, you should be able to also grow earning assets at a faster rate. And so your NII, I always say I focus on NII, not NIM, because NII is real dollars to earnings.
So we're optimistic about our net interest income and the fees from third-party banks over a long period of time as we continue growing the balance sheet and growing earning assets. And we think that that's the trade-off you have with lower NIM, is the ability to grow earning assets faster.
Paul, you've built a multi manager multi-boutique model in your asset management business. But what I'm curious of, what is the strategic benefit to the rest of the firm by having that business? What's the linkage like?
Well, the asset manager, the majority of the assets are still sold externally to other wealth management platforms and other institutional investors. But there is a lot of those assets are also sold internally to our own wealth channel. Particularly a lot of the fixed income assets with shorter duration, medium-term duration. And so there's certainly a benefit to the wealth business of having the asset manager provide bespoke product that the wealth managers can and attractive products that the wealth manager can take advantage of. But we also are very clear that the asset manager does not get preferential treatment. It's actually, in some ways, more difficult to sell asset management product internally than it is to sell externally.
So we want our asset manager, through the multi-boutique strategy, to be competitive and on its own two feet, to build its own distribution force, to generate good returns on its products, to be competitive externally with outside wealth platforms and outside institutional investors.
If you look out at the broader asset manager ecosystem, and you've got a variety of asset classes, active equity, passive equity, fixed income, private markets, where do you see kind of money going, and how is the RayJay Asset Management business positioned for that? And, you know, kind of a follow-up is, if the Fed is cutting, at some point, some of that cash becomes even lazier, and some of that risky cash may move out into areas like fixed income.
Yeah, I spoke earlier about our value proposition of The Power of Personal, and you see that in our asset management business as well. So where the flows are going, certainly are driven by the macro and different types of products and different types of wrappers, but what we see more than anything is where the flows are going across the industry are where the asset managers have the deepest relationships with their clients. And they're not product providers, they're solution solvers. They create solutions. They become extensions or partners with their investors and their clients. And that's what we're really focused on with our boutique asset management strategy. Clark Capital is a perfect example of an acquisition that we just announced with about $40 billion of assets under management, is that they really have deep personal relationships with the financial advisors that they serve.
They, they do pitches with prospects and clients alongside the financial advisors they serve. So the reason their flows have been so good isn't just because of their products and their performance, but it's because they're really focused on developing deep personal relationships and becoming an extension of the team to the financial advisors. That's what we're focused on. Our strategy and asset management is... The foundation is the power personal. Where can we create differentiated relationships with clients? Product performance and product wrapper, all of those things are going to be critical, but how can we make more investments in developing deep, value-added relationships and creating solutions for clients in the investment management space? That's really what our focus is. That's similar to our focus on our capital markets business, our bank, and our Private Client Group, of course.
We got to cover capital markets. Haven't covered that one yet. You've a pretty broad offering there, M&A advisory, equity and fixed income underwriting, equity and fixed income brokerage. How would you characterize the current recovery in capital markets activity that, that we saw last year?
... Yeah, well, the majority of our M&A business is really focused on financial sponsors, where private equity is the seller and/or the buyer, in a lot of cases, both. And so we have a lot of motivated sellers. We have seller-private equity firms that have held investments, portfolio companies a lot longer than they originally expected, and so they're motivated to sell those companies and return some capital back to their LPs. And on the other side of the, with the buyers, there's a lot of dry powder still in the system and capital to be deployed, and so they're looking to make acquisitions. And so the pipeline has been building and growing. It obviously was disrupted as rates rose from near 0%- 5.5% for the Fed Funds Target.
That created a lot of disruption, and we were pretty optimistic beginning of last year, but then we had some disruption with Liberation Day. But as the markets and the economy got more confident around that situation, M&A really picked up in the second half of the fiscal year. So a lot of market participants were surprised with the soft first fiscal quarter that we had last quarter in M&A because we are optimistic about the pipeline, and again, a lot of that's just timing. You can't time... This is not a recurring revenue business. You can't time closings. We're still optimistic about the pipeline and the pull-through going forward for the rest of the fiscal year.
Within Capital Markets, what product gaps or coverage areas would you be looking to fill over the next 12 months?
Well, we have really good coverage across our industry verticals, but almost within every industry verticals, there's sort of sub-verticals where we can continue to broaden and strengthen and continue to gain market share. So, yeah, we have a very good depositories business, but there's a couple other players out there that are bigger, much bigger than us in depository. So that's an example of an area where we can continue to—we have plenty of headroom to continue to grow. We see these as great opportunities for us. Biotech, another great opportunity for us. Industrials, we have a great business, but we don't have the market share that we can get in that sector either.
So really, across all the verticals, we have a lot of opportunity to continue expanding and getting stronger, which is why we're so optimistic about the growth opportunity in investment banking over the next several years.
One of the really nice positive points in the story was you've really accelerated the buyback here. We've seen capital ratios kind of stabilize, and, you know, they look very high relative to other firms. That's good. I think you have $2.1 billion of excess liquidity, too. So my question is, as you look over the next year, how do you prioritize all this? Organic investments, M&A, dividend increase, and also buybacks, which have a lot of near-term EPS leverage.
So our, our capital prioritization framework is very consistent. First and foremost, we're focused on organic growth. We talked about recruiting financial advisors is a big use of capital for us, and that, we believe organic growth will generate the best long-term returns for shareholders, and the best- and that's the best opportunity for us across all of our businesses. Following organic growth is acquisitions, M&A. We, we announced two acquisitions, in the last several months, both GreensLedge in the capital market space, and I just mentioned Clark Capital. We continue to look for acquisitions across all of our businesses. But the acquisitions are, have to be good cultural fits. We don't even proceed from there unless it's a good cultural fit, unless we feel like the, the leadership team and the people...
We are in a people business, so if they're not focused and aligned with our values in terms of putting clients first and making decisions for the long term, then we're not interested in pursuing that acquisition. But it also has to be a good strategic fit, and when we say good strategic fit, we mean that they make Raymond James better, but we also make them better. So it's a true win-win-win for us, the firm that we're partnering with, and the underlying clients, and that's the way we extract long-term value for the clients and ultimately to the shareholders. And then, if it's a good cultural fit and strategic fit, then we look at the valuation. The valuation obviously has to make sense for both Raymond James and the partner that's selling to us.
And then the third focus area of priority for capital deployment is ongoing dividend. We have a long-term target of 20%-30% of earnings for the long-term dividend, and if we can't use the capital to check those boxes, then we would look at repurchases as the fourth and final priority in the capital prioritization framework. We've been fortunate, in a very fortunate position where we have a one of the leading capital ratios in the industry, and we've been generating a lot of capital through what was our fourth consecutive year of record earnings last year, last fiscal year. And so because of that and because of the the excess capital generation, we've been accelerating and increasing the the buybacks to about $400 million a quarter.
Great. We're running low on time, but I wanted to look at the audience and see if anyone has any questions, and if you do, please raise your hand and wait. We'll get you a microphone. We have a question from the gentleman in the front row.
Thank you very much for taking the question. My question is on operating leverage and the margin. You've articulated that you invest, you know, because of your scale, allowed you to invest $1 billion in technology, you know, every year, which is, you know, very sizable. So I wanted to ask on, I guess, when you look at your business, across which areas do you see have the greatest opportunity for further margin expansion beyond the 20% that you've articulated at your Investor Day?
Yeah, when we look at our margins, each of our businesses work together to generate that margin. There's so many interdependencies between the business that it's hard to isolate one segment's margin and its target relative to the others. So, when we look at that 20% target overall, you know, we think... And we've been very consistent historically of growing revenues faster than expenses and, you know, driving the bottom line and improving margins over time. But with that being said, we're a growth business, you know, and our margins would be a lot higher if we only invested $600 million in technology versus $1 billion. And but the reason we invest $1 billion instead of $600 million is because we're continuing to invest in growth.
We're continuing to invest in being the absolute best partners for our financial professionals and their clients, and we're doing that across technology, the product areas. We're record recruiting. All of those things require investment, but that generates better long-term returns for our shareholders over the long term. So, we're not going—we're gonna continue to focus on that balance between investing in the business to drive growth, to drive top-line growth, while at the same time, that long-term aspiration of growing revenues faster than expenses, which we have a consistent track record of being able to do.
Great. Thanks for the question. With that, we are out of time. Paul, on behalf of all of us at Bank of America, thank you very much for joining us.
Thank you.