Raymond James Financial Inc

NYSE:RJF

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, and welcome to the earnings call for Raymond James Financial's Fiscal Second Quarter of 2018. My name is Ashley and I'll be your conference facilitator today. This call is being recorded and will be available on the company's website.

Now, I will turn the call over to Shoukry, Treasurer and Head of Investor Relations at Raymond James Financial.

[Paul Shoukry, Raymond James Financial, Inc.]

Thank you, Ashley. Good morning, and thank you all for joining us on this call. We appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chairman and Chief Executive Officer and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions.

Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, acquisitions, our ability to successfully recruit and integrate financial advisors, anticipated results of litigation, and regulatory developments or general economic conditions. In addition, words such as believes, expects, plans or future conditional verbs as well as any other statement that necessarily depend on future events are intended to identify forward-looking statements.

Please note that forward-looking statements are subject to risk and there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent forms 10-Q which are available on our website.

During today's call, we'll also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release.

So, with that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?

[Paul C. Reilly, Raymond James Financial, Inc.]

Great. Thanks, Paul, and welcome to the call and welcome here to the home of The Tampa Bay Lightning. So, I want to welcome all the Boston folks who are coming down. It is in the 80s here all week. I don't know why the rest of the country is not quite warmed up yet, but look forward to the next week.

So, let me start. First, I'm really pleased with the overall results of the quarter and I think that you need to reflect back on our first calendar quarter where we have a lot of seasonal factors that typically impact us, which we'll talk about a little bit later in the call. Overall, we had record quarterly net revenue of $1.81 billion, up 16% over the prior year and 5% over the preceding quarter. We had record quarterly net income of $242.8 million, up 115% over the prior year's quarter, but you have to remember we had an unusual legal expense item in that quarter and we're 104% over the preceding quarter, but again then we had the tax charge from the new Tax Act in the preceding quarter.

We had no non-GAAP adjustments in the quarter, so I'm going to use some comparisons of GAAP numbers versus our adjusted net income. But our GAAP versus our adjusted net income was up 29% over the prior year and 2% over the preceding quarter. So, the seasonal factors that Jeff may get into a little bit, first, we had fewer days in the quarter, a couple of fewer days and that impacts interest income and our fee billings, so there's a couple percent drag really on those items. And expenses, we have our FICO reset that starts as we start paying FICO taxes starting this quarter. We have our mailing expense in our year-end statements, and we also ran a flight of advertising this quarter. So, those expenses are in this quarter, which usually are elevated over the rest of the year.

We had record quarterly net revenues for the Private Client Group, Asset Management, and Raymond James Bank and record quarters for the two biggest profit drivers, pre-tax income for our Private Client Group and Raymond James Bank. I think most impressively for the quarter, we had a 16.7% return on equity, and our return on equity includes both tangible and intangible capital. A lot of firms exclude intangible capital, which would significantly raise our ROE compared to our peers. So, if you look at that ROE adjusted, I think you'd find that we've outperformed most of our competitors. We also have no preferred equity, we all have common equity, so there's no adjustments to the denominator either.

More importantly, maybe our key drivers, we ended up with records; client assets under administration of $729.5 billion; we had financial assets at a record under management at the quarter-end of $132.3 billion. Our number of financial advisors, 7,604, were up 382 year-over-year and 67 sequentially. Client assets grew even though the S&P Index was down 1.2%. So, if you look so far for the year, the first half of our fiscal year, we had net revenues of $354 billion (sic) [$3.54 billion], up 16% versus last year's first six months, and record net income of $481.7 million or 23% (sic) [32%] over last year's first six months. So, again, we think it's a very, very good quarter.

I'll give you a little color on the segments, the Private Client Group had record net revenue and pre-tax. We've had great retention which has really been the key to our growth. We focused a lot on recruiting, but our recruiting has trended up even over last year's recruiting levels, so recruiting is extremely strong. And all of our channels are independent, our employee, our financial institution division, RIA divisions, all had recruiting growth.

The other thing, I think, that's really kicked in is Alex. Brown, it is showing very well. We closed the transaction and we retained 92% of the trailing 12s which is extremely good compared to any transaction, especially the European bank private client groups. But since then, we have 30 advisors who have joined or committed to join in the last 18 months, and a lot of those have been in the Northeast or West which are target areas for expansion. So, after a year of settling in, they've really had great traction and performing very well.

They've also helped bolster our ultra-high-net-worth platform as we've expanded our alternative investments, our private equity solutions, and our lending to ultra-high-net-worth clients, but still within our Raymond James kind of conservative underwriting. But we've been able to grow those types of products focused for those clients, not for the masses. We've also had robust asset growth really over this time of period, so the Private Client Group has done very, very well and continues on its steady trend of growth.

In Asset Management, we had record net revenues, financial assets under management of $132.3 billion, up 2% sequentially, despite the S&P drop. We had a successful integration of Scout and Reams. They're a great fit into the family and off to a great start. If you remember that transaction, it had added $27 billion in assets last November. Our growth in financial assets under management is driven largely by increased utilization of managed accounts in PCG and we anticipate that continuing.

Raymond James Bank had a record quarter both on net revenues and pre-tax. Loans ended up at $18.2 billion, 13% year-over-year and 3% sequentially, and growth really in all of our major loan categories. Bank NIM increased to 3.21%, up 13 bps sequentially and over last year, driven by short-term interest rates. And even though the Fed funds rate is up 75 basis points over the last year, LIBOR, if you look at 30 and 90 day, if you look at our mix of loans, they're up probably by average over 100%, so that spread and growth has actually helped increase the Bank's earning, and we've had lower-than-expected deposit betas. And this shows a little bit why, for some of who've asked why we didn't load up the Bank balance sheet with fixed rate securities, you can see the impact as rates go up that our balance sheet in the Bank adjusted very, very quickly.

And had we loaded up over the last year, if you look at – even though there's not an accounting charge, if you look at disclosures, a lot of those securities would be underwater if they were forced to be liquidated. So, we take kind of a long-term economic look as we add any asset to the Bank's balance sheet. Most importantly, the credit metrics continue to improve where we had declines in nonperforming asset as a percent of total assets and a decline in criticized loans as a percent of total loans.

The Capital Markets is the area that's been challenged. We had a slow start in M&A, but we told you we felt the pipelines were good and certainly in March we had a big rebound that did help investment banking revenues, both year-over-year and sequentially. However, the challenge industry-wide is I think you'll see as the non-bulge bracket firms certainly report this in institutional equities where the market has been weaker and MiFID II has had an impact for us less than 10%, probably about 8 percentage range, but for a lot of people already maybe 10% or more on over-the-desk commissions.

In fixed income commissions, as the market has been quiet and a flattening yield curve and low rate volatility has certainly impacted those trading volumes. So, if you look at both institutional equities and fixed income commissions, they're down during the quarter. That flat yield curve, maybe with the movement in the last week, maybe help us going forward, but I think we're still cautious. So given that, I'm very pleased with our results for the second quarter and our key drivers look in good shape.

So, with that, I'll turn it over to Jeff for some more color in the line items. Jeff?

[Jeffrey P. Julien, Raymond James Financial, Inc.]

Thanks, Paul. As usual, I'll only talk a little bit about some of the variations from the consensus model, although I would say, this quarter, there were relatively few. As most of your notes already reflected, we came in pretty much very close to consensus on revenues and earnings both.

On the securities commissions and fees, it was a miss versus consensus. Paul already mentioned the short quarter, which does impact fee billings to some extent. But also, the bigger factor was the weak institutional commissions, both on the equity and fixed income side. PCG, the transactional commissions continue to be a little weak, but the fees, as you know, I think the fee-based assets were up 6% starting the beginning of the quarter.

Looking forward on that line item, PCG, as you can see in the press release, PCG fee-based assets are up 3% versus where they were at the end of the preceding quarter. So, we got a little bit of a tailwind on the billings, despite the drop-off in the S&P for the quarter. The investment banking line, I know we were guiding toward a lot of headwinds in our operating statistics releases throughout the quarter, but we got, once again, a late M&A surge in March that saved the quarter in terms of total investment banking revenues. So, the beat on that particular line roughly offset the shortfall on the securities commissions and fees.

For the year, looking forward on that line, as we mentioned last quarter, we're hopeful we can match last year's $400 million type revenue for the investment banking line, although we've got some work to do in the second quarter, which has historically been a little – the second half of the year, I'm sorry, which has historically been a little stronger for us. But we're still optimistic that we can perhaps achieve that same level of revenues.

Paul mentioned the investment advisory fees. Scout and Reams are performing as expected. The assets are still here. We got a little bit hurt by the shorter quarter in terms of days. Even though we bill things on a quarterly basis, it is prorated by days over the course of the year. The other item that had an impact in that particular line item is, bear in mind that for the investment advisory fee revenues, 60% of our fee-based assets are billed in advance, generally all the PCG-related fee-based asset.

But all the institutional type accounts, which are about 20% of the assets, are billed based on average over the course of the quarter and 20% are billed in arrears, particularly the institutional – individual institutional accounts. And so, if you're looking at billings at the end of March versus the end of December, the assets could actually have been down on a per account basis, so then the volatility in March obviously had an impact on the average assets. So, it wasn't quite as clean as just the change in total assets under administration or assets under management.

The net interest income line, we surpassed $200 million for the first time in a quarter. Couple components to that, Paul mentioned the Bank NIM at 3.21%, that was a combination of factors. We put a page now in the press release, page 12, which gives the details of the Bank's net interest margin. You can see on that page that it was driven partly by having less cash on the balance sheet, which is a somewhat low-earning asset. And Paul mentioned the LIBOR increase versus Fed funds, the Bank's loans are generally priced off of LIBOR, some off the one month, some off the three month, and that has moved up faster than the Fed funds rate on the deposit side. So we enjoyed a little bit of a benefit from that.

We've been giving you guidance looking forward there of the 3.10% to 3.20% range, I think that's probably still a good range, although it looks like we're trending toward the higher end of that range at the moment because of those factors. But I think that's still probably a good range for now. The other part of the interest income is the general overall corporate results which reflected the full impact of the December 2017 rate increase.

Deposit beta is a tough one to answer. We're staying as competitive as we think we need to be with all of our peer groups. We look at this every week in detail. So far, for example, of the March rate increase, we've passed through 45% of that to clients, but still deposit beta is very low relative to where we thought it would be at this time. And unless competition dictates that we move higher again in the near future, the March rate increase will actually further assist earnings in the June quarter to the tune of $12 million to $13 million or so. So, it's a hard call on deposit beta. It's historically low.

One of the related factors here, as we put in the press release now are total client cash balances and you can see in there that's been on a fairly steady decline. I wouldn't call it a rapid decline, but it's a steady decline as some clients who have cash that's a little more permanently allocated to cash, they're buying what we would cash alternative products and CDs or purchasing money market funds that we don't sweep to and other things for better yields. So, it's something we keep an eye on is that cash balance, of course, is the primary financing source for our Bank's growth.

On the comp side, the comp ratio came in at 66%, which is below our 66.5% to 67% target, despite the FICO reset and I think that we could predominantly give credit for that to the benefits of the higher interest spreads which have very little variable comp associated with it. Communication and info processing was a big jump from the preceding quarter as almost everyone noted, mainly some timing of projects coming online and consulting fees being incurred and things. But year-to-date we've averaged $90 million a quarter which is kind of in line with our guidance of high-80s to $90 million.

This quarter, as Paul mentioned, was impacted to the tune of probably $2 million to $3 million by the seasonal factors of mailing of 1099s of our summary statement for all of our capital access, which is our cash management account. All those accounts get a 13th statement summarizing their activity for the year and then obviously we had all the shareholder mailings related to our annual meeting. So, those things all hit in this March quarter, so that was somewhere between $2 million and $3 million of cost that is a seasonal factor. Going forward, I think we're still comfortable with our high $80 million to $90 million a quarter type guidance for that line, for the rest of this fiscal year.

The other line that took a little jump was business development. That's going to be a little lumpy when conferences hit. We have virtually nothing of that sort between conferences and trips in the December quarter. So, when you look sequentially, it looks like a big increase, but we have conferences in each of the other quarters. The other thing that we did was run some flights of commercials. Those of you who watched the golf tournaments may have noticed them on the Golf Channel, which is where I happen to see them most often. So, our guidance was of the $40 million a quarter roughly for that line, I think, is still good for the rest of this fiscal year at least. We probably won't be running flights of commercials every quarter. So, I think we're still in line there, just the December quarter was particularly light in that line item.

Bank loan loss provision was a little higher than one might expect, given about the $450 million of net loan growth for the quarter. And as we mentioned in the quote to the press release, aside from all the variety of activity with upgrades, downgrades, payoffs, and sales, and other things that we do during the quarter, we did also add some reserves related to the general interest rate environment as an upward trending, particularly a rapidly upward trending and maybe you don't think a 25 basis point hike every quarter is rapid, but it does add up when you get to three and five-year loans. So, the impact that that rate environment has on certain of our borrowers where it increases their debt service requirements can be of concern, so we added some reserves for those credits that are particularly sensitive to the rising rate environment.

Tax rate was reasonably close. There's still some factors that we don't totally have our arms around and we still don't have answers on and interpretations of, et cetera. But we are assuming about a 28%; it did come in lower than that for a variety of factors. But I think that the 27% to 28% range is probably still good for the rest of the year, plus or minus whatever impact corporate-owned life insurance has on that. And if you remember, that kind of works in opposite directions. In a rising equity market, that will lower our tax rate, and in a declining equity market environment, that will increase our tax rate related to the COLI.

Couple other metrics; the segments which are on page 7 of the press release, for PCG, we ended up with a margin of 12.4% for the quarter versus 12.6% in December. So, still both nicely above the 12% target that we had set as that segment continues to benefit from the interest rate increases. Paul mentioned the FA counts and we would just continue to remind you that the increase in financial advisors and the resultant assets under administration really are what drive the majority of our growth in this firm as they fuel a lot of the other segments.

Capital Markets had a margin of only 7%, which is well below our 15% target, as all three divisions in that particular segment have been challenged for various reasons. Equity capital markets, we've talked about a slower underwriting environment and that's partially contributed to the weak overall commissions in that division. Fixed income, the flat yield curve has resulted in weaker commissions and also in weaker trading profits in this particular quarter. And tax credit funds, they're still in the process of rebuilding their pipeline and that business may or may not be repriced a little bit as tax credits are a little less valuable. They may do an equivalent volume, but may be slightly less lucrative to us in terms of the revenue side. That remains to be seen for the rest of the year.

Asset Management was nice to see AUM up despite the S&P 500 decline for the quarter, but remember that's a point in time measurement. We may have won a couple of big mandates late in the quarter that didn't really contribute much to revenues. Those revenues I talked about were impacted somewhat by the March market volatility, so you can't just draw a direct correlation between their revenues and assets, but it's largely in sync.

And RJ Bank, we talked about the NIM, loan growth there. That gave them record revenues and pre-tax. So, from a segment basis, three of the four performing very well, particularly when you look at the year-over-year comparisons, you see nice double-digit growth on both revenues and pre-tax in three of the four segments.

Just a couple other comments, the overall corporate pre-tax margin of 18.3% for the quarter and for an adjusted basis for the year-to-date as well is nicely above the 17% type target that we had set last year. And again, we'll reset targets here this coming quarter as we get into budget season and hold Analyst Day, which is typically where we unveil sort of our new targets for the coming year. And likewise, the 16.7% ROE for the quarter, 16.6% year-to-date adjusted also surpassing our 15% goal for the current environment.

So, lastly, I'll say that all our capital ratios climbed during the quarter, because the fact is we had a nice net income boost which boosted equity and we had really very little in the way of total balance sheet growth. So, all the risk-weighted assets and total assets and things didn't really change particularly during the quarter. So, as a result, all of our capital ratios strengthened even a little bit further.

So, that's on a line item-by-line item basis some better color. Now, I think Paul's got some comments looking forward.

[Paul C. Reilly, Raymond James Financial, Inc.]

Thanks, Jeff. Just a few, we've covered an awful lot so far in the call, but really I think a good quarter and our momentum based on our key business factors should continue. We have near-record levels on most all of our business drivers. The interest rate hike in March, as Jeff talked about, should continue to help. So, overall we're good in position.

There is changes on the regulatory front. As you know, the DOL fiduciary rule was overturned by the First Circuit who vacated the whole rule. The Department of Labor does have really till May 7 to appeal to the Supreme Court. We think that's unlikely, but who knows and there may be other challenges by other groups, but we think most likely that rule will disappear, but you never know.

In the meantime, the SEC has introduced the best interest standard. The standard is fairly short. It is only a little over 1,000 pages in its release, so as regulatory areas go, as we go through it, it seems workable. It's not everything we love in it, but it's we think certainly more balanced, but we will work with it. And the SEC will be taking comments over a comment period, so that rule could change also, but from a distance it looks like a positive trend and a more balanced and more flexible ruling for investors.

Private Client Group, we talked about recruiting, we're trending over last year and the growth is happening in all of our divisions. And then, once again, Alex. Brown is really getting great traction. So, the retention of our financial advisors is a focused one. We've got a great group and as long as we do that and have good recruiting, I think we've got really a strong outlook. Quarter 3, we should benefit really from starting firm with higher assets and fee-based accounts, up about 3% in the cash spreads.

In Capital Markets, Jeff really hit this is that the M&A business looks good, and public finance and tax credits look like they're recovering and should help. Underwriting still looks a little challenged and the real headwinds are in the equity institutional commissions and fixed income markets, although hopefully with the 10-year moving up and getting a little more volatility, maybe we'll get some more action, but that remains to be seen.

Asset Management also benefiting from their starting assets for the quarter. So, it should be helpful. And the Bank continues to perform well. So, feeling good is the starting part going into this next quarter, but certainly don't know what's going to happen in the markets.

I want to make one comment before I close really on capital deployment. First, our strategy has not changed. We have a long-term focus on utilizing and deploying our capital to grow our business. Our retained comp is partially tied to return on equity, so we're very focused on that to do the right thing, but we're focused on the long term, not the short term. So, we want to grow our business first. We do look at continuing to grow through niche acquisitions and investments in recruiting. But any acquisition first has to fit our culture, be strategic, and most importantly also have a positive return to shareholders.

So, we're very disciplined. And a couple of years ago, we had a lot of pressure saying where are the acquisitions, and then we announced three pretty close together: Alex. Brown, 3Macs, and Scout and Reams, which have so far been very good and very successful, but we do them when we can do them. Our dividend policy hasn't really changed, it's 15% to 25%, and with the tax changes and earnings increase, certainly is morphed to the lower end. But the board, I'm sure, will be looking at that in its next meeting or meetings, but that strategy hasn't changed.

I think also as we talk about even with the capital levels having a 16.7% return on total capital, not just intangible capital, that we're using our capital well for the long term and really providing good returns to shareholders, which is really our focus in capital management. So, good quarter. I think we're in a good position in the industry and in the markets.

And with that, I'll turn it over to questions. So, Ashley, why don't you open the line up?

[Operator]

Yes, sir. And your first question comes from Jim Mitchell with Buckingham Research.

[James Mitchell, The Buckingham Research Group, Inc.]

Hey, good morning, guys.

[Paul C. Reilly, Raymond James Financial, Inc.]

Hey, Jim.

[James Mitchell, The Buckingham Research Group, Inc.]

Hey. Maybe just a question on the recruiting in PCG, and an update sort of on the West Coast. It seems like you've gotten better or you're ahead of the game a little bit on the Northeast, but West Coast maybe not quite as developed. Can you just sort of update us on how the West Coast penetration is going? And do you see sort of Alex. Brown-type opportunities there that could help jump-start the penetration there?

[Paul C. Reilly, Raymond James Financial, Inc.]

Yeah. So, first, we certainly have a lot of room, which is the good news, to recruit both in the Northeast and the West. And if we can get anywhere towards average market share in the rest of the country in those two states, we'll be growing for a long, long time. So, it's our focus still. We've made good progress in the West, but we didn't have the kick-starter of a big Alex. Brown recruit.

Alex. Brown really made a statement with significant presence in Baltimore, New York and Boston, so in the key areas. So, we haven't found that type of opportunity for the West Coast, whether that be LA, San Fran, and Seattle. So, we're doing it organically. We're beefing up our recruiting resources. We are growing and recruiting there, but we certainly have a lot of room. So, if we found something that fit our culture and was a good fit, we would do it, but we're not going to do something just to do something. So, it looks like at least for the short to near term, we're focused on organic recruiting out West and look forward to the opportunity. I think we've got a lot of opportunity to grow.

[James Mitchell, The Buckingham Research Group, Inc.]

No, certainly. Do you feel like momentum there is improving?

[Paul C. Reilly, Raymond James Financial, Inc.]

It's improving, yeah, but we've got a lot of opportunities still. So, we're still small, but certainly our recruits are growing and, again, in all channels, both independent and employee, and Alex. Brown has added commits in California also. So, we're focused on it. Just had a meeting with Scott and Tash that run those two divisions on recruiting out West, so it's been a focus really for a number of years, and we're making progress. But again, we don't force numbers. I mean, I could give them a challenge for numbers and I'm sure they could hit them, but we only want quality advisors and good business. So, we're deliberate and we're taking a long-term focus, but we certainly have a lot of energy around recruiting out West.

[James Mitchell, The Buckingham Research Group, Inc.]

No, absolutely. And maybe for Jeff, one question. In terms of cash levels at the bank, it did come down and it did help the NIM as you reinvest that cash, but it's still above $1 billion. What is the right level of cash? Do you still see reinvestment opportunities going forward from these levels?

[Jeffrey P. Julien, Raymond James Financial, Inc.]

Yeah, we've got targets for how much liquid cash we need to keep on hand at the bank. It's generally between $500 million and $1 billion, just so they can be in a position to fund any loans that they're needed any day, et cetera, without having to borrow or us having to do some kind of machination with the sweeps or anything else. So, it was just heavier than usual in the December quarter, as we were reallocating some of the bank sweep assets out of other banks over to our bank in anticipation of their growth. So, we try to stay ahead of it a little bit. So, I think the level that they've been running at in the March quarter, on average, is probably more realistic for where they need to be.

[James Mitchell, The Buckingham Research Group, Inc.]

So, the upper end of that range is probably a safe assumption?

[Jeffrey P. Julien, Raymond James Financial, Inc.]

Yeah, probably. As we try to stay ahead of their growth, that's correct.

[James Mitchell, The Buckingham Research Group, Inc.]

Okay. Great. Thanks.

[Operator]

Your next question comes from Steven Chubak with Nomura Instinet.

[Julian Craitar, Nomura Instinet]

Good morning, guys. This is actually Julian Craitar filling in for Steven.

[Paul C. Reilly, Raymond James Financial, Inc.]

Okay.

[Julian Craitar, Nomura Instinet]

Hi. So, just a question on capital. So, I appreciate your commentary at the end, but this quarter's strong earnings and significant capital build reinforced the challenge of not having a clear capital deployment strategy where the pace of capital build continues to exceed your organic growth needs. And despite your reluctance to load up on securities, we would argue this has dampened your earnings potential and weighed on the earnings multiple. When should we expect a more fulsome update and any change in your approach?

[Paul C. Reilly, Raymond James Financial, Inc.]

Well, we will update you as we make changes. So, our approach has been consistent. We can do a lot of things to bolster short-term earnings at the risk of longer-term economic issues. Acquisitions tend not to be pro rata. They are lumpy by nature. So, we don't have a quarterly acquisition program to fill in our capital needs. It's a long-term strategy and sometimes we get them, sometimes we don't.

So, we will look at – again, a lot of people try to anticipate the Tax Act just because the Tax Act came in effective really for us at the end of the year, one quarter ago doesn't mean that we're just going to knee-jerk and say without looking at the impact of the running of our public finance business, our tax credit business, our muni business, a lot of other things. So, we could anticipate it or we could do what we always do here is take a longer term, more measured approach and I think that's why we had our 121st consecutive quarter of profitability. And we're still, even with heavy capital by most people's standards, generating superior things.

So, yeah, we could do things for short-term profits. We don't do that here, we do things for long-term profits. And we will analyze again both the impact of the tax law changes, the business mix, and make good longer-term decisions for the firm. So, we're one quarter in to the new tax regime. Certainly, it will be a topic of our May board meeting on capital allocation, but we try to be very clear on our capital deployment and we understand that we have pretty healthy capital ratios.

[Jeffrey P. Julien, Raymond James Financial, Inc.]

I would add to that, Julian, with respect to growing the securities portfolio at the bank, I mean first of all you're not getting paid much to do it, it's a very flat yield curve. We're very opposed to taking a lot of duration risk, which you'd have to do to get any kind of yield pickup right now. And thirdly, we could grow that portfolio significantly and really wouldn't use much capital because the instruments we're buying, it only takes $25 million of capital to support $1 billion of securities. So, it just doesn't seem the logical thing to do to get overly aggressive in that at this point in time, and on top of that, client cash balances aren't growing. And so, which...

[Paul C. Reilly, Raymond James Financial, Inc.]

And rising interest rates too – environment, so.

[Jeffrey P. Julien, Raymond James Financial, Inc.]

And why would you – and we would – again, I want to take duration risk in the face of a rising rate environment, not an excessive amount of duration risk.

[Julian Craitar, Nomura Instinet]

Understood. Appreciate the color, guys. That was helpful. What about in terms of like an annual buyback plan?

[Paul C. Reilly, Raymond James Financial, Inc.]

We've had a plan which we announced previously to kind of buy back on a dilutive basis. We did it in one chunk. And again I said, the board will read this at the capital plan in May. Again, our view was a lot of people took knee-jerk reactions when the tax law was announced. We haven't, because we wanted to analyze it and see the impact of our business, and we're going to relook at it at the May board meeting.

[Julian Craitar, Nomura Instinet]

Got you. Okay. And then one last one from me, but switching gears to Capital Markets. Are you guys planning to take any actions on your IB trading businesses, just given some of the regulatory challenges that you've cited, such as like MiFID within your trading business?

[Paul C. Reilly, Raymond James Financial, Inc.]

I think we have taken actions and have trimmed costs, and others. The model for research is challenged across the industry right now, and certainly it has been really for a decade. And MiFID's probably accelerated a trend that already started. So, we're being rational. We have no plans to exit the business. Our focus for a number of years has been to grow M&A, because the public markets have become increasingly private markets and the M&A business is reflecting that. So, we are taking, I think what I call, reasonable business approaches and watching costs on the one side, and growing the part that we think will continue to grow. But no plans to exit or anything drastic.

[Julian Craitar, Nomura Instinet]

Got it. That's it from me, guys. Thank you.

[Operator]

Your next question comes from Chris Harris with Wells Fargo.

[Christopher Harris, Wells Fargo Securities LLC]

Thanks. Hey, guys.

[Paul C. Reilly, Raymond James Financial, Inc.]

Hey, Chris.

[Christopher Harris, Wells Fargo Securities LLC]

Hey, so it sounds like Alex. Brown has a lot of momentum. Can you guys maybe comment a little bit about what's resonating there?

[Paul C. Reilly, Raymond James Financial, Inc.]

Well, I think that it has momentum and certainly probably focused more on the ultra-high-net-worth space, but it's relative, the other divisions have a lot of momentum too, right? So, I think each of the positions, whether it's our Raymond James employee channel, which has ultra-high-net-worth clients also; the Alex. Brown, which is a brand that's been focused really on that area, the independent side, are all growing.

And one of the things for Raymond James that I didn't create, but inherited that's been great for us, is that we have advisors choice, that we have all these platforms that advisors can choose how they want to affiliate. So, it's been a real advantage as people move from employee to independent to RIA, or RIA to employee to independent, whatever the movement is that we have those options. It certainly helps with the retention. So, Alex. Brown is doing great. We expect it to continue to do well as we do the other divisions. Right now we have positive momentum in every single one of our affiliation options, which is good news for us. And hope it certainly continues. It bodes well for us if it does.

[Christopher Harris, Wells Fargo Securities LLC]

A lot of people tend to think about all the regulatory changes that have happened on the financial advisor side as being universally bad. But I didn't know if you guys maybe thought that actually might be helping you on the recruiting side. Do you think that's been a factor? Or does that really not have anything to do with it, it's kind of all the other things that you mentioned?

[Paul C. Reilly, Raymond James Financial, Inc.]

No, I don't think it's – the regulatory environment, I think, for everyone has gotten tougher. I mean that's just where it has. I will say that it's – since the elections, has been more balanced. I think our worry a year ago was so many rules were coming out so quickly, it was hard to keep up with them, and now there isn't. I think people are looking both at existing rules and making sure they're balanced and they're not seeing a flood of new rules. So, that's been the positive on the regulatory side.

What's really driven recruiting is that we just have a model where we have great respect for advisors in our – whether it's our trust department, our bank, or anything else doesn't compete with our advisors. And many advisors feel at many institutions that they're trying to own their clients and they're competing with the different divisions. So, here we tell the advisors they own their book and they can leave any time they want. So, protocol wasn't even an issue for us because they could always leave and always could.

Second, we don't allow our trust department to call on a client, the bank, they have to go at the invitation of the advisor. Our bank doesn't solicit mortgages or credit cards. We don't put mailing stuffings in. We don't do anything to compete with our advisor, maybe sometimes to our economic detriment, but certainly we think to our long-term benefit. So, I think we just offer right a platform that has the technology and scale to offer advisors what they need, and many are joining us because they feel like we're supporting them versus competing with them. So, I think that's been the secret to the recruiting.

[Christopher Harris, Wells Fargo Securities LLC]

Makes sense. Thanks.

[Operator]

Your next question comes from Conor Fitzgerald with Goldman Sachs.

[Conor Fitzgerald, Goldman Sachs & Co. LLC]

Hi. Good morning. Just first, thanks for the new disclosure on your cash breakdown. That's helpful. Just digging into the $900 million quarter-over-quarter decline, it sounds like based on your comments, the decline is really being driven by your clients buying cash alternatives and not rotating in the equities side, but just was hoping you could elaborate on that a little bit.

[Jeffrey P. Julien, Raymond James Financial, Inc.]

Yeah. That's a true statement. We track the growth of purchased money market fund positions in the firm. We don't really – we can track CDs, but that's a little harder to do. But there is no question that people who have asset allocations that have 5% or 6% or 8%, or whatever permanently allocated to cash are able to get a better yield than we are offering through our sweep program, are able to get a better yield by purchasing one of these short-term cash all taken by a two-year T-bill or a one-year T-bill.

And there's a lot of alternatives out there, and that's happening for those who have permanent allocations to cash. Those who have temporary allocations are in the middle of an investing methodology, then they continue to want to use the sweep vehicles that we've got, which are FDIC insured, which is a benefit over purchasing money market funds or some of the other instruments.

[Paul C. Reilly, Raymond James Financial, Inc.]

But not all of that movement was into cash. So, I mean there's a fair chunk of that's market related, too. So, $900 million did move out from cash to cash alternatives. But certainly there's a fair chunk of that that has and then some that's moving into market as well.

[Conor Fitzgerald, Goldman Sachs & Co. LLC]

Got it. That's helpful. And then on your account and service fees, can you just give us an updated understanding on how that breaks down between fees on your third-party deposits, money markets and other fees?

[Jeffrey P. Julien, Raymond James Financial, Inc.]

Yeah. We put that breakdown to Q, right? 10-Q.

[Paul C. Reilly, Raymond James Financial, Inc.]

We're looking for this at the (45:38) moment.

[Jeffrey P. Julien, Raymond James Financial, Inc.]

For the quarter – is it $191 million for the quarter?

[Paul Shoukry, Raymond James Financial, Inc.]

Yeah. Conor, I can follow up with you on that. I mean like I said it will be...

[Conor Fitzgerald, Goldman Sachs & Co. LLC]

Yeah, yeah, I know.

[Paul Shoukry, Raymond James Financial, Inc.]

(46:03).

[Jeffrey P. Julien, Raymond James Financial, Inc.]

We got a breakdown, but it would take a minute to do some of the math to give you percentages or anything else. But the breakdown is in the Q each quarter, it probably hadn't changed dramatically from last quarter's percentage breakdown.

[Conor Fitzgerald, Goldman Sachs & Co. LLC]

Got it. That's helpful. And then, Paul, appreciate your comments on capital. And I know M&A opportunities can kind of be sporadic in nature. But my question is, how long would you need to go without finding the right opportunity before you would reconsider your capital return policy?

[Paul C. Reilly, Raymond James Financial, Inc.]

Yeah. So first, we examine it constantly. We have a capital planning group inside and we certainly present to the board. So it's always open. We're not locked and we're not trying to hoard cash. I mean both the shareholders and where our comp is tied – our deferred RSUs, half of them are tied to ROE. We certainly, I think, are just concerned about getting a return on capital as every other investor. So, we always look at it. I don't know what the calling point was. We resisted when the rule changed to instantly increase dividends because we wanted to do it measure or instantly change capital and we're being very thoughtful about it.

And so, I just want to say that our policy on capital has been very much the same and the commitment we made is we can't use it, we're going to return it. And again, we know it grew this quarter and part of that because of the tax changes. So, we're looking at it and we'll talk to the board on it, but I think our long-term strategy is the same. I don't think that will change dramatically. The question is at what points do we think we have capital over-accumulated we can't use and, in that case, it would be to our benefit to return it to shareholders. I mean we're not motivated to keep it for any reason.

[Conor Fitzgerald, Goldman Sachs & Co. LLC]

Thanks for taking my questions.

[Operator]

And your next question comes from Devin Ryan with JMP Securities.

[Devin P. Ryan, JMP Securities LLC]

Hey, great. Thanks. Good morning, everyone.

[Paul C. Reilly, Raymond James Financial, Inc.]

Hey, Devin.

[Devin P. Ryan, JMP Securities LLC]

Hey. So, I guess first question here just on some of the technology investments that you're making. I mean it seems like it's a bit of an arms race right now to add capabilities and there's a lot of innovation occurring around back-office functions and digitizing there and then adding the capabilities to help advisors become more productive. Can you maybe just talk about some of the investments that you're making into the system right now, and then also how we should think about the related impact on spending over the next few years, because it seems like that's one kind of inflationary trend and just trying to think about how that could flow from here?

[Paul C. Reilly, Raymond James Financial, Inc.]

Yeah. I think that in the whole industry, the technology spend is certainly up and there's certainly a lot of uses for it. And where we've really focused is two things. One is making sure that we move from multiple platforms to first having a one true source of data for five years. What we haven't – people don't recognize, probably internally or externally, the amount of money we've spent. And with our last initiative going through, which is our automated client onboarding that when we get through this, which has been a little painful to the field as we really collect the data, we'll have one exact source of data across all of our platforms to be able to help clients and our advisors with a lot of data.

So, that is that money and we spent money. We started with, first, the advisor apps, won awards on our mobile – our mobility of all of our advisor apps on our iPhones or iPads to make sure that they were up-to-date. And I can tell you from prudent (49:58) that we're extremely competitive. I never want to say we're the best, but we're extremely competitive on those platforms.

We secondarily are now spending a lot on the client interface to those apps, so we've had on the board robo-like technology for our clients. But we wanted to do the advisors first to make sure that there was an integrated communication. And those are being rolled out now. So, a lot of the spend is really what I call into those client-facing apps right now. And the other part is supervisory and compliance that we are going through a rewrite. And we feel that we want to also have world-class supervisory and compliance systems that actually instead of compete with the advisors just help them make great decisions right at the point of entry.

And so, we've been updating those systems and we've added both a new chief compliance officer and new head of supervision recruited from outside. We've really beefed up kind of our capabilities in those areas. So, that's kind of the big back-office spend we've been going through right now. And through the last few years, we've done things from cash movements and other things in the back office to speed those up. So, we've kind of focused really a lot of our spend on our Private Client Group business, although we've also invested in the bank systems, loan monitoring systems. And I can go through division by division. But the biggest dollar spends have been PCG and advisor and client-facing systems.

[Devin P. Ryan, JMP Securities LLC]

Okay. Great. Thanks, Paul. And then maybe just a follow-up here on kind of industry regulation. So, a couple of things. We're approaching the end of the comment period for FINRA's rule proposal on outside business activity, which could affect oversight requirements for some advisor activity away. I know Raymond James doesn't allow kind of outside custodians. And so, I'm just curious if you have any thoughts on that rule. If there's any implication on Raymond James, or just kind of thought on the industry more broadly. And then also kind of similar kind of theme, the SEC's proposal that could require RIAs to have greater licensing and continuing education requirements, and if that's actually maybe a good thing.

[Paul C. Reilly, Raymond James Financial, Inc.]

Yeah. So, first of all, we don't get paid on assets held away. We don't have any of those issues that I think they're worried about at other firms. So, the rule changes would have pros or cons that certainly would clarify supervisory responsibilities. They should be more clear than – the rule is a little high level, so a lot of our questions is what does that mean. And then what monitoring requirements would we have if assets are held away in an RIA and we had commissioned-based assets on issues like client suitability, concentration, other things because we couldn't see them all.

So, I think that in discussions with Robert Cook and FINRA, they are listening to kind of the issues, and there are pros and cons I think to that rule. We're not overly worried about it. There are things we like about it, like certain outside business activities if you join a charitable board and you're an independent advisor, you become treasurer of your church board, I mean really how much do we need to supervise that.

So, those kind of areas, we think, are good. The supervisory ones are a little tricky is, how do you supervise if you don't see the assets. The proposed rule is voluntary, so you can choose to have your own policy, but you're not required to. So, you ask about competition and all the implications, and we've had a good open discussion with FINRA on it. So, I think that rule, I don't know where it will go, but I think it's early to tell. But I can't tell you I've been up the last month worrying about it too much, although we have provided feedback on it.

[Devin P. Ryan, JMP Securities LLC]

Got it. And then the SEC just looking for commentary around greater requirements for RIAs around licensing and continuing education, which I know has kind of been maybe one benefit to being an RIA. So, I'm just curious, is that potentially higher bar or something that would change the momentum there or you change oversight requirements, et cetera. I'm just trying to think about that.

[Paul C. Reilly, Raymond James Financial, Inc.]

Our view has been first, we're supportive of the advisors in any channels. But we think that both the requirements and the supervision should be similar no matter where you practice, because at the end of the day we're here to protect clients and to get them to invest. So, any rule that kind of makes sure that any advisor and any business is qualified, and that is both whether that's a licensing or testing, and then ongoing education in which we spend a lot of money helping our advisors and our advisors do on their own too, the continuing education would be good.

So, I think the trend of the rule is good. We'd rather see one kind of set of rules apply to everybody. It'd certainly simplify our lives and make it a level playing field, but I think this is a move in the positive direction. And again, the devils in the details. We're going to spend a lot of time, I think, in that rule and who you can call an advisor, or an advisor which I think is a little bit weird in the way it's presented, but I understand why it is and things like that. But in general, I think the SEC rule is a good step forward that allows, first, advisor and client flexibility, pushes for full disclosure which clients should have anyway.

And we've always thought we had a best interest standard with clients, so we've been, as you know, advocates. Although we publicly opposed the DOL rule and testified – I think we're the largest firm to testify to Congress against it. We've been advocates of the best interest standard and the SEC has stepped up to propose one, and like any rule parts are good, there are parts we would tweak, but that's, I'm sure, every firm has a little different view. But I think it's a really good move in the right direction and we'll see during the comment period what comes out.

[Devin P. Ryan, JMP Securities LLC]

Yeah. Great, okay. Appreciate it, Paul. Thanks a lot.

[Operator]

And there are no further questions at this time.

[Paul C. Reilly, Raymond James Financial, Inc.]

So, great, I'd like to just thank you all for joining the call and I believe we had a good quarter. Our assets show and positioning in advisors that we have good momentum and hopefully the markets will be conducive over the next quarter. So, thanks for joining and we'll talk to you soon. Thank you, Ashley.

[Operator]

You're welcome. That concludes today's conference. Thank you for your participation. You may now disconnect.