Raymond James Financial Inc

NYSE:RJF

Earnings Call Transcript 2019-Q2

[Operator]

Good morning. Welcome to the Earnings Call for Raymond James Financial's Fiscal Second Quarter of 2019. My name is Tiffany, and I will be your conference facilitator today. This call is being recorded and will be available on the company's website.

Now I will turn it over to Paul Shoukry, Treasurer and Head of Investor Relations at Raymond James Financial. Please go ahead.

[Paul Shoukry, executive]

Thank you, Tiffany. Good morning, and thank you all for joining us on the call this morning. 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, anticipated results and litigation and regulatory developments and general economic conditions.

In addition to words such as believes, expect, plans, will, could and would as well as any other statements that necessarily depends on future events, are intended to identify forward-looking statements. Please note there can be no assurance that actual results will not differ materially from those expressed in those statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Form 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 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 Reilly, executive]

Thanks, Paul, and good morning, everyone, and welcome. Thanks for joining us. I'm going to start as usual with a brief summary of the second -- of the fiscal second quarter of 2019 and then turn it over to Jeff, who'll provide some more details on the financials and some line items. And then I'll discuss outlook before turning it over for questions.

So following a challenging market during the December quarter, I am pleased with the solid performance in a number of key areas during the fiscal second quarter. These include quarterly net revenues of $1.86 billion, an increase of 3% over the prior year's second quarter, a decline of 4% compared to the preceding quarter.

As we discussed on the last call and at our recent conferences, Asset Management and related administrative fees were the primary drivers of sequential decline in net revenues as the vast majority of these fees are billed based on the beginning of the period fee-based asset levels, which were down with the market in December quarter. This quarter also had fewer billable days than the December quarter, which negatively impacts both Asset Management fees and net interest income.

But despite the fewer billable days this quarter and the seasonal expenses related to year-end mailings and reset in FICA taxes, we generated quarterly net earnings per share of $1.81, lifted by record Investment Banking revenues and higher net interest income, primarily at Raymond James Bank, which experienced improvement in its net income margin during the quarter, driving record quarterly net revenues and pretax income in the segment. We ended the period, importantly, with records for client assets under administration of $796 billion. Total Private Client Group financial advisers of 7,862 and record net loans at RJ Bank of $20.1 billion.

Annualized total return on equity for the quarter was 16.7%. And I want to remind everyone, a lot of people report on tangible equity, but this is total equity, which is a terrific result, particularly given our strong capital levels, which I'll speak about a little bit later.

Stepping back, if you look at the first 6 months, the first half of this fiscal year, we generated record net revenues of $3.79 billion, which were up 7% and net income of $510 million, which was up 41% or adjusted net income of $525 million, which was up 9% over the first half of fiscal '18. And notably, all 4 of our core segments generated record net revenue during the first 6 months of the fiscal year. This is really a fantastic result, particularly given the challenging market environment during the December quarter.

Now turning to the segments. In the Private Client Group, we generated net revenue of $1.27 billion and pretax net income of $132 million during the quarter. The segment's results were negatively impacted by the market downturn in December, which caused fee-based assets, which are billed on balances at the beginning of the period, to start lower this quarter than the starting balance in the immediately preceding quarter. Moreover, once again, there were fewer billable days this quarter than the preceding quarter.

Partially offsetting the lower Asset Management fees, fees from third-party banks increased substantially during the quarter due to higher spreads following the December rate increase and higher client cash balances at the beginning of the quarter. However, these cash balances have been declining due to clients increasingly -- increasing their allocations to other investments, primarily as a result of improvement in equity markets as well as tax-related seasonality. The trend has continued into April.

Fortunately, PCG asset based -- PCG fee-based assets under administration, which now represent nearly 50% of the Private Client Group's total client assets, grew 16% over March of 2018 and 12% over December 2018 and achieved a new record, ending March at $378.4 billion, again driven by equity market appreciation, increased utilization of fee-based accounts and net additional financial advisers.

Our financial adviser retention and recruiting remains solid, resulting in a healthy net increase of 47 financial advisers during the quarter to a record of 7,862. Our client-focused culture, multiple affiliation options and robust service and solution offerings continue to resonate well with existing and prospective advisers.

In the Capital Markets segment, we generated net revenue of $277 million and pretax income of $41 million for the quarter, both representing significant increases over prior year's fiscal second quarter and the preceding quarter.

We achieved record Investment Banking revenues in this segment of $156 million for the quarter. The strong results were driven primarily by record M&A revenues of $118 million, which also included our largest fee in history. This more than offset the industry-wide weakness in equity underwriting in the first quarter due to government shutdown.

Fixed Income and brokerage revenues improved, largely due to a spike in interest volatility during the month of March. However, institutional equity brokerage revenues continue to be challenged by structural and cyclical headwinds.

In the Asset Management segment, we generated net revenue of $162 million and pretax income of $55 million during the quarter. These were negatively impacted by the starting the quarter with lower billable asset levels, given the decline in the equity markets in December, as well as net outflows for Carillon Tower Advisers.

Financial assets under management ended the quarter at $138.5 billion, an increase of 5% over March of '18 and 9% over December 2018.

Overall, the growth in financial assets under management continues to be largely driven by equity market appreciation, positive inflows with increased utilization of management accounts in the Private Client Group, which we believe will continue going forward.

Raymond James Bank generated record quarterly net revenue of $212 million and record quarterly pretax income of $136 million during the fiscal second quarter. We ended the quarter with a record -- with record net loans at $20.1 billion, which were up 11% year-over-year and 1% sequentially. The growth in loans during the quarter was driven by the C&I portfolio and residential mortgages to our Private Client Group clients.

Raymond James Bank net interest margin expanded to 3.35% in the second quarter, up 14 basis points over a year ago second quarter and 10 basis points over the preceding quarter. Importantly, the credit quality of the bank's loan portfolio remains strong, resulting in a decrease in our loan loss provision.

So overall, strong quarter, I believe, an excellent first half of the fiscal year.

So with that, I'll turn it over to Jeff before I provide some comment on the outlook. Jeff?

[Jeffrey Julien, executive]

Thanks, Paul. I'll run down some of the line items and add a little color.

On the revenue side, although total revenues were reasonably close to the consensus model, there were really -- it's the net effect of 2 pretty significant variations. One is in the Asset Management-related fees. The actual decline in that revenue line versus the December quarter was pretty much in line with the drop in the related fee-based assets. If you remember, if you look at the December release, you can see those various asset categories decline between 8% and 10% in December, given the 14% drop in the S&P that quarter. At least -- so it's not a surprise that, that revenue line item would be down 9% sequentially, but apparently that you -- the Street underestimated that a little bit. So that drop was a little more severe than the consensus model would show.

Looking forward to Q3, again, billings, which we have already done in April here, were up a percentage similar to what you would see in terms of the growth in fee-based assets in the March quarter for that particular line item. Granted, a small portion of that line is based on average assets or end-of-period assets, but again, the vast majority, 90% type range, are beginning-of-quarter billed. So you can expect that, I think, for the June quarter.

Brokerage revenues, PCG commissions and equity institutional, both declined. They continue to struggle as we shift more toward a fee-based model here in the Private Client Group. That was offset this particular quarter by a nice uptick in the Fixed Income institutional business, in the principal transactions, both in commissions and what used to be called trading profits, which are now encompassed in the principal transactions line.

Looking forward, the higher equity markets will certainly help some of the PCG trail revenues and things like that going forward, so there may be at least a flattening of the PCG-related portion of that line. And Fixed Income, although they had a really good March month, may regress a little bit back toward the levels they were at and we're starting to see a little bit of that already. So we wouldn't necessarily anticipate a continuation of the level they were running at, at the end of the quarter.

The account service fee line, which is largely fees from unaffiliated banks that are in our sweep program waterfall. As you can see on Page 7 of the release, client cash balances continued to decline subsequent to December, when the markets start recovering and -- so we have seen that all the way up, as Paul mentioned, all the way up through today. We continue to see clients seeking either higher-yielding cash alternatives or going to risk assets. But that decline throughout the March quarter was more than offset by the increased spread that we earned as we had not passed through any of the December Fed hike to clients throughout that quarter. So that caused the net impact to actually have an uptick in the account and service fee line item in the March quarter. Going forward, assuming no additional Fed moves, the spread may hold up in the current range of about 200 basis points, but the balances may continue to run off for the quarter. We'll have to wait and see how that plays out.

The other offsetting variation or fluctuation from the consensus model was in Investment Banking. And again, a really strong close for the quarter. Generally, these have been happening almost too late for us to signal anything in our monthly releases, but we came in with record Investment Banking revenues, driven by record M&A fees for the quarter of $118 million. So we've had 2 really good quarters in a row in M&A fees. And looking forward in that line item, while the pipeline is still pretty active, it seems like it will be difficult to meet or beat the first 6 months on that particular line, but it'll still be a very good year overall.

Net interest income was just slightly above consensus, the NIM at Raymond James Bank, you can see on Page 17 of the release, actually grew 10 basis points to 3.35%. Again, as we -- some of the assets repriced from the Fed rate hike in December had very little impact on the cost of funds to the bank. For quarter 3 and 4 going forward, at least for now, we would think it would stay somewhat in the same range. We'll have to wait and see as the bank continues to grow probably in that 8% to 10% a year type range. So should we continue to see some -- we should continue to see some increase in outstanding loan balances, which helps drive the NIM up. But it's a matter of how much cash and securities they have on average during the quarter and other factors. So for now, I think in that range is probably a good estimate for the next quarter at least.

And the other revenues is the only other one that came in under consensus and that was a little bit slower quarter for the tax credit funds in terms of closings this particular quarter, which now falls in this line item. It used to be in -- with the old Investment Banking line item, but now it's in other revenues. In this particular quarter, there were no significant impacts either direction from valuations on private equity holdings, so that came in slightly lower.

Turning to the expense side, comp expense, the comp ratio came in dead on expectations. The ratio is 65.9% for the quarter and 65.7% for the year-to-date. They're both well under our 66.5% guideline. And that's despite the fact that the current quarter has an $8 million to $10 million impact from the FICA reset that happens every -- beginning of each calendar year and impacts us in the March quarter. So no real surprises with comp.

We've talked about communication and info processing. It was up slightly from last quarter, but still under our guidance for the quarterly average for the year. But we're not really going to change our quarterly -- our guidance for the year of running in the mid to high 90s on average for the year, which kind of means that we are expecting a little bit of an uptrend in the back half of the year here in that particular line item based on what we know today. Some of those things certainly are controllable and subject to delays and other things. But at this point in time, based on what we know, we still think the mid-90s on average for the year is probably a good number for that line.

Business development is running also below guidance. We talked about maybe mid-40s for the first 2 quarters. It has actually run in the low 40s for the first 2 quarters. We had -- some of that had to do maybe with a little bit slower recruiting, which is one of the big costs that goes in there. And also we did no branding or advertising of any kind during the first half. As we've mentioned on prior calls, the last 2 quarters of the year, we anticipate will be higher than the first 2 quarters, based on the timing of our large conferences and our reward trips which are -- both of which are important to preserving our culture and morale within our sales force.

We also have some modest image advertising planned, so we'll be -- my guess is at this point in time, again some of that is controllable, but at this point in time, we would think it would be more in the high 40s to $50 million type range per quarter for the next 2 quarters.

Paul mentioned the bank loan loss provision. It went back to what we call a more normal level this quarter after a series of downgrades within the past category generally in the prior quarter, [ direct ] to what we call a more normal level, which is more correlated with the overall loan growth of $247 million during the quarter. And that growth this quarter was largely within the C&I and CRE portfolios, which led to a little bit higher than the 1% overall provision reserve that we have related to outstanding loan balances.

In the other expense line, again, we think maybe this has regressed back to what we call a more normal run rate that we talked about really actually last summer, when we were experiencing some elevated legal and regulatory costs. In this particular quarter, as noted in at least one report, there was a catch-up valuation adjustment of about $9 million for the one tax credit fund that we consolidate because we have guaranteed the tax credits will flow to the buyer. We've had this on our books for years and years, so as a result of that, their expenses flow through our P&L. And we own a very small fraction of this fund to our own interests. So virtually all of the impact comes out to the noncontrolling interest. So $9 million of that $12 million in noncontrolling interest is all related to that. But that did inflate other expenses by that amount. So ex that factor, you can see it was a fairly low quarter for the other expense line item, and that's again, we think that somewhere around where it is now is a little bit more indicative of what we would call an ongoing run rate.

A couple other metrics. The pretax margin was 18.7% for the quarter. I've been getting a lot of questions about whether that's -- whether we have additional leverage to increase that, whether we -- we're at a maximum point in the cycle on that, et cetera. What happened this quarter, of course, so we had lower revenues from the fee billings and we had some higher interest earnings in account and service fees and things that are very high margin type revenues, including Investment Banking M&A fees. Those are more profitable marginal revenues than the PCG-related fee income, which has a high attendant payout. So as a result, it drove the margin up this particular quarter and also helped the comp ratio.

Going forward, we have -- as you know, for Q3, we had higher fee billings, which again, will be a little bit lower margin revenue, and will drive some higher compensation with the FA payouts, particularly with the independent contractor space. And lower cash balances point to a possible decline in the margin for next quarter when you add those 2 things together, but it will be on higher revenues. So it's not to say that earnings or earnings per share will necessarily be impacted dramatically, but it'll just be a different mix, more like it was in the December quarter perhaps.

Then Paul mentioned the ROE coming in at 16.7% and also for the quarter and also for the adjusted number for the year-to-date, when you take out the impact in the first quarter of the sale of the European equity sales and trading operations. So we're, again, well above our long-term target of 15%. But again, still trying to make up for the many years we ran along at 11% and 12%, when we had no interest earnings to speak of.

Capital ratios, they all remain well above regulatory minimums -- multiples of regulatory minimums, actually. And a little bit up from the preceding quarter, because we only had modest buybacks this particular quarter of 603,000 shares.

I will say, however, the record EPS that we had during the quarter, even though we did not have record income, pretax or otherwise, we had record EPS, which really reflects the full impact of the over 6 million shares that we repurchased in the December quarter.

All in all, a pretty satisfying quarter, given the headwind of the lower fees that we started with and the continued runoff of client cash balances. That's what I have, and I'll turn it back now to Paul.

[Paul Reilly, executive]

Great. Thanks, Jeff.

So let me touch on the segments quickly and then we'll open it up for questions. So in the Private Client Group segment, we entered the third quarter with assets in fee-based accounts up 12% on a sequential basis. And remember, these are billed substantially based on the beginning balances. So it's kind of the reverse of last quarter, when they were down. This quarter, they are up. Also, last quarter, we had 2 fewer days. This quarter, we have 1 more day than last quarter. So those will both be positive on the tailwind for us going in the quarter. Offsetting some of this benefit is the decline in cash balances, as Jeff just mentioned. So overall, we continue to experience very good financial adviser recruiting and retention, so we're really optimistic on this segment and we're excited.

In the Capital Markets segment, while the timing of closings are always difficult in the M&A business, we -- the pipeline for M&A remains very strong. It would be hard to match last year -- the first 6 months' closings, but on the other hand, the activity levels for equity underwritings are increasing. Although it will still be difficult, I think, to match the first half, but we expect good results.

Unfortunately, the Fixed Income side of the business, we had a really strong March and a reasonable April, but you could see it's slowing back down a little bit. So if rate volatility remains low, given a flat yield curve and low long-term rates, it will still be challenging for that division.

The Asset Management segment entered third quarter with assets under management up 5% year-over-year and 9% sequentially. So again, this should help the billing. Increased utilization of fee-based accounts in the Private Client Group as well as a good return performance in Carillon Towers should also help us with financial assets under management over time.

Raymond James Bank started the third quarter with record loan balances and attractive net interest margins. The bank remains very disciplined in growing the loan portfolio and the credit metrics, we believe, will continue to be healthy.

So I said I would touch on our capital levels. As we obviously have excess capital, with our total capital ratio now around 25%, but the story remains consistent as it has always been and we continue to deliberately deploy our capital, after repurchasing 6.1 million shares in the December quarter for $458 million on an average price of $75.70 per share. In the first quarter, we purchased nearly 603,000 shares for $47 million or an average price of $78. This leaves us with $458 million of availability under the $505 million share repurchase authorization, which was increased by the Board of Directors in March of '19. We'll continue to be proactive in offsetting shareholder compensation dilution while remaining opportunistic with increased repurchases.

We also closed on 2 investments in April, including Silver Lane Advisors, a high-quality M&A platform with expertise in asset management and the wealth industries. And we bought out the remaining 55% interest in ClariVest, an asset management manager with over $7 billion in financial assets under management that we first purchased a minority stake in 2012. While these were not huge uses of capital, they do represent our strategic investments that we are continuing to make to augment our strong organic growth.

We have been and will continue to look on pursuing larger acquisitions, but again, only if they meet our criteria of being a strong cultural fit, a good strategic fit and something we can integrate at a price that generates attractive returns to our shareholders.

We also get a lot of questions on whether or not we'd be willing to grow the bank more rapidly. If we found assets that could generate good risk returns, we would. So we are growing our loan portfolio at a rate we are comfortable with, given our conservative parameters and disciplined focus. And while the bank has grown our agency MBS portfolio over the past 3 years, with a flat yield curve, it doesn't make a lot of sense to take 3- to 4-year risk duration for maybe 25 or 30 basis points, given the incremental spread pickup over the floating rate we earn off balances for third-party banks, which offer much more flexibility and more FDIC insurance for our clients.

We have focused on deploying capital to generate good returns for our shareholders, as we did this quarter with a 16.7% annualized return on total equity. We want our balance sheet not only to remain on the defensive side, but also allow us to be opportunistic when we see opportunities.

So overall, we enter the second half of 2019 with a lot of tailwinds, with a record number of Private Client Group financial advisers, fee-based assets up 12% than preceding quarter, record-high spreads on our cash balances, record net loans at Raymond James Bank and a healthy Investment Banking pipeline.

But we also have some headwinds, including declining cash balances and some expenses, such as communications and info processing, as Jeff spoke about, and business development for conferences. For example, we have our largest conference occurring next week with over 4,500 people attending, which will impact the business development line.

So with that, I think we're in great shape. And Tiffany, I'll turn it over to you to open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Steven Chubak from Wolfe Research.

[Steven Chubak, analyst]

So I wanted to start off with a question on the operating margin outlook. You cited a number of sources of record revenue balances and just given the strong revenue tailwinds in the second half and the growth in higher margin NII, how should we think about the outlook for operating margin? Should we think that some expansion in '19 versus '18 is achievable, even with the absorption of some of the higher non-comps as part of your investment plans?

[Paul Shoukry, executive]

There's multiple layers to this, but revenue mix does impact the margin and the comp ratio. So it's great that our fee billings will start 12% higher, but we pay advisers on net revenue. And if interest rates, where we pay -- we don't pay anybody, it really almost flows 100% to the bottom line of net interest. It's obviously going to impact -- the revenue will be up, but it's going to impact, both the comp ratio will be higher and the margin will be lower, given the same mix of other activities. So the revenue mix has been driving some of that margin in this quarter. And if we think what happens, happens, our comp ratio should be up and the margin should be down slightly, but Jeff, I don't know if there's anything...?

[Jeffrey Julien, executive]

Yes, I think that's right. I think, Steve, if we can keep the pretax margin in this 18% type range, that's a very acceptable long-term margin, in our opinion. The way we would like to see growth happen over time is to grow revenues, control expenses at about the same level. So we continue to see this 18% margin, but on an increasing revenue base going forward and then controlling the share count through the repurchases, which we've been doing. And that's sort of long term how we would see it, not so much through concentrating our business in such a way that we optimize the pretax margin. I mean remember, PCG is our core business. And if you look at the margin in the segment, it's actually the lowest margin of our businesses, but it feeds all the other businesses. So through attribution, it's an integral part of that 18% margin. But I wouldn't look for a lot of margin expansion personally. If that's -- that's not how we intend to grow earnings per share going forward. It's more growing revenues and holding the share count flat.

[Steven Chubak, analyst]

Got it. Being [indiscernible], I think expectations reflect margin contraction anyway, so it doesn't feel like the bar there is particularly high. But comments about keeping it stable at 18% is certainly quite encouraging. Just one question for me on the non-comps. Though it certainly -- I can appreciate the fact that you guys continue to invest in the business, it was nice to see also that the other expense line came in a bit better. Jeff, you indicated that the core number for that was somewhere sub $60 million this quarter. At the same time, also noted that $67 million may actually be indicative of a more normalized level. I'm just trying to unpack how we should be thinking about that line item going forward.

[Jeffrey Julien, executive]

It's hard to pick a number on that one. There's a lot of -- I hate to overuse the word lumpy, but there's a lot of costs, particularly on the legal side, that can come in or go out of that any particular quarter. But again, it's somewhere in the -- if we can keep it somewhere in the $60 million to $65 million range for that line, now that we've taken professional fees out and established a separate line item, we can keep the other expense in that $60 million to $65 million range, I think that's indicative of some ongoing legal costs. And in this business, we're never going to be without some litigation from clients or other sources. But in terms of all the other items that fall into that particular category, that would be an acceptable long-term run rate at our current level of operations.

[Steven Chubak, analyst]

And just one final one for me on Private Client Asset Management fee yield. Clearly, well-positioned to benefit from higher AUM levels in Private Client as we approach the back half. But the calculated fee yield continues to contract, albeit at a fairly modest pace. I was hoping you could speak to what's driving that fee dynamic and how we should think about the trajectory for the fee yield going forward?

[Paul Reilly, executive]

The only shift that you could really see is there's more of a movement to fee-based accounts. So we're not seeing big pressure at all on advisers, what advisers are charging clients. So those have held in pretty well. So I know there's been a lot of commentary about compression there, we don't see the compression on the fees advisers are charging. There's normal compression on any Asset Management fee or in our industry, but in terms of the adviser fees have held up very, very well. So I think it's more of a mix than any fee compression.

[Jeffrey Julien, executive]

It's mix and average size of account, as over time in our client base, average account size has grown and larger accounts typically can come in at a slightly better fee.

[Operator]

Your next question comes from the line of Bill Katz from Citi.

[Kendall Marthaler, analyst]

This is Kendall Marthaler, actually, on for Bill Katz. So I know you guys talked a little bit about the client cash since April, but I was wondering if you could give more of an update on pace of that relative to the last few months and how we should think about the economic trade-off between the elevated retail engagement and the lower cash balances.

[Jeffrey Julien, executive]

We've been spending a lot of time on this over the last 4 to 5 months with our sales force. It's gotten to where the rate that people earn on what we call sweep balances compared to what they can earn in what we'll call positional cash, such as an investment in the money market fund. The differential is large enough now that advisers and clients are actually bifurcating their cash into what we'll call operating cash and what we'll call investment cash. And so what we're seeing is, it used to be all just amorphously one into the sweep balance, so now what we're seeing is additional runoff, if you want to use that word, of cash balances into what we'll call positional type of investments. The pace of that, at some point in time, it will hit what we'll call stasis, where the investment cash is in its investment vehicle, and what's left in the sweep program will be the operational cash. I don't know at what point we hit that inflection point. We continue to recruit new advisers and our client assets continue to grow. So there's an incoming flow from that process. But at this point in time, at least through today, we continue to see a net runoff of some of that cash. And again, what percent of assets it ends up being is a little hard to predict now at this point in time. So we'll just have to wait and see.

[Kendall Marthaler, analyst]

Okay, great. And just a quick follow-up, kind of going back to the previous question. So as PCG client AUA shifts more towards the fee-based, how do you see that impacting just the overall margin for Ray Jay?

[Jeffrey Julien, executive]

Historically, on average, fee-based revenues as a percentage of assets have been a little bit higher for us than commission-based revenues as a percent of the related assets. But there's a lot of assumptions and all that go into making a statement as broad as that. I don't think it will have a material negative impact, and if anything, it could have a slightly positive impact. The good news about it is it creates a very predictable stream of revenues and it makes us a little bit more model-able company, if that's a word, going forward. And I know that people in your seat appreciate that. And our advisers have been kind of encouraged over the years to use professional management and other sources of fee-based revenues to eliminate some of the old conflicts that arose with commission-based accounts, and that was obviously accelerated with DOL and some of these other potential regulatory changes, and maybe will again, depending what regulatory changes come out with [ DI ] and other things that may be on the docket. But at this point in time, I think we still see a continuous shift, plus we recruit advisers that have a practice that is largely focused on fee-based, because it fits with our model better. So I think profitability-wise, it will be our best long-term economic history shows it's a slight positive.

[Operator]

Your next question comes from the line of Chris Harris with Wells Fargo.

[Christopher Harris, analyst]

On the 2 acquisitions you just closed, how should we be thinking about the financial impact of those deals? And if you happen to have a revenue number for us, that will be helpful.

[Jeffrey Julien, executive]

Well, Silver Lane is an M&A firm, so trying to determine how those revenues fall is as difficult as trying to determine how our own M&A falls, but it certainly will help augment our M&A revenue stream going forward. It's not an overly material part, as Paul mentioned, neither one of these are transformational acquisitions. And on the ClariVest side, they've been consolidated into our numbers all along. And then the portion we didn't own came out through minority interest. So given the size of minority interest over the last several years, since 2012, when we purchased our initial 45% stake, I mean you could see that what will no longer be coming out. Again, that -- and that won't be a huge transformational number.

[Christopher Harris, analyst]

Got it, okay. That's helpful. I guess a follow-up question I had was on PCG recruiting. You know, you guys continue to have great success there. Just wondering if there's been any kind of change with respect to where you guys are seeing interest among advisers. And then maybe if you can elaborate a little bit more on how the pipeline looks, whether it's better or worse or about the same as to how things were maybe 12 or 24 months ago.

[Paul Reilly, executive]

So I'd say the interest still remains high. Pipeline is strong. We started off with a slower quarter at the first quarter. Part of that was due just to also a reported net number, we had a lot of retirements. We have some retirements this quarter, but we're lower than last year, our pace of recruiting so far on average, but the pipeline is very good, very strong. And I would say similar to 12 months ago, maybe a little bit less, but not a lot. So given that we're behind on the first 6 months, I would expect us to be under last year's all-time record, but still a very strong recruiting pace.

[Operator]

Your next question comes from the line of Jim Mitchell from Buckingham Research.

[James Mitchell, analyst]

Maybe just talking a little bit about recruiting expenses, how do we think, if we're looking at FA headcount growth and recruiting off a record year, I think you had 3 record years in a row, this year is a little bit starting to, I guess, the second derivative is starting to slow. Do we -- would we expect recruiting expenses to also slow in terms of the growth? Or is it not really that impactful because the bigger numbers, amortization, that takes time? Just help me think through the recruiting expense dynamic from this year and next if we're kind of at these levels.

[Paul Reilly, executive]

Yes, so first of all, last year's record was a record above 2009. So we didn't have 3 years in a row. 2009 was our all-time record and then we beat it for last year. So although recruiting is still very strong, it's just not as good as last year's all-time record, so -- and certainly, if recruiting is slower, the expense is lower, both ACAT fees when we transfer client assets in, and outside recruiting fees, if we have to pay them. So those costs, those transfer costs, certainly hit the P&L when people move over. So our goal is not to have it slow down. But if it's slower, the expenses will be lower.

[Jeffrey Julien, executive]

And the amortization of all the transition assistance related to that does have an impact on the comp ratio.

[James Mitchell, analyst]

Great. Well, I'm just trying to get a sense, does this help the margin if these expenses flatten out and the revenues continue to come on? It seems like it will naturally help the margin.

[Jeffrey Julien, executive]

It helps the margin over time. It doesn't in the year or maybe the 2 years following the year you recruit the person. But once they have their business substantially over and have started using our other platforms, the bank, the Asset Management platforms, et cetera, and it radiates throughout the rest of the firm, they become incrementally profitable within a couple of years.

[James Mitchell, analyst]

Okay, thanks for that. And then maybe just a question on just on the progress on the West Coast. I know that's been an area of focus. It seems like you've had very good success on the East Coast, just any help in thinking about the progress in the West Coast would be great.

[Paul Reilly, executive]

Yes, the progress is we continue to recruit. The pace is higher, but we've got a long way to go, because we're just starting, really, in that market being aggressively recruiting. So we're having more and more success, but we've got a lot of territory and opportunity there. So we continue to be very focused on it. We've increased our support out West. And so we still view it as a big opportunity for us.

[James Mitchell, analyst]

Do you think it needs sort of kind of like an Alex. Brown type deal to help jump start it? Or do you feel you can still penetrate pretty well without that?

[Paul Reilly, executive]

We have a number of independent -- we have many independent employee offices out there now. Almost all of our affiliation options are represented in the West. So if there was something out there that made sense, we -- I don't know what it would be.

[Jeffrey Julien, executive]

If you know of one, please call us, Jim.

[Paul Reilly, executive]

But we're long term, and I think our pace is picking up, the number of advisers on a percentage basis, the growth is good, but again, it's a small base, so we're continuing to work at it.

[Operator]

Your next question comes from the line of Alex Blostein from Goldman Sachs.

[Alexander Blostein, analyst]

Jeff, back to your point around the margin, I guess when you talk about 18% being an acceptable margin I guess over time and well, clearly interest rate dynamics and markets will fluctuate and I get the fact that it's obviously going to impact margin in the quarter, but bigger picture, why is there a structural reason that your model can't have margin expansion over time?

[Jeffrey Julien, executive]

Only because our mix of businesses, and this is back to me talking again. I don't think interest spreads are necessarily sustainable at these levels, particularly if the Fed is done with the rate hikes and there will be -- I think there will be continued pressure on client deposit rates for us to maintain any kind of acceptable level of client cash balances. So I think that will -- if we see some spread contraction there, even though we're growing the overall revenue base with the PCG business, and 18% is not just acceptable, that's excellent. I'd love to stay at 18% for the rest of our careers. But given our mix of businesses and that dynamic with interest rates that I foresee going forward at some point in time, I may be right. I haven't been yet for the last 3 or 4 years, but at some point, it may happen. That's why I'd be surprised if there's much room for margin expansion in the near term.

[Paul Reilly, executive]

That's a challenge, when you have, whatever the number is, 65%, 2/3 of your revenues in compensation expense and you add 18% margin, and you've got less than 15% to operate the whole rest of your business, expenses, real estate, people, support. So you can always eke out a little, but there's not a lot of room in there. In our Private Client Group business, our second-biggest corporate expense is real estate. So you add that and put the people in and the people costs, those are hard to beat -- those are hard to move in the short term. You can move them in the short term, but there's a lot of consequences, on service levels and everything else if you do that. You can change payouts, but then there's consequences also. And we pay competitively, not at the highest, but we think we pay fairly and we're able to keep people because of the support, so it makes it tough to move that number a lot.

[Alexander Blostein, analyst]

That's helpful. And then second question around just the current dynamic. So obviously, you guys talked about cash balances coming down in April. Any sense of where these stand today and then more specifically, looks like the bulk of the client cash outflows took place from third-party banks over the course of the quarter. Is that the dynamic you guys expect to continue, where kind of Ray Jay Bank balances remain fairly stable?

[Jeffrey Julien, executive]

Again, it's continued through today. But at some point in time, we think it will level off. We don't know where that is and we're looking at doing some things that will help stem the tide on it that don't involve just purely raising rates to try to keep deposits here. So I don't know where that's going to bottom. It's continued to flow out a little bit every day. Not every day, but a little bit on average every day since the end of the quarter. But again, at some point, we'll reach that level at which people are going to move this investment cash to another location have done so and the money that's there is money awaiting investment.

[Paul Reilly, executive]

I think your comment about it, what you see flow out of third-party, we feed the bank first. So you're going to see the delta really in that cash.

[Jeffrey Julien, executive]

Yes, it's going to be in account and service fees. That will be the line impacted, as Raymond James Bank is, we accommodate its growth. It's the first one in the waterfall stack.

[Alexander Blostein, analyst]

Right, so cash is kind of fungible. Got it. All right, one more, guys, for you, just on Fixed Income trading. Obviously, a quarter of improvement for the first time in a while. I understand that the backdrop sounds like got a little bit softer, but to what degree is the recovery in the muni market is helping you guys and if there's any sort of sustainability in that business? How should we think about that impacting your overall Fixed Income franchise within Cap Markets?

[Paul Reilly, executive]

Yes, again, I think it's really more rate expectation. We do have a big part of that business is muni-oriented. But I think, again, the volatility is going to drive that more than anything else and to get a continued movement, or rate expectations. So you see in March 2 things. That volatility went up, but also, people's mind shift changed about investing long as the Fed announced they were considering slowing down and not giving rate. So there were a lot of people that went long that have been holding off going long, a lot of clients, and that certainly increased the appetite and certainly the volume for us. On the other hand, I mean not just on the revenue side, on the profit side, we have adjusted sales force and have taken cost actions there, where even at a downscaled business from a revenue standpoint, we are profitable. So I think a lot of firms are experiencing that we are, but not certainly the margins that we enjoyed a few years ago, but we do have it scaled for profitability and yet have kept the main heart of our group. So that if there is a market increase, we'll be able to take advantage of it.

[Operator]

Your next question comes from the line of Devin Ryan from JMP Securities.

[Devin Ryan, analyst]

I hopped on a minute late here, but I don't think you touched on this. Just on M&A opportunities, I know you guys have interest in doing deals that can augment organic growth. But the question is, is there really anything out there in wealth management today? Are there any targets, meaning specific companies that you're in touch with, that might be a good fit, but really, I guess the timing will need to be right for them and the price needs to be right for you. But I'm just curious, really, if there is anything out there. And then would you actually look at something in the independent adviser side or is there strong preference in employee adviser models?

[Paul Reilly, executive]

So there are certainly a handful of companies we think are strategically and culturally good fits. They're just not for sale, so we stay in touch with them. And if the point comes that they're interested, both whether they're independent or employed or both, we are ready, willing and able. There are also a lot of things we're looking at outside the Private Client Group. There's probably more opportunities in M&A and Asset Management in terms of certainly a number companies than there are in the Private Client Group side, as that group has just gotten much smaller. It's much more consolidated. So it's not the numbers, same number of firms, certainly, that there has been historically. So I think of the 60 companies that took us public, I think 8 names are still alive, including Alex. Brown, which we kept alive. So there's just fewer opportunities. So we're in touch, we're in dialogue and we have a corporate development department that's active. And again, it just has to line up.

[Devin Ryan, analyst]

That's helpful. And just one on the ClariVest, the kind of the full acquisition. I know it's a relatively small transaction, but can you just remind us how moving the ownership to 100% from 45% is going to impact the P&L? And then just whether that's contemplated in the expense commentary you laid out?

[Jeffrey Julien, executive]

It'll impact our pretax income by a couple million dollars a quarter. And that's the extent of that. So that's the amount that was flowing through NCI related to the part we didn't own. But that's -- and the revenues and the expenses were already in our numbers, because it's been consolidated because of our control. We're not a majority ownership, but our control on the board and other things over some of the operations, where we've been consolidating, but the revenue and expense numbers won't -- you won't see any change. You'll just see lower NCI.

[Operator]

And your final question comes from the line of Craig Siegenthaler with Crédit Suisse.

[Craig Siegenthaler, analyst]

On the Private Client Group fees that you really aren't seeing any fee pressure, can you share with us your internal estimate for the PCG advisory fee rate in the quarter and how this compares to historicals? Because we're back into a large decline sequentially and on a year-over-year basis, and the driver really is just mix shift. Can you help us better understand what you mean by mix shift there?

[Paul Reilly, executive]

We didn't hear the first part of your question. You came in late, can you just...

[Craig Siegenthaler, analyst]

I can repeat it, if that's okay.

[Paul Reilly, executive]

Yes, please do.

[Craig Siegenthaler, analyst]

All right. So earlier in the call, you responded to a question on Private Client Group fees. And I just wanted to understand what your fee rate is in the quarter for PCG advisory fees, and how that compares to historicals, just because we're back into a decline there. And then I think you said to a response to another question, that the driver really was mix shift. I just wanted to better understand what you guys meant by mix shift.

[Jeffrey Julien, executive]

It's hard to say. You can pick one big average rate, and you can just take the revenue line off the PCG financial and divide it by the assets and that's probably what you're doing to see this decline. But it has to do with which types of programs they're in. We have a whole range of different types of fee-based programs, it depends. The mix really has to do more with are they heading more toward Fixed Income versus equity, which do have some impact on some of the programs, particularly in the managed programs. And then as I mentioned earlier, both the average account size makes a big difference as well, as we've seen the average account size of our accounts within the managed programs increase over time, which again, usually engender a smaller fee as you go up the scale. We're not seeing, and we're not seeing within any particular program or within any of our particular objectives or within our management programs -- our managed programs, we're not necessarily seeing a whole lot of fee pressure and decline. It's been a slow dribble for several years, but it's not been the pressure that it has been in years past.

[Craig Siegenthaler, analyst]

And then just as my follow-up, I heard your response to Alex's question on third-party bank deposits. But can you help us on the account and service fee line? What is the outlook for this line in the next couple of quarters?

[Jeffrey Julien, executive]

Yes, so I -- so I said in the very beginning of my comments, in that line item, we're going to see, at least so far, we've seen continued decline in the assets that are in those third-party banks. I think our spread could hold up. It's just a matter of whether the balance decline stops, reverses or continues. If we froze everything today, it would be slightly lower probably next quarter than it was this past quarter, because even though we have the same spread, the asset balances are slightly lower. So it's, that's strictly a combination of balance and spread-driven number. And at this point in time, the spread's constant and the balances are slightly lower. So again, if we froze it today, then it'll probably be down slightly in that particular aspect of account and service fees. There are some other fees and things that fall in that line item, but that's the primary one.

[Paul Shoukry, executive]

Okay, well, I understand that's the last question, so we appreciate you all joining us this morning, and we'll talk to you again soon. Thank you.

[Operator]

Thank you for joining. You may now disconnect.