RayJay Sticks with Recruiting Despite Rising Costs
Raymond James Financial expects to continue its accelerated pace of broker growth over the next five years, despite the rising costs of recruiting and retaining advisors, company executives said on Thursday.
The Florida-based firm will spend about $247 million this year on forgivable recruiting and retention loans, impacting the bottom line of its private client group—its largest division—by about 4.9%, according to a presentation made at its annual Analyst and Investor Day. But executives said they have no regrets about plans to add about 260 brokers to their force of 7,600 brokers, supplementing the 200 net additions made in fiscal 2017.
“Momentum is as strong as it’s ever been, and that’s particularly noteworthy given all the flux over the past year with who’s in or out of Protocol,” said Tash Elwyn, president of the private client group’s traditional employee channel, referencing Morgan Stanley, UBS Wealth Americas and Citigroup’s decisions last year to remove brokers from the protection of the intra-industry recruiting pact.
“We are still tracking for either a record or near-record year in recruitment” in the employee and in the larger independent contractor channels, Elwyn told analysts in a webcast presentation.
He underscored, however, that retaining existing brokers is at least as vital to the retail wealth unit’s prosperity as is recruiting. Keeping advisors “elated” through better technology, platforms and a differentiated culture not only keeps customer assets in place but avoids “the expensive churn…seen at many of our competing firms” of broker hires and departures, Elwyn said.
His presentation included a slide showing the 4.9% impact that “financial advisor transition assistance and retention costs” will likely have on the wealth division’s compensation ratios and pretax margin this year. (Raymond James, which last year cut payout grids to the approximately 3,000 brokers in its employee branch channel by an average of about 1%, expects the private client group to achieve at least a12.5% pretax profit margin, according to new targets released on Thursday.)
Elwyn did not elaborate on retention and recruiting costs, but Raymond James ended its fiscal second quarter at the end of March with $885.2 million of forgivable loans to brokers on its balance sheet—up about $12 million from a year earlier, according to its 10-Q regulatory filing last month. The increase came as UBS and Morgan Stanley, among others, have been working down their much heavier broker-loan balances.
About $20 million of Raymond James’s loans to brokers, which have an average yield to the firm of 1.58%, were made to advisors no longer with the company. About $8 million of those are characterized as “doubtful” to be collected, according to the regulatory filing.
Raymond James is recruiting into both its employee and independent contractor channels, and is indifferent to which unit brokers choose since the “economics” are the same to the parent company over time, Elwyn said. Another executive clarified that the firm, as is typical industrywide, makes lower profit margins on its registered investment advisor platform.
Raymond James has been on a multi-year recruiting campaign promoting a broker-centric culture that it says gives brokers choice on how to conduct their business and latitude to leave when they want to, in contrast to the bureaucratic structures of larger bank-company owned firms. Its recruiting deals are currently lower than aggressive competitors such as Ameriprise Financial and First Republic Bank, according to outside headhunters.
“We can confidently go toe to toe with any other firm,” Elwyn asserted on Thursday, but acknowledged that there will be fewer pools of talent to choose from going forward as smaller firms succumb to growing technology and regulatory costs and as the aging force of advisors industrywide retire.
Company chairman and CEO Paul Reilly foreshadowed that sentiment in an earlier presentation to investors. “We keep upping our training program because we’re not just going to recruit our way to success,” he said.