Raymond James Busts Budget on Alex Brown Acquisition
Raymond James Financial will spend $10 million more than expected to buy the U.S. brokerage business of Deutsche Bank due to complicated technology integration and employment deals with individual brokers, the Florida-based company said Thursday.
Raymond James Chief Executive Paul Reilly announced with great fanfare in March that 92% of Deutsche’s 200 advisors had agreed to join just three months after Raymond James disclosed plans to create a high-net-worth unit for them that will be marketed under the Alex Brown name. The deal was expected to close in September, Raymond James said in February.
On Thursday, Chief Financial Officer Jeff Julien said that integrating upper-echelon brokers is proving more complex than anticipated and that the deal may close a little later than the September target date.
Integration costs that were budgeted at $25 million to $30 million will be in the “high 30s,” he told analysts on a conference call to discuss Raymond James’s fiscal third-quarter profit that fell 6% from the year-earlier period but that beat analysts’ expectations.
In addition to higher-than-planned IT expenses and real estate costs, legal fees are soaring because of “five or six side agreements” between brokers and Deutsche Bank, he said.
Reilly defended Raymond James’s acquisition acumen, noting its well-oiled integration of Tennessee-based Morgan Keegan in 2012 and its on-budget plan this year to buy Canadian independent broker MacDougall, MacDougall & MacTier Inc., or 3Macs. He admitted, however, that the $500 million Deutsche Bank acquisition is askew.
“Yeah, we underestimated it,” Reilly, the former chairman of headhunting giant Korn Ferry International told analysts. “It’s not 100% down the fairway, like the others.”
The inflated integration expense could affect profit margins at Raymond James, which also operates a bank and an investment banking business, because Reilly does not believe in driving away new brokers and clients by quickly imposing cost-cutting programs, he said.
The $10 million forecast miss on the $500 million purchase of Deutsche Bank’s private client group “isn’t going to sway our ROE (return on equity) analysis too much,” he added.
Raymond James’ yen to grow client assets by hiring advisors continues to be strong, Reilly said, noting that its recruiting pipeline is strong this year in contrast to many other retail brokerage firms while its retention of existing advisors continues to be robust. The company’s independent channel, in which advisors contract for operational services but are not full-time employees, has been the company’s strongest recruitment channel this year, Reilly said.
Raymond James had 6,834 brokers as of June 30, including just over 4,000 (59%) in the independent channel. It added a net 327 brokers overall in the past year, including 69 in its April-June third quarter.
In another contrast with large competitors, Raymond James continues to struggle to understand the implications of the Department of Labor’s fiduciary standard that becomes effective for brokers in April, Reilly said. On Wednesday, Morgan Stanley Chief Executive James Gorman said the company is well along in planning for the rule and does not expect it to have a big impact on the company’s almost 16,000 brokers.
Raymond James is talking with fund companies that provide product for its brokers about potential new pricing structures as the law nudges brokers to fee-based from commission accounts, Reilly said, and should have better clarity by the end of the summer. Brokers and their clients are “nervous because they hear stuff,” but appreciate that the company’s staff is working hard on laying a groundwork for the DOL rule, he said.
On the continuing debate over whether full-service brokerage terms should set up automated investment services, or robo-advisors, for price-conscious, mass affluent clients, Raymond James is likely to create an “advisor-light” product that relies on technology to help them gather assets, but is unlikely to set up a direct robo channel that will compete with brokers, Reilly said.