Raymond James CEO on Defensive About Payout Grid Cut
Raymond James Financial Chief Executive Paul Reilly began and ended his earnings call Thursday morning with a defense of the compensation cut that the firm will impose in two months, a sign of the backlash he may be receiving from affected brokers.
The Florida-based company earlier this month said it will cut the percentage of revenue paid to the 3,000 brokers in its Raymond James Financial Services employee branch channel by an average of about 1% at the start of its fiscal first quarter in late September.
The change is being driven by higher costs, related in large part to the Department of Labor’s new conflict-of-interest rule, the company has said. On the earnings call, Reilly said the complexity of the DOL rule and the likelihood of modifications to it by the Trump administration make it “too hard” to analyze the rule’s revenue and bottom-line consequences.
“I think that advisors understood the need” for the payout change, he said at the start of the earnings call, noting he had just returned from the employee unit’s “development conference” attended by 2000 brokers and, “in Raymond James fashion, 600 [of their] kids.”
Raymond James has been on a recruiting campaign, promoting its broker-centric culture in contrast to the bureaucratic structures of larger bank-company owned firms. “Most firms make [grid] changes every year,” he told analysts on the conference call. “We don’t.”
But he conceded that the payout cut is a “major comp change” driven not only by rising regulatory, legal and compensation expenses but by back-office costs that are up almost one-third over the last four years.
The payout change affects only the employee channel, but Raymond James also has tweaked product payout formulas for its larger independent contractor channel to meet the DOL rule. It also is eliminating its Passport managed account platform that some advisors in both channels say limits their discounting capabilities for customers. (The firm is retaining its Ambassador wrap-fee platform.)
Analysts throughout the call questioned why compensation expenses in the April-June quarter grew at a higher-than-targeted level and whether the grid change will affect Raymond James’ recently accelerated effort to recruit advisors.
Chief Financial Officer Jeffrey Julien said it will have an “impact going forward of some magnitude” on the company’s compensation ratios and bottom-line profitability, helping stockholders and brokers alike. “If we don’t perform, the bonus pools are affected,” he said.
Raymond James’ compensation and benefit expenses rose 19% in the third fiscal quarter from a year earlier to $1.08 billion, or 66.6% of its net revenue during the quarter. The increase was affected in part by deferred payments to brokers at the upper-high-net-worth investor Alex. Brown brokerage unit that Raymond James bought from Deutsche Bank last year, Julien said, as well as by the hiring of additional compliance and risk management staff.
The company trumpeted the 56% jump in year-over-year pretax profit in its private client group to a quarterly record of $128 million and the unit’s 25% revenue increase to a record $1.13 billion. Rising fee-based assets driven by market gains and new money, plus Federal Reserve interest-rate hikes, helped growth, the company said. The private client group contributed 46.5% of the company’s pretax income in the quarter and 69.4% of its net revenue.
Rising expenses, however, clipped the unit’s profit margin to 11.35% while the company as a whole registered pretax margin of 16.9% during the quarter. The profitability metric in the private client group, Raymond James’ biggest business, is below the 12% target it forecast earlier this year.
The private client group ended the third quarter on June 30 with 7,285 brokers, up by 63 during the quarter and by 451 over the previous 12 months. The independent channel added a net 68 brokers during the quarter, implying that Raymond James had net attrition in its employee channel. The company earlier this year adjusted its pay formula for some external recruiters.
The independent channel, where brokers get higher payouts and where the grid rate has not been cut, added 276 net brokers over the 12 months ending June 30.