Raymond James Client Assets Tumble, CEO Rallies Troops and Investors
(Updated in fourth paragraph with data on market gains.)
Raymond James Financial opened a window into the effects that the coronavirus crisis is having on retail brokerage firms, reporting late Monday that client assets under administration in its private client group fell 5% over the four weeks of February as markets were just beginning to react to the unknowns of the pandemic.
The S&P 500 has plummeted almost 33% since reaching a record high on February 19, underscoring the damage that firms can expect amid the unprecedented volatility.
U.S. stocks rallied at the market open on Tuesday morning, with the S&P 500 and Dow Jones Industrial Average up 5.6% and 6.3% respectively around 10 a.m. New York time, as Congress appeared close to approving a $2-trillion economic rescue plan.
The volatility appears to have spooked retail brokerage clients into transferring out of investment accounts into bank accounts.
“[S]ince the beginning of March, cash sweep balances have increased significantly to over $48 billion as of March 20,” up from $38.9 billion at the end of February, Raymond James reported. “Spreads earned on these cash balances have been negatively impacted by the two recent emergency rate cuts by the Federal Reserve.”
The company, one of the few in the financial services industry that gives a monthly summary of its financial data, has about 8,100 financial advisors and in fiscal 2019 booked 67% of its net revenue from its private client group business.
The market losses are particularly troubling for retail brokerage firms that have been encouraging brokers to move clients from transaction-based commission accounts to advisory accounts that charge fees based on beginning-of-quarter assets in client accounts. The trend has been widespread for several years since fee-based accounts generate revenue regardless of clients’ trading inclinations.
The $425.6 billion that Raymond James’ retail clients had in fee-based accounts as of February 28 represented 52% of total client assets in the private client group, according to the report. The fee-based assets were up 15% from 12 months earlier but had slid 4% in the four weeks of February.
Raymond James’s report also highlighted other far-reaching effects of the coronavirus crisis.
“We discontinued in-person advisor recruiting meetings and deferred numerous advisor transitions to Raymond James due to COVID-19,” Raymond James Chairman and Chief Executive Paul Reilly said in the report.
Raymond James has marketed its broker-centric culture, including trips to its St. Petersburg headquarters where prospects meet top executives, as a value differentiating it from many of its competitors.
“We are also experiencing disruption in our investment banking business,” said Reilly. “While trading volumes in fixed income are elevated in March, dislocation in the fixed income markets has negatively impacted principal transaction revenues.”
Like the entire banking industry, he added in the monthly report, Raymond James Bank expects to pump up its loan loss reserves “as a result of rapid and widespread economic deterioration.” Net loan losses of of $21.5 billion in February increased 7% over February 2019 and 1% over January 2020, the company said.
The 5% decline in client assets in February applied to both RayJay’s private client group, its largest business with almost $814 billion of administered client assets, and to the company’s total client assets of $854.9 billion, according to the report.
As he did in a press release last week, Reilly reassured investors that Raymond James remains financially strong.
“As we collectively navigate these challenges, our long-term focus and conservative approach to capital and liquidity management should be a source of strength during these uncertain times,” he said. “As of March 20, we had approximately $1.4 billion of cash at the parent. If market conditions continue to deteriorate, we also have an undrawn $500 million revolving credit facility, which we could access to provide additional flexibility.”
The company’s “top priority,” he added, “is the health and safety of our associates and advisors as they remain steadfast in serving clients. I am proud of the dedication and commitment of our associates and advisors as we execute on our business continuity plans….”
Shares of Raymond James were up 7.8%, or $4.30, to $59.40 in late morning trading on the New York Stock Exchange on Tuesday, carried by a broad upsweep on news about the aid legislation.