Raymond James Gears Up Expense Controls as Profit Falls 35%
Raymond James Financial is attacking “almost every single expense line item” in all parts of the company, becoming the first large broker-dealer to acknowledge the prospect of long-term revenue declines due to economic consequences of the coronavirus pandemic.
“The unexpected swing in interest rates and uncertainty that comes with a global recession requires us to evaluate ways to reduce costs,” Paul Shoukry told analysts Thursday as he explained the bank’s 34% drop in fiscal third-quarter profit. “The goal is for these initiatives to yield significant efficiencies for the firm, which is critical so we can continue investing in growth.”
“The Private Client Group leadership team is looking at this as a long-term opportunity to certainly transition more to virtual events, which could help business development expenses,” he said about the Florida-based firm’s largest division.
Pretax net income at Raymond James’ retail brokerage business fell 35% in the April-June period to $91 million from $140 million in the year-earlier quarter, and was off 8% from the first three months of 2020.
Net revenue fell 8% and 16% from the respective quarters to $1.25 billion, while expenses were down 4% from the year-earlier quarter and 13% from this year’s fiscal second quarter to $1.15 billion. Compensation and benefits to brokers were down 14% from the previous month (and 3% from a year earlier) to $783 million.
The company as a whole reported a 42% drop in pretax income from last year’s quarter to $198 million and a 5% decline in total net revenue to $1.83 million. Revenue of $1.83 billion was off 5% from the year-earlier period.
The private client group grew by a net 251 employee and independent channel advisors in the 12 months ending June 30, including just seven during the virus-impacted quarter.
“While recruited production increased sequentially, the net addition of both experienced financial advisors and trainees was negatively impacted by the COVID-19 crisis,” Raymond James Chairman and Chief Executive Paul Reilly said. Many employee channel brokers who had committed to join in March and April postponed their start dates to at least September, he said.
The private client group generated lower management and related administrative fees that were priced off of depleted client account balances at the beginning of the quarter, but a 16% increase in fee-account assets during the quarter bodes well for current period results, Reilly said.
The wealth unit also endured lower net interest income because of Federal Reserve cuts that are expected to continue following dismal U.S. economic reports on Thursday, lower brokerage revenue and lower client account sweep fees from third-party banks.
Despite the planned expense campaign, Reilly said he would not stint on production-club trips.
“The educational trips for top advisors are all part of our culture and our ability to have feedback,” he said on the earnings call.
Raymond James ended the quarter with 8,155 advisors, 58% of whom are independent brokers. Its employee channel broker count grew 5% from a year earlier to 3,379 while the independent channel was up 2% to 4,776. It added fewer trainees because testing centers were closed, executives said.
The firm, which touts its broker-centric culture and compensation transparency, cut payout rates to employee-channel brokers in fiscal year 2018, citing a need to combat rising regulatory expenses and acquisition costs.
Raymond James, which has commercial and investment banking and trading businesses as well as its flagship wealth unit, continues to scout for acquisitions, Reilly said, without specifying business lines.
“We would have no qualms doing an acquisition whatsoever if we have the right one,” he said, noting that the company purchased retail brokerage firm Morgan Keegan 2012 at a time of “economic softness.”
Shares of Raymond James were down 3.9% to $68.71 in afternoon trading on Thursday.