Raymond James Recruiting Breaks Records, But Profitability Slips
Raymond James Financial’s Private Client Group reported record revenue in the company’s fiscal third quarter but fell short of profitability targets in part due to higher costs associated with its record pace of hiring.
The brokerage division reported $1.28 billion in revenue in the past three months and $132.3 million in profit, accounting for 70% of the overall company revenue and 57% of its earnings. However, profit at the private client group was down 16% from the prior quarter on elevated expenses that Raymond James attributed to “significant recruiting and onboarding-related expenses”; conferences and recognition trips for its roughly 7,700 financial advisors; and an increase in legal and regulatory reserves.
As a result, pretax margin in the private client group was 10.3% for the quarter and 11.8% year-to-date, below the target of 12.5%, chief financial officer Jeffrey P. Julien said on the firm’s earnings call. The expenses in that segment also “dragged down the overall firm margin,” which was 17.3% for the overall company, below the 18% target, Julien said.
Shares of Raymond James were trading down over 3% midday on Thursday as results missed analyst expectations.
Raymond James chief executive Paul Reilly reassured analysts on the call that the “unusual climb in expenses” would return to normal as legal costs subsided and the firm’s major advisor conferences were mostly booked in this quarter. He also said that the recruiting costs were elevated because it brought in the 115 brokers in the quarter, a “robust” quarter that put the firm on track for a record year. More advisors typically join in the fiscal third quarter after collecting bonuses and other compensation in the three months of the year, Reilly said.
The 115 brokers represents almost twice the net 63 advisors that the firm added over the same period last year, according to its third quarter 2017 earnings report.
“The revenue drivers are all very strong and we did have certain elevated expense items that we believe are higher this quarter than they will be going forward,” Reilly said, speaking from the firm’s summer development conference for its employee brokers in Orlando. “These are lumpy with timing and really investments for the long term.”
Reilly and Julien declined to discuss specific legal matters that prompted the elevated reserves, but said that they were running around $14 million higher in the quarter than usual.
The rising recruiting costs were telegraphed in an investor presentation in June when when the firm said it expected to spend about $247 million this year on forgivable recruiting and retention loans in its employee channel, impacting the bottom line of the private client group by about 4.9%.
The total headcount of 7,719 brokers was up a net 434 from June 30 last year. The fastest growth was in the firm’s lower-margin independent channel, which had 4,593 affiliated brokers, up 7% in the past year. The employee unit increased headcount by 3% over the past year, to 3,126 brokers as of June 30.
Raymond James also signed on a large correspondent clearing firm that had $4 billion in assets that resulted in around $3 million in account transfer costs alone, Julien said.
Reilly touted the returns that the firm was getting from investing in recruiting and characterized the costs associated with recruiting and other business development as the “good kind of expenses.”
New hires, which “mainly” come from wirehouse firms, usually bring over almost their entire client book by the end of their first year and were helping boost fee-based assets at the firm, a key driver of the firm’s record revenue, he said.
Fee-based assets of $343.1 billion comprised 48% of the total $719.5 billion in client assets, a larger share than the 44% they accounted for last year. Fee-based assets overall were up 24% and total assets were up 14%.
“That should give a good tail wind for the revenue in the private client group, everything else being equal,” Reilly said of the fee.