RJF
#No.
So first, these two weren't totally unrelated.
So one of the AML issues was related to the case.
And it was a specific case and a specific issue in the State of Vermont with a specific group of investors.
So we don't think those are happening all over.
Now, you ask if they're structural.
I think there is in our industry structural regulatory expenses.
And certainly a more aggressive stance by regulators.
Fines are up in the industry.
However, certainly not at this level.
I think hopefully they are unusual levels.
But there will be some fines.
And the 50 people in headcount and AML additions is just one example of the increasing regulatory costs, but those are in the numbers today.
There is a structural elevated cost in regulatory.
And for us they show up largely in compensation expense and systems.
The only thing that's showing up in this other expense, really, are external litigations and fines and things like that.
The structural element that's going to be ongoing is embedded in the comp and systems lines.
I think it's just asset based, both through recruiting and growth.
It's just a rise in the level of assets has caused the growth in that number for the quarter.
Not really much change from where it's been, <UNK>tian.
It's still hovering around $38 billion.
I think probably $32 billion of that is in the bank sweep program, but $13 billion of that $32 billion is going to our own Bank.
So there again, these numbers are not much different than they were a quarter ago.
Post the Deutsche Bank Alex Brown transaction we will have different numbers, as there's somewhere between $5 billion and $6 billion of cash balances that will be coming onto our books in that transaction.
And the spreads really haven't changed much either, by the way.
Yes, <UNK>.
I mean, it's too early to answer that.
I think what you ---+ my contention has always been is that you have fund families that want us to work with them.
We've got to make sure clients are charged appropriately.
And that over time there'd be some equitable redistribution that would impact, some may impact clients because it's regulatory.
We certainly don't want them to carry the burden.
Some of the broker-dealer may impact advisors in the fund family.
I would say we don't have an ask, so I don't think there's negotiation.
I do think there's a willingness and an understanding that they will contribute to this.
And I don't think there's a resistance to it.
It's just how and how do you structure it.
How you keep it level for the firm, the client, the advisor, to meet kind of the DOL requirements.
So it's complex.
I don't see resistance.
But I can't say we all have asked yet.
We got to know what we're going to do before we have a solid ask.
Part of it, there certain ---+ there's a number of elements to it.
So first, certainly equity syndicate being down is an impact.
So you almost have to move that as a separate piece.
There's also movement to fee-based accounts.
So that certainly takes it out.
But we're kind of digging into that number too and trying to figure out if this is systemic or market-oriented.
I think most individual clients have been afraid of the market.
And with all this volatility, it's hard to blame them.
And we teach long-term investment anyway.
So whether you could say there's a structural change or this is a market one, I don't know if it's been a long enough run.
But we're certainly, like everyone else in the industry, looking very hard at that right now.
Hey, <UNK>.
Good morning.
Yes, we would expect, at least over the last couple of quarters as we sit here today, for the spreads in our loan portfolio to be pretty stable.
And as <UNK> alluded to earlier, part of the contribution to the reduced provision expense relative to the gross loan increases was the loan mix and the fact that we really grew our private client banking assets, securities based lending and mortgage loan assets more rapidly than our corporate loans.
And we also net/net, you may have seen we had a reduced level of criticized loans in the quarter, which reduced reserves on those particular loans that were either payoffs, or in one case we did have one upgrade of a loan from criticized status, but the bulk of it was just paydowns in criticized loans that contributed to that reduction in that asset category.
Qualitative reserves, there were no - -
Yes.
The growth is, I think, if you look at the assets in general, market certainly helped.
We thought the number would be different than ---+ the last week certainly changed our outlook of the number in June.
If you remember the market then.
And recruiting.
And so we've had, as you can see by the results, very strong recruiting, a very strong pipeline, and you add those two together, they really drove the client asset number.
The independent channel has been the strongest this year.
And that comes and goes.
Certainly when you add Alex Brown and 3Macs to that it's going to catch up.
But they seem to go in fits and starts.
The recruiting in Raymond James Associates, employee is above last year, and that was a very good year.
But the independent channel particularly has had a very, very strong year.
So we're happy with both of them.
But the independent's stronger right now.
No real concentration of where they're coming from.
Kind of we're clearly in the middle of that dialogue and getting direction at various regulatory meetings that were in on the focus on commercial real estate.
Our balance sheet compositional, although we've grown our commercial real estate book, is a little bit different.
Some of the banks that have significant concentrations, their multiples of their commercial real estate exposure as it relates to their percentage of total loans relative to ours.
Ours is still pretty small.
And I think you know about half of our commercial real estate are loans to REITs that tend to be a lot more diversified.
And the regulators would acknowledge those have historically been less problematic than the project finance real estate.
So our real estate concentration and percentage of total assets and total loans is relatively low compared to other institutions.
There could be some opportunities, to your point that where ---+ as others are pulling back.
But we're going to continue to be very cautious and not change our underwriting standards on commercial real estate, so.
First, I think we've been very good about predicting our closing costs and net/net Alex Brown was just more complex.
The 3Macs, or the Morgan Keegan, we brought the broker-dealer and knew what we had, and controlled both ends of a transition.
And the Alex Brown business, both by part of the reason we're in it is for the ultra-high net worth access and the technology standpoint, the connections, the systems, were just more complicated.
And the agreements with Deutsche Bank are more complicated.
So that drove ---+ the agreements drove the legal costs.
And the sophistication and complexity drove the technology cost.
So yes, we underestimated it.
And Alex Brown was very strategic for us, and their growth.
But it wasn't 100% down the fairway, what you'd call Morgan Keegan and 3Macs.
It was a little stretch in some areas for us on purpose, and we were just a little shy.
So I think we've done a good job estimating generally conservatively on those costs.
And we weren't perfect on this one, but $10 million out of $500 million investment isn't going to sway our ROE analysis too much.
I don't ---+ we've always had a pretty high bar on those and always have been cautious.
If anything, with high commissions going way, way back.
And Tom's in the room and he beats that drum all the time.
So I don't think that's changed.
There's been continual growth to fee-based.
So that's part of it.
And again, you'd have to segment out the syndicate business, which has been almost dead, which certainly a part of it.
And part of is there's been less transactions.
So I don't think there's been a change in philosophy or a push to do something that's caused it.
I think the natural migration to fee-based along with the muted equity markets have just contributed to that.
Yes, I don't think we've written that up to provide it in some kind of format.
But there ---+ we have disclosed there are 70 advisors and they're about on our average $6 billion of assets in Canada.
Our Canadian margins have been near our Private Client Group margins in the US, and we'd expect the same thing.
That business has been lower margin, really because of back-office costs relative to the size.
And we think over time, in that first year that we'll be able to drive a lot of those costs and achieve the margin.
But again, we're very ---+ we're sensitive both to the people, the culture, making sure we get it right before we're just going to slash cost cutting there.
A little bit.
Maybe a little bit.
We told the advisors to wait for an answer.
I think that some people have come out of the box with a solution have had to backtrack.
And we're very ---+ I think the ---+ our message has been very clear to our advisors.
They know we're sincere about it.
We want a solution that's good for clients, keeps as much advisor flexibility as we can, and fair to the firm.
That's the way we've always approached everything.
Until we know what we're going to do, the worst thing you do is go to clients, tell them one thing and then you change it again.
And then you changed it again when the law is finalized or understood the product.
So there's plenty of time to make those changes.
In April (inaudible) is to go to your clients and change either commission accounts or fee-based.
There's plenty of time to do that.
So the key is to get it right.
Luckily I think we have a lot of trust with our advisors and clients.
And our long-term history has been to do the right thing.
So I think in the most part, they're nervous because they hear stuff but they realize that it's the right track.
So far it's been business as usual.
Well, the percentage of assets is very similar.
I can't tell you what the total assets were.
We don't ---+ we get ---+ we'll find out soon on the closing.
But we don't get weekly or monthly reports.
Somewhere between $45 billion and $50 billion for the 92%.
We've been very clear that we aren't going to have a separate robo-advisor that just intermediates our advisors.
We have never said that we were not going to enable technology that could let clients use that channel.
We have an investment central today that manages small accounts for advisors.
We've always had in the plans since our plan of the future to take what we already do in asset management and make it more of a direct portal to clients and make it an automated system.
The question for robo-advice was there any real advantage under the DOL rules to put another system in temporarily or intermittently to help with that.
I think that's probably no, but unclear.
But I'd say at first a lot of people ran to that because of it.
We will have a client FA-oriented solution, but it isn't a solution that takes it away from the advisor and is a competing channel.
So we're not saying no robo-advisor-like platform.
We're in the advisory business.
We will have technology that will help them gather and manage assets easier, as all of our technologies really associated with.
So it's really a nuance on robo-advisors.
When Scott Curtis spoke at his conference, he had two titles: Raymond James Considering Robo-Advisors.
The same story ---+ the same interview was, Raymond James Will Never Have A Robo-Advisor.
I think it's a ---+ it's caught up in the terminology.
We will, I believe, have the technology.
I just don't think it's going to be a robo direct away from the advisor type of technology.
We've had ---+ there so many alternatives.
Again, I know you guys want an answer.
I'd love to give you one.
I think it's unclear.
You can do anything within the BIC if you wanted to.
But I'm not sure that's smart or good.
And we're just looking at all the analysis.
I know people have looked at, can you standardize fees in mutual funds on fee-based platforms.
Can you standardize commissions.
Can you ---+ there are a lot of possible things.
But we're not at the point where ready to say what's the right solution for our clients, advisors and us yet.
We're just not ready.
So we're certainly in dialogue with the industry.
So we know generally the options of what people are thinking.
We're dialogue with our advisors, and we have a big group here that's working on it full time and analyzing the alternatives.
And we are systematically starting to make the basis of decisions, what I call them the macro decisions.
But we've got a long way before we nail it down or give you a detailed answer like that.
It's possible.
But we're not there.
Yes.
July is early.
We're in the middle of July.
We're not reporting on that.
I would say we see certainly muted activity this calendar year compared to historic norms.
I'm not sure we're ready to call that a structural change, but we're in the middle of analyzing it and make sure we understand the components.
And when people are slower into the market we can theorize all sorts of things.
We're trying to get as objective as we can on it.
So we see the trend.
We see it in the industry.
We're not immune from it.
And so we're looking at it.
But certainly the retail investor has been nervous in this market, and you can't blame them.
We've had a lot of ups and downs this last year.
There's a couple of dynamics.
First, last year we said was our second-best recruiting year ever.
So first, the employee channel's doing better than last year.
They are not having a bad year.
They are having a very good recruiting year.
The independent channel's just having an amazing year, and part of that is position of competitors.
So I think we're getting more than our fair share.
The report said that recruiting was down 40% in the industry.
We're certainly not seeing that.
I think we're just in the right place at the right time and the platform's right.
So the independent channel I think has been just a bigger share gain.
We're getting to see more and more joining.
But the employee channel's up over last year.
So even though it certainly isn't lackluster.
And we're I think at a pace that we can bring advisors on, and successfully.
And frankly if it got too much higher we might even have some concerns about onboarding.
But right now we're in good shape.
And you get these relative swings.
So I wouldn't ---+ and these swings may last couple years.
But it doesn't mean they last forever.
So we've watched it go back and forth for a long period of time.
Yes.
Actually, we're still analyzing that.
Obviously the rate environment has changed that dynamic a little bit.
<UNK> mentioned the cash balances, the total client cash balances, the bulk of which are at third-party banks.
Those are pretty stable right now, but he also mentioned that were getting ready to get this influx of cash from the Alex Brown clients.
So that analysis still continues.
We don't want to take a lot of duration risk.
We're not interested in really going out too far in the yield curve to just try to pick up more yield.
So anything we would do would be relatively short in duration.
But we do think that dynamic where we could move some additional cash to the Bank and have a little bit larger securities portfolio without taking any credit risk, we would do things that would be in the agency and very high-grade munis perhaps, but primarily agency-oriented mortgage-backed securities.
That analysis probably is still valid and we're still continuing to pursue that.
As you see, we haven't implemented that yet.
But we're continuing to analyze it.
And it would require nominal additional capital.
Yes.
Actually, it's really going to be based on the types of loans that we're growing.
When we add securities-based loans and residential mortgage loans, the provision expense and the associated loan loss allowance is lower than our corporate loans.
So each quarter that had that new asset composition and the new growth tends to be different.
Our corporate growth this last quarter was muted, which drove that reduced provision expense percentage.
When we have a quarter where corporate loan growth is higher than the other asset categories, then that mix will be different the next quarter, so.
And of course in any given quarter we could have credit issues in either direction and we could have qualitative reserve impacts.
So those are hard to predict, obviously going forward.
But on the growth side I think <UNK>'s comments are correct.
Okay, if there are no more ---+ go ahead.
Thank you, Raquel.
We appreciate you all joining the call.
I'm very proud of our results.
I think growing assets and revenue in this kind of market is really the long-term indicator of success.
We certainly had some unusual expense items, and certainly environment has ---+ between technology and regulatory, it's certainly a challenging environment from an expense standpoint.
But we're doing a good job of managing it.
With the acquisitions coming onboard this year, and I think our positioning.
I'm very confident that we will do well, given the market any market environment.
So I'm proud of the team.
We know we have to earn it every quarter.
And I appreciate you attending the call this morning.
So thank you.
