Q3 2024 Raymond James Financial Inc Earnings Call
Good evening and welcome to Raymond James Financial's fiscal 2024 third quarter earnings call. This call is being recorded and will be available for replay on the company's Investor Relations website. I'm Christy Waugh, Senior Vice President of Investor Relations. Thank you for joining us.
Kristina Waugh: Kristi Waugh, Senior Vice President, Investor Relations. With me on the call today are Paul Reilly, Chair and Chief Executive Officer, and Paul Shoukry, President and Chief Financial Officer. The presentation being reviewed today is available on Raymond James Investor Relations' website. Following the prepared remarks, the operator will open the line for questions.
Speaker Change: With me on the call today are Paul Reilly, Chair and Chief Executive Officer, and Paul Shoukry, President and Chief Financial Officer. The presentation being reviewed today is available on Raymond James Investor Relations' website. Following the prepared remarks, the operator will open the line for questions.
Unknown Executive: I am calling your attention to slide 2. Please note that certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, industry or market conditions, anticipated timing and benefits of our acquisitions and our level of success in integrating acquired businesses, anticipated results of litigation and regulatory developments, and general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs, such as may, will, could, should, and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.
Speaker Change: Call your attention to slide 2.
Speaker Change: Please note that certain statements made during this call may constitute forward-looking statements.
Speaker Change: These statements include, but are not limited to, information concerning future strategic objectives, business prospects,
Speaker Change: Financial Results, Industry or Market Conditions, Anticipated Timing and Benefits of our Acquisitions, and our Level of Success in Integrating Acquired Businesses, Anticipated Results of Litigation and Regulatory Developments, and General Economic Conditions.
Speaker Change: In addition, words such as believes, expects, anticipates, intends, plans,
Speaker Change: Estimates, Projects, Forecasts, and future or conditional verbs such as may, will, could, should, and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.
Unknown Executive: Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our website. Now, I'm happy to turn the call over to Chairman and CEO, Paul Reilly.
Speaker Change: Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our website.
Paul Christopher Reilly: Now I'm happy to turn the call over to Chair and CEO , Paul Reilly. Paul? Thank you, Christy, and good evening. Thank you for joining us today. Last week, Paul and I attended our Summer Development Conference for our employee advisors.
Paul Christopher Reilly: Thank you, Christy, and good evening. Thank you for joining us today. Last week, Paul and I attended our Summer Development Conference for our Employee Advisors. It's exciting to spend time with so many advisors who embody our client-first culture. We hear firsthand what makes Raymond James a great place for advisors who value the breadth of our technology and product platform so they can effectively serve their clients, and importantly, a firm that provides advisors with the tools they need to grow their business. Paul and I appreciate the passion and dedication of the thousands of advisors who continue to serve their clients day in and day out.
Speaker Change: It's exciting to spend time with so many advisors who embody our client-first culture.
Speaker Change: We hear firsthand what makes Raymond James a great place for advisors who value the breadth of our technology and product platform so they can effectively serve their clients, and importantly, a firm that provides advisors the tools they need to grow their businesses.
Speaker Change: Paul and I appreciate the passion and dedication of the thousands of advisors who continue to serve their clients day in and day out.
Paul Christopher Reilly: Turning to our quarterly results, we once again delivered strong results in the quarter. Our diverse and complementary businesses combined to generate record results for the first nine months of the fiscal year. We continue to invest in our businesses, our people, and our technology to help drive growth across all of our businesses. Beginning on slide four, the firm reported record fiscal third-quarter net revenues of $3.23 billion, an increase of 11% over the prior year quarter, primarily due to higher asset management and related administrative expenses. Quarterly net income available to common shareholders was $491 million, or $2.31 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $508 million, or $2.39 per diluted share.
Speaker Change: Turning to our quarterly results, we once again delivered strong results in the quarter.
Speaker Change: Our diverse and complementary business combined to generate record results for the first nine months of the fiscal year.
Speaker Change: We continue to invest in our businesses, our people, and our technology to help drive growth across all of our businesses.
Speaker Change: Beginning on slide four, the firm reported record fiscal third quarter net revenues of $3.23 billion, an increase of 11% over the prior year quarter, primarily due to higher asset management and related administrative fees.
Speaker Change: Quarterly net income available to common shareholders was $491 million, or $2.31 per diluted share.
Speaker Change: Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $508 million, or $2.39 per diluted share.
Paul Christopher Reilly: We generated strong returns for the quarter with an annualized return on common equity of 17.8% and an annualized adjusted return on tangible common equity of 21.9%, a great result, particularly given our strong capital. During the quarter, we repurchased 2 million shares of common stock for $243 million, bringing our fiscal year-to-date total to 5.1 million shares for $600 million. Moving to slide five.
Speaker Change: We generated strong returns for the quarter with annualized return on common equity of 17.8% and annualized adjusted return on tangible common equity of 21.9%.
Speaker Change: A great result, particularly given our strong capital base.
Speaker Change: During the quarter, we repurchased 2 million shares of common stock for $243 million, bringing our fiscal year-to-date total to 5.1 million shares for $600 million.
Paul Christopher Reilly: Client assets grew to record levels during this quarter, driven by rising equity markets and solid advisor retention and recruitment in PCG. Total client assets under administration increased 2% sequentially to $1.48 trillion. Private client assets and fee-based accounts grew to $821 billion, and financial assets under management to $229 billion. Domestic net new assets during the quarter were $16.5 billion, representing a 5.2 annualized growth rate on the beginning of the period domestic PCGS. Our robust technology capabilities, client-first values, and long-established multi-affiliation options continue to retain and attract high-quality advisors to the platform. This quarter, we recruited advisors to our domestic independent contractor and employee channels.
Speaker Change: Moving to slide 5. Client assets grew to record levels during this quarter, driven by rising equity markets and solid advisor retention and recruiting in PCG.
Speaker Change: Total client assets under administration increased 2% sequentially to $1.48 trillion.
Speaker Change: Private client assets and fee-based accounts grew to $821 billion, and financial assets under management to $229 billion.
Speaker Change: Domestic net new assets during the quarter were $16.5 billion, representing a 5.2% annualized growth rate on the beginning of the period domestic PCG assets.
Speaker Change: Our robust technology capabilities, client-first values, and long-established multi-affiliation options continue to retain and attract high-quality advisors to the platform.
Speaker Change: This quarter, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $92 million of trailing month production and $13.4 billion of client assets at their previous firms.
Paul Christopher Reilly: Financial Advisors with approximately $92 million of trailing month production and $13.4 billion of client assets at their previous firms. Including RCS, we recruited client assets of $14.9 billion, making this our best quarter since 2021 in terms of recruited assets. Fiscal year to date, trailing 12-month production of Recruited Advisors is up 33%, and Related Client Assets are up 52% over the prior nine-month period. These results do not include our RIA and Custody Services business, RCS, which also continues to have recruiting success and finishes the quarter with $167 billion of client assets under administration.
Speaker Change: Including RCS, we recruited client assets of $14.9 billion, making this our best quarter since 2021 in terms of recruited assets.
Speaker Change: Fiscal year to date, trailing 12-month production of recruited advisors is up 33%, and related client assets are up 52% over the prior 9-month period.
Speaker Change: These results do not include our RIA and Custody Services business, RCS, which also continues to have recruiting success and finish the quarter with $167 billion of client assets under administration.
Paul Christopher Reilly: We continue to experience growth in RCS from external joins as well as from internal transfers. This quarter, we reported record numbers of 8,782, and that does not include internal transfers to RCS of nearly 50 advisors, primarily all from one firm.
Speaker Change: We continue to experience growth in RCS from external joins as well as from internal transfers.
Speaker Change: This quarter, we reported record financial advisors of 8,782, and that does not include internal transfers to RCS of nearly 50 advisors, primarily all from one firm.
Paul Christopher Reilly: While transfers to RCS lower the firm's advisor count, the client assets typically remain with the firm. Looking at fiscal year to date results, domestic net new assets were $47.7 billion, representing a 5.8% annualized growth rate on the beginning of the period for the domestic private client group, a strong result compared to the peer group. Total client, domestic sweep, and enhanced savings program balances ended the quarter at $56.4 billion, down 3% from March of 2024.
Speaker Change: While transfers to RCS lower the firm's advisor count, the client assets typically remain with the firm.
Speaker Change: Looking at fiscal year-to-date results, domestic net new assets were $47.7 billion, representing a 5.8% annualized growth rate on the beginning of the period domestic private client group assets.
Speaker Change: A strong result compared to peer group.
Speaker Change: Total Clients, Domestic Sweep, and Enhanced Savings Program balances ended the quarter at $56.4 billion, down 3% from March of 2024.
Paul Christopher Reilly: We are pleased to see cash balances remain relatively flat in the quarter following fee billings paid in April. Bank loans grew 2% over the preceding quarter to a record $45.1 billion, primarily due to higher securities-based loans, as demand for C&I loans remains muted.
Speaker Change: We are pleased to see cash balances remain relatively flat in the quarter following fee billings paid in April .
Speaker Change: Bank loans grew 2% over the preceding quarter to a record $45.1 billion, primarily due to higher securities-based loans, as demand for C&I loans remains muted.
Paul Christopher Reilly: Moving on to slide six, the Private Client Group generated record quarterly net revenues of $2.42 billion and pre-tax income of $441 million. Year over year, results were bolstered by higher PCG assets under administration due to strong equity markets and net new assets brought into the firm. The Capital Markets Segment generated quarterly net revenues of $330 million and a pre-tax loss of $14 million.
Speaker Change: Moving on to slide six. Private client group generated record quarterly net revenues of $2.42 billion and pre-tax income of $441 million.
Speaker Change: Year over year, results were bolstered by higher PCG assets under administration due to strong equity markets and net new assets brought into the firm.
Speaker Change: The capital market segment generated quarterly net revenues of $330 million and a pre-tax loss of $14 million.
Paul Christopher Reilly: Net revenues grew 20% compared to a year ago quarter, primarily due to higher debt and equity underwriting revenue. Sequentially, revenues increased 3%, primarily driven by higher affordable housing investment revenue. Pre-tax loss and capital market segment of $14 million reflects weak M&A results and the impact of amortization of deferred compensation granted in preceding quarters, which totaled approximately $20 million this quarter.
Speaker Change: Net revenues grew 20% compared to a year-ago quarter, primarily due to higher debt and equity underwriting revenues.
Speaker Change: Sequentially, revenues increased 3%, primarily driven by the higher affordable housing investment revenues.
Speaker Change: Pre-tax loss and capital market segment of $14 million reflects weak M&A results and the impact of amortization of deferred compensation granted in preceding quarters, which totaled approximately $20 million this quarter.
Paul Christopher Reilly: While the timing of closings remains difficult to predict, we are still optimistic about our healthy pipeline and new business activity in M&A. We continue to expect investment banking revenues to improve along with an industry-wide gradual recovery. The asset management segment generated pre-tax income of $112 million on record net revenues of $265 million. Results were largely attributable to higher financial assets under management compared to the prior year quarter due to market appreciation and net inflows into PCG fee-based accounts. The bank segment generated net revenues of $418 million and pre-tax income of $115 million.
Speaker Change: While the timing of closings remain difficult to predict, we are still optimistic about our healthy pipeline and new business activity in M&A.
Speaker Change: We continue to expect investment banking revenues to improve along with industry-wide gradual recovery.
Speaker Change: The asset management segment generated pre-tax income of $112 million on record net revenues of $265 million.
Speaker Change: Results were largely attributable to higher financial assets under management compared to the prior year quarter due to market appreciation and net inflows into PCG fee-based accounts.
Speaker Change: The bank segment generated net revenues of $418 million and pre-tax income of $115 million.
Paul Christopher Reilly: The Bank's segment net interest margin of 2.64% declined just two basis points compared to the preceding quarter. Looking at the fiscal year-to-date results on slide 7, we generated record net revenues of $9.36 billion and record net income available to common shareholders of $1.46 billion, up 9% and 12%, respectively, over the previous record set in the prior year. Additionally, we generated a strong annualized return on common equity of 18.2% and an annualized adjusted return on tangible common equity of 22.5% for the nine-month period.
Speaker Change: The bank's segment net interest margin of 2.64% declined just two basis points compared to the preceding quarter.
Speaker Change: Looking at the fiscal year-to-date results on slide 7, we generated record net revenues of $9.36 billion and record net income available to common shareholders of $1.46 billion.
Speaker Change: Up 9% and 12% respectively over the previous record set in the prior year.
Speaker Change: Additionally, we generated strong annualized return on common equity of 18.2% and annualized adjusted return on tangible common equity of 22.5% for the nine-month period.
Paul Christopher Reilly: On slide 8, the strength of the PCG and asset management segment for the first nine months of the year primarily reflects the strong organic growth in PCG along with robust equity markets. And now I'll turn the call over to Paul Shoukry for his remarks.
Speaker Change: On slide 8, the strength of the PCG and asset management segment for the first nine months of the year primarily reflects the strong organic growth in PCG along with robust equity markets.
Paul M. Shoukry: Thank you, Paul. First, I just want to echo Paul's comments earlier on how great it was to attend our Summer Development Conference last week, as well as our Elevate Conference earlier in the quarter and visit several branches over the past few months. We truly have a fantastic group of financial advisors and associates who put their clients first each and every day. Now turning to slide 10.
Speaker Change: And now I'll turn the call over to Paul Shoukry for his remarks.
Paul: Paul? Thank you, Paul.
Speaker Change: First, I just want to echo Paul's comments earlier on how great it was to attend our Summer Development Conference last week.
Speaker Change: As well as our Elevate Conference earlier in the quarter and visiting several branches over the past few months. We truly have a fantastic group of financial advisors and associates who put their clients first each and every day.
Paul M. Shoukry: Consolidated net revenues were a record $3.23 billion in the third quarter, up 11% over the prior year and up 4% sequentially. Asset management and related administrative fees grew to $1.61 billion, representing 17% growth over the prior year and 6% over the preceding quarter. This quarter, PCG domestic fee-based assets increased 3%, which will be a tailwind for asset management and related administrative fees in the fiscal fourth quarter. Brokerage revenues of $532 million grew 15% year over year, mostly due to higher brokerage revenues in PCG.
Speaker Change: Now turning on to slide 10.
Speaker Change: Consolidated net revenues were a record $3.23 billion in the third quarter, up 11% over the prior year and up 4% sequentially.
Speaker Change: Asset management and related administrative fees grew to $1.61 billion, representing 17% growth over the prior year and 6% over the preceding quarter.
Speaker Change: This quarter, PCG domestic fee-based assets increased 3%, which will be a tailwind for asset management and related administrative fees in the fiscal fourth quarter.
Speaker Change: Brokerage revenues of 532 million dollars grew 15% year-over-year, mostly due to higher brokerage revenues in PCG.
Paul M. Shoukry: I'll discuss account and service fees and net interest income shortly. Investment banking revenues of $183 million increased 21% year over year and 2% sequentially. Compared to the prior year quarter, third quarter results benefitted primarily from stronger debt and equity underwriting revenue. However, M&A and advisory revenues remain subdued. Moving to slide 11.
Speaker Change: I'll discuss account and service fees and net interest income shortly.
Speaker Change: Investment banking revenues of $183 million increase 21% year over year and 2% sequentially.
Speaker Change: Compared to the prior year quarter, third quarter results benefited primarily from stronger debt and equity underwriting revenues.
Speaker Change: However, M&A and advisory revenues remain subdued.
Paul M. Shoukry: Clients' Domestic Cash Sweep and Enhanced Saving Program balances ended the quarter at $56.4 billion, down 3% compared to the preceding quarter and representing 4.3% of domestic PCG client assets. So far in the fiscal fourth quarter, domestic cash rebalances have declined about $1.25 billion as cash inflows have partially offset quarterly fee billings of approximately $1.5 billion. Turning to slide 12.
Speaker Change: Moving to slide 11, Clients Domestic Cash Sweep and Enhanced Saving Program Balances ended the quarter at $56.4 billion, down 3% compared to the preceding quarter, and representing 4.3% of domestic PCG client assets.
Speaker Change: So far in the fiscal fourth quarter, domestic cash rebalances have declined about $1.25 billion, as cash inflows have partially offset quarterly fee billings of approximately $1.5 billion.
Paul M. Shoukry: Combined net interest income and RJBDP fees from third-party banks was $672 million, down 2% from the preceding quarter. The Bank Segment Net Interest Margin was relatively flat at 2.64% for the quarter, while the average yield on RJBDP balances with third-party banks decreased 18 basis points to 3.41%. The decline in third-party yield was primarily due to a mixed shift towards higher-yielding sweep offerings. Based on spot rates at the end of the third quarter and current balances, we would expect NII and RJBDP third-party fees to be flat or perhaps down nominally in the fiscal fourth quarter.
Speaker Change: Turning to slide 12.
Speaker Change: Combined net interest income and RJBDP fees from third-party banks was $672 million, down 2% from the preceding quarter.
Speaker Change: The bank segment net interest margin was relatively flat at 2.64% for the quarter, while the average yield on RJBDP balances with third-party banks decreased 18 basis points to 3.41%.
Speaker Change: The decline in third-party yield was primarily due to a mixed shift towards higher-yielding sweep offerings.
Speaker Change: Based on spot rates at the end of the third quarter and current balances, we would expect NII and RJBDP third-party fees to be flat or perhaps down nominally in the fiscal fourth quarter.
Paul M. Shoukry: But, of course, we are always monitoring the competitive environment, which has been notably dynamic in the space over the past few weeks. This guidance does not factor any incremental changes we may make to sweep rates based on these competitive dynamics or other factors. Moving to consolidated expenses on slide 13, compensation expense was $2.09 billion, and the total compensation ratio for the quarter was 64.7%. Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 64.4%.
Speaker Change: But of course, we are always monitoring the competitive environment, which has been notably dynamic in the space over the past few weeks.
Speaker Change: This guidance does not factor any incremental changes we may make to sweep rates based on these competitive dynamics or other factors.
Speaker Change: Moving to Consolidated Expenses on Slide 13.
Speaker Change: Compensation expense was $2.09 billion and the total compensation for the ratio for the quarter was 64.7%.
Speaker Change: Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 64.4%.
Paul M. Shoukry: Non-compensation expenses of $494 million increased 6% sequentially, largely due to a favorable legal and regulatory net reserve release of $32 million in the preceding quarter that did not recur in the current quarter. Generally, non-compensation expenses grew this quarter as expected to support growth across the business. For the fiscal year, we still expect non-compensation expenses, excluding provisions for credit losses, unexpected legal and regulatory items, or non-GAAP adjustments, to be around $1.9 billion, consistent with our previous guidance.
Speaker Change: Non-compensation expenses of $494 million increased 6% sequentially, largely due to a favorable legal and regulatory net reserve release of $32 million in the preceding quarter that did not recur in the current quarter.
Speaker Change: Generally, non-compensation expenses grew this quarter as expected to support growth across the businesses.
Speaker Change: For the fiscal year, we still expect non-compensation expenses, excluding provisions for credit losses, unexpected legal and regulatory items, or non-GAAP adjustments to be around $1.9 billion, consistent with our previous guidance.
Paul M. Shoukry: Slide 14 shows a pre-tax margin trend over the past five quarters. This quarter, we generated a pre-tax margin of 20% and an adjusted pre-tax margin of 20.7%, a strong result, especially given the challenging market conditions impacting capital markets. These results are in line with the targets provided at our recent Analyst and Investor Day meeting in May. On slide 15, at quarter end, our total assets were $80.6 billion, a 1% sequential decrease as loan growth was offset by declines in cash balances and the continued runoff of the securities portfolio in the bank segment. (Inaudible) RJF corporate cash at the parent ended the quarter at $2.1 billion, well above our $1.2 billion target.
Speaker Change: Slide 14 shows a pre-tax margin trend over the past five quarters.
Speaker Change: This quarter we generated a pre-tax margin of 20% and adjusted pre-tax margin of 20.7%, a strong result, especially given the challenging market conditions impacting capital markets.
Speaker Change: These results are in line with the targets provided at our recent Analyst and Investor Day meeting in May.
Speaker Change: On slide 15, at quarter end, our total assets were $80.6 billion, a 1% sequential decrease as loan growth was offset by declines in cash balances and the continued runoff of the securities portfolio in the bank segment.
Speaker Change: Liquidity and capital remain very strong.
Speaker Change: RJF corporate cash at the parent ended the quarter at $2.1 billion, well above our $1.2 billion target.
Paul M. Shoukry: With a Tier 1 Leverage Ratio of 12.7% and a Total Capital Ratio of 23.6%, we remain well capitalized. Our capital levels continue to provide significant flexibility to continue being opportunistic and investing in growth. Slide 16 provides a summary of our capital actions over the past five quarters. During the quarter, the firm repurchased 2 million shares of common stock for $243 million at an average price of $122
Speaker Change: With Tier 1 Leverage Ratio of 12.7% and Total Capital Ratio of 23.6%, we remain well capitalized.
Speaker Change: Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.
Speaker Change: Slide 16 provides a summary of our capital actions over the past five quarters.
Speaker Change: During the quarter, the firm repurchased 2 million shares of common stock for $243 million at an average price of $122 per share.
Paul M. Shoukry: As of July 19, 2024, approximately $945 million remained under the board's approved common stock repurchase authorization. Going forward, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental repurchases. Given our present capital and liquidity levels, we currently expect to increase the pace of buyback activity, as we are committed to maintaining capital levels in line with our stated target. Lastly, on slide 17, we provide key credit metrics for our bank segment, which includes Raymond James Bank and Tristate Capital Bank.
Speaker Change: As of July 19, 2024, approximately $945 million remained under the Board's approved Common Stock Repurchase Authorization.
Speaker Change: Going forward, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental repurchases.
Speaker Change: Given our present capital and liquidity levels, we currently expect to increase the pace of buyback activity.
Speaker Change: As we are committed to maintaining capital levels in line with our stated targets.
Paul M. Shoukry: The credit quality of the loan portfolio is solid. Criticized loans as a percentage of total loans held for investment into the quarter at 1.15%, down from 1.21% in the preceding quarter. The Bank Loan Allowance for Credit Losses as a Percentage of Total Loans Held for Investment ended the quarter at 1%.
Speaker Change: Lastly, on slide 17, we provide key credit metrics for our bank segment, which includes Raymond James Bank and Tristate Capital Bank.
Speaker Change: The credit quality of the loan portfolio is solid.
Speaker Change: Criticize loans as a percentage of total loans held for investment into the quarter at 1.15%, down from 1.21% in the preceding quarter.
Speaker Change: The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1%.
Paul Christopher Reilly: The allowance percentage has trended lower, largely due to a loan mix shift towards more securities-based loans and residential mortgages, which account for 34% and 20% of the total loan portfolio, respectively. The bank loan allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 2% at the quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our loan portfolio. Now, I'll turn the call back over to Paul Reilly to discuss her outlook. Paul?
Speaker Change: The allowance percentage has trended lower, largely due to a loan mix shift towards more securities-based loans and residential mortgages, which account for 34% and 20% of the total loan portfolio, respectively.
Speaker Change: The bank loan allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 2% at the quarter end.
Speaker Change: We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our loan portfolios.
Speaker Change: Now, I'll turn the call back over to Paul Reilly to discuss her outlook.
Paul Christopher Reilly: Thank you, Paul. I am pleased with our strong results this quarter, and looking forward, we are well positioned with record levels of assets and bank loans to start off the fiscal fourth quarter. And while there is still economic uncertainty, I believe we are in a position of strength to drive growth over the long term across all of our businesses. In the Private Client Group, next quarter's results will be positively impacted by the 3% sequential increase in assets in fee-based accounts. Our advisor recruiting activity remains robust, and I am encouraged by a record number of large teams in the pipeline.
Paul Christopher Reilly: Paul? Thank you, Paul.
Paul Christopher Reilly: I am pleased with our strong results this quarter and looking forward we are well positioned with record levels of assets and bank loans starting off the fiscal fourth quarter.
Paul Christopher Reilly: And while there is still economic uncertainty, I believe we are in a position of strength to drive growth over the long term across all of our businesses.
Paul Christopher Reilly: In the private client group, next quarter's results will be positively impacted by the 3% sequential increase of assets in fee-based accounts.
Paul Christopher Reilly: Our advisor recruiting activity remains robust, and I am encouraged by a record number of large teams in the pipeline.
Paul Christopher Reilly: We are focused on being a destination of choice for current and prospective advisors, which we believe over the long term should continue to drive industry-leading growth. In the capital markets segment, we continue to have a healthy M&A pipeline and good engagement levels, but our expectations are for a gradual recovery are heavily influenced by market conditions.
Paul Christopher Reilly: We are focused on being a destination of choice for current and prospective advisors, which we believe, over the long term, should continue to drive industry-leading growth.
Paul Christopher Reilly: In the capital markets segment, we continue to have a healthy M&A pipeline and good engagement levels.
Paul Christopher Reilly: But our expectations are for a gradual recovery and are heavily influenced by market conditions, and we expect activity to pick up over the next few quarters.
Paul Christopher Reilly: And we expect activity to pick up over the next few quarters. And in the fixed income business, although we've seen some improvement in the depository business, results are still lagging historical levels. Depository clients continue to experience flat to declining deposit balances and have less cash available for investing in securities, putting pressure on brokerage activity.
Paul Christopher Reilly: And in the fixed income business, although we've seen some improvement in depository, results are still lagging historical levels.
Paul Christopher Reilly: Depository clients continue to experience flat to declining deposit balances and have less cash available for investing in securities, putting pressure on the brokerage activity.
Paul Christopher Reilly: We hope once rates and cash balances begin to stabilize and grow, we will start to see an improvement. Overall, despite some near-term headwinds, we believe the investments we've made in the capital markets business have us well positioned for growth once the market and the rate environment become conducive. In the asset management segment, we remain confident that strong growth of assets and fee-based accounts in the private client group segment will drive long-term growth of financial assets under management.
Paul Christopher Reilly: We hope once rate and cash balances begin to stabilize and grow, we will start to see an improvement.
Paul Christopher Reilly: Overall, despite some near-term headwinds, we believe the investments we've made in the capital markets business have us well-positioned for growth once the market and the rate environment become conducive.
Paul Christopher Reilly: In the asset management segment, we remain confident that strong growth of assets and fee-based accounts in the private client group segment will drive long-term growth of financial assets under management.
Paul Christopher Reilly: In addition, we expect Raymond James Investment Management to help drive further growth over time. In the bank segment, we remain focused on fortifying the balance sheet with diverse funding sources and prudently growing assets to support client demand. We have seen securities-based loan payoffs decelerate, and demand for these loans increase as clients get more comfortable at the current level of interest rates. Corporate growth has been muted as market activity remains low.
Paul Christopher Reilly: In addition, we expect Raymond James Investment Management to help drive further growth over time.
Paul Christopher Reilly: In the bank segment, we remain focused on fortifying the balance sheet with diverse funding sources and prudently growing assets to support client demand.
Paul Christopher Reilly: We have seen securities-based loan payoffs decelerate and demand for these loans increase as clients get more comfortable at the current level of rates.
Paul Christopher Reilly: Corporate growth has been muted as market activity remains low.
Paul Christopher Reilly: However, with ample client cash balances and capital, we are well positioned to lend once activity increases within our conservative risk parameters. In addition to driving organic growth across our businesses, we also remain focused on corporate development efforts. While we prefer to deploy capital through M&A, we plan to increase the pace of buybacks as we continue to look for opportunities that may meet our disciplined M&A parameters. I expect you will have several questions related to the industry news regarding cash sweep changes that have occurred over the past few weeks.
Paul Christopher Reilly: However, with ample client cash balances and capital, we are well positioned to lend once activity increases within our conservative risk parameters.
Paul Christopher Reilly: In addition to driving organic growth across our businesses, we also remain focused on corporate development efforts.
Paul Christopher Reilly: While we prefer to deploy capital through M&A, we plan to increase the pace of buybacks as we continue to look for opportunities that may meet our disciplined M&A parameters.
Speaker Change: I expect you will have several questions related to the industry news regarding cash sweep changes that have occurred over the past few weeks. We have been monitoring these emerging developments closely, like you have, and frankly, probably have some of the same questions.
Paul Christopher Reilly: We have been monitoring these emerging developments closely like you have and, frankly, probably have some of the same questions. We are prepared to attempt to answer any questions you may have. In closing, we are well positioned entering the fourth quarter with strong competitive positioning in all of our businesses and a solid capital and liquidity base to invest in future growth. I want to thank our advisors and all of our associates for their continued dedication to providing excellent service to their clients. Thanks for all you do.
Speaker Change: We are prepared to attempt to answer any questions you may have.
Speaker Change: In closing, we are well positioned entering the fourth quarter with strong competitive positioning in all of our businesses and solid capital and liquidity base to invest in future growth.
Speaker Change: I want to thank our advisors and all of our associates for their continued dedication to providing excellent service to their clients.
Operator: That concludes our prepared remarks. Operator, will you please open the line for questions? Thank you. If you have a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again.
Speaker Change: Thanks for all you do.
Speaker Change: That concludes our prepared remarks. Operator, will you please open the line for questions?
Speaker Change: Thank you. If you have a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We ask that you please limit yourself to one question and one follow up.
Michael Cho: We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Michael Cho with JPMorgan. Your line is open. Hi, good evening.
Speaker Change: Your first question comes from the line of Michael Cho with J.P. Morgan. Your line is open.
Paul Christopher Reilly: Thanks for asking my question. And I will go ahead and start with the regulatory piece. I mean, Paul, you mentioned the interesting comment and RJ B2PC kind of doesn't include potential considerations, you know, to maybe changes in rates on sweep cash. I mean, and you mentioned competition. So, again, how would you characterize the current changes in the competitive environment from your view, from your seat? And is there a way to frame the magnitude or even type of response by Raymond James to this, whether it's either competition or regulatory? Yeah, let me start with the other Paul. There are two Pauls here.
Michael Cho: Hi, good evening. Thanks for thinking my question. And I will go ahead and start with the regulatory piece. I mean, Paul, you mentioned.
Speaker Change: We talked through the interest income and RJBDPC kind of doesn't include potential considerations, you know, to maybe changes in
Speaker Change: Raycon Sweet Cash. I mean, and you mentioned competition. So again, how would you characterize the current changes in the competitive environment from your view, from your seat? And is there a way to frame the magnitude or even type of response by Raymond James, whether it's either competition or regulatory on this front? Thanks.
Paul Christopher Reilly: But let me start by saying first, people are talking about, well, what's the difference between this program and that program? Our suite programs are very, very different. So I want to set the stage first with that.
Speaker Change: Yeah, let me start. The other Paul, the two Pauls here, but let me start by saying first,
Speaker Change: People are talking about, well, what's the difference to this program, that program? Our suite programs are very, very different.
Paul Christopher Reilly: If you look at our suite programs, we offer from 25 to 300 basis points. The programs that, you know, people have been talking about offer one basis point to 50 basis points. So we start off with a whole different value proposition. We have $3 million in FDIC protection per individual or 6 million joint in the suite. We also have, in our programs, very competitive money market funds or institutional class available to everyone irrespective of the size of the investment.
Speaker Change: So I want to set a stage first that if you look at our suite programs, we offer from 25 to 300 basis points. The programs that, you know, people have been talking about offer one basis point to 50 basis points.
Speaker Change: So we start off with a whole different value proposition.
Speaker Change: We have $3 million of FDIC per individual or 6 million joint in the sweep.
Speaker Change: We have also in our programs very competitive money market funds or institutional class available to everyone irrespective of the size of investments.
Paul Christopher Reilly: And you can see how those have grown dramatically. We have an enhanced savings program, again, offering high rates and up to $50 million of FDIC insurance, which you've also seen grow. And our advisors and clients, if you look at the shift, have taken appropriate actions, you know, to invest the money. I don't know what's happening in some of the other programs.
Speaker Change: And you can see how those have grown dramatically. We have enhanced savings program, again, offering high rates and up to $50 million of FDIC insurance, which you've also seen grow.
Speaker Change: And our advisors and clients, if you look at the shift, have taken appropriate actions, you know, to invest the money.
Paul Christopher Reilly: I can tell you ours are well thought through. We think they're very compliant. And as we look at the announcements and changes, they're not very specific yet, right? So we pride ourselves.
Speaker Change: I don't know what's happening in some of the other programs. I can tell you ours are well thought through. We think are very compliant. And as we look at the announcements and changes, they're not very specific yet. Right? So we prided ourselves.
Paul Christopher Reilly: Subject to criticism, even from this group, maybe at times for having such high sweep rates, but we've done it because we believe both. It's the right thing to do. And it's regulatoryly, you know, that was compliant with what we understand. So we're gonna have to look at movements, and each of the movements has been a little different. We don't even totally know totally what they apply to.
Speaker Change: subject to criticism even from this group maybe at times for having such high sweep rates.
Speaker Change: But we've done it because we believe both it's the right thing to do and it's regulatorily, you know, that was compliant with what we understand. So we're going to have to look at movements and each of the movements have been a little different. We don't even know totally what they apply to.
Paul Christopher Reilly: So we don't see anything that we know of today that's forcing us to change rates. But we meet weekly, and we're going to be competitive. So if the competitive landscape of rates changes, you know, we have to be competitive, both for advisors and our clients. So that was more of an unknown comment, Paul saying, if things happen, we're going to adjust. That is, today, we're looking at stuff, but you know, with no current plan.
Speaker Change: So, we don't see anything that we know of today that's forcing us to change rates.
Speaker Change: But we meet weekly and we're going to be competitive so if
Speaker Change: Competitive landscape of rates change, you know, we have to be competitive both for our advisors and our clients. So that was more of an unknown comment, Paul, saying if things happen, we're going to adjust. That is, today we're looking at stuff, but, you know, with no current plans.
Paul Christopher Reilly: Okay, great, no, thanks for the clarification and some of the thoughts there. I guess for my second question, I just wanna zoom out and ask a broader business question and the kind of trajectory for Raymond James. I mean, as you've talked through, continue to hit record assets, record revenue, record bank loans, and I realize you have some margin targets out there for the broader company, and clearly there are some aspects and nuances happening real time as you just talked through, Paul, but I'm just curious, how would you frame the trajectory for operating leverage in the business as this backdrop continues to reach record levels for Raymond James, despite maybe some rate normalization ahead?
Speaker Change: Okay, great. No, thanks for the clarification and the thoughts there. I guess just for my second question, I just want to, you know, zoom out and ask a broader business question and kind of trajectory for Raymond James ahead. I mean, you know, as you've talked through, you know, continue to hit record assets, record revenue, record bank loans, and
Speaker Change: And I realize you have some margin targets out there for the broader company, and clearly there's some aspects and nuances happening in real time as you just talked through, Paul, but I'm just curious, you know, how would you frame the trajectory for operating leverage in the business, you know, as this backdrop continues to reach?
Speaker Change: Record levels for Raymond James, you know, despite maybe some great normalization ahead.
Paul Christopher Reilly: Yeah, I think that, you know, the operating leverage, we, as we grow assets, we believe we can accomplish it. There are, you know, a number of factors, we've certainly have, you know, the whole industry has had a strong equity market, maybe until the last week or two, but, you know, and cash spreads have also, you know, continued to, you know, support the businesses, but we believe that as we grow, and especially our use of technology in the back office, and I know that's one of Paul's keys focus, as we, you know, transition over this next year, to double down on that, we believe we can get operating leverage, and still be able to keep our very high levels of supports, our advisors, and our latest survey gave us, you know, 95%, you know, satisfaction rate, almost 60% net promoter score on service.
Paul: Yeah, I think that, you know, the operating leverage, as we grow assets, we believe we can accomplish it.
Speaker Change: You know, a number of factors. We've certainly have
Speaker Change: The whole industry has had a strong equity market, maybe until the last week or two. Cash spreads have also continued to support the businesses. We believe that as we grow, and especially our use of technology in the back office,
Speaker Change: And I know that's one of Paul's key focus as we transition over this next year to double down on that. We believe we can get operating leverage and still be able to keep our very high levels of support. It's our advisors.
Paul: And our latest survey gave us, you know, 95%.
Paul Christopher Reilly: So, we believe that's a hallmark, but we believe with technology, we can make it better and easier for them, as we continue to spend more money, you know, on that part of the service. And the reason is better service but also much better leverage. Great, thank you so much. Your next question comes from the line of Devin Ryan with Citizens JMP. Your line is open. Hey, good afternoon, Paul. I'm Paul. How are you?
Paul: You know, satisfaction rate, almost 60% net promoter score on service. So we believe that's a hallmark, but we believe with technology, we can make it better and easier for them as we continue to spend more money.
Paul: You know in that part of the service and the reason better service, but also much better leverage
Speaker Change: Great, thank you so much.
Speaker Change: Your next question comes from the line of Devin Ryan with Citizens JMP. Your line is open.
Devin Patrick Ryan: Hey, good afternoon. Paul and Paul, how are you?
Devin Patrick Ryan: [inaudible] Good. I'll ask another question on the advisory cash rates. Sounds like some of what's going on in the industry is news to you guys as well as you're following along. And so I guess just what I'd love to know, if you can, like what percentage of fee-based accounts is in cash at the kind of lowest rates. And then also trying to understand competitive reasons that could drive kind of a change in your thinking.
Devin Patrick Ryan: [inaudible]
Devin Patrick Ryan: I'll ask another one on the advisory cash rates. Sounds like some of what's going on in the industry is news to you guys as well as you're following along. And so I guess just what I'd love to know if you can, like what percentage of fee-based accounts is in cash at the kind of the lowest rates?
Devin Patrick Ryan: And then, just also trying to understand competitive reasons that could drive kind of a change in your thinking. Because obviously, one of the firms...
Paul Christopher Reilly: Because obviously, one of the firms that's moved, you know, made their changes in April, which I'm assuming you guys probably, you know, as you evaluate frequently, you probably saw that then. So just trying to think about what else could competitively change your view, especially now that the vast majority, if not all, of the yield-seeking cash has already been moved on to those higher-yielding alternatives for customers, as, you know, advisors should have already done. Yeah, so if you look at our advisory, you know, sweeps, we'll just focus on those. It's about two and a half percent of those assets are in cash.
Devin Patrick Ryan: Unknown Speaker That's moved, you made their changes in April , which I'm assuming you guys probably evaluate frequently. You probably saw that then. So just trying to think about what else could competitively change your view, especially now that Transcribed by https://otter.ai
Speaker Change: The vast majority, if not all, of the yield-seeking cash has already been moved on to those higher yielding alternatives for customers, as advisors should have already done.
Speaker Change: Yeah, so if you look at if you look at our advisory, you know, sweeps, we'll just focus on those. It's about two and a half percent of those of those assets are in cash.
Paul Christopher Reilly: And to us, that's frictional cash; you can't find an institutional portfolio or anyone that doesn't have some cash in it at those levels for trading or paying fees for whatever, you know, you do in them. So we view that as frictional or spending cash. The average cash amount in those counts is $8,900.
Speaker Change: And to us, that's frictional cash. You can't find an institutional portfolio or anyone that doesn't have some cash in it at those levels for trading, for paying fees, for whatever, you know, you do in them. So we view that as frictional or spending cash.
Paul Christopher Reilly: I mean, I don't know where you can go to a bank and get kind of our sweep rates on that amount of cash. So, the other thing, if you look at those accounts, you can tell the shift. Because before, you know, rates started moving, it was just cash in those accounts. Total money markets, CDs, and treasuries are $22,600 for those accounts.
Speaker Change: the average cash amount in those accounts are $8,900. I mean, so I don't know where you go to a bank and get kind of our sweep rates at that amount of cash. So the other thing, if you look at those accounts, and you can tell the shift,
Speaker Change: Because before, you know, rates started moving, it was just, you know, cash in those accounts.
Speaker Change: Total money markets, CDs, and treasuries are $22,600 for those accounts.
Paul Christopher Reilly: I'm sorry, the money markets, CDs, treasuries, you know, combined are $22,600 in the account. So you can see it's much more invested, certainly in higher yield instruments. So, you know, we believe that at $8,900, you know, $1,000, it's two and a half percent. That's a very low rate of cash to have sitting for transactions.
Speaker Change: I'm sorry, the money markets.
Speaker Change: CDs, treasuries, you know, combined are 22,600 in the count. So you can see it's much more.
Speaker Change: Invested, certainly on higher yield instruments. So, you know, we believe that at 8.9, you know, thousand dollars, that's two and a half percent, that's
Paul Christopher Reilly: So, you know, we think it's, you know, we're putting clients' money to work and that, you know, with those numbers. Right, exactly. So I guess that's, that's kind of my, I guess, the root of the question that, you know, you've already seen that move, it's a very small amount, you are playing a higher rate than some other programs, as you mentioned already.
Speaker Change: a very low rate of cash to have sitting for transactions. So, you know, we think it's, you know, we're putting clients money to work and that, you know, with those numbers.
Devin Patrick Ryan: So competitively from here, and we don't know exactly every action that's happened, but just the catalyst to actually make meaningful change after you're already in the position that you're in, as you just described, Paul. I think the forces that could be happening if there was a squeeze on cash in the industry, you know, where would you get the cash, you would offer higher rates to get it out of treasuries and, you know, money market funds and whatever. But I think that, you know, cash has seemed to have stabilized pretty much everywhere.
Speaker Change: Right, exactly. So I guess that's, that's kind of my, I guess, the root of the question that, you know, you've already seen that move, it's a very small amount, you are playing a higher rate than some other programs, as you mentioned already. So
Speaker Change: Competitively from here, and we don't know exactly every action that's happened, but just the catalyst to actually make meaningful change after you're already in the position that you're in as you just described, Paul.
Speaker Change: I think the forces that could be happening if there was a squeeze on cash in the industry, you know, where would you get the cash? You would offer higher rates to get it out of treasuries and
Speaker Change: You know, and, you know, money market funds and whatever. I think that, you know, cash has seemed to have stabilized pretty much everywhere.
Speaker Change: starting to anyway, who knows where that goes. We have a very clear buffer still for operating our business, but I think a demand for cash.
Devin Patrick Ryan: or if rates go up. You know, you start to see that would pressure it if rates go down and there's plenty of cash. I don't see what really squeezes that outside of following the market as, you know, as rates fall. So I don't see anything else barring some unusual thing in the industry. Yeah. Okay. Very helpful. Thank you, Paul.
Speaker Change: or if rates go up.
Speaker Change: You know, you start to see, you know, that would pressure it, but if rates go down and there's plenty of cash, I don't see what really squeezes that outside of following the market as, you know, as rates fall. So I don't see anything else, barring some unusual thing in the industry.
Speaker Change: Yeah, okay. Very helpful. Thank you, Paul. And then just a quick follow-up on the loan growth. It's really nice to see that
Paul Christopher Reilly: And then just a quick follow-up on the loan growth. Really nice to see the, I guess, securities-based loan demand that you guys referenced. And just curious if that's something that, you know, just as you're kind of maybe seeing a shift in appetite and people's comfort with where rates are, if that's something that you'd expect would continue, can that continue to fuel loan growth? I guess, the root of the question. Hey Devin, Paul Shoukry here.
Speaker Change: I guess security space loan demand that you guys referenced, and just curious if that's something that, you know, just as you're kind of maybe seeing a shift in appetite and people's comfort with where rates are, if that's something that you'd expect would continue, can that continue to fuel longer? I guess is the root of the question.
Paul M. Shoukry: We had the securities-based loan growth during the quarter, which as you point out, was really nice to see. And I think it was due to, one, payoffs and paydowns really decelerating. Since rates started rising, that was a big drag on loan growth in the SBL portfolio.
Paul M. Shoukry: Hey Devin, Paul Shoukry here. We had the securities-based loan growth during the quarter, as you point out, was really nice to see.
Devin Patrick Ryan: And I think it was due to one, payoffs and paydowns really decelerating since rates started rising. That was a big
Devin Patrick Ryan: Drag on loan growth in the SBL portfolio So that is subsided and also in borrowers and clients getting used to the new levels of rates So that's also been
Paul M. Shoukry: So that has subsided, and also borrowers and clients are getting used to the new levels of rates. So that's also been, you know, their tapping into their lines and borrowing more from their SBLs.
Devin Patrick Ryan: You know they're tapping into their lines and borrowing more from their SBL so
Speaker Change: Thank you for joining us.
Speaker Change: Paul Reilly, Paul Shoukry, Kristina Waugh
Speaker Change: And we knew that there'd be some headwinds as rapidly as rates have risen, that there'd be some headwinds as clients get used to the higher level of rates. But going forward, we're growing more optimistic that we'll continue seeing growth in that portfolio.
Paul M. Shoukry: So we're cautiously optimistic that that trend could continue going forward. And long term, as you know, we're very bullish on the prospects for growth in securities-based loans. We think it's a very attractive product for clients.
Paul M. Shoukry: And we knew that there'd be some headwinds as rapidly as rates have risen, that there'd be some headwinds as clients get used to the higher level of rates. But going forward, we're growing more optimistic that we'll continue seeing growth in that portfolio. All right, thanks so much. Thanks, everyone. Your next question comes from the line of Steven Chubak with Wolf Research. Your line is open. Hi, good evening, Paul and Paul
Speaker Change: All right, thanks so much.
Philip: Thanks, Philip.
Speaker Change: Your next question comes from the line of Steven Chubak with Wolf Research. Your line is open.
Steven Joseph Chubak: So this is a bit of a nitty-gritty question just on the same topic of advisory sweep. Now, first, there's been some speculation that at least one wirehouse peer may have received some regulatory scrutiny of cash disclosure. It's disclosed in the filing.
Steven Joseph Chubak: Hi, good evening, Paul and Paul.
Steven Joseph Chubak: So, this is a bit of a nitty-gritty question just on the same topic of advisory sweeps.
Speaker Change: There's been some speculation that at least one Wirehouse peer may have received some regulatory scrutiny of cash disclosures. It's disclosed in the filings.
Speaker Change: So we and others are admittedly scrutinizing some of these cash disclosures much more closely.
Paul Christopher Reilly: So, we and others are admittedly scrutinizing some of these cash disclosures much more closely. For example, your disclosures note that Raymond James shares a portion of the revenue from sweep options with the advisor. So, admittedly, you're a firm with a longstanding reputation for putting clients first, but as conflicts are scrutinized more closely, is there a concern that the method for which advisors are compensated does create some inherent conflict, and what should we think? No, that's a great question, and let me explain the disclosure first.
Speaker Change: Your disclosure is note that Raymond James shares a portion of the revenue from Sweep Options with the advisor. So admittedly you're a firm with a long-standing reputation for putting clients first.
Speaker Change: But as conflicts are scrutinized more closely, is there a concern that that method for which advisors are compensated does create some inherent conflict, and how should we think about that in terms of the go forward?
Paul Christopher Reilly: So on the advisory account, cash has no different payment, you know, in terms of the advisor than any other asset class. So if they have a million-dollar account and they're charging, you know, 1%, they're getting $10,000 in fees. If there's zero cash in there, they're getting $10,000 in fees. If there's 5%, they're getting $10,000 in fees. There are no indirect incentives and trips or awards or points
Speaker Change: No, that's a great question. And let me explain the disclosure first. So on advisory accounts,
Speaker Change: Cash has no different payment, you know, in terms of the advisor than any other asset class. So if they have a million dollar account and they're charging
Speaker Change: You know, 1%. They're getting $10,000 in fees, if there's zero cash in there, they're getting $10,000 in fees.
Speaker Change: If there's 5% cap, they're getting $10,000 in fees. There's no indirect incentives and trips or awards or points or anything. There is zero incentive in an advisory account to do anything but what's in the best interest of your client.
Paul Christopher Reilly: There is zero incentive in an advisory account to do anything but what's in the best interest of your client. And I assure you, there's nothing from home office that even asks them about it. We're, you know, we've been known and continue to believe that advisors should be doing the right things for their clients. And, of course, we have supervision, making sure it doesn't go the other way. But you know, we have a great group of advisors, and by the movements, they're doing what they should be doing. The disclosure really talks about some limited things and the brokerage side. And I will explain that.
Speaker Change: And I assure you, there's nothing from home office that even asks them about it. We're, you know, we've been known and continue to, you know, advisors should be doing the right things for their clients.
Speaker Change: And of course, we have supervision, making sure it doesn't go the other way. But, you know, we have a great group of advisors, and by the movements they're doing what they should be doing.
Speaker Change: The Disclosure really talks about some limited things and the brokerage side, and let me explain that one.
Paul Christopher Reilly: That we've had some, you know, fundraising, and programs like the ESP program, where for high-rate money market types of rates, we've allowed advisors to be compensated. In those programs, they are not compensated a penny on the sweep. So the only incentive that they have is to put clients for compensation into higher-rate accounts. They have zero compensation on the low-rate account.
Speaker Change: That we've had some, you know, fundraising, you know, programs like
Speaker Change: the ESP program where for high-rate money market types of rates, that we've allowed advisors to be compensated, you know, in those programs. They are not compensated a penny on the sweeps.
Speaker Change: So the only incentive that they have is to go, is to put clients for compensation into higher rate accounts.
Paul Christopher Reilly: So brokerages are like dropping a ticket into some of their investment if they put it into those high-rate accounts. They're doing the right thing for clients. It costs us more money. So we don't believe there's any conflict whatsoever.
Speaker Change: They have zero compensation.
Speaker Change: on the low-rate accounts. So brokerages be like dropping a ticket into some of their investment if they put it into those high-rate accounts.
Paul Christopher Reilly: But the fact that we've done that in limited cases, we put that disclosure in, you know, to cover that. And regulatory wise, they like it very clear that you, you know, instead of what you could pay, you are paying, but it's been a very nuanced circumstance. But again, it's all for the very high-rate, high-rate types of programs.
Speaker Change: They're doing the right thing for clients. It costs us more money.
Speaker Change: you know, to cover that.
Speaker Change: And regulatory-wise, they like it very clear that you, you know, instead of you could pay, that you are paying, but it's been a very nuanced circumstance. But again, it's all for the very high rate, high rate types of programs.
Steven Joseph Chubak: No, that's a really helpful, very fulsome response, Paul. So thank you. One point I just wanted to clarify, because you specifically mentioned it's not part of the advisor program, which is consistent with what we saw too. But it also notes that you don't share comp directly with the financial advisor, but the aggregate amount of cash gets credited to the overall payout rate and can cause your FAA to receive higher comp on transactions and other unrelated activities. It's vague. I don't know what those activities could be.
Speaker Change: No, that's really helpful. Very fulsome response, Paul. So thank you. One point I just wanted to clarify, because you specifically mentioned it's not part of the
Speaker Change: Advisor Program.
Speaker Change: which is consistent with what we saw too. But it also notes that you don't share comp directly with the financial advisor, but the aggregate amount of cash gets credited to the overall payout rate.
Speaker Change: and can cause your FAA to receive higher comp on transactions and other unrelated activities. It's vague. I don't know what those activities could be. But if you could provide some context around that as well, just given the focus on this issue.
Paul Christopher Reilly: But if you could provide some context around that as well, just given the focus on this issue. Yeah, when you're looking at the focus like cash, that's the only thing I can imagine. You know, that's the only thing where there's compensation at all for cash directly or indirectly. It's just on those very small investment vehicles like ESP, you know that we've put into brokerage. And that's it. I mean, there is no other. Advisors have opportunities for asset growth and net new assets, but it has nothing to do with cash. I mean, it's.
Speaker Change: Yeah, when you're looking at the focus of cash, that's the only thing I can imagine.
Speaker Change: You know, that's the only thing where there's compensation at all for cash directly or indirectly. It's just on that those very small investment vehicles like ESP, you know, that we've put into brokerage.
Speaker Change: And that's it. I mean, there is no other. Advisors are, you know, have opportunities on asset growth and net new assets, but it has nothing to do with cash. I mean, it's, um,
Paul Christopher Reilly: You know, they bring in new assets; we have a net new asset, you know, a program that can benefit advisors. But it's, you know, it's nothing, it's not centered on Katz. All right, understood. That's very helpful, Culler. If I could just squeeze in one more quickly, just Paul Shoukry, the flat spread revenue guide was a bit better than we had anticipated, so certainly nice to hear. Was there anything you could unpack about the factors to support the flat spread revenue quarter-on-quarter, just given there's been some upward pressure on funding costs?
Speaker Change: You know, they bring in that new assets, we have a net new asset, you know, a program that can benefit advisors. But it's, you know, it's nothing, it's not centered on cash.
Speaker Change: All right. I understood. That's very helpful, Culler. If I could just squeeze in one more quickly.
Paul M. Shoukry: Just Paul Shoukry, the flat spread revenue guide was a bit better than we had anticipated so certainly nice to hear. Was something you could unpack some of the factors to support the flat spread revenue quarter-on-quarter just given there's been some upward pressure on funding costs.
Paul Christopher Reilly: Yeah, so kind of offsetting some of the funding cost pressures that you're describing there is our, it is loan growth that we experienced, you know, throughout the quarter, and the continued asset growth that we would hope to experience going forward. So, that's, you know, we said flat or maybe down nominally, but that's what's driving that guidance. Perfect. That's your caller.
Speaker Change: This is a long tail end of sorting but still some incremental sorting, however modest. So I was hoping you could provide some context on what some of the key astonishing are underpinning that.
Speaker Change: Yeah, so kind of offsetting some of the funding cost pressures that you describing there is our, it is a loan growth that we experienced, you know, throughout the quarter and the continued asset growth that we would hope to experience going forward so.
Speaker Change: That's, you know, we said flat or maybe down nominally. But that's what's driving that guidance.
Speaker Change: Perfect. That's your caller. Thanks for taking my questions.
Steven Joseph Chubak: Thanks for taking my questions. Thanks, Steve. Your next question comes from the line of Dan Fannon with Jeffries. Your line is open. Thanks. Good evening.
Steve: Thanks, Steve.
Speaker Change: Your next question comes from the line of Dan Fannon with Jeffreys. Your line is open.
Daniel Thomas Fannon: I guess one more question on this, just in terms of the competitive backdrop, does your evaluation period imply that you need to see additional changes across the industry for you to potentially react, or are you still digesting these most recent moves and need to get more color around what they exactly were? I think we're, you know, are we digesting? Sure. And we're watching.
Daniel Thomas Fannon: Thanks, good evening. I guess one more question on this just in terms of the competitive backdrop. Does your evaluation period, does this imply that you need to see additional?
Daniel Thomas Fannon: Changes across the industry for you to potentially react, or are you still digesting these most recent moves and need to get more color around what they exactly were?
Paul Christopher Reilly: But I mean, I don't, again, we don't anticipate anything we, you know, as you learn things, you might make tweaks here or there, but we're just going to have to see what plays out, you know, as what we know today. Unknown Speaker, You know, but we'll talk about it at our next cash meeting, but we have no plans going in to make changes at this point, but that doesn't mean we And then, just in terms of the backlog around recruiting, you mentioned the record backlog of large teams. That's a comment I think you've been making for several quarters.
Speaker Change: I think we're, you know, are we digesting? Sure, and we're watching, but I mean, I don't, again, we don't anticipate anything. We, you know, as you learn things, you might make tweaks here or there, but we're just going to have to see what plays out, you know, as what we know today.
Speaker Change: We'll talk about it at our next CASH meeting, but we have no plans going in to make changes at this point, but that doesn't mean we won't.
Speaker Change: Understood. And then just in terms of the backlog around recruiting, you mentioned record backlog of large teams. That's a comment I think you've been making for several quarters. So just curious if there's additional context, thinking, given the strong net new assets in the quarter, the funding, you know, kind of bring onboarding that you're seeing versus the replenishment of that backlog, if there's any other additional color that would be helpful.
Daniel Thomas Fannon: So just curious if there's additional context thinking, given the strong net new assets in the quarter, the funding, you know, kind of bring onboarding that you're seeing versus the replenishment of that backlog, if there's any other additional color that would be helpful. Yeah, we've been, you know, the recruiting is actually picking up. It's extremely strong.
Speaker Change: Yeah, we've been, you know, the recruiting is actually backlog has been picking up. It's extremely strong. I said the last few quarters, we're not surprised by it anymore, you know, but we were surprised the large number of, you know, five, 10,
Paul Christopher Reilly: I said in the last few quarters, we're not surprised by it anymore, you know, but we were surprised by the large number of, you know, five, even $20 million teams. It's continuing, and we continue to get new ones, both joining, committed, and in the pipeline that I think we're competing very, very well for. So, the recruiting activity remains strong, and we're still very optimistic about it. And, you know, I think we are. We don't see anything right now that's slowing down the pace.
Speaker Change: and even $20 million teams. It's continuing and we continue to get new ones.
Speaker Change: both joining, committed, and in the pipeline that I think we're competing very, very well for.
Speaker Change: The recruiting activity remains strong, and we're still very optimistic on it. And, you know, I think we're
Speaker Change: We don't see anything right now that's slowing down the pace, so that's been really good news for us.
Paul Christopher Reilly: So that's been really good news. Understandable. Thank you. Your next question comes from the line of Brennan Hawken with UBS. Your line is open. Good morning, Paul and Paul, or sorry, good afternoon; it has been a rather long day.
Speaker Change: Understood. Thank you.
Speaker Change: Your next question comes from the line of Brennan Hawken with UBS. Your line is open.
Brennan Hawken: Good morning, Paul and Paul, or sorry, good afternoon.
Speaker Change: Thank you.
Brennan Hawken: You know, I'll, I'm going to, I'm going to start with another question somewhat related to this sweep. You know, is it possible for you to identify what portion of your advisory assets or the advisory assets, I should say on the Ray J platform, where Ray J is considered a fiduciary? Well, there are so many words, there's so many terms in fiduciary, right?
Paul: You know I'll
Brennan Hawken: I'm going to start with another question somewhat related to this sweep. You know, is it possible for you to identify what portion of your advisory assets, or the advisory assets I should say, on the Ray J platform where Ray J is considered a fiduciary?
Paul Christopher Reilly: There's a risk of fiduciary, there's best interest, there's, you know, and they all have different responsibilities and rules and, and everything else. So, I don't know the best number we could give. Yeah, I mean, what we could say is that within all fee-based accounts, we have about $15 billion of cash sweep balances, and that excludes the custody business. And then, you know, within that, to Paul's point, it's very, there's some Marissa fiduciary, there's some other types of programs within that, but that's all fee-based accounts. Yeah, some of those are firm managed, some of them are advisors with discretion, and there are some with advisors without discretion, where they have to clear everything, you know, with a client.
Speaker Change: Well, there's so many words, there's so many terms in the fiduciary, right? There's a risk of fiduciary, there's a best interest, there's, you know, and they all have different responsibilities and rules and everything else. So.
Speaker Change: I don't know the best number we could give.
Paul M. Shoukry: So, you know, they, So, but that's the total number if you looked at it. The 15 billion is the sweep in the sum of all Yeah, yeah. And again, almost the average on those accounts is, you know, 8.9 [inaudible] Okay, thanks for that. And then Net New Assets was, Unknown Speaker This quarter, I was curious whether you guys flag the OSJ as a pending headwind. And I apologize if you touched on it, and I missed it.
Speaker Change: What we could say is that within all fee-based accounts,
Speaker Change: $15 billion of cash sweep balances, and that excludes the custody business. And then, you know, within that, to Paul's point, it's very, there's some ERISA fiduciary, there's some other types of programs within that, but that's all fee-based accounts.
Paul: Some of those are firm managed. Some of them are advisors with discretion, and there's some with advisors without discretion where they have to clear everything with a client. But that's the total number if you looked at it.
Speaker Change: Got it. The $15 billion is the sweep in the sum of all of those accounts.
Speaker Change: Yeah, yeah. And again, almost the average on those accounts is, you know, 8.9.
Speaker Change: $1,000 and, you know, two and a half percent. So it's not, you know, it's really the residual cash residing on average in those sweeps.
Speaker Change: Sure, and those accountants.
Speaker Change: Okay, thanks for that. And then Net New Assets was pretty decent actually this quarter. I was curious whether you guys flagged the OSJ as a pending headwind, and I apologize if you touched on this,
Brennan Hawken: But did that event that you flagged as investor day come to pass? And what was the size of that as far as a net new asset? Now we anticipate one coming; it's probably in the next quarter. Okay. You know, that's the one we've been talking about, but it hasn't happened. It'd be nice if it didn't, but, you know, we anticipate it will still happen. That's the one we wanted to flag, but it has not happened yet.
Speaker Change: and I missed it, but did that event that you flagged at the Investor Day come to pass and what was the size of that as far as a net new asset impact?
Speaker Change: Now we anticipate one coming, it's probably in the next quarter, so
Speaker Change: You know, that's the one we've been talking about, but it hasn't happened. It'd be nice if it didn't, but, you know, we anticipate it will still happen. That's the one we wanted to flag, but it has not happened yet.
Paul Christopher Reilly: Got it. Okay. So that's coming likely in the coming quarter. Yeah. 4th, 4th calendar.
Speaker Change: Got it. Okay. So that's still cut. That's coming likely in the coming quarter.
Brennan Hawken: Okay, thanks for taking my call. Your next question comes from the line of Kyle Voigt. Unknown Speaker. Hi, good evening.
Speaker Change: Yes.
Speaker Change: The fourth calendar quarter.
Speaker Change: Okay, thanks for taking my questions.
Speaker Change: Your next question comes from the line of Kyle Voigt with KBW. Your line is open.
Kyle Kenneth Voigt: Maybe a question on the third party bank sweep yield falling by 18 basis points sequentially and about 25 basis points over the last two quarters. Just wondering if you could clarify, are there any changes made to rates or tiers that partially drove that? And also clarify what's driving this in terms of the mix shift towards the higher yield sweep offerings? Is that simply a shift of cash towards higher balance tiers? Or is there something else driving the negative mix shift? Hey Kyle.
Kyle Kenneth Voigt: Hi, good evening. Maybe a question on the third party bank sweep yield falling by 18 basis points sequentially and about 25 basis points over the last two quarters.
Kyle Kenneth Voigt: I'm just wondering if you could clarify if there are any changes made to rates or tiers that partially drove that, and also clarify what's driving this in terms of mixed shift towards the higher yield sweep offerings. Is that simply a shift of cash towards higher balance tiers, or is there something else driving the negative mixed shift?
Paul M. Shoukry: Yeah, a lot of that is initiatives that we run, where we offer kind of a higher rate for new cash that comes into the suite program for the firm, or maturities from money market funds, treasuries, and those type of things where clients want the functionality of the suite program but want a comparable rate to move over and benefit from the FDIC insurance and, you know, the availability of the cash in the suite program. So as we've kind of implemented those initiatives, you know, we've been able to effectively bring in cash from those sources through the quarter, which, while it increases the average cost of the funding, it increases also the amount of funding that we have, and it's, you know, still net attractive. So it's really a win-win-win initiative that we put into place in the SWEAP program.
Kyle Kenneth Voigt: Hey, Kyle. Yeah, a lot of that is initiatives that we run where
Kyle Kenneth Voigt: We offer kind of a higher rate for new cash that comes into the suite program to the firm and or maturities from
Kyle Kenneth Voigt: Money Market Funds, Treasuries, and those type of things where clients want the functionality of the SWEAP program, but want a comparable rate to move over and benefit from the FDIC insurance and the availability of the cash in the SWEAP program.
Kyle Kenneth Voigt: As we've kind of...
Kyle Kenneth Voigt: Implemented those initiatives, you know, we've been able to effectively bring over cash from those sources, you know, through the quarter, which, while it increases the average cost of the funding, it increases also the amount of funding that we have, and it's, you know, net, still net attractive, so it's really a win-win-win initiative that we've put into place in the suite programs.
Kyle Kenneth Voigt: Okay, is there any way to quantify the percentage of those third-party sweeps that are in this, the newer high yielder or the money market fund kind of equivalent yield program, or I think now it's roughly somewhere in the 15 to 20% range of the total suite balances that are in those types of programs. Understandable. Thank you.
Speaker Change: Okay, is there any way to quantify the percentage of those third-party sweeps that are in this the newer high yielder or the money market fund kind of equivalent yield program or?
Speaker Change: I think now it's roughly somewhere in the 15 to 20 percent range of the total suite balances that are in those type of programs.
Paul Christopher Reilly: And then just as a follow-up on repurchases, you mentioned your desire to increase the pace of repurchases from here. You executed on about 240 million repurchases in the prior quarter. Should we think about that ramping to 300 or 350? Any way you can quantify the increase in that pace moving forward? You know, we're not programmatic.
Speaker Change: Understood. Thank you. And then just as a follow up, just on repurchases, you mentioned your desire to increase the pace of repurchases from here.
Speaker Change: You executed it on about $240 million of repurposes in the prior quarter. Should we think about that ramping to $300 million or $350 million, any way you can quantify the increase in that pace moving forward?
Paul Christopher Reilly: So we don't we're not going to give you a hard number. A lot of factors play into it. [inaudible] couldn't find the We're still looking at M&A activity, it's, you know, our preferred method, but if we couldn't find it, we'd return it. You know, we haven't been able to find them yet.
Speaker Change: We're not programmatic, so we're not going to give you a hard number. A lot of factors play into it.
Speaker Change: terms of the sources and uses of cash and capital. But yeah, we definitely intend on increasing the pace from 243, which I know is was higher than many people expected, even during the court this past quarter. So
Speaker Change: But we have lots of capital, lots of cash. And, you know, we we remain committed to, you know, keeping that within our targets over, you know, a reasonable period of time. As we've said, if we
Speaker Change: We're still looking at M&A activity. It's our preferred, but if we couldn't find it, we'd return it.
Kyle Kenneth Voigt: So, you know, we're going to start being more aggressive in returning capital to keep the capital ratios back where we think they should be. Got it. Thank you very much.
Speaker Change: You know, we haven't been able to find them yet. So, you know, we're going to start being more aggressive on returning to keep the capital ratios back, you know, where we think they should be.
William Raymond Katz: Your next question comes from the line of Bill Katz with TV Cowboys. Great. Thank you very much for taking the question. I do want to pick up on that last question. So, I agree, Paul, and thank you both. Just in terms of the commentary of reallocating maybe to a little bit more buyback, is the deal pipeline at the strategic level, is it just less fullsome? Is it just harder to make the economics work?
Speaker Change: Got it. Thank you very much.
Speaker Change: Your next question comes from the line of Bill Katz with TV Cowan. Your line is open.
William Raymond Katz: Great, thank you very much for taking the question. I do want to pick up on that last question. So, hi to you both and thank you both. Just in terms of the commentary of Reallocate, maybe a little bit more buyback.
Speaker Change: Is the deal pipeline at the strategic level, is it just less fulsome, is it just harder to make the economics work?
Paul Christopher Reilly: Is anything shifting in the backdrop here that sort of pushes out that opportunity? And relatedly, if a deal were to come back, would you then forego or truncate the underlying buyback? Thank you.
Speaker Change: Is anything shifting in the backdrop here that sort of pushes out that opportunity? And relatedly, if a deal were to come back, would you then forego or truncate the underlying buyback?
William Raymond Katz: I think the, you know, very active, there are reasonable opportunities, some are pricey, but for us, it's the right culture fit and integration. And, you know, and frankly, we're, As you can see from this quarter, and the last few earnings are very, very strong. So, you know, this capital ratio Unknown Speaker 0, and we don't expect anything of that size. There's no reason not to be more aggressive in returning it to you, to the shareholders.
Speaker Change: I think the, you know, very active, there's reasonable opportunities, some are pricey. But for us, it's the right culture fit and integration. And, you know, and frankly, we're
Speaker Change: As you can see by this quarter, you know, and the last few earnings are very, very strong. So, you know, this capital ratio.
Speaker Change: tweaks up, we want to get it back in a proper range. So we think we can still be a lot more aggressive on the buybacks and still have ample capital if something happens. So it's just saying.
Speaker Change: And we don't expect anything of a size that.
Speaker Change: There's no reason not to be more aggressive on returning it to you, to the shareholders.
William Raymond Katz: Okay, just to clarify, is 10% still the appropriate tier one leverage ratio guidepost as you think about sort of getting back to sort of normal capital ratios? Yeah, 10% is still our target right now for tier one leverage. Great, terrific.
Speaker Change: Okay, just to clarify, is 10% still the appropriate Tier 1 leverage ratio guidepost as you think about sort of getting back to sort of normal capital ratios?
Paul M. Shoukry: And then sort of a second question, going back to your outlook for the stable NII and cash sweep dynamics, how should we think about any residual adverse makeshift into some of these higher fee products? And is there any leakage here that existing customers are not necessarily bringing new money in but would look at that and say, hey, why can't I get that kind of rate and sort of put a little more downward pressure on the net yield?
Speaker Change: Yeah, 10% still our target right now for Tier 1 leverage.
Speaker Change: Great, terrific. And then sort of second question, going back to your outlook for the stable NII and cash sweep dynamics, how should we think about any residual adverse makeshift into some of these higher fee products?
Speaker Change: And is there any leakage here that existing customers, they're not necessarily bringing new money in, but would look at that and say, hey, why can't I get that kind of rate and sort of...
Paul M. Shoukry: And maybe the other way I'd like to ask the question is, sorry to nitpick here so much, but what is the net rate the client is ultimately getting on the cash sweep? Thank you.
Speaker Change: put a little more downward pressure on the net yield. And maybe the other way, I'd like to ask a question, sorry to nestle just here so much, but what is now the net rate the client is ultimately getting here on the CASH sweep? Thank you.
William Raymond Katz: Yeah, so we offer, you know, our grid starts, as Paul said, from 25 basis points and goes all the way up to 3% on the cash sweep program. And, you know, there has been some migration and mixed shift to the higher yielding programs and initiatives that we've offered, which are actually closer to 5%. And so all of this is happening, you know, what hasn't really been there for us or the industry is loan growth.
Speaker Change: Yeah, so we offer, you know, our grid starts, as Paul said, from 25 basis points, goes all the way up to 3% on the cash sweep program, and, you know, there has been some migration and mixed shift to the, you know, higher yielding programs and initiatives that we've offered, which are actually closer to 5%.
Speaker Change: And so what all of this is happening, you know, what hasn't really been there for the us or the industry is loan growth. And that's actually impacted our capital ratios as well, because our earnings have been very strong.
William Raymond Katz: And that's actually impacted our capital ratios as well because our earnings have been very strong. But you know, loan growth across the industry has been muted. So that's, you know, ultimately the driver of NINM and, more importantly, net interest income, which actually impacts the bottom line, will be driven by loan growth, which will drive higher yields and higher earnings overall. And so that's kind of what we're, as an industry, waiting for. We started seeing some improvement on the SBL side, and we're optimistic that, you know, with more corporate activity, we'll start seeing more Your next question comes from the line of Jim Mitchell with Seaport. Hey, good morning.
Speaker Change: But, you know, the loan growth across the industry has been muted, so.
Speaker Change: That's, you know, ultimately the driver of both NINM and, more importantly, net interest income, which actually impacts the bottom line.
Speaker Change: Will be driven by long growth which will drive higher yields and higher earnings overall. and so that's kind of what we're as an industry waiting for. We started seeing some improvement on the SBL side and we're optimistic that
Speaker Change: You know, with more corporate activity, we'll start seeing more activity on the corporate side eventually as well.
Speaker Change: Your next question comes from the line of Jim Mitchell with Seaport Global. Your line is open.
James Francis Mitchell: Good afternoon. Sorry. Just maybe, Paul, can you talk about deposit betas in the face of rate cuts? How do you at least think your asset sensitivity would look in the first 100 basis points? Can you kind of almost get a one for one offset?
James Francis Mitchell: Hey, good morning. Good afternoon. Sorry. Just maybe, Paul, can you talk about deposit betas in the face of rate cuts? How do you at least think your asset sensitivity would look in the first 100 basis points? Can you kind of almost get a one-for-one offset? Or how are you thinking about betas?
Paul M. Shoukry: Or, how are you thinking about betas? It will largely depend on the competitive environment, but because we have been generous in passing rates to clients and through these other programs that have near-money market fund rates like the Enhanced Savings Program, etc., we should have a lot of sensitivity to the downside as well on both the asset and on the funding side of things. We do feel like we have an ample amount of cushion, but again, it will depend on the competitive environment and the demand for cash across the industry as rates go down. Yeah, you know, if you're in a suite, if you have a suite program, it's one to 50 basis points. You get a 50 basis point drop over two cycles. It's kind of hard to respond.
Speaker Change: You know, it will largely depend on the competitive environment, but because we have been generous in passing rates to clients and through these other programs near money market fund rates like enhanced savings program, etcetera, that you know,
Speaker Change: We should have a lot of sensitivity to the downside as well in both the asset and on the funding side of things. We do feel like we have an ample amount of cushion, but again, it will depend on the competitive environment and the demand for cash across the industry as rates go down.
Speaker Change: If, you know, if you're in a suite, if you have a suite program, it's 1 to 50 basis points.
Speaker Change: You get a 50 basis point drop over two cycles, it's kind of hard to respond. You know, we have plenty of room in ours and still be, you know, very competitive in the market today.
Paul Christopher Reilly: You know, we have plenty of room in ours and still be, you know, very competitive in the market today. Right. So, Paul, when you think about next year, and we, think about the forward curve on Fed funds. Kind of a gradual, say, 150 bps.
James Francis Mitchell: It seems like you guys might hold up a little bit better, especially if loan growth picks up and you still have some repricing in the securities portfolio, right? Because the yields are still pretty low there. You put all that together. Don't you?
Speaker Change: Unknown Speaker Right. So, so Paul, when you think about
Paul: next year and we
Paul: Think about the forward curve on Fed funds.
Paul: kind of a gradual say 150 bips. It seems like you guys might hold up a little bit better, especially if loan growth picks up and
Speaker Change: You still have some repricing.
Speaker Change #100: in the securities portfolio, right? Because the yields are still pretty low there. You put all that together, do you, do you, I mean, I know there's competitive pricing, but do you feel like you guys can hold in there pretty, pretty well next year on NII?
Paul M. Shoukry: I mean, I know there's competitive pricing, but do you feel like you guys can hold in there pretty, pretty well next year on NII? Putting aside whether I believe the forward curve or not, we've generated record results now for the last three years and three quarters. And those were in very different interest rate environments. And so, we are confident in our ability to perform very well in any kind of interest rate environment because we have diversified and complementary businesses.
Rob: Yeah.
Rob: Putting aside whether I believe the forward curve or not, we've generated record results now for the last three years and three quarters, and those were in very different interest rate environments.
Speaker Change #102: We are confident in our ability to perform very well in any kind of interest rate environment because we have diversified and complementary businesses. So, for example,
Paul M. Shoukry: So, for example, lower interest rates, at least in the last cycle, certainly supported our M&A business and our fixed income business and supported loan growth. We had record securities-based loan growth during the COVID period partly due to lower rates.
Speaker Change #102: Lower interest rates, at least in the last cycle, certainly supported our M&A business and our fixed income business and supported loan growth. We had record securities-based loan growth.
Paul M. Shoukry: So, there are different things that benefit us in different rate environments. But to your point, on a relative basis, because we have been so generous in passing on the rates to our clients and offering these other programs, we feel like we're relatively well positioned on that front as well. Okay, thanks. Your next question comes from the line of Michael Cyprys, with Morgan Stanley. Your line is:
Speaker Change #102: during the COVID period, because it partly due to the lower rates. So.
Speaker Change #102: There's different things that benefit us, you know, in different rate environments, but
Speaker Change #103: To your point, on a relative basis, because we have been so generous in passing on the rates to our clients and offering these other programs, we feel like we're relatively well positioned on that front as well.
Speaker Change #104: Okay, thanks.
Speaker Change #105: Your next question comes from the line.
Speaker Change #105: of Michael Cyprys with Morgan Stanley . Your line is open.
Michael J. Cyprys: Great, thanks for taking the question. Just circling back to the industry conversation on Cast Sweeps. Just curious more broadly, you know, how you see potential scope, maybe over time, for an evolution in the way customers pay for services and away from Cast Sweep. Just curious, what other ways over time could you imagine 10, 20, some years in the future, potentially in some hypothetical scenario where customers pay differently for services, and how might one still capture economics for the services they provide? What other ways might you be able to capture value?
Michael J. Cyprys: Great, thanks for taking the question. Just circling back to the industry conversation on the movement.
Michael J. Cyprys: and Sweeps. Just curious more broadly, you know, how you see potential scope, maybe over time for an evolution in the way customers pay for services and away from cash sweep. Just curious what other ways over time could you envision.
Speaker Change #107: 10, 20, some years in the future, potentially in some hypothetical scenario where customers pay differently for services, and how might one still capture economics for the services they provide? What other ways might you be able to capture value?
Paul Christopher Reilly: Yeah, I guess there are so many ways it's hard to tell, right, you know, and, you know, a big source of growth and income used to be NB1 fees and other things, and they're, they've become less of a factor over time. Certainly asset-based fees if you look at RIAs and how they price versus the broker-dealers. You know, asset-based pricing is becoming more common. There are all sorts of ways, you know, and part of that depends on regulatory environment. You could have performance fees, you could have, you know, I think it's hard to tell where to evolve. Unknown Speaker I think in business, I don't, you know, people talk about consulting fees or hourly rates. I, I don't think anyone likes a lawyer or accountant's bill when they spell out hours.
Speaker Change #108: Yeah, well, I guess there's so many ways it's hard to tell, right, you know, and, you know, a big source of growth and income used to be, you know, 10B1 fees and other things, and they've become less of a factor over time. Certainly asset-based fees, if you look at...
Speaker Change #108: RIAs and how they price versus the broker-dealers.
Speaker Change #108: You know, asset based pricing is becoming more common. There's all sorts of ways, you know, and part of that depends on regulatory, you could have performance fees, you could have, you know, I think it's hard to tell where it evolves.
Michael J. Cyprys: So I don't think it will go there, especially given the value of the relationship with an advisor where they, You know, it's very, everyone always thinks about the investment part and that that is part of it. But a lot of it is really the advice, the family advisors, and they become a big part of the lives of clients. So there's all sorts of stuff that they change anyway over time. Maybe it'll get more asset base. We certainly have countries that do.
Speaker Change #108: I think in the business, I don't, you know, people have talked about consulting fees or hourly rates. I don't think anyone likes a lawyer or accountants bill when they spell out hours. So I don't think it will go there, especially given the value of the relationship with an advisor where they
Speaker Change #108: You know it's very it's
Speaker Change #109: Everyone always thinks about the investment part, and that is part of it. But a lot of it is really the family advisors, and they become a big part of the lives of clients.
Speaker Change #110: There's all sorts of stuff that they change anyway over time. Maybe it'll get more asset-based. We certainly have countries that
Paul Christopher Reilly: The UK and Australia, where it's just direct charges to clients that have to be in fees, so it's very clear. You know, it could evolve in all sorts of ways, but it's a very competitive, mature industry, and I think that people will find a way, you know, to adjust. We've had to adjust through zero interest rates and high interest rates and all sorts of things, and we've kind of adjusted as we've gone along. 10 years out in our industry seems like forever. Maybe it's because I'm old and Paul has to worry about it.
Speaker Change #110: The UK, Australia, where it's just direct charges to clients that have to be in fees, so it's very clear. You know, it could evolve all sorts of ways, but...
Speaker Change #110: It's a very competitive, mature industry, and I think that people will find a way, you know, to adjust. We've had to adjust through zero interest rates and high interest rates and all sorts of things, and we've kind of adjusted as we've gone along, so.
Speaker Change #110: 10 years out in our industry seems like forever. Maybe it's because I'm old and Paul has to worry about it.
Michael J. Cyprys: Great, thanks for that. And just a follow-up question more broadly on cash sorting and cash rebalancing. Just curious how close you think we are to, and eventually starting to see that grow again. What catalysts do you see on the horizon that might get us there?
Speaker Change #111: Great, thanks for that. And just a follow-up question more broadly on cash sorting, cash refall, I'm just curious how close do you think we are to bottom?
Speaker Change #112: and eventually starting to see that grow again. What catalysts do you see on the horizon that might get us there? And how might the recent...
Paul M. Shoukry: And how might the recent evolving competitive backdrop and industry discussions here and debates on the sweep rate, how might that impact cash sweep balance just given the heightened focus and attention that it's getting? Yeah, I mean, we continue to believe that we're closer to the end of the sorting cycle than the beginning, and some of the metrics that Paul discussed, you know, just in the fee-based accounts having $8,900 of cash per cash sweeps per account.
Speaker Change #113: Evolving competitive backdrop and industry discussions here and debates on
Speaker Change #114: Unknown Speaker, how might that impact cash suite balances just given the heightened focus and attention that it's getting? Transcribed by https://otter.ai
Speaker Change #115: Yeah, I mean, we continue to believe that we're closer to the end of the sorting cycle than the beginning and some of the
Speaker Change #115: Metrics that Paul discussed, you know, just in the fee-based accounts, having...
Paul M. Shoukry: Whereas we have, you know, 22,600 money market funds, CDs, and treasuries, you know, a lot of these clients, to the extent they had investable cash balances, have been invested in the higher yielding alternatives. You know, we're not, as we've always said, since the very beginning, and we're one of the first, if not the first, to say it, we're not going to declare the end of the trend until we have several quarters of history to look back on and start seeing growth in the cash balances.
Paul: $8,900 of cash sweeps per account, whereas we have $22,600 of money market funds, CDs and treasuries.
Speaker Change #116: None of these clients, to the extent they had investable cash balances, have been invested in the higher yielding alternatives. As we've always said, since the very beginning, and we're one of the first, if not the first, to say it, we're not going to declare...
Speaker Change #116: The end of the trend until we have several quarters of history to look back on and, you know, and start seeing growth in the cash balances. And ultimately that growth will come from
Paul M. Shoukry: And ultimately, that growth will come from the stabilization of the runoff and the migration and the continued growth, which we've had phenomenal growth in client assets. And as we retain and recruit advisors, and those advisors bring on more client assets, there'll be cash associated with that, and that ultimately will drive growth and the balance of the market. Great, thank you. Your final question will come from the line of Alex Blostein with Goldman Sachs. Your line is open.
Speaker Change #116: The stabilization of the runoff and the migration and the growth of the continued growth which we've had phenomenal growth of client assets.
Speaker Change #116: And as we retain, recruit advisors, and those advisors bring on more client assets, they'll be cash associated with that, and that ultimately will drive the growth and the balances.
Speaker Change #117: Great, thank you.
Speaker Change #118: Your final question will come from the line of Alex Blostein with Goldman Sachs. Your line is open.
Alexander Blostein: Hey guys, good afternoon. Thanks for taking the time to answer the question. So I appreciate all the detail, and obviously, it's a dynamic backdrop. So we're all kind of navigating and learning from it. So I appreciate that there's still a ton of unknowns there. But I guess as you think about that $15 billion sweep number that you provided, and I think most of us understand that it is fairly small, and it's largely operational. But I guess, at the heart of the question, what we're all kind of trying to figure out is, why is transactional or operational cash, albeit small, on a per account basis, but it's still part of the advisory relationship, treated differently under the fiduciary standard of Reg B.I.
Alexander Blostein: Hey guys, good afternoon. Thanks for taking the question. So, appreciate all the detail and obviously it's a dynamic backdrop, so we're all kind of navigating and learning from it. So, appreciate that. There's still a ton of unknowns there.
Speaker Change #120: I guess as you think about that $15 billion sweep number that you provided, and I think most of us understand that it is.
Speaker Change #120: Fairly small and it's largely operational, but I guess
Speaker Change #121: At the heart of the question, what we're all kind of trying to figure out is, why is transactional or operational cash, albeit small, on a per-account basis,
Speaker Change #121: But it's still part of the advisory relationship would be treated differently under the fiduciary standard of Reg B.I. And why wouldn't that cash balance, again, albeit small, still receive sort of some of the higher yields that are available out there?
Paul Christopher Reilly: And why wouldn't that cash balance, again, albeit small, still receive some of the higher yields that are available out there? Well, I guess my quick answer would be, what do you get on your checking account? There's a cost to having it on the platform, and there's a cost to servicing it. It's transactional, so it has more transactions. And so there's a cost. I mean, if the standard for BI is that you have to pay a rate that is way too uneconomic to operate a business, I don't know what that means.
Speaker Change #123: Well, I guess my quick answer would be, what do you get on your checking account?
Speaker Change #124: There's a cost to having it on the platform. There's a cost to servicing it. It's transactional, so it has more transactions, so there's a cost.
Speaker Change #122: I mean, if the standard for BI is you have to pay a rate that's...
Speaker Change #125: You know way on the economic to operate a business I don't know what that you know what that means, and I don't think that is the standard under BI It's what clients first and you know and and be fair and take their interests at heart first And I think that transactional cash
Paul Christopher Reilly: And I don't think that is the standard under BI. It's to put clients first, and you know, and be fair and take their interests at heart first. And I think that transactional cash, 25 basis points, it's a lot more than you're going to get on your checking account is very reasonable. So, I mean, there may be disagreements. I think a standard like that is, Unknown Speaker, you know.
Speaker Change #126: At 25 basis points, it's a lot more than you're going to get on your checking account, is very reasonable.
Speaker Change #126: There may be disagreements. I think a standard like that is...
Alexander Blostein: Unknown Speaker I guess the difference is like the checking account is not a fiduciary relationship versus this seems to be one. I guess that's where the disconnect comes in and what could be the outcome. There are a lot of fiduciary accounts. I agree that, you know, you look at institutional asset managers, they have a fiduciary relationship, but they don't have zero cash in their portfolios. So, I mean, if you want to benchmark it to other fiduciary relationships of this type of investment side, that would be a real outlier to say.
Speaker Change #122: [inaudible]
Speaker Change #122: is, you know, I wouldn't understand how you can come up with that. So, it's, I guess the difference is like the checking account is not a fiduciary relationship versus this seems to be one. And I guess that's where the disconnect comes in and what could be the outcome.
Speaker Change #127: There are a lot of fiduciary accounts. I agree that you look at institutional asset managers, they have a fiduciary relationship, but they don't have zero cash in their portfolios. So if you want to benchmark it to other fiduciary relationships.
Speaker Change #128: of this type of investment, so I would be a real outlier to say.
Paul Christopher Reilly: All that cash has to be 100% invested because that's not the reality the way accounts work. That would say we have to not only sort the costs, but we'd have to fund the transactions because there wouldn't be cash in the account or sell out securities. You know, in order to fund these transactions or other things. I mean, I just, I think that, to me, that's not a reasonable stand.
Speaker Change #127: You know, all that cash has to be 100% invested because it's not reality the way accounts work.
Speaker Change #127: That would say we have to not only sort the costs, but we'd have to fund the transactions because there wouldn't be cash in the account or sell out securities, you know, in order to fund these transactions or other things. I mean, I just, I think that, to me, that's not a reasonable standard.
Paul Christopher Reilly: Gotcha. All right, understood. All right, my quick follow-up poll, the L poll, back to the discussion around third-party bank sweep and the rate changes and the migration that you've seen there. Do you expect that to be largely done, or could there still be some makeshift where some of the larger account balances will kind of push that yield a little bit lower? And to what extent, I guess, is that, if at all, incorporated in your sort of flattish cash revenue trajectory for next quarter versus this quarter?
Speaker Change #129: Gotcha. All right. Understood. All right. My quick follow-up poll, the L poll, back to the discussion around third-party bank sweep and the rate changes and the migration that you've seen there. Do you expect that to be largely done or there could be still some makeshift where some of the larger account balances will kind of push that yield a little bit lower? And to what extent, I guess, is that, if at all, incorporated in your sort of flattish cash revenue trajectory for the next quarter versus this quarter?
Paul Christopher Reilly: Yeah, well, we have, I mean, the initiative itself; we have some levers on and around, you know, largely rate, right? So to the extent that we want to continue bringing in cash from the outside, your rate is a big lever; we actually just announced that we're reducing the rate on the high yield portion of the program that brings in the new cash from the outside because we have pretty big buffers now, with over $17 billion of cash swept to third-party banks that we can reposition and bring in. To fund our own bank over time.
Speaker Change #135: Yeah, well, we have, I mean, the initiative.
Speaker Change #131: itself, we have some levers on and around, you know, largely rate, right? So to the extent that we've
Speaker Change #130: want to continue bringing in cash from the outside, rate is a big lever. We actually just announced that we're reducing the rate on the high yield portion of the program that brings in
Speaker Change #130: the new cast from the outside because we have pretty big buffers now.
Speaker Change #127: with over $17 billion of cash swept to third-party banks that we can reposition and bring on to fund our own bank over time.
Paul M. Shoukry: So, you know, it really just depends on, you know, how much of the initiative that we want to continue to pull in that we actually, again, just announced that we're reducing the rate. It's still very attractive, higher than 5%. But, you know, we're not going to, again, declare completion of any type of trend until we have several quarters of history. Otherwise, it's just speculation.
Speaker Change #127: It really just depends on how much of the initiative that we want to continue to pull in. We actually, again, just announced that we're reducing the rate. It's still very attractive, higher than 5%.
Speaker Change #127: But, you know, we're not going to, again, declare completion of any type of trend until we have several quarters of history, otherwise it's just speculation.
Alexander Blostein: I gotcha. Sorry. And the reduction on the ESP, or was that the program that sits within third-party banks? Yeah, that's the sweep initiative.
Speaker Change #133: I gotcha, sorry, and the reduction on the, was that ESP or was that the program that sits within third-party BankSweep?
Paul M. Shoukry: That's right. Got it. Okay. All right. Thank you, guys. I appreciate it.
Speaker Change #132: Yeah, that's the SWEAP initiative. That's right.
Speaker Change #134: Got it. Okay. All right. Thank you guys. Appreciate it.
Alexander Blostein: Thanks, Alex.
Alexander Blostein: There are no further questions at this time. I'll turn the call to Paul Reilly for closing remarks.
Paul Christopher Reilly: Well, I appreciate all the questions, and you're on the call. I want to remind everybody, we had a very good quarter, but I understand all the questions on the cash suites. So, appreciate, hope we were helpful in all of our responses, and thank you for joining us.
Speaker Change #136: This concludes today's conference call. We thank you for joining. You may now disconnect your lines.
Paul Christopher Reilly: Thanks, Alex. There are no further questions at this time. I'll turn the call over to Paul Reilly for closing remarks. Well, I appreciate all the questions, and you're on the call. I want to remind everybody we had a very good quarter, but I understand all the questions on the cash suites. So I appreciate it, hope we were helpful in all of our responses, and thank you for joining us. This concludes today's conference call. We thank you for joining us. You may now disconnect your line. Please wait; the conference will begin shortly.