(St. Petersburg, Fla.) Speaking at the 16th annual Women’s Symposium on Oct. 7, Raymond James Financial CEO Paul Reilly said the firm is tackling issues, including auction-rate securities, and positioning itself for further growth. He also told the audience of over 100 female advisors that expected regulatory changes should not have much impact on how Raymond James does business.
“These are interesting times,” Reilly said at the symposium sponsored by Raymond James and held where the company is based. “We’re in an amazing position to really grow and establish ourselves in this industry.”
The balance of auction-rate securities held by Raymond James clients has fallen from $2 billion to $580 million. “We were not able to redeem $2 billion,” Reilly said. “But the balance is moving down, and we should be able to do more. Between our work with Nuveen and other solutions, we should be able to solve the problem soon.”
While the larger banks could borrow money to pay clients back for these holdings, Raymond James was not able to do so, given its smaller size. Raymond James has 5,300 financial advisors worldwide, 625 of whom are women.
Reilly, along with other Raymond James and industry executives, has met recently with regulators in Washington and Atlanta. “We see very little impact on us from the new regulations. Most of it just pushes the industry to do what Raymond James has always done,” he explained. “We put the client first, do don’t do proprietary trading, are well capitalized, low leveraged and look long term.”
He acknowledged that with the many laws being drafted, the company would be experiencing some change. This is why the company is actively involved with the SEC, SIFMA and other groups in the writing of the legislation. “But this will impact us much less than others,” Reilly said.
In terms of the changes to 12b-1 fees associated with mutual funds, the SEC “doesn’t see trailing fees as fair,” Reilly says. As a result, the regulatory body wants to cap these fees, break them up and spread them out over the first four years of a mutual fund’s life (or ownership period). However, since the average life a fund is three years, this plan could prove difficult.
“We want to disclose the fee and not eliminate it,” said Reilly, who took over as the firm’s chief executive officer from Chairman Tom James in May.
While Raymond James continues to top a survey as the firm advisors would most like to join, it has seen some decline in its client-satisfaction rating with J.D. Power & Associates. “And we want to drive this again to be the clear leader,” Reilly said.
The company remains very focused on recruiting and retaining advisors, he said, and is getting especially active in some markets.
Some advisors at other firms who want to move to Raymond James are locked into retention programs, so the firm wants to “find more ways to extend loans to people to overcome this,” said Reilly. The company should make an announcement about this issue in the next few weeks, he adds.
In terms of the compensation grid for existing advisors, Raymond James is evaluating a “flat grid,” Reilly says. “We look very carefully at being fair on a cost basis. And we would like to move to a flat grid, which is easy to say and very hard to implement.”
Reilly added that “while I hoped to announce something for next year, I still feel we are not ready.”
“There’s nothing more disruptive than changing pay and bonuses,” he explained.
In the investment banking arena, Raymond James is expanding its activities in municipal finance, he says. Plus, Raymond James Bank is rolling out a mortgage program and has plans to introduce non-purpose loan accounts.
“The firm has fought from being an unknown to being a player, and it would be a shame not to take advantage of it,” Reilly explained. “You will see more things coming out through focused-driven programs.”
When asked about adding more banking products and services for high-net-worth clients, Reilly acknowledged that the firm has its limits. “We are a retail brokerage firm with a bank and not vice-versa,” he said. This has advantages in terms of putting clients’ interests first, Reilly added, but it also “is a challenge for us.”
The firm is considering what products and services, like credit cards and other lending programs, it can outsource. “We are trying to hit things one at time,” said Reilly, an avid tennis player. “We are trying to get into products that we know we can do well with, but, honestly, we are not going to do what all the big banks are going to do.”
Likewise, Reilly said that when it comes to serving high-net-worth and ultra high-net-worth advisors, the firm wants to move ahead, but “we don’t believe in penalizing the small investor.”
Thus, Raymond James and its advisors had to strike a “hard balance,” Reilly said. “We want to stay true to our core values and yet strive to deliver new services, as we are doing through the alternative investment group, which is getting more resources.”
Finally, Reilly acknowledged that the firm believed in diversity in the work place and wanted to do more in terms of the diversity of its senior management. “It is an issue we have to address, and we know it’s important,” he said.
On Oct. 8, Chairman Tom James and two other executives outlined the firm’s competitive advantages over rivals and said it would, at least in the independent channel, like to boost annual sales 15 percent a year over the next five years.
The executives also pointed to other possible changes at the firm, including a product-neutral grid and the elimination of the $30 transaction fee on mutual funds for RJFS advisors.
“We expect to be the least impacted by new rules among all the broker-dealers and banks,” said James. “This is because we are mainly retail oriented and are committed to doing what’s best for clients.” He added that this is also why Raymond James survived and even thrived during the peak of the financial crisis.
Dennis Zank, president of Raymond James & Associates, the firm’s employee-advisor channel with about 1,270 advisors, reminded advisors about the origins of the firm, which was formed in 1962 to provide clients with financial advice — which trumps expensive IT and other systems.
“There are arguments over our business model, including the need for a global platform,” he said. “But most clients want someone they trust, who is skilled, answers the phone and is very responsive to their needs.”
As for the notion that a broker-dealer must have 15,000 advisors to survive, Zank asked, “Really? Then how is it that Raymond James has had 14 percent compounded annual returns, excluding dividends for so long?”
He also disputed the need for a “massive balance sheet.” “The private client, or retail advisor business, is not a capital-intensive business. We do need some funds for technology upgrades and back-office operations, yes — but not massive capital. That was needed at some firms to fund billions in proprietary trading.”
“This is not a business you can sterilize; it’s a relationship business,” said Zank.
Zank pointed to the “latest craze” at some rival firms to impose fees on clients with less than $1 million to invest. For some advisors, these types of clients are very important, and “even huge teams with large $1-million-plus accounts have lots of people with $400,000 rollovers,” he explained.
The fact that private-client work is Raymond James’ main business should give it an important competitive advantage vs. rival firms going forward, Zank says, and he communicates with prospective advisors who visit the firm.
He also reminded the audience that 75 percent of Raymond James & Associates’ advisors have more than 100,000 competency points, which measure their continuing education, professional designations and similar attributes. “We are hugely proud of this,” he said. “We measure our advisors on something other than production.”
Dick Averitt, chairman and CEO of Raymond James Financial Services, which includes about 3,240 independent-contractor advisors, emphasized that private-client group revenue is about 65 percent of the firm’s revenue.
“You cannot say that for another other broker-dealer as far as I know, and certainly not for those owned by banks,” he said. “We are a private-client-group firm,” Averitt said.
He said about 15 percent of Raymond James’ independent-channel advisors are women. “I’m surprised not to see more women in the business; it’s not on their viewfinders in most cases,” and the firm and industry should do more to change than, Averitt explained.
The average gross revenue per RJFS advisor is now about $311,500 a year, while the average trailing-12 months fees and commissions per RJA advisor is $480,000.
Overall attrition at RJFS is about 9.5 percent, though it is less than 1 percent for advisors with more than $300,000 a year in sales. At RJA, the regretted attrition is under 1 percent.
As for recruiting in the last few years, roughly 70 percent of all recruited revenue for RJFS has come from the four wirehouse plus Edward Jones. And while recruiting is down in 2010 after a record 2009, RJFS is growing the number of $1 million producers.
James described what he sees as “the death of review by the SEC” — a situation caused by the fact there are many new products coming onto the market and few staff members to review all of them. In contrast to this situation, he pointed to the tighter controls at Raymond James. For instance, he said, its mortgages have experienced only one delinquency. “We have been very careful at Raymond James Bank,” James said. The bank had “one small quarter of loss while other [banks] fell flat on their face and had their net worth wiped out.”
Still, James acknowledged that Raymond James’ holding company was going to have two regulators assigned to it. The federal government “didn’t do well last time, so they are making an effort. I give them credit for that, but it will be tough to get used to,” he said.
As for the fiduciary standard, James said he doesn’t believe that its advisors should “just be accountable to the standards of salespeople,” since they give more advice and counsel than FAs with some rival firm. “They indeed should be held to higher standards,” James said.