Raymond James Financial Inc (RJF) — Q3 2015 Earnings Call Transcript

Thanks, Maria. Good morning and thank you for joining our fiscal third quarter earnings call today. We do not take your time and interest in Raymond James Financial for granted. After I read the following disclosure, I will turn the call over to Paul Reilly, our Chief Executive Officer, and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open a line for questions. Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results, industry and market conditions, demands for the product acquisitions, anticipated results of litigation and regulatory involvements, and general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, projects, forecasts, and future conditional words such as will, may, could, should, and would, as well as any other statements that necessarily depend on the future, are intended to identify forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to carefully consider the risks described in our most recent form 10-K and subsequent form 10-Qs which are available on the FCC’s website at fcc.gov. So, with that, I will turn the call over to Paul Reilly, CEO of Raymond James Financial, Paul?

Thanks, Paul, and good morning everyone. We recently returned, a few weeks ago, from our summer development conference which is our RJA Employee Advisor channel. Besides the great group of advisors, there were 700 kids in attendance under the age of 18 years old. So if that’s not a cultural differentiator from other firms, I don’t know what is. It’s kind of a unique place, unique culture, and just great people for training for the advisors and to see families together. I want to start off with an overview of the quarter. First, I think we had a very solid quarter and that we’re in great shape, really driven by a number of key drivers that delivered this quarter and put us in good shape for the future. First is the private client group asset advisors. We reached 6,507 advisors, up 123 over the preceding quarter. This has to be a record recruiting for us in one quarter. We had growth in every advisory channel. More importantly than great recruiting, which we like to see, is the retention. We still have fantastic retention, and it’s the people that really choose to stay here that make the culture at Raymond James. That recruiting and our advisors drove record assets under administration of just under half a trillion dollars and assets under management of $70.2 billion. Loans at Raymond James Bank were essentially flat at $12.05 billion, so very solid results there. A quick overview of the financial results: we had record quarterly net revenues of $1.32 billion, up 9% from last year’s quarter and 3% sequentially. Quarterly net income of $133.2 million is up 9% from last year’s quarter and 17% sequentially. And that quarter is our second-best earnings quarter, just off by $3 million from our record. That quarter where we had the record was an incredible investment banking quarter. So I think very solid results from our bottom line which earned us $0.91 per diluted share and we have an annualized ROE of 12%. The private client group, to get into the segments, had a record net revenue of $892.2 million, up 9% from last year’s quarter and 2% sequentially. Quarterly pre-cap’s income of $86.4 million, is up 6% over last year’s quarter and 15% sequentially. Private client group assets under administration at $475.4 billion is up 5% over last year’s quarter. Our assets under fee-based accounts represent 39% of total client assets which leads to 75% recurring revenue for this segment. Our capital markets had a quarterly net revenue of $233 million, flat from last year’s quarter and then down 1% from the sequential quarter. Quarterly pre-tax profits of $18.3 million were up 35% from last year and 12% from the previous quarter. It’s really a tale of two businesses. Fixed income had a very good quarter as commissions were up, partly due to the volatility, and we have a great team in a tough market. Public finance had a near-record quarter. In fact, if we had not changed allocations in accounting since Morgan Keegan joined us, it would have been a record quarter for them. So very solid performance and a very good backlog. That was offset by the equity capital markets business with its headwinds, and over-the-desk commissions remain challenging this quarter. We’ve also made significant investments primarily in this quarter by adding bankers in our life sciences, financial services, energy, and government services practices. Just to put it in scale, with 80 senior bankers, adding a dozen of them, basically most of them in this quarter is a big investment, but one where you get great people when you bring them on board. Asset management, the net revenues were $98.8 million, up 8% from last year and 5% from the preceding quarter. Pre-tax of $31.6 million was up 1% from last year’s quarter and 1% from the sequentially. The great results impacted by a successful closed-end fund distribution fee cost that impacted the quarter and investment. Very, very good and also highlighted by the acquisition of Kruger. We welcome the Kruger Group and Dr. James Breech and his team, Tyrena James. Because they have a model at delivery program, their assets do not count towards our financial assets under management, but they are a great group of people. RJ Bank's record net revenues of $103.9 million, up 13% from last year’s quarter and 1% sequentially. Pre-tax of $78 million, up 20% from last year’s quarter and 9% sequentially. Total loans are down slightly, basically flat. Both credit quality and our net income margins continue to improve, which Jeff will talk on. If you look at all of our business units, they all performed well with the exception of a tough quarter for equity capital markets. But all the drivers are in great shape and I feel good about not only what they did this quarter but where we’re headed. With that, I am going to turn it over to Jeff.

Thanks, Paul. I’m just going to address some of the significant variances from the consensus model. First of all, I will say they are fewer than normal, which we view as a good thing. Either we had fewer surprises than normal or our covering analysts are getting very good at projections, and given the audience, I will lean towards the latter. With respect to the revenue lines, except for the other revenue, virtually all revenue lines were within low single digits of expectations. The other line, as many of you have already pointed out in your comments, really relates to the ARS gains that I mentioned at the Analyst Investor Day in May, as well as some PG valuation gains that are slightly elevated. A little lower than last quarter but higher than our normal quarters. Aside from that, revenues were all pretty much in line with expectations. A couple of more items on the expense side. I would characterize this quarter on the expense side generally as one of above-average investment. A good portion of that was in people. We have seen 123 net FA increase; we’ve talked about that. As well as at least a dozen significant ECM hires here to date, most in the most recent quarter. Coupled with higher commission revenues than projected, so that increase has come. The commission growth in PCG came about two and a half to one in favor of the independent contractor division which elevates the payout level somewhat. So all that boils down to a comp ratio of about 68.2% for the quarter, a little above our 68% target. We are at 67.9% year-to-date, so we are still running close to target in all these periods. However, this particular period has a little elevated comp ratio as a lot of these people that we’ve hired are obviously not yet producing the level of revenues that we expect in the future. Another area of investment would be in IT. Unfortunately, that’s not necessarily going to be an immediate revenue generator. Particularly in some of the systems there is a small spike this quarter related to some outsourced regulatory projects. When we have some of these projects that we think need to be done on a fairly timely basis, we don’t necessarily want to add full-time headcount or we don’t have the bandwidth and sometimes even the expertise perhaps for some of these specialized regulatory projects in-house. So we outsource some of those projects, including some consulting fees for outsourcing some of those projects that hit this quarter. On a year-to-date basis, though, the data communications expense is running right at $65 million a quarter, which is right on top of where it was running in the prior year. So on a year-to-date basis, even that we have told you it would be lumpy over the course of the year, it is all very much in line. Another expense that surprised a lot of people, ourselves included to some extent, is the loan loss provision. It’s really the net of several items. Even though loans were flat for the quarter versus the preceding quarter, the loan mix changed somewhat away from commercial, industrial loans to securities-based loans and mortgage loans which carry lower provisions. That was a net positive to the provision. Another net positive was the recovery that we talked about; you could see it in the press release at the end. The bank had a significant recovery in the quarter, a real estate loan that had been partially charged off. That was a positive and then going in the other direction, we did get the snick examined in the quarter, but it was a somewhat non-event. They reviewed 339 of our credits; they differed on nine of them, five of them they rated more harshly, four of them they rated more softly than we did. But as you know, we follow the practice of going with the lesser of the two in terms of ratings. So it cost us a little under $2 million to the provision for the quarter. Some of those, by the way, were unfunded revolvers. Of the five that they rated more harshly, three of those were unfunded revolvers. However, the two that they rated more harshly plus a couple of more downgrades that we chose to make during the quarter led to the increase in criticized loans from the prior quarter, which was about the only negatives that I would say are in the bank’s entire two pages of statistics there. So those downgrades that we chose to make and the snick exam results went the other way, but when you net all those things together, it came out to a net benefit of $3 million in the quarter. Other expenses is another investment that we made; there are a lot of little items in that, as you can imagine. Other expenses is sort of a catch-all for anything that doesn’t fit other places, but we did make some investments in some new products and asset management, where again we expect to generate some future asset management fees from. The tax rate, we recalculated for the year-to-date, came to just under 37%, which required us to adjust it in this quarter down about a percent or a percent and a half from where we had been running so it came in at 36% to get us to the correct year-to-date figure. Again, there were a number of items that impacted that, but we sketched towards 37% or 37.5% for the year so we’re running pretty close to it on a year-to-date basis. There was a slight jump in basic share count which was unusual in this quarter and was really a result of some of the Morgan Keegan three-year RSU retention awards vesting in early April. The next and last round of those will be two years from this quarter when some of the capital markets five-year retention awards are left. All that boils down to a pre-tax margin of 15.8% for the quarter, 15.3% year-to-date, so above our 15% targets. ROE was 12% for the quarter, 11.5% for the year-to-date so we’re running close to target. A couple of other things that I will mention quickly: net interest was a record $109.4 million as the bank continues to grow and their net interest margin remains at the level that it has been recently of 3.09%. Cash balances really haven’t increased that much; it’s really been more from the bank generated and some spread to that record. Lastly, for those that didn’t see and I know most of you did and made comments, we did file our stress test results in June which showed pretty strong capital ratios even in stressed conditions, which I think most of you weren’t expecting. Those are my comments on the things that varied from the consensus model. Paul?

Thanks, Jeff. Before I turn over to questions, I’d like to summarize first. The private client group business has great recruiting and, as I talked about before, more importantly, the retention, with record asset levels about to swell and the recruiting momentum is still very solid. I would not expect this number to record, but our pipeline is really good and people are continuing to visit the office, so I am still optimistic about future recruiting. In capital markets, we had a very solid backlog, especially in public finance. The equity capital markets backlog is good; I would say it's exceptional public finance right now. Of course, anytime there’s investment banking, the transactions can be time-sensitive, but I feel good about where we’re sitting at right now. Also, record assets under management I think will bode well for our asset management group and the bank is taking great shape and should continue to grow. We add loans or have opportunities that need our credit quality, which we’re very strict on, and in quarters where we don’t fine them or we have pay-offs, you don’t see growth like this quarter, but we’re very comfortable with where the bank sits. The last line I’m sure will come up for comment from the Department of Labor because there’s so much press on it. I would say there is nothing new to report outside of the fact that the Department of Labor has openly stated in the last week that they are open to discussion and interpretation. There has been a lot of political and even regulatory pressure suggesting that the rule needs to be modified. We will see what happens; the comment period is just closing, there will be some testimony, and hopefully, we will be in a place where there is a modification that we are all very comfortable with. While I think it is good intent, as published it is not a very good way of achieving results, especially as it could cut off access to advice for a lot of customers. So with that, I will turn it back to Maria to open up for questions.

Good morning, Paul, good morning, Jeff. Firstly on the fixed income business, the strength there was a clear positive and nicely outpaced what we have seen at the big banks. You’ve always said you have an 18 play in the B markets, how would you describe the current environment? Is it a C, D, A market and how sustainable is it?

I think for the core, you probably have a D market. There is enough volatility that people are doing things. Our platforms are different from the big banks with our bank distribution channel and merely an origination business with public finance. But this market will certainly improve in terms of the volatility expectation and commission lines to start. It’s gone up for a while and continues to stay up. The trading profits have been about the same but it’s really been driven by increased commission volume and our team has stayed close to the clients, and I think when the opportunity came, we got our fair share of more business. They are doing a good job, and I am proud of what they have accomplished.

Okay, that’s helpful. And just on the DOL proposal, I heard your comments earlier, but I just want to dig into two things you noted in your comment letter that you filed just about a week ago. One was just the cost of compliance and two was the impact of some product exclusions. So my questions are can you help us size or give us your framework on how you are thinking about compliance costs, and then two, what is the revenue contribution of things like options, structured notes, and hedge funds to your business today? Thank you.

First, on the latter, they are not a significant part of our product sweep for clients. Some of our high-net-worth clients and those affected IRA accounts are where typically those products aren’t included, but they are in some. It’s hard to estimate the impact, especially when you have a rule that’s not really written. Even if it passes as it is, the prohibited transaction exemption would have to be written, and how it is written is critical. The problem is if you read the rule and the base value, the disclosure, and the estimating that you would have to do on every single product, how you disclose it would take time from an IT perspective and can be very costly. We think there are much more cost-effective ways of displaying those types of fees, which we already do in generalized terms and we can get much more granular, but our clients see them but what they are asking for is so – to be so precise as to be inaccurate about how these costs and fees were allocated. So that is the costly part, and we have no idea until the final regulation as to what that cost would be or frankly, if we could even afford to service some of the accounts – the smaller accounts – where we don’t really make money. If we want to service the accounts, it might make them too costly, too risky to actually service, and that is our concern with the rule as it’s written.

Okay, thank you, that’s helpful. And then lastly from me, clearly the new advisor momentum is very strong. Help us think about the economic distribution of these advisors coming on board. Is the productivity level of the new guys you’re bringing on board about the same or higher than the current average? How long does it take these advisors to ramp up to full productivity, and are there any additional costs we should be keeping in mind as the advisors ramp up?

Yes, I think that in general, they are slightly more productive. We currently have some huge teams that are very productive. In terms of extra costs outside of A caps to bring accounts in, there aren’t really any extra costs. There’s certainly a transition that depends on where it is. If it’s an independent advisor, we certainly don’t have the real estate costs. If it’s an employee, it depends on whether we are opening a new office or adding him to an office where, frankly, there’s even more uplift if there is an existing office because we are leveraging existing costs and real estate. So, there’s not an unusual transition and then the advisors bring over their assets in about a year; it takes them a few months and they get a lot of their assets and then they trickle in over the next year. Usually by two years they have got more assets than they had when they joined us, so what you see in the recruiting pipeline is just really starting to impact the results because as they bring assets over as they move their clients here, we get the growth. So there is even a lag effect.

That’s great and then comments on the strong business momentum.

We have got great momentum; I don’t know what to say. I tell our people that we are – I think the culture that’s been developed here by Tom and team for many years now is paying off. We’re in the right place at the right time where we have the technology and the products to support all advisors and the very high-end advisors that are joining us, and we have the culture that they like. We are client-centric, and our job is to help service and help the advisor. We are balanced in our approach regarding what’s fair to clients, what’s fair to the advisor, and what’s fair to us. Our existing advisors who have been here a long time are the ones who help us grow that culture and attract new advisors to do, hopefully, the same. We are in the right place and the right time in this market, and the momentum is very, very good right now.

I hear you; I was just congratulating you on that. Thanks guys.

Hi, good morning. I appreciate the color on the snick review. I have a couple of other questions about the bank, one of which is that it looks like we’ve seen some softer economic conditions in Canada. Can you just remind us the types of loans you’re tending to extend there and some detail on the comparison on the yields relative to the U.S. loans and what demand is looking like up in Canada for loans?

Hi, Hugh, it’s Steve Raney, good morning. Related to Canada, I would say the profiles of the deals up there look very similar to the deals in the U.S., with a couple of exceptions. The structure of the C&I, the corporate loans up there probably have a little bit – we don’t see as many coveted light transactions; the banks tend to be more rigorous concerning the structure and governance. Typically, a little bit lower leverage and actually slightly higher margins. The real estate transactions that we do up there are identical. As to retain an individual project finance business up there, I would say for the first six months of our fiscal year, things were a little slow up there. As you mentioned, things have gotten a bit soft but we have actually seen a pick-up here. Recently our pipeline of deals in Canada has actually picked up over the last 60 days or so. I think it’s a good counter-balance for us to have an opportunity to play in that market now; it’s a good counter-balance to everything else that we are involved in at the bank. So, we are very committed to Canada and think that is a good long-term business for us to be in.

Very helpful color. You guys obviously mentioned in the press release that C&I lending was a bit softer relative to some of the security-based and other loans. You mentioned about the pipeline for Canada which was looking like it was picking up a bit. Can you just talk about it in general the C&I loan pipeline and how that’s trending recently?

Yes, Hugh. I would say some of the reduction was kind of self-imposed. We did see a higher runoff rate this last quarter. When I say self-imposed, there were deals that were repricing that we elected to exit as we just didn’t think the risk-return was appropriate with the lower rates. We’ve actually seen an increase in our pipeline in our C&I domestic business as well here recently over the last 30 days or so. We will continue to stay active here in this space that we play in. That does not relate to that higher-end leverage document, particularly as we don’t want to go down that path, but to the extent that the market comes back to us, we will take advantage of those opportunities. We are pretty active in the secondary market. When we see higher-rated credits and better credits that the price comes down around par or maybe a little bit less, we take advantage of adding the positions on a selective basis as well. So we can be pretty nimble in that way.

I would just say that relative to the pipeline that we have got in place today, even though we can never predict payoffs very accurately, I would anticipate a couple percentage point increase in the overall loan portfolio possibly in the next quarter. It is dependent on a lot of things.

Okay, that’s very helpful, thank you. Paul, I guess you mentioned that the public finance backlog you guys get and categorize as exceptional. I was wondering if the feeling was that it is some opportunistic borrowing ahead of raising rates or is it more a function of the economy getting stronger? Maybe municipalities are looking to do more borrowing. Any thoughts there?

Probably a little of both. There’s no doubt that any municipality has borrowing needs, but the question is how? Is it going to pick up a lot of borrowing with banks for a while just because it is quicker and cheaper to execute? We do some credits that we like, and clients will do some lending. There’s just a pickup, I think, across the board right now. Maybe it’s in anticipation of rates. Certainly, if I was looking at long-term financing, I would look to do something in this market. So I think that is driving part of it.

Okay, and obviously you guys had an exceptionally strong recruiting quarter. You mentioned in the press release that you think competition has been very aggressive, and we have been hearing about that as well. But I was wondering if you could give some comments about how that competition has changed over the last three to six months and whether you guys are still sticking with your upfront recruiting packages. Have those changed at all?

With our comment that we’ve had aggressive competition for a long time so this isn’t a new phenomenon. The last few years I would categorize that in the market. We have stuck to our packages; we have made no changes over the last year. We are focused on making sure it’s a good economic deal for us, and we are well aware we are lower in the stream. But it’s a positive self-selection criteria that people are not coming for the biggest check; they are coming here because they want to be here. It doesn’t mean we don’t lose some teams we’d like to have because some of those checks are large, but the people that like the culture and want to be prosperous over the long term end up taking the deal and coming. We haven’t made changes to that. I would say it’s a combination of technology and products that we can serve. A high or even just an acknowledgment when you start landing a lot of these large teams, it sends a signal to others in the market to inquire why did they come, what is Raymond James doing? It helps to build our recruiting momentum.

Great color, thank you.

Hey guys, good morning everyone. At the recent investor day, you spoke about looking to expand the advisory business in the UK, potentially through acquisitions or something that would look like maybe Lane Berry in the U.S. So just curious about an update on this front. Are you still having dialogue there and thoughts around your growth advisory in the UK?

We want to grow advisory in the UK; we haven’t found anything that meets our culture first, price, and immigration criteria. We’ve found some cultural fits but not anything we believe is attractive, so we stay close, like we do to firms here that we think fit Raymond James, that will be a great home for us, but we’re just not willing to do things that are priced that we think isn’t a good return for shareholders. I’m sure short term the results look good, but we treat the money like it’s ours, and we are shareholders. We haven’t found that opportunity so we haven’t done anything. We are still pursuing some M&A firm opportunities in the UK and Europe, and it continues to be one of our strategic initiatives to grow our cross-border M&A business. So that stays on our radar, and we’re actively talking to a lot of firms but we’re just slow in doing something. This isn’t about a short-term hit; it’s about a long-term addition to the team that will help us continue to grow the business. So we’ll continue to be aggressive in looking but very deliberate on executing.

Okay, thanks for the update. And then maybe a bigger picture on capital deployment. All the ratios continue to build during the quarter and obviously you’re looking at acquisitions, so I understand that maybe there’s some level that’s pegged for that. And then you also believe in a strong liquidity position, just for financial advisors, but is there any more discussion or contemplation around maybe moving some of the off-balance sheet customers’ cash into the bank to increase earnings? I know I have asked this before, but I am trying to think about other ways to drive some equal amount of returns with a doting capital position.

No, we look at all sorts of things. There’s no doubt that we could put cash in the bank and grow it off its capital base. We could take – we don’t really go out on securities, and we could take security positions that are longer. To get income, we could do that in the holding company or in the bank. There are lots of things we could do. We could hedge a lot of our rate risk, which we do, and that costs us money. We’re just not going to take those risks. We tell our clients not to take a lot of rate risks, and we just don’t do it here at Raymond James either. So yes, there are lots we could do, and we would look good for a while, and we could cross our fingers and hope we look good long term, but we’re more focused on long-term execution and not taking those kinds of risks. I’m not saying they’re bad risks; there are people that do them, but it’s not in our nature. What you see is what you get here. We also know we can grow the bank. It’s frustrating as we try to hit double digits to be just under double digits. We know we can do it, the banks will grow, but we’re sticking to our discipline on loans and on capital allocation for the bank. I remind people that half of our executive team’s restricted stock, which is taken out of their bonuses every year, is tied to ROE, so we’re as focused on ROE as you are, but we’re more focused on long-term return. We watch capitals discussed at every board meeting; we recognize we do have some excess capital balances, and so we’re not dismissing it, and I am sure we will be discussing it in the November board meeting, but there’s really no update on it.

And with respect to liquidity, I would just remind you that we do have a $250 million note issue that matures in April of ’16, and a year after that, in March of ’17, we have the ability to call our 6.9%, $350 million debt issue out there. So, those are on the horizon as potential uses of liquidity.

Okay, appreciate all that color. And then just maybe lastly for me for Steve, with respect to the net interest margin, should we maybe think there was some upward pressure heading out of the quarter? Just trying to think about it as a go-forward on the NAM, with all the moving parts there. And then, there’s a little bit of a pickup in the size of the loans. I was just curious if there was any specific sector that drove that or what was behind that?

Hi Devin, good morning. I would say yes, there is pressure on NAM; we’re trying to be disciplined. As I mentioned, in terms of the new loans that we’re adding on, I think there’s a likelihood that we’ll see some nominal, small reduction in that interest margin over the next couple of quarters but nothing too meaningful. I would say on the criticized loan front, Jeff alluded to, there was no real sector. Three loans, two of which were part of the downgrades in the shared national credit exam process. One other term loan that we downgraded ourselves during the quarter ended up in criticized status; none of that was in any one industry. It was all over the board. There was a consumer products company; there was a data center, so it was kind of all over the board.

Again, I think our credit metrics are really strong. You can look at the absolutes of the movements which I call rounding. You move a loan into the category and have material presented impact because the number isn't that significant to start with.

We were very encouraged by our non-performing assets coming down. As Jeff mentioned before, we had a large real estate loan that we had partially written down that we actually got a full recovery on during the quarter of full payoff. That was a material improvement. So we feel good about our asset quality still.

Thanks, and I appreciate you guys taking the questions. I’ll talk to you guys soon.

Hey, good morning guys. I wanted to talk a little bit about expenses. The comp. ratio, if you exclude option and security gains, which I wouldn’t think we’d pay our comp on, and I would think the comp ratio in private equity is also highlighted and what it is in the rest of the organization, it seems like you are close to the 69% comp ratio which would be one of your highest ratios in a few years. So I am just trying to get a sense, obviously it’s a great recruiting quarter. And if recruiting continues at this pace, can you get that back to your target of 68 or should we expect some elevated comp ratios for a while until the growth kind of offsets it?

I don’t see a fundamental change. In this quarter, to the extent that we get heavy recruiting in the independent channel, it’s going to drive that ratio. We certainly had elevated comp ratios in the equity capital markets because of the hiring and probably a little bit of underperformance in terms of growth and revenue and challenges over the debt commission. So I don’t –

Hopefully we’ll see a continued drive from PCG recruiting to keep recruiting at a high level. Even if it's a drag on current earnings, it certainly strengthens the platform for the next leg of the market. That happened even in ’09 when we were making significant investments in people in that market environment. I hope it continues to write it as a current drag on earnings. I doubt we’ll see this level of hiring in equity capital markets recur. That one is a matter of waiting for the people we’ve hired to be productive.

The irony is when you grow organically, whether it’s private clients or capital markets, it has a short-term drag. With your acquisitions, you may have some costs in a quarter, but the drag comes off, and it’s the same with the bank. If you do a loan portfolio, we have the provision expense. So, we do have some short-term hits when we have high growth in one of the segments, and I think that’s most of the impact you’re seeing this quarter.

No, absolutely. Okay, I appreciate the color and just maybe on the non-comp side, forgive me if I’ve missed this but I think last quarter that we talked about, communication and info processing was elevated as we accelerated some advertising. It was up even more this quarter. I think you highlighted some regulatory spending but I think you were sort of assuming longer term, closer to 60 and lower to mid-60s versus the upper 60s. Is that still a good run rate going forward or should is that going to remain elevated?

I think that current run rate is probably about right for the year-to-date, probably maybe the mid-60s. By the way, the advertising and all was in business development expenses.

The expenses for the three quarters will remain at $65 million, which I think we’ve been guiding the quarterly run rate. This one is a little higher, but we think that run rate is reasonable.

Okay, thanks for taking my questions.

Good morning guys. I apologize if I missed this earlier, but I really wanted to follow-up one question on the comp expense. Jeff, did you say earlier that the commission revenue was primarily driven by independent contractor activity, and that drove a chip in the comp mix?

The increase in the quarter in the PCG commissions was about 2.5 to 1; that is 11 point something versus 4 something in the contractor versus in the four something in the employee division, which obviously prizes higher comp associated with it. They got about an 80% payout versus 50% type payout in the employee’s channel.

I mean is this something that could continue and be a bit of a headwind on comp versus more one-time?

Yes, we had pretty good recruiting results, and it may in the short run but in the longer term it will become productive. My guess is it will be about where it is because they are both recruiting at about the same rate right now. So this particular quarter just had an abnormal imbalance.

I hope we continue the recruiting rate at the cost of that quarter. I don’t think what we accomplished was an anomaly in terms of recruiting, but we had a lot of people come in one quarter.

Hey guys, a quick question on the Department of Labor. I believe you guys and many; many others in the industry are fairly supportive of a uniform fiduciary standard as opposed to the bifurcated approach we’ve got now with the DOL on one side and the SEC on the other. I get it that having a uniform standard would really solve the inter-agency regulatory conflicts and reduce complexity. But I am also just wondering if you did have something like that, would it not really force the majority of your customers in the industry into the fee model as opposed to the commission? And so just trying to square those two. Obviously advantages on one hand but on the other it might be disruptive if uniform fiduciary ends up dragging a lot more people under the fee model.

I don’t think. First, we have always been – I think our industry is we have always been looking in the best interest of the clients. Whether it’s a client’s best interest standard or fiduciary model, whatever. Our job is to do good work for the client’s period. Being held to that standard is nothing, and we think we have held to it now. Whether it’s commission or fee-based depends. So if someone wants to buy Apple stock or some Wal-Mart stock for and leave it with there for five years, why should they be charged an offset management fee? They can go fee-based. Why should they pay every year for five years? They belong to long-term hold assets. Commission certainly has its place in compensation. I think what’s more important is the client’s interest. But first it’s fully disclosed how they are being paid and why they are doing things. This is over simplification; that ‘feel good’ and commission is sad. We went to amide off incident and he was fee-based. So yes, oversimplification of what’s in the best interest of the client. So that’s what we’re fighting for, we’re fighting for the client’s choice. Frankly, for economics, commission is good for a lot of accounts, and yes, it could be abused, so can fee be abused. You need to have good advisors looking after their client.

Understood. Thank you.

Great guys, I know lots of earnings coming out last week and this week, but thanks for your thoughtful questions and for following us. I hope we could answer all your questions I just characterized. I feel very good about the quarter, especially when you look at the key driver of assets, the advisors, and the investments we’re making. I know sometimes quarter to quarter is choppy and that you have to look at sequential quarters, but if you look at the year as a whole, I think we’re right on and, given any reasonable market going forward, I think we’re in great shape. So, thanks for joining the call and we’ll talk to you soon.