Raymond James Financial Inc (RJF) — Q4 2018 Earnings Call Transcript

Thank you, Phyllis. Good morning and thank all of you for joining us on this call this morning. We appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chairman and Chief Executive Officer; and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions. Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, acquisitions, our ability to successfully recruit and integrate financial advisors, anticipated results of litigation and regulatory developments or general economic conditions. In addition, words such as believes, expects, plans and future conditional verbs such as will, could and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note that forward-looking statements are subject to risks and there can be no assurance that actual results will not differ materially from those expressed in those statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q which are available on our website. During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these measures to the most comparable GAAP measures may be found in the schedule accompanying our press release. So with that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial.

Thanks, Paul. Good morning, everyone. So we've certainly had an interesting week in the market especially for financials and I know a lot of you will have some questions regarding our quarter. So I'd like to start first with a perspective on the quarter and the year. The bottom line is, we had a good quarter. We had record revenue and record profits and on the back of a very good year, again, with record revenue and record profits. But most importantly, we ended with a record level of client assets under administration, record financial assets under administration, record level of bank loans, record number of financial advisors, and these are the metrics that really drive our business going forward. I believe we're in good shape heading into the 2019 fiscal year. However, the equity market volatility and direction certainly raises some questions and certainly we'll talk about cash balances and deposit betas throughout the industry have some questions. First, let me reflect on the quarter and the year and then I'm going to turn over to Jeff Julien who's going to go over some detail on line items and will discuss maybe some run rate on some of those line items. First, for the quarter, we had record net revenues of $1.9 billion, up 12% year-over-year and 3% over the preceding quarter. We had record net income of $262.7 million or $1.76 per fully diluted share, and adjusted net income of $250.8 million or $1.68 per diluted share up 14% year-over-year, and 8% over the preceding quarter. The variance to the consensus models was almost entirely driven by two lines, our valuation write-downs, which I'll let Jeff talk about, and really our other expenses. The biggest line variance was legal and regulatory since that is always the one that's hard for us to estimate. Throughout the year, we always have various cases and we have to evaluate them as we get more information, and we try to reserve what we believe are the right levels, so as we get more information we often adjust those reserves. So we believe the run rate is lower than what we've experienced in the last two quarters, but it's an inherently unpredictable and episodic type of line, so it makes it very hard for us to predict or give you guidance on a quarterly basis. Turning to the fiscal year, our net revenue was $7.27 billion, up 14% over last year, and our net income of $856.7 million was up 35% over last year. If you look at our adjusted net of $964.8 million, it's up 26%. Now, the lower tax rate certainly helped almost everyone over the last year in all industries, but if you take a look even at our pre-tax income of $1.3 billion was up 42% over last year, and our adjusted pre-tax was up 17% over last year, so good solid even non-adjusted tax earnings for the firm. If you look at our ROE of 14.4% and our adjusted ROE of 16% for the year, we had very good ROEs considering our strong capital position. And again, we measure our ROEs on total capital, not on tangible. Most importantly, as I said before, we ended the fiscal year with record quarterly client assets under administration of $790.4 billion, up 14% year-over-year and 5% sequentially. Record quarterly financial assets under management of $140.9 billion, up 46% year-over-year, which was aided by the Scout and Reams acquisition, but up 4% sequentially. Record quarterly financial advisors of 7,813, up over 6% year-over-year and over 4.5% really just from organic recruiting, a fantastic record recruiting year, which I'll talk a little bit more about later, and net loans of $19.5 billion with strong credit metrics. Overall, all of our future growth drivers are in good shape. I'm going to spend a second on the four segments before I turn it over to Jeff. Private Client Group had record revenue for the year and the quarter, up 15% over 2017. Record pre-tax year, but down quarterly due to other expenses that we'll get into a little bit with Jeff. We had record recruiting, and by our count, over $300 million in trailing 12. Just to put that in perspective, that's a little bigger than the Alex. Brown acquisition and that was just through recruiting. And on top of that, with regrettable attrition still staying under our 1% target. A really fantastic organic growth in Private Client Group. Fee-based accounts were up 24% year-over-year and 7% sequentially. In the Capital Markets business, we had record investment banking revenue of $155 million for the quarter or $441 million for the year. It was really driven by record M&A for the quarter and the year. Great performances, particularly by our Tech Services, Health Care, and Real Estate where we had our largest fees. Additionally, our Mummert acquisition has really increased our cross-border activity. Tax credit funds surged, which had 60% of their production really in this quarter for the year, because we had a delay. Remember with the Tax Act changes people were slow to kind of tax-adjust the value of credits, and as that worked its way through, we've caught back up. We think we'll see a similar run rate, not for the quarter, but over the year next year. But it was a little bit of a catch-up quarter for them. Equity underwriting remains challenged, given our historical strength in real estate and energy, which have headwinds, so it was a challenging year for us there. Public Finance was almost flat, which was a big plus given the advance refundings, almost 30% of the Public Finance business kind of went away with the Tax Act. Fixed Income still remains very, very challenging, both with low rates and a flat yield curve. But I'm very proud of our team; they've done a great job of managing costs and inventories, given a very, very difficult environment. Asset Management, record quarterly and yearly net revenues and pre-tax. We had record quarterly financial assets under management, it was up 46%, aided again by the Scout and Reams, $27 billion during the year, but even sequentially, another 4% gain. Raymond James Bank, record net revenue and pre-tax for the quarter and the year. Record net loans, as I talked about earlier, which were up 15% year-over-year and 3% even sequentially. So, NIM improved during the year, slightly in the last quarter. I'll let Jeff get into that; there are a lot of moving parts. But overall, great metrics, a strong year and quarter despite two items that Jeff will now go into some more details about before I continue on with the outlook. So, Jeff?

Thank you, Paul. Let me jump right in. I have a fairly long list today starting with our largest revenue item. There's a detailed breakdown between Private Client Group and Capital Markets on pages 9 and 10 of the release of securities commissions and fees. You can see for the Private Client Group we had nice gains for the quarter, year-over-year and sequentially. The shift to fee-based accounts, which really peaked about a year ago in light of that pending DOL rule, has continued for the first part of this past year and it's at a slower rate now but there's still a bias toward fee-based assets. So basically within that PCG line item, fee growth overcame what we've seen for the last several quarters in the way of a transaction decline or decline in transactional-based revenues. So the fee growth has continued. By way of looking forward, you can see that fee-based assets in Private Client Group accounts were up 7% sequentially, from June to September, which gives us a good start billing-wise for the December quarter; those are all billed quarterly in advance. Within Capital Markets, you can see the continued weakness; the year-to-date comparison on page 10 really shows that best as both equity and fixed income declined year-over-year on the commission side. Paul mentioned the investment banking line which came in ahead of expectations driven by record M&A fees both for the quarter and year-to-date, though certainly the fourth quarter surge and tax credit fund fees were a contributor as well. Again, if you look at the year-over-year detail on page 10, you can see underwriting revenues down 27% for the year, which certainly presents an opportunity for us going forward. Investment advisory fees, although a very large number, are pretty highly predictable and are very correlated obviously to assets under management, and that was pretty much right in line with everyone's expectations, so not a lot to say about that line item itself. However, I do have quite a few details on interest earnings. There are several interrelated factors. Let me first start with sweep balances which are shown on page 12 of the release. You can see they're down about $2 billion for the year as clients have been seeking higher-yielding alternatives. This is not unique to us; this is industry-wide. But that certainly has implications for our net interest earnings, as well as account and service fees, as I'll talk about in a second. By comparison, many of our peers are substantially higher in terms of the percentage of their cash balances being swept to their proprietary banks, and that generates interest income at the bank level. Those balances swept to outside banks generate fee income for the company, and that's included in the account and service fee line. On page 12 you can see the shift as we continue to grow Raymond James Bank throughout the year; the decline in cash balances, which I mentioned earlier, was fully absorbed by the third-party banks, which ultimately lowered our fee income in that account and service fee line. The third aspect of interest earnings has to do with rate spreads and deposit beta. With respect to third-party banks, we had an interesting dynamic this most recent quarter which was noted in a couple of your reports: about 30% of our earnings side within the outside bank sweeps tied to LIBOR, the rest tied to the Fed funds effective rate. Interestingly, those two have not moved directly in sync. The spread between LIBOR and the Fed funds effective rate actually narrowed in July following the June rate increase and stayed more narrow during the September quarter than it had been previously. Conversely, we benefited from an extraordinarily wide spread between the two in the December and March quarters. As a result, fee from outside banks not only was impacted by lower balances, but was also affected by those tied to LIBOR relative to our deposit rate being paid. The narrowing caused some compression, to some extent. That say, those were the primary reasons we missed your expectations on the account and service fee line due to both the balances and the compression of that spread between LIBOR and Fed funds effective. With respect to the NIM at the bank, that was also impacted by that same LIBOR, Fed funds dynamic. Their deposits and our bank sweep program are generally based on rates that we set pretty statically throughout the quarter across all deposit products, but a lot of their assets, particularly the C&I loan portfolio, are pegged to LIBOR, and when that tightens relative to Fed funds, you'll see the same dynamic. I would say those were the primary reasons we missed your expectations on the account and service fee line. Regarding other revenues, as Paul pointed out, that was one of the two line items that caused really the entire miss for the quarter. It was negatively impacted by this private equity valuation write-down, related to three separate investments. It was partially offset by noncontrolling interests and several smaller items which were all negative for the quarter. But it wasn't just the $11.9 million net write-down; we've become accustomed, unfortunately perhaps even complacent, to realizing numbers typically between a few million and up to $10 million or $12 million per quarter from all these private equity investments. So the swing was significant, going from about a $5 million or $10 million gain in the quarter to a $12 million loss, which was the difference in that line item versus expectations, resulting in about a $15 million to $20 million swing. On the expense side, the compensation ratio came in very nicely for the quarter at 65.2% and it was 65.9% for the year. We're actually going to stay with our target of 66.5% or less for now. We have aggressive hiring plans in certain support areas as we continue to grow the sales force. The PCG comp has moved up slightly due to grid creep as people have become more productive and we're hiring financial advisors at higher levels of production; certainly, with the successful hiring we have more amortization of upfront money deals, and those are good expenses because they're related to growth. But, it will cause some pressure on the comp ratio, so we're going to stick with our previous target for now. The communication and information processing line ended slightly above our guidance; we came in at $91.5 million for the quarter, we thought it would be $90 million. In total dollars, that was up 18% over 2017, but we do not see a similar rate of increase for next year. We think it will probably be more in the 10% range. For next year, we have several things underway involving FA desktop, onboarding systems, enterprise financial reporting systems, data security, regulatory tools, etc. A lot of which are in progress. So when we sorted it all out and looked at what's going to come online and begin amortizing for next year, our best estimate is that that line will be up about 10% as I mentioned, which takes us from this $91 million level to about $100 million a quarter for next year, but again, that's subject to market and overall results changes. In the business development line, I'm pleased to say it came in right in line with our previous quarter's revised guidance, where I stated it would be between $45 million and $50 million a quarter, trending toward the higher end in the June and September quarters when we have the majority of our conferences and trips, and lower in the other quarters, came in at approximately $48 million, which is a good result. I think we'll stick with that guidance for next year. December will probably be the lowest of the year, while June and September will still be the two that are the highest, and March will be somewhere in the middle because it will likely have some lower expenses. The bank loan loss provision was somewhat consistent with expectations, though it looked a bit high concerning net loan growth with our 1% allowance, particularly in light of improved credit metrics shown in the release. During the quarter, we had a couple of special reserves, particularly I'll mention one related to hurricane-affected areas in the Carolinas from Florence. For the upcoming quarter, we'll evaluate whether we need to do something similar for Michael regarding any loans we have outstanding in the Panhandle. Beyond that, there weren't many surprises in the loan loss provision. Other expenses, as Paul touched on, we thought the preceding quarter's legal and regulatory reserves were elevated, and we managed to surpass that this quarter. While there are other things beyond legal and regulatory reserves, that was the dominant factor. There are consulting fees and some recurring expenses that continue to rise as we grow. For next year, looking at what our expectations might be, excluding any outsized legal reserves, we would expect this line to average in the high-70s to $80 million, up from our previous run rate of $72 million a quarter for last year, which ended up being a lot higher than that in the last two quarters. I'd like to touch on the tax rate for a moment. The adjusted tax rate for Q4 was a bit high at 28.8%, but for the year, due to some adjustments we made, we tried to refine our estimates relative to the Tax Act. The adjusted rate of 26.7% for the year was actually slightly below our 27% to 28% guidance number. For 2019, bear in mind, given our September fiscal year-end, we had a blended tax rate for federal purposes at 24.5% last year, which drops to 21% for fiscal 2019. So, we'll get the full benefit of that lower federal statutory rate. We project a combined state and federal rate of somewhere between 24% to 25% for next year without taking into account any impacts from COLI. Just a reminder that while the federal rate was lowered to 21%, it doesn't really reflect the effective rate because several items have now become nondeductible, like a lot of entertainment expenses, a good portion of FDIC premiums, some executive compensation, etc. So the 21% really is 21%, but it's certainly going to be lower than it was this year. Versus our targets set last year, I'm pleased to say they were all met except for the Private Client Group margin, where we've discussed several impacting factors. Interestingly, the shift of client cash sweeps to Raymond James Bank actually is a cost for the Private Client Group, because they earn that entire account and service fee from outside banks, but when we shift to the bank, they get reimbursed just for the administrative cost of maintaining the sweep accounts, which ultimately resulted in lower revenues for that segment. For 2019, we've recomputed the appropriate charge from the bank to Private Client Group for generating and maintaining all these sweep balances and accounts, and this re-computation is going to result in about a $60 million additional payment from the bank to the Private Client Group next year, which will have no consolidated impact on the company at all, but will significantly affect the segments for those of you who model on a segment basis. Lastly, as I mentioned before, there's been some compensation increases in PCG due to grid creep and the rate amortization. Overall, we're going to maintain our targets at this time; that's based on the current deposit beta and the current spread being maintained throughout fiscal 2019; that’s probably more at-risk should we experience a flattish equity market since the quarterly billings are crucial for the Private Client Group revenue stream. A couple other points: one, share repurchases. We began repurchasing shares during the September quarter. We ended up purchasing just over 400,000 shares, aiming to offset dilution. We've discussed this in the past, and we hope to continue that throughout the year to get closer to offsetting dilution for the entire year. Lastly, regarding the revenue recognition standard, we're among the last adopters, I guess, given our fiscal year. This standard will not have a significant impact on revenues and expenses; there will be no impact at all on segments or the bottom line. However, it will alter the look and line items within our P&L. Sometime in late November, we'll be filing an 8-K which will provide eight quarters of our results in the new format. Obviously, we will make ourselves available to discuss what the composition of each of those new line items is with any of you who have further questions on that. So, there will be a new look and feel, but shouldn't be much change to the overall results. Back to Paul.

Thanks, Jeff. We know we have a lot going on, and well, I’m sure there will be questions, so I’ll try to sum up fairly quickly. As we look at the quarter by segments, starting with the Private Client Group, fee-based assets were up 7%. This business bills quarterly in advance, so we should have some tailwinds in that segment from that. But, of course, we'll see what happens with client cash in this market, which will have some effect on interest. Jeff talked about the change to the bank. But more importantly, the recruiting pipeline still remains robust. We're coming off a record year. It took us from 2009, coming from a down year to our best year in recruiting. The backlog looks very strong and we expect that recruiting will continue at a robust pace. In Capital Markets, we're optimistic about the M&A backlog. Again, that's market-dependent, so hopefully, this week was just an anomaly. Underwriting coming off maybe a low base looks like it's improving; we hope that we get a little lift from that bottom. Fixed income is still really tough; even with the volatility we've experienced lately, the market remains a tough area where people are waiting and watching. We expect that to continue to be a tough part of that segment and see weakness in institutional commissions and trading profits; we expect that trend as well. In Asset Management, we're coming off a great year and believe we will still see continued inflows, especially as we keep recruiting financial advisors and they join. Now, one of the tailwinds there is that business is billed on average balances or quarter-end balances, so the market could take a toll on that depending on what happens here going forward. At Raymond James Bank, we had record loans and an attractive NIM. Short-term increases in September should help; again the LIBOR movement that Jeff talked about is going to have the biggest impact on spreads there. But we’re looking at remaining disciplined in our underwriting and keeping our positions, so we’ll just see what happens in that market as we move forward. But again, I feel good about that. So net-net, I believe we’re well positioned after coming off the year and into the quarter. The business is in good shape, but we’re aware we’re in a 10-year bull market, and markets could correct for a period of time, which certainly affects our business. Cash dynamics in this environment are certainly interesting; often when corrections happen, cash allocations rise, so we'll see what happens. Pressure on interest rates throughout the financial system indicates that the cash and interest beta will definitely impact results. However, we are in a conservative capital position, so we always consider what can happen and if we're ready for bad markets. Overall, I believe we're in a good shape to be opportunistic if we face a tough market, and I appreciate everyone joining the call, and I'll turn it over to Phyllis to get to your questions.

Hi, good morning.

Good morning, Steve.

So Jeff, I just want to start off with a question on the account and service fee line. I thought you guys provided some really helpful detail there. It looks like revenues are down about 8% sequentially, and the balances on third-party sweeps are down a commensurate amount. I know you had talked about LIBOR driving some more muted expansion in that third-party sweep yield. I'm just wondering as we look ahead if Fed funds and LIBOR move in tandem and betas stay below 100%, would it be reasonable to expect some additional expansion in that yield in the near to intermediate term?

Yeah. It certainly is possible. Bear in mind, that account and service fee that we show there is net. That's net of what we paid to clients, it’s net of the servicing fee we pay to the company that – Promontory that does the action. So it's also certainly impacted by the deposit beta. But is it reasonable to expect that? Yeah, it certainly is possible. I don't know how to handicap it.

Long term, they kind of move in tandem but short term, the spreads come in and out, so.

And again, that's only 30% of those balances, and 70% are tied to Fed funds effective, which is more correlated with how we set deposit rates.

Understood. And I’m sorry guys, I can't help myself, but I have to ask a question on share buyback and capital deployment. If you look at the last time you had done meaningful share repurchase, it was fiscal 2Q 2016. Shares were trading a little bit above 12 times. Now you're trading at a meaningful discount to those levels. Nice to see some share buyback in the quarter, although realistically your capital ratios continue to drift higher and didn’t make much of an impact on the share count. Just given all the positives that you highlighted in terms of what you're seeing in your business— recruitment, organic growth— how are you thinking about the stock at these levels? What’s the rationale for not pursuing more aggressive buyback here?

We think our stock was lower yesterday than it was a couple weeks ago, so. Our capital plan hasn't changed. We kind of told you we were on to a share dilution repurchase program we're committed to. We haven't changed that strategy unless the board decides differently. But I assume we're going to continue on that. We're looking for opportunistic deployments of capital. We've been active in looking for those opportunities, but we're pretty disciplined about that. One good side of a down market may create more of those opportunities. If the market recovers, that's fine. We're going to stay disciplined. You’re going to see us target repurchases to take dilution and be opportunistic if we think the stock drops at attractive prices. We haven't changed that plan from what we announced last year, so we’ll stick to that for a couple more quarters.

Buying back dilution equates to something around – I'll say just under 2 million shares a year, so 1.8 million to 2 million shares a year. That gives you some guidance on it. I don't know if it'll be ratable per quarter; obviously, as the stock gets less expensive, you’d probably see it accelerate and vice versa.

Got it. And maybe just as we think about capital management, Paul, you made some remarks about how the markets come in, and you might see some potential properties or assets trading at more attractive valuations. What's your appetite for M&A at the moment? Where do you see the most attractive opportunities for deployment here?

Our appetite for M&A hasn't changed. We’re still looking for opportunities in the Private Client Group, Asset Management, and mergers & acquisitions. When we find the right opportunities that are cultural fits or strategic, and at a good price, we'll execute. Pricing can get more competitive in a down market, which can provide us with more opportunities. We’re not rooting for a terrible market, but if that occurs, I think we’ll be well positioned. We’ve been active this year; we just need to find the right opportunities. We're talking to firms that could potentially add to our capacity and strategic execution all the time. That hasn’t changed; we just need to find the right triggers.

Not that we’re rooting for a bad market, but two of the silver linings are that it creates some good opportunities, typically in the acquisition space; secondly, as Paul mentioned earlier, typically raises clients' allocations to cash, which would certainly be a welcome reprieve from the trend we've experienced.

Understood. One quick follow-up for me. Jeff, since you made that last remark on client cash dynamics, since we’ve seen the correction here in October, and it’s been at least sustained for a number of weeks, have you seen any changes in terms of client cash allocations?

Not yet, but it’s just too early to see that. Actually, for the last several months, we've seen cash levels stable, therefore, we may have found a bottom. Really what's happening is that as we continue to have successful recruiting results, new client cash balances coming in have somewhat offsetting those moving to higher yielding alternatives. But if we’re going to see a reallocation, we haven’t seen it in a meaningful way yet; it’s still early in this volatility cycle here, only about a week in, so we’ll know a lot more in a few weeks.

Understood. Thank you both for the update. I’ll hop back in the queue.

Hey. Good morning.

Hi, Jim.

Maybe just talk a little bit— I think you noted, Jeff, that you think you would be willing to kind of drift above your self-imposed cap of 50% of client deposits on the balance sheet. Is there a new limit? How do we think about what that capacity is? I mean certainly you have enough capital to do it, so how do we think about your internal thought process regarding how much you could do that?

We kind of view the 50% limitation really as a constraint on what the bank deploys in the loans, which are less liquid. If they're going to just invest in liquid short-term securities, high quality, and not really any credit risk to them, then they still are a source of liquidity if the bank needs it. You did trigger another thought: one of the guidance numbers we've typically talked about has to do with the bank's NIM. It should drift down a few basis points this quarter. The LIBOR, Fed funds spread is a little hard to predict. My guess is, particularly if we continue to grow the securities portfolio ratably, the bank's NIM is going to be in the range of 3.20% to 3.25%, although that’s maybe a bigger range, so perhaps 3.15% to 3.30% considering our loan mix and how fast the securities portfolio grows over time.

Got it. No, that's fine. All good.

Just remember that we talked about the NIM coming in at the bank if we put it into securities. Overall, though, we'll have higher earnings. That’s why...

Higher earnings and higher ROE, just a lower NIM.

Right. So you're not seeing much of an impact in this quarter from the increase in LIBOR that we saw? It flattened out in 3Q, but it has sort of increased of late. But it's a mix issue is what you're saying not...

Yeah. We haven't seen yet, but bear in mind, all the loan repricings are typically either at 30-day anniversaries or 90-day anniversaries, depending on whether they pick the one- or three-month LIBOR as their base. A lot of those even didn't hit from last quarter's rate hike, and we haven't hit, until they repriced more recently. A lot of them continue to hit throughout the quarter. The loans lag a little on the way up, but you also lag a little on the way down, which helps you. Admittedly, those adjustments don't reprice overnight.

Right. Okay. Maybe just one other question on the financial advisor recruiting. You talked about, I guess, for the full year the level of recruiting was trailing 12 months about $300 million, in production. How much of that has been onboarded already? Is there still quite a bit of pipeline remaining for new FAs?

There's always a year—it's interesting, some people can bring it over right away, in the first 90 days, and some take a year-ish. As you hire and they're lagging in, so there's still some tailwinds behind that.

In this year, we had a lot that were in last year's number that still came on during the course of this year.

Okay. All right, thanks.

Okay. Thank you very much for taking my question this morning. On the potential yields coming off of the client assets, if you could maybe talk to some of the trends you're seeing between the managed fees portfolio versus the brokerage? It looks like retail revenues overall were a little soft compared to where we were thinking about. I'm just trying to understand if there's any sort of pricing pressure or activity issues within the assets themselves.

I'm not exactly sure what you're asking regarding the question. We're seeing cash movements in the money markets and other instruments, but we don't have— many of the big banks have tiered programs where they'll go into deposit levels like their demand deposits, money market, super money market, CDs, and you can see where big banks are definitely increasing prices; in our deposit program. We averaged about half of that deposit beta. The cash we're losing looks like it's going into money markets within our system. We earn less off of those, but that pressure continues. But I'm not sure exactly what you're looking for.

I think where we're seeing— we’re looking at the revenue yield on fee-based accounts versus commission-based accounts in the Private Client Group.

Exactly.

The revenue yield on fee-based accounts has been pretty consistent over time. As those accounts grow in size, both with market appreciation and just larger clients, you would see that yield come down based on the larger account sizes. In the commission-based accounts, as Jeff mentioned in his opening remarks, they have been subdued in terms of transactional commissions, but then you get the market appreciation. Therefore, when you look at the revenue yield with subdued transactional commissions over higher asset levels, then the yield does go down on those, to your point.

The only caveat I would add is that when you have market volatility like we've had, typically that increases transactional activity to some extent. Again, it’s too early for us to know that, but if that remains the case throughout the quarter, we may see a slight pickup in transactional activity; we'll have to wait and see.

However, our fee-based continues to grow, as a percentage it is less impacted than it used to be.

Right. Sorry if my question wasn't clear. Second question is you'd given I think some sort of view of how you see the quarters playing out in terms of business development, but I didn't hear— maybe I missed this, if I did, I apologize. Did you give a growth rate that you expect to see relative to the seasonal pattern?

Well, that $45 million to $50 million a quarter range is up from we used to average in the low-40s. So it's another expense that's up probably a 10% plus increase. Just again, it is a more controllable expense. However, I will point out that if our fortunes reverse here, there are a lot of conferences, trips, things like that that are in there, advertising, branding, things that we can control, so that one is a more controllable line item. But based on our current operation levels, we still think that rather than averaging in that $40 million or $42 million range as it did last year, it's probably going to be between $45 million and $50 million for the year, and that is an increase from where it's been running.

I think one of the dynamics— people talked about our expense growth. When you recruit FAs, you don't get all the revenue day one. That means you have them in a branch, hire their assistants, hire the support needed for compliance and oversight. We have a lot of expenses to onboard them, which are ahead of the revenue flow. So as long as we continue to recruit, you’re going to see that expense growth continue.

Yeah. Okay. Thank you very much.

Hey, great. Good morning, everyone.

Devin.

Hey, Devin.

I guess another expense question here. I heard the comments on all the ranges that you gave, and it sounds like all of that is based on the expectation of another strong recruiting pipeline as well. So I want to pose a hypothetical here. To the extent you had a quarter where you didn't recruit any financial advisors— which hopefully isn't the case— can you maybe just give us any sense of how much lower expenses would be? Or maybe say it differently, when you have these big recruiting quarters like the last several, and again, I know there's a lot of lumpy expenses and it's not always mechanical, but can you remind us of kind of the big buckets that are impacted? Just really trying to think about the incremental expenses in the system here as a function of what is a really good situation in recruiting.

Devin, on a quarter, it's pretty hard to react; we're building infrastructure and costs as part of the plan anticipating recruiting. If it stops, some of the transition expenses would end, but we'd still have support, compliance, oversight, all those fixed costs in place. Over time, we would adjust. We'd adjust in terms of headcount, bonuses, payouts, but over a quarter, if music stops, expenses won't really be lower.

If you're talking about if recruiting slowed down dramatically, you'd see probably lower business development with fewer headhunting fees, ACAT fees and things like that. You'd also eventually see less in comp due to less amortization of some signing deals. But it would take a while for that to work through the operations to have a meaningful impact across many other line items.

Yeah. Understood. I appreciate that. And then just a follow-up here. Just maybe a little historical perspective around financial advisor recruiting— when we hit patches of volatility in the last few months, does recruiting get impacted? What's in the psyche of advisors? And furthermore, in an economic downturn, does recruiting shift? Would you expect it would shift as people take a pause?

I guess, two pieces: our best year until this year was 2009, revealing that advisors are willing to move; in fact, we even had to place limits on recruiting back then since we could only handle so much. Certainly, during times of volatility, they're going to question their roles, spending time with clients to explain changes, which may lead to an episodic slowdown for a period, but I don’t think it will change the recruiting trend significantly. Over the last decade, recruiting has continued to grow since the recovery. You could have episodic periods of slowdown due to distractions, but also a lot of people are attracted to our value versus where they currently are.

Yeah, Devin, it seems like recruiting used to be more sensitive to the economic environment than it is today. It seems to relate more to what's happening at the competition or their current status than the overall market condition at this point since in good times, advisors didn’t want to disrupt their revenue streams. We’ve had a strong market for a lot of years, which hasn’t slowed down recruiting since it's more about their satisfaction with their current firms than the overall market condition.

It could impact recruiting; it's just early to assess how sustained that will be, but I don't think it will significantly change much— it would probably cause just more of a pause because of changes.

Got it. Very helpful. Thank you. I apologize if I missed this, but just on the tax credits business. I know you get back to the full year level just from the back of this last quarter. I know it’s a lumpy business, but for modeling purposes, how should we think about a starting point? Is this kind of $50 million level you have been doing still reasonable? Any further help you can provide would be appreciated.

I think it probably won’t deviate significantly from the current annual run rate. The last quarter was just a catch-up from many projects that were in progress. I would annualize the last quarter.

Yeah, I get that one. Great. I appreciate it. Thank you, guys.

Thanks, Devin.

Great. Thanks, Phyllis. We appreciate everyone joining the call and we're anxiously watching the market. We’re not anxious, but we are watching the markets like everyone else. We look forward to an interesting quarter, but believe we’re in a strong position to execute no matter where the market goes. Thanks for your time this morning.