Raymond James Financial Inc (RJF) — Q3 2019 Earnings Call Transcript

Thank you, Jessa. Good morning and thank you all for joining us on the call. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer; and Jeff Julien Chief Financial Officer. Following the prepared remarks, the operator will open the line for questions. Please note 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, anticipated results of litigation and regulatory developments and general economic conditions. In addition to words such as believes, expect, could and would, as well as any other statements that necessarily depend on future events, are intended to identify forward-looking statements. Please note 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 Form 10-Q, which are available on our website. During today's call, we'll also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release. With that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?

All right. Thanks, Paul. Good morning, everyone. Thanks for joining us. As usual, I'm going to give a brief summary of our results for the third quarter of 2019 and then I'll turn the call over to Jeff, who will give more detail. And then I'll come back to discuss our outlook and open up for questions. Overall, I am pleased with our results for the third quarter, despite some elevated expenses and decline in Investment Banking revenues that were both largely timing-related, business metrics were strong and I'm encouraged by the solid performance in a number of key areas during the quarter. Quarterly net revenues of $1.93 billion increased 5% over the prior year's fiscal third quarter and increased 4% over the preceding quarter. We generated quarterly earnings per diluted share of $1.80, lifted by higher Private Client Group fee-based assets and higher net interest income, primarily at Raymond James Bank compared to the same year-ago period. We ended the period with record results for client assets under administration of $824.2 billion, financial assets under management of $143.1 billion and total Private Client Group financial advisers of 7,904, as well as record net loans for RJ Bank of $20.7 billion. Annualized return on total equity for the quarter was 16.1%. And while it isn't a metric that we use, the world does seem to be moving towards measuring and reporting on return on tangible common equity. If you looked at our discussion in our last Analyst and Investor Day in June, our adjusted return on tangible equity on an annualized basis for the preceding quarter would have been approximately 180 basis points higher than the adjusted return on equity. Given a fairly consistent metric, we think that same result would be similar this quarter. Through the first nine months of the fiscal year, we generated record net revenue of $5.72 billion, which was up 6% net income of $769 million, which was up 29% and adjusted net income of $784 million, which was up 10% over the first nine months. Notably, all four of our core segments generated record net revenue during the first nine months compared to last fiscal year. Now turning to the segment results. In the Private Client Group, we generated net revenue of $1.35 billion and pre-tax income of $140 million during the quarter. Revenue growth of 6%, over both the prior year's third quarter and the preceding quarter, was largely driven by higher assets under management and related admin fees, as we continue to experience very strong growth of the Private Client Group assets and fee-based accounts. These fee-based account assets ended the quarter at a record $398 billion, representing 51% of total client assets in the segment and reflecting growth of 16% over June of 2018 and 5% growth over March of 2019. This growth has been driven by strong net additions of financial advisers, equity market appreciation and increased utilization of fee-based accounts, which we believe is a long-term trend that our industry will continue to see. Most importantly, financial adviser retention and recruiting remain solid, resulting in us achieving a record number of financial advisers of 7,904 at the end of the period, healthy net increases of 185 over June 2018 and 42 over March of 2019. Even in the increasingly competitive recruiting environment, our client-facing culture, multiple affiliation options and robust service solutions continue to resonate with existing and prospective advisers. Now let me touch on some headwinds for the segment. First, our client domestic cash sweep balances of $38.2 billion declined 9% from the prior quarter, largely due to quarterly fee payments, tax-related seasonality and increased allocation to other investments. We believe the decline in cash balances was slightly elevated this quarter as the conversion of the money market sweep option in June caused advisers and clients to increase their allocation to other investments such as positional money market funds. Cash sweep balances have decreased in July with quarterly fee payments that are made during the first month of each quarter. The segment also experienced elevated business development expenses this quarter due to the timing of conferences, recognition events for advisers and increased advertising expenses reflected in the Other segment. This resulted in similar sequential increase in business development expenses that we experienced in the year-ago period which Jeff will touch on.

Thank you, Paul. On the revenue side of the P&L, most line items had only small variances from your consensus model this time, which is good to see, as we've communicated the story accurately, especially with the new line items from a year ago. I'll focus my comments on a couple of the larger dollar changes from the previous quarter. First is our largest revenue line, the asset-based fee revenues, which increased by 12% sequentially, aligning perfectly with the growth in the PCG fee-based assets during the March quarter, the relevant period since these are billed quarterly in advance. This suggests that the 4% growth in these assets for the current June quarter should indicate growth in that line item for Q4, although it may not always correlate as it did this time. The other significant dollar variance was in Investment Banking revenues, which I believe you estimated fairly closely. The sequential decline was primarily due to a record M&A quarter in March, not because this current quarter was weak; it was simply coming off a record that was hard to follow. Thus, M&A revenues were down $40 million for the quarter. The details are in the press release on Page 11 if you have the same pagination as I do in the Capital Markets P&L. Overall, total net revenues of $1.927 billion, up 4% sequentially, were right in line with the consensus model. On the expense side, I have two positives and two negatives to share. I'll follow the order presented in the P&L. Compensation saw our comp ratio rise to 66.3%, slightly higher than in recent quarters. This was influenced by a few factors: one is the drop in M&A revenues, which have a very high incremental margin as we benefit from the productivity of those bankers. Secondly, we are beginning to see the effects of aggressive hiring over the last year in compliance supervision, particularly in the PCG segment. While the hiring pace has slowed, the impact is now fully evident in our P&L. A third factor is the independent contractor portion of our Private Client Group segment, which is somewhat larger than the employee portion, as reflected in the relative FA counts in the press release. It actually grew faster on a percentage basis this quarter, contributing to a greater payout that impacts the comp ratio. All of these factors explain why we didn’t revise our targets at the recent Analyst Investor Day last month, where we maintained our target at 66.5%. Thus, we are still below that for the quarter and the year. Communications and information processing expenses are trending well below our guidance at the year's start. We initially expected them to average in the high 90s, but they now look more like the low to mid-90s. This isn't due to significant reductions in spending, but rather because more funds are allocated to large capitalizable projects than anticipated. Over the last few years, we have steadily increased our capitalized software investments. Amortization of these investments will factor into our earnings guidance for the current and future periods. I should also mention that we adhere to conservative accounting principles, capitalizing only what is required by GAAP. We tend to assign shorter useful lives to the software we purchase or develop. The business development expenses were significantly above our guidance. Last year we discussed this in detail and predicted this line item would average between $45 million and $50 million per quarter, lower in the first two quarters and higher in the last two. While that annual guidance still stands, the range has widened. We were below $45 million in the first two quarters, but this quarter exceeded the top end of our projected range. I think our guidance remains correct, but the new range is likely $40 million to $55 million instead of $45 million to $50 million. Factors affecting this quarter, as Paul noted, included multiple FA recognition events and our largest conference of the year. Additionally, we spent $5 million on advertising this year, compared to barely anything in the first two quarters, and we expect a similar amount for the upcoming quarter. Overall, I believe we will be on target for the fiscal year but with a broader range than initially expected. Another positive this quarter was the bank loan loss provision. Several criticized loans paid off during the quarter, offsetting more than enough the provision tied to the $550 million of net loan growth experienced. Consequently, you can see that criticized loans declined, as indicated in the bank detail on page 16 of the release, dropping by about $50 million for the quarter. Net interest, which Paul touched upon, saw the bank’s net interest margin improve slightly by two basis points. Page 17 of the release provides further details about the bank's net interest margin. A key driver was our shift from crediting clients' cash balances based on total assets with the firm to crediting them based on total cash balances. As a result, our bank profited from this change, particularly as they handle the majority of smaller accounts which typically receive lower crediting rates. There was also a decline in loan yields on the corporate side tied to LIBOR, as the prediction of a Fed rate cut led to substantial movement downwards during the quarter. While callable loans weren’t repriced, those that were tied to LIBOR reflected this shift, contributing to the overall cost of funds changes we observed at the firm level. Our spread on funds swept to unaffiliated banks has remained stable, at just under 200 basis points. This is included in account and service fees rather than net interest. Cash sweep balances fell by 8.5% in the quarter. We mentioned at the recent Analyst Day that we had informed our sales force and clients four months in advance about the elimination of the money market fund sweep. As the June deadline approached, many opted to switch to position money market funds, leading to a reduction in sweep balances which took effect on June 11. While overall sweep balances have decreased, the RJBDP line, which finances our bank's growth and is our most profitable sweep option, grew slightly due to this conversion despite some runoff to other investments. As Paul noted, we're seeing some moderation in the runoff of sweep balances, which will impact both account and service fees, and potentially, to a lesser extent, net interest earnings moving forward. We will need to assess if speculation is accurate about nearing a bottom in terms of movements away from what we call operational funds that generally constitute investable cash. A common question we receive is about the impact of a Fed rate cut. I want to assure you we plan to remain competitively positioned at or near the top of our peer group across most account sizes. Thus, our impact will largely rely on competitive actions. Based on my observations at the Analyst Day, I estimate that if a 25 basis point rate cut occurs next week, we could see a deposit beta of around 60% to 80%, translating to a 15 to 20 basis point reduction for clients. This would have a modestly negative effect on firms following that deposit beta, likely compressing our spread by five to ten basis points. Each basis point translates to about $1 million a quarter for us, so a five to ten basis point change could be significant. To conclude, reviewing the segment results on page 8 of the release, three of our four main operating segments showed sequential improvements in both revenues and pre-tax income this quarter. The more stable segments include PCG, Asset Management, and the bank. Our Capital Markets segment is the most volatile and experienced a slight decline due to the exceptional M&A quarter in March. However, monthly results indicate revenue growth across all four primary operating segments, with pre-tax improvements in all but PCG, which faced challenges from declining cash sweep balances. We are continuing to support the growth of the bank, while the cash balances are being drawn from external banks where spreads would benefit the Private Client Group. They are also dealing with some elevated expenses related to compensation and business development that we've discussed. Ultimately, for the nine months, year-over-year improvements have been aided by interest rates and market conditions, even though we started the year with a significant decline in December and a 14% drop in the S&P. We really only had two strong quarters of fee billings, yet we are still showing notable year-over-year growth. Now, I’ll turn it over to Paul to discuss the Q4 outlook.

Thank you, Jeff. Firstly, in the Private Client Group segment, we are starting the fourth quarter with fee-based assets and accounts up by 5% compared to the previous quarter. It’s important to note that almost all of these assets are billed based on the balances at the beginning of the quarter, which should result in strong billings for this segment. However, we do have to consider declines in client cash balances, increased investments in other areas, and the potential impact of interest rate changes. Overall, we are seeing solid retention and recruiting of financial advisers. While we may not surpass last year’s record, we are close, and our recruiting pipeline is very strong. The employee segment has been particularly successful, building on the independent segment's earlier success this year. In the Capital Markets segment, while predicting the timing of M&A closings is challenging, our pipeline remains robust, and we are optimistic about that. Fixed Income results have seen improvement over the last two quarters, and the current rate environment is favorable for trading, especially as interest rates fluctuate. We have slightly right-sized the Fixed Income business and expenses this year, which has positively impacted margins. In the Asset Management segment, we entered the fourth quarter with financial assets under management up by 6% year-over-year and 3% sequentially, contributing to improved billings. The increased use of fee-based accounts in the Private Client Group and strong performance from Carillon Tower also support this growth. At Raymond James Bank, we started the fourth quarter with record loan balances and a healthy net interest margin, maintaining a disciplined approach to our loan portfolio. Our capital levels are strong, with a total capital ratio of 25% for the third quarter, and we are continuing to deploy our capital strategically. In the third quarter alone, we repurchased over a million shares for $85 million. For the first nine months of fiscal 2019, we bought back 7.7 million shares for $591 million at an average price of $76.70 per share. We still have $373 million available under the $505 million share repurchase plan approved by the Board in March 2019. We will remain proactive in mitigating share-based compensation dilution while also looking for additional repurchase opportunities. Following our recent investments in Silver Lane Advisors and ClariVest, we will actively pursue growth opportunities, but only if they align with our criteria for cultural and strategic fit, as well as reasonable integration costs. We are putting in significant effort to achieve this and will continue to adhere to the guidance we have previously provided. As we enter the fourth quarter of fiscal 2019, we are encouraged by several positive factors: a record number of Private Client Group advisers, a record increase in PCG fee-based assets, record high cash balance spreads, record net loans at RJ Bank, and a strong recruiting and M&A pipeline. However, we acknowledge the challenges posed by declining cash balances and the uncertainties surrounding potential interest rate changes, which are beyond our control but we are prepared to address. Now, I will hand it over to Jessa to take your questions.

Hey, thanks. Good morning, everyone.

Good morning, Craig.

So I just wanted to ask a question on the bank after the recent decline in interest rates. From your seat, how do you compare the relative returns between deposits allocated to the Raymond James Bank and also third-party banks? How do you determine the size of the Raymond James Bank?

Well, we look at return on our equity no matter where we put it. We get just under 200 basis points on our sweep and earn a 373 spread on our bank. So we just look at the return on capital, how we allocate it, and look at controlled growth in the bank. We have some internal governors on how large we'd like the bank to be, all of it for the business. But I think you're going to see a very similar strategy as we go forward that you've seen over the last few years both in size and how we deploy.

Got it. And just as my follow-up, we saw a little bit of a slowing in the break rate broker trend in the March quarter partly due to the backdrop including government shutdown. But I'm just wondering, have you seen a pick-up in the migration of advisers away from wirehouses and smaller broker-dealers given the improving equity market backdrop we've seen year-to-date?

Honestly, we haven't seen a lot of slowdown. We are again at pace to be nearer last year's record. You can see it by the number of advisers that we have now. If you look at the pipeline of commits and visits, it's very, very robust. So if anything there may be an increase certainly in the employee side. Independents have been really active the first three quarters, but the employee side is really active. And again it usually comes and goes with the market. But I'd say in all of our affiliation options, we're having very good results on recruiting.

Thank you.

Steve, hello. Are you on mute? Yes, I apologize for being muted. There was a lot of coughing in the background earlier, so I decided to mute myself.

No problem.

Appreciate some color on the high comparable per role in the quarter. I'm just wondering in terms of the revenue outlook, if I look at Street expectations just given the forward curve, people are anticipating, I think rightfully so, continued fee momentum helped by strong organic growth. But the Fed easing cycle which is beyond your control will weigh on NII and spread revenue. And as you think about your ability to hold the line on comp, is that something that's achievable given the expectation for multiple rate cuts in the back half? I'm just trying to think about your philosophy if the growth from here is primarily driven by fee income versus NII.

We believe we will see good growth in fee income due to the current market conditions. The key difference between our revenue streams is that fee income growth has associated compensation costs, while net interest does not. Although I anticipate solid fee income growth, bolstered by a 5% advantage going into the quarter, any negative impact from net interest will be a challenge. Nevertheless, I expect that these challenges will be more short-term rather than long-term, and our performance will be influenced by market fluctuations. I am confident that we will manage effectively through these circumstances.

It depends on what you're projecting. If you're projecting Fed rate cuts then I think you're right in not assuming that NII is going to be a revenue driver. If you're projecting maybe one cut only or no cuts, then it's going to be dependent on how well we're able to hold onto or grow cash balances.

I understand. Just as a follow-up to the expense remarks you just made one of the other big areas of debate is any flexibility that you guys have to maybe manage non-comp lower at least slow the pace of non-comp inflation you've made a lot of investments in systems and technology over the last couple of years. That's clearly helped accelerate organic growth. Is there any potential to flex that as the NII backdrop becomes a bit more challenging?

I think we always have the opportunity to influence our revenue outlook in the medium term, specifically regarding expenses, both compensatory and non-compensatory. In Fixed Income, we improved from a breakeven position to a 15% return on equity, partly due to market conditions but mainly because of effective cost management. If we observe similar trends in other business areas, we will need to enforce more cost discipline. However, it's true that many of our higher expenses are linked to supporting and keeping up with our adviser growth, whether that be through support, compliance supervision, or systems investment, which has significantly contributed to net adviser growth. This does, however, affect short-term expenses. To better manage our compensation numbers, it would be beneficial to slow down recruitment, although I don't believe that's a favorable long-term strategy. Nevertheless, we have the flexibility to adjust as needed. Historically, in any economic slowdown or recession, we've managed costs effectively, and we will continue to do so if we find it necessary.

Thanks Paul. And just one follow-up for me on account and service fees. You quoted the spread on off-balance sheet cash at 200 basis points. It looks like some intra-quarter volatility in terms of the movement in balances impacted the calculated fee rate. I'm just wondering given where the balances exit the quarter in June, what's the right jumping-off point for account and service fee revenue? This seems to have been the biggest source of shortfall versus consensus expectations, so just wanted to make sure that we're modeling that appropriately.

Again, it depends how you want to model client cash balances. That's the line item that will be most impacted by whatever fluctuation you want to assume in client cash balances. We've had run off obviously that's had a negative impact on that line item because external bank sweeps are the ones that are impacted first because we're going to continue to finance the growth of Raymond James Bank as long as we can. So, the external banks get the remainder if you want to call it that. Then to the extent that continues dropping, that's going to be the line item affected more than net interest earnings.

Good morning. You mentioned that recruitment could be close to last year's record. However, when I compare year-over-year net growth, it's only about half of last year's growth. Are you suggesting that the additions in the second half could be much stronger, or is there something I'm not understanding in this analysis?

When we evaluate this, I understand you focus on the financial advisor count, but we concentrate on the trailing twelve months of recruits. I believe that’s the key indicator. Looking back to 2009, we had a significant number of individuals, but last year, the trailing twelve months figures were not even close. Therefore, we prioritize the trailing twelve months of recruits over the advisory count itself.

I would also caution you instead of looking at advisory growth to see how well we're doing. I mean, certainly look at the total asset growth. A lot of the runoff of advisers are people that don't make it in the business, people that retire, reasons they leave. In a lot of cases, their assets stay here with their team or with some other advisers. So, it's really the asset growth that's more important, and with our recruiting metrics and records we're talking about really part of the gross production we're creating as Paul said.

I do think that too and especially we saw the impact in the first quarter, our first quarter, because we've had a lot of retirements as the industry has. So what we measure when we talk about recruiting, we're talking about the gross number. But as you look into the net number, an awful lot of those retirements or, unfortunately, we got people or passed away, we've kept the asset. So, they've gone on to other advisers. And so that's really what we track. That's why we look at kind of non-regretted attrition. Certainly, if someone passes away, it's regretted. It's a death in the family. But if we keep the assets from a financial standpoint, it isn't as negative. It certainly is to the people and us and the people we know.

So, you're bringing on a higher quality financial advisor. Can you clarify the timing comparison between last year's recruiting and this year's? If last year's was nearly a record, do you currently have 75% of the assets and fees from that class, or is it more like 100% or 50%? I'm trying to understand how much additional business you're gaining from last year's recruits compared to the new recruits you've been acquiring over the past year.

It's difficult to determine. Each situation is unique. We anticipate that within the first six to twelve months, we will acquire most of the individuals, and there may be a slight delay afterward before we see significant growth, which will largely stem from the expansion of their production. The teams we bring on board aren't just selected for their assets; they are also eager to expand. Each case is quite unique. However, we expect to see ongoing momentum similar to what we've experienced before. We're still receiving assets from our recruiting efforts, and as long as we maintain a full pipeline, we will continue to experience this growth.

It's reasonable to expect a six-month delay between the assets coming in and the production recruited. If last year was a record production year, we benefit from many of those assets coming in this year. This year will be similar for next year's assets.

Hi, good morning. This is Brian Wu on for Bill Katz. Appreciate the comments on client cash sorting. Any update you can provide on client cash in July?

We've continued to see, although I don't have the exact number, it's been around $1 billion or so through today, primarily flowing into positional money market funds. A significant portion of this, as Paul mentioned, is due to the quarterly fee being withdrawn from accounts at the start of each quarter. This is generally just a subtraction from accounts. Throughout the quarter, money comes into the accounts from dividends and interest, which positions it for the next quarter. The amount withdrawn in fees is currently about $700 million to $800 million at the beginning of each quarter. This has been the main reason for the decline we've observed so far in July. However, we typically see this every quarter, and it tends to build back up over the duration of the quarter.

Got it. And how should we think about the funding mix for the bank, if client cash continues to run off?

It's entirely possible that our bank's going to be entertaining other funding sources aside from our sweep program over time. We're already – we've already looked at some. We've done one CD issuance through our syndicated desk, a secondary market CD. We're looking at alternative funding sources at the bank level preparing for the eventuality that sweep balances are not available given our internal limitations or in general to continue to support the growth of the bank. We don't – if we do the math, we'll have to see whether it makes sense for us to run the bank in place, or whether it makes more sense for us to continue to grow the bank with external funding sources. I think the answer's going to be the latter, but we don't know that for a definitive fact yet. So we are exploring alternative funding sources of various types at the bank. We have been for the better part of the year actually in anticipation of what you're talking about.

Yeah, so agree everything with what Jeff said. The only caveat is right now we are funding basically almost exclusively internally and cash sweep balances moderate the exit or grow we're going to be fine. If they continue to go down at some point, you've got to have alternatives and that's what we're exploring.

Great. Thank you for taking my question.

Thanks, guys. How do you think interest rate cuts will affect the customer cash balances? I ask that question because a lot of people think it would actually help to stabilize those balances. I'm just wondering if you guys would agree with that?

Our premise is that we are often asked to predict what will happen with interest rates.

Or balances.

But I think too right now the attraction has been positional money markets and the spread between that and FDIC insurance. I think that, if rates come in and that spread decreases that the cash sweep is going to be an even better option than the money markets if rates have come in. So I think we agree with that. But we'll see what happens.

I am in the camp that it will help stabilize the balances at least by the second rate cut or so. The first one may not have a big impact or maybe even the second one. But beyond that, if there are that many rate cuts, I certainly think it will minimize the differential that they can get elsewhere.

All right. That's great. And my follow-up question relates to the bank, excellent credit quality again this quarter. Bigger picture how would you guys characterize the risk profile of the bank today? And specifically wondering how you think the loan portfolio's risk profile compares to how the loan portfolio looked in 2007.

So I think that the biggest difference is the bank is much more diversified. Back in pre-2008, 2009 we were almost purchase mortgages or C&I was really our portfolio. So today, C&I is certainly a much smaller percentage. It's much more diversified, but I believe the credit quality in the C&I and other parts of the equation is good. I believe we're in good shape and more diversified in our product portfolio.

We did not have an SBL portfolio in 2007, which has become an excellent source of business for us. Currently, most of our mortgages are originated rather than purchased. Our client base demonstrates very strong credit quality. Additionally, we now have a tax-exempt portfolio that consists of loans to investment-grade municipalities, which we lacked in 2007. This portfolio is more diversified and likely of higher quality on average than it was in 2007. It's worth noting that we navigated through 2008 and 2009 without significant issues. I believe we are in an even better position now.

But we're also cognizant that anything can happen, so we watch it very, very carefully.

Very good. Thank you.

Great. Good morning, everyone.

Good morning.

First question just on private client commissions. So they increased 2% from last quarter. We were thinking they could have been something a little bit better than that just with trailing commissions increasing from the move higher in average daily balances like in mutual funds which I think were only up about 1%. So I'm just curious if there's any lag in there sometimes the accounting can be a little bit funky. Or was it just lighter transactional activity like new sales being slower, which offset some of the benefits of the average daily balance increases?

I believe this reflects a continuing trend of shifting towards fee-based assets instead of commission-based activities within the Private Client Group. The new recruits we are bringing on are primarily focused on fee-based options. Over the past two to three years, we've observed a consistent decline in commissionable activities in PCG, and that trend remains unchanged.

Yes, okay. Got it. And then just a follow-up here on M&A opportunities, I know we touched on this a bit at the Investor Day, but even since then there's press out that USAA may be looking to sell their wealth management business. I know that's a different business, but just something notable activity in kind of financials Investment Banking, so just wanted to get a little perspective on your corporate development function business development. How active is it right now? And how are you guys kind of thinking about M&A balancing views that are out there that we may be late cycle versus long-term opportunities that would come along?

We are as active as ever in exploring various opportunities. The market seems to have more participants considering potential transactions. However, some of this activity, particularly in certain sectors, is influenced by a belief that we are in a late-cycle phase. The current pricing does not necessarily indicate peak growth, so adjustments may be needed before prices align with reality. When evaluating transactions, they must align with our model, and not all opportunities do; some simply do not fit culturally. A key challenge is that while there is increased interest, pricing needs to reflect the current reality rather than peak conditions, as there are concerns about a cycle change. Nonetheless, we are actively engaging with people in the market.

Another silver lining to the market correction whenever it comes along with increased cash balances.

Great. I have always thought that Raymond James doesn't need to be the highest bidder, especially in wealth management, because your retention rates tend to be significantly better. This means that over time, the seller might actually benefit more even at a lower price. How does that factor in? Is that reasoning accurate?

I don't know. We've never aimed to be the highest bidder, so what's most impressive to us in terms of recruiting results, especially at the high end, is that our retention agreements and offers are substantially lower than those of other firms, yet people still choose to join us. In terms of mergers and acquisitions, it varies. If it's a public company, it can be difficult to not be close to the highest bidder. There are some private companies where we ask ourselves if we're being too conservative, but we've encountered situations where we were the preferred choice spiritually, though second by price compared to several others. In some cases, another party's bid was 30% to 50% higher. You can't outbid these extraordinary offers just to secure a deal. This has been more frustrating for us because we were preferred, but the premium someone else was ready to pay was simply too high. We have stayed disciplined, prioritizing providing a return on equity for our shareholders rather than just seeking growth.

Yeah. Great. Thank you.