Raymond James Financial Inc (RJF) — Q3 2025 Earnings Call Transcript

Good evening, and welcome to Raymond James Financial's Fiscal 2025 Third Quarter Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website. I'm Kristi Waugh, Senior Vice President of Investor Relations. Thank you for joining us. With me on the call today are Chief Executive Officer, Paul Shoukry; and Chief Financial Officer, Butch Oorlog. The presentation being reviewed today is available on Raymond James Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to Slide 2. Please note that certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, industry or market conditions, anticipated timing and benefits of our acquisitions and our level of success in integrating acquired businesses; anticipated results of litigation and regulatory developments, and general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as may, will, could, should and would as well as any other statements that necessarily depend on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Forms 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our website. Now I'm happy to turn the call over to CEO, Paul Shoukry. Paul?

Thank you, Kristi. Good evening. Thank you for joining us. We are holding this call from the firm's Annual Summer Development Conference in Orlando, Florida, where financial advisers in our employee channel, along with their families, come for education, networking and activities, one of the great traditions of Raymond James and unique to our culture. I really enjoy being able to spend time and hear directly from such dedicated professionals. Our results this quarter marked the firm's 150th consecutive quarter of profitability. Since our inception, the firm has endured thriving in good times but also persevered through challenges, including recessions, financial crises and events such as the pandemic and other global threats. This long-term record of resilient profitability reflects the strength of our diverse and complementary businesses and our ongoing commitment to always putting clients first. As current market and macroeconomic conditions remain uncertain, we continue to adhere to strategies that have supported consistent success over the past 150 quarters, guided by our vision to be the absolute best firm for financial professionals and their clients. I'm also excited to share that Raymond James has topped the J.D. Power rankings in its annual U.S. Investor Satisfaction Study as the #1 wealth management firm for advised investor satisfaction. The firm also ranked as the most trusted and highest in the Study's individual metrics on people and products and services as well as strong rankings in the J.D. Power Financial Advisor satisfaction rankings in each of the employee and independent adviser surveys. This recognition is purely a reflection of all advisers, branch staff and corporate associates do every day to serve clients so well. So thank you. These are well-deserved honors. Turning to our financial results for the quarter. The firm's values-based client-focused approach continues to generate steady performance. Quarterly net revenues of $3.4 billion grew 5% over the prior year quarter. Pretax income of $563 million declined 13% compared to the year-ago quarter. Results this quarter included a $58 million reserve increase associated with the settlement of a legal matter related to bond underwriting for a specific issuer sold to institutional investors between 2013 to 2015. Although the firm maintains and has strong defenses and denied any liability, given the complexity of the case and the unpredictability of litigation outcomes, we determined to resolve the long-running dispute without admission of wrongdoing. For the first 9 months of fiscal 2025, we generated record net revenues of $10.3 billion and record pretax income of $1.98 billion, up 10% and 5% over the first 9 months of fiscal 2024. These solid results were attributable to our diverse and complementary businesses anchored by the Private Client Group and augmented with the capital markets asset management and bank segments. Across our businesses, we have achieved consistent success retaining and recruiting financial professionals who provide high-quality advice to their clients. In the Private Client Group, we ended the quarter with a record $1.57 trillion of client assets under administration, representing year-over-year growth of 11%. Over the past 12 months, we recruited into our domestic independent contractor and employee channels, financial advisers with $336 million of trailing 12 production and $52 billion of client assets at their previous firms. Including assets recruited into our RIA and Custody Services division, we recruited total client assets over the past 12 months of over $60 billion across all of our platforms. Quarterly domestic net new assets equaled $11.7 billion, representing a 3.4% annualized growth rate. We saw net new assets improve throughout the quarter, with June activity producing annualized growth in the high single-digit level. Based on our robust recruiting pipeline and strong level of commitments, we are even more optimistic about our momentum and growth over the coming quarters. Our best of both worlds value proposition where we offer a unique combination of an adviser and client-focused culture, coupled with leading technology and solutions continues to resonate with advisers across all of our affiliation options. Additionally, our strong balance sheet and commitment to independence is increasingly becoming a differentiator as well. To continue retaining and attracting the best advisers, we are making investments in our platforms and offerings. For example, in the private wealth space, we remain focused on providing education, training, accreditation and enhanced capabilities and product solutions to allow advisers to meet the needs of their most sophisticated clients. About 370 advisers have completed or enrolled in our private wealth adviser program, which continues to attract strong interest from advisers due to its client benefits and contribution to business growth. We also continue to invest in technology, including AI, to drive continued operational efficiencies and improve advisers' productive capacity. We are making investments to automate and streamline processes, which in turn frees up associates and advisers to do what they do best, which is to engage human-to-human and deepen relationships, add more value and importantly, have more capacity to grow their businesses by attracting new clients. In the Capital Markets segment, the investment banking pipeline is strong. And we are becoming more optimistic about macroeconomic conditions relative to the near term, although the environment remains uncertain. However, we are confident that we are well positioned with motivated buyers and sellers along with deep expertise across the industries we cover whenever the market does become more conducive. We remain committed to enhancing the platform by broadening and deepening its capabilities, whether through strategic hiring or acquisitions. In the Asset Management segment, net inflows into managed fee-based programs in the Private Client Group were strong during the quarter, annualizing at nearly 5% and reflecting the complementary impact of our successful recruiting efforts. In the bank segment, loans ended the quarter at a record $49.8 billion, primarily reflecting strong growth in securities-based lending balances, yet another synergistic impact from our growing Private Client Group business as we are able to deploy our strong balance sheet in support of our clients. Importantly, the credit quality of the loan portfolio remains strong. Turning to capital deployment. Our long-standing priorities have remained unchanged, and that starts with investing in growth. First, organically and complemented with strategic acquisitions. We continue to pursue acquisition opportunities that meet our criteria of being a strong cultural fit, a good strategic fit and valuations that would generate attractive returns for our shareholders. During the quarter, we repurchased $451 million of common stock at an average share price of $137. Year-to-date, we have returned capital of over $1 billion through common dividends and share repurchases. As previously discussed in recent quarters, the capital deployment plan is to repurchase shares on a consistent basis throughout the quarter, with total amounts expected to be similar to the fiscal third quarter. This approach is expected to maintain capital liquidity levels, which provide ample capacity to fund organic growth initiatives and execute future acquisitions. Now I'll turn the call over to our CFO, Butch Oorlog, to review our financial results in detail. Butch?

Thank you, Paul. I'll begin on Slide 6. The firm reported net revenues of $3.4 billion for the fiscal third quarter. Net income available to common shareholders was $435 million with earnings per diluted share of $2.12. Excluding expenses related to acquisitions, adjusted net income available to common shareholders equaled $449 million resulting in adjusted earnings per diluted share of $2.19, and our adjusted pretax margin was 17.1%. We generated an annualized return on common equity of 14.3% and annualized adjusted return on tangible common equity of 17.2%. Solid results for the quarter, particularly given our conservative capital base. Turning to Slide 7. Private Client Group generated pretax income of $411 million on quarterly net revenues of $2.49 billion. Results were driven by higher PCG assets under administration compared to the previous year, the result of market appreciation and the consistent addition of net new assets. Pretax income declined year-over-year, primarily due to the impact of lower interest rates. Fiscal year-to-date, PCG generated record revenues. Our Capital Markets segment generated quarterly net revenues of $381 million and a pretax loss of $54 million. Net revenues grew 15% year-over-year, driven primarily by higher investment banking, fixed income, and equity brokerage revenues. However, sequential results declined 4%, largely due to lower M&A and fixed income brokerage revenues, which were partially offset by higher underwriting and affordable housing investments revenues. Pretax income was negatively impacted by the $58 million legal reserve increase previously described. The Asset Management segment generated record pretax income of $125 million on net revenues of $291 million. Results were largely attributable to higher financial assets under management compared to the prior year quarter due to market appreciation over the 12-month period and strong net inflows into PCG fee-based accounts. We had strong net inflows of approximately $2.1 billion into managed programs on our platform. The Asset Management segment generated record revenues and pretax income fiscal year-to-date. The Bank segment generated net revenues of $458 million and pretax income of $123 million. On a sequential basis, Bank segment net interest income grew 5%, driven by continued loan growth and a 7 basis point expansion of net interest margin to 2.74%, resulting from a favorable shift in asset mix along with a higher portion of lower cost deposits. Turning to consolidated revenues on Slide 8. Third quarter net revenues grew 5% over the prior year and were flat sequentially. Asset management and related administrative fees of $1.73 billion grew 8% over the prior year and were slightly higher than the preceding quarter. Record PCG fee-based assets equaled $944 billion at quarter end, up 15% year-over-year and 8% over the preceding quarter. As we look ahead, we expect fourth quarter asset management and related administrative fees to be higher by approximately 9% over the third quarter, primarily due to higher PCG assets and fee-based accounts at quarter end and one more business day during the quarter. Brokerage revenues of $559 million grew 5% year-over-year due to higher revenues in Capital Markets and PCG. Investment Banking revenues of $212 million increased 16% year-over-year and declined 2% sequentially. The sequential decline reflected lower M&A and advisory revenues, while underwriting and affordable housing investments results were higher in the quarter. Moving to Slide 9. Client domestic cash suite and enhanced savings program balances ended the quarter at $55.2 billion, down 4% compared to the preceding quarter and representing 3.8% of domestic PCG client assets. Program balances increased by nearly $1 billion in the month of June after seasonal declines for client tax payments and fee billings resulted in decreases early in the quarter. In July, domestic cash sweep and enhanced savings program balances have declined to date, in line with July's record quarterly fee billings of approximately $1.7 billion. Turning to Slide 10. Combined net interest income and RJBDP fees from third-party banks increased 1% to $656 million as the decline in RJBDP third-party fees was more than offset by higher net interest income. Net interest margin in the bank segment grew 7 basis points to 2.74% for the quarter, the result of the factors I described earlier. The average yield on RJBDP balances with third-party banks decreased 4 basis points to 2.96% primarily due to deployment of incremental cash suite program balances from third-party banks onto the bank segment balance sheet. Based on current interest rates and quarter end balances, net of fourth quarter fee billings, we would expect the aggregate of NII in RJBDP third-party fees to decline approximately 2% in the fourth quarter, largely the result of the lower beginning of quarter sweep balances held by third-party banks. Keep in mind, there are many variables that will influence actual results, including any interest rate actions during the upcoming quarter and factors affecting our balance sheet, including changes in our loan and deposit balances. Turning to consolidated expenses on Slide 11. Compensation expense was $2.2 billion, and the total compensation ratio for the quarter was 64.8%. Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 64.5%, better than our 65% target recently shared at our Investor Day, a good result, especially in a challenging capital markets environment. Noncompensation expenses of $633 million increased 20% sequentially. Adjusting for the previously mentioned legal matter reserve in the quarter, noncompensation expenses were $575 million, up 9% sequentially. While the third quarter typically experiences higher seasonal costs related to conferences and events, a large portion of this quarterly increase also supports firm-wide growth initiatives, including adviser recruiting, professional fees associated with increased underwriting activity and higher investment sub-advisory fee expenses. Through the first 9 months of the fiscal year, we are on track with our guidance for full year noncompensation expenses of approximately $2.1 billion, excluding the bank loan provision for credit losses, unexpected legal and regulatory items and non-GAAP adjustments presented in our non-GAAP financial measures. On Slide 12, we provide key credit metrics for our bank segment. We grew loans during the quarter by 3%, primarily in support of our clients, with this loan growth continuing to be led by a securities-based lending and residential mortgage loan growth. These two loan categories represent well over half of our total loan book, reflecting 36% and 20% of the total. The credit quality of the loan portfolio remains strong. Criticized loans as a percentage of total loans held for investment were stable at 1.14% at quarter end, and nonperforming assets remained low at 34 basis points of bank segment assets. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 93 basis points, consistent with the prior quarter level. The bank loan allowance for credit losses on corporate loans as a percent of corporate loans held for investment was 1.96%. We believe the total allowance represents an appropriate reserve, but we continue to closely monitor economic factors that may affect our loan portfolios. Slide 13 shows the pretax margin trend over the past 5 quarters, which demonstrates the resilience of our diverse business mix and its ability to consistently deliver strong margins. Adjusting for the legal matter reserve impacting the quarter, as well as acquisition-related expenses, our pretax margin would be approximately 19%, slightly below our target of 20% adjusted pretax margin, largely due to the challenging capital markets environment. We remain committed to investing to support growth across the business while maintaining discipline over controllable expenses. On Slide 14, at quarter end, our total assets were $84.8 billion, a 2% sequential increase resulting primarily from loan growth. Liquidity and capital each remain very strong. RJF corporate cash at the parent ended the quarter at approximately $2.3 billion, well above our $1.2 billion target with a Tier 1 leverage ratio of 13.1% and a total capital ratio of 24.3%, we remain well above regulatory requirements. Our capital levels provide significant flexibility to continue being opportunistic in our pursuit of strategic acquisitions and to invest in organic growth. The effective tax rate for the quarter was 22.6%, reflecting the favorable impact of nontaxable corporate-owned life insurance gains that arose during the quarter. For the fiscal year 2025, we estimate our effective tax rate for the year to be approximately 24%. Slide 15 provides a summary of our capital actions over the past 5 quarters. We returned over $550 million of capital to shareholders during the quarter and nearly $1.8 billion over the past 5 quarters through either common dividends paid or share repurchases. We remain committed over the long term to operate our businesses at capital levels in line with our stated targets. I'll now turn the call back to Paul for some final remarks.

As we enter the fourth quarter, we are encouraged by the strong tailwinds arising from fee-based assets up 8%, net loans higher by 3% and strong pipelines for growth across our businesses. Our adviser recruiting pipeline is growing significantly across all of our affiliation options, a testament to our unique culture and robust platform that is resonating with advisers. We are laser-focused on providing a seamless transition as advisers affiliate with our platform, while importantly maintaining excellent service levels to existing advisers and their clients. While the investment banking environment is uncertain based on the current pipeline and activity levels, we believe the next two quarters should be better than the prior two. Lastly, we have plenty of capital to support organic growth and acquisitions as well as continued share repurchases at a level similar to this quarter. As illustrated by our recent J.D. Power #1 rankings, putting clients first has been the cornerstone of Raymond James' value since our inception, and that commitment remains at the center of everything we do. This prestigious honor demonstrates the strength of our client-centric culture and our steadfast dedication to supporting advisers and empowering them with sophisticated resources, support and technology. Our results reflect the many contributions of our associates and advisers and financial professionals across the firm. Thank you for contributing to 150 quarters of consecutive profitability by providing outstanding advice and service to your clients. That concludes our prepared remarks. Operator, will you please open the line for questions.

I just wanted to start on recruiting. Paul, you touched on the solid pipeline out there. You called out the June exit rate at a high single-digit percent level. I was hoping you could unpack a little bit more about that pipeline you see and maybe across different channels where you might be seeing better engagement. I mean, I recall you called out during Investor Day about changing some of the recruiting functions, maybe centralizing some things. And so maybe is this a result of some of the actions you've been taking in previous months and quarters? And this high single digits, kind of the right pace for now given what you see in the pipeline?

Thanks, Michael. Regarding the recruiting pipeline, I can say that we're experiencing a significant increase in activity, with more events and advisor interactions across all our affiliation options. Teams that have been with Raymond James for a long time note that we haven’t seen this level of activity since the financial crisis. The advisors we’re currently engaging with are significantly larger than those who approached us post-crisis seeking stability amidst industry disruptions. We’re very enthusiastic about this opportunity. It’s a team effort involving both recruiters and our transition teams, to whom we’ve invested more resources. This investment enhances their ability to manage the increased activity and ensure smooth transitions for new advisors joining our platform, while also maintaining exceptional service for our existing advisors and their clients. We aim to keep the high satisfaction levels evidenced by our top ranking in the J.D. Power award for service and trust, ensuring that our service quality remains intact even as we onboard new advisors.

Great. If I could just switch to the balance sheet real quick. You saw some nice growth this quarter, particularly in security-based lending, as well as growth in CRE and C&I. I'm curious about how you plan to manage balance sheet growth across key segments for the rest of the year. Additionally, regarding the mix of third-party banks, how should we view the normalized level over time as you continue to see improved balance sheet engagement?

Yes. About a year ago, we noted that clients were adjusting to the new interest rates, and we anticipated increased usage of securities-based loans following a couple of years marked by extensive paydowns and payoffs. This prediction has materialized, with year-over-year securities-based loans to Private Client Group clients increasing by 20% across the firm, showcasing exceptional growth. Mortgages have also risen by 8% year-over-year firm-wide, demonstrating our commitment to supporting client needs, particularly within the Private Client Group. Looking ahead, while we cannot predict the exact trajectory, the momentum and pipeline for securities-based lending remain robust. We are fortunate to have a solid and diversified deposit base to sustain this growth moving forward.

One more on just organic growth. So Paul, your comments this quarter seemed a little bit more bullish, but generally consistent with what we've heard for the last few quarters. But yet, the NNA, both on a dollar basis and on a percentage growth basis is still below where you were last year and other periods. So what is the disconnect or could you talk to what maybe the negatives are that are maybe drawing down the overall growth levels?

Hopefully, you're noticing our increased confidence in the recruiting pipeline, which reflects our intent. Activity levels are picking up, and we have been consistently successful in recruiting advisers across various affiliation options. Our optimism is growing as we look at the pipeline, though we remain cautious since these are just prospects until they convert. Once new advisers join our firm, there’s typically a delay before their contributions are reflected in net new assets, as they need to bring over their clients and assets. This delay can range from 3 to 9 months, depending on how quickly the pipeline converts. We are still experiencing pressure from the existing adviser base, especially from private equity roll-ups, which can disrupt the independent channel. While some valuations have become so high that participants are questioning them and some firms are taking a step back, a few aggressive firms remain active. Despite this, we've had good retention, morale, service, and satisfaction levels, and our pipeline continues to grow.

Great. That's helpful. And then as my follow-up, just within brokerage, can you talk about the fixed income outlook? And what type of environment is best for that business to really accelerate?

Yes. I mean our biggest business in fixed income brokerage, and this is an important distinction from the bigger bulge bracket banks and wire houses who've had really strong quarters on the much higher volatility that you get with commodities and currencies and interest rates, especially in the environment we saw last quarter. We're really not heavily engaged in those higher volatility segments within fixed income. I mean we're really serving our biggest client base in the fixed income business, our depositories, banks, and credit unions, helping them manage their securities portfolio. So in an environment where they're deposit-rich, and there's a lack of loan demand and opportunity to earn more by investing in securities out on the curve is an environment that's most conducive for us in fixed income. When there's spread volatility, that helps our SumRidge business that technology-enabled business is really driven more on spread volatility. And spreads have been actually fairly tight and resilient. And so we haven't seen the volatility that you may expect given sort of the macro uncertainty surrounding it. So that business hasn't really seen the type of tailwinds that you would have otherwise expected with higher spread volatility.

First question, just here on cash balances. The decline was maybe a bit more than we had expected, and I know there's a lot that goes into that with taxes and advisory fees and investors leaning to the market, but it's a bit difficult from the outside to parse through kind of what's cash sorting versus other trends. So just be good to get an update on what you're seeing around your client behavior there, what you've seen through July, if you can share that? And then also what you're expecting in the back half of the year just given what you talked about with kind of accelerating organic growth. So how much that could help for kind of rebuilding some of that transactional cash.

Yes. I'll let Butch speak to the cash movements, particularly in the quarter. What I would say is you're right, the pipeline as it converts as new advisers bring on new clients with new assets that should be, all else being equal, a tailwind to our cash balances. And before turning it over to Butch to talk about the quarterly change in cash balances, what I would do is kind of step back first and look at the year-over-year change in sweep balances, which have been pretty resilient. It's been almost flat year-over-year at right around $42 billion for the sweep balances. So as we said maybe a year, 1.5 years ago, we feel like cash balances are relatively stable. We're not ready to declare victory on that until we actually start seeing growth in those balances. And to your point, as Butch will talk about, that wasn't the case this quarter.

Yes, thanks, Devin. As we discussed in last quarter's call, there is a seasonal aspect to cash balances this quarter, particularly due to client tax payments in April, which generally negatively impact client balances in the short term. We have certainly experienced this trend, along with the rest of the industry. However, we are encouraged by the growth of $1 billion in balances during June as those seasonal factors began to reverse. We hope this indicates a positive trend for balances in the upcoming fourth quarter. Nonetheless, as Paul noted, when comparing balance levels year-over-year, there remains relative stability in those balances.

All right. Great information there. As a follow-up, I noticed the recent press release regarding your significant investment in the Canadian business aimed at accelerating the digital transformation of the wealth management infrastructure and enhancing the adviser-client experience across the country. Although Canada is a smaller component of Raymond James at the moment, it holds substantial importance for your Canadian platform. Could you elaborate on the size and strategy of that investment, especially in a climate where outright acquisitions in the sector have become competitive and potentially costly? Might we expect more of these strategic investments as a way to utilize excess capital?

We have a long-standing presence in the Canadian market, which is important for us, especially in wealth management and capital markets. Our wealth management business is profitable and provides a strong value proposition similar to what we offer in the U.S. We compete against the major banks in Canada, focusing on an adviser-centric approach that aligns with the expectations of advisers who typically come from those banks. This approach is well-received in Canada, making it a compelling market for us. We remain committed to this market and will continue to invest in resources there, just as we do in the U.S. and the U.K. We recently announced a new technology system that has generated excitement among advisers. Additionally, we are open to acquisitions in Canada, although the market is less fragmented than in the U.S., which is also becoming less fragmented. If we find a culturally and strategically compatible firm in Canada at an appropriate price, we would be eager to welcome them to the Raymond James family.

It seems there's some positive momentum in recruiting. Paul, you mentioned some recent easing, possibly with firms in the industry pausing on transition assistance rates or recruiting packages. I'm curious how you would describe the current competitive environment, especially with this easing, compared to the previous year or two. Also, could you comment on whether Raymond James has made any changes in its approach to recruiting packages recently?

Yes, I would say the environment remains competitive. I've been with the firm for 15 years, and it has always been competitive, with those who have been here longer confirming that it was competitive even before I joined. Recently, the last five years have seen a rise in private equity-backed roll-ups appearing everywhere. Particularly in the last three years, these firms have been very aggressive, trading at higher and higher multiples. I think they are approaching an inflection point, trying to determine what comes next and how much higher these multiples can go, especially compared to public company multiples, which are significantly lower in many cases. They seem to be considering their options, such as whether there is a public market or strategic buyers for that kind of multiple, or if another private equity buyer or continuation fund exists. This has led to questions surfacing, but I don’t want to exaggerate the impact on the competitive environment. It still takes only a couple of firms at the early stages of deploying their already raised capital to maintain a lively competitive landscape. Thus, the competitive environment remains intact, although the tone I'm hearing from some of those roll-up firms is somewhat different compared to a year or two ago.

That's very helpful. And maybe just staying on the recruiting topic. And just regarding your earlier comments about the largest acceleration in activity since the financial crisis. Like do you think this is an industry-wide dynamic or you'd expect to see overall industry-wide churn levels increase over the next 12 months? Or do you think it’s more idiosyncratic or something about Raymond James' positioning in the market currently that's made the platform more attractive and has caused you to see this acceleration recently?

No. I believe there has been a catalyst driven by mergers and acquisitions, especially on the independent side of the business that you are aware of. However, the success we are experiencing is not solely dependent on that catalyst. We are achieving success from various firms across our affiliation options. That catalyst has indeed contributed to the increase in our recruiting pipeline and activity.

Maybe sticking on just sort of dynamic of accelerating financial adviser and the new asset growth. I was wondering, could you talk a little bit about does that have any structural impact on your comp ratio? And also, I was wondering with the assets that are coming in, given that the teams are larger, does that have any kind of adverse impact on the client cash as a percentage of those assets that are coming in the door?

I would say, again, we have over $1.6 trillion of client assets. So for anything to really make a meaningful change to any of these firm-wide ratios, it would have to be really substantial. So I would say it would be more of a glide path than a sudden change in any of the ratios across the board with what we're talking about. Just given the size of the base and the magnitude of what you'd have to bring on to change to move the needle given the size of the base.

Okay. And this is my follow-up. Just from a big picture down at your Investor Day, you were pretty rigid in terms of looking at the market and seem a little heavy from an M&A perspective on pricing. You've seemingly passed on a few things. Wondering if you could update us on your thoughts about how the strategic backdrop is looking from an M&A perspective, and where you might be most focused?

We are actively engaged in corporate development and are building relationships at various stages, from initial discussions to more advanced talks about potential opportunities. We remain focused on finding opportunities, particularly in our private clients segment, which we believe will continue to be our largest business in the next 5 to 15 years. We initially look for acquisitions in this area, as well as in capital markets and asset management. Our bank operates with two charters, one branch, and two ATMs, functioning more as a utility bank serving clients rather than a traditional brick-and-mortar business. We continue to develop relationships across the spectrum, from early to advanced discussions, but we will only pursue deals that meet our three key criteria. The first is a strong cultural fit; if a potential acquisition does not align culturally, it will not be successful in our business, regardless of its financial performance. The second criterion is a strategic fit, where we seek synergies that create value greater than the sum of its parts, enhancing both entities. Historically, we have focused on retaining management teams post-acquisition, as evidenced by our ongoing leadership in the Public Finance and Fixed Income business since acquiring Morgan Keegan in 2012. Our goal is to improve ourselves through acquisitions rather than merely increasing assets or revenues. Finally, if a deal meets the first two criteria, it must also have a reasonable valuation that makes sense for both us and the seller. We will continue to maintain discipline in this area.

I wanted to ask you guys a question around just the margins in the quarter, but also the targets and sort of relay that back to your capital markets commentary from earlier in the call. So 19% for the quarter, as you mentioned, it's running a little bit below the 20% target that you guys are shooting for. Is the pipeline in banking what are you seeing right now and stuff that's sort of tangible enough to get you guys into that 20-plus percent pretax margin goal that you outlined at the Investor Day?

Yes. Regarding the current quarter, we were pleased with the 19% pretax margin despite the softness in the Capital Markets segment. While we view the capital markets business as capable of achieving mid-teens margins in the long run, we still anticipate reaching that. However, improvements in the capital markets environment suggest that achieving our pretax margin target of 20%, which we discussed at Investor Day, may be challenging. Nevertheless, we remain optimistic about the strong tailwinds in our private client business, especially with an 8% increase in fee billable assets for the upcoming quarter. We continue to see opportunities to enhance our margins from this quarter.

Got it. Second question for you guys, just around opportunities to better leverage the wealth platform as you think about incremental revenues related to the alternative platforms, alternative business that are out there. Some of your peers, especially on the larger cap side, did quite a good job monetizing that opportunity where effectively shelf space payments. How are you thinking about that for AJ? It feels like the opportunity to increase penetration of alternative products, private market strategies continues to expand. So maybe some guidepost in terms of what percentage of the asset base is in private strategy today, where you guys think that could go? And again, the revenue opportunity attached to that over time?

Our involvement in private markets is not as strong as some of our larger competitors, which indicates significant potential for growth. However, unlike some firms in our industry, we will not push products solely to generate more revenue or encourage client retention, as that does not align with our corporate culture. Demand from clients and their advisors will guide our efforts. Currently, there is an authentic increase in demand for these types of products. We are committed to offering extensive education, resources, and a wider selection of alternatives in this area. Recently, we appointed a new leadership team who is focused on enhancing education and raising awareness of these solutions for advisors and high net worth clients, who tend to benefit more from these offerings. In summary, we recognize the growth potential in this sector and are making substantial investments. While we have a strong lineup of products, we will not impose quotas, promote products aggressively, or create variable incentives to drive growth, as that is not how we operate at Raymond James.

Maybe you mentioned a couple of times strong inflows into fee-based assets in PCG. I know you don't disclose that data, but can you kind of give us a sense of at least a ballpark of the level of growth you're seeing in fee-based flows? And is that materially better than NNA? And maybe just talk about the dynamic between the two.

Yes, the fee-based flows have been stronger than the overall flows. Looking at client assets, year-over-year, the total assets under administration for the firm have increased by 11%, while fee-based assets have risen by 15%. This highlights the relative growth of fee-based assets compared to overall assets at Raymond James. Currently, around 65% of our overall assets in the Private Client Group are fee-based. We've consistently led the industry in fee-based penetration, and when it makes sense for clients, we strive to offer a competitive and comprehensive brokerage solution as well.

So you don't think it's like a difference in client mix that sort of gap between the two is really organic growth and fee-based being a couple of hundred basis points higher than NNA growth?

Advisers have been gradually transitioning their businesses towards more fee-based and advisory relationships over time. However, many clients maintain both fee-based and commission-based accounts because their assets serve different goals and priorities. Some assets might be more suitable for a brokerage account, while others fit better within an advisory relationship and fee-based account. Therefore, it's not common for clients to choose exclusively one type of account; instead, it's a combination that is influenced by what best serves their needs.

Yes, all fair. So just maybe a follow-up on the recruiting pipeline. Is it pretty broad-based across all affiliation options? Or is it more concentrated in one specific segment?

No, I would say we're seeing good success across all of our affiliation options. There's certainly the acceleration rate within the independent channel is probably higher, but we're still seeing very good success in the employee affiliation option and the independent RIA option as well.

Just on the investment banking side, you mentioned that you expect the next two quarters to be better than the prior two quarters. Just curious if you could elaborate a bit on what you're seeing, how the magnitude of the pipelines has evolved and what you're seeing from an environmental standpoint, supporting your confidence versus, say, 1.5 months ago at your Investor Day.

Yes, I believe there was an immediate reaction across the industry in early April due to the tariff discussions, which took many by surprise regarding their scale and impact. As time has passed and deals have been made, with the administration adjusting deadlines and showing a readiness to negotiate, the initial shock has somewhat lessened, although it has not completely disappeared. The current market sentiment is more optimistic than it was in early April. There is significant pent-up demand, stemming from two years of sluggish investment banking activity. We have many motivated buyers and sellers, especially private equity sponsors, who account for roughly 60% of our M&A activity each quarter. These sponsors have companies that have exceeded their intended timelines for sales, aiming to return capital to their investors, and they also have capital that needs to be invested. With increased certainty regarding tax reform and tariff adjustments, along with some stability concerning interest rates, I believe this will create a more favorable environment for our pipeline to convert to actual results.

Great. And then just as a follow-up question, more bigger picture. Just curious if you could just give us a little bit of an update, thoughts around digital assets, stablecoin strategy. How you're seeing the opportunities for Raymond James, what steps might we see you guys take over the next 12 months as it continues to garner more attention across the marketplace.

I think we're optimistic. What we've been seeking over the last few years is for the regulatory framework to align with the increasing demand and actual use of these products. We're seeing positive movement. Recently, our trade associations, where we have senior leadership involvement, have been proactive in advocating for regulations that meet the growing interest in these products. In the interim, we are being very cautious to prioritize client safety. Until regulations are updated, clients face a higher level of risk compared to more established securities. While we are not the pioneers in these products, we are keeping a close watch on developments. Our teams are dedicated to understanding what competitors are offering and what may become available, ensuring we can respond effectively to our advisors and their clients. Great. Well, I think that was the last question. I just want to thank all of you for your time and interest in Raymond James. We certainly do not take it for granted. And I also want to thank all of our financial advisers, bankers, associates and clients for trusting Raymond James and for doing such great work across the country. So we really appreciate it, and we wish all of you well.