Paul Reilly : Thank you, Paul. As I said at the start of the call, I’m pleased with our results for the fiscal second quarter and through the first half of the fiscal year, generating record results and ending the quarter with record client assets. And while there is still economic uncertainty, I believe we are in a position of strength to drive growth over the long term across all of our businesses. In the Private Client Group, the next quarter results will be positively impacted by the 7% sequential increase of assets in fee-based accounts. Our advisor recruiting activity remains robust, and I’m encouraged by a record number of large teams in the pipeline. We are focused on being a destination of choice for our current and prospective advisors, which we believe over the long term should continue to drive industry-leading growth.
In the Capital Markets segment, we continue to have a healthy M&A pipeline and good engagement levels. But our expectations for a gradual recovery are heavily influenced by market conditions, and we could expect activity to pick up over the next six to nine months. And in the fixed income business, the overall dynamic of the past year remain unchanged. Depository clients are experiencing flat to declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. We hope that once rate and cash balances stabilize, we will start to see an improvement. Overall, despite some of the near-term challenges, we believe the investments we’ve made in the capital markets business have positioned us well for growth once the market and rate environment become conducive.
In the Asset Management segment, financial assets under management are starting the fiscal third quarter up 5% over the preceding quarter, which should provide a tailwind to revenues. We remain confident that strong growth of assets and fee-based accounts in the Private Client Group segment will drive long-term growth of financial assets under management. In addition, we expect Raymond James Investment Management to help drive further growth over time. In the Bank segment, we remain focused on fortifying the balance sheet with diverse funding sources and prudently growing assets to support client demand. We have seen securities-based loan payoffs decelerate, and we expect demand for these loans to recover as clients get comfortable with the current level of rates.
With little activity in the market, corporate loan growth has been muted. However, with ample client cash balances and capital, we are well positioned to lend once activity increases in our conservative risk guidelines. In addition to driving organic growth across our businesses, we also remain focused on the corporate development efforts for opportunities that may meet our disciplined M&A parameters. In closing, we are well positioned, entering the fiscal third quarter with a strong competitive positioning in all of our business and solid capital and liquidity base to invest in future growth. As always, I want to thank our advisors who drive this business and associates for their continued dedication to providing excellent service to their clients.
Thank you for all you do. That concludes our prepared remarks. Operator, will you please open the line for questions?
Operator: [Operator Instructions]. We’ll go first today to Alex Blostein, Goldman Sachs.
Alexander Blostein: Congrats to both of you guys. Well deserved. I wanted to start with a question around comp maybe. I understand there are some seasonal factors that impacted the quarter, but maybe help break down how much the seasonal lift was specifically this quarter. It feels a little bit heavier than normal. And then, Paul, I think I heard you say that you’re kind of on target to 65% comp rate for the year, but then you also said you’re still shooting to be below 65% for the year. So maybe just kind of help reconcile where you guys are ultimately expect to end up for the full year.
Paul Shoukry: What we said was that the target that we announced the last Analyst Investor Day was 65%. And so, that’s sort of where we’ve been trending in the first two quarters, but that’s going to – what it does for the rest of the year is going to be largely dependent on the Capital Markets segment. That’s a big driver because typically that would have a lower capital ratio – or comp ratio associated with it than the other segments and help the firm’s overall comp ratio and that wasn’t the case this quarter as you can calculate. We are pleased to be able to generate close to this 65.2% adjusted comp ratio despite the challenges in that Capital Markets segment. In terms of the reset of the payroll taxes and the increase in salaries that’s typical for the calendar first quarter of each year, I would say that probably had an impact around $30 million to $35 million in the quarter.
So, meaningful impact in the quarter. Of course, the salary increases will continue throughout the year, but probably two-thirds of that or so was related to the payroll tax reset, which will decline throughout the course of the calendar year.
Alexander Blostein: My second question around recruiting activity. And if we look at the net new assets disclosed in the quarter, organic growth is trending at a lower end from what we’ve seen from you guys historically. And I guess double clicking into that, it looks like the independent headcount continues to be pretty range bound. So maybe kind of walk us through what’s been sort of pressuring the net new asset growth so far this year, your expectations for the rest of the year, and then specifically what you’re seeing in the independent channel that’s been keeping the headcount relatively flat.
Paul Reilly: I think you’re seeing the same trends that the teams we’re hiring are larger. So we’re bringing in more assets. We’re on a great roll in terms of assets in trailing 12. We do have headcount that moves to our RIA channel. And that takes them out of headcount because they’re not licensed. So, even with that movement and keep the assets, but we’re not keeping the headcount, and we’ll try to give you more granularity on Investor Day, the Analyst Day. And then, you have ins and outs. So, we do have some outs and the ins take time to onboard. So, the assets usually take – when you see a robust quarter like this $80 million of trailing 12, it could take nine months to a year to get all those assets over. So, our expectation is that recruiting will continue and continue strong.
And I think part of the transparency is we need to give you a little more transparency on the RIA and how to think about that. We’ve struggled with a measurement to give you, so you can see through those.
Operator: Next question is Steven Chubak, Wolfe Research.
Michael Anagnostakis: This is Michael Anagnostakis on for Steven. I did want to ask one just on cash sweep. I appreciate the commentary on how things have trended to start the quarter. And it was certainly nice to see that sweep cash was flat in 1Q, but now tax season is behind us. Are you seeing signs that cash sweep is building, inflecting positively? And maybe just speak to your level of confidence that we could see absolute sweep cash balances build from here.
Paul Reilly: We had tax season, we also had a record quarterly fee billing that came out of the cash balances already. And so, I look at today’s report of cash sweep balances, so far in April are down $1.3 billion, which is less than the impact from the fee billings. Now, we had some decline in the enhanced savings program so far this April too. And again, that could have been impacted. We have tracked significant payments to the IRS with tax season here. And if you look at the last couple of quarters, after the fee payments were made, cash kind of built throughout the quarter. And you saw that certainly in this past quarter where cash sweep balances ended relatively flat quarter-over-quarter, which far exceeded our expectations that we shared on the last call. So we are hopeful that balances are stabilizing. And so, we’ll kind of continue monitoring it from here.
Michael Anagnostakis: And maybe just pivoting to DoL, Paul, on the last earnings call, I recall you were relatively comfortable with Ray J’s positioning and that you expected the industry to challenge the new rule. With the final DoL rule now published, maybe you could update us on your views in terms of what the rule in its finalized state means for the industry as well as any implications for Ray J that you would highlight.
Paul Shoukry: Digesting 500 pages of a regulatory rule is a little more – even more complicated than trying to get through our earnings release and analyze it. So it’s early. The early read is actually from the rule itself. There’s nothing that pops out that’s overly problematic. It actually may be surprisingly so. I think the industry’s concern will be two. One is that, does the Department of Labor even have the authority to oversee these accounts? And that doesn’t have to do with this rule. I don’t think the rule itself will have a high impact. But do we want another regulator to concede their statutory authority for the regulator to oversee those accounts? And the other thing is, if the rule is talking about really complying with best interest standard, why is there an extra rule?
But the rule itself is, I think, much more manageable than the draft rule was. So again, that’s an early read. The devil’s always in the detail, but I don’t think the rule itself and what it will require us to do today is – doesn’t look too problematic at all.
Operator: Next question comes from Michael Cho, J.P. Morgan.
Michael Cho: My first one, I just wanted to follow up on M&A again. You talk through a healthy pipeline looking ahead. But just in the quarter again, you also talk through some seasonality and some lumpiness. I’m just curious if there’s anything else you can call out or any more color around nuances between maybe some of the affiliation models that you talk through and maybe anything to call out in terms of how maybe attrition is trending as well.
Paul Reilly: If you look for the first six months, I think compared to the industry and the 5s, we did pretty well. So this quarter was slower in terms of the number. Typically, this is a little lower, but a lower – maybe a little lower than we would have thought in terms of the number itself. But the recruiting is going well, the movement to RIA, you can see that net new assets growth was pretty robust. Net asset growth was pretty robust. So I think it actually was – we have quarters where things are down and quarters where things are up. And I just think it was down a little more than we anticipated from a measurement standpoint. But the recruiting, not only in what we brought in this quarter, but what we have in the pipeline, and think we have a relatively good chance of closing, I can’t remember ever being stronger.
So, the numbers will be impacted by, in terms of advisor count, how many go to RIA, and then hopefully the ones that do will choose to stay with us. And we’ve had a pretty good record on it so far.
Michael Cho: Just switching gears to the Capital Markets business, I realize some of that is driven by the deferred comp that you called that and maybe still recovering and the environment. So with that backdrop potentially improving from here and Raymond James’ history of investing in talent as well, how would you frame your willingness to go after incremental talent in the advisory business over the next, call it, 9 to 12 months?
Paul Reilly: We’ve done a lot of adjusting in terms of the costs and lowering the costs in that business, but we’ve also done some hiring. So the business is very leveraged, the upside of revenue comes up. So, the margin two years ago was, what, 50% or something. So now it’s not. So, there’s leverage for the revenue to grow to really help with that margin. So the question is just the market and we’re open always to bring in talent. I think we showed in 2009 and the worst part of – we were hiring when other people aren’t and it really paid off for our growth for the whole next decade. And so, that is the blessing of a really strong capital position is that we have the opportunity even in tough markets to hire, carry and really position talent to bring us forward.
We’ve done some public finance hiring that we’re already seeing pay off from in the last – this quarter and this coming quarter that you – if you looked at just the results of public finance, you wouldn’t have done it. But we’re again great believers in the business, the platform. And if there’s great talent out there, we’re willing to take the long term investment and liquidity and capitalized support to do that.
