Quarterly profits at Raymond James Financial's Private Client Group slipped 2% year over year, as the company increased spending on marketing, technology and recruiting expenses.
Wealth management pretax profits fell to $75 million for the quarter from $77 million for the year-ago period, even as the broader firm reported a 9% year-over-year increase in companywide net income, buoyed by a 25% jump in profits at Raymond James Bank.
Total assets under administration at the Private Client Group -- the unit that includes both Raymond James & Associates, its employee channel, and Raymond James Financial Services, for independent advisors, as well as the custodial division and Canadian and U.K. broker-dealers -- rose 8.5% to reach a record $471 billion.
FEE-BASED INCREASE
Assets in fee-based accounts increased at an even faster pace, 15%, rising to $182 billion. Revenue for the Private Client Group was up 7% year over year, rising to $874 million.
CEO Paul Reilly attributed the asset growth in part to new advisor recruiting, as advisor headcount rose across both Raymond James channels.
The independent advisor channel grew to 3,422, adding 43 net new advisors from the previous quarter and 134 from the same period a year ago.
In the employee channel, Raymond James said it had a total 2,496, with headcount up by 5 people from the previous quarter and up 48 from the year-ago period.
MUTUAL FUND TROUBLES
Raymond James also said it took a one-time $6 million charge related to mutual fund sales problems.
After reviewing discounts on certain mutual funds, Raymond James decided last year that it would reimburse clients approximately $10 million for not receiving discounts on certain products that they should have, while also recouping about $6 million in comp expenses from advisors who were using those funds.
But management partially reversed itself in February, choosing not to recoup the money from the advisors -- which added the expense to this quarter.
During a conference call with reports, Raymond James CFO Jeffrey Julien said that the original $10 million estimate for reimbursing clients had fallen to $8 million. "Those reimbursements are starting this month," he said.
'OUTPERFORM' RATING
In a research note, Credit Suisse analysts Christian Bolu and Matt Tate continued to rate Raymond James as outperform. "As with retail broker peers, earnings remain depressed in the current interest rate environment; we expect 20-40% boost to the bottom line as rates ultimately normalize," they wrote. "All in all, we view [Raymond James Financial] as a value play on growth in retail wealth, advisors turning independent and rising interest rates."
During the conference call, Reilly pointed to the private client group's record revenue and assets as proof of the underlying strength of the business. He also said that he expected to see more revenue from advisors who are either currently being recruited or recently joined the firm.
"If you go through it all and look at the first-six-month numbers, we've had strong results," Reilly said.
RISING COSTS
Overall, the St. Petersburg, Fla.-based company reported that net income rose to $113 million for quarter from $104 million.
Net revenues grew 9%, rising to almost $1.3 billion, while expenses climbed 8% to $1.1 billion, driven in part by upticks in marketing and recruiting.
"When an advisor comes to Raymond James, there are a lot of exit fees that clients get charged from the firm that the advisor is exiting from. There are home office visits," said Julien. But he defended the costs: "These are investments that we are happy to make, given that we are in a sweet spot for recruiting."
Earnings per diluted share rose to $0.77 from $0.72 per share, but this missed analysts' estimates of $0.82 per share.
In their research note, Credit Suisse analysts Bolu and Tate said that the "EPS miss is disappointing, but core fundamentals are pointed in the right direction, and we expect expenses to moderate over the coming quarters."
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