Raymond James, Inc. (NYSE:RJF)
Q3 2016 Earnings Conference Call
July 21, 2016, 08:15 ET
Paul Shoukry - Head, IR
Paul Reilly - CEO
Jeff Julien - CFO
Steve Raney - President & CEO, Raymond James Bank
Christian Bolu - Credit Suisse
Devin Ryan - JMP Securities
Conor Fitzgerald - Goldman Sachs
Chris Harris - Wells Fargo Securities
Bill Katz - Citigroup
Hugh Miller - Macquarie Research Equities
Sharon Leung - Nomura Securities
Welcome to the earnings call for Raymond James Financial Fiscal Third Quarter of 2016. My name is Raquel and I will be your conference facilitator today. This call is being recorded and will be available on the Company's website. Now I will turn the call over to Paul Shoukry, Head of Investor Relations at Raymond James Financial. Sir you may begin.
Good morning. Thank all of you for joining us on the call. As always, we appreciate your time and interest in Raymond James Financial. After I read the following disclosure I'll turn the call over to Paul Reilly, our Chief Executive Officer and Jeff Julien, our Chief Financial Officer. Following the prepared remarks they will ask the operator to open the line for questions. Certain statements made during this call may constitute forward-looking statements.
Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, anticipated savings, financial results, industry or market conditions, demand for our products, acquisitions, our ability to successful hire, integrate financial advisors, anticipate a results of litigation and regulatory developments, our liquidity and funding sources or general economic conditions. Words such as believes, expects, anticipates, projects, forecasts and future or other conditional verbs, as well as other statements that necessarily depends on future events are intended to identify forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed in those forward-looking statements.
We urge you to carefully consider the risks described in our most recent form 10K and subsequent forms 10-Q which are available on the SEC's website at SEC.gov. During today's call we'll also use certain non-GAAP financial measures to provide information pertinent to our management's view on ongoing business performance. These non-GAAP measures should not be considered replacements for and should be read in conjunction with, the corresponding GAAP measures. A reconciliation of these non-GAAP financial 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, CEO of Raymond James Financial. Paul?
Great. Thanks Paul and good morning everyone. I feel like it's kind of boring after watching the Republican Convention the last few days. We hit our 114th quarter of consecutive profitability which wasn't, I guess, a huge surprise. But the great thing about Raymond James, I think, we're very steady. As I look at the quarter I think the first reaction, I mean, it's just a very solid quarter in a very volatile environment this last quarter. If you look from the big picture, all the strategic drivers of our business look in good shape.
Record net revenues of $1.36 billion, up 3% over last year's quarter and 4% sequentially, record client assets under administration of $534.5 billion, up 7% over last year's quarter and 4% sequentially. Record number of financial advisors, up 327 over last year and 69 sequentially. Record net loans of $14.8 billion, up 23% over last year's quarter and 3% sequentially and record financial assets under administration of $71.7 billion, up 2% over last year's quarter and 4% sequentially. And these are the drivers that you really look for in the forward going business. As many companies have struggled to grow revenue, we've continue to grow revenue which I think is a good long term indicator and all these records are really driven by organic growth and the market.
So these are without some of the acquisitions that we announced that are coming up. Speaking of those acquisitions, as you know, as we're not a very acquisitive Company, but we look at opportunities where there's a culture fit, they drive our strategy, we believe they can be implementable and a good price we believe for shareholders. And we're going to be closing hopefully a couple during this quarter. The first one we've talked about is the acquisition of the U.S. Private Client Service unit at Deutsche Bank or our Alex Brown Division as we will call them, closing. We're on track for our September closing. 92% of the advisors are signed and it's quite -- in reviving the name of the 200-plus year old brand, is very exciting to us.
We closed on Mummert and Company which expands our M&A practice in Europe which we think is a very positive strategic development. And we just got a vote from the shareholders of 3Macs, MacDougall McDougall MacTier in Canada where 100% of the shareholders and 100% of the advisors signed on to join us. And that should close some time in the September-ish timeframe. That's a 175-year-old partnership, again sharing our culture that has decided to join Raymond James. So we're excited about it and we welcome all these groups to the Raymond James family. First I'm going to turn to the financial results. We had record consolidated quarterly net revenue of $1.36 billion, up 3% over last year's quarter and 4% sequentially.
Our net income of $125.5 million is down 6% over last year, but if you exclude the acquisition-related expenses, adjusted net income of $134 million was slightly flat, slightly up from last year's quarter and up 3% sequentially, fully diluted EPS of $0.87 and on an adjusted basis $0.93, up 3% sequentially. All four of our core businesses contributed to growth. And the Private Client Group, the Asset Management and the Bank all had record quarterly net revenue. And Capital Markets only missed a record quarterly net revenue by $9 million. We continued with disciplined expense management. And even with that, in the numbers, we have been affected by a number of expenses, $13.4 million of acquisition-related expenses. We had elevated legal and regulatory expense. The biggest part of that was the settlement with the State of Vermont which was essentially related to the historic FINRA-related AML issue issue that we accrued in the previous quarter.
We believe we've been in good shape on that. We've brought on a few quarters ago a new chief AML Officer. We've installed Mantas, one of the leading AML systems and according to the vendor, really in record time and have it up and running. And we've added 50 additional associates. Simultaneously in our expense numbers we've been working heavily on the DOL and they're all within our -- all of those activities are within our current expense numbers as shown. So I believe we've shown good expense management with this revenue growth. If I turn to the segments, the Private Client Group first, record quarterly net revenues of $900.5 million, up 1% over a year ago and 2% sequentially. And those were driven by the market and assets, but also very strong recruiting, retention and growth in fee-based assets. Our fee-based assets now represent over 40% of the client assets.
Pretax income of $81.9 million, down 5% over last year and down 2% sequentially, driven by a number of things. First, very muted transactional fees which I think you've seen throughout the industry during this quarter as the markets have been very, very uncertain. And also, as previously discussed, impacted by regulatory and litigation costs. Recruiting remains robust. And retention is keeping with our high historic levels. In fact, I've seen the industry reports saying that recruiting was down 40%. We certainly don't see that here at Raymond James. Turning to the Capital Market segment, net revenue of $251.6 million was up 8% over last year and 6% sequentially. Pretax profits, $32.8 million, up 79% over last year's quarter and 17% sequentially.
Again, not against a very strong benchmark quarter, if you look at the contributors to that, there's really an outstanding quarter for our fixed income including public finance, given the marketplace. Brexit volatility, flight to safety, we believe all contributed volumes and record trading profits which we don't estimate will sustain this level of quarter profits into next quarter. ECM continued to struggle, really through the first five calendar months of the year, as everyone did in June. Volume activity picked up significantly, both in M&A and underwriting it, making the quarter better than the last quarter, but certainly overall not a benchmark quarter. Backlog for ECM's continues to be constructive for the next quarter.
So with a reasonable market we have a positive outlook for the Equity Capital Markets. And Asset Management, record quarterly net revenues of $100.9 million, up 2% over last year's quarter and 4% sequentially, with pretax of $32.5 million, up 3% over last year's quarter and 4% sequentially. And record assets under management of $71.7 billion, again driven by market appreciation, increased managed account utilization and a very robust recruiting. Those in-flows and growth more than offset some institutional outflows for Eagle Asset Management. RJ Bank, another strong quarter, record net revenues of $126.6 million, up 22% over last year's quarter, 1% sequentially. Record pretax of $88.9 million, up 14% over last year's quarter, 4% sequentially. Our loans hit a record of $14.8 million, another good forward-looking quarter. We've had resilient net interest margin which I'm sure Jeff will touch on and our loan-loss provision of only $3.5 million, this credit quality remains good.
So with that I'll give some guidance later, but I'm going to turn it over to Jeff to give it some more line item details. Jeff?
Thanks, Paul. The consensus model for the quarter was fairly accurate. The majority of the line items were within 1% or 2% of actuals. Not a lot of line items to focus on here, but I will touch on a few. On the revenue side, pretty close percentage-wise, but a big absolute number, about $16 million ahead of the consensus model. And again PCT driven by the higher asset fees and the volatility that we had in June with the uncertainties surrounding the Fed move and the Brexit vote actually helped institutional commissions, both equity and fixed income. So we had a pretty good June in that regard.
And similarly in Investment Banking we had somewhat of an underwriting recovery in June, although the run rate for the quarter is still low by historical measures. But we did kind of recover somewhat in June to a reasonable number. And that somewhat surprised, I guess, some of the models a little bit in the Investment Banking side as M&A was fairly flat and jumping all the way down to trading profits, paul's talked on that. This was, I think, sort of an outlier good quarter for us in trading profits. I'd like to think not. Maybe we'll get better, but I certainly think that all the stars were in line here for us to hit a number like that in trading profit. So it was a pleasant surprise, even for us, to see the magnitude of that by the end of the quarter and a lot of it again happening in June, and then the other revenues that's driven, as you can see in the detail in the press release, largely by Private Equity valuation gains of $13 million this quarter. More than half of that, by the way, goes to a non-controlling interest down below.
So it's not all ours. In the expense side, numerically again the biggest absolute is comp. But that's generally tied to the revenue growth that we had in the quarter. Communications, info processing was a little higher than our $70 million a quarter type run rate that we've been guiding towards. But I still think that the $70 million-ish number is still probably pretty good. Going forward, this quarter happened to be slightly elevated, but it's been right around that number all year. So I still think that's the right place to be. And more than offsetting that overage, business development continued to be lower than it has historically, recently at least. And even though it's down to $36.5 million for the quarter, we still think the high $30 millions or $40 million-ish is probably a good run rate level for that, for now at least.
The Bank loan-loss provision was a lot lower than people expected. We did have $450 million of net loan growth in the quarter. But interestingly more than half of that was retail-related banking which is securities-based loans and mortgages which carry much lower provisions then C&I and commercial real estate loans. So that caused a lower provision than you might otherwise think with that much loan growth for the quarter. And we had some minor movement up and down in some of the credits, but they generally netted against one another. And then the other expense, Paul's already talked about some of the legal regulatory things. Just to be clear on what he said, we had accrued the AML situation defined from last quarter. That was all accrued as of March, but this newer case, the Vermont situation which is public information out there now, all came up in this current quarter.
So when you look at all those factors and the various regulatory matters, I guess we've sort of say that legal regulatory was elevated by around something by $10 million. Again, similar to what we had told you for the December quarter early in the year. The tax rate for the quarter is still below 37%, as equity markets continue to rise. And actually we got the fixed income market help as well this particular quarter. We continue to get the benefit from our corporate on life insurance investments as those gains are non-taxable. So a little bit of that help keep the rate down below 37%.
Let me just address a couple of the ratios that we follow. The comp ratio for the quarter was 66.9% which is certainly good relative to our 68% target. And that really, as I say, had to do mostly this quarter with revenue mix as you get trading profits, interest earnings, PE gains and some of those things that don't have huge amounts of variable comp associated with them. That sort of helps the comp ratio. And even on the year-to-date basis now we're at 67.5%. So we feel pretty comfortable with that relative to our 68% target. The pretax margin for the quarter on a non-GAAP basis was 15.6% and year to date, 14.8%.
So that number -- I think that we're kind of thinking that we should have a 16% target now in this environment. And again, we would've been close to that potentially without some of these abnormal expenses in legal and regulatory. But we had some help in some other areas. So that margin probably is about accurate for the quarter. We're still optimistic that we can head towards 16% pretax margin as we head to the end of the year and then we'll readdress that target as we get into our FY17 budgeting. In the ROE, again on non-GAAP, basis for the quarter was 11.4% and 10.7% for the year to date. That kind of versus our 11% to 12% range target. We're kind of right in the middle of that and hopefully again we can start trending toward the higher end of that range as we go to the end of this year and look at our budgeting for next year.
Capital ratios were all in the press release. I don't need to talk about those. I think you know there multiples of minimum regulatory requirements. I do want to make a couple of other points before I turn it back to Paul. One is on the acquisition expenses; we've been guiding or thinking we would have, somewhere between $25 million and $30 million related to the Alex Brown acquisition or Deutsche Bank acquisition soon to be Alex Brown. We actually are incurring higher IT costs, higher legal costs than we thought. Actually we still have 5 or 6 side agreements that are still being worked on that will be part of the closing process with Deutsche Bank which is running up some legal bills and we has some real estate costs and some other things.
So by the time we get done, we actually think that unfortunately that number's probably going to be in the high $30 millions rather than the $25 million to $30 million. I know that doesn't impact our non-GAAP results, but it's real money to us. It's shareholder money that's being spent. So we do watch very closely. Another point to make is that you saw the average share count actually decline this quarter versus the preceding quarter. And that's just shows you the result of the share buybacks in January and February earlier this year which more than bought back in control dilution for the quarter. And then lastly, we did have our note offering in July. I think all of you are aware we did close on $500 million 10 years at 3.625% and $300 million 30 years at 4.95%.
So we replenish the liquidity that we used for retiring the debt in April of $250 million that we will be using for the Alex Brown transaction which is about somewhere in the $500 million range. And then we will be back at our, what we'll call a conservative level of liquidity which will put us in a position to take advantage of opportunities, whether it's our own stock price or whether it's acquisitions are other things that come up at that time. But that will, as I think Paul mentioned, have a depressed net interest earnings, obviously for the quarter we're in and the foreseeable couple of quarters as that's added $8.25 million per quarter of interest costs going forward.
With those remarks, I'm going to turn it back over to Paul for a little bit of a forward look.
All right. Thanks, Jeff. First just let me address the segments and I'll give you an overall. In the Private Client Group, certainly you know with record assets it's a good tailwind for us. And Private Client Group, recruiting continues to be robust and we're keeping our historic retention levels. So the trend, certainly from the revenue standpoint, looks very good there. We will likely close on Alex Brown and 3Macs sometime in September. Timeframe, they could slip, but that's the target. Now, those will impact revenue, but you know in our acquisition strategies we don't go slashing costs right away. That our goal is to integrate, keep advisors around, make sure they're stable and then we right-size costs.
So that may have -- they're smaller acquisitions, but it may have some margin impact, certainly not short term margin expansion, but we believe they're both two very good investments. We also have some potential upside it transactional revenues pick up, both through syndicate and Equity Capital Markets and just the equity markets in general. Again can't predict markets. In the Capital Markets side, fixed income and public finance backlogs and the business look good and we continue to think they'll look good, but the $30 million trading profit number is a record and unlikely to continue and hopefully the markets don't gyrate so much that it makes that easy, so looking forward.
The other side, the Equity Capital Markets, the underwriting and M&A backlog look promising. Certainly underwriting calendar looks better than it has in a while. But we all know those markets can turn also. But where there may be some headwinds on public finance, there may be some -- versus this quarter, some tailwinds in Equity Capital Markets. Asset Management, given a reasonable market should continue to grow, given the strong recruiting. And if markets continue to hold, RJ Bank is well positioned. The credit quality still looks good. The Bank is about 34% of our equity target, right about where we target. So we expect loan growth to be more in near corporate growth rates going forward, but it's in good shape.
I know you're going to ask me a lot of questions on the DOL even after I say this and I'll happy to address them. But still, there isn't a lot of clarity on it. We've had teams working very, very hard with a leading outside law firm and consulting firm. The law is very complex. We've generated lots of options, but we're waiting, really, for some DOL guidance that was provided this summer on some of the specifics. We're now working with talking to fund families and others. So next quarter on this call we should have much more specifics or at least directional. Again, we need to make sure that we understand the rule as much as it can be, because it's long and it's guidance based, before we can really give you any solid answers. But I'm confident our team is all over this and we will deal with it.
So if you look this quarter going into next quarter, the headwinds are trading profits. We've had good solid trading profits, but to repeat last quarter would be difficult. We did have some private equity gains that are typical in this quarter that aren't typical next quarter. And the interest expense with the bonds is a new additional expense that we haven't had this quarter or traditionally. But we also have some tailwinds. There are some ups with record assets under administration, record assets under management, record loan levels that should portend well for revenue coming into this next quarter.
We would guess, given where we're, that Equity Capital Markets should pick up, but again that's market dependent. And hopefully, legal and regulatory isn't a recurring expense at the level it has been for the last two quarters. So before I close I just want to thank our associates. We have a lot going on here. We've had a very successful Mantas integration which our vendor has told us has been in record time. We've been working on the Alex Brown close and I think we're in good shape there. We've been working heavily at the DOL well. So we've had a lot going on. And I want to give a special thank you, really, to our advisors who have stayed very focused on shepherding their clients through a very volatile time.
With that, I think Jeff has one more remark and then we'll turn it over to questions. Jeff?
Yes. On the acquisition expenses when I guided up now to the high $30 millions, that's really just for the Deutsche Bank Alex Brown transaction. The 3Macs transaction in Canada will also have some acquisition-related costs. A lot of that's contract termination and severance and things like that. So, but that total for that transaction's estimated to be a little less than $10 million and that will hit some in the September quarter and some in the December quarter.
We're hopeful, because we're not big proponents of non-GAAP presentations, we're hopeful that we can get all of these costs either incurred or accrued by the end of the calendar year. They may slip into March a little bit, but hopefully we can get most of them done by the end of the calendar year so we don't have to continue with that presentation going forward from that point.
Great. Thanks, Jeff. And now we'll open up for questions. Raquel?
[Operator Instructions]. Your first question comes from the line of Christian Bolu with Credit Suisse. Christian, your line is open.
So just firstly on litigation expenses, I guess a couple quarters now of these outsized litigation costs. I don't know, just longer term should we think of issues here as maybe driving structural higher expenses for the firm? And are there any parts of your business model that maybe needs to be modified or changed in some way to satisfy regulators? And specifically on AML, I mean, best you know are we done here? Or are you having discussions with other states?
No. So first, these two weren't totally unrelated. So, one of the AML issues was related to the case and it was a specific case and a specific issue in the State of Vermont with a specific group of investors. So we don't think those are happening all over. Now, you ask if they're structural? I think there is in our industry structural regulatory expenses and certainly a more aggressive stance by regulators. Fines are up in the industry. However, certainly not at this level. I think hopefully they unusual levels. But there will be some fines. And the 50 people in headcount and AML additions is just one example of the increasing regulatory costs, but those are in the numbers today. There is a structural elevated costs in regulatory.
And for us they show up largely in compensation expense and systems. The only thing that's showing up in this other expense, really, are external litigations and fines and things like that. The structural element that's going to be ongoing is embedded in the comp and systems lines.
And then just on mutual funds, I believe in the release you spoke to a pickup in mutual funds service fees in the quarter. Can you give some more color around this, just because there seems to be more of a trend to what passes generally industry-wide? So was the quarter rise more higher asset levels or if you see just greater uptick on your mutual fund products?
I thing is just asset based, both through recruiting and growth. It's just a rise in the level of assets has caused the growth in that number for the quarter.
And then just some quick modeling questions, I don't know if you could give us like the total client cash balances. How much of that were in the deposit sweep programs. And then what kind of rates you're getting on that third-party sweep?
Not really much change from where it's been, Christian. It's still hovering around $38 billion. I think probably $32 billion of that is in the bank sweep program, but $13 billion of that $32 billion is going to our own Bank. So there again, these numbers are not much different than they were a quarter ago. Post the Deutsche Bank Alex Brown transaction we will have different numbers, as there's somewhere between $5 billion and $6 billion of cash balances that will be coming onto our books in that transaction and the spreads really haven't changed much either, by the way.
Your next question comes from the line of Devin Ryan with JMP Securities.
Maybe just a follow-up here on kind of thinking about the DOL, I mean, you mentioned Paul talking to fund families or starting to. I'm just curious if the negotiations around things like revenue share have already started? I guess first question then, client focus has always been a big deal for Raymond James and you guys already aren't selling many products that are viewed as more lucrative by the industry. So I'm curious if you see any changes or expecting any changes to the types or even the number of products that you're selling in a post-DOL world?
Yes, Devin. I mean, it's too early to answer that. I think what my contention has always been is that you have fund families that want us to work with them. We've got to make sure clients are charged appropriately. And that over time there'd be some equitable redistribution that would impact, some may impact clients because it's regulatory. We certainly don't want them to carry the burden. Some of the broker-dealer may impact advisors in the fund family.
I would say we don't have an ask, so I don't think there's negotiation. I do think there's a willingness and an understanding that they will contribute to this. And I don't think there's a resistance to it. It's just how and how do you structure it? How you keep it level for the firm, the client, the advisor, to meet kind of the DOL requirements? So it's complex. I don't see resistance. But I can't say we all have asked yet. We got to know what we're going to do before we have a solid ask.
And then in Private Client, I mean, it just seems a persistent theme here is subdued client engagement. Historically that doesn't correspond with record high markets. Maybe not seeing quite as much in your results because of the recruiting strength, but I'm just curious what you guys think is different this time and what may change the skepticism? I know macro uncertainty is high. I'm just curious if you kind of feel like there's just more of a lasting impairment, just with the financial crisis still relatively fresh?
Part of it, there is a number of elements to it. So first, certainly equity syndicate being down is an impact. So you almost have to move that as a separate piece. There's also movement to fee-based accounts. So that certainly takes it out. But we're kind of digging into that number too and trying to figure out if this is systemic or market-oriented. I think most individual clients have been afraid of the market. And with all this volatility, it's hard to blame them. And we teach long term investment anyway. So whether you could say there's a structural change or this is a market one, I don't know if it's been a long enough run. But we're certainly, like everyone else in the industry, looking very hard at that right now.
Last quick one here just on the bank for Steve. I'm not sure if I missed this, but the NIM outlook just with the flattening of the curve here? And then provision. Understood the commentary, you still seemed a little bit light. I don't know if you can kind of hash out some of the moving parts. I know last quarter you highlighted the qualified reserves was maybe a little bit high, especially with some interest rate related companies. So not sure if that played any part as well. Thank you.
Yes, we would expect, at least over the last couple of quarters as we sit here today, for the spreads in our loan portfolio to be pretty stable. And as Paul alluded to earlier, part of the contribution to the reduced provision expense relative to the gross loan increases was the loan mix and the fact that we really grew our private client banking assets, securities based lending and mortgage loan assets more rapidly than our corporate loans.
And we also net/net, you may have seen we had a reduced level of criticized loans in the quarter which reduced reserves on those particular loans that were either payoffs or in one case we did have one upgrade of a loan from criticized status, but the bulk of it was just paydowns in criticized loans that contributed to that reduction in that asset category.
Good. So you didn't do anything to the qualified reserve, just with the--
Qualitative reserves, there is no--
I assume you call it qualitative reserve?
Your next question comes from the line of Conor Fitzgerald with Goldman Sachs.
I guess just the first one on that net new asset inflows which seem like there were pretty strong this quarter, I guess. Can you give us a little color on where exactly the growth is coming from?
Yes. The growth is, I think, if you look at the assets in general, market certainly helped. We thought the number would be different than -- the last week certainly changed our outlook of the number in June. If you remember the market then and recruiting, and so we've had, as you can see by the results, very strong recruiting, a very strong pipeline and you add those two together, they really drove the client asset number.
And just any more color on specifically where you're having the most recruiting success?
The independent channel has been the strongest this year. And that comes and goes. Certainly when you add Alex Brown and 3Macs to that it's going to catch up. But they seem to go in fits and starts. The recruiting in Raymond James Associates, employee is above last year and that was a very good year. But the independent channel particularly has had a very, very strong year. So we're happy with both of them. But the independent's stronger right now.
No real concentration of where they're coming from.
And then maybe switching over to the loan book, several banks have kind of talked about increased regulatory scrutiny on commercial real estate. I guess two questions. One, are you having any change in dialogue with kind of your regulators on CRE? And maybe more applicable to you, but if other banks are kind of pulling back and that creates an opportunity that spreads wide in that space, is that an opportunity for you to kind of grow your loan book there?
Kind of we're clearly in the middle of that dialogue and getting direction at various regulatory meetings that were in on the focus on commercial real estate. Our balance sheet compositional, although we've grown our commercial real estate book, is a little bit different. Some of the banks that have significant concentrations, their multiples of their commercial real estate exposure as it relates to their percentage of total loans relative to ours.
Ours is still pretty small. And I think you know about half of our commercial real estate are loans to REITs that tend to be a lot more diversified. And the regulators would acknowledge those have historically been less problematic than the project finance real estate. So our real estate concentration and percentage of total assets and total loans is relatively low compared to other institutions. There could be some opportunities, to your point that as others are pulling back. But we're going to continue to be very cautious and not change our underwriting standards on commercial real estate, so.
And then just last one from me would be more on a longer term philosophical one. But you guys mentioned higher costs kind of in closing some of the M&A transactions than you would've thought. Something we obviously hear from a lot of companies these days. I'm just wondering, knowing that was kind of the benefit of hindsight, how does this impact your propensity to do deals in the future?
First, I think we've been very good about predicting our closing costs and net/net Alex Brown was just more complex. The 3Macs or the Morgan Keegan, we brought the broker-dealer and knew what we had and controlled both ends of a transition. And the Alex Brown business, both by part of the reason we're in it is for the ultra-high net worth access and the technology standpoint, the connections, the systems, were just more complicated. And the agreements with Deutsche Bank are more complicated.
So the agreements drove the legal costs. And the sophistication and complexity drove the technology cost. So yes, we underestimated it. And Alex Brown was very strategic for us and their growth. But it wasn't 100% down the fairway, what you'd call Morgan Keegan and 3Macs. It was a little stretch in some areas for us on purpose and we were just a little shy. So I think we've done a good job estimating generally conservatively on those costs and we weren't perfect on this one, but $10 million out of $500 million investment isn't going to sway our ROE analysis too much.
Your next question comes from the line of Chris Harris with Wells Fargo.
Like to come back to the discussion on commissions at PCG, is there anything that you guys are doing internally that might be having an impact on that number? And one of the things I was just thinking about is if perhaps you've raised the bar for sales of higher commission products. And if that is happening, whether that is having an impact on that number?
We've always had a pretty high bar on those and always have been cautious. If anything, with high commissions going way, way back. And Tom's in the room and he beats that drum all the time. So I don't think that's changed. There's been continual growth to fee-based. So that's part of it. And again, you'd have to segment out the syndicate business which has been almost dead which certainly a part of it. And part of is there's been less transactions. So I don't think there's been a change in philosophy or a push to do something that's caused it. I think the natural migration to fee-based along with the muted equity markets have just contributed to that.
Any financial statistics you guys might be able to share with us as it relates to 3Macs? Maybe revenue and perhaps pretax margin, if you can provide that?
Yes, I don't think we've written that up to provide it in some kind of format, but we have disclosed they're 70 advisors and they're about on our average $6 billion of assets in Canada. Our Canadian margins have been near our Private Client Group margins in the U.S. and we'd expect the same thing. That business has been lower margin, really because of back-office costs relative to the size. And we think over time, in that first year that we'll be able to drive a lot of those costs and achieve the margin. But again, we're sensitive both to the people, the culture, making sure we get it right before we're just going to slash cost cutting there.
Your next question comes from the line of Bill Katz with Citi.
Just sticking with the DOL theme for a moment, behaviorally what are you hearing from the financial advisors as everybody starts to distill the implications of fiduciary form? And I guess the core question is, are you seeing any kind of pickup in migration to advisory platforms versus more of a historic brokerage model?
A little bit. Maybe a little bit. We told the advisors to wait for an answer. I think that some people have come out of the box with a solution have had to backtrack. And I think our message has been very clear to our advisors. They know we're sincere about it. We want a solution that's good for clients, keeps as much advisor flexibility as we can and fair to the firm. That's the way we've always approached everything. Until we know what we're going to do, the worst thing you do is go to clients, tell them one thing and then you change it again and then you changed it again when the law is finalized or understood the product.
So there's plenty of time to make those changes. In April, implementation is to go to your clients and change either commission accounts or fee-based. There's plenty of time to do that. So the key is to get it right. Luckily I think we have a lot of trust with our advisors and clients. And our long term history has been to do the right thing. So I think in the most part, they're nervous because they hear stuff but they realize that it's the right track. So far it's been business as usual.
Okay. And just a point of clarification, you've mentioned 92% of the advisors have signed off on Deutsche Bank. Can you give us an update on where the related assets might be associated with those?
Well, the percentage of assets is very similar. I can't tell you what the total assets were. We will find out soon on the closing. But we don't get weekly or monthly reports.
Somewhere between $45 billion and $50 billion for the 92%.
And then just finally, thank for taking the questions. Stepping back, I think a number of your somewhat close peers have been increasingly embracing sort of technology and Robo-Advisors and you've been sort of pretty clear in your strategy of not doing that. Any shift in your thinking in terms of leveraging any online platforms for client acquisition or servicing in the Private Client Group?
We've been very clear that we aren't going to have a separate robo-advisor that just intermediates our advisors. We have never said that we were not going to enable technology that could let clients use that channel. We have an investment central today that manages small accounts for advisors. We've always had in the plans since our plan of the future to take what we already do in asset management and make it more of a direct portal to clients and make it an automated system.
The question for robo-advice was there any real advantage under the DOL rules to put another system in temporarily or intermittently to help with that? I think that's probably no, but unclear. But I would say at first a lot of people ran to that because of it. We will have a client FA-oriented solution, but it isn't a solution that takes it away from the advisor and is a competing channel.
So we're not saying no robo-advisor-like platform. We're in the advisory business. We will have technology that will help them gather and manage assets easier, as all of our technologies really associated with. So it's really a nuance on robo-advisors. When Scott Curtis spoke at his conference, he had two titles, Raymond James Considering Robo-Advisors.
The same interview was, Raymond James Will Never Have A Robo-Advisor. I think it's caught up in the terminology. We will, I believe, have the technology. I just don't think it's going to be a robo direct away from the advisor type of technology.
Your next question comes from the line of Hugh Miller with Macquarie.
So just, I guess, a follow-up on the DOL. We've been hearing a little bit about the potential for the industry to kind of standardized transactional-based commissions across certain product lines for retirement accounts. I wanted to get your thoughts as to whether or not, I guess, you view that as a viable solution for the DOL's fiduciary standard and what potential of limitation challenges there could be if things kind of go that direction?
There so many alternatives. Again, I know you guys want an answer. I'd love to give you one. I think it's unclear. You can do anything within the BIC if you wanted to. But I'm not sure that's smart or good. And we're just looking at all the analysis. I know people have looked at, can you standardize fees in mutual funds on fee-based platforms.
Can you standardize commissions, there are a lot of possible things, but we're not at the point where ready to say what's the right solution for our clients, advisors and us yet. We're just not ready. So we're certainly in dialogue with the industry. So we know generally the options of what people are thinking. We're dialogue with our advisors and we have a big group here that's working on it full time and analyzing the alternatives. And we're systematically starting to make the basis of decisions, what I call them the macro decisions. But we've got a long way before we nail it down or give you a detailed answer like that. It's possible. But we're not there.
Okay. I definitely appreciate the insight and just another question following up on kind of the sluggish retail dynamics that you guys had referenced. I understand the syndicate calendar certainly plays a factor there. We have kind of seen, if you look at some of the retail investor sentiment indexes, a pickup over the last four quarters kind of more towards a four-month high, kind of nearing back towards historical norms. It sounds like from your dialogue that you're not really seeing any change in that retail engagement in July relative to what we may have saw in June. Is that accurate?
Yes. July is early. We're in the middle of July. We're not reporting on that. I would say we see certainly muted activity this calendar year compared to historic norms. I'm not sure we're ready to call that a structural change, but we're in the middle of analyzing it and make sure we understand the components. And when people are slower into the market we can theorize all sorts of things. We're trying to get as objective as we can on it. So we see the trend. We see it in the industry. We're not immune from it. And so we're looking at it. But certainly the retail investor has been nervous in this market and you can't blame them. We've had a lot of ups and downs this last year.
And then last for me. You guys just referenced seeing a little bit more success in the independent channel, obviously mentioning with Deutsche Alex Brown deal and the 3Macs that would kind of change that. But from just kind an organic recruiting environment, is there just more of a willingness for independents to change firms or are you seeing a mix shift where you are seeing kind of in-house advisors at other firms that are adopting the independent channel and coming over to Raymond James in the independent channel?
There are a couple of dynamics. First, last year we said was our second-best recruiting year ever. So first, the employee channel's doing better than last year. They are not having a bad year. They are having a very good recruiting year. The independent channel's just having an amazing year and part of that is position of competitors.
So I think we're getting more than our fair share. The report said that recruiting was down 40% in the industry. We're certainly not seeing that. I think we're just in the right place at the right time and the platform's right. So the independent channel I think has been just a bigger share gain. We're getting to see more and more joining, but the employee channel's up over last year. So, even though it certainly isn't lackluster and we're I think at a pace that we can bring advisors on and successfully.
And frankly if it got too much higher we might even have some concerns about onboarding. But right now we're in good shape. And you get these relative swings. So I wouldn't -- and these swings may last couple years. But it doesn't mean they last forever. So we've watched it go back and forth for a long period of time.
[Operator Instructions]. Your next question comes from the line of Steven Chubak with Nomura.
This is actually Sharon Leung for Steven this morning. My first question is, Steve, you'd alluded to the possibility at Investor Day of deploying some of your excess capital in securing the securities book, at least marginally. Given the recent pressure at the long end of the yield curve, in your view does this still represent like an attractive opportunity moving forward?
Yes. Actually, we're still analyzing that. Obviously the rate environment has changed that dynamic a little bit. Jeff mentioned the cash balances, the total client cash balances, the bulk of which are at third-party banks. Those are pretty stable right now, but he also mentioned that were getting ready to get this influx of cash from the Alex Brown clients. So that analysis still continues. We don't want to take a lot of duration risk.
We're not interested in really going out too far in the yield curve to just try to pick up more yield. So anything we would do would be relatively short in duration. But we do think that dynamic where we could move some additional cash to the Bank and have a little bit larger securities portfolio without taking any credit risk, we would do things that would be in the agency and very high-grade munis perhaps, but primarily agency-oriented mortgage-backed securities. That analysis probably is still valid and we're still continuing to pursue that. As you see, we haven't implemented that yet. But we're continuing to analyze it.
And it would require nominal additional capital.
And then just a follow-up on provision, so provision expenses came in below expectations in the quarter, like you noted. In the past you've guided to provision in the range of 125 to 150 basis points of loan growth per quarter. I guess provision came in below that guidance range this quarter. I was wondering if that guidance still held moving forward?
Yes. Actually, it's really going to be based on the types of loans that we're growing. When we add securities-based loans and residential mortgage loans, the provision expense and the associated loan loss allowance is lower than our corporate loans. So each quarter that had that new asset composition and the new growth tends to be different. Our corporate growth this last quarter was muted which drove that reduced provision expense percentage. When we have a quarter where corporate loan growth is higher than the other asset categories, then that mix will be different the next quarter, so.
And of course in any given quarter we could have credit issues in either direction and we could have qualitative reserve impacts. So those are hard to predict, obviously going forward. But on the growth side I think Steve's comments are correct.
[Operator Instructions]. There are no further questions.
Thank you, Raquel. We appreciate you all joining the call. I'm very proud of our results. I think growing assets and revenue in this kind of market is really the long term indicator of success. We certainly had some unusual expense items and certainly environment has -- between technology and regulatory, it's certainly a challenging environment from an expense standpoint. But we're doing a good job of managing it. With the acquisitions coming onboard this year and I think our positioning. I'm very confident that we will do well, given the market any market environment. So, I'm proud of the team. We know we have to earn it every quarter and I appreciate you attending the call this morning. So, thank you.
Thank you, ladies and gentlemen. This concludes the earnings call for Raymond James Financial Fiscal Third Quarter of 2016. You may now disconnect.
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