Raymond James Financial, Inc. Q3 2026 Earnings Call

Good evening, welcome to Raymond James Financial's fiscal third quarter 2026 earnings call. This call is being recorded and will be available for replay for 30 days on the company's investor relations website. I'm Kristie 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. This presentation being reviewed today is available on Raymond James's investor relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to slide two. 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 statement that necessarily depends 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 Form 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, Kristie. Good evening, thank you for joining us.

Over the past few weeks, we've had the opportunity to spend time with advisors and their teams at various conferences and recognition trips. These advisors exemplify the client-first values that have driven our consistent results since our founding in 1962. Speaking about steadfast values, two weeks ago at our summer development conference, I had the opportunity to honor Tom James for celebrating his 60-year anniversary with Raymond James. He still comes into the office almost every day and reinforces our long-term values that defined his 40-year tenure as CEO, and his incredible generosity of time, leadership, and community giving that serves as an example to us all. I want to thank Tom publicly again for establishing the unique culture that has differentiated Raymond James and helped us continue to be successful over time.

Turning to the quarter, our results for the third quarter were strong and contributed to our record results through the first nine months of the fiscal year. These results reflect the continued execution of our long-term strategies to drive growth, the resiliency of our diversified business model, and our conservative approach to managing the firm. They also reflect the strength of our people-first culture and the commitment of our associates and advisors to serving clients with integrity. In the quarter, we generated record quarterly revenues of $3.93 billion, representing growth of 16% over the prior year quarter and 2% above the preceding quarter. Pre-tax income of $750 million increased 33% compared to the year-ago quarter and 2% over the preceding quarter. Client expectations are changing, innovation is accelerating, and differentiation matters more now more than ever.

What sets Raymond James apart today is the same thing that has always set us apart, our culture and the way associates and advisors serve clients through deeply personal relationships. In the Private Client Group, we ended the quarter with a record $1.86 trillion of client assets under administration, up 9% from the preceding quarter and 18% year-over-year. Our growth remains focused on quality over quantity. Strong retention and continued recruiting momentum again demonstrated that Raymond James remains a destination of choice for financial advisors across our affiliation options. Domestic net new assets were $21.7 billion in the fiscal third quarter, representing a 5.5% annualized growth rate. During the quarter, we recruited financial advisors to our domestic independent contractor and employee channels, with trailing 12-month production totaling $156 million and nearly $23 billion of client assets at their previous firms.

Through the first nine months of the fiscal year, we recruited advisors with trailing 12-month production totaling $393 million and more than $56 billion of client assets at their previous firms, putting us on a clear path to exceed the record results set in FY 2025. The source of this year's recruiting success as well as our current pipeline remains diverse across our affiliation options. This strength in retaining and attracting high-quality advisors reflects our differentiated value proposition. Advisors do not have to choose between culture and capabilities. We offer a unique combination of an advisor and client-focused culture along with the leading technology products and solutions advisors need to serve clients at a high level. Together with our strong balance sheet, long-term focus and commitment to independence, that combination continues to set Raymond James apart for advisors evaluating alternatives.

Our ability to scale and sustain this compelling value proposition is seen in our near record levels of advisor satisfaction. At the same time, advisors' expectations are high, and clients' needs are becoming more complex. This is why we are investing to equip advisors and associates with private wealth tools and resources to deliver deeper, more tailored advice while keeping personal relationships at the center. To support that, we'll continue investing in automation, process improvement, and AI as part of our more than $1.1 billion annual technology spend. These investments are designed to create efficiencies, give advisors more time to deepen client relationships, and further enhance the client experience. For example, this quarter, we completed the enterprise rollout of Rai, our proprietary AI assistant, following a thoughtful pilot program and phased deployment.

Rai gives our people a secure, plain language way to access institutional knowledge, ask follow-up questions, and receive more actionable answers. We are very encouraged by the strong initial feedback from the pilot and full rollout. In Capital Markets, revenues grew this quarter, supported primarily by stronger investment banking results, though activity levels remain below what we would have considered a normalized environment, especially in the middle market and sponsor-driven client segments. We entered the fourth quarter with an encouraging pipeline, reflecting the opportunities created by the strategic investments we have made in this segment over the past few years. While the timing of transaction activity remains difficult to predict, we are optimistic about our positioning as motivated buyers and sellers continue to engage us for the deep expertise across the industries we cover.

In the asset management segment, net inflows into managed fee-based programs in the Private Client Group were strong during the quarter. This reflected the complementary benefits of offering high-quality investment alternatives to financial advisors and their clients, as well as growth from our successful recruiting efforts. We also completed our acquisition of Clark Capital during the quarter, adding its wealth-focused solutions and approximately $47 billion in combined assets under management and non-discretionary assets to Raymond James' platform. We are excited to welcome Clark Capital to the Raymond James family. In the bank segment, loans ended the quarter at a record $56.2 billion, driven primarily by continued strong growth in securities-based lending balances. These balances increased more than $6 billion, or 34%, from the year-ago period and 8% sequentially.

This growth continues to reflect the synergy with our expanding Private Client Group business as we deploy our strong balance sheet in support of clients. Importantly, credit quality across the loan portfolio remains strong. Our capital deployment strategy remains disciplined and long-term focused, with priorities that include organic growth, technology and platform investments, strategic acquisitions, and returning capitals to shareholders. Over the 12 months, we deployed capital through our share repurchase program to help manage capital levels, repurchasing approximately $1.6 billion of common stock, including $400 million during the quarter. We ended the quarter with a Tier 1 leverage ratio of 11.7%. I'll turn the call over to Butch Oorlog to review our financial results in detail. Butch? Thank you, Paul. I'll begin on slide six.

The firm reported record net revenues of $3.93 billion for the fiscal third quarter. Net income available to common shareholders was $595 million, with record earnings per diluted share of $3.01. Adjusted net income available to common shareholders, which excludes acquisition-related expenses, equaled $620 million, resulting in record adjusted earnings per diluted share of $3.14. Our pre-tax margin for the quarter was 19.1%, and adjusted pre-tax margin was 19.9%. We generated annualized return on common equity of 18.8% and annualized adjusted return on tangible common equity of 23.5%. Strong results for the quarter, particularly given our conservative capital base. Turning to slide seven. The Private Client Group generated pre-tax income of $423 million on record quarterly net revenues of $2.84 billion.

Revenues grew by 14% year-over-year, primarily driven by higher PCG assets under administration, resulting from market appreciation, strong retention, and the continued addition of net new assets. Pre-tax income grew 3% over the year ago quarter as the revenue growth was partially offset by the impact of lower interest rates and investments in leading growth, including record recruiting results. The Capital Markets segment generated quarterly net revenues of $477 million and pre-tax income of $48 million. Segment net revenues increased year-over-year and sequentially, largely due to higher M&A and advisory revenues and higher debt underwriting revenues. The Asset Management segment generated pre-tax income of $143 million on record net revenues of $362 million. Results were largely driven by higher financial assets under management compared with the prior year quarter, reflecting market appreciation over the past 12 months and strong net inflows into PCG fee-based accounts.

Results also included a partial quarter contribution from Clark Capital, which we acquired on April 30th. The bank segment generated net revenues of $488 million and record pre-tax income of $206 million. Segment net revenues increased 7% year-over-year, largely due to net loan growth over the period. Results also benefited from a loan loss reserve release during the quarter, driven by a strengthening in credit quality as the loan portfolio continues to shift toward lower risk securities-based and residential mortgage loans. Turning to consolidated revenues on Slide 8. Asset Management and related administrative fees were $2.08 billion, up 20% over the prior year and 3% over the preceding quarter. Record quarter end PCG fee-based assets were $1.15 trillion, up 22% year-over-year and 11% over the preceding quarter.

Looking ahead, we expect fiscal fourth quarter 2026 Asset Management and related administrative fees to increase approximately 11% from the third quarter level, driven primarily by higher PCG assets in fee-based accounts at quarter end. Moving to Slide 9. Clients' domestic cash sweep and Enhanced Savings Program balances ended the quarter at $58.8 billion, up 2% from the preceding quarter and 7% over the prior year level, representing 3.4% of domestic PCG client assets at quarter end. Cash sweep balances grew 4% year-over-year and reflect the impact of organic and recruited growth over the period. We continue to diversify funding during the quarter, with strong growth in Enhanced Savings Program balances up $2.4 billion, or 19%, over the prior quarter level. This on-balance sheet increase in bank deposits enabled us to shift a portion of our cash sweep program balances from our banks to third-party banks.

This dynamic highlights the strength of our deposit gathering capabilities and the flexibility inherent in our funding model to move cash sweep balances on or off balance sheet, enabling us to better serve client needs. Turning to Slide 10. Combined net interest income and RJBDP fees from third-party banks were $658 million, up $8 million, or 1% from the prior quarter. Fee revenues earned on RJBDP balances with third-party banks increased $5 million as a result of both an increase in the yield of five basis points to 2.75%, as well as an increase in average balances swept to third-party banks in the quarter. Bank segment net interest income was flat sequentially as incremental interest from loan growth was offset by higher interest expense, primarily from the growth in the Enhanced Savings Program balances that I previously discussed.

Looking ahead, based on static interest rates and assuming unchanged quarter-end balances, net of the fiscal fourth quarter fee billing collection of $2.1 billion, we would expect aggregate NII and RJBDP fees from third-party banks in the fourth quarter to be approximately flat with the third quarter level. Keep in mind, actual results could be influenced by several variables, including interest rate actions during the upcoming quarter and changes in loan and deposit balances. Turning to consolidated expenses on Slide 11. Compensation expense was $2.58 billion, and the total compensation ratio for the quarter was 65.7%. The adjusted compensation ratio, which excludes acquisition-related compensation expenses, was 65.5%. This result is in line with our target of approximately 65% provided at our Analyst and Investor Day and is down 20 basis points sequentially. In a quarter with better M&A and advisory revenues, we would expect this ratio to improve.

Non-compensation expenses were $599 million, down 5% from the year ago quarter. Recall that the prior year quarter included a reserve increase associated with the settlement of a legal matter which did not recur this quarter. Sequentially, non-compensation expenses increased 3%, driven by higher professional fees and business development expenses, partially offset by a benefit for bank loan credit losses. Professional fees during the quarter reflect elevated legal expenses, with the vast majority being defense costs incurred during the quarter associated with the previously disclosed putative class action lawsuit related to our cash sweep programs. We believe we have strong defenses to the claims asserted, and we are vigorously defending the action. However, such defense is triggering an increase in our costs. Additionally, there were legal costs incurred this quarter related to our acquisitions of Clark Capital and GreensLedge.

Business development expenses were higher as the fiscal third quarter typically reflects seasonal costs as we host many of our largest annual conferences and invest more heavily in advertising during this time of the year. Certain non-compensation expenses are tied directly to our growth, and many of those expenses, particularly those associated with successful recruiting, benefit future periods. For the fiscal year, we remain on track with our target level of non-compensation expenses of approximately $2.3 billion, even with the additional costs associated with our two recent acquisitions, which were not contemplated at the time the target was set. This measure excludes the bank loan loss provision for credit losses, unexpected legal and regulatory items, and the non-GAAP adjustments presented in our non-GAAP financial measures. Slide 12 presents the pre-tax margin trends for the past five quarters.

This quarter, we achieved adjusted pre-tax margin of 19.9%, in line with our guidance of approximately 20%. Our long-term trend continues to highlight the stability and strength of our diversified businesses to consistently generate strong margins throughout various market cycles. On slide 13, at quarter end, our total assets were $94.2 billion, up 3% from the preceding quarter, primarily due to the growth of the loan portfolio. Record bank loans of $56.2 billion grew 13% over the year ago quarter and 3% sequentially, with that loan growth largely in support of our clients. Securities-based loans and residential mortgages represent 64% of our total loans held for investment, reflecting approximately 44% and 20% of the total, respectively.

We continue to have strong levels of liquidity and capital to support the continued pursuit of our capital deployment priorities of investing in organic growth through strategic acquisitions, providing sustainable and increasing dividends to our shareholders, and when appropriate, managing regulatory capital levels through share repurchases. RJF corporate cash at the parent ended the quarter at $2.5 billion, providing excess liquidity of $1.3 billion above our $1.2 billion target. Corporate cash declined in the quarter, primarily due to our deployment of liquidity and capital in completing the acquisition of Clark Capital. With a Tier One leverage ratio of 11.7% and a total capital ratio of 22.5%, we remain well above regulatory requirements with approximately $1.5 billion of excess capital capacity to deploy before reaching our conservative Tier One leverage ratio target of 10%.

The effective tax rate for the quarter was 20.7%, which includes the favorable impact of non-taxable gains on corporate-owned life insurance portfolio in the quarter. We estimate our effective tax rate for the fiscal year will approximate 24%. Slide 14 provides a summary of our capital actions over the past five quarters. Through the combination of common dividends paid and share repurchases, we returned $506 million of capital to shareholders during the quarter. In the quarter, we repurchased $400 million of common shares at an average price of $152 per share. Over the past 12 months, we repurchased 9.8 million common shares for approximately $1.6 billion. Including dividends, over that period, we returned nearly $2 billion to common shareholders, representing 86% of earnings.

Through successful execution on our capital deployment priorities over the past year with strategic balance sheet growth, completion of two acquisitions, and capital return to shareholders, our Tier One leverage ratio has declined 140 basis points over that period to its still strong 11.7% level. We remain committed to operating our businesses over the long run at capital levels consistent with our established targets. I'll now turn the call back to Paul for his final remarks. Paul? Thank you, Butch. I am pleased with our strong performance this quarter as we continue to focus on driving long-term growth across all of our businesses.

Our steadfast commitment to prioritizing the client in every aspect of our business has resulted in record revenues, record pre-tax income, and record earnings per share in the first nine months of the fiscal year. As we enter the fiscal fourth quarter, we do so with significant momentum, supported by historically strong business drivers, robust financial advisor recruiting, and strong investment banking pipelines, along with ample capital and liquidity to support continued growth. Our consistent performance reflects our long-term approach, the resiliency of our diversified business model, and the commitment of our people to serving clients with integrity. Before we conclude, I want to thank our financial professionals and associates across the firm for everything they do each day to serve clients.

The real value in this business has always been and always will be true personal relationships. Client expectations are changing, innovation is accelerating, and differentiation matters now more than ever. What sets Raymond James apart is the same thing that has always set us apart, our culture and the way our financial professionals and advisors serve clients through trusted relationships. That can't be replicated by AI or technology, but it will be helped by AI and technology. We'll continue to invest in the people, platforms, and capabilities that help our financial professionals deliver more holistic and personalized advice while staying true to the culture and long-term approach that has always differentiated Raymond James. Thank you for your interest in Raymond James. That concludes our prepared remarks. Operator, will you please open the line with questions?

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We kindly ask that you limit your questions to one and one follow-up for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Dan Fannon with Jefferies. Please go ahead. Thanks. Paul, I was hoping to just expand upon your comments around the robust recruiting backlog.

Obviously, a lot of momentum in that business. Curious if this gives you confidence around maintaining these levels of organic growth you've put up so far year to date.

Thanks, Dan. We've been consistently a best-in-class recruiter of financial advisors in the industry year in and year out. While recruiting gets a lot of the limelight, I just want to remind everyone, the most important thing we can do to grow the firm is have high retention of our existing advisors and making sure that our advisors are satisfied with the firm as a partner to growing their business and developing deeper relationships with their clients. We look at their satisfaction very closely. There's lots of ways we do that. I spend 70% of my time with advisors, getting to know them and understand what we could do better to help them grow their businesses. We have 97% advisor satisfaction rate.

97% advisor satisfaction rate with our surveys, which is the best I know of in the industry when I speak to other CEOs and other firms. That retention is the foundation for the growth. These advisors know each other in the communities, and they talk to each other, and that's helped us have that consistent growth. We have the largest addressable market in the industry because we have all the affiliation options that an advisor could possibly want. We have advisor choice where we're agnostic into how you affiliate with Raymond James. We want you to fall in love with our culture, values, and the platform and capabilities. How you affiliate with us, we're indifferent to. That combination of factors is increasingly unique in the industry. There's very few firms in the industry that treat advisors like clients anymore.

We're one of those firms, and we couple that with the capabilities, and that's what's really driven our strong recruiting results. The pipeline remains strong. This is not a pipeline that is driven by one firm or one catalyst in the market, or one affiliation option. It's a broad-based pipeline from many different advisors from many different firms and many different communities across the country interested in all of the variety of our affiliation options. We feel very good about the pipeline. We don't think it's idiosyncratic. Certainly, when you look at the net new asset growth for the fiscal year, so far in the fiscal year, it's up 119%. So $75 billion of net new assets for the fiscal year is up 119% from last year, which was a record. So it's truly phenomenal growth that we are driving.

Again, it starts with keeping our existing advisors satisfied and having high retention of our existing advisors.

Understood. Thank you for that. Just wanted to follow up on the investment banking commentary. That seems to be very consistent with what you've been saying the last few quarters. I guess, what do you think it takes to get you to that more normalized level you've been aspiring to?

There's a lot of pent-up energy, I would say, amongst financial sponsors to get deals done.

Pretty well documented in terms of the portfolio companies that are well beyond their original hold dates, as well as the dry powder that financial sponsors and buyers have out there that they want to deploy. There's been sort of idiosyncratic concerns impacting different industries like AI with software and fintech and that sort of thing. I think as we get through those type of idiosyncratic concerns and some level of discovery and closing the gaps in valuations between what sellers expect and what buyers are willing to pay based on our sort of activity levels and dialogues and engagement letters that we're signing. We think that there's going to be significant room for upside in investment banking. Yeah, those factors need to all kind of align for that to happen.

Understood. Thank you. Your next question comes from the line of- Thanks, Sam.

Your next question comes from the line of Michael Cho with J.P. Morgan. Please go ahead. Hi.

Good evening. Thanks for taking my question. I'm going to just start with a recurring one as well. Paul, you just talked through the M&A and the success that you've had year to date. You also kind of talked through the robust pipeline. I was just hoping you could touch a little bit more on that pipeline, maybe pipeline today relative to maybe where 2026 started. I recognize it's broad-based pipeline, but anything to kind of provide any color on the employee versus independent channel? Thank you. Yeah, the pipeline is still strong and robust across the different affiliation options.

There's a team yesterday with $5 million of production that came, and they're actually interested in understanding the various options and the various affiliation options, which those are the best conversations to have. Where it's like we don't necessarily know exactly how we want to affiliate with Raymond James and how we want to run our business going forward. We know that Raymond James is the right partner for us and for our clients and our teams. Now that we figured that out, we want to do the homework on which is the right affiliation option and what are the pros and cons of the affiliation options. I would just say it's broad-based strength. The momentum is strong, and it's really across our affiliation options.

Great, understood. If I could just follow up just on AI. Paul, you referenced in your prepared remarks around the enterprise rollout of Rai. I guess, how do you envision the adoption of Rai? I believe you're partnering for models and some of the other capabilities out there. Can you just talk through the cost of these initiatives and the potential for pricing model changes? Again, just the adoption of how you envision across the firm. Thanks. Yeah. The adoption has been fantastic.

We just did the full rollout of Rai. We had it in pilot phase, but we did the full rollout in June 15th, so just a little over a month ago. We already have 6,500 unique users. The satisfaction rate is 99.5%, which is phenomenal. This is a sort of large language model that can answer many questions related to customer and client accounts. The feedback has been overwhelmingly positive and the utilization has increased substantially, and there's still a lot of advisors and sales assistants that are learning about Rai that haven't even used it yet. We also rolled out an AI academy. I think the first in the industry that I've heard of that's done this to educate advisors and their teams and associates on AI capabilities and how they can use it on a day-to-day basis.

In a very short period of time since our rollout, I think we have close to 20,000 folks who have completed the four-course module. We'll continue to build upon that to help educate people on how they could use AI to improve their efficiency and effectiveness of the various functions in serving clients. All of this is to help people spend more time on what we believe is the most valuable aspect of our business, which is developing relationships. That could be internally but also externally. Financial advisors, the more time we could save their advisors and their teams on the administrative aspects of what they do on the sort of back and middle office aspects of what they do, then the more time they can spend developing personal relationships with their clients and prospects, which is going to win the day.

We say to our advisors, AI will not replace advisors. Advisors who use AI will replace advisors who do not use AI. That's what our goal is to ensure that all of our advisors have access and expertise in using AI to help them better serve their clients. Of course, there's a cost to that, but we believe the long-term ROI, and we're managing that cost very closely, and the token costs and those type of things. We believe in the investments that we're focused on are investments that we have high conviction levels that the long-term ROI will exceed the cost of utilizing AI.

Great. Thanks, Paul. Thank you.

Your next question comes from the line of Devin Ryan with Citizens JMP. Please go ahead. Great. Hi, Paul.

Hi, Butch. I want to follow up on the AI theme, and obviously great to hear about the adoption. I'm curious, is it way too early to map out some of the productivity uplifts that you could see? Do you have a sense of how much more productive people can be with even the tools that you've launched today? On the expense side, just as you guys get smarter around the capabilities, how meaningful do you see kind of opportunities to drive expenses either down or just kind of flatten the curve with AI, particularly just in areas like back office where I know there's a lot of infrastructure and people where it would seem like automating tasks could drive a lot of savings. Any sense on both productivity and efficiency?

Yeah. Those are the two critical questions, not only for Raymond James, but for the AI boom in general. You're asking the absolute right questions. Speaking not only here within Raymond James, but to other CEOs across multiple industries, the answer to that at this juncture is we know it's going to be significant, but it's just too early to dimension it. Our goal now is to make sure that we're not falling behind, and that our associates and advisors are staying well-informed and educated on the capabilities, and that we're investing in the tools and the resources and the infrastructure to provide those capabilities. At this juncture, we're not prepared to sort of put a percentage increase in productivity, which obviously would impact the second part of your question as well. It's just too early to know.

Okay. Fair enough. We'll obviously come back on that one. Just as a follow-up on just the NIM outlook, as we look at just kind of the mix of the balance sheet, obviously seeing still tremendous growth in securities-based loans. The yields there are slightly above kind of the blended asset yields. How should we think about the NIM trajectory here, kind of all else equal on interest rates? Should we expect modest uplift, or are there other remixing considerations that we should be modeling as well?

Yeah. Hey, thanks, Devin. Thanks for the question. Just a couple of things to point out. The yield on our bank segment interest earning assets was flat. We maintained the same yield on interest earning assets over the quarter. As we think about the impact on our NIM, the nature of the deposits and how much the constitution of our deposits, whether on balance sheet or off balance sheet, has a direct impact on our NIM. In this quarter as an example, we grew the ESP deposits. Those are on balance sheet, enabling us to use other capacity in the suite program off with third-party banks. We get fee revenues from that. From time to time, the impact on our NIM can be negative as we have higher cost deposits on balance sheet.

Overall, we manage to the aggregate of the BDP fee revenues and the NII in total in aggregate. We have to look at them in aggregate. We think over the long run, we continue to see in a steady rate environment. We've demonstrated basically consistent NIM performance. I would just say that when you think about our NIM, you really have to keep in mind that dynamic between our deposits that are on balance sheet and off balance sheet.

Yeah, the goal really is to grow interest earnings and BDP fees over time. We're confident that we'll be able to do that. As Butch points out, the geography of the cash will impact the NIM versus the third-party fees. The most critical thing is that we have various funding sources both at the bank and at the wealth business, et cetera, that we test from time to time. We want to see how successful those sources can be. This quarter, we were able to be very successful in raising ESP balances, which allowed us to put more off balance sheet with third-party banks. It's working. The apparatus and the diversified funding sources is working.

Yeah. Appreciate that. Thank you.

Your next question comes from the line of Ben Budish with Barclays. Please go ahead. Hi. Good evening, and thanks for taking my question.

Maybe first, just on the margin. Butch, I heard you talk about how when advisory fees pick up, that's going to maybe drive the comp ratio back down. Curious if you could just talk a bit about what you saw this quarter. It looked like in both Capital Markets and I think asset management, your revenues were up sequentially, but your margin was down. If you could just unpack that a little bit. Particularly curious on the asset management side where your non-comp expenses stepped up a little bit. I presume some of that's related to Clark, but any more color on what's going on there would be helpful.

Yeah. In terms of the, as you mentioned, the long-term opportunities that we have to improve that adjusted comp ratio is with growing our M&A revenues where the comp ratio in our Capital Markets segment is relatively lower relative to the firm-wide comp ratio. What we saw was with pretty steady comp performance in the Capital Markets segment, the pre-tax margin impact was really related to an increase in certain deal-related expenses, non-compensation expenses that impacted the performance. In the asset management segment, keep in mind we included two months of Clark Capital. We've been pleased to close that acquisition. On a segment basis, there are additional costs, both on the non-comp aspect impacting that segment that weren't there prior to the Clark acquisition.

We really need to get a full quarter run rate in place to see the impact on the asset management segment on a comparative basis with Clark in those periods. Basically, the slight degradation that you notice is due to the inclusion of Clark and certain of the acquisition-related expenses that get reported as a segment on Clark.

Yeah. The segment results include the acquisition-related expenses, which for the consolidated results, we back out on a non-GAAP basis. That sometimes creates some noise. As Butch pointed out, we don't look at operating leverage on a quarter-to-quarter basis, just because there's noise and various line items. Certainly year-to-date, for example, in the Capital Markets segment, our revenues were up 5% and pre-tax income was up 93%. Now, there was a one-off legal expense last year, but it still would reflect operating leverage year-to-year, even if you excluded that in the Capital Markets segment. With that being said, the current margin is not where we want it in Capital Markets. We are optimistic that when M&A revenues get back to a good level for us, that we can get back to that 15% target.

We understand and fully appreciate the question around that margin in that segment.

Okay. Thanks so much for all that. Just as a follow-up, similarly on the asset management side, in the PCG segment, as we look at asset management revenues relative to assets, it looks like the yield in the quarter stepped down a bit sequentially and relative to maybe the last few years. I'm curious if there's anything in particular to call out, or I imagine there was some funky timing with the kind of the market movements month-to-month, but anything to note there, and how should we maybe be thinking about that run rate going into the next fiscal quarter and next year?

Yeah, I wouldn't say that anything fundamentally has changed in the way you should think about that. I think adjusting for the timing of those balances and understanding the nature of the fee revenues are being determined on a quarter lag basis. We're coming off a quarter where those asset balances didn't increase as much as they did this quarter at quarter end, would explain that dynamic.

Okay, great. Thanks for taking my questions.

Thank you. Your next question comes from the line of Brennan Hawken with BMO Capital Markets.

Please go ahead. Good afternoon.

Thanks for taking my questions. I'd like to follow up on Dan's question on sponsors and the pipeline. Number 1, it sounds like what you're saying is some of the issues that need to be resolved are probably going to take a little bit of time, so we're a ways away. Of course, your point on pent-up demand, and there's a need to transact and all that's absolutely true, it's been true for a few years. Getting to a catalyst here might take a little time to resolve because these are some rather thorny issues as you lay out that need to be worked out. I want to make sure that I'm reading that correctly. 2, you did define the pipeline as encouraging as opposed to robust.

Is that an actual change or a difference or am I just reading too much into it?

No, no difference intended there in the different words. To your point, I would say the answer to your first question is really industry specific. Really, like the AI concern really impacted the technology team, which is one of our biggest, if not our biggest business year in and year out with fintech and software being relatively uniquely impacted by the AI concern. I don't know how long that takes to resolve itself and to get back to a place where buyers and sellers can converge. Whereas, for example, there's other sectors that last year, for example, the tariff concerns really hit our consumer business pretty hard. That has subsided and consumers actually had a very strong year this year. It really is sector specific.

I'm not sure I would say that definitively that it's going to take a long time for these issues to resolve. I would just say the pipelines and activity levels are good. We don't know when that would actually converts to revenue.

Fair enough. Just a quick one on asset sensitivity. We now have seen the forward curve shift to a more hawkish stance. Could you remind us of your level of asset sensitivity and what factors would come into play? Does the success you've had with ESP sort of blunt some of the asset sensitivity? The other side of that would be SBL loan growth. Do you find that growth is sensitive to rates moving higher? Is it less so just given we're probably only looking at one or two hikes? Thanks. Yeah. I'll let Butch get into the specifics, Brendan.

Higher interest rates, which is amazing that we're talking about that because I think a year ago we were talking about maybe five or six cuts or something like this. The world changes quickly as we are consistently reminded. If rates do increase, that would be a nice tailwind for our business, all else being equal. There's always puts and takes in our various businesses. As far as the floating rate asset that we have on the balance sheet, to your point, securities-based loans, so the corporate loans, the vast majority of those, et cetera, are floating rates. We have a relatively floating rate balance sheet. We've always tried to keep it that way, so we're not effectively taking interest rate risk. Some firms who did that saw the downside of that in 2023.

All else being equal, when rates go down, we see a negative impact on those balances, and when rates go up, we see a pretty nice benefit to those balances. Butch, I don't know if you wanted to provide any more detail than that.

Yeah. No, I think that covers it. Thank you. Thanks, Brennan. Thank you.

Your next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead. Hey, good afternoon, everybody.

I was hoping to follow up on the margin discussion. A little noisy this quarter. Obviously, you guys had the reserve release that helped. You also had the legal cost that sort of hurt the margin. One, could you quantify the legal piece? More importantly, I think when you normalize for both of these, you're kind of like high 19s pre-tax margin, almost 20, kind of almost at your target. Can you talk about the ability to drive positive operating leverage from here if the banking backdrop does not really improve? We've obviously been in this sort of waiting for Godot moment in advisory for some time, and look, maybe it gets better, maybe it doesn't. Talk about improving operating leverage over time, ex banking.

I would just say, 20% is the target we talked about a month ago or maybe two months ago. To your point, we're right there at the 20%. The things that can help our operating margin going forward, we just talked about one of those things, short-term rates. If they increase, I think that would be a tailwind. You talked about M&A. That's another thing that could be a tailwind. Again, we're investing heavily in growth. To get a 20% margin in our business with the type of M&A production, over 6% fiscal year to date, which very few firms have been able to show. Net new assets up 119% year to date over last year's record. The growth, that's a good long-term ROI.

To be able to generate a 20% margin while investing in that growth without Capital Markets hitting on all cylinders is a fantastic result. That's why we gave you that target a couple of months ago. There's certainly catalysts that could drive it higher. There's also catalysts that could drive it lower. Hopefully the market stays where they are and rates don't hurt us going forward. We feel really good about the margin and also the return on equity. We had 19% return on equity this quarter and adjusted return on tangible common equity of 23.5% annualized. The return profile, and that's on a pretty high level of capital that we've been managing more deliberately. Still very nice cushion of capital to be able to generate a 23.5% adjusted return on tangible common equity while making the growth investments that we're making.

Being a leading grower in the industry, we're feeling pretty good about that result.

Just to clean up on the legal reserve, how much was that this quarter?

Yeah. We're not disclosing the specific number, but it was a vast majority of the increase in professional fees in the other segment. It was a meaningful number and your analysis essentially was on target.

Yeah. The only thing I'll add to that is that on an ongoing basis, we do continue to expect to incur some level of additional expense in the near-term quarters, but not at the level that we experienced this quarter.

Again, it's not a unique situation to Raymond James. I think there's at least 13 or 14 other companies in our industry that are all dealing with the same type of litigation.

Yep. Totally get it. All right. Thank you, guys. Thank you.

Your next question comes from the line of Steven Chubak with Wolfe Research. Please go ahead. Good afternoon, and thanks for taking my questions.

Thank you. Of course. I want to follow up with one follow on recruiting.

M&A trends across the firm remain robust. You noted RJ remains a destination of choice for many advisors. Admittedly, some of your peers which have seen a slowdown in recruitment have cited deteriorating returns on advisor or asset recruitment, just given elevated TA rates. Was hoping you could speak to the range of EBITDA multiples or return hurdles that you're underwriting that supports a more proactive recruiting stance. Across which channels are you seeing more or less rational behavior?

I'm not going to speak on peers and what they're saying quarter in and quarter out. What I would say is we've been consistent. First, we don't lead with the highest check. We want to have competitive economics. Certainly, we have to have competitive economics, but we lead with culture and capabilities. We have a true differentiated value proposition. In the absence of a true differentiated value proposition, the highest check is all you have. The economics are going to deteriorate relative to really being able to offer advisors a differentiated value proposition. We've remained disciplined. We always have been disciplined on those transition assistance and economics to advisors. We see it as attractive. Again, as I said in prior calls, recruiting is not something you could turn on and off quarter to quarter.

You have to be consistent in that value proposition that I described in retaining your existing advisors, recruiting new advisors, having the team focused on finding advisors that are good cultural fits with the firm across our affiliation options. We want to remain consistent. Consistency is a critical sort of concept for us, not only in recruiting, but across the results that we generate. We came into this year with 5 consecutive years of record results. Nine months into the year, you can't annualize it, but we have record results so far this fiscal year as well. There's not a lot of other firms in the different market environments that we've seen over the last five years and a half or so that can say they have record results over all of those periods. Consistency's important. Discipline, making decisions over the next 5 to 10 years, not over the next 5 to 10 weeks.

That's really been the foundation of our long-term success. I think this is 153 consecutive quarters of profitability. I should know that exact number, but I think it's 153 consecutive quarters of profitability, again, through the financial crisis. That consistency's super important for Raymond James' long-term success.

That's well said. For my follow-up, Paul, and it's one that you're admittedly uniquely positioned to opine on, is advisor affiliation preferences in an AI world. Historically, you've always talked about, or at least alluded to the fact that you're agnostic to how advisors affiliate. Given that omni-channel approach, wanted to gauge how you see AI adoption impacting advisor affiliation preferences, whether that's the ability to maybe replace regulatory compliance oversight, some of the additional bells and whistles and resources offered to the employee channel. Just trying to gauge how you see that value prop evolving as AI adoption increases.

That's a really interesting question. I haven't thought in terms of the different affiliation options, it's too early to tell. What I do have a belief in is that AI will differentiate firms amongst each other, as technology has, which is why we invest $1.1 billion in technology. A lot of the smaller firms out there just simply can't keep up with that level of investment and that platform, the capabilities associated with that. AI will be an extension of that in terms of differentiating your platform with those type of tools to help increase productivity for each advisor and their teams. Yeah, within the affiliation options, there's such big differences in terms of how advisors spend their time day to day between the various affiliation options.

Some want to dedicate as close to possible to 100% of their time building their books of business, serving their clients, dealing with the financial planning, the holistic financial planning that you provide. That's more aligned with the employee affiliation option. Some want to run a business in addition to those responsibilities of building up the client books and serving their holistic financial needs, running a business. That's building a team, paying for their benefits, dealing with the real estate, dealing with utilities and all aspects of running a business, the legal aspects, et cetera. Your question is, could AI create convergence among those things? Potentially. It'd be interesting to see how that kind of evolves over time.

That's really interesting color, Paul. Thanks so much for taking my questions.

Thank you. Your final question comes from the line of Michael Brown with UBS.

Please go ahead. Great. Good evening.

Thanks for taking my question. Paul, I wanted to ask on Clark Capital. Now that it's on the platform, it does bring a number of differentiated capabilities across models, investment solutions, and planning support. Historically, Raymond James has taken more of a advisor-centric approach rather than pursuing more of a cross-sell strategy here. It's still early, but are you seeing any indications of kind of advisor interest or adoption thus far? More broadly, how do you think about that opportunity to really drive more utilization of those capabilities across the existing advisor base, and maybe what would constitute success over the next few years there?

Yeah. Clark Capital, first and most importantly, great cultural fit with the firm, very aligned with how we approach the business, putting clients and advisors first, making decisions for the long term, and being just good people. We're thrilled to have them join the Raymond James family. Frankly, for the first year or so after you join a family, you really focus on stabilizing your client base, stabilizing your team, and getting everyone comfortable with the new family. We are letting them sort of run independently and, obviously with the appropriate monitoring and everything else, but they run a very tight ship, and their NNA, even through the transition, has continued to be very strong, again, because they have such strong relationships with the advisors that they serve.

Over time, once you get beyond that stage of stabilizing things, again, we're making decisions for the next 5 to 10 years, then you can look at the opportunities to cross-pollinate. Maybe a year from now on a call, we'll be able to talk more specifically around the revenue synergy opportunities. We're already talking about those now. Our team just met with their team in Philadelphia, I think this week or last week, on those ideas. Again, first and foremost, it goes back to how we think about advisor retention. You have to retain before you recruit. When a family joins your family, you have to make sure that they're retaining their people, their clients, before you start adding on to it. That's what their focus is on now, and they've been extremely successful in doing that in these early innings.

Okay, great. Still early days there, and look forward to hearing more. Maybe just another follow-up on the AI front to wrap things up. One thing that certainly gets a lot of discussion and focus is the impact of AI on the industry economics, whether it's on the sweep cash or is the advisor going to be disrupted? Those debates are still lively. I guess against that backdrop and that increased uncertainty around the long-term model, has that changed the way Raymond James has approached recruitment in terms of economics, capital allocation, or even payback expectations? Maybe if I flip that and said, if AI begins to improve advisor productivity, which you are seeing already, reduces administrative burdens, does that actually make you even more confident in your ability to earn attractive returns and continue to compete effectively as you aim to recruit more advisor talent here?

Absolutely. It also makes us more confident that a lot of our smaller competitors aren't going to be able to keep up with the level of investment that will be required to provide these tools to their advisors and their teams. The moat in our industry will increase because I think the cost of making those investments will increase. We could not be more optimistic about the future. We're entering this fourth quarter here, already with record results for the first three quarters of the fiscal year, entering the fourth quarter with fee-based assets up 11% sequentially, which is the highest number I remember in quite some time. We have a significant tailwind going into the fourth quarter. Recruiting pipelines remain strong. The banking pipelines remain strong as well. I'm confident those deals will eventually get done.

I don't know exactly when they'll get done, but there's a lot of pent-up energy there. We just have really great people. I'm biased, but I say the best people in the industry. We really have people that put their clients first day in and day out. I spent a lot of time with advisors here over the last quarter, and I just get so energized by spending time with advisors across the country, across our affiliation options, because they're just really great people that are passionate about helping their clients achieve their financial objectives or long-term financial objectives. That is what Raymond James is all about, is ultimately helping clients achieve their financial objectives. AI will only help us. We're amongst the first in the industry to say AI will help us, not hinder us.

We have more conviction around that now than we did six months ago. With that, I want to thank all of you for your time, your interest in Raymond James. We do not take that for granted and wish all of you a great evening.

Ladies and gentlemen, this concludes today's call. Thank you all for joining.