Message from the CEO & the Chairman
Dear Fellow Shareholders,
The theme for our annual report this year is the Human Connection. Raymond James’ business is based upon deep relationships – with individual investors, institutional investors, corporations and governmental bodies. Our associates’ connections to those clients enable us to add value to their financial planning, funding requirements and strategic solutions for any other problems involving their finances. Later in this annual report, we provide some anecdotal examples of how client-financial advisor relationships contribute to resolving financial issues.
In light of the market decline and volatility during the first half of fiscal 2016, as well as the investment uncertainty occasioned by the presidential election, we are satisfied with Raymond James’ financial results for the fiscal year. We generated record net revenues of $5.4 billion and record net income of $529.4 million, or $3.65 per diluted share. The revenue growth of 4% over fiscal 2015 was driven by record revenues in all four of our core operating segments, which was enabled by healthy organic growth. The 6% annual increase in earnings per diluted common share reflects the realization of operating leverage during the year despite elevated legal and regulatory expenses, as well as the absorption of $41 million of expenses associated with three acquisitions during the fiscal year, which we will discuss later in this letter. Our net income during the year was also aided by higher earnings on cash balances following the increase in the federal funds target rate in December 2015 as well as an unusually low effective tax rate of 33.9% that was improved by several favorable tax benefits during the fiscal year. Our return on equity for the year was 11.3%, which was acceptable given the challenging market environment and the conservative levels of regulatory capital we maintained throughout the year. Our shareholders’ equity on September 30, 2016, of $4.9 billion increased 8.7% during the year, and our book value per share of $34.72 increased at a slightly higher rate of 9.6%, as we repurchased $145 million of our shares at favorable prices during the first half of the fiscal year.
Turning to our segments’ results, the Private Client Group (PCG) generated record revenues of $3.6 billion, up 3% over fiscal 2015, and had its second best year of pre-tax income of $340.6 million, only $2 million less than the record set in fiscal 2015. PCG had an exceptionally strong year for recruiting and best-in-class retention, resulting in the net addition of 550 net financial advisors to a record 7,146. In addition to strong organic growth, it was augmented by the completion of two strategic acquisitions in PCG during the fiscal year: Deutsche Bank Wealth Management’s US Private Client Services unit (rebranded “Alex. Brown,” a division of Raymond James) and MacDougall, MacDougall & MacTier, Inc. (“3Macs”). These acquisitions, which added 265 advisors with approximately $50 billion in client assets, significantly enhance our strategic positioning in both the United States and Canada. Domestically, Alex. Brown increases our presence in the high-net-worth and ultra-high-net-worth client segments, particularly in attractive markets in the Mid-Atlantic and Northeast. The retention of over 90% of the Alex. Brown advisors at closing is exceptional, especially when compared to similar transactions in our industry. The 3Macs acquisition increases our PCG business in Canada by over 20% and establishes a substantial presence in Quebec, which has been a strategic priority for several years. Despite the robust growth in financial advisors and client assets during the year, PCG’s revenues only increased 3% over fiscal 2015, as subdued transactional commissions, including new issue sales credits, created headwinds for the entire industry – in fact, many firms in our industry experienced a decline in revenues during the same period. Moreover, the aforementioned acquisitions both closed at the end of the fiscal year and contributed little to fiscal 2016 revenues. PCG’s profitability also was negatively impacted by elevated legal and regulatory expenses during fiscal 2016, which caused its pre-tax margin to net revenues to decline from 9.8% in fiscal 2015 to 9.4% in fiscal 2016. However, the good news is that the robust growth in financial advisors and client assets in 2015 and the prior two years has substantially increased PCG’s productive capacity.
The Capital Markets (CM) segment generated record annual net revenues of $999.9 million, an increase of 4% over fiscal 2015, and record pre-tax income of $139.2 million, a substantial 30% improvement compared to fiscal 2015. Record results in the CM segment were fueled by record results in the Fixed Income division and Raymond James Tax Credit Funds, which more than offset continued weakness in the Equity Capital Markets division. Institutional fixed income commissions increased 11%, and the firm’s consolidated trading profits increased 57% to a record $92 million. Our Tax Credit Funds business, which is the leading tax credit syndication provider in the country, generated a 33% increase in syndication fees. Meanwhile, fiscal 2016 was another challenging year for our Equity Capital Markets division, as the industry’s equity underwriting revenues were down more than 40% during this period. In this difficult environment, our firm’s equity underwriting revenues declined 27%, which weighed on the profitability of this division. Nonetheless, we continue to make focused investments in this business, particularly to expand our cross-border M&A capabilities, as evidenced by the acquisition of Mummert & Company in Germany during the year.
The Asset Management segment produced record revenues of $404.3 million, increasing 3% over fiscal 2015, and pre-tax income of $132.2 million, only $3 million lower than the record achieved in the prior year. Financial assets under management increased 18% to a record $77 billion, driven by growth in the PCG segment and the increased utilization of fee-based accounts, which we believe will accelerate with the implementation of the Department of Labor›s (DOL) Fiduciary Rule. However, Eagle Asset Management, like all traditional active managers in the industry, has been challenged by industry flows from active products to passive products such as exchange-traded funds that track various indices. While investment performance was generally attractive and gross sales in Eagle were strong in fiscal 2016, large cancellations of institutional accounts resulted in net outflows for Eagle in fiscal 2016, which contributed to a diminution of its profit margin during the fiscal year. On the other hand, increased valuations in the equity markets should presage improved results in fiscal 2017.
Raymond James Bank generated record net revenues of $494 million, up 19% over fiscal 2015, and record annual pre-tax income of $337.3 million, up 21% over fiscal 2015. These superb results were driven by robust loan growth, as net loans at Raymond James Bank grew 17% to a record $15.2 billion, the net interest margin remained relatively stable and there was satisfactory credit performance during the fiscal year. Furthermore, the bank continued to focus on providing competitive lending solutions to our clients in the PCG and CM segments. For example, following the Alex. Brown acquisition, the bank launched a private wealth mortgage solution catering to all of our high-net-worth clients. Also, our Public Finance relationships drove more than 50% growth in the bank›s tax-exempt loan portfolio during the year. More importantly, the magnitude of growth in most other bank results relates to acquisitions, while the growth at Raymond James Bank is organic, which augurs well for the future as it should be sustainable.
Just as important as the numerous records we achieved for several of our financial and operational metrics are the diverse achievements, accolades and milestones our associates achieved in fiscal 2016:
- Raymond James was named to the Fortune 500 list during the fiscal year.
- In December 2015, Raymond James & Associates ranked first for advisor satisfaction on WealthManagement.com’s 2015 Broker Report Card.
- Several of our affiliated financial advisors earned significant distinctions during the fiscal year including but not limited to: Judith McGee being named to Research magazine’s 2015 Advisor Hall of Fame, joining 13 other Raymond James advisors who have earned this recognition since 2006; 14 Raymond James & Associates advisors were named to On Wall Street’s list of Top 25 Regional Advisors Under 40; 24 Raymond James-affiliated advisors were named to the Financial Times’ “FT400” list of top advisors; 36 Raymond James-affiliated advisors were named to Barron’s list of America’s Top Advisors; five Raymond James-affiliated advisors were named to Barron’s list of 2016 Top Women Financial Advisors; and eight advisors affiliated with Raymond James’ Financial Institutions Division were named to Bank Investment Consultant’s list of the Top 50 Bank Advisors.
- Raymond James was recognized as a 2015 Greenwich Excellence Award winner in four categories for Traditional Wealth and Retail Investment Partners, including: overall satisfaction, likelihood to recommend, investment advice/ideas and customer service.
- Continuing our tradition of giving back to the communities in which we live and work, Raymond James donated $8.37 million to charitable organizations in 2016 including $5.19 million to the United Way and its partner agencies across the country. During the annual Raymond James Cares Month in August, more than 3,500 advisors and associates contributed over 6,850 hours toward volunteer projects in 31 states.
- Raymond James Network for Women Advisors’ Michelle Lynch and Raymond James-affiliated advisor Darin Robert Shebesta were named to Investment News’ Top 40 Under 40 List.
- Raymond James received the Bank Insurance & Securities Association’s Technology Innovation Award for the fourth consecutive year. This year, the firm was recognized for its new Client Reporting system.
- Raymond James Investment Banking was named “Investment Bank of the Year” and won two deal-of-the-year awards at the 2016 Americas M&A Atlas Awards, presented by the Global M&A Network. Raymond James Investment Banking also won three deal-of-the-year awards at The M&A Advisor’s 15th Annual M&A Advisor Awards Gala.
- Raymond James Public Finance was once again ranked the nation’s eighth leading municipal underwriter.
- Paul Shoukry was selected by investors and analysts as a top investor relations professional in Institutional Investor’s 2017 All-America Executive Team rankings.
- Raymond James extended the naming rights partnership with the Tampa Bay Buccaneers, ensuring Raymond James Stadium will remain the name of the team’s home field through the 2027 season.
We also announced several changes to our Board of Directors during the fiscal year as part of our deliberate succession planning process and to facilitate our continued success as an independent firm. During the fiscal year, Susan Story was named as lead director to replace outgoing board member Wick Simmons. Accounting veteran Roderick C. McGeary was appointed to the firm’s Board of Directors and named to the Audit & Risk Committee in November 2015. In early December, we announced that Tom James would transfer his Board Chairman position to Paul Reilly but still remain as a member of the board, if elected.
Fiscal 2016 was certainly a year of several profound accomplishments for Raymond James, but more importantly, we continued planning and investing for our continued success in the future. We made substantial investments in additional high-quality associates as well as in new technology. As we write this letter, the equity markets are at record levels, domestic GDP growth and inflation are both near 2% and generally expected to improve, and the unemployment rate has consistently remained below 5%. Furthermore, many additional global and national economic metrics, as well as the Trump rally, suggest that the outlook for our economic future is brightening. These positive economic and market factors gave the Federal Reserve enough confidence to recently increase the federal funds target range by another 25 basis points to a range of 50 to 75 basis points. The consensus is currently for several more rate increases in 2017 but, even if those expectations occur, the measured increase in rates is unlikely to derail improving growth.
These constructive economic indicators, coupled with our strong organic growth, give us reason to be optimistic about the future. However, after an eight-year bull market and the heightened uncertainty associated with a new presidential administration, we also remain prepared for the potential for increased market volatility or a market downturn. While many of the Trump administration’s priorities would be beneficial to the domestic economy and the financial services industry, including lower corporate tax rates, increased infrastructure investments and less burdensome regulations, we believe that effectuating these drastic changes will prove more nuanced and difficult than many market participants currently appreciate, and certainly could take longer than anticipated. For example, the DOL Fiduciary Rule – which has several unintended consequences that negatively impact investors – is an enormously complex regulation that was intentionally fast-tracked by the current administration to facilitate its preservation following a change in the administration. Therefore, while many experts question the fate of this rule under the Trump administration, we must continue to proceed with preparations for the current April 2017 compliance date. Fortunately, we have a fantastic team leading this effort, and we are confident in our ability to help our advisors and clients adapt to this rule in a timely manner, if the rule survives in its current form.
Given all the factors discussed above, our best judgment is that 2017 will be a very good year for financial institutions and Raymond James specifically, unless a substantial adverse event intercedes. The quality, values and experienced professionalism of our associates give us great confidence that the Human Connections with all our clients will deliver excellent results in the future.
Best wishes for a happy, healthy and prosperous New Year!