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Good evening, and 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' Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to Slide 2. 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, and thank you for joining us. Over the past few weeks, we've had the opportunity to spend time with advisers and their teams at various conferences and recognition trips. These advisers exemplify the client-first values that have driven our consistent results since our founding in 1962. And 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 define 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 advisers 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. Pretax 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 now more than ever. But what sets Raymond James apart today is the same thing that has always set us apart, our culture and the way associates and advisers 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 advisers 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 advisers 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 advisers 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 fiscal 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 advisers reflects our differentiated value proposition: advisers do not have to choose between culture and capabilities. We offer a unique combination of an adviser- and client-focused culture along with leading technology, products and solutions advisers 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 advisers evaluating alternatives. Our ability to scale and sustain this compelling value proposition is seen in our near-record levels of adviser satisfaction. At the same time, advisers' expectations are high and clients' needs are becoming more complex. This is why we are investing to equip advisers 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 advisers more time to deepen client relationships and further enhance the client experience. For example, this quarter, we completed the enterprise rollout of Raymond, our proprietary AI assistant, following a thoughtful pilot program and phased deployment. Raymond 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 advisers 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 nondiscretionary assets to the 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 and support our 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 capital 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%. Now 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 6. 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 pretax margin for the quarter was 19.1% and adjusted pretax 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 7. The Private Client Group generated pretax 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. Pretax 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 pretax 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 pretax 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 30. The Bank segment generated net revenues of $488 million and record pretax 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 and 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 5 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. Noncompensation 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, noncompensation 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 cost. 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 cost as we host many of our largest annual conferences and invest more heavily in advertising during this time of the year. Certain noncompensation 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 noncompensation 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 pretax margin trends for the past five quarters. This quarter, we achieved adjusted pretax 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, 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 1 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 1 leverage ratio target of 10%. The effective tax rate for the quarter was 20.7%, which includes the favorable impact of nontaxable 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 1 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 pretax 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 adviser 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. But what sets Raymond James apart is the same thing that has always set us apart, our culture and the way our financial professionals and advisers serve clients through trusted relationships. That can't be replicated by AI or technology, but it will be helped by AI and technology. So 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 is 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?
分析師問答
The operator provided instructions. Your first question comes from the line of Dan Fannon with Jefferies.
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 put up so far year-to-date?
Thanks, Dan. We remain a consistently best-in-class recruiter of financial advisers in the industry year in and year out. And 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 advisers and make sure that our advisers 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 advisers getting to know them and understand what we could do better to help them grow their businesses. We have a 97% adviser 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. Advisers 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 adviser could possibly want. We offer adviser choice where we're agnostic to 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 and there are very few firms that treat advisers like clients anymore. We couple that with capabilities and that's what's really driven our strong recruiting results and the pipeline remains strong. This is not a pipeline driven by one firm or one catalyst in the market or one affiliation option. It's a broad-based pipeline from many different advisers from many different firms and many different communities across the country interested in all of our affiliation options. So we feel very good about the pipeline. We don't think it's idiosyncratic. But certainly, when you look at the net new asset growth for the fiscal year so far, it's up 119% — $75 billion of net new assets for the fiscal year is up 119% from last year, which was a record. It's truly phenomenal growth that we are driving. But again, it starts with keeping our existing advisers satisfied and having high retention of our existing advisers.
Understood. And then just wanted to follow up on the Investment Banking commentary. That seems to be very consistent with what you've been saying in 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?
I mean there's a lot of pent-up energy amongst financial sponsors to get deals done. There are well-documented portfolio companies that are well beyond their original hold dates as well as dry powder that financial sponsors and buyers have that they want to deploy. There have been idiosyncratic concerns impacting different industries, like AI with software and fintech and that sort of thing. I think as we get through those types of idiosyncratic concerns and some level of discovery and closing the gaps and valuations between what sellers expect and what buyers are willing to pay — based on our activity levels and dialogues and engagement letters that we're signing — we think there's significant room for upside in investment banking. But yes, those factors need to all align for that to happen.
Your next question comes from the line of Michael Cho with JPMorgan.
I'm going to just start with the recruiting one of all, Paul. I mean you just talked through the NNA and the success that you've had year-to-date, and you also kind of talked through the robust pipeline. I was just hoping you can test a little bit more on that pipeline, maybe pipeline today relative to maybe where 2026 started and I recognize it's broad-based pipeline, but anything to kind of provide any color on the employee versus independent channel?
Yes. The pipeline is still strong and robust across the different affiliation options. There was 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; those are the best conversations to have, where advisers don't necessarily know exactly how they want to affiliate with Raymond James and how they want to run their business going forward, but they know that Raymond James is the right partner for them and for their clients and their teams. Once they figure that out, they will do the homework on which is the right affiliation option and what are the pros and cons. So I would just say it's broad-based strength. The momentum is strong and it's really across our affiliation options.
Great. Understood. And if I could just follow up just on AI. Paul, you referenced in your prepared remarks around the enterprise rollout of Raymond. I guess, how do you envision the adoption of Raymond? And I believe you're partnering for models and some of the other capabilities out there. Can you talk through the cost of these initiatives and the potential for pricing model changes and the adoption across the firm?
Yes, the adoption has been fantastic. We just did the full rollout of Raymond. We had a pilot phase, but we did the full rollout on June 15, a little over a month ago, and we already have 6,500 unique users. The satisfaction rate is 99.5%, which is phenomenal. This is a large language model that can answer many questions related to customer and client accounts. The feedback has been overwhelmingly positive and utilization has increased substantially, and there's still a lot of advisers and sales assistants that are learning about Raymond who 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 advisers and their teams and associates on AI capabilities and how they can use it day-to-day. In a very short period of time since our rollout, 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 can use AI to improve their efficiency and effectiveness 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 for financial advisers. The more time we can save advisers and their teams on administrative aspects and back and middle office work, 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 advisers: AI will not replace advisers. Advisers who use AI will replace advisers who do not use AI. Our goal is to ensure that all of our advisers have access to 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 is positive and we're managing that cost very closely — the token costs and those types of things. We believe the investments we're focused on are investments we have high conviction will deliver long-term ROI that exceeds the cost of utilizing AI.
Your next question comes from the line of Devin Ryan with Citizens Bank.
I want to follow up on the AI theme. Great to hear about the adoption. I'm curious, is it way too early to map out some of the productivity uplift that you could see? Do you have a sense of how much more productive people can be with even the tools you've launched today? And then on the expense side, as you get smarter around the capabilities, how meaningful do you see opportunities to drive expenses either down or flatten the curve with AI, particularly in areas like back office where automating tasks could drive a lot of savings? Any sense on both productivity and efficiency?
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 for Raymond James but to other CEOs across multiple industries, I think the answer 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 advisers are staying well informed and educated on the capabilities and we're investing in the tools and the infrastructure to provide those capabilities. At this juncture, we're not prepared to put a percentage increase in productivity, which would obviously impact the expense side as well. It's just too early to know.
Okay. Fair enough. We'll obviously come back on that one. And then just as a follow-up on the NIM outlook, as we look at the mix of the balance sheet, obviously, seeing still tremendous growth in securities-based loans. The yields there are slightly above the blended asset yields. How should we think about the NIM trajectory here, all else equal on interest rates? Should we expect modest uplift? Or are there other remixing considerations that we should be modeling as well?
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. When you think about the impact on our NIM, the nature of deposits — how much of the composition of our deposits are on balance sheet or off balance sheet — has a direct impact on our NIM. In this quarter, as an example, we grew deposits that are on balance sheet, enabling us to use other capacity in the sweep program with third-party banks and we get fee revenues from that. From time to time, the impact on our NIM could be negative as we have higher cost deposits on balance sheet, but overall, we manage the aggregate of the BDP revenues and the NII together. So over the long run in a steady rate environment, we've demonstrated a basically consistent NIM performance. When you think about our NIM, you really have to keep in mind the dynamic between deposits that are on balance sheet and off balance sheet.
The goal really is to grow interest earnings and BDP fees over time, and we're confident we'll be able to do that. The geography of the cash will impact the NIM versus third-party fees. The most critical thing is that we have various funding sources both at the bank and at the wealth business that we test from time to time. In this quarter, we were successful in raising ESP balances, which allowed us to put more off-balance sheet to third-party banks. So it's working, and the diversified funding sources are working.
Your next question comes from the line of Ben Budish with Barclays.
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 looks like in both Capital Markets and I think Asset Management your revenues were up sequentially, but your margin was down. Can you 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.
In terms of the opportunities to improve that adjusted comp ratio, one of those is growing our M&A revenues where the comp ratio in our Capital Markets segment is relatively lower compared to the firm-level comp ratio. What we saw was pretty steady comp performance in the Capital Markets segment; the pretax margin impact there was really related to an increase in certain deal-related noncompensation expenses that impacted performance. In the Asset Management segment, keep in mind that we included two months of Clark Capital. We've been pleased to close that acquisition. On a segment basis, there are additional costs, particularly on the noncompensation side 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 included. The slight degradation you noticed is due to the inclusion of Clark and certain acquisition-related expenses that get reported in that segment.
The segment results include acquisition-related expenses, which for the consolidated results we backed out on a non-GAAP basis. That sometimes creates some noise. We don't look at operating leverage on a quarter-to-quarter basis because there's noise in various line items. Year-to-date, for example in the Capital Markets segment, revenues were up 5% and pretax income was up year-over-year even after excluding a one-off legal expense last year — it still would reflect operating leverage year-to-year. That said, the current margin in Capital Markets is not where we want it. We are optimistic that when M&A revenues return to a more normal level for us we can get back to our target. We understand and fully appreciate the question around that margin in that segment.
Okay. Just as a follow-up. Similarly, on the Asset Management side, as we look at asset management revenues relative to assets, it looks like the yield in the quarter stepped down a bit sequentially relative to maybe the last few years. Anything in particular to call out? I imagine there's some timing with the market movements month-to-month, but anything to note there? How should we think about that run rate going into the next fiscal quarter and next year?
I wouldn't say anything fundamentally has changed in the way you should think about that. Adjusting for the timing of those balances and understanding the nature of fee revenues, which are determined on a quarter lag basis, helps explain that dynamic. We're coming off a quarter where those asset balances didn't increase as much as they did this quarter at quarter end, which would explain the timing differences you observed.
Yes, the timing and acquisition-related items create some quarter-to-quarter noise. Over the longer term, we continue to focus on growing fee-based assets and driving operating leverage.
Your next question comes from the line of Brennan Hawken with BMO Capital Markets.
I'd like to follow up on Dan's question on sponsors and the pipeline. It sounds like some of the issues that need to be resolved are probably going to take a little bit of time, so we may be a ways away. That pent-up demand has been true for a few years. Getting to a catalyst might take time to resolve because these are rivalry issues that need to be worked out. I want to make sure I'm reading that correctly. And two, you defined 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 difference intended with the wording. To your first point, it's industry-specific. The AI concern really impacted technology and fintech and software, which is one of our biggest businesses, so that has caused some delay there. Other sectors that had issues last year, like tariff concerns that impacted consumer, have subsided and that business did well this year. It really depends on the sector and when buyers and sellers can converge. I wouldn't definitively say it will take a long time to resolve. The pipelines and activity levels are good; we just don't know exactly when they will convert to revenue.
Fair enough. And then just a quick one on asset sensitivity. We've 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? You've spoken to greater balances moving into ESP. Does success with ESP blunt some of the asset sensitivity? On the other side, loan growth — do you find that growth is sensitive to rates moving higher, or is it less so given we're probably looking at one or two hikes?
Higher interest rates — it's notable we're even talking about that given the recent changes in expectations — would be a tailwind for our business, all else equal. There are always puts and takes across our businesses. Our floating rate assets, such as securities-based loans and most corporate loans, give us a relatively floating rate balance sheet; we've kept it that way to avoid interest rate risk. When rates go down, we see a negative impact; when rates go up, we see a benefit. But Butch can add more specific detail.
Yes, I think that covers it. Thank you.
Your next question comes from the line of Alex Blostein with Goldman Sachs.
I was hoping to follow up on the margin discussion. A little noisy this quarter. You had the reserve release that helped, but then also legal costs that hurt the margin. One, could you quantify the legal piece? But more importantly, when you normalize for both of these, you're kind of in the high 19s pretax margin, almost 20%, close to 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 been waiting for M&A and advisory to pick up for some time. Talk about improving operating leverage over time ex-banking.
20% is the target we discussed previously, and we're right there at that level. Things that can help our operating margin going forward include higher short-term rates, which would be a tailwind, and increased M&A activity. We're investing heavily in growth, which is driving some of the expense base. To generate a 20% margin while investing in growth and producing strong net new asset results is a very solid outcome. There are catalysts that could drive the margin higher or lower. We feel really good about the margin and the return on equity; we had 19% return on equity this quarter and an adjusted return on tangible common equity of 23.5% annualized, which is strong given our deliberate capital base.
And just a cleanup on the legal reserve, how much was that this quarter?
We're not disclosing the specific number, but it was the vast majority of the increase in professional fees in the other segments, so it was a meaningful number. Your analysis essentially was on target.
On an ongoing basis, we do expect to incur some level of additional expense in the near-term quarters, but not at the level we experienced this quarter.
And again, it's not a unique situation to Raymond James. I think there are a number of other companies in our industry dealing with similar litigation.
Your next question comes from the line of Steven Chubak with Wolfe Research.
I wanted to follow up with one on recruiting. M&A trends across the firm remain robust. You've noted Raymond James remains a destination of choice for many advisers. Some peers have seen a slowdown in recruitment and have cited deteriorating returns on adviser or asset recruitment given elevated transition assistance rates. I was hoping you could speak to the range of EBITDA multiples or return hurdles that you're underwriting that supports a proactive recruiting stance? Across which channels are you seeing more or less rational behavior?
I'm not going to comment on peers. We've been consistent: we don't lead with the highest check. We must be competitive economically, but we lead with culture and capabilities. Without a differentiated value proposition, the highest check is all you have, and economics then deteriorate. We've remained disciplined on transition assistance and adviser economics. Recruiting isn't something you can turn on and off quarter-to-quarter. You have to be consistent: retain existing advisers, recruit new advisers, and find advisers who are good cultural fits across our affiliation options. Consistency is critical for us, not only in recruiting but across how we run the business. We make decisions for the next five to ten years, not for the next five to ten weeks. That's been the foundation of our long-term success. We have a very long track of profitability through many environments, and that consistency matters to advisers.
For my follow-up, how do you see AI adoption impacting adviser affiliation preferences? Historically you've been agnostic to how advisers affiliate, but given the omnichannel approach, how do you see AI changing affiliation preferences — for example, the ability to reduce compliance burdens or add bells and whistles to the employee channel? How do you see the value proposition evolving as AI adoption increases?
That's an interesting question and it's too early to tell how it will affect affiliation choices. I do believe AI will differentiate firms as technology has historically, which is why we invest over $1.1 billion in technology. Many smaller firms simply can't keep up with that level of investment and the platform capabilities associated with AI. AI will extend those platform differentiators and help increase productivity for each adviser and their teams. There are big differences in how advisers spend their time across affiliation options: some want to dedicate almost 100% of their time to client-facing work, which aligns more with an employee affiliation, while others want to run a business, dealing with team-building, benefits, real estate, legal aspects, and so on. Whether AI creates convergence among those activities will be interesting to watch over time.
Your final question comes from the line of Mike Brown with UBS.
Paul, I wanted to ask on Clark Capital. Now that it's on the platform, it brings differentiated capabilities across models, investment solutions and planning support. Historically, Raymond James has taken an adviser-centric approach rather than a cross-sell strategy. Still early, but are you seeing any indications of adviser interest or adoption thus far? More broadly, how do you think about the opportunity to drive more utilization of those capabilities across the existing adviser base and what would constitute success over the next few years?
Clark Capital is a great cultural fit for the firm; they're aligned with our client- and adviser-first approach and long-term decision-making. We're thrilled to have them join the Raymond James family. In the first year after an acquisition, the focus is stabilizing the client base and the team and getting everyone comfortable in the new family. We're letting them run independently with appropriate oversight. They've run a tight ship and their NNA even through the transition has continued to be strong because of their strong adviser relationships. Over time, once they have stabilized, we'll look at cross-pollination opportunities. Our teams are already meeting and discussing ideas; for example, our team just met with their team in Philadelphia recently. But first and foremost, you need to retain before you recruit when a family joins yours, and that's their focus now.
Okay, great. Maybe one more on the AI front to wrap up. There's a lot of discussion about AI's impact on industry economics, whether it's on sweep cash or adviser disruption. Has this uncertainty changed how Raymond James approaches recruitment in terms of economics, capital allocation or payback expectations? And if AI improves adviser productivity and reduces administrative burdens, does that make you more confident in your ability to earn attractive returns and compete effectively as you recruit more adviser talent?
Absolutely. AI makes us more confident because it increases the moat: many smaller competitors won't be able to keep up with the level of investment required to provide these tools to advisers and their teams. We're optimistic about the future. We're entering the fourth quarter with momentum — record results for the first three quarters, fee-based assets up 11% sequentially, robust recruiting and a strong banking pipeline. I'm confident those deals will eventually get done. We have great people who put clients first every day. I spent a lot of time with advisers this quarter and am energized by their passion for helping clients achieve long-term financial objectives. AI will help us by allowing advisers to deliver more holistic and personalized advice; we view it as an enabler not a replacement. We're among the first in the industry to take the position that AI will help us, and we have increasing conviction in that view. With that, I want to thank all of you for your time and 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. You may now disconnect.