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BISM Online Update: October 24, 2012

Recurring revenue reaches 63% at Raymond James’ banks

By Andrew Singer

So many banks are talking ‘fee-based’ these days, which is why the news out of Raymond James’ (RJ) management symposium earlier this month is worth a pause. After all, Raymond James’ Financial Institutions Division (FID) has been focused on boosting ‘fee-based’ investment revenue longer than most.

FID, which provides brokerage services to some 200 banks and credit unions, completed a record year in terms of revenue and assets under management—now over $32 billion, division chief John Houston announced at the St. Petersburg, Fla., meeting. For the past 10 years, FID has been the fastest growing unit, in percentage terms, within Raymond James’ Private Client Group.

Fee-based business now accounts for 28 percent of production at FID’s client banks, and recurring revenues—that is, fee-based revenues plus 12b-1 fees and trail commissions—account for 63 percent of division revenues. “Nearly two-thirds is recurring sources,” Houston told us last week.

Raymond James Financial Services President Scott Curtis noted that FID had grown from $22 billion in assets at the end of 2009 to more than $32 billion at the end of September 2012. FID revenues grew 63 percent over the same period. FID advisor productivity has also grown from less than $250,000 in trailing-12 to almost $340,000, while new recruits are averaging $400,000 in T-12, he reported at the October meeting, FID’s ninth annual management symposium.

Gathering and growing assets is a key Raymond James focus, according to Houston. If you gather assets, you view the client differently; you have a different relationship. It changes the whole dynamic. Advisors become more financial-planning oriented, and they tend to focus on the long-term relationship. Gathering assets “is part and parcel of our DNA,” Houston told us.

The ‘trail’ element within FID’s revenue stream is illustrative. Trail commission revenues began to grow quickly about five to seven years ago after RJ capped advisor commissions on variable annuity (VA) sales at 5 percent. Anything over that had to be taken as a trail. This was at a time when VA commissions were high—in the 7 percent to 8 percent range—and Houston feared that advisors might be selling VAs for the “wrong reasons,” i.e., the higher commission rates. Fixed annuities and mutual funds, by comparison, were paying about 5 percent at the time.

Not only did trails begin to grow, but advisors—at least some—became ‘true believers’ in recurring revenue, according to Houston. They began to take as little as 1 percent to 2 percent upfront—by choice—with the remainder as trailer.

Capping the VA commissions upfront was probably pleasing to regulators, too, though Houston hastens to add: “We didn’t do it for regulators.”

Most of FID’s current fee-based business is in mutual fund (MF) wrap accounts and ETF wraps, such as RJ’s “Freedom” mutual fund, which offers clients seven possible investment approaches, ranging from conservative to aggressive growth. Also popular is a fee-based account that is managed by the client and his/her advisor. Separate accounts, usually for more affluent clients, play a smaller role. Recently, RJ’s UMA (unified managed account) business has been picking up steam, Houston told us.

Where does RJ’s bank division find its rep recruits these days? Wirehouses and national brokerage firms like Edward Jones are the preference. Other bank brokerage programs are a secondary source. “You really need a more experienced rep, one who has been around the block,” says Houston. FID reps have at least five years of experience and often 10 years or more.

With regard to recurring revenue, “Many [of RJ’s 200 banks and credit unions] are 90 percent-plus,” says Houston, while some are doing little or none. The compound annual growth of fee-based business has been 24 percent a year, however, while total assets have increased at a 9.8 percent compound annual rate.

We asked Houston where banks need to improve if they want to build a solid fee-based business. “Management at the bank level has to understand the importance of gathering assets, and create an environment that supports that.” If a bank can take some concrete steps along these lines, like paying bridge compensation as brokers transition from commission-based to fee-based business or funding more rep education programs or setting goals for advisors, then that will get them up to speed more quickly.

This is part of a longer story on How Banks Can Better Compete in the Advisory Business that will appear in the upcoming Autumn 2012 issue of Bank Insurance & Securities Marketing (BISM) magazine (print edition).

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