Good morning, and thank you all for joining us on the call. As always, we appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chairman and Chief Executive Officer; and Jeff Julien, our Chief Financial Officer.

Following the prepared remarks, they will ask the operator to open the line for questions. Certain statements made during this call may constitute forward-looking statements.

Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, acquisitions, our ability to successfully recruit and integrate financial advisers, anticipated results of litigation and regulatory developments or general economic conditions.

In addition, words such as believes, expects, plans and future conditional verbs such as will, could and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Please note that forward-looking statements are subject to risks, and there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent forms 10-Q, which is available on our website.

During today's call, we'll also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. These non-GAAP measures should be read in conjunction with and not as a replacement for the corresponding GAAP measures.

A reconciliation of these measures to the most comparable GAAP measures may be found in the schedule accompanying our press release. So with that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial.

Paul?.

Thanks, Paul, and I'm going to start off with a brief summary of the third quarter and turn over to Jeff Julian for details, and then try to give you some outlook, I guess, without trying to use the words will, could and should, according to Paul Shoukry.

Just returned from last week from our Raymond James Associates employee channel development conference. We had about 2,000 attendees, and in Raymond James fashion, 600 kids. So if you don't think we're focused on the next generation of advisers, we start them early here at Raymond James.

It was a great mood, very upbeat even off a grid payment change to the advisers just a few weeks earlier. I think they understood the need with the DOL for some changes, and we'll talk about that a little bit in the outlook.

First, I'm very proud of kind of the results this quarter, and I'm glad you have high expectations of us and most of the analysts have said it looks okay. I know that everyone has high expectations, but I think they're really very, very good results for the quarter.

For the firm, record quarterly net revenue of $1.62 billion, up 20% from last year's third quarter and 4% from the preceding quarter. Record quarterly net income of $183.4 million, up 46% from last year's third quarter, and 63% from the preceding quarter. Now that quarter was impacted by a legal reserve for JP.

EPS fully diluted of $1.24, up 43% from last year's third quarter and 61% again from that preceding quarter. So I think very, very good numbers.

If you look at the adjusted quarterly net income, $185.5 million, up 34% from a year ago's third quarter - last year's third quarter and down 2% from the preceding quarter, and Jeff will get into a little bit of those details. So we certainly have had great growth across the business over this last year.

We had record net quarterly net revenues in PCG segment, AMS segment, and I mean, Asset Management Segment and RJ Bank. We had record quarterly pretax income in both Private Client Group and Asset Management Segments.

And if you really look at the forward drivers of our business, we had record assets under administration of $664.4 billion, up 24% from last year's third quarter and up 3% sequentially. And we had record quarterly assets under administration of $91 billion, up 27% from a year ago's third quarter and 6% sequentially.

Record number of financial advisers, up to 7,285 and record net loans from RJ Bank of $16.6 billion. So that resulted in a quarterly ROE of 13.8% and quarterly adjusted ROE of 14% in what was really conservative capital levels. So overall, I think we've performed very well against them with any benchmark.

For the first 9 months, net revenue was $4.7 billion, up 19% over the first 9 months of 2016. Net income, $443 million, up 24% over the first 9 months of last year. And adjusted net income of $551 million, up 47%, so the same time period. And this is amidst really a complex changing environment with DOL.

It's a very busy, almost stressful time for the firm, both in support, technology as we adapt to all the rules for advisers. We have to explain to client a lot of these DOL changes and a lot that don't seem to make sense, but they are the law. So it's been very, very busy.

So I want to thank all the Associates here, and especially the advisers, your work and your client focus during this time of change. The Private Client Group net revenues were $1.1 billion, up 25% from last year's quarter. Pretax income, $128 million, up 56% from last year's quarter.

Recruiting and retention remained at great levels and I think industry-leading, and also this quarter was helped by not just recruiting and retention but the Alex Brown and RE/MAX acquisitions.

Short-term interest rates also benefited the Private Client Group, because 2/3 of the interest rate impact, whether they're in interest or fees, really hit the Private Client Group. Market appreciation, we started the quarter 8% higher than the preceding quarter, again, all adding to this quarter's results.

And we've also had increased utilization of fee-based accounts. A lot of it driven by DOL and other regulatory things. And they're now 44% of Private Client Group assets. Capital markets, the quarterly net revenue of $259 million, up 3% from a year ago and 1% sequentially. Pretax of $35 million, up 6% over last year and down 16% sequentially.

If you really look at the quarter, a very good M&A quarter driving investment banking revenues. We had a soft tax credit results for the quarter, and basically, with the uncertainty in the tax rates of between the sellers and buyers of the tax credit, there's been a slowness in the market.

It's to be expected until there's more certainty on future tax rates.

Low volatility has really hurt all institutional commissions, both in fixed income and - And fixed income, obviously even more impacted with a flattening yield curve, although I think they've outperformed if you look at other people's results, our competitors have done a good job in this tough market.

Asset management had record quarterly net revenues of $126 million, up 24% over last year's quarter and up 8% sequentially. Record quarterly pretax of $43 million, up 33% over last year's quarter and 14% sequentially. And this was really driven by growth in AUM with a record $91 billion.

And as a result a lot of organic growth, conversion to fee-based accounts, we've had market appreciation, the net recruiting certainly helps asset management and we've had some net inflows even in CTA, our formal Carillon Towers Associates. So again, good results across that sector.

RJ Bank record quarterly net revenue of $150 million, up 19% over last year's quarter and 6% sequentially. Quarterly pretax of $100 million, up 12% over last year and 9% sequentially.

Record loans of $16.6 billion, and we saw the increase and really kind of our business related loans, the SBO, mortgages and tax exempt, which is partially driven by public finance, and a modest decline in C&I loans for the quarter. We've had continued expansion in the back of our agency-backed securities portfolio.

So they've increased to $1.9 billion at the end of June. So the bank's NIM is up 6 basis points to 314 bps. This is due to the increase in short term rates, but partially offset by our agency-backed investments, which have lower rates but with the leverage better earnings.

Most importantly, our credit quality remains very good to satisfactory, nonperforming loans as a percent of total assets declined to 23 basis points from 52 a year ago and 27% last quarter. So overall, very pleased with the strong performance.

We have a lot of tailwinds, again, behind us starting this fourth quarter, which I'll discuss after Jeff goes through some key results.

So Jeff?.

Thank you, Paul. I'll start with the biggest variances from the consensus model here, which again we appreciate you providing us with those models. It enables us to focus on the areas of difference rather than talking about each line item.

Investment banking revenues, as Paul mentioned, outperformed the consensus, really strong M&A more than offsetting the weakness in tax credit on syndication fees, as Paul just mentioned. We underperformed versus year expectations on net interest income, and I will talk about that in a little bit, there are - there's a clear reason for that.

We underperformed on compensation expense, and I guess we'll have to take a little mea culpa on this one.

In the prior quarter, when we took the $100 million charge for the Jay Peak legal case, what we failed to mention was that, that had the effect of dampening some profit-based accruals around the firm, some are department-specific, some are firm-wide. It just depends where the charge happens to fall.

But around that particular charge, it was a little over 15% variable comp accruals related to that. So comp was sort of depressed by about $15 million or $16 million last quarter, and that's what sort of led to the extremely low comp ratio, I'll call it extremely low, but lower than this quarter.

Comp ratio in the preceding quarter, which we should've mentioned that on the call, and we apologize for that. I think that would have probably caused you to get pretty close to the actuals this time around. The other expense, legal and consulting fees, really are the in some of the regulatory consulting work continues, et cetera.

So there's still what we call maybe a little bit of an elevated level we'd like to think that at some point, this tails off. But for now, we're still at a fairly high run rate of compliance, some legal costs and some of the consulting fees that we are incurring trying to get in line with where we need to be.

And the only other item versus consensus that was, I'd say, materially off was the tax rate, and once again, it had to do with gains in our corporate-owned life insurance portfolio.

And some of you maybe haven't heard how this works, and just for a really brief primer, our total corporate-owned life insurance is now about $385 million, and that basically supports or informally funds some of the corporate deferred compensation plans. And another chunk of it is actually people voluntarily deferring comp.

So it all supports deferred comp, some as company directed, some is employee directed. Of that $385 million portfolio, about 70% currently is allocated to equity oriented investments, mutual funds by and large. So the gain and loss that shows up in those underlying investments is not subject to the U.S. taxes.

So as a result, when the markets are going up, we have a gain in that portfolio. That generally helps our tax rate because it's non-taxable when the market's going down, just the reverse. It's a nondeductible loss. You don't actually see that gain or loss on our financial statements. The actual - it's a balance sheet entry for GAAP purposes.

The gain strictly it would basically offset it if there's a gain on compensation expense because it would obviously increase what we would owe under the deferred comp arrangements. But those two things are basically netted.

So what we end up doing is showing a gain or loss on the asset side of the balance sheet and the other side is a payable to the comp payable is adjusted accordingly. So it's only a balance sheet impact for GAAP presentation, but for taxes, their growth stops so you do get the impact of a gain or loss on the tax rate.

Just for rough math, with the $385 million portfolio, 70% is allocated to equity. That's about $270 million. The S&P was up 2.6% for the quarter, so that would imply a $7 million equity-based gain in that portfolio for the quarter. The actual gain was $11 million for the quarter. So we're not all in S&P 500 type objectives.

Obviously, there's international, there's small caps, there's a number of other types of investments, and there's some fixed income that bounces around a little bit as well. So the actual gain of $11 million, so it was not exactly a correlation to the S&P 500, but it does have that impact.

So in times of market movements in the quarter, you ought to think about adjusting your tax rate somewhat for that phenomenon. A couple other items I'd like to mention, we talked a little bit about the comp ratio. We ended up at 66.6% for the quarter and 66.75% for the year-to-date.

So that's - it is under that 67% target that we sort of outlined at the analyst day, although last quarter because of the charge that I mentioned and the impact of variable comp accruals was even lower than these numbers. On Page 10 of the press release, you can see a number of other statistics that you should take note of.

The non-GAAP pretax margin was 17.1% for the quarter, and also 17.1% for the year-to-date. The adjusted non-GAAP ROE was 14% for the quarter, 14.1% for the year-to-date. Tax rate, because of what I mentioned for the quarter, was 33.3%, thank you to COLI; and for the year-to-date, it was even lower than that at 31.6%.

And the reason for that is if you recall in the December quarter each year, we get a fairly nice tax deduction for all the equity awards that vest. We typically award them after our fiscal year end.

So in the December quarter, so when those vest, we now get a tax deduction for the appreciation in those awards, whereas before it went straight to equity. So that started this past year, and that's why we had a low rate in the December quarter and should for each December quarter and it's growing as the stock price grows.

Our capital ratios, all very strong, all higher than last quarter. We had a little higher equity level, of course, for earnings. Our balance sheet growth was largely in very low risk-weighted assets, obviously at the bank level, which I'll talk about in a second.

Getting back to net interest now, I would say the June quarter reflected most of the margin increase that we had. There's a little bit of a lag because of the bank loans that select 60- or 90-day LIBOR as their base. They don't generally reset until the anniversary of that 60- or 90-day period.

So throughout the quarter, some of those continued to adjust. And similarly, in June increase, those haven't adjusted and they will be adjusting in the quarter we're sitting in.

The June quarter reflected actually very little of the June increase just because of the timing in late in the quarter, but our current estimate, and I think we talked about this at analyst day as well, is that the September quarter we'll probably realize somewhere in the $15 million type range. I'd give you a broader range.

A range around that number will benefit from that June rate increase, sort of split between interest and account and service fees. We have already raised rates to customers following the June increase, and we may do so again if competition for deposits heats up.

But we're right now currently at or near the top of our benchmark group in virtually all the levels of client relationships. So we're pretty comfortable with where we are for the moment. But if the competition continues to move, we'll be following suit.

Our current spread - when I talk about spread, I'm really talking about what we earn on client domestic cash sweep balances, and those are now shown in this report on Page 10 at the very bottom of that chart at the lower part of the page. You can see we added clients' domestic cash sweep balances.

That's a factor that you all follow very closely, as do we. The unfortunate part of that, and this is what I think really caused the miss on interest earnings estimate, is that you could see we had a $2.5 billion decline over the June quarter and client cash sweep balances. It's not really - it's not money leaving the firm.

It's money generally either being deployed in the market or being deployed into other short-term or what I'll call almost cash equivalent type investments like short-term CDs or T-bills or even some money market funds that we don't sweep to.

Just to seek a little bit higher yield for money they don't want to put to work for a period of time because it hasn't really, like I said, been money out the door from FAA's departing or anything else. So that had a big impact, as you can imagine.

But of that $43.3 billion that you see in that number at the end of June, about $38 billion of that is in our bank sweep program, by far, our largest and most popular program. Of that $38 billion, just a little under $16 billion was going to Raymond James Bank, and the other $22 billion was going to external banks.

And that fee that we earned from the external banks is what shows up in account and service fees. What goes to Raymond James Bank, obviously shows up in interest, and our spread on that really is reflected in their net interest margin, which we'll get to in a second.

And then the other $5 billion is split between our client interest program, which is interest earnings on our financial statements and some of the money market funds that we still do offer as a sweep, such as the government-fund and the tax-exempt fund.

But our spread, which I would start out this conversation with on these client cash sweep balances that are simply turned around and reinvested in other banks or in the client interest program, our spread on that is currently in excess of 110 basis points, which is very high by historical standards.

So I've talked to you in the past, our historic levels were closer to 70. I do think that, that will contract here somewhat over time. I don't think it will get all the way back to 70, as I mentioned in the analyst day. I think it'll probably level out in the 90s, somewhere.

So over time, whether it's just triggered by competitors or another fed move or whatever, I think that spread will eventually tighten further from where it is a little bit. So that's kind of where we are in interest, again - but we haven't really reflected the June increase in June. So we'll still see a pickup in the September quarter on a net basis.

On Page 11 of the press release are the RJ Bank statistics, you can see the bank grew $1 billion in the quarter. That was accounted for more than all of our balance sheet growth. It was about $635 million in loans and about $300 million in the securities portfolio.

As Paul mentioned, the net interest margin grew six basis points, really kind of a combination of a number of impacts, obviously, the March increase got into that, net interest margin. There's a lag effect of loan pricings.

Growth of securities portfolio, the amount of cash they have on their balance sheet throughout the quarter, all those things, the securities portfolio and cash balances have negative impacts on that. I think we're still comfortable guiding you through the 3.10% to 3.20% range, which is what we had said at the analyst day.

But bear in mind, that's going to be on a much larger base if they're really going to grow $1 billion a quarter, which I don't necessarily think that will be the run rate. But if they're going to grow with the securities portfolio in all, yes, that's going to depress the net interest margin but it's going to be applied to a much larger base.

So we should still see a nice growth in net interest earnings from that growth. Bank capital ratios are consistent with the previous quarter. In fact, they're right on top of the previous quarter by the rounding that we put in here. But that was really basically their own earnings, offset by the asset growth that we mentioned, plus the dividend RJF.

And I talked earlier about the holding company capital ratios in that the asset growth was really in the low risk-weighted assets. And if you see the types of loans that Paul mentioned, that grew. Those are fairly low risk-weighted, the securities base loans and mortgages, et cetera, are much low much lower risk weighting than the C&I loans.

And the securities portfolio as well as all agencies security. So that's very low risk weighting as well. So that's generally the reason the holding company capital ratios grew. And lastly, on the bank, credit metrics are still pretty good. We did see an uptick in criticized loans at the very bottom of Page 11.

Really, I'd say it's us getting ahead of what we think could happen, although we're pretty well protected on to some of our real estate specific loans and Steve can dive deeper into that if you want to get more details on that.

But we also had some upgrades and some sales and things like that, that actually kept the overall provision for the quarter at a pretty normal level. So last thing I'd like to do is touch on how we did versus some of the targets that my targets that I mentioned at the analyst day. I should qualify that. I told you I thought PCG could get to 12%.

They're at 11.35%. So that one's not quite where we'd like to see it yet. And capital markets came in at 13.4% versus the 15% target, as you can - as you know, Tax Credit Funds had a - is having a little bit of a slow time, as well as fixed income with a flatter yield curve. But we still think 15% is a very realistic margin target for that segment.

We were thinking asset management even post the acquisition coming up ought to be over 30% and they were at 34.4%. And the RJ Bank net interest margin, we said 3.10% to 3.20%, and it was right almost in the middle of that at 3.14%. We still are trying to keep our comp ratio below 67%, which we did at 66.6%.

We steered you toward IT, averaging or somewhere around $80 million per quarter and it was just under $78 million this quarter. So that's tracking as expected. The overall pretax margin, we are hopeful to get 17%, and on the adjusted basis we're at 17.1%.

Tax rate, I told you, it was kind of going to be down at the 35%, plus or minus COLI, 35% versus yield 36.5% to 37% because of the change in the equity award tax accounting. And obviously, COLI worked in our favor and knocked the rate down 33.3% for the quarter.

And lastly, the ROE, we're in a 14% to 15% range, we're at the very low and of that range at 14%.

So for some of those that missed, maybe the PCG and the overall in the ROE we'd like to see a little higher et cetera, we missed a couple of those, but there are some additional positives going forward as Paul will discuss as I turn this back over to him..

Thanks, Jeff. Just for looking forward a little bit. There are several really tailwinds heading into the quarter. First, in the Private Client Group, we are continuing strong recruiting and retention, which certainly should build. Assets on fee-based accounts, which are billed at the beginning of the quarter, up 6% as the start.

So we certainly have those billing tailwinds coming in. Short-term interest rates will continue to kind of a flow-through, as Jeff had mentioned. We also announced a comp change really due to DOL and the fact that we really haven't had outside of some structural changes almost in 2 decades was really a major comp change here.

And that should drive another 1%. It's 1% decrease in the comp ratio for PCG, 100 basis points. And that'll start the first quarter of 2018. Now there will be some DOL costs that'll help cover and there are some DOL transitions, we're still in negotiating with mutual funds DOL impacted payments and other things. But so that will continue.

There's lots of activity with DOL right now, and it was on-again, off-again, on-again and it might be delayed or off-again. So we're continuing down the road of the current law, but I think given the request of the SEC and DOL on an extension, I think it's very likely we see one. But we'll see what happens.

In the capital markets, still very optimistic on a strong M&A pipeline, and we know that can change on a dime in the markets but it looks very, very good going forward. Tax Credit Funds will continue to be challenged until there's tax certainty. Certainly banks need CRA credits and there'll be a market.

But as developers are kind of pricing on existing tax rates and the buyers are looking at an effective change, that's going to keep a challenge in that market until there's certainty, institutional commissions with lack of volatility would be soft unless there's a volatility event.

Then certainly, fixed income with the flattening yield curve on top of that, will still see its challenges. Although again, I would say performed very well relative to the broader market. Asset management, again, continues to benefit from recruiting and retention. Continued movement to fee-based accounts, really pushed by the DOL.

Total fee-based assets are starting at 6% higher now, they don't bill all beginning of it, they bill through the quarter. But it's a good start, better to be up 6% than down 6% at the start. Scout and Reams is still on track to add about the $67 billion of assets, when we first announced - it was $27 billion I'm sorry, in assets.

We expect it still to close at the end of the calendar year and that last fourth quarter of the calendar year, all indications are we're still on track for that. RJ Bank, our focus is still to maintain just disciplined loan growth if the market allows it.

We're going to continue to expand our agency-backed securities portfolio, as we previously announced. So I think all businesses are performing well given the market environment. We know this equity market won't continue forever, but it's certainly been tailwinds over the last year. All of our fundamentals are strong from recruiting to assets.

We are well positioned to continue this momentum. So we see changes and we're going to continue our investment in tech and support, which we've continued to invest in both of those really to help our clients and our advisers.

So maybe the one unusual item last quarter was the comp impact but on a positive to shareholders is our associates and management, everyone is impacted by profitability. So we have a lot of profit-based accounts and if we don't perform, the bonus pools are affected. So with that, I thank you for joining us today and I'll open it up for questions.

So Kathy?.

[Operator Instructions] Your first question comes from the line of Steven Chubak with Nomura Instinet..

So just wanted to clarify a couple of items around the comp ratio, and recognizing that JPH did have a dampening effect last quarter but that seasonality in terms of the comp decline is usually quite strong that we see from the March quarter to the June quarter.

And on top of that, you were supposed to have the benefit of Morgan Keegan roll-off, which albeit is somewhat modest, was supposed to help certainly this quarter.

I'm just wondering whether that benefit was in fact reflected in the comp ratio this quarter and to what extent did the remixing towards independence versus Ray J advisers actually impact the number as well?.

Obviously it had some impact, you can see the increase in advisers has been higher on the independent side than on the employee side lately.

Whatever benefit we got from the Morgan Keegan roll-off, which was the smaller of the roll-off, the bigger 1 comes in two years from now when the Private Client Group 7-year arrangements start to roll off, but this was the smaller group of capital markets folks. That obviously did roll off. We typically replace programs with much lesser programs.

So there was a net benefit, but obviously, the comp ratio is being impacted pretty dramatically by all - we replaced it with Alex Brown related deferred comp, as well. So I mean I think again, we come out with that 67% target for a reason.

There are whole lot of factors that play into what you're mentioning in some of them, but there are other ones as well. And we had hope to impact it a little bit by the grid change that Paul's talked about.

We have been adding a lot of people in the compliance area of the firm, our risk mentioned areas of the firm, which obviously has an impact on that as well. So we're still kind of comfortable in the 66.5% to 67% range. And we think that's pretty good result for the quarter and I think that, that's about where we project it to be going forward here..

And in thinking about the larger Morgan Keegan roll-off, which is slated to come a couple of years down the road, I know it's difficult to predict what the competitive dynamics will be like.

But is it fair to expect that, that benefit would also accrete to the bottom line?.

Yes, but let me mention one more factor just to show you how complicated it is. Just so when that rolls off in two years, we don't want that fairly sizable group of finance advisers to be there with zero handcuff, so to speak, on them.

So what we've done is started net this past quarter, we started putting them on the new deferred comp plan two years before the other one rolls off. So when those do roll off, they will actually have some deferred compensation in place. So that obviously had an impact on the ratio as well. That's our standard practice.

We applied it to Morgan Keegan, but it's our standard practice for employees..

But that's at a much lower rate than you will see roll off so there's no question that in 2 years from now, there should be a benefit, again, depending on how large we are, it may not be as impactful as you might think it. It's about in the high teens per quarter now for the people that are still with us, as $17 million, $18 million per year.

So it's not - it'll be a couple of million dollars, $4 million, $5 million a quarter. So it won't be a huge needle mover but definitely we should see the impact of it starting in the June 2020 quarter..

Just one final one from me, and maybe this is best for Steve. Looking at the pockets of bank growth, you did note that there - or was mentioned that it was in predominantly lower RWA intensive buckets, but CRE we did in fact see some very strong growth.

I was hoping you could speak to your risk appetite and whether you thought that pace of growth was sustainable?.

Yes. I would say our risk appetite is very consistent and the approach in the underwriting that we're employing hasn't changed. It's opportunistic. The C&I market, the corporate market has been a little softer. It's a little bit more volatile. Probably too much money chasing too few deals in that sector.

But we are very disciplined on the commercial real estate side. And as you know, a lot of our real estate lending is focused on REITs that are highly diversified and many of them are investment-grade or would have an investment-grade rating if they were rated..

I should just correct myself. The effect of the Morgan Keegan roll-off will start in the June 2019, not 2020..

We'll go to the next question from Chris Harris with Wells Fargo..

Can you guys go over a little bit more the rationale for the change in the comp rate at PCG? I just wasn't quite following that exactly..

You mean this year --.

You mean the grid change that was announced?.

Yes, the grid change, the grid change, yes..

We've increased costs, our back office is up almost 1/3 over 4 years. We've got DOL costs coming in. We've got - if you look at where our grids are, they're still very competitive after most firms. Some firms make tweaks to their grids every single year.

We tend not to do that because we think it - and it shows up in industry adviser satisfaction surveys. But when there's a reason to do it, we're very transparent. We roll it out. We explain it to advisers. At our conference they could get up to the microphones and ask direct questions, but I think this one was actually pretty well-received.

So it was just - it was a grid change in order to cover some of the costs, the DOL and other costs that have been imposed on us by the regulatory environment..

That really is a grid change in the employee channel. I mean, it's somewhat the same in the independent contractor channel except with their - and some of their impetus is going to a product neutral type grid, which we did in the employee side a couple of years ago..

But the same result is almost 100 basis point change and the result - we're very transparent about that, with our branch owners in the independent channel..

No, that all makes perfect sense.

Just the one clarifying follow-up, when that grid change takes effect, are you guys expecting incremental expenses off of the base today, which would offset the benefit of that, or no? Is the grid change versus the expense base today that's in a run rate currently due to DOL and the other elevated costs? In other words, is it going to be accretive or not I guess is what I'm asking?.

Yes, I think it'll be accretive in the short term, certainly costs are elevated now we've continued to hire. So some of it is reflective of cost we've already incurred. And again, we've made some fairly significant hiring still to beef up these areas, so some of those costs will be coming through in the future.

So it's - I think partly accretive and to the existing base cost, but partly covering future cost, too. So DOL is just too hard. There's too many moving parts between revenue that's affected and costs that are required and the law, I think, being back up for review to really quantify it. If we could, we'd tell you.

But so part of it is to cover existing costs we've already raised and part of it is to cover future costs..

And your next question comes from the line of Jim Mitchell with Buckingham Research..

Maybe just a little bit of color on the environment for recruiting. You guys seemingly have had some a big success in the Northeast, maybe less so in the West Coast.

Maybe just kind of talk about where you're seeing the most activity and where you think can you get sort of the recruiting in the West Coast side accelerating like you've done in the Northeast?.

Yes, I think we just started when I came in. One of my platforms was growth in the Northeast and out West, and we just kind of hit it better in the Northeast and then also between Alex. Brown and Stuart Partners had the right kind of teams to help influence that, and we've got better momentum.

So we're now just as focused as we were few years ago in getting the West Coast going, in fact we moved our November board meeting to California to make a statement and start getting a really concerted effort both for clients and advisers to start gearing up to get better drive out west, which has been our slower area and the farthest geographically.

So we've made progress. We have recruited advisers, we've got a good pipeline. That's a big market and we've got a lot to do and it's a big opportunity for us. So if we can do it in the rest of the country, there's no reason why we can't to do it in the 3 Western states on the coast there..

Right.

So do you feel like the kind of the pace you had in terms of FA headcount growth that there's still plenty of runway to keep that at a pretty similar pace going forward?.

Yes, I believe so. I think that we're just in the right place at the right time both in our offering in terms of technology and support and our position. And don't think it'll last forever. So our emphasis on training continues to increase as we put more and more people into our training programs for our next generation advisers.

So I think we have to do both. But if you look at our market share still in the Northeast and the West, if we could bring it to our market share on the other parts of the country, we've got a lot of potential for growth. Those are 2 very big markets. The other thing that's helped us in the Northeast that will help us in the West is that our Alex.

Brown joining us has really increased our ability to service ultra-high-net-worth clients, which might have been something that hurt us a little bit in recruiting the very high-end advisers. But I think today, we have our platforms filled out. So it's just about execution and everything would point to right now we still have plenty of running room..

Your next question comes from the line of Devin Ryan with JMP Securities..

Just maybe to follow-up on that last question on recruiting, so clearly, you have still some really nice momentum. If we dig into the headcount, it sounds like it's more on the independent side.

Is that brokerage, or is it pure RIA, independent RIAAs? And how has that been trending and then how do we think about the economic models of some of the different types of advisers, especially the assets you're seeing the acceleration in assets going to fee-based? And so I'm just trying to think about the grids for that as more money goes fee-based as more advisers maybe are choosing kind of the pure RIA model and just kind of the profitability of client assets dollar in each bucket?.

If you go back two years ago, the Private Client Group, independent employees, and these go back and forth, were pretty equal and then independents kind of pulled away, not massively, but it's been out recruiting. I think this quarter, you seem some anomalies both in some retirement, some terms.

And there are some employees that have moved independent, which is part of our adviser choice program is that you can be wherever you want. And so if you look at the numbers just for the quarter, I don't think that's a fair representation. Recruiting has been very good in the employee channel. So we try to be indifferent.

The margins right now happen to be a little bit better in the independent side, but they go up and down just depending on business and mix and how many offices we're opening and all sorts of other things.

So you see the independent growth, they are independent advisers, some have their own RIA but if you look at those numbers, they are independent advisers versus our RIA channel even though we've had good success in recruiting RIAs and it's a - I call it the third leg of our adviser platform that we want to make sure that if people in here or outsiders want to join Raymond James, they have the RIA channel.

You're seeing the growth really on the independent side is what's driving those numbers right now..

And then want to circle back to something that we talked about at the investor day and kind of the M&A appetite in private clients, and I think you mentioned there's a handful of firms that you're kind of always keeping an eye on and speaking with.

It could be kind of a good cultural fit for Raymond James and it sounded like in the future, to the extent regulatory costs go up and the burden of technology goes up, maybe some of those firms may decide that being independent is not the best path.

And so I'm just trying to think about that, you've had a lot of success with recent deals, Morgan Keegan, Alex. Brown.

They seem to be progressing well and so I'm curious if it maybe makes sense to be a little bit more proactive to kind of rather than wait for them to make that decision to incentivize them more because you've had success and you're clearly getting a lot out of both directly and indirectly the more recent deals you've done?.

Yes. So our approach has been - hasn't really changed first. We don't want to be the only firm out there besides kind of the larger bank-owned firms. So we tend to be supportive of our - we're competitors, but we believe it's good that there are other firms out in the business.

That we feel that those firms stay independent until they feel they have a reason not to be and that we're at a home like we've proven, whether it was Morgan Keegan, Alex.

Brown or 3Macs that if they want to come in and become part of our culture and family, and in fact, those firms have influenced us, trying to take the best of all, we'll be there and we let them know that we're here for them.

So we don't get into bidding wars, things - even if we love firms and they're too expensive, we don't do them and we find the best fit is when they're ready and the cultures fit, they know we respect them and that we are here and we're not a hostile firm.

We feel that these integrations have worked well because we've had people that wanted to join us and we wanted them. It wasn't one side or the other. They're hard work, they're really hard. I've told both our head of Alex.

Brown and 3Macs when they joined us, they said, "I'm glad that's over with." I said, "Are you kidding me? This next year is going to be the hardest year you've ever had," and integrations are hard. And if both sides don't want to do it, and aren't very active, they don't work. So I think for us, how we do it's the right way.

I think what we've changed in the last maybe 5 years is we're very clear to those firms if they ever change, we think there's a home, but we're not going to try to push them or sway them or indirectly get them to join us.

And the advantage we have is, again, if you look at adviser count, since after the Morgan Keegan, it's up roughly about 3.4% compounded. It's 2.8% without these acquisitions. So we are doing a good job in organic growth and those are gravy for us. And I think forcing those or indirectly forcing, we wouldn't get the results we're getting today..

Just last one on the expenses, Paul, I just missed some of the commentary around the step-up in other expenses. But it sounded like that might be a little bit higher going forward.

So I'm just trying to kind of parse through the step-up in the kind of core basis and then is it recurring items that will remain a little bit elevated or things that could roll off but they're just kind of still in the run rate? Just trying to think about how to model that..

Maybe a slightly bit elevated. But it's really the increase really relates to legal regulatory consulting fees, related - the latter related to regulatory matters that we have ongoing. It's probably a function of the regulatory environment if that eases up, it may drift down.

But I'd continue to be conservative on that line if I were modeling, just for the sake of being conservative..

And we are investing significantly in a technology modernization around the supervision and compliance, not just for regulation, but really to help our advisers to get more proactive by giving them information. So we're investing in technology there, I guess, we're investing in technology everywhere. That's the world today..

So just to be clear, as a starting point, the $60 million from this quarter - obviously there's lumpy items and a lot of moving parts, but that's probably not a bad starting point to think about it?.

Yes. I think that would be a conservative number to use..

Our next question comes from the line of Conor Fitzgerald from Goldman Sachs..

Just wanted to circle back on the comp ratio, maybe just taking it from kind of a 9 months year-to-date perspective. But I think you've got revenues up $736 million and you've got comp up $461 million. So it kind of implies the incremental compensation margin is, call it 63%.

Just wondering if that's a fair way to think about the growth of the business from here?.

That's hard to say. Again, it comes from the independent contractor side, which has been the majority of our recruiting lately. It has a much higher comp level attached to it. But....

If it comes from interest rate, there's none..

Yes. If it comes from interest, even though it doesn't have a huge revenue impact but if it comes from interest, it has very little impact. It's nice - that's obviously what's taken the year-to-date ratio down below last year's. I don't know if that's going to be the situation going forward. We'd like to think that.

Plus as these grid changes will have an impact going forward that Paul mentioned of some magnitude. So we think we're still probably pretty comfortable. We don't - it's hard to say what incremental revenues - it just depends where they are. So if this contractor side continues to be a big driver, then it will probably stay about flat.

But my guess is on a relative mix of revenues that we would anticipate growing that you will actually see it drift down, just a little bit, from where it is now..

And sorry, I just wanted to clarify one part of your comment. If I can look at how much the interest rate revenue is up, it implies that the core business kind of had comp ratio go higher.

Is that just because of the independent channel is that how we should think about kind of the pluses and minuses from here?.

That's the biggest driver of the higher comp ratio, yes..

This is complexity why we just try to get targets because certainly the bank's growth and its comp ratio is low, interest rates are very low and independent contractors are high, just because the way we pay them, they per their own overhead costs. So it's such a blending, and it depends where the revenue growth you get capital markets that....

Can be high..

Can be high but usually lower than independent contractors. You get fixed income, which tended to have lower in the core business. But in public finance it's more like Investment Banking comp. So it's just - it's a very, very complex number and these businesses move at different rates.

But to the extent the bank and interest rates grow, you're on the low-end. To the extent that it's private client or even capital markets to the extent you're even higher..

And see, those are all revenue related comments. On the other hand, we can have a lot of overhead added.

We have had a lot of overhead, and the reason I think you're seeing a little improvement is that, that's kind of tapered off with all of the hiring we did over the last 2 years in the risk management world that's already baked into the fixed comp type level. Now we're getting some revenue lift that's helping that..

And the other cost, Paul Shoukry reminded me, that's impacted on the higher side is the retention of Alex. Brown and 3Macs flowing through. So those retention payments, if you pull those out, you wouldn't see comp going up without the others. But you add those in, it's impacting positively comp, too..

That would make your year-to-date even lower..

Yes..

And then more just a broader picture in terms of what you're seeing from clients year-to-date, you and a lot of your peers have seen a very active retail investor.

What's kind of the attitude on the ground from your advisers? And then when your customers are buying into the market, just be curious what type of investments they're putting money to work in?.

I think there's been a pick-up in equities and some in the higher net worth all still remain very popular. Again, you're talking about a couple of percentage points. So I wouldn't call it huge shifts. I think most of the advisers are still pushing hard diversity and I think you see some real entry - some reentry into the market.

But as the equity markets are good, but these aren't huge cataclysmic shifts. There are a few hundred - there are a couple of hundred basis points shifts..

And not 200 but couple of hundred basis points. And you're seeing a lot of it go, not to commission based type trades, you're seeing a lot of it going into the fee-based type products. So we put the fee-based assets in our press release so you can see that 6% sequential growth in that.

So I mean, they're either letting managers do it or buying mutual funds typically..

[Operator Instructions] Your next question comes from the line of William Katz with Citi..

This is Ben Herbert on for Bill.

Just wanted to ask MiFID II, if you're anticipating any impact from that next year?.

Yes, I think there will be certainly on research payments, MiFID II, where it all settles out, I don't know. It was hard to say whether the U.S. was going to move with MiFID II. My guess is given the global nature of the business, more of the larger managers are going to go to MiFID II type payments just because it's too complex to wall them off.

So whether you're a winner or a loser depends overall on what kind of research you do. The good news is our research is pretty focused in small and mid-cap, and I think we can get paid for value. But overall, it's probably going to push and squeeze research payments overall. So I think most of the whole business is going to get some squeeze on it.

So not our biggest revenue item. So I wouldn't call MiFID II a positive. It's probably going to be a negative on overall payments but who knows what that'll look like.

Research has been under pressure for many years, first in the form of commission payments and now as we go to MiFID and more direct payments, it's just asset managers lower their fees, they're lowering what they pass off. So I wouldn't call it a positive headwind or positive law.

I don't know how significant it will really be given our revenue mix, but it's certainly not a positive..

And then maybe just a follow-up on advisory fees, are you seeing - what's the dynamic there around platform fees? Are you seeing any impact there?.

There are two pieces. I think advisory fees themselves have held a very, very well. And we're seeing what advisers are getting from their clients holding up very, very well. So I think even for the firm, the fees that funds paid us have held up well even with the growth of ETFs and other low-cost funds, which don't pay us well.

But so far the overall revenue has held up well, and part of that is the market's grown, too, and the dollar volume is bigger. But I think there are certainly - in terms of what funds can pay there's pressure again as they lower fees, which will have an impact on us over time. The advisory part of the business seems to be holding up extremely well..

At this time, there no questions..

Well, great. I really appreciate you joining us and then some, I think we had a good quarter and sounds like the revenue - the comp communication we could have been a little clearer on. But I still think we're on track.

We think we have good momentum in front of us, especially with the fee-based accounts and billings starting 6% up interest rates and good recruiting. So thanks for joining us, and we'll talk to you next quarter..