Bloomberg News

Raymond James Beats JPMorgan as Best Brokerage: Riskless Return

April 24, 2013

Raymond James Financial Inc. CEO Paul C. Reilly

Raymond James Financial Inc. Chief Executive Officer Paul C. Reilly said in February 2012 that some companies failed because they weren’t big enough to access the debt markets. Photographer: Scott Eells/Bloomberg

Raymond James Financial Inc., the brokerage that posted profits for 100 straight quarters, is showing investors that simplicity is key to generating gains.

With headquarters 1,200 miles from Wall Street, the St. Petersburg, Florida-based company produced the best risk- adjusted return of nine U.S. brokerages, banks and advisory firms since 2009, the BLOOMBERG RISKLESS RETURN RANKING shows. JPMorgan Chase & Co. (JPM:US), the biggest U.S. bank, ranked third as Bank of America Corp. (BAC:US), Goldman Sachs Group Inc. (GS:US) and Morgan Stanley (MS:US) were among the worst performers.

Investors compare Raymond James, which has a business model that’s easy to grasp and shields the balance sheet (RJF:US) from risk, to an asset manager as it mainly relies on fees. Unlike larger rivals, the brokerage gets most of its sales managing investor money, earning 64 percent of annual revenue in the last fiscal year from its private-client group. That gave Raymond James the stability to weather a financial crisis that caused larger banks to write off billions of dollars in loans.

“You threw everything but the kitchen sink at the financial-services industry and this company sailed through rather successfully,” said Dan Veru, chief investment officer at Palisade Capital Management LLC, which owns Raymond James shares and manages $3.8 billion. “That largeness that used to be an advantage, I don’t think it’s such an advantage anymore.”

Financial Crisis

Raymond James returned the most to investors with the lowest risk, data compiled by Bloomberg show. The volatility of its shares was third-lowest of the nine firms examined and 27 percent below Morgan Stanley’s. The results track the performance of the companies starting in 2010, the first calendar year after the financial crisis, which led investors and lawmakers to question the manageability of universal banks.

Advocates of the universal-bank model, including JPMorgan Chief Executive Officer Jamie Dimon, 57, have said large companies need big, global lenders that have deep balance sheets to underwrite loans worldwide and can better absorb losses when something goes wrong.

Raymond James may be proving that diversity in financial services doesn’t lead to higher shareholder returns. On a risk- adjusted basis, the brokerage returned 3.14 percent to investors since the end of 2009 through the end of this year’s first quarter, compared with adjusted losses of 0.52 percent at Morgan Stanley and 0.4 percent for Charlotte, North, Carolina-based Bank of America, data compiled by Bloomberg show.

Evercore, Greenhill

Evercore Partners Inc. (EVR:US), the advisory firm founded by former U.S. Deputy Treasury Secretary Roger Altman, also outperformed the biggest banks, the data show. On a risk-adjusted basis, New York-based Evercore, run by CEO Ralph Schlosstein, returned 1.2 percent to investors since the end of 2009, the second-best performance behind Raymond James’s.

Greenhill & Co., founded by Robert Greenhill, had the worst risk-adjusted return among nine firms evaluated by Bloomberg. The company lost 0.68 percent on a risk-adjusted basis from the end of 2009 through March 31. Its shares dropped 33 percent in that span, the most in the group, which also includes Hamilton, Bermuda-based Lazard Ltd. (LAZ:US) and Charles Schwab Corp. (SCHW:US), based in San Francisco.

“We are quite comfortable with our relative performance given that, including dividends (GHL:US), our IPO investors have more than tripled their investment over a period when the bank stock index has roughly halved,” Greenhill CEO Scott Bok, 53, said in an e-mailed statement, referring to the company’s May 2004 initial public offering.

Swing Dramatically

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses. The ranking shows how publicly traded, stand- alone retail brokerages and deal advisers compare with large banks that are dominant in those businesses.

Raymond James, led by CEO Paul C. Reilly, 58, doesn’t have a large fixed-income trading operation, and investment banking complements its retail business, Doug Sipkin, an analyst at Susquehanna Financial Group LLLP, said in a phone interview. That has helped the brokerage to avoid pitfalls that cause losses at bigger banks, he said.

Steve Hollister, a Raymond James spokesman, said the company can’t comment because it’s scheduled to announce fiscal second-quarter results today. Spokesmen for Bank of America, Morgan Stanley and Evercore declined to comment. JPMorgan and Goldman Sachs had no comment.

Morgan Keegan

Raymond James acquired Regions Financial Corp.’s Morgan Keegan unit last year in a $930 million deal that combined two of the biggest brokerages in the U.S. Southeast. That happened as the number of firms registered with the Financial Industry Regulatory Authority fell the fastest since at least 2009.

Smaller brokerages, including WJB Capital Group Inc. and Ticonderoga Securities LLC shuttered operations amid a slump in trading and a shortage in capital. Reilly said in February 2012 that some companies failed because they weren’t big enough to access the debt markets.

“Raymond James figured this out, whereas a lot of firms that were in their same league five years or 10 years ago didn’t, and disappeared as a result,” said Josh Brown, who helps oversee about $350 million at Fusion Analytics Investment Partners LLC in New York and doesn’t own Raymond James shares.

Now, with U.S. equity markets near record highs, Raymond James is poised to benefit. The firm earns most of its revenue through fees in a model that’s based on assets under management. That means revenue climbs when market values rise rather than when clients trade more, said Joel Jeffrey, an analyst at Stifel Financial Corp.’s KBW unit.

‘Other Issues’

Improving stock markets boosted results at Bank of America, led by CEO Brian T. Moynihan, 53, and Morgan Stanley, which both reported that first-quarter income from wealth management jumped by about one third from a year earlier.

That didn’t impress investors. Shares of the two banks fell after results were announced as “other issues” overshadowed brokerage performance, Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis, said earlier this month.

Some analysts question whether shareholders can wring value from the biggest banks by breaking them into pieces. Bank of America’s Merrill Lynch unit has “unrealized value” and is ripe for divestiture, CLSA Ltd.’s Mike Mayo said in January.

The largest U.S. lenders are trading at a 25 percent to 30 percent discount to more-focused competitors, Wells Fargo & Co. analysts led by Matthew H. Burnell wrote in an April 10 note. That could lead shareholders to demand breakups if valuations remain depressed, they wrote.

Goldman ‘Uninvestable’

JPMorgan analysts led by Kian Abouhossein said this month that investment banks including New York-based Goldman Sachs are “uninvestable” because of pressure on earnings and the unknown impact of global financial regulations.

“Given the challenges posed by increasing regulation, higher capital requirements, and well-publicized trading/market challenges, it’s not surprising that investors remain reluctant to assign a ‘full’ valuation to the universal banks,” the Wells Fargo analysts wrote.

Evercore generated (EVR:US) 87 percent of adjusted net revenue from investment banking in 2012. That includes revenue from advising clients on deals, its institutional-equities unit and private- funds group. The rest comes from investment management.

Shares of Evercore climbed to a record in March after revenue and profit reached all-time highs. The company has been taking a bigger share of advisory fees after hiring senior managing directors during the past two years, while surging corporate profits and cheap borrowing costs encourage deals.

Independent Advice

Executives of advisory firms such as Evercore and Greenhill say that clients value independent advice, meaning they seek guidance from a company that’s not involved in financing the deal.

Greenhill shares (GHL:US) hit a six-year low in 2011 as an increase in departures of top advisers coincided with its decision to pay a greater share of compensation in stock. Greenhill has rebounded 77 percent since then.

Raymond James, which said in January that it has been profitable for 100 straight quarters, is run like the “old Wall Street partnerships,” and shareholder capital is viewed as their own, Palisade Capital’s Veru said.

“This is how you run a brokerage,” he said. “These guys do it and do it very well.”

To contact the reporters on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net; Zeke Faux in New York at zfaux@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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