Good morning, and welcome to the earnings call for Raymond James Financial's Fiscal Second Quarter Results. My name is Terese, and I will be your conference facilitator today. This call is being recorded and will be available on the company's website. Now I will turn it over to Paul Shoukry, Head of Investor Relations at Raymond James Financial.

Thanks, Terese. And good morning. On behalf of our entire leadership team, I just want to thank you all for joining the call this morning. We know this is a very busy time of the year for all of you, so we certainly do not take your time or interest in Raymond James Financial for granted. After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chief Executive Officer; and Jeff Julien, our Chief Financial Officer. Following their 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 information concerning future strategic objectives, business prospects, anticipated savings, financial results, industry and market conditions, demands for our products, acquisitions, anticipated results of litigation and regulatory developments or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, projects, forecasts and future or conditional verbs such as will, may, could, should and would as well as other statements that necessarily depends on future events are intended to identify forward-looking statements. There can be no assurance that actual results would not differ materially from those expressed in the forward-looking statements. We urge you to carefully consider risks described in our most recent Form 10-K and subsequent Form 10-Q, which are available on the SEC's website at sec.gov. So with that, I'll turn the call over to Paul Reilly, CEO of Raymond James Financial. Paul?

Thanks, Paul, and good morning, everyone. Jeff Julien and I are here attending our RJFS Independent Advisors Conference, a record 4,000 attendees, over 240 training classes, and extremely positive constructive environment. In fact, there were 72 recruits attending our conference from other firms. First and foremost, I want to start with we believe we had a very good start for the first 6 months. In fact, a record pace for the first 6 months. Net revenues for the first 6 months of fiscal year were $2.5 billion and pretax income of $383 million, both represent the most we've ever generated for the start of our fiscal year in a 6-month period. Additionally, I think if you look at our key operating metrics at the end of the quarter, we have a lot of quarter-end records. That includes client assets under administration of $496 billion, financial assets under management of $69 billion and net loans at the bank of $12 million. These records have been driven by our long-term focus on recruiting and retaining a great group of financial advisors. That shows up in the numbers also with the record number of financial advisors we grew to 6,384 at the end of March, which is up 182 from last year's March and 48 over the preceding quarter. These strong net additions really understate our actual growth and productivity capacity as they come online. Now I'm going to go over a few numbers before I turn this over to Jeff for more details. We understand this was a noisy quarter as was our first quarter last year, both due to seasonal and nonrecurring items that Jeff will discuss. We achieved a record quarterly net revenue of $1.29 billion, a 9% increase over the prior year's fiscal second quarter and a 3% increase…

Thanks, Paul. As I've become accustomed to now I'll start -- I will go through some of the line items that give a little more detail on some of the items that affected those lines, which I hope will help in the modeling exercises that many of you go through. Commissions and fees were pretty much in line. The noise around that line item for the last couple of quarters, both commission revenues and commission expenses has to do with the mutual fund adjustment that we've been talking about. By way of reminder, in the December quarter, we took a $10.5 million reduction of revenues and a corresponding $6 million reduction of comp expense, assuming that, that would be the amount recouped from financial advisors on commissions that would be reimbursed to clients. Related to the mutual funds, that share class issue, whereby, some of the mutual funds that we sell had -- ran specials periodically, very deep in their prospectuses, there were special deals that were available to certain types of plans. It gets very complicated and very easy to miss. And so what we had done in December was, on an automated basis, went back 5 years and sort of took a charge for what we deemed to be the worst-case situation for us in terms of client reimbursements and FA charge-backs. In the most recent quarter, in the middle of February, we made the decision not to charge this back to financial advisors. So that $6 million reduction in comp expense became an additional comp expense in this quarter, and actually represents a $12 million swing if you're looking at December versus the March quarter. Further, the $10.5 million estimate that we had reduced commission revenues by, in the first quarter, has been refined downward after we…

Thanks, Jeff. And I know we're spending a little more time than usual, but we know we had a little bit of a noisy quarter. In a way I feel it’s like deja vu over again with the same situation we were in the first quarter a year ago. But if you really go through it all, you look at the first 6 months numbers, we've had good strong operating results. And more importantly, if you look at the factors that really drive our business and the Private Client Group record assets under administration at the quarter end, record advisors, a great recruiting pipeline that I think will continue to still drive and grow our business. I wish you guys were all here at our conference and you'd see the positive energy from our financial advisors. In the Capital Markets segment, investment banking activity remains robust, particularly in the M&A and public finance. But we do still continue to feel the headwinds in underwriting, especially in the energy and real estate sectors, as we told you we thought that the energy price fall would impact this sector for a quarter or 2 and be replaced by M&A and increased underwriting, but we're still working through that transition in the marketplace. But we got a very, very good year in -- start this year in M&A. Asset management. Record assets under management, continue to help drive earnings, and you'll also remember, we announced a $1 billion asset acquisition in early March and we're waiting for our final pending regulatory approvals. So assets should continue to grow, driven a lot by recruiting and net inflows. Bank, another very strong quarter. Good credit quality and the NIM improvement, the modest NIM improvement should continue to help drive good numbers. And finally, I know we're getting a lot of questions in the industry about the Department of Labor's fiduciary standard. We were active in fighting back in the first release in 2010 and now the law, as proposed, is very complex. We're analyzing it internally as well as I'm on the board of FSR and SIFMA, Scott Curtis on FSI with our trade groups, I think we're all united. I'm going through the proposals. In fact there is ongoing discussions right now with labor. So it's hard to quantify any changes and we're studying it. But believe, kind of, business we do is very positive for clients. So with that, I appreciate your patience, and we'll finally open it up for questions and answers. So I'm going to turn it back to Terese.

[Operator Instructions] And your first question comes from the line of Devin Ryan with JMP Securities.

A question on the bank. If I look at just the overall kind of deposits and then, kind of, think about the deposits at third-party banks, I mean, I know that you guys want to have the bank -- the balance within the platform and grow kind of with the firm. But when I look at the capital base of the firm, capital looks strong, you've excess capital, maybe you have significant deposits at third-party banks. And so, I would think the spread pick up from moving some of those deposits on to the balance sheet would be pretty significant. So just want to get your thoughts there, is that an opportunity and something you guys would maybe look to do, just given that, I think, from an earnings perspective it could be pretty powerful?

Yes, Devin, I think that there's a lot of things we know we could -- to do to improve earnings, and it goes even taking some fixed rate risk in securities, minimal. We could grow the bank. But we've had a philosophy to target the bank about 35% in capital and no more than 40%. We think it's important for advisors and for our shareholders to understand we're not a bank first, we are a Private Client Group that has strong banking and asset-management backing to it. So sure we could deploy more capital. I think the bank's done a great job of investing in its assets, its loans and its good risk return basis, but our view so far is, we want to keep it within those capital ratios. We have an opportunity to grow. We haven't told Steve not to grow because we certainly have a little more capital room, but we're not going to be overly aggressive in it either. So we're going to stick to our model right now.

Devin, the bank's not intentionally slowing down just because of that constraint. They lend when they find good opportunities to participate in credits that are -- meet our quality standards and our return standards and it gets lumpy. You saw it really big in the first quarter and you it slow down a lot this quarter.

So you're right. It has room to grow and we've told them to grow if they find good quality loans, and I think we're -- as we find good loans and we're opportunistic, we add them, and when it’s not there, we slow it down. And it has room, both within our internal capital allocations and, certainly, our client cash, which again, we limit to 50% of our client cast and the bank has another control and diversification tool. But they've room under both, but we won't let it get out of hand.

Got it. And then, just with respect to the NIM in the bank, nice step-up sequentially. Was that mix driven or what drove that? And then just, kind of thinking about the outlook for the NIM, just given some of the moving parts around mix versus what we're seeing in rates today? That would be helpful.

Devin, this is Steve Raney. It was primarily driven by NIM increase in our corporate-lending book of business. I would say that -- yes, the outlook, I would say is probably stable for the next few quarters, yes, within a small range up or down. But I would say that look will be pretty stable at this point.

Okay, great. And then just lastly, within investment banking, it sounds like the backlog feels pretty good and just kind of within the businesses there, how is M&A, maybe, specifically today, and how does that backlog feels? And with public finance, it sounds like it turned on towards the end of last quarter. So what drove that and is that kind of seen carrying into this quarter?

Yes. I -- first on, in investment banking, I think, it certainly kind of underwriting business has been tough across the board, especially for us where we're strong in energy and real estate. But the other sectors have done well. In M&A, it’s been across-the-board, but particularly in tech and tech services, an extremely good quarter. Late March quarter, actually, where it produced a lot of the results. I think people forget sometimes, in public finance, we're a top-10 underwriter. I think one poll said 8 and one said 9, with total credit to lead so we are -- it's a significant business for us. That business was very slow in January and February. The March turn on had to do with -- I think, first, in that business you get a lot of -- because of the holidays, at year end, financing typically slows in January that carried over longer into February. But we're getting-- the refinancing part of that business is turned on during some rate volatility. So we're -- the refi part of public finance have been absent in the last year, that turned on, and a lot of deals happened quickly. So far we see the movement short-term. Here we are into early April, good activity in both of those, but as you all know, that's a lumpy business that is hard to predict, both of those. But we feel pretty good about the backlog.

Your next question comes from Hugh Miller with Macquarie.

I appreciate the insight that you guys gave on the fiduciary standard, was wondering if you could just give us a little more detail on a few areas to help us kind of frame some things up? With regard to the percentage of your kind of advisors that are RIAs, that are kind of already adhering to that standard, and some color maybe if you can on -- you gave us some detail on the fee-based assets but also, can you give us any sense as to how much of those are qualified? And any rough sense on historically, the type of revenue you typically tend to generate from IRA rollovers and those types of things?

First, let's answer it in 2 parts. The standard, we have an awful lot of our advisors that have their own RIAs are in our RIAs, but that's not actually even the issue. I know that publicly it's been the issue. If you look at the definition of exemption on level fee payments and disclosures, it's pretty complex right now. And so I think, hopefully, in this comment period and working with the Department of Labor, we can get things that are clear, because it's not that clear the way it's written. So we're working through those right now and that's -- it's -- that's hard to tell. So it’s not as simple. If it's as simple as having an RIA, we'd have a lot of people exempt but it's not that simple, in terms of level fees, products, what qualifies in exemption, what doesn't, and that's what, I think, the industry is trying to work through. In terms of assets, Jeff?

Yes. Our retirement plan assets in our firm are about 35% of our assets, and -- which I believe that includes RIAs. Is that right, Paul?

Yes. About 35% to 40% of our assets are retirement planning assets. Actually, it's a little bit higher than that within fee-based accounts. It's about 45% of our assets in fee-based accounts are retirement assets.

I don't think that's a statistic you'll find much different than -- well, maybe different than Ameritrade or something like that, but not much different than most full-service firms that focus on financial planning.

Okay. Yes, that's very helpful. And as we look at kind of the asset management business, do you have a sense of kind of the percentage of the assets that are in qualified accounts?

I don't know that -- I don't think we know that one off hand, but I will tell you that early reads on that, that actually that we get some benefit, there's some restrictions of -- in that area, in the IRAs and what you can sell. But if you read again, the best you can read the deal well standard, we actually made and get some relief and some opportunity in that area. And again, it's just too early to speculate. It's -- the law is 800 pages. It's very complex, and people are still trying to go through and understand it. And I think even the departments are trying to understand the implications and what all this means. So we're studying it like crazy.

We have a whole committee doing that.

Yes, but it's too early to really give you an impact. If we had clearer picture, we would.

Okay. Well, it's certainly helpful, the color you've given there. And then just a question or 2 at the bank. I think you started to talk about maybe some of the energy credits and things like that and getting ahead of this -- the SNC exam. But is that what's driving kind of the uptick we saw in classified assets, just kind of adjusting things ahead? Or are you seeing any changes in credit trends, that may be low-level, but it's not rising to an NPA, but that you're making some adjustments?

Yes, the increase in credit-sized loans was attributable to downgrading 3 of our energy names and us proactively, and we think wisely adding reserves against those names. So the exposure is still remains very low. It's less than 3% of total assets are in the energy sector. And the vast majority, 75% of our energy exposure is really not related to -- is not as sensitive to the volatility of oil and gas prices. It's more midstream-oriented related to exposure, so but continue to watch every name very closely and monitor that portfolio actively.

The percentage may have moved, but if you look at dollars, it's not much. It's in a normal fluctuation, so I think there is nothing underlying that we're worried about that's driven any increased there. It's just our normal credit process and trying to be conservative and doing the best job we can at estimating that and trying never to be behind the curve.

That's helpful. And then, as we look at kind of the deceleration in loan growth, if you could you just give us any color between the resi portfolio and the corporate portfolio. And I guess, as we look at things from a spread basis, we have seen kind of a nice improvement in credit spreads in both investment grade and high yield in late last year into this year, any color as to how we should be thinking about that in terms of your willingness to kind of go out there and put capital to work?

Yes, we have seen improvements in the marketplace, pushing back and -- credit takers like us and institutional investors in this market are finally having a little bit more discipline as it relates to the returns they're looking for. That being said, I would say is reflected in this quarter. Loan volumes I would say broadly in the corporate sector, in particular, were down. There is not as much deal flow right now. And as Paul and Jeff alluded to, as you all know, we've been very prudent, not really changing our credit standards at all. So I think you'll see us really not making any significant changes to our approach. We've got latitude to run in place and even shrink if we needed to if there weren't opportunities.

Hugh, this is the one we've been terrible at guidance because we just don't know. We've seen when we say it's slowing down, and all of a sudden like December quarter, we had a huge quarter. So we just -- we're very focused when the markets are right. When we get the right credits, we act. And when they're not, we slow down. So it's a hard one to tell you how we really -- where we see it going because it can open up like a spicket and that can slow down in terms of the things that we're interested in lending on.

Your next question comes from Chris Harris with Wells Fargo.

Surprise a few questions on DOL. Wondering if you guys can help us out, maybe not getting into the law specifically, but if we just think about your advisor for us. Overall, how does the behavior differ between your advisors that are operating under fiduciary versus those that are not? And I know one is tends to be a little bit more fee-oriented and the other is commission-based, but anything you can kind of help us out with regards to how they run their practices differently, the different products that are in those 2 categories would be helpful.

Here is the hardest thing, Chris. It's -- first, I wish I could tell you that one's one and one is the other. And those operating their fiduciary are different than the commission value. We believe that our job is to put the client first. It's been one of our -- it's the center of our core values. It always is. And to say that just because you're fee-based, it's better for clients when a commission is cheaper, especially in small accounts. In fact, there's anti-churning regulations where we're not supposed to charge a fixed fee when we're not giving a lot of advice. It's cheaper for the client to be commission-based. So this whole thing of fiduciary, what is it mean under the standards? And that's really the question whether it's under the 40 Act? Or is it this fiduciary standards proposed now. We all believe it's in the best interest of the clients. So just because you're fee-based, it doesn't mean you automatically do what's in the best interest of clients, made off[indiscernible] fee-based RIA. But -- so that's the hard thing here, and so it's -- at one extreme you could say, everybody who's doing commission-based will have to go to some wrap fee level commission charge. Frankly, that wouldn't be good for a lot of clients. And frankly, for small accounts, it probably is cheaper not to have them. Better for the client, if that's forced. But they're going to lose access to advice. Short term, it may impact as we -- our accounts, but frankly, a lot of those accounts aren't profitable for us either. We do them as an accommodation to our clients, friends of our clients or relatives and to our financial advisors. So although we may have some juggling around, it may hit revenue. The expense part, we might be better off. So this thing gets so complicated and everybody wants to simplify it until we get through the rules, the regulations. And one of these exemptions really mean, it's so hard to give guidance. It really is. So I wish I could answer, but I think the headline from the administration of the DOL is fee-based is good, commission is bad. Well, we can show you hundreds of thousands of accounts where that's not true. So we're just going to have to see where this ends up.

Okay, helpful. The other kind of question I have on this topic, have you guys disclosed or can you disclose the amount of revenue-sharing payments that you generate on a recurring basis?

Revenue sharing from?

Chris, we have a line in the Q that we provide that just shows what we earn from mutual fund companies, of all types of fees and revenues we earn from mutual fund companies and the Private Client Group segment. But again, going back to Paul's comments, we're not even sure that those fees would actually be totally impacted by the new proposal as we kind of go through it and look through all the exemptions. So we haven't disclosed an estimate of what portion of those fees we think would actually be impacted is because we don't know what that estimate would be. So until we get more guidance on that item, you can kind of reference that line item in the Q under the Private Client Group segment. That's probably as a good number as any for you to look at.

Okay, great. I'll check that out. And then real quick, a question on the numbers this quarter. Jeff, thanks a lot for walking through all of those expense items. Just one follow-up on that. It seems like a lot of those discrete items were in PCG, yet you had a pretty decent drop-off in the capital markets margin this quarter. I know you had the $3 million item that impacted the numbers there. But was there anything else to call out in the Capital Markets, why you saw a bit of a drop-off there in the margin?

Well, you see the investment actually in the new practices was kind of a like number all in between recruiting fees, guarantees, start-up costs. And you also, as our business shifts and we look and estimate comp, we were better as we get to the end of the year in that business to get better estimates at the end of the quarter. So again, it had a lot of shifting pieces in this, but there are certainly those 2 pieces that on a smaller business that had an impact on the bottom line. Oh yes, and the other one is -- I'm sorry, as Jeff just pointed out to me -- is the other impact is Canada has had a very difficult market, not just for us, for everybody. And the results there had been from a bottom line standpoint, haven't been positive. So -- and that's across the board, even with our competitors because it's commodity energy-based market. So those numbers have dragged down significantly through this quarter. That's the other big factor.

Your next question comes from Bill Katz with Citi.

This is actually Ryan Bailey filling in for Bill. I just had a quick question on margins and ROE targets and how we should think about that going forward and kind of what might be the main drivers there?

Yes, for the moment, we're sticking with for the year to exceed 15% margin. We would like to hit 12% ROE. We know we're behind that even for the first 6 months here, still, our 12% ROE goal in this particular interest rate environment. As we get into the 2016 budgeting process, we're going to be revisiting the targets for margins in all of our businesses as well as the overall firm. And when we arrive at those, we'll make them more public. But for this fiscal year, we haven't shifted in the middle of the year here because we don't expect any change in interest rates either.

Your next question comes from Christian Onwugbolu with Crédit Suisse.

Just a broader question on expenses. Ignoring the ins and outs of this quarter, expense inflation just seems to be a recurring theme for you, and I think some of your other peers. Just curious if there's anything in the operating environment that's driving this. Is there increased competition that's driving higher marketing spend? Or is the rise of robo-advisors fueling the need to just improve technology capabilities?

I don't think the robo-advisor factor is certainly topical, but not impacting our business really at all. So I think we've been running under our technology and investment run rate, which is help drive our recruiting, because we have extremely competitive platform and technology now and we continue to advance it. But we've told you it slowed to mid-60s as a run rate and we believe as a run rate average. That's what we're going to come in this quarter. Marketing, our budget for the year is the same budget we've had all year. It's just lumpy. We just had a bigger expense this quarter because we run them in flights. We don't run all year around and it just happened to hit this quarter. So I don't think anything in the expense -- sure, we've got -- we've run high levels of back office support. We always have. It's part of our model. But I don't think anything's fundamentally changed. And if you look at the first 6 month run rates and what we've given as guidance, we don't see anything that's fundamentally different. It's just we got a lot of hits this quarter.

Yes, I'd say, Christian, even though we're comparing this to 1 year ago or 2 years ago or anything else, we have -- we're bigger, so we have some increased absolute expenses. But the only area I'd say that disproportionately has increased in expense has been the compliance and regulatory, which obviously mainly in the admin side of the P&L comp expense.

We are not alone in that.

Yes. I don't see any fundamental in the other expense line items that are responses to anything in the environment.

Okay. That's fair. Just switching over to kind of M&A and acquisitions for you. I mean, you've declared Asset Management as a priority. You did cover it but that was fairly small, just curious as to what's holding back. You guys pulled the trigger in the bigger deals, is it that you just haven't found the right targets or price or just something else?

Yes, we are very clear that our strategy is, first, has to the cultural fit. Secondly, it's strategic fit. And third, has to be at a fair price. And the hardest filter is the first one. A lot of the companies that we're interested in, because they share our culture and we think of our values and background are private, not for sale. So that's problematic, but we believe another of those companies will both through owner, founder transitions. So we stay close to them. So we continue to talk to a lot of people. We stay very close. We're very active. We're very desirous of doing something, but they have to hit the criteria. So I'll tell you, we're more and more active and we talk on more and more deals than ever, but we're very disciplined on spending cash.

Okay. And then just a follow-up question on just long-term operating margins for you guys for the firm. We can do the math in terms of like how much margin should improve as rates rise. But I was curious, is there a natural level of which can margins max out for you just given competitive forces that should come into play as maybe as rates rise?

Sure. Margins definitely are not going to be rising forever. So given our current mix of businesses, that once we get the benefit of interest rate lift and we would get some modest benefits of scale and some of the businesses over time, but it won't be as material as the impact of interest rates. So a couple of hundred basis points from here in terms of margin is probably a realistic cap, given the dynamics and businesses that we're in today. The world can change on a dime, but we don't anticipate that.

Okay, fair. And then just lastly for me. I apologize if I missed this one in the earlier remarks, but an investment advisory fee line, I think revenues there were up kind of 3% year-over-year, which kind of lagged significantly, the pace of AUM growth was more like 11%. Do you have any color on what was driving that kind of revenue lag relative to AUM?

Yes, there's been a pretty -- if you look at the components of our assets, which I think are disclosed in the Q in chart form, the components of our AUM, you'll see that the growth has come in what we would call our lower-fee type products, which the most of it -- a large part of the growth has come in the lower-fee products predominantly the product we call Freedom. There is a Freedom in our Freedom UMA, which are managed mutual fund portfolios. And given the significant cost embedded in mutual funds already, we don't feel like we can layer on a particularly large charge on top of that to manage that. So that's where a lot of the growth has come from and it's a very low fee relative to say a separate managed account where you're managing equities.

Your next question comes from Jim Mitchell with Buckingham.

Maybe just on the growth in fee-based assets. You guys were up, I think, 4.7% quarter-over-quarter. That seemed to -- quite a bit stronger from -- versus the market impact. Can you -- I know you guys don't disclose flows into fee-based assets, but is that a fair assumption? Or is there something unusual from a market impact? Or is that just reflective of the higher recruiting and the assets coming over and quite a bit of it was net new assets?

It's recruiting. It's net new -- we've had net assets inflows and we -- just recruiting is very, very strong, and that drives Asset Management also.

And a lot of it's billed in advance, obviously, so that will be a good harbinger for next quarter.

Right, that should be priced in the next quarter. Okay. And then maybe just another stab at the fiduciary duty, just maybe bigger picture. Obviously, there's a lot of moving parts so we don't know how it's going to play out, but if there's some pressure and some revenue stream that says, hey, this is not allowed under a fiduciary standard. I mean, just big picture, do you guys feel you have pricing power to maintain pricing regardless of what an individual revenue stream may fall away on the wayside? Can you reprice somewhere else? Or do you feel like if there is some impact on a particular revenue stream that you won't be able to make it up?

It's kind of hard to say. I would say, overall, if you look at where we are in terms of size and distribution power, that we should be able to -- if one source of payment goes down, then we have to change it. You would assume that, I don't know in the short-term, but over time it's going to even out. And the worst parts of the law, you would say we'd have to get rid of some accounts and assets because they're not cost-effective. On the other hand, those accounts are not profitable to us in general anyways. So it's really hard to tell the net income. I do think that at the end of the day, it's a very competitive market. We have a valuable franchise and distribution, and I think people are going to pay us fairly to access that, but I don't know how it's going to look.

Your next question comes from Douglas Sipkin with Susquehanna.

Just had a couple of questions here. First, I figured I'd answer them -- I'm pretty sure I know the answer I'm going to get. I'm looking at your record results for the first 6 months, yet your ROEs coming to trend down and it just feels like the logical thing to do is maybe shrink the equity somewhat, and I know you guys are not hip to doing buybacks, but I still struggle with why you guys wouldn't at a minimum just buy back the dilution from new award. It seems like a pretty common practice in the industry to do that. Just doing that alone could probably would've shrunk the share count a couple of million shares over the last 1.5 years. So I'm just curious, are you guys considering doing that giving a little bit of pressure showing now on the ROE?

Yes. I don't think it's -- philosophically, a year ago the board's position was that we felt we could deploy the capital and that nominal share buyback was really kind of a false signal. We knew it would pacify people, but it really didn't move the needle but 1% or 2% and as deployment of capital be stronger. I think we reported after our last board meeting that was an item that was under further discussion, and I think an item that will be looked at again. We've told you guys and our shareholders, our job isn't to hoard capital. We don't do it. In fact our -- the holdbacks on our compensation each year as a management team are RSUs. Half of that holdback is indexed to ROE targets. So we're not incented to hoard capital for the heck of it. We are trying to do what's best for our shareholders and how we think we can use it. So the topic and discussion of the board is not dead. I'm sure it will come back up. And if we can't find uses for the capital, we will look at ways of returning it. So I think it's a fair question. Doug, I'm surprised you took so long to come up, but maybe we had enough operating expense questions that took a little longer to hit this time, but it's a fair question and we are looking at it.

Yes, okay. No, that's great to hear and I appreciate the color on the targets related to stock awards and things like that. That's very helpful. Secondly, so obviously great run with the recruiting, you're seeing in the fee-based accounts. You're seeing in the FAs. You're -- obviously, you're seeing some of the front-end cost. I mean, it's been a couple of quarters with this. So looking out 6 months, I mean, are we still on this toward pace here? Or are you guys sensing maybe there's a little bit of flat-lining of the recruiting. I mean, it's still looks like you guys are winning advisors in your pipeline of new people coming in is pretty good, but I'm just curious to get your pulse?

Yes, right now, I remind our people don't believe the press. Everyone is writing about us because they're going to write other stuff someday. So -- but the truth is our recruiting is going great. We've been one of those firms that have just been attractive to advisors. Pipeline is very strong. It's lumpy. We have a lot of people that like to change after year-end, just like in other places after their bonuses and things. But having said that, if you look at the pace of -- in summer months, slows down a little bit typically. But the pace and the backlog are very, very strong. And in our discussions aren't are they going to fall off, it's maybe we should even increase our recruiting sales force more and take advantage of the position we're in. So the 6-month year-end outlook is very, very good, but we know these things don't go forever, and just like good markets don't go forever. So we're trying to take advantage of it while we can, and also to make sure our FAs are very, very happy here and that we keep continue with high support levels. And retention is the key. I think our real net recruiting is really good, but the nice thing about the firm is we don't have to chase a dark hole that a lot of firms have to chase some advisors leaving. We're -- our regretted attrition stays low, and that's a big focus for us too. So the outlook is still good.

Great, that's helpful. And then shifting gears, so I have been very encouraged to see the fixed income commissions start to show a little bit of life, 2 consecutive quarters of sequential improvement. I mean, just curious, digging a little deeper into that marketplace, I mean, do you get the sense that this quarter here in March was kind of an anomaly, given the rate volatility? Or are you may be picking up that there's a little bit of a sustainable trend improvement that may be coming about in this market? Because I know there was a point in time where this was doing $80 million, $90 million in quarterly revenues a quarter now. Obviously, still a long ways away from that, but the last 2 quarters have seen a real nice uptick. So I'm just curious, is there more there? Or is it just too hard to call?

I'd say the trend has continued so far. Certainly, for the last few years, we always wondered every quarter that was the bottom, that it wasn't. As people stop trading and certainly, the 2 big drivers of the fixed income business there is rate volatility and slope of the yield curve. So if the fed rates are short-term rates and we have a flat yield curve at 2% from 1 day to 30 years, it wouldn't be good for the business. If there's volatility and speculation on that, it's good for the business. And so far, that momentum has kept up, and it's nice to see for us to the institutional commission has picked up when there's activity and that's continued so far. So how long it lasts is a function of volatility in the markets and what happens with rates. We got a great team though. We got a really -- I told our team in the last 2 years we had an A-plus working in a D market. I think, when a business is really terrible and you can stay at double-digit margins, you're doing really well, and they've done a good job.

Great. And then just the last question, and I know it's been hit on today, the fiduciary standard, maybe try to approach it from a different perspective. Can you maybe just shed a little bit of light on the philosophy of your guys advisor business and some of the products that you have historically sort of shied away from because I think that may be -- provide a good framework of sort of how the business has been run for a long time period rather than sort of focusing on, obviously, what's going to be some compliance headaches from a potential rule.

Losses of this firm way before me is to be very conservative in client product, and then every new product is to say the first screen isn't what we make, is it good for the client. Does it give returns compared to other things existing in the market? Is the risk less for the return and is it explainable? So very early on, the firm was a pioneer in requiring and variable annuities to lower the front-end fees, in fact firms had to manufacture those products specifically for us because we didn't want the upfront loads. And pricing of the riders and everything had to be fair one about the firm, it was the client. Our nontraded REITs, we've stayed out of that market. It's not that we think all nontraded REITs are bad, but we look at liquidity versus returns and the valuations of -- and we said it's not worth it for clients. So you look to closed-in funds. We have very strict leverage ratios. It doesn't mean there's a lot of great product that we won't sell, but we said, hey, the leverage and the return isn't worth the yield enhancements. So that's always been our philosophy and it's been the philosophy in the products and the things we sell. Now having said that, I think for a lot of accounts, commissions are a lot better for small accounts than a continuing fee. And at the heart of the fiduciary standard, commissions are bad isn't fair. And that's the heart of the debate. Now, we can all find examples in the industry and all of our firms where there is always the 1% bad actors. But you shouldn't penalize all the really great people that are doing the right thing for clients. We should get after those folks as an industry and as regulators to make sure we penalize the misbehaviors and take care of those clients instead of just messing up the whole industry, which honestly, I believe will leave millions of people without advice and that they're getting today. So that's the heart of the debate so -- and we're still in it. And we're continuing to work with the DOL. The great thing is all the trade groups are in line on this, and we don't have a split between the custodial firms and the broker-dealers and I mean we all kind of agree on this approach, and we'll see where it ends up.

Your next question comes from Joel Jeffrey with KBW.

Just like to follow up to Doug's first question. I mean, in thinking about potentially buybacks, just curious as to how much you guys believe you have in excess capital, not just necessarily above what's required by regulators, but what you see in terms of operating the business currently?

It depends how you look at it. There's probably a couple of hundred million, 200 million to 300 million if you really go through it. But we also have a bond issue coming due next year, and people could say, "Well, why don't you just refinancing these low rates?" We tend to be very anti-debt, again, not just for our clients. We keep the same philosophy for ourself. And so when you look at that, that's kind of the excess level. And it doesn't mean that we couldn't do a much larger transaction and the good Asset Management business and take on some more debt and use our equity. So we're not adverse to it for the right situation, but we kind of view that as kind of the excess real capital that we have today.

Okay. And then when you talked about, clearly, the negative impact the underwriting business tied to what's going on in the energy markets for you guys, do you also see that on a go-forward basis kind of playing out in terms of equity-based commissions from the institutional side of the business?

I don't know if I can make that call. There's certainly been a lot of activity and speculation in the equity and energy markets, people making bets that oil is going down and oil is going up, so it -- and clients, we've lot of people who have gotten it.

But our commission base is pretty broad. I mean, they're buying a lot of sectors, not just energy. And the low energy prices are good for a lot of other sectors. So it definitely -- equity commissions were down, but that was just related to the underwriting activity, maybe underwriting activity will pick up in some of the other sectors that are beneficiaries.

And so the commission drop is as Jeff pointed out is and I said in my remarks is really underwriting-driven. There is nothing else fundamentally if you took out those factors that, that there wouldn't really have been a decline.

And we're adding SBUs and we're just continuing to build out our consumer and life science just to help augment some of the underwriting activity of the firm.

Okay, and then, Jeff, I think you mentioned that there were some items on your balance sheet that you could get better -- potentially better risk-weighted treatment under Basel III. Can you just talk a little bit about what those might be?

We're -- it's kind of hard to go into detail at this point in time, but there are some pretty significant pots of assets that it's unclear to us, just exactly how they're supposed to be treated and we've asked for regulatory guidance. And like I said, we treated them all as though they're the most heavily, but I don't want to get into any of the details right now until we get the regulatory guidance. One second, I move the ratio 10,000 basis points. I might move it to 100 basis points.

And again, we think we've taken a very conservative approach overall. We believe we have some upside on that.

Okay. And then just lastly from me, I apologize if you guys touched on this earlier. But in terms of the impact on the fewer number of business days on the investment advisory revenue line, can you just talk about how that impacts the actual billing of the client?

The clients gets billed based on the number of days in the quarter over 365. So we're getting a lower fee in that quarter from clients given it's 90 days instead of 92 or 92 or 91 days, which the others are, for that quarter into the investment advisory fee line item and obviously FX interest earnings as well with the bank, which is done on a daily basis. So 2.2% fewer. Relative to December quarter, it's the same as last year's March stuff.

And do you have -- do you know specifically how much on a revenue basis that actually impacted the number this quarter?

I don't have an exact figure. I don't have an exact figure on that now, sorry.

And your next question comes from Chris Allen with Evercore.

Apologies if these were already asked. I joined the call a bit late. But I was just wondering, the business development increase in the sequential basis, how much was due to recruiting-related and how much was due to with ad spending increase, just trying to break it down?

This is development. How much recruiting? How much we're in advertising? How much is?

The advertising spike was the -- called the spike, was between $4.5 million versus a normalized run rate. So I'd say it was a little bit slanted towards that, because recruiting has been active for a while, so I'd say it was a little bit more slanted towards to the TV airtime purchases, $4 million to $4.5 million, something in that range.

Got it. Okay. And then in the Asset Management segment, pretax margins were down on a year-over-year basis, even though you've seen nice revenue growth, nice AUM growth. I was just wondered if you could give any color there what's driving that and whether that could -- the trajectory you have to change?

Well, that relates to the shift in the lower fee products that was talked about earlier. Maybe you weren't on the call then that got -- if you just look at the mix of where the assets and the -- are being held, there has been a bit of a shift to some of the lower-fee products to us, particularly the Freedom Account products, which again as I mentioned were our managed mutual fund portfolios that have pretty high embedded costs already in the underlying mutual fund. So we had a fairly modest margin on top of that.

But Chris, if you look at the first 2 quarters compared to the first half of the fiscal year versus the last fiscal year, the margin improved from 33.6% to 36.6%. So there was about a 300 basis point improvement in margin on the year-over-year basis if you look at the first 6 months, which is important to do because of the noise you may have in any one quarter that can really impact their margins given their revenue base. So there is still operating leverage occurring as Paul mentioned in his opening remarks.

At this time, I'm not showing any further questions.

Well, thank you, all, for joining us. We know it's a difficult quarter. I wish we could give better guidance as these -- as this quarter happens. It's the same thing as last year, net-net strong. We think the start to the year are best for 6 months start ever. We've gotten -- if you look at the key indicators of our business, recruiting, FA account, assets under administration, assets under management, net bank loans, all the quarterly kind of records and -- so that's going to position us well for the next quarter. And we have to fight in this environment like everyone else to bring it in. So I -- just make sure that when you look at the quarter and kind of normalize the expenses, I think the 6-month run rate is a good proxy for that. So thank you for attending us. We know on a busy day with a lot of calls, and we'll talk to you soon. Thank you, Therese.

You're welcome. And ladies and gentlemen, thank you for joining today's conference. And thank you for your participation. That does conclude the conference. You may now disconnect.