As regulatory scrutiny increases, Raymond James steps up compliance
Faced with heightened regulatory scrutiny and new regulations, Raymond James is upping its compliance game – and potentially adding new expenses in the process.
The shift in strategy was prompted by recent regulatory actions against the firm with regard to alleged compliance failures as well as the Department of Labor's fiduciary rule, due to go into effect early next year.
CEO Paul Reilly told analysts during an earnings call Thursday that the St. Petersburg, Fla.-based company has been adding compliance resources while simultaneously preparing for the implementation of the DoL rule.
"I'm confident that my team is all over this," Raymond James CEO Paul Reilly said of his firm's preparations to implement the fiduciary rule.
Raymond James has hired 50 new anti-money laundering associates to its compliance department in addition to a new chief AML officer. The firm has also paid for new AML software called Mantas to better monitor suspicious activity.
"The 50 additional AML associates is just one example of higher structural regulatory costs," Reilly said, adding that fines have become stiffer for the industry too.
The firm's noninterest expenses rose 4% year-over-year to reach $1.167 billion for the recent quarter. The fastest growing line item — other — increased 43% to $66.9 million.
Raymond James has recently incurred higher legal costs due to regulatory actions.
In May, FINRA fined Raymond James $17 million for failures in the firm's anti-money laundering compliance program, saying that the firm's rapid growth in recent years outpaced its ability to properly catch red flags. The regulator also fined Linda Busby, Raymond James' former chief AML officer, $25,000 and suspended her for three months.
Raymond James also recently agreed to pay almost $6 million to Vermont securities regulators in order to settle charges that it violated state securities laws related to investments in a Vermont ski resort.
"It was a specific case and a specific issue in the state of Vermont and with a specific group of investors," Reilly said.
The regulator says the firm had "widespread failures" in its anti-money laundering programs for both its employee and independent channels.May 18
The firm settled charges by Vermont securities regulators connected to a ski resort at the center of an alleged $200 million fraud. A related lawsuit filed by an SEC-appointed receiver is pending.July 1
The additional compliance resources come as the firm continues to report record growth. Adviser headcount hit a new high of 6,834 for the recent quarter, up 327 from the same period a year ago, according to the firm. And more advisers will be joining later this year, as the firm is set to close on acquisitions of Deutsche Bank's U.S. Private Client Services unit, which has about 180 advisers, and Canadian wealth management firm 3Macs.
Reilly said that the firm is on track to complete those acquisitions and that 92% of Deutsche advisers have signed on to stay with Raymond James.
PREPPING FOR FIDUCIARY
At the same time, the firm is readying itself for one of the most sweeping regulatory changes in years. Reilly told analysts that the firm was working with outside law firms to determine how best to respond to the DoL rule, emphasizing that it is "very complex" and that the firm is awaiting additional guidance from the department.
"I'm confident that my team is all over this," the chief executive said.
Reilly said that the firm has long taken a critical view of products with high commissions and would continue to do so when the fiduciary rule goes into effect.
"We've always had a bar on those and had a cautious attitude going way, way back. [Chairman Tom James] has been in the room and he's been beating the drum on that for a long time," Reilly said.
There could be a new shift from commission-based accounts to fee-based accounts as a result of the rule. But Reilly said that the firm has told advisers to be patient while experts wade through the rule's details.
"I think some people have come out of the box with a solution and then had to backtrack. We want a solution that is good for the client and fair to the adviser," Reilly said.
He adds, "The worse thing is to go to the clients with one thing and then have to change it and then change it again."