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Raymond James' New Breed Pushes Ahead After Morgan Keegan Acquisition

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Known as the "horse capital of the World," Lexington, Ky., is home to one of the most internationally recognized horse-breeding operations: Darley Stud at Jonabell. A number of champion steeds, including Bernardini, the winner of the 2006 Preakness Stakes, have been sired on these grounds. Each day from mid-February to June, some of the most prestigious horses in the industry are selectively paired off here and at a number of other local farms with the hopes of producing the next Triple Crown winner.

Owned by the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, Darley is the scene of about half a dozen breeding sessions a day, and owners sometimes pay up to a half million dollars to mate a mare with one of the farm's stallions. It is all aimed at preserving the thoroughbred bloodline and producing future excellence.

Similarly, the most renowned firms of Wall Street have varied and distinguished pedigrees, as is visible on Main Street in Lexington. At one end of the street lie Wells Fargo and Morgan Stanley, which respectively assimilated A.G. Edwards and Smith Barney, among other firms. Farther down the street, the smell of varnish is still fresh in the entranceway of another office; the name Morgan Keegan has been scratched off the wall and replaced with the Raymond James marque.

On Main Street, "You saw the Wells [Fargo] office; you saw the Morgan Stanley office—every one of those firms is part legacy," says the Raymond James branch manager, 43-year-old Robert A.A. Brewer. "There is no A.G. Edwards anymore. There is no Wachovia anymore. There's no Smith Barney anymore. It's not like it's any different for the Morgan Keegan name to go away. It's just part of the business."

On Presidents Day, Raymond James officially retired the Morgan Keegan name. Simultaneously, the firm switched all 500,000 Morgan Keegan accounts over to the Raymond James technology platform. It was one of the final major steps in the integration and occurred almost 11 months after Regions Financial Corp. completed the sale of Morgan Keegan in a $1.2 billion deal on April 2, 2012.

The acquisition added around 900 Morgan Keegan advisors to Raymond James, bringing the head count to about 6,300 and making the firm one of the largest brokerages behind the four wirehouses. Assets under management also rose 39% last year to reach $370 billion, thanks in large part to a $66 billion infusion from Morgan Keegan's clients.

Brewer, who oversees around $185 million in client assets, is hoping he can take those numbers higher. "The bottom line is we're going to grow," he says four days after the conversion. "I'm excited about building this office, and it's great to be on offense again."

A Sudden Turn of Events
Brewer has been up since before 6 a.m., when he had an exercise class at the local YMCA. Regretting the oysters he had at dinner the night before, he kicked off his day running up and down stairs with a client, who tells him that he likes the way his account looks on the new Raymond James system. By 8:45, Brewer is wearing a suit and in his office, checking on how his team is adapting.

Seven of his team of eight advisors and the branch operations assistant have gathered around a conference table for a weekly team meeting. Brewer asks about any challenges they have found in using the new Raymond James system. On the whole, they report only minor difficulties. "This system is vastly superior to the way we used to do business," says Frederic Lamar Dupree III, a second-generation bond broker.

Raymond James spent more than $200 million on upgrades and accelerated the deployment of new technology for its existing advisor force, according to the firm. As a result, Brewer now has a website. Feedback from clients and from advisors in the Lexington office has initially been positive.

When the meeting wraps up after about an hour, Brewer is back in his office, a sizable space with a glass facade that faces out to the lobby, where his assistants sit. He checks emails and makes calls, at times standing tall behind his desk and talking out toward the glass on speakerphone. He is trying to make an annual school luncheon with his 9-year-old daughter at 11:30, but an emergency call from a prospective recruit throws off his plans.

An independent advisor whom Brewer had been prospecting since before the merger is on the line. He has received another offer, he said. If Brewer wants him, he will have to make a bid from Raymond James today.

Brewer, who has his coat on, ready to leave, takes to the stairs a second time that day, running from his office to regional director Van Thompson's office in the basement of the building to try and drum up an offer on short notice.

It is his first chance to officially bring in an advisor under the Raymond James name. Anyone who joined before the technology conversion and name change would have technically come in as a Morgan Keegan advisor. That situation has made things difficult for the past year.

"Obviously, there was no way it was going to make sense to try to recruit," Dennis Zank, Raymond James' chief operating officer, says. "If you were a Morgan Keegan branch manager, you couldn't recruit into your location at least initially, when the company was for sale.... [Then] once it was determined Raymond James was merging with Morgan Keegan and now you knew you were facing a conversion, why would an advisor from another firm go to the Morgan Keegan branch only to be converted to the Raymond James system?"

Driving to the luncheon, 30 minutes late, Brewer receives word from Thompson: it's a go. He calls the prospective recruit on his car's speakers through a Bluetooth connection and leaves a message. By the time he arrives at the lunch, the pizza is cold, but it doesn't matter because Brewer never sits down. He shakes hands with 13 people on the way to the cafeteria and, after meeting with his daughter for a few moments, continues conversations with friends and contacts at the school.

Brewer, who is an alumnus of the school, was chairman of the school's board and raised $11 million for the endowment during the financial crisis. He resigned last July to devote his time to the integration of the two firms. "This has been a wonderful experience," he told the board. "But with this merger, I'm going to rebuild this office, and I just can't be in two places at once."

Challenging Times
When the recruit finally calls back, it's the middle of the day and the sun is warming the grounds outside of Jonabell Farm. Brewer is standing at the edge of a circular driveway with the main clubhouse behind him. The chief financial officer of the farm, a client, had scheduled a tour for Brewer, but the branch manager is glued to his phone.

The conversation lasts around 15 minutes. They discuss numbers, the terms of the offer, and the mentor who will take the recruit under her wing. Brewer has chosen an advisor he recruited several years ago from Hilliard Lyons, Nicole Zielke, who is the branch's top producer. "She's dangerous," he tells the prospect.

The recruit, who first made contact with Brewer a year and a half ago, eventually brings the conversation around to the merger. "I think it's only going to make it better for you," Brewer says.

The prospect tells him that if he doesn't call back within two hours, it means that he has accepted the offer. He promises to call later on to confirm the decision.

In addition to struggling with recruitment over the past year, Brewer was continually worried about keeping his team together. The ordeal started in June 2011, when Regions announced that it wanted to sell Morgan Keegan. In the beginning, executives at Regions were estimating that a new buyer could be locked in within 90 days, he says. But morale at his branch faded as the months passed.

Recruiters began closing in on his team with attractive deals from some of the wirehouses, according to Brewer, who was solicited as well. "I can't tell you how much I dearly love Morgan Keegan, but the last few months were very, very difficult," he recalls. "From a recruiting standpoint, your front door was locked and your back door was wide open."

Believing that he owed it to his branch employees, Brewer stayed put, but he had to take a tough stand with three advisors on his team. "They'd made up their minds, and I knew it," he says. "Finally, I said, 'I can't let you sit here and plot your next move. You're either on the bus or you're not." The three submitted their resignation at the start of the next week and affiliated with an independent broker-dealer.

Meanwhile, Morgan Keegan Private Client Group executives, Dick Ferguson and Bill Geary, were meeting with private equity firms and brokerages for 10 to 12 hours a day for five days a week well before the Raymond James name surfaced. "They had been run through the ringer in the prior five or six months," says Zank.

Zank admits that even he had his doubts leading up to the initial meeting: "I had been with Raymond James almost 35 years, and we just don't have a history of doing many acquisitions, just because of the challenges of the acquisition, the risks, the cultural fit, and so on," he says. "I wasn't hugely confident that we would go ahead with it unless all of the stars aligned relative to the cultural fit and pricing and whether we were really confident that we could effectively integrate the business."

The tides began to change in December 2011 at a surreptitious meeting in south Atlanta. Zank, who was president of Raymond James' Private Client Group at the time, and Chet Helck, the chief operating officer, showed up at an airport hotel to meet with Ferguson and Geary.

"It took us about three minutes to start laughing and realize it was great," Ferguson recalls. "We spent a couple hours talking about philosophy and differences and how we were going to make this work. But then we went downstairs, had a sandwich, and drank a beer, and we knew it was going to be a great match."

The Right Fit
In January 2012, it was announced that a deal was on the table, and Raymond James moved quickly to introduce itself to the Morgan Keegan brokers. That month, Brewer and a number of other branch managers were invited to the Raymond James home office in St. Petersburg, Fla., for a presentation and Q&A with the CEO, Paul Reilly; the chairman, Thomas James; Zank; and Helck.

"I knew this was going to be the right fit when I went down there in January and saw it for myself," Brewer says. "They understand our business the way I thought Morgan Keegan understood our business."

Brewer continued to make monthly visits to St. Petersburg and to Morgan Keegan's headquarters in Memphis, Tenn., for conversion and training sessions and came to admire various aspects of the Raymond James culture, including the tenure of advisors. "I asked people how long they'd been there, and they'd say 17 years or 14 years," says Brewer, who had been at Morgan Keegan since 1998. "That told me something was working."

He and several Morgan Keegan executives also liked the fact that Raymond James was primarily a retail-driven operation. In the first quarter of 2013, for example, the Private Client Group accounted for 64% of the company's revenue. "Raymond James owns a bank, but isn't owned by a bank," Ferguson says. "There's a huge distinction there. You have to be in the banking business if you're going to service high-net-worth and ultra-high-net-worth clients, but I'd rather own a bank."

Raymond James also relaunched Morgan Keegan's seasonal magazine The Culture (Brewer had been on the cover in 2002 under the title "The Kentucky Thoroughbred"). In the first issue, Raymond James pointed out the historical parallels between the two firms. They were established within seven years of each other in the 1960s, went public in 1983, had the same shade of blue as their corporate color, meshed geographically, and shared similar mantras: "Be Better, Do More, Have Fun" at Morgan Keegan and "Work, Work, Play" at Raymond James.

"Regionally, both firms were from the South and ... Morgan Keegan probably was happy that a firm in a similar part of the United States acquired them, rather than a Wall Street firm," says Alois Pirker, a research director at Aite Group, a Boston-based financial services research and consulting firm.

To help spread that message, the rest of the Morgan Keegan's branch managers and top producers were also invited down to St. Petersburg for a home-office visit. In January and February of 2012, more than 550 of Morgan Keegan's force made the trip. The visits are ongoing and open to anyone who wants to learn more about the firm, a Raymond James spokeswoman says.

Instrumental in the cultural integration was keeping the executive leadership. All of the top officers from the Morgan Keegan Private Client Group, more than a dozen individuals, stayed on in various capacities, and the firm has initially avoided major consolidations or moving branch managers like Brewer. Ferguson and Geary have become co-divisional directors of Raymond James' Southern division.

"It was critically important... that we fully integrate the leadership from Morgan Keegan Private Client Group into Raymond James & Associates Private Client Group to help protect the culture that both these firms have grown up with," explains Tash Elwyn, president of Raymond James & Associates' Private Client Group.

The strategy has paid off. The combined firm retained over 95% of the revenues from Morgan Keegan advisors. Most of the advisors who left, including two of the three from Brewer's branch, produced under $300,000 and did not receive retention packages from Raymond James.

"We had been recruiting Morgan Keegan brokers for months because of all the turmoil," says recruiter Rick Peterson of Rick Peterson & Associates. "Initially, we thought that these guys were going to look at it and we would have shot at getting them because a deal from almost any other firm would have been better than the retention package that Raymond James gave them. Lo and behold, we were wrong. They welcomed Raymond James with open arms."

Even after the deal closed, sources at other firms that were rumored to have been in the running for the acquisition claimed that their retention offers would have been better. Raymond James, however, says it was able to make offers to a higher percentage of the advisor force and that the corporate culture was an important factor.

A New Name
For the advisors who stayed, the retirement of the Morgan Keegan name marks a symbolic turning point. Raymond James initially gave the brand a two-year prognosis, but the change came sooner, partly at the urging of former Morgan Keegan executives.

"While we were certainly sensitive to the rich history, heritage, and the strong reputation of the Morgan Keegan name, it was with the full support and even urging of financial advisors and branch managers of the Private Client Group leadership team that the firms have moved forward with the rebranding to Raymond James," Elwyn explains.

Another factor that may have contributed to a willingness to give up the former name was a number of lawsuits that were filed in recent years over proprietary mutual funds, known as RMK Funds, which were heavily impacted by the market decline of 2008. In 2011, the Financial Industry Regulatory Authority ruled that Morgan Keegan had not fully disclosed the risks associated with the funds, which contained some subprime assets, and ordered that some $200 million be repaid to investors.

"We had never seen anything on the scale of what we went through with those bond funds," Brewer says. "All the years I'd been in the business I never had to deal with anything that painful. Friends, family, clients, myself invested in those funds."

The settlements were paid by Morgan Keegan, not the brokers, and the overall effect on the merger was negligible, according to the legal department at Raymond James. "These amendments had very little effect on the brokers during the RJ-MK conversion because FINRA and state regulators realized the amendments related primarily to a product issue rather than sales practice activities," Raymond James wrote in an emailed statement. Raymond James was indemnified for all of Morgan Keegan's litigation matters as part of the deal it made with Regions Bank to acquire Morgan Keegan.

"To close the book and start fresh is good for everybody," Brewer says. "We've got the right platform. We've got the right people. I can see it in my branch; there is a renewed energy. There is a renewed bounce in their step."

For Brewer, the relief is palpable. "It's like the proverbial quote: in life sometimes the most difficult mountains you climb, you look back and you're glad you gutted it out," he says. "I'm more energized and excited than I've ever been in this business."

Brewer mentions a recent visit from a prospective client. The day that the sign in front of the building was changed to read Raymond James, a couple who were on their way to lunch happened to see the new name. The husband had taken a buyout from an automaker with a significant presence in the area and would be retiring soon. A relative had had a positive experience with Raymond James, and he thought they might be able to help. That unexpected encounter "just says a lot about the respect level that Main Street has" for the Raymond James brand, Brewer says.

By the time Brewer had lunch, which consisted of a bag of almonds he picked up while refilling his car with gas, at 2:30 in the afternoon, two hours have passed since spoke with the prospect. The recruit has not called back. He has made his first Raymond James hire.

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