Low rate environment ‘punished savers’ but ‘buoyed the market,’ Raymond James CEO says

Raymond James CEO Paul Reilly joins Yahoo Finance Live to discuss the company's first quarter earnings, the Fed's move to potentially hike interest rates in March, and the outlook for the investment banking industry in 2022.

Video Transcript

BRIAN SOZZI: It was another big quarter for investment banking out of Raymond James, powered by strength in M&A and in equity underwriting. Shares are rising here in the early going. Joining us now for a first on Yahoo Finance interview is Raymond James CEO Paul Riley. Paul, always nice to see you here. The strength in investment banking really sticking out here to a lot of folks. What is driving that strength?

PAUL RILEY: Well, Brian, first, good to be here. We've been building our investment banking pipeline, and arguably, since we're really a private client group firm, lagged a little bit. So we've done some strategic acquisition, made some great hires. We have great leadership, and the business has really been booming.

So the market's been very constructive for everyone, but we've really gained market share by the teams we've added, the focus we've added, especially around private equity clients. And so it's been a good market, and the backlog continues to be very strong. So it's good for the firm and good for our practitioners and clients.

JULIE HYMAN: Hey, Paul. It's Julie here. So obviously, a rising rate environment hits you guys differently than it does a consumer-facing bank, who it can help in terms of net interest margin. As we see these concerns about removal of liquidity from the system, what's that going to mean for your clients and then for you guys by extension? It looks like you had a light go out there, Paul. But we can still hear you loud and clear.

PAUL RILEY: Yeah. I'll look a little shady here, but hopefully we'll get the lights back. Well, first, we have over $50 billion of client cash, $75 billion. And a 100-basis-points instantaneous rise would add $560 million of profits to our firm. So like a bank, because we have so much client cash in our private client group, it would be a great driver of profits.

But on the M&A side, the question is, if rates rise quickly, does it slow down M&A? And I think you have to remind people that we're at almost historic low interest rates. Germany just came out of negative interest rates. And rates are still low. Even the Fed rises of 100 basis points is really not big in the markets. Historically, when the Fed has risen because of good economies, the positive market momentum stayed around for a long time.

So if the cost of capital gets a lot higher, could it slow down M&A? Sure. But I think that what the Fed is talking about, really-- I know people are worried about it. I think it's more of a rounding error given our rates are so low, especially in the capital markets area.

BRIAN SOZZI: But still, Paul, there's some folks out here this morning calling for potentially, this year, six to seven rate hikes. Should that happen? Should it happen? Where do you see the economy going?

PAUL RILEY: Well, the question is what's too much. I still remember when I got a home mortgage at 9%, and I watched them go to 12%. And that was a few years ago, but the economy wasn't stopped then. So there is still a lot of room. So if the hikes are maybe 2% in total over a couple of years, I think part of it will be good for the economy.

Part of this has punished savers. People who are retirement and savings-oriented haven't been able to earn anything off their cash. So it probably has buoyed the market because that was the only place you could go is in the equity market. So may it impact the equity markets? Sure, as money may get more invested in cash. But I still think under all of this, the economy is going to grow.

We have demand. All the industries are trying to hire enough people. So it's not just full employment. We need more people that are in the job market right now. So I think those are going to push the economy for a while. So I'm a lot less worried about it than some of my colleagues may be.

JULIE HYMAN: And how about your clients, Paul? I'm curious what you're hearing from them in terms of whether there is any level of concern or alarm about interest rates going higher and the effect that's going to have in the economy.

PAUL RILEY: Yeah, I think you have to take the individual client versus the institutional clients-- maybe the institutional clients a little bit, but they think they'll work through it. If you look at the individual clients-- people refer to them as retail, but they're all so different, especially in the clients we serve-- I don't think so much. If you look at sentiment, they said 50% were confident in the stock market, a little over 50%. That was the same as the last few quarters.

So there's concern. But where they really vote is in their investments. We have about-- client cash is 6.5% of the assets. Typically, that's 10-plus. So they're still invested in the market. Luckily, their advisors have kept them in these last few years as there was fear, because they've benefited from it. And I think most of them are concerned on the volatility.

We worry about individual investors because they tend to get out when they see something fall, which is a time, maybe, for a lot of cycles to get in. But I think their advisors, who they show 95% confidence in, which is great, have kept them in the market, and I think will keep them there. And so they're concerned, but they're staying in. And they're voting with their investment.

BRIAN SOZZI: Well, so many folks have left the labor force during the pandemic, especially in the financial advisor industry. And it makes me wonder if we need some Tesla robots here to help us sell financial products. Where are you seeing recruiting at this point?

PAUL RILEY: I know Julie won't use one by her earlier comments. But we still find-- it's interesting-- with all the pressure, with all the robo types of entrants, that our assets have continued to grow. In fact, I think the industry reported 14% annualized net new assets, which is just assets coming in, because people want advice. So I use my kids as examples. Now that they're in their late 20s and 30s-- they would say we'd never invest, or we're going to invest directly-- they all have advisors. And as life gets more complicated, people want advice.

And the only fee that's not under pressure in our industry has been advice fees. The advisor fees have held up very, very well because advisors are a lot more than stock pickers or investment pickers. They're really family planners. So how do I get my kids through college? How do I retire? What happens with my special needs child? What do I do with this illness, and how do I save for it? And people want that help in very complex markets.

So we're pretty confident that the technology we see in robo and others, we think, will be table stakes in connecting our clients to our advisors. So we're all investing in it. But I think advice is here for a long time, and I don't think the robots are going to replace that anytime soon.

BRIAN SOZZI: Yeah, because I'm not buying CDs or stocks from any form of Tesla robot or any other ones that look like those. We'll leave it there. Raymond James CEO Paul Riley, always good to see you. We'll talk to you soon.

PAUL RILEY: Great. Thank you. Good seeing you guys.