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Raymond James CEO on short-seller squeeze: retailer investors need to understand the long-term risk

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Raymond James CEO Paul Reilly joins Yahoo Finance Live to break down how heavily shorted stocks are faring this week and weigh in on the importance of investing long-term.

Video Transcript

JULIE HYMAN: And let's begin with the first of them right now. Paul Reilly is the CEO of Raymond James. As I mentioned, the company just reported revenue that was at a record as the company's seeing asset management fees on the rise of fee-based assets up 12% as well. Paul, it's wonderful for you to join us. Thank you so much for being here.

I do want to start, however, not with the earnings, but what is going on in the market because I think so many people are talking about it. I'm sure that your advisors are getting a lot of calls and a lot of questions about this. What are your folks telling clients as they're getting these questions and, sort of, what are the biggest questions they're getting?

PAUL REILLY: Well, first, you know, the advisors have always focused on long term financial plans, not short term gains. And even though some clients will take part of their portfolio to speculate or to take investments that are a little riskier, most are really focused on the long term. So when you see something like this, you have to explain that this is a very strange phenomenon. So we don't short stocks and we don't tout stocks.

So as you give advice, you say, first, shorts are important to the marketplace. They do provide liquidity. The question is, when is over shorting? During the financial crisis, when they eliminated shorting on financials, they fell precipitously. So they do provide a function. The question is, is it overused?

And the same with retail. We love that retail investors take an interest in individual stocks. You could say with ETFs and mutual funds, a lot of investors stop looking at individual stocks. So it's good they get knowledgeable. And it's good they want to invest. The problem is, is when you have something where just a herd over-invests and you get prices that aren't near to reality, you know, it's going to correct and a lot of people are going to get hurt. So there's good sides and bad sides. And the question is, what's the right balance?

JULIE HYMAN: Well, doesn't, you know, isn't the thing usually that the market figures that out? That the market finds that balance? And that if there are collateral damage in the form of people losing money, well, that's the way the market works?

PAUL REILLY: Yeah, that's true, but if, you know, if a company went to all their investors and said, look, we want this stock, we think it's good, there's a short play, there's a run, everyone invest, they would get in trouble with the SEC. So the question is, in a market that's online and you're using message boards and social media, what's that balance? And what's the right market structure to prevent things from happening?

Here, we had a hedge fund, not that the public feels bad about hedge funds losing money that had a cover. And then you had an online trading organization that had to raise $1 billion overnight to cover liquidity for the trades. And you're going to have investors lose money. So the ques-- you don't want to create that kind of dynamic across all the markets. This is a small part of the market, but if it grows and grows, you don't want to create market instability and have investors lose confidence in the market.

So yes, there's good parts of it and people do figure it out. The question is, do retail investors, if they hop on something, do they really understand the risks? And through-- if they're one of our clients, at least they'll have an advisor talk about the risks. But if it's just momentum and herd investing and the prices get way, way 100 times overvalued and they're still investing, you know, is that really a positive for people's confidence in the markets? So I think these are the things that the SEC and others are going to have to sort through in the next few weeks because it is a new phenomena.

MYLES UDLAND: And Paul, we certainly see a lot of energy in the market one way or another, however that materializes. And looking at your results, you know, the capital markets business is booming in the fourth quarter. I'm just curious how-- how those trends again, that we see manifested in the market through these individual names, but in your part of the business there is energy in capital markets today. How did that play out in that segment of your business?

PAUL REILLY: Well, you know, there's-- there's two-- our biggest part of our business by far is our private client group. We've gone from December of 2010 from $260 billion in assets to we crossed a trillion. So that's over 15% compounded growth. And like our clients, we look at conservative long term growth and we're very proud of that.

The capital markets was the Delta this quarter. And you see a lot of people buying and selling, especially private equity firms that have owned companies, often selling to other private equity firms or strategics. And that activity has significantly picked up, I think both because of the market dynamics-- valuation's up-- and since this is a relatively new phenomenon, in terms of the amount of the private companies they've owned over the last five or six years, holding times come in where people are just getting liquid on investments they've held for a while at good value.

So capital markets tends to be cyclical. Certainly, the fixed income market's been robust because with the volatility and low interest rates, you know, the capital markets [INAUDIBLE], the debt raising has been very, very high at these rates. And on the equity side, an M&A has been very robust because of the valuation question. So hopefully it lasts for a long time. It's a good robust part of the market, but, you know, it's also a cyclical part of the business over-- if you look over years.

BRIAN SOZZI: Paul, it's been a real-- it's been a real battle for financial advisors throughout the financial services industry of late, but do you think, just given the activity we have seen, the massive inflows and increases in assets under management, or even the frenzy pace of trading activity with the-- that we've seen this week with the GameStop and other short stocks, that this creates more excitement for people to become financial advisors? And we could see the next generation-- could see a wave of financial interest by potentially new advisors going forward?

PAUL REILLY: Absolutely, we've been investing at universities for financial advisor degrees. We've had a program, now, for a decade of our-- what our women advisors trying to attract women and who we think get res-- have a resistance, if you look at finance degrees, to look at our industry. But it's a great industry for them, giving advice and helping families long term.

And now, trying to spend a lot more energy, we have for years, is on getting people of color into this industry. So we think it's a great industry. Like any business, it's hard during the startup years as you accumulate assets and get clients, but it's a great industry long term because you get to help people and their families. And you have a relative degree of freedom in terms of time because there aren't too many financial emergencies. So if you want to coach little league or do something at school or something, you have that flexibility. So we think it's a great profession.

JULIE HYMAN: And Paul, in addition to recruiting the universities you've also, in some cases, been recruiting from other firms. And all of this, of course, costs money to recruit new people. Where are you in terms of your inflection point between those recruiting costs and then the fruits of that recruiting? I mean, it looked like this was a good quarter, so you're starting to see that bear fruit, but how are you thinking about that cost versus revenue from that side of the business?

PAUL REILLY: Yeah, we've been at the recruiting business for a long time. It wasn't that long ago people viewed us as a small firm, and now that we're in the Fortune 500 and S&P 500, it's been through that steady recruiting. And we get good ROEs. We calculate what we think they'll generate and the cost of bringing them over. And the secret for us has been just the lack of turnover. We've had less than 1% regretted turnover every year, so we really focus on high end service and trying to help advisors help their clients and grow their business. So it's been very, very important for us.

The issue as you look forward is the number of financial advisors are been declining and there's a lot of people retirement ages, so we've really built up our recruiting classes. Typically our recruiting classes aren't people right out of school, they're people that are in another career that want to change, or they've been a assistant advisor, or working with an advisor for a number of years and they want to get licensed and become advisors. So we have a very robust training that's in the office, and then at home office, and then back in the office, and really mentor them over a couple of years to really get them ready that they can be able to work with clients directly on their own.

JULIE HYMAN: And Paul, just very quickly, how many people do you expect to hire on that front this year?

PAUL REILLY: We've hire-- our recruiting class is down a little this year. And we did it on purpose because of the virtual environment we knew would be harder to mentor the people as we basically shut down our home offices and things because of the pandemic. We're less than 10% occupancy, so it's very safe and-- but it's hard to bring people in for the training and the classes and we've had to do it virtually.

So we have reduced recruiting this year, but we plan to step it right back up after the pandemic when we can get people in because this really is an apprentice business. You learn-- almost in any personal services business, you learn by watching other people, how they interact with clients, and you train live. It's very hard to do virtually and one-on-one, so we're going to go ahead and resume increasing our training classes as soon as we start returning to the office. And like everyone else, we're hopeful the vaccine will really get the pandemic behind us and we can go to the new normal. It will be different, but at least the new normal will be a lot better where we can get together.

The other important thing is, culture is really important to us. That's why our turnover so low. And the mentoring and caring for people. And you can do it virtually, but it's a lot nicer when you're together and can create those bonds and those personal interactions. So hopefully soon.

JULIE HYMAN: Amen to that. Paul Reilly, Raymond James CEO, thank you so much for joining us this morning, appreciate it.

PAUL REILLY: Thank you so much.