Thomas James, the CEO of Raymond James Financial, lives just off the 17th hole of the Bayou Club, a private country club, just 10 miles from Raymond James headquarters in the Feather Sound area of Saint Petersburg, Fla. James says he's a “mediocre” golfer; he also says he'd be better if he didn't prefer tennis. But after 36 years as CEO of the firm, 63-year-old Tom James may one day soon have time to improve his golf game.
What really has kept him off the links for the past 36 years is Raymond James Financial (RJF), where he still puts in 12-hour days. And at this, he is clearly a scratch player. Consider the recent performance of the firm he leads. In fiscal 2005, pretax earnings hit $247 million, an increase of 87 percent over fiscal 2002, a cyclical low point for the industry. Investors took notice: The firm's stock has nearly doubled in that time. More recently, over the trailing 12 months ended in mid-May, Raymond James stock jumped by 63 percent, easily outperforming big-named rivals like Merrill Lynch, Morgan Stanley and UBS, but also outpacing glamour firms like Lehman Brothers and Goldman Sachs. Since going public in 1983, RJF has posted average annual earnings growth of 18 percent — a fairly remarkable track record to be sure.
It has indeed been an extraordinary career. Since becoming CEO in 1970, at a mere 27 years old, Tom James has built Raymond James Financial into what it is today: a unique, multiplatform, full-service securities firm with about 4,500 (mostly) retail registered reps, about three-quarters of them independent contractor reps. The firm was established by his father, Bob, as Robert A. James Investments, a financial-planning and mutual fund-sales firm in 1962; today, Raymond James is a full-fledged securities firm, with a respected research department, investment-banking unit and asset management, offering proprietary mutual funds and alternative investments programs.
By all accounts Tom James is — as Reggie Jackson would say — the straw that stirs the drink. “There is no doubt that he's the driving force of the company,” says Paul Marshall, a Harvard Business School professor and long-serving member of the RJF board. But James will soon be 64. The question circulating among investors and securities industry participants alike is can RJF continue without his leadership? Or is RJF, as its share price suggests, takeover bait? After all, James could retire in one big bang of glory by organizing a sale to a larger player, earning a fat reward for himself (he and his family own nearly 20 percent of the stock), longtime employees and shareholders.
As evidenced by UBS' recent purchase of Piper Jaffray's brokerage unit, it's a hot market for brokerage firms. In this business with ever-soaring compliance costs, size helps. Many firms — wirehouses, regionals and independent broker/dealers — have declared they want to increase the number of advisors; but training continues to be a problem. So, RJF, with about 1,000 employee reps (working in its Raymond James & Associates unit) and another 3,500 independent contractor reps (affiliated with Raymond James Financial Services), must be regarded as a tantalizing morsel. Other players have recently snatched up Legg Mason, Advest and now Piper. Making a sale more enticing for James is the fact that RJF's P/E is hovering around 20, an earnings multiple that is higher than all of the firm's peers except Charles Schwab. Even Tom James himself says the stock is fully priced.
David Trone, an analyst who follows Raymond James for Fox-Pitt Kelton, thinks that Tom James will sell. “The stock has a couple points of takeover premium in it, the market is good — what better time to do it?”
While Tom James says he won't rule out a sale, he also downplays the possibility, saying he would only do a deal “if it was the best situation for everybody, all your constituencies.” And, he adds, “The usual rational reasons for a sale, you're old, you don't want to work, there's a problem, you need money,” don't apply to him or the company. Anyway, “We've done very well staying independent,” he says.
To be sure, business is great, but RJF has its challenges. The firms' retail brokerage unit, the private client group, which is responsible for more than 50 percent of total revenues, saw pretax profits drop — the first time since 2001 — to $102 million from $107 million last year; at the same time advisor headcount fell by 5.5 percent. Also, there were a couple of nasty regulatory episodes. Both blows were delivered by the independent contractor reps (from the RJFS unit). The settlements were a significant factor in causing a pretax profit dip for the division.
A Money Man With the Chops
Tom James moved to the Sunshine State from Ohio when he was three years old. And it was as a boy that James developed two of his most prominent passions: collecting stuff and investing. Stamps and coins were favorites. He says his father funded the initial purchases, but he quickly realized the value of his collection and began trading. Through wise trading he says he parlayed $5,000 in coins into $10,000.
James enrolled at Harvard in 1960, just as the Cuban missile crisis was unfolding and the possibility of nuclear confrontation between the U.S. and the Soviet Union became real. “That was a scary time,” says James, who recalls having his car packed and ready to go in case there was an attack. The events were influential in his choice of majors: economics, with a specialty in Game Theory. “I was the only kid in that program,” he says. His studies and the frightening real-world application of them shaped his politics, at least regarding nuclear standoffs. “I'm steeped in deterrence strategy and thinking because of all that,” he says.
While strategic analysis fit the studious side of Tom James' personality — he would graduate magna cum laude — another side of him wanted to be a rock star. He was in a band during his Harvard days, playing the college circuit, eventually managing music groups of all kinds. He still plays guitar (he owns 12: the electrics are Fenders and the acoustics are Gibsons and Martins) and loves music (he recently took in a Lynyrd Skynyrd concert).
During his sophomore year, his future began to take shape when his father opened up Robert A. James Investments. The year he graduated, 1964, the firm merged with Raymond & Associates to become Raymond James & Associates. “There was never a question that he was going to carry on at the firm when he graduated,” says Hardwick Simmons, another RJF board member, who attended Harvard with him. (Simmons is a former CEO of Nasdaq and Prudential Securities.) “He was a very serious student.”
James joined the firm after picking up his MBA from Harvard in 1966. There was a catch, however. The Vietnam War was raging, and to avoid being drafted, he needed to hold onto his education deferment. So he enrolled in night school at Stetson University College of Law, which was not far from the offices of two-year-old Raymond James. “I wasn't a conscientious objector or anything like that, but I certainly preferred not to go [to Vietnam],” says James.
While studying for his law degree, James and a few fellow classmates from Harvard as well as Francis “Bo” Godbold, a budding investment banker, started a venture-capital company, Investment Management & Research (IM&R). The next year, it would become Raymond James' first affiliate b/d, focusing on investment-banking opportunities. “Looking back, we were just kids at the time,” says James. “I don't know how we sold anything.” In 1969, IM&R became Raymond James' investment-banking department, headed by Godbold.
Hard Times, Then Growth
James took over as CEO from his father in 1970 at the age of 27. (His father would hold onto the chairmanship until his death in 1983). With the market in the doldrums, the firm was hurting. Profits were low, costs were rising and a bid to follow the first brokerage herd raising capital by going public didn't pass muster with the SEC. Without an infusion of capital, Raymond James needed to slash payrolls and close branches, two things his father preferred not to do. “I wasn't afraid to pull the trigger,” recalls James.
But it wasn't enough, and, in 1974, James tried unsuccessfully to sell the company to J.C. Bradford, a Nashville-based regional firm. Short on capital and with few services and few products, James says the firm survived by becoming an expert in alternative investments: oil and gas, leasing, cable television and real estate limited partnerships.
It was in this deathly environment that he transformed IM&R again. James made it the firm's first affiliate independent contractor. It was a breakthrough: a traditional brokerage firm and an independent contractor firm, supported by a shared infrastructure, Raymond James & Associates. The motivation, however, was less visionary than practical. Two big producers couldn't stand the bland furnishings and design of their branch office and told Tom James they would leave the firm. James, unable to upgrade their digs due to a lack of discretionary cash, convinced them to stay with the firm as an affiliate branch.
In 1980, he added a second independent contractor b/d, buying Robert Thomas Securities. That same year the firm earned $1 million for the first time. Three years later, with a bull market at James' back for the first time in his career, Raymond James Financial finally had the strength to go public, raising $14 million.
The combination of a strong market and access to the public trough enabled Raymond James to expand its operations dramatically. Yet, one by one, James' contemporaries left the firm or slowed down. Herb Ehlers, who joined Raymond James in 1980 and built up the firm's successful Eagle Asset Management, bowed out in 1994. A year later, Godbold, president of RJF and Tom James' heir apparent, relinquished his leadership of the investment-banking unit and remained president with “semi-retired” status. Tony Greene, president of Raymond James Financial Services, the affiliates unit, was next, in 2002. The following year Thomas Franke left. He had been the head of Raymond James & Associates, the brokerage arm, for more than a decade and had been instrumental in acquiring Roney & Co. and its 320 brokers, RJF's largest acquisition. His departure made it a clean sweep for the senior executives who been at James' side during the lean years.
The New James Gang
James' new leadership has been in place for nearly five years now. The goal for Chet Helck, RJF chief operating officer and Tom James' apparent successor — as well as Richard Averitt, who took over from Greene, and Dennis Zank, who replaced Franke — is to improve the production of advisors already in RJF and to attract more advisors. One way they've worked to stay on track is to weed out weak producers. More than 1,000 independent contractor reps producing less than $150,000 per year have been forced out in the last 18 months, says Helck. To join RJFS, there's also a new annual production minimum of $250,000. (The current average production for RJFS affiliated reps is $254,000.) At Raymond James & Assoc., the employee b/d, the firm is upgrading its advisor force, too. In the last 18 months, RJA has hired 230 reps, roughly half of them from wirehouses and half from regionals. While the annual average production is currently $380,000, the mean for the last 84 RJA recruits is $550,000.
One of the reasons given for the firm's recruiting success has been a nationwide marketing campaign promoting AdvisorChoice; the program offers five different ways an advisor can affiliate with the firm. If a rep finds his chosen platform doesn't fit his style, he can switch to one of the others. On the RJA side, management pays retention bonuses of 30 percent of production every five years. That helps keep turnover down. But, if advisors want to go, they can take their books with them — or sell outright — without any strings attached, as long as they average at least $250,000 in production, don't owe the firm money and have a clean compliance record.
James is giving his executives more room to maneuver these days. Marshall, the board member, says that as of late James is subtly encouraging his team to take him on in meetings more. He says the operating committee, which consists of the heads of the businesses, is taking positions different than James' and getting heard, which he says was not too common in years past. “Tom's no shrinking violet,” Marshall says. “But he's trying to give the younger guys a voice.”
James is coy about where all this is leading. “There might be a time in the not-so-distant future when I won't want to be CEO,” he says. Perhaps not so coincidently, he has been outspoken on controversial business issues, like CEO compensation (he's for pay for performance) and independent directors (he's against them). He also serves on the “Florida Council of 100,” an advisory group to Governor Jeb Bush, who is his friend.
But politics, he insists, is not a future career. The most likely possibility then may be that he does as his father did, holding onto the chairman's job while getting more involved with other interests. As Ehlers puts it: “His name is on the building. This is his life.” At least, for now.