Stifel Financial Corp. (SF) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Eric and I will be your conference operator today. At this time I would like to welcome everyone to the Stifel First Quarter 2015 Earnings Call. [Operator Instructions]. Mr. Jim Zemlyak, CFO is Stifel, you may begin your conference.

Thank you. Good afternoon I'm Jim Zemlyak, CFO of Stifel.I would like to welcome everyone to our conference call today to discuss our first quarter 2015 financial results. Please note this conference call is being recorded . If you would like a copy of today's presentation you may obtain it at our website at www.stifel.com. Before we begin today's call I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance. They may include statements regarding among other things our ability to successfully integrate acquired companies or branch offices and financial advisors, general economic, political, regulatory and market conditions, investment banking and brokerage industries, our objectives and results and also may include our belief regarding the effect of various regulatory matters, legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk or other similar matters. As such they are subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements. To supplement our financial statements presented in accordance with GAAP, we may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the company's GAAP results. To the extent we discuss non-GAAP measures, the reconciliation to GAAP is available on our website at www.stifle.com. And finally, for discussion of risk and uncertainties in our business, please see the business factors affecting the company and financial services industry in the company's annual report on Form 10-K and MD&A of results in the company's quarterly reports on Form 10-Q. I will now turn the call over to our Chairman and CEO of Stifel, Ron Kruszewski .

Thank you, Jim. Good afternoon to everyone. We’re pleased with our first quarter results which represent our third best revenue quarter on history that said, while investment banking was a good quarter our results on this item can and will be lumpy. Furthermore, we have incurred additional operating expenses specifically relating to enterprise risk management, audit and compliance relating to the build of our infrastructure and becoming a [indiscernible] company. Looking forward we’re optimistic about the continued growth in our business. In today's environment we see ample opportunities to continue to build a premier investment banking and wealth management firm. Before reviewing our results I would like to comment on the operating environment during the first quarter. The S&P and Dow was flat for the first quarter. Equity volumes were close to 7 billion shares traded per day essentially flat with the comparable period. The 10 year continued to decline by 25 basis points to close the quarter at 192 basis points. Although I would note that a substantial rise in the 10 year have occurred, we are currently yielding 227 basis points. Equity capital raising was strong up 45% and will comment on this in more detail in a minute. M&A announced and completed, the volumes were up 25% and 15% year-over-year and up a couple of points from year-end. In terms of equity flows our two important mix is the industry that I want to highlight. First, international funds appear to be growing by U.S. domestic funds and have been more than stagnant -- have been more stagnant. In the first quarter domestic equity mutual funds saw outflow of $2.7 billion, while international had inflows of $29 billion. And second, there is a growing trend of investment in the passive funds combining mutual funds and ETFs active domestic funds experienced outflows of $38 billion while passive domestic funds had inflow of 57 billion. Turning to our financial results for the quarter, non-GAAP net revenue was $564 million, an increase of 2.8% over the prior year but down 2.5% from a record fourth quarter. GAAP revenues were $561 million. On a non-GAAP basis excluding our merger expenses diluted was EPS was $0.65 on net income of -- or net income of $50 million. This compares to non-GAAP EPS of $0.68 a net income of $51.4 million in the first quarter last year. Non-GAAP pretax margin for the quarter fell about 1.2 to 14.3%, about half of the one point decline relate to the increased infrastructure cost which I will talk about in a moment. Turning to the next slide I want to provide some context around our results versus Street expectations. Our first quarter results fell short of consensus on top line revenues by $27 million. The myths versus expectation was mainly an investment banking which was $28 million lower than the Street. As I stated on our last call we had a terrific record fourth quarter investment banking but investment banking is going to be lumping. I'm pleased with our first quarter of $125 million and will give more color on this in a moment. I will also point out that the impact of the [indiscernible] both on revenue and expenses. As we stable all the $10 billion threshold we generate less revenue from the bank or simply from the expansion of our balance sheet and the additional compliance of regulatory cross hit expenses. Those expenses were approximately $3 million higher in Q1 of '14 as compared to Q1 of '13 and 2 million more than the fourth quarter. As I said this accounted for about half a point in pretax margin. Our core comp ratio was 62.5% slightly less than the 62.8% estimated by the Street. Finally our tax rate was 38.2% was higher than Street's have estimated about 37% and the resolve was a penny a share. So net-net our revenue net of compensation accounted for $0.07 and a higher tax rate accounted for a penny resulting the $0.08 difference as compared to Street estimates. I will now discuss our top line activity during the quarter, total brokerage revenues were down 1% to approximately $281 million but up 4% sequentially. In the first quarter we did not have the trading losses our fixed portfolio would have dragged down these revenues for the preceding two quarters. Investment banking revenues decreased 8% to 125 million from a 136 million in the first quarter of 2014 and decreased 28% record of 175 million in the first quarter. The decline in investment banking revenues is attributable to lower advisory fees which decreased 16% from Q1 of last year and 52% from our record fourth quarter of 2014. In both comparable periods we completed large deals which makes the comparison favorable to the first quarter where we did not complete any large M&A deals. As I said investment banking can be lumpy. Asset management service fee revenues were a record 114 million, the increase was due to an increase in assets under management in our fee based account. The quarter was also possibly impacted by the addition of 1919 Investment Council which attributed approximately $14 million. Other revenues increased primarily as a result of increase in gains realized on our investment. We had gains of approximately $5 million which was frankly a reversal of mark to mark losses in the fourth quarter. I would now discuss our brokerage and investment banking revenues. Total brokerage revenues increased 4s% from the prior quarter to 281 million. Global wealth management brokerage revenues were down slightly both sequentially and year-over-year, while the equity brokerage institutional equity decreased 4% and 8%. These two items were offset -- the declines were offset by fixed income which 5% and 45% from a week quarter a year ago. Total investment banking revenues was 125 million, a good quarter but not reflective of the revenue power we can generate. As we continue to build this business our results are lumpy as we get larger and move our business toward higher earning fee. Equity capital raising decreased 19% to about $49 million. Activity was slower as compared with the very strong first quarter of '14 where our strength FIG, tech, and healthcare were hitting on all cylinders. Overall market issuance level versus last year our larger dollar rate with the smaller in number of fields. IPO issuance is nearly half of last year, while follow-on levels are driven by large private equity monetization i.e. the large [indiscernible] deal, that’s an area where we just simply don't have as much market share. However, our equity back log was similar to last year singling a pickup in activity as the year progresses. Fixed income benefited from an increase in public finance revenues and also from the efforts of our new colleagues for merchant merge capital. In the quarter we underwrote 193 issues ranking a second in the nation in the terms of number of issues which was 93 last year. Our advisory revenues decreased 16% year-over-year to 49% which was down 52% from the fourth quarter, where we recognized a sizeable fee for our Miller Buckfire work, bankruptcy work with the City of Detroit. In our experience, it is not unusual to have a stronger fourth quarter relative to the first quarter especially in M&A as our clients focus on completing transactions prior to year-end. In the first quarter as I’ve said we did not close any large sizable deals, however, second quarter visibility is good with several larger transaction expected to close including the BF system sale, [indiscernible] by site transaction and also the Susquehanna sale to BB&T is slated for early third quarter of 2015, these are all large notable transactions. In terms of U.S. M&A the dollar volume is being driven by a number of very large transaction with the number of transactions that’s trending flat. Stifel continues to see a strong M&A pipeline of appeals that arise in the closing process or mandated in slight of the second half of the year. The next slide reviews our core non-interest expenses for the quarter excluding non-core expense as comp benefits of net revenues was 62.5 million similar to a year ago, transition pay as a percentage of net revenue is still large at 4.1%. The core non-compensation operating expenses were a $130.6 million or 23.2% of net revenues. The increase in this line item over a year ago quarter is related to first an in increase due to an increase in number of location. Communication and code equipment is up due to our continued expansion efforts and an increase in professional fees due primarily to higher consultancies associated with maintaining compliance with regulatory requirements. The next slide slows the results of our reporting segments. Global wealth management revenues increased 11% from the year ago quarter and 6% from the fourth quarter to a record $329 million. The operating contribution increased 24% to 99 million. We are very pleased with the 30% margin in the segment. The institutional group hosted net revenues of $239 million and the operating contribution declined of 32 million, margins were 13.5 % or 13.6% to be precise. Turning to the next slide on global wealth management, the increase in net revenues for first quarter of '14 is primarily attributable to growth in asset management, service fees and commissions in net interest revenue. This was offset by a decrease in principal transactions in investment banking revenue. Comp benefits came in at 55.6% in the quarter and non-comp operating expenses were 14.4% of net revenues. At this time I would like to comment as we have received numerous question on the Department of Labors proposed fiduciary standard for retirement accounts and the impact on Stifel. First of all, the deal proposal exceedingly complicated and absent major modification would negatively impact investor choice, restrict investor access to education and increase cost for investors in the firms that serve them. In disrupting the market for retirement savings, the proposals negative impact on investors will largely be borne by those who can least afford it, lower and middle income retirement savers. This proposal incentivized those firms to move individuals to fee based accounts which might not be their choice nor the best results for those investors. Today investors can choose to work fee based investment advisors or commission based broker dealers. The vast majority of investors particularly with those with small account balances choose to work with the non-managed broker dealers, 98% of IRA investors with accounts balance of less than $25,000 are in brokerage relationship . For Stifel, 26% of our total AUM are at IRA, and of the IRA assets under management, 80% of those are non-managed IRA. The deal proposal in effect almost mandates the non-managed IRAs becomes managed. When I think about the impact on investors primarily the small investors we would charge our non-managed account if we would charge our non-managed account the same rate as our managed IRA account we would increase the fees on these revenues by 75%. I do not want to predict what investors will do but the basic premise of this proposal limits choice and simply cost more. Again, from a pure business perspective on a space of this proposal will raise revenue, but again, for certainly my viewpoint, it's really embraces cost not only on smaller investors but on firms that need to invest a lot to comply with this proposal. I expect the industry is going to be view this proposals unworkable, there is going to be lot of comments about it. Turning to next slide on Stifel Bank, bank of total assets are generally flat year-end or up 5.5% year-over-year. However loans the total assets the ratio of 47% from 32% from a year ago and getting closer to our stated goal of getting to 50:50 loans to investment. Gross total loans grew by 9% in Q1 at 55% nearly a $1 billion year-over-year. Net interest margin decreased to 2.46% Q1 of '15 mainly due to an increase in prepayments on the age of SMBs portfolio. The bank continues to be positively exposed to rising interest rates given the general insured effective duration of our bonds and loans. NPls and NPA is for 29 basis points to 13 basis points respectively, past due loans as a parentage total loans at the end of Q1 was 56 basis points. Security based loans drove the growth in our portfolio during the first quarter increasing 17% and 61% year-over-year and now total 858 million. Commercial loans increased 2% in the quarter to approximately 1 billion. Non-redemptions at run-off funded the loan growth as we held off crossing 10 billion in total [indiscernible] assets which were triggered DFAS requirement. As I mentioned in our last call we intend to stay at 10 billion through the third quarter of this year and plan to resume our historical growth rate and our balance sheet in the fourth quarter and beyond. Given our lack of large debit charge revenues the implications across grew 10 billion are most limited to the infrastructure being built for stress test and risk management which as I’ve said we’re incurring now and have been incurring and [indiscernible] which impacts a lot of banks across 10 billion really has minimal impact on Stifel. The next slide for our institutional group results for the quarter, institutional group revenues were down 4.6% that came in at 238.6 million, a decrease was due to declines in equity capital raising and advisory fees and equity brokerage revenues offset by increases in fixed income. Comp investments as a percentage of net revenue was 62.6% while non-comp expense ratio was 23.8%. This ratio remains elevated, it does reflect investments we made in the segment. However travel, conferences, occupancy, professional services were all up over the last year and again I think this is revenue issued this quarter on a percentage basis as it is just expensed. However as a result lower profit margin was due to lower revenues and obviously higher non-comp operating expenses. Next slide, we review our capital structure. Total assets were 9.4 billion a 2% decrease from March 31 last year and also from December 31 of '14. The decrease was due to a decline in the investment portfolio offset slightly by an increase in the loan portfolio. Our debt to equity ratio at the end of the quarter was 22.5% Tier 1 leverage 17.5% and our Tier 1 risk based capital ratio came in at it's high at nearly 30%. I will discuss that in a moment. The next slide looks at our balance sheet growth overtime, we have grown our balance sheet since 2008 at the beginning of the financial crisis, we have grown our balance sheet at an compound annual growth rate of 43% and that’s from 2008 through 2013 when we got to almost 9.5 billion but since then we have maintained assets below 10 billion level and that’s really flat or flat growth for '13-'14 in the first quarter of '15. To anticipate a question I regularly get regarding our capital plans, we continue to regularly review capital deployment matters with our Board, particularly so given the obvious very strong excess capital levels we currently enjoy. We consider all of our alternative including the institution of a regular dividend, utilization of our already offering [ph] stock to purchase program and of course future needs in our business. Our current thinking is that there are significant opportunities presented to Stifel through first the acquisition of Sterne Agee which is expected to close at the end of the month, second the desire to grow the assets of the firm rapidly at the point when we cross the 10 billion asset regulatory threshold later this year and finally other opportunities that we see and currently see for business expansion. So our current thinking particularly as it relates to distribution of the dividend is that it's a subject that we should address at year-end and not today. I assure that we’re focused on these matters including particularly the timing of instituting a dividend, keeping in mind that Stifel is first and foremost a growth company and that we’re optimistic about our ability to deploy our capital to execute on the various opportunities that present themselves to us. Turning to other financial data as of March 31, total stockholders' equity was 2.4 billion book value per share, 34.83, our leverage ratio was 3.2 times, advisor headcount declined by a net [indiscernible]. In the first quarter we deal with mostly retirement and low-end producers that don’t meet our minimum requirements of the first quarter phenomenon for us but we also hired 32 new FAs during the quarter. Total consolidated [ph] assets reached a 188.6 billion up 12% from last year and 1% from the fourth quarter, 1919 investment comps were about 9 billion in client assets in Q4. Now some comments our acquisition and strategic vision, simply put our goal is to build a premier investment banking in wealth management firm, our growth is both organic and via acquisition. When we look across our two segment we strive to build on our capability basically at three businesses. Under global wealth three businesses, our private client business, our asset management businesses at Stifel Bank and fourth, broad businesses under institutional which is equities and fixed income, sales and trading, investment banking and research. Turning to the next slide I’ve been asked many times how much our organic growth versus acquisition contributes to our result primarily top line growth. As the way to illustrate this if you compare our 2004 revenues prior to our 2005 transformation of Legg Mason Capital Markets acquisition to pro forma revenues today, acquisitions have contributed 55% to revenues in organic growth that contributed to 45%. We have broken it out further by segment business lines, for example Stifel has mainly is organic growth. First Service revenues of bank we bought were negligible and Acacia as an acquisition was really minimal whereas our institutional business had almost -- mostly result of the professional we brought on board to Stifel via mergers. As always we will continue to position Stifel to take advantage of opportunities with the strategic objectives of the first ensuring the financial transaction that are accretive to our shareholders and to the partners that we’re bringing on Board and second of all with the businesses that we do makes people more relevant in the marketplace. Now turning to our Stern Agee acquisition, we expect to close the deal on or around the end of this month. We are very pleased to announce that 100% of Stern Agee traditional financial advisors have agreed and signed agreement to join Stifel and my experience of doing transactions of you never had 100%, being a lot maybe 99% but we have never had 100% of the Stifel offer retention not only take the retention but frankly very excited to join us. I'm very pleased with what's going on with what’s going on with the private client group at Sterne Agee. We have also announced the Sterne Age's institutional equities business, including equity sales trading and research will join CRT Capital Group, we have accomplished our goal of keeping approximately a 150 to 160 professionals together so that they can continue their career as a team. We feel good about this transaction and while I'm not updating the numbers at this point but the sales of these business exceeded our expectation. We’re able to generate proceeds and eliminate significant expenses i.e. of 7 year lease in New York which we did not originally come at the time of the acquisition or count on frankly that we would be able to do this deal. We also announced that Sterne Agee and Stephens Inc recent agreement were by five Managing Directors of the depository investment banking group of Sterne will join Stephens and it connect smooth our merger we have agreed to sell the mortgage business back to the founders. One last point which I think highlights the merits of this deal are Sterne Agee's annualized revenues based on the last two months we announced the merger. Global wealth management annual revenues and well I should say, the last two months annualized are a 190 million and fixed income annualized last two months is approximately 130 million currently at 320 million run-rate which is within our estimated range of revenues of approximately 300 million to 325 million but frankly also is not really our experience, we generally see between announcement and closing of rather significant decline in historical revenues both from the uncertainty and just what happens in merger. So the people in these two divisions have continued to work and talk to their clients and we’re very pleased with the results of those business and are looking forward to closing this transaction at the end of this month. The next slide reviews our non-core deal cost, in the quarter we incurred 10.7 million of pretax expenses, 6.8 million after-tax related to recent acquisition, these are how we look at acquisitions, a lot of our economic investment and acquisitions the way we evaluate them. We run through the P&L because of accounting rules. We estimate, and disclose it. Also included in this number is 2.7 million which was incurred to refinance our growth as we refinance our 6.7 bonds or at for our fourth quarter tenure bonds, but when we refinance that we had to write-off issuance cost of $2.7 million. In connection with Sterne Agee we expect the expense a bulk of the non-core expenses in the second quarter of this current quarter comprised of stock based comp;. of 32 million and duplicative expenses of approximately 20 million. The remainder is a quarterly estimate of non-core expenses rolling off by the second quarter of '16. In conclusion we had a good start to the year, we’re well-positioned to continue to gain market share in our businesses, we have excess capital to deploy and we will continue to evaluate all of our options. Our strategy at the bank remains to grow modestly until we have met all the regulatory requirements and then accelerate growth. So with that I will open the call up for questions.

[Operator Instructions]. Your first question comes from the line of Steven Chubak with Nomura. Your line is open.

So I appreciate your comments that you provided on the fiduciary proposal. Certainly some strong views about the potential risk of creating a advice gap, I just wanted to get a better understanding as to what elements specifically do you believe are unworkable in the current format?

First of all in my comments were strong because it's a big market and a lot of investors rely on the -- I think what’s unworkable is that at first brush if you read the preamble to the role it appears that the model for small investors, many of which are known a onetime information based whether an ETF or a mutual fund, still continue to do that but when you get into the rules the ability to meet with its called the best interest standard exemption is really unworkable and I can't go into all the details I'm not alone in the viewpoint but the cost and everything that it comes to concluding some litigation risk if you’re not exactly point on with some of these requirements it's very detailed. So you know the simple my view of it is and I think many in the industry have this view point is that the rule the set of rules that would allow to keep non-managed or non-fee based IRAs, it's not workable so most within our organization we believe that if the rule would stand most of our non-managed IRAs would have to be fee based.

Do you think that transition from a non-fee based to a fee based relationship given the significant step up in fees, how you’re thinking about that in the context of potential risk of client nutrition as well?

Well you know I think it's from a I can't predict behaviors, I'm not exactly sure but I would believe that with the relationships and advisor relationships there will be a lot of people who wouldn’t like it but would take fee increases and maybe a lot of people who don’t like it would leave and maybe net-net we end up in the same place, okay, because we’re talking about a major increase in fees and it doesn’t -- not everyone has to stay to fee us revenue neutral. That’s not the point though, the point is about investor choice and cost and this proposal simply limits choice and this proposal simply limits choice and cost mark. I keep it at that simple level and that’s my proposal.

And just one more from me on the expense side, Ron, you did cite the need for the additional infrastructure investment for regulatory and compliance spend. The last two quarters we have seen that step up somewhere closer to the low 130s range versus I suppose a low 120s baseline prior to that and is that a reasonable jumping off point at this juncture going forward where that low 130 incorporates a lot of the incremental spend that’s been required on the ERM side and alike.

I think we’re spending, we’re spending probably we’re at an elevated level of expense in Q1. We’re really pushing to complete a number of initiatives that we want gone because of our goal to have be what I would say regulatory ready to be DFAS company and if our spend is elevated I want to be a little careful about the 130 I said that the increase over Q1 of last year, for risk management, compliance in turn a lot it's about $3 million. But we continue to grow by acquisition and so we had merchant capital, in there we had 1919 Investment Council. These firms add revenue as well as expenses. So if we were 120 last year, 7 million of it relates to new businesses, London which we added in August of last year and then you know the increased regulatory but that’s not all of them. I mean the increased regulatory spend quarter-over-quarter is 3 million.

And how much of that is front loaded cost that should evade overtime versus that will be reflected in the run-rate going forward?

I would like to think that if we could stabilize this cost here that will be a good thing. I don’t want to talk about reducing expenses in this environment. I think it's important that we get to where we want to be before we talk about reducing expenses. So we’re spending an array --if I annualize the first quarter that would not be an acceptable spend for us but that’s just the first. So I don’t want to overplay it a little bit taking trouble annualizing numbers. But I think we’re getting to a run-rate maybe I can update you more the coming quarters as to what OpEx should be. But then again we’re going to be adding -- we’re going to close on Sterne Agee so it's going to add like I said if it's current add it would add gross revenues of 300 to 325 and with that comes non-comp OpEx so I will add to that mix too.

Your next question comes from the line of Devin Ryan with JMP Securities. Your line is open.

I had a question on GWM commissions in principle transactions, it looks like that line declined a bit year-over-year sequentially as well and so are you trying to think about that, should we take that as a view on retail investors being less engaged today or is it more product mix like annuities or some other commission products have been but it's offered [ph].

Well look we have recorded revenues but market is generally flat, not a lot of volatility and in general fees and commissions lose market share to fee based account. So I wouldn’t view that as necessarily less engagement although I wouldn’t characterize the quarter as robust engagement either.

And then with respect to net interest income you highlighted the prepayment but it looks like in the period assets were roughly flat. So does that imply the loan growth occurred more toward the end of the quarter so is it just a function of timing. Is it part one, and then also interest expense was roughly flat and I thought you guys retired some debt in December so just wanted to see if I was correct and why that number reflected in the interest expense?

Well you answered your question to the first one which it is later in the quarter. And as it relates to interest expense we did retire some debt in the middle of the January. I'm not sure how much the material impact that would have on net interest expense, you know overall. So I can get back to you on that frankly I don’t have that answer in front of me and if I get it I will ask someone to look and I will answer it for in a moment okay?

And then just lastly within the other segment, is there any deal or any expense Sterne Agee this quarter in terms there is anything else that’s kind of non-recurring or lumpy that impacted the results.

In non-core or core?

Right, so I'm not sure there is any if you guys didn’t backout any legal fees or anything else kind of merger related heading into the deal or was that all back down?

Well John, I mean the extent that we had some -- the legal some of it goes into just the cost of the transaction and what would have hit the income statement would have been backed out as it related to Sterne Agee.

Your next question comes from the line of Chris Harris with Wells Fargo Securities. Your line is open.

Another follow-up on the DOL, you guys happen to know what percent of your advisors kind of across the entire platform, so both IRA and taxable are already acting as fiduciaries or operating under the fiduciary standard?

Well first of all in any brokerage firm you’ve advisors, most of our advisors have which is part of the -- actually one of the confusing things about the whole proposal. You know most of our advisors have accounts that are traditional brokerage accounts and 40 advisor accounts and in fact many customers have 40 advisory account and taxable, trading accounts and bond accounts and so it's across the board that relationship and to the extent that you act under the 40 act [ph] there are certain loans you got to be a [indiscernible] going all the way to the risk of standard fiduciary and the risk account. So it's a little technical. So most of our advisors operate under both models and most of our clients understand what they are doing and what they want, example we have clients who have advice equity accounts and commission based muni bonds attached because they simply don’t want to pay a fee on a buy and hold muni bond account. They have it and they are going to reinvest, they don’t want to be charged a fee on the entire account balance yet that’s an active asset allocation strategy, they may want a fee based account. So I don’t view this as any kind of a training issue in terms of our advisors at all. I think it's more a question of choice and frankly one of the that’s really interesting about the DOL proposal is the fact it's a third standard, it creates a standard that is somewhat unique to IRAs separate apart from the rest of accounts. So it's confusing from a business perspective I'm not concerned about training issues, all right, I'm concerned about a lot of the proposals but there are one of things just example of the proposal once brokerage in terms to project forward returns and cost for 5 to 10 years that’s simply prohibited under SEC rules. So there is a lot of things that need to be worked on but overall I just think that if the client wants a non-managed IRA and really doesn’t want to be charged a fee rather just pay episodic commission that should be their choice. This rule pretty much mandates that you can't do that. I always say can't I probably be controversial but you know the deal all said if you like the advisor you can keep them, I'm not sure that’s the case here.

The other thing I'm wondering about the best interest contracting exemption does permit certain compensation practices that we would kind of know about, one of those being revenue sharing payments from product manufacturer partners. is there any way you guys could quantify what those revenue payments are and to the extent that an advisor migrated over to a fee based model what will be the impact on those payments to Stifel?

Here is what I do know is that as you talk about revenue sharing being -- it will be all one fees, I assume that’s what you’re referring to and there are many sub-segments but as I said we charge our non-managed accounts but they tend to be smaller accounts and non-managed versus managed IRAs. Our realized revenue as a percentage of AUM it's nearly half the rate that we charge in AUM and I'm sorry in managed accounts and that includes trailers because you can't get a trailer in a fee based comp. So it all nets out in the [indiscernible] and even though we’re getting revenue sharing, even with revenue sharing where we see significantly less as a percentage of AUM for non-managed IRAs versus managed IRAs and I actually think the best effects that’s true across the industry and I think it's one that’s not very well understand. The industry has been doing a pretty good job of saying [Technical Difficulty] rule, this set of investments non-managed IRAs, people who choose not to have a fee based relationship if they want to stay in their current relationship are going to have a substantial increase in cost with a reduction and choice and investment choice because this thing also has rules on prohibited transaction. So you know it's just -- and that’s at the top level. I mean in terms of the best interest exemption and what it means there are so many paragraph three, eight, two, little [indiscernible] that’s just makes it very difficult to comply. The best interest exemption is sounds good on as I’ve said in the preamble but in the details as really unworkable.

Last question, with this proposal kind of floating around and we don’t know what the final ruling query is going to look like. Does that give you some pause to how you approach acquisitions at this point or is that really something you’re not really focused on at this point or in other words kind of give you make you think twice about how you’re approaching view of that, you talked a little bit about how much the excess capital you guys have and certainly acquisition is part of the mix, just wanted to get your thoughts on that.

Again I think I have said that on balance I would believe that our revenue would increase. I think the problem is that I think the long term effect and I don’t that we would it. I think the industry figure something out. So have a lot of IRAs that are small that tend to get larger, as people start with younger people small IRAs that tend to build net worth and become investors and we don’t want to lose a generation of potentially larger investors because we can't properly service them when they are small IRA and I think the impact can have a much longer tail than the short term impact which frankly could be positive from a financial point of view. I'm not concerned the implementation of this rule as a negative from our company, from a financial perspective, in the immediate snap your fingers and implement. Now again if that’s your behavior maybe people say everyone believes -- that’s not my belief, but I believe that retirement savings choice is important and so I'm more on a bandwagon for that that I'm about the implication to Stifel, and the business -- I think these very implications that impact investors across the country. So I hope that we will have a healthy debate on it and I think when investors understand the impact there will be more of an outcry from them than there are from me saying I think the rules is unworkable.

Your next question comes from the line of Hugh Miller with Macquarie Group. Your line is open.

I guess one and following up on the last discussion about the fiduciary standard and what have given you cause and should book to deploy capital on your growth opportunities. On the more organic recruiting side are you seeing any change in competition from some of your peers as they consider kind of the ramifications on where things are going to turn out, there will be real change from a competitive standpoint for advisors?

No I mean again I think there is just a view point toward the preservation, I should like a broken record but the preservation of choice. I mean I think that -- I think the industry should come up with a workable best interest standard I think that’s something that clearly we need to do because it keeps coming up that best interest standard should be grounded in transparency, disclosure of conflict. A number of things like that but should preserve choice and not mandate what you can do. Again the rules -- I will give you an example, the question s in many view on this call have this but there is a question as to whether or not in the self-directed IRA you can own an IPO. There is a number of people who own initial public offerings, and this has ramifications through a capital formation process and everything and then you’ve a proposal that says we don’t think that’s a good idea and limits that ability to invest in that product and it just doesn’t seem like a good idea. But from a competitive perspective I think the industry can certainly modify it's business practices in a manner this isn't some draconian measure. I think it's more draconian to small investments.

And you gave a little bit of color on kind of you had very strong retention of Sterne Agee Advisors, as we look at the Sterne Agee production curve rep relative to Stifel it seems like it trails a bit, can you give us a little color as to what some of the differences and the business practices between those retail advisors and what you see as the opportunities to maybe narrow that gap overtime?

First of all I think the people I’ve met are first class advisors and in many ways it's how people compute average production, you know the some of the larger firms compute all the revenue and -- advisors, we don’t tend to do that. I feel in general that the advisors in the location adjusted for the locations where they are very productive, if there is any shortfall it would be a product and on the ability to do muni bonds, and capital market syndicate things that we have more product on and I think that they will benefit from an increased product suite but I don’t have any sense that this is a relatively less productive group of people than the average person that we have here at all. So I'm not exactly sure which number, you got to be careful because everyone computes this numbers differently.

It seems like from your comments around the Sterne Agee acquisition that the initial guidance you guys had given, you seem to feel very confident in that you know whether or not you could potentially exceed those expectations is that correct?

As I’ve said I think that we were hopeful that we could and we gave a revenue estimate of the businesses that we would retain and we said that we wanted to evaluate for sale mortgage in the equity business both of which we have done and we have done in manners that combine, exceed our expectations and the time on the dispositions of those businesses both actually from a human perspective and a financial perspective -- within the sale. I'm certainly pleased with and you know and we will see when it gets here but I generally make these estimates based upon trailing 12 revenue of the people that we’re emerging with and often you know have taken pause in the time between [indiscernible] and revenues fall off. That has not happened here. So generally we’re pleased.

And you also mentioned just about kind of rapid growth for Stifel after you pass the $10 billion threshold can you just talk to us about where at this point you see the most attractive opportunities, is that primarily within the bank and if so are there certain product areas that you guys are more excited about.

I think as a mathematical exercise, you can all do that math, on growing assets in the bank at 1% ROE or something and what happens to growth based capital that’s a mathematical exercise and those returns are attractive as long as you know manage credit. And certainly I talked about that in the past. However we have as I said here, we have a lot of opportunities and are seeing a lot of opportunities to continue to build our franchise across many of our businesses that’s just isn't in the bank and that’s opportunity for the marketplace to just continue to add to our capability. So over the years we have done very -- we have grown and we have used our capital to grow and at this point in time because of our limitations in our growth and our balance sheet our capital is elevated but I don’t want to limit the deployment of that capital to anyone strategy, we will do what we think is in the best interest to shareholders and give best return whether that’s capital deployment, factory purchases as I’ve mentioned about the consideration of the dividend, all of those things are proper capital management and we take them very seriously. All that said we see a lot of opportunities today outside of that.

And last question for me, as you think about the current state of the Robo advisor movement, can you just give us your thoughts there and are there any other steps that you’re taking at this point to address any proceed risks that you see on the horizon?

It's Robo Advisor I guess is I like to think of myself as tech-savvy and I like to think of myself as doing all the latest tech things. The concept that a human writes a program so that some robo can asset allocation based upon some other input to me is looking backwards to try to predict future and I think taken the human element out of investing is not a good thing and it's really not different than a different spin on discount investing. It's just -- there is a lot to financial advisor relationship in terms of planning, in terms of the courage to give people to invest and what to invest and I don’t see a robo advisor fulfilling that need and so it's kind of like the webpage and automated trading and all of these things. To a certain segment of the people invest that will have some appeal but to the vast majority of people who are looking for sound personal advice, I don’t view that as a huge threat. I think when computers start to think maybe then, but they don’t actually think right now, right.

Your next question comes from the line of Michael Wong with Morningstar. Your line is open.

So institutional fixed income trading was fairly good but specifically the principle transaction revenue line and wealth management was down sequentially in terms of the previous year, is there a different fixed income dynamic in wealth management or can you remind me if there is something material in there besides fixed income.

No I think, nothing in particular. I think it was again I think that we had revenue was relatively flat. We had an increase in advisory that was offset by a decrease in principle transactions and then as much as I would like to explain that in great detail for you to give you a synched answer is to why it occurred. I think it's at that highest level is the best answer.

Okay. And let's going forward after the Stern Agee expense synergies are done with, do you see your wealth management operating margin changing much from the current about 30% level due to the change in advisor mix, to more independents?

Well for sure, I mean absolutely initially the independent advisor business is a lower margin business and something that we will work on to improve those margins but at first certainly the margins are lower, the comp expense is higher, I mean the non-comp operating expense start to look better but that’s not the answer you really want to hear because that business is at this point a lower margin business, although we do we have some thoughts around that.

There are no more questions at this time. I will turn the call back over to Mr. Kruszewski.

Well everyone again feel that we completed a very successful quarter, the revenues were not as robust as the fourth quarter for the reasons that I’ve explained but still our third best quarter. Well look as I sit here today and look at all the opportunities in front of us including what I think is a very nicely accretive with Stern Agee, our ability seeing light at the end of the tunnel is to build a lot of infrastructure to support our future growth and the balance sheet, leveraging that capital and then driving higher relative earnings and earnings per share as a result of that all of which we have talked about is something that I see coupled with an environment that while it's been fine [ph] one I believe on balance over the next few years is going to be generally positive. So I'm very optimistic about where we stand. Look forward to reporting back on our acquisition and close to Stern Agee and look forward to continuing to deliver superior results for your shareholders so with that we will sign off and everyone have a great day. Thank you.

Ladies and gentlemen this concludes today's conference call. You may now disconnect.