Raymond James: Increasing Our Moat Rating to Narrow and Fair Value Estimate to $132 from $118

We are increasing our Morningstar Economic Moat Rating for Raymond James Financial to narrow from none. The main source of the company’s moat is switching costs in its wealth-management segment, which often accounts for over 65% of revenue and over 50% of pretax earnings. If we were to include the company’s customer deposits business that is related to the wealth-management business, then wealth management is responsible for over 75% of revenue and usually over 70% of pretax earnings. The wealth-management business is healthy, with about a 12% compound annual growth rate in client assets and a 4% compound annual growth rate in advisor headcount since 2010, which includes some acquisitions such as Morgan Keegan that materially added scale, Alex Brown that brought in some high-end advisors, 3Macs in Canada, and Charles Stanley in the United Kingdom. Of the company’s 8,712 affiliated advisors at the end of fiscal 2023, about 40% of the advisors are employee advisors, and 60% are independent contractor advisors. Given the general trend in the wealth-management industry to more advisors choosing the independent contractor business model, the company’s range of affiliation options provides healthy diversification.