Raymond James’ private client group saw revenue rise, but profits decline in the fourth quarter as difficult equity markets, a “root” of Raymond James’ business, as well as higher compensation expenses from the ongoing incorporation of Morgan Keegan, hampered earnings.

Revenue increased 26% since to $553 million from a year earlier. While that number rose 1% from $685 million last quarter, net income fell to $50.4 million from $63.8 million last year and $64.3 million last quarter.

“This segment was negatively impacted by the S&P 500 being down 3.3 percent in the preceding quarter, which affected our advance billings,” Paul Reilly, the company's CEO, said during a conference call on Thursday. “Integration and technology spend [sic] and certain one-time charges primarily impacted the pre-tax income for this segment during this fiscal year. Technology and integration costs (from headcount and consultants) will remain elevated throughout the system conversion targeted for February 2013.”

Firmwide, compensation expenses increased 32% from a year earlier to $745 million. Reilly attributed this increase to increased training costs, Morgan Keegan retention packages, which were amortized July 1, the implementation of a new advisor desktop from Advisor Access, and some one-time costs aimed at catching up on benefit packages. Since some of the information technology consultants were brought on as contractors, their pay showed up in the compensation report, Reilly said.

The firm has also had to perform significant regulatory reviews going along with the Morgan Keegan acquisition, which did not help results. “Unfortunately there is no capitalization involved or anything with those type of projects,” Jeffrey Julien, the chief financial officer at Raymond James, said during the conference call.

Advisor headcount declined in the fourth quarter, falling to 5,452 from 5,489 the previous quarter. Reilly attributed that drop to low-producing advisors from Morgan Keegan who left, “good people who weren’t meeting standards,” he said. 

Ninety-six percent of legacy Morgan Keegan advisors who were offered retention packages are staying, Reilly said.

“We’ll be able to lower some of our costs in between, but I think a great bulk of that is going to happen during that post-integration timeframe [after February 2013],” he said. “But I’m confident that we’re on track. If we can keep the people, it’ll be a great story, and so far, so good.”

Despite what Julien described as difficult market conditions going into the quarter, client assets increased to $390 billion from $376 billion at the end of the third quarter. Assets were broken down into approximately 50% equities, 35% fixed income, and 15% cash alternative investments, such as real estate.

“That gives you some idea of our sensitivity to the equity markets,” Julien said. “Obviously we had a good market in the September quarter, so our billing base was substantially higher on Oct. 1 and going forward than it was on July 1,” Julien said.