Q3 2022 Ameriprise Financial Inc Earnings Call
We are a mild recession.
Therefore, I expect there will be more volatility ahead.
For Ameriprise, the diversity and strength of our business allows us to deliver good outcomes, even in challenging times and you certainly saw that in our results. This quarter. We continue to remain in strong client inflows in wealth management and the rise in interest rates the growth of the bank and the stability of the re time protection businesses.
Help to more than offset the effect of depreciating markets and foreign exchange that impacted our asset management business.
The investments we made in our business over the years and our technology client service product solutions and advice value proposition are paying dividends as we continue our strong focus on our clients and helping our advisors navigate a difficult environment.
Now I'd like to discuss our third quarter results in more detail.
Total assets under management administration were $1, one trillion, which is down 9% from a year ago.
Assets were impacted by the steep decline in both equity and fixed income markets and the strength of the dollar which affected the foreign exchange rate in our European business.
In terms of adjusted operating financials, excluding unlocking revenues were $3 5 billion up 1%.
With that earnings per share were up 9% to $6 43.
And the return on equity was strong at 47, 9%, which is consistent with this time last year.
Now, let's talk a bit more about our businesses I'll start with advice and wealth management, where we continue to deliver strong results. Despite the environment. We had good client flows as clients remained engaged total client flows were up 11% in the quarter to more than $11 billion. The mix of our flows reflect the environment. We're in.
And we saw strong growth in brokerage cash certificates and other products as we expected cash balances continue to be up sharply to more than $46 billion.
Compared to more than $40 billion, just a year ago, we are seeing good growth across our cash offerings.
Very importantly, our adviser productivity remains strong as we continue to reinforce our personal relationships and the value of advice. It was up 7% to 819000 per advisor. We recently met with our top advisors to recognize this success and discuss growth opportunities at Ameriprise engagement was terrific.
Advisors are highly satisfied with the firm and the support we provide and they like the technology and the capabilities, we've added which is helping them grow.
Which brings me to recruiting we had another very good quarter, adding 89 highly productive advisors advisor consistently tell us they recognize the strength of our value proposition our brand and the stability of the firm, it's a competitive marketplace and I feel good about our pipeline.
In the third quarter as we have all year, we continue to invest steadily in the business. We continue to release additional tools capabilities and enhancements that help our advisors engage and meet with clients deliver actionable advice and improve efficiency of their practices.
As part of our investment agenda, we have been very much focused on expanding our cash offering and growing our bank.
The bank provides important flexibility in this rising interest rate environment and will continue to be a good opportunity for us to further engage and deepen our relationships with clients.
We continue to move cash to the bank, adding $3 1 billion in the third quarter and with that we've been able to invest appropriately to garner additional spread today. Our bank has grown to nearly $19 billion. We will also continue to see good growth in our pledge loan business and we will be launching more products in the bank as we move forward.
Overall, the advice and wealth management business continues to generate strong profitable growth and margins reached 27, 8% up 540 basis points.
Now, let's turn to retirement and protection solutions, starting with variable annuities, we have narrowed our focus to concentrate on products that are good for clients in this environment and for the firm and with that strategy in place. We have continued to generate solid sales in variable annuities without living benefits as well as our structured products.
As we have shifted away from annuities with guarantees.
Therefore, our sales are down but in line with the industry. We also made a shift in protection away from fixed insurance to focus on <unk> and Dci products life sales were also down given the climate, but again results were in line with the industry.
Based on what we've done to appropriately risk adjust these businesses. They continue to generate good earnings stability and solid returns and cash flow as a complement to our other businesses.
Now I'll cover asset management.
As you've seen across the industry markets have impacted asset levels from an equity and fixed income perspective, as a global asset manager with sizable presence in Europe were also affected by the depreciation of the Sterling and the euro versus the dollar.
Assets under management were down 6% to 546 billion, given the equity and fixed income markets and the FX impact I've mentioned more than offsetting the BMO acquisition.
System, what youre seeing in the industry investors have more of a risk off perspective, and you have a level of tax loss harvesting taking place based on market depreciation.
Critically in this environment, we are maintaining good investment performance and we're continuing to maintain good three five and 10 year track Records.
While theres been a lot of volatility of the course of the year over 70% of our funds are above medium on an asset weighted basis. Our short term performance has been impacted in some of our fixed income strategies based on the spike in interest rates and in Europe . Some of our equity strategies were impacted because of our quality growth positioning.
Let's turn to flows in the quarter, we had outflows of $2 4 billion that included $1 billion of legacy insurance partner outflows.
Positive flows in institutional were more than offset by the ongoing pressure we've seen in retail.
In retail overall were in net outflows, but it improved a bit from a tougher second quarter for us in the industry.
We ended the third quarter with lower gross sales and high redemptions than a year ago given the markets. This resulted in $5 3 billion of net outflows driven by weak conditions.
In U S retail equity outflows remain generally in line with the industry and fixed income results were behind given our product mix.
In EMEA. The retail flows remained under pressure, we did see some improvements in continental Europe , and overall flows were a bit better than the industry for the quarter.
Turning to global institutional excluding legacy insurance partners net inflows were $3 9 billion.
And we're seeing fundings get extended given the markets and some asset allocation calls.
In asset management, we expect the environment will remain challenging. However, we think there will be opportunities as markets settle down over time and interest rates stabilize at.
At the same time, we've been very much focused on integrating BMO EMEA business and that's going well, we continue to make good investments in the business overall, ensuring that we have the right focus to move forward and distribution as well as servicing and platform capabilities, but we will also have a very strong eye towards managing expenses in this.
Market and adjusted for the BMO EMEA acquisition, we brought G&A expenses down by 7% and we will continue to be very focused there.
As I look ahead for Ameriprise I believe we will continue to be operating in these markets for a while so as you expect from us with very much focused on what we can control.
That includes continuing our strong engagement with clients and advisors as well as leveraging our investments as we continue to manage our expenses tightly moving forward.
Accordingly, I feel like the strength of our businesses and the growth of the bank will allow us to navigate these markets very well and generate a consistent level of free cash flow and good returns for our shareholders.
And what's very important and critical for the firm and what we deliver is the engagement of our people and advisors I feel very good about the team. We just conducted our employee and advisor surveys when we continue to see high levels of engagement and satisfaction industry leading.
And we know how important this is going through a challenging environment to keep our focus on our clients.
In total I feel really good about the mix of our business the flexibility we have and how we're positioned for both the challenges and the opportunities ahead now.
Now I'll turn it over to Walter and then I will take your questions.
Thank you as Jim said results this quarter continue to demonstrate the strength of the ameriprise value proposition and as adjusted EPS, excluding unlocking increased 9% to $6 43 in a challenging market environment.
Wealth management business momentum higher interest rate environment and expense discipline more than offset equity and fixed income market depreciation coupled with significant weakening of the pound and euro in the quarter.
We continue to benefit from strong growth in wealth management, which represented 60% of adjusted operating earnings in the quarter up from 49% a year ago.
Across the firm we continue to manage the expenses tightly relative to the revenue opportunity within each segment.
As a result, we've continued to make investments in the bank and other growth initiatives.
Typically in wealth management, while prudently managing overall firm wide expenses.
On a year to date basis G&A expenses are flat excluding BMO.
We expect that for the year G&A will be down 1%.
Our balance sheet fundamentals remain strong despite continued market depreciation in the quarter.
And we returned $632 million of capital to shareholders.
For the full year, we remain on track to return approximately 90% of adjusted operating earnings to shareholders.
Let's turn to slide six assets under management and administration ended the quarter at one one trillion.
9%.
While MAA.
Benefited from strong client flows and the addition of BMO late last year, we experienced.
Significant market impacts.
Equity and fixed markets were down, 19% and 14% respectively.
In addition.
Asset management, <unk> and levels were substantially impacted by significant weakening of the pound and the euro with.
With the AUM of non U S businesses down to approximately 35% of the total.
Overall pre tax earnings remained strong in this environment.
Up 6% from last year, excluding unlocking.
With meaningful benefits from interest rates and strong client flows more than offsetting significant negative equity and fixed income markets and foreign exchange impacts that largely occurred in September .
Let's turn to individuals' segment performance, beginning with wealth management on slide seven.
Wealth management client assets declined 12% to $711 billion as a result of significant market depreciation over the past year, partially offset by a strong organic growth.
Total client net flows remained strong at $11 2 billion up 11% from last year.
With $6 4 billion of flows into wrap accounts and $4 8 billion into non advisory accounts, specifically certificates and retail brokerage.
Anticipated in this environment.
Revenue per advisor reached 819000 in the quarter up 7% from the prior year from continued enhanced productivity and business growth.
On slide eight you can see wealth management profitability increased 30% in the quarter.
With the significant benefit from interest rates and strong organic growth exceeding negative impacts from market depreciation and lower transactional activity.
Pre tax operating margin reached nearly 28% up over 500 basis points year over year and up 390 basis points sequentially.
Adjusted operating expense declined 3%.
With distribution expenses down, 7%, reflecting lower transactional activity and asset balances.
G&A is up 12% in the quarter and up 7% on a year to date basis.
The higher than normal year over year increase in the third quarter was driven by unusually low prior year expenses relating to staffing levels and TNA Tommy of expenses in the current year and continued expenses associated with higher volumes and continued investments in the bank and novo growth initiatives, we anticipate that.
The full year will be in line with the 7% year to date growth pace, we expect the higher interest rate pattern to drive substantial and sustainable benefit in the fourth quarter of 'twenty, two as well as 2023.
Let's discuss the components in more detail.
Cash balances remain high at 46 billion this quarter.
With multiple products available to meet client needs, including brokerage cash bank and certificates.
The majority of our brokerage cash isn't working cash accounts for our clients well over half of the balances less than $100000.
And our client crediting rates are continuously benchmark and remain competitive.
As a result, we have not experienced cash sorting issues to the extent of others in the industry.
A certificate products offer another solution for clients looking to ladder their liquidity and garner some additional rate upside in the multiple product offerings.
The bank provides flexibility to optimize the benefits from higher rates by investing in high quality longer duration securities.
Sustainability of interest earnings.
Our bank reached nearly $19 billion in the quarter up from $10 billion, a year ago and.
In 2023, we plan to grow the bank to the $22 billion range.
In the quarter.
The pickup from investments in the bank has approximately 150 200 basis points above the spreads from off balance sheet cash.
Over the past several years, our total client cash balances have been consistently 5% to 6% of total client assets.
This positions us well to capture the opportunity from rising rates and lock in those benefits over the medium term.
In 2022 spread earnings will increase by over $600 million.
Versus the prior year and we expect this trend to continue into 2023.
Let's turn to asset management on slide nine.
We are managing the business well through a challenging market.
Total assets under management declined 6% to 546 billion, primarily from equity and fixed income market depreciation and unexpected significant negative pound and euro foreign exchange impact.
As I mentioned, the BMO acquisition broaden our geographic diversification with about 35% of the assets in EMEA. However, this diversification increased our foreign exchange translation exposure.
Asset management like the industry was in outflows in the quarter.
<unk> strength in our global institutional business will offset a meaningful portion of retail outflows Michael.
Like others, we experienced pressures from global market volatility a risk off investor sentiment and geopolitical strain in EMEA.
Margin in the quarter declined to 35, 6%, which was slightly above our target range of 31% to 35%.
Decline versus last year is attributable to broad market depreciation and foreign exchange impacts.
Given the material market depreciation of foreign currency weakening in September .
We expect additional margin erosion next quarter on slide 10, you can see asset management financial results reflect the market environment.
Earnings declined to $191 million, reflecting double digit market depreciation.
Significant foreign exchange weakening and outflows.
Importantly, we are continuing to manage the areas we can control.
Expenses remain well managed excluding BMO total expenses were down 13% aided by a 7% decline in G&A.
We continue to make market driven trade offs and discretionary spend and remain committed to managing expenses very tightly and the current revenue environment.
And the fee rate remained stable in the quarter at 48 basis points, let's.
Let's turn to slide 11.
Retirement protection solutions continued to deliver stable earnings and free cash flow generation clear.
Clear result, differentiated risk profile pre.
Pretax adjusted operating earnings excluding unlocking were $203 million in.
In the quarter, we completed our annual actuarial assumption update which resulted in unfavorable pre tax impact of $172 million.
Sales in the quarter similar to the industry declined as a result of the volatile market environment.
As well as management action to discontinued sales of variable annuities with living benefits to reduce the risk profile of the business.
Protection sales remain concentrated in higher margin asset accumulation of <unk> with.
Which now represents one third of total insurance in force assets.
Annuity sales in the quarter were lower risk products without guarantees and structured variable annuities.
These products represent over 40% about total VA account value.
We have begun to reposition our investment portfolio to capture the interest rate opportunity.
We have remained short on duration and this portfolio given the low rate environment over the past several years.
We now have the opportunity to enhance yield by extending asset duration and changing the mix of business without increasing credit risk.
Now, let's move to the balance sheet on slide 12.
Our balance sheet fundamentals remain strong and our diversified high quality investment portfolio remains well positioned.
In total the average credit rating of the portfolio is <unk>.
With only one 6% of the portfolio and below investment grade Securities.
Despite significant market dislocation in the quarter.
Hedge effectiveness remained very strong in the quarter at 97%.
Our diversified business model benefits from significant stable free cash flow contributions from all business segments.
Supports the consistent and differentiated level of capital returned to shareholders, even during periods of market depreciation like we experienced this quarter.
During the quarter, we returned $632 million to shareholders in excess capital and holding company liquidity remains strong.
We are on track to return approximately 90% of the adjusted operating earnings to shareholders in 2022.
With that we will take your questions.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your Touchtone phone.
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We'll take our first question from Ryan Krueger with K B W.
Hi, Thanks. Good morning. My first question is could you give an update on your excess capital position.
Any moving parts in the quarter.
Sure I will take that.
The number is $1 3 billion, it's down $300 million from.
From last quarter and the main drivers on that as the market dislocation in the growth in the bank and the remainder is coming from the unlocking.
Got it thank you and then separately.
In retirement and protection there the earnings of over $200 million. This quarter Exxon locking that had previously been running more in the $180 million to $190 million range can you help us think about the run rate earnings in that business going forward and also how the portfolio repositioning will impact that.
Yes, I would say that yes.
It did increase a little but I think the run rate that you're talking about between 180 range is certainly one to read.
Anticipate going forward in USD interest rates, we'll take that up again as we do it because we are reinvesting out.
As we looked at the portfolio and the opportunities because we basically say shorter duration now we're taking advantage as we move out.
But it will go up but I would say I would start with the 180 range.
Got it that's helpful. Thank you.
We will take our next question from Brennan Hawken with UBS financial.
Good morning, Jim Walter Thanks for taking my question I would love to start with some of the comments on the bank.
I believe you indicated that you'd be moving about 3 billion in balances in 2023.
Why not accelerate that some more.
Then that move in 2022 the rate environment is certainly attractive.
And it seems like a good place to see.
Utilize some of that capital so thats number one and then number two when you think about the pledge loan book within the bank are you seeing any change in demand or growth as a result of higher rates or maybe the demand has eased up a bit.
So as it relates to 'twenty three.
Indicated that.
Better to say it was at least two we would add $3 billion.
Our next year, which obviously, we will gauge the situation. We certainly have the capacity to do more both from the availability of liabilities and capital and we will assess it and the key element associated with that is also the availability of investments that meet our standards both from a quality standpoint, and diversification standpoint that will be a factor in that.
We feel very comfortable with the balances we have that will be the source of that so I would probably modify and say at least $3 billion.
Okay. Thanks for that clarification, and then <unk>.
Loans have you seen any shift in demand with higher rates or as those continued to grow.
Okay.
On the pledge loans pledge loans on Florida and pledge loans.
Actually right now, it's adjusting with markets, but it's growing steadily.
We feel very comfortable with it and.
From that standpoint.
Total of that is in the.
Over the $1 billion range for total <unk>.
Standpoint, with the program, so we feel very comfortable with it.
Thanks, Thanks for that and then.
Wealth in the wealth business.
You guys do a great job of returning capital to shareholders.
And have a long track record there and I think it's appreciated but have you considered maybe.
Maybe shifting and having an allocation.
Growth capital and using some of your excess capital to actually continue to build on the recent success that you've had in adding advisors.
And generating that really steady net new assets in the mid single digits, and maybe even pushing that a little higher have you considered any of that or is that.
You just sort of comfortable with that.
We see recruiting approach that you've taken so far.
Yes, so we're very much focused on continuing to bring in quality recruits. We just don't want to associate people to us.
Being a processing platform per se as you can see we have a very good strong client value proposition.
That's very important.
That's why we generate good returns good margins good retention of assets, we ensure that we have an excellent client experience keeping our client satisfaction really high and we really focus on helping good quality advisors grow their practices and retain and build.
So we're going to continue to look and attract good advisors in.
We're spending a bit more time on bringing in some younger people again in building succession in their practices and helping advisors extend their teams and we're also building out our Ipi group, which is our institutional business and we're winning some nice accounts, there and growing the advisor force and where.
We're also doing some work on a remote channels and expanding that activity that we think will also be a compliment.
So along those lines, we are putting money to work we are investing in et cetera.
So it's not so much about the use of capital it's more about continuing to drive in the areas that we think we can generate both good returns, but more importantly continue to build out against our value proposition.
Great. Thanks for the color.
Yeah.
We'll take our next question from Tony <unk> with Jefferies.
Great. Thanks, just wanted to go back to the bank if I could.
I guess in addition to adding more deposits.
Another lever you guys have.
Reinvest some assets that are maturing.
<unk> currently supporting so can you frame, maybe how much of those assets are rolling off in 2023, and if possible what the yield was on those assets relative to where you are able to invest new money today.
Yeah, So let me taken approximately Walter.
Approximate because those were short duration, if you look at it where durations tad arbitrary that.
You should expect over $3 billion to mature.
In the year and I don't have the exact numbers on yield, but you should imagine that.
We're going to we're going to pick up at least three or 400 basis points versus what's maturing, but I cannot have a lift to get back to you on that.
Okay. That's helpful. Thanks, and then I guess for Jim.
Towards as the quarter progressed, and we are getting quite a few questions on <unk> in the UK and whats going on there and what any impact on your UK asset management business. There could be so could you maybe frame that out how you're thinking about that.
An opportunity or where the risks are just want to make sure that it's clear in terms of where your exposure is if possible. Thanks sure Sidney So I think as everyone is aware this is a very large markets, although the one three to one.
One three trillion in the U K depends on the day.
And it's really used by almost all of the pension funds, they're supported by the regulatory authorities.
The long term guilt and European interest rates, you know increased dramatically in September and that resulted in clients having to post additional collateral to maintain their LDR coverage ratios.
The volatility was something that wasn't necessarily seen in the past it was in the 15% to 18 standard deviation type event.
Which is really abnormal and so that volatility.
Volatility affecting any of the bond markets interest rates going up et cetera. So clients have maintained their LDR positions as you would expect the systems.
And we think this will normalize over time, but they had to post more collateral and then free up some assets to do it.
This market will come back around and a sense of stabilization and reverting back to the mean, so we feel like the market will continue to be very important there.
And the pension funds will continue to utilize that for the way they have to manage their assets going forward to get the returns.
We do expect some adjustments in the market going forward.
<unk> players would have to reduce leverage a bit there may be some more operational adjustments to make sure that the markets can slow a bit more easily as you get these types of dislocations.
And with US you of course saw a asset level decline, meaning from the depreciation of the market, but we really havent seen major outflows in any fashion.
And in fact, there is some new business that came in.
So we feel like this market will recover.
And we feel like we can still do a good business there and it won't have a significant long term effect.
Yes, so just to summarize near term more of a kind of.
Potentially earnings issue as opposed to anything more significant than that yes, yes exactly.
Okay. Thanks, guys.
We'll take our next question from Alex <unk> with Goldman Sachs.
Okay.
Great. Good morning, Thank you for the question.
First just around some of the cash dynamics.
Advice over in advice and wealth.
How that's trending so.
Clearly great to see deposit beta is still very low at this point in the cycle. As you look forward I guess, how do you think that will progress.
And part B to that curious if you're seeing any incremental demand from third party bank sweep.
And whether the spread is starting to improve in that channel as well.
So as far as third party.
Demand certainly we have an extensive program in.
We do not have an issue on the placement of the funds from that standpoint.
And we also again again the bank allows us the capability as I talked about growing and certainly reinvesting more directly.
<unk> institution as far as the deposit data.
We do have competitive span each week, we certainly evaluated certain as rates go up and we look at the competitive elements is that because you look at the per per account.
<unk>.
Client crediting rates, they will change and I'm sure there will be going up as it relates to because we our main focus is.
To ensure that our clients are getting the appropriate rates that are competitive.
Got it and then Walter just to make sure that I understood.
Are you, saying youre seeing an improvement in demand from third party banks report no real change in terms of what we've seen over the last I would say this with a healthier environment, but it's a healthy environment and certainly we saw back a couple of months ago from that standpoint, absolutely got.
Got it understood and then Jim one for you.
It's been a couple of articles talking about some potential asset management platforms for sale in.
In the past you guys have obviously been very opportunistic and when I kind of think about the Columbia acquisition from Bank of America.
As the environment gets potentially or remains I guess kind of dicey here.
Do you think about opportunities for incremental M&A.
Sure Amir price on the asset management side of the house.
So again I think the market is going through a level of dislocation right now and some pressure from as you can see the appreciation in the market and flows we are very much focused on really the business that we have right now we're integrating the BMO in international and Thats going well and Thats.
We're consuming in summer time and attention.
At the same time, we know that this is a time for us to really <unk>.
Engage our clients and maintain it and we have a lot of good new stuff going on and some of the areas and disciplines that we've been investing in from the ESG to to some of the institutional and CIO and et cetera, et cetera, and some alternatives. So we feel good about the hand, we don't know that down the road if there is more significant.
Location and it makes some sense, maybe will play but right now it's not as something we have on the <unk>.
Right.
Got it thank you guys.
Okay.
We will take our next question from Andrew <unk> with credit Suisse.
Hey, good morning.
Maybe staying on the topic.
The M&A on the divestiture and.
The market has been pretty volatile and just in general.
Lock transactions of insurance assets have not been as robust as we would have provided.
I had some optimism that maybe ameriprise, we do some transactions could you give a little color on.
The types of talks you're having about long term care variable annuities and life insurance blocks, respectively, and the potential to divest.
Sure.
So as we said we wanted to survey the market potential and what the opportunity may be just to evaluate and so doing what we found most importantly is that.
There arent a lot of market participates participants that have transacted are interested in more what I would call high quality books.
In a sense they have been much more focused on general account assets.
And invest with using their various structures and capital situations.
So we don't think the market is sufficiently involved to look at the type of business that we have and the type of value that we realized from that business and so at this juncture, we actually feel very good about holding business, we actually derisk. The business tremendously we moved out of a lot of types of businesses.
Have a bit more of that volatility or.
Long term tail.
Our mix of business, including our variable annuities without living benefits is a significant part of our portfolio. The other portfolio with the living benefits Thats closed at this point was actually done in the right way with the right benefits and the right hedging.
And so we get good cash flow from these businesses and good stability I think you even saw in the current quarter. This has been a nice stability for us as you get depreciating markets on the equity side.
And now Walt is able to even invest out longer and get higher yields on the book, which is good.
And our long term.
Care book, you can see the quality of that even over the current year as a number of years.
And so here again, there might be some opportunities as people start to get more informed on this over time that we will see and I think we're starting to.
But I think at this juncture, we're very comfortable with the hand, we have what we're doing the type of businesses, we maintain and types of businesses, we invest in and the type of businesses that we move.
And handle the book to manage.
And so we actually think it's a great complement particularly in an environment like this.
Yeah.
That's really helpful.
Jim maybe just shifting over to asset management.
Per the presentations clear.
Clearly and retail three.
Three five and 10 year numbers are excellent versus peers, but the one year numbers seem to have deteriorated in both retail equity.
And retail fixed income could you kind of give a little color on why those figures have deteriorated versus peers and strategically what you might do too.
Turnaround that performance.
So again good question and I think we've mentioned in a little higher level. So let me dig a little deeper for you so overall and across our portfolios even for the one year very good there are a few pockets that where we have some under performance, but it is not by a lot that really brings the averages down.
So some of that's in our fixed income so in some of the longer duration because of the rise the spike in interest rates has quickly. Our teams were much more focused on the credit side and so the duration was a bit longer and so that that will come in reverse around as we get <unk>.
Further out where the yield will be good and et cetera, but.
I'm pleased to say, that's where we've gotten some of the impact on the shorter duration on the longer and then the second part is in Europe , and Thats not because the performance it's because in Europe . When they have equities, they don't break their benchmark into value versus growth et cetera.
So we have more growth quality oriented portfolios and as you would understand value has performed a bit better in this market, even though it's down it's been down less and growth oriented and so those benchmarks underperformed the benchmark, but our clients. They are understand that that's why they invested in the portfolios.
And they know and feel good about what that is over the longer term, but on a benchmark basis. That's why you got the underperformance.
Yeah.
Makes a lot of sense.
Thank you.
We will take our next question from Craig Siegenthaler with Bank of America.
Thanks, Good morning, everyone.
My question is on brokerage cash sorting how do you expect <unk> activity to trend over the next six to 12 months and what do you see as the direct impact about money market fund AUM and cash balances.
So let me start and then once a complement so we already have and in what you've seen in the growth of our cash is already had the cash up test sorting occurring so the growth of cash itself. If you call. It in our largest category is higher than our 46 billion because money has gone into money.
Markets and they have gone into shorter duration funds in some brokerage activities and so with the growth that we have this is more of the continuation of the growth that's more in the transactional held for cash oriented our certificate programs and so we saw some of that cash sorting occur in the third quarter as.
<unk> said.
We may see some more of it but tied to the cash has grown because people have moved money to the sidelines.
There is I think as I think Alicia.
Over 50% of this transitional working cash is less than $100000 or $100000 unless so stickiness is there and certainly we are competitive in what we do so I think the sorting is less of an issue for us from that standpoint, because in the higher tiers, we are competitive and we constantly evaluate like I said weekly.
To ensure that that space. So it's a different model that we have.
It's demonstrated stickiness.
Thank you Walter and then sticking with that brokerage cash what are your longer term targets for both off balance sheet cash and then on balance sheet cash inside of the bank and I'm thinking when you reach more of an equilibrium and your cash next as post the bulk transfer effort.
So let me take a shot and obviously, we have a growing situations certainly with.
Getting additional cash from our current clients and new era is coming and so we think we see that as growing from that standpoint, and we will gauge. It is obviously the impact of looking at.
At alternatives because it is again transitional and where it's going to go but that is something from a directional standpoint, very sticky and we do see certainly potential to grow that.
We will then look for as I indicated the ability to redeploy in our multiple strategies to ensure the stability of our earnings that we have both non-GAAP garnering the higher yield with the.
Certainly.
Hi.
The low risk profile that we do and to ensure that so I would say that you'll see that percentage growing over to bank, increasing as we've as we progress as we feel comfortable but it's all situational driven and Thats why I said, what I said in my $12 3 billion, it's probably at least $3 billion because we do see in this case, but we reevaluate that there is substantial.
<unk> opportunity to use the bank not just for the investments we're talking about to grow the capabilities that we have to meet our clients' needs also with deposit products and other products that they're developing at this stage.
Yes, we will be launching a number of the deposit products in the bank starting in the first quarter, and then high yielding types of deposits and other things that you're seeing some of the other types of institutions later in the year. So we feel there's an opportunity to do not just transfer money and but to actually grow the deposit base.
Thank you.
Okay.
Take our next question from Kenneth Lee with RBC capital markets.
Hi, Thanks for taking my questions and good morning.
One on the asset management business in terms of the margins.
Yes, obviously above the target range. This past quarter wondering if there was any specific factors.
Diving that any potential benefits that are nonrecurring and in terms of the outlook for margins.
You mentioned potential erosion based on FX.
Just wondering if you could just further expand that thanks.
So on the margins as you saw.
Certainly as it relates to the markets that we looked at last year. There Ryan they are in their Forty's, and we mentioned that and certainly getting the benefits from.
The market appreciation was taking place scenario youre seeing from that standpoint, we've already absorbed the lower margin is and we indicated to that associated to BMO business, which is the nature of the business. So this 35, 6% range is that.
Above slightly above our target of 31% to 35.
Thats been impacted by the market's primary theres no abnormalities that we see other than the foreign exchange and the other things that have impacted them, but as al mentioned.
The market.
Depreciation substantially took place in.
The September timeframe, so youll see a carryover of that into.
The fourth quarter, but there'll be a market driven situation will probably move to the low end of the range.
On foreign exchange, we had 40% of our assets as you know a year ago with the BMO acquisition in Europe , and the U K and you can see the size of the depreciation of the pound and the euro.
That had a sizable effect now hopefully that will stabilize over time.
So strong maybe start to come back in a fashion that would be a positive but the combination of that and appreciating markets are really squeezed a bit.
Got you very helpful.
And just one follow up if I may just on the annual actuarial review I'm wondering if you could just share with us some of the key assumption changes driving most of the impact. Thanks.
Well.
The key elements that drove it from the Acura <unk> and that was we adjusted our mortality tables.
From the standpoint, we looked at our experience in.
So that was one and then we also saw lower lapses coming in and therefore, extending our living benefit benefits going those are the partner.
Again.
Nothing.
Out of pattern it was just.
That was the trend line.
Did not adjust our interest rates, where we had lower than a year ago and you can see the rise in interest rates.
Quickly.
Got you.
Helpful. Thanks again.
We will take our next question from Tom Gallagher with Evercore ISI.
Good morning first question is just how do you how do you think about the.
<unk> Roy difference right now between the build and bank versus the benefit of share repurchase.
Thinking about how much you've grown the size of that bank and the capital.
That's been used to build that up I assume those are pretty high ROE, but just curious if you can give some perspective on what level of ROE. ROI. However, you wanted to describe it in how that would compare to the return you get from share repurchase.
Well, it's interesting because listen I think as you look at the net amount of <unk>.
Cash flow, we generated in the amount of excess capital, we have and our ability to.
Does not inhibited in any manner shape or form our ability to continue to grow and invest in our bank to garner the benefits of both and we constantly are making that evaluation accessing our excess as it is the situation.
The generation that we have so I would say the returns for the bank, but certainly getting to very respectable levels and the buyback from that standpoint is an element that we look at.
Certainly our excess looking at the opportunity to return to shareholders and then other opportunities, but one of the things that we constantly do is the ability that we are not basically starting or reducing our impact of investing in the business and that is a key to us. So I would say, they're not mutually exclusive we can.
And I think you'll also find that the bank now who will become a nice compliment and it's not just.
For what it is today, but strategically it will actually help us expand our relationships deepen them with clients offer a lot of other products of situational for the wealth business.
And so we actually think it's a great diversified and a great complement and that capital that we're deploying will get a very good return on it.
Okay. Thanks, and then just a follow up on the whole.
Cash benefit that you would see.
I still expect to see heading into 2023, I just wanted to make sure.
Thinking about this correctly or at least directionally correctly.
Look at the 46 billion all in.
Our balances and listen to everything you've said so far.
On the revenue side, I can and I'm going to compare it to the run rate you had in <unk>. So then where they should go to in 2023.
But on the revenue side I can get somewhere in the $3 million to $400 million pre tax earnings revenue pick up headed into 2023.
But then it's a little less clear to me how much of a give up you would expect to have on cost of crediting whether thats.
20%, 50% and any.
So Walter curious if you could give me some idea of whether I'm in the right direction will place on the revenue pick up and then I'll have Joe.
Credit is Tom.
Nothing against their forecast I will say as you see what the trend lines are and certainly the elements of potential rate increases in the balances we have but there is a lot of variables that go into it but certainly we have a very very strong trend line as we certainly go into fourth quarter and going into 2023.
We feel with the complement of both the short cash coming out of.
Sweep accounts and the investments there.
Spreads that were picking up in the bank.
You can imagine is going to be a positive trend as we move in to the fourth.
End of.
In 2023.
Okay, and Walter sorry, just a follow up on that anything you can offer it doesn't look like you've had to give much up on cost of crediting so far any sense for how that might change do you think that's still going to be fairly.
No.
Impact what do you think that might move off.
What we're saying is there is an increase in crediting rates and there will be as rates continue to be persistent or it will go up we will make adjustments. So again based on size of account them, whether it's really a transactional or not and keeping the cash but as Walter said.
Some of that could be will be offset based on some of the rollover in assets, we have in the bank and how to invest as well as what we transfer but also.
There's a question is the fed going to continue to raise rates I mean, it's pretty much. We think is going to go up again I know, there's a lot of things that the fed's going to pull back next year, but.
Inflation, so persistent that I'm not sure that's the case and if it is we have the ability to invest out so.
I think we're feeling very good that we get from the bank.
What we get from the overall business will offset the appreciating markets and give us a nice complement here.
Okay. Thanks.
We will take our next question from Steven <unk> with Wolfe Research.
Hey, good morning.
So wanted to start off with a question just on the organic growth drivers in AWS, the 6% organic growth certainly a good result, given the choppy tape. It looks like you recorded some wins in the financial institutions channel during the quarter, how material, where some of those wins from an M&A perspective, and could you help frame.
The organic growth opportunity that you envisage within that channel.
Yes, so we are getting some nice wins and we are actually have a good pipeline of even some larger size types of deals arrangements.
Excuse me.
And as those deals occur the assets usually follow.
No.
<unk> do you have that pipeline that occurs and then when you bring on the advisors et cetera to help grow those channels. So.
We feel it will be a nice growth business for us again based on the size and scale compared to our other businesses. It's not of the scale yet, but we think this will grow in scale.
Over time, and so we feel very good about it we don't breakout information yet that will be something we'll look at down the road.
Got it and just a follow up on the earlier discussion relating to cash sorting you noted that you've seen some better cash ordering trends relative to peers.
Some of your peers also alluded to.
Benefited from heavy selling activity in September and was hoping you can just give an update on what youre seeing in terms of cash balanced trends or levels in October .
And maybe a little bit more specificity just in terms of where you expect cash balances to settle out once we reach whether its terminal fed funds or just peak sorting activity across the complex.
The only thing I mean, the way I would position. It to you is we've always had a certain level that is held in our cash based on how we do asset allocation, how we have it for clients liquidity needs, an emergency or even for cash to reinvest in balances that.
Our ability to to allocate and so if you assume that's the case, 5%, 6% you can look at it that way of course cash has built up a bit more and we saw that and Thats why I said there is a complement the cash above what we're holding that have gone into some of these other types of money markets and other things.
And brokerage Cds et cetera, et cetera, so structured so I would probably say we are.
Not seeing that there would be a dramatic falloff in the cash that we're holding there may be some adjustment because it has gone up a bit.
But we feel very comfortable that within that type of range of percentage to assets. Because again. This is not where people are holding huge amounts of cash just short term. They usually are advisers, usually invest at one level anyway, even if it's in the type of cash product or a box.
Over time fixed income will come back.
Bode well for our asset management business as well and go to work in a wrap accounts, but I still think that that five or 6% would be rational as the clients as we've seen over the past.
Helpful color. Thanks, so much for taking my questions.
We'll take our next question from John John Barnidge with Piper Sandler.
Thank you very much I. Appreciate it can you talk about your outlook for expense reductions and asset management with the BMO acquisition now coming up on a full year I know the one year rule is important for European regulators.
The synergies from the BMO acquisition centered synergies synergies right now actually on track as we talked about and gave us.
When we announced that we are tracking on synergies obviously.
That standpoint.
The synergies are between us are seriously.
2023.
I would say the bulk of these synergies will be achieved as we go and we will also then.
<unk>, our most of our row transition expense activities as relate to it and so we're on track and nonperforming and most of what you saw in the reduction of expenses wasn't necessarily from synergies yet in the current periods. So that's more of tightening up our expenses as.
As we go in and the team is doing a good job of rationalizing what that is.
And we will look to maintain control of those expenses, we are still making a nice investments in asset management.
But I think the synergies will be helpful. As well as we go in that will offset some of the compression that was seen in the European market.
Thank you and then my follow up question. There has been early mortality is the best strongest healthiest <unk> annually did.
Did that pre COVID-19 cadence to mortality trends returned for the retirement and protection solutions like business. Thank you.
So if youre doing the mortality table that we adjusted in the second.
No I'm just talking about.
Warner.
Mortality.
Normal life business.
Yes, again, a mortality in the life as we're using basically industry tables right now.
You're seeing that our trends are totally consistent with the industry tables that we've been that are out there.
Thank you.
Our last question will come from Erik bass with autonomous research.
Hi, Thank you maybe for wealth management, just trying to put it all together it doesn't sound like there's anything unusual that benefited margins this quarter and still expect to see some benefits from interest rates going forward. So do you see a margin in the 27% range sustainable near term and something that could potentially even move higher market stabilized.
I would say listen our margin based business are increasing but really we are getting.
Lift from the interest rates and that is important.
<unk> contributor and certainly we do see margins from those activities are being larger elements as you look at the.
The bank and you look at the sweep cash so yes. The answer is yes, we do see the margins will be increasing based upon the current assumptions that we see.
Okay. Thank you and then.
Last thing just on the new advisor recruiting outlook can you just talk about how market conditions are affecting your ability to recruit advisors because there was a good quarter this quarter, but I noticed the things sort of happen on a lag. So are you seeing any change in the pipeline.
We see a good pipeline, we are maintaining sort of.
<unk> focus on that in the areas of levels that <unk> been seeing.
I think we're finally breaking through as far as what advisors understand about our business I mean, when we compare what we do our capabilities our technology.
Et cetera, I think advisors are very impressed.
And we get very good complement I mean nine times out of 10, our advisors join us say that our capabilities technology support is way beneficial from the pharma stayed joined us from whether they'd be.
The independence of the wires et cetera. So we feel very good about what that is as long as we have the conversations.
Perfect. Thank you.
And that does conclude todays presentation. Thank you for your participation and you may now disconnect.
Okay.
[music].
Yes.