Ameriprise Financial Inc (AMP) — Q3 2022 Earnings Call Transcript

Thank you and good morning. Welcome to Ameriprise Financial's Third Quarter Earnings Call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer. Following their remarks, we'd be happy to take your questions. Turning to our earnings presentation materials that are available on our website. On slide 2, you'll see a discussion of forward-looking statements. Specifically, during the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company's operations. Reconciliation of non-GAAP numbers to their respective GAAP numbers can be found in today's materials and on our website. Some statements that we make on this call may be forward-looking, reflecting management's expectations about future events and overall operating plans and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our third quarter 2022 earnings release, our 2021 annual report to shareholders, and our 2021 10-K report. We make no obligation to publicly update or revise these forward-looking statements. On slide 3, you see our GAAP financial results at the top of the page for the third quarter. Below that you'll see our adjusted operating results, followed by operating results excluding unlocking, which management believes enhances the understanding of our business. By reflecting the underlying performance of our core operations, it facilitates a more meaningful trend analysis. We completed our annual unlocking in the third quarter. Many of the comments that management makes on the call today will focus on adjusted operating results. And with that, we'll turn it over to Jim.

Good morning and welcome to our third quarter earnings call. What I'd like to do is give you my perspective on the environment and how Ameriprise is performing. Then Walter will cover the financials. In terms of the market environment, both equity and fixed income markets continued to decline in the third quarter both here and in Europe. Inflation remains high and sticky, and geopolitical risk is elevated. This is causing a high level of volatility, keeping investors on the sidelines a bit more. With that, short-term interest rates were up 300 basis points so far this year, with 150 basis points raised just in the third quarter. I believe that the Fed and other central banks have been playing catch-up and that they will have to continue increasing rates to get inflation under control. Having said that, it will lead to a slowing of the US and European economies and at this juncture, it looks more like we're heading for a mild recession. Therefore, I expect there will be more volatility ahead. So for Ameriprise, the diversity and strength of our business allow us to deliver good outcomes even in challenging times. And you certainly saw that in our results this quarter. We continue to see strong client inflows in wealth management, and the rise in interest rates, the growth of the bank, and the stability of the retirement protection businesses helped 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 in 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 and administration were $1.1 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 and 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. Our stock 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 flows reflects the environment we're in. We saw strong growth in brokerage cash, certificates, and other products. As we expected, cash balances continued to be up sharply to more than $46 billion, compared to more than $40 billion just a year ago. We're seeing good growth across our cash offerings. Very importantly, our advisor productivity remained strong as we continue to reinforce a personal relationship in the value of advice. It was up 7% to $819,000 per advisor. We recently met with our top advisors to recognize their success and discuss growth opportunities at Ameriprise. Engagement was terrific; advisors are highly satisfied with the firm and the support we provide. They liked 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. Advisors 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, releasing additional tools, capabilities, and enhancements that help our advisors engage and meet with clients, deliver actionable advice, and improve efficiency in their practices. As part of our investment agenda, we've been very 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 also continue to see good growth in our pledge loan business, and we'll 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. 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, our sales are down but in line with the industry. We also made a shift in protection away from fixed insurance to focus on VUL and DI products. Live 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 in cash flow as a complement to our other businesses. Now we'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 a sizable presence in Europe, we were also affected by the appreciation 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. Consistent with what you've seen 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. Very 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 there's been a lot of volatility over the course of the year, over 70% of our funds are performing above their benchmarks 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 affected because of quality growth positioning. Let's turn to flows; in the quarter, we had outflows of $2.4 billion, which 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, we're in net outflows, but it improved a bit from a tough second quarter for us in the industry. We ended the third quarter with lower gross sales and higher redemptions than a year ago, given the markets. This resulted in $5.3 billion of net outflows driven by weak conditions. In US 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've seen 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 the same time, BMO's EMEA business is going well. We continue to make good investments in the business overall, ensuring we have the right focus to move forward in distribution as well as servicing and platform capabilities. But we 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'll continue to be very focused there. As I look ahead for Ameriprise, I believe we will continue to operate in these markets for a while. So as you expect from us, we're 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. Importantly, 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 and we continue to see high levels of engagement and satisfaction, industry-leading. 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 are positioned for both the challenges and the opportunities ahead. Now I'll turn it over to Walter, and then I'll take your questions.

Thank you. As Jim said, results this quarter continued to demonstrate the strength of the Ameriprise value proposition as adjusted EPS excluding unlocking increased 9% to $6.43 in a challenging market environment. The combination of management business momentum, a higher interest rate environment, and expense discipline more than offset equity and fixed income market appreciation, coupled with significant weakening of the pound and the 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 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, particularly 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 a 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 6. Assets under management and administration ended the quarter at $1.1 trillion, down 9%. While AUM 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 AUM levels were substantially impacted by significant weakening of the pound and the euro, with the AUM of non-US businesses down to approximately 35% of total. Overall, pretax earnings remain 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 individual segment performance beginning with wealth management on slide 7. Wealth management client assets declined 12% to $711 billion as a result of significant market depreciation over the past year, partially offset by our strong organic growth. Total client net flows remain 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, as anticipated in this environment. Revenue per advisor reached $819,000 in the quarter, up 7% from the prior year from continued enhancements in productivity and business growth. On slide 8, 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. Pretax 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 in 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 travel and entertainment timing of expenses in the current year, and continued expenses associated with higher volumes and investments in the bank and other 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 a substantial and sustainable benefit in the fourth quarter of '22 as well as 2023. Let's discuss the components in more detail. First, 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 is in working cash accounts for our clients, with over half of the balance being less than $100,000. Our client crediting rates have continuously benchmarked and remain competitive. As a result, we have not experienced cash sorting issues to the extent of others in the industry. Our certificate products offer another solution for clients looking to ladder their liquidity and garner some additional rate upside in the multiple product offerings. Second, the bank provides flexibility to optimize the benefits from higher rates by investing in high-quality, longer-duration securities, creating sustainability of interest earnings. Our bank reached nearly $19 billion in the quarter, up from $10 billion a year ago. In 2023, we plan to grow the bank to the $22 billion range. In the quarter, the pickup from investments in the bank was approximately 150-200 basis points above the spreads from wrap 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 9. We're 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 broadened our geographic diversification with about 35% of the assets in EMEA. However, this diversification increased our foreign exchange transaction exposure. As is true in the industry, we experienced outflows in the quarter, though continuous strength in our global institutional business offset a meaningful portion of retail outflows. Like others, we experienced pressures from global market volatility, a risk-off investor sentiment, and geopolitical strain in EMEA, matching the quarter's decline to 35.6%, which is slightly above our target range of 31% to 35%. The decline versus last year is attributable to broad market depreciation and foreign exchange impacts. Given the material market depreciation and 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 continue 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 spending and remain committed to managing expenses very tightly in the current revenue environment, and the fee rate remained stable in the quarter at 48 basis points. Let's turn to slide 11. Retirement and Protection Solutions continue to deliver stable earnings and free cash flow generation, a clear result of a differentiated risk profile. Pretax adjusted operating earnings excluding unlocking were $203 million. In the quarter, we completed our annual actuarial assumption update, which resulted in an unfavorable pretax 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 discontinue sales of variable annuities with limited benefits to reduce the risk profile of the business. Protection sales remain concentrated in higher margin asset accumulation VUL, which now represents one-third of total insurance in-force assets. Annuity sales in the quarter were in lower-risk products without guarantees and structured variable annuities. These products represent over 40% of our total VA account value. We have begun to reposition our investment portfolio to capture the interest rate opportunity. We have remained short on duration in 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 in the 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 AA, with only 1.6% of the portfolio in below-investment-grade securities. Despite significant market dislocation in the quarter, VA hedge effectiveness remains very strong in the quarter at 97%. Our diversified business model benefits from significant stable free cash flow contributions from all business segments. This supports a consistent and differentiated level of capital return 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'll take your questions.

Hi, thanks. Good morning. My first question is could you give us an update on your excess capital position and any moving parts from the quarter?

Sure. I'll take that. The number is $1.3 billion. And it's down $300 million from last quarter, and the main drivers on that is the market dislocation and the growth in the bank, and the remainder is coming from the unlocking.

Got it. Thank you. And then separately in retirement and protections, our earnings are over $200 million this quarter excl unlocking they'd previously been running more than $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 bit. But I think the run rate you are talking about between the $180 million range is certainly one to that we anticipate going forward. And yes, the 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 short duration now, we're taking advantages we move out. But it will go off, but I would say I would start with $180 million range.

Good morning, Jim and Walter, thanks for taking my question. I'd 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? We saw more than that move in 2022. The rate environment is certainly attractive, and it seems like a good place to utilize some of that capital. So that's 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 where maybe the demand has eased up?

So as relates to 2023, we, I indicated that the... it's probably better to say it was at least two, we would add $3 billion next year. We certainly have the capacity to do more, both from the availability of liabilities and capital. 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 pledge loans. Have you seen any shifts in demand with higher rates, or have those continued to grow?

On the pledge loans, have you seen any shifts in demand with higher rates, or have those continued to grow?

On the pledge, I am sorry, I didn't hear, in pledge loan is actually, right now it's adjusting with markets, but it's growing steadily. We feel very comfortable with it. And from that standpoint, it's a total of that is over the $1 billion range for total standpoint with our program. So we feel very comfortable with it.

Great, thanks for that. In the wealth business, you do a great job of returning capital to shareholders and have a long track record there, which is appreciated. Have you considered shifting some of your excess capital to build on your recent success in adding advisors and generating steady net new assets in the mid-single digits, potentially pushing that a little higher? Have you thought about that, or are you comfortable with your current recruiting approach?

Yes, we are very much focused on continuing to bring in quality recruits. We just don't want to associate people to us and have been 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. 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 and building succession in their practices and helping advisors extend their teams. We are also building out our IPI group, which is our institutional business, and we're winning some nice accounts there and grow in the advisor force. We are also doing some work on our remote channels and expanding that activity, which we think will also be a compliment. So along those lines, we are putting money to work; we are investing, etc. 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. Just wanted to go back to the bank, if I could. I guess in addition to adding more deposits, we're thinking another lever you guys have is to reinvest some assets that are maturing that the deposits are 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're able to invest your money today?

Yes, so let me take an approximate, this is Walter, approximately because we're short duration, if you look at it, where the duration is a tad over three, that you should expect over $3 billion to mature in the year. I don't have the exact numbers on yield, but you should imagine that it's we're going to pick up at least 300 or 400 basis points versus what's mature. And I can have Alicia get back to you on that.

Okay, that's helpful. Thanks. And then I guess for Jim, towards the quarter progressed, we're getting quite a few questions on LDI in the UK, and what's going on there? And what any impact on your UK asset management business there could be? So could you maybe frame that out? Well, how you're thinking about that as 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, Suneet. So I think as everyone is aware, this is a very large market; it's over $1.3 trillion in the UK, depending on the day. It is used by almost all the pension funds, they're supported by the regulatory authorities. The long-term gilt and European interest rates increased dramatically in September. That resulted in clients having to post additional collateral to maintain their LDI 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. This volatility affecting the bond markets, interest rates going up, etc. So clients have maintained their LDI positions, as you would expect, the systems. 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 the stabilization and reverting back to the mean. 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. But we do expect some adjustments in the market going forward. Some players would have to reduce leverage a bit; there may be some more operational adjustments to ensure that the markets can flow a bit more easily as you get these types of dislocations. With us, you saw the asset level decline, meaning from the depreciation of the market, but we really haven't seen major outflows in any fashion. In fact, there is some new business that came in, so we feel like this market will recover. We feel like we can still do good business there, and it won't have a significant long-term effect.

So just to summarize, near term more of a kind of AUM, potentially earnings issue, as opposed to anything more significant than that.

Yes, exactly.

Great, good morning! Thank you for the question. First, just around some of the cash dynamics and advice over and advice and wealth, and how that's trending. So clearly great to see the positive 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, and we do not have an issue on the placement of the funds from that standpoint. And we also, again, the bank allows us to capability as I talked about growing and certainly reinvesting more directly with our bank institution. As far as the deposit beta, look, we do a competitive scan each week, we certainly evaluated certain as rates go up and we look at the competitive elements because you look at the per account compensation or client crediting rates, they will change and I'm sure they will be going up as relates to this. Of course, our main focus is to ensure that our clients are getting appropriate rates that are competitive.

Got it and Walter, just to confirm my understanding, are you indicating that there has been an improvement in demand from third-party banks, or is there no significant change compared to what we have observed over the past few quarters?

I would say this is a healthy environment, but it's a healthy environment. Certainly, we saw a couple of months ago from that standpoint. Absolutely.

Got it. Understood. And then Jim, one for you. There have been a couple of articles talking about some potential asset management platforms for sale. In the past, you guys have obviously been very opportunistic when I think about the Columbia acquisition from Bank of America. As the environment gets potentially or remains, I guess, kind of dicey here. How do you think about opportunities for incremental M&A for Ameriprise on the asset management side of the house?

So again, I think markets are going through a level of dislocation right now and are under some pressure from, as you can see, the appreciation of the market and flows. We are very much focused on really the business that we have right now. We're integrating the BMO international acquisition, and that's going well, and that's consuming some time and attention. At the same time, we know that this is a time for us to really engage our clients and maintain it. We have a lot of good new stuff going on in some of the areas and disciplines that we've been investing in from ESG to some of the institutional and OCIO, etc., and some alternatives. We feel good about the hand; we don't know that down the road, if there's more significant dislocation and it makes some sense. Maybe we'll play, but right now it's not as something we have on the plate.

Hey, good morning. Maybe staying on the topic of M&A but on the divestiture end, the market has been pretty volatile. And just in general, locked transactions of insurance assets have not been as robust as we would have thought. I had some optimism that maybe Ameriprise would 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, Andrew. So as we said, we wanted to survey the markets to potential and what the opportunity may be just to evaluate. In so doing, what we found, most importantly, is that there aren't a lot of market participants that have transacted or are interested in more what I would call high-quality books. In a sense, they've been much more focused on general count assets so they can invest using their various structures and capital situations. So we don't think the market has sufficiently evolved to look at the type of business that we have and the type of value that we realize from that business. So at this juncture, we actually feel very good about holding business; we actually de-risk the business tremendously. We move out of a lot of types of businesses that have a bit more of that volatility or long-term tail on the mix of business, including our variable annuities without living benefits as a significant part of our portfolio. The other portfolio with the living benefits that's closed at this point was actually done in the right way with the right benefits and the right hedging. We get good cash flow from these businesses and good stability. I think you've even seen in the current quarter; this has been a nice stability for us as you get appreciating markets on the equity side. Now wealth is able to even invest out longer and get higher yields on the book, which is good. In our long-term care book, you could see the quality of that even over the current years, a number of years. Here again, there might be some opportunities as people start to get more informed about this over time that we'll see. 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 the type of businesses we invest in. The type of businesses that we move up and handle the book to manage. We actually think it's a great complement, particularly in an environment like this.

That's really helpful. And Jim, maybe just shifting over to asset management for presentations. Clearly, in retail, 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 to turn around that performance?

So again, good question, and I think we've mentioned that at a slightly higher level. So let me dig a little deeper for you. Overall, in across our portfolios, even for the one year, there are a few pockets where we have some underperformance, but it's not by a lot that really brings the averages down. So some of that's in our fixed income. So in some of the longest duration because of the rise, the spike in interest rates as quickly, our teams were much more focused on the credit side, and so the duration was a bit longer. That impact now will come and reverse around as we get further out where the yields will be good, etc. But I would probably say that's where we've gotten some of the impact: not on the shorter duration, on the longer. The second part is in Europe. It's not because of underperformance. It's because in Europe, when they have equities, they don't break their benchmark into value versus growth, etc. We have more growth quality-oriented portfolios, and as you wouldn't have understood, value has performed a bit better in this market, even though it's down, it's been down less than growth-oriented. Our clients there understand that and feel good about what that is over the longer term. But on a benchmark basis, that's why you got the underperformance.

Thanks. Good morning, everyone. My question is on brokerage cash sorting. How do you expect sorting activity to trend over the next six to 12 months? And what do you see as the direct impact on money market fund AUM and cash balances?

Let me start, and if Walter wants to complement. So we already have an in what you've seen in the growth of all cash, there's already had the catch of cash sorting occurring. The growth of cash itself, if you'd call it in a logic category is higher than $46 billion because money has gone into money markets, and they have gone into shorter duration funds and 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 health of the cash or in our certificate programs. We saw some of that cash sorting occur in the third quarter, as you said; we may see some more of it. But the ties of the cash have grown because people have moved money to the sidelines.

The only thing I'd add there is I think Alicia said yesterday, over 50% of this transitional working cash is less than $100,000 or $100,000 less. So its stickiness is there. We are competitive in what we do. So I think this 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 stays. So it's a different model that we have, and I think it's demonstrating its stickiness.

Thank you, Walter. 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 in your cash mix as opposed to the bulk transfer effort.

So let me take a shot. Listen, obviously, we have a growing situation, certainly with getting additional cash from our current clients, and new year is coming. We see that as growing from that standpoint. We will gauge it as obviously the impact of looking at alternatives because it is again transitional on where it's going to go. But that is something from a directional standpoint, very sticky. We do see certainly the potential to grow, but 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 garnering the higher yield with the certainly the low-risk profile that we do and to ensure that. So I would say that you'll see the percentage going over the bank increasing as we've progressed as we feel comfortable; it's all situational driven. That’s why I said, when I said my top points, $3 billion is probably at least $3 billion because we do see in this case, but we reevaluate that there are substantial opportunities 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 projects and hybrid products that they're developing at this stage.

It will be launched in a number of deposit products in the bank, starting in the first quarter and then high-yielding types of deposits and other things that you see in some of the other types of institutions later in the year. We feel there's an opportunity to not just transfer money in, but to absolutely grow the deposit base.

Hi, thanks for taking my questions and good morning. Just one on the asset management business in terms of the margins. Obviously, above the target range this past quarter, wondering if there's any specific factors driving that any potential benefits that are nonrecurring. And in terms of the outlook for margins, you mentioned potential erosion based on FX. Just wondered if you could just further expand that. Thanks.

So on the margins, as you saw, certainly as relates to the markets that we looked at last year they are running in their 40s. We mentioned that we're certainly getting the benefits from the market appreciation that was taking place. Now you're saying from that standpoint we've already absorbed the lower margin, as we indicated to that associated with the BMO business, which is the nature of their business. So this 35.6 is around range is that above, slightly above our target of 31 to 35, that's been impacted by the markets, primarily. There's no abnormalities that we see other than the foreign exchange and everything that have impacted that. But as I mentioned, the market depreciation substantially took place in the September timeframe. So you will see a carryover of that into the fourth quarter, but there'll be a market-driven situation; we'll probably move it to the low end of the range.

And foreign exchange: we have 40% of our assets. A year ago, with the BMO acquisition in Europe and the UK, you can see the size of that depreciation of the pound and the euro. That had a sizable effect. Now, hopefully, that will stabilize over time because the dollar is so strong, maybe start to come back in a fashion that would be positive. But the combination of that and appreciating markets have really squeezed that a bit.

Got you. Very helpful. And just one follow-up if I may, just on the annual actuarial review, wondering if you could just share with us some of the key assumption changes driving most of the impact. Thanks.

Okay, the key elements that drove it from the actuarial net was that we adjusted our mortality tables, and from the standpoint we looked at our experience and so that was one, and then we also saw our lower lapses coming in and therefore extending a living benefit only those that are partner. Again, nothing out of pattern. It was just that was the trendline.

Good morning. First question is just how do you think about the ROI 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 are ROE, ROI, however you wanted to describe, and 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 amount of free cash flow we generate and the amount of excess capital we have, and our ability to does not inhibit in any manner, shape, or form our ability to continue to grow and invest in a bank to garner the benefits of both, and we are constantly making that evaluation accessing our access as it is the situation and generation that we have. So I would say the return to the bank are 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 stopping or reducing our impact of investing in the business. And that is key to us. So I would say they're not mutually exclusive.

I think you'll also find that the bank now will become a nice complement. And it's not just for what it is today, but strategically it will actually help us expand our relationships, deepen them with clients, and offer a lot of other products in situational for the wealth business. We actually think it's a great diversifier and a great complement, and that capital that was applying will get a very good return on it.

Okay, thanks. And then just a follow-up on the whole cash benefit that you would still expect to see heading into 2023. I just want to make sure I'm thinking about this correctly, or at least directionally correctly. If I add, look at the $46 billion all-in balance and listen to everything you've said so far, on the revenue side, I can and I'm going to compare to the run rate you had in 3Q to then where this should go to in 2023. But on the revenue side, I can get somewhere in the $300 million to $400 million pretax earnings, revenue pickup 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 that's 20%, 50% any. So, Walter, curious if you can give me some idea whether I'm in the right directional place on the revenue pickup and then also credit.

I am not going to provide a forecast, Tom, and I have no issues with the report. As you observe the trend lines and consider the potential rate increases and our existing balances, there are numerous variables at play. However, we certainly have a very strong trend line as we head into the fourth quarter and into 2023. We feel confident about the combination of short cash coming from our sweep accounts and our investments. The spreads we are capturing in the bank are expected to positively influence our trend as we progress into the fourth quarter and the first quarter of 2023.

Okay, for 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 a fairly low impact? Whether you think that might move off? I'm just curious.

I would say this: what I was saying is there is an increase in crediting rates and they will be as rates continue to be persistent or go up, we will make adjustments again, based on size of accounting, whether it's really a transactional or not in keeping the cash. But as Water said, some of that could be will offset based on some of the rollover and assets we have in the bank and how to invest as well as what we transfer. But also, if 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 is going to pull back next year. But with inflation so persistent, 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 what we get from the bank and what we get from the overall business will offset the appreciating markets and give us a nice compliment here.

Hey, good morning. So why don't we start off with a question just on the organic growth drivers in AWM? The 6% organic growth is 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 were some of those wins from an M&A perspective? And can you help frame the organic growth opportunity that you envisage within that channel?

Yes, so we are getting some nice wins. We're actually having a good pipeline of even some larger-sized types of deals and arrangements. As those deals occur, the assets usually follow. In that sense, you have that pipeline that occurs, and then you bring on the advisors, etc. to help grow those channels. We feel it'll be business progress, again, based on the size and scale compared to 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 break out information yet. That'll 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 sorting trends relative to peers. Some of your peers also alluded to a benefit from heavy selling activity in September and was hoping you can just give an update on what you're seeing in terms of cash balance 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 it's terminal Fed funds or just peak sorting activity across the complex.

Look, the only thing I mean, what 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, and emergencies, or even for cash to reinvest in and balances that ability to allocate. 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 that's why I said there's a complement of cash above what we're holding that has gone into some of these other types of money markets and other things and broker CDs, etc. So structured. I would probably say we are not seeing that there will be a dramatic fall-off in the cash that we're holding; there may be some adjustment because it's gone up a bit, but we feel very comfortable that within that type of range of percentage to assets. Again, this is not where people are holding huge amounts of cash just short-term; they usually, our advisors usually invest that at one level anyway, even if it's in a type of cash product or a bond. I think over time fixed income will come back. That bodes well for our asset management businesses well and go to work in wrap accounts. But I still think that the 5% or 6% would be a rational decline as we've seen over the past.

Thank you very much. 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.

Synergies, right now actually on track. As we talked about, we gave in when we announced that we are tracking on synergies, obviously, from that standpoint. The synergies between us — what.

The next year as well. For 2023 that's what I would say the bulk of the synergies will be achieved as we go. We will also then complete most of our transition expense activities that relate to it. So we're on track, and we're pulling in.

Most of what you saw in the reduction expenses wasn't necessarily from synergies yet in the current periods. So that's more of tightening up our expenses as we go in. The team's doing a good job of rationalizing what that is, and we'll look to maintain control of those expenses. We are still making a nice investment 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 we're seeing in the European markets.

Thank you. And then my follow-up question. Do you think only mortality is the best, strongest or healthiest in 3Q annually? Is that pre-COVID cadence to mortality trends return for the retirement protection solutions life business? Thank you.

So, look, if you're doing a mortality table that we addressed it.

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 you'll still expect to see some benefits from interest rates going forward. So do you see a margin in the 27% range that sustainable near term and something that could potentially even move higher if the market stabilized?

So, listen, our margin in the base business is increasing. But really, we are getting a lift from the interest rates, and that is an important contributor. Certainly, we do see margins from those activities of being a larger element as you look at the bank and you look at the free cash. Yes, the answer is yes, we do see the margins will be increasing based upon the current assumptions that we see.

Thank you. And then it's 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 this was a good quarter this quarter; I know things sort of happen on a lag. Are you seeing any change in the pipeline?

No, we see a good pipeline. We are maintaining sort of our focus on that and the areas of levels that you've 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 to our capabilities, our technology, etc., I think advisors are very impressed. We get very good compliments. I mean, nine times out of ten, our advisors who join us say that our capabilities technology support is way beneficial from the former stage joined us from whether they be independence or the wires, etc. So we feel very good about what that is as long as we have the conversations.