Ameriprise Financial Inc (AMP) — Q1 2023 Earnings Call Transcript

Thank you, and good morning. Welcome to Ameriprise Financial's first quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, our 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 will 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 insights 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 first quarter 2023 earnings release, our 2022 annual report to shareholders and our 2022 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 first quarter. Below that, you'll see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. Many of the comments that management makes on the call today will focus on adjusted operating results. And with that, I'll turn it over to Jim.

Good morning, everyone, and thanks for joining today's call. As you saw in our release, Ameriprise had an excellent first quarter, building on a strong year in 2022. As you know, equity markets were choppy up for the quarter, but still down 9% from a year ago, and interest rates were up strongly year-over-year. However, questions around whether we'll see a hard or soft landing continue to play in the background. And the failure of certain regional banks and another large financial institution caused investor concern. To confirm, Ameriprise has no exposure to the recently affected banks. With regard to our bank, our deposit base is extremely stable, our investment portfolio is high quality with a short duration and it's all held as available for sale. In addition, all of our client cash sweep deposits in Wealth Management and the bank are FDIC or SIPC insured. As we reflect on the quarter, I'd like to reinforce some important points. Ameriprise remains strong and stable. We navigate environmental uncertainty extremely well for our clients in the business, and we demonstrated that again. Ameriprise is a diversified business with Wealth Management representing two-thirds of the firm's earnings, complemented by our Retirement & Protection Solutions and Asset Management businesses. This diversity enables us to generate strong results and multiple revenue streams across market cycles and offset pressures. We can also quickly capitalize on opportunities and deal with risk. Last and importantly, our financial foundation, risk management and expense discipline are all excellent. We're able to consistently invest in business growth across market cycles and return to shareholders at attractive levels. With that as background, I'll discuss the strong adjusted operating results we achieved in the first quarter. Revenues grew 3% to $3.7 billion, driven by double-digit growth in Advice & Wealth Management. Earnings were up nicely with pre-tax adjusted operating earnings up 20% and EPS up 25%, which is significant. And the return on equity, excluding AOCI, was 50%. Our return on equity continues to be among the best across financial services. Our assets under management and administration ended the quarter at $1.2 trillion. It's down from a year ago due to lower markets and a negative impact from foreign exchange translation, which was partially offset by our strong client flows. Let's turn to business highlights. In Advice & Wealth Management, we delivered another excellent quarter. We're bringing in strong flows as we focus on providing more advice to more clients and deepening our relationships. Client inflows continue to be robust, more than $12 billion in the quarter, up 18% and very close to an all-time high, and this builds on our record year in 2022. Both wrap flows and transactional activities were impacted due to market volatility. We expect to see a pickup in wrap and other solutions as markets and the environment settle over time. The Ameriprise client experience helps drive leading client engagement. Our advisers are supporting clients with our excellent market volatility resources and advice-based client experience. Even during this period of heightened uncertainty, client satisfaction remains very high at 4.9 out of 5 stars. Our adviser value proposition is another differentiator. Ameriprise Advisor retention is among the best, and productivity continues to grow nicely, increasing 5% to $847,000. Advisors continue to tell us that they love our technology, tools and support. For example, we're rolling out a great new capability called e-meeting that reduces adviser meeting prep time down to just a matter of minutes and generates a highly personalized professional presentation focused on client goal achievement. In addition to our legacy advisors, our experienced advisor recruits appreciate our client and advisor value propositions as well as the firm's financial strength. Another 83 experienced advisors joined us in the first quarter. The quality of the people we're bringing in continues to build in terms of practice size and productivity, and we're seeing a nice recruiting pipeline ahead. As you know, we began building the Ameriprise Financial Institutions Group channel a few years ago. Since then, we partnered with a number of quality financial institutions who want to work with a firm like Ameriprise that can provide excellent client and advisor service. In the quarter, we announced a new bank partner, Comerica Bank. This partnership will bring approximately 100 financial advisors and $18 billion in assets by the end of the year. Regarding our bank, it's growing nicely. We're adding additional deposits, have grown it to $20 billion in just a few years. It's an attractive complement to gain spread revenue in this rate environment. And we had strong growth in our certificate business with assets now close to $12 billion as well as good growth in our pledge loan business. At the end of the quarter, we launched a new savings product and will follow that with our home brokerage CD in May, as well as preferred savings vehicle later in the year. As we grow in the marketplace, we continue to build on our strong brand awareness. In the quarter, we launched the next phase of our advertising to further promote our referable advice value proposition and the excellent client satisfaction we consistently earn. And the Ameriprise team and I are also immensely proud to be recognized for how we operate and do business. Some of our recent awards include being ranked as one of the most trusted wealth managers by Investor's Business Daily. Ameriprise is also ranked number two in trust on Forrester's U.S. Customer Trust Index. In addition, we were named one of America's Best Customer Service companies for 2023 by Newsweek. And for the fourth consecutive year, J.D. Power recognized Ameriprise for providing an outstanding customer service experience for our phone support for advisors. Overall, for our Wealth Management business, earnings were up strongly again, 58% year-over-year and our margin was 30.6%, a new record for Ameriprise. Turning to Retirement & Protection. We continue to perform nicely while adding value and stability in this environment. This business consistently generates good returns and strong free cash flow. We maintained solid books and our investment portfolios are high quality. With the improved interest rate environment, we're able to reposition our portfolio and as investments mature, we're able to reinvest and generate better returns. In terms of priorities, as you know, we are very much focused on asset accumulation products that align with our client needs and our risk profile, which results in a very solid liability base. Our structured annuity product is our best seller, combined with our RAVA annuities without living benefits. And in our life business, we've shifted to concentrate on VUL and disability products that are appropriate for clients in this environment and generate strong returns. Sales are down, but we are similar to the industry. Even with slower sales, we continue to generate good earnings up 11% from a year ago. In fact, last year, our Life Company was ranked as the second highest returning company in the industry. Now let's turn to our Asset Management business. We've been impacted by market volatility and industry-wide sales pressure. However, the business continues to perform well and generated good returns and margin. Assets under management were $608 billion at the end of the first quarter, down 13% from a year ago, largely driven by lower markets and the impact of negative foreign exchange translation. Regarding flows, total outflows were $1.7 billion, excluding legacy insurance partner flows. In U.S. retail, like others in active management, we remain in net outflows as gross sales were pressured from market volatility. That said, redemptions are better sequentially. In EMEA, our flows improved a bit from a year ago. In institutional, we had another good quarter. We had inflows of $2.8 billion, excluding Legacy insurance partner flows, driven by wins in fixed income, real estate and LDI. Expanding our alternatives capability as a long-term priority, including global real estate, where we are building out the business and earned a large mandate in the quarter. With regard to investment performance, we continue to have stronger long-term performance across equities, fixed income and asset allocation strategies. While our one-year numbers were impacted by market volatility, primarily in certain fixed income strategies, we're starting to see those numbers come back this year as interest rates stabilize and given our strength in credit. And we maintain 118, 4 and 5 Morningstar rated funds globally. Across regions, we're earning important recognition, including recent Lipper awards and other accolades. In addition to focusing on investment performance, we continue to work through our EMEA integration. We plan to complete much of it by the latter part of the year and look forward to deriving additional synergies. In Asset Management, we also continue to manage G&A tightly. So overall, I feel very good about the firm, how we're engaging clients and the results we're driving. We have not had to divert from our chartered costs and we're generating strong growth and returns in a rocky climate. We continue to have strong free cash flow as well as the ability to return to shareholders. In the quarter, we returned another $641 million in buybacks and dividends and we just announced another dividend increase of 8%, our 19th increase since going public in 2005. To close, Ameriprise delivered an excellent quarter and we're well positioned to continue to navigate the environment, manage expenses well, while investing for growth. Now, Walter will provide further detail on our financials and we'll answer your questions after his remarks.

Thank you. As Jim said, results this quarter continue to demonstrate the strength of the Ameriprise value proposition as adjusted EPS increased 25% to $7.25. Wealth Management's business momentum, higher interest rates and expense discipline more than offset the equity and fixed income market dislocation over the past year. This reinforced the value of our diversified business model. Wealth Management earnings grew 58% and represented 66% of the firm's adjusted operating earnings, a new record. This is up from 49% a year ago. Asset Management was challenged with industry flow pressures as well as substantial market impacts to AUM. And Retirement & Protection Solutions delivered a good 11% growth primarily from opportunistically repositioning the investment portfolio as well as from the lower sales levels given the environment. Across the firm, we continue to manage expenses tightly relative to the revenue opportunity within each segment. As a result, we continue to make investments in the bank and other growth initiatives, particularly in Wealth Management by prudently managing overall firm-wide expenses. In the quarter, G&A was down 1%. Our balance sheet fundamentals remain strong, and we saw limited impacts from the significant market disruption in the quarter. Our portfolio is positioned well and no assets are accounted for as held to maturity. We have strong capital and liquidity positions as well as effective hedging. This allowed us to return $641 million of capital to shareholders, a strong return at 80% of our operating earnings. Let's turn to Slide 6. Assets under management and administration ended the quarter at $1.2 trillion, down 8%. While AUMA benefited from strong client flows, we experienced significant market impacts. Equity in fixed markets were down 9% and 5%, respectively, year-over-year. In addition, asset management AUM levels were substantially impacted by the weakening of the pound and euro, resulting in non-U.S. AUM down to approximately 36% of the total. The portfolio effect of our business mix garnered robust earnings growth with pre-tax earnings up 20% from last year with meaningful benefits from strong client flows and interest rates more than offsetting significant negative equity and fixed income markets and foreign exchange impacts. Free cash flow generation remains strong. Let's turn to individual segment performance beginning with our strongest growth business, Wealth Management on Slide 7. Wealth Management client assets declined 3% to $799 billion. Strong organic growth in client flows was more than offset by significant market depreciation over the past year. Total client net flows remained strong at $12.3 billion, up 18% from last year, evenly split between wrap accounts and non-advisory accounts. Our flexible model and broad offering allow advisors and clients to pivot as markets and client preferences shift while keeping money within the system. Revenue per advisor reached $847,000 in the quarter, up 5% from the prior year from higher spread revenue, enhanced productivity, and business growth. Turning to Slide 8. I'd like to provide some additional insights into the sustainability of our client cash. The safety of these deposits and our investment approach managing cash that is at our bank and certificate companies. Our cash balances are relatively stable in total at $44.3 billion in the quarter and about 5.5% of total client assets. While there is some seasonality with cash levels, particularly with tax payments in March and April, cash has always been a component within the client asset allocation and generally remains above 4% of client assets. Sweep cash specifically has an average size of $7,000 per account and over 60% of the cash is in accounts with less than $100,000. As I mentioned, we have a broad set of product offerings to meet our client needs across environments. From a cash perspective, we have our sweep cash and certificate offerings with many options for clients seeking yield and looking to ladder their liquidity. In the quarter, we launched a new savings account option within the bank and will be adding a preferred savings account and broker CD later this year. Lastly, we have no assets that are accounted for as held to maturity, and our portfolios are constructed under the rigor of our asset liability modeling approach. Our bank portfolio is AAA rated with a 3.1-year duration. The overall yield on the portfolio is 4.3% and the yield on investments made in the first quarter was over 6%. Our certificate company portfolio is highly liquid with over 55% of the portfolio in cash, governments, and agencies. It is AA+ rated and on average, with a 0.8-year duration. The yield on this portfolio was 5.3%, and purchases in the quarter were at a yield of 5.2%. On Slide 9, we delivered extremely strong results in Wealth Management on all fronts. Profitability increased 58% in the quarter with strong organic growth and the benefit of higher interest rates offsetting the impacts from market depreciation. Pre-tax operating margin reached nearly 31%, up over 910 basis points year-over-year and up 70 basis points sequentially. Adjusted operating expenses declined 2% with distribution expenses down 5%, reflecting lower transactional activity and asset balances. G&A is up 7% in the quarter as we continue to invest for growth, including the bank. Let's turn to Asset Management on Slide 10. We are managing the business well through a challenging market. Total assets under management declined 13% to $608 billion, primarily from equity and fixed income market depreciation and negative foreign exchange impact. Asset Management, like the industry was in outflows in the quarter, continued strength in our global institutional business offset a meaningful portion of retail outflows. Like others, we experienced pressure from global market volatility, a risk-off investor sentiment, and continued geopolitical strain in EMEA. As a reminder, flows in the prior year included $2.6 billion related to the U.S. asset transfer associated with the BMO acquisition. On Slide 11, you can see Asset Management financial results reflected the market environment. As anticipated, earnings declined to $165 million, reflecting market depreciation, foreign currency weakening, and outflows as well as lower performance fees than a year ago. Importantly, we continue to manage the areas we can control. Expenses remain well managed. Total expenses were down 13%, aided by an 11% decline in G&A, which benefited from lower performance fee compensation. We continue to make market-driven trade-offs and discretionary spending and remain committed to managing expenses very tightly in the current revenue environment. Margins in the quarter improved sequentially to 31%, returning to our targeted range of 31% to 35%. Let's turn to Slide 12. Retirement & Protection Solutions continued to deliver good earnings and free cash flow generation, reflecting the high quality of the business. As you are aware, the long duration targeted improvement accounting change went into effect in the first quarter. Our current period and historic results are now being reported under this framework. While this accounting change impacts GAAP equity and earnings, it does not impact our dividend capacity, excess capital, or cash flow generation, which are based upon a statutory accounting framework. In the quarter, pretax adjusted operating earnings was $194 million, up 11% from the prior year, primarily as a result of higher investment yields from the portfolio repositioning we executed over the past six months. We estimate that LDTI will reduce RPS earnings by approximately $50 million for full year 2023 versus the $63 million impact in 2022. As it relates to the year, we remain comfortable with the $800 million run rate taking into consideration the impact of LDTI and the benefit from portfolio repositioning and higher rates. 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 living benefits to further reduce the risk profile of the business. Protection sales remain concentrated in higher-margin asset accumulation VUL, which now represents over one-third of the total insurance in force. 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. Now let's move to the balance sheet on Slide 13. 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 1.3% of the portfolio in below investment-grade securities. Despite significant market dislocation in the quarter, VA hedging remains very strong at 95%. Our diversified business model benefits from significant and stable free cash flow contribution from all business segments. This supports the consistent and differentiated level of capital return to shareholders even during periods of market depreciation. In light of the LDTI accounting change, we incorporated a new non-GAAP disclosure in our earnings release of available capital for capital adequacy. This represents how we manage capital and is unchanged as a result of LDTI. During the quarter, we returned $641 million to shareholders and still ended the quarter with $1.3 billion of excess capital and $1.6 billion of holding company liquidity. With that, we'll take your questions.

Good morning. Thank you for taking my questions. I'd like to start by discussing cash and the outlook for rate earnings in AWM. There has been growth in certificates, and you mentioned a high-yield offering in the bank that you recently launched, along with additional brokered CDs. This should certainly meet the demand for yield in cash equivalents. However, do you believe that the current level of net interest income can be sustained moving forward? Are the rising deposit costs sufficient to counterbalance the shift to the bank, or can that shift help maintain stability at the current levels? Thank you.

Yes, we are indeed considering the performance of the sweep accounts, which gives us an opportunity to transfer more funds into the bank. This has been driven by their current performance and will enhance our yield. Additionally, as we assess the timing, we anticipate that the spread will also widen. Therefore, we are confident in shifting more funds into the bank for improved profitability, while also expecting the spread to increase over time as we make adjustments. So, absolutely, we believe this is a positive direction.

Okay. Thank you for that. And then at this point, through April, you've moved $3 billion, which I believe you previously indicated as your plan for the year. Do you plan to move further balances into the bank? And then beyond the balance transfers, do you expect that these new savings offerings could allow you to actually see organic non-transfer oriented growth coming out of the bank as well? Thanks.

Yes, regarding the cash accounts, especially in the first quarter where tax considerations come into play, we are seeing performance align with our expectations, and there is a slowdown, which provides us with an opportunity. We are assessing this further. Additionally, we see potential in our sweep accounts to enhance our position, and this is something we are actively evaluating.

Yeah. And I'll take your second question. So we just in March, launched a savings product. We'll be launching a brokered CD in May and then a high-yield savings account a bit later in the year. And we see the opportunity to garner more cash from clients of bringing it in from their banking institutions now that we'll have some of these products. But in addition to what we're holding ourselves and whether it's a sweep or either in our certificate, we have much more cash that our clients are holding externally in brokered CDs. They put money in that came into the firm or in money markets. And so we think we can garner some of that cash back in. So in total, there's about $66 billion of cash. We have about $44 billion. We actually think by offering the brokered CDs and things like that, that we will garner some of that, that have gone out to banking institutions that our clients have put money in that we feel much more comfortable having them at Ameriprise. So we think there's an opportunity there for us as we continue to build out the bank. And we are also holding a lot more cash as general so that our sweep activities is only about 4%, which is really always been around that level for transaction of 4% to 5%. So we feel very good that there is opportunity for us.

Okay. Thanks for taking my questions.

Hi. Thank you. I have a broader question about advice and wealth management, specifically regarding your outlook on margins. Do you still see potential for margins to improve, or is your objective more about maintaining them at the current level of around 30%?

Well, I think the way we look at it, listen, we are probably at one of the highest margins out there in the industry, including the big wires that have had banking activities for a long period of time. But money is, as I said, sitting on the sidelines and cash, we are holding up with $66 billion, some of that money, not necessarily from transactional activity at the hold for expenses and other things. Some of that money will go back into wrap. I mean, what’s so positive is we brought in $12 billion of client flows. We’ve been bringing in record numbers for us over the last some many quarters and that hasn’t been deployed yet. So as they put money back into transactions and contracts and wrap a business, that will also earn us fees. So I can’t tell you exactly what that margin is, but I would say, it’s an excellent margin and our business has some good opportunity that continue and so from my perspective I think it was a very positive quarter building on a positive VA last year.

Got it. Make sense. And then maybe building on your comments about organic growth. I mean, it has accelerated. It has been running at over 6% annualized the past couple of quarters in wealth management. Can you talk a little bit about what’s driven that acceleration in inflows and given the pipeline that you have and clients and advisors coming in. Do you see that as a sustainable run rate?

We think so because we are – our advisors are engaged. We’ve helped them with a lot of tools and capabilities and support. Even in this climate, we give them a lot of information and appropriate communications for their clients. Our market volatility, we help them really help our clients stick with their goals and what they need to achieve over time balancing out of volatility. We are engaging and bringing in a lot of good new client flows and deepening. And we are also adding highly productive advisors. So we added another 83 in the quarter who have very good practices. We have a good pipeline. So yes, we see it continuing. We are adding new capabilities like our e-meeting tool that’s going to help our advisors conduct even more meetings very efficiently. So we feel good about how we are situated in this climate.

Thank you. Good morning, everyone. Following the Comerica win, can you provide an update on your pipeline for additional financial institutions or wins, and how we should anticipate the frequency of these wins in the future?

We have added several financial institutions over the past year. Our recent win was with a larger institution, which took a bit longer to finalize due to their existing broker-dealer setup. However, we are successfully gaining business with other banks in the financial sector. We are now positioned to collaborate with larger institutions like Comerica, and we feel confident about our capabilities. They appreciate our service and the support we offer to their advisors, as well as the gold-based solutions we provide to their clients. We believe this is a solid foundation for growth moving forward. While I can't specify when deals will be finalized, we have a strong pipeline and foresee adding more business as we advance.

Great. And I just had a follow-up on recruiting. So advisor count was down very modestly on the franchise side and up a hair on the employee side, but down on a total basis from last quarter. So I'm just wondering, if you could provide us any perspective on this downward trend including reminding us of any first quarter seasonality and then I wanted to hear how the bank failures in March impacted both your ability to recruit new advisors, but also retain existing advisors in March, and now April because persistently we are pretty robust.

Yeah. So no, our numbers in franchisee are very strong and stable. Retention is very strong. As with anything I mean we have 7,000, so it doesn't advisors there. So you have some turnover in some of their assistant advisors; you also have some retirements that occur in the first quarter, but there's nothing different than what we've seen in the retention rate is quite strong and the assets are here. So we're not concerned about that as we go through succession planning, et cetera. As far as the pipeline, we feel very good. One of the things that people have told us is they value very much what we do and what we provide, but they also value the strength and the integrity of the firm and how we're positioned. I've mentioned a few accolades about how clients trust us. But when you have a very stable institution like Ameriprise that is able to really navigate these market circumstances when I would stand by their clients, that's what advisors are looking for as well.

Thank you.

Thanks. Good morning. My first question is about the Comerica partnership. Can you specify what type of assets from the $18 billion are being transferred to your platform?

It's a combination of different assets; for instance, advisors manage a variety of assets in the market. This includes a mix of wrapped assets, funds, and insurance contracts. What we have achieved is demonstrating how we can assist those advisors and their clients in deepening their relationships and expanding their client base for the bank. We are confident that the $18 billion will smoothly transition with that. There is potential for us to support their growth, which is what they are aiming to accomplish.

Got it. Thanks. And then on your initiative to introduce new savings products within the bank. Do you see the earnings characteristics of that as similar to the certificate balances or do you have a preference from a profitability standpoint within the bank?

We believe, actually, it will be higher based on the investment strategy and the other elements within it. So we will actually pick up the yield on that.

Thanks. And then just one last quick one. The $66 billion of total client cash you mentioned, does that include CDs from outside of Ameriprise as well as money market funds or was that predominantly CDs?

Yeah. So it would include our clients, advisors putting their clients in brokered CDs we have on the platform from financial institutions.

Hey, guys. This is Michael on for Alex. I was wondering if we could maybe get an update on cash balances so far in 2Q and maybe how that's trended on a monthly basis. All else equal, I kind of figure out what the seasonal impact might be on taxes. It sounds like you guys might have seen that in March and April already, but it looks like historically, that might be a 2% to 3% sequential impact. So any update on cash balances that you can give us so far in the quarter?

From that perspective, the situation appears stable. For accounts under $100,000, the percentage has increased from about 52% at the end of the fourth quarter to nearly 60% now. Overall, it is performing as we anticipated, and we feel confident about it. The situation remains fluid, and we are experiencing growth in certificates. Additionally, we are actively considering transferring more back into the bank once we complete our analysis.

Great. That's helpful. Go ahead. I'm sorry.

No. As I mentioned earlier, there's a seasonal factor when transitioning from the fourth quarter to the first quarter due to taxes. I can't provide the exact percentage, but there are definitely outflows associated with that.

Thanks. And then maybe for the follow-up. Can you help us maybe think through the NIM impact at the bank from the upcoming maturity roll on, roll off yield? Maybe the mix of assets between fixed and variable at the bank and what the duration profile of those might look like?

That's an interesting point because we have about $2.5 billion coming due, which will increase our base lease spread. Currently, as we evaluate the situation and look at the supply, we plan to maintain our existing strategy and mix, which is a duration of 3.1 years. We are confident in this approach, and the redeployment of the maturing assets will certainly enhance the yield.

Thank you.

Hi. Thank you. I may have missed it, but I think you had mentioned the reinvestment rate of the bank was around 6.5% at the end of last year. What was it in the first quarter and do you continue to invest mainly in MBS or is that strategy shifted at all?

The reinvestment in the bank is confirmed. From that perspective, I'm not sure I understand the question.

You are referencing the first quarter, not the end of last year?

Yeah. What was it in the first quarter?

The reinvestment yield, Walter.

The reinvestment yield in the quarter was 6%, I believe, in the first quarter, as I indicated and we're tracking at 6%. Sorry, I didn't get the question at first.

Okay. When you examine client allocations of the certificates, interest rates have increased, and it's currently about 25% of the mix. Looking back to 2019, it reached a similar level. Given that interest rates are higher and expected to remain elevated for a longer period in this cycle, do you have any thoughts on where that might head or what your expectations are?

We are certainly seeing an increase in client allocations as we move into the three and six-month periods, allowing them to meet their objectives. We believe this trend will continue. Additionally, as Jim mentioned, we will also be introducing brokered products in the bank, which should enhance our yield. Overall, I expect continued growth in this area based on the alternatives we provide to our clients.

Yeah. It's going to grow because we're bringing in more client assets, right? And not all of it's going to be deployed directly in the market. So there's going to be some that go into cash-type holdings. So some of it that clients will use for transactional activity and holding for emergency expenses will be kept in the type sweep accounts and others that positional cash will be put into things that are earning some of the yield that they're looking for. And a lot of these CDs are not necessarily long-term CDs, right, brokered CDs as well. So that's where the cash will grow. And some of it has been coming from the regional bank activity, I would imagine. So I feel like the certificate program can grow. That's why we're also going to offer our own brokered CD to garner some of that cash that clients want to move into the firm.

And we've clearly seen a pattern from basically what we call the cash reserve, which is the short term. And more cash basically going into the three and six months. So people are taking advantage of that opportunity because of the competitiveness of the rates.

Okay. Thank you.

Yeah. Thanks. Just a couple more on cash. So you had mentioned that $66 billion number, of which I think you have $44 billion. So as we think about the $22 billion balance, I guess, what would you think is a realistic expectation in terms of how much of that you could bring on to your platform and over what time period?

Well, Suneet, I think the way I would think about it is that that's roughly around 8% of the total assets now, which is a bit higher for our clients, right? Usually, it's around the 5% mark or something like that. So there's more cash being held right now. So I think as we go through this cycle, and people are looking for some alternatives coming from their banking institutions, et cetera, we think that we can garner some of that other cash coming in as well from banks or even as some of these CDs and other things roll over that we're holding can go into our own banking institution. But I also think over time, that some of that cash will be deployed back into wrap-type programs, et cetera, as the market volatility settles or as people feel more comfortable. So it's not as though money isn't being deployed into the market, it is, right? We had over $6 billion going back into wrap in every quarter. But that could pick up as well and other transactions can pick up. So it's hard for me to say exactly, but the idea is we're helping to bring more client flows in and then some of that goes into cash-type products, which we can garner our piece and then others will, over time, be deployed back in the market. So we think it's an opportunity for us.

Yeah. Understood. And then I guess, if we think about just the cash sweep balance, I don't know if you commented on this, but it was down, I guess, $6 billion quarter-over-quarter to around $10 billion. Can you give us some help in terms of how you see that $10 billion trending maybe over the next couple of quarters? And I guess of that $6 billion decline, I think some of it went into the banks, some of it went into certs, but can you give us some help in terms of where sort of the rest of it went because I'm having a little bit of trouble seeing exactly where that cash went?

As Jim mentioned, the total cash has increased. You’re correct that we deposited some into the bank, and a portion of that was put into certificates. Some also went into brokerage. The key point is that we have this cash available, and it's being managed within our overall strategy. Currently, we see a trend where sorting is slowing down and remaining within a specific range. It's important for us to note that 60% of our accounts are under $100,000, and the average account balance has decreased from $8,000 to $7,000, which is a significant factor in our assessment.

Suneet, I believe you had 46 going of 44, with part of that $3 billion from the $10 billion deposited into the bank. Additionally, a few billion went into certificates, but there were also cash expenditures for tax payments and other items. It's challenging for us, but we are experiencing an increase in client flow. Some funds may have been allocated to brokered CDs or other investments. Overall, I think we've performed fairly well compared to the industry, and we have seen a positive influx of clients as well. As I mentioned, it's difficult to pinpoint an exact number, as the situation is fluid regarding how clients manage their funds. However, the circumstances remain quite stable overall. The total sweep is approximately 4%, and the $10 billion primarily reflects a shift for the bank and various other factors, so I would recommend not viewing that figure in isolation.

Makes sense. And maybe just one last one on Comerica. As we think about that opportunity, should we, Walter, be expecting any incremental costs associated with that platform as we kind of move through the year?

I think, again, this has a short payback for us as you look at it from a P&L standpoint. So the answer is, obviously, there'll be some cost, but certainly, the revenue will do it and we have a very quick payback on it. But it's a good economic relationship for us and for Comerica.

Yeah. I mean you got onboarding expenses and stuff and moving the clients and the advisers and stuff. But overall, we think it's a good arrangement and one that will work for both parties.

Good morning. It's Michael Anagnostakis filling in for Steven. I wanted to ask about the cash per account metric of $7,000 for the quarter, which is certainly useful information. How does this metric compare to the lowest point you observed in the last cycle? I'm trying to assess the potential downside concerning cash as a percentage of assets under management. Thank you.

I really can’t provide specific figures, but I can say that the stability of that portion, along with the working capital, has always been a significant factor for us. It has dropped by $1,000 compared to the previous quarter. From that perspective, we feel very confident about it. It has remained a stable element, and we saw a considerable increase during the cycle, especially with the tougher balances. Unfortunately, I can't provide the numbers from that long ago.

Got it. No worries. Okay. So I did want to touch on Asset Management to expenses very well controlled. You reached that 31% low end of the target range. I guess, assuming stable markets, is the 31% sustainable run rate given the efficiency efforts you're continuing to deliver on or is there some downside to that? Just any color there would be helpful. Thanks.

I think there’s downside; it’s a lot of variability in it as you look at rates and look at mix. But certainly, the expenses are being extremely well managed from that standpoint. So that’s the controllable factor in it as we look at it. And certainly, as we look at hopefully that we stop getting back on a better pattern, but we’re certainly aligned with the industry where that is. And we certainly move into that 31% to 35% is basically you feel comfortable. But it’s, again, a lot of variability.

Good morning. Walter, I wanted to follow up on the customer cash balances. One of the earlier questions asked if you expect the earnings contribution from customer cash balances to remain stable. Let me rephrase that. What do you anticipate the earnings contribution will be for the next couple of quarters? Do you expect it to remain stable or increase? Could you provide some sort of range?

I can't provide an exact range, but I want to be clear. The key factors are related to the maturity aspect of the bank and the changes occurring there. As we experience maturities, this will increase the interest rates. We definitely see the situation slowing down, and the bank transfer will further influence this as we gain more confidence. Considering the timing with the rate increase, there is an opportunity for the net spread to rise. Therefore, I would say it is likely to remain stable or increase as we examine these factors, but keep in mind the rate fluctuations and other elements at play. However, the foundational stability of what exists today is important. If everything were to remain unchanged, you could expect it to be stable or increasing.

Got it. Stable to up. That's what I was looking for. Thanks. Now in terms of the 6% new money yields, I've definitely been getting questions on that. Like what are you buying exactly? Is it still RMBS? Is it floating rate?

We have a mix of floating rate investments, which are well-structured and of the highest quality. We are selective about our choices, but the yields are promising. We are patient, especially with AAA-rated assets, and feel confident sticking with these investments in the current environment. These are the levels we are focusing on. We benefit from having CTI manage this process and guide us. It is important to consider the majorities in this structure.

And the crediting rate on that, we'll call it, $1.7 billion of net deposits into the bank. Was that consistent with the cash sweep like 50 basis points or what would the incremental credit rate have been?

Part of AWM is its cost of funds, which is why we feel comfortable with that. We will evaluate the deposit betas if rates fluctuate. You're exactly right.

Good morning. Thank you very much for the opportunity. My question is on the Asset Management segment. Can you talk about fee rates on the flows leaving versus coming in? And then institutional tends to have a longer sales cycle. So any visibility into the pipeline there would be helpful. Thank you.

If we experience retail outflows, they typically carry a higher margin compared to the institutional side. The positive aspect for institutional flows is that some of the incoming investments are in real estate, which provides strong fee rates. We also have a decent pipeline for the future. However, retail outflows remain slightly negative overall due to the higher fee rates there. Hopefully, retail activity will improve. In Europe, the quarter was almost neutral, which is encouraging, and if that sector picks up, it could yield even better fee rates than in the U.S. Currently, the U.S. shows weaker growth, but redemptions have decreased, so we are optimistic about a potential turnaround. I believe we are seeing more stabilization, and hopefully, this will continue to improve as the year progresses.

Great. Thank you. And then my follow-up question. You were talking about additional synergies in Asset Management with integration to be completed by the end of '23. Those additional synergies, I know sometimes in Europe, a notice period may be longer. Are you talking about those synergies being announced or absolutely flowing through earnings by the end of the year? Thank you.

So we should garner about as it relates to not realized, but certainly garner around 57% of it in that range, 50% in this year. So it's tracking and you're right, it’s certainly what's going on, but we feel comfortable we're on track. Did that answer your question?

I was talking about the additional synergies, you...

Yes, we are making progress. We expect to achieve some of them this year and even more as we approach the end of the year and into next year, as we are currently expanding our technology integration efforts. This will allow us to continue with the middle and back office processes. However, as you mentioned, it does take a bit longer in Europe and the U.K. due to the different legal entities involved. Nonetheless, we are on track with our initial goals.

Yes. So basically, as we talked about, we're talking about in the 85% range, we will have not 57%, it was $57 million, we think will probably be the number that we will certainly not realize, but certainly achieve by the end of this year.

Thank you very much.

Good morning. I have a couple of quick follow-ups regarding Comerica. With the $18 billion in assets you're acquiring, once the onboarding is complete, how should we evaluate the margins on that $18 billion compared to your other non-wrap assets of over $350 billion? Will it be significantly better, similar, or how should we approach that?

From what I've observed regarding our direct contribution margin, it falls comfortably within our expected range. I've made a distinction between the profit and loss statement and cash flow, and from the profit and loss perspective, the direct contribution looks strong and acceptable as we evaluate this channel. It's balanced beneficially for both parties, and we believe this balance will support our growth in this area. Therefore, the contribution margins will remain robust and won't negatively impact our other operations.

Got it. Perfect. And then with respect to the 83 advisors you brought in, could you give us a sense of maybe the AUM per advisor relative to the AUM per advisor that you have now? And maybe a little color on their sweet spot. Are they in that $500,000 to $5 million net worth, what end of the spectrum do they come in at?

Yes, we are continuing to see a consistent pattern in the quality of our assets under management and the gross dealer concessions. The trailing gross dealer concessions are stronger, and we are maintaining growth in that area, which makes us feel very optimistic. We are being very selective to ensure that these advisors align well with our approach and relationships. Overall, we feel confident about their quality.

So Walter, so net assets per adviser a little better than your average?

I would tell you, it continues to be better than our average.

Got it. And then lastly, just on the capital management. It looks like your payout ratio as a percent of operating earnings is coming in around 80-ish percent, maybe a little less. Historically, you were at 90% or maybe even better. And I guess with the bank having grown a lot, should we expect something in that sort of 75%, 80% payout range going forward? Anything likely to change there?

We mentioned that we are growing organically, and while there is capital available, we believe we can manage it effectively. We indicated that the payout ratio should be in the 80% range, but we are open to adjustments based on market opportunities. At this point, the 80% figure seems reasonable and is likely already factored into most projections.

Yeah. We have. Thanks a lot.