Welcome to the Third Quarter 2022 Earnings call. My name is Lisa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you would like to ask a question, please press star and the digit one on your telephone. As a reminder, the conference is being recorded. I would now like to turn the call over to Alicia Charity. You may begin.
Thank you and good morning. Welcome to Ameriprise Financial T hird 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 two, 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 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 earnings release and 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 and 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. 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 are 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 in increasing rates to get inflation under control.
Having said that, it will lead to a slowing of the U.S. 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. For Ameriprise, the diversity and strength of our business allows us to deliver good outcomes even in challenging times, and you certainly saw that in our results this quarter. We continue to remain in strong client inflows in wealth management. 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 in our European business. In terms of adjusted operating financials, excluding unlocking, revenues were $3.5 billion, up 1%.
With that, earnings per share were up 9% to $6.43, and the return on equity was strong at 47.9%, which is consistent with this time last year. Now let's talk a bit more about our businesses. I'll start with Advice & Wealth Management, where we continue to deliver strong results. Despite the environment, we had good client flows as clients remained engaged. Total client flows were up 11% in the quarter to more than $11 billion. The mix of our flows reflect the environment we're in. We saw strong growth in brokerage, cash, certificates, and other products. As we expected, cash balances continue to be up sharply to more than $46 billion compared to more than $40 billion just a year ago. We're seeing good growth across our cash offerings.
Very importantly, our advisor productivity remains strong as we continue to reinforce our personal relationships and 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, and they like the technology and the capabilities we've added, which is helping them grow. Which brings me to recruiting. We had another very good quarter, adding 89 highly productive advisors. 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.
We continue to release additional tools, capabilities, and enhancements that help our advisors engage and meet with clients, deliver actionable advice, and improve efficiency of their practices. As part of our investment agenda, we've been very much focused on expanding our cash offering and growing our bank. The bank provides important flexibility in this rising interest rate environment and will continue to be a good opportunity for us to further engage and deepen our relationships with clients. We continue to move cash to the bank, adding $3.1 billion in the third quarter, and with that, we've been able to invest appropriately to garner additional spread. Today, our bank has grown to nearly $19 billion. We 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 & Wealth Management business continues to generate strong, profitable growth, and margins reached 27.8%, up 540 basis points. Now let's turn to Retirement & 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 and variable annuities without living benefits, as well as our structured products, as we have shifted away from annuities with guarantees. Therefore, our sales are down, but in line with the industry. We also made a shift in protection away from fixed insurance to focus on VUL and DI products. Life sales were also down, given the climate, but again, results were in line with the industry.
Based on what we've done to appropriately risk adjust these businesses, they continue to generate good earnings, stability, and solid returns in cash flow as a complement to our other businesses. Now I'll cover asset management. As you're seeing across the industry, markets have impacted asset levels from an equity and fixed income perspective. As a global asset manager with sizable presence in Europe, we're 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're seeing in the industry, investors have more of a risk-off perspective, and you have a level of tax loss harvesting taking place based on market depreciation.
Very critically in this environment, we are maintaining good investment performance, and we're continuing to maintain good 3, 5, 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 above medium on an asset-weighted basis. Our short-term performance has been impacted in some of our fixed income strategies based on the spike in interest rates. In Europe, some of our equity strategies were impacted because of our quality growth positioning. Let's turn to flows. In the quarter, we had outflows of $2.4 billion that included $1 billion of legacy insurance partner outflows. Positive flows in institutional were more than offset by the ongoing pressure we've seen in retail. In retail overall, we're in net outflows, but it improved a bit from a tougher second quarter for us in the industry.
We ended the third quarter with lower gross sales and higher redemptions than a year ago, given the markets. This resulted in $5.3 billion of net outflows driven by weak conditions. In U.S. retail, equity outflows remained generally in line with the industry. In fixed income, our results were behind, given our product mix. In EMEA, though retail flows remained under pressure, we did see some improvements in continental Europe, and overall flows were a bit better than the industry for the quarter. Turning to global institutional, excluding legacy insurance partners, net inflows were $3.9 billion, and we're seeing fundings get extended given the markets and some asset allocation calls. In asset management, we expect the environment will remain challenging. However, we think there will be opportunities as markets settle down over time and interest rates stabilize.
At the same time, we've been very much focused on integrating our BMO EMEA business, and that's going well. We continue to make good investments in the business overall, ensuring that we have the right focus to move forward in distribution as well as servicing and platform capabilities. We also have a very strong eye towards managing expenses in this market. Adjusted for the BMO EMEA acquisition, we brought G&A expenses down by 7% and will continue to be very focused there. As I look ahead for Ameriprise, I believe we will continue to be operating in these markets for a while. 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. 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're 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. Both asset management business momentum, higher interest rate environment, and expense discipline more than offset equity and fixed income market depreciation, coupled with significant weakening of the Pound and 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 the quarter, and we returned $632 million of capital to shareholders. For the full year, we remain on track to return approximately 90% of adjusted operating earnings to shareholders. Let's turn to slide 6. Assets under management administration ended the quarter at $1.1 trillion, down 9%. While AUMA 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 the total.
Overall, pre-tax earnings remained strong in this environment, up 6% from last year, excluding unlocking, with meaningful benefits from interest rates and strong client flows more than offsetting significant negative equity in 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 seven. 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 remained strong at $11.2 billion, up 11% from last year, with $6.4 billion of flows into wrap accounts and $4.8 billion into non-advisory accounts, specifically certificates and retail brokerage, as anticipated in this environment.
Revenue per advisor reached $819,000 in the quarter, up 7% from the prior year from continued enhanced 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. Pre-tax operating margin reached nearly 28%, up over 500 basis points year over year and up 390 basis points sequentially. Adjusted operating expense declined 3%, with distribution expenses down 7%, reflecting lower transactional activity and asset balances. G&A is up 12% in the quarter and up 7% on a year-to-date basis.
The higher than normal year-over-year increase in the third quarter was driven by unusually low prior year expenses relating to staffing levels and T&E, timing of expenses in the current year, and continued expenses associated with higher volumes and continued 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 2022 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 cashes and working cash accounts for our clients were over half of the balances less than $100,000.
Our client crediting rates are 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 is approximately 150-200 basis points above the spreads from walked balance sheet cash. Over the past several years, our total client cash balances have been consistently 5%-6% of total client assets. This positions us well to capture the opportunity from rising rates and lock in those benefits over the medium term. In 2022, spread earnings will increase by over $600 million versus the prior year, and we expect this trend to continue into 2023. Let's turn to asset management on slide nine. We are managing the business well through a challenging market. Total assets under management declined 6% to $546 billion, primarily from equity and fixed income market depreciation and unexpected significant negative pound and euro foreign exchange impact.
As I mentioned, the BMO acquisition broadened our geographic diversification with about 35% of the assets in EMEA. However, this diversification increased our foreign exchange translation exposure. Asset management, like the industry, was in outflows in the quarter. Continued 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. Margin in the quarter declined to 35.6%, which is slightly above our target range of 31%-35%. 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 in discretionary spend 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 & Protection Solutions continued to deliver stable earnings and free cash flow generation, a clear result of our differentiated risk profile. Pre-tax adjusted operating earnings, excluding unlocking, were $203 million. In the quarter, we completed our annual actuarial assumption update, which resulted in an unfavorable pre-tax impact of $172 million.
Sales in the quarter, similar to the industry, declined as a result of the volatile market environment, as well as management action to discontinue sales of variable annuities with living benefits to reduce the risk profile of the business. Protection sales remain concentrated in higher-margin asset accumulation in VUL, which now represents 1/3 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 of investments 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 double A, with only 1.6% of the portfolio in below-investment-grade securities. Despite significant market dislocation in the quarter, VA hedge effectiveness remained very strong in the quarter at 97%. Our diversified business model benefits from significant stable free cash flow contributions from all business segments. This supports the 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.
Thank you. We will now begin the question and answer session. If you have a question, please press star one on your touch-tone phone. If you wish to be removed from the queue, please press star one again. We'll take our first question from Ryan Krueger with KBW.
Hi. Thanks. Good morning. My first question is, could you give an update on your excess capital position and any moving parts in from the quarter?
Sure. I'll take that. The number is $1.3 billion. 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. Then separately, in retirement and protection, the earnings are over $200 million this quarter ex unlocking. They had previously been running more in the $180-$190 million range. Can you help us think about the run rate earnings in that business going forward and also, you know, how that portfolio repositioning will impact that?
Yeah, I would say that yes, it did increase a little, but I think the run rate that you're talking about in the 180 range is certainly one that we anticipate going forward. Yes, the interest rates will 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 stay shorter duration now we're taking advantage as we move out. It will go up. I would say I would start with the 180 range.
Got it. That's helpful. Thank you.
We'll take our next question from Brennan Hawken with UBS.
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. You know, 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. That's number one. 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 is eased up a bit?
As it relates to 2023, I indicated that it probably was better to say it was at least two. We would add $3 billion next year. We obviously will gauge the situation. We certainly have the capacity to do more, both from the availability of liabilities and capital, and we will assess it. And the key element associated with that is also the availability of investments that meet our standards, both from a quality standpoint and diversification standpoint. That will be a factor in that. We feel very comfortable with the balances we have. That will be the source of that. I would probably modify and say at least $3 billion.
Okay. Thanks for that clarification. Pledge loans, have you seen any shift in demand with higher rates or have those continued to grow?
On that point?
On the pledge loans side.
Oh, the pledge loans. I'm sorry. Didn't hear you. The pledge loan is actually right now, it's adjusting with markets, but it's growing steadily and we feel very comfortable with it. From that standpoint, it's total of that is in the over $1 billion range from a total standpoint with our program. We feel very comfortable with it.
Great. Thanks for that. Then in the wealth business, you know, you guys do a great job of returning capital to shareholders and have a long track record there, and I think it's appreciated. Have you considered maybe shifting and having an allocation to growth capital and, you know, using some of your excess capital to actually continue to build on the recent success that you've had in adding advisors and generating that really steady net new assets in the mid-single digits and maybe even pushing that a little higher? Have you considered any of that, or is that you're just sort of comfortable with the recruiting approach that you've taken so far?
Yeah, we're very much focused on continuing to bring in quality recruits. We just don't want to associate people to us and be in 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. 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're also building out our IPI group, which is our institutional business, and we're winning some nice accounts there and growing the advisor force. We're also doing some work on our remote channels, and expanding that activity that we think will also be a complement. You know, along those lines, we are putting money to work, we are investing, et cetera. It's not so much about the use of capital, it's more about continuing to drive in the areas that we think we can generate both good returns, but more importantly continue to build out against our value proposition.
Great. Thanks for the call.
We'll take our next question from Suneet Kamath with Jefferies.
Great. Thanks. Just wanted to go back to the bank, if I could. I guess in addition to adding more deposits, you know, we're thinking another lever you guys have is to reinvest some assets that are maturing that the deposits are currently supporting. 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 new money today?
Let me take a stab at that. It's Walter. Approximately, because we're short duration, if you look at where duration is a tad over 3, 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 we're gonna pick up at least 300 or 400 basis points versus what's maturing. But I can have Alicia get back to you on that.
Okay. That's helpful. Thanks. Then I guess for Jim, you know, towards as the quarter progressed, you know, we were getting quite a few questions on LDI in the UK and, you know, 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? How you're thinking about that as, you know, an opportunity or where the risks are? Just wanna make sure that it's clear in terms of where your exposure is, if possible. Thanks.
Sure, Suneet. I think as everyone is aware, you know, this is a very large market. It's over $1.3 trillion in the UK, depends on the day. And it's really used by almost all the pension funds there, supported by the regulatory authorities. The long-term gilt and European interest rates, you know, increased dramatically in September, and that resulted in clients having to post additional collateral to maintain their LDI coverage ratios. You know, the volatility was something that wasn't necessarily seen in the past. It was in the 15-18 standard deviation type event, which is really abnormal. That volatility affecting, you know, the bond market, interest rates going up, et cetera.
Clients have maintained their LDI positions, as you would expect, the systems, and we think this will normalize over time, but they had to, you know, post more collateral and then free up some assets to do it. This market will come back around in a sense of the stabilization and the 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. We do expect some adjustments in the market going forward. You know, some players would have to reduce leverage a bit.
There may be some more operational adjustments to make sure that the markets can flow a bit more easily as you get these type of dislocations. You know, with us, you of course saw an asset level decline, meaning from the depreciation of the market, but we really haven't seen major outflows in any fashion. In fact, there's some new business that came in. We feel like this market will recover, and we feel like we can still do a good business there, and it won't have a significant long-term effect.
Just to summarize, near term, more of a kind of AUM potentially earnings issue as opposed to anything more significant than that?
Yes. Yes. Exactly.
Oh, terrific. Okay. Thanks, guys.
We'll take our next question from Alex Blostein with Goldman Sachs.
Great. Good morning. Thank you for the question. First, just around some of the cash dynamics at Advice over in Advice and Wealth, and kind of how that's trending. Clearly great to see deposit beta is still very low at this point in the cycle. As you look forward, I guess, how do you think that will progress? 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.
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. We also, again, the bank allows us the capability, as I talked about growing and certainly reinvesting more directly with a bank institution. As far as the deposit betas, you know, look, we do a competitive scan each week. We certainly evaluate it as rates go up, and we look at the competitive elements as, 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 it relates because our main focus is to ensure that our clients are getting appropriate rates that are competitive.
Got it. Walter, just to make sure that I understood, are you saying you're seeing an improvement in demand from third-party bank sweep or no real change in terms of what we've seen over the last quarter?
I would say this is a healthy environment, but it's a healthy environment than certainly we saw back a couple months ago from that standpoint. Absolutely.
Got it. Understood. Jim, one for you. There's 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 kind of 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?
Again, I think, you know, the market's going through a level of dislocation right now and 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 and International, and that's going well, and that's, you know, consuming some of our time and attention. At the same time, we know that this is a time for us to really engage our clients and maintain it, and 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 and et cetera, et cetera, 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 something we have on the plate.
Got it. Thank you, guys.
We'll take our next question from Andrew Kligerman with Credit Suisse.
Hey, good morning. Maybe staying on the topic of M&A, but on the divestiture end.
The market's been pretty volatile, and just in general, block 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. As we said, we wanted to survey the markets, see 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 interested in more what I would call high-quality books. In a sense, they've been much more focused on general account assets so that they can invest with using their various structures and capital situations. 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. At this juncture, we actually feel very good about holding business. We actually de-risked the business tremendously.
We moved out of a lot of types of businesses that have a bit more of that, both volatility or long-term tail. Our mix of business, including, you know, our variable annuities without living benefits, is 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 even saw in the current quarter this has been a nice stability for us as you get the appreciating markets on the equity side. Now Walter is able to even invest out longer and get higher yields on the book, which is good.
You know, in our long-term care book, you could see the quality of that even over the current years and number of years. Here again, there might be some opportunities as people start to get more informed on this over time that we'll see, and I think we're starting to. 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 type of businesses we invest in, the type of businesses that we move, you know, and handle the book to manage. We actually think it's a great complement, particularly in an environment like this.
That's really helpful. Jim, maybe just shifting over to asset management. Per the presentations, you know, clearly in retail, the 3-5- and 10-year numbers are excellent versus peers, but the 1-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?
Again, good question, and I think we've mentioned it at a little higher level, so let me dig a little deeper for you. Overall across our portfolios, even for the one year, they're very good. There are a few pockets where we have some underperformance, but it's not by a lot that really brings the averages down. Some of that's in our fixed income. In some of the longer duration, because of the rise, the spike in interest rates as quickly, our teams were much more, you know, more focused on the credit side, and so the duration was a bit longer. That impact. Now, that will come and reverse around as we get further out, where the yield will be good, et cetera.
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, and 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, et cetera. We have more growth quality-oriented portfolios. As you would understand, value has performed a bit better in this market. Even though it's down, it's been down less than growth-oriented. Those as benchmarks underperform the benchmark. Our clients there understand that. That's why they invested in the portfolios, and they know and feel good about what that is over the longer term. On a benchmark basis, that's why you got the underperformance.
Makes a lot of sense. Thank you.
We'll take our next question from Craig Siegenthaler with Bank of America.
Thanks. Good morning, everyone. My question is on brokerage cash sorting. How do you expect sorting activity to trend over the next 6-12 months, and what do you see as the direct impact to both money market fund AUM and cash balances?
Let me start, and then Walter wants a comment. We already have, in what you've seen, in the growth of our cash. There has already been cash sorting occurring. The growth of cash itself, if you call it in a liquidity category, is higher than our $46 billion because money has gone into money markets, and they have gone into shorter duration funds and some, you know, brokerage activities. With the growth that we have, this is more of the continuation of the growth that's more in the transactional, held-to-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 tide of cash has grown because people have moved money to the side lines.
The only thing I would add there is, I think Alicia said yesterday that over 50% of this transitional working cash is less than $100,000 or $100,000 or less. It's stickiness is there, and certainly we are competitive in what we do. I think the sorting is less of an issue for us from that standpoint, because in the higher tiers, we are competitive, and we constantly evaluate, like I said, weekly to ensure that that stays. It's a different model that we have. I think it's demonstrating its stickiness.
Thank you, Walter. Sticking with brokerage cash, what are your longer-term targets for both off-balance sheet cash and then on-balance sheet cash inside of the bank? I'm thinking when you reach more of an equilibrium in your cash mixes post the bulk transfer effort.
Let me try take a shot. Listen, obviously we have a growing situation, certainly with getting additional cash from our current clients and new clients coming in. We think 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 and where it's going to go. That is something from a directional standpoint, very sticky. We do see, you know, certainly potential to grow. 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 in garnering the higher yield with the low risk profile that we do and to ensure that.
I would say that you'll see the percentage going over the bank increasing as we progress, as we feel comfortable. It's all situational driven. That's why I said, you know, when I said my talking points $3 billion, it's probably at least $3 billion because we do see in this case, but we Re-evaluate that there's a substantial opportunity to use the bank, not just for the investments we're talking about to grow the capabilities that we have to meet our clients' needs. Also with deposit products and other products that they're developing at this stage.
Mike.
Yeah. We'll be launching a number of deposit products in the bank, starting in the first quarter, and then high-yielding type 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 actually grow the deposit base.
Thank you.
Take our next question from Kenneth Lee with RBC Capital Markets.
Hi. Thanks for taking my questions, and good morning. Just one on the asset management business in terms of the margins. You know, obviously above the target range this past quarter. Wondering if there's any specific factors driving that, any potential benefits that are non-recurring. In terms of the outlook for margins, you mentioned potential erosion based on FX. Just wonder if you could just further expand that. Thanks.
On the margins, as you saw, certainly as it relates to the markets that we looked at last year, they're right in there in the 40s%. We mentioned that was certainly getting the benefits from the market appreciation was taking place. Now you're seeing from that standpoint, we've already absorbed the lower margin and we indicated to that associated with the BMO business, which is the nature of their business. This 35.6% range is that above, slightly above our target of 31%-35%. That's been impacted by the markets primarily. There's no abnormalities that we see other than the foreign exchange and the other things that have impacted that. As I'll mention, the market basically depreciation substantially took place in the September timeframe.
You'll 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.
In foreign exchange, you know, we had 40% of our assets, as you know, 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 enough over time, you know, because the dollar's so strong, maybe start to come back in a fashion that would be a positive. The combination of that and depreciating markets have really squeezed that a bit.
Gotcha. Very helpful. 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.
Well, okay. The key elements that drove it from the actuarial element was that we adjusted our mortality tables and from the standpoint we looked at our experience and is so that was one. We also saw our lower lapses coming in and therefore extending our living benefit benefits growing. Those are the primary. Well, again, nothing out of pattern. It was just that was the trend line.
We did not adjust our interest rates where we had lowered them a year ago, and you can see the rise in interest rates.
Yeah. Good point.
Gotcha. Very helpful. Thanks again.
We'll take our next question from Thomas Gallagher with Evercore ISI.
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? You know, 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 ROEs. But just curious if you can give some perspective on what level ROE, ROI, however you want to describe and how that would compare to the return you'd get from share repurchase.
Well, it's interesting because, listen, I think as you look at it, the amount of free cash flow we generate and the amount of excess capital we have and our ability does not, you know, inhibit in any manner, shape, or form our ability to continue to grow and invest in our bank to grow and honor the benefits of both. We constantly are making that evaluation, assessing our excess as is the situation and the generation that we have. I would say the returns for the bank are certainly getting to very respectable levels. 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.
One of the things that we constantly do is we are not basically stopping or reducing our investment in the business, and that is a key to us. I would say they're not mutually exclusive.
No. I think you'll also find that the bank now will become a nice complement. It's not just, you know, for what it is today, but strategically it will actually help us expand our relationships, deepen them with clients, offer a lot of other products that's situational for the wealth business. We actually think it's a great diversifier and a great complement. That capital that we're deploying will get a very good return on it.
Okay. Thanks. Just to 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 look at the $46 billion all-in of balances and listen to everything you've said so far. On the revenue side, I can and I'm going to compare it to the run rate you had in 3Q to then where they should go to in 2023. On the revenue side, I can get somewhere in the $300 million-$400 million pre-tax earnings revenue pickup headed into 2023.
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%. Walter, curious if you can give me some idea whether I'm in the right directional place on the revenue pickup and then also cost of crediting.
I'm not going to get into the forecasting, Tom. I will say as you see what the trend lines are, and certainly the elements of potential rate increases and the balances we have. There's a lot of variables that go into it. Certainly we have a very, very strong trend line as we certainly go into the fourth quarter and going into 2023. We feel with the complement of both the short cash coming out of the sweep accounts and the investments there and the spreads that we're picking up in the bank. You can imagine it is going to be a positive trend as we move into the fourth and in 2023.
Okay. Walter, sorry, just to 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? Or do you think that that might move up from here?
I would say that what we're saying is there is an increase in crediting rates, and there will be. As rates continue to be persistent or go up, we will make adjustments. Again, based on size of account and whether it's really a transactional or not in keeping the cash. As Walter said, some of that will be offset based on some of the rollover in assets we have in the bank and how to invest as well as what we transfer. Also, you know, there's a question, is the Fed going to continue to raise rates? I mean, it's pretty much we think it's going to go up again. I know there's a lot of things that the Fed's going to pull back next year. You know, inflation is so persistent, I'm not sure that's the case.
if it is, you know, we have the ability to invest out. I think we're feeling very good that what we get from the bank, what we get from the overall business will offset the appreciating markets and give us a nice complement here.
Okay. Thanks.
We'll take our next question from Steven Chubak with Wolfe Research.
Hey, good morning. Wanted to start off with a question just on the organic growth drivers in AWM. The 6% organic growth, certainly a good result given the choppy tape. It looks like you recorded some wins in the financial institutions channel during the quarter. Now, how material were some of those wins from an NNA perspective? And could you help frame the organic growth opportunity that you envisage within that channel?
Yeah. We are getting some nice wins, and we're actually have a good pipeline of even some larger size types of deals, arrangements. Excuse me. As those deals occur, the assets usually follow. You know, in that sense, you have that pipeline that occurs, and then you bring on the advisors, et cetera, to help grow those channels. We feel it'll be a nice growth business for us. Again, based on the size and scale compared to our other businesses, it's not of the scale yet, but we think this will grow in scale over time. 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. 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. We're 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.
The only thing, I mean, the way I would position it to you is we've always had a certain level that is held in our cash based on how we do asset allocation, how we have it for our clients' liquidity needs and in emergency or even for cash to reinvest in cash balances that our 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 to cash above what we're holding that had gone into some of these other types of money markets and other things and brokered CDs, et cetera, et cetera, and structured.
I would probably say we are not seeing that there would be a dramatic falloff in the cash that we're holding. There may be some adjustment because it's gone up a bit. We feel very comfortable that within that type of range of percentage to assets, because again, this is not where people are holding huge amounts of cash just short term. 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, you know, asset management business as well and go to work in our wrap accounts. I still think that 5%-6% would be rational as the clients as we've seen over the past.
Helpful color. Thanks so much for taking my questions.
We'll take our next question from John Barnidge with Piper Sandler.
Thank you very much. Appreciate it. Can you talk about your outlook for expense reductions in asset management with the BMO acquisition now coming up on a full year? I know the one-year rule is important for European regulators.
Synergies from the BMO acquisition.
The synergies.
Synergies from.
Synergies right now are actually on track. As we talked about, you know, when we announced, we are tracking on synergies. Obviously, from that standpoint, the synergies between us are what?
The next year or so.
For 2023, that's when I would say the bulk of the synergies will be achieved as we go. We'll also then complete our most of our transition expense activities as they relate to it. We're on track, and we're performing well.
Most of what you saw in the reduction in expenses wasn't necessarily from synergies yet in the current periods. That's more of tightening up our expenses, as we go in, and the team's doing a good job of rationalizing what that is. We'll look to maintain control of those expenses. We are still making some nice investments in asset management, but I think the synergies will be helpful as well as we go in, that will offset some of the compression that we're seeing in the European markets.
Thank you. My follow-up question. Seasonally, mortality is the best, strongest, or healthiest in three Qs annually. Did that pre-COVID cadence to mortality trends return for the Retirement & Protection Solutions life business? Thank you.
If you're talking about the mortality table that we adjusted from the second-
No, I'm just talking water.
The mortality in our normal life business. You know, again, our mortality in the life business, we're using basically industry tables right now, and we are basically saying that our trends are totally consistent with the industry tables that are out there.
Thank you.
Our last question will come from Erik Bass with Autonomous Research.
Hi. Thank you. Maybe for wealth management, just trying to put it all together. It doesn't sound like there's anything unusual that benefited margins this quarter, and you'll still expect to see some benefits from interest rates going forward. Do you see a margin in the 27% range as sustainable near term and something that could potentially even move higher if markets stabilize?
I would say, listen, our margins base business are 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 as being a larger element as you look at the bank and you look at the sweep cash. Yes, the answer is yes, we do see the margins will be increasing based upon the current assumptions that we see.
Thank you. Last thing, just on the new advisor recruiting outlook. Can you just talk about how market conditions are affecting your ability to recruit advisors? This was a good quarter this quarter, but 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 in the areas and levels that you've been seeing. I think we are finally breaking through as far as what advisors understand about our business. I mean, when we compare what we do, our capabilities, our technology, et cetera, I think our advisors are very impressed, and we get very good compliments. I mean, nine times out of ten, our advisors join us, say that our capabilities, technology, support is way beneficial from the firms they've joined us from, whether they be, you know, the independents or the wires, et cetera. We feel very good about what that is as long as we have the conversations.
Perfect. Thank you.
That does conclude today's presentation. Thank you for your participation, and you may now disconnect.