All right. I am very pleased to say this will be my last fireside today. I am not kidding when I say it is my pleasure to welcome Walter Berman to the stage. Thank you.
Glad to be here.
Walter is the longstanding Chief Financial Officer of Ameriprise Financial. Under Walter's financial stewardship, Ameriprise has established itself as a leading platform among diversified financial services companies, overseeing $1.8 trillion across your wealth, asset management, and insurance annuities business. More recently, as the cost of recruiting has risen, Ameriprise's focus on discipline and profitability has made it a bit of a lightning rod in that debate with investors in the tug-of-war in between growth and operating leverage. Please join me in welcoming Walter, to today.
Thank you. Thank you. The environment has certainly been very aggressive in the last couple years as it relates to recruiting, both in pretty much all sectors, from the independent broker dealers, the RIA, and the wirehouses. If you step back and look at us, our foundation is built on organic growth, and I mean by organic growth is really our investment in same store. If you take a look, our definition is the advisor and clients are there in the beginning and at the end.
We invest, and we've continually invested in their growth, both in growth of, in their infrastructure, growth in their practice acquisition, acquiring assistant advisors to basically expand, and providing the tools and capabilities. When we see this aggressive nature, it certainly affects us from the standpoint of competition for our existing advisors, and I'll discuss that in a minute.
But when it comes to recruiting, we are very balanced in how we approach it since our core is growing the base, and that's where the profitability is in expanding that. We augment it with external recruiting. We'll compete because our value proposition is demonstrating to the advisor recruit coming in how we create terminal value for them, how using our tools and capability, integrated capabilities that we provide, their productivity will increase and their terminal value will be available to them as they look at their expansion and where they're going. It is a challenging environment, and we'll certainly compete in the inorganic side, but we will stay core to our capabilities of investing to get growth in the organic side of it per our case.
But it's an interesting world fueled by, I would say, this risk on and this belief that probably nothing's going to change, interest rates will stay high, equity markets will be great. At some point, you have to assess what your economic value proposition is to your clients and to your advisors and how you operate a network that really, in some cases, you're only making money on cash.
Yep.
We're more balanced on the AWM side, approximately 30% is from cash, the rest from core, and we do that basically because we provide value to our clients and our advisors.
Right. It's interesting, we jumped right in here on recruiting, which I love. It is sort of the topic of the day. Sitting in meetings yesterday with one of your competitors in the independent space, I hadn't heard this, but when the Commonwealth deal got announced, apparently recruiting packages went up immediately. So curious whether or not you saw that and whether or not you think, if that's right, might we see some rationale seeping back into that market now that that deal is closed and the opportunity has passed?
Yeah, certainly we understand the Commonwealth deal. Certainly, what we saw there was, listen, Commonwealth's a great broker dealer, and certainly, the advisors are valued, and we participated within that, and understood the economics of it. At a point, we just said, no, it didn't make sense to take that approach. Now that supposedly everything is settled and that they're at their levels and they retained at a certain level.
Yep
Are they going to be focusing on additional opportunities and now, trying to get additional recruits, which I think is your question?
Yeah. The spirit of the question was sometimes you can see elevated turnover when there's a deal in motion, right? What my reading of it was, the market got hotter, more competitive because of that dynamic, and therefore, was that somewhat episodic to the deal?
I think that motion is, I think, is over at that stage.
Yep.
And I think now it's getting back to now focusing on what they call recruiting, which is some other people's retention.
Yep.
From that standpoint, I do believe in this environment, it's going to continue at a fairly rapid pace, because the ingredients are there. The non-controllables of both the equity markets and the interest rates are there to participate, certainly, and people do believe that there's opportunities to gain share, as it relates, and they'll look at potential opportunities on scale driven by operational scale, but also AI. But again, that's going to only go so far. At some point, I think it is going to have to come to a reckoning about really the ability of generating profitability in core.
That's when I think is going to have to people where have to make assessments about what they do with their business model. That business model, if they change as it relates to affecting the value for the clients.
Or affecting the value for the advisors, is going to cause an element of concentration exposure, and then a reassessment. Or if you get basically an adjustment in the marketplace.
Yep.
That is clearly going to be a. To me, it is concentration. At this stage, I think it is the fuel is still there, and we will see it continually growing, and we will just stay true to our knitting.
Sure, sure. There is. You referenced a lot in there. There is definitely a lot of potential for disruption in the marketplace. So, hanging tight and being ready to be agile is probably a sensible approach.
Yeah. It is not just the independents, it is now the RIA, an element of that, and looking at the different models there. So on the RIA side, if you are clearing and then using turnkey sort of capabilities, that certainly has its own economics. But the economics of that are interesting because they basically, I think, are replicated in many cases by what we do and independent broker dealers provide. Advisors have to make a choice about what works for them within that network, the degrees of freedom that supposedly they will have, their ability to basically sell or create value versus creating value inside of a broker-dealer network.
Those are going to be elements that are going to have to be considered. But I think all those are going to be a factor of where the environment is, because the environment is fueling it right now.
Yeah. Yeah, for sure. Okay. I would love to take a step back. You mentioned your strategy, so would love to think about it from that frame of reference. So, you have grown the wealth business significantly, discussed having the asset manager and RPS businesses as complements. Does it still make sense to have the three businesses together, and what are the leverage points or benefits from the integrated model?
Yeah. You have to step back. When basically Ameriprise was created or it was acquired by American Express, it was primarily an insurance company with a distribution, captive distribution. That was the origin and the source. When we came into existence as Ameriprise, we evaluated what the real elements of potential are for our shareholders, and we saw it was more in the distribution capability.
We started then evaluating the risk return of the RPS at that time and looking at it, and that's when we started saying, "Yes, it is valuable because it is core." A lot of the clients had all these products and capabilities, but we said the risk profile for us and return profile had to be adjusted. That's when we went through adjusting as we cycled through on basically stopping, long-term care was stopped, and how to manage that more effectively from that standpoint, which we did.
Sure.
We ensured our situation with Genworth and other things to protect that side of it. Then we also basically started paring back from stopping living benefits, and selling off and reinsuring and risk transferring on fixed annuities. So we've shaped the entire risk return profile of RPS, and it's a long way of saying, if I didn't have it, I wouldn't certainly buy it, but I had it. How do I create the best value proposition, not only from the financial side of an insurance company, but also our clients had huge product capability in there, and then how do it provides a tremendous amount of capability to our advisors with the solution sets that we create. So we brought that to a point of allowing it to coexist in a risk return-friendly way.
Yep.
It met its objectives as an insurance company, fed in from the standpoint of AWM support, from that standpoint, all arm's length.
Yep.
And then the issue of the leverage points that come in from CTI on its ability of fund to fund to manage that pool on a fund-to-fund basis and get the benefit. So the leverage we get from each one of these businesses is very complementary, but compete, and now especially with Signature Wealth and other elements, that capability gives a huge element of leverage across. Those are the business leverages, and then you have the tech leverages that come and the balance sheet leverage that are quite complementary when you think about what we return to shareholders.
Yeah.
And what allows us to do it is the stability of RPS's earnings. The semi-stable, if you look in different environments of AWMs, and then you have the cyclicality of AM, it forms a perfect synergy capability of allowing source free cash flow of 90%.
Yep.
And it gives us that ability to return to shareholders.
Yep.
And have that stability between those three businesses working together on arm's length basis.
Yeah, like a ballast, basically. Makes sense. You got financial advisors, it is all got to be arm's length. That is helpful in framing the discussion. Now, when we drill into your biggest business, which is AWM, the one that I focus probably the most on, talked a lot about recruiting here in the beginning. We chatted a little bit about it on the third quarter call. You spoke about your philosophical approach and that you want to be focused on discipline and be careful, and that the street is a little bit overly optimistic in what they are willing to pay. That all makes a ton of sense. You guys have had, and Jim laid out some various purposes for the advisor financing, such as practice acquisition, succession.
Makes a ton of sense, but how do you protect yourself in those situations to ensure that you are continuing to deliver the sort of elevated returns that your track record would support?
Yeah. You have to step back, and I think you have framed it the right way. Our model has always been to focus on growing our advisor base.
Yeah.
By investing in them, that is how we have grown, by giving them capability of acquiring practices or having different succession strategies, whether it is acquiring them and allowing the sale within the network, which optimizes. Because any time an advisor moves or sells, there is disruption. It is a standard within the industry that 15%-20% of the assets do not move.
Yep.
In our case, 20%- 25% don't move, then you have the disruption of that. We have always invested in that. We have always invested in infrastructure capabilities, allowing them to continue to use our tools, integrated tools, to get their terminal value up through productivity of serving their clients. That's a cornerstone of how we operate, and that's what I was explaining before. What has now happened is we are just continuing to do that. When advisors are now seeing these deals that are out there and looking at, they're evaluating trade-offs like anybody.
They come, we discuss what their objective. We understand how they've grown. We understand their potential to grow. We understand their investment strategy. They want to see if they have. They want a minority interest. They want to basically be acquired, and what their strategies are.
We provide the resources to allow that to happen and the capabilities to do that, but it comes within a commitment that goes two ways.
Yep.
That's not changed, and that commitment is based on if we're making strategic investments.
Yep
Then you deal with liquidated damages. You deal with the commitment to us that we're making to them as it relates to the collateral that is posted from that standpoint, their growth opportunity. It's not for everybody. It is based upon we see the potential, and then they value the creation that we bring to the table as an integrated capability that we provide, and then we basically continue. All that's happened now is, as the differentials have changed, people are having discussions. Not like it's out of control. It is basically natural when.
Yep.
You see these arrangements out there, they want to understand that trade-off. Do I leave? I stay. The key is they come and discuss, we evaluate with them, and it's a perpetuation of what we've been doing. On that basis, now you're just looking at whether it's independent broker dealers offering prices or it's RIA options as it relates. All we're doing is continuing to invest in them and growing that way with them, so we feel it's just a perpetuation of what we've been doing before.
Yep. Yep. When you think about the stuff, like, for example, when it's succession, right, you've got as long as I've been covering the wealth space, they've been talking about the graying of the FA population, right? So succession is probably as big a topic today as it ever has been. You think about the financing of moving that book when you got an advisor that wants to retire, right? Is the payback done through just like maybe a haircut, a production payout on the book, or is it the capital directly returned, you know, as a normal loan would be?
Well, there's two things. Listen, one of the things that with us that we've done is, you know, the advisor network has really not grown.
Yeah.
On that basis. With advisor succession and retirement or other elements, we have been building within the practices, bringing in assistant advisors, allowing them to grow, allowing them to bring clients, allowing them to buy into the practices. So that is a perpetuation from that standpoint.
Got it.
When we look at the economics of this, it makes sense over the long term. We know this is going to grow because we basically, that's the model. We grow more organically than pretty much any of our peers. That is in the equation. It's all factored into that commitment of their growth, ours, stimulating that growth, but also ensuring we have the right protections.
Yep.
That ensure that connection to us from a strategic standpoint. Like I said, they have to evaluate staying or going because there is a price to pay.
Right. Yep. Okay.
Make sense?
It does.
Yep.
Thank you. So you guys have you are a little bit newer in the larger bank part of the market. You had some success with Comerica. Now the Comerica deal happened, M&A happens, but now you have HBAN coming in. So would love to discuss that market a little bit and your outlook there. The right way to think about it is we had Comerica move off in the third quarter. There is a little bit of tail left, right, with Comerica, and then you have Huntington coming on in the fourth quarter largely, right? Do I have the sequencing right? How did you discover Huntington as a potential client, and what is your outlook for that channel?
Sure. So it is interesting. You know, we got into this business several years ago. We built the capability. We saw the potential of it, and Comerica came along, and it was a long negotiation with them. What they were looking for is basically what we were offering. It more how to grow their client base and the capabilities within their client base of the broker side of this and really create that value proposition for their deepening of their on this side of the business.
We, candidly, it was one of the most successful events that we have had. We talked about what we could do, how we differentiated, and the support we would give to that network, and how we were growing, and it was working extremely well. Of course, came along with, you know, Fifth Third. I would say, how can I say this in the best way?
The best advertising, the best endorsement we had was from Comerica [to] Huntington. They were the best. Basically, what they discussed with Huntington is what we did and what we committed to do and how we successfully achieved that. I would say they were a major factor as a proof point. Not just what we say is here was a live example of it. It was unfortunate. We tried to demonstrate, but we couldn't. They also lost the majority of.
Yeah.
Could not participate in that because of the contractual arrangements of it. But the Huntington was really result of what we accomplished with the Comerica and their openness about how to operate with us. It was the benefits of that. Comerica, yes, is finished. There are small portions run off from that standpoint. Huntington has been pretty much onboarded for the wrap and those aspects of it. Still, we are now transferring the annuities and other transactional act with.
Yep.
Majority of that, I would say, is in the fourth quarter of the $28 billion. Probably 20-some-odd billion will come through and the balance comes through, but the earnings ones will all be reflected in the fourth quarter. 260 advisors moving, very high retention, very high. On that basis, the balance will come in the first quarter for the Huntington portion. Then Cadence, which is a bank they acquired, that will come on in the second quarter, and that is around $4 billion.
Four [audio distortion] Okay.
What that has now positioned us is clearly, that we differentiate ourselves versus other people in that, and the capability we do to deepening.
Yep.
And that relation. Yes, we are still getting our active on small, medium, that has been very good, and even some large potential there. So we certainly have the capabilities.
Yeah.
We have the unique value proposition from that standpoint, and we have the capability to grow in that. So it is a good opportunity for us.
How long is that sales cycle? I mean, we are talking chunky institutional deals, right? It is pretty long?
Large ones are, it's two-year cycles, because again, depending on whether they're independent or they're under a contract.
Yeah.
But the medium and small cycle within six months.
Okay.
Yeah.
I believe you spoke to that, and you sort of referenced this before, but the pipeline there is still really good.
We feel very comfortable with it, and we feel it's again, it's what we bring to the table.
Right. Right, yeah. It is about more than just numbers.
Yep.
Okay. Shifting gears a little bit to rates and NII. You have had a lot of success in standing up your bank over the last few years. It was a new thing for you, and now you have some like 20-some billion dollars in the bank, which is great. You are in the process of migrating on the rest of the loan book, the pledge loan book that you had done with a partner.
That is going to migrate onto the balance sheet. Could you talk about timing and when we should expect that? What led to the decision to work with a partner in the first place around that capability, and why you have the comfort to assume the full book there?
Yeah, so that was time to market. Listen, Goldman had a great product and still does, and on that basis, it really allowed us to offer pledge, which is a key element for recruiting and for existing advisors. It is from that standpoint, excellent partnership, and we have migrated the percentage of underwriting that we have taken, so right now it is in the 60-some-odd percent range that we have. We will bring on the balance of that through 2027, as we conclude with Goldman and go on to a new provider.
That will give us an additional capability to penetrate our base. Right now, I would say, on pledge, we are probably under-penetrated by around 50%-80% of that we have a big opportunity there. Certainly for recruits, it is a major opportunity from that standpoint.
But it's a huge capability for us to basically build on the pledge loan element. Again, the bank has turned out to be an excellent element of earnings for us, stability of earnings, and deepening of our relationship with our client base and our advisor base. We are certainly with checking and the expansion of pledge and certainly HELOC and the credit card, and other products, it really is giving us that foundational base of having capability for meeting clients' needs profitably with strong earning and capability that sustains, not just being cycled on sweep accounts.
Right.
And with the spread that we earn on the bank and the way we invest it's a real attribute to our capability and sustainability of that.
Yes.
We feel very good about that, and it's the source of we're trying to diversify now. Yes, sweep is quite stable. Sorting is not an issue from that standpoint, and the majority of the balances are under $100,000, $6,000 average count. It's the level that you need for a transactional capability there, and we're just looking to build on that liability base, either to leverage off the 40-some-odd billion we have in third-party money markets or.
Yep.
Or CD products. It really, it's with the turnover and everything goes over from the standpoint, maturities, pay downs, and new money coming in, it's going to basically be a good source of stable earnings.
Yep. When we think about the loan book moving on, what kind of financial impact should investors expect from that? It has been quite a while since I thought about purchase accounting, but I know that usually it comes on with a discount for the provision. How should we think about it?
We are in the midst of doing that right now and negotiating with that aspect of it. I would say that will, again, you would buy in that portion. It has already been prearranged, and we are working through the evaluation of it. But with, like I said, the ability to grow now, with the combination of bringing that on the book, it will be a positive.
For sure. For sure. Okay. There is some component of duration in your interest-earning assets sitting in the bank. You spoke to the stability of that earnings, which definitely is directionally similar to that. We have seen rates backing up recently. Can you give us a sense about what the right way to think is about any potential yield pick up, from reinvestments and the maturities that you just regularly have in the bank?
Yeah, I gave you a little insight. Listen, right now, for the recent, we brought on, it is around a duration 4.1%, picking up around 5.7% yield. It is there. Our total turnover, which I mentioned before, is about $4 billion. That will give us an opportunity as that book gets repositioned, to pick up now. Even though rates are down, they are still up 40-some-odd basis points from where we were. It is an opportunity from that standpoint. The short rates, who knows where it is, but because we do keep a balance of asset liability on the short end there. The prospects are good, to have net interest income increase.
Yep.
We look forward.
Okay. Got it. And of course, loan growth will be a part of that too.
That is the. Yeah, that's. It's good on both the earnings and the penetration factor.
Right. It also, I would assume, helps to tighten the advisor's connection to Ameriprise, right?
Right. Remember, we only focus on our advisors and our clients. This is totally focused on internally AWM capability. No outside clients.
Got it. You talked about being 50%-80% under-penetrated. Is that the goal, and how long do you think it will take you to get there to bridge that gap?
I would say it does not happen overnight, but our expectations are that there is certainly movement in near-term elements. We would certainly make substantial progress to improve our penetration on that basis, yeah.
Yep. Yeah. I mean, we track the loan growth. The loan growth is solid. It is off of a low base, but it is really the.
And that is what we know our customers, and it is really, it is a two-way street on that one. It is profitability and penetration and meeting their objective sets.
Right. I mean, you guys are obviously on the, what is it, the left side of the balance sheet with the assets, right? But if you can get into the right-hand side and do the liabilities too, it is just.
Yep.
Yeah. Okay. Profitability, big focus for Ameriprise. You guys have a rich history and focus on discipline. That is a watchword. Generated high 20s- 30% margins for the last few years. We just got a rate hike and have a few more coming. You spoke before, 30% of the earnings is cash, so it is a much more balanced approach for you all. Given those rate tailwinds, is the bias for margins maybe a little bit higher in the near term? Or at this point, is it just that the rate sensitivity is sort of lesser and we are further along in a hiking cycle?
So listen, within what we control, the answer is yes. I certainly anticipate looking at what we think is going to occur. That margin is certainly going to stay in that range.
More importantly, it's the balance of it, like you said. It's ensured that the earnings power coming out of the bank on its cash side and the other certs and the sweep is really quite stable, and we understand the dynamics and the risk-return profile is quite good. We certainly, as we talked about before, managing our the operating side on the core to ensure that we still get the benefits of investing and still the benefits, operating benefits, that we get from our efficiency and augmenting with AI a number of capabilities.
I would say the margins, we feel very comfortable with that. Again, it's a factor of our value proposition, and that's a factor that we bring to the table with our clients and our advisors, that stability on both sides of it.
I would say the margins we feel comfortable with, and the sourcing of it is balanced, and that's the most important part. It's not skewed just to cash.
Right. Right, right. Had this discussion yesterday with Jed from Morgan Stanley, who runs that wealth business. The Right? We're in a really interesting moment for the wealth management business with AI. There's sort of two levels of debate. One is on the cash side, which I feel like is kind of not that hard to get your head around. It's just whether or not these AI tools are going to get people to optimize their cash to a greater degree. Maybe, maybe, I don't know. Who knows? It's not a huge thing for you, as you said. It's just a portion. You have a balanced business, so it's less of a big problem, or a big risk from an Ameriprise standpoint.
But one thing that I think is more sort of pernicious would be if we see a hybrid AI solution, so it's basically a better version of robo. When robo came out a decade ago, everybody was convinced it was the end of the wealth management industry, woe is me. None of that happened. An automated solution I don't think resonates with people. I think people like to have an advisor.
But what do you think about the risk of either a new entrant or an incumbent that decides they're going to go after more scale through semi-automated or advisor-facilitated tools, and then weigh on price? We end up in similar to what we saw with the asset management industry when beta started to take over. There was just this challenge around constant pricing pressure.
Listen, we have invested in an integrated model that really does serve the intent of the customer in a way with the advisor in the middle.
Yeah.
Candidly, to us, it is the advisor judgment and augmenting it with the capabilities that AI or other tools bring. We have the tools today on an end base, and that is the value proposition. We are investing to make sure those AI augmentation points.
Are established to continue it. I do not see the disintermediation taking place the way people are talking because.
Yeah.
It will allow the advisor to be more effective, more efficient to provide. Is it for everybody? No. But for the networks and improving the value of an advisor is critical, and I do not think that is changing. Again, it may get certain people to shift, but I think it is the advisor capability in that middle using these tools and capabilities is a stable act that we believe will continue. I do not know what the person said on the other side, but that is.
No one knows.
Again, it's self-starters, other people doing. I do not know. I just personally would not like an agent investing from maybe a.
Right. No, me neither. I mean, I do not have that level of comfort at all with those tools. It is nothing that is happening today, right? There is not even really any tangible signs of it. People are more just thinking out a few years and wondering.
Yeah, but again, it is something that builds on it, and you see it, but I do see it is really not replacing the advisor. I really do. What the advisor brings to understanding the solution sets across and to be able to basically have that discussion, understand the variables in a way that really becomes part of the relationship they have with.
Right.
Not only the direct family, but certainly the potential extension of that.
The younger generation. Yeah. Yeah. It is true, and you know from our own experience in working with these tools, if it is something you know a lot about, then you can get really good output out of these AI tools. If you do not know a lot about it, the results are way more mixed. A lot of people do not have the confidence in financial planning and whatnot. It is a totally reasonable point. I would love to touch on where you sit in the independent channel. I cover a bunch of independent firms.
When I look, and it is a little harder because you guys do not, your disclosure is a little different because you have distribution, but using distribution as a proxy for FA compensation, it would put you guys at a little bit lower payout than some of the others.
Is that where you sit in the marketplace? Can you talk about how you are able to do that? It obviously helps your profitability remarkably, but how you are able to do that with the advisors and still continue to resonate in the way that we have been talking about today?
Yeah, because again, it is what the value creation that we bring into that equation, and I would say we are certainly in the main competitive, but it is more looking at we always evaluate our value proposition versus what others bring to the table.
Yep.
About what the capability to grow and create terminal value and the consistency and continuity of practices. We are an integral part of their growth, integral part of how they service their clients, integral part of the entire operating framework. There's a price to pay for that. People judge that on the basis of growth and what we allow. It's not just that you're paying something, it's what value you create for growing the existing advisor base or penetrating your client base. That's the way it's been measured about both from a financial standpoint, an operating standpoint, a risk standpoint that we bring to play, and that's what creates the difference of people assess all the time.
Yep.
I mean, people just don't pay money for basically saying, "I'd just like to pay more to you." There's a value creation that's there, and that's the judgment that goes into whether they're in the network and looking or they're looking to basically leave the network. It's that trade-off of, and when we believe that value proposition of constantly investing and demonstrating the proof points of it.
Is financial planning still?
[audio distortion]
Yeah.
Really, that's what we're bringing to the table is that deepening relationship. Our ACE, which was Ameriprise Client Experience, which really is constantly evolving the advisor with the client and penetrating and really understanding their solution sets as they evolve through their life cycles and having the full capability of measuring solutions, not just a commodity of investment.
Yeah. Are you finding the engagement with the tool remains robust?
It is a cornerstone to what we do. Again, with AI, it is changing, it is evolving, but I believe we have that core infrastructure and that cultural value that is there and still that we don't take for granted, we continue to build on.
That's great. That's a great note to end on. Walter, thanks a lot for your time today.
Thank you. Pleasure.
Thank you.
I'm glad you're the last one.