I'll read my disclaimer. For important disclosures, please see Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs, the use of recording devices is not allowed. If you have any questions, reach out to your Morgan Stanley sales representative. All right, with that out of the way, I'm thrilled to have with us today Jason Tyler, Chief Financial Officer, and Steven Fradkin, President of Wealth Management from Northern Trust.
Thank you.
Thank you so much for joining me this afternoon.
Thanks for having me, and congratulations on the conference so far. Seems great.
Thank you. Thank you so much, Jason. It's so great to have you here. And Steven, thanks so much, too, for joining us. We're gonna start with Steven. Just let's talk a little bit, Steve, about what is going on in the wealth business, and then we'll shift gears to the overarching views on Northern Trust. But I recall we did a deep dive into Northern Trust's wealth management business a couple years back and had many Zoom meetings, and it's very nice-
Mm-hmm
... to be able to be in person.
Agreed.
And Northern Trust Wealth Management has been in operation for well over 130 years, and now look, you have not the whole time, but 40 years you've been with Northern Trust and having served in a variety of roles and leading wealth right now. And I know that Northern recently published a book, The Secrets of Enterprising Families.
Correct.
Can you share some of those secrets with us?
Well, but it's only for our clients right now. Look, I think the genesis of that book was really around codifying the learnings that we've had, not just how to manage money or provide a loan to an affluent family, but the learnings we've had working with these families for 135 years through up and down and challenging family dynamics and the rest of it. And I think the reason that we were well-positioned to write the book, which is really a first in our industry, is first, we've been doing it 135 years. That's what we've done. Second, just for perspective, today we're serving 67% of the 20 most affluent Americans. We're serving almost a third of what they call the Forbes 400 most affluent Americans.
We have an institute of 175 faculty members studying 40 areas of importance to wealthy families. The day-to-day interaction with these firms has all come together to enable us to write this book. The book is not available on Amazon. It's only for our clients right now, but a lot of the learnings are around less about portfolio theory and so forth, and more about how do families work through the inevitable sequence, birth, employment, having a family business, death, kids, all the things that happen in life. We've seen pattern recognition on, I'll call it, better and worse ways to navigate that, and so we brought that together and codified it for the first time in our industry.
With the goal of?
The goal of making sure that clients weren't reliant solely on the point of contact with their teams, but making sure they get the best thinking of Northern Trust always. In any company, there's dispersion as to who you work with and where you sit, and if you really have that expertise, you should be able to codify it, and we chose to take up that challenge.
Okay, great. Well, let's shift now to how you're managing the business from how clients should manage their business. Think about intergenerational wealth transfer, et cetera.
Mm-hmm.
When you're managing wealth business, you know, with a multi-year time horizon, but also, I'm sure, a day-to-day finger on the pulse of the KPIs-
Yep
... how are you running the business? What... Maybe you could help us understand what your top KPIs are and overall strategy for wealth. Just to put it in context for folks in the room, wealth represents close to 40% of Northern Trust's revenues, and the wealth AUM has been growing at about a 6%-8% CAGR over the last 5-10 years, with family office having, I believe, the highest underlying growth-
That's correct
... out of all of the sleeves that you run. It's 30% of your overall wealth management at Northern, so big piece of the business. Just to step back, strategy, and how are you keeping on top of that strategy?
Yeah, so when you think about measuring the performance, you of all people, Betsy, would know, there's lots of different ways to measure, and so the measure. And I've been at Northern Trust, this is year 39 in different roles, and the measure that I anchor to most actually is, how are we doing relative to the competition? It's easy to get caught in the, what's our sequential performance, what's our year-over-year performance, what's our performance versus plan? But, you know, the plan could be good or not so good. So in the aggregate, when I think about how we wanna look at our business, we have to outperform peers, and so we look every quarter. And, you know, segment reporting, a lot of flaws to it, but how are we doing on trust fees? How are we doing on revenue growth?
How are we doing on net interest income? How are we doing on expenses? How are we doing on asset accumulation? And we quadrantize, if that's a word, how we're performing, not that we're worried about any given quarter, but you gotta be cognizant of the trend and how you sit. So that, competitors is probably the number one performance metric that we look at. But beyond that, in looking at growth, fee income is really important to us, not just total revenue, so we're really zeroed in on the growth in our fee income. Efficiency is important. You've heard Jason, Mike, and others talk about the expense to trust fee ratio and making sure we're not that our expense growth is linked to our sort of predictable, more stable fees. We look at market share.
We create a, I'll call it a faux market, because the market's so big that you can't, even when you're big, market share of the total wealth market is... But we can look at that peer group and see how are we doing in asset- assets under management, assets under custody, and so forth. And then lastly, there's, there's also client satisfaction. You know, you can have a lot of great financial metrics, but if you're seeing erosion in the satisfaction from clients, that's gonna get you. We don't over-index to any one. It's triangulation amongst all of those metrics.
And the peers that you're looking at, are you able to see this from... Would I be able to see this kind of data, or is this data that you share-
It's-
among peers that are blinded and then?
No, it's mostly publicly available information, which has its flaws. You know, if you're comparing yourself to a wealth manager who is equity-biased, and the equity market goes up, they're probably gonna do better than everyone else. But, you know, most firms do a reasonable job of segment reporting, again, with all the flaws that is inherent in that. But the way I think about it is, any individual comparison is probably flawed because, you know, some put mortgages in the wealth business, some don't. You know, there's a variety of just differences. But when you look at the aggregate, the aggregate doesn't lie. If everyone is outperforming you on assets under management, it can't be because they all have a different business model.
So we just use that as the proxy for where we are, and we know that it's imperfect, but it still gets us anchored to the overall story.
Sure. And then one of the other elements of differentiation comes from you know, the client market that you are servicing. And, if I recall correctly, you're really focused on the ultra high net worth, high net worth. Can you remind us what that... how you define that group of folks in terms of ultra high net worth and high net worth, you know, average AUM or things like that? And then, is there any interest or, you know, how you're feeding that, right?
Yeah.
- that group? Thanks.
So, one, we serve affluent families across the continuum.
Mm-hmm.
We have people with $3 million, we have people with $30 million, $300 million, $3 billion, $30 billion. All are welcome. We try and think in terms of lifetime value of a client. You know, our starting point is: Can we help them with the problem they're trying to fix? If we can help them with the problem that they're trying to address, how do we think about it through a shareholder lens? And I'll give you a simple example. If you take someone with $7 million, just, you know, random number, and they're 90 years old, and they have no kids, from a shareholder point of view, that's a very different profile than someone with the same $7 million at age 30, earning $1 million a year with two kids.
So not all, in financial terms, not all clients are created equally, and we're trying to think through, where can we add value, solve the client's problems, and reward our shareholders? Coming to your ultra high net worth client, you can use a different number. Generally, informally, we use that number at $100 million and above. Now, again, that doesn't mean people below $100 million are not ultra high net worth in my vernacular, but, what we tend to see is that one of the great things about our business is that when you talk about wealth management, generally, it's a massive market. It's got good growth dynamics. It's got a lot of competitors.
When you look at Northern Trust, we're tilted to, whether you call it ultra high net worth, or people with $30 million, or $50 million, or 100, you know, $80 million , people who have a great deal of financial complexity. And the more financial complexity you have, in some ways, the better positioned we are to help. If you have $1 million, we can help you, but it's stocks, bonds, cash, paying your mortgage, getting your kids to school, through school, and so forth. When you start creating more wealth or have the good fortune of more wealth, you've got trusts, you've got banking issues, you've got, family education issues. Just the complexity, the accordion gets bigger.
Our focus, history, and expertise is really built more on the complexity side, which, from a business model point of view, is harder to replicate. Everyone wants to be in wealth management. That's harder to replicate than mass retail.
Can you talk a little bit about client acquisition? What are the funnels that are delivering new clients to Northern Trust?
... a lot of our clients are direct word-of-mouth, do a good job. They have friends, neighbors, family members. We get a fair amount from what we call centers of influence, which is, the attorneys, the estate planning attorneys, and so forth, who are helping clients with their needs. And we've been creating forms for them for literally a century. So we're kind of a bible of trust forms. We have an annual symposium that attracts 2,000 centers of influence—2,000 people who are what we call centers of influence. They dial in or come in person to our symposium to hear what is Northern Trust seeing. So we foster these relationships, and when they have a client with a lot of complexity, they have confidence with us.
The other more emerging one that I would point you to is digital marketing, and that might sound quizzical to you a little bit because if the nature of our clientele is very affluent, you wouldn't necessarily think that they're, you know, sending digital inquiries in, but it's extraordinary. They are, and they do. Everyone's digital, and we ran an ad recently in relation to our book, The Secrets of Enterprising Families, and, you know, we got a lot of inquiries, but we're able to evaluate those inquiries, study those inquiries, and there were billionaires, there were ultra high net worth families. Doesn't mean they'll all become clients, but it's digital marketing is gonna be a powerful piece of the pie over time.
That's great. You're... that's very interesting insight. Thank you. Let's lean into growth a little bit. So when everything you're looking at, what are the biggest opportunities to accelerate growth from here? Where's the next leg of the growth coming from?
Yeah. So, one, remember that we're operating in what most pundits would say is a great demographic business. The wealth management sector, you know, if you talk to BCG and McKinsey and Capgemini and so forth, everyone has different projections, but good core growth demographics or projected demographics. And the relevance of that is, you know, as we often say, you know, smart people in bad businesses often do poorly, and people of average intelligence in good business can do very well. We're trying to be smart people in good businesses, but we have a good demographic. Within the wealth management demographic, most projections say the upper end of wealth is growing five times faster-
Mm.
-than the rest. So we start by trying to get ourselves in a good business, and we think we are. Second, family office. When you think about, well, okay, within your wealth business, where are we seeing some exciting opportunities? As you alluded to, Betsy, our Global Family Office segment, which is a subcomponent of our wealth business, has consistently grown faster than the rest of our business. Again, rich getting richer. These are generally families with $500 million or more. We've built a global franchise in that business, I would say. We've been doing it for 40 years. And, you know, you're hearing a lot of firms talk today about launching a global family initiative. Good for them. We've had one for 40 years and are well-positioned.
So we feel very good about that segment of the market and increasingly more global within that segment. Second would be, and these aren't in order, just-
Mm
... the ultra high net worth. Again, if you look at families who are $100 million or more, if we use that as the proxy, they have complications. You know, getting rich is complicated. It's a good complication to have, but you just have different issues than the rest of us. You have investment issues, you have banking issues, you have trusted fiduciary issues, you have estate planning issues, you have wealth transfer issues, you have issues with educating your kids, and depending how big and complicated, and you have more toys and, you know, all sorts of things. We're doubling down on that segment because it's very important. Third would be... a third example would be what we call workplace services or firm-to-firm.
This is where we're working with the managing directors of a private equity firm or a law firm or a management consulting firm. High white-collar earners, they're doing great wherever they are in the wealth accumulation phase, but what they don't have is time. They're billing 2000, 2200 hours. They could probably figure all this stuff, this stuff out themselves. They're, you know, good schools and all the rest of it, but it's hard to bill 2000 hours and be a spouse, and be a parent, and be a friend, and so Northern Trust can come in and help them. And then last example would be something we call internally the venture portfolio.
Not as in venture capital, but as in, what are the smaller pieces within our wealth management business that are growing very fast, that could get lost because they're small? We got a $2.8 billion business, and it's great, but it's not $280 million, it's something smaller. We isolate those to watch them much more closely, to make sure we're resourcing them appropriately enough for their long-term potential. So an example there would be something we call virtual markets. These are markets where we don't have a physical office, but we already have clients. The demographics of that city are great. We may or may not put an office in there over time, but we want to make sure we really double down on that market. Nashville would be an example.
We don't have an office in Nashville, but we have great clients, it's growing fast, and we want to make sure we give it the requisite attention. So the point is, we see lots of sub-segments, even within our business, that provide growth opportunity for us in the future.
One of the other potential channels, more advisors or, you know, folks that are providing support and advice, is that a potential for delivering more client inflow?
We are not in the team lift-out business.
Mm-hmm.
We have generally been an organic grower, sort of earning clients one brick at a time. We have had some great success with the changing landscape of financial services. There aren't that many firms that look like Northern Trust today relative to 20 or 30 years ago.
Mm-hmm.
And so if you were at a firm—if you are at a firm today that, that has changed a lot over the last 20 years, but wanna be sort of back with our style of firm, we had this happen in Jacksonville, we had this happen in Philadelphia, where we came upon people who looked like us, talked like us, thought like us, had our kinds of credentials. So we don't go out looking for teams per se, but when we find-
Mm.
-people who wanna fit in our ecosystem, we'll take them.
Okay. Any challenges that you're looking to address?
Look, in any business there are challenges. The two that come to my mind, one would be just... You alluded it, to it earlier, Betsy, competition. Everyone likes this business now. I personally liked it when, you know, they didn't.
Mm.
You know, they were focused on other financial services activities. So there's always competition, and that's why we're extremely focused, not just in our capabilities or our metrics, but just watching every day what everyone's doing, so we can learn and adjust. The second thought that comes to mind is technology. Not so much that it's a challenge, but the world is shifting very, very fast, and expectations are shifting very, very fast. One manifestation or example of that is we have many offices that are cashless. We don't have tellers. We're a bank. You know, like, this would've been unheard of, you know, when I came into the industry, but now we have offices, full-scale offices, and no tellers.
So in the world of Amazon and Uber and so forth, people are—their expectations for speed and ease are extremely high, and so we've got to continue to invest in that functionality, that flexibility, to make sure that we're not an outlier when they pull out their phone, you know, after they take their Uber and so forth and so on. You don't want them to feel like they're working with a bank. So that's—it's not an issue unique to us, but it's one we've got to navigate.
Okay. And then lastly, just on the wealth business, on the first quarter conference call, we learned about a bolstering of the team in asset management that collaborates with wealth. Maybe you could speak to what's going on there, why was there the call-out, and what are you looking for in the partnership there with them?
Yeah. So, you know, if, if you... Some firms have combined wealth and asset management. We have not. They're separate.
Mm-hmm
-entities. I think that's important in our view because we take a fiduciary standard. It can't just be, "Hey, we've got this wealth management or asset management arm. Whatever they have, we offer." We don't do that. We treat our asset management arm just like any outside manager. And Daniel Gamba, our President of Asset Management, if he were here he would tell you that, 'cause we had him on hold for something for a period of time, which he didn't care for, but that's what it is. Here's the big shift. Daniel has joined us and really come in and embraced the power and importance of wealth management to our asset management business. And so when he thinks about product development, he's not just thinking about what's going on in the market, and should we offer this new ETF?
His starting point is, what does Northern Trust Wealth anagement clients need? That's, that's got to be first and foremost in his mind. Secondly, he's, he's calling with our people, not that we need them every day, but when they can be helpful with a particular client or prospect, they're, they're all in. So he's brought in, I think, a sea change of, positive, energetic support, and I think that's why it was called out.
Got it. Okay, very good. Thank you for that. Okay, Jason, we're gonna turn over to the bigger picture, Northern Trust as the full company, talk about the financials a bit. First off, any updates to the guidance that you have outstanding?
No changes to guidance numbers that we gave in April.
Okay, so everything's going smooth sailing?
Well, I wish the guidance numbers were higher, but-
Okay.
Things are similar to what we anticipated in most regards.
Okay. Can we just ask a few questions on deposits?
Okay.
... You know, the win in 1Q, you had a positive bump in deposits, and that helped drive the net interest income beat. And you indicated back in April that deposits had begun to move a little bit lower in the beginning of the quarter. Is that trend still underway here?
Deposits have been flattish from a volume perspective, which is good. There had been obviously a trend down as clients were reallocating, but so far what we've seen in the quarter, very flattish, spreads a little tighter. And so it's mostly what we anticipated coming into the beginning of the quarter, and that's played out through the first two-plus months.
Are we seeing still the shift from non-interest bearing to interest bearing? Is that still happening?
That's very much flattened out. It's what I refer to, it's more in rounding at this point, in terms of an overall trend. And so we might see another tick down or up in terms of the percentage, but in general, it's very even that trend is flattened out significantly.
Okay. So then lastly, on NII, you have the Visa B share, which-
Yes
... you are taking advantage of, right?
Yes.
And so that's gonna have a bit of an impact on NII in the quarter, right?
A bit. And just for people that aren't following this closely, we were shareholders of Visa B shares, and so now that we're able to convert and then sell those, we'd always held that security, not because it was a strategic asset, but because we weren't able to liquidate it without a significant discount. And so the strength of our capital base, it allowed us to just be patient and hold on to it, and so we did. But now that we're able to convert it to A shares and liquidate it, we are taking advantage of that, and we're doing it deliberately, but not in a rushed fashion. And so the recent change in Visa's position is, now we're able to convert half of our original position and sell that in three tranches.
The first tranche was we were able to sell in April, mid to late April. That has been executed. We'll be able to do another tranche right at the end of the quarter, and then the next will be in August. The impact to that is actually less from an NII perspective, because if you think about it, and if we had rough numbers, $900 million pre-tax, and we're able to sell a third of that, it doesn't actually provide a lot in terms of what we're adding to our investment base. So you think about if whether it's deposits at $100+ billion or and then split that in assets, in terms of being at the Fed overnight or being in securities, it actually doesn't add a lot to that $100 billion base of earning assets.
But it does add to equity, and so the impact is more from a leverage capacity perspective, market value of equity. So it enables us to just have stronger capital and will enable us to think more about share repurchase and other components of how we invest the balance sheet.
Right. Can we dig into that a little bit?
Sure.
How are you thinking about that with regard to share repurchase?
Yeah.
Because clearly there's a nice capital benefit to this for you, which you've always had, but now it's just realized and flows into the reported-
Right
... you know, regulatory results. You know, the underlying question here is, with the higher capital ratio, how long are you okay with holding this level of capital? You know, is there a desire to lean into growth more organically, to the degree that there's demand, versus M&A, versus buybacks? How are you thinking about that?
Sure. So you're right that we run capital levels well above regulatory minima. But we also are thinking about what it looks like on an absolute basis relative to our history, which we feel is a good guidepost. And from that perspective, we also have to think about what's coming from a regulatory perspective, so Basel III Endgame and other dynamics. Now, you and I both know that's not gonna-- it's not gonna limit us-
Right
... at the same time. So practically, what we think about is, where are our peers? It's ironic, there was one of our very large clients who's just in to visit us last week, and they're not depositing $200,000. They're depositing hundreds of millions or even billions of dollars in different points in time, and it's a very strategic relationship for us. They do much more than just simple balance sheet deposits. And so it's something where they look at us, and they're doing due diligence on our balance sheet, and they're choosing us over our peers, whether they're other trust banks in some instances or GSIBs.
And so we've got to look at those at where we are on a relative basis to continue to attract and ensure that the most sophisticated asset owners, not just domestically, but around the world, appreciate the strength of our balance sheet. So that's something that we're always gonna have in mind when we think about how much capital to hold. And then as we think about, but at the same time, we are already, and what we think of, the way we analyze our balance sheet, not just CET1, but also as we think about leverage capacity, we're obviously in a good position. And so we say, "Okay, then what do we do?
Is it? There are other ways to deploy it in terms of M&A. Steve talked about the fact that even in the area of the business where we'd like most to bring on new clients, it just doesn't always fit from our perspective to bring on teams. And so it's great for us to bring on groups of clients, but not we haven't figured out how to do that in a way where we're bringing on firms, and so we don't think there's big deployment there. Then the next thing to do would be RWA deployment, investing in the business. We did that a few years ago in Steve's business when we talked to our clients and talked about the fact that we have demand for their lending needs. We don't see that as an incremental source of RWA deployment, and so that does leave share repurchase.
So we'll do that, and you'll see that likely at an accelerated level, but not in a way that we're gonna back up the truck and write a huge dollar and write a huge check at any given point in time. We can just have a higher pace and ensure that the things we're looking at from a regulatory perspective and from a peer perspective continue to be in place, particularly as we think about regulatory changes that might be coming.
So when you're thinking about this, you've got, excuse me, you know, quite a bit of excess capital over and above minimum.
Right.
Right? And as long as that's attracting new clients, that's helping generate growth, right?
That's right.
So in an environment where you're attracting those clients, fine, I'm assuming you're measuring this to assess that activity level, because to the degree that, you know, net new clients are coming in slower, you might want to dial up buybacks.
Yeah, and even frankly, our clients like where we are, and you're right, too. That's actually perfect phrasing. That's how we talk about it internally, as where the capital levels we run. But at the same time, we know we've got good returns on capital where we are. So it is a balancing act, but we certainly have to acknowledge that our capital levels are strong in any measure, whether it's on an absolute basis from a regulatory perspective or relative to our peers.
Okay, and then one more ticky-tacky question.
Sure.
You know, we've got CCAR coming up-
Yep.
And it looks like a very similar test to last year.
Yeah.
Anything we should be thinking about with regard to Northern? Because I'm kind of going into this expecting similar SCB as last year, but am I missing anything there?
Yeah, we talk about it a lot. To answer your question first, we expect the same Stress Capital Buffers as we've had before.
Mm-hmm.
But to give you a little bit more information around it, we do see it the same way. Very similar, maybe a little bit tougher around the edges in some ways, but nothing that would change the SCBs at this point.
Okay. And then lastly, on expenses and operating leverage.
Okay.
Can you talk through expectations here as we go through the rest of the year? In 1Q, expenses were up 5% year-over-year, but you've, you know, guided to no, you know, 3%, right? I think for the full year.
Well, we said we'd try to do... the goal is to do five or better.
5 or better.
Five or better.
Sorry.
And the three—no, no, you're not wrong. The three that we mentioned was, we were saying that that we were coming into the year knowing that some of the known items would put us at a minimum of three. So it implied that it'd be very difficult to do better than three, but the goal was to do five or better. And to get at how we're feeling about it, first quarter was at five, but some of a meaningful portion of that increase, particularly relative to what we anticipated-
Mm.
came from the fact that markets were higher. That drove things like higher subcustody expense, higher market data, and other items, and then, so it made it even harder for us to get to that point. But we're still, we're still targeting to get to that five or better. It's just gonna be more challenging, but for reasons that were really positive. When markets go up, it's gonna make our expenses higher, but we have positive operating leverage in those dynamics.
Mm.
So those expenses being higher means that our revenue is much, much benefited even more than the increases in those expense categories.
Right. So 3% is as low as it goes, but if it's a little higher, you're still generating positive operating leverage.
Yeah, from those dynamics of market-related expenses, I think that five number is still where we target. And there might be some movements between the expense categories, but overall, we're still working at that five or better for the year.
Well, I know the market has appreciated the incremental insight on expense outlook that you have communicated over the past several quarters, so keep it going. And, looking forward to hearing you on the next conference call.
All right.
All right.
Thank you, Betsy.
Thank you so much for joining us today.
Great to see you in person. Appreciate it.
Jason and Steve. All right, thank you. Thank you.
Great to see you.