The fireside chat with Northern Trust Corporation. As many of you know, it's a company headquartered in Chicago with about $156 billion in total assets. Assets under management: $1.6 trillion. Assets under custody: over $13 trillion. I always remind investors that during the financial crisis, there were only two banks in the top 20 that were not required to cut or eliminate their dividend, and Northern Trust was one of those banks. So it's one of our highest quality banks in the United States. And joining me today for the first time to my immediate right is David Fox, Chief Financial Officer. David took over this role in October from Jason, who I'll introduce in a moment. And he's been with Northern Trust since 2012. And prior to that, he was with JP Morgan for over 25 years. Jason Tyler is to his right.
And some of you may remember Jason from last year participating as CFO. Now he's President of the Wealth Management Group. And he joined Northern Trust in 2011. Gentlemen, thank you for joining us.
Thanks, Gerard. Good to see you.
Maybe, David, we'll start with you, and then we'll go to Jason with some questions about the Wealth Management Division. On the earnings call in January, you guys provided some good color in terms of the strategy and expected financial outcomes for Northern over the medium term. Can we start with the strategy? What are some of the primary benefits you see from Northern's One Northern Trust strategy?
Yeah, so thank you for that question. You know, One Northern Trust, it's a pretty easy moniker, but at the end of the day, not everybody does it really well. People talk about it at other firms, but they don't do it as well. And when you think a little bit about Northern and our three businesses, it harkens back a bit to my old business that I used to run, which is the family office business. And that particular business had the intersection of all three of our businesses. As you're looking to grow organically and in a scalable way, it's incredibly important that you can leverage off other parts of the institution to get what you need.
And so we take a bit of a different approach through One Northern in the sense that if you've got client issues within a particular silo, let's say wealth management, that's where family office was, you present a lot of your challenges and issues to the broader group in asset management and in asset servicing and say, "Here's what I'm thinking. Here's what I want to do. Can you help?" And so one of the interesting things there is, you know, Front Office Solutions, which you may have heard of, is a front office application that we developed to basically track alternative investments, which is a huge pain point for a lot of our clients. It was not built for the family office segment, but guess what? The family office clients ended up being large users of that particular technology.
And it necessitated my sitting down, talking to the folks in asset servicing about that. The second thing I would say is, you know, actually, Jason, at the time when I first did this, was running institutional sales for asset management. We wanted a more direct approach to our asset management sales in the family office and wealth space. We decided, you know, sit down with our asset management counterparts and say, "Okay, we could build it on our own within the wealth business, or we could leverage off of what we've got internally inside of the asset management business." And so what we did there is we built a dedicated service team just for that particular segment within asset management. And so the message here is there's tons of synergies, if you mine them properly, across the entirety of the organization.
And what you don't want to do is have duplicative processes that you are investing in separately, when in effect, if you bump into somebody in the hallway, they say, "Well, wait a minute, I could have done that for you." The other thing is you can deepen client relationships the more you understand about the other businesses. And an example of that I would give you is having dinner with a very large international client. They're a big fiduciary client. And so we did a lot of trust work for them.
One thing led to another, a very large client, and they were saying, "Oh, we're doing this in offshore funds and this and that." And I said, "Well, that sounds a lot like a hedge fund." They said, "Well, yeah, it's basically we're running our own hedge fund." I was like, "Well, you should talk to our folks in Hedge Fund Services," and so they did, and now they're one of our largest hedge fund services clients, so I think it's that realization that certain client segments, private equity would be another one. We're all touching them in all three businesses, but if we're all talking to each other, we touch them in a very holistic way, and that drives growth, and you're not just talking about your particular silo, which I think is incredibly important.
Yep, and following up on that, how do you get the three segments to communicate effectively on a continuous basis rather than just a one-off? Is there any procedures in place or just meetings that once a month they get together?
Yeah. I mean, I would just say that having worked at other institutions that are larger, obviously, we have a very nimble management team, and we all know each other extremely well. I mean, it does help that I ran the big chunk of the asset servicing business. And then I partnered daily with the asset management business. And so when we look at everybody in our management team, they've had some exposure to those other businesses to the extent that, like, for example, we've asked our Vice Chairman, Steve Fradkin, to run our new initiative around strategic accounts. Well, Steve's run asset servicing, wealth management, and was CFO. And so when you think about it around the table, it's that knowledge of everybody else's business that's critical.
And I would just say on our top tier executive committee management group structure, we meet once a week and we go through everything we're doing. So literally everybody knows what I'm doing now in finance and wealth management. And so all those things surface themselves on a continuous basis, not an issue in a company our size. Much harder to do with a larger institution, I think.
Yep. Also, you gave out at the time some medium-term financial targets. First of all, can you remind us what they are? And second, if you can talk about the confidence you have in achieving those targets.
Yeah. So we have sort of three metrics we put out. You've probably seen them, but expenses to trust fee of around 105%-110%, pre-tax margin of 30% or better, and then ROE target between 10% and 15%, and really more the high end of that. And so it all starts with positive operating leverage, okay, and organic growth. Then it drives a lot of those KPIs. And in the end, if you can hit all those, you're going to have sustainable double-digit EPS growth and obviously great capital appreciation for your shareholders. And we've seen it work through the test of time. We achieved many of those benchmarks in the fourth quarter. And we had some tailwinds from markets and interest rates and things of that nature. We know we can do it.
We have a super large focus right now on the expense side, only because you can't always rely on markets to kind of keep pushing the sailboat faster and faster. So you've got to have a resilient business model. And so the confidence we've got, one is that we've done it before. And two, we've got an expense discipline right now that I think has really got our arms around everything we're doing and being driven to a large extent by the productivity measures we're doing. So it's all identifiable. We know where the levers are and we're pulling them pretty rapidly.
As a follow-up to that, what does management focus on to create long-term shareholder value? Is it these items that you just identified? Or how do you guys think about that?
Well, I think you had it in one of your write-ups, but it was also in the deck we gave to our earnings. But when you think about the three pillars that our CEO talks about, whether it's optimizing growth, strengthening resiliency and risk elements, and then productivity. You know, the resiliency and risk part of it has been where a large part of our spend has been last year in terms of architecting that foundation and modernization of our foundational base of technology. When you think about productivity and growth, they tend to go very much together because the productivity is going to fund the growth to a large extent, right? So what you don't want to do is just cut costs for the sake of cutting costs. That, to me, is not a strategy, right?
The strategy is to become much more efficient in what you're doing, mind the seams, find out where you can be much more productive, take that savings and reinvest it in your big businesses like wealth management and asset management. So those three pillars together, I think, provide for that foundation that's going to drive shareholder value. And then we measure it, obviously. Those are the ones you see externally. We also have internal measures that we look at as well and KPIs for each business.
Great. Jason, coming over to wealth management, what do you see as the primary growth opportunities in the wealth management business going forward?
Sure. Well, I'd call out probably four things I've been talking about internally. It's the first time I've talked about them externally, but one, and it's ironic. I'm going to talk about it. David's going to start twitching because it's the GFO business, and it's the business that he ran for nine years, and that's been a big element of our growth for the last several years, and so there's nothing in anybody's mind other than continue to have that fed from a resources perspective so we can continue that growth, and then second, but very related, is ultra-high net worth.
And that'll enable us to have clients that are very large in assets, over $100 million, up to often $500,000, $600 million, $700 million, but that for various reasons don't want to have a family office, still be able to access the technology, the advice that Dave and that group built out. And that's such a big part of why that group is doing well. And so a lot of initiative around ensuring that we put that group together, the ultra-high net worth group, in a way that can accelerate the growth for us, leveraging the capabilities we already have. The third thing we've been talking about a lot internally is geography inside the U.S. And there's such a high percentage of the ultra-high net worth households and in general, the upper end of the market, very concentrated in just three or four markets.
If you look at New York, San Francisco, LA, Florida, Chicago, those markets have a very high percentage of the overall households. Obviously, our market share in Chicago is very strong. We're really proud of it. We've been in Florida for 53 years. Our market share there is a lot higher than what most people would think. We're proud of that as well. We've got the capabilities to do well in those other markets, but we're not where we want to be. We're not where we think we should be. Focusing on those areas, it is not to say that we are de-emphasizing any other area in the organization. When we put something on the board and say, "This is going to be an area of focus for us," that means we're going to have a specific plan against it.
And so there are specific plans that we're working on at the senior levels around those three geographies. We're still investing in the other areas, but those business leaders continue to come and say, "Hey, here's an opportunity for us to grow." And we said, "Great, let's do it." But it's not more of a top-down and top-managed strategy. And then the last thing I'll mention is alternatives. And that's an area that obviously every wealth management firm is talking a lot about. It's becoming more and more a part of the financial model. And so we've got capabilities there. Again, none of the things I'm talking about are us inventing something that we don't have. We're building something we don't have. It's all about heightened focus in certain areas. And this last one is focusing much more on alternatives. I'm spending a lot of time on that personally.
I'm convinced it's a great opportunity for us.
Yep. On the geography, so I shouldn't expect the Northern office in Portland, Maine then, right?
Yeah. Yeah. Yeah. There's a lot of wealth there.
Oh, yeah. Old line.
A lot of wealth.
Yep. Yep. Jason, on the relationships, and David talked about deepening the relationships with the clients, how sticky once you get a very strong relationship in wealth management, how sticky is that? And how do you make it even more sticky so that a competitor couldn't just come in and try to steal that customer?
Yeah, there's very little instances of a client saying, "We're taking our funds and going somewhere else because the service is bad." And obviously, clients are going to make sure that, and we lead with, we're super transparent about our fees. And so I was just talking to the head of our investment practice yesterday about just how you open a Northern Trust statement, and it's just very clear where fees are. And so we don't get clients that have negative surprises around that. And so what tends to happen in the wealth business that creates movement is when a client passes away. And so when we're working on client retention, we're working on ensuring that we're connected to the next generation and ensuring that they understand what our capabilities are. We've got direct line of communication.
And so we're working on family education to make sure we're engaged with those relationships early, early on to ensure that if there is a passing, then we're not meeting family members for the first time at that point.
Yep. Good point. Very good point. What are some of the obstacles or the largest obstacles you see or impediments for wealth management in growing the business in the current environment?
The biggest one is that we talk about it a lot. Wealth is more than 50% of the pre-tax income of Northern Trust, and so that's rare. There's only one other firm I can think of that has one of the large ones that has that type of reliance on wealth, but all the other large universal financial institutions, everybody wants to get into this business and have it be a bigger part. They realize the RWA efficiency. They realize the capital returns. They realize the fact that January 1st, when some businesses are restarting from zero, we're not starting from zero. We're starting from $450 billion in assets under management and the dozens of thousands of clients that we've got across the world, and so number one is definitely just the heightened competition, and for us, that turns into where it really pushes us two ways.
One, our competition for sure will try and take clients away. They'll be aggressive about it. But the real aggressiveness shows up in trying to take talent because they realize that if they hire someone from Northern Trust, they're getting someone that is going to come with a lot of credibility. And so in all the traveling I've done in the last five months, I'm spending obviously a lot of time with our top clients, but I'm also spending a lot of time with our people just to ensure that they all realize how important they are to Northern and make sure I've got my own personal connection with them as well. It's something that's very front of mind for me. And you know I also think it's something that Dave and I over time have worked on together.
But Dave and I both spend a lot of time with clients. And Dave spent more time, he spent a lot of time with clients in his last role. When he's been coming to my office the last few weeks, he's actually been talking about specific client opportunities that he's working on. And so back to just the culture of our leadership team, that's how we're defending against that risk by ensuring all of us are engaged at that level.
Just in the current environment, obviously, we heard about tariffs last night, and there's a lot of change. Are the high net worth clients concerned? Or when you guys talk to them, what are they saying to you guys about what they're feeling or seeing?
Yeah. Yeah. Well, they're asking a lot of questions around it. And it's one of the reasons that clients are with us. They know that we've got more ACTEC fellows. It was really the highest accreditation that you can get as a trust advisor. And most firms will have zero or one or maybe two. We've got somewhere between 15 and 20. And so they're taking advantage of being able to talk to our advisors around that space to understand what might happen, how does it impact what they're doing. Just a shameless plug. I think today or tomorrow, we're going to launch a new series, Why Wealth Lasts. And Katie Nixon, who's our Chief Investment Officer, I'm interviewing her and talking about the dynamics of what do you do in market volatility. And so it gets specifically to the question that you ask.
It's just neat to hear the experts we have talking about the importance of staying calm, the importance of using portfolio reserves in time of stress, not overreacting. And those messages resonate really well when you walk through it with our clients. And they want to be the type of investor that are being greedy when others are fearful and fearful when others are greedy. Buffett's quote is on my mind since his shareholder letter came out last week. Those are the types of themes that we're talking about with clients.
Got it. Good. Dave, maybe coming back to you, can we talk about anything on the first quarter? How is it shaping up? What are you thinking? I know it's only March 4th.
You know how much I love giving guidance. Yeah. So listen, what I would say on the first quarter is, and obviously, I think yesterday the S&P was actually just in the red for the year for the first time. So obviously, there are things we don't control, like markets, interest rates, and things of that nature that need to cooperate. There are things we do control. What I would tell you on the do control side, it's exactly the way we thought it was going to pan out. The pipeline looks good. The business is great. Folks are very focused on all the things we're trying to achieve. But I would say that generally speaking, it's sort of no real surprises, positive or negative, right?
So kind of in line with what I told you at the end of the year, it's kind of shaping out to be what I thought it would be. And so we'll see. There's still, I don't know how many days left in the month of March. And obviously, the markets are going to move up and down. But there is a lag effect. So the first quarter, to a certain extent, is pretty much protected from some of the gyrations because a lot of our business will reprice based on quarterly lags and things like that. So at the end of the day, I think first quarter is pretty much the same level of guidance I gave you folks before.
Yep. And remind me on the guidance for expenses for the full year, what you guys gave us?
We're very committed to 5% or below expense growth. That's something that obviously I talked a bit about productivity at the front end. And as I get my arms around, I obviously had to submit our 2025 plan to the board and everything and work with each business unit head going through everything together. So that 5% or below isn't just my target. It's the target of our CEO, our board, and the entire management team. And we're driving very hard towards that. So we feel very confident that we're going to be able to do that.
I know, obviously, as a fee-based bank, the majority of revenues are fees, 75% plus versus a traditional bank. But deposits are still important. And any thoughts on how the deposit trends are going? What are you guys seeing in the deposit area?
NII obviously has become a much bigger percentage of our revenue than it ever has been, I think close to 30%. We got to pay attention to it for sure. One of the things we did is we put together this year or last year a Liquidity Solutions Group that sits between treasury and the businesses and basically collates all our best ideas around client liquidity. We're being a lot more intentional around deposits. What I would basically say is on the deposit front, it's very stable. We're kind of back into what I would call a normalized environment. It got a little bit abnormal with SVB and things of that nature. Right now, it looks to be trending very much in line with the way we have seen it typically for Northern. Our deposits will grow in line with our new business.
So when you think about our organic growth targets of 3%, things of that nature, I think low single-digit deposit growth, very achievable in the course of the year is sort of the way we're thinking about it. But it's been very predictable so far.
Good. Got it. The other important part with your organization and your peers is the investment portfolio, securities portfolio. Can you talk to us about how you're managing that in this kind of environment and what you see for that going forward?
Yeah. I mean, listen, over 80% of our securities are HQLA, right? So we're on the shorter end of the curve. Our duration is 1.6 years. We're not changing that. We like the flexibility it gives us. And the higher for longer bet has actually been really good for us, right? And so we're not going to stretch on risk or stretch on tenor to sort of artificially lock in yields. We want to have a sustainable, repeatable number through time. And so I think we guided for the full year to be up single digits in NII. And I think that's still a good target. Quarter by q uarter, it's going to be what it is. I think we gave you guys a range, a pretty big range. And again, that's tracking the way I thought it would be tracking, so.
Now, it didn't happen, of course, yesterday with the 10-year falling, but we were having a high front end of the curve around 4% on Fed funds and a positive slope, which we haven't seen in 20 years.
Yeah. Well, we'll take advantage of that. We have some maturities that are rolling off too that are longer term. The average weighted life, I think, of our portfolio is over three years. And so we're not doing anything down the curve, but we're going to go where there's an opportunity, right, in the belly of the curve where we think we've got some opportunity to make some spreads. But right now, we like the balanced portfolio that we've got. And it gives us a ton of flexibility. We like that.
Yep. Jason, can we come back to the alternative investments because it has been one of the hottest topics in asset management for the last 10 years, let's call it? Can you elaborate and give us a sense on just how that's fitting together with the One Northern Trust strategy that you guys are putting together?
Yeah, that's a good way to frame it because it does touch different areas of the company, and we're positioned really well along the spectrum, so put it in three buckets. One is, even from a fund administration perspective, we do a lot in the fund admin space for fund sponsors, and traditionally, it's been more in the public asset space, but more and more there's investment to do more with private fund sponsors from a fund administration perspective, so you mentioned the assets under administration that we have, and that's obviously been growing, and so big investment there. We can engage more with fund sponsors as part of the overall ecosystem of how we deal with alternatives. Second is our banking platform, actually, so we're one of the largest providers of liquidity to GPs and to the principals of fund sponsors.
And then we can also do wealth advisory for those. And so there's a lot of wealth being created in the alternative space for principals. And they also, though, need liquidity for them to invest in their own funds, to invest in the business. And so our private banking capabilities plus our wealth advisory capabilities just sets up incredibly well for us to be able to help fund sponsors. But then the biggest one, or frankly, I'm spending the most time right now, is how we engage with our wealth clients from an investment perspective in this space and the ability to bring a broader array of products. We've got everything we need in this space. We've got great manager research, manager due diligence, operational due diligence, and then our advisor education. But we've had great relationships with fund sponsors, but we can ramp all of that up.
And so what we're doing in single strategy funds, we can ramp up. And then we've also got great capabilities with our alternatives group, 50 South Capital. And they've got a great suite of products, whether it's in PE, hedge, secondaries. And we've got to accelerate what we're doing there as well. We're their largest client, and we want to continue to do that. And so I've kind of gone in reverse order in terms of the areas we're focusing in, but it gives you a sense of just the breadth of capabilities we have to do a lot more in the alternative space in general.
Yeah. The only thing I'd add to that is we actually also spun up an alternative advisory practice alongside of the 50 South Capital, which is our captive subsidiary, to make sure that our clients get access to the best-in-breed third-party funds that we curate, and we have this very large OCIO business, obviously, that does a ton of research around that space, and so onboarding a lot of those new managers and making sure those, if they're not part of 50 South, they're available to our clients is also super important to us.
Got it. Yep. Maybe both of you might want to answer this question, but starting with you, David, it seems like over the years, the custody business has always been having pricing pressure to deal with. Can you share with us today, is that still a theme that you guys see from competitive forces, that custody and fund administration pricing pressures remain in place? Is that something that you guys are constantly fighting against?
Yeah. What I would tell you is that if price alone is the only reason you're choosing to move to another firm, we're not the firm for you in the sense that it doesn't mean we're not competitive. But at the end of the day, we don't like bidding on just one discrete piece of business. What we do is we take a step back and we say, "Listen, what are your issues? What are you doing? Let's do a business process review. Let's look at how you're running your middle office and your front office. And let's figure out how to save you costs. Let's figure out how to do some operating alpha solutions for you in addition to just saying, 'Will you charge me X for custody?'" There are certain parts of the custody business that are commoditized, and certainly those are priced very competitively.
But there are other parts that aren't. And we tend to do custody plus. And in some cases, we'll do some certain technology applications that other folks don't have. But we bundle together the entire thing. And when you bundle it all together, the kind of clients that we like that we go after are not just pure vendor, give me a price type clients. They're much more partnerships, if you will, to try to figure out. We make them better. They make us better. And in the end, that custody is a part of that. But custody alone, it's very hard to find clients that are just doing that with us, right? So yeah, but I wouldn't say it's something that's really a huge headwind.
Got it. Yeah, and Jason touched on this in the wealth management area about you want to make sure you know the next generation before the passing of the patriarch and matriarch and the family. How do you guys do that on the institutional side so that if business comes up for rebidding, how do you ensure that you're really deep with your client so that they don't choose to go somewhere else?
On the institutional side?
Yeah.
Yeah. So I mean, service is really important. But let's face it. I mean, at the end of the day, switching is painful, right? And if you're servicing your client, everybody makes mistakes. We try to make less. And if we do make a mistake, we own up to it and we fix it quickly. But at the end of the day, you have to make the client feel that they're super important. And I do think that we operate sometimes in a segment of the market where we have superior service. And I think with superior service comes the benefit of the doubt and also comes with a partnership, as I talked about previously. And so when you develop that partnership and that codependency, they think that you're on their side, if you will. And when they think that, they're going to stay with you.
It's going to take quite a big event to move. And so we don't lose a lot of clients for that reason. As I tell people, we spoil our clients so much, nobody else wants them.
That's good. That's very good. Can you share with us your thoughts on what's going on in Washington from a regulatory standpoint? There appears to be, obviously, change coming with all the new heads of the agencies. How are you guys appraising it, especially when it comes to Basel III Endgame? What are your guys' thoughts?
Yeah. So listen, I mean, I'm not going to handicap anything at this stage. I think it's still a moving target. A month and a half ago, somebody would have said something different than they are probably saying today. What I would tell you is that we're prepared for any scenario. And obviously, if one of those scenarios is we have to apply less capital, that capital can be used for other purposes, whether it's return to shareholders, investing in our business, and things of that nature. So from our perspective, we'll be looking at where we stand relative to our peers. We're going to have a healthy buffer at or above where they are in terms of these types of measurements. And if the measurements are relaxed a little bit, that's only opportunity for us is the way we look at it.
But we can react to what happens, but at the end of the day, we're not going to predict what happens.
Right, and I would assume you guys are hopeful that during the DFAST CCAR tests, more transparency is obviously positive. I mean, it's not an issue really for you guys, but more transparency is good.
Yeah. Absolutely.
Yeah. Well, hopefully, we get all those answers by sometime this year. But I see we've gone to the red zone, which means we're out of time. I want to thank the management here from Northern Trust. Please join me in a round of applause. Thank you.