Check that. But, Stifel is one of the premier brands in wealth, 2,300 financial advisors. And look, the wealth segment's been seeing really strong momentum. You know, Ron always likes to tout the number one, J.D. Power ranking, and but certainly that's paying dividends in terms of improved recruiting momentum. So we're really trying to, we're keen to unpack some of those dynamics, and what's driving some of those better outcomes. But before we talk about all the good news, let's focus on and maybe what's a challenging macro backdrop. Just want to get a sense as to what you're hearing from your clients, both on the retail and institutional side, just how it informs your outlook for your two biggest businesses in wealth and institutional.
Well, first of all, thank you, and thank you for this conference, and thank you to Wolfe. I enjoy this conference and try to make it every year. I really appreciate the insights and the insights that you personally have been following us for a while. You call them as you see it, even though sometimes I don't like it, but that so be it. So anyway, I want to thank you.
Look, as it relates to the general environment, the way I think about it is that we are dealing with the aftermath of not only the pandemic, but the from the financial side of the pandemic was almost $6 trillion of stimulus and Fed printing of money and monetizing the debt into the economy in 2021, which saw, you know, bank deposits, just bank deposits went up $6 trillion, and interest rates were at 0. And you saw a ton of money raise at valuation levels, especially in the PE space. The valuation levels that frankly, probably, are not were maybe sensible in an environment where rates would stay near 0 for a long time. Of course, that's not what happened. As we all know, I don't need to recap that.
But what I would say is normally, what we're talking to wealth management clients about is, you know, 60/40 portfolio, the advantages of investing in equities, the advantages of long-term investing, wealth, you know, wealth planning and all of that, which is the crux of advice. And today, what we really talk about is, well, there's a lot of uncertainties. One, I just buy a six-month treasury yielding 5.5%, and the 10-year is only yielding, I don't know what it is, today, 4.60, 4.70. That inverted yield curve is, and the conversations that result from what is an easy trade today, if you're uncertain about the equity environments, take 5.5% for six months. That mutes a lot of other activity.
It exacerbates cash sorting, which we talk a lot about, and that's on one side. On the other side of the ledger, the same dynamic is at play at Stifel. I've been CEO for 26 years. Thank you for acknowledging that. But for 24 of those 26 years, we did an acquisition, sometimes two. The last two years, we've not done one. And the reason, again, is the impact of a 5% risk-free rate. So not only is that true as me as a CEO of an investment bank looking at it, but as a person who puts on an acquisition hat and does strategic mergers, that has made those just at today's valuations or at 21 valuations that people not have forgot about, can't do. So all that, you put that all together, there's very little strategic M&A going on.
There's very little capital raising going on, and on the wealth management side, most of the interest is in zero to six months duration.
It's interesting because you alluded to the fact that there's just a girth of deal activity. It's just untenable in the context of a 5% risk-free rate environment. Do we need to see rates come in order to catalyze some of the activity on the institutional side, or do you feel like that inflection can actually happen a little bit sooner?
I don't think the inflection can happen any sooner than it takes for boardrooms. So just think of being a private equity. I, I really believe I've used this example a few times, and I've listened to it, and I've seen it happen. And that is, again, 2021, we're at a board meeting. We have a company that we think is worth $75 million pre-money, and we want to raise, say, $50 million in cash. All right? And at one of the big unnamed funds that were throwing money around comes and says, "Ah, you know, we'll give you $100 million, twice what you need, at a $150 million valuation." And what board wouldn't take that? They would take that. Except today, that, that sets the cap table.
Now, we're in that same boardroom and saying, "Look, we have to either raise more money, do a strategic deal, or maybe even do a capital raise." "Well, what's the valuation?" "It's $100 million. You know, it was $75 million a couple of years. It was $100 million. Now, congratulations." "No, we just did a round at $150 million," and they won't. And so everyone's frozen. That is going on more than you know, in private equity, and put on top of that, again, a 5% risk-free rate, and you have a lot of activities being delayed. Go to the bank, borrow another six months' operating expenses. We'll deal with the cap table later.
I know I'm jumping a few questions here, Ron, but I feel compelled, given what you just said, to talk about that normalization in capital markets activity. You've noted that you believe that you can generate, in a more normal backdrop, $1.7 billion-$1.8 billion or so of revenue. I think back to 2019, I think you were maybe 35%-40% below that. I know you've added scale. I know you've added a lot of bankers. What gives you confidence in that $1.7-$1.8 billion normalized number? And given some of the challenges you just highlighted, how should we think about it from a timing standpoint in terms of when we can see, credible path to normalization?
Well, we did $2.2 billion in 2021. I don't think 2021 is coming back in terms of some of the areas that we didn't do as much as a lot of firms do. But the SPAC thing's not coming back anytime soon. There was a lot of M&A in financial institutions that I think will come back to this. That was a big part of our business. So, you know, to say $1.7 billion down from... Oh, it's always good to have your CFO sitting next to you. Yeah, you know, it's a dearth of business today. We're doing $1.3 billion. We did $1.5 billion in 2022. So that's not a stretch to say that.
And as Jim Marischen just pointed out to me, we have 40% increase since 2019 in managing directors. So we have grown this business. So just, the, well, we've gained market share. So that is not a stretch to say normalized IB, with our current headcount, is $1.7 billion-$1.8 billion. Not at all.
Essentially, it's a static MD productivity, with just 40% more MDs essentially on the platform.
Basically 19 activity. Yes.
Great. Well, I'd be remiss, since it is a wealth conference, if we didn't actually talk about the wealth management business. But before digging into a lot of the growth trends and KPIs on that front, Ron, you always have really great insights on the regulatory landscape. And would you be remiss, given the DOL fiduciary rule just came out last week, if you could provide, I'm sure what's going to be very candid thoughts and feedback around the proposal.
Well, I, frankly, I wasn't surprised. But what I'm, what I'm surprised about as I sit here right now is, is, is a somewhat muted reaction by the industry at this point. Like they're saying, "Well, it's, it's only dealing with commodities and a few other things." Well, it's not. I just, I want to say that the proposal is the fourth attempt just for the Department of Labor. With all due respect to the Department of Labor, our securities markets, securities transactions are regulated by the SEC. It's the fourth attempt for the DOL to insert themselves into being, I think, they believe, the primary regulator for retirement accounts, including IRAs. And this proposal is very similar to the 2016 proposal.
And it has what I think the industry should be concerned about is just a almost another set of standards in addition to Reg BI. That, in my way of thinking, is balkanization of our securities laws. All of our clients have IRAs. So to talk to you and say, "Well, wait a minute, I'm talking about your IRA, I have this rule book. So I'm talking to you about your brokerage account, I have this rule book, and Reg BI may not be equal." That's not how you develop the most deep and efficient markets in the world. Do it because of what this country did in 1975, was pass NSMIA, that said, you can't have balkanization of securities laws. So I'm, you know, I don't want to come off as, you know, being overly negative.
I just want to say that this argument about who the primary regulator is for retirement accounts has been going on now for 14 years. This is the fourth attempt to do it, and I think the industry, for the fourth attempt, is going to have to resist.
Do you feel as though the regulators are at least receptive to some of the industry feedback? I think part of the challenge with some of the regulation that's being introduced on the bank side, in particular, it seems to suggest that a lot of their concerns that they voice simply haven't been heard or aren't really resonating.
I believe... First of all, I believe that all the regulators, from what all agencies are well-intentioned, people who do listen to feedback, yet have objectives, all right. And so the objectives, you know, may not align, but I would certainly never say people don't listen. I think they do. But that doesn't mean they agree, and that doesn't mean we have—you have to agree. I'm gonna stand what I've always stood on for what's going on 14 years on this subject, and that is that choice is important.... No matter what even it says, this latest proposal does what the other proposal wanted to do, which is eliminate brokerage option from IRAs. It just—that's my reading of it, and investors should have choice.
And that's been the argument from day one. I add to it that we don't need multiple regulators. That's not efficient.
I couldn't agree more on that front. Though it does keep us busy on the sell side as people try to navigate this regulatory landscape, immediately, and definitely adds some layers of complexity, but-
Look at Steve, I want to add, and I've said this before, I've, and we have, you know, a to comply, which would, which many would argue that you should, all clients should pay a fee, and that's level compensation and, and theoretically eliminates all conflicts. That would be a good thing for, for Stifel. You know, our, our brokerage revenue and retirement accounts are substantially less than our fee revenue. Now, we don't provide continuous monitoring. We don't do the same things. However, there are a lot of accounts that are smaller accounts that this is the most efficient way to build their retirement savings, and that choice belongs with the investor.
Well said. Well, maybe, Ron, just transitioning to a discussion around organic growth within the wealth business. One of the things that you've had success, the channel you've had success in of late is the independent channel, but your, employee, affiliation model also continues to see some improvement in organic growth trends. You've sustained that mid-single-digit growth rate. Any opportunities you see on the horizon to accelerate that growth and maybe give some context on what you think is sustainable over the long term for Stifel, in your view?
Well, I've, I've had a lot of discussions with you about this, and I, I will say that the way to look at this is there's a core part of our business, which will grow as the industry grows. It's, it's a statistical certainty that if you take, you know, I've always said this, you take a thousand of my advisors and mix them in with a thousand of advisors of similar firms to Stifel, and then you pull out a thousand advisors, you're going to get the same growth rate. All right? I just, it's not, it's not like we're building some iPhone that someone wants, that's going to be, oh, you know, we're going to suddenly grow faster because we have this.
Now we're in the advice business, and our advisors are very similar as long as we give them tools, which we do, and that group grow. Where you're going to get the acceleration in growth and is in recruiting and adding new people, either by hiring a veteran or training people. And where you're going to lose it is by losing people. In the advice business, we gain clients because we attract advisors, and we lose clients because we lose advisors. And at Stifel, we have been, for years, a net gainer of clients, and therefore, what we disclose is our success in recruiting and the number of people we recruit and how much business they bring. And we also have, you know, mid-single digits AUM growth like everyone else does.
I just think you overly focus on that number and under focus on just growth and wealth management revenue.
Sure. Although I don't... I like to think I'm not alone in that regard.
Oh, no, you're not alone at all. I'm alone in arguing with you. You're not alone.
Well, the other piece here, that I was keen to unpack is really the NII outlook. You gave a guide on 4Q , suggesting that it would be an annualized NII level of about $1.1 billion. You also talk about a roadmap to $8 of future earnings power and have contemplated some stabilization in that NII. As we prepare for the eventuality of interest rate cuts or some normalization in interest rate levels, how do you hold the line on NII, and what are some of the building blocks supporting that greater resiliency that you envisage?
So first of all, I think it's constructive to unpack NII and net interest margin. Okay? You have to look at both. And my view on net interest margin, and one of the reasons that we've guided a little bit lower for NII is because in this environment, with an inverted yield curve and a lot of uncertainty, we have decided to limit our balance sheet growth. And the second you say that you're not going to grow your balance sheet, and then I tell you that NIMs are probably because of cash sorting and other reasons, NIMs might be at a cycle high, well, then NIM is going to come under pressure, or NII is going to come under pressure, which is what we're saying. It's 1.1-1.2.
So not only not growth, but a little bit of decline within that range in NII. The missing factor is growth. And what we have shown over the years is that we have a tremendous amount of quality loan demand, tremendous amount. And we also have put in place deposit generation capabilities, our new entry into the venture business, which a lot of people like to, you know, think is not good. It is a great business, but that's deposit generating. So what we're not really talking about here is a resumption in balance sheet growth, which can drive NII even with compressing NIMs. So I'd ask you to look at both.
Today, we're being conservative, like we always are, and we're just keeping net interest at a range that's slightly below, if it may be flat, but, yes.
Oh, so focus on rate and volume.
You taught me that at Indiana.
Yeah, it's one of the first-
But in that, in that rate times volume, I'm sure there's a variance in that.
Well, the other big, you know, input that we're all acutely focused at the moment is this whole debate around cash sorting. And you guys were early in trying to introduce a product at the bank that would ensure for yield-seeking clientele that those deposits would stay within your ecosystem, and I think that's positioned you quite well. But how much of the remaining idle or sweep cash is still available for that program? And just provide any general color, Ron, in terms of how you think about this cash sorting narrative and what inning we're in as we start to, you know, look out to a potential better backdrop with some stabilization, even growth in sweep deposits.
I'll start by saying that cash sorting is accelerated by two sort of events that occur from the outside. One is just whenever the Fed increases rates, everyone reads about it, and that just, you know, has everyone ask about that. As I said, it's our probably our top investment outcome to just invest in short-term duration type assets. But so, you know, will there be another rate increase? That has an impact. We mute it because we tied our Smart Rate to the rate. So it's close to 100% beta on the way up and by the way, on the way down as it relates to Smart Rate. So that's one thing that can accelerate.
The second thing is just the inversion of the yield curve has really, again, caused. When there's a 90 basis point spread between the 10-year and the six-month, it puts a highlight on cash sorting. As it relates to Stifel, we put in an alternative years ago. I mean, we thought about this and said, we're going to need to have an alternative. And you should actually chart this. I'll give you an idea. Just chart our net interest costs compared to whoever you want. That's where the number is. What is the net interest cost for the organization over time? And you will see that our cash sorting happened faster. So when I tell you that we're near the end of it, we are, because we were faster in the beginning. And that's what we're saying. Innings?
Isn't baseball season over? How about end of the Q3 , we're in football season. That's about the seventh inning, if you want to use sports analogies. But I think that when you look at the forward curve, if you, I don't really, for one, put too much stock in what says there's a cut in June, followed by three more. That would certainly not only be good for institutional business, but that would also slow cash sorting.
Probably be sensitive to the fact that St. Louis actually lost its football game, Ron.
And we didn't make the playoffs in baseball either. And we're not coming to this conference next year.
Most of it's all I need to ask, but it's interesting, Ron.
Who's your football team?
Buffalo Bills. We're struggling immensely.
Yes, you are. Okay.
But the other piece here, admittedly, is the duration discussion, and you guys have done a really nice job of introducing on the liability side, a program where as rates get cut, you are certainly going to have room to cut commensurate with that on the Smart Rate program. You also have a very asset-sensitive balance sheet, particularly geared to the short end. So just curious, Ron, as you think about trying to protect some of that NII downside, is this an environment where you might be inclined to take on some incremental duration, which you've been reluctant to do historically?
Well, very reluctant and will continue to be reluctant, because what you're really saying is, you know, do we want to make an interest rate bet outside of what we think is a balanced model? So there's no question that when rates decline, that will impact our NII negatively. We've disclosed that a 100 basis point decline is about $65 million in NII. The reason, I don't like making bets, just like we didn't make bets when rates were at zero. We didn't put a bunch of fixed rate assets on our balance sheet. Thank you. And you've not seen any issues at Stifel regarding any of those issues. Where today, you could be tempted to pull, push on duration and buffer, and provide a hedge for declining rates.
Our view is that we have a natural hedge in our institutional business, because when rates decline, that business will come back... in spades, and it will swamp the decline in NII, and we won't take the risk anyway. We have that hedged. So, while once in a while, I might say to Jim, "You know, should we extend duration?" And he always points out these factors and passes me notes, and the answer is no. Okay.
Well, the other source of NII resiliency that you touched on, Ron, and this is definitely a different view than what we've heard from some others, is around loan growth, outlook, and appetite. You've actually sounded more sanguine or constructive relative to some of the others that we've spoken with. We recognize in a higher rate environment, certainly things like SPL demand, that's going to moderate. But why are you more positive, at least on the outlook for loan growth, or at least have greater appetite than some of your peers?
Well, first of all, we haven't, we are sort of, to use your term, we're sorting our own balance sheet. All right? And we do see a lot of loan growth. At the same time, we've been selling certain assets, where—You know, let's face it, almost every financial institution, when you got a wash of deposits, were making would rent their balance sheet. Okay? We weren't immune to that, not prudently, but we did. So what—now what we're doing is we're just saying we'll make loans where we have the ability to have cash deposits, other relationships. We sold some of our syndicated loans, you know, at par, I'll add note. But as we've been thinking about that, the question isn't whether we could grow the balance sheet. We could. We absolutely could.
It's just in today's environment, with the uncertainty of where rates are going. I, for one, would think there is, you know, I'll say, an equal chance for another rate increase versus a decrease. And there's a lot of uncertainty in that. There's a lot of uncertainty in valuation. Certainly, real estate's under a lot of pressure because of rates again. And we just think, why don't we make sure our house is in order? We're focused on liquidity. We're focused on asset quality. Let's let the yield curve get to a normal yield curve, and growth's not a problem. Growth's never been a problem.
So, Ron, you did talk on the last earnings call about a roadmap to $8 at unspecified timeframe. I should throw in that caveat. But you talked about the NII level that would support that, the capital markets normalization level that would potentially support that glide path. Maybe speak to, you know, normalized margin expectations in the business. And I'm especially keen to hear your thoughts, since what's really been the most significant change over the past few years is the growing contribution from NII, which is a nearly less compensable.
Well, that is a lot of the driver, okay? Is our growth in NII, which has been... is really an offshoot of our wealth management business. Remember, our a great deal of our loan demand and substantially all of our deposits are generated out of our wealth management business. And as we grow our wealth management business, an ancillary benefit to that is the increased demand we have for liability products and deposits. So, that was there. The $8, but frankly, I don't think your model is much different. It was just, you know, reiterating what I think the Street says, and just trying to point out that that is not an unreasonable viewpoint.
And maybe, maybe I was just a little frustrated in pointing it out because, you know, I think we've shown a very diversified model, where we have 19% margins. Our institutional business is losing money. We've kept revenues generally flat while that business' revenues are down 30%. 30%. And so the earnings power of Stifel is there. I see it, I know it, I've been doing it a long time. I just decided that instead of really talking too much about it, well, we talked about the highest and best use of our capital is returning it to our shareholders via dividend and share repurchase.
Well, rest assured, we'll get there in one moment. But,
Just in case we're running out of time.
No, no, we're okay.
I wanted to get that point out.
We've got five minutes left. But the other piece that I did want to unpack is just around, like, the comp ratio dynamics. Because one of the things that we are seeing from some of your institutional peers that have been, you know, hiring bankers fairly aggressively, is that the amortization of some of the comp over the next few years is going to be a significant drag on margins. Comp ratios are going to be structurally higher, potentially, is the biggest concern that we hear from investors. I want to get your thoughts, Ron, as to whether you expect to see upward pressure on comp ratios, or how you're trying to balance the need to invest for growth, at the same time, mindful of some irrational behavior out there in the marketplace.
I mean, that's a great question. I'm not sure I know the answer. I will say this, everyone talks about green shoots, all right? And I've said I don't want to really talk about them, but the one green shoot that I really do see is the optimism in my competitors and how many people they're hiring, and it just what I think is... You know, I'm all for everyone here, that bet paying off, all right? Because there's a lot of optimism in terms of just the sheer number of hiring that's going on. The question of how that's accounted for is a good question. And at Stifel, you know, we did come out at the beginning of the year with a range of 56-58.
If you know me, that usually doesn't mean that we end at the high end of the range. We've seen some comp pressure to protect our franchise, but we're not betting our future on it. We're not—you know, you're not gonna see our us taking a bunch of comp and then rolling it into future years, where you'll see a permanent decline in margin, not permanent, but certainly a decline. And I understand the street's concern. I don't know other people's numbers. I know our numbers, and I think we're very mindful of that and mindful of our biggest expense is compensation. We need to manage.
So perfect segue to capital management, given you alluded to that before. At the risk of leading the witness, Ron, just given, you know, I don't want to say less attractive returns at the bank, but certainly more modest growth in balance sheet, heavily discounted valuation. You've brought that up on multiple occasions. You know, how are your capital management priorities evolving and really focused more on the buyback relative to other potential deployment avenues?
Well, we today, because of there is uncertainty, there's uncertainty in the overall cost of, you know, the deposit side of the balance sheet. There's a little bit of uncertainty of an economic cycle in loans. There's an argument to be made to be careful not to lean into this uncertainty, which is why we've limited growth. That said, we enter this with an abundance of capital. We're generating a lot of capital. If you think about, in years past, where we've grown $4 billion-$6 billion in assets, that's $400 million-$600 million of capital deployment by just supporting our regulatory capital ratios in the bank. Well, if we're not growing capital, if we're not growing the bank, well, there's call it $500 million that is going somewhere.
When we look at acquisitions, and I told you we haven't done acquisitions because I think the valuations in this rate environment are high. We're not doing that. We have a modest dividend. That leaves one of the best acquisitions that I can see from my seat, which is to buy our own stock at a multiple, which is at a significant discount to what anyone's showing me on the M&A side. It's really not that hard. It's just. It is the right way to think about capital deployment from a shareholder's perspective, of which I'm a large shareholder, so I do not lose sight of that.
Very well. In the last minute here, Ron, I was hoping to get your perspective on—you talked about regulation, but I'm thinking about it more in the context of Basel III Endgame. A lot of the banks that are 100 billion-plus in assets appear to be at a competitive disadvantage, certainly have to hold significantly higher capital, have to issue TLAC-eligible debt. You are well below that threshold, at least at this juncture. Are you seeing any opportunities to maybe get more aggressive, lean in for growth, recognizing that some of your larger competitors are, you know, facing significantly more burdensome capital rules?
Well, the answer on the surface, absolutely. We, you know, we can... We're a $40 billion holding company. We have a lot of growth that we can do. I do not agree with the arbitrary line at a $100 billion. I think that creates weird incentives from a regulatory perspective. But I actually will say that the Basel III Endgame concerns me more than it excites me on the opportunity set. There's no question that we will have opportunities because of increased capital requirements, the business that can come our way, because our larger brethren are going to have to hold more, I mean, significantly more capital than some estimates, up to 20%. However, I am concerned about what that means for the overall competitiveness of the U.S. markets.
Like, we need to have a healthy, competitive banking system which cannot be overcapitalized. I think our banking system is very well capitalized today. To layer this capital on is in many ways a drag to the U.S. economy. As a drag to the U.S. economy, whatever benefits I see on being able to make a loan over here, over there, is offset by the lack of economic activity that will drive our overall business. Keeping a rising boat lifts all ships. While I see competitive advantage, I really believe that Basel III needs to be rethought. I'm, you know, it doesn't impact me negatively.
In fact, we have some positive impacts, but it's, I have to be on the side of my larger brethren, that they need to listen to them about the potential negative impacts of Basel III. And that's. I think that's an objective viewpoint.
Well said. You know, I think they'll appreciate that perspective since obviously it's not self-serving.
At one level, we'll gain competitively. I'm again more concerned about the overall economic impact of having the banks have to hold too much capital. That will impact loan availability, that will impact economic growth, as sure as capitalism is reliant on a healthy banking system.
Very well. Ron, thanks again for coming. I know you said you won't be back next year.
I'm coming back.
Otherwise.
No, thanks, to everyone. Great conference. Just, well attended. I would appreciate a little more break. So you've kept me busy from beginning to end, and it's now 5:15 P.M. Okay? Very few conferences am I here all day till 5:15 P.M.
Well-
Thank you. And thank you to everyone that took the time to come listen to us today. I appreciate it.
Thanks so much, Ron.
All right.