Ronald P. O’Hanley: Yes. Let me start on that, there’s a lot in there. A comment on — I’m not going to comment on past restructurings, I’ll comment on this one, right. We’ve made some changes to the way we organize ourselves. We talked about that back in the middle of the year. And there’s some benefits we can take out of that in terms of simplifying the management structure, having a smaller number of senior managers, we’re going to take advantage of that. It’s consistent with simplifying our business. It creates accountability and we stand by the need have done that restructuring. In terms of where do we take this business going forward, it’s — it has a lot of benefits to it. It’s very tied to investment markets over time.
Investment markets grow, they don’t shrink. So the actual, if you will, unit pricing while the unit pricing may go down, overall pricing actually — overall revenue is actually more times than not have the tailwind. We like that business. It’s also one that is changing fundamentally from being a kind of a back office, show me the lowest price kind of thing to much more of an enterprise outsourcing business. We are very new in that. We’re very early in that transition. And we think by far, we are the best positioned to take advantage of that in terms of the technical capabilities that we have, the people capabilities that we have, the position we have in the marketplace. We’ve made initial in roads and wins in that, but there’s development that we talked about that will be delivered in 2023 and beyond, but a lot of it in 2023 that will only help strengthen our position.
So we see the end game here in terms of the core investment servicing business as being one which is much more akin to an outsourcing services business, much less susceptible to kind of these instantaneous, I’m going to put it to RFP. And it’s just a stickier business. And we are very respectful and wary of our competitors because having an edge and a lead can be easily caught up on. But we — right now, we believe we have that edge and lead, we’re going to capitalize on it. In the investment management business, again, similar kinds of changes there. We’re seeing an increased desire for the kinds of things that we do, systematic and otherwise. Asset allocation, which we are very, very good at is now an area that everybody is talking about after literally decades of reliance on the 60-40 model, and guess what, it didn’t work or it doesn’t work at all time.
It will lead to a lot of thinking and demand for that. So we like our businesses. We like where we are strategically. In terms of what’s going to happen, will there be other Brown Brothers out there. What I do think that you will see over time is an increasing number of competitors where this may not be their core business saying enough is enough. The capital requirements are — in terms of the investment capital requirements are much too high, mostly above the technology. If it really does continue into an outsourcing kind of environment like we believe it will, it’s going to put more demand to invest in the business. And if this is business 42 of your 80 business structure, you might decide you don’t want to be in this business. So that’s how we see it going forward.
Michael Mayo: That was expansive, thank you. And the fixed cost part of the question, you don’t report it that way, but just in rough terms, I guess. So in asset servicing, less RFPs, lowest price, this enterprise outsourcing, okay, investment management, more holistic instead of the real old model. But still as you transition, you have a certain degree of fixed costs that are tough to manage. I mean it’s not quite like a brokerage firm where you reduced bonuses. So is there any way just to ballpark how much of your expenses are fixed costs and I think they’ve come down from the past, you’re probably trying to floor them more?
Eric Aboaf: Mike, it’s Eric. All good questions. I think that this section in the industry, which used to be variable cost intensive, right, it was very manual, and when you add a new piece of business, you actually have to hire fund accountants. We’re working on ledger paper first and then on the Excel sheets next. And so it’s quite manually intensive and variable in nature. It’s actually as we’ve automated, think about the data centers, you’ve talked about the movement to the cloud, the developers that we have, this business has really evolved to a fixed and semi-fixed cost oriented business in truth. And that means that for certain types of business, we bring on custody business, core custody. Those are kind of the most automated and the most the oldest part of what sits in our franchise, that comes in, you plug it in, and the computers just process a few more times, not overnight, but literally in nanoseconds.
And so this has become a more fixed cost business. And so what we need to do is think about how do we want to manage those fixed costs, how are they deployed, the development dollars and technology, how do we shape that each year because we can — if we do that right, we’ll add feature functionality and that will bring in new business over time, that will help retention and that will help growth. And so this is more of a fixed cost business and semi-fixed costs. Where is it? It’s more 80-20 fixed and semi-fixed than 20-80. And I think it actually has evolved. And so what’s important for us to do is to make sure that we have the products and the offerings and the client coverage to support that and to add new business, add the right type of new business.
And then where there are variable cost components, we’ve talked about some of the more manual and complex areas. Servicing for private, for example, is still quite manual, it’s complicated. They are not standard systems. Typically, in the industry, there are no — there’s very little in third-party software that one could avail oneself of, those are the variable areas where we need to continue to find ways to automate and streamline and that’s part of what we’re doing with the ongoing investment program that we have underway.
Michael Mayo: Alright, thank you.
Operator: Thank you. Your next question comes from the line of Rob Wildhack from Autonomous Research. Please go ahead.
Robert Wildhack: Hi guys. AUC/A wins in the fourth quarter were pretty good. And Eric, you called out a strong pipeline there. What level of new business wins are you expecting in 2023? And do you see those coming from any specific client category, cohort, service area, anything like that?
Eric Aboaf: As we have said, the pipeline remains strong. I think we’re pleased with wins this year. Wins were about $1.9 trillion for the full year. What I have said is and I think we feel good about this target or line in the sand as we’ve said, to drive the kind of organic growth that we’d like we want to win about $1.5 trillion per year of new business. We did that this past year, we did it in space closer to double that in 2021. And so — and that’s our expectation. We expect and we think that’s par for 2023 as well. Obviously, we want to sell more than that. We want to bring in new — more new clients or further deepen relationships with existing clients. I think what we feel good about here is both the new business this year, the $1.9 trillion that has come in has come in at good fee rates.
The fee rates of the new wins are actually in line with our overall fee rate this year. And so that means that as it on-boards it will be neutral or even accretive to the fee rate. So that’s important and that’s an important part of the program. In terms of segments, it’s been broad-based. I mean this past quarter, for example, was broad-based across regions, literally, I think it was a third, a third, a third and we saw particularly strong growth this past year in Asia. We’d like to repeat that again. I think we got — we have an intensity on Europe and North America as well. So there’s not — I’d say it’s not one particular segment or one particular region. It’s fairly broad. But it’s a good pipeline overall.
Robert Wildhack: Got it. And then you also mentioned some higher renewals in the Alpha business. Wondering if you could talk about the retention rate there, how is the retention among front-to-back clients compared to your more traditional back or middle office only clients?
Ronald P. O’Hanley: Yes, Rob, I mean in terms of fully installed Alpha clients, the retention rate is 100%. And you wouldn’t expect it to be much less than that simply because it’s still relatively new. I think that there’s a real commitment that’s made on both sides of the house when you enter into these things. First of all, to actually rewire the firm around — for the client to rewire around front to back. There’s a lot of effort on their part. And while there’s a lot of commonality across these clients, there’s a lot on our part that we need to do to install it. So contracts are longer. But the reality is that the switching costs have also gone up dramatically in these front-to-back things. So we would expect more. But we also recognize that we’ve got to earn that. I mean we’ve got — right now, there’s a — when that happens, there’s a huge dependency on the part of the client and us delivering every day. And so we take that responsibility quite seriously.
Robert Wildhack: Got it, thanks.
Operator: Thank you. Your next question comes from the line of Vivek Juneja from J.P. Morgan. Please go ahead.
Vivek Juneja: Thank you. Just a couple of little details for you, Eric. You mentioned RWA came down by about $10 billion and you expect to see another decline $10 billion to $15 billion. Any color on what you did there and does it sustainable post 1Q?
Eric Aboaf: Yes. Let me just clarify. RWA was lower than expected in the fourth quarter by about $10 billion. And in first quarter, we expect it to reverse, in other words, to move back up by $10 billion, $12 billion, $15 billion. And it’s just driven by some of the underlying volatility in our business. For example, overdrafts were lighter than expected this quarter. They moved around by a few billion dollars, and that moves RWA by a few billion dollars each quarter. In the FX book, we run a very sort of a typical forward book 2 weeks, 4 weeks, 6 weeks forward. And as you have U.S. dollar appreciation or depreciation, you can get you can get $5 billion moves in RWA relatively easily. So that’s just the volatility that we saw.
We tend to be quite careful to stay within our RWA internal limits. That’s why we tend not to have upswings in RWA, but we tend to have these beneficial quarters now and then. And we’ll just note them to you so you can model out our capital ratio trends.
