Ally Financial Inc. (ALLY) Earnings Call Transcript & Summary

Okay. Can you hear me now, James?

Yes, I can.

Great. Okay. Sorry about that, everyone. We'll start again. Moshe Orenbuch, the specialty finance analyst here, joined by my colleague, James Ulan. And we're very pleased to have with us Lule Demmissie, who's the President of Ally Invest. Ally's Digital brokerage and wealth management arm. Before joining Ally, Lule had been a Managing Director at TD Ameritrade and also been at Morgan Stanley. We're going to do this in a fireside chat format. If you'd like to also register your own questions, you can click on either my e-mail or James' and send the questions to us to work into the program. So with that. Lule, could you talk a little bit about how Ally Invest fits into Ally's overall strategy? The -- mentioned the digital platform and almost 0.5 million customers and $16 billion of assets under management. What's driven that growth to that level? And how big do you see this kind of getting in the future?

Yes. It's been a fascinating 2 years. I mean the original thesis, obviously, was that people who do digital banking are likely to also want to do digital investing because so much of the financial services that people consume have been digitized. But really, the last 2 years have taken that thesis and put it on steroids. And that's really what grew it, is the synergy between consumer thinking. I logged on to my bank account and then I look at what my investments are doing, is so tight that the growth really has been, If you create an experience that creates a tightness to that, obviously, making sure you're complying with your regulatory obligations. The consumer will essentially take both elements of the dish. So really, that's -- the last 2 years really expanded that growth. And then in addition, there is a secular trend that's taking place, especially among millennials wanting to be more self-directed in their investment appetite, whether that is a robo, which fundamentally is a self-directed managed instrument or whether that's buying individual securities that they wish to have.

Lule, this is James. Thanks for joining us. You talked about 2 years of rapid growth. And I was wondering if you can share a few thoughts on what you think the next 5 to 10 years might look like? It's a long time. But I guess, what are the operational goals and maybe even strategic goals, how Invest fits into the greater Ally?

Yes. So I think that's actually how we think about it because we think that Invest is a small business within a large institution. And so we treat it as a company that you have to think of the arc that is longer than 5-plus years, right? Because if you don't think of it that way, it's really hard to make the investments that make that potential growth and scale happen. So ultimately, there's a few areas. Most of all, what we look at is who is the consumer that's coming through the bank? And what kind of investments behavior are they displaying? Or are they expressing they want? Whether that's what they pick that's on our menu or whether it's because of a survey we do with them or whether, frankly, which tells us even just as much, where they go to when they leave us because we may not have something? So all those 3 sort of sources of input, if you will, really drive our strategy. And so what is that strategy? Initially, it was obviously self-directed, and we saw the era of self-directed came roaring back in the last 2 years, right? And so we think that, that level is not going to be sustainable, but something shifted. So even though that level will go down to a certain sort of natural watermark, we think that, that's sort of the self-directed trend is here to stay. In addition to our strategy, a lot of our customers are mass affluent individuals who are actually eligible for a scalable advice offering, right, not just a robo, but advise, with an adviser at the center of that. And one of the things we find when we talk to customers is like, listen, I don't want to just be going to a call center, I want an adviser that's going to advise me on my financial plan and help me manage that, not just what you have with me, what I have with you, but across the group; sort of the landscape of where my money is. So wealth is going to be important in our strategy. And we believe our wealth take is going to be one where we bring a lot of the elements of, if you will, the sort of private client element to the scalable way for our mass affluent, sort of millennial and extra customer base, which is the majority of our customer base. The other element of our strategy is obviously robo, which benefited a lot from this pandemic. The story that we don't hear about this pandemic is actually -- it's not -- it was a -- it wasn't a monotone experience. You have people who team in and became more diversified investors. You have people who team in and decided they wanted to be individual stock investors and primarily growth. You have people team in who wanted to be speculators. And you know what, they've led it for us, all of it is possible, right? So self-directed is going to continue. We're going to be building out wealth. And we're going to continue to support robo. And then lastly, I'd say if the crypto question is the big factor x that I think any shop that has a self-directed offering has to really seriously look at.

Great. Great. Just a quick follow-up on wealth. I mean your experience is perfect to lead that because you spent, I think, almost a decade at Morgan Stanley. And I actually was a financial adviser at Morgan Stanley for a period of time. Could you just elaborate on what might wealth look like? How do you roll it out? And what is it like in the early days and what do you hope to build it into?

Yes. So we must know Henry Kaplan in common then if you were at Morgan Stanley as an adviser. So really, the -- indeed, I have spent a lot of my career building out wealth offerings, both at Morgan Stanley and TD Ameritrade. And what that affords me obviously, is like I have made a ton of the stake that inform my sort of my strategic intent when it comes to building out wealth, which is valuable. But wealth, the way we look at it at Ally Invest in this: we believe that it is not plausible to do a meaningful scalable wealth program that is purely digital. It's been proven out. As you can see, robos have reached a ceiling, right? so this idea of thinking you can digitize all of it is -- it's not probable. There's people that have really won the scale game or those who have made it -- respected the digital evolution but have put an adviser at the center of it as well because people want to have an adviser. And that's the angle we're going to take. Now the benefit we've got is like I don't have a storefront. So my margin's already, over the long run, will be better much in terms of the kind of delivery we can make. The other thing we learned, which is really fascinating is that even though people want an individual adviser, they don't necessarily need to have to have them in-person. And that makes sense. The lives we live and COVID even made it more probable, right? So ultimately, we think that a digital plus human in a non sort of branch model is one that's going to help us drive scale of advice at Ally. And our customers tell us on a regular basis, if you had -- remember, I told you those 3 sources of input, people who leave us tell us on a regular basis. I'm going to consolidate with an adviser. And so we want to be that brand that they choose because they love Ally, but they want to be able to have that offering on our shelf.

Got it. And maybe going back to some of the things you discussed at the earlier part of that. Lule, could you talk a little bit in a little more detail about what the typical customer really does look like? And as you think about that, what behaviors you've seen from them in the last year or 2 and maybe a little bit about how that's going to evolve in the next several years?

Yes. So broadly speaking, what's interesting is Ally Invest is a story of the company that was acquired and the company that it's becoming. So there is a legacy customer, which does options trading, which is an active trader, which is essentially either stabilized or diminishing, right, because of the fact that the growth is coming from 2 types of customers. One is either the majority of our new account -- let me -- the plurality of our new accounts is millennials. So the kind of persona that comes into the bank ends up taking a bite out of Invest. So that's one. So the second is really xers. If you look at generationally millennial and xers, they make up a majority of my account base, my customer base and growing even more so. So it is a customer that's -- who's younger, which is different from like the typical Morgan Stanleys that you would see or other traditional broker-dealers, right? So it's a younger-skewed investor base that is an affluent millennial or xer, digital-native. And the digital native actually crosses the whole divide. Because at the end of the day, even if you are older than an xer, you're going to have to be a digital-native to consider us. So digital nativity is a very dominant trait of the kind of investor that we attract. The kind of investments that they make, as I said, it's across the board, but they really reside under 3 categories. And it's not exclusive, like 1 individual that comes in, may do a robo and then goes off and buys a FANG stocks, few of the FANG stocks. But it's typically growth stocks that dominate when they come in or a robo or a diversified ETF or the last is they want to speculate, right, whether it's any kind of security that they have a bet. They think that we'll do well in the short run or the mean stocks that they want to follow. So it's really those 3 main categories is how they express their behavior.

Got it. And just 1 quick follow-up. I did get a question come in from the audience asking like are these generally coming from Ally Bank? Or are you kind of marketing separately to them? Or is it a combination? How to think about how those customers come in?

The majority currently are coming from Ally Bank because we feel that the penetration of our book is so ripe. And so when I -- I think I joined about 2-plus years ago, and we were approximately 40% of our customer base -- actually before my time, the year before, it was about 30% of our customer base, were people who were also bank customers. That's now fast approaching to about 50%. So our book and our complexion is looking very much like the bank customers whether they came in through the Ally Investor or whether they came through the bank door. But right now, our acquisition is the penetration of our book, and there's still a lot to penetrate. And so -- and even when we bring out our wealth offering, it's still going to be a penetration strategy. We will eventually start marketing. But what we decided actually was instead of spending marketing dollars, we did what investors have been hankering for in the marketplace, which is that if you noticed, we have a ton of investment outlook out there in the marketplace. So our customers, the way we acquire them is actually giving them real-time insights on what's happening in the investment landscape. It was a fantastic strategy during the pandemic because people didn't want it to be marketed to. They wanted to know which way was up and which way was down every time the market went sideways, upwards or downwards. So that's how -- what our primary marketing strategy was: insights.

Okay. Over to you, James.

Thanks. Lule, can you talk about what you saw pre-pandemic as far as flows in investor behavior? And what you saw as government stimulus was disseminated? I mean, Moshe and I watch credit closely. Credit performance was really excellent over the pandemic and largely because people had extra money from the stimulus. Just what were the flows and activities like pre-pandemic, during? And did they change over the course of I guess, 2020 and into this year as well?

I think there were 2 things that actually happened before the pandemic, the era of commission 0 came. So that was really a major stimulus already, right? So I would say before even the pandemic, commissions to 0 had already shifted behavior and adoption of self-directed. Before we went to commission to 0, I would say, I think the conventional wisdom was self-directed was an important component, but not the main actor. That growth really was going to be purely a wealth game. And especially when you saw the regulatory changes that were happening with best interest and all these other things, people thought, "Oh, God, it's going to be so onerous to self-directed and the cost of delivery is going to be difficult." And then commission going to 0 change the scale. And adoption rate for consumers. What then happened is when you added the pandemic on top of commissions going to 0, that really sort of took it to the next level, right? Now did stimulus part -- have a part in people, both in their savings account and in their investment accounts? I can't quantify it to a precise degree, but I mean, it's intuitive to think that, that was a contributor. But I think that the main contributor before stimulus kicked in was we were all in front of our computers and you logged on to your bank and then the natural thing was to log into your investments account. And if that was difficult to do, you said who do I go to, to make that easy?

Got it. There were lots of days at the beginning of the pandemic where I didn't -- I refuse to log on to my investment account. But fortunately, some of those have passed. Lule, we're in the second day of a 3-day kind of fintech conference. And we've had lots of companies here that are trying to disrupt various elements of what one would think about as a kind of a legacy environment. And so as you said, kind of a somewhat unique position because it is a kind of a digital kind -- of a digital business, but inside of a larger company. So how do you think about the impact of potential disruptors? What areas do you think they will focus on? And how is Ally Invest positioned for this?

Yes. I think it's interesting. I think the conventional wisdom was once commissions went to 0, we thought that, that was going to have a chilling effect on disruptors and new entrants, right, because where were they going to get the revenue to be able to disrupt towards the conventionalism. And actually, that's not happened. So if you look at some of the fledgling sort of digital providers like Public or some other companies, they're doing well. And I think part of the disruption that will happen going forward is going to be who is the fastest to adapt to this sort of nimble client experience that is digital. Now the incumbents have spent quite a bit of money during the pandemic. They've not been sleeping, right? So you look at some of the larger banks, they've invested quite a bit in their digital transformation, whether it was Merrill Lynch or other places. So it's not as if the incumbents are sleeping. I think the edge that the disruptors still have is that incumbents still think of digital investment as though it is building a building, right, it's infrastructure. Disruptors think of it as a disruption of the client experience. And so I think as long as that mental framework of designing product and experience is one of which that you're hyper-focused on client behavior, I think disruption will be there because the customers will be attracted to it. And I think the incumbent, although they have become more digital, I don't know if they've become digital-native yet.

Got it. Okay.

So multiproduct relationships are something that the leadership that Ally has been talking about. And I think I think the latest quote was that these relationships have grown 17 straight quarters in a row, and they're now standing at 9% of depositors. Can you just describe the landscape of multiproduct relationships at Ally? Maybe just define what some of the common pairings are and just discuss the strategic importance of them to Ally Invest in the greater organization.

Yes. Ultimately, we -- the thesis around multiproduct relationships really is the stickiness and the share of wallet story, right? Those are the real 2 KPIs. The fact that when you have a multiproduct relationship, it tends to be stickier and the share of wallet tends to be higher. So those are the sort of the 2 bogies that we're looking at. In addition, it just happens to be that they also have -- they become some of the more satisfied customers. But one could argue cause an effect. Are they becoming multiproduct because they're the most satisfied customers or not? But the other 2 are definite truisms that are displayed in our numbers. I think the strongest multiproduct relationship right now there is between investing in banking, and that is not surprising, right? Because in consumer buying, regulators aside, they're connected, they're cousins to each other, those activities. One has a lower rate of return and the other one gives you a longer rate of return over the long time -- long term. I think mortgage is going to be a big one. I think lending will be another one ultimately because of the demographic we're in, it makes sense that lending will be a major sort of lever of that multiproduct relationship. So our goal really is how to make each of those products capabilities viable in their own rights, right? Would a company -- would a customer consume those even if they didn't come to Ally. Even if they didn't come through the umbrella of Ally. Making them viable products on their own right. But then ultimately, with hyper precision, invest our resources in clearing any kind of rigid or rigidity or inflexibility in the client experience to be able to consider those multiproduct relationships. There are plenty of companies that have resilient products on their shelves. But in order to engage those products, it feels like you have to engage with 6 different shops, right? That's not going to cut it for the consumer. So it's not going to be enough just to have multi products. The key is going to be how fluid you make it to be able to have those multiproduct relationships, and that's our goal at Ally.