Welcome to the Q4 2016 earnings call. My name is Sylvia, and I'll be operating for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Alicia Charity. Alicia, you may begin.
Thank you. Good morning. Welcome to Ameriprise Financial's fourth quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, our Chief Financial Officer. Following their remarks, we'll be happy to take your questions. On Slide two of the earnings presentation materials that are available on our website, you will see a discussion of forward-looking statements. Specifically, that during the call, you will hear reference to various non-GAAP financial measures which we believe provide insight into the company's operations. Reconciliation of non-GAAP numbers to their respective GAAP numbers can be found in today's materials. Some statements that we make on this call may be forward-looking, reflecting management's expectations about future events and overall operating plans and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties.
A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today's earnings release, our 2015 annual report to shareholders, our 2015 10-K report, and the first, second, and third quarter of 2016 10-Q reports. We make no obligation to update publicly or revise these forward-looking statements. Turning to Slides three and four, you see our GAAP financial results at the top of the page for the fourth quarter and the full year respectively. Below that, you see our operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. The comments that management makes on our call today will focus on operating financial results. With that, I'll turn it over to Jim.
Good morning. Thank you for joining today's earnings call. I'll provide my perspective on the business, then Walter will focus on the numbers, and we'll be happy to take your questions. Let's get started. I feel good about Ameriprise and our position. We had a strong quarter capping off a solid year. Across the firm, we remain as focused as ever on serving our clients and advisors while we execute our strategy for growth and long-term value creation. We're gaining good traction in Advice & Wealth Management and sustaining competitive results across the firm. Meanwhile, the operating environment has been challenging with continued low interest rates and lingering geopolitical unease. Although equity markets have rallied post-election, and we had a small lift in interest rates at year-end. Ameriprise navigated the environment well, and we made good progress across the business, which I'll review.
Our focus was on executing our strategy while continuing to prepare the business and our advisors to comply with the Department of Labor rule. At the same time, Ameriprise delivered solid earnings and very good overall return. We managed expenses well as we continue to invest in the business to deliver an even more compelling experience for our clients and advisors. As we begin 2017, equity markets are off to a good start, and we may also see further improvements in interest rates. In terms of our financial results, for the quarter, operating net revenues were solid given headwinds from low rates and foreign exchange. We saw particularly strong revenue growth in AWM. Clearly, this is a growth engine for the company and now represents close to 45% of Ameriprise's total revenue. Operating earnings per diluted share was strong, up 11%. We have significant scale.
Assets under management and administration grew to $787 billion, despite an $18 billion negative foreign exchange compare in asset management, which muted strong growth in AWM, where we had very good client flows. Our retail client assets ended the year at a record high. In 2016, we continued our track record for delivering a differentiated level of capital return and excellent expense management while handling regulatory change, maintaining our growth investments, and a healthy excess capital position. In fact, we returned over 150% of operating earnings to shareholders through dividends and share purchases for the year. That included another increase to Ameriprise quarterly dividend early in 2016, our 11th increase over the past 10 years, and the repurchase of a total of $1.7 billion of shares.
With good business results and significant capital return, operating return on equity was very strong at 24.6% at the end of the year, excluding the non-cash impact of unlocking, or 22.2% including unlocking. Very few financial services companies are generating this level of ROE and capital return. We've consistently grown these measures at a meaningful rate. Let's move to the businesses. Advice & Wealth Management is strong and growing. Ameriprise is one of the largest providers in the industry, and we're well-situated with our leadership and financial advice. We've navigated a tougher environment well and ended the year with good client flows and nice increase in margins. During the quarter, we continued to grow fee-based assets as well as expand pre-tax operating margins in AWM, which were up considerably to 19.3% for the quarter.
If you look at the trend throughout the year, margins grew 100 basis points to 18.1% for the full year. Total client assets increased to a record $479 billion, reflecting continued strength in our investment advisory business, which remains one of the largest in the industry. With regard to our advisors, the Ameriprise value proposition and culture is attractive. Our advisor force is strong, and they continue to grow productivity, with operating total net revenue per financial advisor of $518,000 on a trailing 12-month basis. It was another good quarter for recruiting, with 77 high-quality advisors joining the firm. We also had a record year for bringing in larger sized practices. We're starting 2017 with a solid pipeline and expect the recruiting landscape to continue to be fruitful for Ameriprise. The strength of the Ameriprise brand and our reputation is another important differentiator.
We had excellent results in 2016. Our Be Brilliant campaign drove the highest brand awareness we've ever experienced, it continues to resonate very well with mass affluent and affluent investors. We're back on the air with new ads for our Be Brilliant advertising. We also continue to invest in our digital experience on ameriprise.com and the Ameriprise app to provide clients with increased capabilities and security, an even better experience. Building on our strong reputation, Ameriprise continued to earn important industry recognition in the fourth quarter. We're ranked number 1 in the investment industry in Temkin Group's 2016 Net Promoter Score Benchmark Study. In addition, in the Hearts & Wallets 2016 Wants and Pricing Survey, Ameriprise is a top performer in customer ratings based on unbiased and puts my interests first in the investment firm category. We're proud to earn this type of recognition.
It confirms even more that the core elements of our advice value proposition and the way we do business positively influences client satisfaction and loyalty, which is important to our long-term growth. As it relates to the DOL rule, clearly the situation is evolving with the new administration. We, along with the industry, are closely monitoring developments. We're remaining flexible. If the rule is delayed, we will adjust accordingly. However, there are a few changes that we're making that are aligned with where the industry is going. In our advisory platform, we're moving from 12b-1 fees to advisory shares, for example. As we've communicated, any new rule of this significance and complexity needs to be carefully considered and most importantly, preserve choice for the millions of retirement savers impacted.
Our focus remains on ensuring that our clients and advisors have access to a broad suite of solutions to help meet client needs, grow and protect their assets, and achieve their goals. As we move forward, Advice & Wealth Management is situated well. We're focusing on serving clients' needs, growing the business, and handling any regulatory adjustments as necessary. Let's move to Annuities & Protection. We continue to serve our clients' longer-term financial security needs through our annuity and protection offerings. These are solid books that we're managing well. The theme for these businesses is managed growth over time and they're performing as expected given persistently low rates and industry trends. In annuities, VA account balances were up slightly year-over-year from market appreciation.
Like others in the industry, our VA sales were down in the quarter and the year, From what we're seeing, our numbers fared better than the industry, given our financial planning focus. The fixed annuity business is performing as we expected in this rate environment. We continue to see good results from the advisor workshops we've held throughout the year and higher use of the capabilities we have in place. In life insurance, while overall sales were down consistent with the industry, VUL and UL account balances were up 3% given markets. Our life insurance in force remains stable at $196 billion. Overall claims experience remain within expected ranges. At Ameriprise, we continue to focus on being a strong, stable provider that stands behind our clients as we help our advisors improve their productivity and grow. We're focused on building on our progress in 2017.
We built these books over many decades and feel good about the returns we can generate. With signs of the 10-year interest rate coming back, that would situate us even better as we proceed in 2017. In Auto & Home, our changes are taking hold, and we're seeing improved results. As we discussed, we put a good team in place, and a number of the product pricing, underwriting, and other changes that we've implemented are beginning to show up in the numbers. Improvements we've made include increased rates and pricing sophistication, more data-driven and disciplined underwriting, enhanced segmentation, product changes to mitigate property cat risk, and improved claims management. We're seeing improvement in loss development trends and starting to reflect that in our financial results and reserving levels as favorable quarter, we have experienced headwinds similar to other active global players.
As always, we're working to deliver the outcomes our clients expect while generating solid earnings. We've been in front of clients during this volatile period and providing our global perspective. Regarding assets under management, we were impacted by an $18 billion unfavorable foreign currency translation on non-U.S. dollar assets. Excluding the currency move, assets under management were essentially flat year-over-year as outflows were offset by equity market appreciation. We focused on further developing our product lines, providing value-added services to our distribution partners, and earning greater share. We're managing expenses well and delivered a competitive adjusted net operating margin of 36.5%. In addition, we're investing in our middle and back-office operations and executing a multi-year plan to establish an efficient and effective global platform. For the quarter, excluding former parent flows, we had global retail net inflows of about $500 million that included reinvested dividends.
In the U.S., we experienced a bit of a pickup in redemptions in the fourth quarter as we saw across the industry. However, over the course of the year, we've been able to grow share on many of our key intermediary platforms. We are very focused on working with partners to achieve their key strategic growth themes. In the U.K. and European wholesale, we, like others in the industry, were impacted by the Brexit vote in advance of the U.S. election and the Italian referendum. The overall political environment had softened wholesale markets, we're seeing signs that this is settling down. In terms of institutional, our win rate remains strong, we have a healthy pipeline of opportunities in a number of equity, credit, and solutions multi-asset strategies.
However, we did experience a delay in mandates fundings that led to about $700 million out in the quarter, excluding low-fee former parent assets. That said, our won, not funded list of mandates is the largest it's been with wins in both domestic and international that should fund in the first half of the year. We have a number of initiatives underway to complement our core business that we expect will gain traction. These include in solutions, especially our multi-asset, tax-efficient, and adaptive risk products that are already receiving good interest. In addition, we're looking to build on our capabilities in managed accounts, strategic beta, and responsible investing. Our long-term investment performance remains strong. However, we did see slippage in one year versus benchmarks in equity funds with a core or growth bias as traditional value sectors outperformed sharply after the U.S. election.
Our average performance was close to medium versus peers. Performance should improve as the strong post-election surge ebbs. We saw some of that already in January. With regard to our overall fixed income and risk allocation products, they performed quite well for the year. Importantly, across the house for both equity and fixed income, our three and five-year numbers are strong. We also maintained our ratings with 112 4 and 5-star Morningstar funds. As we look forward, we have established ourselves as a global player during a period of intense change for the industry. We're managing the level of change well and preserving profitability. Overall, we have a competitive business, and we continue to position ourselves as a client-centric firm. In closing, I feel good about how the company is situated. We're executing our strategy and investing for growth as we manage the change facing our industry.
We're focused on delivering our advice value proposition while handling the regulatory change environment. We have a solid business, and we're delivering good earnings, cash flow, and shareholder return, and we continue to manage expenses tightly. As we look forward with our client focus, business strength, our capital profile and return, as well as our operational risk management, Ameriprise is positioned well. Now Walter will cover the financials, and I'll be back to take your questions.
Good morning. Ameriprise delivered a very strong quarter with operating EPS of $2.73 and a return on equity above our targeted range at almost 25%, excluding unlocking. Advice & Wealth Management continues to be our primary growth driver with improved wrap net inflows, strong experienced advisor recruiting, and excellent margin expansion. Asset management provided a strong contribution to profitability and sustained very competitive margins through tight expense management during a period of outflows.
Annuities and life and health insurance underlying earnings remained within expectations in light of the low rate environment. Auto & Home was profitable in the quarter, reflecting the enhancements we've made to pricing and operations. Finally, our balance sheet remains strong, enabling us to return over 150% of operating earnings to shareholders in 2016. Excluding unlocking, we returned over 135%. Let's turn to slide seven. Ameriprise delivered EPS of $2.73, up 11% from the prior year. Advice & Wealth Management delivered 21% growth in earnings, and Auto & Home had a substantial turnaround in results. G&A expenses remained well managed. We continued to invest in targeted growth areas and overall remained disciplined. G&A declined 4%, even with elevated corporate segment expenses, including $11 million of DOL project cost and $12 million in severance cost.
As Jim said, we are monitoring an evolving situation as it relates to the DOL. A substantial number of projects were well underway in anticipation of the April deadline. This level of DOL expense will continue in quarter one. Beyond that, the level of expense will be fluid until there is more clarity. We returned a substantial amount to shareholders through dividends and share repurchase, with $523 million returned in the quarter and $2.2 billion for the full year. ROE reached 24.6% for the year, excluding AOCI and unlocking. Let's turn to segment performance. Starting on slide eight, the Advice & Wealth Management business continues to perform very well, delivering strong business metrics and financial results. We are seeing strong leading indicators for this business, excellent recruiting, strong advisor retention, and client acquisition, all contributing to record client asset levels and positioning our platform for future growth.
Operating net revenue was up 4% from last year to $1.3 billion in the quarter from solid wrap net inflows, higher earnings on brokerage cash, and asset-based fees. We saw a portion of the impact from the December rate increase and expect additional lift in 2017. We are tightly managing G&A expenses, down 5% from last year. We are making targeted investments for growth while controlling the overall expense base. Finally, we delivered an excellent operating margin in the quarter at 19.3%. In 2016, our margin was 18.1%, an increase of 100 basis points versus 2015. Asset management continues to generate good profitability, as you can see on slide nine. Assets under management were $454 billion and included $18 billion impact from foreign exchange.
Adjusting for the impact of foreign exchange, AUM was essentially unchanged from a year ago, as market appreciation largely offset the impact of net outflows on AUM. Operating net revenues decreased 9% to $761 million, reflecting lower performance fees than the prior year and foreign exchange changes. We continue to deliver on our goal of maintaining competitive margins in the business by tightly managing expenses. This is demonstrated by an 11% decrease in G&A expenses, a portion of which related to foreign exchange translation and lower performance fee compensation. Excluding those items, G&A was still down 6%. Pre-tax operating earnings were $169 million, unchanged compared to a year ago if you exclude elevated performance fees in the prior year. We continue to deliver margins in the 35%-39% target range for both the quarter and the year. Turning to annuities on slide 10.
The segment is performing in line with our expectations given the market environment with pre-tax operating earnings of $127 million. Holder behavior assumptions to reflect current experience as part of the annual unlocking process. As we indicated last quarter, we expected an ongoing impact to variable annuity earnings relating to those changes of approximately $40 million per year, primarily from an increase in the growth rate of the living benefit reserve. Results in the quarter included $11 million from this change. Our assumptions will be revisited again in the third quarter as part of the 2017 unlocking. Additionally, variable annuity net outflows were elevated in 2016, reflecting the industry decline in VA sales as well as higher lapses, though still within actuarial expectations. In fixed annuities, we are continuing to see account values decline given minimal sales in this rate environment. Turning to the protection segment on slide 11.
Pre-tax operating earnings were $59 million in the quarter. Auto & Home has had a significant turnaround and delivered an operating profit in the quarter, which included a benefit from lower reserves that was partially offset by a true-up of our prior period cat losses. As we previously told you, the actions we have taken to improve our pricing, underwriting, and claims practices are taking hold, and positive trends have emerged in the last couple of quarters. We will continue to monitor performance in the book to determine if further actions are appropriate. We are seeing Auto & Home premium trends in the right direction, reflecting the price increases we are making, which more than offset the decline in policy count related to underwriting change. The life and health business delivered solid results, though with some large unusual items in both the current and prior year.
Last year, we disclosed a favorable $28 million waiver of premium adjustment for life insurance, and the current quarter included two unfavorable items totaling $10 million that are not expected to reoccur. Overall claims experience was in line with expectations. Let's turn to the balance sheet on slide 12. Our balance sheet fundamentals remain strong. Our excess capital is approximately $2 billion, with an estimated RBC ratio of approximately 500%. Our hedging program has been quite effective, with weighted managed hedged effectiveness at 99% in the quarter. The investment portfolio remains strong and diversified, with a net unrealized gain position of $1.2 billion. We returned $2.2 billion of capital to shareholders through dividends and share repurchase in 2016, which was over 150% of operating earnings, or over 135% excluding unlocking.
As we enter 2017, we are still targeting to return 90%-100% of operating earnings to shareholders as a baseline. We will adjust that as we assess market conditions and our valuation. With that, we will take your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. Our first question comes from Suneet Kamath from Citi.
Thanks. Good morning. I wanted to start with Advice & Wealth, just as we think about trending this over the course of 2017. In that 19% margin in the fourth quarter, was there anything that we need to think about as being particularly favorable in the quarter, or was that a pretty clean result?
It's Walter. I would look at it as a pretty clean result.
Okay. As we think about that shift that you talked about from 12b-1 to advisory, what sort of impact is that going to have on the margin? I think the earnings are probably going to be fairly stable and maybe revenues lower. I would think that would improve the margin. Just any color on that?
Yes, it will improve the margin. Again, there's fundamentals that are going to substantially increase the margin also. Yes, there'll be some lift because of the revenue adjustment as comes through. Again, we don't know exactly how much is being repriced right now, which would offset that from the margin standpoint. Clearly, we see the margin improving even beside that.
Okay. Just on asset management, I think, Jim, you had mentioned that the, I think you called it the funded pipeline in institutional was the largest ever. Can you give us a sense of how big that pipeline is?
Well, it is the biggest ever that we've had. We don't really put out numbers at this point, but I would probably say it continued to sort of build. The extra delays that we experienced in the fourth quarter, we're hoping will carry over and that we're still getting some more wins that we expect in the first quarter. I would probably just say, on a relative basis, it's the highest we've ever had.
Okay. Then just the last one for me. Back in December, Jim, you talked about at a conference the earnings mix of the company over time. I think the slide said 75% plus from the accumulation businesses near term, which I'm assuming is two to three years. Did that contemplate any acquisitions or divestitures, or is that kind of what you think you can do organically?
No, that was organically. That did not contemplate acquisitions or divestitures.
Okay, great. Thanks.
Our next question comes from Nigel Dally from Morgan Stanley.
Great. Thanks. Good morning. I had a question with the DOL. I know a lot of what you're doing would remain unchanged, but how would your strategy change at all if the rule was delayed? Would there be any earnings impact from a delay?
As I mentioned before, there are certain things we're continuing, like the move away from 12b-1s and advisory shares, putting that in place, institutional share classes, et cetera, that we're going to continue down that road. If there was a delay and the administration is reevaluating, we'll participate in that. What that would mean is that part of the activities relating to the BIC Exemption and the activity changes there would probably be put on hold across the industry for revision or review further. We would probably hold on that activity level and what we would do there until there is some clarity about what would be appropriate or what the industry will move towards with new regulation.
Okay. Just on recruiting, you also spoke to recruiting strength in a settled pipeline, but the number of advisors shrunk down a little. I guess hoping to get some color as to what was driving that.
Yeah. There are two things. One is we continue to sort of wean out lower producers in our employee channel. In that regard, we're bringing in higher productive advisors. As people are hitting thresholds or not hitting thresholds, they're starting to reevaluate whether they should be in the channel there. The second thing is w e experienced a little higher turnover in our franchisee with some of their assistants as they continued to make adjustments based upon the environment and the regulation and what they needed to do there for their own areas. We don't see anything significant in a sense of a pickup. We've had some additional retirees where they transfer their book internal through our succession planning before the new regulations have come out. Nothing abnormal. It was more in the lower producer end, if anything.
Very helpful. Thanks.
Our next question comes from Doug Mewherter from SunTrust.
Hi, good morning. This is actually Matthew Rosenberg on for Douglas Mewherter. Thank you for taking my questions. In asset management, your mutual fund outflows seem to be high. Aside from FX and conditions in the European market, is there anything else driving those outflows? Are you seeing those trends moderate into the first quarter?
Yes. We did experience two things. We did experience a bit of a slowdown in some increased redemptions out of our U.K. activities, Europe in particular, due to the Brexit. After the Brexit was some of the election and some of the unknown, I think you've seen across Europe there's been a bit of a pullback, whereas the U.S. has actually seen more of an inflow. We're starting to see that stabilize as we move into the new year, which is good. In the U.S., we saw some additional pickup in redemptions I think that the industry also experienced more in the latter part of November, December. It was actually doing pretty well in October. There was some adjustment there. We're hoping that, again, that starts to stabilize to come back in the new year. We're seeing some stabilization there as well.
Those are the things that we saw a bit of a pickup that was probably more than we expected.
Okay. In Advice & Wealth Management, you touched on this earlier, but is your lower distribution in G&A expenses, is that mainly a function of turnover, or are you also seeing benefits from new policies following the fiduciary rule?
What we've been doing is we do modulate the amount of expense that we have across the company. As you saw, our G&A is down. We've tightened up on our expenses. We're trying to get greater level of productivity from the activities that we have underway. We have invested well in our technology and enablement. That is also giving us some good benefits. That's what we continue to sort of focus on, knowing that the environment was a bit softer last year with both the markets on average were down, as well as just the idea that the increased regulation might have had some effect on activity. We're seeing us manage and continue to manage expenses quite well so that we can use that as an offset to any pressure on the revenue side.
Okay. Thank you. That's all I have for now.
Our next question comes from Ryan Krueger from KBW.
Hi. Thanks. Good morning. I wanted to follow up on Suneet's question on the AWM margin. I guess, Walter, is the takeaway from your comment that you think the fourth quarter margin is sustainable as we move into 2017 as kind of a starting point before any impacts of potential short-term rate increases?
The issue is our average rate for the year was 18.1%. Clearly you get seasonality as it comes through, but we do see that that will be appreciating. Obviously within that, they will get some benefit from the interest rate. We do see a base level of increase.
Okay. Think about the full-year margin as a starting point with upside from there.
Yes, absolutely.
Okay. Then just on the tax rate, can you give us a rough sense of what you'd expect in 2017 at this point?
Yes. Again, looking at it and looking at the mix of business and everything and assuming obviously no benefit being derived based on what people are saying from any of this tax discussion going on in Washington, I would think 24-25 is probably a range, it's fluid. It's based upon the mix we see in the business. I think it's a good number. Good range.
Okay. Thank you.
Our next question comes from Thomas Gallagher from Evercore ISI.
Good morning. First, just a bigger picture question on Advice & Wealth Management, Jim or Walter. If you just look at some high-level statistics, your AWM revenue yield are higher than peers by a considerable margin, depending on which peers you're looking at. Certainly one of the bear cases on your company is that your fee levels are quite high over time. They're going to have to come down meaningfully. Now, I think there are some pretty significant differences in your business versus those peers. Can you address that broad question and is there a movement for you as you're growing assets now to move that down, or are there pretty significant differences? How would you address that issue?
I would say that I think there are differences. Particularly, we have a very strong fee-based business around our financial planning and advice that renders a lot of services to the clients on their full life planning, full retirement, everything from estate to children's education, et cetera. All of that is part of our fee-based model that is of great value to our clients. In addition to that, when you look at, when you say the fees on an average client basis, et cetera, based on assets, et cetera, it's very much in line based on asset levels, et cetera, when you look at a competitive frame. Of course, fee rates for people who have a significant amount of wealth will be always lower than the people who might be in a mass affluent account based on size and effort for the services rendered.
There are differences there as well. It's hard for me to do a compare on just an absolute basis. You got to look at some. The financial planning basic foundation and the services rendered there is part of our fee basis. I would tell you that we generate very strong value in client. Our Net Promoter Score, as I said, was right at the top. All of our ratings for client satisfaction for the services rendered. In fact, the more we do the financial planning, even though there's a fee for it, the more the clients are satisfied. We feel very comfortable with that as we continue to move forward, and we'd like more of our advisors to actually embrace that model more fully across their client base.
Jim, you don't see anything structurally that you need to change, whether it's in terms of your typical structure moving far more aggressively into passives or just broader changes to level of fees based on your offerings. You don't see any real need to change in lieu of where things are going in the environment?
The big change is removing the 12b-1s as there are more institutional share classes, and where there aren't, we'll rebate. Moving that is a reduction in fee to the client for the cost as well as we move into institutional share classes across our range. The second thing very clearly there is, as we look at our business model as anyone else, there is always the move to more fee based. Our advisors are already factoring in their model portfolios and what they do, passive ETFs. Having said that, it's not as though active doesn't make sense as a component of that based on a combination of factors, including volatility and risk management and diversity of assets against market conditions.
We're helping our advisors to actually build more full-fledged portfolios, taking into account the combination of factors so that they can manage against the needs and the goals of the client, not just against the benchmark. We think that's very critical for the long-term achievement of what the client needs to do with less risk.
Got you. Finally, you previously said the change from 12b-1 to advisory shares shouldn't have any meaningful impact to your bottom line because most of that was a pass-through to the advisor. I assume you're closer along since it now has been implemented. Is that still the case or has that changed at all?
No. We've always had when we said we always have a piece of what the 12b-1s that we would get based on the grid and various. Having said that, we also said that we would work to offset that through a combination of expense management and other arrangements, and that's what we're doing. If you just took it as a direct, would there be a piece hit to it? The answer is yes. As we said, we are working to offset that, as you've seen that we've been continuing to do in combination of expenses, as well as ensuring that for services rendered and what our advisors start to actually do in certain cases different than what they did in the past.
It will have that effect, but we're looking to offset that, and we think we have things on the way that would help that along, just like our advisors will make adjustments in their practices as they look at what they need to do. As I said, they've tightened up their expenses as well in some instances.
That's helpful. The margin benefit, I assume some of the significant expense improvement you saw in the margin this quarter, some of that's going to be given back in 1Q as you transition? Or is that not right?
Yeah. That's why we don't look at the 12b-1 just as a margin adjustment because we would have gotten a cut at that. We'll probably, in looking at it as a piece anyway. What we're doing is what you just saw in the fourth quarter based on the expenses that we've tightened and other, we want that to roll in. Last year, we had a full-year margin of 18.1%. You can look at the various quarters based on activity and expenses that pick up in certain times. We're looking for that to increase from the 18.1% on an annual basis. That would also help to offset anything that would be the reduction in the 12b-1s from a revenue perspective to translate in.
That's where Walter said the 19% is what we're shooting for as we go forward, continuing to roll on a full-year basis.
Got you. Thank you.
Our next question comes from Erik Bass with Autonomous Research.
Hi, thank you. I had a question about the recent FCA review of the asset management business in the U.K. and what you see as the potential implications for Threadneedle, and if there's any impact you would expect on sales or margins.
Yeah. Well, as you're aware, the FCA has published an interim asset management market study, which they're inviting comment. The focus is on regulated funds and delivering value for the end investor. We're currently engaging with the FCA through a series of industry roundtables as well as the industry bodies on how the recommendations in the market study can best be taken forward. It just recently has come out. We're looking at that, of course, and with the industry, and we'll be working to get back with the FCA and give our comments and understand what they might want to move forward with. It's a little early yet to talk about it.
Okay. Then maybe a follow-up to, I think, sort of what Thomas was asking. Can you just discuss the average wrap account fees, and if there's been sort of any changes in those over time? Do you anticipate any pressure on wrap fees as the discount brokers continue to both reduce commissions and index fund costs?
I think there's been a lot of talk, when you look at it against the industry of just a wrapper of an ETF or no support from an advisor, and you just have a separate portfolio that's all automated. The real value of what the advisor brings is much more than just putting together a simple allocation of ETFs, and then let the client fend for themselves. The real key around the advice value proposition is the advice that's tangential to that. How do you help a client with their behavior? How do you help them make decisions against their various goals and when to adjust, when to add, when to take out, what's tax beneficial, what's not, and how to manage that volatility through cycles. I do believe, as with anything, it's always a competitive frame, and there will always be adjustments.
At the end of the day, as I said, I think with Ameriprise and our advisors, we continue to actually move more upmarket. We continue to gain greater client flows based on the type of client that we're continuing to bring in based on our advisor value proposition. What we're looking at is there'll always be some adjustments where necessary based on services rendered or price in the market. The value added of the advisor, I think, is still very important and very critical. Our advisors know with their clients, what is the price and the value that they're offering for the services rendered.
Also, I would say we're going to continue to focus on continuing to move a bit more upmarket so that the asset levels go up, in which case prices may, on a fee basis, on a relative, go down, but it will be offset by volume.
Got it. Thank you.
Follow-up question comes from Humphrey Lee of Dowling & Partners.
Good morning, and thank you for taking my question. On the brokerage cash balances in AWM, it continues to build. I think the $26 billion plus is probably a record high. Just thinking about with the high short-term rate and what you are doing in terms of enhancing productivity at the advisors channel, how should we think about the deployment of those cash balances in terms of, I guess, the engagement between your advisors and clients, and how should we think about the client activities going forward?
Yeah. As we looked at last year, we saw in the beginning part of the year more of a slowdown in activity. If you remember, the markets were very volatile. They fell a lot. There were a lot of unknowns. You had Brexit, et cetera. What we started to see, as you saw in the fourth quarter, some of our flows back into the wrap business started to pick up again. We continue to see that now as we move into the new year. We brought in assets. The cash balances built. The advisors didn't put as much to work. They started to do that again in the fourth quarter. There's always events and changes, as we continue to see move forward, particularly if there's some delay in regulation as well, the market conditions have improved.
Interest rates are starting to pick up a little bit. Economic activity is more positive. I actually believe that some of those assets will go to work as we move through 2017. The good thing is that they have the cash on hand to do it, and we're bringing in flows. That's the positive in it. Also, as Walter mentioned, there is a pickup of interest rates that just happened at the latter part of December, and it looks like a few more rate increases coming that would also get money to work.
I guess, a more generic question regarding the cash balances. Is there any seasonality based on what you're suggesting as money putting to work, money into the fourth quarter, maybe a little bit on the sideline and putting more to work in the coming year. Is there some type of seasonality with respect to the cash balances?
Yeah, there's a small seasonality as it relates to the December buildup. Again, this is record numbers for us, but there is a small seasonality in the fourth quarter.
Okay. Got it. Thank you.
Next question comes from Yaron Kinar from Deutsche Bank.
Good morning, everybody. You touched on the FCA report. Could you also maybe talk about the MiFID II regulation in Europe and how you see that impacting your business at Threadneedle, and what adjustments you may be making?
Well, obviously, we are working through it as it relates to it. From that standpoint, it is certainly going to have an element of a lot more reporting, a lot more rigor in looking at, again, to avoid the conflicts similar to the RDR, what they did. We are working through it. We have teams, and we will certainly be compliant with the elements within the time frames that are prescribed.
Do you see it as having any impact on flows or profitability?
Not at this stage.
Okay. In Advice & Wealth Management, productivity's up a little bit this quarter. Can you remind us where you think this productivity level could move to, assuming a gradual improvement in the rate environment and kind of normalized market appreciation?
Regarding the productivity, as I said, I still think there's a little bit of an overhang, depending on the regulatory frame that people will be working on to get compliant if that was to move forward. I think the other things that we brought about, and the switch to advisory shares and the changes we're making there, is working its way through. It occurred starting last year, but we're making the changes as we go into the first quarter. The real question then is whether the rule moves forward for full implementation starting in April, in which case we'll have activity and training and all activities as we continue to move forward. If that is put on delay, that would actually help with the idea that advisors can be back focused on their book and growing that book.
That's what we would probably say at this juncture.
Okay. Maybe put a little bit differently, in terms of the pivoting from kind of the lower productivity advisors into higher productivity advisors and the hiring of more experienced advisors, where would you say we're at? What stage in the game are we at today?
We are continuing to bring in now higher producing advisors based on our recruiting. The GDC is going up or the total of their productivity is going up that we are recruiting in. For the people we've recruited in and the new people we're bringing in, that continues to ramp up. You could probably start to see that even more in our P1 channel or employee channel as that continues to go to fruition. We're continuing to see that as something that will be part of the equation going forward. Again, it's sort of a gradual quarter-by-quarter with what people we bring in, they ramp up, et cetera. The pipeline for our recruits still look very good. We're even bringing in a lot more million-dollar practices. It was the highest we've ever been in 2016 based on our value proposition.
We want to continue along that focus into 2017.
Thank you.
Our final question comes from John Nadel from Credit Suisse.
Good morning. Thanks for getting me in. I guess I have a couple of quick ones for you. If we think about the full year 2016 margin for Advice & Wealth Management at 18%, how big is the differential at this point between the margin produced by your franchisee channel and your employee channel?
Okay. As we have indicated, the employee channel is building as you get the advisors and they vintage through. That is actually improving, but that is lower than the franchise channel. That gap has really narrowed from that standpoint as when we started this journey. I would say they are certainly moved into the mid-teens, and the franchise channel is closer to the high teens.
Got it. Okay. That's helpful, Walter. Thank you. A couple of years ago at your Investor Day, you showed us a hypothetical impact from a 200 basis points rise in the Fed funds, and that would, all else equal, that that would drive about a four-point increase in the pre-tax margin in Advice & Wealth Management. If I think back on that, though, I think the level of brokerage cash balances was about half then of what it is today. Does that make a significant difference in how we should think about that?
I have to go back and reference, clearly I think we were probably in the mid-teens back then, depending on when the year, and certainly it has grown. As we assess it, as we talked about it, there is looking at the environment, we believe for the first 100 basis points, as we talked about, 80% range will fall to us. As you progress up, you would start to stream that depending on competitive situation. I'd have to go back through the math from that standpoint, but the environment's different. Certainly, we've grown. You're going to get the volume, and then it's a matter of getting the rate mix shift.
I think the math we told you for sure on the first 100 that we should get the 80, then we have to go from there looking at the competitive elements as we assess it today.
Okay. That's helpful. The last question I have for you is really more of a, it's a bit of a hypothetical as well. It's no secret that you guys were at the late stages of looking at a relatively sizable asset management transaction that went in a different direction. I'm curious if you did a transaction that was going to cost somewhere between $3 billion-$4 billion, would you need to issue equity as part of that transaction financing?
Hypothetically speaking, it was not our intention to issue equity. We really do believe we have the capacity to not do that.
Maybe another way of thinking about it is, how long do you anticipate the buyback would need to be either turned off or curtailed? Would it be a matter of a year or less than a year?
Okay. That, again, we look at returning to shareholders in a different way, clearly as we looked at your hypothetical, we certainly feel we have capacity. We have to gauge the circumstances, the buyback, the assimilation, looking at the agencies and everything. Certainly, the capacity is there. We generate a lot of cash. It's the transitioning the upper elements. Again, let me go back to your original premise. It was not intended in something of that nature that equity would be the element that we would use. It would be more from debt or internal cash.
Terrific. Thank you so much.
We have no further questions at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.