Okay, thanks everyone. We're going to get going with our next presentation. Next, I'd like to welcome Ameriprise Financial, one of the most diversified financial services firms when it comes to wealth management, asset management, and annuities and insurance products. With the shares up nearly 50% this year, Ameriprise has definitely been a big beneficiary from both improving macro conditions and deregulation, but also just as importantly, continued growth on the wealth side of the business with very strong organic growth yet again in 2017. With us today are Jim Cracchiolo, Ameriprise Chairman, CEO, and Walter Berman, the company CFO. I think Jim is going to kick us off with a couple of brief opening remarks and a couple of slides, and then we'll jump into the Q&A.
Great. Thank you, Alex. What I want to do today is just give you a little perspective. I spoke a year ago about what we saw as the opportunity dealing with the environment that we're in. I think we've come a long way, we've been consistent on the path that we told you we'd be on strategically. Let me just run through very quickly. I believe, actually, it's even more exciting about the market opportunity that I see today than I saw it three and five years ago. I think that our differentiated value proposition regarding advice and the solutions we provide is really important for the consumer, and one that I think we can continue to really build a great franchise in.
With that, the continued move to fee-based businesses and the expansion that we have around the wealth and asset management space, I think is generating excellent returns that we are returning in a strong way to you as the investor. One of the most important things I want to say, this is continuing, is I really feel great about the people I have at Ameriprise. What we do, how we do it, the culture that we have, the values that we have, the employee engagement what we have, the advisor satisfaction that we have, really leads to a strong business. We are being highly respected out there from the consumers and the relationships that we have formed. Very critically, that in any financial services company, being a people-oriented business is critical.
With that, the need for advice, the need for how investable assets are growing and the advice that you need around those investment assets is continuing to be what the consumer is looking for. Whether it is the baby boomer transitioning to retirement, the generation X accumulating for retirement, or the millennial, all of them will say that we are looking for someone who will help us navigate the environment and help us achieve our financial goals, not necessarily an investment to beat or just achieve a benchmark. With that, Ameriprise is one of the leaders in it. We're still the leader in financial planning and advice, but we have an excellent foundation, almost 10,000 advisors, and we're serving the consumer in a strong way. Very clearly, the need for advice continues to grow. People who say, "No, well, that's continued.
Everyone has advice. They're just looking for a simple solution, and they're looking for someone to be self-served" is not necessarily the case. When you look at who we are in the marketplace, when you look at what the consumer is saying, they are rating us as one of the highest firms out there, whether it's in trust, it's forgiveness, a top performer in serving them in an unbiased way, or even in a Net Promoter, meaning that because of the way we've served them, they will recommend us to their family, their friends, their colleagues. Our Confident Retirement approach is even stronger when we serve the mass affluent and the affluent. People with more than $1 million, their satisfaction are in the 90s. They, again, they're not just asking for an investment solution. They're asking for, how do I navigate? How do I achieve my retirement?
How do I achieve the goals that I have ahead of me in a financial way? Very clearly, we continue to invest strongly. With the DOL now, something that went into effect in the best interest, but now putting the BIC exemption on hold, we're able to redeploy our resources back into building our brand, our value proposition, the digital capabilities that we've invested heavily to continue that, the security and the technology necessary to serve the consumer when, where, and how they want. Our advisor productivity, the client growth, continues to be leading in the industry. From that, we've been able to more than double our business over the last number of years in thinking about how we've achieved revenue growth, margin growth, as well as pre-tax operating earnings. Our annuities and insurance business are solutions we sell to our client.
Therefore, we can put a good, strong proposition with good benefits at an appropriate price and to generate a good return. When we do that, we deepen our relationship with clients. With that, we generate very good returns. The growth of that business now has moved from living benefits to actually an annuity without a living benefit, which is also great for us. The growth in business and sales have come from that area as there's been a reduction in the sales of a living benefit. In our asset management business, we think there is a continued growth of assets under management over time on a global basis. With that, we are a player. We have enough scale, enough diversity, and good product and good performance to be competitive.
Over time, we've always been hit with some level of outflows based on how we've acquired some of the businesses. As you can see, over the years, we've moved from a good part of our business being in that proprietary ownership when we took over the assets to now being a significant smaller piece, less than a significant smaller piece of our portfolio. Our growth has really come from third-party retail and institutional. Over 90% of our revenue is through third parties or affiliates. Where are we concentrated? We have great expertise in credit, high conviction equity, asset allocation, solutions, and strategic beta that we're continuing to develop. Therefore, we're putting more product to market. We're actually gearing what we sell against outcomes for the advisor and for the firm that we're supporting, and we're making good progress in that area.
There's more that we are concentrated to do as we move forward. With that, our assets under management, our operating net revenues, our margins remain quite strong and one of the most competitive in the business from an absolute of what we generate in a return. Overall, we have shifted our business mix from what was more capital intensive to what now is more asset light, and we are two-thirds, one-third in that category, and we're going to move to more than 75%. That has been giving us the ability to generate a good operating EPS growth, a good ROE. We're one of the highest in the industry as a diversified financial services player, almost 30%. That has generated, to me, lower earnings volatility and a higher compound annual growth in EPS compared to any segment that we work against.
Overall, what does that mean to you? A good dividend payout, good share buyback, and a total payout to you over 100%. That's what we've achieved over the last six years. Overall, good opportunity, as the economy continues to improve, markets are stable. As we look at where the economic growth will be for the future, as regulatory pressures ease a bit, I think we're situated quite well, and I think that we can continue to generate a good, strong return as a diversified financial player with our strength in wealth management and asset management. Thank you, and I'll turn it over to Alex.
Great. Thanks, Jim, for the intro. Very helpful. My first question for you guys is obviously around advice and wealth management. That really has been the key driver of the organic growth in the business for the last couple of years. We've seen some acceleration even this year with, I think, organic growth in the wrap account channel of about 10-ish% or so. A couple of questions on that. I guess, first, can we discuss the drivers of that acceleration this year? How much of that is coming from your existing clients just converting from brokerage to advisory, or that's really new money coming in and being rolled into the advisory program?
It's a combination of both. We are seeing good client flows into the business. We're seeing our advisors move further up market that are bringing in more assets per client. We also have seen a continued shift to investment advisory. That shift was already occurring. I think it probably got a little more accelerated as you went through the DOL, where people are saying, "Okay, if people are saying serving people in the best interest is a little more around the fee-based advisory, I'm going to shift a little more business that way." I think that shift will continue to occur, but the growth of it is not just moved assets internally, it's more that we're bringing in more assets and they're being deployed.
If I look at the percentage, I think you guys are around 44% of your total assets is in wrap account. If you go back even 3 years ago, I want to say it was in the mid-30s. If you look forward, where do you guys think it could go over the next 3 years?
I think you'll continue to see that shift to become a bit more the majority. Again, I don't think it will be a radical shift. We're still doing about 30% of our business in more of a commission base, but I think that will reduce over time. Remember, Ameriprise is a very strong fee-based business today.
Yeah.
That's where we get the majority of our revenues, and I think that will continue.
One of the things that you guys have been talking and continue to talk is just really the strong FA pipeline. The recruiting process sounds like it's going quite well. A little bit of color, I guess, on A, looking at the FAs you brought in this year, where are they coming from? Are they evenly balanced? Is it a little bit more wire house, a little more independents or RIA being rolled up? Again, any thoughts about how you think this could evolve in the next few years?
I would say if we look at overall, there's probably a bit more coming from the wirehouses. As we continue to recruit also into the franchisee channel, we're bringing in some RIA and independents as well. I would say that we still get a good pipeline coming from the wirehouses.
This feeds well into, I guess, the next question, and we didn't actually prep this way. Both Morgan Stanley and UBS talked about ending the Broker Protocol. How, if at all, do you think this is going to impact your ability to recruit from them? Any broader kind of impacts you think this is happening on the industry?
Remember, the Broker Protocol was set up probably a bit more than a decade ago by the same firms that are doing this recruiting back and forth. I think it's the nature of it. People always evaluate if they're losing, "Maybe I should get out of the Broker Protocol." People like UBS built their business off of recruiting. There's a lot of advisors that brought their books over that probably are still going to evaluate whether they should be there or whether they want to move someplace else at a certain point. We think, at the end of the day, there's still a lot of people in the Broker Protocol. We still believe that advisors will make the informed decisions, and if they decide to leave just like today, and they do it in the right way, they're going to be able to leave.
Clients will go with the advisor, depending on if the advisor runs a good practice in business. I don't think everyone leaves today, even under the Broker Protocol. I think people make informed decisions or try to make informed decisions. I think the recruitment practice will still be there.
Yeah. Net doesn't sound like a big impact.
No, I think, again, you have to do it in the right way, and I think if you do it, there's always probably a bit more that you'll probably put into the work that needs to be done, but you'll still go through the process.
Yep. Makes sense. I want to spend a couple of minutes on pricing, and you and I talked about this topic a bunch in the past as well, but if I think about the wealth management business today, we all know the fee pressures that the asset management side of the equation has been facing for the industry and that that's ongoing. It feels like the focus on fee accounts is starting to intensify a little bit in the advice channel as well, and there's obviously a few competitive offerings, whether it's Vanguard or Schwab with some sort of a hybrid offering that's priced in the 30 to 50 bips, call it. How big of a risk, I guess, is that to the growth you guys have seen in the wrap accounts?
Are you starting to think about potentially segmenting your customer base to accommodate folks that perhaps don't need a whole suite of advice products and could be just fine with something like that? Just trying to think about the pricing implications over time.
Yeah, what we look to do is do a full-fledged personal business around the client. We can easily put solutions to market that, what I would call is, simplified to put together 5 ETFs in a portfolio. To me, charging 50 basis points or 30 basis points for that is expensive. I think the key is really what are clients looking for that will help them make better decisions, how to manage through volatility, how to think about their behavior, how to think about what's the best way to achieve their goals. Those are the things that I think are critical that is embedded in when you charge an advice fee that I think is important. What we're doing is helping our advisors understand that they need to serve their clients more completely as an advisor rather than just as a money manager or investing their funds.
To me, that does deal with volatility. It does deal with risk. It does deal with how to achieve the goals over time rather than just hit a benchmark. Those are the things that we're gearing. When we do that well, as I showed you, our client satisfaction is unbelievably high, and they will pay for the service. That's really what we're looking at. To your point, if we're just going to serve them in a managed portfolio of 5 ETFs, then yes, we have to meet those competitive prices if that's really where we go.
Right. Anything in the works for you guys to start thinking about a robo-advisor type of product, or is it not really-
Yeah. We do have our remote centers that will provide something a little more what would be automated at a lower price. Again, we feel like it has to be complemented by the service that we provide. It's not going to be a simple robo-advisor. We don't necessarily feel that that's a business that we really want to spend time and energy in.
Right. That makes sense. Let's shift gears a little bit, but staying within advice and wealth. Walter and Jim, this one is probably for both of you guys. If we think about the pre-tax margins in the business, that's been for a while, a cornerstone of the story for Ameriprise as well, just a nice expansion in the operating margins we've seen in a while, for a while rather. If you look at the cost growth more recently, it looks like G&A growth is on track to see one of the higher kind of relative growth rates that we've seen from you guys in a while. A couple of questions there, I guess. A, is it a function of the environment? The markets are up, and you're just kind of embarking on sort of new projects.
Is there a catch-up, or is this more of a, look, G&A continues to grow at this kind of pace. If that's the case, how should we think about the pre-tax margins for the segment over time?
Okay. If you look at the third quarter, certainly, we had the growth, and certainly some of the expense was related to that. The reality was there were several catch-ups in there. One related to we brought on IPI, and basically the expense base there and the margin aspect of that will mature over time, but the expense came in. As we indicated, we had our catch up on, we were getting higher confidence on our bonusing.
We took that up. We are very diligent on looking at expenses, but we are certainly now, hopefully with less regulatory focus, we'll focus more on growth, but we feel the expenses will be well-maintained as we have in the past, but we still will invest for growth, less hopefully for regulatory.
Fair enough. I guess, the bigger picture, I guess the pre-tax margin right now, I think is somewhere in the low 20s. When we look at some of the competitors, whether it's kind of the pure play independents or maybe some of the wire houses, the margins there are kind of in the higher 20s, and some have aspirations to be over 30. When I think about Ameriprise and the growth path that you've been on and where you're recruiting and where you're investing, is that sort of the aspirational pre-tax margin with which you think about the business over time, or is there something structural that will prohibit you to get to the goals?
No, I think what you'll find is we have our employee segment, and we have a franchise. We actually have one of the best margins and continue to accrete those margins. If you look at us against the independents based on having a franchisee channel. In our employee channel, there's opportunity for us to even grow more through the scale and productivity to actually get even higher margins than where we are today. When you compare it to one of the major wire houses and you look at the breakout of their margin, you'll find that a good component of that margin comes from banking activities. You don't see that with Ameriprise since we shut our bank. Now, it's one of the things that we'll evaluate as we go forward of whether we put that back in or in complement with some partnerships. That's really the difference.
We still feel that we can improve our margins in the wealth management space, but when you look at the components of someone else you may compare it to, you'll find that we're much better than any independent, and the difference in our wealth management versus some of the wire houses may be on some of the banking activities that they do-
Yeah
that's embedded into their overall financials.
Got it. Okay. Still upward trajectory.
Yeah
Probably not 30+ as we think about.
No, unless we get back into the banking business.
Got it. Makes sense. Shifting gears a little bit, let's spend some time on the asset management business, and I guess starting with flows. Look, obviously, we know some of the legacy issue, whether it's Zurich business or the U.S. Trust business, and you've kind of given a lot of granularity in terms of what the big book of business is and sort of what the pace of runoffs is from there. I guess taking that aside, could you guys spend a couple of minutes on some of the areas where you see the biggest opportunities for net flows for Ameriprise over the next kind of 12 to 24 months, and then on the flip side, the areas that you continue to see, to expect to remain fairly challenged?
If I start from an international perspective, we actually see good opportunity in the U.K. and Europe. We're actually expanding some of our activities across the continent, and we see the ability to grow in certain markets, Germany, Italy, Spain, et cetera. That will be a nice complement for us. We see a bounce back from when people pulled in a little bit because of Brexit, et cetera, and the volatility that was experienced with some of the elections. We see that coming back now and flows picking up nicely. That's a good opportunity for us to continue. We see opportunity in the institutional space more globally. We continue to build relationships there. That is always a little lumpy. We've been impacted by some of the sovereign wealth, but I think over time, that will start to bounce back.
I also see good growth and opportunity in our solutions business. It has taken us a little while to actually put the foundation and the elements in place. We already manage over $100 billion of multi-asset type of product and solutions, what we're trying to do is expand that more to both retail and third-party institutional. I think we're making good progress. The products we have now have hit three-year track records, and they're very strong, and they can compete against anything that's out there. We now need to build that space and distribution, which I think we're beginning to see that opportunity for. That's another area of opportunity.
We're also trying to gear our product mix to really identify the areas that we can bring good product and solution as part of a portfolio to get a generated outcome, either from an advisor in a retail space, model portfolios from various platforms that we're on, or from an institutional perspective. What I mean by that is, even though, as an example, in the U.S., you have a move to passive, you can complement still your passive with some good active and equity, concentrated equity that would increase your return over time or how you manage your volatility. You can do the same thing in fixed income with having some good credit product or using product like our Strategic Income that would be a great complement rather than just being an intermediate bond. There are things like that that we're concentrated on.
Yes, there's going to be a lot of pressure if you're just running a large cap core, you got to look at where you can generate good alpha, where you can generate and manage things like volatility and give a return over time for a portfolio that someone is having to achieve an outcome. That's where we're gearing our time and energy, and we're doing that by identifying who, what, and where from a distribution perspective and the space that we should be in.
Yeah. One of the things you guys hit on. It was one of the slides in terms of the areas that you're trying to build out into kind of the new product opportunities. Two questions there, I guess. A, you guys recently closed on a Lionstone acquisition, which brings you a little bit more of a kind of real asset angle to the distribution. What kind of synergies, I guess, you guys see with the rest of Ameriprise and kind of what can make this product better under the Ameriprise umbrella? Two, totally separate question, but also M&A related, I guess. You had strategic beta/smart beta as one of the growth initiatives. You look around, the theme is you got to buy it because if you're not in the game today, it's really hard to break in.
You guys have a little bit of an advantage, I would argue, given you have a distribution network that could prove pretty powerful. Talk a little bit about the appetite of build versus buy when it comes to smart beta.
Sure. Let me start with the real estate. We already have a nice property business in the U.K., and it's been a great complement. We leverage through distribution what we do there. We weren't in that space in the U.S., so Lionstone gives us sort of a beachhead. It's something that we can help them expand. They have good capability to launch other products that we thought would be interesting in the retail space, which they're not in today. We could really take that as, again, not necessarily that it's going to be the largest property business, but they have a good process and good capability that we think we can help them grow. They could be part of our solution set as we move forward and part of our distribution that we can bear to scale them up.
On the other side, as we think about strategic beta, we already had a good foundation in what we do in multi-factor, in our quant shop and et cetera. What we're really doing is coming out with some good product that we think can generate a good return on a multi-factor basis, but with certain overlays like ESG, so that it's actually going to fit in a certain category, right?
This is a smaller business that we're doing, but we're going to try to leverage it, to your point, through our distribution channels, through the RIA channels, et cetera. Again, now we might complement that over time. We may do some additional acquisitions. At the end of the day, we're not looking at it to replace our core active space, but it gives us a start in the business.
Yeah.
We're also going to learn a bit more of how to work with ETFs in the active space over time.
Makes sense. Shifting gears a little bit. When I think about your guys' capital story, it's really been one of the best in financial services, just thinking about the pace of capital return and the decline in the share count. I guess if you look at the more recent trends, your buyback is running, I think, at about $1.4 billion for the year. It's shaking out to be still very significant, but I think it's the slower pace that we've seen in the last versus a couple of years ago, and probably the slowest since 2012. How should we think about the pace of buybacks from here? Is it either a % of net income, and should we think about the current trend as the runway we should be thinking about, or there's an opportunity to play a little bit of catch-up?
I'll start, and Walter can continue. We still have a target out there returning 90%-100% of our earnings to the shareholders through dividends and buybacks. Last few years, based on a combination of stock price and not using the funds for other means, we were returning 120%, 130%, as you said.
We think we're going to come back more into line, closer to the targets that we put, but we're starting to use our capital for small acquisitions, IPI, Lionstone, et cetera. It's not as though we're not going to still in some way utilize the capital. We just think that we'll utilize it for a complement of inorganic and return.
Got it. Makes sense. Last one from me, and then we'll turn it over for the audience for a couple of questions. Taxes, obviously very topical. You guys have somewhat of a complex, perhaps, tax structure. Your tax rate is already somewhat low. As you think about the proposals that are out there, any initial thoughts on how either one of the bills could impact the effective tax rate? I think you guys are running in the mid-20s right now.
Yeah. If you look at our tax rate, before discretionary items, say it's around 25%, 26%. We see that, again, it's still shaking out, but with the elements that are taking place, initially, we'll have to readjust some of our deferred tax assets and take an impact in 2017 if it comes into effect. Thereafter, you should assume that the tax rate can get into the mid-teens.
Got it.
Subject to where it finally shakes out.
Yeah. Wide range, but narrowing. Great. We got a couple of minutes left. If anybody's got questions in the group, just raise your hand and there should be a mic coming around. Okay. Well, we'll keep going. I'll ask another one here, maybe folks will get a little braver. MiFID II, obviously pretty topical. I think you talked a little bit about it on the call, that generally you are, I think, expecting to absorb the cost of research in Europe and then ring-fence it, that shouldn't really be a big driver to, or a big hurdle to operating margins for the asset management business. What do you hear from clients? You guys are a large global asset manager. Are you starting to hear any nuanced discussions that some of this might spill over into the U.S.?
If that's the case, I guess, how do you plan to treat cost of research and the implication for the markets?
I think, listen, MiFID II's coming about, I think people are getting their hands around what that looks like and what it means. All of us are really looking at what is the research that we do internally, what's the research that we pay for, what's rational for that, how much you really use, what's really valued, I think us and others are going through that process now. What you find is when something isn't necessarily a direct cost, et cetera, you maybe not evaluate it as you do more fully. I think we're all rationalizing that, I think the cost of research and what you are paying for will come down, it is already. I'm not going to go over that yet, because we're still working through that.
It'll be a little more manageable as I think about it, and I think that will occur over time as you think about global and U.S. I don't think it's there yet, and I think different pricing occurs for different reasons.