Okay, great. Thanks so much, everybody. We're going to move on to our next presentation. I'd like to welcome Ameriprise Financial, one of the leading and one of the more diversified financial planning firms out in the space. Despite a challenging macro backdrop and lots of concerns around regulation and DOL specifically, Ameriprise continues to grow its wealth management business organically and a mid-single-digit rate, manage expenses quite well, and remains one of the better capital return stories in the space, with the share count probably down something like 8%-9% this year alone on the back of a couple of quite successful years. With us today are Jim Cracchiolo, Ameriprise's Chairman and CEO, as well as Walter Berman, the company's CFO. Thank you for coming, and welcome both. I think Jim is going to open up with a couple of prepared remarks, and then we'll jump into Q&A.
Great. Thank you for being here this afternoon. I wanted to just give you a little overview perspective before Alex goes into a little more of the Q&A section to give you a little better understanding of how we're thinking and what we think is the opportunity for you as investors. First of all, forward-looking statements, but we're a diversified financial services retail firm, as Alex has mentioned to you, and we have had very strong performance over market cycles, and I believe this is another jumping-off point for us for the future. As you think about our firm, we would say we have leading capabilities to serve our clients comprehensively with the products and solutions, but mainly through the advice value proposition that we have. We operate in two markets, really, the wealth management space, really around financial advice, and in the global asset management space.
We still see good opportunities even as we have more discussion about active to passive, but we see good opportunities in the space that we're in. We have significant scale of $800 billion of assets that we have under management or that we administer for our clients. We have very strong and diversified cash flows coming from the combination of our businesses that we're able to return back to shareholders in a large way, as Alex mentioned to you. We do believe that we have the ability for continued growth because of the opportunity out in the marketplace and the type of businesses that we're in. We can also look at that through inorganic growth. We've been very successful in the few acquisitions that we've done over the years from Threadneedle Asset Management, Seligman, H&R Block Financial Advisors, and Columbia.
I would tell you another thing very clearly is we are tremendously undervalued again today. We go through these sort of cycles where we get tossed out the baby with the bathwater because of the unknown. Today, we're significantly discounted to the value, and I'll give you a little idea of what I mean there. What are we looking for as we move forward? One is we're going to continue to build on our wealth management activities here in the U.S. We are one of the largest providers there. We are still the leader in financial planning, and more and more affluent and mass affluent clients are looking for advice. They need to navigate their financial future.
A robo's not going to do it for them, and just a passive index fund is not going to do it for them. They want true advice, and they want a relationship with an advisor to do that. We already manage over half a trillion dollars of our clients' assets in that way. Over $200 billion of it is under our wrap business. With that, we have 70% of our revenue coming already through a fee-based relationship. Where is our opportunity? Our Confident Retirement approach is really what the consumer's looking for. We're getting more of our advisors to do that more fully with all of their clients and tapping into that opportunity in the five to five segment, which we think is very significant for us. It's moving upmarket for us. Our average clients are about a half a billion, half a million dollars.
If we can get them more into that upper tier, that will even be better for us. Our productivity has been strong. It's been growing by double digits over the last decade because of the tools, the capabilities, how we interact with our advisor and how they interact with the clients, and how we give them the ability to operate all the ways they want, mobile, online, as well as face to face. With that, we have a very attractive value proposition for advisors. We're a firm built around the advisor, very clearly they get the support of a very large firm, but they get the ability to operate their practices and own equity in them. With that, there are other opportunities. We've been operating in a market where interest rates are all-time low. We have $25 billion of cash.
If interest rates go up on the short end, that's all extra juice for us in the revenue that will go to the bottom line or sharing with the clients. Last but not least, we have shown over multi years that we've been able to grow this business. Very clearly, we have leading margins in the business, and we have leading client relationships in the business. Our asset management business is also almost a half a trillion dollars of assets. With that, very clearly, we're a global player today. We have very good retail and institutional, domestic and international. We have a broad product line, and we have the distribution now that we're building out in the capabilities. We have high-performing products, 110 four and five-star funds. With that, we feel there is a continued operation for active management. We know that's in the solution space.
We know that's in higher outfit and concentrated equities. We know that's in credit, and we have those capabilities. We over have $100 billion in managed assets already, this is an area we're investing in our solutions area for the future. Our products are good and strong and performing, and we're starting to gain traction in the U.S. and the intermediate channel. We've gained market share even though all of us are at a level of outflows. We continue to gain traction in the institutional space globally. We have more of our products now being considered out there, and we believe that that will continue to grow. We're expanding more fully across Europe as well as in Asia. The market's tough. I think we've all experienced, particularly in the U.S., a level of outflows.
Brexit has slowed down activities, we feel that we are situated. Yes, we have a bit more outflows, that's mainly from our ex-parent, like Zurich. As an example, over the last 4 years, we've suffered about $4 billion of outflows just from our Zurich relationship. The assets under management there and the revenues we get today versus 4 years ago is about the same. It's constantly in our flow metrics, it doesn't mean that it's actually harming us from the idea that we've diversified, we've grown through third parties, and we've grown through retail. Protection annuity. I know this sometimes is looked at, depending on who you're talking to, as kind of a negative or how does this fit in? It's a solution that we provide to our clients. We have very deep relationships.
As part of their financial planning, we provide life insurance to protect them. We provide an annuity, maybe as a solution for a guarantee in the long term so that they can generate income. Our book is very strong and very solid. We have good, attractive asset persistency, meaning that clients stay with those products a long time. They're not churn. Even though we have hit where spreads in the long term have been very low, hopefully that will come back in the future. We still generate good profitability, strong margins in this business, and good returns. We risk manage it well, I would say we're probably one of the best in the industry for it. Over the years, we have changed the mix of our business.
If you look at it today, we're about 33% still in the protection and annuity, the majority now has shifted to the advice and wealth management and the asset management. That has been able to help us generate good, strong cash flow that we've been returning to you and has lowered our capital requirements tremendously. That's why we've been able to return more than 100% of our earnings, 130%, 140% over the last few years. We're looking to take that even further so that we got about three-quarters of it in the asset light over the next number of years. Last but not least, how are we valued? This always happens in certain cycles.
If you look at our wealth management business and you look at the earnings of it, and you look at the profile of that's a pure wealth management. It doesn't have lending. It doesn't have market-making, et cetera. If I take the average of our peers in the wealth management business and apply it to my business, you get a market cap of about $15 billion of the $18 billion of my market cap. I take $2 billion of excess cash, all my other businesses are worth $1 billion. I would venture to say my wealth management business is even more diversified than what I'm comparing it to. I don't have commercial lending as a large part of my business. I don't have market-making. I'm just taking that to say what's the value of the wealth management.
My asset management's a half a trillion dollars of assets. Good investment performance, good diversification, retail and international, domestic, and et cetera. I can tell you, I can put a value on that. You can put the low end of the market, you can put the medium end, but I would tell you it generates very good margins and it's billions and billions. The annuity and the protection businesses at those various multiples, you can add that up. We're probably at minimum 35%-40% undervalued just on market medians . You can look at what the opportunity may be, and I still think it's great, and we've shown that over the years, but there's very few diversified firms that are generating the type of return that we have with ROEs in the 20s. I would tell you discount that against just the market multiples as we are today.
With that, I'll turn it back over to Alex.
Great.
Let me just end with one thing. I mentioned the discounted cost, but our wealth management, our capital profile, our return, our operational risk management all adds up to why we think that this is a good firm for investing for the future.
Great. All right, well, thank you. Thank you for the intro. Just maybe jumping back to one of the slides, when you talk about the mix of business and kind of the 75% or so of your pre-tax income coming from non-protection, non-annuities type of businesses, I know you kind of put near term. Would you venture out to say, in terms of the timeframe, when you guys expect to get there? I guess more importantly, how much of that improvement is coming from just kind of like normal markets and improvement in rates versus some of the organic things you're seeing in the business, meaning net flows and operational improvements or margins going higher?
I think it's a combination of both. We have a very large business, so if markets are going negative, where you got market depreciation or interest is going negative, that will slow down that sort of mix. If you get some of that more of a tailwind rather than a headwind on the type of base that we have, that just helps that compound itself. Don't get me wrong. If interest rates went up in the long term, we would earn a lot more in the I&A business. We just have two-thirds of our business in these other businesses. For instance, short-term interest rate, we've got $25 billion of cash that if you just raise those rates 25, 50, 75 basis points will toss off a lot of earnings.
Yeah. Makes sense. The first topic I would like to talk about is around regulation and Department of Labor fiduciary standard, obviously been a huge topic for the space for the last year or so at this point. Maybe update us on the progress you made so far to prepare for the DOL's April deadline. I guess more importantly, how are you proceeding with respect to potential changes? I know it's totally speculative at this point because we ultimately don't know what the new administration is going to want to do with respect to the DOL standards. How much of that is truly reversible versus how much of that is locked? This is just now new course of business and you're going to kind of proceed as you will.
One of the things I think has been one of the things impacting us negatively from a perspective would be Our business will be significantly impacted. I will tell you under the DOL, it will not be significantly impacted. We already do 70% of our business in investment advisory relationship. The change that we've made there is so that we're really fully under how we would operate on the exemption for the qualified. With that in mind, we'll move all of it where across, whether it's qualified, non-qualified, we're eliminating the 12b-1s, and we'll move to investment advisory shares as part of all the investment advisory accounts. Complement to that, we're changing our platform, so it'll make it easier for our advisors to move in types of portfolios that they would have between and across. That we did in complement to that.
That's already on the way. We'll look to do that conversion in the first quarter. We would not change that. The other things that we're doing is around the whole BIC exemption for commission-based. In our business, commission-based products or solutions represent maybe the other 30% of that with the 70 in investment advisory. You're really talking and qualified about 15% of our business. We still feel under the DOL that if you operate correctly, you levelize commissions, you ensure that there's a tight range around it, you do the proper due diligence, you do the right documentation, including in the both the sale as well as where those products fit in, including with an annuity, you can continue to do that business appropriately. We've been gearing our operation to do that.
Putting in price the structure, the compliance, the technology, making sure that with our product partners, that we can deliver that in the right share class. All that's on the way. If there is a hold on that from the administration or the new secretary coming in in the Department, we would just put that on hold. If not, we'll be able to pull the trigger, where we train up our advisors and pull the switch, and we'll still be able to do that business, and we think in a fully compliant way.
Yeah, fair enough. The one follow-up that I have on this, and it'll open up a topic on distribution broadly, but you mentioned rationalizing shelf space. Many of your peers have announced similar things. Can you talk a little bit more about what kind of changes you guys already made with respect to the number of products and the type of products that are offered on Ameriprise's platform? Thinking through broader kind of the economics between the distributors and the manufacturers, I think DOL in a way has intensified some of these conversations. When you think out a couple of years, DOL or not, how do you think the shift in economics between the two changing?
Okay. First of all, what would occur is this. We offer thousands of funds on our platform. What we would do is cut that down and work with a large number of providers, but we wouldn't probably offer the range of funds we do today because we would want that all done on a consistent way of updating that due diligence and compliance on an ongoing, and also what is the level of support and the servicing necessary for that. That's where we would cut down. We would have to move them all to a consistent share class with a consistent commission level. The key today is everyone has a little difference on what that is. All that would have to be equalized and levelized, and that's what we're preparing for as the industry is. If it comes about, that's what we would do.
Yes, it would reduce the number of providers on our platform. Still be pretty significant, but not to the extent that it is today. We do a number of accommodations and other things for our advisors that we would probably curtail. We would do the same thing for annuities. All that would be consistent in what the commission structure is, et cetera. That would happen if we continue to move forward and there was no adjustment. Now, as far as what that does for a distribution versus a manager, well, I work on both sides of the house.
As an example, Columbia today and Ameriprise, you need to deliver to the large distributor platforms the type of service support, wholesaling, product performance, all those things necessary so that they can meet the due diligence, fit on the platforms, and get the right type of information and support necessary for the sale. What we find is that you're going to move to more scale players that can provide those capabilities so that it can give the distributor the comfort they need and make that consistent with other providers on the platform.
Makes sense. Shifting gears a little bit, let's talk about the AWM business, Advice and Wealth Management. You mentioned on your slides a couple of points around improvement in productivity, retention rates, and recruiting that you've seen over the last couple of years. Can you spend a couple of minutes, I guess, on the pipeline that you see in your incoming FAs and the productivity among those FAs? How does that compare to the kind of installed, kind of existing book of business? Broadly, what's the environment has been like for recruiting financial advisors in light of all the regulatory changes that are upcoming?
Our average productivity on advisor side is about a half a million dollars, and our pipeline of advisors that we're adding is along on average about the same. We've seen a bit more now in larger teams that actually produce a bit more with more assets. I would say over the course of, let's say, the last quarter or two, it's been an average about $500,000. Right in the range of our productivity. The pipeline is strong. We still see advisors making the determination to come over because of both the advice value proposition, the culture of the firm, the support that we provide, the ability for them to actually manage their practices as they see appropriate.
We're seeing people come from the wirehouses on one end, we're also seeing people come from the independent and even the RIA space because they're starting to say, "Hey, I need more support. I need more integrated technology. I need to actually deal with the compliance issues." Some of them are even coming back into an employee system, not just a franchisee system. With that, I think we're well-situated whether the DOL goes forward or not because of the type of value proposition and the culture we have in the firm.
Makes sense. Well, let's talk about margins for a minute. Walter, one for you. AWM, I think, continues to surprise a lot of people for not just this year, for the last couple of years with continued margin improvement. Despite probably similar to a choppier revenue backdrop this year. Can you update us where you guys see those margins going, excluding the interest rates backdrop, just if you continue to execute on the organic growth plans?
Sure. Even in this year when we have the average equity markets being 2% under last year, our margins have improved, as you saw in the third quarter. We certainly see some disruptions as it relates to distraction or other elements as it relates to the DOL. That being said, we do see a clear path to the margins that we said that we could achieve over the near term or long term as it relates to some interest-
Walter, mic again.
Oh, I'm sorry. You know why? I looked down at the mic.
I'll repeat the whole thing. All right.
That didn't work.
I heard him. I always hear him. I said, listen, this year has been a situation where the equity markets have certainly been lower than last year. In that environment, we still have improved our margins. As we indicated back in 2014, as we looked at where the margins of the business are going, we felt that at that time, I think we were in the 16%, 15% range. We're now 17%, high 17s. That we see that our objective set of getting to that 20% in a couple of years, obviously, there is a little disruption as you get through the DOL distractions associated with it, but that is still clearly on the path that we believe. There is a factor of interest, yes, a little, but certainly the momentum and productivity of the business.
Got it. Switching gears, let's talk about the asset management business. It's been a recurring topic for you guys for several years now, related to the Columbia acquisition. On the retail side of the house, there's been a little bit of improvement this year relative to last year, but flows clearly still remain quite negative. Can you walk us through over the next 12 months, the areas that you're most optimistic about versus areas where you're going to probably continue to see challenges from a product perspective in retail?
What I would probably say if I look out is I think we're gaining traction, as I mentioned, in the intermediary channels right now. We think that we're situated well. We have good product to sell. As advisors start to think about a little more this dislocation, they're going to be looking for some better credit products. They're going to be looking for some tax advantage in certain areas. They're going to look for some of the more concentrated equity areas, et cetera. I think we have products that will play well, and we're seeing that already. We're seeing gained traction. One of our products that we came out was our CARA product, which is a risk parity type product. We have excellent performance compared to the universe of these asset strategy products out there.
That's already hit this year, $1 billion, and we think that will gain traction. We're doing the same thing in Europe. Brexit really put a little bit of an impact there in our international business because we've had good retail flows there, and that slowed down tremendously in the June, July. Now that's starting to come back. It's probably not back to where it was prior to Brexit, but it's starting to gain traction now with retail coming back in both the U.K. as well as in Europe.
We think that will start to pick up again over the next number of months. In retail, I think we will gain traction here. I'm not saying we're going to go into inflows immediately because I think we still have a level of outflow from the U.S. Trust that we will deal with. That has slowed tremendously as they've moved some of their fixed income stuff back. Our Acorn business that negatively impacted us over the last few years, that performance in that particular area, we made a lot of changes to it with a new PM and team. That performance has improved tremendously. That really was a large part of our outflow that really increased the negativity of it. I think that's stemming now. I think we're in good shape.
It doesn't mean that we're not going to have to work hard, I think over the course of another year, 18 months, et cetera, we can gain enough traction to get that back into a positive area.
Makes sense. The other topic that I was hoping to address is just around the macro impact of higher interest rates. Again, both of you mentioned a little bit on this front, but maybe we can break it up into really three buckets. A, can we talk about the impact of rising short end of the curve, which again, I think is predominantly going to be felt in the AWM business, but I guess kind of giving us an update on what kind of a pre-tax margin, pre-tax income rather benefit you could see there. Steepening of the curve, and whether or not that's going to start to diminish some of the net interest income headwinds you've been seeing in the business. Thirdly, from an organic growth perspective, higher rates, what does it mean for organic growth within protection annuities, AWM, and asset management?
Okay. Let me take the short end. The short end, as we've talked about, we have about $25 billion in short funds, sweep accounts, and others. That basically on that, as we said, 1% movement, if you want to move it on that basis, the conventional rule is for the first 1%, 80% of it stays with us. We obviously have to look at competitive elements, you can do the math on that. There's clearly a benefit that's to be derived there. On the moving of the spread, as we look at the interest rates going up from our standpoint, as long as it's not a dramatic increase, it's obviously not going to put pressure on our reserves. We will get the benefit. We're basically short duration now, we'll pick up funds as we invest out.
It will help the growth trajectory of both the VA and the insurance business. Fixed annuities are going to take a while because where the guaranteed rates are, it's going to have to. Bless you. It's going to have to move further on that. The other thing that it will do, as we talked about the unlocking that we did.
Sure
Clearly, where we positioned the unlocking on the rates that we're using on the unlocking, we are at levels now that is higher than we anticipated when we did the unlocking where the mean reversion will take. If everything's frozen, that'll be a positive for us also.
Okay. On organic growth, I don't know if there's anything to hit from either asset allocation or any other annuity business picking up steam.
Yeah. I would say, listen, I think if you get a bit more normalization in rates and the markets are feeling more comfortable because there's not another shoe to drop because of why the Fed kept rates, I actually think the consumer will be even more comfortable of being more active back, and put more money back to work. I think our advisors would actually have that viewpoint. I actually think activity would probably pick up a bit more, including into contracts.
Okay. Great. Maybe we'll open up to the group, see if there's any questions in the next five minutes or so. Questions? Okay. Yep, one right there.
Thank you. Just on personal tax reform.
Yeah
Can you give us a view on what you think the impact could be of a material simplification around personal taxes, particularly around retirement planning, which is a very large part of your business? Thank you.
Yeah. I think, listen, we're all probably thinking that there will be some level of tax reform, at least we're hoping in some fashion. I think a level of bit of simplification and understanding what those rates and if they are a bit better for the middle class or the upper middle class consumer, I think that would all be a positive for what they put aside and what they save and invest. I think that would have a positive impact. I can't sit here and tell you exactly what that would look like or feel like. On the other side, I don't think tax rates are going to go down so tremendously between the federal and the state that if you're in the higher income brackets, you're still going to probably look for tax advantage activities. Now, whether that's deductible or not, we'll have to see.
I think it will impact to some extent, but I think it would be a positive, not a negative for savings and investment.
Thank you.
Another question that I have for you guys is around just the M&A. You guys have obviously been in the press. I'm not sure whether or not you can comment on some M&A opportunities in Europe. It sounds like you're not really involved anymore. Thinking about M&A within asset management broadly, and within private wealth as well. You guys talked about both of those opportunities recently. If there is a watering down of some sort on the DOL side, should we think again you more focused on the asset management opportunities, or you still think there's a big chance that you could roll up some of the wealth businesses?
I would say this, so if we're talking about the wealth businesses, I think over time there will be some level of opportunity, even with the DOL moving back, where people are going to need both the type of support, the compliance infrastructure, the technology, even things like cybersecurity and things like that. I do believe there will be the continue to move. Having said that, we're not interested in anyone. We're interested in higher quality, people who really value advice, people who will operate in a more compliant fashion. I know there's always rumors about what, but we would not be venturing into territory that would change our dimensions, our culture, or brand imagery.
Second is, if you look at the asset management business, we think there will be some level of consolidation as people figure out where they need to be and how they need to grow up. To some extent, we will look for both strategic as well as roll-up opportunities, but we're also very, what we would call, disciplined in what we do. If it can add true product capability, if it can expand our distribution, if it would be complementary, but it would fit within our integrated way we operate, but leaving investment prowess to itself, we would be quite interested in it. If it expands ourselves into other regions or something that would be complementary, that would also be of interest. We're also going to be a disciplined buyer.
One of the things that we value very much, we have the ability, we can use some more of our excess capital. We can take out debt. We have the ability of reasonable size if we wanted to, but only if it's a good acquisition that would fit in with our returns. We don't need to go to the capital markets for equity or raise it to do even a reasonable size deal because we can easily take the extra debt that we would need if we wanted to do it. We're still very disciplined in that we just don't go out and buy.
Any metrics from accretion perspective, any financial targets that you can talk to when you're considering a host of deals?
The basic thing that we deal with is first the cultural. It has to fit.
Yeah.
Obviously, we then look for whether strategic or for the expense synergy basis that would do. We do look for deals that are accretive within a reasonable time for two to three years, we really do look at it both from using full equity or using full cash and then work our way in the middle. We don't dilute ourselves. It does sound cheap accurate.
Yeah.
Cheap debt.
We wouldn't use that.
Makes sense. Great. Well, on that note, I think we'll wrap it up there.
Thank you.
Thank you guys very much.