Welcome to the Q2 2016 earnings call. My name is Paulette, and I will be your operator 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. Ms. Charity, you may begin.
Thank you, and good morning. Welcome to Ameriprise Financial's second 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 will be happy to take your questions. Slide two of the earnings presentation materials available on our website include the 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 the non-GAAP numbers to the 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 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 quarter of 2016 10-Q report. We take no obligation to update publicly or revise these forward-looking statements. Turning to slide three, you see our GAAP financial results for the second quarter. 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 make on the call today will focus on operating financial results. With that, I'll turn it over to Jim.
Good morning, and thank you for joining us for our second quarter earnings call. I'll provide my perspective on the business. Walter will discuss our financials. Then we'll answer your questions. Domestic equity markets improved in the quarter. However, internationally, markets remained quite weak year-over-year. Volatility spiked in June, which was reflected in slower client activity. Post-Brexit, the British pound weakened significantly and created a difficult foreign exchange translation. Our internally weighted equity index, which aligns to our domestic and international assets under management characteristics, was down 5% on average year-over-year. We ended the quarter with $777 billion in assets under management and administration, which was down a bit year-over-year. As you're well aware, the low interest rate environment remains a persistent headwind. These are external factors that we can't control.
That said, we're focused on what we can control, serving our clients, executing our strategy, managing expenses well as we invest in the business, and navigating these market movements. How did this translate into our performance? Overall, Ameriprise delivered solid second quarter results. On an operating basis, net revenues reflected the tougher market environment and were down 4% to $2.9 billion. Earnings per diluted share were also down 4% to $2.23, but that included certain items in the quarter that we highlighted. Our return on equity, excluding AOCI, remained very strong at 23.9%. This is up 40 basis points from a year ago. Both our financial foundation and ability to consistently generate good free cash flow remained strong. We increased the number of shares we repurchased year-over-year to 4.7 million shares.
In total, we returned about 150% of earnings to shareholders, the second consecutive quarter where we returned at that level. Let's move to our business results. In Advice & Wealth Management, our advice value proposition is strong, and we continue to generate good earnings with very good margin. Our advisors and teams are working closely with clients to help them understand the current environment and importantly, to ensure they remained focused on achieving their long-term goals. Naturally, the market volatility and general unease in the quarter continued to affect investor behavior. With this volatility, we increased our market commentary and communications for the field to help equip their advisors to have meaningful conversations with their clients. As you expect, clients are cautious and overall transaction activity remained muted.
In the quarter, we continued to grow our client base, and in terms of retail clients assets under management, assets grew to an all-time high in the quarter to $462 billion. We continue to have solid flows into fee-based investment advisory, another $2.3 billion in the quarter, where we have one of the largest platforms in the industry. However, given market volatility, brokerage cash balances continued to rise, up 17% from a year ago to more than $23 billion, which can be redeployed in the future. I'm feeling good about the strength of our field force. Our advisors take pride in and appreciate the Ameriprise value proposition and strong culture. That's also very attractive to advisors in the industry. We continue to have terrific advisor satisfaction.
I spent time with many of our top advisors at our national conference in May, and they're feeling very good about the value, the support, and the growth opportunity they have here. Our Be Brilliant advertising campaign is on the airwaves and being positively received both on TV as well as online. Ameriprise brand awareness also remains quite strong. Though industry recruiting slowed, this was one of the best quarters for recruiting for Ameriprise. Another 98 experienced advisors with good productivity joined Ameriprise, and our pipeline for the rest of the year looks good. Overall, given market pressures, advisors maintain good productivity with operating net revenue per advisor at $507,000 on a 12-month basis. From a metrics perspective, we're delivering good profitability with margins increasing to a strong 17.7% in the quarter. We remain well-positioned in the marketplace to take advantage of the growth opportunity as conditions settle.
Clearly, the Department of Labor fiduciary rule remains a top priority for us. As I've discussed with you, I believe Ameriprise is well-positioned to handle the changes required. We have the experience, capabilities, compliance, infrastructure, and dedicated teams to ensure we comply with the new rule. As we and others in the industry noted, this is a highly complex rule that requires a thoughtful, rigorous approach. Of course, we'll also be factoring in the Department's additional guidance, which they indicated will be coming in the near future. Since the rule's introduction, we've been working closely with our advisors and field leaders to help them understand the requirements and the adjustments we're making to implement them effectively. We're conducting a comprehensive and ongoing series of webcasts, workshops, and local training sessions to help them prepare to operate in compliance with the rule.
We will continue to deliver the high level of support throughout this transition, which is consistent with our commitment to help our advisors grow their practices. Advisors have been very appreciative of the level of support we're providing. Given what we know, we feel comfortable that we can effectively navigate through it, and we'll keep you apprised as we move forward. Let's move to annuities and protection. The annuities and life and health insurance business are performing as we would expect in a low interest rate environment. With regard to annuities, earnings were in line given rates and the equity market pressure on account balances. On the variable side, account balances declined slightly to $75 billion, and sales slowed year-over-year, which was similar to recent industry trends. A year ago, we had higher sales from new living benefit riders that were well received by our clients and advisors.
Keep in mind that variable annuity sales and flows reflect both our current block of business and closed legacy blocks. On the fixed side, the book is performing as expected in this low interest rate environment. In life and health, overall business results are within our expectations, including our claims experience. Sales slowed a bit in the quarter consistent with transactional activity. We continue to focus on the asset accumulation portion of the business, primarily in VUL and UL, and providing a high level of advisor training service and support. With regard to Auto & Home, consistent with the P&C industry, we experienced a high level of cat losses in the quarter, primarily driven by wind and hail storms in southern and central regions of the country.
In Auto & Home, we're making more strategic and impactful changes in our business lines to tighten up areas where we had higher loss levels. This is in addition to the pricing, underwriting, claims, and organizational changes we're making. We're seeing improvements that will translate into improved financial results in the coming quarters. In asset management, we're executing a focused strategy for long-term growth. Clearly, the market environment was challenging in the quarter with both the average equity market declines, high volatility in June, and the pound dropping to the lowest point against the U.S. dollar in more than 30 years. In this environment, assets under management declined to $460 billion, and we also have one-time expenses which we previously noted that impacted earnings in the quarter. Underlying expenses have remained well controlled as we work to preserve margins in the current environment.
In terms of investment performance, we continue to generate good long-term performance track records across many asset classes and styles. This performance looks relatively strong against industry peers. Regarding the U.K. referendum, I'm pleased with how we're implementing our initial plans to manage the post U.K. referendum period effectively and providing support and perspective to our clients and investors. The transition will take time. We have been reinforcing with clients that there is no immediate decisions investors need to make. As you would expect, we are monitoring decisions in Britain and the EU as we and the industry determine next steps. We have a strong and important business in the U.K., Europe, and we're committed to serving the needs of all of our investors and feel comfortable with our ability to do so going forward.
We also have operations in Luxembourg and already have established a fund range that we sell in Europe and we will continue to build upon. Now let's move to flows. In the quarter, we experienced $4.7 billion in outflows. About half were driven by lower fee former parent-related flows that we discussed with you. Of the remainder, several of the institutional fundings we expected in the second quarter were delayed due to Brexit. While we should see them come through in the second half of the year, the timing aspect resulted in $2.6 billion in institutional net outflows in the quarter, with approximately $2 billion of very low fee, short duration fixed income mandates. Overall, our institutional pipeline remains strong. Global retail flows were modestly positive and included invested dividends.
In the U.S., we continued to focus on improving market share. While industry growth sales in the active space were down, outflows improved a bit. In U.K. and European retail, we saw outflows leading up to the vote as investors were cautious. This turned more negative after the vote. Based on our initial read of flows in the third quarter, this pressure appears to be subsiding. I'd like to point out a number of developments in the quarter in the U.S. We announced the acquisition of Emerging Global Advisors, a smart beta provider focused on emerging markets, and we've also launched three new equity income smart beta ETFs. Smart beta is a long-term opportunity for us. It's a natural complement to our traditional active business as we take the necessary steps to advance the business.
In addition, shareholders supported fund mergers that further strengthen our U.S. product line. We also launched a new advisor website for Columbia Threadneedle, enhancing the online experience. Overall, I feel good about how we're managing a tough and uncertain market environment. The actions we're taking to drive long-term growth are the right ones. We're managing the business prudently to preserve profitability while investing in initiatives to compete in our key regions. As I look at the company overall, Ameriprise is a strong company in a good position with significant opportunity for growth when conditions settle. We're focused on what we can control and delivering a strong client experience. We have the financial stability and capital to navigate the headwinds, to continue to invest for growth, and return to shareholders at a very attractive level.
I'd add that very few financial services companies are generating this level of return on equity and returning to shareholders as strongly as Ameriprise. With that, I'll turn it over to Walter to discuss the numbers for the quarter in more detail.
Thanks, Jim. Ameriprise continues to navigate the macro conditions well, delivering solid financial results in the quarter. Given the revenue challenges related to the macro environment, we are selectively investing for growth while managing expenses tightly. We believe our stock continues to be undervalued. The valuation, combined with our strong balance sheet and free cash flow generation, allowed us to be opportunistic in the quarter in our share repurchase. Let's turn to consolidated results beginning on slide six. Macro conditions impacted revenue in a few ways. A weighted equity index, our proxy for equity market movements on AUM, declined 5% on average year-over-year, but was up 6% on average sequentially. This affected average AUM and fees, which are collected based on average daily assets. The dislocation over the past few quarters has muted client activity and contributed to asset management outflows.
Low interest rates remained a headwind for our insurance and annuity businesses. The pound fell at the end of the quarter following the UK referendum to leave the European Union, the foreign exchange translation impacted ending asset levels. With that as a backdrop, you can see how this macro environment impacted operating net revenue, which were down 4% year-over-year. Lower average equity markets reduced revenue by approximately $50 million and also suppressed client transactional activity. On a sequential basis, we saw revenues improve in the quarter up 2%, reflecting improvement in the market index. Let's turn to slide seven. Ameriprise delivered good underlying business performance and EPS in a challenging revenue environment, demonstrating our ability to navigate through business cycles. We are tightly managing expenses while making the right investments to adjust to regulatory and geopolitical changes and support future growth.
We are seeing the results of our targeted re-engineering initiatives, which we expect to be realized more in the second half of the year. Pre-tax earnings declined substantially, driven by market dislocation. However, EPS was only down 4%, reflecting effective tax planning and our significant share repurchase program. Our business model generates significant free cash flow, and our valuation provided a good opportunity to repurchase shares at a discounted level. In the quarter, we delivered a strong 23.9% return on equity. Let's turn to segment performance, starting on slide eight. First, the Advice & Wealth Management business continues to perform very well, delivering solid results in the face of the challenging environment. Jim spoke about the strong leading indicators we're seeing in this business, excellent EAR recruiting, strong advisor and client retention, and record client asset levels. Financial results are also good in this context.
While operating net revenue was down about 2% from last year to $1.3 billion in the quarter, it was driven by lower average equity markets and slower transactional activity. These dynamics impacted PTI as well, but PTI was also benefited from our disciplined expense management. It should be noted that earnings in this segment improved sequentially due to better equity markets and transactional activity levels, which drove revenue up 4% and earnings up 8%. Operating margin in the quarter was strong at 17.7%, up 40 basis points from last year and up 60 basis points sequentially. Outside of significant market disruption, we expect future margin expansion to continue over time. Let's turn to slide nine on asset management. Clearly, we faced external headwinds in the quarter. The average WEI was down 5% year-over-year, which impacted both revenue and pre-tax operating earnings.
Operating net revenue was down 11% to $739 million, with approximately a quarter of the decline related to markets. The other primary driver of revenue decline was the cumulative impact of net flows. Pre-tax operating earnings were down 25% to $148 million, which was impacted by markets, outflows, as well as the pre-announced resolution of a legal matter. I'd like to note that foreign exchange translation impact from Brexit was minimal in the quarter. We are prudently managing expenses, with overall expenses down 7% and G&A down 5%. Looking ahead, we see an opportunity to improve margins as we move to more normalized markets. Turning to annuities on slide 10. The segment is performing in line with our expectations. Variable annuity pre-tax operating earnings was $118 million, down slightly from $120 million a year ago.
This business was also impacted by market dislocation in terms of the direct impact on account values and lower asset earning rates. The underlying business is solid, and the risks are well-managed. Fixed annuity pre-tax operating earnings declined to $28 million due to elevated lapses over the past year as the block has been running off. The earnings in the quarter were a bit better than anticipated due to higher mortality experience among income annuity contract holders. Given the current interest rate environment, there are limited new sales, and as a result, this book is expected to gradually run off and earnings will trend down during the year. Turning to the protection segment on slide 11. Pre-tax operating earnings were $37 million in the quarter. Let's focus on life and health first.
Pre-tax operating earnings were down from last year, largely due to an $18 million long-term care reserve release in the prior period. Also, long-term care claims were elevated in the current year but remain within expected ranges. Auto and Home had an operating loss in the quarter due to pre-announced cat losses of $37 million. The combined ratio was 118% in the quarter, which included 14% from cat losses. Underlying results reflect the booking of accident year 2016 incurred losses at a level consistent with the end of 2015. Management has taken action to enhance underwriting, pricing, and claims practices, which are driving improvement in frequency and severity trends in both short and long-tailed coverages. As these business trends continue to emerge, we anticipate that they will begin to be reflected in the financial results. Let's turn to the balance sheet on slide 12.
As we have told you before, Ameriprise maintains a strong balance sheet that we will use opportunistically. We have approximately $2 billion of excess capital, and our estimated RBC ratio remains above 500%. Our hedging program continues to work well, and the investment portfolio is diversified. We returned approximately 150% of operating earnings to shareholders through dividends and share repurchase again this quarter, well above our baseline of 90%-100% of earnings. We repurchased 4.7 million shares in the quarter, up significantly from a year ago. 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 are 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 Nigel Dally from Morgan Stanley. Please go ahead.
Great. Thanks, and good morning, everyone. Given the UK referendum, hopefully you can provide some more color on the various plans you're executing, especially around your Luxembourg operations to continue to distribute your funds throughout the EU and the amount of AUM which is potentially impacted there.
Okay. Nigel, we already have an operation formally set up out of Luxembourg. We already have a reasonable portion of our fund lineup on the SICAV format that is distributed throughout Europe. What we're going to do, we have a process already in place for what we've established so far, that we'll just build out that line to be a full complement to the line that we offer in the OEICs, and that's already going to be underway. We'll have plenty of time and ability, depending on what the final outcome is of the referendum and the decisions made between the U.K. and the EU, for our clients to move into the new format if that's the most appropriate for them as they move forward. We've done it before. We've actually had that in operation already, so it's not something that we have to newly establish.
Great. Thanks. Second question on asset management adjusted margins. We've heard a couple of quarters now where it's declined on a core basis into the mid-30s. Is that the new normal, or is the high 30s, which I think was your previous guidance, still an achievable goal?
It's Walter. The range that we have, 35-40, is still in effect. Obviously, this quarter hit the 35, but certainly, we see the 35-40 as the range that we think is appropriate.
Great. Thank you.
Our next question comes from Yaron Kinar from Deutsche Bank. Please go ahead.
Good morning, and thank you. I wanted to follow up on Nigel's question regarding the OEICs. Maybe you could give a little color on what percentage of your AUM in Europe, or retail AUM in Europe comes from that platform today?
We probably have about 25%. That would be the non-U.K. Of that, already, we have almost 60% already in the non-U.K., the SICAV format. It's really the difference. We're probably talking about $5 billion that could be moved to the SICAV, if that's what was necessary.
Okay. That's helpful. Turning to the Advice & Wealth Management segment. We've seen, I think, one or two management teams already talk about stopping the sale of Class A mutual fund shares through advisors and not allowing the receipt of 12b-1 fees in wrap business. Is that something that you're considering as well? Maybe you could also give us a little bit of color as to what percentage of revenues come from those fees.
We are moving to, as we highlighted previously, we're moving to institutional share classes. Where there aren't any, it will be a load-waived Class A. In that regard, we'll have that orchestrated as we move to a complete new account structure , and those share classes are more introduced across the industry. Now, that will take place, probably we're looking at towards the first part of next year. That would eliminate some of the 12b-1s that are currently collected. Most of, as we do, we pass on those 12b-1s to the advisors. The advisors will be now adjusting their business model appropriately so to look at their services rendered and other things. That's a decision we've made, and we're moving towards that, and we're helping our advisors through that transition over the course of the year.
Do you envision, or what do you envision that impact to be on Ameriprise's earnings?
Well, on a revenue, of course, the revenue would be adjusted for the 12b-1s going away. We only get a haircut on that. Most of that's passed to the advisor, similar to our distribution arrangements, particularly in our franchise channel. With that, there will be an impact to earnings, but we are focused very much on offsetting that through other adjustments that we're making in our business model as well as on a cost basis. We think that will have a minimal impact as we phase through this by other changes we have to make. Just as we're asking our advisors to review their business model as well for adjustments that they may be looking to make.
Thank you.
Our next question comes from Ryan Krueger from KBW. Please go ahead.
Hi. I just had a first, a follow-up. On the 12b-1 fees, are you only going to eliminate the receipt of 12b-1 fees in the advisory platform or across the entire platform as well?
When you say across the entire platform, we will be eliminating them across both qualified and non-qualified. Across the complete of the advisory type platforms. In regard to brokerage is a little different. The 12b-1s are still able to be collected there. We're looking at what is the appropriate share class and appropriate distribution arrangements there, that we'll make a decision on that subsequent. We feel that can still operate appropriately under the exemptions of the BIC.
Okay. I guess somewhat related question on revenue sharing payments and platform fees is, do you see any changes necessary regarding the new DOL rule on that aspect of the business?
What we see right now is that you're still very appropriately allowed to get cost reimbursements for the services rendered. We'll, of course, make some adjustments and tighten some various things. Having said that, we think that the bulk of what we do and how the services provided and the reimbursement we get will be able to be continued.
Okay. Then just one last clarification as a follow-up. Is the $5 billion number you referenced the amount of non, I guess, or EU investors that are invested in UCITS types of products that could potentially have to move to SICAV? Was that the number you were referring to?
Yes. With that, again, there's nothing that's come out formally that says they do have to move at this point in time. If they do, we'll have the like product set up in just the SICAV format. There are ways that we're reviewing right now for that transfer to be made appropriately from a client perspective if necessary.
Okay. Thank you.
Our next question comes from Alexander Blostein from Goldman Sachs. Please go ahead.
Hey, guys. Good morning. I guess first, just to follow up on the discussion around potential changes you guys could still make on the Advice & Wealth Management platform to kind of offset some of the revenue pressures. One of the areas we've been hearing a little more about is just what the brokerage firms charge just for access and essentially platform fees. Given the size of your platform with obviously a lot of financial advisors and a lot of assets, can you talk about two things? I guess, A, your plans to rationalize any shelf space
Kind of what it means for the number of products you're offering there, and two, what you are contemplating in terms of charging the manufacturers to be on your platform.
What we're doing, of course, and we do this on an ongoing basis, is we review various products and services offered on our platform. We make sure that there's a level of appropriate due diligence around them in the offering, as well as with that, the appropriate lineups for our advisors so that they have a full opportunity to review all the appropriate investments for their clients. We'll go through that review as we are now, consistent with any changes necessary required by the Department under the exemption, et cetera. We might tighten a range a little bit. We might tighten things more formally against the entire platform. We don't see a radical shift at this point in time for what we're offering, because we already put those products and services through a level of due diligence appropriate.
We may look to things to ensure that they're more equalized than any other offerings, and some of the services rendered and the commission structure on them. That's what we're reviewing right now. As far as the platform fees, again, we will look to make sure that that is very consistent and within tight ranges appropriate so that there is no differences that would in any way influence even from an objective view in the offering. Those are the things that we're working on right now. We don't see a dramatic shift for what we've been doing.
Got it. To paraphrase a little bit, it doesn't sound like you guys think that the distributors will have much of a pricing power over the manufacturers to get their products on the platform.
Listen, I think there's always a balance between the manufacturer and the distributor now. I think if anything, the distributor, at least in our case, looks for cost reimbursement against the services that are rendered for the products offered. That's what we're going to continue to do.
Got it. Great. Then question just around capital management for you guys. Obviously, very consistent level of buybacks over the last couple of years. If we think about the level of payout, and if we get into an environment where the equity market's a little bit tougher, and obviously the interest rate dynamic is not particularly helpful, what's the appetite, I guess, to continue to maybe dip into the excess capital, $2 billion number to maintain the level of, call it, around $450 million of buyback?
Well, I'm not going to talk about the 450, I'll talk about the ability. As you've seen, we have dipped into the excess, and we've dropped it, and it's decreased, and we just had a call on some debt also. We have the capacity to do that, and certainly, we'll evaluate the opportunity to best return to our shareholders as we look forward and look at the environment which is in. We have the capacity, and it's just a matter of assessing what is the best way to return to shareholders as we look over the remainder of the year.
Understood. Great. Thank you very much.
Our next question comes from Thomas Gallagher from Evercore ISI. Please go ahead.
Thanks. Jim, just a few follow-up DOL questions. From your response to Ryan's question, it sounds like you expect to be able to retain all of your marketing and support fees in terms of that revenue piece. If that's the case, just thinking about how you're transitioning and what risk that represents, and how we should think about that, you're going to be operating under the BIC, and that would carry some legal liability risk associated with it that would be higher instead of being a level fee fiduciary. Is that the right way to think about it?
Well, part of our business, as we said, there's a part of the business that will be operating under the BIC, where necessary and appropriate for the sale of commission-based products, such as an annuity and certain things, including individual funds, where it wouldn't be appropriate necessarily to put them into a advisory or a wrap fee basis, particularly based on SEC guidelines, et cetera. Under that regard, a portion of our business is in brokerage. It is a smaller part of our business today, and maybe will even be a bit smaller as this continues to go forward. That will operate under the BIC, and we will abide fully under the exemption of what's required there, including for the sale of any individual product and for any payments made so that there's level commissions and all those various things that are required.
In the bulk of our business, which is under investment advisory today, we will move more fully to an exemption allowed under the investment advisory. Where necessarily inappropriate, there is allowance for some level of cost reimbursement for certain of the services rendered that we'll continue to get. That's the way we're reviewing and looking to implement against the various exemptions allowed.
Would you agree, though, I'm thinking about it the right way? You're thinking about the fees that you can continue to make for marketing and support fees. Really the trade-off here is that I presume there's some higher level of legal liability risk associated with using the BIC versus level fee fiduciary. Is that a fair way to think about it, or would you disagree with that?
Under the BIC exemption, okay, there is allowance for cost reimbursement for certain services rendered that are permissible. We will ensure that we meet those requirements so that we would be able to appropriately offer various products and get reimbursement for the services rendered.
Okay. Then just shifting to, I just want to better understand, as you eliminate 12b-1 fees and move to institutional share classes, what that means exactly. That would be for all of your wrap accounts, this would be occurring? Maybe a better way to put it is, can you dimension what % of your wrap accounts have 12b-1 fees where you would be moving clients to the institutional share classes?
We will be moving to institutional classes where they're offered for all of our accounts. As I said, we'll move to a load-waived A-share where we wouldn't have an institutional account available for the client at this point in time. In that regard, it will be across all of our advisory businesses. That will occur over the course of the beginning of next year. With that, to me, I'm not sure what your question is fully.
Well, just thinking about, is this going to happen, this move to institutional share classes, this new structure?
Right.
Is this happening to all of your wrap accounts?
Yes.
Is this just some fraction of it?
Well, some of our wrap accounts are already on some. As we introduced the new classification on some of our wrap over the last year, have moved to institutional, and that is what we are moving all as we convert our account structures and we get larger groups of offerings. Not all offerings are out there on the institutional share class today. As that occurs, and we move our account structure, which we are hard at work at, we will go into a one broad account structure that will occur by the beginning part of next year.
If I think about that kind of large movement beyond the elimination of 12b-1 fees, will that also reduce fees overall? Just a movement in from retail to institutional.
Well, the 12b-1 fees will go away from revenue. At the end of the day, advisors will be looking at their various accounts and services rendered and other services that they can offer the various clients when necessary if they need to. From our perspective, our haircut from that will go away. We are making adjustments in our business model so that we can offset that or remedy that in certain circumstances.
Okay, thanks. Then one last one, if I could. Walter, I know you mentioned you see opportunity to improve margins in asset management, but if we look at asset earning rates, they have been coming down for the last few quarters. Just broadly based on what is happening with DOL, there is clearly a movement afoot here to move certainly qualified investors into lower fee type structures. Do you really think this is a trend that is going to reverse or stabilize in terms of asset earning rates that have been declining here?
Well, our fee rates have been consistent, certainly in the first quarter when you saw the drop where you could not adjust your expense base based on revenue. We actually do see the 35%-40% as a reasonable range is, and we have not seen the behavioral pattern that you're talking about take shape yet. No, the business model has the capacity to generate the 35%-40%.
Okay, thanks.
Our next question comes from Doug Mewhirter from SunTrust. Please go ahead.
Hi, good morning. I have two questions. First, just a clarification on the asset management segment on some of the flow data. You cited a couple billion of outflows from, you characterized, a former parent company relationship, and that's happened on and off over the past couple quarters. How big is sort of the potential for outflows from that particular category? Or is that sort of pipeline, as it were, almost empty?
What we had experienced a bit more was some greater level. We always mentioned that there would be a normal outflow from our arrangements with Zurich and U.S. Trust over time, just as Zurich is a closed book, we constantly get a level of outflows. Having said that, the book has been relatively stable with reinvestments and other things, and appreciation, where we still manage roughly equivalent levels of assets over time, but we always have to book that outflow as it comes through, and it always looks like a negative. In U.S. Trust, as an example, there's always a level of that just because as new sales come into U.S. Trust or as their level of sales may have gone down, when we purchased it was a larger base of their assets.
There's always a little difference between a level of redemption and a level of new sales, and we expected that. That's normally what occurred. What occurred over the last number of quarters was that U.S. Trust decided to take some of their separate account fixed income business back in-house. In that regard, we suffered a little higher level of outflows from some of the dedicated activities we did for them. That looks like it now has slowed through the end of the second quarter, and we think that we'll go back to a more normalized number. Those are the reasons that we had some oversized flows that we experienced there.
Okay, thanks for that. My second question, more of a conceptual question. How is the feedback or the questions you're getting or the conversations you're having with your advisory force regarding variable annuities? I know that they've been in the spotlight in terms of the DOL rule. I know there's been some uncertainty around how they could sell them. Is there sort of still a willingness to sell these to an extent? Is there more of a replacement where more of them are saying, "No, I don't want to do this. I'm just going to put them into a wrap account." If you could just describe conceptually the conversations you're having with your advisors about that.
I think, first of all, there's probably, it may be a little difference in the way we look at the sale of the annuity and what we do today versus in broad terms the industry. We look at the annuity as part of a broader solution set against our overall account and retirement plan for the client. They're really sold as a solution for a piece of their activities. We really have educated and we work with our advisors to understand where they would provide the essential income as a piece of that income drawdown plan. That's the way we've done business for a while. As you can see, our business has been very stable in the amount of sales that we've done consistently because they're not sold as just a product out there, but as part of the broader solution.
With that, every sale of our annuity goes through a pre-approval process and an upfront review, compliance, et cetera, to ensure that it is fit and appropriate for that client. That process that we already have in place will be the same process that will be in place as we move forward. There's always a few things and tweaks that we'll make sure are complemented there based on any other additional thought process necessary. We believe that the extent of the process we have in place already goes through that level of due diligence and review. Where it is appropriate in a qualified account, that's what we review today in a very rigorous way. We don't see a fundamental change in the way we do business regarding the sale of that product. Could there be adjustment in some of the activity there?
The answer is always yes. That's something we'll see over time where necessary. We don't see a fundamental change driven by a change in a fundamental process that we have in place or review that we currently do. In addition, there may be some move to more of a level load over time rather than an upfront commission. Again, that will depend on what circumstances or how the advisor thinks about it. We're not planning for a fundamental shift in our annuity business.
Okay, thanks. That's very helpful. That's all my questions.
Our next question comes from Eric Berg from RBC Capital Markets. Please go ahead. Eric, your line is now open. We'll move on to our last question. Our last question comes from Suneet Kamath from UBS. Please go ahead.
Thanks. Good morning. I wanted to start with Advice & Wealth Management and just get a sense on client activity. It looks like the distribution fees in that segment have been running $550 million a quarter for the past couple of years, and we've had a step down here for the past two quarters. Just want to get a sense based on the feedback you're getting from your advisors, are we at a new run right here in terms of activity or do you think we can get back to that mid $550 million or mid $500 million level, especially as these EARs start to vintage in?
I think as you saw in these first two quarters, there's been, especially in the first quarter, the impact of the markets and certainly the dislocation associated with on long dated. It is our expectation that as we work our way through, I can't exactly say where it's going to go back, but we certainly don't see this as a permanent trend. We're working through EARs are, as you indicated, we are bringing on board. They are vintaging and certainly the productivity within the legacy advisors. It's going to be a combination as we work through it, Suneet.
Okay, thanks. Just related to EARs, the 98 I think that you added in the quarter was maybe the strongest we've seen since back to 2012. Just a question, do you think this is the early signs of wealth management consolidation post-DOL? Relatedly, once the DOL standard goes live, I guess, next year, are you envisioning or expecting any changes to your ability to recruit advisors, particularly as we think about things like transitional compensation?
Suneet, as we look at the business today and what we're doing to both support our advisors, but also have a strong business model to actually help them serve both the retirement and non-retirement market, particularly to our target market of the $500,000 to $5 million. We're working very closely with what is the level of support our advisors need, the training, what is the level of what we would call activities necessary for them to truly serve these people more fully. We feel like we have a very strong business model in place that can respond to whether it's both the regulatory, but also the consumer dynamics that the consumer is interested in. The more we speak to the consumer and do research, whether even with millennials or not, they're asking and want more personal advice.
They like working in an engaged world and using the digital, et cetera, we have some of the better digital capabilities, we've been recognized out there, and we're continuing to invest in it. That includes digital advice. They want more than something called robo, and they want more than something than a computer model. We do feel that we have the ability with our planning model to actually serve this universe. Therefore, we think we continue to be attractive to advisors, particularly based on a combination of that and our culture here, built around how the advisor needs to serve the client and how we, as Ameriprise, also interact and connect to help the advisor serve the client. I think there will be some people evaluating going through the DOL.
I think our pipeline has been good because we're actually working day to day with our advisors to help them handle this, and we have the compliance and the infrastructure necessary. I think people will evaluate that over time, particularly if they're independent or if they feel like the advice model would work for them a little better as they go forward. I can't predict what that will ideally look like, but I think we're able to serve them. As far as transition comp, et cetera, we're looking at all of those various things. Again, we feel like the way we have set that up and what we can do or even adjust for it, will be done in a way that we think we can satisfy some of those requirements.
Okay, thanks. Just one last one, if I could. Just on the asset management business. Given the focus on margins and some of the pressures that we're seeing in fees across the industry, just wondering if there's been any change to your appetite for M&A, particularly given maybe the scale requirements for that business have gone up given some of these macro pressures. Just wanted to get some thoughts there.
No, we continue to feel that, number one, we've globalized our business now, we're continuing to invest to even make that more efficient by having a seamless and consistent way of operating through our front and middle office. We're doing that in how we're sharing research and other things. We're continuing to complement what we do and make adjustments, as Walter said, so that we can get both effectiveness and efficiency on a global scale. With that, we are still very open to look at complementary acquisitions as this world continues to change and if consolidation continues to occur. I think we have the wherewithal to do that. I think we've shown that we can do that successfully, and that we look for other activities or companies that would fit in with what we're trying to orchestrate and find that as an opportunity.
We're very much open to that as the world continues, as I said, we still have a very strong capital base. We're not over-leveraged. We have the ability to do that. At the same time, we have the ability to return to shareholders.
Size, you could do a larger transaction. That would be something that would be of interest to you if it came along?
Yeah. We have the ability of a range of sizes here based on our capacity, the earnings power, the balance sheet, the debt offering, et cetera, that we can do.
All right. Thanks, Jim.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.