Welcome to the fourth quarter 2015 earnings call. My name is Hilda, and I will be your operator for today. 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 Ms. Alicia Darabi. Ms. Darabi, you may begin.
Thank you and good morning. Welcome to Ameriprise Financial's fourth quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and Chief Executive Officer, and Walter Berman, Chief Financial Officer. Following their remarks, we will be happy to take your questions. During the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company's operations. Reconciliation of non-GAAP numbers to their respective GAAP numbers can be found in today's materials available on our website. 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 2014 annual report to shareholders, and our 2014 10-K report. We take no obligation to update publicly or revise these forward-looking statements. With that, I will turn it over to Jim.
Hello, everyone, and thanks for joining us for our earnings call. This morning I will provide my perspective on the business, and Walter will discuss our financials. Ameriprise, like the industry, was impacted by a more volatile market environment during the second half of 2015. Overall, our fourth quarter results were solid. We are executing our strategy and have work to continue to do in certain areas that I will discuss. For the quarter, operating net revenues and operating earnings were largely flat with operating EPS up 7%. For the full year, operating net revenues were up 1%, operating earnings grew 3%, and operating EPS increased 9%. In terms of operating return on equity, Ameriprise continues to deliver at a differentiated level. We generated a new record return of 24.3%, up 130 basis points, which is one of the best in the industry.
Ameriprise continues to demonstrate strength in our ability to return capital to shareholders, returning another $569 million in the quarter. In fact, 2015 represented the fifth consecutive year we returned more than 100% of operating earnings to shareholders through dividends and share repurchases while investing for growth and maintaining our capital strength and flexibility. Very clearly, our financial foundation remains in excellent shape. In total, assets under management and administration were $777 billion as solid Ameriprise retail client flows were dampened by asset management outflows, market depreciation, and an unfavorable foreign exchange impact. Let's move to the business results in the quarter. In Advice and Wealth Management, we have a strong business, and I feel good about our ability to continue to help advisors build productive practices. The strength of our advice value proposition is even more attractive in this environment.
Ameriprise is well-positioned to help clients and prospects in every stage of their lives and to address the full spectrum of their needs across both market cycles and their lifetimes. We're helping advisors uptake the extension of our successful Confident Retirement approach that we launched last quarter for those who are still building their wealth. Wealth builders, as we call them, represent more than half our target market, consumers with $500,000-$5 million in investable assets. They value a financial planning relationship. This is a real opportunity for us going forward as we introduce it to our entire field force over the coming months. We continue to invest significantly in our brand and marketing programs that help our advisors spend more time with their clients and grow their practices.
Our Be Brilliant advertising campaign tells our story by illustrating the everyday moments of brilliance that they can realize by working with the right advisor and the right firm. The campaign is doing well and outperforming competitive norms with all of our key audiences, consumers, clients, and advisors. We're complementing our broadcast activity with digital channels like social media and online ads that expand the Ameriprise message and increase engagement with our brand. Our advisors are taking advantage of Be Brilliant in their local communities and online to gain new clients and assets. Overall, client assets remain strong at $447 billion. We also had solid flows into fee-based investment advisory accounts, and cash positions increased to more than $23 billion. Clients are naturally taking a more conservative position, which is a typical pattern in this environment.
With regard to our advisors, Ameriprise value proposition and culture is attractive in the industry. It was another strong quarter for recruiting as more advisors are recognizing the strength of the Ameriprise value proposition. 82 new experienced advisors moved their practices to Ameriprise. For the year, nearly 350 advisors joined Ameriprise in both the franchise and the employee channels. So far, the pipeline for this year looks strong. Advisor practices are more productive because of the combination of excellent retention of our most productive advisors, very strong recruiting results, and our investments in growth. Advisor productivity, a metric that we consistently grow and increase 4% year-over-year to $514,000 on a 12-month basis. We're well-positioned in the marketplace in generating good profitability. In this environment, we're working closely with our advisors to handle the effects of market volatility with clients.
As clients pull back, it's important to keep them focused and engaged on their goals. People need to plan for their future, that doesn't change based on market conditions. As we look ahead, the U.S. Department of Labor's pending fiduciary rule will add additional requirements that will have implications for our industry as well as Ameriprise. We're hearing the DOL will be issuing the new regulation in the coming months. With that in mind, we're very much focused on putting together our plans and resources to effectively meet the DOL's requirements, but we need to understand what the final rule will be and how it will impact our clients. We have the resources, compliance, infrastructure, and capabilities to respond to the DOL's objectives, and we believe that our value proposition, satisfying client needs for the long term, has been and will continue to be very appropriate.
Let's move to annuities and protection. I'll focus more on the underlying business, Walter will cover the financials. In terms of annuities, we continue to see solid sales of our variable annuities with and without living benefits in our channel. While we are in outflows, it reflects our closed third-party book, we remain focused on serving our clients. Within fixed annuities, we continue to have a level of outflows given the book is in runoff, as we have not been adding to it given the current rate environment. Our focus remains on working with advisors to help clients understand the importance of guaranteed income in a well-diversified plan. It's integrated within our Confident Retirement framework, I feel good about how we're managing the business, developing and enhancing our competitive products and features while managing risk.
Within protection and life and health, we closed the year with a nice increase in sales driven by UL products. While life claims were higher than a year ago, we recognize there will be fluctuations quarter to quarter, and these movements are within our planned ranges. We have a good book, we're working with our advisors to serve clients' protection needs. The environment does create growth challenges for these longer-term products, at the same time, it reinforces the importance of protecting what matters most to clients. In Auto & Home, we're disappointed with the financial results in the quarter. As you saw, we did increase reserves this quarter for higher claims experience in some of the older business. New business is performing in line with our expectations. Walter will explain that in more detail.
We continue to make a number of enhancements to improve the financial performance and risk characteristics of the business. We brought in significant resources and leadership to continue to enhance our pricing, underwriting, and claims management. We feel that we are making the progress necessary, we recognize it will take time for the benefits to work through the book and be fully realized. Importantly, we continue to maintain our strong client satisfaction affinity relationships in Auto & Home. In asset management, we're generating solid financial results executing our strategy focused on gaining market share and profitable flows. With $472 billion in assets under management, we have an at-scale business with a diversified base of assets and earnings, we're focused on serving more individual and institutional clients in key markets globally.
For the quarter, operating earnings were $193 million as revenues were largely flat and earnings were down a bit year-over-year from the timing of a few expense items and investments in the business, including supporting our new Columbia Threadneedle Investments brand in our key regions of the U.S., U.K., Europe, and Asia. Investment performance remains quite strong. I'd highlight U.S. and European equities, asset allocation, and tax-exempt fixed income as particular strengths. Our investment teams in the U.S., London, and Singapore are demonstrating the importance of active management, both in terms of capital appreciation as well as preservation, given the volatility we're experiencing. On the product front, in Europe, we're seeing good sales in our U.K. and European equity products. Here in the U.S., we've had good traction with sales in large cap equity products as well as in our Strategic Income Fund.
Within the solution space, our CARA strategy continues to gain interest. From an overall flows perspective, we had about $700 million of net outflows in the quarter with reinvested dividends. This did include a higher level of outflows at U.S. Trust. However, underlying flow trends are improving, and I'll take you through it. Let's start with institutional. Total outflows were driven by about $6 billion in net outflows of former parent assets, largely driven by outflows of low-fee fixed income common trust funds and IMAs at U.S. Trust, given the changes they have made. We mentioned this last quarter and expect continued IMA outflows of several billion dollars at U.S. Trust in the first half of 2016. In addition, we and others in the industry continue to experience outflows from a large client who redeemed from strong performing strategies to address liquidity concerns.
That was approximately $1.4 billion in the quarter, and we expect at least $1 billion of additional outflow in the first quarter. These two components, low fee former parent assets and a single large client, muted continued progress in third-party institutional flows. We have strong client and consultant relationships, a solid list of one-not-funded mandates, and a good pipeline which we expect will drive flows this year. Let's now move to retail. In the U.S., we're seeing positive trends from the work the team has done to focus our sales strategy. However, this was muted from a flows perspective given continued outflows in the Acorn Fund. The fund's short-term performance has improved from the changes we've made, including adding an experienced lead PM who came on board at year-end. We expect outflows will continue in the near term as the team reestablishes the fund's longer-term track record.
In addition, in the quarter, we made the decision to end the sub-advisory relationship with Marsico Capital Management, given the strength of our global investment capabilities. This resulted in a few hundred million of outflows in the fourth quarter. We plan to ask shareholders to support our plans to merge certain funds in 2016. In addition, we expect outflows of about $700 million in Marsico-managed institutional SMAs in the first quarter. Based upon the previous servicing relationship with them, these outflows will have no financial impact. Overall, we've been able to grow gross sales and market share in the larger broker-dealer and independent channel in the past year at a time when gross sales declined for the industry. This bodes well as industry sales may pick up down the line.
We recognize we need to do more to increase both gross and net sales in U.S. retail. I feel good about the business, the team in place, and our strategy. We're seeing early results. With regard to European retail, we continue to build on our strong presence in the U.K. and serve more clients in key markets on the continent. At $1.4 billion in the quarter, European retail flows bounced back strongly from a tough third quarter. The market environment so far this year is clearly challenging. We're focused on what we can control. We're generating strong performance for clients. We have a good product line and distribution. I feel good about the team in place, the moves we're making, and the traction we have in key initiatives in asset management. Overall, the company is performing well, and our core businesses are strong.
Ameriprise delivered solid earnings in a more difficult environment. Higher market volatility and declines have clearly shaped the start of 2016. We've managed through difficult market cycles before. We're very much focused on executing our strategy, connecting with clients and advisors, and driving results. Ameriprise has the ability and long-term perspective to continue to invest as we navigate the environment, capture opportunities, and generate shareholder value. We have a strong track record of returning capital to shareholders and intend to continue to return to shareholders as we have, as well as maintain our excellent financial foundation. We're focused on keeping the company strong as we look for further growth opportunities. With that, I'd like to hand things over to Walter to review the numbers.
Thank you, Jim. I'd like to build on what Jim shared with you as we review the financial results. As context, markets were volatile and on a downward trend in the second half of 2015, which impacted revenues for our growth businesses. The results we delivered in the quarter were strong. The one exception is Auto & Home business, where we were disappointed with the results, which we'll cover in more detail when I review the segments. We remained optimistic in repurchasing our stock at an elevated level in the quarter, given the pullback in the valuation, and still believe our stock is undervalued. Our capacity to buy back stock remains strong, given our balance sheet fundamentals, and the business mix generates strong free cash. We are committed to maintaining a differentiated level of capital return. Let's turn to slide four. Macro conditions impact revenue in a few ways.
We had limited equity appreciation, which impacted asset under management. Volatility also suppressed client activity and contributed to asset management outflows. Low interest rates remained a headwind for our insurance and annuity businesses. Foreign exchange translation impacted asset levels and earnings. These impacts were felt across all financial services companies. We are not unique in this regard. As you can see, total revenue growth was not at the level we had seen in the past. Volatile markets and low interest rates, which decreased AUM and client activity slowed. This muted the impact of areas where we successfully built the wealth management business through increased wrap flows, growth in insurance and annuity sales, and building cash sweep levels as clients wait for a less volatile environment to make investment decisions. Let's turn to slide five.
Ameriprise delivered solid growth in EPS and return on equity, demonstrating the multiple levers we have to manage the business in a variety of market environments. Specifically, we managed G&A expenses, investing for growth in targeted areas but remaining disciplined. This, combined with solid tax planning and share repurchase, supported good 7% EPS growth. The operating effective tax rate was 20.1% in the quarter, which is lower than we had anticipated, driven by the level of dividends received deduction coming in higher than we expected. Turning to segment performance, starting with AWM on slide six. The advice and wealth management business continues to perform well, delivering solid financial results. Operating net revenue was $1.3 billion in the quarter, up 1% from last year. Our revenue growth slowed due to the impact of market levels of volatility and didn't experience the typical lift we have seen from markets.
Wrap net flows were quite good at $2.1 billion, despite the deterioration in the markets and flat client activity levels. Total expenses increased 2% year-over-year, driven by higher distribution expense. G&A expenses in the quarter were flat year-over-year and also flat for the full year 2015 versus full year 2014. On a sequential basis, we had a normal uptick in G&A related to elevated advertising spend and other timing-related items in the quarter. This resulted in earnings of $210 million and a strong margin of 16.6%. Margin for the full year was up to 17.1% from 16.5% in the prior year. Results were achieved with little benefit of increasing short interest rates. We had $23.5 billion of brokerage cash balances.
We anticipate a more material benefit in the first quarter from this Fed rate hike, with the majority of the first 25 basis point increase falling to the bottom line. Asset management continues to provide a solid contribution to our revenue and earnings, as you'll see on slide seven. Operating net revenue was essentially flat at $833 million, reflecting marginal growth in equity markets and the cumulative impact of net outflows, partially offset by strong CLO benefits and the performance fees in the quarter. Expenses were up due to elevated performance fee compensation, as well as the timing of certain project-related costs. We remain committed to delivering strong profitability by tightly managing expenses. Pre-tax operating earnings were $193 million, down 3% from last year. Again, this reflects the impact of markets and outflows, partially offset by elevated performance fees.
Turning to annuities on slide eight, the segment is performing in line with our expectations. Variable annuity pre-tax earnings increased $6 million from a year ago to $129 million. We are maintaining good profitability in this book. Fixed annuity pre-tax earnings declined to $23 million due to elevated lapses as the block runs off as it comes out of the surrender charge period. 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. Turning to the protection segment on the next slide. Pre-tax operating earnings were $35 million in the quarter. Let's focus on life and health first. Pre-tax operating earnings benefited from $28 million from an assumption change related to our waiver reserve.
Underlying earnings were pressured by elevated life and long-term care claims, which were at the higher end of our expectations, as well as continued low interest rates and the mix shift from VUL to IUL. Moving to Auto & Home, we were disappointed with the results in the quarter. We built reserves by $57 million, primarily in the auto book from the 2014 and prior accident years. Driving this was elevated frequency and severity experience for auto injury claims, which is in line with the trends the industry has experienced. Additionally, we did not see the level of impact in improving the outcome of 2014 and prior accident year existing claims as much as we'd previously expected. We have been focused on operational improvements this year, including our pricing to risk.
We have begun rate actions on almost 95% of the auto base and approximately 80% of the home, which will take time to be seen in the financial results. These actions have been effective in slowing sales across product lines, and performance for 2015 accident year is in line with our expectations. While results in the quarter did not meet our expectations, we are aggressively pursuing additional business improvements and anticipate better profitability in 2016. Let's turn to the balance sheet on slide 10. Our balance sheet fundamentals remain strong. Our excess capital is approximately $2.5 billion, with an RBC ratio of approximately 640%. Our hedging program has been quite effective, and the investment portfolio remains strong. I will get into our energy exposure momentarily. We continue to return over 100% of operating earnings to shareholders, with $569 million distributed through dividends and share repurchase in the quarter.
For the year, we returned $2.1 billion to shareholders, which was 125% of operating earnings. Looking into 2016, we plan to return 90%-100% of earnings to shareholders as a baseline, but we will be optimistic based on valuation. There's been a lot of interest in the energy sector, given oil prices. I'd like to take a few minutes to give you more detail on our portfolio. As you'll see on slide 11, we have approximately $3.3 billion of energy sector exposure. The duration is short on these energy holdings, with over 35% maturing in less than three years. We feel quite comfortable with our holdings for the following reasons. We have a consistent, rigorous research process behind our investment decisions. As we analyze investment opportunities, we consider low commodity prices when we analyze, stress test, and purchase energy company bonds.
Our analysis focuses on key variables such as a company's cost structure, balance sheet health, flexibility of CapEx budget, asset coverage, and our assessment of management quality and behaviors. Approximately $1.2 billion of our energy exposure is to pipelines, which are essentially the infrastructure to move oil products, and natural gas from the producer to the end users. The vast majority of our exposure is with a handful of the largest U.S. pipeline operators. These pipeline operators are highly regulated and receive most of their revenues from contracts where the customers pay a reservation charge regardless of the quantity and price of product being moved. In many cases, these pipeline assets originate at the wellhead, making this pipeline infrastructure essential to the producers. Additionally, contract terms with producers and customers are generally multi-year in duration. The rest of our energy exposure is focused on large, diversified North American-based companies.
While we anticipate that some investment-grade holdings may be downgraded to high yield by the rating agencies, we do believe that these companies have the financial flexibility to weather this extreme pricing environment. We have already seen these management teams taking aggressive actions that we would expect of them. Reducing their cost structures, cutting capital expenditures related to future production growth, reducing or eliminating dividends, undertaking asset sales, and even issuing equity, all with an eye towards living within cash flow as these distressed commodity prices continue. So far, we have only two downgrades from investment grade to high yield in the energy space. The last thing I'll mention is that the team we have in place today is the same team that managed our portfolio well during the global financial crisis.
In fact, approximately 30% of our overall energy exposure was purchased in 2008 and 2009, when commodity and bond prices were last near these levels. Overall, I feel very good about our financial performance in the quarter and in the year. We delivered solid earnings growth in the face of challenging market conditions. 2016 is off to a difficult start with continued market deterioration and volatility, which will pressure results if it persists. We have managed through challenging environments in the past, and we have the levers to do so this year. We have an excellent track record of returning capital to shareholders in a meaningful way, and we'll continue to do so opportunistically. We'll take your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star and then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or 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 and then one on your touchtone phone. We have a question from Ryan Krueger from KBW.
Hey, thanks. Good morning. First question was, can you give us a rough sense of the fee rate differential between the former parent-related outflows that you've referenced as being low fee and new sales at this point?
You were looking for the differential from the differential that we had from a basis point on fee? That's what you're talking about?
Yeah. Even roughly.
Okay. The rough approximate, again, for the inflows and outflows, again, looking at that as we talk about the low basis point. It was about a nine-point differential between the inflows were about nine points higher than the outflows. Obviously the U.S. Trust element was substantially lower than at the lower end of flow of basis points of revenue.
Okay, got it. That's helpful. Then secondly, have you seen any improvement in the M&A environment given lower property valuations in the asset management sector?
I would say that there seems to be a bit more activity going on. I think the stuff that was out there a little over the course of this year was still at a bit more elevated price. I would probably see if we continue in this environment, that things would probably either come forth more or be in a better valuation basis.
Okay, just last quickly, do you have a tax rate expectation for 2016?
Yes. Right now, we haven't input it in, it should be in the range of 24%-26%.
Okay, great. Thank you.
We have a question from Jaron Kenar from Deutsche Bank.
Good morning, everybody. I realize we ended the year with a pretty challenging environment with deteriorating and volatile markets, but it seems like this is continuing this year. Can you give us any sense of how the first month of the year is looking for you?
What I would probably say is, with the increased volatility at the beginning of the year, we're probably going to see client activity slow a bit as people sort of get to a better perspective of whether markets are balancing out and not to put more money to work. I think as you saw in the fourth quarter, even though we had good client inflows, we did build cash balances. Usually what you find is as you begin the year, those cash balances will go to work a lot quicker in the first quarter. We're probably seeing them being held more now until the volatility sort of calms down. There's a little more direction to the markets.
Okay. If we turn to the Auto & Home business, I understand it was a little disappointing on your end as well. Do you still expect it to be profitable in 2016, as you'd indicated earlier?
Certainly from the standpoint of the action we've taken, certainly looking at 2014, our expectations are that it should, but it's going to be at the real low end of the profitability.
Okay. I guess I'm surprised a little bit to see the continued prior year reserve developments, now I guess going back to 2014 as well. I haven't really seen that coming from other auto players in the industry, I'm just curious, what is it that really makes this business so difficult to get the reserves right for, particularly in Ameriprise's case?
Well, okay. Let me try and answer it again. I can only take you through what we see in the industry statistics and other things like. What you're looking at is long data as you look at BI on underinsured and physical damage. What you're seeing there is we had claims on the books looking at this is typical, I think, for the industry. As they go through their aging cycle, the environment has become a lot more litigious, I think that's not just exclusively for us. I think that is an overall situation. Basically, assessing as we looked at it, we added the staff and certainly started looking at the claims performance and aspects, realized that this was more and more about our case reserves were going to need to be bolstered as relates to 2014 and prior.
Again, if you look at up to 2014, you're looking at probably more severity. In 2014, a combination of severity and frequency. We therefore had to increase our case reserves to do that. We now believe that certainly assessing the situation that we're more confident in that these reserves will be adequate and certainly with the amount of staff. I think the reason why you don't see some of it, even though, again, we talk about claims on liability have deteriorated. I think other firms probably had higher reserve capabilities into basically weather that situation, we did not as we were building it.
Last year when we built the reserves, we built them more to when we went into 2014, we caught that what we were reserving in that year, as we indicated, when we assessed it at the end of the day, was not adequate, and that's where the majority of that money went. We've seen further deterioration, like I said, in BI and UIM and UM.
Great. Thank you very much.
We have a question from Erik Bass from Citigroup.
Hi. Thank you. Just had a couple questions about advice and wealth management expenses. I guess first, how much of your G&A expense is variable cost? If you do see revenue pressure from market conditions, how should we think about the impact on margins?
Well, overall, again, as a rough rule of thumb, again, it's three categories, fixed, semi-variable, and variable. I would say variable in that case would be about a third. Again, from that standpoint. Certainly, we've demonstrated in the past our ability to appropriately assess the situation, see what expenditures provide the sort of return. We do, so we have flexibility.
Got it. Can you help us think about the level of expenses you may need to incur to comply with the new DOL rules? Is this something you may be able to offset through re-engineering, or should we expect some net impact in 2016 once kind of the final rules are out?
Well, right now we are assessing it. Obviously, from the standpoint, the rules have not been distributed. Certainly, we realize that if we read it and depending on, there will be development expense, and there'll be some ongoing operational expense. We hope to, certainly, we've been in a planful mode at this stage trying to be proactive. Again, not having the full elements of that, it's difficult to put a number on. We will look to what re-engineering and basically repositioning we would have to do. I think that is something as this comes out, we'll be more direct about. Kevin, it's something that we're focusing on and be part of the development. I don't know if Jim wants to. You want to be good?
Yeah, I think what I would say right now is we have mobilized our resources. We're looking at all aspects, from the compliance to the technology to the training necessary for the advisor force. We will go into deployment of that as soon as we know exactly what the rule looks like. We're doing some work already to prep for that and get various activities on the way that we think based on some of the directions that were in the previous proposal, that's already in the functional requirements and stuff from a tech perspective. Depending on how significant that is and what the change is, we think we do have the capabilities to accommodate that or adjust for it. There will be impacts and expense from it.
We will offset some of that based on what we will tighten the reins, for some other things we might have on the way as this takes a priority. There'll be some offsets there. Having said that, I couldn't tell you in the short term, depending on how aggressive the timetable for implementation is, what we'd have to do to heavy up on some of the resourcing necessary. As I said, I think Ameriprise will be one of the companies that would have the ability to deal with this more effectively. We do have the resource capability and can move things around to try to accommodate that. We will set up so that in the end, hopefully, we'll be a place that would be better able to serve.
Okay. That's helpful. Thank you.
Our next question comes from John Nadel from Piper Jaffray.
Good morning, everybody. My first question is related to advice in wealth management. I'm curious, Jim, market volatility and maybe client activity slowing certainly makes some sense, it's sort of a continuation from what we saw in the third quarter. I'm just curious whether you're seeing or you believe you're seeing any impact just yet in the results from the proposal, from the DOL proposal. Are advisors already starting to adjust?
No. I would say, as advisors are as curious as you all are to what exactly this will mean, et cetera, and we're starting to give them a little better sense and communication on that. What I would just say is, I think what you're seeing more near term is more of the volatility picked up in the market. In our case, we run a lot of assets in the management fee-based business, and so you have that depreciation at the end of the third quarter. As you saw, we still got $2 billion into our wrap flows. Our cash balances increased by a few billion. I think at the end of the day, activity is still going on. I think people are just like you and I, probably looking and saying, "Is there another leg down? What is it?
What's the level of volatility? I think on the other side, we're not seeing wholesale changes to client activity or people pulling money or anything like that. I think people are more staying tuned. There's still money going to work, and some people are using this as an opportunity. I think at the end of the day, I think increased volatility always gives people a little pause.
Related to that, Jim, I think at this point, most of your competitors who have some sort of an advice-based business have really tried to quantify, at least provide some sensitivity around where they might expect to see some of the impacts from the DOL proposal. Assuming it goes through as it's currently written, and it seems more and more likely that there won't be any significant changes to it. I'm just wondering now with many months to evaluate the proposal, whether you can help us with some sensitivities on where you might see some impacts on your revenues and margins.
What I would say is this. I think one of the things people have identified is the idea that if they're unable to sell REITs, et cetera, or some of the type of broker transactions into the qualified accounts, and what would that do to revenue. I would just say over the course of this year, based on changes in regulations and other things and where the market was, our advisors pulled back from that. I think the pullback from that's going to be less significant because it was already occurred in our numbers in 2015 in a large way because there are a level of changes happening there already. I think in regard to the business overall, it really depends on whether DOL comes out with their Best Interest Contract Exemption.
If they truly are giving you the ability to do commission-based business within that and to satisfy your obligations there, that's one method. If they're saying, "No, we don't like that, we want to move more to fee-based," we can accommodate that as well. We're trying to figure out which way as far as the actual final rule. You would imagine that there's going to be some increase in compliance and cost of disclosure and various things like that. Over time, we'll get everything adjusted for it. It's hard to really say. We probably see some adjustments that would happen in the idea of the commission-type business for these accounts.
We do see that a lot of our annuity business, I know that was one of the things that people mentioned, a lot of our annuity business today, very, very little, almost none of it is done without extra death benefits or living guarantees or something that, again, the administration has said that's still important. We're still under the impression that under the Best Interest Contract, you can still actually do those things as long as you satisfy the requirements of the value provided and what that is and how you disclose it, et cetera. That's why I'm saying it's kind of hard to give you an adjustment. We have all the what-ifs depending on where we go. What we're planning on doing is as soon as we get that information, we'll come out in a more informed way and let you know what that is.
We already know that there are a number of offsets that we can do by adjusting things, including what fees we charge and don't charge and where we do it. On the other side of it's hard to tell exactly what is permissible at this point. I don't want to get ahead of my skis on this.
No, I understand. If I can just ask one more question on the asset management side. I'm just curious whether you could help us with what the underlying, either the fee rate or the operating margin, what that looked like in the segment in the quarter if you adjusted out the performance fees and the CLO gain.
Okay. On that basis, it will be pretty similar to what you've seen before in the 53% range, if you want.
Okay, thank you.
Our next question comes from Jay Gelb from Barclays.
Thanks. Good morning. On the capital management perspective, I know you're sticking with your baseline of around 100% return of capital in terms of dividends and buybacks. It was 125% last year. Given the drop in the share price, which I think is largely due to macro conditions, is there a hard stop in terms of what percentage of annual earnings the company would return to shareholders, buybacks and dividends?
I don't believe we have a hard stop. We certainly evaluate it and look to see our assessment of the, is the shares undervalued, the environment, and we certainly understand the fundamentals of the business. We have the capacity and capability. There was no hard stop on it. As we've seen in different years, we've moved to 120, 125. We will assess that based upon the circumstances of how we feel about the environment and obviously, the excess position that we have. We do believe the shares are undervalued right now, and opportunistically, we will certainly assess that like we did in the last quarter, and certainly with the price being down, certainly you have more bang for your buck with the money being spent.
Okay. My next question is on advice and wealth. The margin in the fourth quarter did not increase for the first time for any quarter in, I think, over three years. I'm just wondering what that means on an ongoing basis. Do you feel in this environment, especially given what's happened in the first quarter with equity markets, that there's any chance of margin improving versus the 17.1% in 2015?
What I would say is this. If you look at the fourth quarter, actually the fourth quarter margin's pretty good. Our overall revenue stayed. It didn't go down or anything like that. We had an impact because the lower markets at the end of the third quarter, and as our wrap fee business builds at the beginning of that quarter through the quarter, you saw that it would be impacted because assets are depreciated by, it was 8%, 10%, whatever it was, from the beginning of the end of the third quarter. It did have some impact in the revenue based on the billings from the depreciation that occurred. The transaction activity was pretty much consistent with the previous quarters. It didn't necessarily go down in the fourth quarter. We usually see a little more activity happening at the end of the year.
The way our expenses sort of accrue, particularly as we do our advertising because that's really a fall campaign, as an example, advertising expenses picked up in the quarter, but that's consistent with the prior year and the year before that, et cetera. Expenses always go up a little in the quarter. On the full year basis, we're still only relatively flat in G&A, and year-over-year in G&A is consistent because of the quarterly accruals. I would just say what happens is you always have that little extra expense coming in the fourth quarter because our advertising campaign, there was an extra payroll week, et cetera, pay period, and things like that. We didn't increase expenses at all. What happened was we didn't get the lift of revenue that you did from all the wrap balances coming in previous quarters because the market depreciated.
That's why the margin compressed. Going forward, I think if you say the market's up 10% from where we are in the equities, it's going to impact our fees. We run a very large fee-based business. I would say margins would compress if the markets don't bounce back only because that's going to take a chunk out of your revenue. We'll adjust and think about expenses, but again, you can only adjust expenses going out, not necessarily for what's there today.
Yeah, that makes sense. Jim, for the overall company.
On the plus side, interest may be a little more of a benefit because the short rate was up 25 basis points. That will help us in the first quarter. I don't know the actual numbers one versus the other. It depends on where the markets are.
Right. Jim, for the overall company in 2016, clearly there's a benefit on EPS from the share buyback, directionally, would it be pretty reasonable to expect kind of a flat EPS in 2016 given pressures, especially from equity markets?
I haven't done the calculations in my head yet because I'm trying to figure out the markets, but I'll let Walt go over that.
No, I think, listen, the markets, as Jim said, will certainly affect us, and the thing that we then have to assess is the impact it has on the client behavioral aspects, and then the actions that we think are prudent to sustain growth and other things of that, and how you adjust it. There's a lot of elements there, but it's certainly a challenging one.
He asked about the buyback and the EPS suggestion.
The buyback, again, it will have an impact on it. Again, is it going to be able to negate? I can't say at that stage as we assess those other variables.
All right. Thank you for the insight.
We have a question from Suneet Kamath from UBS.
Hi, good morning. Just wanted to go back to Auto & Home for a second. Is there anything structural about that business, whether it's the distribution relationship you have with Costco or anything like that would preclude your ability to either exit it or use reinsurance to free capital?
From the standpoint of exiting free capital, no, there's no restrictions from that standpoint. The other thing I would say, Suneet, the basic business fundamentals of this, and certainly looking at it, we've looked at it and we've had outside consultants look at it. The basic fundamentals is quite solid, but in the contractual elements, I think we can certainly manage the balance sheet.
Yeah. Suneet, we do run a direct affinity business, and our partnerships are very critical to that business. Very important is this is why our business is something we want to get back to a really good state, and we want to then ensure that we're continuing to deliver. We are and have been, and that really has reinforced the idea of our growth over the last number of years. Now with that, as I said, the most appropriate for us, for a shareholder, from a relationship, from a partnership, from the longevity of the business, is to get this back to a good, strong state, and then that gives us a lot more ability to think of and how to continue to foster good partnerships or good arrangements for the future.
Okay. I guess we're looking at a difficult 2015, very low profitability in 2016. It doesn't sound like there's anything structural that would prevent you from exiting. We've run the math that suggests if you freed capital from it would be more EPS accretive than turning it around, and that was when the stock price was, I think, I don't know, $105, and now we're looking at $20 lower than that. Why is that math wrong?
Our math, and when we look at it, as Jim has said, the business, we believe, is fundamentally a sound business. We believe it's in the best interest from the shareholder perspective to take the approach that we are. I know certainly it's taking this reserve increase certainly is impactful. We do believe the structural elements moving forward for us are good, as we talked about them. We have a view that from a shareholder basis, fixing it and assessing is the best approach. You know it takes time to get these price increases, these price-to-risk elements adjusted through, and we certainly focus on the infrastructure and the investment we've made in people and capabilities will pay dividends for us. The relationships are unique and very valuable and certainly provide the capability to have good returns for it. We certainly are trying to fix it.
We think we've addressed the old, now we are moving forward and putting in place, but it does take time to get there. We did miss on the basis of how much impact we could have with the 2014 prior. That's our view of it.
Suneet, we do evaluate. We are not looking, and we do evaluate all various options and ability. I would just tell you that based on everything, with including other people looking, et cetera, that this is the way to create the best shareholder value and to maintain the strength of that business for the future, for whatever may come in what we are doing right now. I know looking at it from just the mechanic and what you think, but I would probably say being a bit more in understanding it, that is where we come out, and we will get this back to where it is in good shape, and in some way creating a future shareholder value of greater means.
Okay. I guess we will revisit that. In terms of the excess capital and the buyback, maybe to follow up on Jay Gelb's question. It just seems to me that you have this $2.5 billion of excess capital. It is a pretty sizable component of your total equity. The market does not seem to be giving you any credit for that excess capital. I know you want to be opportunistic, but can you flesh out a little bit more just maybe the pace of buyback, just so we get a sense of how aggressive you are thinking about being?
Again, I think we have been, as we looked at 2015, certainly looked at the latter half of 2015, we certainly accelerated the pace and certainly from the dollar standpoint, certainly in the number of shares as the elements there. We do believe as we assess that sort of positioning is the right one to continue with. We look at it each quarter and assess the impact. I think as a good gauge, maybe from our standpoint, being opportunistic about it, that what we did in the latter half of the year is something that is a barometer to start that we would continue with, of course, where the price is. Again, we get into assessing the excess and the environment. We feel very comfortable about that. I think it is a pretty good barometer if you use the latter half of the year.
All right. Build in $425 per quarter and maybe there is some opportunistic upside to that?
It seems like that's latter half of the year.
Okay, thanks.
We have a question from Tom Gallagher from Credit Suisse.
Good morning. First, just a follow-up on that last question. Can you talk about priorities right now? Obviously, you've upsized the buyback a little bit in the latter half of the year, but I know you've also discussed contemplating M&A. Can you talk about Just given where your stock is, whether M&A opportunities are still on the table or is your money better put to work just through buybacks right now? That's my first question.
No, M&A is definitely on the table. If we see things that come along that are appropriate for us, we have the means to do it. I think having the capital position we do have gives us the flexibility. We won't have to go out and over-leverage ourselves to do something bigger. We wouldn't have to go raise equity in a difficult market, which doesn't make a lot of sense. Over time, we also can return back in a more, what I would call, stronger way, so that you always have something there in addition to whether you're in a weak market and climate to buy back more. That's the way we thought about it. I remember before the financial crisis, a number of investors asked us to, and analysts, why aren't we returning more? Why don't we go out in the risk curve?
Why don't we get more higher-yielding instruments, et cetera. I think they thanked me afterward in the sense that we kept the company on a consistent path. We did appropriately, having the flexibility and the means to navigate. We did have the opportunity then to do a bigger deal, even though we had to do, because it was a little bigger deal because the environment was so unsettled. We actually just did some equity at the same time. I would just say Ameriprise is very well situated. If this market gets even more difficult, I think we're actually one of the stronger players to actually be able to capitalize on it.
If it doesn't, we'll be able to continue to buy back our stock at good numbers and still be able to keep the company strong, not knowing what the next step of the turn of the environment or an M&A comes along. I actually think we're situated well, and this is actually kind of good environment for Ameriprise in that sense.
Got you. Walter, just a question on advice and wealth margins. I realize you may not have the precise answer at this time, but I just want to know if you can answer this directionally. The little better than 16.5% margins in advice and wealth in Q4 was lower than where it's been trending lately. If I consider the benefit you're going to get from higher short-term rates plus the seasonal expense reduction that you typically get from Q4 to Q1, and then I consider the offset of the weaker revenues, assuming we don't change a lot from current market levels, would you still expect margins to be lower than the Q4 level? I should just ask it this way. Would you expect margins to come in below the level of Q4? Can you give us a sense directionally?
Directionally, certainly as Jim has indicated, the market reduction and the deterioration impacts it. Again, you're talking about margins. The question is really getting to base profitability. Because remember, revenue is going to be moving and also profitability and the actions that we then take. I think the elements, the moving parts of the market, both interest and with equity, certainly compounds a little. The actions we will be taking as we look at that and the interest lift. The underlying direction of the business is solid. I think, the question is client behavior. It is a difficult question. The fundamentals are there, but we do get impacted by these variables that we just can't control. That's the non-controllable side. We get to the actions that we take to manage the business.
Margin's a tough one because you got a lot of moving parts on it, but profitability certainly will be impacted by the drop in the equity marks offset by the interest lift. It's a matter of how it affects the client activity, both from the level and then the shifting, right? That's why it's a tough one. Really is. The fundamentals of where we're going is solid, certainly from that standpoint. As Jim has said, we're attracting advisors. We certainly feel comfortable about the fundamentals of the business, there is no change from that standpoint.
Got you.
Yes, please. Oh, I'm sorry. I interrupted. Go ahead.
Hey, just one last follow-up, if I could, on the asset management business. The spike in the U.S. Trust net outflows, can you comment a bit about, I don't know, the pool of assets that remain that you believe are at risk, the level of outflows that you expect going forward? I presume we're going to keep getting leakage, but this one was obviously kind of a jumbo redemption quarter on that end. Can you give a little color in terms of where you see that trending?
Yeah. Let me just say a few things on that. I know that was a bit of a sizable number. As you saw, it came out of the institutional section. This is very low-fee type of assets. We were doing the business that was part of an in-house operation, et cetera, that we had as part of Columbia, are we supporting in the U.S. Trust business. It's unfortunate that they're taking it back in-house actually to manage it, and it's all fixed income assets. Having said that, even though we don't like to lose it's very different on a fee basis than the business that we are writing and continue to do. I think it will be another few billion. We don't know exactly.
They're not sitting here and saying we're taking these accounts and different clients, et cetera, but we can say it could be another few billion. Having said that, I will be very clear. Our stronger business with U.S. Trust is our funds business and our equity products and all those various things, and those continue on. It would be nice if I was able to not just report flows as a flow number in total. Again, this is part of when you do a deal that has a proprietary business and you're taking it over, you're going to have some of those things. We still have it for Zurich, and we still have a good account, good relationship, good overall fee basis. What I would say in looking through this, I'll just give you some numbers.
As you know, the fourth quarter wasn't a great quarter for the industry in outflows because of what's happening. I would say if you take out the U.S. Trust, particularly around this, and the normal Zurich, that was $6.6 billion of our outflow. Okay? Even though we don't like that per se, it was the lower fee end of the spectrum there in that regard. If you look at all of retail would've only been out $1.6 billion. This is before reinvested dividends, and all of that was the Acorn Fund. If we can continue to improve that performance, et cetera, in this study, we're actually moved to almost a net neutral on all our retail, and we're making some good progress in growing in the core retail channels, and Europe continues to be good for us.
You look at institutional, here again, you take out the U.S. Trust, which was buried in there. At the end of the day, what you really have is a net $1 billion out. That's in a tough market where institutions aren't necessarily funding at this point in time. That $1 billion, one-fourth of it was one client, and that client has taken a lot more out of the industry. As I'm looking at this, it's hard to see based on you seeing the total number, we actually are making some underlying progress. The industry in total last year in active funds have been out $200 billion of numbers. We're starting to gain traction in the areas that are important for us, that are higher fee, more consistent where our good investment product is, et cetera. It is a tough environment.
The U.S. Trust, listen, we love that relationship, et cetera, but they're going to make the adjustments as they need to. Right now, some of this lower fee stuff is going away. We still have a very good relationship with a very good product in there with some of the stronger activity in the types of areas we want it. Zurich will be Zurich, but it's a great ongoing account for us, but it's going to be an outflow because part of that book is pretty closed. I don't know how to describe it any different for you. What I'm trying to say more importantly, is we're focused on those things that we would really grow. We got a good diversified business.
If the environment continues where money gets put back to work, I think we'll be in even better stead than we were going into 2015 than we're coming out of 2015.
Okay, thanks.
Our last question comes from Eric Berg from RBC Capital Markets.
Thanks so much for working me in here at the end. Jim, my questions really involve asking you to build on some of your earlier responses. First, with respect to the margin in the brokerage business, in the advice and wealth management, I thought I heard you say that activity levels, while depressed from where they were at their peak, were roughly in line, did not change much from the activity levels in the September quarter. My question is, if activity levels were in fact unchanged, if expenses were well controlled, and if the stock market, I'm looking at the average level of the S&P, and I believe I have it right when I say that it was actually up modestly compared to the average in 2014's fourth quarter.
If you got a little bit of a lift from the stock market, good expense control, and stable client activity, why did that combination not lead to a further improvement in profit margins?
Eric, I think what it is what we said is if you look at the numbers in the fourth quarter, revenue quarter to quarter was actually relatively the same, slightly up.
Yes.
There are two things. One is revenue would have been higher if at the end of the third quarter, the markets didn't pull back. You remember the markets went into 1,800s in August, September. What happened is you have all your wrap assets under management that you bill fees starting in October, beginning of October through the quarter. Some of those fees being billed were at lower absolute production because the fee level was based on the asset level, and that just climbed back towards the quarter to the end of the quarter. You don't just bill at the end of the quarter.
That was really what took out some of the production that happens on the asset side of the equation. Right?
Yes.
That's part. The second part of it very clearly is, and we've had it in the fourth quarters, is we do have some of a G&A expense. Even though we manage the G&A expense flat over the year, when we put our advertising campaigns, we usually go on the air at the end of September. With the bulk of that being October, November, beginning of December. We accrue for that expense when we're actually on the air, and that's millions of dollars to run that campaign, which is not in the third and second quarter. Now, over the course of the year, since we didn't increase our advertising year-over-year, it's the same. Fourth quarter to fourth quarter, if you look at the expenses in the supplemental, you'll see that expenses did not go up, and for the full year, we're pretty flat on G&A.
Eric, it's Walter. Let me One other point, because you're talking about the rates, and certainly if you look at, and I can understand from your perspective, that looking at the S&P and looking, you would see it's up marginally. What we do is run a weighted index related to the assets that we hold. If you actually look at that on both on average and on ending, it's down.
Okay.
It's not just the S&P. Again, we actually do the earning rate assets that we have, and it's down. That is what Jim was explaining. That certainly impacts the fee base.
Jim, if I could wrap up just by asking further about the fiduciary matter. Should I take away from your comments that there will be an impact on revenues, but that the impact will be muted by the fact that there has already been a pullback in some activity?
No, Eric. Let me clarify if I wasn't clear. Okay?
Thank you.
What I said is, I think when some people have come out publicly earlier in 2015 and said, "Oh, it will only be X, or it is X because of REITs," et cetera, and this is the percentage of the business I do in that. What I said is, a lot of that business actually reduced tremendously for us in 2015. I do not have the exact number. Maybe Alicia has it. I think we did not do a lot of production in REITs, and it was not necessarily in that production. We did a lot in the qualified area. She can give you the numbers on it. What I said is, they were identifying a little more of that if that went away.
We say, looking and reading the DOL's proposal before all the commentary, there are a number of things that are going to be affected. The question is, they also said that they would allow for certain business to be done under a best interest exemption standard that you would apply for and you would actually adhere to, and you would disclose on, et cetera. Depending on what they finalized there would depend on whether you can continue to do a lot of the business you are currently doing today under greater disclosure and a contract and et cetera. Or that that would have to be adjusted to more of a fee-based type of basis, in which case you would have to figure out with those clients whether it is appropriate to move. I cannot give you what that would look like yet until I know it.
What I am saying is, there are different ways that we think that we can manage and lead the business through, if those exemptions are there and if you are able to execute appropriately against them. If not, there are some alternatives. Part of the activity would be, do you serve some of the smaller accounts? Again, small accounts are a little more costly. Part of that is you got to look at your business model appropriately in that regard. I do not have a perfect answer to you. That is all I said is it will have an effect on the industry. It will increase some costs. The question is, what do you do over time, and can you offset some of that? On the revenue side, again, I think there are some alternatives, but I do not know until the final rule.
If the final rule says you cannot do certain business or certain business has to be done at a certain rate, then there will be some adjustments there, part coming from the advisor, part from the firm.
Very helpful addition. Thank you, Jim.
Thank you. With this, ladies and gentlemen, we conclude today's conference. We'd like to thank you for participating. You may now disconnect.