Welcome to the first quarter 2015 earnings call. My name is Ellen, 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 first quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer. Following their remarks, we will be happy to take your questions. 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 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'll turn it over to Jim.
Good morning, everyone, and thank you for joining us for our first quarter earnings call. I'll begin by providing my perspective on the quarter and the progress we're making. Walter will follow me with a detailed review of the numbers. Overall, Ameriprise had another good quarter and was situated well. Higher equity market volatility, unfavorable foreign exchange, and continued low interest rates did affect results, as did a long-term care reserve increase. That said, our capital position, ability to generate good free cash flow, and deploy capital all remain excellent. For the quarter, our operating earnings per share were up 7%. From a return on equity perspective, we continue to deliver. With a combination of solid business results and significant capital return, operating return on equity reached another high.
Excluding AOCI, we ended the quarter with operating return on equity of 23.1%, and that's up 230 basis points in the past year. Assets under management and administration grew 4% to $815 billion from client net inflows and market appreciation, and that includes the negative impact of more than $17 billion from foreign exchange. We remain committed to an effective capital management and maintaining our financial strength as we continue to invest in the business while delivering differentiated shareholder return. In the first quarter, we returned $459 million in share repurchases and dividends. Yesterday, we announced a 16% increase to our regular quarterly dividend and we consistently increased our dividend by double digits over the years. As we stated, we expect to continue to return strongly to shareholders and have targeted a 90%-100% range of earnings annually.
In Advice & Wealth Management, we are positioned well and are building on our strengths. We continue to generate good growth. Operating earnings were $210 million, up 16%. In the first quarter, we did experience a little more market volatility. Overall, we're serving more clients and bringing in more client assets with 8% growth in retail assets and an increase of 13% in fee-based advisory asset under management. For the quarter, advisory net inflows were $2.8 billion. Advisor productivity also grew again by double digits, 11% year-over-year to a record $505,000 per advisor on a trailing 12-month basis. In terms of advisor recruiting, we continue to attract strong candidates, and they're increasingly higher producers. During the quarter, another 77 experienced advisors joined Ameriprise. These advisors relate well to our strong brand, advice, value proposition, and leadership.
As we discussed with you, we're working to help advisors grow their practices. As you know, we serve both mass affluent and affluent clients. As we move forward, we're making a larger commitment to serve more affluent clients who want and need advice. We are confident in our ability to serve them and believe based on the value that we provide, that this will become an even larger percentage of our client base. We also want to provide comprehensive advice to more Americans. We know from our research that our Confident Retirement approach and advice value proposition resonate even more strongly with affluent consumers. Our brand and reputation appeal to these consumers, this is a long-term effort to drive growth. In addition to the affluent market, we're also looking to serve more consumers who are still accumulating wealth and aren't as close to retirement.
In terms of investments for growth, advisors are benefiting from our online and paperless office capabilities that are both integrated and time-saving. They're using our digital and social media to create brand awareness for their practices, generate leads, as well as to deepen relationships with current clients. Overall, we're growing nicely in AWM. Both client and advisor satisfaction remains strong, and we're focused on helping advisors expand their client base and grow productivity. As we move to insurance and annuities, we're focused on driving advisor uptake of our solutions while we maintain the differentiated strength of our risk profile. These are high-quality businesses that deliver important benefits to our clients and Ameriprise, especially as we expand our Confident Retirement approach to serve more consumers. Year-over-year operating earnings were down, there were items from the current and previous quarter that Walter will discuss.
In terms of the annuity business, variable annuity account balances were up slightly on market growth and $1.2 billion in new sales, down slightly from a year ago and consistent with the industry. That said, we're seeing a pickup in sales of VAs without living benefits, reflecting good wholesaling activity and a positive reaction to educating clients and advisors about the advantages these products can provide. Sales of VAs without living benefits represented about a third of total VA sales. There's really no change in fixed annuities given the current rate environment. In protection, we continue to work with our advisors on the benefits of insurance for our clients. Life and health cash sales were down a bit year-over-year, which we believe is also consistent with the industry.
Our overall client retention in these solutions continue to be very good, which helps enhance the long-term nature of the Ameriprise client and advisory relationship. In auto and home, we've built a strong business with our affinity relationships and are pleased to have renewed the Costco contract. They're an important client and we'll continue to offer their customers excellent value. We're focused on improving overall auto and home returns through changes in pricing, underwriting, and claims management to get back to historical performance levels. We're taking the right steps to strengthen the business and believe we can profitably grow and serve more clients as we move forward. With asset management, we're executing our strategy as we go to market more globally.
Our assets under management for this business are just over half a trillion dollars, up slightly from this time last year, reflecting significant headwind of more than $17 billion from foreign exchange that I've mentioned earlier. Financially, we generated good operating earnings of $191 million in the quarter and a competitive adjusted net pre-tax operating margin of nearly 40%. In terms of where we're putting our time and attention, we're investing in aligning resources to leverage the strengths of both Columbia and Threadneedle. As you saw, we introduced our new global brand, Columbia Threadneedle Investments, a few weeks ago. The new brand represents the combined resources, capabilities, and reach of both firms. Moving to a global brand was a natural next step for the business, as our teams have been working together for more than two years for the benefit of our clients.
In third-party institutional, we have further aligned our resources to run it globally. Our current pipeline is quite strong as we continue to build on the traction we gained in 2014. We're looking for our institutional business to be a growing and larger part of our overall asset management business as we move forward. Though we had outflows in the quarter, they were mainly driven by funding delays caused by market volatility. We expect a number of large mandates to fund over the next few quarters. Part of our future growth will come from the solutions space. We continue to invest in talent, product, and capabilities, and are building on our large base of assets under management, and we see this as a good opportunity. During the quarter, we began to gain traction on our fairly new Columbia Adaptive Risk Allocation Fund.
In regard to retail, we've made a number of changes in U.S. intermediary distribution. We're beginning to see positive signs from our segmentation strategy and enhanced business intelligence efforts to improve wholesaler productivity, and we're better aligning product, marketing, and sales support functions to gain share. We've seen some improvement. However, it's been obscured by the elevated outflows in the Acorn Fund. Our investment team is taking steps to address the fund's performance, but we expect continued outflow pressure here. In the U.K. and Europe, retail flows are beginning to improve with the outlook of Europe becoming more favorable with their larger program of quantitative easing. In Asia, we're generating good performance in funds we launched last year. Now that we're nearing a one-year anniversary, we're starting to garner some interest.
Our investment teams in the U.S. and internationally are generating strong equity and fixed income investment performance across a broad range of products, both domestically and internationally. In asset management, we're continuing our efforts to drive flows and align resources to leverage the strengths of Columbia Threadneedle. Overall, with regard to Ameriprise, we're generating good performance in our asset-light businesses and very strong cash flow. This gives us the ability to continue to invest in our business as well as return to shareholders through continuation of our buyback program as well as increases in our dividend. With our strong capital base, we also have the ability to continue to look for small acquisitions that could add to our strategy and complement the company. Well, as fiduciary rule proposal.
Like many other firms across the financial services industry serving the retirement market, we're carefully reviewing the proposal's hundreds of pages to understand its objectives and potential implications. There are a number of steps that need to take place before any changes will be made a comment period and subsequent review by the administration. We've long advocated for the importance of access to financial advice for all Americans and providing clients choice in products and services they use to reach their goals. Our high client satisfaction and long-term relationships stem from this comprehensive personal approach. In fact, Ameriprise already operates as a fiduciary under the SEC standard for advice when we are acting in an investment advisory capacity. We have established policies and procedures to support our clients and advisors, including extensive and appropriate disclosures, which puts us in a good position.
We're at the starting point of the rulemaking process. Any final rule would impact many firms serving more than 100 million Americans saving for retirement. Therefore, we must take into account both the intended and the unintended consequences. The details do matter. We want to make sure that the creation of a new third standard would not be overly burdensome for clients and would work with the existing SEC and FINRA standards. We've dealt with regulatory changes before. We will work with our trade associations and other stakeholders throughout this process to advocate for our clients with the goal of most appropriately satisfying the DOL's objectives. In closing, as we execute our strategy for growth, I believe we can continue to navigate the markets, deliver a terrific experience for our clients and advisors, while generating good returns for our shareholders.
With that, I'd like to hand things over to Walter for a detailed review of the numbers.
Thank you, Jim. As Jim indicated, Ameriprise delivered another solid quarter financial results in the face of a fairly volatile market environment. Let me provide some additional context. Equity market volatility was elevated at the start of the year. Interest rates also moved a lot during the quarter, with the 10-year treasury rate starting the year at 2.17%, falling to 1.64% at the end of January, and settling at 1.92% at the end of the quarter. The strength of the dollar did impact AUM and earnings at Threadneedle. These environmental factors impacted revenue and earnings directly, as well as influenced activity levels with retail and institutional clients. With that as context, let's look at the results in the quarter. Operating net revenue was $2.9 billion, up 3% from last year. Operating EPS was $2.18 and included a few one-time items.
We increased reserves on our long-term care block by $0.11 per share. Additionally, there were a variety of smaller items netting to a negative $0.02 per share that we detailed in the earnings release. Excluding these one-time items, operating EPS was $2.31, up 13% from last year. Operating return on equity reached a new record level of 23.1%, which is above our target range of 19%-23%. Turning to slide four. You'll see that our business mix shift continues to evolve. Advice & Wealth Management and Asset Management represents 64% of pre-tax operating earnings this quarter. As we grow, we expect the mix shift will continue and should reach 70%. We continue to expand margins in Advice & Wealth Management, reaching 17.1% this quarter. Margins in the employee channel were over 10% in the quarter, and were over 18% in the franchise channel.
This demonstrates the strength of our model, the success of our strategies to grow this business, and the opportunity we have to drive profitability even higher. Asset Management margins were a solid 39.7% in the quarter on an adjusted basis, reflecting continued good expense discipline. Let's turn to the segments on slide five. Advice & Wealth Management business is performing quite well across key growth and activity metrics and delivered solid financial results, particularly given the market conditions. Revenue is up 7% to $1.2 billion, with good client flows and market appreciation, partially offset by slower sales in a couple of product areas and the impact from volatile markets. We kept G&A expenses flat year-over-year. This resulted in earnings of $210 million, up 16%, and a record margin of 17.1%, up 130 basis points from last year.
It should be noted that on a sequential basis, results were impacted by having two fewer fee days this quarter than the fourth quarter, which equates to approximately $6 million of PTI. Overall, the business continues to deliver consistent good results, demonstrating the strength of our business model. Turning to Asset Management on slide six. Operating net revenue was flat at $807 million, as the benefit of market appreciation was offset by the impact of higher fee outflows from the Acorn fund and Threadneedle's U.S. equities desk, as well as a $15 million unfavorable impact from foreign exchange. Expenses were down 1% to $616 million, reflecting lower distribution expense and continued good G&A expense control, even with the additional relocation expense associated with the move to a new office space in London. This resulted in pre-tax operating earnings in the quarter of $191 million, up 4% from last year.
Excluding the foreign exchange impact and the office relocation expense, pre-tax operating earnings would have been up 8%. It should be noted that on a sequential basis, results were impacted by having two fewer fee days this quarter than the fourth quarter, which equates to approximately $8 million of PTI in the segment. Turning to flows on next slide. We had net outflows of $5.8 billion in the quarter. Retail net outflows were $3 billion, with outflows concentrated in a number of areas we had previously discussed, namely $2.3 billion in the Acorn fund and approximately $600 million from the former parent-affiliated distribution and subadvisor. Excluding these items, we are seeing some positive trends sequentially. Retail flows in the U.K. and Europe improved following a slow fourth quarter. We also had a large flow into our Asia Pacific fund.
We are increasing awareness and beginning to see traction with our new Columbia Adaptive Risk Allocation Fund. We are optimistic that momentum will continue. We continue to make progress to improve retail distribution in the United States. The institutional business had $2.8 billion of net outflows in the quarter. Let me provide some additional detail on the two reasons we saw a higher level of institutional outflows than in recent periods. First, we had approximately $1.8 billion of outflows from low basis points insurance mandates in the U.K. This includes a normal level of Zurich outflows at $800 million. Additionally, it includes $950 million of outflows from Liverpool Victoria associated with asset reallocation to funds we do not offer.
However, we expect to recover some of those assets later in the year into a higher fee product. The net impact of these flows should be neutral on a revenue basis for the year. Second, we had outflows in third party, mainly driven by a slowdown in the funding of new mandates. We expected several large mandates to fund in the quarter that were pushed back to the second quarter. Additionally, we have redemptions in both high yield and short duration at the beginning of the year that we would expect to get back in the latter part of the year. Turning to annuities on slide eight. Annuities pre-tax operating earnings were $172 million, down 2% from last year. However, the prior year results include a significant benefit from clients moving to our managed volatility funds. The mean reversion benefit was similar in both periods.
Without these items, underlying annuities earnings were up 15%. Variable annuity pre-tax earnings grew 22% from a year ago to $132 million. Without the benefit of clients moving to managed volatility funds and mean reversions in both periods. This was driven by higher account values. Fixed annuity pre-tax operating earnings decreased 10% to $28 million as account values declined. Lapse rates are in line with our expectations following the repricing of our five-year guarantee block that are now coming out of surrender charge period. Given the current interest environment, there are limited new sales, as a result, this book is expected to gradually run off and earnings will decline. Let's turn to the protection segment on slide nine. Protection pre-tax operating earnings were $51 million in the quarter, impacted by $32 million claim reserve strengthening for long-term care.
As we announced last quarter, we conducted a long-term care review of our claims reserve based upon additional information we received from Genworth, the firm that reinsures half of our long-term care book and administers all of our claims. As you know, this is a small closed block with no new sales since 2003. We have not seen adverse claims experience in the book and have been making appropriate premium increases since 2004. At the end of the quarter, we had $2.2 billion of statutory reserves, net of reinsurance, with about $400 million in claims reserve and the remainder in the active life reserves. Based on the information provided by Genworth, management's best estimate of a claim reserve resulted in a $32 million reserve increase. The most significant drivers were updates to the benefit utilization rates and claims termination rates, partially offset by a benefit from a higher discount rate.
As reviewing the analysis we received from Genworth, we decided to engage a third party to validate their analysis. This review may result in a fine-tuning of our reserve, and we anticipate that it will be completed in the second quarter. Excluding the long-term care reserve increase, the life and health business is performing in line with expectations. We saw marginally higher claims than we have in recent quarters, though still within expected ranges. The auto and home business had a modest operating loss of $4 million in the quarter. We are booking reserves for the 2015 accident year at a level consistent with the 2014 accident year loss ratio assumption we changed in the last quarter. The business was also impacted by $12 million of cat losses, of which $4 million was related to the prior year.
As we discussed last quarter, we are phasing in changes to our pricing to risk models. In addition to modifications to underwriting claims and operations, we are seeing early signs of improvement, specifically a targeted slowdown in sales across all product lines. For the full year, we expect marginal profitability for auto and home, with a more meaningful improvement to earnings in 2016. Let's turn to the balance sheet on slide 11. Our balance sheet remains strong with approximately $2.5 billion of excess capital, and our risk-based capital ratio is estimated to be 630%. We continue to return over 100% of operating earnings to shareholders, with $459 million distributed through dividends and share repurchase in the quarter. We remain committed to continuing to raise our dividend and announced a 16% increase yesterday. This brings our dividend payout ratio to the high 20% range. 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. The first question is from Erik Bass with Citigroup. Please go ahead.
Hi, thank you. I guess if we could start on the Department of Labor issue. Are there any specific buckets of revenues that you'd be focused on as sort of more potentially at risk as a result of the changes? I guess, do you expect there could be any impact on sales of either alternative products or things like mutual funds or other products that you manufacture through the Advice & Wealth Management channel?
The Department of Labor, as you know, there's hundreds and hundreds of pages, and there are a level of various exemptions, et cetera. We, as the industry, are sifting through that to truly understand what they're looking to accomplish, and with that, how you can continue to work with your clients against the needs that they have. Explicitly, from what we're being able to read so far, there are certain things excluded, like things like REITs, et cetera, that they wouldn't want sold in qualified accounts. In our business, REITs, as an example, makes up a very small percentage of what we do, and we have the ability, as an example, since we work more holistically with the client, if that's still a need, we could probably deal with it by offering it in the non-qualified section of their investment assets.
There are certain things like that they are saying at the outset are precluded. Many other products like mutual funds, et cetera, there are exemptions for, as long as you have appropriate disclosures, et cetera, as we're currently reading it. It's still too early to really tell. I think us and many other companies across all the industries in financial services that deal with retirement will be in some way affected by it. What we want, and I think many other companies in the industry, is their needs are requiring and appropriately do so.
Okay, thanks. That's helpful. I guess one follow-up or other question on long-term care. Just wondering, why did you choose to only look at the assumptions and reserves for the disabled life reserve? I guess, wouldn't changing assumptions on the disabled life reserve also affect impact of the changes in the assumptions on both?
Okay. Well, number one, the information on the claims reserve is supplied by base information supplied by Genworth. If you look at the active, there are many of our assumptions that go into it including claims that we've been managing and evaluating for time. The morbidity of that has been factored in, and we also factor in terminations, factor in price increases over a longer term. We feel that reserve is actually adequate. We looked at it and looked in light of the situation, the information we've gotten from Genworth. We felt the only adjustment that was needed was in the claims reserve.
Got it. You did sort of factor in, you made no changes to the active life reserve, you did sort of contemplate the new data relative to the assumptions that you're making in it. Is that correct?
That's correct. We've been factoring in the actual claims and looking over the full life of it. We've been doing that. Including the other elements, like I said, termination, price increases, other things that go into it. We felt that reserve is adequate.
Okay. Thank you.
You're welcome.
The next question is from Nigel Dally with Morgan Stanley.
Great, thanks, and good morning. Just to follow up on the DOL and the fiduciary standards. I guess in addition to the fee pressure and potential impact on proprietary product sales, some investors are concerned about higher compliance costs. I just hope you can discuss whether that's also a factor.
Yeah. Well, again, as we say, first of all, I think, and relative in the industry, we are probably one of the best prepared to deal with fiduciary because we already act as fiduciary in much of our client activities today under the SEC standard. I think what I've mentioned in my opening remarks was that this establishes a third standard. With a third standard, of course, you're going to have additional compliance and figuring out how the third standard works appropriately with the first two standards. We're hoping that the regulators, and the people who are oversighting this appropriately would take that into account and figure out how the regulations wouldn't be overly complex to deal with, and that would be appropriate, and operate with each other in appropriate fashion.
Having said that, I think that's yet to be determined, and I think that's part of the work that needs to be done. Having said that, as with any regulatory change of this extent, there is going to be increased level of compliance and increased cost to get those things implemented and executed. I would definitely say there'll be increased compliance costs. On the other side, I would say, at least today, Ameriprise already operates with much of the compliance and supervision. We have the compliance resources already in place. It will still increase the level since of what you're doing now is a bit more and different, and applies in a more special fashion to this particular activity.
Okay, thanks. That's helpful. Second question, just on advice. You talked about the fewer days impacting results. I'm guessing that's purely an impact on revenues, doesn't impact margins. Is that correct? Also, is it possible there to be a weather impact to client activity? If so, should we expect some catch up of that business in the second quarter?
Well, you're right. It doesn't impact margin, but does impact PTI. Again, we do believe those two or three days were aligned with the activity we've seen in the industry, and we do believe that
We're on track, and we should recover as, again, given markets and things of that nature.
There was, to Walter's point, the two fee days that did impact the PTI that he gave you the numbers on. What I would say is a level of volatility, also a level of weather. That's hard to break that out and clarify, but as you would imagine, January was also a very difficult weather month for many parts of the country that would've impacted advisors as well as how they serve their clients. We don't necessarily put that in. We just saw that activity did slow a bit in the first quarter, not so much. We saw it come back stronger in February and March. January was the slowest of the months.
Okay. That's great. Thanks.
The next question is from Yaron Kinar with Deutsche Bank.
Good morning, everybody, and thanks for taking my question. I have two questions. First, going back to the Department of Labor proposal. I think there's been speculation that it would also create maybe an increase in potential lawsuits down the road, and I wanted to hear your thoughts on that and maybe how you can preempt some of that, realizing that these are still early days.
Yeah. It's hard to say exactly what it would derive in the end. As I said, it's very important to know both the intended and the unintended consequences of anything of this substantial. Let's remember, there's 100 million Americans being served here by all types of companies, whether they be distributors or manufacturers, all types. Remember, it covers every one of these. If you're selling any product into a qualified account, so it's not just relevant for someone who has a financial advisor. It could be direct players, it could be product companies, et cetera. I think one of the things that we, the industry, many of the participants in the associations are looking at is what are those activities and does it cause. Yes, you can have additional disclosure.
The question is, it's unclear if you have that disclosure, if you work and operate within the exemption rules, what that may result in. Of course, those are things are undetermined at this point in time. Again, it's like that with any regulatory change. We work through it. We figure out what those things are appropriate, and we ensure that we supervise against it. We have to get clear on what that exactly is.
All right. Turning back to long-term care. I think you mentioned on the call that in the script that against the assumption changes, you also had an offset from an increase in the discount rate used. First, I guess it's a little counterintuitive, just given the rate environment today. I was just wondering if you could give us a little more color on what led to that. Second, can you give us any sense of what the proportion of the change was or any way to quantify that?
Sure. What we did is when we were reviewing this, we realized that we were using a discount rate was lower than our asset earning rate that is pretty much used in the industry. We basically adjusted that a little lower than our asset earning rate to be aligned with the industry. On the proportions, you should figure on that basis, it's about somewhere near around $15 million.
Okay.
The same thing was applicable to our GI because they're both accounting-wise treated the same way. We took that discount rate up. Obviously, it's less than the long-term care because of the length of duration of investment.
Right. Can you give us any sense of how much of a change in the discount rate that was? Was it 25 basis points, 50?
It was approximately almost 200 basis points.
Okay.
For the long-term care portion.
The next question.
Question, I guess. Yeah, okay.
I'm sorry, you didn't respond after that. The next question is John Nadel from Piper Jaffray. Please go ahead.
Hey, good morning, everybody. A question on Advice & Wealth Management first is, I recognize there were two fewer fee days and that that had some impact on revenues. I think you did also mention some softness. Can you give us a sense for what kind of impact, you feel like the softness, and I assume that softness was really more on the insurance sales side, but maybe I'm wrong. Your overall fee rate did come down quite a bit quarter-over-quarter, even if I adjust for the number of days. I just wanted to get a sense for that. Relatedly, you're doing a terrific job managing G&A to be flat year-over-year, especially in light of investments and continued ongoing recruiting.
I'm just wondering if you think we should expect that G&A can remain flat as we look forward on a year-over-year basis, or if we ought to expect some increase there.
No, it's Walter. You should expect the G&A to stay in that range. Certainly, we will gauge it depending on the environment. Certainly, we have a focus on still providing to our clients. We are very focused on maintaining the G&A, that's a reasonable range. It could deviate 1% or 2%, certainly, we are very conscious of the G&A management. On the slowdown, it is in insurance, and it is in other products, non-traded REITs, it is something that we believe in the latter part, we will see a pickup. We do believe the volatility, like I said, it was industry aligned, and we anticipate that we'll see improvement going forward.
Walter, just a quick follow-up on that G&A in terms of it remaining flat. Can we think about that as flat on a dollar basis with the first quarter result or flat year-over-year?
I would tend to say I would look more on the total year basis. Quarterly, you get your seasonality coming through.
All right. That's helpful. Then just second question on the asset management side. Margins are really solid at around 40% adjusted. Without a significant change in the outlook for flows, though, can we really expect that that margin can get a whole lot better from here?
I think the margin is at a rate, which is, again, we're talking about a pretty high rate in the high 30s, almost 40%. Yes, we are feeling the impact of, like we talked about, the U.S. equity desk falling off from the U.K. and the Acorn. There is some pressure, but I think the margin will stay in that range.
You mentioned a drag on PTI from FX. I just didn't catch the number in your prepared remarks, if you could just follow up.
I didn't give it, but it's about $4 or $5 million.
Okay, perfect. Thank you.
The next question is from Alex Blostein with Goldman Sachs.
Wonderful. Hey, good morning, everyone. A couple of questions. I guess starting with Advice & Wealth Management business, it's really just kind of a follow-up on the last point. When we look at the distribution line, clearly there's a lot of the kind of market-based assets or revenue sources in there. I was hoping you can kind of help us isolate the decline quarter-over-quarter that came predominantly from the transactional part of the business, kind of the pure commission stuff. It sounded like it's non-traded REITs, maybe some annuities. I was wondering if you could help us isolate that. Back in the envelope, I was getting down 10, 11% quarter-over-quarter. I was just wondering if you could provide more color there.
Sure. It was in the VA and the non-traded REITs. With the non-traded REITs, we believe it's a timing because there are new regulations out about disclosure, which we are working through with advisors which we believe in the back half of the year we will pick up on that.
I guess given the increased scrutiny on non-traded REIT product in general, I appreciate it's still obviously very early in the Department of Labor conversation, what gives you confidence that the financial advisory industry just doesn't start pulling back from that product ahead of time given potential risks down the road?
Well, okay. If you look at our track record in non-traded REITs, certainly the diligence we put through it and the returns it's given to our clients, the non-traded REITs are an important part of retirement. While it has liquidity elements, which certainly fit into a retirement aspect to it gives a return characteristic that's quite good. So I think, again, we have to study it. There's, as Jim said, there are different elements where you can put it in, it's an important product, and it's worked very well for our clients.
Alex, to the point reference, I think, again, it's another product, a type of alternative product, et cetera, that should only be a small part of anyone's portfolio, that's the way we utilize our advisors, utilize it with their clients, it just complements some of the income streams that they're looking for. As, again, it's only a few percent for us in our total activities. If that was to change, I don't think it would be that material to us, we would look for other products that would satisfy those similar objectives.
Yeah. No, I agree with that point. I'm just kind of curious from the industry perspective how financial advisors could react to this ahead of a kind of finalized regulation. Staying, I guess, with AWM segment and the Department of Labor, I was wondering if you guys could help us with a couple of numbers. A, it would be helpful, I think, to better understand what % of your revenues as a whole in AWM comes from a relationship that's already in a fiduciary standard. I know you said it's a bulk of it, but I was wondering if you had a number.
I would say that we have a strong part of it, probably a majority, a little over majority of where we do operate in a fiduciary standard with the assets that we have. We mentioned that there's $180-some-odd billion of assets under management there. Those are all within a fiduciary. We also provide financial planning and advice and complement that against the entire client's portfolio activities. I think it's a reasonable portion of what we do already today. It's a growing portion as our advisors continue to look at more holistically how they help their clients satisfy their objectives. Again, I think we're well situated for any continuing, and we would be very supportive if the SEC moved to one larger fiduciary standard that would be more appropriate in how firms like us and others should operate.
The question is, when you get a combination of three different things going on, which we operate in two, both
The fiduciary standard under the SEC, the FINRA standards for brokers and commission-based activities. You overlay in a third standard, that's really the complication of how all those three work together and what role each regulator plays and how they play it.
Got it. Understood. Switching gears to asset management business for a minute. Two questions there. I guess one, on the number side, I was wondering if you could size the mandates that are yet to be funded in the second quarter. I'm sorry if I missed that, but it sounded like you had some slippage there. Second question there, just broadly, Jim, your comments earlier about your business potentially shifting more towards institutional, just given the successes you guys are having in institutional Columbia and continued kind of struggles on the retail front. As that business continues to evolve and move towards institutional, how would the margins in that segment be impacted over time?
Let me answer the first one. I think what we saw, and again, I can't say it was something abnormal, is we saw a number of institutions that we won mandates and we thought they would fund within the first quarter as we were predicting from the fourth quarter. Because of the level of volatility that was experienced during the first quarter, as you saw interest rates going down and then backing up and then back down again, people put a number of those things on hold, so to speak. It didn't say they were changing what that is. They just said that they were going to fund them a bit later.
I do believe that we expected a bit more of that to come in in the first quarter and will come in over the next few quarters, we think, because no one has changed what they're looking to do. It's just the timing of them doing it. Again, we still feel good. The pipeline is as strong as ever. Our win rates are good. Nothing has changed from what we were seeing in the 2014 period other than the timing is what I'm getting from our institutional business. In regard to how we would like to grow that, very clearly, we have a large institutional business today. It's not as though we're not looking to continue to grow the retail. It's just that we think there are a level of activities as we now have a more global platform we're working with between Columbia and Threadneedle.
We are increasing the number and level of activity that we do, not just here in the U.S. or in U.K. and Europe, but to the sovereigns, to Middle East, to Asia. We think over time, particularly as we add solutions in, that could be a growing part of the business. Now, with that, if you can grow that institutional business a bit more, there are good margins if you can get continued scale in a number of those product mandates, which we think we can. I don't think that that would lower our margins. I think it actually would be complementary for us, and leverage a bit more of the infrastructure and investment teams we already have.
Sure. Great. Thanks so much.
The next question is from Ryan Krueger with KBW.
Thanks. Good morning. I had a follow-up on the institutional flows. You mentioned the pipeline's very strong. There were some delays in funding. I guess you had $800 million of third-party institutional outflows in the quarter. Based on what you're seeing now, would you expect those third-party flows to be positive in institutional for the balance of the year?
I think as we look at the third-party, yes, we would. I think Walter mentioned that of the institutional outflows we experienced, $1.8 billion, one was almost $1 billion from LV=, Liverpool Victoria, which is one of the large insurance mandates that we have. That was just a few basis points, and it was appropriate for them as they did their reallocation from it. They already gave us a nod to some other product that we already have that they will be funding over the next few quarters that are much higher fee rate that would more than offset that loss. Zurich is the typical Zurich activities. Again, few basis points. What we're looking at is for the third-party business to be an inflows this year, consistent with what we were seeing as a trend line last year.
That's what we're still calling for at this point.
Okay. That's helpful. Thanks. Shifting to recruiting, it was pretty strong in the quarter. Can you just give an update on how the recruiting environment is these days? What have been the mix of recruits into the employer versus franchisee channel in recent quarters?
Recruiting continues to be very good for us. As we said, we added 77 new people. They were very good productivity, in both channels. We're seeing higher levels of productivity from the people that we're recruiting, the pipeline continues to look good for us. We're getting probably of the mix, I think a bit more has gone now into the employee platform. We continue to do probably a relative basis based on the production we're bringing in. I would just say it's probably 50/50, but we're getting very strong production increases, and very good ones into the employee channel.
Okay, great. Thank you.
The next question is from Eric Berg with RBC.
Thanks very much, and good morning to everyone. I'm still trying to clarify why it is that you are already under a fiduciary standard. By my question, I mean this, it's been my sense that, as a general statement, meaning there are going to be exceptions FINRA-regulated registered reps, or registered reps are regulated by FINRA and their broker-dealer, in this case, Ameriprise is a broker-dealer, and that they're generally not subject to a fiduciary standard, but rather the suitability standard. How does it come to pass that you're already under a fiduciary standard?
You're correct in how we are regulated by FINRA on the rep business that we do as part of the broker-dealer and commission-based activities. As an investment advisor, where we're managing clients' money under an ADV, under the SEC, we are an investment advisor, and therefore, we have to and we're governed under the fiduciary rule to operate in the best interest of our clients, rather than a suitability rule.
Just so that you can, I have one more question after this of an unrelated nature, but just to build on your answer. When you say "we" do you mean Ameriprise or its advisors? In particular, do you happen to know whether an advisor can be at once a registered rep and a registered investment advisor, or must the advisor choose?
Okay, our advisors operate under our investment advisory charter with the SEC.
They can work in both standards because of how we set up our compliance and based on the activities that they currently do. We supervise them appropriately, and we ensure that for each one, they operate with the correct supervision and compliance and meet those standards.
Okay. Separately, just a quick one on the Threadneedle. I think you said a couple of times in the course of this call that in contrast to Columbia, which enjoyed progress in the quarter, there was a little bit of a stagnation or setback at Threadneedle in the U.S. What is different about Threadneedle's operation here that would produce a different outcome for it than what we're seeing out of Columbia?
Eric, it's Walter. I think maybe let me clarify. When I said the U.S., it was U.S. Equity. They manage a fund that was called U.S. Equity Fund that basically the team left, and we had runoff. That was what I was referring to. They are the PMs for the U.S. Equity Fund that they sell overseas.
Mm-hmm. What happened? Was there a change? Was the point that there was a change in the personnel?
Last year, the team left, and we've been building back teams. We had basically redemptions, which we talked about.
Oh, okay. This is the sort of the ongoing effect or the residual effect of what happened last year.
Yes.
Well, what Walter's mentioning is last year we had those assets. A part of that team left, and therefore we suffered a level of redemptions in the first few quarters of last year. That has completely slowed. We have part of that PM built back for person who were there and part of the team, and we've added more resources. That's working well now. What Walter was talking about is the year-over-year effect from the redemptions that occurred a year ago.
Thank you.
The next question is from Suneet Kamath with UBS.
Thanks. Good morning. I wanted to go back to the DOL one more time if I could. Just based on your reading of the proposals, is there anything in there that suggests distribution of proprietary product, whether it's mutual funds or annuities or even life insurance, through your channel could be at risk?
We're sifting through the 700 pages. From our early read on this, there are exemptions, as consistent with any other product sale, including for products that have revenue sharing, et cetera, that you can meet those exemptions. They're allowed. We fully today, just in clarity, and this is part of the importance of what we already do, is to meet the various standards of both FINRA and the SEC today. We sell our product like every other product on the platform in, let's say, our mutual funds. Compensation's exactly the same. There's no different incentives. There's no different fee arrangements in what we charge in the various loads and non-loads, et cetera. We feel very comfortable that Columbia product, as an example, can continue to be sold, as would our annuities.
The only question on the annuity front, as one had raised, is can they be allowed in non-qualified and in qualified accounts? We think, again, I think if you're thinking about things with living benefits, and those guarantees, they're very important for the client to get assured income in the future. Again, those might be very much allowed with the exemptions as appropriately done. We don't have a concern about the proprietary and different than any other product sold on the platforms. Remember, Ameriprise, even though we have a large advisor base, whether they be direct players, all those platform, and they have their own product on them, or even any one of the other houses, all have the similar mix of products. Some of them are proprietary. Some of them are networked in. Again, everyone would have to meet similar those standards.
We feel very comfortable because we fully disclose everything today, as we should, and there is no variation in how we market or sell them.
Okay. Just following up on the annuity point. You've been highlighting your shift in terms of new sales away from living benefit products. It seems to me if we're moving towards an environment where the benefit of the annuities comes into greater focus, do you anticipate a reversal of that, where going forward more of your sales will actually come from living benefit products?
Well, I would say again, we have a nice mix that we would like, to your point, and very clearly, would like to grow the portion that's non-living benefit. We think there's very good value for that, including with the benefits from a tax perspective for a client, and also the type of product in there to generate income that's tax beneficial. We would probably, again, just gear more of that as we do today, to the non-qualified portion of the client's accounts. One of the things that I think we continue to look at is we don't just serve qualified separate from non-qualified. We look at holistically how we help a client achieve their retirement, their income level that they need, the allocation of their various assets that's tax preferred versus not. Those are all real value clients get from working with advisors.
If you remove an advisor, it's like removing any other professional you may work with. You can self-treat yourself for medicine or doctor or even your tax attorney or your lawyer, but it's not advisable. Part of helping clients is not just that they can get a product that is low cost. The issue is how do you use that product? When do you put it in? When do you maintain it? The biggest issues with loss of assets is the individual behavior around managing those assets. They get frightened at the wrong time. They invest at the wrong time. They don't look at it in the right, probably more objective fashion because there's still a lot of behavior emotion involved. We think, again, we understand what the DOL is looking to achieve. We hope to support that to be in the best interest of clients.
We just want to make sure that clients can be served as best as they can. We think our holistic way of doing that would continue to be very beneficial. I think the industry is going to have, as they go through this, as you'll find, each industry participant will be affected in some way, and we'll have to deal with it.
Yeah, that's helpful. Maybe last numbers question, just bigger picture. You've talked about your progress towards the 70% earnings contribution from asset management and Advice & Wealth Management. Just wondering if we look forward a little bit longer, ultimately, where do you see the mix in terms of segments kind of settling out?
I think what Walter mentioned, I think is a very fair thing. Again, we look out for the next periods or two and he's saying we'll get from the 64 to the 70. I actually believe over time, again, as we continue to grow these businesses that we are investing in, it will be much higher than 70% over time, not because the insurance and annuities aren't good businesses, but again, they're only a part of the solution set that we only market as part of our client base. Asset management, we're looking to grow more fully external to our own channel, as well as in our channel. So there's a growth beyond that if we're successful. And then the Advice & Wealth Management business as an example, we look at holistically managing more client assets with more advisors.
It's just natural that it will be a part of that solution set, but it's not going to be the majority of that solution set.
Right. Maybe 80/20.
Yeah. I think that would be reasonable to assume as we look out.
Terrific. Thank you very much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.