The main competitor will be one that was launched by GSAM.
We don't have a list.
Maybe I should be quiet.
Thank you, everybody. We're going to start our next session here.
That was great. Good to meet you.
I'd like to welcome back Jim Cracchiolo, the Chief Executive Officer of Ameriprise.
Yeah. Good
who is joined by Walter Berman, the company CFO.
No, thanks very much, Mo. Thanks.
Do any one of you guys want to take off your mic?
I do, yes. I should. Here, I'll put this down and take it off.
Okay. Can we fix the sound?
I do think. Oh, here we go.
That doesn't sound like my voice. Okay. Are we good now? Great. Apologies for those on the webcast. Welcome back, Ameriprise. Jim and Walter, thank you for joining us again this year. Over the last several years, as many of you know, Ameriprise has evolved into a very comprehensive wealth management business with a best-in-class capital return story among large cap financials. The stat that I keep quoting at this conference every year is how much your share count has gone down a bit, and it's nice to see that that number continues to grow every single year. Since 2010, you guys repurchased about 20% of your share count, and we're obviously hopeful that number continues to grow over time.
I think given the landscape right now, Ameriprise is very closely linked to retail re-engagement across its brokerage platform, the asset management platform, and obviously the variable annuity business as well. There's no slides, so we'll keep it more as a fireside chat. We'll kick it off with a question, and then I'm going to hand it over to the audience. The first one for me is the theme that we've heard throughout the conference has been retail re-engagement, which seems like continues to get a little bit of traction. Maybe we can start off by discussing what are you seeing in the wealth management business, what are your financial advisors seeing, how folks approaching 2014, what are they doing with their allocation? That would be the first one.
Okay, good. Well, as you probably looked at from our numbers over the last number of quarters, but probably more so as the industry, we do see the retail client re-engaging. I think as people have felt that some of the risk has subsided, they feel that the economy is a bit more on the mend, and that there wasn't another big shoe to drop, so to speak. The retail client has been more re-engaged. What we continue to see is, as an example in our business, our wrap flows are probably the strongest they've been. We're getting billions of dollars of flows every quarter going into our wrap programs. Now, those are asset allocation programs, so that's not all going back into the equity market. They're going into more balanced portfolios.
I would say, on average, the type of portfolios have a bit more equities in it than they have in the past. On the fixed side of the equation, they're probably at a little more shorter duration. They're still balanced portfolios that rebalance every quarter or every month, depending on the circumstances. The client feels that they're not excessively riding and getting overly engaged in the equity markets. We do see them starting to also think about the longer term again. They are taking out longer term contracts. Our insurance business, particularly one of our strong businesses, is our Variable Universal Life. That was pretty weak over the last number of years, and that has come back in a nice way over the current periods. The variable annuities have re-engaged. I do see the retail client starting to think about their retirement more holistically again.
We've been bringing in a lot of new client flows as well. Our client flows are increasing. Our new clients joining us have increased. The flows into more of their asset allocation and more of long-term contracts has increased.
Okay. Sticking, I guess, with the wealth management channel, I want to spend a couple of minutes on financial advisor recruiting backdrop. I think one of the trends we've seen this year is that the fact that equity markets have gone up a lot, that may have slowed down some of the transition that some folks might have contemplated otherwise, and some moving pieces that we've seen over the last couple of years. Where do you see this going? Are you starting to see any acceleration in the pipeline of folks that are willing to move? We'll start there and then I have a follow-up on the structures one.
We actually had a pretty good flow in of new advisors in last year, and we saw a little bit of a slowdown in the fourth quarter last year and the first quarter. I think that's when you saw an acceleration of some of the equity markets and there were some changes in that regard, and people were sitting tight. Our pipeline started to rebuild in the first part of the year. We've had a strong pipeline since that point. We've been adding a nice group of advisors with good productivity, and that continues. We continue to see that pipeline being solid. We have really tightened some of our criteria as well, we are bringing in people who have a bit more production.
We look for a certain type of advisor, an advisor that would fit our profile a bit more, that is more interested in financial advice and financial planning, that really wants to do a more holistic amount of business, and really are focused on sort of the client equation. We've been able to find those advisors. The interest in Ameriprise is stronger today than it has been as people are recognizing us more, and we have stepped up our recruitment a bit more holistically across our channels. No, we feel pretty good about it. Having said that, I think the world has gotten a bit tighter, and people aren't necessarily just looking to jump per se, but they are evaluating people that they would want to be associated with.
When you look at your pipeline today, is there a way to dissect a little bit more and say, this is roughly the percentage of the breakaway brokers that are trying to go from the wirehouses towards the independent model, or folks that are trying to switch from a much closer competitor.
Right
to Ameriprise? The second question to that, I guess, would be, how do you compete against the LPLs and the Raymond Jameses of the world, and how do you compete against the RIA wave that is going to Schwab and Ameritrade?
I think where we're getting recruits from is across. I would say the majority have been from the wirehouses. Having said that, we are now attracting people in as we've started our recruitment into our franchisee channel as well. We're getting them from independents. We're also getting them from some of the regionals. Now, again, as I would say, the people who are interested in Ameriprise are interested in our value proposition. Unlike being a complete independent, we have a branded proposition out there. We support our network, whether they be a franchisee who actually owns their practice. They're an independent business owner, small business owner. They own equity in their practice. We actually help them and support them more with our marketing, our branding, our best practices, our practice management capabilities.
If you're coming from a wirehouse, as an example, and you move into our employee system, we'll give you a lot more support than you will get probably at that productivity level at a wirehouse. If you're coming from an independent or a regional, we have a much more significant enhanced value proposition that will help you build your practice and position yourself in the marketplace, because much of what you would have to do yourself, we provide to you. Now, with that, we also really concentrate on helping them with their actual client relationships, and to deepen those client relationships, and to help them grow their productivity. We have very clear research, very clear results that show that the productivity, if you're associated with us, on average, is higher and grows. The value of your practice grows.
Eventually, even if you're independent, if you want to sell that practice and have a successor, we within our system can get you a higher value and an easier transition because we have a consistent business model that we apply. People who are interested in that would come to Ameriprise versus being completely independent. We're actually starting to see a shift a little bit as compliance costs, as it becomes even more difficult to differentiate themselves in the market, as they think about where they want to actually put their investments, on whether it's on client relationships, or it's positioning themselves, or it's the idea of how to develop to be a higher producer. We are attracting those people in from the independents now as well.
Picking up on that point, when you think about the same store sales productivity that Ameriprise has an opportunity to sort of improve when somebody joins, is there any metrics you can cite that can kind of help us frame that opportunity? Because you did bring in a lot of new folks over the last few years, and it feels like they're not producing yet where they could once they fully ramp and they fully utilize everything the platform offers.
Probably because our franchisee channel is so large and highly productive, we actually, if you look at our franchisees against any of the independents, we're the most productive franchisee model out there against any independent. We're number one in productivity there. I guess the easiest place to look if you're looking for visibility would be in our employee channel. If you look in that area, that used to be a novice channel that we brought in new people, career changes, people out of school, and we trained them to develop their books. Today, we are still bringing in some career changes, et cetera, but mainly we're recruiting experienced people, and as they ramp up their book, you can start to see the average productivity of that system continuing to rise.
Our employee system, just as an example, used to be a money loser for us because we used to help people develop their business, and we had all the cost of doing it until they became productive and moved to independence. Now we make that a permanent channel, and this year we've moved that from a loss, and it used to be a large loss, to profitability. We see over the next few years that the profitability and the margins will increase to be along the lines of what we have in our franchisee channel. That's all coming from the productivity increases, particularly from the people there as they develop, but more as the experienced people that we recruited ramp up their books. As we've done financial analysis, Walter has shown that that improvement has been nice and significant coming from our experienced advisory groups.
Okay. That feeds well into my next question around the AWM margins, that's something that we've seen, to your point, continued improvement. I think that a couple of years ago, we thought 12% might be the best it could get, and you guys are sitting here at 14%, and that's still with the employee channel, to your point, just starting to break even. We're starting to become more profitable. Where do you envision, I guess, the AWM margins going over the long term? Is the upper teen number achievable, I guess, when you kind of compare yourself to other players?
Yeah, we do. If you compare us to independents, we've sort of completely, even though a large part of our business is our franchisee, we are materially better than the independents if you look at that on any relative measure. When you look at it against the wirehouses, yeah, we are not for those that have a huge scale. Having said that, right now we have a very efficient capital model. We exited our banking business and lending business and activities around that. We've lost some margin from doing that, and that could always add a nice reasonable margin if you factor that in. We don't have all the capital requirements of being under the Fed. We don't own a bank anymore. We don't have any of those restrictions. We will actually be a much higher returning model because of it.
In that regard, we still feel that there is good upside on our margins, it's going to come this way. First of all, even if I leave out short-term rates, that could add a nice big improvement in margin, I just look at the business that we have today without interest rates, I would say the margins will come from continuing to ramp up our productivity in our P1 channel as we're doing. It will come from overall growth of productivity. We usually increase our productivity by high single to more double digits on average over time. We are bringing in very good flows, and we're making those flows very productive in the products they go into because of our planning advice relationship.
One of the things we're really excited about is we are even going stronger in the market next year regarding our Confident Retirement approach. It's an approach that I think is a lot more consumerable of how we bring our financial planning relationship to prospects and clients. Even current clients that we've been engaged with for a while as they go through this approach increase their assets, increase their productivity, engage with us even more against the fuller retirement relationship. We're going to start to bring that publicly to market even more formally in February with the Olympics. We really feel like we have a great approach, particularly against what consumers need, and we also feel very good about the tools and capabilities we put in and the ability for our advisors to even become more productive by uptaking them.
As an example, our tools, our capabilities, our new brokerage system, our online and web-based client engagements, those things can make our advisors a lot more productive to work with more clients, bring in more assets at the same time, lower their cost, as well as the company cost. Those things will also get to margin.
Makes sense. I want to shift gears a little bit and talk about the asset management business. Clearly, Columbia acquisition feels like it's been a long time ago, but the benefits of that on the one hand are still coming through the return of capital and the price ultimately, but there's still some challenges with former parent-related flows. Maybe spend a couple of minutes on where we are and what inning we're in with respect to Columbia-related outflows. I think the Zurich issue is well understood, and you've helped us frame that in the past. I think the Columbia one is a little bit more difficult.
Yeah. I think if you look at it and say, "Hey, you're in outflows, a number of competitors in the industry in outflows. There are a few have been in inflows for particular product that they've had, et cetera." I actually think we're on a relatively good base. I think the issue more that you would have to really understand is we did a major acquisition, an integration, and now we have what I think is a very good overall capable platform, both domestically and internationally. Now with that, since the firm we bought was part of a larger banking institution that did a lot of proprietary work, you're going to naturally experience a level of outflows coming from that because you can't garner through institutional relationships that used to be part of their programs or solely as a big proprietary in-house provider for retail.
That's exactly what we've been suffering from. Having said that, if we go back to why we acquired what we got, the margins, the economics, the return, and even when we look at the nature of the total flows that we have and expected in the asset base, we by all dimensions are in a positive compared to anything that we wanted to achieve. Having said that, the flow picture, just like with Zurich with Threadneedle, good client installed base, but you still got a drip, drip out on the flows because they're not part of the proprietary makeup it once was. What we're seeing right now is this. The institutional took a bit longer, but it's almost out. There's a few billion left that would probably come out sometime over the course of the next 12-18 months.
We had another sub-advisory relationship there that experienced outflows because it was another strong provider that we assumed during this relationship, and that's sort of made its way. Some of the performance in those products have come back, and the PM situation there have settled. We also know that we had a very good relationship that we think will continue with U.S. Trust. Having said that, we're not going to garner 100% or even a larger percent of those flows anymore, but we can garner a reasonable percentage of those flows. As that asset base equalizes on redemptions to what they used to have, I think that will continue to be a very strong client that we enjoy working with, and they enjoy having Columbia. The last piece is we proactively made changes. We consolidated funds.
We changed our wholesaling and integration of territories, and we even changed some of our pricing, like in our RIA channel, to make it more appropriate, and therefore, we lost a number of flows there. That is already starting to get over its hump, so to speak, and I think we'll be on a better trajectory as we go into 2014. I'm seeing progress as we grow our third-party channels. Our institutional pipelines are quite strong right now and growing. We'll have more fundings coming in. We're actually winning a lot more global mandates internationally between Threadneedle and Columbia, and we're starting to put some global product with a combination of their efforts together. I do believe we'll start to overcome some of the ex-parent activities.
Some of those will slow down, and others will start to gain even more traction to the third party at higher fees.
Great. Staying with the flow picture for a couple of minutes. You made a number of decisions over the last year and a half, to enhance third-party distribution and become a much more visible player on some of the larger platforms. Can you give us an update on where we are in that process? Whether or not there's still lots of platforms that you need to-
There
there's one in there.
Yeah.
Whether or not there's a lot more platforms that you still feel you're underrepresented in, and what would it take to become a bigger player there?
Well, I actually believe we're starting to make progress. We are now concentrating our efforts on some of the bigger platforms that are out there. We are getting some of our products on both in their model portfolios as well as some of the products that we have great performances are starting to make traction within the wholesaling ranks through their intermediary channels. I actually feel good, but this is an everyday job. What you have to do really is displace some other people. At the same time, you have to see where the puck is going, so to speak, of what are the products that the advisors and the clients are interested in.
Right.
There's a move away from fixed. We got some great product on the short end of the spectrum. We got some good credit product. Those things are starting to gain traction. We also have some great product in equity, whether they be in some of the growth areas or in the dividend areas or in income. We're starting to make a stronger play against products that can generate income for the clients that have an equity proposition. I actually think that it just will take a bit more time and effort.
Yeah
as we start to get into each channel, develop those relationships in a stronger way. I think we're starting to get on the radar screen, and we're starting to win some. We just got to win a bit more to get us into the flow picture that we're looking for.
Going across Atlantic, Threadneedle has been a better performer, I think, for you guys over the last few quarters, also from a flow perspective. What are you seeing on the retail side at Threadneedle? We're in early innings of re-risking. They're just starting to take place there, or there's still, you think, a lot more to go?
Well, Threadneedle has gained tremendous traction. Their performance was quite strong through even the downturn. I think they are being recognized in the marketplace because they've had quality product with quality performance over a longer period of time. In a number of quarters, as we've looked at our traction, Threadneedle has come out in a number of quarters as number one in retail sales in the U.K. market. These are against some of the bigger players. I'm not saying that will continue, but I am saying that they're getting their fair share, and that has been going quite well. Now what we're doing with Threadneedle is probably increasing the traction that they can gain through larger institutions. We're doing that with a combined effort with Columbia in markets beyond the U.K. and Europe. We're gaining traction in the Middle East.
We're gaining traction in Asia. We just set up regional operations out there. I actually feel good with the product set we have that we can continue to even do better. Retail has been one of the strengths of Threadneedle recently.
Great. I want to shift gears a little bit and talk about capital. You guys continue to be a very unique story among large-cap financial services company, $20+ billion market cap at this point. You have still buying back somewhere between, I don't know, 5%-7% of your market cap a year. Still have $2 billion of excess capital that remains untapped. How should we think about your prospects for continuously strong capital returns?
I think as we have indicated, certainly with the situation we are in, as we entered the year and certainly as we improved it, we see, as you indicated, $2 billion and certainly the generation of free capital remaining. Certainly the strength of the balance sheet and certainly the product consideration as we shift more and more to asset management and advice wealth management, that we will continue to return capitals in the form of buyback, but also evaluate the dividend and certainly the value that creates. I think what you're saying, we will continue. Again, we constantly evaluate the environment and situation, but we are sitting in excess. We put contingent elements of capital against the variable annuities, which has been reflected. We feel we're in good position to certainly continue what you're saying.
Okay. Acquisitions have come up every once in a while when people think about Ameriprise. Can you give us a sense of, is there anything that, from a product perspective, you still think you'd like to fill? It sounds like you've tried going at some of the asset management opportunities on your own and build out products as opposed to go out and buy them. Is that consistent, or you still think something might be out there better to buy than build?
Well, first of all, I think across our businesses, we invest nicely every year for organic growth, and particularly we're doing that in the asset management business, and we will continue to do that. We think there's the opportunity. Now, we do look at opportunities that may come out or things that could fit in nicely, and we evaluate them. We evaluate them strategically, if it can get us where we want to be quicker. We evaluate that from an economic and financial perspective, if we can generate a better return with the use of that capital versus returning it the way we're doing. We evaluate it from the perspective of how that would situate itself to just give us a stronger overall position in particular markets or channels. If things fit like that, we will definitely buy out of the cash that we have.
If there's something bigger that makes some overall sense, we always evaluate, but it has high hurdles for us to want to make a move. I clearly would say it wouldn't change our way that we're positioned ourselves to return capital as part of our overall model because we generate a lot of free cash. We're sitting with a good excess at this point that we've freed up more capital. The reason that excess hasn't gone down the last few years as we're returning 130% is because we've done an excellent job with our product makeup, our features, how we've hedged, how we've lowered the volatility to free up even more capital. We continue to do that. I'm actually feeling quite good about a combination of the business mix shift, the free cash generation, the ability to return in markets like this.
I think if markets fell, we would probably figure out how to return more. If markets continue to rise, we still feel we're on the value. We think this is a business that would generate a 19% return on equity that will get into the 20s. We feel like we have some real good runway, particularly as we think about our two strategies, the wealth management business. Our annuity insurance business, we think, is highly differentiated against the industry. We have a wonderful book built through our client base, through our planning clients. Our risk profile is very differentiated in the way our clients and our advisors use those products, and we generate very high returns from them. For us, I think we have a good balanced portfolio. We can generate a good return through deep client relationships under a branded value proposition.
70% of our profitability comes through our wealth management business and the depth of those relationships that we have with almost two and a half million clients, right? That's a great business. That's one of the best things you can get in financial services, deep client relationships through multiple facets that stay with you for decades, right? We have a great, I think, now platform that we are continuing to refine that can take space in the asset management world as those assets grow, as more clients look for solutions, and we have some great products with great performance. We will make more headway there. We'll overcome what we're ex-parent, but through those acquisitions, we put together, I think, a terrific competitive position in the marketplace in asset management. We're kind of excited, and the capital return story is part of our story.
I mean, that's part that we're going to continue to focus on. My objectives of what I have from my criteria is we've won a lot of recognition. We have some of the highest client satisfaction rates. We've just been recognized as one of the most consumer advocates in our positioning with the client. We win a lot of awards. Our capabilities are being recognized out there for everything from online to our branding. From a perspective of our shareholder return, I think we have one of the best propositions based on the nature of the makeup of our business.
Okay. Let's turn over to the audience.
Yes.
One of the strengths of your business has been the margin expansion in the asset and wealth management. Your old target was 12. I think last quarter you did something like 13. How good does good get? Could you maybe compare your margin to your publicly traded comps like a Ray J or a Morgan Stanley, for example, in that business? Thanks.
Well, as I said before, I think we continue to improve that margin. We've been managing our expense ratios. We've made some nice investments over the years. I'm not shy to tell you I'm continuing to invest nicely. As I understand, you see our advertising in the marketplace this fourth quarter. We stepped that up. You'll see a big, powerful campaign come that will be a 360 campaign in the first quarter. I will still say, even with those investments, we are looking to continue to grow our margins through productivity flows, client flows, and the assets that we're bringing in, and the ramp-up of our experienced people. I do believe we can get that into the upper teens without interest rates improving on the short end. With short-end interest rates, you can add a few hundred basis points to margins.
How we compare, I think, as I said, if you compare us to independents, our margins are probably closer to double or close to getting there. If you compare us to wirehouses, it depends on the wirehouse and what's in that makeup of margin, whether it's banking and spread businesses or others like Raymond James has a larger bank, but I haven't dissected their margins for the wealth management between their channels. I would just say, I think we have competitive margins for the makeup of our business, which is two-thirds independent and one-third employee. Our employee channel, I'd be the first one to tell you our margins are low there, but we think we can get them into the strong double digits as we ramp up and use our capacity there.
If anything, those margins come up to like margins we have in the franchisee channel, which is much higher than the industry in that channel. I think you'll see very good margins overall on a combined basis.
Okay. Have time for maybe one more. Yep, one on that side.
Hey. Talking about your variable annuity business, variable annuity sales have been around the $1 billion-$1.5 billion per quarter range for the last year. Do you see anything on the horizon that would accelerate sales or any products that you've changed that you are working on to move the needle here?
Yeah. One of the things we actually kind of like is that we kept on a steady diet of flows with our annuities. I think one of the things that I think the industry has wrestled with is they've put on a lot of business at certain points in time that now based on where interest rate environments are, et cetera, that has been a little more probably a heartburn. We had a consistent flow, and that continues roughly around $5 billion a year. Our mix right now is it's all Managed Volatility product, and we are actually starting to really reposition to get in variable annuities again without living benefits.
Again, it will fit as a perfect solution in our Confident Retirement approach, both the living benefit with volatility, but also those without that need tax-deferred assets and how they would use that as part of a retirement portfolio. I think that's where we'll see it. Part will be a mix shift, part might be an increase. We're not looking for accelerated growth there because we really want it as part of a client solution rather than to just aggressively sell a product on its own. Since we don't sell variable annuities to third parties today, we think that it, again, positions as part of a depth of a relationship that we can get a very high return on.
Great. All right. I think we'll wrap it up there. Thank you, guys, very much for-