Welcome to the first quarter 2012 earnings call. My name is Sandra, and I'll be your operator for today's call. At this time, all participants are in 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 Charity. Ms. Charity, you may begin.
Thank you. Welcome to Ameriprise Financial's first quarter earnings call. With me on the call today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer. Following their remarks, we'll 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 underlying performance of the company's operations. Reconciliations 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 2011 annual report to shareholders, or our 2011 10-K report. We undertake no obligation to update publicly or revise these forward-looking statements. With that, I'll turn it over to Jim.
Good morning. Thank you for joining us for our first quarter earnings discussion. Let's begin with my overview of our business performance in the quarter. Then Walt will discuss our financial results in more detail. Afterwards, we'll take your questions. As I look at the quarter, the business is performing well. Fee-based business growth is offsetting interest rate pressure, and we continue to differentiate Ameriprise with our ability to return capital to shareholders. The fundamentals of our business are good. Client assets and retail flows are strong, and we're helping our clients manage through an unsettled economic environment. While our clients have re-entered the market a bit more in recent months, they remain cautious and continue to prioritize capital preservation. The markets, while improved, still present challenges.
U.S. and European average equity markets were only up compared to a year ago, and the low interest rate effects on the industry were evident in our results as well. On an operating basis for the quarter, net revenues were up 1% to $2.5 billion. EPS increased 9% to $1.45. Return on equity, excluding AOCI, rose to 16% from 14.9% a year ago. Our balance sheet and capital remain among the strongest in the industry. With our capital position, we have the flexibility to both invest for business growth and return significant capital to shareholders. During the quarter, we returned 109% of our operating earnings to shareholders through share repurchases and higher dividends. We continue to buy back our shares at a healthy pace, with 5.4 million shares repurchased in the quarter for $300 million.
Meanwhile, we've been increasingly focused on raising our dividend as a portion of capital returns. As part of our plan, we declared another quarterly dividend increase yesterday, boosting our quarterly dividend 25%. Over the past 12 months, we have announced three quarterly dividend increases, which in total nearly doubled our dividend in a short period of time. Our dividend growth now brings our implied dividend yield to approximately 2.6%, which puts us in very good company. In fact, in terms of total capital return to shareholders, we are a leader among the S&P 500 financials. In 2011, we were in the top quintile of the S&P financial companies for return of capital. We returned almost three times the capital of the average company. I feel very good about our capital position and our strategy to increase total shareholder return.
We're generating strong free cash flow to reinvest in the business and return to shareholders. We intend to return the majority of our earnings to shareholders annually and increase the mix between dividends and repurchases gradually as we maintain our capital strength and flexibility to navigate periods of economic and market stress. Now let's review our business segment performance. First, advice in wealth management. We've consistently invested in our advisory business, transforming it into a powerful growth platform. We've expanded both the earnings power and the profitability of the business by serving more mass affluent and affluent clients and growing advisor productivity. Through our targeted growth investments, we've set a nice springboard for our advisory business. Our national television advertising presence continues, and we were recently recognized with a David Ogilvy Gold Award for excellence in advertising research.
This year, we'll complete our new brokerage platform implementation, a significant technology project that we began over a year ago. As we proceed through the next two quarters, we expect to convert more than 6,000 advisors to the new platform, with the related technology expenses wrapping up later this year. We're also having very good success recruiting experienced advisors with attractive books of business. Advisors are increasingly attracted to the value we offer and the values we stand for. During the quarter, 117 experienced advisors joined Ameriprise, which was one of our strongest recruiting quarters yet. Combined with the excellent stability and satisfaction of our legacy advisors, our advisor force is growing. These initiatives are translating into solid business metrics. We're growing our core client base.
Wrap net inflows were the strongest since before the financial crisis, and retail client assets increased nicely to $334 billion at the end of the quarter. We're always focused on driving advisor productivity growth. We finished last year at a record high, and we're not stopping there. At the end of the first quarter, advisor productivity, as measured by operating net revenue per advisor, was up 5% sequentially. In terms of segment financial results, our fee-based business growth offset the very real impact of low interest rates. As we reach year-end, our brokerage investments will be behind us, which will provide some margin relief. While I remain optimistic about the economic recovery, we're still operating in a fragile environment and limited by very low rates that will remain with us for quite some time. When rates eventually rise, our advisory business will realize even greater earnings power.
I'll move on to asset management. Two years ago, next week, we acquired Columbia Management and began a large-scale integration. Today, the integration is essentially complete. We have outstanding talent and excellent business and global growth opportunities, putting us in an attractive position going forward. We ended the quarter with $463 billion in assets under management and offer broad and high-performing product lines. Our teams at Columbia and Threadneedle continue to produce good investment performance, including strong fixed income performance and improved domestic and international equity results. In fact, five Columbia mutual funds recently received Lipper Fund Awards as top performers in their respective categories. In terms of flows in the quarter, we experienced $4.6 billion in net outflows that included $2.3 billion of Bank of America 401 assets that we previously discussed.
We also experienced outflows in funds sub-advised by a third party and from planned retirement of one of our fund managers. We have great confidence in the new team at the helm. Adjusted for these components, Columbia's underlying retail funds would have been in net inflows. Looking forward, we expect additional outflows in the second quarter from Bank of America's 401 plan and the New York 529 plan. Walter will walk you through these pieces. When we acquired Columbia, we knew it would take time for the combined businesses to settle down and reestablish a new baseline. I feel we're nearing that point. It's important for you to see the underlying trends and why I'm confident about our asset management growth prospects for many reasons. Our wholesaling and client service teams are gaining traction.
Our investment performance is strong, reflected in our more than 110 four and five-star Morningstar funds across Columbia and Threadneedle. Columbia is generating retail net inflows and fixed income, as well as net inflows in our focus funds. We're picking up momentum at U.S. Trust and on many of our key intermediary platforms. Threadneedle is building good momentum with retail sales recovering nicely. Our institutional win rate for finals remains very good. We continue to add to a strong new business pipeline. Columbia and Threadneedle are operating collaboratively to capture global growth opportunities. When you look at our asset management business, the key message is this: We're getting over the hump. The business is nearing its new baseline from which we can build in the future. I'll move on to annuities and insurance.
The annuities business had a good quarter and continues to perform in line with our expectations, both in terms of its financials and risk controls. We offer our annuity products as income solutions, not commodities. They are critical retirement products, and since we focus our sales through our advisors, we know our clients better. The business is generating good returns, and we're able to grow the business prudently. In terms of metrics, variable annuity net inflows in the Ameriprise channel were $333 million, down slightly from a year ago, considering we increased rider fees to better balance the economics of the product. We announced a new variable annuity with living benefits that utilizes a managed volatility fund. With regard to fixed annuities, we remain in net outflows because of the rate environment.
In protection, we have good books of business that generate solid earnings and provide steady contributions to our diversified business. Our life and health products are instrumental in fulfilling the comprehensive needs of our clients. We have strong underwriting and have built a stable book with $191 billion in life insurance in force. The industry has faced a difficult operating environment over the past several years. However, we're starting to see a pickup in new business driven by our new universal life insurance product. In the auto and home business, we go to market as a low-cost provider to the mass affluent. While the auto and home business experienced significant weather-related claims last year, the business results have returned to more normal levels. We're generating solid growth and profits in the quarter, and our policy counts were up a steady 7%.
I feel good about the risk characteristics and the returns in our insurance and annuity businesses. Overall, Ameriprise continues to be in a strong position, and we're making good, consistent progress in executing our strategy and helping people gain confidence in their financial future. The economy in the U.S. is slowly recovering, and while investors have started to return to the market, they remain cautious as they try to achieve decent returns in a slow-growth environment. The continued low interest rate environment creates challenges, and the regulatory environment is evolving. At Ameriprise, we are very conscious about the operating environment and its effect on our revenues, and we rely on our expense discipline to offset revenue pressure. We remain focused on realizing the benefits of our re-engineering program to fund growth investments and help contribute to the bottom line. As I shared in my opening, Ameriprise is performing well.
Our business remains strong and diversified. We will continue to invest appropriately to capture future growth opportunities. We're delivering good returns while generating significant free cash flow. We're differentiating the company with our strong client focus, capital strength, flexibility, and ability to return capital to shareholders. Now I'll turn it over to Walter.
Thanks, Jim. I wanted to start by providing some context for our results in the quarter. While markets improved on a sequential basis, on a year-over-year basis, we did not get much lift from the equity markets, as the S&P was up only 3% on average. The weighted equity index, which is weighted to our products, was up just 1% and is more reflective of the impact of markets on our results. We also continue to experience significant headwinds from a rate perspective. You can see on page four how this impacted results on a year-over-year basis. Operating net revenues were up slightly, while operating EPS was up 9% in the quarter, reflecting the impact of prior year share repurchases. Underlying business fundamentals are strong. As Jim outlined, we are seeing good traction on the business metrics that should translate into future business growth.
Our operating results in the first quarter reflected the impact of a low rate operating environment and a higher operating effective tax rate, as well as continued investments with growth initiatives and strong execution of our capital management programs. As we told you in Q3, we were anticipating lower pre-tax earnings of $55 million from the impact of low interest rates in 2012. Based on this number, which could increase, we realized more than 60% in the first quarter. We had modest operating growth reflecting the continued headwinds from low interest rates in both Advice Wealth Management and in annuities. Total operating expense growth was 1%, as higher expenses from growth initiatives in brand, technology, and Experienced Advisor Recruiting were offset by lower expenses and variable annuities from mean reversion and model enhancements. Overall, expenses remained well controlled. Let's go to the next slide.
Operating earnings and EPS increased by 9% and 11% respectively in the quarter. The sequential improvement was due to equity market improvement, limited incremental interest rate impact, and lower expenses. We also began realizing initial benefits from our re-engineering initiatives. Turning to operating return on equity, we also had good progression, up 110 basis points to 16% versus a year ago. We achieved this through a combination of earnings growth as well as capital redeployment. Our balance sheet remains strong due to our continued focus on enterprise risk management. Our investment portfolio is high quality, with only $6 million of impairments in the quarter. As we have said, we have no holdings of sovereign debt in financially troubled European countries. We ended the quarter with over $2 billion of excess capital. Our RBC ratio is approximately 525%, and our hedge program remains effective.
We continue to return capital to shareholders at a strong pace, as you can see on slide seven. We paid out 109% of earnings to shareholders this quarter through a combination of share repurchase and dividends. As Jim indicated, in 2011, we were in the top 20% of the S&P 500 financials in total return of capital to shareholders. This is from our strong excess capital and free cash flow generation. Based on this strong position, we announced yesterday our decision to increase the quarterly dividend by 25%. Over the past 12 months, we have announced three dividend increases, which represent a 94% increase on a cumulative basis. Going forward, we plan to return the majority of our earnings to shareholders, gradually increasing the mix between dividends and repurchase. Turning to segment results. Advice Wealth Management demonstrated good progress in key business metrics.
We had the strongest quarter for wrap net inflows since the financial crisis. We recruited more experienced advisors than we have since 2009. We continue to have strong advisor retention and productivity. However, we continue to face headwinds from the interest rate environment, which impacted year-over-year earnings by $11 million. We are continuing to make investments that position us for strong growth in the future, building our brand, adding experienced advisors, and transitioning our advisors to a new brokerage platform. As we look to the end of the year, the brokerage platform expenses will begin to taper off, and you will also start to see the benefit of our expense re-engineering efforts. However, in the current quarter, this elevated level of expense, combined with headwinds from a low interest rate environment, pressured earnings and margins. We are comfortable that we are making the right investments for the longer term.
Margins improve sequentially. If markets remain at current levels, we will be able to drive gradual margin improvement. Margin expansion will result from improvement in revenues from increased asset levels, which should benefit from our successful experienced advisor recruiting. Expense controls and re-engineering will also improve margins. Turning to asset management, here we are feeling the impact from outflows we experienced last year. This is particularly evident in the retail channel at Columbia, where AUM is down 2% from last year. This is driving 4% lower operating revenues and is pressuring earnings and margins. On a sequential basis, earnings improved in line with higher markets if you exclude the CDO gain from the fourth quarter. We are encouraged by early indicators. Retail flows have improved, which I will detail shortly. Importantly, expenses remain well controlled.
Performance, a leading indicator of future flows, remained strong and improved this quarter across both equity and fixed income style funds at both Columbia and Threadneedle. Turning to flows, we are seeing a number of dynamics impacting results. Former parent outflows are within expectation, with a total of approximately $2.3 billion this quarter in retail and $300 million in institutional. Like the industry, we are seeing strong inflows into fixed income and facing headwinds in equity funds. This trend is compounded by a concentration of equity funds that are sub-advised, where we have seen outflows over the past few quarters due to weak performance. The remaining Columbia retail assets have inflows of $200 million, even after over $900 million of outflows related to the retirement of a portfolio manager. While it was planned, it did result in a few large clients moving their assets. Institutional flows at Columbia were challenging.
While we are seeing some inflows from our growing pipeline in the third-party channel, we had large outflows in portfolios that we supervise and $500 million due to the portfolio manager retirement I previously mentioned. At Threadneedle, retail flows were strong. Though we did see some pullback in the first quarter, that leads us to believe retail flows may not be as strong in the second quarter. In institutional, we saw $800 million of outflows, primarily from Zurich, which is consistent with our prior periods. I wanted to provide an update on the former parent-related and other outflows at Columbia that were discussed in February when we told you that we anticipated about $9 billion of outflows in 2012, with the specific timing a bit unclear. In the first quarter, we had $2.4 billion of former parent outflows.
In the second quarter, we expected an additional $5 billion of outflows at Columbia from the about $9 billion we previously identified. In Q2, we expect $2.2 billion of former parent 401 outflows, $500 million outflows from Balboa, as well as the previously announced loss of the New York 529 Program. While we completed the Zurich-owned asset re-tender last year, Zurich's pension assets, which we currently manage, are being re-tendered and we are participating in this process. We may see some outflows as they seek to diversify managers. Turning to annuities, we had good earnings growth driven by variable annuities offset by the expected decline in fixed annuities. Variable annuity operating earnings increased 34% to $133 million pre-tax and included $30 million of benefits from mean reversion and model enhancements over last year, offset by $8 million in impact from interest on fixed accounts.
We will be introducing a new variable annuity product in May, initial feedback from advisor indicates that it is being well received. For fixed annuities, operating earnings declined 23% year-over-year to $56 million, reflecting the anticipated decline in spreads as well as the gradually shrinking block of business. On a sequential basis, earnings were flat, adjusting for an unfavorable EIA adjustment of $8 million in the fourth quarter. Turning to protection, life and health operating earnings declined year-over-year, primarily from long-term care claims and lower investment income from the dividends paid to the parent. Auto and home fundamentals and profitability are back to historical levels. We are growing auto and home business with 7% policy growth, we are seeing good traction with our affinity partners.
In closing, we delivered solid financial results in the quarter, we have continued to see improvement in our business fundamentals. Our investment in growth initiatives and re-engineering should drive benefits throughout the year. Our balance sheet is strong, we remain committed to returning capital to shareholders through dividends and share repurchase. With that, we will open it up to 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're 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 Andrew Kligerman from UBS. Please go ahead.
Hey, good morning. A couple of questions on asset management. Back in November, I think the pre-tax operating margin was targeted at about 23%. Earlier in the year of 2012, you dialed it down to about 20%-21%. What we saw this quarter was 18.4%. Are you still confident that we could see 20%-21% by the end of the year? Maybe just a little color around that.
Andrew, it's Walter. I think we are expecting that we'll be in that range. We do see that some of the re-engineering we were talking about before will start taking hold. We'll start getting some revenue margin improvement as we progress through the year. We do see that as achievable, yes.
Okay. Just as I looked at assets under management, it was $344 billion up sequentially, versus the last quarter, about 5.5%, which is a nice move. The revenue line at $711 million was up about 1%. I think maybe last quarter, I think you had a CDO gain of $11 million. That would have been an extra 1% this quarter. Do you think that you'll get the pickup in revenue commensurate with those AUM as we move into the second quarter?
Yes, I think we will. There's a couple of things as you look through it. Obviously, there's been a shift to more fixed income, which has certainly affected that. We were beginning to see hopefully that trend line moving back, which will give us a higher yield. We also, as you mentioned, the CDO gain, certainly on a sequential basis, increased the management fee to basis points. Also, we had some losses on our alternative, which certainly is a high profit aspect. That is the performance is improving. We'll see that hopefully will start improving there. We are re-engineering not just on expense, looking at the revenue line too. We think the prospects are good there.
Great, Walter. Just lastly, on a consolidated basis, sequentially expenses, G&A were about $775 million, barely up from the fourth quarter. You talked about a lot of different moving parts, but it sounds like you could keep expenses pretty flattish during the year and maybe even dip down after you stop investing in brokerage IT at the end of the year. Is that the right way to look at it?
We're certainly controlling the expenses as we've indicated, and certainly as we look at the circumstances, we're cognizant of the margins. We are managing the expenses, and we have, as Jim said, put in place a re-engineering effort that we always have one, but we certainly have accelerated some of that, which will start taking hold. I'm not going to give you a number we're going to be flatting out because that will change, as we say, what we allow goes to the bottom line, not depending on the circumstance. Certainly, we are very focused on the G&A line.
Helpful. Thanks, Walter.
Thank you. The next question is from John Nadel from Sterne Agee. Please go ahead.
Hey, good morning. Just wanted to follow up a little bit on the margin, and I guess more specifically on the fee rate. I know, Walter, in response to Andrew's question, you were just talking a little bit about the fixed income versus equities. Maybe some positive impact moving forward from some improvement at the alternative or the hedge funds. The fee rate, if I look at management fees and asset management, that came down a lot from what was a more recent trend maybe three, four basis points lower than we've seen. That's a pretty meaningful driver. Should we expect that that bounces right back up to the trended levels that we saw last year? Is there some reason we should expect that that remains maybe somewhat pressured?
There's a couple of things happening. First, as we emerge funds, as we indicated, we would have revenue denigration from that a one or two basis points, and that has occurred. That's what was in our dissynergies discussion. That's what you see taking place because it worked its way through. As Andrew mentioned, we had the CDO gain certainly looking at in the fourth quarter, which certainly distorted the revenue mix and margin in the fourth quarter, and that was fairly substantial. That was also a disclosed item. We had a fee day shift because between the first quarter of last year and this year, there's a differential of one day each.
As it relates to it, we do see that it should start improving, as I explained, because we do believe that we will hopefully start seeing that mix of equities proportion going up and starting to get a better return on that, and the alternative is performing better. The re-engineering, I do believe will start giving us benefits as we get towards the latter part of 2012. I think it's not going to immediately bounce, but certainly, I think we're on a good trend line.
Okay. That's helpful. Just maybe shifting to Advice and Wealth Management . There's a lot of moving parts. You've got the timing of some of the expense coming off from the brokerage platform and implementation. You've got some higher costs, obviously, with some better experienced agent or Experienced Advisor Recruiting. Just trying to get a sense if we could revisit the 12% margin target for advice Coming in just shy of 10% this quarter, is that 12% margin target for 2012, and I believe it was a full-year target, is that something that you still view as achievable and how do we get there?
Yes, you're correct. It was a full-year target. As you saw, we increased nicely sequentially. I do believe as we look at the trajectory of the expenses, as Jim indicated, we certainly were in the midst of our advertising launch, and we still will continue to advertise. We will obviously gauge that. The brokerage platform will trail off in the fourth quarter, as I indicated on that investment side. It is a good thing on the EAR. We are certainly attracting, as my comments and Jim's, about a high quality of EAR and also the numbers. That does get an initial expense. Hopefully, that will continue, actually. I think that'll be a good thing. I do believe with the combination of events that we see and starting to get benefits from the EARs coming in, that the 12% is definitely achievable.
It's not a walk in the park, as I told you, but it is achievable.
Okay. To the extent that there's a shortfall there versus that 12%, it sounds like maybe the experienced advisor recruiting is just going better than you expected, and I'd have to imagine that from a decision-making, longer term decision-making perspective, you'd take that trade-off, right? You'd take those higher expenses this year and maybe modest margin shortfall to grow your experienced advisor counts.
Yeah. I agree with you. It's a high class problem.
Okay, thanks.
Thank you. The next question is from Alex Blostein from Goldman Sachs. Please go ahead.
Good morning. Thanks. Just one more follow-up on expenses. Walt, I appreciate your comments about re-engineering and a couple of moving pieces there. If you look at the G&A up sequentially, so is the $750 this quarter, do you think this is kind of a high watermark, and from here, the G&A line should at least stay flat or maybe trend a little bit down? Is there room still, I guess, for that number to go up as you guys implement different initiatives?
Again, we have the capability to manage the number. As I indicated, we have instituted programs, and we will see that re-engineering build. The question then is what we do with it as we look at the market and the opportunities. I don't want to forecast on a particular number, but certainly with the elements that we said we're driving through the launch of the advertising program, the brokerage platform, and the EAR expense. Those are elements that we're concentrating on, but we are managing the other aspects of it, but we will then gauge how much we will potentially allow some of that to flow through to the bottom line and then or be invested. We'll have to gauge the situation. Certainly, we have the ability to manage the expenses within the ranges that you're talking about.
Got you. Shifting gears a little bit on capital management. Obviously very strong returns here again. Jim, to your point, you guys raised the dividend a number of times over the last year. Considering your comments with majority of earnings still being paid out on a quarterly basis, do you think another dividend increase is possible? Not to get overly greedy here, but towards the end of the year, and how you balance that versus the buybacks?
Well, we clearly are looking to continue to return to shareholders. We feel we're in a very good situation to do that based on the mix of businesses and the free cash that we're generating. As we saw last year, we know that dividends have become a more important vehicle for investors at this point in time. We wanted to continue to gauge that. Of course, we're looking at what may come in the future with tax rates and other things, so we don't want to get too far out on the curve. As you saw, we're very open to continued. What we tried to do since we became a public company was increase our dividend every year. There's only one year we missed on that, which was right at the heat of the financial crisis. We didn't cut our dividend, we maintained everything.
As you saw, we came back quickly with buybacks, we think dividends are an important part of the return back formula and will be possibly even more important. We will keep an eye to that to continue to look for potential increases. We'll also evaluate what's appropriate for investors may be interested in.
Got you. Just one last one for me on flows. Could you guys comment on the AUM, I guess, and the value in your structured fund where you had a senior PM retire? How much of AUM do you think is potentially still at risk? If you could kind of look at the client dialogues with the new team, do you think the majority of those outflows are behind us, or you could see a little more trickle into the second quarter?
I think you all understand that it's always hard to predict. The gentleman retiring, Dave Williams, was a long-term PM as part of the U.S. Trust business originally when Bank of America acquired it. He had a very good following. I think his fund even over the long haul, had excellent performance. It did suffer over the last two years a bit based on his investment style. That's coming back and came back towards the latter part of the year. Having said that, sometimes assets flow when the PM changes. We have an excellent PM and team that was part taking over for Dave, Guy Pope. We feel very good about his ability to continue the longer-term performance that Dave did have there over the long term. Having said that, sometimes those are lumpy.
As an example, in the first quarter, we had a big out in one of the sub-advised, half a billion dollars because of that change. I can't predict what may continue in the second quarter. Having said that, we have a good team there, a good manager. People recognize Guy Pope's performance, et cetera. We're hoping that that will improve and sustain the business. There may be a few other lumpiness based on model changes. That was one of the things that impacted us in the first quarter.
Got you. Thank you.
As a reminder, if you'd like to ask a question, please press star, then one on your touch-tone phone. The next question is from Jay Gelb from Barclays Capital. Please go ahead.
Thank you, and good morning. Could you update us on your view on M&A potential, including, The Hartford has its broker-dealer operation on the block, just whether you have general or specific comments?
Well, I think in general, in M&A, we thought at the latter part of last year, there may be some properties coming out that might have some interest. Having said that, as we reviewed through those various properties, et cetera, it was less for what we thought as we move forward appropriate for us. I think there will be some things that come out. We don't think they're significant. You mentioned the broker-dealer out of The Hartford. I think that's a smaller opportunity, and I can't comment on it. I don't have the information on that at this point in time.
What I would say is, we'll continue to look at things that may be appropriate for us, but we don't see anything large on the horizon per se, that in some way would change what we've just discussed with you as far as our strategy and return to shareholders, et cetera. If there are some opportunities, even if smaller, fit in neatly and wouldn't jeopardize our strategic position and where we're moving, we'll always look at them and see if they're appropriate for us that will get us some additional value.
My next question was on the impact from interest rates. Walter, I believe you mentioned that at the outset of the year, you were looking at a $55 million impact from low interest rates, but it seemed that you were thinking that could have upside?
Yeah. Well, okay. I think, certainly the forward curve took that away, the pronouncements from the Fed certainly has changed that trajectory. As we indicated, I think I indicated something like $35 million of incremental after-tax interest expense, which is something like $55 pre. We actually had the majority of that hit us in the first quarter, as we talked about, because of the compare. Obviously, as we go through 2012 and compare what the changes took place in 2011, the implication year-over-year will become less, but the majority of that came through in the first quarter. I believe right now in the short end and everything, it's just going to be certainly tough going for a while with the rates staying where they are, and certainly the rates on the long end certainly not going to get much better.
Any way to size the impact for the full year?
I say right now, my guess would be it's going to be higher than $55. Not significantly higher, but certainly could be 10%, 15% higher, even 20.
10%-15%?
Higher than the 55.
Right.
Just say maximum $15 million, something like that.
Okay. Thank you.
Thank you. The next question is from Eric Berg from RBC Capital Markets. Please go ahead.
Thanks very much, and good morning to everyone. Jim, I guess what I'm trying to reconcile is your statement. My question involves asset management. What I'm trying to reconcile is this. You have very good performance as evidenced by the large number and percentage of funds that are 4 or 5 star. Performance improved markedly in the March quarter versus the December quarter. You mentioned the strength of and the size of your wholesaling team. I guess my question is, given all that, why can't you control these outflows, whether it's 529 plan, the pension plan at Zurich, the retirement assets. I mean, you have a very strong person in Guy Pope. His performance is indeed well known.
Given the strengths that you have cited and the fact that you knew all these things, you were looking at all these things, why can't these outflows be limited and if not prevented given your strengths?
Well, I think, Eric, let me try to answer that in two ways so you can understand a little of why I'm feeling more optimistic as we move forward based on what we created here. As we look at the underlying flows in core fixed income funds now as well as in equity funds, we actually are gaining share. We've actually were in inflows. We're actually in many of the large intermediary areas where we're focused on picking up business. Having said that, I think flows in general in equities are still weak. They haven't come back in full flavor, you're not going to see big appetite for big increases in that. We are gaining traction. I see that. We're gaining traction because we do have good product with good performance, and now we've reestablished our wholesaling.
In the items that you mentioned, I think they're all in particular. First of all, we're going through a major change by acquiring Bank of America's business. It was a proprietary in-house business. Some of the stuff you're going to lose over time is there may have been a reason that they had the business in-house, but take their 401(k) plan. It was all with Columbia. You're going to have a change there. Take American Express. When we separated, we used to manage their muni bond for their traveler's check. Again, we had an agreement to continue that, but when that's up at one point, that gets reevaluated in a similar basis. Zurich is a perfect example. They re-tendered everything. They went to competitive bids. We won all of those client portfolios.
Having said that, for their own pension plan, again, Threadneedle managed all of that. Now they're looking at whether they take pieces out. I think those things are going to naturally come up based on a change of ownership and philosophy and other things. I don't see that as abnormal. You got to get over the hump. What I've created with the combination of these two gives us a great potential. It's a great platform. I think it's very competitive with the majors out there for a lot of reasons. 529, another particular. We no longer worked with one of the providers that were actually doing the type of the client-served activity with New York. It was a decision made prior to us taking the combined unit from Columbia, that sort of played out.
Maybe we would've did things a little differently knowing that it was a more profitable business than at the time Columbia or Bank of America thought it was. We are making changes as we go along. We're adjusting our focus on various things, with a change comes change. Dave Williams retiring, long-term PM. We know in the industry, sometimes even if you put a good team in that can get that performance where we need it, once a change occurs, it gets reevaluated for due diligence and other reasons. I do believe that as we go through the next quarter or so, we'll get over the hump of these major items that comes with a deal of this size and a merger of this size. What we have underneath, I still feel good about.
I would tell you differently if I felt differently, I think as I speak to the people and the teams and the leaders and the people on the ground, they feel we're gaining traction. To be very honest, you can look at our performance. It's good. Yeah, there's still some pockets that continue to need improvement. We all want every fund to be where we need it to be. There's still work in some areas, overall, I think we've got a good fund lineup now. It does take a little time to gain back that traction. Nothing changed. Maybe it just got extended a bit more because the lumpiness you would hope ends sooner. As Walter said, it is 2 years now in the month of May.
I think for size and scope and going through a market volatility that we have, I think we're in really good shape. Look at the foundation of what we created in the asset management business. I think it's tremendous compared to where we used to be.
That's a very comprehensive answer and responsive. I appreciate it. One quick one for Walter. Walter, you indicated repeatedly in your prepared remarks, I think you said that the transition of the advisors to the new platform and the money being spent on that transition will be completed by the end of this year. Could you quantify the savings that will appear as a result?
Well, we actually haven't quantified it. I prefer not because currently getting into systems and other things like that, as I say, it has an impact. Okay? It certainly will have an impact because it's a huge investment to put that sort of platform in. You can imagine that, and we are incurring the expense. Like I said, it will go in conversion by the third quarter, and it's reasonably impactful. It really is. I prefer not to get into specific numbers.
Eric, I think what I can add a little, when we talk about this implementation, it's not just the technology development. That's a piece of it. What we really have as the increased expense right now is as you're going through a conversion, you're carrying two systems. One is live, that you just made live, and the other one is the continuation of your old platform until you convert all the accounts. You have the duplicate operating expense there. The second thing is you have a lot of additional servicing costs as you're going through account conversion and getting people up and moving all the data and the information and client activities. It's a combination of three components. One is the technology development, the other one is the training and the support cost for the conversion and service delivery.
With that, you have the two operating systems that you carry. As we convert, we have two, one occurring in May and one in August. After that, we can start to turn off the other system. With that, we bring down a lot of the training costs, et cetera, and wind that. There's the third thing is the development starts to get a lot less because you still have ongoing development, but it's not as material as we're hooking up all of the various systems to get that new operating system online. It's a material amount per quarter in a combination of those factors that will go away.
Thanks to both of you.
You're welcome.
Thank you. The next question is from Thomas Gallagher from Credit Suisse. Please go ahead.
Hi, just one follow-up on Eric's question. Walter, the 12% margin on advice and wealth, with those expenses going away from the new platform, would you be at the 12% with that going away? Or is there more heavy lifting you need to do on either the revenue or the expense side?
If I understand your question, it's a combination. Obviously, we will have the majority of that expense sticking through the third quarter. It will be embedded in when I said that we will achieve. Our assumption was that that expense would be there. It would be a combination of certainly other expense items that we're managing, because those are the investments we're making in the business and obviously the revenue pickup. That's already embedded in the number for this year when I said we have a pretty good shot of getting to the 12.
I guess my question is by 4Q, when this expense goes away, A, is it going to go away completely? Are we going to see sort of a cliff on the cost, meaning the cost going down meaningfully? And if we fast-forward to that eventuality, and we kind of pro forma it on this quarter's revenues, would we be close to the 12% margin level?
No. Again, you're picking up because as Jim said, there's so many moving parts as it relates to that aspect of it. Again, I remind you, it is a major system and once this system is fully implement, we will then start the amortization aspect of it. Certainly there'll be a differential.
I think what we're saying, let me just try to be very focused on your question. One is it does assume that revenue continues to improve as we drive a greater productivity as well as improvements in our asset levels, et cetera, which is ongoing. We're not looking at anything what we call radical from where we are, but a continued progression as you saw in the first quarter. Second would be that, as Walter said, we're managing other expenses and re-engineering during this timeframe to bring down some expenses that will offset the expense that we had in the first quarter. We will get relief as we go into the fourth quarter for some of the wind down occurring in this system.
With that in mind, that the margin, if you just project it out from where we are, would have to be higher in the fourth quarter than the 12% to get 12% for the full year based on a combination of those factors occurring.
Exactly. The fact that you're giving us this glide path suggests margin by 4Q needs to be substantially above 12 to come up with the average of 12 for the year.
Yes. Because the expense is embedded in for three quarters, right? On that basis, it would have to be.
Sure. That makes sense. Now just another question on that. This overall program, how much of this is being expensed kind of on a real-time basis? How much is being capitalized?
Well, there is obviously from the standpoint of the enhancements and everything from the training of those are being expensed. From that standpoint, there is a significant amount of this that is being on a period charge basis with, again, as we implement the system and the changes related to that is the portion that will be pushed forward.
The development expense gets capitalized and amortized, we're carrying two operating systems that there's operating expenses, period. All the conversion costs, all the training costs, all of that is period charge.
Yeah.
Got it. Is there any way to quantify how much? Is it half and half percent being capitalized, half percent being expensed in the current period, just in terms of absolute costs?
Normally, again, I don't want to give you an average because each project's different depending on the intensity. I would prefer not to give it because, like I said, each project depends on how much is really for development then versus how much is for implementation. Off the top of my head, I don't have the exact numbers on that.
The amortization is a smaller part of what we're talking about at this point as we move forward.
Okay. I just wanted to be clear on that we're not really backloading a lot of it. Okay. The last
We're not definitely backloading.
Got it. The last question I had is just on, I guess going back to John Nadel's question about the revenue yield and how that declined, even after backing out the CDO impact. I guess, Walter, when I heard you mention the fund mergers being an issue, I can understand that. Was there a big delta from 4Q to 1Q? I thought the fund mergers were mainly behind us. If I just look at what happened from 4Q 2011 to 1Q 2012. The thing that stood out to me was the fact that your equity assets went up markedly. When I do sort of the back of the envelope calculation, your equity assets went up by probably $20 billion or so on average from 4Q to 1Q. You would expect that your revenue yield wouldn't have declined as much.
Anyway, any light you can shed on that would be helpful.
Sure. Between the sequential, you really do have a fee day differential, which is one part of it. The gain on the CDO is really a big part. As the mergers came through, they hit their full stride basically starting in the first quarter. I would say those are the elements that had, and also on the alternative, you're getting the full impact coming through. It's really the two big items is the fee day that's less and the gain on the CDO. That's the biggie, and that swings most of it.
Got it. Thank you.
You're welcome.
Thank you. The next question is from Jeff Schuman from KBW. Please go ahead.
Thanks. Good morning. I was wondering if we could talk a little bit more specifically about advertising. If we go back a quarter, I think on the fourth quarter call you indicated at that point that you had very good visibility about the first quarter ad spend that was largely determined. Now that we're down the road, I'm guessing that you have pretty clear visibility on the second quarter spend. Either you've produced some new commercials in about time or you haven't. Can you give us a little bit better look into what second quarter advertising spend might look like, please?
Yeah. As we looked at even from last year, we clearly knew as we're going into the first quarter what we were thinking of spending, and we bought various space that you buy sometimes in the spot market, but sometimes upfront to get better positioning. Clearly, as we spoke about with you at the beginning of the end of last year, we did look at the first two quarters of what we were planning to spend, and we've been consistent with that in actually spending. We do have our ads running now through April and some part of May. We will go off and lighten up and just use more of some web activity in through the interim period. Then we will come back with their advertising, as we did last year in the September timeframe through the end of the year.
With that, as I look at the rest of the year, I have the ability for the second half, as Walter said, to determine what I would like to spend in that regard. The positives for us and the reason we're spending, or we did, is because our advertising is really hitting a positive note. It is a positive for us, both for our advisor channel, WIC clients, et cetera. We do think that we're generating value from that as a top-line awareness for our advisor and client activity. We will review that. Having said that, if we find that we're going into tough markets or we find that revenue will be squeezed tremendously, we have the ability to scale back what we want to do in the media. Having said that, we think we have a good campaign.
We're looking to continue that campaign, but we'll manage the activities. The one thing you will not see is because we do both top-line advertising as well as below the line marketing and other activities, we do have ability to manage some of that activity and use different levers in a sense of what we want to put more emphasis on. You're not going to see an increase over last year as we go for the rest of the year, since we particularly in the fourth quarter as we launched the new campaign. On the other side, we may want to continue that advertising if it does give us some benefits depending on market conditions as well as how we're doing in the rest of the business.
Okay. That's very helpful. Just one follow-up. Can you give us just a rough sense of how the ad spend typically hits the segment? Is a lot of it in Advice & Wealth Management, or where does it generally hit?
Yeah. Our advertising right now, first of all, you got marketing and advertising in what we do with the web, et cetera. Everything that we think is directly attributed to the AWM business, we do charge to the AWM business. There's some of the advertising that's for corporate, and that goes over to the corporate area. As we said, depending on what we're focused on, what we're communicating, et cetera, it either is explicitly tied. For instance, direct search, paid search, various things go directly. Including national advertising, there's a good portion that goes to the AWM business.
Okay, great. Thanks a lot.
Thank you. The last question will be from John Hall from Wells Fargo. Please go ahead.
Thanks very much, and good morning. Jim, I just wanted to follow up on the dividend capital management a little bit. Is there a payout ratio that you're aiming for or shooting for?
We look at various things in that. I think what we would probably say is we're more focused on looking at how much of our earnings that we're going to give back to shareholders. As we said, we're looking to do a majority of that as we look at the next number of years, et cetera right now based on positioning, our capital strength, our ability to generate good, strong free cash flow. As far as the dividend, we wanted to continue to sort of boost that from where we had started originally. We feel good that we're in the two-plus range. We're going to continue to look at growth of our dividends over time, but we're not going to manage it to an exact yield rate because of the changes in the market and the stock price and various things. It's always hard to see.
Sometimes you're over, and then you don't want to raise your dividend. Sometimes you're back. We're looking more for steady improvements and generating a reasonably good yield for the type of company that we are in the industry or across the S&P 500 financials. That's more of how we're looking at it rather than a set yield rate.
Okay. In response to Jay's question, you sounded a little bit more conservative on the outlook for M&A and the like. I guess in that context, you've got a lot of excess capital. You've got a lot of cash that you're holding. That represents some sort of earnings drag. If the M&A environment is not as vibrant as it might be, what's the need for hanging on to so much excess capital and so much cash?
Well, again, we don't look at it as purely a current need per se. If opportunities come along, I'm not saying we're out of the M&A market, but that's all I'm saying is we don't see, of the things that are out there, anything significant that would be a very large undertaking for us in thinking about using all of our capital versus returning and maintaining a good position depending on market volatility that's out there. We're always going to look to maintain a good, strong capital structure. We hope that you as looking at us in that light, based on the types of volatility that these one in 100 year events that keep on occurring every year. We want to make sure that we don't have to go to the capital markets in any fashion. Having said that, we don't want to be overly conservative.
That's why last year we returned $1.7 billion of capital. There are periods that we will probably increase the return, and there are periods that maybe some small acquisitions may come along. That's all we're saying is, it's not so much that I'm negative on M&A, I'm not. We thought that there might be larger ones that might be more important for us coming to light at the end of last year. We haven't seen that in the sense, I'm just giving you a signal in that regard as well. We're not stopping M&A from occurring if there are good things that come along. I'm just saying to you that we feel very good about our return of capital to shareholders as one of our priorities right now.
Great. Just my final cleanup question here has to do with the outflows that you anticipate in the second quarter, the $4.7 billion identified on slide 11. Do you have any sense of timing in the context of the quarter? Are those out at the beginning of the quarter or at the end or roughly on average across it?
I can't tell you exactly. I would say, we were expecting this to probably come out in the May timeframe, which is sort of the middle of the period. Again, that's not a perfect science, but I think based on what I was aware, sometime in May timeframe.
Okay, great. Thank you very much.
Mr. Cracchiolo, I will turn the call back over to you for closing remarks.
Okay. I want to thank everyone for listening to us this morning, and for your questions and any other thoughts that you have in your conversations with Alicia and Chad. Very clearly, again, I just want to emphasize that based on a combination of factors, both from a business as well as an environmental, we do feel good about our position. We feel good about the traction that we have and the improvements that we're making. Having said that, we will experience, being in the businesses we're in, some level of adjustments from quarter to quarter. A little lumpiness as we're getting over with the Columbia transaction, hopefully going to be more behind us than in the middle of, which will occur over the next quarter or so. Yeah, we got another lumpy quarter to get through in flows.
I would still say that we have good underlying improvements in our business. I think we have a great foundation that we built. I think our AWM business, again, market climate isn't great for robust trading activity and large investments, you can see some of the underlying metrics are strong for us. We have a really healthy annuity and insurance business. I do believe that we're in a more of the better end of that slice of the pie, for where we're participating. I think the combination of those things gives us a very good company, and gives us an appropriateness that we can return well to shareholders. We will continue to execute against our strategy.
Quarter to quarter, it's not perfect science of where you're going to come in, I think look at us over the last eight quarters, four quarters. Look at us in total of what we created over the last two years, and where we've come from, and I think you'll find a good, consistent story, even though quarter to quarter won't be a perfect science. Thank you for both your interest as well as your questions and your comments, and we'll look forward to continuing having the conversation with you as we go forward.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating