Welcome to the fourth quarter and year-end earnings call. My name is John, and I'll 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 Ms. Alicia Charity. Ms. Charity, you may begin.
Thank you, welcome to Ameriprise Financial's fourth 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 the respective GAAP numbers can be found in today's materials available on our website. Some of the 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 2010 Annual Report to Shareholders, or our 2010 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. Thanks for joining us for our fourth quarter and full year 2011 earnings discussion. I'll begin with an overview of our business performance and some thoughts about our positioning for future growth, and then Walter will discuss our financial results in more detail. After that, we'll take your questions. We finished the year of substantial progress with a solid fourth quarter, despite continuing challenges from the environment. Markets recovered a bit in the quarter but remained highly volatile, which caused clients to become more cautious and move to larger cash positions, and interest rates remained near zero, which resulted in further spread compression. My key message for you today is this. As always, we have the ability to navigate through the short-term challenges, and we're focused on the medium to long term, which holds great potential for us.
Our financial foundation remains one of the best in the industry. It continues to give us important stability and strategic flexibility. We believe our financial strength enables us to weather the current storms and retain our strong position in the future. We continue to generate significant capital. We're still holding more than $2 billion of excess capital, and that's after returning $1.7 billion or 135% of our operating earnings to shareholders through dividends and buybacks during the year. In addition, in December, we announced a 22% increase in the dividend, which will be paid in February. We now have increased our dividend five times in our six years as a public company. Even with the significant capital we've returned, I believe we are in a stronger capital position now than we were a year ago.
As our business has become less capital-intensive, we've been able to free up capital to return to shareholders and invest for growth while maintaining our ratings. Our many strengths, from our highly diversified and proven business model to our client focus to our financial position, allowed us to generate record operating earnings of $1.23 billion and record operating revenues of $10.1 billion for the year. Now I'll provide you some commentary on our business segments. Then I'll give you my thoughts on the year ahead. First, in our Advice and Wealth Management segment, we delivered another strong quarter and our most profitable year ever. The market volatility and low rates seem to be affecting firms across the industry, with clients once again seeking safety and moving to cash and other low-risk options.
Still, our advisors generated good quarterly production and a record $384,000 of annual operating net revenue per advisor. We've generated strong client asset flows, highlighted by $1.4 billion in wrap net flows for the quarter and $7.3 billion for the year. We also recorded our third consecutive quarter of growth in the number of advisors. Our long-term work to re-engineer our advisor platforms is largely complete and has given us the lift in advisor productivity that we anticipated. At the same time, we stepped up our experienced advisor recruiting efforts and generated good momentum with 105 advisors joining us during the quarter and a total of 337 for the year. The momentum is continuing into this year. In fact, January was one of our best recruiting months ever with two recruits joining the firm.
In the quarter, our margins in the Advice and Wealth Management segment decreased slightly as a result of our increased investments for growth and slowing client transaction activity due to market volatility. Even in the difficult operating environment, we're investing in the business. Beginning in September, we increased our national television advertising presence. We're finding that the ads are resonating well with consumers. We're also continuing to roll out a new brokerage platform, which is a major multi-year investment. The conversion has gone smoothly for our employee advisors. Now in the process of converting franchisee advisor systems, which is the larger part of our overall network. The brokerage platform investment will continue at a fairly high level this year. We expect the process and related expenses to wrap up in 2012.
We're also investing in new avenues for long-term growth, including the launch of a financial planning business in India. That pilot with India advisors bringing our holistic approach to the Indian consumer is off to a promising start. In addition, we will soon open a new operation site in Las Vegas, where we have been able to take advantage of a good labor market and low real estate prices. Our building there will house several functions, including advisors, technology support staff, and client service people. We continue to invest while we're beginning to tighten our management of discretionary expenses to offset potential market volatility. We're doing that across the firm, and I'll comment further on this topic in a moment. Now I'll move on to asset management, where the fundamentals remain solid and our growth opportunity is quite attractive.
For the quarter across the segment, we generated $4.3 billion of net inflows. That number includes the $14 billion institutional mandate Threadneedle won from Liverpool Victoria, which was one of the largest single pieces of institutional business that went up for bid in the U.K. in 2011. Apart from the significant win, as we mentioned during our financial community meeting in November, we experienced $6.7 billion in redemption from low-revenue former parent accounts. We expect some lumpy outflows to continue, including about $4 billion of former parent-related outflows in the first quarter and an additional $3 billion of these low-margin assets as the year progresses. We also still expect to lose the previously announced $1.8 billion outflow from the New York 529 plan at some point this year. It's important to note that the vast majority of the expected outflows from former parent accounts should be completed this year.
Retail assets remained a significant challenge for the industry, with almost $50 billion in net outflows from domestic long-term equity funds in the fourth quarter alone. We remain in net outflows from retail funds at Columbia, primarily because of weakness in sub-advised accounts, which accounted for $1.3 billion of net outflows in the quarter. That said, we're seeing significant improvements in sales early this year, particularly in our focus funds. As a result, we're generating net inflows in certain fund areas that are in significant outflows across the industry. The institutional business is also making progress, especially in third-party channels. We have won several mandates that have not yet been funded, and our pipeline of potential new business continues to grow. In terms of investment performance at Columbia, our shorter-term numbers dipped somewhat, but our longer-term record remains strong. We're seeing good improvements in performance early this year.
In fact, Columbia generated a very strong performance month in January. Internationally, Threadneedle continues to generate strong results with excellent investment performance and reasonable flows given European market conditions. I should note that Threadneedle also retained the mandate to manage substantially all of its Zurich assets through a competitive re-tender process. Like Columbia, Threadneedle is off to a good start this year with good net inflows in January. Overall, we feel good about our positioning in global asset management and what we created with Columbia. The integration will be complete in the quarter. We have our wholesaling teams fully engaged across the country, and they have strong performance to back their efforts. We're developing new business collaboration between Columbia and Threadneedle to drive global growth opportunities. Now I'll move on to annuities and insurance.
The annuity business continues to perform in line with our expectations, both in terms of sales and risk. In total, the variable annuities business generated net inflows of $227 million, and the Ameriprise channel delivered net inflows of $442 million. Overall flows continue to be impacted by our decision to exit outside distribution of variable annuities, and we continue to feel good about that decision given the interest rate environment and the current risk-return parameters of the business. With regard to fixed annuities, we continue to be in net outflows because we have not put new product on the books due to the low rates. Walter will discuss this in more detail. Overall, both the fixed and variable annuity books continue to deliver solid returns, and our risk is well managed. That said, we recognize that the economics of this business are changing.
To accommodate the changes brought on by the years of near zero short-term interest rates, we've decided to raise fees on new variable annuity riders. We've communicated the decision to our advisors. The higher fees are likely to dampen sales in the short term, but we believe this is the right move to ensure we can continue to meet the long-term guarantees of many of our annuity contracts and deliver strong shareholder value from this business. In the second quarter of this year, we will introduce new variable annuity products that we believe will meet client needs while providing sustainable economics. In fixed annuities, with low rates continuing and with the Fed's Operation Twist last year, we expect spread compression to continue in 2012. The protection segment delivered the strongest quarter of the year, primarily from improvements in auto and home results.
That business returned to more normal claim levels and is once again generating solid growth and profits. Auto and home policy counts continue to steady increase, up 7% over a year ago. In the life business, while clients continue to be reluctant to commit cash to long-term contracts given the tough economy and volatile markets, we have seen some improvement in sales. We generated good sales of our new indexed universal life insurance product, which meets an important client need in volatile markets. During the quarter, we were recognized by Insured.com as the number one life insurer in terms of client satisfaction. Those kinds of accolades serve us as good sales too for wholesalers and advisors. In total, life insurance in force remained essentially flat at $191 billion. To summarize, 2011 was a very good year for Ameriprise despite significant environmental challenges.
While the economy in the U.S. is slowly recovering, the market environment remains quite challenging. I think you see financial services industry. Even with a recent bounce back, equity markets are exceptionally volatile. Interest rates will likely remain near zero for three more years. The regulatory environment is changing rapidly. We are very conscious of the environment and its effect on our revenues. Expense discipline has long been one of our core competencies. We're further stepping up our expense management efforts now. We're taking a close look at all discretionary spending across the firm to ensure we're operating as efficiently as possible. That said, we're continuing to make important investments. For the year and beyond, we're focused on a number of initiatives that we believe will drive the business forward. I'd like to briefly review just a few of them.
We're going to emphasize our retirement capabilities through our advertising and a new approach to help our advisors discuss retirement with their clients. You all know that the retirement need is very large. We think we're ideally situated to meet the holistic needs of people approaching this milestone. Second, we'll continue to invest to help advisors become more productive and to bring in highly productive experienced advisors. We're providing the technology and marketing support advisors need to serve clients efficiently and bring in new clients. Third, in asset management, we're focused on flows and broadening our distribution. We believe we have the investment performance to drive improved flows, and we've emerged from merger-related impacts in the U.S. Now we're investing to build the Columbia Management brand and to promote our investment performance.
At the same time, we're broadening our distribution reach to new markets with Threadneedle making inroads in the Middle East, Continental Europe, and Asia. Overall, we are uniquely positioned to take advantage of the extremely compelling consumer need for retirement products and advice, and we have the financial strength and talent to realize our opportunities. We will continue to invest to drive long-term growth and shareholder value. We have demonstrated our ability to succeed in good times and bad, and I believe we are in an excellent position to navigate this period and emerge stronger, just as we did following the financial crisis three years ago. Now I'll turn it over to Walter.
Thanks, Jim. Operating earnings in the fourth quarter clearly reflected the challenging environment. While equity markets have rallied about 5% in January, market volatility will remain with us in 2012, and it is clear that interest rates are unlikely to increase until 2014. Looking at revenues in more detail, you can see that excluding the hedge fund fees, revenues would have been about flat to last year. The underlying slowdown in revenue growth reflects low client activity from weak market sentiment. Clients are increasingly focused on capital preservation and generating income. This impacted revenues in two ways. Lower transactional volumes and an increase in cash balances. How long this shift in behavior continues is difficult to predict. Revenues were also impacted by low rates, with net investment income down 4% from last year.
The underlying fundamentals of the business remain strong with a growing advisor base and good asset growth. From an earnings perspective, operating earnings per share grew 2% despite lower revenues as we managed expense levels and continued to make substantial investments in brand and technology. We also realized synergies from Columbia integration and saw good improvement in auto and home results. Turning to slide four, operating return on equity in the quarter increased 13.1% compared with 12.9% a year ago. As a reminder, we calculate return on equity on a trailing four-quarter basis. We saw a big swing in DAC unlocking and model changes year-over-year. Excluding these impacts, underlying return on equity grew from 12.5% to 13.4%. As we look ahead to next year, we are on track to hit the 15%-18% range we provided in November.
Underlying our return on equity is our strong balance sheet fundamentals. Our hedge program is effective. Our capital ratios are strong with debt to cap of 18.5%. The investment portfolio is high quality. We had only $11 million of impairments in the quarter. As we have said, we have no holdings of sovereign debt in financially troubled European countries. Turning to page 5, we ended the year with over $2 billion of excess capital and about $600 million of debt capacity. In 2011, we returned $1.7 billion of capital to shareholders or about 135% of our earnings. We received $2.1 billion of dividends from our operating companies this year, with most of that coming from our life companies. In the Q4, we received $850 million dividend in the form of securities from the life company. These securities are highly rated and very liquid.
This additional dividend will reduce investment income at the life company by about 2%. After the dividend, the RBC ratio remained strong at 490%, which was our targeted level. Turning to segment results starting with Advice and Wealth Management. Operating earnings in Advice and Wealth Management decreased 14%. We continued to see good asset growth and retention, with wrap net inflows of $1.4 billion in the quarter. Earnings were impacted by a slowdown in revenue growth from a decline in transactional volumes and from clients holding more cash. This is a trend being experienced throughout the industry. Cash sweep accounts increased to $15 billion, we are currently earning just 42 basis points. In the quarter, we continued our investments by launching our new brand campaign and the development and implementation of our new brokerage platform. The new platform is expected to be complete by the Q4 of 2012.
In total, gross investments were about $14 million higher in the quarter, we'd expect that elevated level of expense to continue through 2012. Turning to asset management. Asset management earnings declined $36 million, primarily due to hedge funds, where earnings were down $21 million year-over-year. The remainder of the earnings decline reflects the expected impact from both markets and outflows. Expenses, excluding the hedge fund impact, were about flat year-over-year and includes funding additional brand investments. Adjusted net operating margins were 31.4%. The Columbia integration is progressing well, we realized net synergies of $130 million, in line with our target for 2011. The technology integration is on track for separation in mid-2012. Annuity earnings were up a bit this quarter. We see different trends in variable and fixed annuity books. In variable annuities, operating earnings grew 13%, excluding some favorable adjustments.
On a year-over-year basis, the DAC and DSIC impact was about the same, given very similar market performance in each period. We had client inflows also had $10 million of favorable items, including improvements to our models and the market impact on our death benefit reserves. Variable new sales in Ameriprise channel declined 9% compared to sales a year ago when we introduced our RAVA 5 product. Net flows in this channel were about $442 million. In the quarter, we also announced plans to increase fees on variable annuity new business. We believe this is an appropriate action to reflect the change in economics for that product. In fixed annuities, operating earnings declined 32%, which includes an unfavorable adjustment to the reserve for indexed annuity contracts. As we previously indicated, we expect fixed annuity earnings to decline as we invest assets at lower yields.
The incremental annual negative impact will primarily be about $35 million after tax for all Ameriprise. As I mentioned earlier, the reduction in investable assets at the life company will add additional pressure on net investment income. Let's move on to Protection. Operating pretax income in the Protection segment increased 30%, driven by improved earnings in auto and home and stable earnings in the life and health area. Auto and home revenues increased 6% over last year, primarily driven by growth in sales through our partnership with Progressive. We saw improvement in trends in auto and bodily injury claims, which are back to more normalized levels. In closing, we delivered strong results in 2011 and continued to demonstrate our ability to be successful in a range of market conditions. As Jim said, we're managing for the short term, but we're focused on the long term.
We have strong financial fundamentals and will continue our focus on enterprise risk management to drive shareholder value. With that, we'll open it up to 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 remove 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. Our first question comes from John Nadel from Sterne Agee. Please go ahead.
Hi, good morning, everybody. Obviously, a lot of margin pressure in Advice and Wealth Management and Asset Management this quarter, 9-ish in AWM and maybe just shy of 17x items in Asset Management. I'm just interested in the 12% target and the 23% target for those two segments respectively. I know client activity, et cetera, pressure points. I guess my question is, are those targets achievable and over what timeframe?
Hey, John, this is Jim Cracchiolo. I'll respond first, and then Walter can complement. If I look at the AWM segment, we were hit with a bit of impact due to the market volatility. Fees were lower. Our wrap business went down a lot in the third quarter because of market depreciation. Our underlying flows are still fine. That started to come back in the fourth quarter. Of course, you're taking the fees for every month during the quarter, and they would have been impacted. Second, I think if you look at a number of companies already reporting and in the industry, a lot of client activity did slow in the fourth quarter, whether you look at the retail firms, the direct firms, or the wirehouses because of the market volatility. It does impact client behavior.
Even though we're sitting here now in January and the markets are back, during that period, if we recollect in August, September, things were looking pretty ugly again. It does give people pause, and there was a large amount of volatility in October, November, et cetera.
We're no different. Our client activity is looking at CNBC and the news and looking at how many times that stock index moves up and down, and the European crisis and the political climate that's out there. Now, will that come back? If things start to, again, continue to show stabilization, et cetera, the answer will be yes. It does hit our top-line revenue. Now, in addition to that, what we thought appropriate, we are investing in a multi-year platform. We didn't want to slow that down, we started the conversion to a franchisee system, integrating in the full brokerage to all of our other systems and capabilities, and going through that conversion that will continue through this year. As we get to the fourth quarter, it will be pretty much complete. That was a step up a bit in investment.
We also were investing in a number of other things to continue to build out our systems, mobile, et cetera, apps, and a number of things that funds get committed before, and you got project work going on before you can tell what the market's going to do.
Yeah, I understand that. If I could just interject. I'm sorry. If I could just interject. If I think about that $14 million year-over-year higher expenses on those items that Walter had mentioned, that's about 150 basis points as I calculated on the margin for the segment. I guess, in other words, should we think about the remainder of the difference to your 12%, which is about where you were the last couple of quarters, as being just, we got to watch, we got to see consumer sentiment, we got to see transactional volumes and client activity pick back up, we regain that difference?
Yeah. We will regain that because remember, our systems development was through the year. We had a little extra in the fourth quarter, but it was through the year. The only thing incremental was the relaunch of our new campaign, which started in September, we had a full year impact. We are going to continue that campaign through the first quarter, then we'll evaluate how much we spend later in the year. I would say this, we do have the ability to control some of our discretionary expenses that we're looking at. I do believe, again, I can't dictate the markets and client activity, but I would say I still would say we will be in the 12% margins this year in the AWM business. I don't look at that one quarter as an issue. I would actually say there's strong underlying growth.
Indicators are there. Advisors are not going to stop their productivity, clients do have to get a little settled. I feel good about that segment, I feel good about what we're doing in it. As I said, the investments we're making, they'll start to roll off like the technology this year, there'll be a big upside because we're running two systems, we're converting thousands of advisors, we're doing a lot of systems development. A lot of that was in last year's P&L, we still got good margins. Once that rolls off, it'll help tremendously. In the asset management business, to be very clear on that, we have a level of depreciation. We've lost a number of assets because equity markets weren't the best to get the flows where we thought we would get.
The parent stuff, I know people look at the volume of those dollars, we always sort of thought that we would lose them. They're not a lot of fee basis. I would say that 23%, no, I would probably put it more in the 20, 21% based on just where markets are, because I think that compressed us, where we thought things would improve in the market situation. Again, if markets come back, it'll be a different story. If we're thinking about that on a relative sense today, that's probably more where I would target it. Having said that, I do see some underlying things changing around there. Now, flows in the industry aren't great, but Threadneedle is doing well. I think Columbia is starting to gain some traction through its third party institutional, retail outflows are slowing.
We'll get over the hump of the parent stuff. I identified it just as I told you in my talking points, so that no one's surprised in it. Those will be lumpy, but at the end of the day, again, I think we're making a good underlying traction.
Thank you very much for all of that. Just one last quick one. Is your buyback currently curtailed, or is your buyback operating just at a lower level than we've been accustomed to?
We did not curtail it. Going into the fourth quarter. Looking back, you can always say, "Hey, yeah, markets, why'd you do that?" Markets were a bit more volatile. We're looking at what that looked like. We did a substantial amount over the course of the year, and we were also looking at potential opportunities at the same time. No, buyback is not curtailed. We will continue it this year. We just sort of adjusted it depending, at the same time, we don't have a perfect crystal ball on things.
Yeah, and just to-
Understood
let me just add to that. If you looked at the share price, it went from like 37 to 50 in the quarter. It was completely volatile. We actually purchased on the average. As Jim said, it was just looking at a pretty volatile market. In retrospect, you can always say, could have bought more. The reality is, I think we bought appropriately. No curtailment.
Thank you very much.
Thank you very much.
Our next question comes from Suneet Kamath from Sanford Bernstein. Please go ahead.
Thanks, good morning. I just wanted to follow up on John's questioning on the margin. I'm actually surprised to some degree that you feel comfortable with the 12% Advice and Wealth. You're sort of lowering asset management. The reason is, you reaffirmed those targets or those objectives in November at your Investor Day. From Investor Day to the end of the year, I think the markets were higher in terms of helping the asset management. I get the fact that client activity is weaker, but again you're affirming the 12% in Advice and Wealth. I guess I'm just trying to understand what's the delta between what you said in November in terms of asset management and what you're saying now?
It's Walter. You talk about looking at it from that standpoint, certainly the markets have rallied, and as we've seen the volatility with it. If you just take a straight line projection up, certainly, as Jim said, you might get to a higher number. It is challenging for where these markets are. The more you get shifts coming in and out of that nature, it does affect us from the equity and the fixed income flip. I think that is really where, because that's where the leverage is going to go in and out. It's just this volatility in the market is just at a pretty steep basis. I think that's where you're seeing us be a little cautious on that.
Okay, maybe getting back to Advice and Wealth then. 12% is a pretty big lift for the year. I know you touched on it in answering John's question, but what specifically do you think gets you from where you are today there? Is it really a throttling back of some of the advertising expense beyond the first quarter? Or what are the big levers that you have to get to the 12%?
Let's look at it. From a perspective, again, I can't predict activity during the quarter and fees. For instance, that goes for the asset amount. If you say the markets are going to just continue to go up from here or even manage stability from here and rise, then we're talking about a different story. Our forecast or projection just based on last year was we didn't take that ride. It was up, it was down, and you don't get, on average, the fees all the time. Part of our difference maybe from what you're looking at is that if we're here and we're continuing to rise on a nice even slope, that's one thing. If you got a level of volatility, it's another thing. In regard to the margin itself, I do believe we can manage some of the discretionary expenses.
I think we're going to set some internal targets to tighten up on some things that are nice to do and nice to have, but if the revenue is weak, we got to adjust that. At the same time, as I said, we want to complete some of these investments, like the technology, get it behind us. That will help our margins in the future. Interest rates also affected us a bit more when the NII, we were using even the yield curve last year. That took a little out, we want to make up for some of that by tightening the expenses. Will revenue rise as much because maybe not, but I can still tighten the margin even if revenue's a bit lower. We're guarding against the revenue weakness.
If the markets come back here and stay stable, I think we'll continue to show the rise we did in the first few quarters of last year. If it doesn't, I need to tighten the ship a little bit.
Understood. One quick follow-up. When you said earlier that you expect to hit 12% margin in Advice and Wealth in 2012, is that for the full year or are you saying sort of by the end of the year?
That is for the full year. That was the expectation.
That's still your expectation?
With the caveats that you mentioned. We can't guarantee any. What we're saying is we're still trying to shoot for that, and we have a number of things that we're working on to help make that happen.
Understood. Thanks.
Our next question comes from Andrew Kligerman from UBS. Please go ahead.
Hey, good morning. Just following on that last line of questions, it would imply to get that 12% margin, you'd need to use these discretionary spending initiatives to maybe cut at least $15 million a quarter in expenses. Is that the objective? And maybe Jim or Walter, a little more clarity on those potential initiatives?
I haven't done your exact calculation, it is a combination of, certainly as Jim said, as you look at the revenue and on managing the expense based upon that revenue base. Yeah, and I think we have degrees of flexibility in that. I haven't done the exact calculation the way you've done it, because it is a combination of factors that go through.
Anything specific you could lay out that you could cut, Walter?
Really what it is across the board is this. We do a lot of technology spend for enhancements, new initiatives beyond the brokerage platform conversion. There are numerous programs from a marketing and support levels that we have. There's a number of things that we truly invested, enhanced in training and setting up new initiatives like onboarding our new advisors and even increasing our advertising there. There are a number of different things that we've done that we could tighten a bit depending on what the market situation looks like. That would be helpful in this environment. Control of some of our staff expenses that get charged in from the different units into the AWM business that we can tighten in. Listen, when we were growing in a number of areas and et cetera, we wanted to continue to invest more heavily.
We had a big investment in general, we might just have to temper that a bit and tighten it. We've been used to doing this. We've always re-engineered. We have a number of new initiatives that our resources were consumed with the integration of Columbia that we're freeing back up that we can work on, again, re-engineering and moving things, enhancing the way we operate and process. Some of the things we're looking to do will help in that line. Listen, this is part of what we need to do. This is part of what we've always done. Again, I'm not putting the 12% as a firm thing as the most important objective. I'm just saying I think I have opportunities, we are still believing that we're growing the advisor force. We're growing ways that they can deepen their relationships.
We're introducing things that hopefully will help them deepen and gain more assets. Some of it will come from revenue, some of it can come from expense tightening.
Okay. Maybe just shifting gears to the asset management area, particularly Columbia, where the one-year number per year above average Lipper numbers, it went from 62% asset weighted in 2Q to 56% in 3Q, down to 38% in the fourth quarter. That kind of dragged down the three-year number as well. Could you give a little color on where you expect that number to go in the near term? What's causing that struggle in performance, what do you think the implications are for retail net flows going forward?
There are two things that occurred then, I'll give you a little more color to it. In the one-year performance, what occurred is that we had a number of our domestic equity funds falling a bit below the Lipper medians. The differentials between the second and third quartile were very small in 2011. While we underperformed, since it was so small, we can make up that ground in most cases quickly, January is already showing that that's come back around. We think that we'll start to show improvements. The big change was we had one of our funds move below, it was a big fund, move below the medium. That was because a good quarter rolled off and a bad quarter rolled on in a sense of hurting that.
Already January performance is good there as well, we're hoping that that will start to turn its colors as well. We think it has a lot to do with that movement, so to speak. Our investment people are feeling good that there's an ability to continue to see improvements there.
Got it. Just lastly, M&A. It seemed like you were alluding in an earlier question to the fact that you're looking at opportunities. Do you think that the environment's heated up a bit in terms of opportunities, and in what areas? Asset management, Advice and Wealth Management?
Well, I think you've seen a bit more level of activity out there in the asset management world. We'll continue to look at potential opportunities. That doesn't mean there is one for us, but we'll continue to look and see if there is something that's good that we could potentially do. We have the flexibility to do that incremental to what we're doing now. We'll continue to look at the buybacks, as I said, as part of what we're going to continue to execute on, we're going to continue to review our dividend policy as well. We did another raise at the end of last year. We're going to look flexibly of how we can create shareholder value using the strength of our balance sheet and the free cash that we continue to generate.
That's why, as I look at the fourth quarter, it wasn't what we ideally would want. Having said that, I think if you look at the underlying of what we've been able to invest in, what we've been able to do, and even though one can estimate what that will always be the next quarter, I think if you look at the underlying things we've just accomplished over the last few years, we want to continue to build upon that. We're going to continue to work hard to do that.
Got it. Thank you.
Our next question comes from Alex Blostein from Goldman Sachs. Please go ahead.
Hey, guys. Good morning. Just to go back to, I guess, the margin discussion in AWM, and I understand that it's hard for you to predict the environment and the markets and the levels of connectivity, et cetera. It does feel like you guys are bringing in higher producing advisors in the employee channel where you have plenty of capacity, and the incremental margin on that should, in theory, be higher. Taking that into consideration, do you think there's some room for still margin improvement from this kind of 9%-10% level, assuming markets don't really change from here?
Yes. I put the yes complement to what I said, but yes, that was another thing you've just pointed out. Very clearly, we are adding a lot of productivity from new people joining us. It takes time to ramp up. The ones that we've added two years ago are ramping up nicely. The one we added last year will help to ramp up this year. We accelerated the number of people we brought in towards the latter part of the year.
Okay. On asset management, you told us about the same redemptions, I guess, at the investor day a month and a half ago. Net-net, you're probably seeing maybe $8 billion-$9 billion of still redemptions coming that you know of in 2012. You guys also talked about institutional pipeline that was pretty good, and there's some mandates that you won that haven't funded yet. Can you quantify those? What do you think those are actually going to fund?
As I said, we have some fundings already coming in, like in our Threadneedle area and in the Columbia area. We have some good wins that we won in the fourth quarter in December, et cetera, that we think will be funding in the first quarter. We have others that we're in the pipeline for, that we're bidding on. The pipeline is quite strong. Here again, I can't give you numbers per se right now, but I would just say that the improvements are there. We think that we'll win. Again, if you adjust for these parent stuff that I've just mentioned, I think that this will be one of the areas that we'll look for improvement and growth this year based on the traction that we're gaining.
Okay. Shifting gears a little bit on capital management and I guess potential acquisition opportunities for you guys. On a kind of operating earnings basis, you guys paid out, Walter, you pointed out 135% of your total operating earnings between the buybacks and the dividends. Given the slowdown in the fourth quarter, maybe we should think about more on an annualized kind of full run rate basis. Is that kind of the total payout that you guys are thinking about for 2012? That's question number one, the follow-up to that on the M&A side, I guess what areas in asset management do you guys still feel you have some product holes that you would need to fill?
Yeah. Alex, we don't set a hard, fast target, but we have about, as of the end of December, about $1.45 billion left in the authorization, and that spreads over approximately six quarters. You can get a pretty good idea what the standard of this on playing averages is. As we said, we'll be optimistic about it. Really, while we bought back a quarter of a billion in the fourth quarter, we didn't feel that was really retreating from it, as I indicated. It was an extremely volatile market. We will just gauge that. Certainly, I don't forecast the earnings, as you look at it, we do gear, and we do understand that. As Jim said, we're looking at which way, whether it's dividends or it's going to be buybacks.
I think those sort of indications should get you some comfort zones of where the minimum standards are.
Okay, the product holes, potentially?
I think we would like to continue to grow our international businesses. I think if we look at the U.S., it's not so much product holes per se. We could probably take on, now that we've completed and upgrading our systems, et cetera, and we have good things in place, we could probably take on more assets, and expand a bit more there in some of the areas. It's more of what would help us to continue to position ourselves well, and gain from the position that we put in place, even gain some more profitability and revenue. I think that's what I would say. If you're looking at areas to expand in, it would mainly be more international than domestic. If we're looking for more of an ability to consolidate onto something we've built, it would be more in the U.S.
Okay, thanks.
Our next question comes from Jeffrey Schuman from KBW. Please go ahead.
Thanks. Good morning. I think we hit the wealth management margin pretty well. I maybe got a little bit lost on one of the asset management margin comments. In response to John's question, you mentioned 21%. I wasn't clear if you were suggesting that as possibly a relevant aspiration for 2012 or whether that is the new 23% sort of longer-term, more basic aspiration.
I was just commenting on 2012. Again, I'm not here to predict or project my actual numbers because again, a lot goes into it. If we had a good read on markets and what happens in equity and whether there's a shift back around in flows in equity, I'd be able to sit here and give you a better calculation. I think just off the top of our heads here in thinking about the 23%, and just based on what we've been seeing and have, we sort of adjusted that in our view right now for 2012, not for the longer term.
Okay. Well, that's very helpful, Jim, because we've seen a lot of margins over time, and I think for a period we operated under some pretty clear goalposts, and you were advancing on those goalposts. I think we're all sort of on the same page, and I think over the last couple of quarters, we've all gotten a little bit disoriented. Understanding that things are fluid, it's still very helpful that you've given us, I think, some sense of where you could be headed in 2012.
Yeah, no, I agree with you. As I said, if we go back a few years on the AWM, we had counted on getting a lot of margin from interest rates rising to get to the 12%. As I said to you, we're trying to shoot for that 12%, even in these volatile markets with heavy investment without that interest margin. If Bernanke changed that view of the world, you're talking about a substantial improvement there that we've just, again, put off again for another year and a half because of his latest view. These things are a bit fluid. The markets are a bit volatile. When they go down in Europe, you lose flows. When they come back, you start to gain them again. It's not like it's a consistent feeling that anyone has. It's fluid, but the underlying focus has not changed.
I want to be very clear to you, both the analysts and investors, it has not changed. We're working hard on it. As I said, we'll continue to look at using both the balance sheet flexibly as well as Of our current day spending and investments. There's just some things I won't curtail because we're halfway through them, and I think they'll pay good dividends after we're finished.
That's all very helpful. Just one other thing, if I might. It's pretty clear that you've probably gotten some good traction building your brand, I think with customers, and certainly for a while, the brand was attracting advisors. Can you kind of give us maybe an update on how the brand is positioned in the advisor world? Are you still kind of drawing people in the same way you were kind of post-financial crisis, or is that moderated, or how's the momentum, I guess?
No, actually, the momentum is good. We've ramped up our efforts last year, the latter part of last year. Pipeline has built. Part of the increase in expenses, we started to actually put our name out there in trades as recruiting. We never did that before because we never recruited before. We sort of ramped up our advertising there. We have a good pipeline. As we said, we've added 52 people in January, which is our strongest probably ever. Productivity of the people we're adding is higher than it was. Also, our brand, just so we know, the brand launch that we did, the advertising, and a number of research things that we've looked at, it was the number 1 rated financial services ad in the quarter. It's really hitting with the consumer.
That's why we want to continue it through the first quarter as well, then we'll see where we go. Tommy Lee Jones and those ads are excellent for us. It's telling our story. The retirement market's going to be here through this volatility, and the need is going to be there. That's why, again, even though we've weakened a bit, as you saw the results in profitability in the quarter, I'm feeling more optimistic about that segment than business. In the asset management business, for everything we put in place, I feel good about everything that's underlying that we have in place. Having said that, you saw the industry flows over the last year. There's only a few places where people are getting inflows, and it's usually a targeted area or targeted fund or global bond or something like that.
It's not in any large case across equities or a large case across all areas. Fixed income's starting to pick up again, which is good. We're starting to push that a little bit more as part of our focus sales. Listen, I think if the environment continues to stabilize and improve, I think we're in good shape. Nothing has changed fundamentally from what I told you in November, nor what I told you a year ago, and I think we'll continue to gain traction. The one other thing I will tell you, and don't underestimate, is the idea that we are freeing up more capital. Our capital requirements are continuing to go down. We're continuing to work on those things even more, including in our annuity business. The decisions we made there, we think were excellent in that regard.
We're going to continue to put some new products out that will continue to help that in more volatile environments. Listen, I think the markets will be the markets, the environment as such. Quarter to quarter, I can't do your modeling. I would say that if you're looking at this as an underlying strength and core investment, I think we're in good shape.
All right. Thanks a lot, Jim.
Our next question comes from Thomas Gallagher from Credit Suisse. Please go ahead.
Hi. First question. Walter, just on your ROE guidance on slide four. 15%-18% ROE accounting for the DAC change, that implies a range of, let's just call it approximately $570-$670. Pretty broad range. Is it safe to assume, given what you're telling us about asset management margins, that you're going to be at the very low end of that range? Can you give a little bit of perspective about sort of the puts and the takes there?
Can you help me, Tom, a little on when you said the 15-18 is certainly what we said at the financial community meeting, I didn't catch the point about the $570.
Sure. Walter, I was just calculating, looking at what your adjustment on book value is going to be, assuming some growth in book value throughout the year. I'm just applying $570 would imply a 15% ROE. A little over $670 would imply an 18% ROE. My question for you is very simply, in lieu of what you've told us about asset management margins being below previous range, is it fair to say that we should expect the absolute ROE for 2012 to be at the very low end of the range? Can you help us, just give us a little bit of sensitivity around expectation because that range is very wide.
Yeah. Well, okay, I'm sorry.
Anyway, any light you can shed on that, just kind of broadly speaking.
Actually, the range is basically it's the same width as we had before, is the 12-15, the 15-18. Again, not forecasting here. Certainly with the understanding, as we just said, the mix of the businesses and things of that, I believe that we're in certainly a reasonable above the 15, and it's again, depending on what takes place, we should be able to move into
reasonable safe territory. Again, I just don't want to forecast it, certainly I feel that making the statement that we'll be in that range with these challenging events, I think is a good statement. Remember, we're still finalizing our EITF and going through there from that standpoint. There's factors that come in. The business shift is taking place. I think that we see a good trajectory to get us into those ranges, and that's why I said it in the comments.
That's helpful. You feel comfortably above 15 at this stage in the game?
Right.
Got it. Okay.
Feel that we will go above the 15, yes.
Sure. The next question I had on the asset management margins is it fair to say that the reason you're expecting kind of subdued margins, at least relative to plan for this year, is really just simply because you're seeing no momentum on active equity management, which is your high fee business. When you are seeing recovery in flows, it's going into low fee fixed income. Is it really just that simple at this point?
I think it's actually coming as what Jim was saying. Because of, as we know, with the volatility that takes place, and certainly we are driven more towards equity. We are trying to evaluate the implication of that, because when you get this much volatility, we get reasonable share into fixed income. The profitability for us is higher and on the equity side, and in these markets, it certainly has not been as conducive. That I think is exactly where we're positioning. Again, it's been extremely volatile. Certainly, as we indicated, the rates have gone up 5% and you can start saying the world just takes off from here. That's great, but that's not what we're seeing, and it's difficult to calibrate off that. That's exactly where it is.
I think as Jim said, we're getting close and things like that nature. The issue is it's this mix, and it's really the volatility in the market.
Got it. Then, Jim, last question, just circling back on Advice and Wealth Management. I hear everything you said about the dampening impact of client funds moving into cash, slowdown in client activity weighing on the margins in 4Q. You talked a bit about what you've seen thus far within asset management. What have you seen in Advice and Wealth Management so far year-to-date? Have you seen any kind of recovery in client activity, in sales? Have you seen any kind of mix shift moving back out of cash or is that still likely to pressure things into 1Q?
Well, I think you got, again, two things. One is you see an increase in back of fees again because the markets have recovered a bit. Then, as I said, we didn't see people pull money. We just didn't see as much money get continued investments into the equity funds, et cetera, in the fourth quarter. I think if things continue to show what they're showing, we'll start to see a move back. I also believe that people today, I don't think you're going to see a spurt back in anything. I think you could see some things happening across the industry where things have settled. I think it might take a little time for it to start to get back to more normalized. In a sense, well, I don't even know what normalized is anymore.
It's more of how long are you in a more stable, less volatile period for people to feel comfortable. January, it's early yet. I really don't even have all the information for January in for me to give you a better read. I would just say, on a fee basis, it should be better because the markets have come back. On a transaction basis, I think it hasn't gotten worse. I think it's starting to stabilize, and maybe it'll start to prove if this continues. I think it's still early in the quarter for me to give you a read.
Okay, thanks.
Our last question comes from Eric Berg from RBC Capital Markets. Please go ahead.
Thanks very much. Jim, I'd like to return first to Suneet's question. If the markets have been so volatile, affecting retail activity and affecting willingness of people to invest in mutual funds as well as institutional flows, that was true all of 2011 and has continued into 2012. Why the change now? In other words, again, my thinking is that was the case as of Investor Day. As of your financial community conference. What has happened between then and now that would lead you to revise downward, admittedly for 2012, only your margin guidance for your thoughts on margin in the asset management business? What's happened in the last few weeks is really what I'm asking.
Eric, I think you embedded two things. One is some of the retail things that I said and the asset management. Let me separate the two. First of all, I do believe there was nice improvement last year in level of client activity and engagements with the markets. I think where we saw a fallout earlier in the year in Europe that affected European flows in the asset management, but didn't really affect retail flows here in the U.S. in the AWM business. That sort of changed when the market really collapsed in the third quarter and was collapsing. People don't look at the first time it goes down, they look at the added effect of that, and then they start to pull back and get concerned. Well, what if it went down another leg and fell from 1,100 to 900, et cetera?
I think that's what happened. I think if you look at all retailers across the industry that have reported, you'll find 15% down in dots or transactions or fee levels. I think many of them have commented. We're not an outlier there. We probably fall a little less, but it takes us a little more to get back quickly based on just client activity. I don't think we're an outlier there at all, and I think you can see that if you just look at other people and what they've said in their reporting and what has been published on the industry. In the asset management business, as we looked at the numbers, et cetera, what we're continuing to see is that there isn't a big move into equity funds.
If that changes, maybe based on what's happening and settling in Europe, when you don't get a lot more move into equity funds, particularly in the retail business, that's your higher margin business. When you continue to add that up, when you assume that, I'm just assuming continued volatility that we saw last year. When you start to think that way, it does impact your fees. You can't adjust your cost consistent with that up and down. You need to continue to drive forward. I think you'll find that when you do that and you take some revenue out, even though the market may end up higher, you start to compress because you have a fixed expense base.
Given that Columbia with RiverSource now is such a broad and vast complex, I would think you'd have sort of what some people have called an all-weather portfolio, if customers don't like equity, you have a broad portfolio of both municipal and taxable bond funds, I would think you would be seeing strong flows there you'd be okay. That'll be my last question. Why are we seeing outflows in retail? This is my last question. You get my point.
Eric, I would say last year we didn't actually garner as much in the fixed income because we got really hit, particularly in our tax-exempt at the beginning part of the year for places like the U.S. Trust business. I think that's starting to come back. As I look at new sales coming in right now, tax-exempt has picked up, fixed income has picked up. We're actually selling and focused a lot about selling equity. I think the wholesaling and distribution and the pipeline, even institutional, has shifted that now to balance that with more fixed income focus. Exactly what you said occurred, but we did not have that the way it was for the reasons that I just mentioned to you.
Yeah, I think we will continue to gain flows there, but when you gain flows in fixed income or in institutional fixed income, you got different margins than if it's retail equity.
Thank you.
I'll now turn it back to Mr. Cracchiolo for closing remarks.
Listen, first of all, I appreciate your questions today. Also trying to better understand what's happening underlying the business. I'll just leave you with this. I think that as you look at our company and you look at the quarter but put the quarter in light of last year, we had nice improvement in profitability in AWM. We had nice improvement in profitability in Columbia, in asset management with Threadneedle. We have a continued strong, an appropriate base for our annuity business. We have managed risk quite well. Our protection business has come back where we were having some issues with the catastrophic losses in the auto and home, and that has recovered. We are continuing and have made stronger investments in the business for future growth. We also have put in place a stronger platform, as you've mentioned, in the total of our asset management business.
I can't predict by quarter exactly what you'll see, but what I could say is that we're building even a stronger foundation, that we have all the capability, flexibility to ride out the markets. I do believe over time our margins will continue. I believe our earnings will continue to shift. I believe our capital requirements will continue to come down. Listen, the fourth quarter didn't change anything along those lines. The only thing I could probably say is that we probably didn't think that volatile market would affect things as much as it has, but I think it did across the industry, and I think you can compare it across the industry to see how that is consistent. With that in mind, we will continue to have any other questions or comments, please call Alicia or Chad, and we'll try to follow up with you.
I'm just guarding against a continued environment that I can't predict, and I'm going to continue to make some changes in the company so that we can handle that quite well in the short term. If the environment improves, if you guys in thinking about the equity markets continue to sort of stabilize and go up, then we're in great shape. I'm just guarding against it not being, okay? Have a great day. We'll talk to you further as the weeks go on.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.