Ameriprise Financial Inc. (NYSE:AMP)
Special Conference Call
November 14, 2012 9:00 am ET
James Cracchiolo – Chairman, Chief Executive Officer
Kim Sharan – President, Financial Planning and Wealth Strategies, Chief Marketing Officer
Ted Truscott – Chief Executive Officer, Global Asset Management
Walter Berman – Executive Vice President, Chief Financial Officer
Alicia Charity – Senior Vice President, Investor Relations
Tom Gallagher – Credit Suisse
Alex Blostein – Goldman Sachs
Sumeet Kamath – UBS
John Nadel – Sterne Agee
Jeff Schuman – KBW
Eric Berg – RBC Capital Markets
Ian Gutterman – Adage Capital
Jay Gelb – Barclays
Gary Lu (ph) – (Indiscernible)
Good morning everyone. Thank you for joining us for our financial community meeting. We’ve got a full agenda for today. You’re going to hear from Jim Cracchiolo, our Chairman and CEO, then Kim Sharan, President of Financial Planning and Wealth Strategies and our Chief Marketing Officer; Ted Truscott, our Chief Executive Officer of Global Asset Management, and Walter Berman, our Chief Financial Officer. Following our prepared remarks, we’ll take your questions.
During the meeting, you will hear reference to various non-GAAP financial measures which we believe provide insight into the company’s operations. Reconciliations of the non-GAAP numbers to the respective GAAP numbers can be found in today’s materials on our website. Some statements that we make during this presentation may be forward-looking, reflecting management’s expectations about future events and the 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 results to be materially different from forward-looking statements can also be found in today’s presentation, our 2011 annual report to shareholders, and our 2011 10-K. We undertake no obligation to update publicly or revise these forward-looking statements.
And with that, I will turn it over to Jim.
Thank you, Alicia, and good morning everyone, and for those joining us on the web, I appreciate your attention to Ameriprise today. What I’d like to do is give you a bit more of our story. We asked a number of you what you would be interested in learning about, and a little more focus on the strategic part of our company and how we think about our strategy and how we’re looking to continue to move forward, grow and invest for the future.
In so doing, we want to give you a little perspective of where we’ve been, how we’ve generated our performance, what that performance looks like, and how we’re using the strengths and capabilities that we have to build for the future. What I’d like to do today is leave you with three messages that you’ll hear in combination from my presentation as well as my colleagues that will follow me. One, and very important, is that we are a strong, powerful retail financial services company today. We’ve invested heavily through the financial crisis. We have a strong position today in the marketplace, and one that we think situates us well to capture a large and growing opportunity that we’ll talk to you about.
Second, since our spinoff we’ve generated very strong and differentiated financial performance in our firm, and we did while investing for the future. We did that by building capabilities, by strengthening our positioning in a number of our businesses, and from that we think that we’re in a great position to continue to build for the future and generate strong shareholder value by pulling a number of levers that we have in place today. So I’d like you to think about those messages as we go through our presentation.
Now many of you know where we came from - seven years ago, we were spun off from American Express, and at that time of spinoff we were mainly focused on the mass market. We were mainly built in profitability around our insurance and annuity business, but we had a strong distribution arm. We had a domestic asset manager as a proprietary asset management business, and we had traditional wealth management tools and capabilities. Our technology was somewhat limited because we’d under-invested previously, and there was a lot of questions regarding our financial strength.
Now since our spinoff, we’ve been able to prove that we can establish a very strong and growing retail financial services firm, and we have. Our focus has really been on the mass and mass affluent clientele, and most of our asset growth has really come from this area. We’ve built a new brand with significant recognition and we’ve gained a lot of trust through the financial crisis in our brand versus others of our competitors.
We also today have a large and profitable wealth management business. We invested heavily and we transformed ourselves, and we think this will be a strong growth engine for future growth and profitability. And we converted our proprietary asset manager to a global asset manager through both organic growth as well as acquisitions, and we think we’re situated well to take advantage of a growing opportunity that we want to talk to you about.
And today, we continue to be a leader in financial planning and advice, but we are also tapping, as I said, people who have more assets and people who have a greater need to serve for their financial future. We think that we’re situated unbelievably well in the sweet spot of that area. And we invested to have a real scalable infrastructure, one that we have as state of the art technology and tools and capabilities both in the real world as well as the online world that we’ve continued to invest in and you’ll hear more about. And so overall, I think we’ve demonstrated that we can deal with a financial crisis and we dealt with it quite well, and that we have differentiated financial performance, and we’ll talk about that in a minute.
Now as we look at some of the key attributes of our firm, and we looked at that compared to our competitors, we think that we’re in the strong part of these sort of rankings. And so whether it’s our strategic positioning against what we’ll talk to you about is the retail market and mass and mass affluent for retirement, our brand positioning and how it’s gained trust, our distribution that we have one of the strongest affiliated channels, but at the same time we’ve been able to develop a differentiated positioning also in the sense of building through third party distribution for our asset management business. We continue to build upon the persistency and strength that we have in our client relationships and this is one of the things that’s going to add to our value in the future as we look to serve people through 30 years and retirement.
Our financial strength – we’re stronger today than any time in our past, and I would say on a relative basis for our size, with our balance sheet and the size of our company, we have a stronger capital position on a relative sense. And we’ve been able to generate strong shareholder returns and one that I think that we have the flexibility and strength to continue in how we can give back to shareholders, based on the generation of our free cash flow for the businesses that we’re in today.
Now that didn’t come by chance. Since we separated and became a separate public company, we had a very focused strategy and we stuck to that strategy to advise and manage and protect assets and income for our clients, to really focus on the mass and mass affluent and establish ourselves, as well as in the asset management business to take further ground and be in more of a diversified company. In addition to that, I have a very strong leadership team, a leadership team that has remained with and part of this company since our spinoff, and during that time we’ve been able to add very strong additional leadership, either through acquisitions or organically from the industry as well as developing what we had as very good talent internally. And we have demonstrated both to our clients as we faced and dealt with the financial crisis and supported our activities, to our advisors how we’ve supported them and helped them grow and continue to build their productivity and their teams, as well as to you our shareholders from what we told you we would try to deliver through the financial crisis and what we have delivered. So that situates us well to continue the path for the future.
Now let me talk to you about some of the unique opportunities that are out there and ones that we are looking to continue to play in, and let start with the wealth management opportunity. Today there is a compelling market opportunity. I know sometimes we look at the headlines every week and look at the market and look at what’s happening with the consumer and economic growth, but over the last number of decades, the population in the mass affluent and the affluent has continued to grow. There are over 30 million people now in these two dark parts of the pie chart, and that will continue to grow in the future. As people need to continue to accumulate assets, as they look to figure out how they’re going to manage their financial assets to handle 30 years of retirement – remember, Social Security, even it stays the way it is, and we don’t address entitlements today, it will only serve a very small part of people’s real needs as they’ve actually increased their standards of living. And so of this pie of $26 trillion dollars, more than half of it is in that population that continues to grow and will be accelerating its growth as we come out of this economic downturn.
Now as you can see on the other part of the chart, what’s also happening and even more significant is the wave of baby boomers moving to retirement, and those first baby boomers have already started – 10,000 of them a day are turning 65. And over the next decade, that’s going to peak, and what do they need? They need to provide for 30 years in their retirement. They need to feel confident about their retirement. They need to have advice to help them do that, and we are situated quite well in that particular marketplace. Why? Only one in five of people turning 65 feel confident about their retirement, and they do need advice, and they are looking more for that as they move forward. They know there are a lot of good products out there, but how to have those products work together to satisfy them to generate a good retirement and an income check for their future, and that’s where we fit in.
So if you take these three concentric circles – the mass affluent, affluent population and it’s growth in asset accumulation, the baby boomers – largest part of our population moving to retirement, and then third their need for advice and solutions to help them satisfy that particular need, we’re right in the center of it. Ameriprise is well positioned there. We have a full range of wealth management and asset management solutions. We are the fifth largest player already in the retirement space and the advice space. We’re the seventh largest provider of the IRA for assets under administration. We have a very differentiated position in the marketplace built around financial planning advice. We’ve over the years established long-term relationships with millions of clients, and we have the strength and wherewithal to support that positioning the marketplace, continuing to invest and diversify and grow. We have built now a national brand to the mass and mass affluent population around who we are and what we stand for, and we have more qualified advisors, more CFPs around financial planning than anyone else in the industry. So very clearly, we’re situated well to take advantage of that opportunity.
Now what have we been doing? How have we been investing? What results are we already achieving, and why do we feel that we can continue to do that as we move forward over the next number of years? Well first of all, let me just give you one of those metrics. So let’s look at our retail client assets. They’ve gone up over 60%. Now remember, during this time frame from 2005 to 2012, markets have been relatively flat – up and down, but relatively flat over those years. We have grown those assets. Why? Because we actually have increased the population of our mass affluent and affluent clients by over 37%, and increased our advisor productivity strongly in that period. We have invested in advice and capabilities and tools. We have developed a brand strongly in the marketplace and delivered it through our face-to-face relationships. We’ve enhanced our technology capabilities and the way that we can actually manage our clients’ assets to help them diversify for the future, handle their full lifestyle needs, and we’ve been able to actually satisfy them. You’ll hear more from Kim on what that looks like, how it feels to the consumer, why they like working with Ameriprise and our advisors.
So we think that we have the great foundation in place to do that, not that we are finished. We will continue to invest, we’ll continue to evolve, we’ll continue to grow; but very clearly, we think that over the last number of years, we’ve made a good—tremendous progress, actually, in transforming in our business for growth and profitability, and Walter will talk a bit more about the profitability side of that.
Let’s look at our advisor side of the equation. Over the years, we’ve moved from building our advisor force organically with novices to now recruiting experienced people with books of business. We’re getting known in the marketplace. Our pipeline is strong, so we’ve moved from practically very few advisors coming in and joining us that way to now over 400 on a past 12 month basis. And their books of business and their productivity are stronger today than they were last year and the year before.
In addition to that, our retention has always been strong, and as we move from more novices to experienced people and experienced recruits, our retention rate in our employee channel has moved up very strongly. We still think there’s opportunity for further improvement there as we continue to mold that channel and develop some of the novices; but very clearly our most experienced advisors with strong books of business, their retention rates are even higher than this. Our productivity has grown over two-thirds in this time period, and so very clearly our average productivity per advisor in how they’re developing their practice, their teams, the support we have given them—and one of the things that we constantly focus on is not just adding advisors but helping the entire advisor force grow their productivity on an annual basis.
Now what does that mean for the future? That means that we have the platform in place. We have capabilities in place. We have invested heavily to put that in place. Our new brokerage platform, which was one of the largest significant investments we’ve made over the last few years since the spinoff is now in place. We have the opportunity to continue through our training, through our support, through our marketing tools, our branding to help our advisors to continue to take a stronger position in the market, and in fact we’re starting to even go further up market to more of the high net worth clients. We’re also thinking about how do we change our channel a bit to support more of the growth of the younger generation, and so we’ve set up a centralized service center with advisors in it that deliver our value proposition remotely and through the Internet. Therefore, we think there’s an opportunity to reach more people where we do not have offices, or the younger generation that wants to do business a little differently in what we call the new face-to-face.
And so very clearly, we have the ability to continue to invest. We feel we’re on the right track. Our positioning fits very well with what the consumer is interested in, and Kim’s going to bring this to life for you, so you’ll hear a bit more about that, both the color of it, what we’re doing and how we’re doing it, so that you can get a better feel for it. One of the questions that you’ve raised is, can I get a better feel for who you are in the marketplace and how do you think about that, and what you’re bringing to life out there.
Let me turn to the next opportunity. How do we continue to focus on building a top tier global asset manager? Well, let’s look at what’s happening out in the marketplace. Let’s look at that opportunity. It’s compelling, and so if you look at in 2010, there were roughly 61 trillion assets under management. By 2016, some research has shown that that’s going to grow to over $93 trillion in assets, so there is growth occurring. Now where is that growth occurring? Well, you see the pie going up, and the percentage of the pie is shifting a little bit but you’ve got tremendous growth happening in emerging markets around the world, in addition to growth that will continue here in the U.S.
So let’s think about what’s happening in the asset management world. You have the growth of assets under management and the further globalization that’s occurring. You have a need right now for not just product but solutions, and there is a greater need for solution orientation and that’s one of the things that Ameriprise has always done for our clients and for key relationships that we have formed over the years. Then you have what’s also occurring in the consolidation, so as things have grown and changed, it’s more expensive to serve people. You need further scale, and therefore there is a consolidation that has occurred and will continue to occur at one level around the world. We’ve been able to start to play in that – the Columbia acquisition, the Seligman acquisition, the Threadneedle acquisition, and we have proven that we have been successful in doing those acquisitions.
So we’re situated well, we have a large global manager today – number 32 – but as the 32 global asset manager, one of the ones that are independent. We have strength in the U.S. and Europe and we’re growing in the Middle East and starting to put beachheads and platforms in Asia. We have embedded advice solutions that we’re starting to re-channel to reposition to take up some of the space, and particularly want to build on some of our capabilities in asset allocation and risk management that Ted will talk to. But we already have top 10 positions in the U.S. and the U.K. We’ve demonstrated our success in acquisitions and I believe that we can get into inflows that Ted will talk to you about near-term as we go through this market cycle.
So today, we’ve doubled our assets under management roughly over the last numbers of years through the cycle from a combination of organic and acquisitions. We have strong competitive investment performance that we can build upon. Our building products for even our product capabilities are in place, and our strength in equities in particular, I think will take more space over time. We can leverage the expanded distribution now that we have in place, diversified for both retail and third party as well as for institutional, both here and internationally. We are very much focused on driving profitable flows. We are focused on the areas that we can drive good profit margin and we can gain assets for the long term.
Ted is going to show you and talk to you a bit more about those building blocks from investment performance to our product architecture and how we want to continue to build upon that, as well as to how we turn from outflows to inflows, and Walter will talk a bit more about the margins here.
Now let me talk about our protection annuity business, and I feel we are differentiated and I feel that it complements us well based on what we’ve invested in over time, the returns that we generate, and who we provide these products and services to. So the need – baby boomers today moving to retirement. There is a demand for tax advantage investment solutions, and based on the environment we’re going into, maybe more so. There’s also a desire for accumulation in income guarantees. Why? They’ve faced a great amount of volatility over the last decade, and there is still an unmet need for protection of assets and income.
Now we’re very careful about where we want to play and how we want to play. We’re very focused around the asset accumulation business. We’re very focused on risk management of those products and services. So let’s talk about a little of that, and Walter will complement me with his presentation.
So we provide our I&A solutions to who? To our retail clients through our affiliated branded network. What does that mean? The people who uptake these products for us are our planning clients. On average, our client base has four relationships with us; through planning, they have over seven. Why is that important? Because we understand those relationships. Those relationships stay with us a long time. The persistency of those assets are unbelievably strong; therefore, we know the behavior of our people. They’re planning clients. They’re risk adverse clients. They like to manage their financial future, so whether it’s in our P&C business working through our clients or through affinity relationships, we find a similar thing, and so that’s very critical when you’re in a risk management business.
Next and very important here, we only play in certain parts of this. We’re not a broad provider of protection and annuities. We don’t go through third parties. We did not play in the arms race, and in face as the arms race heated up, we pulled back from the small distribution we did through third parties.
Next and very important, we try to minimize that risk. We try to fully hedge it if we take on the risk. Even on our protection business, we reinsure 90% of mortality risk, and so very clearly I know as you think about these businesses and you think about the industry, you think about the volatility, there is a concern out there; but very clearly for us, we feel that we have managed that well, we have unbelievable strong books of business built over decades, and we did not play in the high growth arms race that we were actually doing fire sales. So this is a business built over many years in a complementary fashion that is generating good returns.
A few of the attributes that we see from it and why it’s a differentiator – we have an attractive risk pool. The persistency through our affiliated network is very strong. We have a higher percentage of fee-based revenues than our peers. We have significantly lower exposure to living benefits, and we make sure that we price them appropriately so that we can fully hedge the economic risk. We have comparatively less interest rate risk for our portfolio, and our risk managed product designs, including what we have come out with our volatility funds will serve us well.
Now I will also tell you if that will not be the case in the future for whatever reason, or if the arms race in some way changes and we want to give those products to our clients, we will not participate, okay? So we are not going to sacrifice the company. What we want to do is put a good product out there that we can stand behind for 30 years of our clients and deliver upon it, and deliver for our shareholders in the same fashion.
Okay, so let me think about that coming together. Why are we situated the way we are? Why do we like our business model? Why do we think about it as a little more that we want to play in these three circles? First and foremost, our annuity and protection business was built over decades and it’s a strong performing book, and I’ll talk to you about the returns in a moment. Our advice wealth management business and our asset management business are high growth businesses that we’re heavily investing in, and we’ll show you some of the results of that. When you put those concentric circles together, the dark blue gives you some complementary of what we achieve with it: number one, we already service millions of clients. We want to have deep relationships with them. We choose where we can manufacture some of that product and where we will distribute third party product in a complementary fashion. So if I already go out and have a good strong relationship with someone and have all the costs of developing that relationship, and I can put more product that I manufacture in it, what do I get? I get multiple revenue streams and multiple ways to generate profit through a good strong client relationship that has persistency of assets. That’s what I gain my protection annuity business. I don’t give it to every one of my clients; I give it to only a piece of that clientele that really wants it and needs it through my advisor.
Second, my asset management business – I am one of the largest packaged providers out in the industry. My Columbia platform has shelf space, has to compete for that shelf space but they have a very strong position on that platform. In addition, they manage the assets for my protection annuity business, therefore I get some benefits from that and I get the capabilities of my asset management business – the knowledge, the know-how, strategic allocations, product solution sets that we develop that help in developing my advice and wealth management and help manage the risk and the performance from my protection annuities. Those are the benefits. What does that mean? Diversity of revenue and profit streams, covariance analysis on my risk, able to capture assets through market cycles and maintain a nice profit margin, and strong deep relationships.
Okay, what does that mean financially? Why is our performance what it is today? Why do we feel it’s differentiated, and where we can go with it? Let’s look at the pie charts here. In 2005, we generated roughly a billion dollars in PTI. Only 18% of that as we drew the picture of how to segment this business came from our asset management and advice and wealth management. Eighty-two percent came from annuities and protection.
Now, it wasn’t that we didn’t have a very large distribution business; we just ran it more as a cost center than a profit center, so we wanted to change that. Over the last seven years, you can see what happened on the pie chart. First of all, the size – it doubled, 1.9 billion in profitability through a very severe market downturn. Number two, very clearly part of the chart for the advice and wealth and asset management grew tremendously to represent the now over nearly 50% on a trailing 12-month basis of the profits of the company. So the pie grew and the percentage of the pie that went to our faster growing business grew tremendously.
At the same time, we continued to have a strong balance sheet, and today our balance sheet is even stronger. We have a strong (inaudible) position, and that’s even stronger today that Walter will talk to, but what did we do during that time to strengthen that? We went to full hedging of our products. We discontinued our variable annuity sales in the third party channel. We put more prudent product features to satisfy both the clients and the shareholder. We’re exiting our banking business not because it wouldn’t generate good revenue and profit for us but because of the regulatory environment and the future capital requirements for the entire company, and we didn’t want to slow down our growth in the businesses that we’re really investing in. And overall, we’ve strengthened our positioning, as I’ve mentioned to you.
Now let’s look at what that means. So take the advice and wealth management business – we have now gone up to over 400 million on a trailing 12-month basis in profitability. That is significant annual growth. Next, our asset management business has grown strongly in profitability, and I think if you measured us profitability against a lot of peers out there, you’ll find it pretty significant. Let’s talk about what that looks like as you look at certain other metrics that you look at. Our wealth management PTI operating margin – 10.8% on a trailing basis versus wealth management peers of 9%. Again, growing nicely. We believe that we can continue to grow this margin. We’ll have some adjustment for the bank, as we mentioned to you; but we believe what we put in place to grow the product, the asset performance that we have and the growth there in clients, as well as productivity of advisors and new recruits coming in, will continue to help that even in a very difficult interest rate environment.
Our asset management – I know we look at our PTI margins and it looks anemic, but when you adjust for the way it’s accounted for when you net out the gross-up of expenses and with the revenue and the adjustments as our peers report these, you can see that our adjusted margin of 33.2% compares to the average of the asset managers of 33%. Now, that’s not something we just did ourselves. That’s from an outside study that we participate in in benchmarking, and there’s more than one study that has shown that. Now, could we get it better? Absolutely. Are there better performing margins out there for some of our competitors, depending on the product and the distribution that they have? Absolutely. But we believe that we have the opportunity but we’re not disadvantaged today. We’re comparable.
Let me talk about protections and annuities. I talk about our risk profile. I talk about our persistency. I talk about our books of business. Well, how do you relate that to what you get? Well, think about our operating ROE from those businesses – double what’s out there for our industry peers – double. The only way we can do that is because the capital required, our risk management, the ability to have persistency and profitability in those books are stronger. That’s why we like the business.
Now, is it going to be a high growth business? No. The other two businesses we want to continue to grow more quickly. Having said that, the reason we can be in the business, manage them well and even look at it as slow growth for our client bases for that reason. But if it changes, we have opportunities.
Okay, what does that deliver in total? This is what’s important, right? Can you generate the revenue growth? Well, operating net revenues from 2009 to ’12 coming out of the recession, on a relative basis to each segment we’re quite strong. If you take those segments in combination, we’re stronger. Well, what does that give you in combination versus individually? Well, let’s look at our EPS compounded growth and our PTI earnings volatility. You take the individual peers at segments, roll them up together, we even look stronger on a relative basis – 23% for us on EPS compound annual growth.
Let’s look at earnings volatility. The reasons those businesses are together, we got lower earnings volatility. Now you’re much more qualified. You look at this and analyze it every day, but the reason it adds up for us is what we’re showing you here. Remember, we’re a consumer branded company with strong retail relationships that are our relationships in addition to having the ability to penetrate other relationships with our asset management group.
Okay, how do we generate good returns and how do we reflect that for you, the investor? Well, over again the last number of years since we came out of the recession, we’ve increased our dividends to have a very strong yield today, and I think you’ll find that we’re in the top in the peer groups in number of areas; and in fact, if you adjust for one or two, you’ll find there’s a nice differentiation and we continue to look at that as an opportunity. Next is return through buybacks – 3.8 billion in total. Let’s look at our return as a percentage of net income versus our peers. It’s higher on each segment. If you consolidate it again on a combination, depending on how you invest, we’re better that way. Let’s look at now our returns to shareholders overall and what that means from appreciation. You can see Ameriprise in the dark chart – 180% versus whether it’s the S&P 500 at 70, asset managed custodial banks at 39, S&P financial 500 at 36, diversified at 29%, life and health, or investment banking and brokerage. So here again, we’ve been able through what we’ve been doing, how we’ve been executing, investing and returning, we’re hopefully generating a good return.
Now how do we move forward? I’ve given you all the reasons. We’re not embarking on a new strategy. We’re not changing how we go to market. We’re not stopping our investments. We’ve invested through the downturn, including this year and last year. We’ve executed on our acquisitions. We’ve got to continue to get good results there. So your own analysts, and this is coming from Bloomberg and Factset and sources that look at estimated earnings for—ROE for 2013, they said Ameriprise would be at 16.4%. If you look at indices for any industry, it’s above that. I think if we look at the peer groups, you’ll see something similar as well for the peer companies we had identified previously.
Now I’m not saying that’s all we’re going for. As Walter will talk to you, our goal short term is 15 to 18%, and we want to be at the high end of that range. That’s with a strong position. If we utilize that capital more, whether through acquisitions, buyback returning, et cetera, we’ll get above that and that’s where our focus will be. So we want to continue to do what we did over the last number of years and since we became public.
So we do have multiple drivers of shareholder value creation. Whether it’s our ability to continue to strategically execute and transform the business and the mix of the business, as we’ve been doing, through the strong cash flow over 90% of our earnings are free cash generation to use, the financial strength we already have and the flexibility to apply that and deploy it, we apply stringent acquisition criteria so we’re not holding that to just spend our money foolishly - we’re looking that we can get a good return versus returning to shareholders directly and versus organic growth – and our ongoing ability and wanting to return to shareholders, and so we think that will continue to position us well for the future.
Now with that in mind, I’m giving you a little bit of an overview of some of those things. What I’d like to do is drill down a bit more in the advice and wealth management business, the asset management business, and for Walter to give you a bit more of what’s under the covers, so to speak, in the financials. Now, we’re not here to talk about quarter to quarter and every detail of the metrics that we know many of you will apply in your models. We think you’re very sophisticated and very smart to do that. What we’re trying to do for you is to say where are we, how did we think about it, what results we’ve received, and how we want to continue down that path and why we have the drivers in place to help go do that, and give you more color and feel for that. And then we’ll take a lot of your questions, okay? Thank you.
Let me introduce Kim Sharan. As Alicia said, she’s the President of our Wealth Management and Strategies and Financial Planning and she’s also our Chief Marketing Officer. She is going to represent her colleagues in advice and wealth management and give you a flavor for what that business looks like and how we’re doing in it. Kim?
Thank you, Jim, and good morning everyone. As Jim said, I’m here on behalf of my colleagues in our advice and wealth management business – Don Froude, Joe Sweeney, and Maglaque. So I’m going to build on what Jim talked about around the wealth management and our advisory business, and I’m going to start by talking a little bit about the consumer, consumer confidence, optimism, and that certainly does play a great role in our business. I’m then going to talk to you about the unique position that we’re in, the client value proposition that we bring to market, and then I’ll close by talking a little bit about our advisor value proposition and how we’re uniquely positioned.
So let’s start with the consumer mindset. We’ve been tracking consumer sentiment over the last number of years, and as you can see here through the Great Recession to today, both confidence and optimism certainly continue to have declined from 2007, whether it’s optimism about the country’s financial future, optimism about their own financial future, or the fact that they believe that they really can’t continue in the same lifestyle that they were in prior to 2007 in retirement. However, there is a bright spot here and that is around consumers who are working with a financial advisor in a planning relationship, which I’m going to talk about more, they appear to be more confident in their financial future and in achieving their overall financial goals.
As Jim talked about, our consumer target has tremendous unmet needs. Only 16% believe that they are financially prepared for retirement – quite a low percentage, and it’s all well publicized that we’re all living longer. We are increasingly responsible for funding our own retirements and we’re facing rising healthcare costs as well as the uncertainty around the fiscal cliff. Yet consumers do believe that there is a benefit in working with a professional, and more are saying that they’re looking to reach out to an advisor to help them, so clearly there is a tremendous need particularly around retirement; and within our mass affluent and affluent segmentation that you heard Jim talk about, we believe that there are about 30 million households that represent about half of the investable assets in this target. Our sweet spot really ranges from about 100,000 in investable assets to around $3 million. Of course, we do serve those with over $3 million; however, the sweet spot is within that range.
Since our spinoff in 2005, we’ve been investing in building a unique brand, and we’ve particularly emphasized our capabilities in the retirement space. Through a number of brand campaigns that you’ve seen in the market, we’ve been able to grow our brand awareness from zero to 60% today. Consumers now know who we are, what we stand for, and what we deliver. Today we’re continuing with our advertising with Tommy Lee Jones and in fact we’ve just shot some new commercials, which you’ll start to see on air in 2013, and we will also be in the online space.
Now advertising is certainly only part of the story here. What I want to do is drill down and talk to you a little bit about the overall client experience that we bring to life. We work across our 10,000 advisors every day to bring this consistent experience to life, and it really is around three simple words but really a very robust experience called Dream, Plan, Track. We start by really understanding the consumer, and that is embedded within our financial planning approach. There are four key areas to this experience. The first is around delivering personal high quality advice; the second around developing customized solutions with a comprehensive set of products and services that we have; the third is around delivering service when, where and how the consumer wants that delivered, and then finally developing a personal contact strategy that really provides that meaningful contact that we know builds both satisfaction and loyalty with our company, as well as advisors. So let’s drill into each one of these a little bit.
The first one around delivering personal high quality advice – this is through our financial planning approach. As you heard from Jim, we have pioneered this approach through the 1970s and 1980s, and we believe today this really does differentiate the way we go to market. We start by listening to clients’ goals, their needs, their dreams, and then we develop a personalized plan around those goals and dreams that really then and only then can we talk about products and solutions to map to those. Given our scale as a number five player in terms of our advisor force, we believe that our advisors are best suited to go to market with this unique approach. We also have more certified financial professionals than any other firm, and this creates an even more powerful position for us to go to market.
The second element is around these customized solutions. We have a comprehensive set of products, both ours as well as other companies’. We offer everything from cash to investments to insurance and importantly tax planning. Our advisors then are able to customize a set of solutions for clients based on the financial plan that is developed.
The third element of our experience is around delivering to clients when, where and how they want to be served, and this is an area that Jim mentioned and we have invested significantly over the last seven years. We traditionally have been a face-to-face business, and we still are a face-to-face business; but what we like to say is that we need to play in the new face of face-to-face, which is in a digital world. Technology is rapidly evolving around us and we need to be where consumers are. The foundation for this infrastructure is around our Thomson Reuters brokerage platform, which we’ve just converted our 10,000 advisors and 2.5 million clients to over the last two years. That’s no small feat, but it really has given us a tremendous platform to work from.
In addition, we have built a robust digital platform that starts with our award-winning advisor website, and for most clients, the advisor website is the front door to Ameriprise. In addition to that, it includes a new client dashboard where clients can see 24 hours a day their activity. They can look at the information that we are posting. They can look up research, and importantly they can collaborate with their advisor in real time. We have a mobile experience that we’ve introduced to market, and through the Thomson platform we have significantly enhanced our research and trading capabilities. We’ve also brought to market through social media on Facebook, YouTube, Twitter as well as LinkedIn a way for us to continue to augment and tell our story.
The fourth area of the experience is around providing regular meaningful contact, and this is a really important piece of the entire experience. Across the board, research tells us that contact is a key driver of satisfaction, loyalty, and ultimately referability; and you all know our business is primarily built on referrals. In a recent competitive study, we were really pleased to see that Ameriprise ranked among the top brands for meaningful contact, the right amount of contact, and then also the preferred contact methods.
So ultimately, what does this experience deliver for us? As you saw from Jim, we’re generating solid growth in terms of client assets and the growth in client assets has been significantly contributed through our growth in the mass affluent and affluent client segments. Total mass affluent and affluent clients’ assets are up 79% from 2005 through September of 2012. Mass affluent and affluent clients are up 37%, and our average assets per mass affluent and affluent client is up 31%, driven by a larger part of the pie being in the affluent market. It’s also leading to significant client metrics – 92% total client retention, 90% client satisfaction, and 62% advisor net promoter score, which essentially tells you how many clients would be out there promoting you and referring to an advisor’s business.
So I’ve told you a lot about the client experience, but I’d like you to hear directly from some of our clients. We’ve put together a video of some client stories. I though this would be helpful for you, so could we play that video?
So let’s turn to talk about our advisor force. First as you know, we’re a top five branded force in the market. Perhaps the largest differentiator for us is the fact that we have two ways to affiliate, both as a franchisee as well as an employee. And as you can see here, our franchisees are the vast majority of our advisors; however, we have both platforms and they are both very strong career choices.
Now amid some challenging advisor trends in the marketplace, we do feel that we’re very well positioned. Let me just highlight a couple of them that we’re aware of and that we’re dealing with. First, we’re in an industry with flat to declining advisor population, and Ameriprise has very strong advisor retention rates, as you saw from Jim, thanks to our succession planning as well as our teaming strategies. Secondly, while there is significant movement between firms on an industry-wide basis, Ameriprise has overcome this trend and we really are a go-to firm. We’re offering multiple affiliation options, open product architecture, a very strong brand, a trusted brand, and one that has made it through the financial crisis unscathed. And thirdly, as we experience a shift from transactional business to a recurring revenue stream, we offer a comprehensive set of financial solutions and those are what clients are looking for today. In fact, we are the leading provider of our wrap product with over $100 billion in assets, and we have very strong net flows this year.
Now let me talk to you a little bit about our advisor value proposition and the different elements that make that up, and it really does start with a nationally recognized brand one that is trusted among consumers. We have a significant level of local marketing support that we’ve built over the years for our advisors. Our advisors’ practices are supported by a robust set of comprehensive products and solutions as well as an integrated technology platform creating significant efficiency in their practice, and this is all supported by a very robust field leadership structure as well as a corporate office structure that they can depend on. We also offer tiered recognition programs for top advisors and support for practice profitability.
Now as Don talked about last year, we are focused on driving growth and profitability among our advisor force. We are recruiting experienced advisors like we’ve never done before, and we are identifying those advisors that really can deliver the proposition that we have in the market through financial planning. We have industry-leading advisor retention rates in the 94, 95% range, and ultimately we are focused on improving those rates of profitability as well as productivity.
As it relates to experienced advisor recruiting, Jim showed you these numbers. This year, trailing 12 months and as of September, we have about 419 experienced advisors who will be joining us, and our pipeline remains very strong. The advisors that we’re bringing onboard today have larger books than they did a year ago, up 24%; and we’ve been named the number four firm in a recent cogent study as an attractive destination for advisors looking to shift broker-dealers. So we feel very good about the work that we’re doing in this area, and that’s leading to a broader story around our advisor productivity and the improvements.
You heard Jim talk about our operating net revenue per advisor remains very strong, and we’re continuing to help advisors grow through new client acquisition programs, deepening relationships with existing clients, and these are focused on our overall retirement strategies. We’re also helping advisors run their practices more efficiently with a lot of the new tools and capabilities from a technology perspective that we’ve invested in.
So again, I’d like to show you a short video of some advisors that have joined our firm, as well as some that we have had with us for many, many years and have them tell you a bit of the story. So can we play that video?
So to wrap up, we feel Ameriprise is in a very powerful position. We’re the largest financial planning company with more certified financial professionals than any other firm, and we are also a leader in retirement solutions, which is really the sweet spot for our overall target market. We’ve also been recognized from some key external sources for the experience that we bring to market. We’ve been recognized as the number 3 full service investment online brand, which is pretty amazing for a company that just seven years ago really didn’t have a great digital strategy, a top scorer among financial advertisers and also the winner of the prestigious David Ogilvie Award. So putting this all together, we feel great about the position that we’re in, about the opportunity that is ahead of us, and about the future growth that we have an opportunity to capture.
So thank you very much, and what I’d like to do is turn it over to Ted Truscott, who leads our global asset management firm and he’ll talk to you about that. Thank you.
Good morning everybody. Let’s go to the first slide. What I’d like to do in talking to you about the asset management business around the globe and its ability to be a growth engine for Ameriprise is to focus on the drivers of the business. You all know that investment performance is key. If you don’t have investment performance, you really don’t have much of anything; and we’re going to spend a lot of time dissecting the performance here and, quite frankly, giving you a lot more detail around how strong the performance is across the platform. We’re going to talk about the product line. One of my colleagues likes to say that product is essentially the axle in between the two wheels of distribution and investment of performance, and what we want to do there and what we are doing in the product lines today. Talk to you a bit more about our distribution capabilities around the globe, what we’re doing to try and drive net inflows, which I know is very, very important, a key driver in the business; and then of course what we’re doing financially because we keep an eye on how we run the firm financially, an eye on the expenses particularly in this difficult environment, and an eye on the way we can enhance revenue going forward.
So Jim showed you a version of this slide earlier -$461 billion in assets. We show you this from 2005. I joined this company in 2001. If you look at where we were in 2001 and where we are today some 11 years later, we’ve really made very, very good strides in growing this business. Importantly, we have a very competent management team at Columbia and Threadneedle, one of the best teams I’ve ever worked with, and I have a lot of confidence in this group both from the investment and non-investment sides of the business to continue to drive our agenda going forward. You can see the breakup I assets among Threadneedle and Columbia, as well as the cut between fixed income, equities, and a smaller alternatives business.
This next slide is arguably the most important one that I’ll show you because it shows you what our strengths are and where we have opportunities to improve. We have very good investment performance. Now, it doesn’t seem to be well recognized for that, so we’re going to spend some time showing you why we have strong competitive investment performance and why that’s an incredible base off of which we can build. We have a very broad traditional product line – we can do more with that, very high client satisfaction, very good gross sales levels, scale in our home markets – very important – and a very deep and skilled management team around the globe.
What can we do, though? What are the opportunities to improve? We can enhance that product line, and we’ll talk to you a bit about what that looks like. We definitely need to strengthen the brand, what we stand for, and what our competitive performance truly is. We want to drive profitable net flows – the key word is profitable net flows there. Anybody can get flows at a sub-scale margin. We want to have profitable net flows. We want to grow our global footprint. We’re focusing a lot more on what Columbia and Threadneedle can do together, and then we want to improve our distribution economics which is a key part of that financial metric that I was talking to you about earlier.
So let’s talk about performance, and we’ll start with this slide which shows Columbia and Threadneedle. If you look at the Morningstar ratings, we’ve got 53 out of 113 funds rated four or five stars in the U.S. You’ve got 63 out of 90 offshore funds at Threadneedle rated four or five stars. You’ve got the breakdown across various asset classes over the one, three and five-year periods in the top two quartiles of Lipper or Morningstar, and that’s a very, very important metric. Performance is very, very strong at Columbia and Threadneedle. It’s not as well recognized as what we would like it to be, and I wanted to show you a couple other ways to look at this to help drive home my point.
This is essentially our goal. Our goal within Columbia is to have 60%-plus of our funds in the top two quartiles over the one-year period, 65% in the top two quartiles over the three-year period, and 70% of our funds in the top two quartiles over the five-year period. Now what is that essentially saying to you? It’s saying that consistency counts. As you all know, there’s a survivorship bias in this industry, number one; but number two is because the industry is largely inconsistent, the greater amount of consistency that you bring, the more you are able to achieve those goals. So if you’re good on the one and the three, by definition your five is going to be very, very good, which is why we upped that target. We start at 60, we go to 65, we go to 70.
So we decided to show you using data that is publicly available what we look like against key competitors. So if you look at this chart, essentially green indicates that you’re 60% or better in one year, 65% or better in the two-year, and 70% or better in the five-year. If you look at this on the one, three and five, we’re basically ahead of our goals. On the one and the three, we’re one percentage point below the goals, and we are two percentage points above the goals on the five-year basis. You can see how we rank against key competitors in the industry.
Let me show you the next slide which is even more important, and this is we have removed sub-advisors in our platform to show you this data again. You can see that once we remove those sub-advisor performance records, we are well ahead of our goals on a one, three and five-year basis; in fact, it’s some of the best performance in the industry. So one of the things, if there is anything that I would like you to take away from this presentation, is that we are up there with all the folks that we would identify as our key competitors, all the folks we keep an eye on in terms of what they’re doing performance, product, distribution-wise, and these slides we put together and we’re not only showing them to you, we show them to our fund boards as a way of tracking very, very strong, very competitive performance. Colin Moore, Mark Burgess and their teams have done a tremendous job of bringing consistent and very competitive investment performance. This is the table stakes, folks. If you don’t have this, I might as well not even be here talking to you, and that is a very, very strong way to grow this business is to continue to promote – and by the way, deliver – on that investment performance.
So let’s move on to our product lines. As I mentioned, we have between Columbia and Threadneedle a very broad traditional product line with good performance, but we have lacked some key areas, many of them with the word global in front of it. We have what I would call more traditional asset allocation products that I’ll talk to you a bit about in a minute. We have emerging markets track records in both equity and debt, but not well promoted and not particularly long, and we have risk aware solutions that we have identified and marketed to the various customers out there, but again those track records need to be promoted better.
So we’re really focused on two things. Number one, we need to expand and, if you will, cultivate that more traditional product line; but number two, developing more of the multi-asset class solutions that are in demand out there today. So let’s give you a little bit deeper cut on this.
Here is how we’re evolving the product line to meet essentially the areas of demand. The blue indicates where we have products that are both strong in terms of flows and we’re meeting or exceeding industry averages, and you can see that in U.S. equity, U.K. and European equity, U.K. fixed income—sorry, U.S. fixed income, U.K. European property, we tend to be doing very, very well. Where can we build upon and where can we cultivate more? Well, we’ve got a very strong number of assets in the asset allocation and managed fund space, but we need to commercialize that better. We have all of this expertise that’s gone into developing discretionary wrap programs for Ameriprise, variable annuity, asset allocation portfolios, managed funds for various Threadneedle clients. We have that expertise but we need to commercialize that more. We need to tell the marketplace about this expertise, and by the way, we need to get beyond, if you will, things that are more shaped as fund-to-funds products into multi-asset class products and use that expertise that we have today to deliver more of the multi-asset class solutions that people are looking at. We need to do better in global and international as well as in the emerging market equity and alternative space.
So what have we done and what are we going to keep doing and develop further? Well, what we’ve done is we’ve had a very, very big consolidation effort as a result of the merger of Columbia and Riversource. We merged and liquidated over 80 funds after the initial integration. We’re going to do 18 more mergers planned in 2013. That’s taking that product line, simplifying it a bit, making room for products that we either can add to the shelf or commercialize better.
If you look at expanding and cultivating the traditional product lines, we’ve repositioned some funds. For instance, we’ve taken a strategic investor fund and turned it into a global dividend opportunity fund that’s playing into the global wave, essentially very, very heavy cash balances being on many companies and paying those dividends out to investors. We’ve launched a global small cap capabilities, a flexible capital capability, and we’re going to continue to strengthen the non-U.S. capabilities – global, international – build on strong records in emerging markets, and commercialize them more and take advantage of the active ETF line-up that we have. We’ve filed for 17 more active ETF strategies in addition to the five that we had as part of the Grail acquisition.
And then in the third wave that we’ve worked on here, and we really think of this as sort of a three-part story that we’re executing on here, is we have done a lot in terms of leading the way in advice embedded portfolios. The Columbia group and the broker-dealer at Ameriprise partnered together to create a discretionary wrap program called Active Portfolios. It’s been a big driver of assets across the firm, a big source of satisfaction for advisors. We’ve launched multiple multi-asset class solutions that are more recent – absolute return funds, risk allocation funds, and we need to continue to develop those multi-asset capabilities.
That is the area of high demand out there, and so as we cultivate that traditional product line and then develop more products, we want to get in the way of where most of the flows are these days. I’ll show you a bit more about that in a second. But beyond that, we also have to get out there and tell our story to people, and we’ve been doing that both at Threadneedle and Columbia. If you pick up most of the trade journals as well as your Berens (ph), you’ll see that we’ve been running a lot more advertising in the U.S. We’ve been doing the same thing in the U.K. We are planning in the coming year to spend even more dollars on business development. The basic fact of the matter is that more advisors – and remember, we deal mostly with intermediaries and institutions – more intermediaries and more institutions need to hear our story, and we’re going to keep doing that.
So let’s talk about the distribution strength that we have and how we can further expand those capabilities. Here’s some just basic facts for you. We have very strong inflows, and this is on a gross basis – 99 billion in 2011. Please deduct 14 billion as the take-on of the Liverpool Victoria assets that we did with Threadneedle over the last year, and then you can see what we’ve done year-to-date in terms of gross flows. We sell a lot of product here. We sell a lot of product and we’ve got a very strong distribution network, both institutional and retail at Threadneedle, at Columbia. Very strong leaders that we have in Campbell Fleming and Chris Thompson, Jeff Peters and their teams in essentially selling as well as a dedicated person that we put against some of the relationships I’ll talk about in a minute, Amy Youngquist (ph). And we’re doing quite well in terms of how much we’re selling and we’re also doing quite well in terms of cultivating, I think, four very important relationships for us.
I think that you all need to look at these four relationships that we have as a really nice base off of which to build an expanding asset management business. We’ve got our Ameriprise relationship. We’re the home team, if you will. That doesn’t mean we get a lot of favors from it, but what it does mean is that we continue to be the number one seller in the system. We’ve got to fight for every dollar and I intend to fight for every dollar, and by the way I intend to continue to use somewhat of a bully pulpit that I have within Ameriprise to get those dollars. I’ve cultivated a lot of relationships with advisors over the last 11 years, and that’s been deliberate on the part of Jim in asking us to do so and deliberate on the part of essentially making sure that I get every dollar that I can out of this system.
Number two, we’ve got a strong relationship with U.S. Trust. As I mentioned earlier, Amy Youngquist has been the point person on that for us, and that is a very, very strong relationship for us. Again, leading market share there, just like we have at Ameriprise. That’s the result of essentially the way that Columbia was integrated with U.S. Trust when it was part of Bank of America.
You all know about the Zurich relationship. Granted, this is a closed book, but we continue to manage essentially all of the policyholder assets for Zurich, a very, very strong base off of which to build and essentially a great platform from which we’ve diversified the business at Threadneedle. And we’ve taken that expertise in managing insurance assets and added a new client here – that’s Liverpool Victoria. Again, a very, very strong relationship, and again we have dedicated people at Threadneedle like Andrew Nickle who spends time looking after the Zurich and Liverpool Victoria relationships. So we are very, very interested in continuing to cultivate these relationships, and by the way it’s a great base off of which to continue to grow and diversify this business. A lot of our competitors do not have this base off of which to operate, and I think it’s a big, big strength even though, quite frankly at U.S. Trust and of course already at Ameriprise, it’s largely an open platform. There is no freebies – you’ve got to compete for it, but because of that strong relationship I think that we have a good ability to develop the business further.
Now what are we doing on the intermediary side? We have 200-plus people at Columbia going after that intermediary space. What do we need to do? We need to expand our platform sales. So we’re very good at what I would call belly-to-belly wholesaling, but we need to get better about getting through those gatekeepers, if you will, that institutional sale of a retail product in order to build assets more. We want to be essentially a top 10 provider at all of our focus firms, and that is a key initiative that’s ongoing for us and one that I think we’ll succeed in, and we’re going to marry that with improving wholesaler productivity. We get market metrics data just like everybody else out there. We know what our wholesaler productivity is. We understand how we can adjust it for the relative advantage we have in the Ameriprise system, and we want to grow that wholesaler productivity beyond what it is today. And by the way, having better platform sales will essentially help us get part of the way there. We know that some of our key competitors that boast very high rates of wholesaler productivity also have very strong platform sales, and we want to do that.
At Threadneedle, very established retail seller. Key relationships with intermediaries across the U.K. and increasingly in Europe. Number one seller in retail over the last quarter – very proud to see that on Threadneedle’s part, and we’re very, very pleased at what we’re doing there.
On the institutional side, the good news was Columbia and the Riversource company were rebuilding their institutional products at the same time, and when we married the two together and put the business under Jeff Peters, we essentially have got exactly what we need for an institutional business - $121 billion of assets under management, 70-plus people, very strong 300-plus clients. We’ve doubled the amount of consultants that are rating strategies by over the last year, and we’ve got a very robust and growing pipeline and a 96% client retention rate, which is huge in the institutional business.
At Threadneedle, we have more funds rated by consultants, but quite frankly we need to tell a better story on the institutional side around what Threadneedle is capable of doing. We are refining that go-to-market strategy and we are winning large mandates in various parts around the world, including Asia and the Middle East. So we’ve got some more work to do institutionally, particularly operating that business with more of a global eye, but a very, very strong business that we have that we are going to continue growing as well.
Now, net inflows – it’s a daily focus, and what we wanted to do is give you some sense of where we stand vis-à-vis the industry for net flow dynamics and some idea of what we think we need to do to get into that profitable net inflow space. IF you look at the industry, year-to-date long term mutual fund flows – minus 2% in the equity space, 11%-plus positive in the fixed income space, 2% in hybrid. Columbia minus 16 in equities, plus-5 in fixed, and 1% in hybrid; but what we’ve done is we’ve taken the large and previously disclosed items to you, including parent assets going away, the New York 529 plan, the value and restructuring fund, and we’ve deducted those to show you were we stand vis-à-vis the industry after we remove those large one-time items, particularly the former parent assets that have gone away. We still have plenty of room for improvement, folks, but when you look at that, we’re not far off the industry from an equity perspective, not that far off from a fixed income perspective. Fixed income flows have been very strong this year and positive, and the hybrid space we’re not too far off the industry there, but again some of that is getting into that multi-asset class space that we need to do.
Another way to look at this is we wanted to show you Columbia and Threadneedle flows in terms of strengths and opportunities. So where is Columbia outperforming? Well, Columbia does have the reputation of having a very strong equity performance record. Now by the way, our fixed income record is very strong, too; it’s just we tend to be better known in the equity space. We’re trying to change that perception right now and I think we have the performance to do it, but we are known for having some strength in equities. And in the equity income space, you can see on here what our year-to-date net inflows are – 1.8 billion. That’s a 16% flow rate and essentially 8.5% of beginning of the period AUM. We compare that against the industry where total net flows are 14 billion, 9% flow rate, and 2.2% beginning of the period assets. And I won’t read the whole chart to you, but you can see that we’ve dissected this on where are we outperforming the rest of the industry and where are we in line with the rest of the industry, like U.S. mortgages and high yield, et cetera, and then where are trailing the industry. And notably on here, emerging markets – we had $58 million of outflows, and you’re looking at a category that had $16.7 billion in inflows.
Now we have emerging markets track records in debt and equity. We have not commercialized them as well as we could. Some of them are still in the process of being grown, and we’ve had teams that I would describe as sub-scale that we have already fixed and have a better go-to-market value proposition than we had just a year ago. So we are very much focused on where the flows are in the industry and what we have to do, and do in an ongoing way, to improve in this area.
Now I’ll show you Threadneedle because we dissected it the same way for you. You’ll see a very, very strong North American equities result, very good flows into that product, and again something that we’re outperforming very strongly a bunch of other equity strategies at Threadneedle also doing very well against the industry. We’re in line in the bond area and a couple of other pieces of asset allocation and most notably fund-to-funds. So how do we define fund-to-funds? It’s basically any fund that invests 80% of more of its assets in other funds. So again, what I would call a more traditional asset allocation approach as opposed to the multi-asset approach that we’d like, and you can see where we’re trailing the industry. We go down to asset allocation other, which is essentially multi-asset class, and you look at that – 4 million in inflows in a category that attracted $10.3 billion in inflows.
So one of the things that I want to get across to you is, look –if you take a look at the industry, sometimes it’s one, two or three strategies that are the difference between a firm being in inflows versus outflows. And if you look at the industry data, it’s very clear that if you get in the way of those flows in the areas of high demand, you can truly change the game for yourself. So I’m proud of everything that we have at Columbia and Threadneedle. I’m proud of the product line. I’m very proud of the performance, but where we need to go with this is essentially offer more in the areas that are in demand, and in some cases commercialize it better. We know how to do asset allocation – you’ve seen the assets under management in this presentation. We just need to commercialize it better and do more of the multi-asset class strategies for people and take advantage of that expertise; and quite frankly, I think that’s going to make a big difference for us going forward.
Now you’ve got to keep an eye on the P&L, right? And that’s as important a part of what we do as anything else. One of the things I wanted to reemphasize for you is not only did Columbia realize all of the expected revenue and expense synergies, and they are considerable, but we’ve continued to focus on how we can maintain a very strong expense discipline, take out unnecessary cost, reinvest it in things that will give us a better result, or just take out cost that we don’t think is necessary. And we understand the financial dynamics of this – we’re dealing with a net outflow situation, so you have to take a look at what you can do on the expense side to offset some of that. We can’t always offset all of it with expenses, so you’ve got to look at revenue enhancements. And we have explored and been able to get some success in essentially what I would describe as revenue enhancements across mostly the retail product line, and that’s been a key driver. You’re beginning to see some benefit of that in our 2012 results. You’re going to see more of it in 2013, and the fact is that some of that is going to be offset by net outflows but some of that essentially is going to become very visible to you. The expense piece of this should be very visible to you if you look at direct to profit center expenses.
With Threadneedle, they’re doing a fine job of diversifying beyond the former parent, Zurich. We want to increase that non-U.K. revenue and capture some longer term European mandates, and of course we also are working both Threadneedle and Columbia at expanding in Asia. Again, expense discipline is the watchword at Threadneedle, too, and I don’t think any asset manager can talk to you about this space without talking about expense discipline.
We are in a very challenged environment today. I don’t think I need to tell you guys that, but it’s not exactly the 90s anymore; and I think asset managers need to keep as close an eye on the P&L as possible while making sure that we deliver on all the things that we just talked to you about here.
So key takeaways – we’ve built a very strong, competitive global asset manager and I’ve got to give kudos to Jim for basically being relentless on this strategy over the last 11 years. We’ve come a long way in 11 years, and not all of you have had that long a history with us over that time period; but I look at where we were 11 years ago and where we are today and the fabulous management team that surrounds me and supports this business, and I’m extremely confident that we have the ability to execute on all the good stuff we have going on, particularly that investment performance and do even better going forward, particularly in that key area of net inflows.
And so we’re executing on this strategy. We know who we are. We know what we have to do, and we’re very resolute about it, and we’re going to take advantage of the increasingly global nature of this business by doing more together, both Columbia and Threadneedle going forward.
So what we’re going to do now is first of all thank you for coming to this event. We’re going to have a 15 minute break, and then we’re going to come back and have Walter Berman take you through the financials, and then we’ll do Q&A.
Okay, see you in 15 minutes.
All right guys, let’s go. I’m between questions, so let’s get going. Come on, Alex.
Good morning. We actually stayed on schedule and it is still morning. So I’m going to close and actually attempt to demonstrate to everybody, building on the presentations of my colleagues, taking a look at our past, our current situation, and our future ability to drive shareholder value. And basically, we made very good strategic decisions and we delivered strong results with headwinds. We invested both organically and non-organically in difficult situations, and they’ve proven to be very effective investments. And I’m going to demonstrate that we actually have evolved to a more efficient use of capital through this entire process, and we certainly compare very well to our peers and we are positioned extremely well for growth.
Starting with this slide, and this is really just taking us back to 2005 and working our way through, and it’s interesting to take a look. So if you take a look at the bottom of this and really take a look at the environment that we operate in, and certainly for a financial services firm, the S&P is certainly a good surrogate and certainly the Fed treasury rate yield. Back in 2007, certainly a good situation – 1477 with good interest rates at almost 5%, which for treasury rates, that’s really great, we would certainly want it today. We have navigated very well both on an operating basis and on a capital basis, and certainly have demonstrated to not only maintain our rating but actually improve the ratings over this time frame in difficult situations. And that has given us our building blocks to move forward, so we really generate strong growth in that income, strong growth in profitability, and kept our capital ratios extremely well and actually grew our return on equity by over 600 basis points.
That point is demonstrated quite profoundly by taking a look at the underlying growth of our balance sheet elements, and here I’ve chosen AUM/AUA, and seeing that that has grown from 428 billion to almost 678 billion over this time frame. At the same time, our available capital has basically stayed virtually the same. Our excess capital, while all these different calculation methodologies have been applied, has doubled and we’ve returned to shareholders over this period over 5.2 billion net. So to me, I think that is effective management of the company and giving the company the ability to grow on an operating basis with a strong foundational capability.
This has manifest itself from the standpoint of looking from 2009 what we’ve returned to shareholders as a percent of net income, and here you can see we’ve turned 112% and that compares quite favorably to our peers both in asset management, wealth management and in the insurance area. And as you move over, as we’ve announced, our shifting to give higher dividends and rebalance that return to shareholders, you can see at 3% we compare quite favorably to asset management and certainly to advice and wealth management and insurance premiums during this same time frame.
Now I’m going to move on to the building blocks of the firm, which as we talked about and Jim has talked about, I’m going to start with advice and wealth management. Clearly over this time frame, we really have really had exceptional good growth in difficult situations, but we certainly have managed to reshape the business and grow the business from a financial capability and operating capability, as you can see. Operating net income increased from 2.5 billion to almost 3.7 billion over this time frame. Pretax operating income, as Jim has demonstrated, going from 20 up to almost 407 million, and then our pretax operating income growing to 10.8% from 0.8 back in 2005.
We have tremendous upside as it relates to growing our operating margins based upon adding experienced advisors, productivity, managing our expenses, and really the upside with our large sweep accounts once the interest rates start hopefully improving.
I’m going to use this chart to really help demonstrate not just the value that I place on the firm, but it’s on an absolute and a relative value. So when we do compares to our peers in the industry as we take a look at it both on metrics and our operating income, I believe we compare quite well, and as is demonstrated on this slide looking at the operating net revenues, looking at per advisor operating net revenues in total, and looking at the operating earnings. You also take a look that the business construct of these businesses from our standpoint are not geared to heavy capital situations. While we have strong capital, our business base is not predicated on having heavy loan capability and other aspects of that, which gives us tremendous leveraging capability, and also avoid exposure profiles are requirements go up in the industry.
So when we take a look at their PE multiple and evaluate it and looking on a trailing basis and apply it to us, I’m using this as a reference point to talk about what the value that we have, looking at the attributes that we have. We have a business that if you compare is worth close to $5 billion - $4.5 billion. And I’ll show you why I’m doing that, because as we start evaluating different aspects of how we apply our capital and why we apply our capital, you’ll see as I evolve it because I’ll show this chart two other time as it relates to two other businesses.
As we move on to wealth management, I’m not going to spend a lot of time here. Clearly Ted has demonstrated with Jim that certainly our operating margins compare favorably to the industry when you look at the other aspects of sub-advisor, pass through aspects, and on a comparable basis we feel comfortable with it. We’re certainly looking to strive and improve it, and we have the opportunity to do that with the capabilities within the business, both from its global nature, the scope of the business, and certainly leveraging off the revenue and expense capabilities that we believe we have.
Again, using this same chart and comparing it to peers, you can see that we compare quite favorably; and if you take a look on both the operating aspects of this and take a look at the performance aspects that Ted has talked about, we have—while we have 116 four and five-star Morningstar funds that are in the four and five category, comparing it on an apples-to-apples basis just for domestic 53, it compares quite well, so that’s a strong driver on that capability, as Ted has indicated. Again, we have a strong underlying capability from a balance sheet standpoint and certainly as demonstrated with our ratings, and when you apply them all, so here again, you get to a situation looking at this business, it’s over $5 billion.
Let me move on to protection. Protection and annuities are a key element and a key important factor within the portfolio effect of our company. They are designed to help our solution sets with our customers. They evolve to allow them to meet their needs. We have taken a very strong balance between managing risk and meeting our clients’ needs, as manifested with our 90% reinsurance, and certainly looking at the limited death benefit on universal life and the limited GM (inaudible). We’re very conscious of meeting our needs of our customers but also balancing our shareholder responsibility.
We also have a very diversified revenue source as it relates to not just having life and health – we have auto and home, and also it is diversified from the standpoint of investment income, premium income, and based upon fee income. We feel quite comfortable with the mix of these businesses. They are geared for accumulation and they are geared to meet our clients’ needs. That differentiates us from, I believe, our competition.
Going further down that path, as you look at the attributes of variable annuities, you can see there’s a clear distinction from our standpoint of what we balance to meet our clients’ needs, we also are meeting our shareholders’ needs by looking at the attributes and not getting to, what I would say very aggressive characteristics within the portfolio, but we balance it. And here you can see that 47% of our book does not have living benefits. One hundred percent of living benefits policies require asset allocations, and probably a key factor – living benefits represents now the net amount at risk is 1% compared to the industry that’s close to 12%, and that our withdrawal rates are close to 60% of the industry. These are by design, but they’re also by design to meet our customers’ needs also because they’re different aspects that we provide.
We have the ability to navigate, and certainly as we look at evaluating our exposure profile as it relates to the protection business, the annuity business – and I’ll show you in the next slide – that we actually have the capability to meet stress needs, and that is done on—and that’s constantly evaluated.
We manage our interest rate exposure. You can clearly see here, back in 2008, 2009, we adjusted our profile back in the 2009 period actually to lower our guaranteed minimum interest rate to 1.5%, and those will be re-priced in the 2014 time frame.
Again, showing this same chart against our peers and looking at the aspects of the operating earnings, looking at the balance sheet, the RBC, and the other factors, and certainly looking at our ratings as it relates to that, we feel quite comfortable as we look at the product and look at the product features and the velocity of impact that we could have in different stress situations, and on that basis using the averages that—using on a trailing basis, it’s $6 billion.
Now here’s a chart which I’m actually going to tell you something new. We started off back in 2005 talking about we had more than a billion dollars. Then we evolved to more than 2 billion-plus. When we review the product, when we assess it as you saw in Jim’s slide, we generate a return of 20% on the $3 billion of required capital. We also run our models, as we’ve talked about many, many times, about over a multiple year situation, looking at multiple stress. Within that, we’ve determined in that level that that plus is between 400 and $600 million over and above the $2 billion that we talk about as our excess. This is constantly run each quarter and evaluated to ensure that we have that capability, and it’s assessed as we look at our use of resources and use of capital.
So now let me try and address some of the topics which are certainly from our standpoint questions have been raised about it, and certainly are plaguing the industry. First, low interest rate environment – for us, certainly we have disclosed what the situation is from a low interest rate environment. It is impacting us, but in 2012 we’re totally on target and in 2013 it will go a little higher, from 40 million to $55 million. But when we compare ourselves to our peers based upon their public announcements, the percentage of our projected net income as we move forward is substantially under what we’re seeing. Some of our peers are projecting that it will be close to 10%. It is obviously nowhere near that as it relates to our activity. And the key element here is we’re not changing the fundamentals of how we manage the business, both from an AUM, credit quality – any of those standpoints in order to generate our yield. We are staying true to making sure that we can manage our exposure profile.
The same thing as it relates to managing our expenses – we’ve demonstrated in the past that we have the ability to manage our operating expenses, G&A expenses, and manage them effectively as we look at reengineering activities and actually improving the capabilities that we have to handle and meet our clients’ needs, as Jim has mentioned with the introduction of our new broker-dealer product capability and other things that we’re constantly doing to streamline and to give our clients and advisors better ways of being user-friendly and providing capabilities to them. But the key element that we do, and we’ve talked about it before, it’s the amount that we will then allow to fall to the bottom line. We are constantly investing, but we then have the choices, depending on the circumstance, depending on the revenue, to allow that to more flow to the bottom line.
So if we look where we’re going and how we’re going to manage our capital, which is a key element, certainly in the future as we see it today, based upon the market, we will continue to generate 90% of our earnings as free cash flow. We plan to deploy 90 to 100%-plus, but we also realize that holding onto $2 billion is not the most shareholder opportune situation for us, and with the capabilities that we have, we plan on deploying that either through certainly share buybacks or other opportunities that evolve. As Jim has indicated, we will remain disciplined on how, if we are looking for acquisitions, what those acquisitions and standards that will be applied to achieve (inaudible).
Certainly questions have been raised about our return. We have announced that our targeted returns are in the 15 to 18% range. Certainly as you take a look this year, we’re in the 15% range. As you know, we did have a fairly large write-off of DRD, which is a one-time item; but looking forward again, I’m not projecting but certainly I see we have the ability to substantially improve that as we move forward when you adjust for the DRD, and certainly if we start deploying more of our excess capital.
This next chart is really—I designed it, so if you don’t like it, you can say so. Actually, I prefer you don’t, but--. When I showed you the charts before about looking at our PE ratio, what I recommend to management is what I feel is the most effective use of our capital, and it’s both on an absolute and a relative measure. I know our current value. I look on our value at a trailing basis, which is the second circle, and then I look at—excuse me, is the forward, and then I look on a trailing basis. No matter how I evaluate it, I do believe it is an effective use of our capital to buy back our shares. Certainly we’ll evaluate other opportunities as they occur, but we generate a lot of excess capital. To me as I look at the current value, this makes smart business sense to invest in our business when you look at the value that’s applied to the various components of it. And this is one of the charts that helps to demonstrate that as I discuss this with Jim and with the Board.
So in summary, we have a strong record of effective risk management and capital generation and growth. I believe the business model is well positioned to deliver on future growth and shareholder value. Our protection business and annuities businesses are unique and they have characteristics which distinguish us versus our peers and provide a unique capability for us. We have well defined excess capital positions and we monitor them constantly, and a differential return on equity with expansion opportunities. And then finally, I’ll say it again, I think we’re undervalued and it’s smart to actually deploy our excess capital to shareholders in this situation.
So with that, I’ll turn it over to questions. Jim?
Question and Answer Session
Thank you, Walter. So what we’d like to do now is open it up for questions. If you raise your hand, we’ll have a microphone come around and then I will either answer your question or forward it to the appropriate party in my management team.
Tom Gallagher – Credit Suisse
Thanks. Tom Gallagher, Credit Suisse. Walter, I guess just to start with your last comment on deployment of excess capital, so the 2 billion that you’re now talking about deploying that’s excess, can you comment around the time frame if no acquisitions come up, because obviously that’s sort of one-off. Does that suggest you’re going to step up the pace of buybacks?
It certainly suggests—yes, we will. We’re not going to commit that all $2 billion is going to be used in one year time frame, but certainly we feel it’s a smart investment to start redeploying that. Again, we generate a lot, so the answer is yes.
So just remember this year, just as an example, we are redeploying 130% of our earnings, and so we’ve been able to reengineer, so to speak, our capital base based on getting less risky, freeing up capital, diversifying our business, generating more free cash flow. So what we’re going to do is just think about how we continue down that path going forward, but at the same time we want to have flexibility in case something does appropriate come along that meets our acquisition criteria, similar to the past. But to Walter’s point, that’s why we are raising the dividend, we are deploying more than our earnings. We are freeing up now more capital because of the bank, and we want to redeploy that and put that back into the EPS, so there’s a number of factors.
(Inaudible) obviously environments. Environments do change, and that’s one of the things you would imagine as we do our stress-testing that that could put additional pressure, even though—again, we have the 400 to $600 million and we believe that will handle most environments. But again, if you’re looking at a 2008, we might obviously hold off.
Tom Gallagher – Credit Suisse
All right. Next question for Kim – just in advice and wealth, and maybe for Walter as well on the financial side, but you’ve been growing this business in part because of hiring the experienced advisors, and you mentioned that as your first bullet for having a lot more upside for your margins. What kind of margins are you getting on those hires, if we can think about it that way? Is it 2x your current margin or something along those lines, and how expensive is it to hire these people right now?
Yeah, I think there are two ways that we think about it, so to try to answer your question, and then if Don or Neil want to complement my answer. First of all, when we bring in a recruit, it takes a little time so you’ve got some of the upfront expense for the transition that’s in the P&L, and we’ve been having that in the P&L; and then as they ramp up their business, that starts to accrue in the sense of getting certain return and margin from them. So the ramp-up takes on average two to three years to sort of get to more of a full run rate by the third year.
Now in that regard, the reason they are profitable for us is twofold. Number one is based on the arrangements that we had with those deals, we are bringing in a profitable advisor in the sense that they have a book, they’re established and they can grow. Second of all, if we look at that within our employee platform, right now I reengineered that platform with the team and so we have a lot of capacity. So as we add more advisors to that platform, it covers my fixed costs and starts to actually accrue in margin, so right now we’ve moved that from a—moving from novices that was highly costly in the first number of years to one that we’re getting closer to a break-even for the employee channel; and once we add more utilization of that, it’s going to get into a nice growth and profit margin for us, and that will be part of the reason that we continue to grow.
The second reason our overall gross margin is growing is because we’re gaining productivity across the entire base, so not just for the hundreds of people we’ve been bringing in but across the 10,000 people we already have, okay?
Next question here, and then there and there. No, no – here.
Alex Blostein – Goldman Sachs
Thanks. Alex Blostein, Goldman Sachs. Wanted to first go back to the capital comments You guys clearly have been one of the best capital deployment stories in anything with 10 billion-plus market cap in financials. It feels like there’s been a little bit more of a preference toward the dividend or at least more appetite to raising the dividend, but I guess when you look at how aggressive your buyback has been, you could effectively keep your dollar amount dividend the same and dividend per share will keep going up by about, I don’t know, 10% a year. So is that the methodology we should be thinking about, or there should be continuous kind of mix between the total dollar amount that you are returning still with a little more towards the dividend every, and obviously keeping the buyback pretty robust as well.
So I’ll start and Walter can comment. We actually wanted to—we had a policy in place that it’s more of what we determined when we became public of how we think about it. And so we wanted to have a dividend that we would continue to grow every year, and there’s only year that we laid off growing it, was in 2009. So since that point again, we have been doing annual increases; in fact, now we’ve been doing them twice a year. And the reason we think it’s more important now for dividends is based on you, the shareholder, telling us. So as we speak to a number of investors, what we have been told is dividends have become more important based on the environment, you would like a piece of that continuing to grow. But our philosophy has always been to raise the dividend on an annual basis, so we want to continue to do that even though we would buy back shares and that would raise on that side.
So I would say we’re getting a little more complementary and putting a little more emphasis on the dividend. Now of course, I don’t know what’s going to happen in the world of taxes and dividend rates, but we’ll continue to speak to you, the investor, to find out what’s important to you, but we have the ability to do both.
Alex Blostein – Goldman Sachs
Okay. My second question, I guess is more on the broader strategy. I think we’ve tried making the sum of the parts argument on you guys for the last two years, that hasn’t changed a ton; and you look at the numbers you put out there in that circle, you were getting to about, I don’t, a $16 billion market cap. If the market still fails to recognize this value, what’s the appetite, I guess, to split up the business to recognize the value?
Well part of where we see—and that’s why we put together the presentation the way we did today, so that you can gain a better understanding of how we look at it and think of it for good reason. So first of all, we think the complements of our business actually add, so if you look at that one slide I put up that says what is our EPS growth, what is our earnings volatility, and you compare that against the advice and wealth management industry peers, the asset management peers individually, or the insurers, it’s better for us having this together, okay?
Second of all, if you don’t value what that insurance and annuity business, why would I sell it today at a low value? To me, I think it’s way differentiated against what’s out there in the industry, and so to me, I think at one point maybe people will recognize it more; but again, it’s not the growth engine of my company but it is a very important solid part. These are all my client assets, so they’re part of what we do in a detailed relationship.
The one thing—even if you compare it to the wealth managers Walter put up, one is a network as an independent that don’t own their clients at all – have no relationship with their clients. That’s not their client. Number two, if you look at the other company, those earnings are from investment banking, trading, and a very large banking business. So when you look at the retail business that we have, that’s one. If you look at the asset management business, we’re comparable to anyone out there and there’s a few that, yes, are better; but in general, our flows and everything for the other ones, we’re good.
If you think about the annuity insurance business, again, Walter gave you a lot of reasons why that business doesn’t have an overhang. Now in addition to that, just so we know, if you take that insurance business, we’re putting an extra level that we don’t need of contingent capital that we’re setting aside outside of the 2 billion just in case. So the overhang that people may think that is in this business, in our company, I don’t believe is something that in any way will damage our company, let alone juicing that base of earnings to actually use to redeploy over time, and that’s the reason why we’re together.
But you know, we’re always—we’ll think about things if it makes sense to.
Did you want to add something?
Yeah, I was just going to add, if you don’t mind – I was not fairly persistent about it, but if you sit down and demonstrate, you take a look at the advice and wealth management, you take a look at the asset management, and you start assigning implied values there, whether you want to use forward or you want to use trailing, and then look at the value of what’s left over – and certainly we’re taking into consideration corporate and excess and factoring it in. You get to a level of value that personally in my opinion – don’t take offense – is absurd because of the quality of what we have. These businesses certainly have challenges in these markets. We’ve demonstrated in every aspect of the way we manage this product and certainly what this product means to us within the firm and the attributes that are related to it, that if anything we should an equal value or a higher value. You can deal with growth, you can deal with risk – we’ve managed those elements within it, so I happen to believe we keep on being persistent about it, we’ll get there.
Sumeet Kamath – UBS
Thanks. Sumeet Kamath from UBS. Just a follow-up on the last discussion – my view of the sum of the parts argument is—I’ve had it for a while, but one of the issues that I do have with that is if you really want to differentiate yourself, you have to establish targets and you have to exceed or meet those targets. And so thinking about this investor day, I’m a little surprised that you didn’t sort of provide margin targets or margin guidance for asset management, advice and wealth, kind of like you did in 2009 because establishing those targets and showing that they are better than the peer group, and then achieving them or beating them, in my view, sort of crystallizes this sum of the parts argument that you’re striving for. So I guess my first question is why the change in terms of that approach?
Okay. Well, I’ll give you my answer and Walter has his color that he’ll add. Two reasons – number one is what we wanted to do was to focus on that we have delivered, that we continue to deliver, and the proof was in the pudding, so to speak – number one. For you, you’re very smart. You run very complex models, you understand the business well, investors understand the business well. So we figured this was a better way to portray to you strategically how we’re thinking about it, the decisions we make around it rather than just giving you an explicit number and margin for AUM, et cetera.
Second thing that comes about when we do that explicitly is this – very few people remember what those margins were based on, the environment that we’re in; and so things like interest rates, people kept on coming up to me all through this, and we’ve been able to hit them, like, 12% advice and wealth management – well, you’ve come in a little short. Well, we didn’t take 2 or 3% out of the margins when interest rates dropped through the floor. So at the end of the day, we become so wed to a number that we forget what we are doing and how we’re accomplishing on a relative basis.
The third thing I would just say is this – when Walter and I did that, as I traveled and met with certain investors here and around the world, we got a lot of lip for why did we do that. So I don’t know why, but other people just said, listen, why are you doing that? Just deliver, put it out there, show them what you’re doing. Don’t put just a number that every quarter you’ve got to sort of track to, per se.
Now doesn’t change our philosophy – we’re still going to track to it, we’re still going to give you the information, we’re still going to explain why. We’re still telling you that we’re looking for improvements in those margins, but I can’t dictate to you the equity markets next year, the interest rate environment, and a whole bunch of other factors that sometimes we forget about when we’re talking about a quarterly number or even an annual number, and that’s part of the reason.
Walter, I don’t know if you want to add.
Let me just take everybody back to 2009. We made a major shift in the business with Columbia and then with the acquisition of H&R Block, and we were trying to demonstrate to people there was going to be a paradigm shift, and we were trying to then demonstrate through—and we used in that particular case return and we used margin. And what Jim just said was right – everything then got sliced into components as it relates to, gee, you moved from 9 to 12 but you’re off a half a point – what’s going on? We normally don’t really give guidance of that nature, but it was so critical at that stage since we had Columbia, we had H&R Block, we were making a major shift in our employee channel, that to give people the essence of how we were shifting the business, and that’s why we did it.
And it seemed then while we achieved many aspects of it, it still has come back and—it’s been three years. He’s been terrible with me because when every—they said, gee, you were off a half a point, but that was the main reason.
You know, we tried something different. We’ll see how that works. But I would also say one other thing, that the sum of the parts versus what we did. What we just tried to say is we didn’t say we were better than anybody. What we said was we’re different, and what we said there is you can evaluate—so my retail business versus retail business. You can evaluate our asset management company, our profitability, the growth, the performance and all that. You can evaluate my insurance annuity.
The one thing I will say that maybe we don’t talk about enough is the combination. You’ve got to look at the uniqueness of this retail financial services company. The number of truly independent companies that is in our space at our size and scale, the earnings that we generate versus a very large multinational banking institution or a very small focus firm, and the combination we think is powerful because we think we can ensure that we can generate good cash flow, good earnings with lower volatility. And that to me makes it a sweet spot. You’re in asset management, you’re in wealth management, you’re in products with deep relationships with your client – that’s the reason I think if you go back to the years when Harvey Golub first ran the IDS company, put in by Sandy (inaudible) who had bought this company from American Express, that was why they did it.
And so that’s why this company, we’ve tried to really bring that forward. We’ve tried to evolve it, we’ve tried to make it really competitive out there and grow it globally and in this space, but that’s the unique formula of why I think this company is highly valued, or should be.
Sumeet Kamath – UBS
Okay, thanks for that explanation. So as I think back to 2009, there was obviously a lot of things changing and you were sort of anticipating those changes when you gave the margin guidance. So with that as a guide, should we think about the margin expansion story here at Ameriprise going forward to be more cyclical, it’s going to be driven by market levels and interest rates, or is there still structural margin expansion in the model; and if there is, where do you see it?
There’s still more structural opportunity in our model for expansion, so we’re not containing it. So as an example, we’re going to lose the bank. That’s going to take 100 basis points out of the wealth management. We think we’re going to offset that by incremental margin improvement not driven by interest rates and not driven by just growth in the market, based on what we told you we’ve been doing and that we’re getting good results in. So we’re continuing, we’re not saying no.
Same thing in asset management – Ted mentioned, yeah, we’re impacted by flows, we’re impacted by markets. He continues to focus his energy where he can drive profitable flows, where he can adjust his pricing appropriately, where he can adjust his cost structure, his distribution, the economics of how he can drive more assets there. And we’ve been impacted still – I mean, even now we’ve been impacted by things like the sub-advisor flows, things like that.
So we’ve got to overcome that more completely, but we see opportunity that we’re not sitting still. What we’ve tried to explain here are the things he’s going to do to try to continue to grow and expand that margin. So please don’t take away that we are not going to look for margin expansion from what we’ve been doing. That’s all we’re just doing, is not going after a new set of targets right now for that, but we still are living with the idea that we can get asset management margins better and advice and wealth management margins.
Sorry, I’ve got to get you—get him first.
John Nadel – Sterne Agee
Sorry, Jeff! John Nadel from Sterne Agee. So I guess one question on my mind is if we think about the 15 to 18% range, longer term or intermediate term type of range for ROE, how do we think about the building block to the low end versus the building blocks to the upper end, especially given a consistent level of capital management, maybe even more than what you’ve done consistently, it should drive the ROE higher as you eat into that $2 billion of excess. So how do we think about the key business metrics to the low end versus the upper end?
I’ll let Walter answer that.
The answer is you’re right – there’s no question if you take a look this year and as I mentioned, we had one big exceptional item, which was the DRD which has effected both sides, numerator and denominator. When you play with that, and assuming that’s not going to recur, and which I’m telling you that should not recur, and then you should see that moving higher as we stay in the near term and intermediate. And again, we’re not going to get into exact percentages, but certainly if you would look playing with the DRD, you would get into the 16 and then—
You’ve got the DAC on lock-ins, too, on interest.
Yeah, but again, DAC and lock-in, don’t know next year what it’s going to be. But clearly the DRD is not, and then—so you should see a progression on that basis as you go through. Again, speaking about with circumstances and things like that, even though we have capacity and certainly have elements within it, but if you get into a lot of the clouds in the environment, we’re going to back away, which you would expect we would do.
John Nadel – Sterne Agee
Is it fair for me to sort of paraphrase your commentary then, Walter, to say—
John Nadel – Sterne Agee
--we’re sort of leaving 15% behind unless market conditions deteriorate and dictate that it pushes margins on your business lower.
Well listen – if market environment continues to be—or get weaker per se, Walter has highlighted where we are with interest rates right now if interest rates don’t improve, right? So you’ve got that as a headwind. The second thing is we’ve been able right now as the equity markets have come back a bit, right? Everyone’s sitting here and saying, well, whether the equity markets is fairly valued or not, but relatively you would say that if things in the economy improve, then equity markets are at least reasonably valued, if not undervalued. If they don’t, then they’re going to be fall, in which case we will be impacted. We have $670 billion-something of assets under management. I think the key would be this that we’re saying to you – the strength and diversity of our business, the ability for us to manage the use of our capital, the ability for us to reengineer and tighten the reins gives us good flexibility just like we managed through the last downturn.
Now, I can’t say we’re not going to be impacted. All I can say is that I think on a relative, if you’re investing in these type of companies, I think we’re going to be situated well as we did through the last downturn to ride it out and invest. If that doesn’t come along, then we’re going to get some favorable upside because as Ted told you, we’ve got good equity product that could be sold. We have a wealth management business that client appetite right now is slow, but we’re growing anyway; and we’ve got a good insurance and annuity business that we’ve been impacted severely by interest rates but the book is still really good and solid, and we’re still getting good returns the way it is.
So that’s all I would think about.
John Nadel – Sterne Agee
Okay. And then if I can sneak two quick segment questions in. One, on advice and wealth management, experienced financial advisor recruiting, it seems like the runway there, the opportunity set remains pretty robust. I just would be interested in your characterization of the runway, disenfranchised financial advisors from other places, et cetera. And then separately for Ted on the asset management side, I heard you use the world commercialization a lot today. It sounds to me like maybe code word for some increased spending, and I would just be interested in sort of year-over-year what your expectations are on the G&A line as you think about that.
Don, could you answer about the pipeline and how we’re thinking about that?
Sure. So the climate right now is very interesting for the overall advisor situation, right? You’ve got lots of things going on for us that are really positive. We have a story that’s now been told for five or six years in a marketplace that didn’t really know us, and at the same time that story continues to resonate as we’ve brought over 2,000 advisors over the last four or five years, and we have done it successfully. So what they’re telling their peers is that Ameriprise is a great place to come and we can get it right.
Many of my competitors continue to do things that amaze me in terms of making their advisors feel unwanted and unloved, and they are attracted to us because we treat the advisor with respect. We’ve done it in an environment where that hasn’t been the case. So I feel really proud about what we’ve built. I think that our entire opportunity of the advisor continues to get stronger and better if we continue to add more product and other opportunities there.
The other side of this is our business is compelling in terms of our ability to help the advisor grow, so when you put all of this together, I think the pipe continues to get stronger for us as the story continues to go out, and what we’re doing and how we’re doing it continues to get better.
Commercialization is not a code word. We use a lot of code words in the company, but that’s not one of them. The idea behind this, John, is that if you look at the asset allocation, assets under management, there are, if you will, pockets and teams who are good at doing this, a lot of it in what I would call the more traditional space. But we have a capability and we have the building blocks to make that capability better. What we have to do is be more commercial about it – hey, we have the ability to create a solution for you, XYZ Client. Here are the things that we can put together to help you do that, and we need to essentially put more emphasis on that multi-asset class element to this, i.e. individual asset classes as opposed to fund-to-funds, which has been more of the structure that’s been used.
So it really is—you know, take me very seriously on the expense side of this. We are cognizant of the P&L detriment of net outflows, and so what we’ve tried to do is make sure on the financial side that we’re cutting expenses where prudent or reengineering where prudent, i.e. cut expense there, add spending there. And then importantly, we’re also going after those revenue enhancements that Jim mentioned and Walter mentioned because there are some things we can do in distribution economics that can improve the picture here. And of course, what we want this ultimately to lead to is what you guys have all been asking about, is better margins through the operating leverage that’s inherent in this business if I can get that drag of net outflows away.
Jeff Schuman – KBW
Jeff Schuman from KBW. The protection and annuity returns, 20% or 17 to 18% on a fat capital base, I mean, those are very high returns, much better than peers for similar product mixes. What do new business returns look like today? Are you putting on new business at those levels, or a lower level?
I can say for our VAL control product, we are putting them at those levels. They’re at the lower end of the levels but within the range, and certainly from that standpoint. On the indexed universal life, they are also meeting our standard return characteristics.
Listen, this is a tough environment but they are staying within the ranges.
Jeff Schuman – KBW
Okay, that’s helpful. And then on expenses, I just want to come away, I guess, with a little better understanding than maybe we did last year. I think the stock took a hit earlier this year because people were a little surprised about some of the infrastructure and marketing spending. I think we all understand that markets are volatile and unpredictable, and we’re all going to be surprised by markets; but I think what would be good is if we had a clear understanding of maybe things that are visible.
So if you look at big infrastructure spending, big marketing spending, that sort of thing, what should we expect year-over-year?
So again, Walter can complement, but we are not looking for any large surprises or large investments. We’re continuing to invest, like Ted mentioned and Don and Kim and others, so we’re continuing to invest in our business, but it’s on a consistent run rate. Some of the expenses, as we’ve said, will come down a bit because the brokerage platform we heavied up. We started seeing some of that come out in the third quarter, et cetera, so we’ll continue down that path. But there is nothing that we are saying that we’re doing. Now, we’re still doing a lot, but there is nothing that is going to bulk that up.
Our advertising right now, we’re planning, and we can adjust that; but we’re planning for a similar run rate as this year. We’re actually producing new ads right now that will be in, consistent with what we did last year, that we’ll be running next year. Now, we can always manage that, but right now we think it’s a good time to continue, but it’s not as though it’s going to go up another bump. It’s already at the run rates that we have been.
Now last year, we were heavying it up at the same time when the market was going like this and client activity went down, so we got double hit. Right now, I can’t tell you the market but there’s no expense increase; in fact, it’s probably slightly better.
Jeff Schuman – KBW
Very helpful. Thank you.
Okay, they’ve got make their way, and then we’ve got to come back. Okay, get Eric and then we’ll come back here and go over here. Going to have to give people numbers.
Eric Berg – RBC Capital Markets
Thanks very much. Eric Berg from RBC Capital Markets. I have two questions, one for Kim and one, I suspect, for Don, although we’ll see. Kim, a number of life insurers have said in the last couple of weeks, technical accounting stuff, but the bottom line is that they have said that they expect the stock market for many years to not do as well as it has in the past, and they expect fixed income bond market returns to be poorer too than they have in the past. So my question is, is it your sense—I know you can’t talk to all advisors, but what’s your general sense about what advisors are telling their customers about what retirement is going to look like? In particular, are they telling their customers they’re not going to have as good a retirement as they thought?
Well, a couple things –first, we don’t predict what’s going to happen with the stock market. We obviously have our market strategists and our overall sentiment around the market. But a couple of things that I would say – first, through our financial planning process, our advisors really do look at what the client has today and where they want to go. So through that, we have models that they look at in a very broad sense. These are over 25, 30, 35 years, so we’re not looking at what are we going to be able to do tomorrow or two years or three years from now in terms of returns.
The other thing is that we do have a very broad and, I would say, diversified sense of what the client portfolio looks like, and when we’re looking specifically at retirement planning, we are looking at those essential expenses, how can we help clients cover those essential expenses with products and services that give them guaranteed income, and then what kind of lifestyle do they want to live, and then from that map the portfolio to what we’re expecting over time.
So I know insurance has come out and basically said there’s not going to be any growth anywhere, but the fact is that there is a lot of other opportunities to help a client put together a diversified portfolio.
Eric Berg – RBC Capital Markets
That’s helpful. My question for Don is really one that builds on Tom’s question. It’s apparent why you’ve been recruiting for several years now experienced people – they are more productive. But as Tom pointed out, they cost a lot more than hiring people, say, off the college campus. So my question is—and Jim got into this but I’m hoping you can build on Jim’s answer, what is the nature of the analysis that you go through to conclude that hiring—I’ll just make up an example, a 50-year-old guy who’s producing whatever, 750,000, who you have to buy out of his stock, who you might have to pay the last 12 months commission for as an incentive to move across the street from Merrill, UBS, whatever. What’s the nature of the analysis—oh, and by the way, this guy is probably going to see a sharp drop in his production. What’s the nature of the analysis that you do to conclude that the internal rate of return on that is better than just hiring 10 kids right off the college campus?
Well first of all, we’ve got Walter Berman; but Neil Maglaque works with Don for Don in running the recruitment and the economic analysis of each of those deals, and so Neil, why don’t you--?
So what I’d like to say is that as we think about each of these recruits, we look at them individually not only from a fit perspective but also from a P&L perspective. So whenever we look at a recruit, we do an individual P&L for that. We look at the cash flows, we look at the break-even from a P&L perspective, and so we take a look into the experience they have, the quality of their book, the composition of that book, and obviously we calibrate against the competition, but all that stuff comes into play.
So we’re not chasing the highest deal in the market. We never do that, and we won’t do that. What’s more critical for us as the end of the day is does the advisor understand the value proposition of the firm, and if they buy into that, that’s when we put a financial offer together. But we have a fairly tight financial process around each of those recruits that we bring in, and then we track them at the back end of every quarter to see how they’re performing against the expectations.
Eric, when Jim asked us to take a look at our employee channel and evaluate the old employee channel, what we used to bring novice recruits, we went through this whole series of analysis. One of the key things was payback, and the payback as we’re talking about on the experienced advisor versus a novice recruit is there’s other aspects that make it beneficial to have a permanent employee base, but clearly the paybacks are well within the standards that we set and substantially lower than novice recruiting, especially in this environment.
It’s essentially less than half the time for payback for an experienced advisor recruit relative to the novices coming into the system, because for all the novices we brought in, we lose probably somewhere between 50 to 60% of them after the first year, so you’d lose all the fixed cost that you put into it.
Ian Gutterman – Adage Capital
Ian Gutterman with Adage. Walter, I was hoping you could help me with some math I was trying to do on the WM margins here based on some of the disclosures. So if three-quarters of the advisors are franchise and a quarter are employee, and we said the employees are losing money today or close to break-even—
The employees don’t lose money, but what we’re saying is on a fully loaded, after everything we’ve put in the system, cost overhead, yeah.
Ian Gutterman – Adage Capital
Exactly. So I’m just trying to do a mix thing, right? I don’t know what the percent of revenues is because I assume the franchises maybe have a little bit higher revenue. Maybe that’s the piece I’m missing. But if I just did a 75/25 split of revenue and you’re at 12 overall, and one part’s basically zero, that implies the franchise channel is 15 or maybe even better. Am I close?
Ian Gutterman – Adage Capital
Can the employee channel as you ramp up and get leverage get to that kind of level?
Remember, you’re making a contribution to fix, right? And the more you actually drive into that contribution of fix, you’re going to improve the margin.
Ian Gutterman – Adage Capital
Thank you. And then the other one, Walter, is on the excess capital, the 90% generation per year, you’ve had that goal for a while but I think you’ve beaten that goal materially for as long as I can remember. There’s always been a series of one-off things that have been favorable. Is there still a pool of one-off things that could be favorable down the road, or did you use those all up?
He’s not telling me about it!
The answer – listen, there’s a lot of variables that goes into it, but it’s (inaudible) and certainly we manage it and we work very hard at managing the required within that, and certainly the markets play a role in it. But it has been consistent and we do have degrees of freedom in it.
There’s one thing I would just say in complement to your question about whether you would get rid of—jettison some business. One of the things we do have the opportunity to do, just like we do with variable annuities, is if we wanted to slow down that growth more, if we wanted to open the channel more, et cetera, we can easily do that. But even if we go on this trajectory, we’re talking about that move of 50%, 50/50 to 60 and 70; so that’s all I’m saying, is even if we aren’t on the current trajectory, that piece is going to be smaller and smaller of a growing pie. So I’m not sure—the diversification, I think, will give us some benefit, so I’m not exactly sure of the strategy. But we do always evaluate the differences in the strategies to see what would give the best shareholder value.
And listen, I’ll just say one of the key things that I think has helped a lot is really we don’t have baggage. When you look at the products that we offered, how we offered, how we hedged it and how we managed it with the asset quality, we feel very comfortable with the existing block that we have, and that is an important factor especially when you’re in these environments to have to make up for situations that maybe you’ve been too aggressive in the past. We feel that we’ve been pretty balanced and pretty--.
Jay Gelb – Barclays
Thank you. Jay Gelb from Barclays. Ted, can you give us your outlook for net flows in the asset management segment for next year, and when do you feel net flows could turn positive?
Well, it’s somewhat like predicting what the S&P 500 is going to be down the road, but look – I tried to give you some sense of what I think, what are some of the variables that go into this? Well number one, we’ve still got a couple of things that we’ve disclosed to you that are going to flow out next year, like some remaining Balboa assets, right? The sub-advisor side of this and the outflows associated with that are somewhat unpredictable, but the trend has been unmistakably one way, unfortunately. But if you look at the things that we’ve disclosed as either one-off items or the retirement of Dave Williams in the case of value and restructuring, a lot of that stuff is behind us. So now, what you’re really looking at is, I think, a combination of things that could drive us into net inflows either in the coming year or in ’14.
Number one, quite frankly, what kind of markets do we have? I mean, it’s not an excuse but it’s just basically the reality is that Columbia has been better known as an equity shop despite our really great fixed income performance, and so quite frankly an equity bull market would potentially help us a lot. We think it would help us a ton, actually, and despite the fact their fixed income performance is tremendous. That’s number one.
Other factors – institutional, we see the potential for some pretty good net inflows in the coming year. It’s lumpy. There are always unfunded mandates that we’ve won, but that has the potential to contribute in both ’13 and ’14 in a strong way.
The next thing is what I tried to show is, quite frankly, we just have not been in the areas of demand as much as we would like to be over the last year, and actually it’s more of a two-year trend. I tried to show you the magnitude of that – I mean, we’re talking about multiple billions of dollars of assets on a net basis flowing in in the area of go-anywhere asset allocation, emerging markets, everything global, everything. And we certainly have plans to either commercialize in the good way that capability, or (b) strengthen the track records, or (c) strengthen the teams, whatever we need to, as well as continuing to focus on the fact that we know that the market is going to want more and more customized solutions and we have all the building blocks for that. This is not I have to go do another acquisition or I have to go do this or that. We have most of the building blocks that we want to create those customized solutions, so we have to be a little smarter about how we present that to the marketplace.
All of those are factors. Could it be ’13, could it be ’14? I mean, quite frankly, the Truscott Long Term Employment Act somewhat is dependent upon this question; but we’re certainly trying to shoot for it for ’13, and quite frankly if we didn’t get it in ’13, I’m pretty darn confident about ’14, just given the trends that I’m seeing. But by the way, you know as well as I do there’s some factors that can come at you, either positive or negative, that could swing that. But all the things that we see, quite frankly, we’re on the cusp. Talk to anyone in my management team – they’ll come in and say we’re right on the cusp of it. One, two funds, maybe one, two big institutional wins in either Threadneedle or Columbia could tilt it very much the other way very quickly; and like I said, we don’t have a lot of these one-time things coming our way anymore.
Remember, you have to offset also some of the ongoing Zurich stuff that’s going on, and U.S. Trust moved to a more open platform. Those are just things we’re going to have fight against that, no excuses, that’s just what we have to do.
Jay Gelb – Barclays
Can you quantify those headwinds in ’13 – Balboa?
Balboa, I believe we’ve disclosed there’s probably another billion and a half coming out there; and those headwinds, I mean, Zurich, we’ve kind of given you a flavor for the fact that there is usually an outflow—what’s that?
Yeah, 3 billion a year roughly. So U.S. Trust is a bit of wildcard because we tend to be a little stronger in the mutual fund space than the SMA space, but they are opening up their platform a little more, and quite frankly, that’s just the trend in the industry. I don’t know how big a headwind that’s going to be, but it is a headwind and we just need to be cognizant of that.
And the last one is just the sub-advisor, if that can settle down.
Jay Gelb – Barclays
So net inflows, even including those headwinds, you just—
Oh, that’s exactly what we’re going for. I mean, please – when we build the ’13 plan, we’re looking at what can we do against those headwinds. I mean, to be honest with you, if you saw the piece of paper I have, we have basically every category of assets, institutional and retail, where we think we can grow, where we sustain, and where we’re going to basically just suffer some outflows. And those net inflows absolutely have to come in ahead of those headwinds, but it’s why I go back. And please, I’m not making this up – I literally look at some of these key categories that we have not done as well as we could have in there. You get a few billion dollars in a couple of those categories, and your picture changes dramatically.
Jay Gelb – Barclays
That’s great, thank you. And then just a larger issue but probably more near-term, any impact from the looming fiscal cliff on client activity in the advice and wealth management segment or asset management?
Well, how do you feel today?
Jay Gelb – Barclays
A little worse.
Right. So I think that’s exactly. I think people saw this election as a lot of beating up back and forth, and now we’re left where we were prior to the election. So when you think about it, now the question is—you know, you hear from people like me, you hear from people on the street, everyone wants Washington to do something. So it depends on what happens over the next few months. We all know they need to do something. Everyone there knows they need to do something. The question is, right now you’re still not feeling pretty good about it, right?
Okay, who did I miss? I’m sorry. It’s hard to get the order of raising hands. But please raise your hands – other questions? Yes?
Gary Lu from (inaudible). I’m just going over my notes from last year’s investor day, and I think besides the 15 to 18% ROE guidance, you also gave 6 to 8% revenue growth, I think 12 to 15% EPS growth. I didn’t see it this time. Can you maybe talk about it? Is it already baking to the 15 to 18% ROE guidance, or maybe you have a different (inaudible)?
You want to answer it, or you want me?
Yeah, I think what you have is exactly right – it’s on average over time 6 to 8. I would say in this environment, 6 to 8 is very, very aggressive, especially if a very large percentage of your base is on investment income. It’s going to be tough to do that, so we’re building in a lower growth level than that.
On the earnings?
On the earnings, I think we are certainly trying to stay within that certainly as we stay within the range, and then the return characteristics – EPS, right.
Okay, if there’s—yes, you’ve got another question?
John Nadel – Sterne Agee
Thanks, John Nadel from Sterne Agee. So I guess if we’re at the end, so what’s your margin targets for advice, wealth management, and asset management?
He’s in charge!
John Nadel – Sterne Agee
Thank you. That’s all I have.
First of all, thank you. We appreciate you spending the time with us. Very clearly, we’ll continue to communicate. You have our phone numbers to give us a call. We’ll make some visits out there upcoming. But we do feel good about the business. The company is a stronger position than it’s ever been. We don’t like the environment any better than you do. Hopefully things will improve there, but even if it’s not, I think we have a good battleship right now that we can take out to sea and continue going down.
So thank you. We appreciate your time and we look forward to speaking to you in the future.
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