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WIKI ANALYSIS
(NYSE: AMP) Ameriprise Financial employs more Certified Financial Planners than any other company in the United States.[1] These financial advisers pay Ameriprise a franchise fee in exchange for using the company's brand name, client acquisition services, and financial planning software. While the outsourced nature of its business limits costs, the independence of its financial planners limits Ameriprise's ability to raise its franchise fees.
Ameriprise representatives sell life annuities, insurance, and asset management services to customers. In 2008, the company has set its sights on Aging Baby Boomers that have plenty to invest and are in need of retirement planning.[1] As it does so, it has been weighting its portfolio more heavily towards equity managed products like stock mutual funds, rather than selling insurance and fixed annuities which guarantee specific payments to clients. AMP hopes this transition will free up capital and increase management fees, while shielding the company from interest rate fluctuations and increasing its exposure to changes in stock market prices.[2]
Ameriprise announced 3 acquisitions during the summer of 2008, part of an ongoing strategy to buy financial advising companies to grow its revenue base.[3] For example, the $315 million purchase of H&R Block's Financial Planning Business in 2008 increases Ameriprise's presence in California, Texas, and Florida, and also will raise managed assets and the Number of Financial Advisors by approximately 7%.[4]
Business Overview
After spinning off from American Express in September of 2005, Ameriprise has become the largest U.S. financial planning firm.[1] The company uses a network of 11,500 financial advisors to sell annuities, insurance policies, and asset management services.[1] The company's basic business model includes training financial advisors, targeting affluent investors, and acquiring new businesses.
- Training Financial Advisors: Ameriprise depends on both its 10,200 branded advisors and 1,300 employee advisors to obtain clients and sell Ameriprise's proprietary insurance, annuity, and asset management products.[2] The more money an advisor manages and the higher his or her sales, the more Ameriprise returns to them. While Ameriprise makes the most money when advisors sell its managed products, it does not restrict customers' choices to only its catalog of investment offerings - for instance, Ameriprise 103 Riversource family of mutual funds compete with over 2,700 non-Ameriprise funds offered through its advisor network.[2]
- Targeting Affluent Investors: Ameriprise focuses attention on obtaining clients with at least $100,000 of investable assets.[2] This group of clients forms 91% of all investable assets among Americans[1], and tend to generate more money for Ameriprise since higher assets under management means more management fees collected. More than 67% of these clients have received a financial plan, compared to just 46% across all of Ameriprise's clients,[2] and these customers also hold an average of more than four products offered by the financial planning firm[2]. Ameriprise has increased affluent client assets 30% over 2005-2007.[1]
- Acquiring businesses: Ameriprise's most recent acquisitions include H&R Block's Financial Planning division (Aug 2008), Brecek & Young Financial Advisors (Aug 2008), and J&W Seligman (July 2008). By acquiring the H&R group and Brecek & Young Financial Advisors, Ameriprise plans to expand its presence in California, Texas, and Florida.[7] J&W Seligman will increase Ameriprise's mutual fund exposure outside of its financial advisor distribution channel.[8] The acquisitions will increase total financial advisors to 13,000.[7]
Financial Overview
Ameriprise has increased revenues by focusing on adding Mass Affluent and affluent clients and shifting towards offering equity investments instead of fixed income instruments.[2]
Affluent clients increased 10% in 2007 and 30% over 2005-2007, and contributed to an 17.5% increase in net revenue per advisor from 2006-2007.[10] At the same time, Ameriprise has let less productive financial advisors leave, and focused on financial advisors that were growing business the quickest. Total advisors decreased from 12,592 at the end of 2006 to 11,824 at the end of 2007,[6] while revenue per advisor jumped 17.5% over 2006 to $315,000 in 2007[6] and 38% over 2005-2007.[1] Ameriprise also has shifted its attention from offering fixed-income products, like fixed annuities, towards less capital-intensive offerings like equity mutual funds[2]. For instance, Ameriprise does not have to invest large amounts of capital to ensure interest payments on annuities, but rather can focus on simply investing client's money in equity markets and capturing the management fee. This shift frees up capital, and creates a higher potential return on invested equity, and also, shifts interest rate risks towards market risk. This change of risk is discussed further in the Trend/Force section of the article.
Owned, Managed, and Administered Assets
Ameriprise grew owned, managed, and administered assets (OMA) between 2005-2007, but OMA declined in the first six months of 2008. Owned assets are assets in which Ameriprise does not provide investment management services or recognize management fees. Administered assets include client assets invested in other companies' products. Ameriprise earns an administrative fee, but does not collect management fees. Managed assets generate management fees for Ameriprise and the financial planning company provides investment management services in return.
- Ameriprise grows managed assets through capital appreciation of managed funds and obtaining new money from current and existing customers.
- The asset manager's Riversource line-up mutual funds invest in domestic positions and account for 42% of managed assets.[11]
- The international positions managed under the Threadneedle brand form 35%, or $120.9 billion at the end of June 2008.[11]
Managed assets form the bulk of AMP's OMA Assets, and produce the highest margins; owned assets do not generate revenue and administered assets only earn processing fees. As such, managed assets are key for determining earnings. The recent drop in managed assets resulted from generally weak equity prices and caused net pretax income to be 7% lower for the first six months of 2008 compared to the same period in 2007.[11]
Business Segments
Ameriprise's is divided into five business segments.
- Advice and Wealth Management (38.48% of 2007 Net Revenue): This group offers a full service brokerage and banking services to retail clients through its affiliated financial advisors. The fee-based business is driven by the level of clients' assets, and thus, susceptible to market movements and net asset flows.[2]
- Asset Management (17.98%): This division provides investment advice and products to retail and institutional clients. Working through primarily its advisor network, Ameriprise offers domestic funds through its Riversource family of funds. Using 3rd party venders, Ameriprise sells international funds through its Threadneedle line-up of funds. Total assets managed were $286 billion at the end of FY 2007 compared to $294.3 billion the previous year.[2] The decrease was a result of capital depreciation as net inflows were flat.[2]
- Annuities (23.25%): As the 9th largest variable annuity provider in the United States[1], Ameriprise makes money by earning more investment income than it pays to clients on their fixed account balances.[2]
- Protection (20%): Ameriprise also sells life, disability, and property casualty insurance through its financial advisor distribution network. Ameriprise markets these products as part of a full financial plan; insurance reduces risk and financial variability[2].
- Corporate and Other Segment (0.29%): Responsible for net investment on the corporate level and unallocated expenses, this division lost $484 million in 2007.[5]
Trends & Forces
Competition for Financial Advisors
86% of Ameriprise financial advisors are branded advisors and not employee advisors.[6] Under this affiliation, the advisor is an independent contractor who uses the Ameriprise brand name. While they receive a higher payout than employee advisors, they are responsible for paying their own business expenses and any compensation of staff. Because these advisors are the ones forming relationships with the clients, Ameriprise's customers tend to be more loyal to the advisor than the Ameriprise brand name. As such, Ameriprise franchising fees are capped by competitive pressures. If they charge the advisors too much or offer too few benefits (i.e. client acquisition programs and advisor training), then these financial advisors will leave, going to a competitor like Merrill Lynch (MER) or National Financial Partners (NFP) and bringing their clients with them. 75% of Ameriprise's branded advisors have been with the company for more than 3 years.[2] Ameriprise made note that advisors with Kansas City H&R Block, which it is set to acquire, will receive attractive retention packages.[4]
Aging Baby Boomers
According to the U.S. Census Bureau, between 2000 and 2020, the 45-64 age group will increase by 34%, with most of the growth occurring by 2010[2]. This age demographic tends to be those in greatest need of financial advice as retirement approaches. Baby boomers are more likely to sign up for total financial planning packages - in May 2008, 68% of this group was enrolled in a financial planning program.[1] Ameriprise aims to target this age group through television advertisements that focus on retirement planning.[2]
Equity Prices impact revenue.
Ameriprise estimates that a 10% drop in the S&P 500 index would cause earnings to fall by about $127 million during the year, or 16% of the company's 2007 net income.[2] This reduction in net income results from two main factors:
- capital depreciation of current managed assets
- slowing down of net fund inflows
With the weak equity prices in 2008, Ameriprise had client activity slow, reduced net investment income, and lower equity-related income.[1] Ameriprise's Threadneedle family of international mutual funds accounts for 35% of managed assets.[11]
Fund performance influences managed assets
Ameriprise offers mutual funds through its financial advisor network and 3rd party channels. Relative performance is a key gauge to determining fund flows. If Ameriprise's Riversource funds do well, investors are more likely to funnel new money into them. If they have relatively poor performance, then net flow will slow or be negative. For 3-years ending December 31, 2007, 69% of Riversouce internally managed equity mutual funds outperformed their respective Lipper group. For the one-year, only 45% did better.
As one can see in the Riversouce net inflow graph, net inflows have been poor to mediocre. Further, for the second quarter of 2008, the Riversouce funds had $0.6 billion in net outflows and Threadneedle had $2.5 withdrawn.[12] Threadneedle weakness resulted primarily from portfolio management changes, while a 10% capital depreciation year over year of Riversouce funds kept new invesments minimal.[12] A look at Riversouce top 5 and bottom 5 performing funds YTD as of 9/12/2008 shows that fund performance has been poor in 2008. Negative performance lowers AUM through capital depreciation and contributes to investor net fund outflows.
| Fund Name | Symbol | YTD Performance (9/12/08)[13] | AUM (in $millions)[14] |
| Inflation Protected Securities | APSAX | 4.54% | 960 |
| Real Estate | ARLAX | 3.83% | 229 |
| Minnesota Tax-Exempt | IMNTX | 2.11% | 312 |
| Intermediate Tax-Exempt | INFAX | 2.05% | 76 |
| Cash Management | IDSXX | 1.78% | n/a |
| Disciplined International Equity | RDIAX | -24.76% | 687 |
| Partners International Select Value | APIAX | -25.35% | 1,539 |
| Precious Metals and Mining | INPMX | -26.49% | 111 |
| Partners International Small Cap | AISCX | -29.04% | 80 |
| Threadneedle Emerging Markets | IDEAX | -31.67% | 517 |
Shifting away from selling fixed annuities to offering more equity products makes Ameriprise more susceptible to market risk than interest rate risks.
In 2008, Ameriprise is actively marketing equity funds over fixed annuity and insurance contracts. Management expects this business to be less capital intensive and plans to continue moving towards the fee-based revenue source.[2] Between 2006 and 2007, pretax income growth from annuities declined 9%, while the advice and wealth management segment had 45% growth.[1] Fixed annuity and insurance contracts, which promise the client a fixed return in exchange for set investment, require more capital investment to be set aside to ensure interest payments or insurance payouts than equity management. At the same time, it replaces interest rate risks with market risks. So, with the company's annuity and insurance focus in 2003, declining interest rates put pressure on variable interest rate investments as they generated less income, in 2008 fluctuations in equity markets have been the most significant driver of the company's performance.[15]. Changes in equity prices directly impact Assets under management (AUM) as a weak equity market causes capital depreciation and shifts money away from these type of investments.
Competition
Ameriprise competes for financial advisors and for managed assets. Branded financial advisors work as independent contractors. They use Ameriprise's brand awareness, information technology services, and training, and in exchange, pay a franchising fee. Because of this independent nature, financial advisors are able to flow from one company to a new one or simply work for themselves. This factor means Ameriprise competes with brokerage houses like Merrill Lynch (MER), Hartford Financial Services Group (HIG), and National Financial Partners (NFP) in order to retain advisors. Among branded advisors that have been with AMP for more than 10 years, Ameriprise has a 96% retention rate.[2] Overall annual retention rate is 94% in 2008.[2] Keeping financial advisors is important for maintaining Assets Under Management (AUM). If AMP's advisors leave, so do their client assets. Ameriprise believes its focus on developing productive financial advisors, as well as adding Certified Financial Planners give the company an advantage over peers.[15] At the end of 2007, Ameriprise had 2,489 CFPs working as advisors.[16]
Ameriprise also competes with companies, like Fidelity, Oppenhiemer Funds, and American Funds for managed assets. Clients within AMP's financial advisor network can choose from 2,700 mutual funds outside of those managed by Ameriprise.[2] Performance, fee structure, and brand recognition are the main basis for fund competition.[15] Ameriprise has 59% brand recognition in the United States[1] and fund performance was average compared to peers.[15]
The annuity and Insurance part of Ameriprise competes largely with Hartford Financial Services Group (HIG) , MetLife (MET), Lincoln National (LNC), and Nationwide Financial Services (NFS). Life-insurance is a commodity-like asset[15]. It's hard for one company to differentiate themselves from another, because a $1,000,000 payout is the same across any firm - the only difference is price.
Companies ranked by Assets Under Management (AUM)
The following table[17] ranks assets managers by AUM (in $millions) as of December 31, 2006.
| Rank | Manager | Country | Total assets |
| 1 | UBS | Switzerland | $2,452,475 |
| 2 | Barclays Global Investors | U.K. | $1,813,820 |
| 3 | State Street Global | U.S. | $1,748,690 |
| 4 | AXA Group | France | $1,740,000 |
| 5 | Allianz Group | Germany | $1,707,665 |
| 6 | Fidelity Investments | U.S. | $1,635,128 |
| 7 | Capital Group | U.S. | $1,403,854 |
| 8 | Deutsche Bank | Germany | $1,273,500 |
| 9 | Vanguard Group | U.S. | $1,167,414 |
| 10 | BlackRock | U.S. | $1,124,627 |
| 11 | Credit Suisse | Switzerland | $1,092,906 |
| 12 | JPMorgan Chase | U.S. | $1,013,729 |
| 13 | Mellon Financial | U.S. | $995,237 |
| 14 | Legg Mason | U.S. | $957,558 |
| 15 | BNP Paribas | France | $817,482 |
| 16 | ING Group | Netherlands | $792,162 |
| 17 | Natixis Global Asset Mgmt. | France | $769,981 |
| 18 | AIG Global Investment | U.S. | $730,921 |
| 19 | Credit Agricole | France | $704,367 |
| 20 | Aviva | U.K. | $700,789 |
| 21 | Northern Trust Global | U.S. | $697,166 |
| 22 | Goldman Sachs Group | U.S. | $693,049 |
| 23 | Prudential Financial | U.S. | $616,047 |
| 24 | Morgan Stanley | U.S. | $606,476 |
| 25 | HSBC Holdings | U.K. | $595,000 |
| 26 | Wellington Management | U.S. | $575,492 |
| 27 | Societe Generale | France | $556,890 |
| 28 | Fortis Group | Belgium | $556,200 |
| 29 | Franklin Templeton | U.S. | $552,905 |
| 30 | Bank of America | U.S. | $542,977 |
| 31 | MetLife | U.S. | $527,700 |
| 32 | Generali Group | Italy | $523,726 |
| 33 | Aegon Group | Netherlands | $477,611 |
| 34 | Prudential1 | U.K. | $477,000 |
| 35 | Old Mutual | South Africa | $468,232 |
| 36 | INVESCO | U.K. | $462,600 |
| 37 | Legal & General Group | U.K. | $455,955 |
| 38 | MassMutual Financial | U.S. | $455,723 |
| 39 | Nippon Life Insurance2 | Japan | $439,671 |
| 40 | TIAA-CREF | U.S. | $405,647 |
| 41 | Ameriprise Financial, Inc. (AMP) | U.S. | $397,000 |
| 42 | Rabobank Group | Netherlands | $378,125 |
| 43 | Sun Life Financial | Canada | $374,535 |
| 44 | Zenkyoren2 | Japan | $364,776 |
| 45 | Manulife Financial | Canada | $355,256 |
| 46 | Mitsubishi UFJ Financial | Japan | $351,189 |
| 47 | T. Rowe Price | U.S. | $334,698 |
| 48 | Unicredito Italiano2 | Italy | $328,043 |
| 49 | Hartford Financial | U.S. | $327,500 |
| 50 | Zurich Financial Services | Switzerland | $310,003 |
References
- ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 2008 Sanford Berstein Strategic Decisions Conference
- ↑ 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 2.19 2.20 (AMP) 10-K FY 2007, Item 1, Pages 1-41
- ↑
- ↑ 4.0 4.1 Biz Journal - Katharine Grayson "Ameriprise to Buy H&R Block Unit for $315 mln
- ↑ 5.0 5.1 5.2 AMP Financial Highlights Spreadsheet FY 2007
- ↑ 6.0 6.1 6.2 6.3 AMP 2006 Financial Highlights Spreadsheet
- ↑ 7.0 7.1 Financial Advisor Magazine
- ↑ Star Tribune, Kara McGuire, "Ameriprise to buy J&W Seligman"
- ↑ 9.0 9.1 (AMP) Financial Data Spreadsheet FY 2008 2Q
- ↑ (AMP) 10-K, FY 2007, Letter to Our Shareholders
- ↑ 11.0 11.1 11.2 11.3 (AMP) 10-Q FY 2008, 2Q, Item 2, Pages 25-49
- ↑ 12.0 12.1 Reuters: Ameriprise Financial Reports Second Quarter 2008 Results
- ↑ RiverSource Investments Site
- ↑ Morningstar.com
- ↑ 15.0 15.1 15.2 15.3 15.4 AMP 10-K FY 2007, Item 1A, Pages 42-54
- ↑ Investment News Company (AMP) Profile
- ↑
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