(NYSE: AMP) Ameriprise Financial employs more Certified Financial Planners than any other company in the United States. 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. 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.
Ameriprise announced 3 acquisitions during the summer of 2008, part of an ongoing strategy to buy financial advising companies to grow its revenue base. 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%.
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86% of Ameriprise financial advisors are branded advisors and not employee advisors. 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. Ameriprise made note that advisors with Kansas City H&R Block, which it is set to acquire, will receive attractive retention packages.
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. 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. Ameriprise aims to target this age group through television advertisements that focus on retirement planning.
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. This reduction in net income results from two main factors:
With the weak equity prices in 2008, Ameriprise had client activity slow, reduced net investment income, and lower equity-related income. Ameriprise's Threadneedle family of international mutual funds accounts for 35% of 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. Threadneedle weakness resulted primarily from portfolio management changes, while a 10% capital depreciation year over year of Riversouce funds kept new invesments minimal. 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)||AUM (in $millions)|
|Inflation Protected Securities||APSAX||4.54%||960|
|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|
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. Between 2006 and 2007, pretax income growth from annuities declined 9%, while the advice and wealth management segment had 45% growth. 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.. 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.
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. Overall annual retention rate is 94% in 2008. 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. At the end of 2007, Ameriprise had 2,489 CFPs working as advisors.
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. Performance, fee structure, and brand recognition are the main basis for fund competition. Ameriprise has 59% brand recognition in the United States and fund performance was average compared to peers.
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. 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.
The following table ranks assets managers by AUM (in $millions) as of December 31, 2006.
|2||Barclays Global Investors||U.K.||$1,813,820|
|3||State Street Global||U.S.||$1,748,690|
|17||Natixis Global Asset Mgmt.||France||$769,981|
|18||AIG Global Investment||U.S.||$730,921|
|21||Northern Trust Global||U.S.||$697,166|
|22||Goldman Sachs Group||U.S.||$693,049|
|30||Bank of America||U.S.||$542,977|
|35||Old Mutual||South Africa||$468,232|
|37||Legal & General Group||U.K.||$455,955|
|39||Nippon Life Insurance2||Japan||$439,671|
|41||Ameriprise Financial, Inc. (AMP)||U.S.||$397,000|
|43||Sun Life Financial||Canada||$374,535|
|46||Mitsubishi UFJ Financial||Japan||$351,189|
|47||T. Rowe Price||U.S.||$334,698|
|50||Zurich Financial Services||Switzerland||$310,003|