AMP - Ameriprise Financial

[Libs]

I thought this could be an interesting discussion based on the number of RIA's and industry people on the board. Interested in feedback.

 

AMP strikes me as a big, fat cow, whose revenues and margins are facing secular headwinds. I don't believe the market has fully recognized this.

 

AMP makes money primarily from 1) charging their advisors  25% - 50% of their revenue; 2)  their proprietary annuities, life insurance, and mutual funds ( Columbia), sold  through this advisor force; and 3) fees earned as a custodian, offering a platform for proprietary and non- proprietary funds and ETF's held by the clients.

 

Every leg of this stool  is being kicked out, and the accelerator, IMO, will be advisor attrition.

 

1) Advisors are realizing they can set up their own RIA, or join another one, and eliminate or greatly reduce those haircuts. Doing so boosts income dramatically, and is a relief from the bureaucracy of a large organization. Leaving is getting  easier every day, as the available RIA ecosystem ( compliance, custodians, software) continues to develop. Advisor count is slowly dropping;  I believe it will accelerate, as colleagues see others leave successfully. (Client retention among  breakaways  is 90%+; clients view their relationship as being with the advisor, not AMP).

 

2) As advisors exit, so goes  their sales force for proprietary products noted above. That's a big, unsolvable  problem.

 

3) Apart from that, even the advisors that stay will continue to move assets away from the expensive, mediocre proprietary products, further  costing AMP revenue. These outflows are happening now, as the world gravitates to lower-fee options.

 

That's the basic bearish scenario. There is so much fat here, something has to give. As an example, the advisors' average wrap fee is 1.4% (that's before you layer on the expensive mutual funds held). Meanwhile, Vanguard , Schwab and others are hiring CFP's in droves,  who will create and monitor a plan for clients and charge ~.30% to manage their assets. Schwab even caps it at $3600 per year! So a $2MM client who would pay about  $15,000 annually to an AMP advisor, would pay $3,600 at Schwab. I don't think this will hamper client retention - clients are very sticky - but attracting new clients will be harder. And as the AMP advisors inevitable cut their fees to compete,  that also reduces AMP's revenue.

 

I think the Q4 numbers tell the tale pretty well. In a quarter where the market was up 5%, revenues dropped 1%.

 

AMP is at $127. Market cap is 19.5B If you normalize 2016 shareholder earnings,  they were ~$1.5 B, same as 2015 and down from $1.6B in 2014. So 13X.

 

Risks: 

 

1) Stocks rise sharply, raising revenues faster than this bleeding.

2) Advisors' retention is better than expected ( it takes a real commitment to leave, and there's a solid fear campaign afoot to discourage it).

4) AMP advisors are good financial planners, in general. That makes assets even stickier and helps with new asset gathering. That may slow the inevitable.

 

Final issue: AMP is buying back stock in droves. Share count is dropping 10% a year, faster than the decline in earnings. So EPS keeps going up. I really don't know how to think about this. Another OUTR?

 

In summary, AMP has its fingers in every pie, scraping basis points from clients and advisors. The world is not going to keep cooperating. Their 20% ROE is unsustainable. Either advisors leave, which kicks out two prongs of the stool, or they give haircut relief to their advisors - which hurts margins.

 

 

 

 

[benhacker]

Thank you for sharing this idea.  I haven't done any work here obviously, but your entire thesis seems right.

 

I was surprised to see the valuation... this seems like a cyclical and secular peak for their business.  I also think they are not distinguished in this field vs other planning / advisor organizations (Edward Jones).

 

Seems like a reasonable-ish name on the surface, but you highlight a lot of trouble under the surface.

 

Thanks!

[bizaro86]

Thanks for posting this. On the surface, this seems like it might be a good (short) side of a pair trade with IBKR. It has the opposite characteristics (high fees, getting disadvantaged by technological change, etc).

[atbed]

Thank you for sharing this idea.  I haven't done any work here obviously, but your entire thesis seems right.

 

I was surprised to see the valuation... this seems like a cyclical and secular peak for their business.  I also think they are not distinguished in this field vs other planning / advisor organizations (Edward Jones).

 

Seems like a reasonable-ish name on the surface, but you highlight a lot of trouble under the surface.

 

Thanks!

 

+1

[Libs]

Q1 is out. They are treading water in what should be a growth environment.

 

Revenues the last 4 quarters: 2.9B, 3.0B, 3.1B, and 2.9B (most recent). They've gone nowhere even though the S & P is up 15% in that time.

 

AUM is up 4.8% over that period.

 

Advisor count down from 9758 to 9668. To shore that up, they just bought a BD with 200 FA's; said crew has 300K revenue per FA VS. the  current AMP average of $529K per FA. Deal closes later this year. Buying such a low-producing crew seems odd to me.

 

My recruiting contacts at Fidelity and Schwab say their pipeline is full of AMP advisors leaving. It's ramping up.

 

Also... 12B-1's have been eliminated. That was the only reason many advisors even used actively managed funds; without that revenue, they will increasingly go to cheaper ETF's. This will cost Ameriprise revenue.

 

I still see this as a melting ice cube. It's a question of how fast. Just like our other favorite melter, OUTR, they are desperately buying back stock.

 

P.S. Schwab just tripled their recruiting team. Compare their Q1 to AMP's....no question who has the better model.

 

I'm buying more SCHW, and shorting more AMP.