AMP is doing deals to lure new financial planning practices and shore-up distribution, but this could lead to more trouble ahead for the wealth management giant, whose share price has been steadily falling.
AMP has mounting liabilities, with old and new buyer-of-last-resort agreements in place to acquire financial planning firms from retiring principals in the next 12 to 18 months, at significantly higher multiples than the broader market will pay.
In return for the security of a guaranteed buyer waiting in the wings, principals typically relinquish the right to volume bonuses and agree to support inhouse products and platforms.
BOLRed over
Pushing aside the blatant conflicts, product manufacturers claim these arrangements make commercial sense. Why then isn’t the brilliance of BOLR reflected in the AMP share price?
Maybe the market thinks overpriced businesses with declining revenues, ageing client bases and retiring principal advisers aren’t such a good buy.
AMP boasts that its premium dealer group Hillross has added seven new practices, representing over $1 billion in funds under advice, and recruited a further 11 newcomers in the last 12 months.
Unlike AMP’s bank rivals, it did not pay hefty sign-on bonuses because its “attractive value proposition” was compelling enough, Hillross acting managing director Chris Digby said.
He admitted confidential commercial agreements had been struck to ensure each firm was aligned to AMP from a “cultural and commercial perspective”, but declined to elaborate.
Anecdotally, a number of practices – some of which have been for sale since before the global financial crisis – have entered BOLR arrangements with AMP in the last few years.
It is understood, BOLR was a key feature of Hillross’ 2011 acquisition of Iris Financial Group.
It is alleged that Hillross has “enhanced buy-back agreements” with approximately half of Iris’ underlying practices.
AMP’s longsuffering shareholders will ultimately foot the bill for any BOLR deals.
Salary sacrifice?
Then there’s the risk that clients will leave when their adviser exits. This is why institutions typically structure deals to keep principals on board as salaried advisers for a period of time to ensure a smooth handover.
A “book of business” acquired under BOLR arrangements is often divvied up and on-sold, or gifted, to other advisers with strings attached.
A wave of BOLR contracts are expected to be exercised before July 31, 2014, which could leave AMP with books and books of clients and no one to service them. One possible solution is for AMP to put on salaried advisers.
Such a strategy would be a deviation from AMP’s traditional intermediated model which involves an army of self-employed, corporate authorised representatives.
Unlike the banks, which house hundreds of employed advisers in their branches, AMP has only a handful.
It has bucked the B2C movement partly because it already has iron-clad contracts stipulating it owns the client relationship. When other institutions, including AXA, were relaxing their grip on advisers a decade ago and allowing them to take their clients with them if they changed licensees, AMP maintained its stranglehold on its network. Few advisers dare to leave while those who have have commonly found themselves in court.
It’s academic
Then there was FMD.
FMD was one of the biggest and most profitable groups in the Hillross network but the mega group left in 2011 to join independently owned licensee, Paragem. AMP has been reeling ever since.
FMD was the catalyst for Hillross’ current reiteration of BOLR, referred to internally as “enhanced buy-back terms”. The new terms use a different, supposedly more favourable, formula to calculate a practice’s value and sale price.
To manage the impending wall of clients about to hit AMP, it’s scrambling to organically grow its advice network.
The sight of 11 fresh-faced advisers at Hillross is a change in direction for AMP.
Historically, Hillross has focused on winning established practices that service professionals, business owners and other high net-wealth clients.
These are not the types of clients who want to be told how to invest their money by a twenty-something graduate.
Hillross’ newest additions come via AMP’s Horizons Academy. At the Academy, university drop outs mix with former bank tellers to fast-track the journey to become qualified advisers. Graduates from the Horizons Academy are mainly placed in AMP Financial Planning because it charges cheaper dealer fees than Hillross.
Digby said the 11 newcomers had joined Hillross under a “start-up” program, which provides “assistance” to acquire a registry of clients from retiring AMP principals.
It is also understood dealer fees have been waived for a period of time, after which these new recruits will be slugged with some of the highest licensing fees in the industry.
AMP acknowledges that its advisers are retiring at a record pace, but denies a spike in the number of BOLR options being exercised since the introduction of the Future of Financial Advice reforms. At the group’s 2013 half-year results in August, incoming chief executive Craig Meller said any practice that AMP had acquired through BOLR had been on-sold internally to another AMP adviser, adding that demand for businesses far outstripped supply.
AMP’s share price closed at $4.68 on Thursday.
