Mike Wilkins, AMP's interim CEO
The reputational damage of what’s inarguably been the toughest year in AMP’s history will continue to play out for some time, but a financial blow is already being dealt to the country’s largest wealth manager – as the market got a glimpse on Friday.
The unparalleled $290 million-plus contingency AMP has set aside for reparations to its clients who have been affected by bad advice will almost certainly hurt the financial stability of the listed company, analysts and investors learned on a call during an update for the company’s half-yearly results.
The impact of these reparations will be compounded by the lower revenues flowing into AMP’s superannuation business following the announcement it will be cutting its MySuper fees, and by additional costs it will incur as it attempts to modernise its advice operations.
The company stated it expected its dividend payout ratio to finish the year at the lower end of the 70 per cent to 90 per cent guidance range, and that it had taken a hit to its capital surplus. AMP now has a $1.8 billion cash surplus, down from $2.3 billion at the end of December last year.
While AMP’s acting chief executive, Mike Wilkins, assured analysts during the update call the leadership team was comfortable with its cash position, he was pressed hard on whether the outlined reparation plans, combined with further potential unforeseen costs, could lead to future blows to AMP’s financial position.
Specifically, analysts raised questions about how much potential asset sales could cost the company. AMP announced today it would expedite a review of its portfolio businesses and stated it was in active discussions with a number of interested parties.
Stripping out integrated businesses was an option, Wilkins admitted, which is a process he said would ultimately need to be funded. He also confirmed he was comfortable enough at this time with the surplus cash position not look to the equity capital markets to raise further funds.
All these costs will be top of mind for investors contemplating the wealth manager’s future.
“I think when we run that through our business quality test, we really do struggle to make a positive case for it at all,” said Matthew Williams, Airlie Funds Management’s portfolio manager, during a presentation earlier in the week. “The business quality is difficult, and I think they’ve got a lot of hard years ahead.
“There will be periods where they’ll perform…and probably when they get a new CEO, a very credible CEO, I think you’ll see some performance then. But for us, taking a three- to five-year view, we probably can’t make the case stand up.”
AMP announced it had set aside $290 million, over three years, to pay customers reparations for advice highlighted during recent ASIC reviews and brought to light during the royal commission. The amount is an estimate based on a sample of adviser client files. Wilkins said he believed it was the most a financial institution had set aside for customer reparations.
In addition to the $290 million, AMP shareholders will also need to wear a cost of $50 million a year during the reparation period, for implementation of the reparation plan.
By comparison, during the royal commission, Commonwealth Bank said it had refunded $118.5 million to customers who were charged fees for advice they did not receive, which the royal commission QCs pointed out at the time was more than half the $219 million compensation the big four banks and AMP combined paid during the last decade to more than 310,000 financial advice customers charged fees for no service.
Advisers a big part
Wilkins said AMP was “working closely” with advisers in its network to understand the extent of the reparations and would continue to work with these advisers to examine client situations.
There is no indication large numbers of advisers have looked to draw on their buyer of last resort (BoLR) arrangements to leave the group – something that further hurt AMP’s financial position; for example, a recent Morgan Stanley analyst report estimated that $474 million in advice fees and $1.4 billion in BoLR contingent liabilities would be at stake if Hillross and AMP Financial Planning practices decided to leave the licensee.
AMP has been meeting regularly with its advice businesses to quell fears representatives may have that the company could be constrained in its ability to honour existing BoLR arrangements.
“The percentage of advisers with a request in to exercise their BoLR deals is slightly higher at the moment but that is not unexpected, because we’re seeing a number of people broadly in the industry leave [due to] new education standards and because many advisers are approaching retirement,” AMP Financial Planners Association chief executive Neil Macdonald told Professional Planner. The potential exodus of advisers due to age and new education standards is well documented.
Macdonald also noted, however, that the true extent of possible adviser departures might not be captured fully in the BoLR numbers because they don’t account for direct adviser-to-adviser sale negotiations.
While the amount AMP needs to spend on reparations is significant, the additional costs required to catapult the group’s legacy advice business into the modern advice world are not yet known. This is where most of the doubt relating to the future of the once-thought-infallible Australian company is accumulating.
The cuts to fees on its MySuper product alone will result in an underlying revenue compression of 3 per cent to 4 per cent, AMP chief financial officer Gordon Lefevre confirmed.
The cuts to MySuper products will, on average, reduce the fees on those products by about 45 basis points, Wilkins said; however, it is not clear yet whether the AMP fee reduction announced today brings AMP’s MySuper products in line with new super fee caps currently proposed and expected to be legislated.
The company also stated in its half-yearly update that it had set aside an additional $35 million a year, after tax, for improvements to its risk management, governance and compliance.
AMP’s latest disclosures cover possible financial impacts over the next three years. Beyond that, there is much uncertainty. Banks, including Commonwealth Bank and NAB, have examined the costs associated with operating old wealth management business models and decided it’s probably not worth the pain.
As the largest integrated wealth management company in the country, AMP has such models at the core of what it does, and doesn’t have the same luxury of easily spinning off those businesses.
TOPICS: advice, Airlie Funds Management, AMP, AMP Financial Planning, BoLR, buyer of last resort (BOLR), Gordon Lefevre, hillross, Matthew Williams, Mike Wilkins, MySuper, Neil MacDonald, Royal Commission