阿默普萊斯金融 (AMP) 2010 Q2 法說會逐字稿

Welcome to the 2010 second-quarter earnings call. My name is Sandra and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will turn the call over to Ms. Laura Gagnon. Ms. Gagnon, you may begin.

Thank you and welcome to the Ameriprise Financial second-quarter earnings call. With me on the call today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer. After their remarks we will take your questions. During the call you will hear references to various non-GAAP financial measures, which we believe provide insight into the underlying performance of the Company's operations. Reconciliations of non-GAAP numbers to the respective GAAP numbers can be found in today's materials available on our website.

Some of the statements that we make on this call may be forward-looking statements, reflecting management's expectations about future events and operating plans and performance. These forward-looking statements speak only as of today's date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today's earnings release and related presentation slides, our 2009 annual report to shareholders and our 2009 10-K report. We undertake no obligation to update publicly or revise these forward-looking statements. With that I'd like to turn the call over to Jim.

Good morning. Thanks for joining us for our second-quarter earnings discussion. Today Walter and I will give you some insight into our results for the quarter. We'll discuss the progress we're making across our businesses and we'll give you an update on the Columbia acquisition. Let's get started.

This was a strong quarter for us. Despite the market declines we experienced in May and June all four of our business segments performed well, highlighted by continued margin improvement in our more fee-based segments -- Advice &Wealth Management and Asset Management. We drove stronger client activity and advisor productivity. We made solid progress in our integration of Columbia Management and we experienced good sales trends in both protection and annuities. The positive momentum in the business contributed to operating earnings of $291 million for the quarter, an increase of 172% compared to a year ago. Operating net revenues were $2.4 billion, a 27% increase over a year ago. Our operating earnings and revenues both reached all-time highs, which, of course, reflects the benefits of the acquisitions we've made but also demonstrates that the business is returning to its pre-crisis profitability levels. Total owned, managed and administered assets increased to our highest level ever at $600 billion, which includes the Columbia assets.

Our strong financial foundation and prudent operating principles continue to serve us well. The balance sheet remains in excellent condition and our capital and liquidity positions continue to provide a great deal of flexibility. In fact, during the quarter we received a new stock repurchase authorization from our board. We subsequently took advantage of the market opportunity and bought back 5.7 million shares for approximately $220 million. Going forward, we'll continue to balance opportunities to buy shares with external factors. In addition, we are maintaining our reengineering and expense focus and we continue to reinvest a portion of our savings to drive growth initiatives. In the quarter, while distribution expenses increased along with advisor productivity, our controllable expenses remained well managed.

Now I'll discuss our segment performance. First, in Advice & Wealth Management we reported pre-tax operating earnings of $88 million compared with $21 million a year ago and $54 million last quarter. Our pre-tax operating margin in the segment was up 3% sequentially to 9.1%. Our advisors remain satisfied and engaged and our retention rates remain high, especially among our most-productive advisors. We continue to provide a high standard of advisor support, technology and tools, as well as marketing and training. We're continuing the phased rollout of our new brokerage platform, which is one of our largest current investments. It provides advisors with important additional capabilities. The advisor productivity continued to rebound in the quarter, with operating revenue per advisor increasing 32% over a year ago and 12% sequentially. At $83,000 of operating revenue per advisor for the quarter, our productivity has returned to pre-crisis levels.

During the quarter, clients continue to increase their activity. For example, in our wrap business we recorded another quarter of net inflows of more than $2 billion and brokerage volumes increased. Of course, more recent market conditions could reverse this positive turn. If the downward market movement continues, clients can once again seek safety. Client confidence has rebounded somewhat, but given the depth and duration of the recession we believe confidence is still quite fragile. You'll notice that our advisor count declined again this quarter. As we've told you in the past, we're strongly focused on productivity and less productive advisors are leaving the system. While experience advisor recruiting slowed in the quarter, we remain focused on bringing in more productive advisors and we believe we have a compelling offer and value proposition.

In Asset Management we generated pre-tax operating earnings of $104 million compared with a $3 million loss a year ago. The segment's pre-tax operating margin was 18.5%, the highest level we've achieved in this business in several years. These results obviously reflect two months of earnings from the combined Columbia Management organization, but also demonstrate improved profitability in our legacy business. Our global assets on the management in the segment increased 40% due to the acquisition. In terms of asset flows, we reported total domestic net outflows of approximately $4.6 billion. On the surface we realize the outflow seems significant, but we feel very comfortable with where we stand. While we would, of course, like to see stronger equity markets to help drive assets to our funds, the flows and business results are right in line with what we expected when we closed the transaction. Walter will provide detail to help you understand the flows picture shortly.

Overseas the red needle moved to net outflows, mostly from low-margin Zurich assets. The turn to slight outflows in retail funds resulted from the significant volatility the European markets experienced during the quarter. In terms of investment performance, short-term domestic performance slipped somewhat due to the high-quality bias of our portfolios. Longer-term numbers looked good and international performance remained very strong. We are comfortable with the current performance trends and we believe the Columbia product platform will be well positioned to deliver consistent competitive performance. The integration of the acquisition is proceeding according to plan and on budget and we remain confident that we will be able to execute the transaction and deliver on our financial projections. Just as important, we continue to feel very good about the benefits Columbia is giving us. We feel good about our ability over time to realize the significant distribution and wholesaling opportunities, and when we complete fund mergers in the coming months we will have a deep and compelling product platform.

Moving to Annuities, the segment reported pre-tax operating earnings of $129 million, an increase of 50% over a year ago and 10% sequentially. The segment's operating revenues increased also to $626 million for the quarter. In variable annuities we generated net in-flows despite a continued challenging environment for sales. We launched a new product enhancement about two weeks ago and we believe advisors were awaiting the latest generation of our variable annuity offering, which temporarily muted sales. Early indications for the new product are positive. The fixed annuity business remained very stable, even though the current rate environment continued to be unfavorable for new fixed annuity sales. The larger book that we accumulated last year continues to generate solid returns. The Protection segment produced pre-tax operating earnings of $134 million for the quarter, 21% better than a year ago and 14% ahead of the sequential quarter. Sales improved across product lines, especially in variable and fixed universal life, and expenses remained well controlled. The auto and home business continued its steady growth trajectory, with policy counts increasing 9% over a year ago. Overall our book of insurance business continues to generate strong returns.

So as I look across our businesses, all four segments are performing well and we're realizing the value inherent in our diversified and integrated model. Of course, we continue to monitor the environment closely. The economic recovery still feels fragile and as you've seen, markets remain quite volatile. While equity markets have recovered a bit in July, they were very weak in May and June. Clearly a sustained market decline or renewed macroeconomic problems would impact our asset-based fees client activity and profitability to some degree. That said, our business fundamentals have improved steadily for several quarters now. We're beginning to realize value from our acquisitions and our financial foundation expense discipline remains strong. We're making good, consistent progress towards our goals and we are clearly focused on realizing the opportunities we've created for the Company. Now I'll turn it over to Walter and later we'll take your questions.

Thanks, Jim. We posted slides on our website again this quarter and they will be updated with my talking points after the call. Please take a moment to review the Safe Harbor statement on page two and then turn to slide three. This was a strong quarter for Ameriprise. Reported EPS was $0.98 and operating earnings per share were $1.10. We generated strong top-line growth, along with continued expense management, which resulted in improved margins. All four of our operating segments generated solid PTI and margin results and we maintained our strong balance sheet fundamentals.

Now on the next slide, in the quarter, our operating earnings were $291 million, or $1.10 per share. Our operating return on equity, excluding AOCI, was 11.4%. This substantial improvement was generated by higher equity markets, benefits of our reengineering activities and the acquisition of Columbia Management. This operating performance in the quarter included the following items. The 12% decline in the S&P 500 resulted in a higher DAC amortization impact of $0.09 per share. In the second quarter, we realized $0.08 per share benefit for revising certain calculations in our DAC and DSIC valuation models. Widening credit spreads impacted the liability valuation of our hedged living benefits, increasing earnings by $0.06 per share. And finally, a contribution to support our legacy 2a-7 funds increased expenses by $0.02.

On the next slide operating net revenue growth was strong at 27%. Revenues have been on a upward trajectory over the past five quarters. Excluding the Columbia acquisition, revenue would have been up 18%, driven by primarily higher markets, positive retail flows and increased client activity. Let's turn to expenses. We continue to effectively manage our expense base. Operating general and administrative expenses grew 13%. However, normalized for Columbia's ongoing operating costs and other items, primarily 2a-7 reimbursement and last year's legal reserve increases, these expenses increased only 4%.

On the next slide I'll turn to the segments. This was an excellent quarter for Advice & Wealth Management. Pre-tax operating earnings were $88 million in the quarter and the operating margins have improved from 2.6% a year ago to 9.1% this quarter. Year-over-year earnings growth and margin expansions were driven by growth in average fee-based assets, driven by the daily average S&P up 27% and wrap net inflows of over $10 billion. Lower operating, general and administration expenses reflect strong expense management, partially offset by continued investment in marketing and the new brokerage platform. And finally, improvement in client activity, although it continues to be below pre-crisis levels.

On the next slide you can see we also had strong performance in our Asset Management segment. Asset Management generated pre-tax operating earnings of $104 million and an operating margin of 18.5% in the quarter. Earnings and margins benefited from year-over-year market appreciation and expense management, and of course, the addition of Columbia. Our legacy Asset Management margins improved to 15.9% in the quarter. These results reflect continued strong investment performance, high levels of retention of our investment professionals and our broad product platform by type and style.

Now let me give you some color on assets and flows, please turn to the next slide. At the end of June AUM from the Columbia acquisition was $166 billion. In May and June market depreciation was $13.5 billion and we experienced $4 billion in net outflows. Legacy outflows in the quarter were $600 million, resulting in a total US net outflow of $4.6 billion. Institutional net outflows were $2.5 billion. The vast majority of these outflows related to a single low-yielding account, where the client diversified into multiple managers. So while we kept the mandate, our portion was cut. We feel good overall about the institutional business, with strong asset retention and many mandate wins during the quarter. Retail experienced $2.3 billion in net outflows. We had approximately $700 million in net outflows from [platform] changes, primarily the integration of Bank of America distribution channels. We expect these outflows to continue over the next several quarters. It is important to note these future outflows are expected to be larger in revenue and PTI neutral, based upon the structure of our underlying agreements and fees.

We had an additional $500 million in outflows from sub-advised assets. These assets are lower margin than our retail assets. Outflows were primarily the result of weaker investment performance in the past; however, that performance is improving. Clearly outflows are being impacted by volatility in the market and the overall market share for fixed income products. While we have significant fixed income capabilities, our retail sales have an equity bias. As you are probably aware, industry flows in domestic equity funds were a negative $28 billion in May and June. The net flows reported in the quarter are consistent with our expectations at this stage of the integration. Specifically, sales and flows are showing the impact from consolidating funds where advisors are still uncertain about the ultimate outcome of the fund mergers; wholesaler realignment where we are reconfiguring the territories and greatly expanding the products for each wholesaler; and the pending transfer agency integration, which will ultimately facilitate transferring from product to product across our platform.

That being said, the integration is proceeding quite well in all key areas, as the next slide shows. In the current quarter we expensed $53 million in integration costs, with $48 million recorded in the Asset Management segment. The primary driver of this expense was severance accruals. Our target for the integration costs remains at $130 million to $160 million. We originally reported expected net synergies of $130 million to $150 million, comprised of gross synergies of $150 million to $190 million offset by the dissynergies I've already discussed. Again, we are on track. In the quarter we realized $14 million of gross expense synergies and have taken a number of actions that will drive synergies in the future quarters. We are also on track with respect to our revenue dissynergy forecast of $20 million to $40 million, having realized about one-third through the second quarter. Lastly, we committed to update you on the in tangible amortization related to this deal. Our current estimate is approximately $17 million per year below our original estimates. The difference is primarily due to allocating more of the purchase price to non-amortizing intangibles.

Before I turn to the remaining segments I want to provide you context on our Asset Management segment margins compared with our competitors. We believe that our margin target is appropriate for our business model. Many of you have heard us say that accounting differences and business model differences make it difficult to compare our margins across the industry. On this slide, we show the magnitude of some of those difference and we've used this quarter's 18% margin as the starting point. Some asset management's net pass-through distribution expenses from their GAAP revenue line. Others net it out as they calculate margins. If you lower the revenue in our margin calculation by netting these pass-through distribution fees from revenue, it would add over 7% to the margin calculation.

In addition, our Asset Management business presides over a large block of sub-advised assets, part of it driven by our Life and Annuities business and the new enhanced Portfolio Navigator. These sub-advised relationships increase both revenue and expenses and depress margins. For us, netting sub-advised fees from revenues would add about 2% to the margin calculation. We also have other pass-through revenue, like trust administration fees, that are a function of the integrated model and our organizational structure. Finally, we have intangible amortization of about 3%, which some analysts choose to net to see underlying cash margins. Just to be clear, we are providing this to give you some context as you compare our margins across the industry. Going forward we will continue to report and focus on the operating margins as we define it. I want to reinforce that we remain committed to driving our margins in this business to 25%.

Let's move on to the annuity segment, which also generated strong results in the quarter, driven by solid underlying fundamentals. The $129 million of operating earnings included the following; (inaudible) increased expense by $35 million; actuarial modeling benefited earnings by $26 million; hedged living benefits increased earnings by $25 million; and finally, the implementation of EPN increased expense by $6 million. We continue to see positive net flows for variable annuities, with second quarter showing improvement over the first quarter of 2010. In the quarter our hedge programs continued to work well.

On the next slide the Protection segment continues to generate healthy revenues and earnings. Operating earnings reflect lower DAC amortization expense as a result of the following items; increased expense of $4 million due to the market impact on DAC; a benefit of $6 million due to higher gross profits forecast driven by EPN; and a benefit of $7 million due to actuarial modeling changes. While we still haven't seen activity come back to pre-crisis level, VUL/UL sales are up 31% year over year. Expenses were well controlled in this business, with G&A expenses down 5% from a year ago.

On the next slide we continue to manage our financial foundation well, which has enabled us to return capital to shareholders. During the quarter we repurchased 5.7 million shares for $220 million and continue to hold more than $1.5 billion in excess capital. While our cash flows are down from the first quarter, with enhanced Portfolio Navigator fully implemented, our free cash and holding Company liquidity remained high. The underlying quality of our balance sheet also remains strong. RiverSource Life's estimated RBC was above 500% and our unrealized gain position increased to $1.6 billion. Our balance sheet ratios continue to remain conservative. Finally, our variable annuity hedge programs continue to be effective despite volatile markets.

To summarize, our business trends continue to improve. Our actions have resulted in increased operating leverage and we are making progress towards our financial goals, with margin improvement in AWM and Asset Management, and operating returns approaching our on average, over time target. Our balance sheet remains strong, including our capital and liquidity positions, and overall, although the market and economic outlook remains uncertain and could impact our near-term results, we believe we are well positioned to deliver against our long-term financial goals. Now we will take your questions.

Thank you. (Operator Instructions). The first question ask from Alex Blostein from Goldman Sachs. Please go ahead.

Hi, guys, good morning. First question for you. Wanted to circle back on your comments in Advise & Wealth Management about higher pay activity and more importantly, where -- what areas are you guys -- do you see retail investors putting money to work in this environment? Because as you highlighted, the mutual fund flows remain pretty weak industry wide. So the big pick up this quarter if you could just give a little more color where that's coming from would be helpful.

We see a pick up -- actually one of the main areas has been our wrap programs. People have moved money back from all cash into the wrap business and a combination of both equity and fixed income underlying the wrap program. We also see -- they've increased some activity back in long-term contracts, such as the variable annuities, as well as in the Protection products. (inaudible) activity occurring in the brokerage world. So I would say that people are getting back to business. We saw that starting to pick up in the first quarter. It definitely accelerated a bit in the second quarter and then I think the markets hit a bit and that slowed a little towards the end of the quarter, but it was at an increased level than where it was over the previous quarters.

Got it, thanks for that. And then, Walter, one for you on the pro forma margin for the Columbia business, if it was fully in the numbers for the whole second quarter. Can you just give us a sense where that number would be as opposed to the 18.5% that you guys reported?

Yes, they -- actually it could be pretty close, probably take it up maybe a half or something like, but it's pretty close, because it's only the differential on -- as you saw, we did at RiverSource 15.9% in aggregate so on -- I would say maybe take it up half a percent. But again --

Got it, thanks. Okay. And then just a broader question. There's been continued industry-wide discussion about potential limitations of 12b1 fees. Can you give us a sense of what percentage of your total revenues you guys got from 12b1 fees and if there's a 25-basis point cap or other form of reduction. What kind of impact should you potentially have?

What I would say is we're exact -- we're looking at it right now to just understand the issues and implications and also putting together various comments to go back to the SEC. I think there are some rational that we see for why they're doing it in transparency. We don't do a lot of C shares. We terminated all B shares. So is there an impact? We don't think it would be significant and we're very clear and transparent in what we do anyway. So it's something we're studying right now. We'll get back to you as soon as we know a bit more.

Got it. Thanks, guys.

Thank you. The next question is from Andrew Kligerman from UBS. Please go ahead.

Hey, good morning. First question around Asset Management. Walter, you mentioned in your comment that you were about a third of the way through the integration process and I think you were implying the effect on flows. So if you had net negative flows of $4 billion related to the integration and you're a third of the way through should I be thinking that there's another $8 billion of net negative outflows of about $8 billion?

No. Actually what we're doing, as we said, as related to our situation we are looking at combining and then getting the impact as it relates to that. I wouldn't draw a correlation on how this relates to -- relating to the $8 billion. We still have to combine the funds and there is -- still understand the impact as it relates to the fees, so we're just taking a point in time. This -- remember, a lot of the flows and other things this relates to what we were talking about, are -- will largely be neutral. So I would just say more of that was related to the reduction in fees due to consolidation and relating to the loss that RiverSource and others as we combined and loss of assets as we put the PMs together and the programs together, which is still in process with the mutual fund (inaudible).

So if you're still in the process can you give any color on what you think the net flows impact might be? Do you think we'll still see significant numbers for the next quarter or two coming out as opposed to in?

I think we're going to see -- certainly we're going to see it continuing as its impact on profitability we believe will not be significant and it will be marginal. What we -- as they combine and integrate their networks we anticipate there will still be some flows going out.

Andrew, just if you look at the flows and the outflows for this quarter. $2.1 billion was a very low fee as Banc of America institutional account where we lost a part of that mandate. We're actually still in the mandate and other people lost completely out, but it was a lumpy outflow. It was $2 billion. So really what we're going to continue to see really is as we integrate funds sales activity is a little slower. We have the wholesaling coming together, new product set territories. We're actually consolidating the fund families. So the advisors want to know which funds are going to remain open because they don't want their clients repapered, et cetera, they want to know which ones going to be the ones that are going to be standing. That will occur in the September timeframe, we can give them all that information.

And then I think the other big thing that we do expect -- and I want to be clear about -- is similar to what we saw as the combination of the Banc of America or Merrill Lynch platforms. They fully informed us that that was taking place as they integrate the firms, and as they move their accounts to their own managed account basis, we will see outflows moving from us managing those accounts to them. Now part of our agreements and arrangements with them is that they'll use our capabilities and modeling and selection there and then we'll get certain fees for that and those fees pretty much offset what we would do in managing those assets under the relationship, but you will see outflows from it. What we will do each quarter -- we know that part of that occur in the September quarter and we know part of that will occur also at the end of the year, beginning of next year -- we will identify that clearly with you. But under our arrangements a lot of the fees will maintain themselves just under a different clause that we have in the agreements. So, clearly we are integrating, but I would also say sales across slowed a bit in the quarter because equity sales aren't as strong as they were. So we'll do our best to identify for you where it might be from an integration activity, but we still believe that the $20 million to $40 million that we put as dissynergies on revenues would cover the outflows that we expect from the combination.

So that kind of clarifies the $20 million to $40 million of dissynergies. It doesn't sound like there's a massive impact coming. But maybe, Jim, just so that investors won't be shocked when they see the number, are we going to look at magnitude in the $3 billion to $5 billion over the next two quarters of outflows? Just to get a feel for that magnitude.

Eric, it probably is hard for me to say as it comes --

Eric?

-- as it comes from a large institutional mandate versus a retail. I would not want -- I don't expect, necessarily, that we're going to see that type of thing. With the combination of the platforms, as I mentioned, in Banc of America, we'll get some idea of what the size of those are in flows and we can identify them. But I don't want to call anything on that. I do feel very comfortable, however, with what our estimates are as we look at the synergies and dissynergies and we looked at the overall flow picture. And I actually think once we get the fund family settled and if the market comes back a little we should have good product to sell. We've got good performance, good track records, we have a good wholesaling team in place, so I think we're just in a combination of events.

Okay, and I'll let the one go. And real quickly, appetite for more buy backs?

We're going to -- we looked at the opportunity we had in the second quarter and we took advantage of some of that opportunity with our board authorization. We'll continue to evaluate that based on market climate and our ability to utilize our funds appropriately and we'll continue to utilize our buy back programs over the next two years as we got approval for.

Okay, thank you.

The next question is from Suneet Kamath from Sanford Bernstein. Please go ahead.

Thank you and good morning. Two questions. First on the Asset Management margin, 18.5%, call it 19% if you had Columbia for the full quarter. Given that you've talked about the expected outflows being PTI neutral and given the fact that we've not seen the full impact of the cost savings relating to Columbia, if we still stick to your original market forecast in terms of 8% market appreciation and net flows being positive -- just the base case that you set when you did the acquisition -- given that you're already at 19ish-% in terms of the margin why wouldn't you assuming an 8% market appreciation then -- and positive net flows, why wouldn't you be above that 25% target given that you're most of the way there? Is there something else going on in the numbers that would prevent you from surpassing that 25%? And then I'll have another question on Advise & Wealth.

Let me give you my -- listen, as we said that we targeted it would be 25%. We're two months into the closing on the transaction and certainly a lot of the synergies are in front of us and benefits, net flows and all that. So we are -- and Jim has actually said that 25% wasn't a stop point. Now, are we confident two months into this that we're [going to start forecasting changes, no.] I think we're on track and we're moving on track, both on the synergies, certainly the one-time costs and the elements, as we just spoke. So I think we've gotten some good start points here and we're progressing through, but we have a long journey.

All right. But did you think that 19% -- or 18.5%, 19% was achievable in the first quarter that you closed Columbia? Was that the plan?

Suneet, I would say that we did make a number of changes to our underlying legacy business, so as you saw, our legacy business bounced back from the middle single digits to almost 16% in the second quarter just based on a combination of factors, which includes market rebounding a bit, as well as from some of the synergies we got from the Seligman acquisition as the cost of doing that was completed, as well as from the reengineering we did within the Asset Management business. I think part of what we clearly see is the ability to earn reasonably good returns and get reasonably strong margins. Now Columbia will give us a whole new level of that that we're layering on, but we're still working a lot of the details of Columbia. But we feel good about what we originally put together based on the initial information went we did the deal that we disclosed to you and what it seems as we close that deal and we're underway on integration, things are proceeding consistent with plan there.

So I probably would say at this point we need a little more time so that we can see how things unfold and we can get those synergies and see how we can get some traction against the product line up and the institutional business and we'll get back to you. I would also say to what Walter pointed out, even though we underlying report GAAP the way we do on the margins you can see some of the adjustments and some of what other people have as they reflect their margins. So, the 18%, if you look at it fully that way, could be much higher, and so when you take the 25% on a similar basis that looks pretty good, as well, depending on what you factor in there. But we're still proceeding to get that 25% as a target, but as Walter said, if we can go beyond that and we see the ability to go beyond that we will start to let you aware of that as we proceed.

Okay. Well, for it's worth I was very surprised to see the 18.5% to 19% in the first quarter with Columbia. Turning to Advice and Wealth, again a similar sort of question. You got 9% margin. Obviously, the revenues came back. I think the key issue there, also, was that costs remained pretty low. So I guess question number one is, is the SG&A level that you're seeing in Advice & Wealth sustainable for the balance of the year and into next year? And then related to that, I seem to recall -- perhaps it was in a meeting that we had with some of you folks -- that there was a comment made that within the employee advisor channel, meaning all the distribution offices that you have, the Company is currently at about 50% capacity, meaning it's already -- it's only got 50% of the advisors in that channel that it could absorb from an expense perspective. Is that still accurate? Any thoughts on that would be helpful. Thanks.

Let me respond. On the expense, yes, we believe it is sustainable, it's part of the reengineering that Jim spoke to as we implement that, so we -- yes, that is sustainable. As it relates to the occupancy or the utilization, we are -- yes, we still have ranges to improve and it's in that range.

Okay, thank you.

The next question is from Jeff Schuman from KBW. Please go ahead.

Good morning. I was just wondering if you could update some of your big picture thinking. Columbia is early but it's off to a good start, you still have a strong balance sheet. So from here what is your level of interest and appetite for thinking about further asset management or distribution acquisitions?

Well, I think what I would say is we do feel very good about our position. I think we've been very much focused on continuing to drive the organic growth and we're starting to see some of that come about. We are right in the heat of the integration of Columbia, so very clearly from an asset management business we have our people very much focused on orchestrating that and it's a very large deal for us and it's a sizable integration because it's sort of a merger of equals there that we're working on. Clearly, we want to continue to invest organically to grow that we're already doing and putting more funds to work in our investments to do that, and we will continue to look at potential opportunities. If something really makes sense for us or fits as we go further into the year and next year, but we would also look to really play the hand that we currently have. We feel like we have a good line up and we have a good position. We have flexibility to do something if necessary, but we also have flexibility, as we've shown in the first quarter, to buy back our shares. That's probably what I would probably give you as a perspective right now being where we are in the year.

That's helpful, and then just one other area. You may have spoken to this early on -- if I missed it I apologize -- but obviously you've had improvement in advisor productivity driven by a few things. Probably one of the factors has been the recruitment of some more experienced advisors. How does that stand at this point? Are you still attracting incrementally a higher level of interest from the more experienced advisors and how much ambition do you have to put those people on at this point?

Well, we are still adding experienced recruits. Again it's at a slower pace than last year, I think. Last year it was much more than we expected because of the dislocation that occurred in the market. And this year we're starting to refocus, as we put in place our new brokerage platform for some of our people, to try to accelerate our focus there again. But having said that, it is a slower period I think across the industry. I think it's getting a little frothy out there with some of the packages that the warehouses are currently putting out for some people. So we're picking our spot. We want to be focused on what's good for our Company and who will be appropriate for our value proposition. I still see potential for those recruits and I still see our ability to extend our reach throughout our channel, both in our employee channel, where we started this off, but also in our franchisee channel as we move forward. So it will clearly be part of our plans for the future. We will devote time and energy to it, and I do believe it will add.

Now, the people we are bringing in today are multiples of the people who are leaving in production. So we're seeing nice strong production from the people coming in that would add value to our system over time and I think it will compliment what you've seen reported in the production areas. The people we added last year on a similar basis, as they ramp up their books we'll add to that. And as I said, the people that were leaving on average had a very low production. So the incremental, even though on numbers it's not the same, the incremental production is five fold. And from the people who are leaving, as well, on the [nova] side most of those book of business stay with us any way and they just move over to another advisor.

Okay, thank you.

The next question is from Eric Berg from Barclays Capital. Please go ahead.

Thanks very much. So I wanted to return to the issue of profitability pre-tax margin in the Asset Management business. I listened very attentively, Jim, to everything you said, but indeed margins tripled in one quarter. Do you view that -- I think you said that the legacy business went from roughly 5% or 6% to 16% or 15.5%, a tripling of margins. That's almost unheard of in business in a year, let alone -- it's just very unusual for any business to see their profitability triple let alone in one quarter. How sustainable is that?

Well, Eric, I think there are a few things. One is, when you look at reported in the first quarter, remember we had the TAM PIP that impacted that margin and TAM itself is performing much better and we don't have that absolute adjustment that occurred in one quarter for that, so that's number one. That would have helped the margin a bit. Number two is, we did take out a lot of cost last year starting the year before and that also, as you get the asset levels from the market, et cetera, bouncing back and the Seligman cost from that integration being complete. It was a combination of factors. So it's not so much that we don't think it's unsustainable, we think it is sustainable. Of course, we can't dictate what the markets are going to impact but there is leverage in this business.

And that's a key point. If you look period so period, especially (inaudible), 27% increase in the market and it is a leveragable business and so I think it's actually -- I think it's certainly within our -- the way we plan for it and the implications of it.

Okay. Given that you are seemingly -- going back to Suneet's comment -- ahead of plan with respect to Columbia, maybe you agree with that assessment, maybe you don't -- that's my assertion that you're ahead of plan -- how are you feeling now about your -- the ROE goals that you expressed at your last investor day? Achievable or perhaps even more than achievable?

I'll answer that question. As you were talking about between the 12% to 15%? (inaudible)

Well, I think you established it. I'd have to review the slides but I think you established a single point for your ROE goal for the end of -- and maybe Laura can chime in -- for the end 2011 -- 2012, I think it's.

2012. We said we would get close to the 15% and that's based upon, certainly again, a lot of factors that have to be certainly achieved as we talk about external and (inaudible) but I believe that we are on track to achieve what we said we would do.

Okay, thank you.

Thank you. The next question is from Tom Gallagher from Credit Suisse. Please go ahead.

Good morning. First question on Advice & Wealth Management. Just in terms of the big jump in distribution fees, can you comment a bit as to whether or not there was anything unusual there. What were really driving those? What particular types of product sales? And then if you can also just comment on, of the distribution fees the split between what is AUM based versus what is transaction based? That's my first question.

Well, I think the increase in distribution fees were a combination of the increase that we saw sequentially in the VMA sales, as well as the sequential increase in VUL and UL sales, as well as an increase, as we said, in the deployment and the wrap accounts. So that's really the sequential increase. Regarding increase, we saw both the increase in the asset management type of fees and distribution, as well as in transactions for the things I just mentioned to you for quarter. And we also had a it of -- also an increase in brokerage activity and that's coming a bit more in our business from some of the experienced recruits, as well as from some of the block advisors as they cover. So that's really where we saw the increases.

Do you all have a breakdown of the distribution fee revenue line, how much is AUM versus how much is transaction based just, rough split?

We do but we haven't disclosed that at this point in time so I'd rather not on this call, per se.

Okay. And then just to circle back to a question Andrew was asking and I'm not sure if I understood the answer, but, Walter, just very straightforward, the revenue dissynergies of $20 million to $40 million, if you assume ballpark 40 to 50-basis points of revenues per assets that would imply $8 billion to $10 billion of net outflows. You had $4 billion this quarter. Is it -- and again, I'm just looking for ballpark numbers. Should we be expecting over the next several quarters you'd identify $4 billion to $6 billion of incremental merger-related outflows and then we're done, or is it not that simple?

It's not that simple. It really is -- as we spoke about before, the $20 million to $40 million was really a combination as you combine certain funds, which is still in the progress of being approved, and you had a loss factor at either RiverSource or at Columbia and then the loss of rate as you had the step functions coming in. So it is really -- extrapolate it would just be pure, pure speculation.

The other thing I would day, just as an example, the $2 billion account we just lost in the second quarter, that was coming about prior to our closure, but that was only a few basis points. I don't want to just do a calculation off of 50-basis points translated. So it depends where the flow is coming (inaudible) sub-advisor funds, in which case on that it's a lower basis point, as well. So it's hard to do a one-to-one for you to come up with a number, per se.

Okay. And then would the anticipation be that the assets that are more at risk would they tend to be lower-fee funds, in which case the cosmetics might look like bigger outflows but ultimately the revenue impact would be the same? Is that fair to say?

Again, like I said, I'll just put a spin -- it would probably have a bias towards it but it'll be, of course, a spectrum as, again, decisions are made about -- from the PM standpoint and then the step functions on the rate. As we get a firmer handle as we move through it, we will certainly at the board and where we go, but it's just so difficult to really get a full handle on it.

I think what Walter's referencing is that if we combine two funds one of the funds may have a lower fee rate, or by combining the two funds it would move to a higher level in the break point. And so that's part of where the breakages in that $20 million to $40 million, as well, and so that's why he's talking that it's over the spectrum because -- but you're not going to see a material reduction from that, you're going to see basis points go down. (inaudible) same level of assets, so it's not necessarily that you're going to lose the assets, it's just that you've got break points in the fees.

Got it and then last question. Walter, on slide 11 when you went through the comparability of your Asset Management margins to your 25% goal, this 15%, I guess, add on when you do comparability to competitors, which would imply your 25% is more like a 40% margin versus peers. 40% is a very good number. What's the reason for putting this up? Just to show apples to apples or is it to show us that it's going to be fairly heavy lifting to get to 25%? Just curious what we should be reading into that?

Let me step back. I was trying to make it perfectly clear that we are committed to the 25% on a GAAP basis. What has happened, we have got in discussions with many of the analysts and many of the investors concerning comparability and looking at different elements, and all I was trying to do is point out different methodologies, different formulas, different approaches. In some cases you can't even add them because -- but there are elements there that we -- when you use GAAP, you do not reflect some of the reduction of, if you netted the pass through downs that you would get higher margins. All this is for information purposes that I felt people have asked to give us -- that we would give some context and that was it.

So I would put it this way. If you look at some firms that may not have the pass-throughs, they would have is a higher margin for the asset levels that they have. If you look at some firms that do have some of the pass-throughs, as an example, or amortization expense, some of them will reflect that in, some will reflect the margin without that and some will net it. So that's all we're doing is giving you information so when you do the comparison and you look at who in the industry or you're comparing against certain types of companies to certain mix, you can understand a bit more of what happens to the margin and the differential. So our business doesn't look that bad when you look at it that we pay certain things on a net basis based on distribution or sub-advised, et cetera. And so that's all. It's to give you the information so that you can diagnose that because some of the questions may be, well, if you had 25%, why don't you have 40%, and it wouldn't be appropriate to be at 40% based upon how those revenues come in and what's paid out and sub -- on a net basis. And so that's what it's there to do. So you can take that, analyze it and say, well, how does that look against whoever I'm comparing it to and what do they do within that mix and line up. Is that helpful?

Okay, thanks. That is. That's clear. Thanks.

Thank you. The next question is from John Nadel from Sterne Agee. Please go ahead.

Hey, good morning, getting in there under the wire. Two quick one's for you. As it relates to the tax-rate guidance, 25% or the low end, I guess, of the 25% to 27% for the full year, does that imply we have to think about the back half being higher to blend it to 25%?

Yes, it does.

Okay. And then if we --

As we do the plan, it comes in different elements, so really, that's why we said it's lower end of 25%.

And then as we think forward, Walter, you guys have talked about that tax rate consistently moving higher as pre-tax earnings moves higher and importantly as the mix of those earnings shifts and I suspect that still holds to as we thick out to 2011 and 2012?

Yes, it does and I believe the 25% to 27% will hold as we look into 2011. Certainly there's a lot of factors that go here, but certainly within tax planning and other things we're doing, that's a reasonable assumption.

Oh, thanks for that. Okay. And then I guess my only other question is, thinking about Advice & Wealth Management at about a 9% pre-tax margin this quarter, I know, Jim, in your remarks you talked about client activity and maybe that's slowed over the course of the quarter. As we think about where the S&P is today, average S&P down 7.5% or 8% right now in the third quarter, should we be thinking about, just from a 50,000-foot level, that the earnings have to take a -- or the margin has to take a modest step back before it starts to ratchet up again?

Well, I think --

Just based on macro conditions.

Yes. Well, I think based on what you just said the market is down, and so as an example within the AWM area, let along the Asset Management, you're earning fees on those assets, and so if the asset's deappreciated the fees will be down in that regard. I can't predict to you how people are feeling, but if the Markets are very rocky, as we told you in the past, activity does slow a bit. So I would say you definitely have to take into account macroeconomic factors and Market factors because the retail investor -- our retail investor are not traders per se, and so volatility is not necessarily a positive thing.

Yes, understood. I mean --

(inaudible) on a fee-based business such as ours will be impacted.

Well -- and just to follow up on that. So you guys mentioned that distribution fees in Advice & Wealth Management were up nicely linked quarter and that part of that was VMA sales were very strong on a linked-quarter basis, life insurance sales were up linked quarter. As you look at the trend of those sales in the -- during the quarter, is it fair to say that they slowed down from April to June or -- I'm just trying to get a sense how much do we need to think about this taking a modest step back before we go forward?

Listen, it takes a little time for things to adjust. It doesn't automatically adjust based on a week of markets or a few weeks. I would say it was relative during the quarter. We didn't see a major falloff, per se, in activity. And we also just launched a new product in our variable annuity line up that people were waiting for so that may have some demand for it. And our insurance --

When was that launched, Jim?

-- (inaudible) quarter of it. So I don't think it's going to be an absolute across all product categories, so there are some things that may be there that will continue to have activity. So it's too early to tell right now for the whole quarter. Just one other thing, The third quarter is usually slower. People take vacations, et cetera, in July and August so I just want to make -- seasonality is always -- is there, as well, but I think that might be across the industry for you as you analyze.

Good point. Thank you very much.

The last question will be from Colin Devine from Citi. Please go ahead.

Morning, just a couple of quick ones. First with respect to Threadneedle in terms of the Zurich assets if you can just give us some idea what you're down to? Secondly, if you can just confirm that you have not done any buy backs yet in the third quarter? And then also with respect to Columbia, how has its market share in VMA system changed since you acquired it? I assume it's down somewhat. Perhaps you could just give us some granularity on what's happening there?

Let's take the first one, Threadneedle. Threadneedle today -- and Laura, you can correct me on this -- I think their Zurich assets are less than 50% of the total assets, but on a revenue basis it's probably less than 20% or so. So as I said, there's the -- closed books there in some of the institutional business for their owned accounts and that's what we've seen more of the consistent outflows as they regear their various businesses. But our arrangement with Zurich will continue and it is continuing, and so there is sort of the steady that we have had and dealt with since we bought Threadneedle. And they have diversified their businesses pretty significantly, both in the institutional, as well as taking stronger positions on retail platform in the industry. And so we've seen that and we saw a nice inflow over the last few quarters, over the last year in Threadneedle and we think we just saw it a bit slower because you've seen the market volatility in Europe both impacted the retail, as well the institutional investor. The second --

The second one is during this timeframe from the close of the quarter until a certain point after the earnings we are not allowed to direct buying of shares, so let me leave it at that, okay?

Okay.

As far as the positioning on the share, I believe the shares pretty much stayed where they are, it's a marginal change. We have not seen a discernible change.

Okay, and then one [of the follow ups]. In terms of the advisors, you mentioned you're continuing to squeeze out the lower producing advisors. Where should we expect this to bottom, and I guess both for the branded financial advisors and also for Securities America?

Well, I would say that we should continue to experience some of the negative over the next few quarters, but I think some of that is slowing, as we've just seen over the last quarter or two. I would also say that from a net production perspective, I'm not saying that will be negative as that slo -- continues to slow. As I said, even if we're bringing in fewer people at much higher production levels it more than offsets on a multiple basis. We are looking to grow our ranks. We will probably, next year, start to kick off a bit more of adding career changes. We're actually helping and working with franchisees even now to bring in experienced people into their practices, as well as recruiting into our franchisee system. For instance, if you looked at some of our attrition in our franchisee system it's down slightly, 20, 30 a quarter, something like that. That's because we have people selling practices, retiring, sorry to say, passing away.

We also, because we're not doing novices and then migrating them, we have less transferring in, so we' start tore going to look at the franchisee system and recruit directly in there and help the advisors there build their own teams, which they used to do from some our recruits. So (inaudible) ways that we will approach it, but I think the positive for us is we will do this at a lower cost and a higher productivity level and that's what's important. And in fact, in our P1 system we are also forming some teams, marrying up some of our advisors that do financial planning with some of the experienced people that we've brought in, or as well as the block to really help round out their businesses, and then over time we'll be able to add more junior people to those practices to help drive productivity. So those are some of the things that we're doing, but if your -- just to answer your question directly, we will continue to see net negative over the next just few quarters. It will continue to slow. We'll stabilize thereafter, we think, and then we'll start to try to increase from there.

Okay, that was very helpful. Thanks, Jim.

Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, you may now disconnect.