阿默普萊斯金融 (AMP) 2013 Q2 法說會逐字稿

Welcome to the second-quarter 2013 earnings call.

My name is Larissa, 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 this conference is being recorded.

I would like to turn the call over to Alicia Charity.

Alicia, you may begin.

Thank you, and good morning.

Welcome to Ameriprise Financial's second-quarter earnings conference call.

On the call with me are Jim Cracchiolo, Chairman and CEO; and Walter Berman, Chief Financial Officer.

Following their remarks, we will be happy to take your questions.

During the call, you will hear reference to various non-GAAP financial measures, which we believe provide insight into the Company's operations.

Reconciliations of non-GAAP numbers to the respective GAAP numbers can be found in today's materials on our website.

Some statements that we make on this call may be forward-looking, 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, our 2012 annual report to shareholders, and our 2012 10-K report.

We take no obligation to update publicly or revise these forward-looking statements.

And with that, I will turn it over to Jim.

Good morning, and thanks for joining us for our second-quarter earnings conference call.

I will provide my perspective on our results and the business.

Walter will review the numbers more fully, and then we will take your questions.

Yesterday afternoon we reported strong second-quarter earnings.

We are making significant progress across the Firm, and we delivered record results in our Advice and Wealth Management business.

In terms of the economic environment that we've been operating in, US and European equity markets moved around quite a bit during the quarter.

They rose significantly in the early part of the quarter before hitting a rough patch in June, and have since come back.

Investments are beginning to get back into the markets, and the economy is on more stable ground.

The bond market backed up a bit, increasing long-term interest rates.

However, short-term interest rates remain at an all-time low.

Overall, I'm pleased with how Ameriprise is performing, while moving forward with purpose and executing our consistent strategy.

Walter will discuss the numbers in detail, but our financial results demonstrate a strong quarter.

On an operating basis, net revenues grew to $2.7 billion from significant growth in our fee-based businesses and a pick-up in client and advisor activity.

Our earnings were $352 million, with diluted earnings per share of $1.69.

And return on equity, excluding AOCI, reached a new level, increasing to 17.9%, which is an all-time high for us.

In addition, our assets under management and administration increased to $703 billion.

Maintaining an excellent financial foundation is core to how we operate the Company.

We continue to demonstrate the strength of our capital position and ability to generate significant free cash flow to return to shareholders.

During the quarter, we returned $488 million to shareholders through share repurchases and dividends.

Over the last four quarters, we returned 134% of our operating earnings to shareholders.

As we said, we intend to return the majority of our earnings to our shareholders annually.

With that, let's talk about our Advice and Wealth Management performance.

As I mentioned at the start, Advice and Wealth Management had excellent financial results, even after the banking last year and the pressure from low interest rates.

Operating net revenues increased 13% to $1.1 billion, driven by significant retail client net inflows, more client activity and market growth.

Excluding former bank operations in 2012, operating net revenues increased 17%, and operating margin increased to 14.1%, due to the growth in productivity and our expense management efforts.

We also had very good client flows in asset growth.

Ameriprise advisor client assets grew by 13% to $373 billion because of strong net inflows, good results in client acquisition and equity market appreciation.

Client activity continue to increase, and wrap net inflows were up 18% to more than $3 billion.

Advisor productivity is also up nicely, with operating net revenue per advisor, excluding former bank operations, growing 17%.

Importantly, our advisor retention remains high.

And in terms of experienced advisor recruiting, we saw a meaningful improvement in bringing in another 88 experienced advisors in what was generally a slower recruiting quarter for the industry.

I'm pleased with both the number and quality of advisors joining our Firm.

We are building on our leadership presence in the retirement space, and driving advisor efficiency through our tools and capabilities.

During the quarter, we formally launched are exclusive Confident Retirement approach, which helps clients to feel more confident about their retirement by addressing all of their needs comprehensively.

Our advisers say it makes difficult conversations easier, and helps to deepen relationships.

We are putting a concerted effort towards implementing this program more broadly over the next 18 months.

This year is about continuing to educate and engage advisors through field training and focus groups so they can utilize the Confident Retirement approach in their practices.

We are also focusing on deriving benefits from the investments we have made, including end technology.

We are channeling our efforts to help advisors fully uptake all of our brokerage platform offers, as well as our online tools for client advisor engagement over the next 18 months.

And we continue to enhance our tools and processes with new self-service features and enhancements that help advisors save time and make it easier to transact business.

During the quarter, some of our online capabilities, including our advisor websites and social media efforts, were recognized with awards from the Financial Communication Society.

Overall, it was an excellent quarter for Advice and Wealth Management across the business.

With continued growth in client flows and increased productivity, as well as our ongoing focus on expense management, we are able to grow our margins and offset low interest rates.

Now let's move to Asset Management, where we are beginning to gain some momentum while managing the outflows we discussed with you last quarter.

Assets under management were $459 billion, up 3% compared to last year, as growth and equity markets more than offset net outflows and the negative impact of foreign exchange.

The growth in assets from market appreciation, as well as ongoing revenue and expense reengineering, led to solid earnings in our Asset Management business, even after adjusting for the Cofunds' gain.

In fact, adjusted net pretax operating margin, which does not include the one-time gain, was 36.2% for the quarter compared to 33.7% a year ago, and 34.6% in the sequential quarter.

In terms of investment performance, our one-year, three-year and five-year numbers are quite good and reflect our focus on generating consistently strong performance for our clients.

We had very good fixed income performance numbers, and saw an improvement in domestic and international equity at Columbia.

In total, we offer more than 120 4- and 5-Star rated funds.

With regards to flows, net outflows were $2.1 billion in the quarter.

In retail, we showed nice improvements.

Threadneedle experienced significant net inflows in the UK and Europe, with a very robust showing in the first two months of the quarter.

Overall, we had about $900 million of total net outflows, as the positive gains at Threadneedle were offset by outflows at Columbia.

Columbia's outflow drivers were slightly improved from the first quarter, and also reflect industry-wide pressure of retail fixed income outflows in June.

When adjusting for the market dynamics, underlying Columbia retail net outflows were primarily from the areas we discussed last quarter -- a former parent-affiliated distribution relationship, a key sub advisor and our actions to improve the economics of our share class in the RIA channel.

While the former parent-affiliated distribution relationship represents an important client for us, we will experience ongoing net outflows as our market share normalizes over time.

For Columbia, increasing our presence on large distribution platforms and gaining wins on platforms remain the focus for retail.

We are also expanding our due diligence efforts.

Importantly, sales within our focus funds are good, especially those within our redefining income campaign.

However, we need to increase our overall penetration.

With regards to institutional, we had about $800 million in total net outflows, but that was driven by $2 billion in outflows from legacy insurance mandates, parent-affiliated distribution and former parent-influenced assets.

When you adjust for these elements, the underlying traditional institutional business had a solid quarter.

As I mentioned last quarter, the pipeline of won but not yet funded mandates have been building.

We had several large US equity and fixed income mandates fund in the quarter.

I should also note that our Global coordination across our Asset Management businesses is one of our key long-term growth initiatives.

During the quarter, existing and emerging market debt and equity teams at Columbia and Threadneedle began working together.

And over the next several months, we will expand collaboration between the two organizations to include Global Asset Allocation, Global Fixed Income and Global Equity Asset Classes.

We know we have more work to do in Asset Management, and we will drive hard to gain profitable net flows.

We feel we have a good foundation in place that we will continue to build upon.

Let's move to Annuities and Insurance, businesses that are important to meeting clients long-term financial needs and our Confident Retirement approach.

In Annuities, we are generating good returns on a business that has effective risk profile and hedging.

The business is well-positioned, and cash sales of variable annuities through Ameriprise were up 20%.

Sales of our managed volatility funds have continued to increase in recent months, with improved equity markets and our wholesaling efforts driving our momentum.

In May, we introduced three new volatility control products and 20 additional tax-efficient variable annuities without living benefits.

Overall, we are pleased with the initial sales and flows that we're seeing in these products.

With regard to fixed annuities, as we said in the past, this is a good book of business for us, but not one that we are looking to grow in a low interest rate environment.

This is consistent with our strategy to manufacture products where we feel we can get attractive risk adjusted returns.

In Protection, the business is also performing well, with good profitability.

We have a diversified portfolio that is mostly comprised of variable Universal Life, cash-valued focused universal life, disability income and some term products.

We are seeing a nice pick-up in sales, and we are generating meaningful returns.

Sales in life insurance are up 32% from last year.

Indexed Universal Life sales continues to be strong, and will also experience an improvement in Universal Life sales, a business where we are a leader.

In Auto and Home, we had a solid quarter, with steady policy growth of 10% from a year ago.

We are working to deepen penetration with our affinity partners and with our own advisors, and we're seeing nice progress.

Client satisfaction retention of Auto and Home remains very positive.

To summarize, we had very good quarter.

All of our businesses performed well, especially Advice and Wealth Management, which is showing excellent results.

In Asset Management, we are generating solid returns, but we have more work to do to gain flows at Columbia.

Our Insurance and Annuity businesses are performing well and complement our total offering.

Overall, we are executing our strategy, managing expenses and the headwinds from low interest rates.

As I mentioned, our return on equity reached a new level in the higher end of our targeted range, consistent with what I told you last quarter.

As I look forward, we see opportunities to take it even higher and continue to grow returns over time, especially with an improved rate environment.

With that, I'd like to hand things over to Walter for a detailed review of the numbers.

Thank you, Jim.

Ameriprise delivered excellent financial results this quarter, particularly in our targeted growth areas, Advice and Wealth Management, and Asset Management.

These two segments represent over 60% of our total revenues, and grew 17% on a combined basis when you normalized for exiting the bank.

In Protection and Annuities, revenue grew in line with our expectations, particularly in light of continued low interest rates.

Let's turn to earnings on slide 4.

Operating pretax earnings had similar trends to revenues.

Advice and Wealth Management and Asset Management together represent over 60% of operating pretax earnings.

This quarter was particularly high with the Cofunds gain.

And adjusting for that, it would have been 59% of operating pretax earnings.

We expect this trend line to be in the high 50% range for the balance of the year.

Growth in these two areas was particularly strong.

In Advice and Wealth Management, earnings grew 63%, even with low interest rates and after adjusting for the bank exit.

Asset Management earnings increased 53%, excluding the gain from the Cofund sale.

Asset Management earnings increased 30%.

Annuities earnings growth was a solid 7%, considering the low interest rate environment.

The year-over-year comparison for Protection was impacted by one-time items in both quarters that I will discuss later.

Let's turn to EPS on slide 5. Earnings per share were $1.69, up a robust 50%, and return on equity hit an all-time high of 17.9%.

These reflect strong earnings growth in our Advice and Wealth Management and Asset Management businesses, and our ability to utilize our balance sheet to return capital to shareholders, given our financial strength.

Looking ahead, we continue to see opportunities for further ROE expansion.

Moving to the segments, results in Advice and Wealth Management were strong across the board -- business growth metrics, revenue growth and expense management, all of which drove strong earning and significant margin expansion.

Pretax earnings grew 37% in face of both $18 million of lower bank earnings and a negative impact of $15 million from lower spreads on cash sweep accounts.

We expect that we will continue to beat earnings pressure from low short-term interest rates during the balance of the year.

Business growth, coupled with strong expense management, has fueled margin growth in the segment to a high of 14.1%.

This is up 250 basis points year-over-year.

And if we normalize for the bank, margins would have expanded about 400 basis points.

Turning to Asset Management.

We had earnings of $199 million, up from $130 million in the prior year.

Earnings in the quarter included a $30 million gain from the sale of Threadneedle strategic business investment and Cofunds previously mentioned.

Including this, earnings were up 30%.

During the quarter, we had a CDO liquidation.

A portion of CDO earnings are recognized when funds are liquidated and performance fees are earned.

The liquidation this quarter generated $19 million of profitability, which more than offset higher performance-related compensation expense.

Adjusted operating margins improved to 36.2% from 33.7% a year ago.

Let's turn to flows in more detail on the next slide.

In the quarter, we had a total of $2.1 billion of net outflows.

Global Retail outflows were $900 million.

International retail inflows were $700 million, with strong inflows for April and May, which slowed in June when markets became more volatile.

US retail outflows were $1.6 billion.

For institutional, outflows were $800 million, an improvement from the last quarter.

We had outflows of $2.5 billion, which included $700 million of normal outflows from legacy insurance mandates at Threadneedle.

And approximately $1.3 billion of outflows in former parent-influenced mandates and former parent-affiliated distribution at Columbia, some of which was low basis points.

However, in the quarter, we had $1.7 billion of new mandates funded across Columbia and Threadneedle, and the pipeline remained strong.

Turning to Annuities.

Operating pretax earnings were up 7% to $124 million, in line with our expectations.

Consistent with our strategy to manage the risk profile of our variable annuity business, we are seeing good growth in attractive new business after launching several new managed volatility funds offerings.

We also continued to experience outflows from closed-block policies sold through outside distribution.

Sales of variable annuities with managed volatility funds and products with no living benefit riders drove a 20% increase in sales during the quarter.

Variable annuities operating pretax earnings were $82 million, flat compared to last year.

While equity markets were higher, that benefit was offset by the distribution expense associated with VA sales growth and higher assets.

The level of mean reversion was similar to the prior year.

However, this year's mean reversion was due to interest rates and bond fund returns, compared with last year when the change was due to the equity markets.

In fixed annuities, operating pretax earnings increased $9 million to $42 million.

Results in the current quarter included about $18 million of lower earnings from spread compression.

However, the higher investment income from former bank assets transferred into this portfolio late last year offset the interest impact by $7 million.

In addition, the prior-year period included $17 million of one-time unfavorable adjustments.

Moving to Protection.

Operating pretax earnings were $98 million, down from $109 million in the prior year.

The underlying life and health business remains quite strong.

We had good sales of both variable Universal Life and Indexed Universal Life.

In the quarter, we increased reserves with disability income insurance by $8 million.

However, the loss ratio on claims levels remained well within our expectations.

Auto and Home has continued strong new policy sales growth across market segments, primarily from our affinity relationships.

In the quarter, we incurred $18 million of catastrophic losses, which was $4 million higher than we anticipated.

And we incrementally added to reserves, as we did in the first quarter.

Let's turn to capital on the next slide.

In the quarter, we returned $488 million to shareholders through dividends and share repurchases.

As you can see, we have been able to consistently return more than 100% of earnings to shareholders due to our business mix shift, risk management capabilities and strong balance sheet fundamentals.

Based on current market conditions, for the rest of 2013, we anticipate that our capital actions will drive continued ROE expansion, and will fully neutralize the EPS impact of exiting the bank by year end.

Overall, we are executing our strategy, and it shows in our results.

Our ROE reached 17.9%, and we continued to return capital to shareholders.

With that, we will take your questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Suneet Kamath from UBS.

I wanted to start with the Advice and Wealth Management business.

On the past couple calls, you have talked about the employee advisor channel as break-even.

Just wondering if we are still break-even with strong second-quarter results?

And then, how long you think it will take you to actually start to generate a profit in that business?

And if you could hit on some of the drivers there, that would be helpful.

Okay.

This is Jim.

The employee part of the AWM business is actually profitable.

It turned profitable this year and is starting to improve nicely.

Having said that, it's not to the margins that we would like.

That's consistent across the entire franchise now.

But as we continue to gain productivity there and manage our expenses, we think that will continue to accrete to earnings and improve the margins.

If you think about the advisors in the two channels, how would the productivity of the employee advisors compare to the franchisee advisors?

Well, today, as you would realize, because the employee channel was one that we more started from maintaining an employee base over the last number of years rather than migrating people who are maturing over to the franchisee, we still have a number of our legacy people continuing to mature in that, as we recruit experienced people into the channel.

So we are seeing a nice increase in productivity as they continue to mature, as we continue to ramp up for the years coming in, as they continue to get their productivity back up to what they were before they were recruited, as they transfer their books.

So I would say over the next few years, we should be pretty equal in productivity between the channels.

Having said that, I think we are looking to grow both channels, and the productivity in both channels continues to go up.

Right.

Could we use a rule of thumb?

Is it like 50% the productivity in the employee channel on average, versus franchisee?

Or is there any way of dimensioning that?

What we will do is -- I would say, I think it's more than 50% at this point in time.

I don't have the numbers right in front of me.

But I would continue to say that it will narrow over the next number of quarters.

I think it materially changed from where it used to be over the last two years, but I don't have the latest numbers in front of me.

Okay.

And then just lastly, on the Advice and Wealth business.

If we think about that 14.1% pretax margin, compare it to the 12.9% that you did in the first quarter, I think the second quarter tends to be your seasonally high transaction quarter.

I'm trying to figure out how much of the delta between the two periods is related to that seasonality, versus productivity or margin expansion that we would expect to continue, even as we move into the third quarter.

Sure.

It's Walter, Suneet.

Again, there's no crystal ball on this, but certainly in the third quarter, we do see a basic cyclicality that will be lower.

But we anticipate that the margins, if you get into where we are going to be, should be in the high 13%s.

We think certainly the trajectory of this is going to continue, and the fundamentals are going to drive it.

But it will be in the high 13%s.

Got it.

And just the last question I have is on the Asset Management business.

We talked for a while now about expanding into third-party distribution channels.

I'm just wondering, as you think about that strategy, what are the levers or the catalyst that you have to increase your penetration there?

In other words, is it just about performance of the funds, or are there some other competitive advantages that you bring to the table that could increase penetration in that channel?

Yes, I think as we talk about growing our third-party distribution -- and again, I will separate the retail from the institutional.

In the retail side of the business, it's really getting in front of the various distribution partners with our product.

As you would imagine, they have a number of products already on their platforms, they have utilized a number of carriers.

And so what we are doing is showing them what our Columbia line-up is.

We had reestablished our wholesaling in the distributions as we had merged with wholesaling.

And now we need to continue to make progress working with them to get into their model portfolios through the gate keepers and on the various platforms for the different types of products that we have.

So it's not as though we don't have the products, nor the performance.

We do.

It just takes time to build those relationships back and see our products versus the other ones that they are offering, and getting our wholesaling capabilities attached to that.

So we're making good progress.

As you know, it's a very competitive area, but one that is large.

And we're making good headway.

I think on the other side of it, we do experience some of the outflows from some of the past things that might have been on there.

There's a sub advisor or for a portfolio or two where the managers have retired or changed.

And that had affected, on the net basis, some of those activities.

So we see the ability to grow the distribution through our third parties as we continue to get more firmly on the ground and ramp-up our efforts.

Institutional, it was the same thing.

We got put on hold, as you know.

But now that pipeline is building.

We are getting in front of many of the consultants and their clients, and we are winning engagements there.

And so we feel pretty good about our ability to do that.

Now in the institutional space, we have broadened our line-up, and we will continue to broaden our line-up, as we are actually developing some of our other products in certain categories.

So in that case, it's more expending some of our product lines as we hit full fruition with the number of years, et cetera, with some of the merge platforms.

So I feel like we will make good progress.

However, it doesn't come as quickly as we would all like.

Understand.

Thanks very much.

Erik Bass from Citigroup.

First, I realize there may be some sensitivity because US Trust is a client of the firm.

But can you provide any detail as to the amount of US Trust assets that are managed by Columbia?

And then it would be helpful if you could kind of gauge how far along is US Trust in the process of shifting to a new architecture platform?

And any estimate you have in terms of the size of additional potential outflows related to this transition and how long it may continue.

Look, we don't comment on any client or the assets we have for any particular client.

What I would say is this.

US Trust has their open architecture.

They do have line-ups of different products and as they continue to shift based on market cycle.

So what we have been somewhat affected by as well is their shift from more of the fixed income, where we had some good capability and good product that we had more of their clients in -- in some of our fixed income and our tax exempt, et cetera -- to more of an equity buys.

And as you would imagine, as you do, do a shift, particularly as we have merged our own platforms, and we have to get into their cycle as anybody else does, as they evaluate different products or different sectors that they want to invest in.

So as we do that, we might lose a bit more share for the areas that we had some large buckets in.

And even though we will gain some share from some of the newer areas, it may not be as high as it once was.

So listen, we think that will continue, simply because we did have a good install base when this was all part of Bank of America, or when US Trust actually had some of these products.

So as an example, they had a reasonable amount of money with some of the sub advisers.

That had it with the VNR, et cetera, that was originally one of their PMs.

So I think as things continue to evolve, we will experience a level of outflows there.

Not that we don't win a reasonable amount of the business or have a good relationship and manage a good bucket of assets, it's just that things do change.

It's similar to what we did in our system years ago.

Okay, that's helpful.

And then can you comment on the level of margin on the US Trust assets relative to the margins on new sales that you are getting?

The outflows versus the inflows.

What I would say there is that we have a good relationship with US Trust.

Of course, each distribution and each activity is a little different.

So I would say, on average, new retail flows would be at a higher fee basis than what we -- but again, it is in different buckets, including with US Trust.

Some is institutional, some is retail, some is within SMAs, some is within mutual funds.

So each one of those are a bit different.

But I would say on average, the new retail would be at a higher fee basis.

Okay, thank you very much.

Alex Blostein from Goldman Sachs.

Wanted to follow up on the capital return story.

You guys continue to stand out again as one of the best, probably, capital return stories in the financial space.

But some of that was attributable to a catch-up from the bank going away.

But I'm wondering once we get through that, why shouldn't we expect well over 100% payout going forward?

It feels like it should be sustainable given the mix shift, but I just want to make sure I understand that dynamic.

It very much is, as we look at the foreseeable future, based on our excess capital, as well is our earnings and the free cash flow, that we could return more than 100%.

And we may very well do so.

Having said that, we don't want to sit here today and just say we will continue to return more than 100% going out.

I think we have set a nice base level for you to say we will return a majority.

But I think as we have shown you, even before the bank, we were returning over 100%.

And as Walter said previously, we are not looking to score a lot of excess capital unless we have good use for it and some opportunities.

Which, as we have been doing, we will return the capital to shareholders.

We think that's appropriate.

So as you saw, we didn't slow that in the third quarter -- I mean the second quarter.

That make sense.

Another quick follow-up on the Asset Management business.

The institutional business was a little bit better at Columbia this quarter.

And I know things can be fairly lumpy, but maybe you can give us a little more granularity on where the pipeline stands today versus where they were a quarter ago.

And then maybe the mix of those pipelines.

So what kind of strategies you guys see most traction on, on the institutional front.

Okay.

So our pipeline for institutional actually continues to look quite strong.

We also have won a number of mandates that still are unfunded, just like we had in the first quarter.

They are funded in the second quarter.

We won some nice mandates in the second quarter that are unfunded.

And hopefully, they will fund in the third quarter.

We continue to have a good pipeline as we look out today, and that pipeline has grown.

Having said that, as we look to the third quarter, we may get some lumpiness for some other ex-parent activity legacy things around pensions, et cetera, in the Columbia business.

We will get the usual from the Zurich.

So I think we will find that second quarter as we showed you, we had a nice pick-up in the third party.

However, when you look at the absolute flow, that was offset a bit by some of the legacy parent stuff, which would be at a lower basis point.

So we might experience some of that.

We can't always optically know exactly when the timing is.

But we know there is some of that, that will come out.

We think it will come out in the third quarter.

Great.

And then just the last one for me.

I want to get an update on interest rate sensitivity, given the move in the markets we've seen recently.

Both to the expectation on the short end of the curve moving perhaps sooner, as well as on the long end of the curve.

Well, on the short end, as we talked about, again, we are not projecting it.

But I will just reiterate as it relates to the sweep accounts, a good rule of thumb on that, if it goes up 100 basis points, we should retain about 85% of that.

And that could contribute close to 300 basis points of margin if it happens for the full year.

So that is, again -- certainly we are sitting on a very large amount of cash in the sweep account.

So that -- it's very beneficial.

On the long end of the curve, what really is going to happen here -- again, a gradual increase here will certainly be beneficial from both the standpoint of our asset earning rates, as we certainly have a duration where about 20% is coming through each year that we are reinvesting.

So that would be beneficial on that standpoint.

We then will have to evaluate now as we do the repricing on the five-year fixed annuities that we talked about previously, where we are going to set those rates.

And obviously, that will be a factor into it.

So it will be beneficial.

Again, as long as it's a slow, gradual increase, it will be beneficial to us on that basis.

And then, of course, it's beneficial from the standpoint on our hedging programs, and of course embedded within that.

Yes, great.

Thanks so much.

You're welcome.

Jay Gelb from Barclays.

I want to touch base on the overall return on equity profile.

It looks like the Company is clearly going to be in the high-teens range on return on equity for this year, and that's up from around 16% in 2012.

I'm just wondering if there is anything that you could see that would prevent Ameriprise from continuing to put up 200 basis points of return on equity improvement over the next few years.

This is Walter.

Obviously, no.

In most situations, we should be able to generate.

You can always have a 2008 event, so I don't want to preclude.

But no, barring that sort of dramatic situation, the business model is generating the sort of free cash flow that allows us to do that.

And we are working on reducing our requirements, and certainly as we shift the business, that is certainly being extremely beneficial and allowing us to take the -- increase the return on equity.

So between a combination of the good, strong earnings power, the buybacks that could absorb 100% or more of net income, and then lower capital requirements on the business, those would be the drivers?

Yes.

All right, thank you.

You're welcome.

Tom Gallagher from Credit Suisse.

A few questions from me.

First one, just to come back to the situation at Columbia and comparing it to Threadneedle, what's going on there.

So I understand the Zurich outflows that are expected are very low basis point mandates.

So there is clearly a -- not much loss of revenues, if you look at -- follow the trail of assets.

Meaning there's still a positive revenue trend, even though there is potentially net outflows there.

But on the US side with Columbia, can you help us think about the order of magnitude on -- because you have already laid out that there are the affiliated former parent assets that you expect to flow out.

But are these anywhere close to the Zurich fees?

Are those much higher?

Because I heard your comment, Jim, that you -- that the new mandates are higher.

But I just want to get a sense for how much higher.

Are we talking about the assets that are flowing out are 40 basis points and the new mandates are 50 basis points?

Can you help flesh that out a little bit?

Okay.

I think -- let me separate just the two.

Because some of the outflows are also related, as we just said, over the last few periods that weren't necessarily just ex-parents.

So they are ex-parent in a sense, but for instance, we have a sub advisor relationship.

Outside of that, we made some changes in our RIA pricing that we think economically will be beneficial, even with the outflows.

And those are beyond the ex-parent stuff.

But the sub advisor was a separate sort of arrangement that we did assume when we did the deal.

With the ex-parent stuff, the institutional would be at lower basis points.

So that would be, actually in some cases, lower than the Zurich.

In some of the cases, like on the retail side that would be in funds, would be higher than would be the Zurich.

Because that is a balance of institutional and retail.

And when we separate the two, that would be higher.

But what I am saying, on a light-to-light basis, for retail or institutional, the inflows that we are receiving through third parties and growing new distribution is at a higher rate overall, and a reasonable higher rate.

So from that basis -- now when you look at it to Threadneedle, it took us a little while for Threadneedle to really ramp-up that third party.

But when we first acquired them, a lot of the mix was the Zurich that we had to diversify.

But the amount of the bucket is large, even though the fees were low.

With Columbia, we had a combination of what we acquired from Columbia that was their proprietary and what they did with their channels.

There was a part that was third party.

And then we combined that with what we had, which was significantly in the US, Ameriprise, which is sustaining.

So I would say that there is a better balance here than we did when we acquired Threadneedle.

And so we will overcome that hurdle.

But we will experience continuous outflows as that base of Columbia that came from the Bank of America diversifies.

Okay.

Is that helpful?

Yes, that is.

So the lost revenues on the outflows we are going to be seeing, your point is that it is somewhat similar to the dynamic that's going on with Threadneedle.

But probably less of a spread, if I think about the basis points on new mandates versus the business you are losing.

Is that a fair way to put it?

Yes.

For the stuff that will come out over time, for the stuff that has already come out, the basis points we lost wasn't as significant, because a lot of it was in the institutional, pension, Balboa, things like that.

So that was even a lower basis point than the Zurich is on average.

But on the stuff that will continue, let's say as an ongoing through retail, would be a bit higher basis points than Zurich.

But again, the mandates we are winning in retail would be higher than that.

Okay, that's helpful.

The next question I had is, Jim, just given how well you guys are executing in Advice and Wealth right now, any thoughts on more aggressively investing into this business?

Whether it's M&A, much bigger ramp-up of hiring, new advisors -- any thoughts on that?

Yes, we continue to invest nicely into the AWM business, as I said, and you have seen over the last number of years for our technology, our branding, some of our online capabilities in mobile.

We are coming out with our Confident Retirement approach.

We have added some extra resources to help our advisors train-up on the tool capabilities, to integrate their practices, particularly to engage the clients with the online and activities around how people want to do business in a more 360 dimension today.

So we continue to do that.

Regarding recruitment, very clearly we have still a good pipeline.

We are out there.

We have actually expanded our reach over the last year or two.

As you know, the industry has slowed a bit in there.

And you can see others in the first and second quarter.

But we feel like we have a good pipeline, and that has come back.

And we will continue to reach out there for recruitment and additions.

We do buy some individual's smaller practices and other things that we add.

Having said that, we don't look to go out and just buy independents at this point, because we like our model.

And we -- anybody who we feel and is interested in joining our model as a franchisee or as our employee with our value proposition, we would definitely be interested in.

But we are not just out there trying to roll up firms to grow advise accounts.

Okay.

And then last question I had, just on a numbers question for Walter.

Page 38 of the supplement, Disclosed Items, the $21 million earnings drag from what you guys are labeling compensation items.

Can you just give a bit more granularity on what exactly this is from, which segments this is showing up in, and whether or not all or some of this is going to go away by next quarter?

Well, okay.

It spreads across all the segments, and including Corporate.

Because obviously, there's an element there.

So it deals with, first and foremost, a very high-class problem we have on compensation as it relates to retention for advisors from H&R Block.

We actually have a higher retention factor relating to that, and we are recognizing that now, obviously, as we are getting closer to the period.

So that is really a big plus for us.

So that will continue towards -- as we go towards the end of the year.

But -- and then obviously, that would end.

The performance is -- relates to really assessing, both on our programs, and it goes across -- certainly, our Asset Management programs, it goes across our regular bonus [towards] as we evaluate where that level is.

And we now have assessed that, and we have taken it up.

Which, in taking it up in the second quarter, takes it up obviously for the prior quarter.

And now going forward, that should stay at that level.

Again, we will reassess as we try to get our accruals as accurate as possible, as we think the end performance will be there.

So I think it is -- it follows the normal pattern that we've done.

It's across the board and it's certainly, on that basis, it deals with that.

The other thing that we have and it's not on -- as relates to page 21, it relates to severance, in which we, from time to time, we reflect the severance.

And the severance is reflected in the Corporate segment.

Okay.

And then, Walter, it sounds like there is some kind of tail on this $21 million.

Meaning it doesn't go to zero next quarter.

Can you just frame that out?

How much of this $21 million would you expect to recur?

Well, let me -- it's such a -- we are doing -- obviously, in the second quarter we are booking up for the first quarter in the area that I mentioned.

And again, it will continue to book at that level as you look up the increase.

But you won't get the same, because you are not catching up for the first quarter.

But we will certainly continue to book at the higher level.

And then you have to take apart the various components as it relates to severance.

Severance, again -- I can't tell you where we will be booking through.

And then, we will book through a portion of the elements as it relates to the H&R Block.

Okay.

And --

And it gets smaller, it should certainly -- the level in the second quarter, the third and fourth -- it should be -- again, if it's constant, if we don't change, it should be small.

So it should go down from $21 million.

Would it fall in half or a third?

Well, Tom, here we go.

It will go down.

Okay, all right, thank you.

You're welcome.

Eric Berg from RBC Capital Markets.

Jim, I was hoping we could return to the earlier discussion you had with another questioner about US Trust.

Are you essentially saying -- I just want to get a sharper point around your answer.

Are you essentially saying that one, US Trust is going to a more open architectural approach, having relied heavily on Columbia?

And two, that there had been a mismatch that is evolving between your strengths and strongest performance, and their focus?

Help me -- maybe we can go over that again, please.

No.

What I am saying is, first of all, US Trust always had their diversified business.

And so what I mentioned to you is, as an example, there are certain portfolios in US Trust, like the VNR.

The gentleman who ran that was actually one of the PMs originally that was part of the US Trust business.

So as you would imagine, assets build in those type of portfolios over the long term.

There is a good association, the system is familiar with it.

So when he retired, we experienced a greater outflow, right?

Because that is a lot of where those assets were originally.

So you have those things that are normal in any distribution system.

In regard to what I mentioned here is, we at the -- Columbia used to work very closely with US Trust in their tax exempt categories, in their SMAs, and various things to craft individual client portfolios, et cetera.

So when they rotate out of certain classes like that, it is just like any other provider that may have been strong in fixed income in a certain distribution channel.

You are going to experience a bit more outflows when you rotate out because of that type of penetration.

And so that's part of what we are experiencing.

And then part is, when Columbia was there, they had a certain line-up of funds.

And in those lineups, that is what was sold within the distribution.

Just like, again, on any platform.

When we merged the two platforms -- and now we have a larger line-up of funds -- we've got to get some of those new funds in as they look at their own line-up of other carriers that they had.

And so if their install base had a lot more of the Columbia funds originally for the reasons I mentioned, and then you are adding new types of business.

And your other funds you are trying to add are newer, just as they have to try to get on and compete against the next person, you are not going to win as much business as you once had.

But your redemptions will be higher because your base of assets is higher with that distributor.

And that's exactly what has happened.

That's why we said, over time, it would normalize or equalize.

And again, we have a good relationship.

It was always a part of what they did for many, many years.

So it does take a little time for that rebalancing.

Second question.

It's interesting to me that it feels like and it seems like the retail picture at Threadneedle has been materially better than that at Columbia.

Would that be your perception, too?

If so, why this contract?

When you think of these two money managers and their retail mutual fund businesses, if it is in fact the case that, in general, Columbia has been in an outflow mode, Threadneedle an inflow mode, why are they different?

Eric, very clearly -- let me take Threadneedle first, okay?

Threadneedle for many years had excellent performance.

But at the beginning, just having excellent product and performance didn't get them to win business in the UK.

Because, again, in the past, they worked more closely with the Zurich and they focused on Zurich as a part of their proprietary house to that business.

So when we purchased Threadneedle, we worked with Threadneedle to really diversify, invest appropriately, so that we took more time and effort.

But it took years for us to get onto those platforms and channels in the UK.

I mean, last year -- I will give you an example.

Even with some of the larger players there, we actually -- for a few quarters, actually became the number one seller in the UK because we had good performance.

But we had been there, and we took the time to build those relationships and positioning.

And we had great product that was what was in demand there.

And that's what we're doing right now with Threadneedle in Europe.

So again, two years ago, we weren't really selling much in Europe.

We were trying to build that.

Now we are starting to sell in Europe after it took us a time to build.

So that's what is happening at Threadneedle.

Columbia has good product and good performance.

Having said that, a number of years ago, Columbia didn't have that performance.

And they were dealing with a lot of their own things, and the roll-up of those firms -- from Fleet and Bank America and Nations and all that -- and going through their changes.

But they also had big focus on when they merged in the US Trust business, and that asset management business with the Fleet business, with the Bank America business, there was a roll-up with Nations.

So overtime those things have to settle.

They actually went to one brand called Columbia.

And so it wasn't as though they were firmly established for a long period of time.

And so when we acquired them, they were on the way.

But when we acquired them, that disrupted it a bit, too, right?

It puts things on hold.

We had emerged funds, there is a number of changes that occur.

So that's exactly what's happening.

I actually see this as a terrific opportunity.

But it does take more time than we want to think about, because it wasn't as though Columbia was all settled and established for a long period of time prior.

It was a roll-up of things that they did a good job putting together to become Columbia.

And over time, the team actually developed good performance.

If you go back, their track record years ago probably wasn't as strong as it is today.

And that continues to build, to give us the consistency with a wider platform of product.

So that's exactly what is occurring, Eric.

And again, sometimes we look at it.

But there has been a lot of change in the industry, a lot of flow issues because of markets, and now fixed incomes backing up a little bit.

So it takes a little time.

Thank you.

That's helpful additional perspective.

John Nadel from Sterne Agee.

A question on Asset Management, at least on the GAAP-based operating margin.

If we exclude the couple of one-time items, the one-time gains that you guys called out this quarter, I think it calculates out to about 19.5%, 19.6% margin.

How should we think about the drivers of the improvement in margin as we look forward?

Is this really -- the margin improvement is really about a turn in flows, or are there other factors aside from just market performance that might contribute to the expansion of the margin there?

Obviously it's a flow.

As you get to that, certainly it's the mix of business as we look through -- you are using the GAAP approach.

And obviously, if you use the adjusted approach, which tends to normalize it, you would get that.

Clearly, it's our reengineering and other elements as we improve margins that will continue to drive that.

So there is a -- it is -- again, it's a very leveraged business.

And as you make the contributions to it, and the mix shift between the businesses, equity markets and fixed and other things of that nature, those are all the acute drivers that are, obviously, again, the focus of the Firm.

And I think it's consistent of what we said in the past.

And then if I drill down and look at the management fee rate this quarter, notwithstanding the fact that flows shifted, equity as a percentage of AUM was definitely up.

And the fee rate expanded pretty nicely on a quarter over quarter basis.

Is that really what we should be looking for, is overall equities as a percentage of AUM moving higher?

And to the extent that, that happens, that fee rate just naturally moves higher.

I guess this goes part and parcel with Tom's question earlier about the fee rate of assets coming off, versus the fee rate of assets coming on.

Well, I think it's very consistent.

Your observation is correct.

As Ted talked about it at the FCM, certainly as equity markets take on greater proportions, that would be a beneficial factor as it relates to our margins.

And certainly -- but again, that is certainly a key driver.

Jim, I don't know if you want to --

And then also, as Walter also said, it's the mix.

Or you just said that.

As some of the outflows have occurred in lower margin business or lower fee-based business -- not necessarily margin -- that is exactly what you will start to see transfer.

Now again, I think it's a little lumpy.

And it's not a perfect science every quarter, because you have a number of those different variables or key levers happening.

But that's exactly what you said.

That's what I'm trying to get at is not -- I'm trying to see whether -- prevent getting ahead of ourselves on how much this fee rate can move higher --

Yes, I (multiple speakers) let you get ahead of yourself there.

(laughter) The last thing I want to just ask is -- there's a lot of moving parts, there's US Trust, you had some issues at Marsico.

You've got the RIA adjustments that you made.

As we look forward -- I know you guys quote fund flows, including reinvested dividends.

But if we look at it ex-reinvested dividends, where clearly there is a seasonal factor to that, do you have real -- do you have any visibility on how we should expect -- especially Columbia retail net flows to trend from here, if we exclude reinvested dividends?

I wish I had a crystal ball.

I don't.

The only thing I can say is this on a few of the levers.

One is, we made the change with the RIA.

People knew it was coming in the first quarter, the change actually went in at the end of March.

You would always experience a little more adjustment after that occurs, which we did in the quarter, from the first.

I don't know if that will continue or slow down, et cetera.

We think it hopefully will slow down.

Regarding Marsico as an example, very good partner, over time built a very good book of business.

Their performance has come back, they are settled, et cetera.

Having said that, some of those things are lump fees based on how people evaluate them in their portfolios.

So we think we will experience a little of that again.

But hopefully, their performance and activities will come back there.

¶ And again, on the US Trust, as I would say, is there is going to be a continuation in normalization there.

But we're working hard to get more inflow, as I -- I actually saw sales pick up nicely.

And then, what happened in June with everybody, when the pullback in the bond market affected a lot of people's sales and activities.

Listen, I don't have a crystal ball.

The only thing I can tell you is we are working hard, we are looking at all the various levers to grow the business.

And sometimes you hit some more quickly or better at certain spots.

But I think we have opportunity.

And we've just got to work at it.

And hopefully, we will get that to go in the right direction.

And that's what we are pushing for.

Thank you.

And then one last real quick one, if I can sneak it in.

There has been some outflows pretty consistently out of the alternative asset classes.

Maybe you could just give us an update on where things stand.

I know you accrue performance fees back in the -- late in the fourth quarter.

But where does performance stand?

Right now I think performance is improved.

Again, it will -- with the flows coming off, it will not be a major factor.

Okay, thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.