阿默普萊斯金融 (AMP) 2016 Q2 法說會逐字稿

Welcome to the Q2 2016 earnings call. My name is Paulette and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Alicia Charity. Ms. Charity, you may begin.

Thank you and good morning.

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

On the call with me today are Jim Cracchiolo, Chairman and CEO; and Walter Berman, our Chief Financial Officer. Following their remarks, we will be happy to take your questions.

Slide 2 of the earnings presentation materials, available on our website, includes the discussion of forward-looking statements.

Specifically that during the call you will hear reference to various non-GAAP financial measures which we believe provide insight into the company's operations. Reconciliation of the non-GAAP numbers to the respective GAAP numbers can be found in today's materials.

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 2015 annual report to shareholders, our 2015 10-K report and the first quarter of 2016 10-Q report. We take no obligation to update publicly or revise these forward-looking statements.

Turning to slide 3, you see our GAAP financial results for the second quarter. Below that, you see our operating results which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. The comments that management make on the call today will focus on operating financial results.

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

Good morning, and thank you for joining us for our second-quarter earnings call.

I'll provide my perspective on the business. Walter will discuss the financials, and then we will answer your questions.

Domestic equity markets improved in the quarter, however internationally, markets remain quite weak year-over-year. Volatility spiked in June which was reflected in slower client activity.

Post Brexit, the British pound weakened significantly and created a difficult foreign exchange translation. Our eternally weighted equity index which aligns to our domestic and international assets under management characteristics was down 5% on average year-over-year.

We ended the quarter with $777 billion in assets under management and administration which was down a bit year-over-year. And as you are well aware, the low interest rate environment remains a persistent headwind.

These are external factors that we can't control. That said, we are focused on what we can control: serving our clients, executing our strategy, managing expenses well as we invest in the business and navigating these market movements.

So how did this translate into our performance. Overall, Ameriprise delivered solid second-quarter results. On an operating basis, net revenues reflected the tougher market environment and were down 4% to $2.9 billion.

Earnings per diluted share were also down 4% to $2.23, but that included certain items in the quarter that we highlighted, and our Return on Equity, excluding AOCI, remained very strong at 23.9%. This is up 40 basis points from a year ago.

Both our financial foundation and ability to consistently generate good free cash flow remain strong and we increased the number of shares we repurchased year-over-year to 4.7 million shares. In total, we returned it to 150% of earnings to shareholders. The second consecutive quarter where we return at that level.

Let's move to our business results. In advice and wealth management, our advice value proposition is strong, and we continue to generate good earnings with very good margin. Our advisors and teams are working closely with clients to help them understand the current environment, and importantly to ensure they remain focused on achieving their long-term goals.

Naturally, the market volatility and general unease in the quarter continue to affect investor behavior. With this volatility, we increased our market commentary and communications for the field to help equip our advisors to have meaningful conversations with their clients. As you expect, clients are cautious and overall transaction activity remained muted.

In the quarter, we continued to grow our client base, and in terms of retail client's assets under management, assets grew to an all-time high in the quarter to $462 billion. We continue to have solid flows into fee-based investment advisory, another $2.3 billion in the quarter, where we have one of the largest platforms in the industry. However, given market volatility, brokerage cash balances continue to rise, up 17% from a year ago to more than $23 billion which can be redeployed in the future.

I am feeling good about the strength of our field force. Our advisors take pride in and appreciate the Ameriprise value proposition and strong culture. And that's also very attractive to advisors in the industry.

We continue to have terrific advisor satisfaction. I spent time with many of our top advisors at our national conference in May, and they are feeling very good about the value, the support and the growth opportunity they have here. Our Be Brilliant advertising campaign is on the airwaves and being positively received both on TV as well as online.

Ameriprise brand awareness is also remains quite strong. Though industry recruiting slowed, this was one of the best quarters for recruiting for Ameriprise. Another 98 experienced advisors with good productivity joined Ameriprise, and our pipeline for the rest of the year looks good.

Overall given market pressures, advisors maintain good productivity with operating net revenue per advisor at $507,000 on a 12 month basis. From an metrics perspective, we are delivering good profitability with margins increasing to a strong 17.7% in the quarter. We remain well-positioned in the marketplace to take advantage of the growth opportunity as conditions settle.

Clearly the Department of Labor fiduciary rule remains a top priority for us. As I've discussed with you, I believe Ameriprise is well-positioned to handle the changes required. We have the experience, capabilities, compliance, infrastructure and dedicated teams to ensure we comply with the new rule.

As we, and others in the industry, noted, this is a highly complex rule that requires a thoughtful rigorous approach. Of course, we will also be factoring in the department's additional guidance which they indicated will be coming in the near future. Since the rule's introduction, we have been working closely with our advisors and field leaders to help them understand the requirements and the adjustments we're making to implement them effectively.

We're conducting a comprehensive and ongoing series of webcast workshops and local training sessions to help them prepare to operate in compliance with the rule. We will continue to deliver the high level of support throughout this transition which is consistent with our commitment to help our advisors grow their practices.

The advisors have been very appreciative of the level of support we are providing. Given what we know, we feel comfortable that we can effectively navigate through it, and we will keep you apprised as we move forward.

Let's move to annuities and protection. The annuities in life and health insurance businesses are performing as we would expect in a low interest rate environment. With regard to annuities, earnings were in line given rates and the equity market pressure on account balances.

On the variable side, account balances declined slightly to $75 billion, and sales slowed year-over-year which was similar to recent industry trends. A year ago, we had higher sales from new living benefit riders that were well-received by our clients and advisors. Keep in mind our variable annuity sales and flows reflect both our current block of business and closed legacy blocks.

On the fixed side, the book is performing as expected in this low interest-rate environment. In life and health, overall business results are within our expectations including our claims experience. Sales slowed a bit in the quarter consistent with transactional activity.

We continue to focus on the asset accumulation portion of the business, primarily in VUL and UL and providing a high level of advisor training service and support. With regard to auto and home, consistent with the P&C industry, we are experiencing a high level of CAT losses in the quarter primarily driven by wind and hail storms in southern and central regions of the country.

In the auto and home, we are making more strategic and impactful changes in our business lines to tighten up areas where we had higher loss levels. This is in addition to the pricing, underwriting, claims and organizational changes we are making. And we are seeing improvements that will translate into improved financial results in the coming quarters.

In asset management, we're executing a focused strategy for long-term growth. Clearly the market environment was challenging in the quarter with both the average equity market declines, high volatility in June and the pound dropping into the lowest point against the US dollar in more than 30 years.

In this environment, assets under management declined to $460 billion, and we also had one-time expenses which we previously noted that impacted earnings in the quarter. Underlying expenses have remained well controlled as we work to preserve margins in the current environment. In terms of investment performance, we continue to generate good, long-term performance track records across many asset classes and styles, and this performance looks relatively strong against industry peers.

Regarding the UK referendum, I am pleased with how we are implementing our initial plans to manage the post UK referendum period effectively, and providing support and perspective to our clients and investors. The transition will take time, and we have been reinforcing with clients that there is no immediate decisions investors need to make.

As you would expect, we are monitoring decisions in Britain and the EU as we, in the industry, determine next steps. We have a strong and important business in the UK, Europe and we are committed to serving the needs of all of our investors and feel comfortable with our ability to do so going forward. We also have operations in Luxembourg, and already have established at fund range that we sell in Europe and we will continue to build upon.

Now let's move to flows. In the quarter, we experienced $4.7 billion in outflows. About half were driven by lower-fee, former-parent related flows that we discussed with you. Of the remainder, several of the institutional fundings we expected in second quarter were delayed due to Brexit. While we should see them come through the second half of the year, the timing aspect resulted in $2.6 billion in institutional net outflows in the quarter with approximately $2 billion of very low-fee, short-duration, fixed-income mandates.

Overall, our institutional pipeline remains strong. Global retail flows were modestly positive and included invested dividends. In the US, we continue to focus on improving market share, and while industry growth sales in the active space were down, our flows improved a bit.

And in UK and European retail, we saw outflows leading up to the vote as investors were cautious and this turned one negative after the vote. Based on our initial read of flows in the third quarter, this pressure appears to be subsiding.

I'd like to point out a number of developments in the quarter in the US. We announced the acquisition of Emerging Global Advisors, a smart beta provider focused on emerging markets, and we've also launched three new equity income smart beta ETFs.

Smart beta is a long-term opportunity for us. It's a natural complement to our traditional active business as we take the necessary steps to advance the business. In addition, shareholders supported fund mergers that further strengthened our US product line, and we also launched a new advisor website for Columbia Threadneedle, enhancing the online experience.

So, overall, I feel good about how we are managing a tough and uncertain market environment. The actions we are taking to drive long-term growth are the right ones. We're managing the business prudently to preserve profitability while investing in initiatives to compete in our key regions.

As I look at the company overall, Ameriprise is a strong company in a good position with significant opportunity for growth when conditions settle. We are focused on what we can control and delivering a strong client experience. We have the financial stability and capital to navigate the headwinds to continue to invest for growth and return to shareholders at a very attractive level. And I'd add that very few financial services companies are generating this level of return on equity and returning to shareholders as strongly as Ameriprise.

With that, I'll turn it over to Walter to discuss the numbers for the quarter in more detail.

Thanks, Jim.

Ameriprise continues to navigate the macro conditions well. Delivering solid financial results in the quarter. Given the revenue challenges related to the macroenvironment, we are selectively investing for growth while managing expenses tightly.

We believe our stock continues to be undervalued. The valuation combined with our strong balance sheet and free cash flow generation allowed us to be opportunistic in the quarter in our share repurchase.

Let's turn to consolidated results beginning on slide 6. Macro conditions impacted revenue in a few ways. Our weighted equity index, our proxy for equity market movements on AUM declined 5% on average year-over-year, but was up 6%, on average, sequentially. This affected average AUM and fees which are collected based on average daily assets.

The dislocation over the past few quarters has muted client activity and contributed to asset management outflows. Low interest rates remained a headwind for our insurance and annuity businesses, and the pound fell at the end of the quarter following the UK referendum to leave the European Union, so the foreign exchange translation impacted ending asset levels.

With that as a backdrop, you can see how this macroenvironment impacted operating net revenue which were down 4% year-over-year. Lower average equity markets reduced revenue by approximately $50 million and also suppressed client transactional activity. On a sequential basis, we saw revenues improve in the quarter, up 2%, reflecting improvement in the market index.

Let's turn to slide 7. Ameriprise delivered good underlying business performance and EPS in a challenging revenue environment, demonstrating our ability to navigate through business cycles. We are tightly managing expenses while making the right investments to adjust to regulatory and geopolitical changes and support future growth. We are seeing the results of our targeted reengineering initiatives which we expect to be realized more in the second half of the year.

Pretax earnings declined substantially driven by market dislocation. However, EPS was only down 4% reflecting effective tax planning and our significant share repurchase program.

Our business model generates significant free cash flow and our valuation provided a good opportunity to repurchase shares at a discounted level. In the quarter we delivered a strong 23.9% return on equity.

Let's turn to segment performance. Starting on slide 8. First, the advice and wealth management business continues to perform very well, delivering solid results in the face of the challenging environment. Jim spoke about the strong leading indicators we are seeing in this business: excellent DAR recruiting, strong advisor and client retention and record client asset levels.

Financial results are also good in this context. While operating net revenue was down about 2% from last year to $1.3 billion in the quarter, it was driven by lower average equity markets and slower transactional activity. These dynamics impacted PTI, as well, but PTI also benefited from our disciplined expense management.

It should be noted that earnings in the this segment improved sequentially due to better equity markets and transactional activity levels which drove revenue up 4% and earnings up 8%. Operating margin in the quarter was strong at 17.7%, up 40 basis points from last year and up 60 basis points sequentially. Outside of significant market disruption, we expect future margin expansion to continue over time.

Let's turn to slide 9 on asset management. Clearly, we faced external headwinds in the quarter.

The average WEI was down 5% year-over-year which impacted both revenue and pretax operating earnings. Operating net revenue was down 11% to $739 million, with approximately one-quarter of the decline related to markets. The other primary driver of revenue decline was the cumulative impact of net flows.

Pretax operating earnings were down 25% to $148 million which was impacted by markets, outflows, as well as the pre-announced resolution of a legal matter. I would like to note that foreign exchange translation impact from Brexit was minimal in the quarter. We are prudently managing expenses with overall expenses down 7% and G&A down 5%. Looking ahead, we see an opportunity to improve margins as we move to more normalized markets.

Turning to annuities on slide 10. The segment is performing in line with our expectations. Variable annuity pretax operating earnings was $118 million, down slightly from $120 million a year ago. This business was also impacted by market dislocation in terms of the direct impact on account values and lower asset earning rates. The underlying business is solid and the risks are well-managed.

Fixed annuity pretax operating earnings declined to $28 million due to elevated lapses over the past year as the block has been running off. The earnings in the quarter were a bit better than anticipated due to higher mortality experience among income annuity contract holders. Given the current interest rate environment, there are limited new sales and, as a result, this book is expected to gradually run off and earnings will trend down during the year.

Turning to the protection segment on slide 11. Pretax operating earnings were $37 million in the quarter.

Let's focus on life and health first. Pretax operating earnings were down from last year largely due to an $18 million long-term care reserve release in the prior period. Also, long-term care claims were elevated in the current year but remain within expected ranges.

Auto and home had an operating loss in the quarter due to pre-announced CAT losses of $37 million. The combined ratio was 118% in the quarter which included 14% from CAT losses. Underlying results reflect the booking of accident year 2016 incurred losses at a level consistent with the end of 2015.

Management has taken action to enhance underwriting, pricing and claims practices which are driving improvement in frequency and severity trends in both short- and long-tailed coverages. As these business trends continue to emerge, we anticipate that they will begin to be reflected in the financial results.

Let's turn to the balance sheet on slide 12. As we have told you before, Ameriprise maintains a strong balance sheet that we will use opportunistically. We have approximately $2 billion of excess capital and our estimated RBC ratio remains above 500%. Our hedging program continues to work well and the investment portfolio is diversified.

We returned approximately 150% of operating earnings to shareholders through dividends and share repurchase again this quarter, well above our baseline of 90% to 100% of earnings. We repurchased 4.7 million shares in the quarter, up significantly from a year ago.

With that, we will take your questions.

(Operator Instructions)

Nigel Dally, Morgan Stanley

Given the UK referendum, hopefully you can provide some more color on the various plans you're executing, especially around your Luxembourg operations to continue to distribute your funds throughout the EU and the amount of AUM which is potentially impacted there.

Okay. Nigel, we already have a operation formally set up out of Luxembourg. We already have a reasonable portion of our fund lineup on the SICAV format that is distributed throughout Europe.

What we're going to do, we have a process already in place for what we have established so far that we will just built out that line to be a full complement to the line that we offer in the OEICs, and that's already going to be underway. So we will have plenty of time and ability depending on what the final outcome is of the referendum and the decisions made between the UK and the EU for our clients to move into the new format if that's the most appropriate for them as they move forward. And so we have done it before. We actually have that in operation already, so it's not something that we have to newly establish.

Great. Thanks.

And then second question on asset management adjusted margins. We've had a couple of quarters now where it's declined on a core basis into the mid-30%s. Is that the new normal, or is the high 30%s, which I think was your previous guidance, still an achievable goal?

It's Walter. The range that we have, 35% to 40%, is still in effect. Obviously, this quarter, it hit the 35%, but certainly we see the 35% to 40% is the range that we think is appropriate.

Great. Thank you.

Yaron Kinar, Deutsche Bank

Wanted to follow up on Nigel's question regarding the OEICs. Maybe you could give a little color on what percentage of your AUM in Europe or retail AUM in Europe comes from that platform today.

So we probably have about 25% that would be the non-UK, but of that, already, we have almost 60% already in the non-UK, the SICAV format. So it's really the difference. So we're probably talking about $5 billion that could be moved to the SICAV if that's what was necessary.

Okay. That's helpful.

And then turning to the advice and wealth management segment.

We have seen, I think one or two management teams already talk about stopping the sale of Class A mutual fund shares through advisors and not allowing the receipt of 12b-1 fees in [rap] business. Is that something you are considering as well?

Maybe you could also give us a little bit of color as to what percentage of revenues come from those fees.

We are moving to, as we highlighted previously, we are moving to institutional share classes where there aren't any. It will be a load-waive A-class. But in that regard, we will have that orchestrated as we move to a complete new account structure, and those share classes are more introduced across the industry.

Now that will take place, probably we are looking at, towards the first part of next year. So that would eliminate some of the 12b-1s that are currently collected. Most of, as we do, we pass on those 12b-1s to the advisors. The advisors will be now adjusting their business model appropriately so to look at their services rendered and other things.

And so that's a decision we have made, and we are moving towards that, and we are helping our advisors through that transition over the course of the year.

And do you envision, or what do you envision that impact to be on Ameriprise's earnings?

Well, on revenue, of course, the revenue would be adjusted for the 12b-1s going away. We only get a haircut on that.

Most of that is pass to the advisors, similar to our distribution arrangements, particularly in our franchise channel. So, with that, there will be an impact to earnings, but we are focused, very much, on offsetting that through other adjustments that we are making in our business model, as well as on a cost basis.

And so we think that will have a minimal impact as we phase through this by other changes we have to make. Just as we are asking our advisors to review their business model, as well for adjustments that they may be looking to make.

Thank you.

Ryan Krueger, KBW

I just had, first, a follow-up. On the 12b-1 fees, are you only going to eliminate the receipt of 12b-1 fees in the advisory platform or across the entire platform, as well?

When you say across the entire platform, we will be eliminating them across both qualified and non-qualified, so across the complete of the advisory type platforms.

In regard to brokerage. Brokerage is a little different. 12b-1s are still able to be collected there. We're looking at what is the appropriate share class and appropriate distribution arrangements there and that we'll make a decision on that subsequent. We feel that, that can still operate appropriately under the exemptions of the BICE.

A somewhat related question on revenue sharing payments and platform fees. Do you see any changes necessary regarding the new DOL rule on that aspect of the business?

What we see right now is that you're still very appropriately allowed to get cost reimbursements for the services rendered. We will, of course, make some adjustments and tighten some various things. Having said that, we think that the bulk of what we do and how the services provided and the reimbursement we get will be able to be continued.

Okay, and then just one last clarification as a follow up. Is the $5 billion number you referenced the amount of EU investors that are invested in UCITS types of products that could potentially have to move to SICAV? Was that the number you were referring to?

Yes. And with that, again, there's nothing that's come out formally that says they do have to move at this point in time. If they do, we will have the like product set up in just the SICAV format. And there are ways that we are reviewing right now for that transfer to be made appropriately from a client perspective if necessary.

Okay. Thank you.

Alex Blostein, Goldman Sachs

I guess, first, just a follow up on the discussion around potential changes you guys could still make on the advice and wealth management platform to kind of offset some of the revenue pressures. One of the areas we have been hearing a little more about is just what the brokerage firms charge just for access and essentially platform fees. Given the size of your platform, obviously, a lot of financial advisors and a lot of assets.

Can you talk about two things. A, your plans to rationalize any shelf space, what it means for the number of products you're offering there. And two, what you are contemplating in terms of charging the manufacturers to be on your platform?

So, what we are doing, of course, and we do this on an ongoing basis is we review various products and services off and on our platform. We make sure that there is a level of appropriate due diligence around them in the offering, as well as with that the appropriate lineups for our advisors so that they have a full opportunity to review all the appropriate investments for their clients.

We will go through that review, as we are now, consistent with any changes necessary required by the Department in that, under the exemption, et cetera. So we might tighten a range a little bit. We might tighten things more formally against the entire platform. But we don't see a radical shift at this point in time for what we are offering because we already put those products and services through a level of due diligence appropriate. We may look to things and make sure they are more equalized in any of the offerings and some of the services rendered and the commission structure on them. That's what we are reviewing right now.

As far as the platform fees, again, we will look to make sure that, that is very consistent and within tight range as appropriate, so that there is no differences that would in any way influence even from an objective view in the offering. Those of the things we are working on right now, but we don't see a dramatic shift from what we have been doing.

Got it. To paraphrase a little bit, it doesn't sound like you think the distributors will have much of a pricing power over the manufacturers to get their products on the platform?

Listen, I think there is always a balance between the manufacturer and the distributor now, and I think, if anything, the distributor, at least in the our case, looks for cost reimbursement against the services that are rendered for the products offered, and that's what we're going to continue to do.

Got it. Great.

And then a question just around capital management for you guys. Obviously a very consistent level of buybacks over the last couple of years.

If we think about the level of payout and if we get into an environment where the equity markets are a little but tougher, and obviously the interest rate dynamic is not particularly helpful. What's the appetite to continue to maybe dip into the excess capital $2 billion number to maintain the level of, call it, around $450 million of buyback?

I'm not going to talk about the $450 million, but I'll talk about the ability. As you've seen we have dipped into the excess and we have dropped it, and it's decreased. We just had a call on some debt, also, but we have the capacity to do that, and certainly, we will evaluate the opportunity to best return to the shareholders as we look forward and look at the environment which it's in.

We have the capacity. It's just a matter of assessing what is the best way to return to shareholders as we look over the remainder of the year.

Understood. Thank you, very much.

Thomas Gallagher, Evercore ISI

Jim, just a few follow-up DOL questions. From your response to Ryan's question, it sounds like you expect to be able to retain all of your marketing and support fees in terms of that revenue piece. And if that's the case, just thinking about how you are transitioning and what risk that represents and how we should think about that, is it you are going to be operating under the BICE and that would carry some legal liability risk associated with it that would be higher instead of being a level fee fiduciary? Is that the right way to think about it?

Part of our business, as we said, there is a part of the business that will be operating under the BICE where necessary and appropriate for the sale of commission-based products, such as an annuity and certain things including individual funds where it wouldn't be appropriate necessarily to put them into a advisory or a wrap-fee basis particularly based on SEC guidelines, et cetera.

So under that regard, a portion of our business is in brokerage. It is a smaller part of our business today, and maybe will even be a bit smaller as this continues to go forward. But that will operate under the BICE, and we will abide fully under the exemption of what's required there, including for the sale of any individual product and for any payments made, so that there's level commissions and all those various things that are required.

In the bulk of our business which is under investment advisory today, we will move more fully to an exemption allowed under the investment advisory, and where necessarily and appropriate, there is allowance for a similar level of cost reimbursement for certain of the services rendered that we will continue to get. And that's the way we are reviewing and looking to implement against the various exemptions allowed.

Would you agree, though, I'm thinking about it the right way? You're thinking about the fees that you can continue to make from marketing and support fees, and really the trade-off here is that I presume there's some higher level of legal liability risk associated with using the BICE versus level fee fiduciary.

Is that a fair way to think about it or would you disagree with that?

Under the BICE exemption, there is allowance for cost reimbursement for certain services rendered that are not necessarily, they are permissible, and we will ensure that we meet those requirements so that we would be able to appropriately offer various products and get reimbursement for the services rendered.

Okay. And then just shifting to, I just want to better understand as you eliminate 12b-1 fees and move to institutional share classes what that means exactly.

So that would be for all of your wrap accounts this would be occurring? Or maybe a better way to put it is, can you dimension what percent of your wrap accounts have 12b-1 fees where you would be moving clients to the institutional share classes?

So, we will be moving to institutional classes where they are offered for all of our accounts. And, as I said, we will move to a no-load A-share, waived A-share, a load-waived A-share where we wouldn't have an institutional account available for the client at this point in time.

In that regard, it will be across all of our advisory businesses and that will occur over the course of the beginning of next year. And with that, to me, I am not sure what your question is fully?

Well, just thinking about, is this going to happen, this move to institutional share classes, this new structure, is this happening to all of your wrap accounts? Or is this some fraction of --?

Some of our wrap accounts are already on some, and as we introduced the new classification on some of our wrap over the last year have moved to institution, and that's what we're moving all, as we convert our account structures and we get larger groups of offerings. Because not all offerings are out there on the institutional share class today.

So as that occurs and we move our account structure which we are hard at work at, we are going to a one-[word] account structure that will occur by the beginning part of next year.

And if I think about that large movement, beyond the elimination of 12b-1 fees, will that also reduce fees overall? Just movement in the retail to institutional.

It will go away from revenue at the end of the day, but advisors will be looking at their various accounts and services rendered and other services that they can offer the various clients where necessary if they need to. And from our perspective, our haircut from that will go away, and we're making adjustments in the our business model so that we can offset that or remedy that in certain circumstances.

Okay. Thanks. And then one last one if I could. Walter, I know you mentioned you see opportunity to improve margins in asset management, but if we look at asset earning rates, they have been coming down for the last few quarters.

Just broadly based on what's happening with DOL, there's clearly a movement afoot here to move certainly qualified investors into lower fee type structures. Do you really think this is a trend that's going to reverse or stabilize in terms of asset earning rates that have been declining here?

Our fee rates have been consistent and certainly in the first quarter when you saw the drop where you could not adjust your expense base based on revenue, so we actually do see the 35% to 40% as a reasonable range and we have not seen the behavioral pattern that you're talking about take shape yet. So, the business model has the capacity to generate the 35% to 40%.

Okay. Thanks.

Doug Mewhirter, SunTrust.

Two questions. First, just a clarification on the asset management segment on some of the flow data.

You cited a couple billion of outflows from -- you characterized a former parent company relationship, and that's happened on and off over the past couple of quarters. How big is the potential for outflows from that particular category, or is that pipeline, as it were, almost empty?

So, what we had experienced a bit more was some greater level. We always mention that there will be a normal outflow from our arrangements with Zurich and US Trust over time just as Zurich is a closed book, we constantly get a level of outflows. Having said that, the book has been relatively stable with reinvestments and other things and appreciation where we still manage roughly equivalent levels of assets over time, but we always have to book that outflow as it comes true, and it always looks like a negative.

In US trust, as an example, there's always a level of that just because as new sales come into US Trust, or as their level of sales may have gone down, when we purchased it, it was a larger base of their assets, and so there's always a little difference between a level of redemption and a level of new sales, and we expected that. And that's normally what occurred.

What occurred over the last number of quarters was that US Trust decided to take some of their separate account, fixed income business back in-house, and in that regard we suffered a little higher level of outflows from some of the dedicated activities we did for them.

That looks like it now has slowed through the end of the second quarter, and we think that will go back to a more normalized number. But those are the reasons that we had some oversized flows that we experienced there.

Okay. Thanks for that.

And my second question, more of a conceptual question. How is the feedback, or the questions you are getting, or the conversations you're having with your advisory force regarding variable annuities? I know that they've been in the spotlight in terms of the DOL rule.

I know there's been some uncertainty around how they can sell them or is there still a willingness to sell these to an extent? Is there more of a replacement where more of them will say, no I don't want to do this. I'm just going to put them into a wrap account. If you could just describe conceptually the conversations you are having with your advisors about that.

So, I think, first of all, there is maybe a little difference in the way we look at the sale of the annuity and what we do today versus in broad terms of the industry.

We look at the annuity as part of a broader solution set against our overall account and retirement plan for the client. And they are really sold as a solution for a piece of their activities, and we really have educated and we work with our advisors to understand where they would provide the essential income as a piece of that income drawdown plan. So that's the way we have done business for a while.

As you can see, our business has been very stable in the amount of sales that we have done consistently, because they are not sold as just the product out there but as part of the broader solution.

Now with that, every sale of our annuity goes through a pre-approval process and an upfront review, compliance, et cetera, to ensure it is fit and appropriate for that client. So, that process that we already have in place will be the same process that will be in place as we move forward. There's always a few things and tweaks that we'll make sure are complemented there based on any other additional sort of thought process necessary. But we believe that the extent of the process we have in place already goes through that level of due diligence and review, and where it is appropriate in a qualified account, that's what we review today in a very rigorous way.

So, we don't see a fundamental change in the way we do business regarding the sale of that product. Now, could there be adjustment in some of the activity there? The answer is always yes, but that's something we will see over time where necessary. But we don't see a fundamental change driven by a change in a fundamental process that we have in place, or a review that we currently do.

In addition, there may be some move to more of a level load over time rather than an upfront commission, but again, that will depend on what circumstances or how the advisor thinks about it. But we are not planning for a fundamental shift in our annuity business.

Okay. Thanks. That's very helpful. That's all my questions.

Eric Berg, RBC Capital Markets

(Operator Instructions)

Suneet Kamath, UBS.

I wanted to start with advice and wealth management, and just get a sense on client activity. It looks like the distribution fees in that segment have been running $550 million a quarter for the past couple of years, and we've had a step down here for the past few quarters. Just want to get a sense, based on the feedback you are getting from your advisors. Are we at kind of a new run rate here in terms of activity, or do you think we can get back to that mid $500-million level especially as these EARs start to vintage in.

I think as you saw in these first two quarters, there's been, especially in the first quarter, the impact of the markets and certainly the dislocation associated on long dated, so has our expectation as we work our way through. I can't exactly say where it's going to go back, but we certainly don't see this as a permanent trend and we are working through EARs as you indicated. We are bringing on board. They are vintaging, and certainly the productivity within the legacy advisors. It's going to be a combination as we work through it, Suneet.

Okay. Thanks. Just related to EARs, the 98 I think that you added in the quarter was maybe the strongest we have seen since back to 2012.

Just a question, do you think this is the early signs of wealth management consolidation post DOL. And relatedly, once the DOL standard goes live, I guess next year, are you envisioning or expecting any changes to your ability to recruit advisors particularly as we think about things like transitional compensation?

As we look at the business today and what we are doing to both support our advisors, but also have a strong business model to actually help them serve both the retirement and non-retirement market, particularly to our target market of the 500 to 5 million.

We are working very closely with what is the level of support our advisors need, the training. What is the level of what we would call activities necessary for them to truly serve these people more fully. And we feel like we have a very strong business model in place that can respond to whether it's both the regulatory but also the consumer dynamics that the consumer is interested in.

The more we speak to the consumer and do research, whether even with millennials or not, they are asking and want more personal advice. They like working in an engaged world and using the digital et cetera, and we have some of the better digital capabilities, and we have been recognized out there, and we're continuing to invest in it, and that includes digital advice. But they want more than something called robo and they want more something than a computer model.

And so, we do feel that we have the ability with our planning model to actually serve this universe. And therefore, we think we continue to be attractive to advisors, particularly based on a combination of that and our culture here built around how the advisor needs to serve the client and how we, as Ameriprise, also interact and connect to help the advisor serve the client.

So I think there will be some people evaluating going through the DOL. I think our pipeline has been good, because we are actually working day-to-day with our advisors to help them handle this, and we have the compliance and the infrastructure necessary. And I think people will evaluate that over time particularly if they are independent, or if they feel like the advice model would work for them a little better as they go forward. So I can't predict what that will ideally look like, but I think we are able to serve them.

As far as transition comp, et cetera, we're looking at all of those various things, but again, we feel like the way we have set that up and what we can do or even adjust for it will be done in a way that we think we can satisfy some of those requirements.

Okay. Thanks.

And then just last one, if I could, just on the asset management business. Given the focus on margins and some of the pressures that we are seeing in fees across the industry, just wondering if there has been any change to your appetite for M&A particularly given maybe the scale requirements for that business have gone up given some of these macro pressures. Just wanted to get some thoughts there.

No, we continue to feel that number one, we have globalized our business now, and we are continuing to invest to even make that more efficient by having a seamless and consistent way of operating through our front and middle office.

We are doing that in how we are sharing research and other things, so we are continuing to complement what we do and make adjustments, as Walter said, so that we can get both effectiveness and efficiency on a global scale. But with that, we are still very open to look at complementary acquisitions as this world continues to change and if consolidation continues to occur. I think we have the wherewithal to do that. I think we have shown that we can do that successfully and that we look for other activities or companies that would fit in with what we're trying to orchestrate and find that as an opportunity.

So, we are very much open to that as the world continues, and as I said, we still have a very strong capital base. We are not over leveraged. We have the ability to do that, while at the same time we have the ability to return to shareholders.

So size, I mean, you could do a larger transaction? That would be something that would be of interest to you if it came along?

Yes. We have the ability of a range of sizes here based on our capacity, the earnings power, the balance sheet, the debt offering, et cetera that we can do.

All right. Thanks, Jim.

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