阿默普萊斯金融 (AMP) 2017 Q2 法說會逐字稿

Welcome to the Q2 2017 earnings call.

My name is Nicole, and I'll be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded.

I'll now turn the call over to Alicia Charity.

Miss Charity, you may begin.

Thank you, operator, 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'll be happy to take your questions.

On Slide 2 of the earnings presentation materials that are available on our website, you will see a discussion of forward-looking statements.

Specifically, 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 their 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 expectation about future events and overall operating plans and performance.

These forward-looking statements speak only as of today's date and involve a number of risk factors 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 on our second quarter 2017 earnings release, our 2016 annual report to shareholders and our 2016 10-K report.

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

Turning to Slide 3. You see our GAAP financial results at the top of the page 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 makes on our call today will focus on operating financial results.

And with that, I'll turn it over to Jim.

Good morning, and thanks for joining today's earnings call.

I'll provide my perspective on the business, Walter will discuss our financial results in more detail, and then we'll take your questions.

Let's get started.

Ameriprise reported strong second quarter results led by our Wealth Management business.

In a period of change and opportunity for the industry, we're delivering excellent growth in earnings and earnings per share and we had very good momentum in a number of important metrics, including nice growth in Ameriprise client assets, client net inflows as well as advisor productivity.

With favorable equity markets and low volatility, clients are putting more money to work.

It's also good to see that short-term interest rates are slowly coming off record lows.

Consistent with our strategy, we're serving client needs and growing our fee-based businesses, which continue to become even larger contributors to total earnings.

Our business creates significant free cash flow that supports our growth, our investments and our return to shareholders.

In terms of the regulatory environment, we're managing well through an ongoing period of change.

Regarding the Department of Labor fiduciary rule, Ameriprise and our advisors were well prepared for the June 9 implementation.

As part of our comprehensive advisor support plan, including the series of webcasts and more than 100 training sessions over the last few months, we continue to provide clear direction and extensive training for our advisors so that they are well supported and able to continue serving clients and building their practices through this time.

We eliminated 12b-1 fees in advisory accounts earlier this year, as we have highlighted.

And we've also streamlined our fund range like others.

We're currently working to be ready for any further requirements that may be necessary on January 1, and continue to have appropriate resources devoted to this work.

Let's move right into Advice & Wealth Management where we had an excellent quarter.

As I mentioned at the opening, we achieved strong growth in client assets.

In fact, Ameriprise client assets increased 11% to $512 billion, a new high.

Net inflows into fee-based investment advisory accounts were $4.5 billion, another all-time high.

This marks our fifth consecutive quarter of growth in wrap flows and bodes well for the rest of the year.

As we discussed with you, serving more investors in the $500,000 to $5 million range is a key priority and client acquisitions increased nicely, especially in this target market.

And we're serving more $1-million-plus clients than ever before.

We continue to invest in our brand, in marketing and our social media presence.

Ameriprise brand awareness is, again, at our record-high of 66%.

Our Be Brilliant TV, digital and social media advertising continues to resonate with consumers and advisors and we're finalizing the third phase of this advertising that will come out in the fall.

Advisor recruiting is another positive for us with 81 experienced advisors joining Ameriprise in the quarter.

Importantly, advisors joining us from wirehouses, regionals and independents are on average more than a third more productive than advisors recruited this time a year ago.

Across our network, advisor productivity continues to grow nicely.

Ameriprise advisors have consistently increased productivity at a higher rate than many of our competitors.

And for the quarter, productivity was up another 9%.

Normalized for the net impact of transitioning advisory accounts to share classes without 12b-1 fees, productivity would've increased 14% on a quarterly basis.

As the leader in advice, Ameriprise is differentiated in the marketplace.

Consumers need to plan and accumulate wealth for retirement and we're well positioned to serve this need.

Our Confident Retirement approach creates real value for our clients.

Our research consistently shows that it contributes to a very high satisfaction with Ameriprise and their advisor, and that clients are committed to implementing the recommendations and feel more confident.

This approach also works well across all life stages.

So we're very focused on cross-generational opportunity in our Wealth Management business to acquire and serve more clients, people who prefer to work with a seasoned professional to guide their future in a digitally enabled relationship.

The Ameriprise culture and the way we work with clients continue to be important differentiators.

I want to let you know that I'm very proud of how Ameriprise is being recognized in the marketplace in many important ways.

From the 2017 Temkin Group ratings, we were #1 for Customer Service across the investment industry.

Importantly, we are also second in Trust across the investment firms, as well #1 for forgiveness, the likelihood of consumers to forgive a company if it made a mistake.

And in the Hearts & Wallets' Wants & Pricing survey, Ameriprise was rated a top performer in customer ratings based on being unbiased and putting clients' interest first, which is what the DOL fiduciary rule is all about.

Ameriprise also stands out for our very engaged culture.

We've earned leading employee and advisor engagement for many years.

And earlier this month, career website, Indeed.com named Ameriprise as one of the top-50 Best Places to Work.

I believe this important recognition further underscores that the Ameriprise advice value proposition and the way we do business, positively influence client satisfaction, loyalty as well as our strong culture, all vital to our long-term growth.

Meanwhile, we continue to invest significantly to enhance our client experience.

This includes further digitally enabling the advice experience our advisors provide and making our financial planning process even more collaborative.

We're also investing in making goal and performance tracking easier and providing advisors with dedicated local leadership and training to support this work.

And as you know, robust information security is more critical than ever.

We invest tens of millions of dollars annually in people, processes and tools to protect our clients' information and the firm through a multilayered approach to security.

Finally, in July, we officially closed the acquisition of Investment Professionals, Inc., an independent broker-dealer based in San Antonio, specializing in on-site delivery of investment programs for financial institutions, including banks and credit unions.

This is a new channel for us and one we believe will be a great complement to Ameriprise.

As we move forward, Advice & Wealth Management is situated well.

We're focused on serving clients and growing the business as more consumers realize they need guidance on accumulating for retirement and other important goals as well as managing their wealth through retirement.

Our insurance and annuity businesses provide important solutions to our clients, help protect their wealth and generate retirement income.

Consistent with what we've discussed with you, we continue to maintain very strong books of business and manage our growth.

In addition to offering clients important income protection benefits, these businesses deliver strategic benefits for Ameriprise, including contributing to high client satisfaction and asset persistency.

The businesses are performing as we expected, given low rates and industry trends.

In annuities, variable account balances increased to $77 billion on market appreciation, which more than offset redemptions and slower sales, both are industry trends.

We consistently had annual sales in the $4 billion to $5 billion range.

This quarter was at the low end of our range, given the shift of sales.

In insurance, we've seen a nice pickup in cash sales from a year ago.

UL and VUL sales are up 18% with good growth in installment sales and lump sum deposits.

We continue to focus on asset accumulation primarily in Variable Universal Life and Universal Life products.

In Auto and Home, our financial results continue to improve in line with our actions we've taken across all parts of the company, especially in product pricing, underwriting and claims.

Leading indicators in these areas point to continued improvement in the underlying business.

But like many personal line insurers, we experienced elevated levels of cat losses in the quarter, which were significant, particularly from a historic Colorado hailstorm and significant hail events in Minnesota and Texas.

We recently implemented several new reinsurance programs that helped reduce some of the effect of these cats on our results.

We continue to improve the book, take rate in several areas, underlying loss ratios continue to trend lower and we feel good about how we're tracking with our plans.

In Asset Management, we're growing assets under management and generating good financial results.

We're executing our plans as we adapt to industry changes and invest in areas where we see near- and long-term growth opportunities.

Total asset management -- assets under management grew to $473 billion.

Markets have been favorable, which helped to more than offset net outflows.

I'll start by providing more color on flows in the quarter.

We've been impacted like the industry and working hard to make the changes we need, but there is more to do.

The majority of our outflow, $7 billion of the $8.7 billion, were lower fee former parent assets, most of which related to particular events or actions.

As we discussed with you, we have large important relationships with Zurich and U.S. Trust from prior our acquisitions.

These relationships provide a nice base of assets as we continue to focus on growing higher fee third-party assets.

Given the nature of these books, we typically average a couple billion of outflows per quarter.

It was higher in the second quarter as Zurich redeemed a large pool of low-fee pension assets of $3.6 billion and outflows at U.S. Trust were higher because of mutually agreed upon actions that should improve our economics over time.

In third-party retail, like other active managers, we're experiencing pressure from industry flows into passive, especially here in United States.

U.S. intermediary experienced outflows of about $1 billion after dividends reinvested.

While the environment remains challenging, we're focused on building our offering in categories where assets are flowing.

While we made some progress, our flows are not where we want and we continue to focus on improvement.

In the U.K. and Europe, we are in net inflows of $500 million as the political environment has settled somewhat and investment sentiment has improved.

And in the third-party institutional, we're seeing mandates fund as expected.

However, this was offset by $500 million outflow from a large client seeking liquidity and about $800 million in outflows from CDO liquidations.

Let's move to our investment performance.

It remains strong and will continue to be a benefit as we look to garner flows for the future.

We had a good first half of 2017 and we're delivering compelling 3-, 5- and 10-year investment track records.

Our U.S. and U.K. equity franchises are strong, and we're benefiting from our quality growth bias in equities this year.

Regarding fixed income, our long-term track records are strong and our taxable performance has improved nicely over the last year.

The 114 Morningstar 4- and 5-star funds we offer reflect good performance we're delivering.

As we look to continue to improve our flows, there are a number of things we're focused on.

First, we're enhancing aligning our distribution by executing a more informed and targeted channel strategy and putting the right resources where we're looking to grow.

That includes within DCIO, where we've added a new head of the business to complement the team.

Second, with broad capabilities in equities, fixed income and multi-asset, we're serving client needs and ensuring our products address important investment themes: generating income, managing taxes, managing changing rates and growing assets to deliver the outcomes they're looking for.

Third, we're enhancing our product lines in a number of areas, such as, in solutions.

We continue to build out our multi-asset business.

We're seeing good interest in our adaptive risk allocation capability in both retail and institutional channels in the U.S. We have a nice base of assets of just over $4 billion that we've grown and have garnered strong 3-year numbers for us to build on.

We're also building out our solutions internationally with the Dynamic Real Return Fund in the United Kingdom and seeing good results.

And we'll be launching a complementary solution in the European market.

In the responsible investment space, we have over $30 billion in assets under management and we're adding to our product line and launched the Threadneedle European Social Bond Fund to complement our U.K. and U.S. funds.

And in strategic beta, we've integrated the EGA acquisition and have a strong team in place.

Our sustainable ETFs have established 1-year track records and we intend to expand our product lineup beyond equities to fixed income later this year.

Fourth, we're strengthening awareness of Columbia Threadneedle.

Our global advertising campaign centered around consistency is resonating in the marketplace.

Fifth, as we discussed, we have an important project underway to move from separate regional operations capabilities and controls to a global front-, middle- and back-office capability that will help us increase efficiency and flexibility, especially in the solutions space.

And finally, we continue to manage the evolving regulatory environment, both in United States and internationally, including Brexit and multiple regulatory initiatives in the U.K.

Overall, the actions we're taking to drive long-term growth are the right ones, but there is more work to do.

We're managing the business with a strong focus on our clients and profitability, while we invest to compete in our key regions.

Before I turn things over to Walter, I feel very good about Ameriprise, the value of the advice and solutions we offer our clients, as well as the progress we made at the midpoint in the year.

We're executing our strategy and are focused on delivering a strong client experience.

Very few financial services companies are generating this level of ROE and returning to shareholders like Ameriprise is, while continuing to deliver good earnings.

As we look forward, with our client focus, business strength, capital profile and return as well as our risk management, Ameriprise is positioned well.

Now Walter will cover the financials, and I'll be back to take your questions.

Thank you, Jim.

Ameriprise continues to execute on the strategy Jim outlined to deliver very strong financial results across shareholder driver components in the quarter.

Advice & Wealth Management continues to be our primary growth driver, now representing almost half of our total revenue.

Our other businesses have performed well and within our expectations.

Our balance sheet remains strong.

We are generating strong free cash flow, which we are using to consistently return capital to shareholders, driving excellent EPS and return on equity growth.

In the quarter, we returned $481 million of capital to shareholders, which is almost 110% of operating earnings.

This included the repurchase of 2.8 million shares, which was similar to the first quarter.

Turning to Slide 6. Ameriprise delivered excellent financial performance across the top and bottom lines.

Ameriprise operating net revenue was up 5%, normalizing for the net impact of 12b-1 fee changes we've discussed with you, with Advice & Wealth Management revenue up 13%.

Top line growth was driven by 7% growth in total assets fueled by $4.5 billion in wrap net inflows and strong equity market appreciation.

In addition, we demonstrated strong expense discipline across the firm.

The overall expense base was down 1%, with G&A down 3%.

This resulted in a very strong margin in the quarter of 19.8%, up from 16.7% a year ago.

We returned a substantial amount to shareholders through dividends and share repurchase.

Combined with strong earnings, our capital return supported EPS growth of 26% to $2.80 and return on equity of over 25%.

Overall, we delivered excellent financial results across the firm.

Let's turn to Slide 7. The Advice & Wealth Management businesses continue to perform very well, delivering strong business metrics and financial results.

Operating net revenue was $1.3 billion, up 13% in the quarter from solid growth in wrap assets from client inflows and market appreciation as well as higher earnings on brokerage cash.

We successfully completed the previous announced move to share classes that do not have 12b-1 fees for advisory accounts and other associated changes, which reduced revenue by a net $54 million in the quarter.

The PTI and margin impact of these 12b-1 fee changes was very small and within expectations.

Expenses were up 3%, reflecting higher distribution expenses, including investments in recruiting experienced advisors.

We are tightly managing G&A expenses, which was flat to last year.

Revenue growth and expense discipline drove operating earnings up 32% to $291 million, and we delivered an all-time high margin of 21.6%.

Turning to Slide 8. Asset Management generated strong profitability, up 19% versus last year.

Operating net revenue was up 1% at $748 million, with market appreciation more than offsetting the impact of net outflows.

As Jim discussed, outflows were elevated in the quarter from low fee, former parent-related outflows much of which we tied to specific events.

We remain focused on bringing in assets at a higher fee rate than the assets we're losing to manage profitability.

Our overall fee rate remained stable in the quarter at 53 basis points due to our mix of equity and fixed assets as well as strong equity market appreciation in the quarter.

We continue to maintain very competitive margins by tightly managing expenses with G&A down 4% from last year.

Last year's expenses included a onetime legal settlement.

Excluding that item, G&A was down 1%.

Pretax operating earnings were $176 million, up 19% and margins were up nicely at almost 38%.

Let's turn to annuities on Slide 9. Variable annuities pretax operating earnings were up 8% to $127 million.

This increase included the benefit of equity market appreciation, partially offset by net outflows.

Variable annuity net outflows were elevated again this quarter, reflecting a decline in VA sales as well as higher lapses, both of which are in line with industry trends.

We are seeing a good portion of our VA lapses in qualified accounts for policies out of their surrender charge period.

A benefit of our business model is that the majority of these assets stay within the firm but move to other products.

We hedge the living benefits risk from our variable annuity businesses very effectively.

As a reminder, our direct variable annuity hedge strategy is primarily designed for protection against economic risk and to mitigate volatility in GAAP earnings in addition to our macro hedge program.

Under the statutory reserve framework, this direct hedging strategy can create noneconomic strain and excess capital under rapidly rising interest rates.

Therefore, we requested and received approval from Minnesota for a committed practice to mitigate this impact effective July 1, 2017.

This permitted practice leverages principles underlying the NAIC's related accounting proposal for certain derivatives hedging variable annuities interest rate risk.

Fixed annuities earnings declined to $15 million from $28 million a year ago, from low asset portfolio yields and decline in account balances.

As we described before, we wrote a block of fixed annuities following the financial crisis with a 6-year surrender charge period.

Over the past couple of years, we've seen higher lapses, as those policies reached their guaranteed minimum interest rates and exited the surrender charge period.

The book is continuing to run off at a pace we anticipated and is in line with our actuarial assumptions.

This book is already at its guaranteed minimum interest rate, but we've had higher-yielding assets run off and they were replaced at a lower rate causing spread compression.

As you know, we conduct our annual unlocking in the third quarter, which is based on market assumptions around interest rates as of 6/30/2017.

The 10-year treasury rate as of 6/30/2017 was higher than a year ago, and above where we had expected it would be at that point.

In the quarter, the behavioral assumptions will be evaluated to determine any changes from our prior year assumptions.

Turning to Slide 10.

Life and Health earnings declined 4% to $69 million due to lower investment portfolio yields.

Life claims continued their improving trend and all other products were within expected ranges.

Auto and Home results improved by $16 million from last year despite higher cat losses.

We remain focused on managing our cat exposure.

We entered into several new reinsurance arrangements to reduce net cat exposure in the first quarter and realized substantial benefits from them in the second quarter.

We expect benefits from those reinsurance agreements to continue in the second half of the year.

We are pleased with the progress in our underlying loss performance for this business from the steps we have taken to improve results.

Our non-cat loss ratio was 70%, which was 8 points better than the prior year.

Underlying Auto loss performance was particularly strong with nearly 12 points of improvement.

Many of the policy and pricing changes are still rolling through our book, which should support continued improvement in these trends.

Lastly, we continue to monitor our underlying reserve levels and the impact of policy and pricing changes on our current and prior accident year reserves.

On Slide 11, you can see that Ameriprise continues to make progress shifting its business mix to less capital intense businesses.

And for the first time, Advice, Wealth Management and Asset Management made up over 70% of Ameriprise's pretax operating earnings.

We anticipate this shift will continue and reach 75% over the next couple of years.

It is an important aspect of our continued capital return story.

You'll see on Slide 12 that our balance sheet fundamentals remain strong with excess capital at $1.8 billion and an estimated RBC ratio at nearly 500%.

We returned $481 million of capital to shareholders through dividends and the repurchase of 2.8 million shares in the quarter, which was 109% of operating earnings.

We continue to target returning 90% to 100% of operating earnings to shareholders as a baseline.

And as we did this quarter, we will adjust as we assess market conditions and our evaluation.

And with that, we will take your questions.

(Operator Instructions) And our first question comes from John Nadel from Credit Suisse.

My first question is on Advice & Wealth Management.

Jim, I'm curious, it sounds from your commentary like you're really not stopping as it relates to making needed investments in the business, whether it's digital, training or otherwise.

But how much longer do you think the segment can continue to generate what appears to be pretty solid revenue growth without some level of corresponding growth in G&A?

And then, separately, in Advice, I'm curious if you think we should expect any meaningful impact, whether it's on revenues or margins from the acquisition that closed at the beginning of the third quarter.

I don't imagine that's going to really shift numbers, but just want to make sure we're tight on that.

So we are continuing to invest organically in the businesses.

And you mentioned Advice & Wealth, in particular, so we have some really good initiatives on the way to further our capabilities in the digital world, particularly around digital advice and online capabilities to interact with the consumer and the advisor even further there in a much more integrated fashion.

We also have things underway to enhance our CRM capabilities.

So really what we've been doing, and you saw it from my commentary, we still have invested a lot of time and energy around the DOL activities.

And so what I'm hoping is, as we come to fruition on that, I could start freeing up my resources to go back to more of these growth initiatives.

But in the meantime, we have more of the R&D and the development underway.

And as we pass-through the DOL activities, we'll move more to execution and implementation against more of the growth types of things again.

So we're making those investments as we free up resources that are being devoted to DOL, we'll put more of that money back to work on growth initiatives and capabilities more fully and try to get them rolled out over the next year or 2 as well.

And then, just real quick on that acquisition.

Should it have any impact?

Yes.

So we'll work on that acquisition as we go to close and we get the broker-dealer approvals, et cetera.

It's not going to have a major impact initially on a margin basis.

What we'll do is over time support that business' growth and improve their productivity and the margins in that business by actually building out the business further.

It will add a good number of advisors.

I think it's still about approximately 200 to our line.

But really what that will be is more of a build over time to get the types of margins and productivity that we think it's capable of.

Okay.

And then my follow-up question is just on the Asset Management side.

I think last quarter, Jim, you had touched on -- or you had quantified the former parent AUM, the legacy AUM at about $70 billion and that the revenue contribution from that -- from former parent AUM was about 8% of the segment's revenues.

I imagine, given the outflows this quarter, that $70 billion number has come down.

Is that 8% still a reasonable estimate?

Yes.

A large part of -- like the Zurich, as I mentioned to you, was a low-fee pension type activity.

And even in that, where those assets was lost, there has been some adjustment in some of our fee arrangements appropriately, so on a positive end.

So I would actually say that was a very small revenue loss for us.

It was appropriate for Zurich and appropriate for us at this point in time.

And some of the changes we also made with U.S. Trust will adjust some of the pricing based upon that being a better economic scenario as well.

So we actually think that on a total basis, we'll be in good revenue on -- adjusted for those assets.

So it will come out of the asset base, as you said.

But there has been a market appreciation against that asset base.

So we're still getting relatively about the same revenues based on the appreciation for the other activities.

Remember that it was fixed income mainly in the Zurich, very low fee.

And our next question comes from Ryan Krueger from KBW Research.

As you got close to the June 9 applicability date for the DOL, did you make any additional fee or commission adjustments that we should expect to have any sort of meaningful impact going forward?

No.

No.

As I said, we've realigned all of our product line due diligence elements, et cetera, reduced the number of funds on our lineup.

It will only affect about 6% of our assets.

And there's a transition period and those assets already mapped into other types of funds.

So it should not impact the revenue or the activities from the advisor perspective.

Okay, great.

And then a follow-up on AWM.

The 21.6% margin, certainly, recognizing you'll get future benefits from rate increases.

But do you view that the 21.6% as a good level to run rate and build off of going forward?

Or should we think about this as a particularly good quarter for that business?

Yes.

So I would hate to just say every quarter is exactly the same based on seasonality and other things.

But I would say, the plus 20% is a good base level for us to operate under now.

I've mentioned to you previously and investors that we were targeting to get over the 20%.

We feel now comfortably over the 20%.

So we would probably say -- I don't want to sit here and project every quarter per se based on levels of activity in market.

But over the 20% margin rate, I think will be solid.

And our next question comes from Erik Bass from Autonomous Research.

Can you talk about the level of distribution expenses in Advice & Wealth and how we should think about those going forward?

I realize there's some impact from the 12b-1 change.

But are there other steps you're taking to reduce distribution costs?

No.

The April, the last of the 12b-1s was captured, and so all of that now is at either investment advisory level fees or rebates back to the client.

There -- you know, listen, if the DOL comes forth and says, hey, there needs to be some adjustments as we go into commission-based products, we feel that we'll be able to move there and adjust.

Not -- nothing is really sold at targeted levels of what the retail price is, everything is relatively discounted in some fashion.

So we don't see a significant, if we move to like a consistent share class at one fee.

There'll be some adjustments up and down in certain areas, but relatively, over the course of the remaining year, we don't see a change for the things we've already implemented.

Most of those implementations were done previously.

Got it.

So the ratio of sort of distribution expenses to fee revenue should be relatively stable?

Yes.

Got it.

And then switching to Asset Management.

Is the level of G&A spending there this quarter a reasonable run rate?

And if you could talk about where the savings are coming from?

And if there were a downturn in equity markets, do you still have levers to maintain margins?

Yes.

So we -- across the firm, as -- if you're familiar with us, we do a lot to constantly reengineer our activities, looking at areas that we're not generating value, to free up resources using technology better, for servicing and activities from a client perspective.

So in the Asset Management business, we're doing something very similar.

But we're making good investments into the Asset Management business, whether it's the new systems and capabilities, whether it's investing in new product, whether it's adding talent.

So we're continuing to do that.

We have launched a new advertising campaign globally.

So we're continuing to make those investments, but we are tightening up where we're not generating the revenue, or the value, or getting the productivity that we need.

So we'll continue to do that.

Of course, if markets become tighter, et cetera, yes, we would have to take more actions.

But right now, what we're doing is freeing some of the money and investing it in the areas we think will give us future capability.

And our next question comes from Suneet Kamath from Citi.

Just wanted to start with Advice & Wealth and the cash balances there of roughly $26 billion, down a little bit sequentially, but up about 10% year-over-year.

I guess, I'm a little surprised that given the market environment, maybe clients didn't put more of that cash to work.

So just want to get a sense of where you think that's going to trend over the next couple quarters, because I think at $26 billion, you're still quite a bit above where you've historically run?

Yes.

So I think there's a few components.

One is, more money has gone to work.

Having said that, I don't think either our advisors or clients are sort of overly enthusiastic of jumping full scale into the market where the market is situated right now on balance.

But they're actually trending the money back in.

It's actually interesting that money still went into fixed income categories as well.

But we're also bringing in a bit more flows from a client basis, so that sort of replenished some of the cash as well.

So I would probably say, if we didn't do that, you would have seen more cash go back to work based on our investments in wrap flow business, et cetera.

So I think that's a positive trend.

So as long as it continues, markets are in good condition, and relative, I think it's good that money goes in over time rather than in a one big swoop.

Got it.

And then, I guess, sticking with AWM.

In the past you've given us a little bit of a split between the employee advisor and franchisee advisor channels in terms of margins and productivity.

Can you kind of give us a sense of where you stand today in those 2 channels on those 2 metrics?

Yes.

So we've had nice improvement in the employee channel.

Our margins are now in the mid-teens, solid, and that's after the elimination of 12b-1s, et cetera.

We're getting good productivity increases there as advisors have ramped up from the recruiting.

And actually uptake of even our financial planning activities.

And so, I actually see that leverage continuing to improve as we continue to grow that productivity there.

And the margins in the franchise channel has held pretty well with the uptick in productivity that offset anything on the 12b-1s activity as we've mentioned to you as well.

Our next question comes from Humphrey Lee from Dowling & Partners.

In Asset Management, you talked about the solutions business.

Can you talk about the growth there?

And how should we -- maybe how should we think about the inflows in the second quarter of $500 million compared to that in the first quarter?

Yes.

So we actually -- we don't talk about it this way.

Just like I've mentioned in some of the other space.

But we manage over $100 billion in multi-asset-type categories for our clients.

And so what we're doing now is trying to build out that multi-asset solution set in a more customized fashion for institutions, but also have good products now that we've developed and we're going to continue to build upon in the retail space.

So as an example, our CARA product here in the United States has grown to now a few billion dollars, almost $4 billion -- over $4 billion.

And we see good interest in that type of product that has excellent 3-year performance, better than many of the strategy funds out there today.

And same thing in the U.K., our DRR Fund is now launched nicely and growing and we're going to launch in the U.K.

So we actually believe that we have some really good capabilities.

We have a really good team in place, both here and the U.K., in multi-asset solutions being built out.

In the U.S, it's under a gentleman named Jeff Knight.

In the U.K., it's under Toby Nangle.

I mean, we've got a good team.

So we feel that this is a good opportunity for us.

But again, it always takes time to build, particularly as you start to branch off from some of your core activities.

But we feel good about that progress and the ability to continue to grow there.

Okay.

And then in terms of the institutional pipeline, I think in previous quarters you talked about the pipeline remained pretty solid.

But then, we haven't really seen in terms of kind of gross inflows.

So when you -- especially when you look at the first half in '17 from a gross inflows institution that was probably roughly flat compared to first half of '16.

When can we expect to see some of these mandates to come through and then show up in the inflows now outlying for institutional asset management?

Yes.

I -- first of all, it's a good question.

Unfortunately, and then again, some people might have been impacted as well as when a large client starts to continue to redeem, not because of performance or anything, but because of liquidity or change in what they need.

It had impacted us.

It was actually a larger impact in the first quarter than the second.

And so a lot of good fundings sort of were offset in a sense by doing that.

And the same thing here in the U.S. and we had some of the CDO that normally come up for liquidation at this point but didn't refund during the period.

And so we had some of those fundings.

Now other mandates that we're also working on sometimes that take a little longer in some categories.

They got to put on hold a little bit based on the environment or even where some of our concentration is like in high yield and stuff.

So what we're looking at right now is that we're continuing to focus on what that pipeline is for the future, but we've been able to handle.

And again, this is ex -- the ex-parent stuff, we've been able to handle the offsets of some of those liquidations with the new fundings.

We would've liked that if it wouldn't have occurred that way, but that's exactly what occurred in the first part of the year.

And our next question comes from Kenneth Lee from RBC Capital Markets.

Just want to focus on the Asset Management business.

Could you give a little bit more granular breakdown in terms of the U.S. retail fund flows just between your major asset classes, whether there is any notable drivers in the flows?

And I also had a question in terms of the new products that you mentioned, specifically like the multi-asset funds.

Whether you can give us a sense of the fee rates on these kind of new products?

So when we look at the categories we're focused on, we're getting good activity in many of our strategic and what we call our anchor fund areas.

So like our strategic income, like the CARA product, I mentioned, like in some of our high alpha equity products or dividend income, things such as that, in some of our fixed income and -- but there is more for us to do there.

I think we need to get better known in regard to our fixed income credit capabilities, particularly in retail that we've got some really good product.

We see pickup like in our strategic income, but we've been known more for equity than fixed.

And I think we have some really good capabilities that we got to continue to grow in.

We've been seeing a nice pickup in activities in some of the major broker-dealers that we do business and the independents.

There is more for us to do.

We're gaining traction.

We're building the relationships.

We're getting considered more as in model various portfolios.

So we're gaining good traction.

Having said that, there is the level of activity more broadly out there and most of the actives have moved a bit more into fixed income, which we are not as known for, that I think we can get known for.

And we're putting a bit more emphasis on, because we've got some good product there to sell.

And in regards to the CARA product, as I mentioned, this is one that now that has hit its 3-year track records and they're quite strong against the competitive frame and it's something that we're getting more seen on.

We're hoping that those flows will even pick up further.

Got you.

And just one final follow-up question.

Just in terms of the -- specifically the alternatives category within Asset Management, granted still a small portion of AUM.

Just wondering longer term, are there any thoughts in terms of like meaningful expansion within that area?

Yes.

So we'll continue, as I mentioned, to build-out our solution capabilities with that as we build it out, not all the, what I would call the sleeves in those categories will be manufactured by us, but they'll be sub-advised with other entities providing some of the capabilities similar to what we're doing now on some of our multi-asset solutions.

That will be a complement.

So what it actually, with the way we allocate the strategic risk management, the allocation methodologies we've used and the capabilities and how we actually construct will be ours.

So it won't slow us.

But we are looking for some smaller types of acquisitions appropriately to fit into the alt space for us.

And we have a number of things that we're reviewing today.

So over time, we feel like we'll be able to pick up some other types of capabilities that will complement our core equity fixed income space that we have today.

And our next question comes from Thomas Gallagher of Evercore.

First question I had is, have you had to get more competitive with compensation packages now that 12b-1 fees are gone for your advisors?

Or how are you dealing with that, because you described that as more or less a pass-through to them?

Yes.

No, when we look at it, as you are aware of, our actual compensation -- and we're attracting actually much higher productive teams in the industry today.

And if you look at the employee channel, the 12b-1s necessarily weren't captured by them in the employee channel to begin with.

So it has no effect there.

And so from that perspective, we're seeing good activities in the employee.

But in the franchisees area, also we've actually had a stronger pickup in activity there with larger people coming.

And because of the capabilities that we're providing, the support we're providing, the compliance, the training, even the idea that this is a very trusted brand and some of them don't necessarily look to be completely independent anymore based upon the challenges out there.

So I actually find that where -- we haven't changed the compensation packages, but what I find is that we're being more considered out there based on what we've been able to achieve and how we can help them.

And, Jim, just a related question on that.

Is that what's really driving the strong flows here?

Is that the impact of new hires?

You're getting higher end brokers, brokers with larger books, you're losing ones with smaller books.

Is that really what's going on beneath the surface in terms of why...?

No.

It's only a piece.

Remember, we have a network of almost 9,700 people.

You're not going to get the type of productivity lift.

We've got 14% productivity lift year-over-year.

You're not going to get that just from a number of recruits.

The recruits will continue as we said, be a nice complement as in addition, particularly more so in the employee channel as that continues to tenure now, because the recruits there is a bit larger than the total of the franchisee.

But what I would say is -- and I showed the chart recently that said, if you look at us since 2011, 2009, whatever you want to look at, in productivity improvements against all the major houses, both employee channels and -- especially independents were relatively flat in productivity.

But we are actually at the top of the charts in annual productivity increases across our entire network.

So that's what we continue to do to help our advisors improve their practice, grow their practice, serve their clients, deepen their relationships, our advice value proposition.

So I'd like to add more productive groups.

And exactly to your point that's exactly a piece of it.

But when you go grow productivity like we have constantly and consistently, it's based on what we added as the value to the advisor.

And our next question comes from John Barnidge from Sandler O'Neill.

I was hoping you could talk about the outflows in the annuities business and kind of where you think it will shake out?

And then, I have a follow-up to that.

Yes.

We always, as we've said to you in the past, unlike other providers that really ramp up annuities at certain periods of time or in certain markets to sell aggressively, we have never done that.

And so our book continues to be very solid, consistent, the benefit's consistent, the return's consistent.

How we actually support and service the book.

How that fits in as a solution set.

So -- but we've always sold within a rough range of $4 billion to $5 billion.

We're just at the low end of that range.

Yes, I think some of that fall off in sales has been done because our advisors, like other advisors, were like, what does this mean with the DOL or the fiduciary rule, or what does that mean in changes, et cetera, et cetera.

Now some of that we see is starting to stabilize and starting to refresh.

But yes, we went to the lower end of our range there, which is fine.

Those flows don't leave us.

They just get put the work in other activities, which is also fine for us that we have good solutions.

And -- but we feel like our book is really good and stable and that activity will pick up over time in certain things like some of our benefits or non-benefits.

Actually, what happened is, we've got increased sales in our nonliving benefit sort of product in the variable annuities this last quarter and the quarter before it.

So we think that it's good that there is always an adjustment where necessary, but we are able to take those flows in other categories.

But the book remains very solid and there may be a pick up back as we continue to go.

We don't necessarily -- if it doesn't pick up, we always operate in roughly this range anyway, so we feel very comfortable.

Just a follow-up on that though.

I understand you're at the low end of the sales range, but a lot of that outflow is also being caused by the market increase in withdrawals and terminations.

So if you could speak to your thoughts on the -- my follow-up was the comment letter (inaudible) put out yesterday.

Yes.

It's higher but it's within the range.

It's not materially higher.

And again, I think, you'll see that across the industry as well.

So some of that in the past, lapses, people again start to put money to work a little differently.

For instance, some of them feel maybe, hey, the guarantee, we don't need at this point in time as much because the markets are really stabilizing.

It depends on a client's circumstance and the advisor and what they're looking at for the total portfolio.

But these are all within ranges.

And as I said to you, we're never looking to really grow our books to be very expansive.

We provide them as a solution set.

We can really provide good books and where we get good returns, so we'll provide that.

And where it makes sense for the client and the advisor, we complement with what we have on the shelf from the other providers.

So all of the other providers are also on the shelf.

Sales have slowed a little with their activities as well.

So I think you'll see this across the industry.

We're not an outlier.

But as I said, the money goes to work in other areas like investment advisory and other activities.

Our next question comes from Doug Mewhirter from SunTrust.

First question, and I'm sorry if you had detailed this last quarter.

I think you had.

But if you could just review the issue of the loss of the 12b-1 fees and how they are transitional?

And maybe the timing of when you would fill that hole.

And I guess, the underlying question is, is it where you actually have the map specifically the new products to where you can specifically identify where you're going to get the revenue back through asset-based fees and a wrap account for example, or something like that?

Or is it where you lost the revenue and you think you know where you're going to get the revenue back, but it could take some time.

If you understand, what I am asking.

Okay.

So let's be clear, for all of our wrap business, all the assets and all the investment type of advisory accounts, all of the 12b-1 fees have already been eliminated.

The last piece of that came out in April.

And the bulk of it came out in the first quarter.

So when you look at the second quarter numbers, those revenues have already -- are gone.

There is only a small piece that was there in April and that's gone now.

But we have tried through productivity, through a combination of other adjustments that we've made from both the cost as well as a revenue perspective, it's already been factored in and offset through what you have seen in the P&L today in the margins that we are generating.

So that's already gone.

Now 12b-1s are still collected in commission-based and they are allowed to be continued under that category even under the DOL.

So those are still in the commission-based products and that will continue to go forward.

So there will be no change there.

So what we did when we replaced the share classes with 12b-1s is that there was an investment advisory share class, an institutional share class that didn't have a 12b-1, that was what we used to replace it with.

And if there wasn't, and that's still the only share class there then what we do now and have done in the second quarter is rebate those back to -- through the advisor to the client, so they are not collected by either the firm nor the advisor.

And that is already negated in the revenue as well.

I hope that gives you a better understanding.

Okay.

That's helpful.

My follow-up actually in a different subject, more on capital levels.

You definitely have a very generous shareholder return policy, and obviously, you have the capital levels to support that.

But what I was wondering, how much capital roughly are you generating every quarter?

In other words, does your capital return approximate your capital generation?

Are you slowly drawing down your excess capital position?

Are you still building your excess capital position?

This is, all things being equal, of course, I'm not asking for guidance or anything like that but on a run rate basis.

It's Walter.

We are generating free cash flow, which is pretty much approximately 90% to 100% discussion point that we've given as our target.

So the answer is, it goes ups and down.

Obviously, it's different parts of the model shift.

But we are basically replenishing at the same rate.

Our final question comes from Adam Klauber from William Blair.

Roughly, how much of the margin expansion in Advice & Wealth Management came from increasing brokerage sweep fees?

On a percentage basis, I would guess, maybe 1%, in that range as it relates -- because you have to annualize the whole thing.

But I think it's in that range.

Okay.

And then just one follow-up on the Asset Management, the distribution expenses as a percentage of retail AUM came down 0.37% versus [maybe] 0.39% or 0.4%.

Is that due to 12b-1s?

Or is there something else occurring there?

No.

That's -- as you have identified, it's 12b-1s.

We have no further questions at this time.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.