AMP Announcement Shakes Advisers

Thursday’s announcement of AMP’s half yearly results was widely anticipated by the finance sector, who expected an outline of AMP’s “new strategy”. After a dismal 18 months which included getting spanked at the royal commission and seeing its share price tumble 70%, Financial Advisers licensed by AMP were sweating on announcements, perhaps more than anyone else, and what they heard will prove devastating for many, with AMP set to shed hundreds of advisers as well as making changes to their Buyer Of Last Resort (BOLR) arrangements.

Among nearly a dozen separate announcements, AMP outlined a transformation plan to invest in growth, reduce costs and tackle legacy issues which it estimated would cost between $1 to $1.3 billion to achieve. The company delivered a $2.3 billion net loss for the six months ended June 30, compared to a $115 million interim profit last year. It has revived its attempt to sell its life insurance business – this time at a lower $3 billion price, and also announced a $650 million capital raise to help pay for the transformation.

But the big news for AMP advisers centred on AMP new rationalisation plans in its wealth arm, aimed at repositioning the company’s outdated business model towards new industry realities. This included killing off grandfathered commissions by March 31 next year.AMP described this as a“reinvention of its wealth management business” and said it would include a shift in focus to direct-to-client channels and digital solutions together with a further integration of AMP Bank solutions and wealth management.

The changes will likely see steep cuts to its large adviser network. AMP chief executive, Francesco De Ferrari refused to put a number on how many advisers he expected to lose from the network but said the company would have fewer advisers in the future. The company has directly referenced having "fewer, more productive advisers" and he implied that in his experience losses of 30% would not be out of the question. This would mean up to 800 advisers are facing an uncertain future.

Who's At Risk

AMP said 20% of advisers bring in 60% of adviser revenue. So for the remaining 80% of advisers, the strength of their book along with cost factors may play a role in deciding whether AMP wants them to continue with their authorisations. Looking at which advisers might be most at risk - the cost of the licensee's compliance burden for smaller practices may outweigh the strength of their book - unless the smaller firms are performing particularly well. There are currently 920 advisers who are part of 1 or 2-man firms who may fall into this bracket." 

Our first chart shows the distribution of adviser numbers by practise size across AMP’s licenses.

Our second chart shows the total number of practices according to size across AMP's licenses.

The uncertainty for advisers was compounded when AMP announced it would no longer pay advisers four times earnings for advice businesses under the buyer of last resort (BOLR) program. The multiple AMP is now willing to pay under BOLR agreements will be 2.5 times.

Although BOLR contracts have master terms agreements, there are other T&Cs in these contracts that potentially could reduce BOLR even further from the new rate of 2.5 times - for example, non compliant advice. It could be that the smaller the practice, the less oversight and higher costs AMP have to manage these practices, so these smaller practices may be asked to find a new home.

The AFR reported that AMP Financial Planners Association CEO Neil Macdonald said planners were considering their options after the announcement was made. “I'm pretty sure we will be contesting it," Mr Macdonald said. "AMP is trying to have its cake and eat it.”

De Ferrari said "We are all running businesses. As the CEO of a public company I would find it difficult to explain to shareholders how to justify buying something that is worth 2.5 times at four times," he said.

While the move could immediately affect up to 150 advisers, AMP’s BOLR arrangements have previously been viewed as a $1 billion-plus contingent liability.

There has already been talk of class actions by affected advisers, many of whom expanded their business with AMP’s explicit encouragement – including, on some occasions, loans from AMP Bank. That some will now see their businesses’ worth devalued to 60% of what it was last week would definitely be hard to swallow.

AMP said it has put aside $550 million to help advisers with transition, and De Ferrari said it would be handled with “the least collateral damage for them and for the clients”. "Clearly, there are agreements in place and there are also clauses for adjustment including changes in the environment and operating conditions" he said.

"People will take actions to try and protect themselves, we will take that into consideration.”

Market analysts have generally welcomed AMP’s efforts to re-shape their business, but also identified a relatively high risk in the execution of their plans. Any successful challenge to the changes in their BOLR arrangements could contribute to this – as would an increase in the cost of ongoing remediation payments they must make. It was reported that AMP did not change its forecast of $778 million for remediation costs resulting from misconduct, even though some analysts estimate that figure could ultimately rise above $2 billion.

There will be a lot of ructions for AMP advisers and the industry at large based on the limited headline information provided so far. The relative smoothness of the execution of AMP’s new strategy will determine whether AMP can re-establish itself as a leader in the financial advice landscape in the years ahead.

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