AMP: Confusion about wealth business

  • By Elizabeth Fry

AMP's share price is down by about a quarter since the royal commission first heard evidence that the wealth manager provided inappropriate financial advice and did not always act in its customers' best interests.

The wealth manager’s share price is currently hovering at $3.60.

According to Credit Suisse analyst Andrew Adams, AMP is trading on the assumption that its earnings will fall close to zero in the coming years which is far too aggressive.

A lot of what he sees written about AMP suggests there is some confusion about the company’s wealth management business.

The analyst is not for one second saying that AMP's earnings are immune from the pressures of regulatory and operating environment changes or from brand damage.

Confusing reports

But he is saying that recently-released reports confuse the AMP network of advisers with AMP, the listed company.

“Despite being the licensee to the largest planner network in Australia, AMP has a very small salaried planner base, especially when compared to the major banks,” Adams said in a note.

“This results in AMP generating minimal earnings from financial advice.”

 In fact, he said, AMP's largest earnings contribution comes from operating a platform.

Because of the AMP structure, Adams went on to say, potential industry changes such as removing grandfathered commissions would have little earnings impact.

“Given that AMP generates negligible earnings from financial advice, the current payment of grandfathered commissions benefits them little,” he added.

Grandfathered commissions

Even within their broader planner network, he reckons only a small proportion would be affected.

“This {the impact} would be limited to a select few advisers in the AMP advice network (i.e. small business owners operating under the AMP licence), not the average across the broader AMP network."

This calculation flies in the face of press reports that up to 70 per cent of AMP's financial advice earnings is due to grandfathered commissions.

Adams estimates that only 20 per cent of the remuneration across the entire AMP adviser network is from grandfathered commissions and for the AMP in-house adviser he estimate that this number is less than 3 per cent.

Also, the analyst strenuously disagrees with the prevailing view that AMP will sit around and do nothing to mitigate the risk of revenue loss to the bottom line.

 “We appreciate that AMP is currently without a permanent CEO; however, we suggest that the simple assumption that AMP would do nothing in the next few years is conservatively far too aggressive.”

Alarming headlines

To him, there is plenty of proof AMP may do more than sit on its hands.

In the note, he reminded clients, that the Wealth's net revenue margin declined from 1 per cent in 2012, to 0.73 per cent in the second half of 2017.

During this time, operating profit margin increased from 35 per cent to a near peak of 41 per cent and operating earnings increased by over 37 per cent.

“This highlights that historically AMP has been able to offset revenue margin compression and hasn’t just taken the revenue hit through to the bottom line as a lot of sensitivities currently imply."

Further to this, while net flows for AMP have been disappointing, he noted that market movements added 40 per cent to AMP's assets under management over the five-year period.

“We therefore caution some of the simple, one-variable analysis that may be generating alarming earnings risk headlines to AMP currently.”

In the May 2018 budget, the government proposed to cap super fees at 3 per cent for accounts of less than $6K.

While 40 per cent of AMP’s accounts are less than $6k, one-third of those are retirement savings accounts and not affected by the cap, according to Adams

Assuming AMP can offset 25 per cent via cost savings, Adams reckons the Group impact is 2 per cent.