Couple this with investment management expenses of 25 basis points of assets under management and a further 35 basis points of controllable costs, it appears the only source of positive net cashflows coming from customers is from a product that is producing less revenue than the unit costs of running the division.
To make matters worse, AMP said at the start of the year that costs were still on the increase.
The revenue issues don’t end there. Adviser Ratings estimates the removal of grandfathered commissions will slash the average adviser income in the industry by 42 per cent. For some firms it could be as much as 75 per cent, which is profound.
In an interview with Sky News’ Ticky Fullerton last month, De Ferrari said a turnaround of AMP could see up to one-third of financial advisers leave the business. Given AMP has 2412 advisers, this is equivalent to the loss of 800 advisers.
De Ferrari is yet to elaborate on how he will pitch the financial advice business going forward but the stakes are high for AMP. He has said he wants it to be affordable to Australians, which suggests that technology will play a big part of it. In other words, scaled advice to the mass market, as well as continuing to offer advice to high-net-wealth individuals.
AMP may well refurbish and rename its goals-based advice strategy, which was scheduled to be launched at the end of 2017 in a number of phases to all advisers but was interrupted when the Hayne royal commission was announced. The project and technology cost AMP at least $100 million and is currently being used by salaried AMP advisers.
Underpinning the project was centres with a concierge to welcome customers and coaches to help them identify and prioritise goals using technology. The backbone of the business is robo advice, with Salesforce software for the back office functions.
It sounds good in theory but given its current reputational damage from the fallout of the fees for no service scandal, it would require a big leap of faith. Furthermore, in an era of intense scrutiny of fee-for-service, the fees must surely fall further if the service is downgraded to robo advice with a few bells and whistles.
Then there is the issue of how it deals with the many Buyer of Last Resort contracts it has with advisers, which will become increasingly challenging as trailing commissions are banned and conflicts of interest become more difficult to manage. There have already been write-downs in the value of client registers that the company acquired.
Will AMP adopt a realistic approach to provisions?
Another area that will need to be addressed at the August 8 shindig is customer remediation. Speculation is rife that AMP will need to up the ante in this area, but how much is the big question. Put simply, will AMP adopt a realistic approach to provisions or do it incrementally over the next couple of years and avoid the hit to capital that upfront provisions require?
After the fees for no service scandal erupted during the royal commission as well as other shoddy financial advice, the big four banks – which generate billions of dollars a year in profit – have been comfortably lifting their provisions for customer remediation.
For instance, in Westpac booked a pre-tax customer remediation provision of $892 million over the past year in its wealth business, which included 632 financial advisers. Westpac has since announced its exit from this business.
In comparison, AMP, has put a $778 million pre-tax estimate on customer remediation and provisioned for $615 million pre-tax, yet it has more than 2400 salaried and aligned advisers operating under its umbrella. If Westpac’s numbers are any guide, a more realistic provision is closer to $2 billion.
The more it is delays customer remediation the more doubts will be raised about its capital position and the longer it will take to repair its reputational damage.
In the year to December 2018 AMP spent just $10 million of its customer remediation provision.
With ASIC and James Shipton now breathing down its neck, the pace is accelerating. Indeed, an AMP spokesman said it had done a lot of work with ASIC on remediation and that it was on track to complete the program by 2021.
The spokesman declined to comment on speculation it would require higher provisions, saying “these are our best estimates of the size of the program – based on sampling of advisers, a process which ASIC has agreed”.
Against this backdrop, there is a growing unease about the completion of the sale of AMP Life to Resolution Life, which it announced last October as part of a plan to free up capital and simplify its portfolio.
Shareholders want an update on where it is at and whether it will return the cash it expects to receive from the sale to its shareholders. Perhaps, shareholders won’t see much of this money as it may be used to fund a cost reduction program and additional customer remediation payments.
At its annual general meeting it told shareholders that separation was proving difficult and complex and that it had to deal with multiple regulators, Australia, New Zealand and China. “In some instances, these regulatory requirements have changed since the transaction was agreed,” it said.
There is no doubt AMP has a lot on its plate, including fighting a series of class actions and regulators crawling all over it.
In June APRA issued a statement that it had issued new directions and imposed additional licence conditions on AMP Super to ensure it makes “significant changes to its business practices”.
It said it would engage an external expert to report on remediation and compliance with the new directions and conditions. It is yet to reveal where that is at including whether the expert has been appointed, who it is, and what progress has been made.
With so much going on, including a share price that has more than halved since the royal commission, De Ferrari has a big job on his hands. He dodged a bullet in February when the royal commission delivered a report that preserved the model of vertical integration.
But, across its shrinking empire it is facing dwindling margins and accelerating outflows as customers and corporate clients including Australia Post abandon it for industry funds. One bullet may well have been dodged but there are plenty more to come.
It begs the question where the bloody hell is the strategy and will it be enough when it comes?