Making the case, with reasons one to four, for fully breaking up AMP

AMP chief executive Francesco De Ferrari in the company’s Sydney offices. Picture: John Feder.

Magellan Financial Group has $90 billion in funds under management and is valued at $9bn. AMP, or more specifically AMP Capital, has $200bn in FUM and the whole group is valued at $6bn.

That is, Magellan has less than half the FUM of AMP but is ­valued at 50 per cent more. Two weeks ago, it was 100 per cent more. This difference, and the ­stories of Magellan and AMP, ­explain what’s right and wrong with Australian financial services, what the royal commission did and didn’t do, and where the ­industry needs to go from here.

AMP was the first, and remains the most spectacular, victim of the royal commission: its distribution system of tied financial planners was exposed as profoundly flawed and occasionally corrupt, which management lied about. Senior heads rolled.

But having exposed the conflict of interest that lay at the heart of the financial advice system, and its consequences, royal commissioner Kenneth Hayne declined to do something about it.

For reasons best known to himself, Hayne decided not to ­recommend the separation of product and advice, by banning the practice of banks and wealth managers using employed and aligned financial planners to distribute their products. Those left at AMP, led by David “Unquestionably Strong” Murray, breathed a sigh of relief.

Last week, Murray and CEO Francesco De Ferrari revealed the result of that sigh of relief: they doubled down on “advice-based distribution” as the company’s core strategy.

They are cutting the number of advisers and the choice of those to remain will be based on “productivity”, focusing on quality not quantity, says De Ferrari, which of course makes sense, but what does productivity mean? I asked the company: it means funds under management, and therefore revenue. No surprise there.

The other main part of De Ferrari’s three-year plan, apart from “reshaping aligned ­advice” is to “grow AMP Capital through differentiated capabilities”, etc.

AMP Capital is a very good, very substantial global asset manager with $200bn in FUM. Not only is it more than twice the size of Magellan, it’s 50 per cent bigger than the biggest super fund, AustralianSuper, and the industry funds’ infrastructure vehicle, IFM Investors.

But there are four reasons that AMP Capital is not valued as it should be, based on FUM alone, and that’s not even including the fact that it’s shackled to a floundering, reviled wealth manager.

According to last week’s half-yearly report, AMP Capital made $402 million in revenue from its $200bn in FUM — an average of 20 basis points, 9bp from internal AMP funds and 23bp from external funds. Magellan’s average fee is 62bp, 130bp from retail cus­tomers, on average, and around 40bp from institutions.

So that is reason No 1: it simply makes more money per dollar of FUM.

Reason No 2: Magellan’s cost-to-income ratio is 20 per cent, the lowest in the world (to be clear: it is the leanest-run asset manager on earth).

AMP Group’s CTI is 60.2 per cent and AMP Capital’s is 55.6 per cent.

That is, Magellan keeps 80c in every dollar of fee income and AMP keeps only 40c.

No 3: Magellan is a performance and marketing powerhouse led by founder, chairman and chief investment officer Hamish Douglass. Its success has been based on independent financial planners — unaligned to them, that is — recommending that their clients increase the allocation to international equities, and then dividing the money ­between Magellan and Kerr Neilson’s Platinum, making both Douglass and Neilson billionaires.

The five-year performance of Magellan’s Global Fund is 19.2 per cent a year, after fees; AMP Capital’s wholesale global equity growth fund has returned 16.08 per cent — lower, but not shabby. Platinum’s international fund, by the way, has returned 9.7 per cent over five years.

Finally, reason No 4: strategy. This week Magellan ­unveiled its retail direct plan, to bypass brokers and sell its next IPO direct to its retail investors by paying them the 2.5 per cent that would otherwise have been paid as commission, as a bonus direct to investors. In addition, there’s a 7.5 per cent loyalty bonus for existing shareholders.

Magellan invests money for 500,000 investors but most of them are behind platforms, and they are “owned” by their financial planners. But 84,000 of them are Magellan’s own direct clients — Magellan has their details. It’s that group that Hamish Douglass now wants to build on.

It’s not that Douglass is trying to cut out advisers and brokers but his plan, four years in the making, is to build a direct channel to market.

In other words, his strategy is very different to Francesco De Ferrari’s, who is sticking with planners, relieved that Hayne didn’t stop him.

Which strategy will win? I think there is zero doubt: the business of distributing investment products through aligned financial advisers is fundamentally broken because consumers no longer trust it, and it will never work ­properly again.

AMP advisers can only regain trust by recommending everyone’s products except AMP’s, so there is absolutely no point in AMP employing them, or holding their licences or having anything to do with them apart from ­persuading them to recommend its products.

The only thing that matters is performance, integrity and good marketing — both to independent planners and direct to investors. And the point is there is nothing wrong with AMP Capital’s performance; it’s just the parent company’s marketing and perceived integrity is a terrible liability.

It’s perfectly clear that AMP should be broken up further than just selling the life insurance ­business.

The financial advisers, AMP Capital and AMP Bank should go their separate ways and not be housed in the same holding company.

The sum of those parts would be worth more than Magellan.

The problem is that there’s a board and group management team who would lose their prestigious, well-paying jobs.

Alan Kohler is editor in chief of InvestSMART.com.au