Banking royal commission: what is the point of AMP?

After the reviews of its conduct, culture and systems, AMP’s hapless board will need to ask, is the business model broken?

Craig Meller, who stood down as AMP boss last Friday, with chairman Catherine Brenner at the AMP annual meeting. Picture: John Feder

What is to become of AMP? Or perhaps the real question is: what is the point of AMP?

For 146 years it was a very well-regarded life-insurance mutual society, owned by policyholders — a bit like today’s industry funds — and paid handsome commissions to its agents, who were also pillars of every local community in the land.

In 1995 it began a new life as one of the most spectacularly unsuccessful and badly managed listed companies in stock exchange history. Apart from four good years of rebuilding under Andrew Mohl and Peter Willcox between 2003 and 2007, the stock has been a shocker.

Even after tripling in price from the 2003 all-time low to when it peaked in 2007, the share price had only got back to about half of the $18 at which it had floated just 12 years before.

Now it’s once again in full crisis mode, sacking the CEO (who had already resigned), appointing a fill-in CEO from the board, refunding customers and undergoing no less than five independent reviews and investigations.

But at some point soon, AMP’s hapless directors will need to look up from all the reviews of conduct, culture, governance, systems and processes and ask a more existential question: is the business model broken?

More fundamentally: what is AMP? For 23 years, the answer has been that it’s a financial conglomerate — life insurance, wealth management, superannuation, financial advice, banking.

Nice sounding idea, but it never worked. And it really doesn’t work now. The banks are all getting out of wealth management, superannuation can no longer be sold on commission alongside with life insurance by office-bearers of Rotary and the Lions Clubs, and financial advice needs to be independent, not the company’s “distribution” arm, as it always has been.

The immediate reason for these questions is the impending appointment of a new CEO, who will want to know what the board wants him or her to do — that is, of course, if they can find someone prepared to do the job before the royal commission plays out. Mike Wilkins might be running the place for a while.

But let’s assume the headhunters can scratch up someone in the next few months prepared to do it for the sort of deal Craig Meller was on last year (cash salary of $1,288,000, or $61,264, after tax, hitting the family bank account each month, and total remuneration of $8,322,000) — he or she will need to know whether AMP is a wealth management business or a financial advice business.

“They’re part of the same thing”, is no longer the correct answer. Nor is “both, separately” going to cut it anymore. It’s looking increasingly likely that advice and wealth management not only have to be separate operations, with no crossovers or incentives for advisers to push house products, they probably have to have separate ownership.

Not that AMP’s version of combining the two has worked for at least a decade.

Over the past ten years, AMP’s funds under management have grown from $129 billion to $188 billion, a compound annual growth rate (CAGR) of 3.8 per cent. According to AMP’s latest full year results presentation, Australia’s superannuation market has grown at a CAGR of 7.1 per cent over the past ten years.

In other words, AMP’s growth rate has been not much more than half the growth of the market.

Its “profit attributable to shareholders” in 2007 was $1,056 million; in 2017 it was $848 million.

Part of the reason AMP has struggled, and why having 3,277 financial planners inside the tent has been so important, is that its investment performance has been below par.

For example, the 10-year performance of “AMP Australian Shares” in the Investment Linked Superannuation Plan is 4.54 per cent per annum. Over the same period the performance of the ASX 200 accumulation index has been 5.1 per cent per annum.

The planners have been trying to sell this story, and have been struggling. Now they have to stand as a separate, independent business.

That is only going to be reinforced by the royal commission, even if Commissioner Ken Hayne doesn’t take my advice from Saturday’s column and abolish percentage fees altogether.

So the incoming CEO will want to know whether AMP’s advice business can, in fact, stand alone. The answer appears to be “No”.

According to a recent company presentation, the average “assets under management” of its 2,692 “core licensees” in its Australian “dealer groups” (as they are called) is $41 million.

Their average fees are impossible to find. I suspect, but don’t know, that it’s around 1 per cent. If so, each adviser is bringing in $410,000, nowhere enough to cover his or her salary plus on-costs and overheads.

Advisers have written to me over the weekend complaining that my guess of 1 per cent for advice was “way too high”. If so, the picture is even worse for AMP, and God help them if my idea of making them send invoices is ever taken up.

So we return to the question at the start of this column: if the advice business doesn’t work unless it’s distributing AMP product, and if the product consistently produces lower returns, after fees, than the sharemarket, what is the point of AMP?