Ameriprise: Increasing Our Fair Value Estimate to $450; We Expect Continued Growth in 2024

Director

Michael Wong

Associate Analyst

Maoyuan Chen

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Ameriprise Financial has transformed itself into an investment management powerhouse, with about $1.4 trillion in total assets under management and advisement and around 10,000 financial advisors at the end of 2023. The firm gradually shifted away from insurance and emphasized asset and wealth management operations more. Columbia Threadneedle Investments, the firm's global asset-management business, turned Ameriprise into a contender in the global asset-management industry with around $600 billion of assets under management, or AUM. About 80% of revenue comes from the company's wealth and asset management segments which should help the company generate operating margins consistently in the mid-20s compared with midteens to low-20s historically.

Ameriprise’s advisors served over $900 billion of wealth management assets at the end of 2023. Approximately 80% of its advisors are franchisees of Ameriprise and about 17% of its advisors are employees of the firm. In both channels, advisors use the Ameriprise brand to provide financial planning and advisory services to clients. Ameriprise has been increasing its market share in both client assets and advisor headcount over the past decade. Recently, Ameriprise has broadened its service offering to advisors of financial institutions like banks and credit unions. The Comerica partnership in November 2023 added $15 billion in client assets to the firm. Ameriprise is also using its capital to support the growth of its bank and certificate subsidiaries. Wealth management firms have been able to increase their profits by housing client cash as deposits in their banks and offering loan products, such as securities-based loans. The certificate product also allows Ameriprise to earn a spread on client cash that boosts net investment revenue. 

Ameriprise has earnings that are highly exposed to changes in asset class prices and interest rates. 2023 was a record year for both the top line and bottom line, as the firm benefited from about a 90% increase in client cash-related revenue. Management expects that asset repricing in 2024 will allow the firm to grow this revenue line despite headwinds from several federal-funds rate cuts.

Business Strategy & Outlook

We assess Ameriprise has a narrow Morningstar economic moat rating from its advice and wealth management business and asset management segment based on switching costs and intangible assets. The two groups account for around 80% of net revenue. The firm has deemphasized its legacy insurance business through divestitures and reinsurance transactions while it has kept its annuity and life insurance business in its retirement and protection segment, and we believe its insurance operations do not have a moat. 

Ameriprise provides advisory and planning services to help clients meet their long-term financial objectives. The primary target market is households with $500,000 to $5 million in investable assets. The asset management and retirement and protection segments offer a broad range of products and services that help clients meet their needs. The size and scale of its operations, the strength of its brands, and the diversity of its assets under management, or AUM, by asset class, distribution channel, and geography also provide Ameriprise with a leg up over competitors.

Advice and Wealth Management – Narrow Moat Based on Switching Costs

We believe Ameriprise’s advice and wealth management business warrants a narrow moat rating based on switching costs, which is the major moat source we assign to wealth managers. Since its 2005 spinoff from American Express, Ameriprise has gradually moved up the value chain to provide customized services and financial planning solutions to the mass affluent and affluent client groups. Ameriprise’s focus on personal relationships helps the firm build on its switching-cost advantage. 

Ameriprise has a network of more than 10,000 financial advisors with around $900 billion in client assets at the end of 2023, which makes the firm one of the largest US broker/dealer advisor groups apart from the four wirehouse players (Bank of America Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo). Based on Cerulli's 2021 statistics, Ameriprise has a market share of around 3.5% of US financial advisors and 2.8% of all industry assets, ranking as the seventh-largest firm in both measures. The general retention rate of financial advisors and client assets by the firm are both above 90%, which is indicative of a narrow moat from switching costs.

There are two major ways of generating revenue for advisors, the first is collecting asset-based fees and the second is commission-based. Fee-based advisors charge clients at a flat rate based on asset levels, while commission-based advisors generate commissions from transactions, such as securities trades and purchasing mutual funds There's a trend in the wealth management industry toward more fee-based accounts than commission-based ones. Ameriprise's fee-based client assets have increased to around 54% from 39% since 2008.

We think Ameriprise, similar to other wealth management firms, benefits from both client asset stickiness and advisor stickiness. On the one hand, clients are often hesitant to switch advisors because of existing relationships with their current advisor, uncertainty about the potential cost-benefit trade-off of a switch, and inertia with financial management decision-making. Because of this, Ameriprise benefits from the stickiness of its client asset base. As an example, the firm’s peer, LPL Financial, posted an AUM retention rate consistently above 95% over the past five years. We believe Ameriprise also has a client asset retention rate at similar levels. Data from McKinsey show that for advisors serving households with more than $250,000 in assets, even the bottom-performing quartile of advisors have a client retention rate of 92% with top-performing quartile advisors retaining 99% of clients.

On the other hand, we believe advisors tend to stay with their current firm due to the threat of losing client assets if they switch. Based on Cerulli’s research, an advisor loses around 30% of client assets when switching. The 2004 Broker Protocol allows advisors to bring key pieces of client information when transitioning to new firms without being sued by former firms. Nevertheless, former firms could still limit the client documents and paperwork a switching advisor could bring, adding to the leaving advisor’s client attrition. Operational logistics challenges such as transferring client accounts and learning new technology could also deter advisors from switching. Cerulli estimates that the average tenure of an advisor with a firm is 10.8 years, which is equivalent to a 90.7% retention rate. Ameriprise has been retaining advisors better than the industry, with a five-year average retention rate of 91.7% for its employee advisors and 93.5% for its franchise advisors. In 2019, Ameriprise disclosed that the average tenure of franchisee advisors who had stayed with Ameriprise for more than 10 years was 22 years, which is well above the industry average and showcases switching costs.

Advisers going independent has been an industry trend for the past decade, and we’ve seen wirehouse firms and broker/dealers losing advisors. The wirehouse firms lost their headcount of advisors at a negative 1.6% 10-year CAGR from 2011 to 2021 and broker/dealers (national and regional broker/dealers and independent broker/dealers) recorded a smaller decline CAGR at negative 1.3%. We think Ameriprise’s brand, compensation, culture, and technology have been conducive to keeping and recruiting advisors, allowing the firm to grow its adviser headcount at a 0.4% 10-year CAGR despite industry headwinds. Although brand in the wealth management industry is hard to quantify, we think clients associate wirehouse firms and national broker/dealers like Ameriprise with brand comfort. 

Ameriprise also has a bank that offers savings accounts, credit cards, security-based lending, home loans, and other products. With around $22 billion of assets at the end of 2023, the bank provides additional earnings power since Ameriprise houses client cash as deposits and earns net interest income. The bank is supportive of the wealth management business by helping clients meet their financial needs with banking and lending products, and it’s highly profitable to Ameriprise.

Asset Management – Narrow Moat based on Switching Costs and Intangible Assets

Ameriprise has become a meaningful asset manager (Columbia Threadneedle brand) through several acquisitions and organic growth with over $630 billion in AUM at the end of 2023. We think Ameriprise’s asset management segment warrants a narrow economic moat rating based on switching costs and intangible assets.

Although the switching costs might not be explicitly large, the benefits of switching from one asset manager to another are at times so uncertain that many clients simply stay where they are. As a result, money that flows into wealth management firms tends to stay there, creating significant asset stickiness. Outflows over the past decade of Ameriprise asset management averaged about 22% every year, which is better than the industry average redemption rate of 25% over the past 30 years. 

We think a diversified product set, strong distribution capabilities, and broad geographic footprint help Ameriprise keep investors' assets sticky. Columbia Threadneedle's product is diverse, with 51% of its AUM at the end of 2023 focused on equities, 37% on fixed income, 4% on money market offerings, 5% on alternatives, and the remaining 3% on hybrid and other miscellaneous categories. After the 2021 $845 million acquisition of BMO EMEA that had $124 billion of AUM, Columbia Threadneedle not only increased its overall AUM by 20% but also strengthened its presence in Europe and the UK (EMEA AUM increased to 40% of total Columbia Threadneedle AUM). The financial advisors of Ameriprise can cross-sell funds managed by Columbia Threadneedle, creating synergies by serving as an in-house cost-effective distribution channel.

Retirement and Protection Solutions - No Moat

We assess Ameriprise’s insurance and annuities business has a no-moat rating, and Ameriprise has shifted away from its insurance business in recent years. In 2019, the company closed the sale of its auto and home insurance business, and in 2020 it discontinued new sales of its proprietary fixed annuities.

In general, insurers do not benefit from favorable competitive positions. They are in the business of selling commodified insurance products to consumers who attribute very little value to the brand. Industry competition is fierce on pricing, and there is a high degree of cost uncertainty. Because of the long duration attached to many of the products they sell, insurers do not necessarily know the cost of goods sold for a number of years, allowing them to underprice policies without knowing it. The long duration of insurance policies doesn’t create switching costs, either, as insurers generally lack the ability to reprice the premiums on the products that were previously sold. Firms have a large incentive to chase growth without regard for profitability, a cycle that repeats itself as competitors are forced to match artificially low prices or risk losing business.

From our perspective, the insurance and annuities industry is very mature, and insurance products are mostly commodities that can be replicated by a competitor fairly easily. In fact, most companies lose money on underwriting, and they rely heavily on investment income to make up for underwriting losses. Since the typical life insurer is operationally leveraged to the state of the capital markets, over which the company has no direct control, we think it is difficult for most life insurance companies to generate consistent excess returns, a requirement for an economic moat.

Although we don’t think the insurance business is moaty, we like its complementary benefit to the company’s overall one-stop financial products offering. The financial advisors from the wealth management segment serve as a great distribution channel for the variable annuities and life insurance products, adding some distribution cost benefits but not material enough to constitute a cost-advantage-based moat.

Narrow

Economic Moat

Ameriprise Financial

Ameriprise Financial, Inc. operates as a holding company. The firm provides financial planning, asset management and insurance services to individuals, businesses and institutions. It operates through the following business segments: Advice & Wealth Management, Asset Management, Retirement & Protection Solutions, and Corporate & Other. The Advice & Wealth Management segment provides financial planning and advice, as well as full-service brokerage and banking services, primarily to retail clients through the company's financial advisors. The Asset Management segment provides investment advice and investment products to retail and institutional clients. It also provides products and services on a global scale through two complementary asset management businesses: Columbia Management and Threadneedle. The Columbia Management business primarily provides U.S. domestic products and services and Threadneedle primarily provides international investment products and services. Its international retail products are primarily provided through third-party financial institutions. The segments retail products include mutual funds and variable product funds underlying insurance and annuity separate accounts. The Retirement & Protection Solutions segment offers a variety of protection products to address the protection and risk management needs of the company's retail clients, including life, DI, and property-casualty insurance. The Corporate & Other segment consists of net investment income on corporate level assets, including excess capital held in the company's subsidiaries and other unallocated equity and other revenues from various investments as well as unallocated corporate expenses. The company was founded by John Tappan in 1894 and is headquartered in Minneapolis, MN.

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