AMP has suffered a $5 billion slump in cash inflows in its core Australian wealth management business over the latest half year because of damage to its brand from disclosures at the Hayne royal commission.
In its first results since the bruising commission appearances and subsequent management turmoil, the AMP revealed net outflows for the half year amounted to a record $873 million. The numbers illustrate the scale of the task facing the troubled wealth manager to reestablish its reputation.
In a step towards that goal, acting AMP chief executive Mike Wilkins laid down a new staff mantra to own and fix any mistakes and restore the group’s tarnished image and earnings. But he refused to follow rivals that have stopped paying trailing commissions to advisers on legacy products.
His comments came as AMP delivered a drop in interim profit and sharp outflows from its wealth management unit, provisions for customer remediation and regulatory costs.
Mr Wilkins stopped short of giving earnings guidance for the 2018 year, but expects to beat a $950 million annual cost cutting target. AMP appointed former Treasury secretary John Fraser as a non-executive director, although information on the timeframe to have a new CEO in place was limited to the search “progressing”.
It has been a horror year for AMP, which was accused of misleading the regulator and charging for financial advice that wasn’t received.
“Where we are going is just the start of it and that’s really just to make sure that we keep emphasising the importance of customers and doing the right thing for those customers,” Mr Wilkins told The Australian Financial Review.
“Accepting that organisations are going to make mistakes and people make mistakes, but when you make that mistake admit it, own it, fix it, learn from it and move on rather than try to hide it.
“We are believers in vertical integration…you need to recognise those conflicts and manage them.”
AMP is expected to endure another grilling at the superannuation round of the royal commission in the latter half of next week.
But despite moves from rivals Macquarie Group and Westpac Bank-owned BT Financial to stop paying controversial trailing commissions – where customers pay an ongoing small fee to advisers for years after financial the financial advice has been given – Mr Wilkins held firm on the controversial payments. He said they reflected about 20 per cent of AMP’s “aligned” adviser base commission and they would be “phased out” over time as older financial advisers and products left the business.
Investors were positive on the AMP result as it printed ahead of profit expectations, with wealth outflows not as severe as some were predicting.
Underlying net profit – which removes one-off charges and market volatility – fell 7.2 per cent to $495 million from $533 million for the six months ended June 30.
AMP’s interim statutory net profit tumbled 74 per cent to $115 million, as a post-tax provision of $290 million was made in the first half for advice remediation and AMP outlined $35 million in additional annual costs to boost risk management systems and controls.
AMP’s shares rallied 2.5 per cent to close at $3.44. Still, about $5.7 billion has been wiped from AMP’s market value since March this year. The company is now worth just more than $10 billion.
“Wealth management has had certain products in outflow for years, but North [an investment platform] continued its strong momentum and the overall second quarter net flows were not as bad some feared,” said Matthew Davison a senior analyst at AMP shareholder Martin Currie.
“The fallout remains to be seen, but for context, consensus expectations are for multiple billions in net outflows in coming years.”
Arnhem Investments managing partner Mark Nathan said fixing the reputation damage at AMP was a “multi-year project”.
“I don’t think the model is broken but it’s certainly going to be challenged for a period of time.”
UBS analyst James Coghill said: “Until a new CEO can more clearly outline how AMP might look in two years’ time and what it might cost to get there, we retain a cautious view.”
Interim revenue from ordinary activities across the group declined 6 per cent to $7.2 billion.
AMP’s wealth management unit – its biggest contributor to income which spans superannuation, investment platforms and advice businesses – saw operating earnings rise 5.7 per cent to $204 million compared to the prior corresponding period. Net cash outflows of $873 million in the six-month period reflected the fall out of the royal commission and subdued member contributions.
The accounts included the payment by AMP of $1.2 billion in pensions for customers in retirement.
AMP also disclosed that chairman David Murray will be paid generous directors fees relative to his peer group at $850,000 per year, including superannuation. Mr Wilkins will receive $1.46 million in fixed pay to December 31 and an additional $70,100 for the period he was acting executive chairman.
Mr Wilkins defended AMP’s approach on pay on Wednesday, saying board fees were based on a “balanced scorecard” and were benchmarked with the market.
In the accounts, AMP Bank posted a 20 per cent lift in earnings but Mr Wilkins cautioned fierce competition in the mortgage market would weigh on net interest margins going forward.
Infrastructure and real estate arm AMP Capital saw operating earnings edge up while the life insurance unit, known as wealth protection, New Zealand and the Australian mature divisions saw lower interim earnings.
When asked about regulators, Mr Wilkins said while he spoke briefly to Australian Securities and Investments Commission chairman James Shipton on Tuesday, he was yet to form a view on plans to embed regulatory staff within major banks and AMP. The idea is for ASIC staff to supervise governance and compliance.
The pair plan to meet to discuss the matter further in coming weeks.
Mr Wilkins also told investors there was a pipeline of adviser practices that may be acquired by AMP under its buyer of last resort policy.
AMP said it continued to review pricing of other products, after announcing fee cuts on its MySuper products.
The company also outlined that it remains “adequately capitalised” with $1.8 billion in regulatory capital above minimum requirements. That was down from $2.3 billion as at December 31.
AMP declared an interim dividend of 10¢ a share, franked at 50 per cent.