American Express to Exit the Financial Advisory Business

American Express announced today that it is spinning off its Financial Advisors unit (AEFA) from its credit card and travel operations. American Express shareholders rejoiced, sending shares up 6.4 percent. AEFA will be spun off to shareholders and not sold, Amex executives said, because of adverse tax consequences that shareholders would have faced in a sale.

American Express announced today that it is spinning off its Financial Advisors unit (AEFA) from its credit card and travel operations. American Express shareholders rejoiced, sending shares up 6.4 percent. AEFA will be spun off to shareholders and not sold, Amex executives said, because of adverse tax consequences that shareholders would have faced in a sale.

Saying there are “few critical strategic links between the two businesses that create a compelling case for keeping the businesses together,” American Express CEO Ken Chenault seemed to underscore what readers of Registered Rep. already knew: The combination of a credit card/travel services company with the old IDS didn’t offer much to either unit.

In September 2004, Registered Rep. published a story called “The Great Experiment”, which detailed the problems plaguing AEFA. “With a tradition of grooming brokers from scratch, American Express Management hoped the franchise option would attract more seasoned planners who would bring sophisticated skills—and rich clients—under the corporate umbrella. The strategy hasn’t quite panned out.” For more, see registeredrep.com/mag/finance_great_experiment.

In fact, IDS—purchased by American Express in 1994 but which dates back 110 years—didn’t get much from the American Express brand name, said Jim Cracchiolo, president of American Express, Global Financial Services. “For financial services, [American Express] wasn’t as strong a brand name for the business that we’re doing on a relationship basis.” American Express Financial Advisors, as IDS came to be known, will continue to be run by Cracchiolo.

AEFA’s advisor network couldn’t match the growth of the credit card company and held the combined company’s performance back. Indeed, in a conference call today, Chenault said, “With this spinoff, I am even more confident in our ability to maintain our long-term growth financial targets of at least 8 percent revenue growth and 12 to 15 percent earnings-per-share growth.”

In 2004, if the companies had operated separately, American Express, the credit card and travel services company, would have netted about $2.7 billion on revenues of $22 billion; equity would have been around $6.4 billion. That would have given the credit card company an ROE of around 28 percent or more, instead of an ROE of 18 percent, according to American Express executives today.

AEFA, on the other hand, netted around $700 million in 2004 on revenue of $7 billion. The spinoff, said Cracchiolo, will allow the company “greater flexibility to drive its strategy to pursue investment opportunities.” AEFA has a network of 12,000 advisors serving more than 2.5 million clients, $410 billion in assets and more than $145 billion of life insurance, he said.

Cracchiolo also said, “Over the years we have benefited from being part of the American Express family. However, Financial Advisors also is built on a solid foundation and a rich heritage that goes back 110 years. We will develop a new name for Financial Advisors that builds upon that heritage, which we will begin to use after the spinoff.”

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