If there's one thing that irks reps about American Express Financial Advisors, it is the way the firm keeps changing its rules. Since launching its unique three-tier career-track system in 2000, the company has regularly tweaked payouts, fees, incentives and training and affiliation options. Now, the recently announced spinoff from American Express may force it to rethink itself once again.
The company line, of course, is that the spinoff will bring positive change. American Express' lucrative credit card and travel businesses long overshadowed its financial advisory arm. By striking out on its own, AEFA simultaneously sheds its stepchild status and acquires the ability to make the moves it deems necessary to thrive — including dipping directly into the capital markets to finance strategic projects.
Reps see the benefits of this position. “A lot of my fellow advisors and I feel that this makes us a more nimble company,” says Ken Nacar, who just joined AEFA's captive employee platform in October of last year. (In addition to the captive employee track for novices, the company has a semi-independent franchisee network and a stand-alone broker/dealer, Securities America.) “We will be a company that hits the floor running — a start-up with a huge running start.”
Still, analysts say the company reps shouldn't count on too much extra freedom. “That sounds like wishful thinking to me,” says Chip Roame, managing principal at consulting company Tiburon Strategic Advisors. Indeed, without the backing and deep pockets of parent American Express, and considering the current regulatory hostility to revenue-sharing deals and proprietary products, AEFA's margins could be squeezed, analysts say, and the company may have to rethink the economics of its model.
One thing the company will likely do is slim down its rep force, weeding out several thousand under-performing brokers by raising production minimums or by slapping new fees on low-end producers, says Matt Bienfang, analyst with Boston-based TowerGroup. In addition, AEFA will need to create a stronger regional supervisory network, he says. Though an army of 12,000 advisors might seem like an advantage, it's also a liability, considering the company's far-flung network. There are far too many one-man offices out there, he says, with 30 in New Hampshire alone. “They have a very unwieldy distribution channel,” says Bienfang. “It's hard to manage from a regulatory perspective. And now they've got more budget responsibility.”
Another theory making the rounds is that AEFA could be bought out by a large company with captive distribution, like Manulife, AIG, ING or Pacific Life. (The spinoff isn't actually scheduled to take place for another six months.) In fact, American Express initially put AEFA on the block, but no one would pay the asking price, say analysts and industry observers.
A buyer won't want to wait too long. Already, some top producers have started to defect to places like AIG, ING and LPL, says one New York-based advisor who has been with AEFA for eight years. Management has offered bonuses to about 50 percent of its advisor force to keep departures in check, says Teresa Hanratty, senior vice president of AEFA's U.S. advisor business. Still there probably won't be a mass exodus, says Roame. “I think what you will see is some selective rep pickoff, specifically higher-end reps who are not overly focused on proprietary products,” he says. “But a guy who was taught in the old IDS system, with a book of all AmEx products, it's just not as simple for him to leave. He'd have to cash in all those products."
After the spinoff, AEFA will keep its advisor force, as well as the investment management division, which includes a number of subadvisors, and the recently acquired Threadneedle, an international fund manager based in London. AEFA will continue to receive referrals from American Express' card division for an indefinite period of time after the spinoff, but the two entities eventually will renegotiate as independent companies.
At 10 percent, AEFA's margins are still almost double those of most independents, but should shrink as it shells out dollars to come up with a new name and build a new brand. The firm already has hired one of the biggest names in the business (Lippincott Mercer) to develop the brand. “Anything is possible,” including a return to IDS (Investors Diversified Services), AEFA's name before it was bought by American Express, says AEFA's Hanratty.
American Express also revealed in its 10K that AEFA anticipates losing revenue from its revenue-sharing deals this year after it changes their structure. Like many other b/ds, AEFA faces possible enforcement action from the NASD for failing to properly disclose the details of revenue-sharing deals. These deals can often account for one to two percentage points in net margins, according to industry executives.
AEFA's profits have been falling for years. Last year, AEFA netted $700 million on $7 billion in revenue. That's down from $859 million in net income for 2003 and $935 million in 1999. Profits haven't been helped by a decrease in sales of proprietary products, which carry higher profit margins. Today, 50 percent of product sales at AEFA are American Express products, compared with 80 percent just a few years ago, says Roame.
A number of advisors say AEFA stopped giving them financial incentives to sell in-house funds a few years ago, but regulators seem to differ. New Hampshire's securities watchdog filed charges against the company in February, alleging it gave illegal financial incentives to advisors who steered clients into proprietary mutual funds.
If it wants to be competitive in its mass affluent target market, AEFA will have to stop pushing in-house funds and insurance, says Tom Watson, an analyst with Cambridge, Mass.-based Forrester Research But that shouldn't be a problem: At this point, AEFA's used to making changes.