AMP sees no evil

AMP chief executive Andrew Mohl was proud of his interim results last week, even if the stockmarket was perhaps expecting a little more upside. Yet behind the solid figures from a leader in the booming wealth management sector lurks something that looks rather like a moral failure.

We saw a month ago in AMP Explains, our interview with AMP Financial Planning’s managing director, Craig Dunn, that the company was in denial about the seriousness of ASIC’s allegations against many of its financial planners. It appears that denial goes right to the top of the company, with AMP showing no great interest in actually finding out which of its planners ripped off customers.

As Mohl admits in today’s video interview, AMP will only review cases of superannuation switching if customers specifically request them to do so.

About 7000 customers switched their super out of industry funds and from other private funds to AMP vehicles after consulting AMP financial planners. Human nature being what it is and the incentives of a commission-based fee structure being what they are, a percentage of those switches were done to benefit the income of the financial planner rather than enhance the best possible performance of the clients’ superannuation savings.

When the credibility and success of a company depend on its trust and reputation, you might think there would be an urgency in discovering whether its frontline sales force was corrupt or not '” but not AMP. The letters haven’t even gone out yet to those 7000 customers telling them they can have their advice reviewed if they choose.

What looks like saving AMP from further embarrassment is the success of its fund managers. The strong investment results recorded by AMP funds means the switched clients are less likely to smell a rat in the advice they’ve been given and there’s less chance again that whatever constitutes AMP’s “review” of the advice will find that clients have been badly served.

AMP’s line is that the advice offered by its sales force is holistic: it can’t just be looked at in the context of fees and commissions from investing in one super fund or another. There are matters of strategic structure of funds, tax and insurance advice as well.

And that is true, but that helpful advice and genuine “planning” cannot ethically be used as justification for not providing the best possible advice on where funds should be invested.

The tone of Andrew Mohl’s defence of his financial planners seems to have changed over the past year. When we interviewed him after the interim results (Surfing The Super Wave) he said there was a trend towards fee-for-service away from commissions, especially at the upper end of the market.

Now the message is very much one of AMP withholding an opinion in that area: that it’s a matter between the adviser and the client and that clients are overwhelmingly happy with the advice they’re receiving.

I can’t help wondering whether it’s really a matter of the sales force wagging the AMP management. The planners are too powerful in the AMP scheme of things for the company’s management to upset; it is all too easy for them to go elsewhere.

And as for the clients: just like going to a doctor, you really only know if you’re getting bad advice on the occasions when something goes spectacularly wrong. Most of the advice is good and most of the advisers are professional, but I suspect some stellar work by the fund managers tucked away inside AMP means some clients will never find out whether they should have been better served.

The interview

Michael Pascoe: The stockmarket perhaps a little disappointed in its immediate reaction. Maybe they were expecting even more from AMP. Are we, though, somewhere near the top of the investment boom from an industry point of view?

Andrew Mohl: Well not from an AMP point of view. We believe that the business is continuing to improve. All of our key metrics have had strong gains over the last 12 month period. So our return on equity is up to 26.5%. Operating earnings grew by 15%. Cost ratio fell to a new low of 40%. Our value measures grew strongly, and 85% of our funds met their benchmark so as a company we believe we can continue to improve. As far as the market’s concerned, I mean certainly the Australian economy’s had a long run. It’s had 15 years of expansion. The profit share’s at a pretty high level, but we don’t see fundamental imbalances in the economy and frankly we don’t believe that the market as a whole is much away from fair value. So we’re still, in our funds, overweight Australian equities.

Is the industry perhaps priced to perfection? All the wealth managers are trading at pretty hefty multiples.

Well Michael, chief executives should never discuss whether their stock is fairly or unfairly valued.

Which is why I said the ind '¦

But it’s all a market. I mean, wealth management companies are highly attractive because they return pretty impressive returns on equity relative to manufacturing companies. There’s strong growth in the Australian system. I mean, this market becomes the fourth-largest market in the world. It’s going to be larger than the rest of Asia combined in terms of private sector funds under management by 2015 so the dynamics in this industry are attractive. At the same time, that means it’s a very competitive industry. There’s a lot of people coming here from overseas and boutiques setting up, trying to play a part in delivering advice, products, and asset management services to customers.

There’s a boom thanks to the performance of the stockmarket and Government policy. How do you think investors will react when normality does return to markets one day?

That’s a good question. I mean it’s staggering, really. I mean, our balanced fund was 18% in the year to June. This is a balanced fund! I mean this can’t continue. We believe benchmark type returns are more around the 7–9%. That’s still a pretty good return in a world of 3% inflation but I think investors, particularly through financial advisers, I mean they come in. They’re told they’re there to invest for five or seven years or even more. To expect volatility. One of the best rules of thumb is that find the asset class that had the worst performance last year. That’s usually the place that you want to buy. So I think investors are smarter these days and again the superannuation model means that the money is, in effect, held through to the retirement age, so of course they can switch but again the evidence is that it’s a relatively small percentage of the population that is active in managing the superannuation money.

You mentioned financial advisers. Your internal enquiry into the switching that did occur, how’s that going? What percentage have they found to be unsatisfactory.

We’re still in the process of verifying the details of just how many customers '¦ we believe there’s around 7000 customers. We’ll be writing to those customers during October and those customers who write back to us and request a review, we’ll have a review done and where that review indicates there wasn’t a reasonable basis of price based on the full contents of the file we will then write back to those customers and offer to pay for all of the cost of advice that they’ve incurred and to transfer them back to the fund that they came from or to an alternative fund.

So customers have to ask for the review. It’s not automatic. So you won’t get a full picture of what’s happened?

We’re offering a review. This is what we agreed with ASIC as part of the undertaking. Customers have chosen AMP. Customers are free to leave AMP at any time. We’ve identified around 7000 clients either from industry funds or other retail funds who may not have received a reasonable basis for the advice. We actually don’t know but what we do know '¦

Don’t you want to find out rather urgently?

Well, that’s why we’re going to write to those customers and offer them that review '” and just recognise that the funds that they’ve been invested in have been some of the highest-performing funds in the market so at this point in time we’ve had no complaints. We have no basis to believe that there is any number of customers have actually incurred any disadvantage. We recognise that the disclosure to those customers when they came into the funds was not in accordance with the interpretation that ASIC had, and that the documentation in some cases was inadequate so we fully recognise that. We’ve changed the processes. The new statements that all customers coming into an AMP plan will now receive will be as good as any in the market, and so we’re going to offer those customers the option to have their advice reviewed and when we have the full results of that then we’ll be happy to share with them, with you and others.

What’s your estimate of inertia? Must be 75, 80, 90% that just won’t bother replying to your letter?

Well, what I can say, Michael, is in the first half of this year, 90% of the customers who bought products from AMP and received advice rated the service that they received as excellent.

Do you think they know any better? By the nature of coming to you for advice, do you think they know any better?

People’s retirement savings is one of their key assets. It’s one of the key decisions they make. We know Australians generally are under-advised. There’s a whole range of reasons for that. They don’t know who to turn to. They don’t know who to trust. They don’t understand the process. The industry, as you well know, is continuing to become more and more professional. It’s a business now. It’s changed very significantly. The costs of providing the service are continuing to rise. But, I mean, we don’t have a viable long-term business if we are not providing quality advice, value for money and peace of mind for our clients.