AMP's no-frills future

AMP chief executive Craig Dunn plans to do to the superannuation and financial advice businesses what Geoff Dixon did to the Australian airline business.

Dixon's Qantas had a full service airline and spun off a discount operation, Jetstar. Dunn has a full service superannuation/investment product and distribution operation and is planning to create a discount business with very different dynamics. Unlike Dixon's Jetstar, AMP's discount operation will stay incorporated into the same AMP operation. This was the message Dunn delivered after his address to the Trans-Tasman Business Circle in Melbourne.

Dunn's plan to copy Qantas does not depend on the AXA acquisition. However if AMP acquires AXA it will add considerable scale to the proposed revamp. It is highly likely that the big banks' own wealth management operations will follow AMP by creating discount operation, which will begin a fascinating new era for Australian superannuation and investment products.

The investment product/superannuation product business had been complex for generations. The old life policies that were sold by AMP and other agents were complex and incredibly hard to understand. Then the industry moved to products where there was no guarantee of principal. They were distributed by financial planners who often took high commissions based on the size of an investment.

The products were very complex and had many features which enabled people to craft an infinite variety of investment options. Now that financial planners are to be remunerated by fees rather than asset-based commissions, it has sparked a rethink by AMP of its product mix.

The full-service products will still be produced, but they will carry higher fees than the discount products and financial planners will tend to spend more time working with clients on them, so the advice fees will rise. There remains an important market for these complex but flexible products and they are akin to flying business class with a full-service airline.

But Dunn also plans to produce a series of very simple discount products offering only three options– high equity/high growth; a balanced option with less equity; and a more defensive investment mix. The investment mix in all three will be fixed and they will be simple and very low cost. AMP will seek high volumes.

Dunn believes that this will substantially widen the advice market as some advisers will specialise in discount products looking for high volumes. These discount products will often be sold in competition with industry fund products.

Other advisers will stick to the more complex products while some may try for both.

One of the big differences between Australia and most other parts of the world is that in the majority of Australian superannuation products the client takes the risk. That means very little capital is required by issuers like AMP. In the European model the life office usually guarantees the principal and takes the risk.

The European life offices have been able to offer capital guaranteed products because their regulators require much less capital than Australian regulators to back the guarantees. The Australian capital requirements makes life office guaranteed investment products too costly for all but a small segment of the market.

In light of the big losses during the global financial crisis, the Europeans are reassessing their capital requirements for these products and some life offices are pulling back. That makes the Australian model of customer risk and employer and employee direct contribution, probably the best in the world.

That's one reason why China Life chose to link with AMP. Just as Jetstar exported its model to Asia, so the AMP discount model may be applied to the Asian market.