Feb 2, 2012
Executives
Alicia Charity - SVP, Investor Relations Jim Cracchiolo - Chairman and CEO Walter Berman - EVP and CFO
Analysts
John Nadel - Sterne, Agee Suneet Kamath - Sanford Bernstein Andrew Kligerman - UBS Alex Blostein - Goldman Sachs Jeffrey Schuman - KBW Tom Gallagher - Credit Suisse Eric Berg - RBC Capital Markets
Operator
Welcome to the Fourth Quarter and Year-end Earnings Call. My name is John and I will be your operator for today’s call.
(Operator Instructions). I will now turn the call over to Ms.
Alicia Charity. Ms.
Charity, you may begin.
Alicia Charity
Welcome to the Ameriprise Financial’s Fourth Quarter Earnings Call. With me on the call today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer.
Following their remarks, we’ll be happy to take your questions. During the call, you will hear references to various non-GAAP financial measures, which we believe, provide insight into the underlying performance of the company’s operations.
Reconciliations of the non-GAAP numbers to the respective GAAP numbers can be found in today’s materials available on our website. Some of the statements that we make on this call may be forward-looking statements, reflecting management’s expectations about future events and operating plans and performance.
These forward-looking statements speak only as of today’s date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in today’s earnings release, our 2010 annual report to shareholders or our 2010 10-K report.
We undertake no obligation to update publicly or revise these forward-looking statements. And with that, I’d like to turn the call over to Jim.
Jim Cracchiolo
Thanks for joining us for our fourth quarter and full year 2011 earnings discussion. I’ll begin with an overview of our business performance and some thoughts about our positioning for future growth, and then Walter will discuss our financial results in more detail.
After that, we’ll take your questions. We finished the year with substantial progress with a solid fourth quarter, despite continuing challenges from the environment.
Markets recovered a bit in the quarter, but remained highly volatile, which caused clients to become more cautious and move to larger cash positions, and interests rates remained near zero which resulted in further spread compression. My key message for you today is this, as always, we have ability to navigate through the short-term challenges, and we are focused on the medium to long term, which holds great potential for us.
Our financial foundation remains one of the best in the industry, and it continues to give us important stability and strategic flexibility. We believe our financial strength enables us to weather the current storms and maintain our strong position in the future.
We continue to generate significant capital and we are still holding more than $2 billion of excess capital and that after returning $1.7 billion or 135% of our operating earnings to share holders through dividends and buybacks during the year. In addition, in December we announced a 22% increase in the dividend which will be paid in February, and we now have increased our dividend five times in our six years as a public company.
Even with the significant capital we’ve returned, I believe we are in a stronger capital position now, than we were a year ago. As our business has become less capital intensive, we’ve been able to free up capital to return to shareholders and invest for growth, while maintaining our ratings.
Our many strengthens many our highly diversified and proven business model, to our client focus to our financial position allowed us to generated record operating earnings of $1.23 billion and a record operating revenues of $10.1 billion for the year. Now I will provide you some commentary on our business segments, and then I will give you my thoughts on the year ahead.
First, in our Advice & Wealth Management segment, we’ve delivered another strong quarter and our most profitable year ever. The market volatility and low rates seem to be affecting firms across the industry, with clients once again seeking safety and moving to cash and other low risk options.
Still, our advisors generated good quarterly production and a record 384,000 of annual operating net revenue per advisor. We’ve generated strong client asset flows highlighted by 1.4 billion in wrap net flows for the quarter, and 7.3 billion for the year.
We also recorded our third consecutive quarter growth in the number of advisors. Our long term work to reengineer our advisor platform is largely complete, and has given us the lift in advisor productivity that we anticipated.
At the same time, we stepped up experience advisor recruiting efforts and generated good momentum, with a 105 advisors joining us during the quarter, and a total of 337 for the year. The momentum is continuing in to this year.
In fact, January was one of our best recruiting months ever with [new] recruits joining the firm. In the quarter, our margins in the Advice & Wealth Management segment decreased slightly as a result of our increased investments for growth and slowing client transaction activity due to market volatility.
Even in the difficult operating environment, we are investing in the business Beginning in September, we increased our national television advertising presence, and we are finding that the ads are resonating well consumers. We are continuing to roll-out our new brokerage platform, which is a major multi-year investment.
The conversion has gone smoothly for our employee advisors, and now we are in the process of converting franchise advisor systems, which is the larger part of our overall network. The brokerage platform investment will continue at a fairly high level this year, but we expect the process and related expenses to wrap up in 2012.
We’ll also invest in new avenues for long term growth, including the launch of a financial planning business in India. That power with India advisors bringing our holistic approach to the Indian consumer is off to a promising start.
In addition, we will soon open a new operation site in Las Vegas, where we have been able to take advantage of the good labor market and low real estate prices. Our building there will house several functions, including advisors, technology support staff and client service people.
We continue to invest, while we are beginning to tighten our management of discretionary expenses to offset potential market volatility. We are doing that across the firm, and I will comment further on this topic in a moment.
Now we’ll move on to Asset Management where the fundamentals remain solid and our growth opportunity is quite attractive. With the quarter across the segment, we generated 4.3 billion of net inflows.
That number includes the 14 billion institutional mandates Threadneedle 1 from Liverpool Victoria, which was one of the largest single pieces of institutional business that went up for bid in the UK in 2011. Apart from this significant win, as we mentioned during our financial community meeting in November.
We experienced 6.7 billion in redemption from low revenue in form of parent accounts. We expect some lump outflows to continue including about $4 billion of former parent-related outflows in the first quarter, and an additional 3 billion of these low margin assets as the year progresses.
We also still expect to loose the previously announced 1.8 billion outflow from the New York 529 plan at some point this year. It’s important to note that the vast majority of the expected outflows from former parent accounts should be completed this year.
Retail assets remained a significant challenge for the industry, with almost $50 billion in net outflows from domestic long term equity funds in the fourth quarter alone. We remain in net outflows and retail funds at Columbia; primarily because of weakness is sub-advised accounts, which accounted for 1.3 billion of net outflows in the quarter.
That said, we are seeing significant improvements in sales early this year, particularly in our focused funds. As a result, we are generating net inflows in certain fund areas that are on significant outflows across the industry.
The institutional business is also making progress especially in third party channels. We have won several mandates that have not yet been funded and our pipeline of potential new business continues to grow.
In terms of investment performance at Columbia, our shorter term numbers dip somewhat, but our longer term record remained strong. We are seeing good improvements in performance earlier this year.
In fact Columbia generated very strong performance month in January. Internationally Threadneedle continues to generate strong results, with excellent investment performance and reasonable flows given European market conditions.
I should note that Threadneedle also retained the mandate to manage substantially all of the Zurich assets to a competitively re-tender process. Like Columbia, Threadneedle is off to a good start this year with good net inflows in January.
Overall, we feel good about our position in global Asset Management, and what we created with Columbia. The integration will be complete in this quarter.
We have our wholesaling teams fully engaged across the country and they have strong performance to back their efforts; and we are developing new business collaboration between Columbia and Threadneedle to drive global growth opportunities. Now we move on to annuities and insurance.
The annuity business continues to perform in line with our expectations both in terms of sales and risk. In total the variable annuities business generated new inflows of 227 million and the Ameriprise channel delivered net inflows of 442 million.
Overall flows continue to be impacted by our decision to exit outside distribution of variable annuities, and we continue to feel good about that precision given the interest rate environment and the current risk return parameters of the business. With regard to fixed annuities, we continue to be in net outflows, because we have not put new product on the books due to the low rates.
Walter will discuss this in more detail. Overall both the fixed and variable annuity books continue to deliver solid returns and our risk is well managed.
That said, we recognize that the economics of this business are changing. To accommodate the changes brought on by the years of near-zero short-term interest rates, we’ve decided to raise fees and new variable annuity riders, and we’ve communicated the decision to our advisors.
The higher fees are likely to dampen sales in the short term, but we believe this is the right move to ensure we can continue to meet the long term guarantees of many of our annuity contracts and deliver strong shareholder value from this business. In addition, in the second quarter of this year, we will introduce new variable annuity products that we believe will meet client needs while providing sustainable economics.
In fixed annuities, with low rates continuing and with the Feds operation twist last year, we expect spread compression to continue in 2012. The Protection segment delivered strongest quarter of the year, primarily from improvements in auto and home results.
That business returned to more normal claim levels and is once again generating solid growth and profits. Auto and Homes policy accounts continue their steady increase, up 7% over a year ago.
In the Life business while clients continue to be reluctant to commit cash to long term contracts given the tough economy involved for markets, we have seen some improvement in sales. We generated good sales of our new indexed universal life insurance product, which meets an important client need in volatile markets.
During the quarter, we were recognized by insure.com as the number one life insurer in terms of client satisfaction, and those kinds of accolades served us as good sales [through] for wholesales and advisors. In total, life insurance in force remained essentially flat at a $191 billion To summarize, 2011 was a very good year for Ameriprise, despite significant environmental challenges.
While the economy in the US is slowly recovering, the market environment remains quite challenging, and I think you are seeing the impacts across the broader financial services industry. Even with a recent bounce back, equity markets are exceptionally volatile.
Interest rates will likely remain near zero for three more years, and the regulatory environment is changing rapidly. We are very conscious of the environment and its effect on our revenues.
Expense discipline has long been one of our core competencies, and we are further stepping up our expense management efforts now. We are taking a close look at all discretionary spending across the firm, to ensure we are operating as efficiently as possible.
That said, we are continuing to make important investments for the year and beyond. We are focused on a number of initiatives that we believe will drive the business forward.
I like to briefly review just a few of them. We are going to emphasize our retirement capabilities through our advertising and new approach to help our advisors to discuss retirement with their clients.
You all know that the retirement need is very large. We think we are ideally situated to meet the holistic needs of people approaching this milestone.
Second; we’ll continue to invest to help advice become more productive and to bring in highly productive experience devices. We are providing the technology and marketing support advisors need to serve clients efficiently in bringing new clients.
Third, in Asset Management, we are focused on flows and broadening our distribution. We believe we have the investment performance to drive improved flows, and we’ve emerged merger related impacts in the US.
Now we are investing to build the Columbia management brand and to promote our investment performance. At the same time, we are broadening our distribution reach to new markets with Threadneedle making inroads in the Middle East, Continental Europe and Asia.
We have demonstrated our ability to succeed in good times and bad, and I believe we are in excellent position to navigate this period and emerge stronger, just as we did following the financial crisis three years ago. Now I will turn it over to Walter.
Walter Berman
Operating earnings in the fourth quarter clearly reflected the challenging environment. While equity markets have rallied about 5% in January, market volatility remains with us in 2012, and it is clear that interest rates are unlikely to increase until 2014.
Looking at revenues in more detail; you can see that excluding the hedge fund fees, revenues would have been about flat to last year. The underlying slowdown in revenue growth reflects low client activity from weak market sentiment.
Clients are increasingly focused on capital preservation and generating income. This impacted revenues in two ways; lower transactional volumes and an increase in cash balances.
How long the shift in behavior continues is difficult to predict. Revenues were also impacted by low rates, with net investment income down 4% from last year.
However, the underlying fundamentals of the business remained strong, with a growing advisor base and good asset growth. From an earnings perspective, operating earnings per share grew 2% despite lower revenues, as we managed expense levels and continued to make substantial investments in brand and technology.
We also realized synergies from Columbia integration and saw a good improvement in auto and home results. Turning to slide 4; operating return on equity in the quarter increased 13.1% compared with 12.9% a year ago.
As a reminder, we calculate return on equity on a trailing four quarter basis. We saw a big swing in DAC unlocking and model changes year-over-year.
Excluding these impacts, underlying return on equity group from 12.5% to 13.4%. As we look ahead to next year, we are on track to hit the 15% to 18% range we provided in November.
Underlying our return on equity is our strong balance sheet fundamentals. Our hedge program is effective; our capital ratios are strong with debt-to-cap of 18.5%; the investment portfolio is high quality.
We had only $11 million of impairments in the quarter, and as we have said, we have no holdings of [stopping] debt in financially troubled European countries. Turning to page 5; we ended the year with over $2 billion of excess capital, and about 600 million of debt capacity.
In 2011 we returned 1.7 billion of capital to shareholders or about 135% of our earnings. We received 2.1 billion of dividends for our operating companies this year, with most of that coming from our life companies.
In the fourth quarter, we received 850 million dividend in the form of securities from the Life company. These securities are highly rated and very liquid.
This additional dividend will reduce investment income at the Life company, by about 2%. As for the dividend, the RBC ratio remained strong at 490%, which was our targeted level.
Turning to segment results starting with Advice & Wealth Management; operating earnings in Advice & Wealth Management decreased 14%. We continue to see good asset growth and retention, with net inflows of $1.4 billion in the quarter.
However, earnings were impacted by a slowdown in revenue growth from a decline in transactional volumes and from clients holding more cash. This is a trend being experienced throughout the industry.
Cash [sweep] accounts increased to $15 billion, and we are currently earning just 42 basis points. In the quarter, we continued our investments by launching our new brand campaign and the development and implementation of our new brokerage platform.
The new platform is expected to be complete by the fourth quarter of 2012. In total, growth investments were about $14 million higher in the quarter, and we would expect that elevated level of expense to continue through 2012.
Turning to Asset Management. Asset Management earnings declined 36 million, primarily due to hedge funds, where earnings were down 21 million year-over-year.
The remainder of the earnings decline reflects the expected impact from both markets and its outflows. Expenses excluding the hedge fund impact were about flat year-over-year, and includes funding additional brand divestments.
Adjusted net operating margins were 31.4%. The Columbia integration is progressing well, and we realized net synergies of 130 million, in line with our target for 2011.
The technology integration is on track for separation in mid-2012. Annuity earnings were up a bit this quarter.
However, we see different trends in variable and fixed annuity books. In variable annuities, operating earnings grew 13%, excluding some favorable adjustments.
On a year-over-year basis, the DAC and DSIC impact was about the same, given very similar market performance in each period. We had client inflows and also had $10 million of favorable items, including improvements to our models and the market impact on our debt [band] of reserves.
Variable annuity sales in Ameriprise channel declined 9%, compared to sales a year ago, when we introduced our RAVA 5 product. Net flows in this channel were about 442 million.
In the quarter, we also announced plans to increase fees on variable annuity new business. We believe this is an appropriate action to reflect the change in economics for that product.
In fixed annuities operating earnings declined 32%, which includes an unfavorable adjustment to the reserve for indexed annuity contracts. As we previously indicated, we expect fixed annuity earnings to decline, as we invest asset at lower yields.
The incremental annual negative impact will primarily be about 35 million after tax for all Ameriprise, and as I mentioned earlier, the reduction in investable assets at the Life Company will add additional pressure on net investment income. Let’s move on to Protection.
Operating pre-tax income in the Protection segment increased 30%, driven by improved earnings in auto and home, and stable earnings in the life and health area. Auto and home revenues increased 6% over last year, primarily driven by growth in sales through our partnership with Progressive.
We saw improvement in trends in auto and body injury claims, which are back to more normalized levels. In closing, we delivered strong results in 2011, and continued to demonstrate our ability to be successful in a range of market conditions.
As Jim said, we are managing for the short-term, but we’re focused on the long-term. We have strong financial fundamentals, and we’ll continue our focus on enterprise risk management to drive shareholder value.
With that, we’ll open it up to questions.
Operator
(Operator Instruction). Our first question comes from John Nadel from Sterne, Agee.
Please go ahead.
John Nadel - Sterne, Agee
Obviously a lot of margin pressure in Advice & Wealth Management and Asset Management this quarter. 9ish in A&WM and maybe just shy of 17x items in Asset Management.
I’m just interested in the 12% target and the 23% target for those two segments respectively. I know client activity, etcetera, pressure points; my question is; are those targets achievable and over what timeframe?
Jim Cracchiolo
John, this is Jim Cracchiolo. I’ll respond first and then Walter can compliment.
If I look at the AWM segment, we were hit with a bit of impact due to market volatility. I mean, fees were lower, our Wrap business went down a lot in the third quarter because of market depreciation and our underlying flows are still fine; that started to come back in the fourth quarter.
But of course you’re taking the fees for every month during the quarter and they would’ve been impacted. Second, if you look at a number of companies are already reporting, and in the industry a lot of client activity did slow in the fourth quarter, whether you look at the retail firms, the direct firms or wire houses because of the market volatility.
It does impact client behavior. So even though we’re sitting here now in January and the markets are back, during that period if we recollect in August, September things were looking pretty ugly again, and it does give people pause and there was a large amount of volatility in October, November, etcetera.
So we’re no different. I mean our client activity is looking at CNBC and the news and looking at how many times that stock index moves up and down and the European crisis and the political climate that’s out there.
Now, will that come back if things start to again continue to show stabilization etcetera? The answer will be yes.
But it does your top line revenue. Now in addition to that, what we thought appropriate so is we are investing in our multiyear platform.
We didn’t want to slow that down, and so we started the conversion to our franchisee system, integrating in the full brokerage to all of our other systems and capabilities, and going through that conversion that will continue through this year, as we get to the fourth quarter, it will be pretty much complete. That was a step up a bit in investment.
We also were investing in a number of other things to continue to build out our systems, mobile, etcetera, apps and a number of things that funds get committed before and your project work going on before. You can tell with the markets going to do (inaudible).
John Nadel - Sterne, Agee
I understand that. If I could just interject.
If I think about that $14 million year-over-year higher expenses on those items that Walter had mentioned; that’s about 150 basis points as I calculated on the margin for the segment. So in other words should we think about the remainder of the difference to your 12%, which is about where you were the last couple of quarters, as being just, we got to watch we got a see consumer sentiment, we got to see transactional volumes, and client activity picked back up and we regained that difference?
Jim Cracchiolo
We will regain that because remember, our systems development was through the year. We had a little extra in the fourth quarter, but it was through the year.
The only thing incremental was the relaunch of our new campaign, which started in September when we had a full year impact. Now, that we are going to continue that campaign through the first quarter, and then we’ll evaluate how much we spend later in the year.
But I would say this. We do have the ability to control some of our discretionary expenses that we’re looking at.
I do believe, again, I can’t dictate the markets and client activity. But I would say we will be in the 12% margins this year in the AWM business.
So I don’t look at that one quarter as an issue. I would actually say there’s strong underlying growth, the indicators are there, advisors are not going to stop their productivity, but clients do have to get a little settled.
So I feel good about that segment and I feel good about what we’re doing in it. As I said, the investments we’re making, they’ll start to roll off like that technology this year, and there will be a big upside because we are running two systems, we are converting thousands of advisors and we are doing a lot of systems development.
A lot of that was in last year’s P&L and we still got good margins. So once that rolls off, it will help tremendously.
In the Asset Management business, to be very clear on that, we have a level of depreciation. We’ve lost a number of assets because equity markets weren’t best to get flows where we thought we would get.
The parent stuff, I know people look at the volume of those dollars, but we always sort of thought that we would lose them. They are not a lot of fee basis.
So I would say that 23%, no, I would probably put more in the 20%, 21% based on just where markets are, because I think that compressed us where we thought things would improve in the market situation. Again, if markets come back it will be a different sorry, but if we’re thinking about that on a relative sense today, that’s probably more where I would target it.
Having said that I do see some underlying things changing around there. Now flows in the industry aren’t great, but Threadneedle is doing good.
I think Columbia is starting to gain some traction through its third party institutional, and retailer’s outflows are slowing. So we’ll get over the hump of the parent stuff.
I identified it just as I told you in my talking points, so that no one’s surprised at it, but those will be lumpy. But at the end of the day again, I think we are making a good underlying traction.
John Nadel - Sterne, Agee
Just one last quick one, is your buyback currently curtailed or is it operating just at a lower level than we’ve been accustomed to?
Jim Cracchiolo
We did not curtail it. Again, going into the fourth quarter; now looking back you can always say hey, markets why did you do that?
But markets were bit more volatile. We are looking at what it looked like.
We did a substantial amount over the course of the year and we are also looking at potential opportunities at the same time. But no, buyback is not curtailed.
We will continue it this year. We just sort of adjusted it depending at the same time.
We don’t have a perfect crystal ball on things.
Walter Berman
Let me just add to that, if you looked at the share price, it went from like 37 to 50 in the quarter, and so is completely volatile. We actually purchased on the average.
But, as Jim said, it was just looking at a pretty volatile market, and in retrospect you can always say could’ve bought more. The reality is I think we bought (inaudible) but no curtailment.
Operator
Our next question comes from Suneet Kamath from Sanford Bernstein. Please, go ahead.
Suneet Kamath - Sanford Bernstein
I just wanted to follow-up on John’s questioning on the margin. I am actually surprised to some degree that you feel comfortable with the 12% Advice & Wealth, and you are sort of lowering Asset Management.
The reason is you’ve reaffirmed those targets or those objectives in sort of November at your Investor Day. From Investor Day to the end of the year, I think the markets were higher in terms of helping the Asset Management.
I get the fact that client activity is weaker, but again you’re affirming the 12% in Advice & Wealth. So I’m just trying to understand like what’s the delta between what you said in November in terms of Asset Management and what you’re saying now?
Walter Berman
As you talk about looking at it from that standpoint, certainly the markets have rallied, and as we’ve seen the volatility with it, if you’d just take a straight line projection up certainly, as Jim said, you might get to a higher number. But it is challenging for where these markets are, and the more you get shifts coming in and out of that nature, it does affect us from the equity and fixed income flip.
So I think that is really where the leverage is going to go in and out. It’s just this volatility in the market, it’s just at a pretty steep basis, and so, I think that’s where you’re seeing us be a little cautious on that.
Suneet Kamath - Sanford Bernstein
Maybe getting back to Advice & Wealth then, 12% is a pretty big lift for the year. I know you touched on it in answering John’s question, but what specifically do you think gets you from where you are today there?
Is it really a throttling back of some of the advertising expense beyond the first quarter or what are kind of the big levers that you have to get to the 12%?
Walter Berman
So let’s look at it. From a perspective, again, I can’t predict activity during the quarter in fees.
So for instance if you say, and that goes for the Asset Management; if you say the markets are going to just continue to go up from here or even manage stability from here and rise, then we’re talking about a different story. Our forecasts, our projection is just based on last year was we didn’t take that right.
It was up, it was down, and you don’t get on average the fees all the time. So part of our difference may be from what you’re looking at is that if we’re here and we’re continuing to rise on a nice even slope, that’s one thing.
If you got a level of volatility it’s another thing. In regards the margin itself, I do believe we can manage some of the discretionary expenses.
I think we’re going to set some internal targets to tighten up on something that’s nice to do and nice to have. But if the revenue is weak, we got to adjust that.
At the same time as I said, we want to complete some of these investments like that technology, get it behind us. That will help our margins in the future.
Interest rates also affected us a bit more when the [NACE], we were even using the yield curve last year. That’s a little out so we want to make up for some of that by tightening those expenses.
Now will revenue rise as much? Maybe not, but I can still tighten the margin even if revenue is a bit lower.
So we are guarding against the revenue weakness. If the markets come back here and stay stable then I think we’ll continue to show the rise we did in the first few quarters of last year.
If it doesn’t then I need to tighten the ship a little bit.
Suneet Kamath - Sanford Bernstein
Understood, and one quick follow-up. When you said earlier that you expect to hit 12% margin in Advice & Wealth in 2012, is that for the full year or you staying sort of by the end of the year?
Walter Berman
That is for the full year. That was the expectation.
Suneet Kamath - Sanford Bernstein
And that’s still your expectation?
Walter Berman
With the caveats that you mentioned, yeah.
Jim Cracchiolo
We can’t guarantee anything. What we’re saying is we’re still trying to shoot that, and we have a number of things that we are working on to help make that happen.
Operator
Our next question comes from Andrew Kligerman from UBS. Please go ahead.
Andrew Kligerman - UBS
Just following on that last line of questions, it would imply to get that 12% margin, you need to use these discretionary spending initiatives to maybe cut at least $15 million a quarter in expenses. Is that the objective, and maybe Jim or Walter, a little more clarity on those potential initiatives?
Jim Cracchiolo
I haven’t done your exact calculation, but it is a combination of, certainly as Jim said, as you look at the revenue on managing the expense based upon that revenue base. So yeah, I think we have degrees of flexibility on that.
I haven’t done the exact calculation the way you have done it. But it is a combination of factors that go through.
Andrew Kligerman - UBS
Anything specific you could lay out (inaudible), Walter?
Walter Berman
Really what it is across the board is this. We do a lot of technology spend for enhancements, new initiatives beyond the brokerage platform conversion.
There are numerous program on the marketing and support levels that we have. There’s a number of things that we truly invested in, enhanced training and setting up new initiatives like onboarding our new advisors and even increasing our advertising there.
So there are number of different things that we’ve done that we could tighten a bit depending on what the market situation looks like that would be helpful in this environment. Controlling some of our staff expenses that get charged in from the different units into the AWM business that we can tighten.
Listen, when we were growing in a number of areas, etcetera. We wanted to continue to invest more heavily.
We had a big investment agenda and we might just have to temper that a bit and tighten it, and we’ve been used to doing this. We’ve always reengineered.
We have a number of new initiatives that our resources were consumed with the integration of Columbia that we’re freeing backup; that we can work on again reengineering and moving things and enhancing the way we operate and process. And some of the things we’re looking to do will help in that line.
So this apart we need to do, this is part of what we’ve always done. Again, I’m not putting the 12% as a firm thing as the most important objective.
I’m just saying I think I have opportunities and we are still believing that we are growing the advisor force, we are growing ways that they can deepen their relationships. We are introducing things that hopefully will help them deepen and gain more assets.
So some of that will come from revenues, some of it will come from expense tightening.
Andrew Kligerman - UBS
Okay. And then maybe just shifting gears to the Asset Management area, particularly Columbia, where the one-year number for your above-average (inaudible) numbers.
It went from 62% asset weighted in 2Q to 56% 3Q, down to 38% in the fourth quarter and that kind of dragged down the three-year numbers well. Could you give a little color on where you expect that number to go in the near term?
What’s causing that struggle in performance, and what you think the implications are for retail net flows going forward?
Jim Cracchiolo
So there are two things that occurred, and I’ll give you a little more color to it. On the one year performance, what occurred is that we had a number of our domestic equity funds falling a bit low the Lipper medians.
Now the differentials between the second and third quartile were very small in 2011, and while we under-performed and since it was so small, we could make up that ground, in most cases, quickly and January is already showing that, that’s come back around. So we think that we’ll start to show improvements.
The big change was we had one of our funds move below, and it was a big fund, move below the median and that was because a good quarter rolled off and the bad quarter rolled on in the sense of hurting that. But already January performance is good there as well, and we’re hoping that, that will start to turn its colors as well.
But we think it has a lot to do with that movement so to speak, and our investment people are feeling good that there’s an ability to continue to see improvements there.
Andrew Kligerman - UBS
Got it. And then just lastly M&A; it seemed like you were alluding in an earlier question to the fact that you’re looking at opportunities.
Do you think that’s the environment [heated] up a bit in terms of opportunities, and in what areas? Asset Management?
Advice & Wealth Management?
Jim Cracchiolo
Well, I think you’re seeing a bit more level of activity out there in the Asset Management world. We’ll continue to look a potential opportunities.
It doesn’t mean there was one for us, but we’ll continue to look and see if there is something that’s good that we could potentially do. We have the flexibility to do that, and incremental to what we’re doing now, we’ll continue to look at the buybacks as I said as part of what we’re going to continue to execute on, and we’re going to continue to review our dividend policy as well.
We did another raise at the end of last year. So we’re going to look flexibly of how we can create shareholder value using the strength of our balance sheet and the free cash that we continue to generate.
That’s why as I look at the fourth quarter, it wasn’t what we ideally would want. But having said that, I think if you look at the underlying of what we’ve been able to invest in, what we’ve been able to do, and even though one can estimate what that will always be to next quarter, I think if you look at the underlying things we have just accomplished over the last few years, we want to continue to build upon that.
And we’re going to continue to work hard to do that.
Operator
Our next question comes from Alex Blostein from Goldman Sachs. Please go ahead.
Alex Blostein - Goldman Sachs
So just to go back to the margin discussion and AWM; I understand it’s hard for you to predict environment in the markets and the level of productivity, etcetera. But it does feel like you guys are bringing in higher-producing advisors in the employee channel where planning capacity and incremental margin on that should in theory be higher.
So kind of taking that into consideration, do you think there’s some room for margin improvement from this 9% to 10% level, assuming markets don’t really change from here?
Jim Cracchiolo
Yes. Complemented to what I said.
But yes, that was another thing you just pointed out very clearly. We are adding a lot of productivity from new people joining us.
It takes time to ramp up. The ones that were added two years ago are ramping nicely.
The one we added last year will help the ramp up this year, and we are accelerated the number of people we brought in towards the latter part of the year.
Alex Blostein - Goldman Sachs
On Asset Management, you told us about the same redemptions at the Investor Day a month and a half ago. So net-net you are probably seeing maybe $8 billion to $9 billion of [still] redemptions come in that you know of in 2012.
But then you guys also talked about institutional pipeline, that was pretty good and there’s some mended that you won but haven’t funded yet. Can you quantify those, and what you think those actually going to fund?
Jim Cracchiolo
Well, as I said, we have some fundings already come in like in our Threadneedle area and in the Columbia area. We have some good wins that we won in the fourth quarter and December, etcetera, that we think will be finding in the first quarter.
We have others that were in the pipeline that we’re bidding on; the pipeline is quite strong. So here again, I can’t give you numbers per say right now, but I would just say that the improvements are there.
We think that we’ll win. Again if you adjust for these parent stuff that I just mentioned, I think that this will be one of the areas that we’ll look for improvement in growth this year based on the traction that we’re gaining.
Alex Blostein - Goldman Sachs
Shifting gears a little bit on capital management and potential acquisition opportunity for you guys, Jim, on current operating earnings basis you guys spit out, Walter, you pointed at 135% of your total operating earnings between the buybacks and the dividends. Given the slowdown in the fourth quarter, but I mean maybe we should think about more on an annualized full run rate basis, is that kind of the total payout that you guys are thinking about for 2012?
That’s question number one and then the follow-up to that on the M&A side, I guess, what areas in Asset Management do you guys still feel you have some product holes that you would need to fill?
Walter Berman
Alex, we don’t set a hard fast target, but we have about, as of the end of December, about $1.450 billion left in the authorization, and that spreads over approximately six quarters. So you can get a pretty good idea what the standard of this playing average is, and then as we said, we’ll be opportunistic about it.
So really, while we bought back a [250 billion] in the fourth quarter, we didn’t feel that was really retreating from it. As I indicated it was extremely volatile markets so we will just gauge that.
But certainly I don’t forecast earnings; as you look at it, we do gear as we understand that as Jim said we’re looking at which way whether its dividends are it’s going to be buybacks. So I think those sort of indications should give you some comfort zone of where the minimum standards are.
Alex Blostein - Goldman Sachs
Okay. And the product holes potentially?
Jim Cracchiolo
I think we would like to continue to grow our international businesses. I think if we look at the US, it’s not so much product holes per se.
Now that we’ve completed and upgrading our systems etcetera and we have good things in place we could probably take on more assets and expand a bit more there and in some of the areas. So it’s more of what would help us to continue to position ourselves well and gain from the position that we put in place, even gain some more profitability in revenue.
So, I think that’s what I would say. If you are looking at areas to expand in, it would mainly be more international than domestic.
If we are looking for more of an ability to consolidate onto something we’ve built, it would be more in the US.
Operator
Our next question comes from Jeffrey Schuman from KBW. Please go ahead.
Jeffrey Schuman - KBW
I think we hit the Wealth Management margin pretty well. I maybe got a little bit lost on the Asset Management margin comments.
In response to John’s question you mentioned 21%. I wasn’t clear if you are suggesting that as possibly a relevant aspiration for 2012 or whether that is the new 23% sort of longer term more basic aspiration?
Jim Cracchiolo
No. I was just commenting on 2012.
Again I am not here to predict or project by actual numbers, because again a lot goes into it. I mean if we had a good read on markets and what goes into happens in equity and whether there’s a shift back around in flows in equity, I’d be able to secure and give you a better calculation.
But I think just off the top of our heads here and thinking about the 23 and just based on what we’ve been seeing and have, we sort of adjusted that in our view right now for 2012 not for the longer term.
Jeffrey Schuman - KBW
Well, that’s very helpful, Jim, because we’ve seen a lot of margins over time and I think for a period we operated under some pretty clear goalposts and you are advancing on those goalposts. I think we were also on the same page and over the last couple of quarters we’ve all got a little bit disoriented.
So understanding that things are fluid, it’s still very helpful that you’ve given us some sense of where you could go in 2012.
Jim Cracchiolo
No, I agree with you. As I said if we go back a few years on the AWM, we accounted on getting a lot of margin from interest rates rising to get to the 12%.
As I said to you, we’re trying to shoot for that 12% even in these volatile markets with heavy investment without that interest margin. So if Bernanke changed their view of the world, you’re talking about a substantial improvement there that we’ve just again put off again for another year and a half because of his latest views.
So these things are a bit fluid, the markets are a bit volatile. When they go down in Europe you lose flows, when they come back you start gain them again.
It’s not like it’s a consistent feeling that anyone has, but it’s fluid, but the underlying focus has not changed. I want to be very clear to you about the analysts and investors, it has not changed.
We’re working hard on it, and as I said, we’ll continue to look at using both the balance sheet flexibly as well as some of our current base spending and investments. There are just some things I won’t entail because we’re halfway through them and I think they’ll pay good dividends after we’re finished.
Jeffrey Schuman - KBW
That’s very helpful. Just one other thing if I might.
It’s pretty clear that you’ve probably gotten some good traction building your brand with customers, and certainly for a while the brand was attracting advisors. Can you kind of give us maybe update on how the brand is positioned in the advisor world?
Are you still kind of drawing people in the same way you were, post financial crisis or has that moderated or how is the momentum I guess?
Jim Cracchiolo
No. Actually, the momentum is good and we’ve ramped up our efforts last year, the latter part of last year, pipeline has built.
We started to even part of the increase in expenses. We started to actually put our name out there in trades as recruiting.
We never did that before because we never recruited before. So we sort of ramped up our advertising there.
We have a good pipeline as we said, we’ve added 52 people in January, which is our strongest probably ever productivity. The people we’re adding is higher than it was.
Also, just so we know, the brand launch that we did, the advertising and a number of research things that we’ve looked at, it was the number one rated financial services ad in the quarter, and it’s really hitting with the consumer. So that’s why we want to continue it through the first quarter as well, and then we’ll see where we go.
But Tommy Lee Jones in those ads are excellent for us; it’s telling our story and the retirement market is going to be here through this volatility, and the need is going to be there. So even though we can debate as you saw the results, in profitability in the quarter, I’m feeling more optimistic about that segment and business.
In the Asset Management business, everything we put in place, I feel good about everything that’s underlying that we have in place. But having said that, you saw the industry flows over the last year, and there are only a few places where people are getting inflows that it’s usually a targeted area or a targeted fund or global bond or something like that.
It’s not in any large case across equities or large case across all areas. Fixed income is starting to pick up again which is good.
We’re starting to push that a bit more as part of our focused sales. So listen, if the environment continues to stabilize and improve, we’re in good shape.
Nothing has changed fundamentally from what I told you in November, nor what I told you a year ago and I think we’ll continue to gain traction. The one other thing I will tell you and don’t underestimate is the idea that we are freeing up more capital.
Our capital requirements are continuing to go down, we’re continuing to work on those things even more, including in our annuity business. The decisions we made there we think were excellent in that regard and we’re going to continue to put some new products out that will continue to help that in more volatile environments.
So listen, I think the markets will be the markets, the environment is such, quarter-to-quarter I can’t do your modeling, but I would say that if you’re looking at this as an underlying strength in core investment, I think we’re in good shape.
Operator
Our next question comes from Tom Gallagher from Credit Suisse. Please go ahead.
Tom Gallagher - Credit Suisse
First question, Walter, just on your ROE guidance on slide 4, 15% to 18% ROE accounting for the DAC change, that implies a range of let’s just call it approximately 570 to 670, pretty broad range. Is it safe to assume, given what you’re telling us about Asset Management margins that you’re going to be at the very low end of that range?
Or can you give a little bit of perspective about sort of the puts and takes there?
Walter Berman
Can you help me, Tom, a little? When you said the 15 to 18 certainly what we said at the financial committee meeting, but I didn’t catch the point about the 570.
Tom Gallagher - Credit Suisse
Sure. Walter, I was calculating looking at what you’re adjustment on book value is going to be, assuming some growth in book value throughout the year.
I’m just implying 570 would imply a 15 ROE, a little over 670 would imply an 18 ROE. So my question for you is very simply, in lieu of what you’ve told us about Asset Management margins being below previous range, is it fair to say that we should expect the absolute ROE for 2012 to be at the very low end of the range?
Or can you just give us a little bit of sensitivity around expectation, because that range is very wide. Just any light you can shed on that just kind of broadly speaking.
Walter Berman
Well actually the range is basically it’s the same as we had before is the 12% to 15% to 15% to 18%. Again not forecasting here; certainly with the understanding as we just said the mix of the businesses and things of that; I believe that we’re certainly in a reasonable about the 15 and it’s again depending on what takes place, we should be able to move into reasonable safe territory.
Again, I just don’t want to forecast it, but certainly I feel that making a statement that we’ll be in that range with these challenging events I think is a good statement. So remember we’re still finalizing our EITF and going through there and from that standpoint so factors are coming in.
But the business shift is taking place, and I think that we see a good trajectory to get us into those ranges. And that’s why I said it in the comments.
Tom Gallagher - Credit Suisse
That’s helpful. So you feel like comfortably above 15 at this stage in the game?
Walter Berman
We feel that we could go above the 15.
Tom Gallagher - Credit Suisse
Sure. The next question I had on the Asset Management margins is; is it fair to say that the reason you’re expecting kind of subdued margins at least relative to plan for this year is really just simply because you’re seeing no momentum on active equity management, which is your [High Sea] business.
So when you are seeing recovery inflows it’s going into low-fee fixed income? Is it really just that simple at this point?
Walter Berman
I think it’s actually (inaudible) what Jim is saying, because as we know with the volatility that takes place in certainly we are driven more towards equity. We are trying to evaluate the implication of that because when you get this much volatility, we get reasonable share in to fixed income; the profitability for us is higher on the equity side.
So in these markets, it’s certainly has not been as conducive. So that I think is exactly where we are positioning.
And again it’s been extremely volatile. Certainly as we indicated, the rates have gone up 5% and you could start saying the world just takes off from here, that’s great.
But that’s not what we’re seeing and it’s difficult to calibrate off that. That’s exactly where it is.
As Jim said we are getting close and things of that nature. But the issue is its mix and it’s really the volatility in the market.
Tom Gallagher - Credit Suisse
Got it. And then Jim, last question, just circling back on Advice & Wealth Management.
I hear everything you said about the dampening impact of client funds moving into cash slowdown in client activity weighing on the margins in 4Q. What have you seen?
You talked a bit about what you seen thus are within Asset Management. What have you seen in Advice & Wealth Management so far year-to-date?
Have you seen any kind of recovery in client activity in [shales], and have you seen any kind of mix shift moving back out of cash or is that still likely the pressure things into 1Q?
Jim Cracchiolo
Well, I think you got again two things. One is you see an increasing back of fees again because the markets have recovered a bit.
And as I said we didn’t see people pull money, we just didn’t see as much money continue to investments into the equity funds, etcetera, in the fourth quarter. So I think if things continue to show what they’re showing, we’ll start to see it move back.
I also believe that people today, I mean I don’t think you’re going to see a spurt back in anything. I think you could see some things happening across the industry where things have settled.
But I think it might take a little time for it to start to get back to more normalized in a sense. Well, I don’t even know what normalized is anymore; it’s more of how long are you in a more stable, less volatile period for people to feel comfortable.
So January it’s early yet. I really don’t even have all the information for January in for me to give you a better read.
I would just say on a fee basis, it should be better because the markets have come back. On a transaction basis, I think it hasn’t gotten worse, so I think it’s starting to stabilize, and maybe it’ll start to improve if this continues.
But I think it’s still early in the quarter for me to give you a read.
Operator
Our last question comes from Eric Berg from RBC Capital Markets. Please go ahead.
Eric Berg - RBC Capital Markets
Jim, I’d like to return first to Suneet’s question, if the markets have been so volatile, affecting retail activity and affecting willingness in people to invest in mutual funds as well as institutional flows. And that was true all of 2011 and it has continued into 2012, why the change now?
In other words, again, my thinking is if that was the case as of Investor Day, so as of your financial community conference, so what has happened between then and now that would lead you to revise downward, admittedly for 2012 only, your margin guidance for the or your thoughts on margin in the Asset Management business? What’s happened in the last few weeks is really what I’m asking?
Jim Cracchiolo
So, Eric, I think you embedded two things. One is some of the Retail things that I said and the Asset Management so let me separate the two.
First of all, I do believe there was nice improvement last year in the level of client activity and engagements with the markets. I think where we saw a fall-out earlier in the year in Europe that affected European flows in the Asset Management, but didn’t really affect Retail flows here in the US in the AWM business.
That sort of changed when the market really collapsed in the third quarter and was collapsing. So people don’t look at the first time it goes down, they look at the added effect of that, and then, they start to pull back and get concerned but what if it went down another leg and fell from 1100 to 900, etcetera.
I think that’s what happened there. I think if you look at all retailers across the industry that have reported, you’ll find 15% down in dots or transactions or fee levels, and I think many of them have commented.
So we’re not an outlier there. We probably fall a little less, but it takes us a little more to get back quickly based on just client activity.
But I don’t think we’re an outlier there at all. I think you can see that if you just look at other people and what they’ve said in their reporting and what has been published on the industry.
In the Asset Management business, as we looked at the numbers, etcetera, what we’re continuing to see is that there isn’t a big move into equity funds. Now, if that changes, maybe based on what’s happening and settling in Europe.
But when you don’t get a lot more move into equity funds particularly in the Retail business, that’s your higher-margin business, and when you continue to add that up and also when you assume that, and maybe it’s a wrong assumption on my part, but I’m just assuming continued volatility that we saw last year. So, when you start to think that way, it does impact your fees.
You can’t adjust your costs consistent with that up and down; you need to continue to drive forward. So, I think you’ll find that when you do that and you take some revenue out, even though the market may end up higher, you start to compress because you have a fixed expense base.
Eric Berg - RBC Capital Markets
But given that Columbia with RiverSource now is such a broad and vast complex, I would think you’d have sort of what some people have called an all-weather portfolio and that if customers don’t like equity, well you have a broad portfolio of both municipal and taxable bond funds, and I would think you would be seeing strong flows there and that you’d be okay. That’ll be my last question.
Why are we seeing out flows in Retail is my last question. You get my point.
Jim Cracchiolo
Yeah, Eric, I would say last year, we didn’t actually garner as much in the fixed income, because we got really hit particularly in our tax exempt at the beginning part of the year for places like the US Trust business. I think that’s starting to come back.
As I look at new sales coming in right now, tax-exempt has picked up, fixed income has picked up. We’re selling and focused a lot about selling equity.
I think the wholesaling and distribution in the pipeline even institutional has shifted that now to balance that with more fixed income focus. So exactly what you said occurred, but we did not have that the way it was for the reasons that I just mentioned to you.
So yeah, I think we will continue to gain flows there. But when you gain flows in fixed income or an institutional fixed income, you’ve got different margins than if it’s retail equity.
Operator
I’ll now turn it back to Mr. Cracchiolo for closing remarks.
Jim Cracchiolo
First of all, I appreciate your questions today and also trying to better understand what’s happening underlying the business. I’ll just leave you with this.
I think that as you look at our company and you look at the quarter, but put the quarter in light of last year. We had nice improvement in profitability in AWM.
We had nice improvement in profitability in Columbia and Asset Management with Threadneedle. We have a continued strong and appropriate base for our annuity business.
We have managed risk quite well. Our Protection business has come back where we were having some issues with the catastrophic losses in the auto and home and that has recovered.
We’re continuing and have made stronger investments in the business for future growth. We also have put in place a stronger platform as you mentioned in the total of our Asset Management business.
So I can’t predict by quarter exactly what you’ll see, but what I could say is that we’re building even a stronger foundation that we have all the capability and flexibility to ride out the markets. I do believe over time our margins will continue.
I believe our earnings will continue to shift. I believe our capital requirements will continue to come down.
The fourth quarter didn’t change anything along those lines. The only thing I could probably say is that we probably didn’t think that the volatile market would affect things as much as it has, but I think it did across the industry and I think you can compare it across the industry to see how that is consistent.
So with that in mind, if you have any other questions or comments please call Alicia and Chad and we’ll try to follow-up with you. But I’m just guarding against a continued environment that I can’t predict, and I’m going to continue to make some changes in the company so that we can handle that quite well in the short term.
If the environment improves; and thinking about the equity markets continue to sort of stabilize and go up, then we’re in great shape. So I’m just guarding against this not being okay.
Have a great day, and we’ll talk to further as the weeks go on.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference.
Thank you for participating. You may now disconnect.