AMP down but not out

While the royal commission didn’t recommend the break-up of AMP’s vertically integrated business model, the reputation of its wealth arm has been materially damaged and it will likely take several years before FUM – and earnings – are back on track.

But while AMP might be down, it isn’t necessarily out, due to the relationships it has fostered over the years and the sheer reach of its wealth arm.

“We believe it would be difficult for a new entrant to easily reproduce these types of relationships and replicate AMP’s distributional reach and brand recognition among Australian financial advisers and the general public,” Morningstar said in a note.

“These strong relationships also generate switching costs, both monetary and non-monetary.”

For advisers, those non-monetary costs include the difficulty of learning a new wealth manager’s procedure and understanding its systems. For clients, non-monetary costs could be the hassle involved with closing an account and opening a new account with another wealth manager.

However, Morningstar does expect a “significant reduction” in AMP’s network of financial advisers over the next few years due to the material reputation damage suffered from the royal commission, as well as stronger educational requirements and the phasing out of grandfathered commissions. The reputational damage will also make it harder for AMP to attract clients and new FUM in the next few years.

AMP’s wealth arm has so far done little to mend its reputation, reporting a disastrous NPAT of $195 million in 2019 – 48 per cent lower than 2018. At the same time, CEO Francesco de Ferrari also received a bump to his short-term bonus of more than 200 per cent of his fixed base in the hopes that he will be able to execute a bold new three-year plan for the company. 

But that might be a tall order in the face of “more fines, compensation payments, court actions, licence changes and potential class action lawsuits”.

Morningstar also slapped a “poor” stewardship rating on AMP, but noted that the business was working to reform its culture and had already made sweeping changes.