The AMP Limited (ASX: AMP) share price has been on a downward trajectory since the Banking Royal Commission, falling 25% in a single day last year off the back of fees for no service revelations. The share price is now languishing around $1.60, down heavily from its pre-Royal Commission highs of more than $5.
In the headlines for all the wrong reasons, AMP was skewered for charging for services it never provided and then lying about it to the regulator. Now navigating its way through complex litigation, AMP has provisioned $672 million before tax in remediation costs relating to the Royal Commission.
The big banks opted to exit the wealth management industry in the wake of the Royal Commission. Against stiff odds, AMP is instead attempting to create a modern and profitable wealth management company.
Could AMP be the future?
Is AMP set to pave the way to the future of financial planning in Australia? Under CEO Francesco De Ferrari, the plan is to fundamentally alter the business model and embrace a new paradigm of financial advice.
A shift in distribution models that leans towards working directly with customers will align with heavy investment in technologically assisted advice channels. This will result in reduced advisor numbers and allow for product rationalisation. The focus throughout is on the needs of clients, rather than advisers.
Seeking inspiration from technology players including Amazon and Ant Financial, AMP intends to leverage its technology platforms for the mass market. A key component of the strategy is to offer direct financial advice through digital channels. Annual cost cuts of $300 million by 2022 are promised.
Where to from here?
AMP has little choice but to make drastic changes in a dramatically changed business environment. It is planning to increase the contribution of the AMP Capital and AMP Bank business units. More money is being devoted to AMP Capital, which, with a return on equity of 52%, is the overachiever of the AMP team.
AMP Capital manages about $200 billion of mainly institutional money, approximately four times the money Magellan Financial Group Ltd (ASX: MFG) manages. Yet MFG has a market capitalisation one and a half times that of AMP, and a dividend yield of 3.7% to AMP’s 8.3%.
AMP Bank is to be merged with the wealth management business, clearing the way for the provision of a more holistic financial services offering. The strategy aims to simplify the business, creating a better integrated organisation positioned to focus on client-led solutions.
The bull case is that AMP re-establishes itself as a leader in financial advice. With the big banks exiting the space there will certainly be fewer players to compete with. AMP’s directors, at least, seem quietly confident: seven took up their full entitlements in the recent share purchase plan, despite nearly 98% of retail shareholders declining to participate.
AMP has a plan. The gamble is whether they can pull it off. The dividend yield is attractive at current prices and there is potential for capital growth if De Ferrari can deliver. AMP has made a number of previous attempts to modernise. If AMP is to thrive in the future failure is not an option this time.
AMP is not the only financial advisory firm that has been struggling of late. IOOF Holdings Limited (ASX: IFL) shares are trading at a touch above $6, down from above $10 pre-Royal Commission. With a dividend yield of above 6% IFL also offers decent income potential and like AMP, is looking to “reinvent” the future of financial advice.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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