The embattled wealth management and financial planning giant is expected to be smacked by more fines, higher compensation payments and potential class actions over the next few years.
That’s the verdict from Morningstar. In a recent report on AMP, banking analyst Chanaka Gunasekera evaluated the company in light of last week’s announcement that it will sell its life business and spin off the New Zealand wealth and advice business via an IPO.
“We believe AMP will be in a period of transition for the next few years and will suffer from higher compliance costs and lower growth as it employs new senior management following shocking revelations regarding the royal commission,” Mr Gunasekera said.
“There is also considerable uncertainty on AMP’s strategy, given it has just appointed new CEO Francesco de Ferrari, and David Murray has only recently started as chair of the board,” he said.
“We also expect more fines, higher compensation payments and potential class actions.”
Morningstar noted that AMP has suffered from “material reputational damage” over the last 12 months and described the revelations from the Hayne inquiry as an “unprecedented disaster”.
The analyst expects that a more proactive corporate regulator and a compression in margins due to the royal commission will result in significantly lower growth rates for AMP’s funds under management.
However, Mr Gunasekera believes the biggest blow to AMP will occur if it is forced to dismantle its vertically integrated model, which he described as the “backbone” of its entire business.
“The royal commission increased the risk that AMP will be required to break up its vertically integrated model, and this threat and other regulatory risks make AMP a high-risk investment,” he said.
AMP’s vertically integrated model allows it to charge several layers of fees, including management and platform fees, the analyst noted.
“Prior to the royal commission, AMP intended to increase minority stakes in growing advice practices and acquire more client books via ‘buyer of last resort’ agreements. But with the combination of the likely phasing-out of grandfathered commissions and higher education standards, this may prompt more advisers to leave the business, triggering more BOLR agreements than expected.”
In 2012, prior to the introduction of the FOFA reforms, AMP had 4,276 financial advisers.
The total number of AMP-aligned financial advisers currently sits at 3,123 across its licensees, down 7.3 per cent from 3,370 in the first half of 2017.
The group’s 2018 half-year results revealed a decline across almost all of the company’s “core licensees”, including a 10.1 per cent drop at Charter Financial Planning, 12.9 per cent drop at ipac, and 5.9 per cent drop at AMP Financial Planning.
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