When a company is revealed to have lied 20 times to regulators, as AMP has been, there are two possible reactions. The first is to conclude the company is run by crooks and move on, the second is to see if there is an underlying reason for the lies.
Going in search of a reason is what all investors in AMP should be doing. And to do this, there are four questions that need answering.
First some background. The core issue with the financial planning business in Australia is that financial planners are salespeople working on commission, styled as professionals like accountants and lawyers.
There are two ways of charging for financial planning. Either the customer pays directly for a plan and any ongoing advice, or the customer pays indirectly through the planner getting commissions on products the customer buys.
The first is the model that accountants and lawyers use. The latter is the model financial planners use, based partly on a belief that most financial planning customers won’t pay directly for financial planning.
The government’s Future of Financial Advice (FOFA) reforms in 2012 made important changes. Two of them, to quote the ASIC website, are:
· A prospective ban on conflicted remuneration structures including commissions and volume based payments, in relation to the distribution of and advice about a range of retail investment products.
· An annual fee disclosure statement requirement.
This pretty much pulled the rug out from under the current financial planning revenue model, but it made total sense from a consumer protection point of view. After pressure from the industry, the reforms were watered down in 2014 to only apply to new customers who signed up after 1 July 2013.
So the big question is how many new customers are signing up under the new model?
The reason this is important for investors is that share prices are fundamentally based on future growth. A company whose growth rate slows or stops, will find its share price heading down pretty quickly. And it’s doubly important for a company like AMP who rely on being able to cross-promote their other products to its financial planning customers.
So anyone who holds AMP shares should be asking the following questions to understand whether AMP’s financial planning business is growing or shrinking:
1. How many new financial planning clients is AMP signing up each month? Is it higher or lower than before July 2013?
2. What is the churn rate of new clients? Is it higher or lower than for clients AMP has had since before July 2013?
3. What is the lifetime value of new customers? Is it higher or lower than for clients AMP has had since before July 2013?
4. What is the average age of AMP’s customers? Is it getting younger or older since July 2013?
I would be asking these questions now. The big investors already will be…