One of Australia’s oldest financial institutions, AMP Ltd, spent years building the country’s largest network of financial advisers to recommend its products, and well over a century polishing its brand.

But in a bruising few months, some investors say two crucial elements to AMP’s success — its good name and model of licensing external advisers to distribute products — have been devastated.

AMP, already under pressure from various government reforms, has been put under the microscope at the country’s powerful inquiry into financial services industry misconduct.

Regulators have unpicked the most controversial parts of the distribution model used by AMP, with companies no longer allowed to pay commissions to advisers for recommending new products.

Investors are now also pricing in potential restrictions flowing from the Royal Commission such as forcing the separation of the development of financial products from the selling of them.

“About a week or two into the Royal Commission we sold out our position, mainly because we couldn’t price the potential downside,” said Atlas Funds Management founder Hugh Dive, who crystallised a 5pc loss on the trade.

“This is a major Australian financial services company, but they’ve lost a chunk of their board, their chairman and their CEO, and it’s been the worst hit.”

Seven senior officials have now left the 169-year-old company since the inquiry heard the company had charged thousands of customers for financial advice it never gave, then doctored a supposedly independent report to the corporate regulator about it, which could lead to criminal charges.

AMP’s interim executive chairman Mike Wilkins said the company was working on earning back community trust by improving its systems and remediating clients who have lost out.

“Our strategy remains unchanged for now and our underlying business is strong,” Wilkins said in a statement to Reuters.

“We are confident in the strength of our products, investments and the value of financial advice, which remains a cornerstone of AMP.”

AMP shares are down more than 20pc since mid-April, when poor practices at the asset manager started to be revealed at the inquiry. Shares in the country’s four largest banks have fallen by about 8pc over the same period, while the broader financial sector is little changed.

The inquiry findings have sparked several class action lawsuits on behalf of investors who argue AMP didn’t meet its market disclosure obligations. AMP, which demutualised and listed in 1998, has said it would “vigorously defend” the claims.

What’s in a name? The share sell down has caused immediate pain to investors, but some analysts argue that might be just the beginning.

The research arms of Macquarie Group and Morgan Stanley have started to factor in significant client outflows — investors taking money out of the fund manager’s products — into their forecasts, cutting AMP’s fee-earning potential.

Macquarie expects the brand damage alone could result in outflows equivalent to 27pc of assets under management (AUM) in its wealth management division over the next few years.

Morgan Stanley analysts are more optimistic and say AMP’s strong brand and advisory network may prove resilient.

But the investment bank also factors in a “bear” case scenario where the scandal could cause A$15bn in outflows - or 15pc of AUM - by fiscal 2021.

Jason Beddow, managing director at Argo Investments, a top 20 shareholder of AMP, said the company’s new management would need to adapt quickly to any regulatory changes flowing out of the Royal Commission.

“We are still a shareholder but clearly the organisation needs to change,” said Beddow. “It’s a matter of how much they can change and over what time frame.”

Distribution upheaval Australia’s big banks and wealth managers spent the early 2000s jostling to build the biggest internal financial planning businesses, while also licensing external advisers to distribute their investment and insurance products.

This was usually done through incentives or controlled lists of products an adviser is licensed to recommend, dominated by the license-holder’s own offerings.

AMP built the biggest network of advisers in the country with more than 2,600 advisers working for its planning business and AMP-licensed practices by 2018, according to researcher Adviser Ratings.

Along with building the largest advisory network, AMP is also the third largest fund manager in the country after Macquarie and the Commonwealth Bank of Australia-owned Colonial First State. All up, it manages and administers over A$257bn in assets, according to its annual report.

But the close ties between its advice and asset management arms are now under existential threat.

Goldman Sachs analysts say separating the units would not only threaten AMP’s wealth advisory revenues but given the division is a distributor of the company’s insurance, banking and investment products, it would impact the other businesses.

The inquiry is expected to start making legislative recommendations to the government later this year. —Reuters

Published in Dawn, The Business and Finance Weekly, June 25th, 2018