Ameriprise Financial Inc (AMP) — Q4 2020 Earnings Call Transcript

Thank you, Sylvia, and good morning. Welcome to Ameriprise Financial’s fourth quarter earnings call. On the call with me today are Jim Cracchiolo, Chairman and CEO, and Walter Berman, Chief Financial Officer. Following their remarks, we will be happy to take your questions. Turning to our earnings presentation materials that are available on our website, on Slide 2, you will see a discussion of forward-looking statements. Specifically, during the call, you will hear references to various non-GAAP financial measures, which we believe provide insights into the company’s operations. Reconciliations of non-GAAP numbers to their respective GAAP numbers can be found in today’s materials and on our website. Some statements made on this call may be forward-looking, reflecting management’s expectations about future events and overall operating plan and performance. These forward-looking statements speak only as of today’s date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our fourth quarter 2020 earnings release, our 2019 annual report to shareholders, and our 2019 10-K report. We make no obligation to publicly update or revise these forward-looking statements. On Slide 3, we see our GAAP financial results at the top of the page for the fourth quarter. Below that, you’ll see our adjusted operating results, which management believes enhance the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. Many comments from management during the call today will focus on adjusted operating results. And with that, I'll turn it over to Jim.

Good morning, and thanks for joining our fourth quarter earnings call. As you saw in our release, Ameriprise delivered an excellent quarter and a very strong year, considering the challenging operating environment. In the quarter, equity markets rallied on positive vaccine news, the outcome of the U.S. election, and the likelihood of further fiscal stimulus. The strength of our advice value proposition, investment expertise, and solutions are translating to our business results. Client activity inflows in the quarter continue to be very strong. We set new records, including ending the quarter with assets under management and administration of $1.1 trillion, an important milestone. Revenues in the quarter were quite good, up 3% to over $3 billion, driven by strong business fundamentals and positive equity markets, offsetting the interest rate headwinds. Earnings per share also increased nicely in the quarter, up 8%, and ROE remains very strong at 36%. During the quarter, we continued to make good investments in the business as well as continuing to execute against our reengineering goals, resulting in a 1% decline in G&A expenses. We're always looking to drive efficiency and invest strategically to extend our position—it’s core to how we operate. We also returned more than $500 million to shareholders, which was 90% of our adjusted operating earnings and among the best in financial services. For the full-year, we returned close to $2 billion. Very clearly, our ability to consistently generate substantial free cash flow as well as to reinvest and return to shareholders are key differentiators for us. Let's turn to Advice & Wealth Management, where we delivered very strong organic growth. We began by delivering a differentiated level of advice, keeping clients focused on their goals, which was key in a volatile, disruptive year. Total client assets were up 14% to $732 billion, driven by excellent client flows and positive markets. As you know, we've built a leading investment advisory business, and it continues to grow nicely. In the quarter, wrap net inflows were close to $8 billion, up 82% over last year. This was another record for us and a great indication of our excellent client-adviser engagement and focus on growth. Another highlight was transactional activity bouncing back, up 5% over last year. Client cash balances continue to grow, ending the quarter at $41.5 billion, up $2.1 billion from the last quarter. Meanwhile, we're continuing to invest to make our offerings even more compelling for clients and advisers. We continue to see very good engagement in our digital capabilities, allowing advisers and clients to interact and transact seamlessly. The majority of clients now have their goals online and follow their progress. Our advisers are utilizing our tools and capabilities on our integrated technology platform. They report that they're processing business more efficiently and spending more time with their clients, growing their practices. That's evident in increased financial planning and adviser productivity, which was up 8% adjusting for interest rates. You've heard me share that one of the greatest benefits of being an Ameriprise adviser is our caring culture, including truly best-in-class support and strong field leadership. I recently spoke with all of our field leaders to kick off the year. They're energized about Ameriprise and focused on continuing to drive productivity and growth. This high level of support is also reflected in our recruiting success. Our virtual recruiting program is extremely effective, continuing to drive strong results with 82 experienced advisers joining us in the fourth quarter. We're recruiting top advisers from across the industry who recognize that Ameriprise offers a value proposition, technology, and level of support that can help them deliver an exceptional adviser-based client experience and take their practices to the next level of success. We have a track record of helping advisers grow 2.5 times faster than peers, which is very compelling from a competitive perspective. So far in 2021, this momentum continues, and the recruiting pipeline remains strong. It was also great to see our client service teams recognized by J.D. Power for the excellent experience they deliver. This certification recognizes best practices from the highest-performing contact centers across all industries, not just financial services. Regarding the bank, total assets grew to $8 billion, with $7 billion of sweep deposits. We plan to move additional deposits to the bank this year. We also added pledged loans to the product portfolio in the quarter, and we're seeing a good response to date. It's an appealing product for high net worth clients seeking liquidity. Wrapping up AWM, margin was strong at 19.8%, up 60 basis points sequentially. As I mentioned earlier, expenses continue to be well-managed, with G&A up only 2%, including investments in the bank. Next, Retirement & Protection Solutions. This business is performing well and in line with our expectations. We're executing our plan to drive a mix shift in the business, focusing on higher returning products given the rate environment, which is further reducing our risk. Variable annuity sales increased nicely, up 20% driven by the success of the structured product we introduced earlier in the year, more than offsetting reduced sales of living benefit products. Very importantly, this increased the percentage of VA sales without living benefits, which grew to 58% of total sales in the quarter. In protection, while sales were down 4% year-over-year, we've seen improvement quarter-to-quarter. Sales of our flagship VUL product doubled in the quarter, offsetting the reduced sales from IUL products. This product both better meets clients' needs in this rate environment while generating good returns for the firm. Clearly, as Ameriprise continues to grow overall, the Retirement & Protection Solutions segment will represent a smaller part of our business mix over time. With regard to fixed annuities, I know some of you are interested in our progress regarding a reinsurance transaction. We are actively looking to execute a transaction this year and are encouraged by the recent uptick in the 10-year rate. Turning to Asset Management, we continue to build on our progress and have a great story to share as an active manager. The team is serving clients well in driving profitable growth. We continue to have excellent client engagement and investment performance. The investments we're making—including in data and digital—are helping to drive organic growth at Columbia Threadneedle, with strong results in North America. We’re targeting advisers better and delivering a compelling experience. Importantly, we strengthened our relationship with our distribution partners across regions, including with the large broker-dealer firms and independents in the U.S. We're also investing in our operating platform including important work to reduce duplicate legacy systems. In the quarter, we completed the final phase of the installation of our global trading portfolio management system, which will help our investment teams and drive additional efficiency and scale globally. With a continuation of positive flows in positive markets, assets under management grew 11% to $547 billion. Our Asset Management business is making strong contributions to our overall earnings and free cash flow. The margin for the quarter was nearly 40%. Looking ahead, we expect to remain in the 35% to 39% range. However, if these market levels hold, we should come in at the higher end. Strong investment performance has been essential to our success, and our teams have been collaborating really well throughout this pandemic. We have steadily invested to build a strong global platform with a disciplined research focus. Our people are delivering exceptional performance across all categories: equities, fixed income, and multi-asset strategies. At year-end, Columbia Threadneedle had 108 four and five-star funds, which shows the breadth and strength of our product lineup. In equities, on a global basis, over 70% of our funds—on an asset-weighted basis—were above median while beating benchmarks over one, three, and five-year periods across domestic and international strategies. Regarding fixed income, we also had great performance. More than 75% of our taxable funds, on an asset-weighted basis, were above median or beating benchmarks over the same time frames. With this type of investment performance and the growth focus across the business, flows continue to be strong. Overall, excluding former parent outflows, we were net positive $8.3 billion for the quarter, an improvement of $4.1 billion from a year ago. In terms of total retail flows, excluding former parent, we were net positive by $7.7 billion, including reinvested dividends. These positive flows were driven by continued momentum in the U.S., where we were net inflows for 10 months of the year, including this location in March. For the quarter, U.S. retail had $7.1 billion of net inflows. In fact, 30 Columbia strategies were in net inflows, and 10 had gross sales in excess of $1 billion in 2020—across equities, fixed income, and our multi-manager lineup. In EMEA retail, we were net positive of more than $600 million in the quarter, with particular strength in Continental Europe, which more than offset outflows in the U.K. We're optimistic that the resolution of Brexit and the gradual reopening of the U.K. economy will be positive in terms of investor sentiment. In terms of global institutional, we continue to gain traction and have a significant opportunity and platform to grow. We have a compelling lineup of capabilities and excellent investment performance. We recently added to our Consultant Relations team and strengthened client service. In the quarter, we had net inflows ex forma parent of about $500 million, driven by continued strength in EMEA. The pipeline looks attractive across our regions. When I look across asset management, I'm very pleased with the momentum over the last several quarters and our ability to sustain it. Stepping back to metal price overall, we’re in a terrific position. We are delivering strong results and further reinforcing our record of navigating uncertain times. I'm incredibly proud of our employees and advisors and the resilience that they've shown during this pandemic—they've stayed focused on our clients while continually driving the strong results you're seeing. Nearly a month into 2021, I feel very good about the high level of client engagement and business activity that we're generating. From a capital perspective, we're continuing to deliver a differentiated level of return. Our balance sheet fundamentals are excellent and we're generating strong free cash flow. With that, Walter will cover the quarter in more detail and then I'll take your questions.

Thank you, Jim. Ameriprise delivered a strong quarter of financial results and excellent business metrics, with adjusted operating EPS up 8% as strong underlying organic growth more than offset headwinds from low interest rates. Assets under management and administration reached a record $1.1 trillion including nearly $15 billion of inflows from RAP and asset management. We achieved our targeted reengineering for the year while investing for future growth in Advice & Wealth Management and Asset Management. We continue to effectively manage our profile with continued mix shifts to lower-risk, higher-margin retirement and protection solution offerings and are actively exploring additional reinsurance opportunities. In 2020, we returned over $1.8 billion of capital to shareholders. Our strong balance sheet fundamentals, coupled with sustained underlying business growth, are driving free cash flow generation across our business segments. This positions us well as we enter 2021. Let's turn to Slide 6. Ameriprise adjusted operating net revenue grew 6% driven by strong underlying business trends and equity market appreciation. After excluding the benefit of $92 million of higher short-term interest rates in the prior period, general and administrative expenses are down 1%, even as we make investments for growth including the bank. Expenses also include higher compensation associated with the impact of AMP share price appreciation in the quarter and strong business performance. We were able to achieve this result through disciplined reengineering initiatives. In total, we delivered strong underlying EPS growth, excluding interest rates of over 20% and very strong margins in the quarter. Turning to Slide 7. As Jim mentioned, Advice & Wealth management delivered robust organic growth. We continue to benefit from sustained traction and experienced adviser recruiting, a personalized client experience, effectiveness of our digital tools, and success in reaching more of our target markets. As you can see in these core areas, we had strong growth in client assets, wrap flows, and adviser productivity. This is a good foundation as we move forward. On Page 8, financial results in advice wealth management were strong, with underlying adjusted operating earnings up 19% to $352 million after the $92 million interest rate headwind. This was driven by strong wrap net inflows, improved transactional activity, and higher market levels as well as continued expense management. Pre-tax adjusted operating margin was 19.8%, which would have been a 160 basis points improvement year-over-year, excluding changes in interest rates. On a sequential basis, the margin improved 60 basis points. Turning to Page 9. Asset management delivered very good financial performance and continued improved flow trends. The cumulative impact of outflows has been a significant headwind for us in the past. As flows improved this year, that has declined, and if inflows continue, this would provide a tailwind for us in 2021. In the quarter, we had inflows of $8.3 billion, excluding former parent-related flows, which is a $4.1 billion improvement from a year ago. Investment performance, a table stake for net inflows, is excellent across a diverse product set. Adjusted operating revenues were $798 million. Revenue increased 7%, reflecting improved flow trends, stable fee rates, and market appreciation after normalizing for the timing of the performance fees. General and administrative expenses remain well-managed, reflecting disciplined expense reengineering that funded investments for growth. Adjusted for the timing of performance fees and other compensation-related expenses, G&A increased 2%. Putting this together, pre-tax adjusted operating earnings grew 13% with a 39.5% margin. Overall, we are very encouraged by the continued progress the business is making that is resulting in both strong flows and financial performance. Let's turn to Page 10. Retirement and protection solutions continue to perform in line with expectations in this market and rate environment. We are executing our strategy to shift our risk profile. In the quarter, 58% of sales were on products without living benefits, up 24% year-over-year, driven by our new structured variable annuity product, along with the decline in sales of VA products with living benefits. In protection, sales were down 4% in total, with a meaningful increase in higher-margin VUL and a significant decline in index Universal life, a product that is not as attractive in this rate environment. These mix shifts are expected to continue going forward. Financial results continue to be in line with expectations. Pretax adjusted operating earnings increased 1% to $180 million. Like the industry, we are seeing an uptick in claim counts related to COVID-19, but we've experienced a limited financial impact. Overall claims were more favorable than the prior year. This business is well managed. Net amount at risk remains among the lowest in the industry, and our hedging has been extremely effective. Turning to Page 11. In total, the Corporate and Other segment had a $60 million loss in the quarter, which was a $39 million improvement from the prior year. Excluding the closed block, the loss in the corporate segment improved 23% to $79 million. The prior-year period had elevated losses related to impairments in the affordable housing portfolio. The current year had approximately $24 million of incremental compensation expense related to the impacts of share price appreciation and company performance. In our closed blocks, long-term care had $21 million of earnings in the quarter due to a significant increase in terminations and lower new claims. Fixed annuities had a $2 million loss related to the low-interest rate environment. We continue to evaluate opportunities to execute additional reinsurance transactions this year. Now let's move to the balance sheet on the last slide. Our balance sheet fundamentals remain extremely strong, including a liquidity position of $2.3 billion at the parent company, substantial excess capital of $1.9 billion, 98% hedge effectiveness in the quarter, and 97% for the full year, as well as a defensively positioned investment portfolio. Adjusted operating return on equity in the quarter remained strong at 36%. We returned $502 million to shareholders in the quarter through dividends and buybacks, totaling over $1.8 billion for the full year. Overall, this was an excellent result for the quarter. With that, we’ll take your questions.

I'd like to start with the Advice & Wealth Wrap net flows. I mean, $7.9 billion was phenomenal. Just 1.5 years ago, we thought the run rate was just a little over $4 billion. Could you give a little color on the background? What drove it so high this quarter? And what kind of a—what might be a sustainable range?

Yes, Andrew, this is Jim. We continue to see a good pickup of activity over the course of the year. We were still having very strong wrap flows even in the prior quarter, as you saw in our results over the year. But we saw a bit of an increase in the fourth quarter. We actually grew our client base. Our new client acquisition picked up even more. We saw a good level of activity with our advisers. Now, some of that could be people feeling a little better as the vaccine came about as well and the idea that the economy and activities would continue to open up. But I would probably say we've seen a more consistent strong flow coming in. So, we feel good about the underlying growth factors. It was both from the legacy clients that we have organically as well as from some new clients that we added.

And then with regard to general and admin across the board, I mean, just a really solid outcome, down 1% year-over-year. I think earlier last year, you were guiding to about $125 million expense general admin decline year-over-year. It was down about $76 million as we looked at the quarter. And I think some of that was the share price. Some of that was maybe other investments that you were making in the company. But just kind of looking forward, could you kind of see another $50 million pickup getting back into that $125 million objective? Could you go further? Where are you looking toward G&A into 2021?

Okay. So we definitely more than achieved the reengineering goal that we mentioned to you of $125 million. So that's embedded in our numbers. I think what you're seeing overall, and we've been talking about that not just for the fourth quarter, but over the course of the remaining part of the year after the pandemic. We had increased our reengineering goals in that regard, and we did achieve them. Our expenses are being managed very well. But I would also say, we did also increase some investments we were making. We wanted to accelerate because of the great productivity we're having to even add a bit more in some of the technology and the capabilities that we wanted to bring to both the advisers and from a client perspective and our web activities. So our investment agenda last year was actually a bit higher in total dollars than in the year before. So that was embedded in our numbers. What I would say is the pickup you saw in a little bit of expenses were more from the stock price appreciation and what that does in some of our deferral programs on a mark-to-market. That absorbed some true-ups and some compensation based on the year and the strong fourth quarter. So I feel good about the expenses going into the New Year. I think they will increase if the economy opens up a bit more as we bring travel and T&E and some other expenses back to some extent. We continue our investment agenda. But I think we're going to manage expenses pretty well. And you can—you know how we do that over time, but we'll continue to look at the business growth, revenue growth, and the market climate as we do that.

Maybe just lastly, on the fixed annuity block, I think you lost what, $2 million in the quarter. Target was to free up about $700 million in capital, but with kind of a money-losing line like that, do you think you'll get close to the $700 million? And how imminent is that fixed annuity block sale?

Okay. I'll let Walter respond on the fixed annuity side.

So as Jim said, and I said in my remarks, we are certainly actively looking. We do believe that we've freed up the capital that's there. We have to gauge the basic fundamentals and the implications of the rate, but we certainly feel that we will free up a reasonable amount of capital, and we're working to evaluate.

Just staying with AWM for a moment. The transactional activities for mutual funds and loan duration products appear to be back to pre-pandemic levels. Can you talk about how they trended throughout the quarter and what you are seeing into January?

Yes. So we definitely saw a pickup as we went from the second to the third to the fourth quarter in transaction activities, and they got back more to a normal level. In fact, they were up 5% over the year before's fourth quarter. We felt good. The pickup was, as you mentioned, both in the brokerage activity but also in some long-duration products. Even in our business where we sell our annuities, there was a strong pickup continuing in our structured annuity business, and even a pickup in the insurance business. We feel like we've gotten back to a more normalized level, and we think that will continue as we go through the New Year.

And then in terms of capital deployment, as you plan for 2021, can you remind us kind of how you think about capital deployment priority in terms of returning to shareholders versus M&A for whether it's AWM or asset management?

Yes. So we have a consistent capital deployment strategy, as you've seen over the years. We first of all make the right investments in the business that we think are good and appropriate for us that will get strong growth and productivity from. From there, we evaluate the opportunities that may come, continuing to increase our dividend, and buy back appropriately based on the free cash flow that we generate, which is very strong. However, we also evaluate acquisition opportunities. In that regard, we see that there are more opportunities coming about, but we're very disciplined about what will strategically help us grow, what we can get good returns on, and what would fit into both our culture and the environment to keep us on track. We will continue to evaluate that. We have excess capital that would help along those lines, as well as, you know, what we would do as we look out based on the cash that we generate. That's how we look at it. We haven't changed that philosophy and will continue to focus in that way as we move forward.

Okay. Just to add that we're still targeting about 90% for this year. I think your question was on buyback.

Okay. I guess on the M&A side, just to elaborate a little bit, is there any kind of preference between scale versus capabilities?

We look more for additional capabilities, and that will continue to add our ability for us to grow. In certain acquisitions, it does provide some additional scale. We've invested heavily into our platform, capabilities, and technology that we could add more assets with very minimal costs. So we feel that we have that ability as well. But primarily, we look strategically about how we continue to round out and have a strong quality asset manager globally.

Just want to stick there with asset management for a minute here and you give some good color. But hopefully, you could spend some time going a little more detail around the fun flows and kind of just wondering which high-performing strategies are maybe showing accelerating inflow momentum? And maybe if there are strategies that are showing either fading headwinds or an inflection from outflows to inflows, any color there would be fantastic.

Yes. So I think if you look at our supplemental, you'll see, first of all, we've had very strong investment performance across our fund family. Particularly if you look at, take equities as an example, we are beating the benchmark on the one, three, and five-year, especially strong. Our fixed income strategy is strong. Threadneedle is having very strong performance across their range. So we feel like we have a broader good lineup of funds. As I mentioned in my talking points, there were over 30 funds that had gross sales of more than $1 billion. We had good net inflows in a number in the range of funds, so it broadened from where we were. We are continuing to see good flow in equities, particularly in the income-oriented equities across our lineup. We're seeing a pickup in activity in global and European activity in some of our funds there. In fixed income, we see it in certain of our income ranges, like mortgages, et cetera. In equities, we have managed allocation funds that are doing well. Also, I would probably say we're likely going to see a bit more of a shift into value, which we have a lineup there as well. So, I would say it's broadened out. Also, if you look at our lineup in equities, it has been very strong from a flow perspective.

And then anything notable that’s maybe inflected from outflows to inflows over the past year as the overall numbers have improved?

I don't have that in front of me. We can look at it. I would probably say we've seen some turnaround, like some of our more concentrated funds that may have not performed as strong previously but have bounced back, where just based on the lower sales activity, there's always a level of redemptions. You may move into a net outflow. Some of those have really rectified themselves in some of our fund groups, like contrarian and a few of the larger fund areas like that, that are seeing nice performance, our select growth area, et cetera. Some of that is more of a - yeah, to your point a little more of a turnaround or adjustment in picking up sales and lowering redemptions.

And then just one final one, just a clarification on the fixed annuity block. I think, you know, one thing we've heard in the industry is that with rates rising in the last quarter of the year, the bid/ask has widened a little bit. You know, what are you guys seeing around demand for that block of assets, especially now with Blackstone getting even bigger among the alternative guys that have already played in the sandbox there too?

Walter, you want to?

Yes. It's Walter. We're seeing good demand, as you're indicating. Certainly, while our spreads are wide, we’ve seen some narrowing spreads, but we feel very comfortable. We’re in ranges where transactions can be executed.

Thanks for taking my question. Just one on the Advice and Wealth Management business, we’ve been seeing a nice recovery in margins over the last few quarters. Just wondering if you could give us a little bit of color around where you think margins could trend over the near-term? Thanks.

Yes. I think what we would probably say is, we see the trend line continuing. We see our advisor productivity as still quite strong. I mean, if you adjust for sort of the interest advisors, productivity was up 8% or more. That’s across a very large base. That’s really positive. We've seen a pickup as you saw in our flows and fees—the financial planning is up. So, I would say that we want to continue to see that trend line of the margin continue to accrete. We also think we've sort of hit a low point on the interest side of that. Over time, as we deploy a bit more into the bank, and get some spread there, that will be helpful as well. I would probably want to see that a margin continued to be targeted to get back into the 20 plus percent range.

And just one quick follow-up just on that sixth annuity reinsurance again, and it sounds like it's not too much dependent on 10-year yields further rising. But I just want to check in to see whether the outlook for executing your transaction is predicated on any further increases in 10-year yields? Thanks.

I would say we're in the—we're in the range. Certainly, from that standpoint, it would certainly be beneficial if you get a higher rate coming in, but we are feeling comfortable in this range. We are— as Jim indicated—pursuing.

Just—I guess a follow-up on what you're thinking on risk transfer. Is one of the reasons that we haven't heard that you've executed a fixed annuity deal yet because you're considering doing something broader on risk transfer, potentially including long term care or other insurance businesses, or should we think about those potential transactions being done separately?

So, Tom, I would probably say as we look at it, and I'll have Walter comment. We always evaluate our businesses and look at them both individually and collectively. But there's nothing that ties together us doing a fixed transaction, fixed annuity transaction versus evaluating something in addition to or different than. Walter, I'll let you.

Yes. So let me just say this. On fixed annuities, there's a higher confidence. Clearly, that's what we're focusing on. But as Jim has said, we will entertain and look at that from that standpoint; the quality of our book, the earnings, and everything will certainly have potential, and we will continue to evaluate it. But right now, we're focused on fixed annuities.

The other thing I would say, Tom, is as you saw, we have shifted our emphasis both on the new business being put on, but also the current business to de-risk a lot in our book, just like we had closed off fixed, are shifting now to structured from guarantees, are shifting from fixed insurance to variable, which is a better product both for the client and us in this rate environment. We’re continuing to change that mix and the shift of that mix, but we will definitely continue to evaluate if there are other books that could be or should be reinsured or that would make sense for us.

I guess a question on advice and wealth. Jim, I heard your comments about I guess, the confidence in terms of the quality of the flows. Is it fair to say that the move-up to almost $8 billion of wrap flows could be a new level that you might be able to sustain? And I guess just relatedly, I just want to make sure there was nothing unusual or unsustainable in this quarter's result, like big ticket, new advisers transferring assets over? Do you feel like this could be a new higher level for AWM?

Yes, I would say, Tom, as I mentioned, all of the full—mainly the increase of the total flows. We've had more of an ongoing of bringing in new advisers. There is nothing special in the fourth quarter. It was a continuation. I mean we continued to bring in a good level of top advisers in the industry with good production. As you saw, that's been consistent. Third quarter, we brought in good, even in the second quarter after the pandemic that picked up nicely and the first quarter was good. So, now that continues as an ongoing trend line in the spot of numbers. But I would say that it was more of increased activity from our current client flows as well as new clients that current advisers are bringing into the franchise. Whether that continues at $8 billion being the base? I can't tell you that, right? I think we all saw a pickup in some level of activities in the fourth quarter from clients putting some more money to work because of maybe a little more optimism about the opening. The underlying, we feel good about the activity; the level—it wasn’t like it went from $2 billion to $8 billion; it was $6 billion in the third quarter. But whether it's $8, $7, or $6, I can’t tell you that exactly. There is always some level of seasonality, et cetera as well. But I feel good about the underlying, and I feel good that there will be a good underlying trend there as we move into this year, if there is no major disruption.

And then Walter, just one final one. The tax rate moved up a little bit, can you talk about how would you think about modeling it over the next year or two? Should we see a little bit of an increase because of the mix moving to some higher tax businesses now?

Yes. I think we pretty much hit our target for the year-end. You are correct. I would say probably a good number to think about it. It will move up because of the business mix shift. I would say move up maybe to 18% would be something like a reasonable number.

18% in 2021 and 2022, would you think? Or?

No, this is for 2021.

Just more gradual.

I wanted to go back to the retail flows. If we just think about it at a high level, it seems like over the past couple of years on a gross basis, your gross inflows have been tracking around $13 billion a quarter, and now we're at something like $16 billion for this year or for 2020. I guess the question is how much of this improvement would you say is due to performance and how much of it is due to structural changes around distribution platforms and how you can improve your positioning there? Is there any way that you can help us think about that?

I think, Suneet, it's a combination of factors. First of all, we've had strong investment performance, but I think it’s been very consistent. Some that were underperforming have bounced back nicely as well. So across a larger range, we have very good performance, so I think investment performance is part of a given here of what's necessary. The team has done a great job of broadening the distribution, getting better relationships established on the various platforms, etc. We have a wide range of products that have been considered than in the past, particularly in certain categories that are making sense, like I said, in income categories. It's a combination of factors that we've worked hard at over the last number of years that are starting to show good results. We’ve made a lot of investments both in the AWM business as well as the asset management business. We completed our whole trading and attribution platform in Columbia Threadneedle—ability to share research globally has improved our ability to get more data and analytics to inform our investment people and distribution people to improve targeting to understand where there might be good opportunities. I actually think Europe showed a nice bounce back, remember we had to go through a lot of change there of establishing a whole European lineup of funds with Brexit. It sort of took us out of the market a bit for a while. Now that we've got that lineup established, we saw really strong flows into Europe this last quarter. The UK is still a little weak, because of Brexit and the economy being closed, but we still see some signs that if that can open with Brexit moving to another completion, that will also help. It’s a combination of factors as you said; I wouldn’t point to one, but that's what gives us a good feeling as we move forward.

And then, moving to AWM, if we look at the capital you have in that segment, you know, up about $300 million year-over-year, I'm assuming that's based on the capital you're putting in the bank. So the question is, how much capital would you be willing to put in the bank to support growth? How do you think about that, sort of, the trade-off in terms of capital that you could use for other purposes, and then growing the bank?

I would start, but I’ll let Walter complete. We feel like as we can continue to derive good margins and good returns from the bank activity as a complement to get greater spread or growth in various loan books there, like our pledged assets are growing nicely in the fourth quarter. We took over half of that book back, and the growth is being picked up, which will be a good product for us. We feel very comfortable continuing to add capital as required there. Our overall returns for the total firm are up in the mid to upper 30s, so it’s not as though we have a return issue. And would still, even with that, our cash flow and what we generate is strong. It still gives us good capital that we could continue to return or look for organic acquisitions. So I don't think that's going to be a pressing issue for us. But, Walter, if you have something to comment.

No, the only thing I'll add to that is that we have in our plan allocated additional capital for the growth that Jim was talking about and feel comfortable where our returns are, certainly good, when we look at it relative to the off balance sheet. So we feel comfortable with that. To maintain that risk-return equation, we have allocated more capital to it, and we have the capital to do that.

And also Suneet, as you can see, whether we evaluate the sale and do a transaction with fixed annuities, that will free up capital there, or even lighten some of the areas where we have some of the fixed books.

A couple of follow-ups around the asset management business as well. Could you guys talk a little bit about the incremental improvement in retail flows that we've seen for several quarters now? And by the way, it feels like that's continuing into the new year, which is great. But that incremental improvement, how much of that is coming from AWM versus third-party distribution? I know that's been a big focus to comp some bigger third-party distribution platforms. And as that occurs, how sort of does that mix shift, if it's meaningful at all, sort of impact the profitability for AMP as a whole? So in other words, if you get much bigger in third-party distribution, does it impact the net profitability from wide kind of flows that are coming through those channels?

I'm not sure I understand the second part of the question. I would say, we've seen a nice pickup through the third-party channels in complement to Ameriprise. Ameriprise actually picked up a bit. But what I would just say, it is no different from what we're seeing as a pickup across the major distributors that we have, and so both have been positive in that regard because of the combination of the products that were put into market and the performance, etc. Regarding what does that mean, the economics between the internal sale and the external sale to us is the same. I mean, we pay the same on it. The fees are the same on it, etc. So, I'm not sure there is a material difference in that way. Overall, as you continue to get good flows, I think the return will be good for us.

If no material difference, then what can skip like that second part. I guess when it comes to M&A, you’ve given a little— you’ve given a little color. It sounds like if you were to do something on the asset management M&A side, you're kind of looking at capabilities over capability-type deals over big deals for scale purposes alone. So, what are the capabilities that you guys still find compelling, in particular to better complement the rest of your platform?

So I would say, Alex, as we look at our business, we have a good lineup, we have scale, and we have a global platform today. However, it’s not as though I could say we have everything we would want in fixed, equities, or solutions in all parts of the world. We evaluate that both individually and collectively. It would have to be a transaction where it gives us a complement of things rather than we just want to put assets on the platform.

I just had a quick one. Could you talk a little bit about your expectations for further growth in the bank over the next year? And the opportunity to move more sweep assets there?

Yes. I'll begin and let Walter. So we see an opportunity to continue, as we said, both for the movement of some of our sweep activities further into the bank. As you saw over the course of last year, we moved the bank up from roughly $4 billion to $8 billion. We gradually started to shift more into the bank. We see that continuing in the 2021 here in the new year. We’re also trying to add more on the product capability, like we picked up the pledged loan book. We launched the mortgage product. We’ll start to look to add some other deposit products later in the year or maybe into next year. We’re looking at different things like that, but we feel the opportunity to continue to shift a bit more into the bank on a gradual quarterly basis as we move forward.

Walter, do you want to add anything? No. I think to the other part of your question, we certainly have the capacity of our wealth balance sheet to accommodate what Jim just said and the plans that we filed to grow the bank and the capital. So, we have a certain position regarding that.

Can you help us think about overall organic growth in the AWM business? We can see the wrap net flows and total client AUM. But are there other metrics you can point to that help to paint a more holistic view of organic net flows and new client growth, and how this compares to some of your peers?

Yes. I mean, I could probably say that organic growth in client acquisition is up nicely, both for the overall client base and, in particular, also for what we would call targeted clients that we want in the five to five category. That has been strong and picked up nicely as we went through the quarters last year. The flows from the current client base continue to be good and actually pick up further in the fourth quarter, as I said to you. The years that we're bringing in and the business and production they are bringing in, continues along the trend line that we spoke to you about, particularly as we continue to move more into both the employee channel and the independent channel, which has also picked up nicely and continue to add scale to us. It's a combination of factors. We continue to get more efficient based on the technology we deploy that helps advisers concentrate more on their client engagement and can actually focus more on what they can do to deepen that advice. Our advice formula is working really well. We have more than 50% of the majority of our clients now having goals online that they can track and follow their progress down to a very visible level. So all of those things, we feel really strengthen the underlying core of the base. I can't judge it against any particular peer. If I look at what the warehouses were reported, I think we're standing pretty strong against that.

And just one more question regarding long-term care. Obviously, good results this quarter. How are you thinking about the potential for IBNR, given that people may be eligible to make a claim, but haven't because of the pandemic and not wanting to enter facilities or have people come into their homes? And I guess, related to that, the improvement in the book's performance over the last year. Does that have any potential impact on your ability to execute a reinsurance transaction for it?

Yes. Walter, you've been working closely on that, so.

Okay. So we—as you saw this year, we saw improvements both unfortunately, termination and less people entering into long-term care facilities. We have not built any of that into our unlocking assumptions, and we are monitoring the situation. But with the programs we've put in place, both on premium increases, benefit shifts, and things like that, and the claims we're seeing, we feel very good about the book and its risk profile.

So no change really in terms of either appetite for reinsurance or kind of ability to execute on something?

We see some interest in it. We feel very good about the position of the risk profile that we see. But certainly, we've seen some interest, and we'll just continue to evaluate. I think as we continue to see what is happening both in our book, but also as we evaluate client behavior or what’s happening in that regard. If anything, the risk profile continues to look more favorable. As people better understand what that is in the marketplace and what they might be interested in, I think it does open up some additional thoughts or opportunities possibly as we go forward. So I think we're very open to continue to see how that plays out, and maybe that will provide other evaluation and opportunities as we go along.