To keep reps home, AmEx sweetens the pot

American Express Financial Advisors used to force its reps through a gantlet of legal challenges if they tried to leave with their clients in tow.

Now, instead of wielding a stick, it may be trying to dangle carrots to keep them home.

The Minneapolis-based financial planning unit of American Express Co. has come up with new financial incentives to reward advisers who keep client assets in-house.

Officially, the company says the move is designed to make it easier and more financially rewarding for reps to move client assets between certain AmEx-brand products such as mutual funds, wrap accounts and variable annuities.

But some advisers suspect another motive.

Ken Wilmot, an AmEx adviser in Portland, Ore., thinks the company has one eye on June 30, the date on which advisers will be free to leave the company with their clients without the prospect of being sued by AmEx.

“I think this is more of a marketplace-driven concession, as opposed to them saying, `We feel warm and fuzzy all over, and we want to share,”‘ he says. “The home office is trying to make staying with American Express more viable.”

The problem is, it may be too little, too late, says Mr. Wilmot, president of the Association of Financial Planning Professionals, an independent group created a year ago to represent AmEx advisers who work under a new system as franchisees.

Mr. Wilmot says the increased compensation is part of what he calls a “shell game.” The company is adding incentives, he notes, at the same time it is raising costs for advisers through new charges, such as a $95 monthly technology fee that was added in February.

Company spokesman David Kanahan says there is no connection between the proposed changes to the compensation structure and the fact that thousands of reps will soon be eligible to depart and recruit their clients without facing AmEx’s legal arsenal.

“This is a good thing,” he says. “If that makes advisers feel good about being here, great.”

The proposed compensation changes were first laid out in an e-mail memorandum March 16. As part of the deal, AmEx advisers will get partial commission payments for moving client assets from older variable-annuity products to the newer Retirement Advisor Variable Annuity.

The memo also details plans to pay advisers “full compensation” for assets that move into a wrap account, provided they have been held with American Express for at least three years.

The current policy, which ends at midyear, states that no wrap-fee compensation will be paid for one year on assets that have been held in other investments for less than 12 years.

AmEx estimates that the new wrap-fee compensation model will result in approximately $3 million annually in additional adviser compensation.

No `carte blanche’

To avoid charges of churning, AmEx has had what it calls an exit/ purchase policy covering situations in which clients move assets from one in-house investment to another.

Although clients are charged a commission, advisers currently get no more than a finder’s fee for making the sale – the idea being that without a commission, no incentive to churn exists.

But under an “exemptive application” filed with the Securities and Exchange Commission, AmEx is seeking permission to let advisers “proactively talk to clients” about exchanging one variable annuity for a newer Retirement Advisor Variable Annuity, says Mr. Kanahan.

The exemptive application will let advisers collect half of the commission on the sale when in-house annuities are swapped for the new products, but the policy is unchanged on other in-house sales.

Mr. Wilmot says changes in the exit/purchase policy are far from “carte blanche.”

For starters, he points out, the company has yet to give advisers access to non-American Express annuity products.

James Harkin, an AmEx adviser based in Tucson, Ariz., says the company depends on the exit/purchase policy as a revenue source, and he thinks they will not give it up easily.

“My issue, personally, has been if you don’t pay me the commission, you shouldn’t charge the customer,” he says.

“The bottom line is, what’s best for the customer?”

Mr. Kanahan declined to comment on the company’s policy of collecting commissions that are withheld from advisers.

bonuses

Concerning the variable-annuity exchange program, which isn’t expected to emerge from the SEC for several months, Mr. Kanahan says the changes are designed to “give advisers and clients the flexibility to be in products that are more suited to them.”

According to industry analysts, the current AmEx exit/purchase policy is unique in not paying reps the commissions that clients are charged on proprietary products.

Cerulli consultant Mary McAvity says a growing percentage of new variable-annuity sales is coming from so-called 1035 exchanges, in which older products are replaced by newer ones that offer investor “bonuses.”