Life Without AmEx

Ameriprise, the financial-planning unit AmEx is cutting loose, faces a crowded field in targeting -- you guessed it -- baby boomers

When American Express Co. (AXP ) gave James M. Cracchiolo the job of running its financial-planning group back in 2000, he thought he was getting the company's crown jewel. But almost immediately the business lost its luster. Bad investments from the late 1990s imploded, his mutual funds sank faster than the stock market, and regulators started making all sorts of serious charges. Mutual-fund assets plummeted, from $95 billion in 2000 to around $55 billion today, according to Boston's Financial Research Corp. "There were some cracks in the foundation," he says. After battling for five years to repair the damage, Cracchiolo was making progress. His reward: Chief Executive Kenneth I. Chenault called him into his New York City office last January and told the 23-year AmEx veteran his unit was being dumped. "It was shocking," recalls Cracchiolo.

Now he's on his own -- as chief executive of Ameriprise Financial Inc. (AMP ), the new name for the American Express Financial Advisors unit AmEx will spin off on Sept. 30. The move will unload several laggard businesses from AmEx. And with that drag lifted, AmEx' shares should sell for more than 20 times earnings, up from 16 today, says T. Rowe Price Group Inc. (TROW ) stock analyst Kyle Cerminara. But now that Cracchiolo no longer has highly profitable AmEx activities such as credit cards to act as a safety net, pressure on him to perform will intensify.

The hurdles are many. Ameriprise inherits a perception that it caters largely to middle-class families, rather than upmarket clients. Cracchiolo plans to target affluent baby boomers who are nearing retirement, but that's a market where lots of rivals have a head start. He'll push new products and services to set Ameriprise apart in the marketplace, though the spin-off will have no monopoly on innovation. He'll also try to sell his mutual funds through banks and other firms; success there, however, depends on keeping the funds' improving performance from dropping again.

While AmEx may not think its financial-planning business is valuable, Cracchiolo hopes to persuade investors -- who will receive one Ameriprise share for every five AmEx shares they own -- to see things differently and stick with him. The new company will have 2.7 million clients; 10,700 mostly independent advisers, the fourth-largest such force in the industry; and more than 3,700 offices, third behind Wachovia (WB ) and Edward Jones. It will also be one of the few financial-services firms offering a complete range of products, from life insurance to mutual funds.

The business was a financial-planning pioneer under the name IDS Financial Services before AmEx acquired it in 1984, and Cracchiolo hopes to return it to a preeminent role in the industry. Still, with $410 billion in client assets, it pales alongside the likes of Fidelity Investments ($2.2 trillion) and Merrill Lynch (MER ) ($1.6 trillion).

Splitting his time between headquarters in downtown Minneapolis headquarters and a New York outpost, Brooklyn native Cracchiolo has focused on restoring the firm's reputation. In the past two years, it paid a total of $24.1 million to settle allegations that it overcharged mutual-fund clients and fraudulently steered customers to its in-house, underperforming products. In June it settled with New Jersey for $5 million for allegedly failing to properly supervise its advisers. In all four cases the firm neither denied nor admitted guilt.

One of Cracchiolo's first changes back in 2000 was to let his financial advisers recommend thousands of additional outside mutual funds rather than mainly its own products. Now he has removed the extra compensation that salespeople were getting for selling the firm's own funds. Also, he has cut costs by $900 million and slashed the workforce by 21%. Last year the unit earned $794 million on $7.2 billion in revenue. Cracchiolo's goal is to raise earnings by 10% to 13% a year.

To get there, Cracchiolo is setting his sights on folks with $100,000 to $1 million to invest, the "mass affluent" in industry jargon. It's a highly profitable niche, with 29 million households owning more than $8 trillion in investable assets, says Boston Consulting Group. It's also dominated by boomers, who are increasingly turning to advisers to tackle their complicated finances as they head toward retirement. "We think this group is underserved by the competition, and we think we have the ability to serve them well," says Cracchiolo.

Unfortunately, his rivals think they do, too. These days everyone from banks to online upstarts is targeting baby boomers. Fidelity just signed former Beatle Paul McCartney to pitch its services. "It's the equivalent of saying a fast-food restaurant is going after teenage boys," says Gary Singer, chief strategy officer for consulting group Interbrand.

The key for Ameriprise, says Cracchiolo, will be to stand out from the herd. So he's relying on his army of advisers. Many have long-standing relationships with their clients -- adviser turnover is below the industry average. Plus, Ameriprise counts more certified financial planners in its ranks than any of its rivals. So after the spin-off, it will devote a major portion of its $300 million in marketing to promoting its advisers, including funding both local advertising campaigns for them and local events to attract clients. "These firms are essentially selling the same products, so the relationship between the adviser and the client is important," says Denise Valentine, a senior analyst at Celent Communications. "When you look at the Ameriprise reps, you're seeing advisers with a lot of tenure."

Cracchiolo wants to give those advisers something distinctive to sell. New Gold and Platinum programs launched over the past few years offer traditional services such as wealth management, tax strategies, and retirement planning. Depending on which service customers pick, they also get a dedicated customer-service line, discounted home loans, estate-planning services, and access to hedge funds. Clients need $100,000 in assets to qualify for the Gold program and $500,000 for Platinum.

Such bells and whistles, however, are no substitute for higher mutual-fund returns. At the end of 2002, only 12% of Ameriprise's equity funds had beaten the average of their peer groups over the previous three years, according to Lipper Inc. (RTRSY ). To boost that performance, Cracchiolo hired a team from Fidelity in 2002 to run some of the domestic equity portfolios and acquired Britain-based Threadneedle Asset Management in 2003 to build a deep bench in global equities. Now more than half the firm's stock funds beat the average.


Investors don't seem impressed. In the year through July 31, they pulled some $6 billion out of Ameriprise funds, says FRC. In part, says Cracchiolo, those losses have been amplified as his advisers shift away from selling mainly in-house funds because they have many more choices now. As his funds' long-term record improves, he hopes to win over both his advisers and outside vendors so that they will want to sell his funds, as they do his annuity products. "Improving the performance of the funds is the quickest way to alleviate that problem of not having a captive audience," says Morningstar Inc. (MORN ) analyst Arijit Dutta. "If it's a good fund, any adviser can recommend it."

He also hopes to make his products more appealing via other innovations. Ameriprise recently introduced a guaranteed-returns feature for its annuities, which not only promises investors a certain level of income but also allows them to capture a portion of gains made by investments underlying the annuities. And it plans more mutual funds like its Managed Allocation Fund, which varies stock and bond holdings based on valuations and earnings.

All this is familiar territory for Cracchiolo, who was instrumental in turning around Shearson Lehman before AmEx sold the brokerage firm to Primerica in 1993. So he knows he's far from done. "It takes a while to change a reputation," he says. But now, as CEO of a public company, he has to wonder whether the market will give him that time -- and how long he'll be able to stay independent.

By Adrienne Carter in Minneapolis, with Mara Der Hovanesian in New York

— With assistance by Mara Der Hovanesian

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