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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Fourth Quarter 2018 Earnings Call. My name is Sylvia and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.
I will now turn the call over to Alicia Charity. Alicia, you may begin.
Thank you, operator, 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'll 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 reference 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.
Some statements that we make on this call may be forward-looking, reflecting management's expectations about future events and overall operating plans 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 actual results to be materially different from forward-looking statements can be found in our fourth quarter 2018 earnings release, our 2017 Annual Report to shareholders and our 2017 10-K report. We make no obligation to update publicly or revise these forward-looking statements.
On Slide 3, you will see our GAAP financial results at the top of the page for the fourth quarter. As you are aware, the year-over-year comparison of results was impacted by the Tax Cut and Jobs Act in the prior year as well as manual version related impact and unlocking in both years. As such, we have provided our adjusted operating results excluding these items.
Management believes this enhances the understanding of our business by reflecting the underlying performance of our core operations, and facilitates a more meaningful trend analysis. Many of the comments that management makes from our call today will focus on operating financial results, adjusted for the tax act unlocking and mean reversion related impacts.
And with that, I'll turn it over to Jim.
Hello and thanks for joining our earnings call. This morning, we will discuss our fourth-quarter results and I'll update you on the business and our priorities in a much more dynamic operating environment. Really markets were quite volatile in the quarter, particularly in December in the U.S. with significant declines across asset classes and while that's come back a bit when managing the business in light of this uncertain backdrop. Overall for the year, we continued our track record of delivering excellent results for the Company and generated good profitability and returns. And we also continue to invest the long-term value creation and business growth.
In Wealth Management, we delivered strong and Ameriprise client flows and advisor productivity. As we've demonstrated in prior cycles, a volatile environment reinforces the importance of the personal advice, investment perspective and solutions that we offer. Our Asset Management business was more directly affected by the market declines and hiking volatility. That said, our impacts were in line with the industry in terms of asset declines and accelerated outflows. And in variable annuities, the market environment resulted in a non-cash impact that Walter will recover in more detail.
Our assets under management and administration was down 8% to $823 billion, reflecting the 14% sequential market decline, which was mitigated by continued strength in Ameriprise client net inflows. In terms of adjusted operating results and excluding the items we highlighted, revenues remained steady at $3.2 billion, earnings increased 12% to $544 million, earnings per diluted share were up 21% to $3.80. Return on equity excluding AOCI and unlocking was a strong 37.8%.
During the quarter and the year, we continue to invest in growth initiatives that will help to sustain the business to the future. In addition to growth investments based on earnings and capital position and with our strong cash flow, we accelerated our share repurchases, given the market decline and our discounted share price. For the year, we committed more than $2 billion to shareholders by increasing our dividend and repurchasing 11 million shares. This reduced our shares outstanding by 7%, and represents a truly differentiated level of capital return. And we continue to maintain $1.5 billion in excess capital.
We also continue to shift our earnings mix to less capital-intensive business lines, something we've done consistently over the years, and this generated significant free cash flow. Looking at the last four years, as we've grown our earnings with increased to percentage of contributions from Advice & Wealth Management and Asset Management from 66% in 2015 to 74% in 2018. Looking ahead, we see additional opportunity to take this number even further.
With regard to our financial advisory business, Ameriprise client assets held strong at $539 billion, down just 4% even with the volatility and steep market declines. A key growth platform for Ameriprise is our fee-based investment advisory wrap business. It's one of the largest investor running the industry at 251 billion at the end of the fourth quarter.
Net inflows remain robust at $4.5 billion. This marks the seventh consecutive quarter where we've had wrap net inflows above $4 billion. Sequentially, wrap flows declined a bit as clients took a more defensive posture and move more into cash, and we're earning competitive returns on our $28 billion of brokerage cash balances which were up 6% in all time high.
As a diversified financial services firm, the combination of the breadth of our products suite and financial planning expertise helps us retain assets. We continue to bring in clients and we're helping them rebalanced their assets based on changing market dynamics. With good client flows, increase client activity and traction from our investments, we continue to grow our advisor productivity nicely.
On a trailing 12-month basis, it's up 9% to $620,000. This builds on many years of strong productivity gains, and we continue to earn high client and advisor satisfaction. Recruiting is an important complement to retaining our top people. Experience productive advisors are consistently attractive to Ameriprise because of our excellent support, reputation and track record of investing to help advisors to grow. In the quarter, 93 advisors joined the firm and for 2018 overall, we brought on 335 new experience advisors.
We're also investing to convert our national trust bank to a federal savings bank. Things are going well and we expect to hear from regulators this quarter. With a clear focus on our clients and growth, Ameriprise and our value proposition are directly aligned with the significant wealth management opportunity in U.S. Consumer research affirms that the mass affluent and affluent want to work in a personal advice-based relationship with a trusted advisor. In fact, trust remains most important aspect of working with a financial advisor.
Ameriprise is both the long-standing leader in advice and we ranked number one in trust across the investment industry by attempting with various focused on advice and delivering what our clients and consumers want. Across the firm, we're making additional investments to continue delivering an excellent client experience and help advisors growth productivity. This includes enhancing our digital and financial planning capabilities as well as upgrading to an advanced CRM system later this year to enable our advisors to work and even more goal-based and integrated way with their clients.
As we've discussed last quarter, we've been testing these enhanced capabilities in the field and are pleased with the initial results. Advisors have reported clients are more engaged and confident when advisors are having goal-based conversations and using these new capabilities. So we feel there is a compelling opportunity to expand this across the entire client base.
In addition, we continue to invest in the Ameriprise brand, which is strong in the marketplace with awareness there, our highest levels. We introduce the next chapter of our Be Brilliant platform earlier this month with new ads that highlight the personalized differentiated experience we delivered declines to help them achieve their goals. Overall in Advice & Wealth Management would generate excellent results double digit earnings growth and strong margins of both 23% in the quarter.
With regard to protection annuities, the books are performing well in this rate environment. Sales over the course of the year held up with some slowing in the fourth quarter. Variable annuity sales were up 6% to $4.5 billion for the year, right in line with the consistent 4 billion to 5 billion sales range, we have seen historically. We continue to generate an appropriate level of sales and returns in these businesses.
Let's move to Asset Management. The fourth quarter was a tough market environment with substantial industry wide outflows across asset classes, styles and geographies as you've seen with other asset managers who have already reported. In the U.S., it was the most difficult quarter for long-term mutual fund flows in the industry dating back to 2007. Investors move to de-risk given significant market declines in December, year-end tax selling and higher volatility.
And in Europe, key indices were down sharply in October spiking higher outflows across Europe. How did that affect us in the fourth quarter? Like others, we felt that pressure in assets under management declines which included net outflows of $4.7 billion, but reinvested dividends. In the U.S. our rate of mutual fund outflows was in line with the industry. And in Europe, we suffer the level of outflows consistent with our peers. In past market disruptions, European investors tend to react quickly to market dynamics whether that's positively or negatively.
So far in January with improved markets, we're seeing better mutual funds flow rates in the U.S. and Europe, and we hope that will continue. From a revenue standpoint in the quarter, the decline reflected a drop in assets under management as well as the unwinding of a couple of our CLOs and higher performance fees last year. To gain flows we are working to deliver relevant quality solutions and service to our retail and institutional clients, and consistent competitive investment performance.
Our one-year investment performance was impacted by unusual, but not unheard of price dislocation that took place in the fourth quarter. In the few occasions where this has previously occurred, those securities with positive ratings from our proprietary research subsequently performed well on average, which is what we're already seeing for January. This impacted our three year numbers as well, but we expect they will improve in 2019 at the dropping of a similar underperformance in our U.S. portfolios that occurred in the first quarter of 2016.
We are also sharply focused on maintaining our excellent expense discipline and will continue to be thoughtful moving forward given the current climate. In the quarter, expenses and asset management were down nicely. We also had to absorb additional Brexit related cost due to the transfer of EU client assets from our OEIC funds into Lux domiciled C-cap products, which we are in the process of completing.
As we look forward, we were focused on gaining traction where we see growth opportunities. This includes our efforts to enhance and further introduce our data driven distribution work in the U.S. that will help drive improvement in gross sales and market share at many of our top intermediary firms. We're building on our strength in the UK and continue to expand in Europe with a focus on Germany, Italy and Spain, now that we've established a more comprehensive C-cap lineup of funds.
And we want to continue to grow Columbia Threadneedle of brand awareness and consideration. Given the scope of our capabilities, we see opportunity to capture market share in our core markets. Overall in Asset Management, it was a tough quarter, but the industry and for us we're managing headwinds as part of the Ameriprise and competing for share in a very competitive marketplace.
In closing, we delivered a good quarter in a volatile market environment completing what was a good year for Ameriprise. We have a consistent record of delivering long-term value, investing for growth and returning capital to shareholders at attractive levels. We continue to transform the business and focus on areas of opportunity that would generate a strong return with wealth management driving our growth.
At the same time, we will focus on continuing to tightly control expenses in 2019. As we look at the year ahead, I'm confident in our ability to serve clients well and navigate a very fluid environment. Walter?
Thank you, Jim. Turning to Page 5, Ameriprise delivered strong results in 2018. We continue to make significant progress in delivering our long-term shareholder objectives, as demonstrated by 4% growth in revenue, strong 27% growth in EPS, and 38% return on equity.
Let me take you through the details beginning on Slide 6. Overall, Ameriprise delivered 4% revenue growth for the year despite been flat in the fourth quarter from market dislocation. Through the first three quarters of 2018, revenue growth was 6%. Advice & Wealth Management absorb the pressure from the substantial drop in markets through continued good client flows and higher earnings on cash balances. Asset management and annuities were more impacted, which is what we would expect in this environment.
Let's turn to our earnings on Slide 7. Full year earnings increased 20%. With the challenging revenue environment, we remain keenly focused on expense management. Expenses continue to be well managed across the perm with G&A down 5% in the fourth quarter and flat for the full year. This remains a critical area of focus and the key lever as we navigate environment in 2019. The effective tax rate came in as expected at 17.3%. And I'd like to take a moment to remind you of a few dynamics that will impact the results in the first quarter.
First, there are only 90-fee days in the first quarter which impact Advice & Wealth Management, Asset Management and Annuities. Second, we have some seasonality in our expenses that we have discussed in the past related to payroll taxes. This impacts all business segments with the largest impacts in the Advice & Wealth Management and Asset Management area. Last, in the fourth quarter, we absorb the significant percentage of market decline impact. As the current market levels sustain, a portion of the carryover impact will be mitigated.
Next on Slide 8. You will see excellent EPS growth of 21% in the quarter and 27% for the full year. In total, adjusted operating EPS was $3.80 for the quarter and $14.94 for the full year. You will buy Advice & Wealth Management, which now makes up about half of our pretax adjusted operating earnings.
In 2018, we continued our track record a differentiated capital return with 2.1 billion return through buybacks and dividends including a 50% increase in share repurchases in the fourth quarter buying back 3.6 million shares given the particularly attractive value. Lastly, we are maintaining excellent balance sheet fundamentals with 1.5 billion of excess capital and excellent liquidity.
Let's turn to Slide 9. For the year, Advice & Wealth Management represented nearly half of the Company's pretax adjusted operating earnings, demonstrating a significant upward trend from 44% in 2017 and 40% in 2016. We have diversified sources of free cash flow from our businesses with Advice & Wealth Management driving much of our growth complemented by Asset Management, Annuities and Protection.
Our fee-based businesses of Wealth Management and Asset Management now make-up nearly three quarters of our earnings. Our distribution of earnings continues to diversify with AWM and Asset Management generating approximately 65% of our free cash flow in the near term. We are seeing strong growth trends in advice wealth management, which you can see on Slide 10.
Total client assets were pressured by equity market declines, down 4% to 539 billion despite very strong client net inflows throughout 2018, including in the fourth quarter. Through the first three quarters of 2018, our client assets benefited from a combination of solid flows and market appreciation, with our clients assets reaching 588 billion at the end of the third quarter. Finances were negatively impacted from the 14% drop in equity markets point-to-point in the fourth quarter, a portion of this impact would be offset by the improvement so far this year.
Brokerage cash balances grew to 27.7 billion in the fourth quarter. In the first part of the year when markets were less volatile, we saw clients putting money to work and cash balances declining. Given the volatile environment in the fourth quarter, clients reverse course and kept additional cash, as we expected. It is important to note that retained assets on our platform by meeting clients' needs in our all environments.
We are benefiting from short rates getting back to more normal historical levels, while we have retained a high percentage of the rise and short rates to date, we have recently increase the client crediting rate based on market changes. We are closely monitoring crediting rates to remain competitive with peers. Finally, organic advisor productivity also continues to improve reaching 620,000 on a trailing 12 months basis for the quarter. This level has grown steadily throughout the year.
Let's turn to Slide 11. Advice & Wealth Management is delivering consistent strong financial performance overtime that is underpinned by sustainable business fundamentals that I just discuss. Overall AWM had been delivering a substantial 22% earnings growth trend through September. The market dislocation the fourth quarter reduce the trend, but AWM still delivered 30% growth for the quarter, and an excellent 19% growth rate for the full-year.
Trends were consistent for revenues. We had been on the growth trajectory of 12% through September, driven by wrap net inflows and higher transactional activity levels, as well as the benefit of higher short-term rates on cash sweep balances. Fourth quarter market declines reduced fees and slowed the growth rate to 5% for the quarter, resulting in a full year revenue growth of 10%.
Markets have come back in January, which should help. Expenses were very well controlled with G&A up only 2% for the quarter compared to full year increase of 6%. We are diligently managing G&A while investing to improve the client experience and ease of doing business. We are making investments where we see the best payback and margins reached a record 23.3% in the quarter and 22.4% for the full year.
Let's turn to asset management on Page 12. With financial performance was clearly impacted by substantial industry headwinds, positive earnings trends from asset management were disrupted by the market dislocation in the fourth quarter, earnings down 27% year-over-year and 22% sequentially to 153 million.
Let me explain the year-over-year change first. Of the 57 million decline, approximately 40% was related to the 28 million benefit from performance fees and CLO unwinds in the year-ago compared to just 5 million in this quarter, and the business absorbed 8 million of additional expenses associated with the development and implementation of our Brexit strategy.
The remainder of the decline was primarily due to outflows. On a sequential basis earnings declined to 44 million of which approximately 35% was related to lower performance fees and the one-time expenses associated with Brexit, normalizing for these two items earnings were down 16%, primarily from markets.
Revenues of 706 million also reflecting the impact of markets and lower performance fees, the fee rate in the quarter decline to just under 52 basis points, demonstrating the fee pressure the industry is facing. Expenses continue to be prudently managed by generating operating efficiencies and reengineering, which is funding growth investments, and higher regulatory course in Europe.
Excluding the one-time Brexit expenses in the quarter, and the lower performance fee compensation, G&A expenses were down 6%, demonstrating our commitment to expense discipline, and the challenging revenue environment. We anticipated adjusting our ongoing expense base in light of the markets, while ensuring we continue to invest for future growth. In addition, given the factors I just described, we delivered a 35% margin in the quarter.
Let's turn to annuities on Slide 13. In the quarter, variable annuities earnings are 115 million, which is essentially flat to last year after excluding mean reversion related impacts. In the quarter there was a 68 million unfavorable mean reversion related impact from the 14% drop in equity markets point-to-point.
Based on the outside impact and volatilities from market declines, we are evaluating changing our definition of adjusted operating earnings to exclude mean reversion related impacts consistent with others in the industry. Variable annuities continue to be in outflow though at a slower pace than last year.
Variable annuity sales slowed a bit from the market volatility in the quarter, but remain up 6% for the full year, which is above the industry. And nearly 30% of our VA sales are in products without living benefit riders. It should be noted that are net amount of risk was 1.7% of the account value with living benefits and 1.6% of account value with death benefits.
This was up sequentially due to the change in the markets, but we believe this remains at best-in-class levels. Fixed annuities pretax adjusted operating earnings declined to 4 million, reflecting the continued impact of lapses and interest rates, as well as lower mortality for income annuity policyholder.
Turning to protection on Slide 14. Life and Health pretax adjusted operating earnings were 67 million reflecting lower portfolio, yields and claims in line with expectations. In the Auto and Home business pretax adjusted operating earnings were 15 million excluding net cat losses. Gross cat losses were 62 million primarily from California wildfires. Net cat losses growing 12 million, reflecting substantial benefit from our reinsurance program.
Let's turn to the balance sheet on Slide 15. Our balance sheet fundamentals remain strong. Our excess capital is approximately 1.5 billion with an estimate RBC ratio of approximately 500%. Our hedging program has been quite effective with weighted managed hedge effectiveness at 98% in the quarter. The investment portfolio remains strong and diversified, and free cash flow generation remains excellent.
We've returned 2.1 billion of capital to shareholders through dividends and share repurchase in 2018. As we enter 2019, we are still targeting to return 90% to 100% of operating earnings to shareholders, as a baseline, but we will adjust that as we assess market conditions in our evaluation.
In closing, Ameriprise delivered another strong year of financial results and organic growth. With strong client flows and productivity gains in Advice & Wealth Management, we are focused on expense management and have the ability to adjust our expense base this year based on the revenue environment.
Finally, our balance sheet is strong and our business model generates significant free cash flow that will sustain a differentiated return.
Now, we will take your questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Ryan Krueger from KBW.
AWM client activity appeared to hold up reasonably well considering in the tough market backdrop. Can you give some more perspective on what you saw and then how you are seeing customers behave far in the New Year?
Yes, so what we saw in the fourth quarter was a continuation of good engagement between the advisor and the client, and very clearly what we're focused on doing is helping the client sort of navigate this as sort of a bullet rather than an idea that they need to change what they're planning for. So, we try to keep them on target, on focus of what their longer-term goals are, knowing that the markets will be about a volatile, but we also try to work with them very clearly on their asset allocations rebalancing and diversifications that they have, and so that's what we continue to see.
As you saw, there was a bit more pickup of cash in the quarter not necessarily from people selling out per say, but from new cash coming in that's been hold on the sidelines a bit. And as we went through the first quarter, we continue to see that engagement rebalancing occurring, et cetera, which we think is a healthy and good, but we are very much focused on keeping them focused on what their ultimate goals are rather than just the market, the volatility, that's currently here.
And then within the Asset Management, you've talked about a 35% to 39% margin in the past. You were at 35% in the quarter. Do you feel like you can maintain at least the low end of that range given the tough backdrop?
So, we did experience in the quarter as you saw, the markets depreciated a lot on, and of course as that occurs, your fee revenue particularly from your equity product goes down a bit more as it had occurred. We also experienced some increase even though we've actually reduced expenses a lot.
Our margins in Europe went down, mainly because of what we had to do in transferring the assets for Brexit and the number of the expenses that we had to fund there. So, yes, were still focused on maintaining those margin levels to a combination of things that we're working on, but it would be at the lower end of those ranges at this point in time, as we have start to see hopefully some markets recover a bit.
Our following question comes from Humphrey Lee. Your line is now open.
Regarding the brokerage cash in AWM, I think in your prepared remarks you talked about, you have passed along some of the economics to your clients. I was just wondering, can you talk a little more about the competitive pressure that you are seeing from your competitors and then some of the actions that you're looking to take given there is definitely a greater competition for deposits nowadays in the market?
Yes, this is Walter. We monitor this as we indicated on a weekly basis. Our whole group of peers to ensure that we stay competitive along the different segments of the dollar amounts of the sweep accounts. And we have passed on certainly some of that as we saw from the September one, but we are remaining competitive. And candidly, we're actually seeing, right now, there is a less competitive pressure in the areas of focus, but we'll continue to monitor it and certainly as appropriate pass that on.
So, you've talked about raising the crediting rates in the fourth quarter. Can you talk about, how much did you raise your crediting rate?
We've raised it at the upper end of it, that's where we saw a little gap, and it was -- I don't have the exact numbers, but it was only certainly in a couple basis points that basically passed on to allow us to be in that alignment with our peers.
And then regarding the application of converting your trust bank to your federal savings bank. So in your remarks you talk about you should hear back from the regulators this quarter. Then I guess what would be the next step? And once you get the approval, how soon can you be operational?
Well, right now, again, we are tracking and we've indicated that in the couple weeks that we hope to have the approvals from both regulators the OCC and the fed. And once that occurs, assuming that occurs, we hopefully would be operational in the beginning of the first quarter or the end of -- beginning of the second quarter or the end of first quarter.
Our next question comes from Erik Bass from Autonomous.
This is valuations for asset managers continued to come down, how does that factor into your strategic view of business? I guess, are you more inclined to look for growth in other areas and continued to shift the mix away from traditional asset management? Do you see a disconnect whether maybe opportunities to acquire assets or platforms at attractive prices?
Well, we are -- as you see, we actually think if you look at our make-up of 50% now is coming roughly from our Advice & Wealth Management business, which I think would have a differentiated PE from asset managers, that I think it should be factored more into our value. And as you heard from my opening comments, we're putting a lot of focus on the continued growth there and investments to continue to grow the client base, grow the advisor productivity, add more advisors, and even look at other opportunities to enhance our channel mix there by growing our central sites, our ACC, IPO which is working with community banks et cetera. So, we have an emphasis there regarding where we're putting a lot of our focus.
And then and we go to Asset Management as we said, we've done -- we picked up a few other things were launching some other alternatives infrastructure funds and other things within the Asset Management. So what we're trying to do in the asset management is more of refine against the core areas that we see good opportunity, good growth that we can achieve good margins, expand in certain sections like in the international arena as well, and really right size that for what we're seeing in the marketplace regarding the sales and the activities. And we will try to complement that where necessary and appropriate for areas of opportunity that we can get good returns in the future. So, that's the way were looking at it today.
And then this quarter the level of corporate expense looked unusually low. How should we think about the run rate going forward for the corporate loss?
We're -- again, again, I don't want interpret because every time I do, I am wrong, but somewhere in the 65 million to 70 million range, it is something that we've talked about.
And that is with or without long-term care?
Long-term care is available, but for this particular -- I would include, it's included. It's only been several million dollars.
Our following question comes from Jeff Smith from William Blair.
One of the things I noticed in Wealth Management that investment income was up 43% on a quarter. I think it was up more than 30% on the year. What's driving that high growth?
I'm sorry, can you repeat the question? I'm sorry.
Yes, the investment income piece in the Wealth Management segment, it was up around 43% in the quarter and more than 30% on the year. Why is growth so high there?
That's from our surge. Surge hasn't been growing, our search on product.
And then just looking at the pretax margin wealth management come from just looking over two years 18% to 22%, but G&A expenses were -- are up a lot by 20% over that time period. So, it seemed that starts to level out again there is some upside there. Do you have a long-term goal and where you think that margin can get to, I mean, as 25% reasonable over the longer term?
It depends on life services. As you notice, so we are enjoying exceptionally strong and continually growing margins. It is slowing and obviously it depends on markets. We do generate a lot of productivities and certainly the interest rates improve that. So, certainly, we do see opportunity to increase. I can't get to exactly because we're dealing with so many variables on where we will get to 25, but certainly we have room to continue to grow that.
Yes, I would say and some of the things that you heard me speak about during the year and even here in the fourth quarter is that, we're continuing to make investments in technology, we are continuing to help on our advisors to be able to go deeper against their client activities with greater levels of engagement for the digital tools, the capabilities, the planning tools that we're putting in there, customer relationship management system as well as how they're marketing themselves in their own communities.
So, we're really positive about the effects that, that could continue to have to help drive their productivity. We do manage expenses while the increases that you're seeing were mainly due to the type of the investments that we think will get some good paybacks on, as we continue to look to the future. The only other investment we're making beyond what I've mentioned to you that Walter and I've discussed is really the banking business, but we think the banking business will generate a very good margin that could be complementary like some of the other houses.
Our next question comes from Suneet Kamath from Citi.
Just wanted to start with the G&A expense. You've mentioned expense just went up a couple of times. So, can you just give us the sense of what your plan is for 2019 in terms of G&A?
Well, Suneet as you know, we've been quite disciplined and certainly appropriate in managing the business therefore managing the G&A expenses to ensure that we're being and quite effective, and but still investing for growth and appropriately and interestingly. So that is the plan, but we certainly continue -- will plan on continue to prudently manage those expenses and certainly evaluate the situation and have the flexibility, again to make adjustments where appropriate, but again looking at the market, there we feel will just continue to evaluate.
And should we be thinking about sort of flat G&A like we had this year or are the investments going to pull at, pull that higher?
Well, we have again, as Jim just mentioned the bank and other things of that and all of the growth investments. So, it would bar on that basis it is certainly we continue -- we're going to focus on trying to maintain the expense levels with those investments and other growth investments in this lower range dealing with the revenue situation.
Yes, Suneet. So, we're going to control expenses across the firm. At the same time, we're not going to stop the investments that we'd think it makes sense like the bank, et cetera. So they may add some incremental, but we look to manage all of the other expenses tightly along those lines, but those investments that were making should give us some good paybacks like the bank. So that's the way we look at it, and we have maintained our level of flexibility as we've seen in the past.
And then switching to the Auto and Home and I think you talked about year-end 2018 being sort of a time when you reassess that business given the progress that you've made. So, I was just hoping you could give us an update on how you are thinking about it going forward?
Yet, so we're we are underway in our reviews there and so we will be working through that as we go through the first quarter here and so we will be getting back to you in the future.
Our following question comes from Kenneth Lee from RBC Capital Markets.
Wondering if you could provide a little bit more color around the advisory fee revenue within Advice & Wealth Management. And this is a separate from the financial planning and transaction fees. Just wondering why the trends still resilient? I think there's only a slight decline sequentially versus a much steeper decline in the advisory assets in the fourth quarter. What's driving that our resiliency?
Again, it's the average from our standpoint, unlike some of our peers. We set rates on average basis, so you're getting not the full impact. So some people said, got the benefit or setting on October 1st. And candidly, we did have strong inflows while they are less than you know they drove off a little, but we have strong inflows. And so, it's tracked to going to our expectations considering the change in the market and the average.
And then just a little bit of a follow-up on what you mentioned in the prepared remarks on expansion to Germany, Italy, France. Wondering what potential time frames you're thinking about and potential milestones before we see some contribution from that expansion?
Yes, so, we have already laid the groundwork and really what we were needed to complete really as you would imagine because of Brexit and because of the way clients could be affected, we had to wait till we set-up our full align of C-cap funds and convert our clients in Europe from where they were situated in our OEIC funds in the UK over to our Lux domiciled funds. And that transition, we did the bulk of it in the fourth quarter. So, it actually showered sales of that because we couldn’t do it as we are transferring client assets, et cetera.
And it was completed actually last weekend, which we feel very good about that will situate us well in a sense that would not cause any harmful effects to our European clients as the Brexit transaction or whatever occurs there in agreement in the future. So, now, we'll be able to start to ramp up our activities to drive some more sales activities and add our resources there to grow activities more in those countries.
Our following question comes from Alex Blostein from Goldman Sachs.
Couple of questions. So, first just on client cash balances, so obviously, a really nice ramp in the quarter not surprising given the volatility. Can you give us an update on where cash balances stand today? We've seen from others obviously talk about some of that going back into the markets, so just curious where you guys shake out there? And then, Walter, just want to make sure I understand, the -- In Q4, it looks like you guys retained about 80% of the higher rates. Is the implication for Q1 that the number will be little lower as you kind of play it a little catch up? Or you still expect to retain roughly 80% of the December hike?
As it relates to the hike, as I indicated, we are adjusting to our rates and we feel we're evaluating now. So, we don’t feel we have to go to catch up. We'll continue to evaluate as the changing environment is, but it looks like right now, there is not a tremendous peer pressure on adjusting rates and were competitive within competitive ranges.
And regarding the current cash balances, I don’t have the latest numbers here, I would probably say that they've probably come down a bit, but they are still maintaining but on higher than they were prior to the fourth quarter. So, I think that will gradually seatback in as you saw. We still had good inflows in the fourth quarter into our wrap business, but some of that did maintain in cash. So as the client rebalanced, I think you'll see to your point as money go back in. It might actually go a little into equities, but also some fixed income now that they feel the rates are more stabilized.
And then just in terms of the growth in the AWM segment, so obviously, you guys talk about the growth in the fee base business, the wrap accounts. Anyway to help us think about that, the net new asset growth in the franchise as a whole? And granted, if we can sort of back into it based on the market performance of client assets that you disclosed, but anyway you can kind of help frame where is the total organic growth that's from a net new asset perspective for the segment as a whole and, where you see that going over the next year or two given your strong comments around the pipeline from the recruiting perspective?
It's typical for us, it's -- but we do see continues growth in our client assets as we look at the productivity, the new programs were running, and the ability to actually drive those activities with our advisor base and certainly bring in a new advice, but mostly because of the way we are driving our productivity, and again, it's going to be dependent and it has some influence on behavior points based on markets, right but we are seeing good strong client growth.
So net new assets, I just put the firm as a whole are still positive not just throughout the count?
Yes, they were positive and nicely in the fourth quarter and throughout the '18, and we still are looking for them to continue in a positive trend as we are in '19 and that's where we're really focused our advisor retention on growing their net flows, but more importantly, engaging their client so that they can deepen those relationships with them.
Last one for me if I can just sneak in one more in. We've seen in the Company appears both public and private talk about taking on research payment on to the P&L entirely, not just for mid two clients, but doing it globally. What you guys stand I guess on that front? And do you expect that to impact sort of your G&A outlook for 2019? And I guess that would hit the asset management segment.
Yes, so we -- as you are aware and you mentioned, we did take that up fully in '18 because we do have a large UK European operation relative to our size in the asset management business, and that was absorbed. Having said that that did increase the expenses there that we had to figure out how to offset, and luckily based on what we were doing in our global transformation and technology and integration. We were able to really offset that rather than and it's the same bringing that further to the bottom line because of it.
Having said that in the U.S. we are monitoring that, looking at that closely, I know one competitor came out and said they are looking to possibly do that. But again, this is a very large industry here. And when that occurs, it does fundamentally change what research -- the cost of research, how research is charged, et cetera, as it has occurred in Europe. So, I think it's more than just a player saying it. There is a number of other things across our industry that has to occur for that to be something I think gets moved forward.
Our following question comes from Andrew Kligerman from Credit Suisse.
First question, Walter, you talked about maintaining flexibility in general and admin, and of course advice and wealth it was only up about 2%, asset management was down 6%. I guess what I'd like to get the sense of it is -- I mean can you consistently have these general and the admin expenses lag operating revenues? I mean, can you consistently do that that maybe that would be a good?
Okay, so let me try to just answer it if that works. Within our -- since we've gone public, we have a focus program on reengineering. We are constantly evaluating and improving our processes and certainly getting payback for our expenses, and gearing that towards the asset business grows this is embedded into the way we operate, Andrew. So from that standpoint, yes, I do believe looking at all of the elements of investing in the business the business is usual, the streamlining of those fences, we have a effective track record of us working as with the businesses to drive that effectively and leverage our overall activity. So I feel comfortable that we -- that will continue.
And then just a few quick data points. One on the sweeps, can you -- where do you that going from 195 basis points up from 173 basis points in the sequential quarter? Two, Jim, you mentioned that some of your one year numbers got hit pretty hard. I noticed in international equity and taxable fixed income in particular, how have they done in the past months? And then lastly your reinsurance costs in Auto and Home, are they up materially since the reinsurers paid out to $50 million?
So, in regard to investment performance, as I mentioned, as we looked at the various equity markets, when you have some major dislocation, yes, we get hit with it and it does cause a material blip so to speak in those numbers for the period of the year. As I said, we think that will work through as we go through the next number of quarters January looks good already. The three year numbers we think will bounce back because the first quarter '16 happen the same way based on the volatility, that quarter will bounce off even though the new quarter came on, and so our numbers should bounce back in that regard.
European was a little more in the sense of also we got hit based on the dislocations that you saw in October timeframe and some of the adjustments and that we think will also work through because we feel good about the investments we have there and you know, I think that is something that again. I know the investment teams are very much focused on we feel pretty good about how each of those portfolios are constructed and the quality including fixed income the quality of the credits, etcetera. So that something that they're going to be focused on making sure that, that gets back to the improvements and then maintaining the levels that they need.
Okay, Andrew, as it relates to the spread. I assume you're referring to the rate that we've already got and then have seeing that's going to evolve sequentially, okay.
Yes.
As I indicated, it's a process that we evaluate. Certainly, the competitiveness of our pricing versus peers and we have not seen basically changes taking place, but we are certainly prepared and but right now we just got engage with -- where it goes and meet -- and certainly be a competitive. On the reinsurance for us, I guess from our standpoint, we were quite effective as you saw in the quarter. Growth 62 million 12 net, and we will be continuing those programs into 2019. And again, we are constantly improving our product and certainly maintaining our insurance effectiveness.
But has the cost gone up sharply in the reinsurance because of the payout?
It’s a combination I think of course it have gone-up somewhat enable to adjusted terms but we still feel an effective mitigation.
So maybe a double-digit ups or not?
No, I don’t have the exact. I know it's not double-digit it was good negotiations, and I think we feel there's been a change, but it is still a very effective program.
Our following question comes from John Barnett from Sandler O'Neil.
The combined ratio meaningfully improved for full year in protection. Are you considering actions that could unlock value and free up capital committed that business. And then my second question, how much rate are you currently taking and pushing across the different products in protection after several years of cat losses?
Okay. So you're talking on from the standpoint on the rate I guess.
Yes for Auto and then Home.
On Auto and Home, we have had as Jim has said, we started from several years ago to take a very effective underwriting and evaluation of our pricing, and certainly using big data to drive that to a more effectiveness to certainly from the clients standpoint and our standpoint. So, we feel quite comfortable with the programs that we are taking and making changes to the product suite that we feel is appropriate and to give us the sort of paybacks that will appropriate. The second question I am sorry. Was there another question?
Yes, there was. It's meaningfully improved. Are you considering actions that would unlock value for that business and free up capital to be reallocated to something else?
I think right now we are committed it gets certainly we have the right capital ratio so we are certainly committed to the product. And certainly, when the time is appropriate, as we're indicating, we're getting improvements. We will evaluate reducing capital appropriately and staying within the record of the agency and regulatory framework.
So, you were watching the reviews, as I said that will complete as we go through the first quarter.
Our final question comes from John Nadel from UBS.
I have a couple. Just wanted to follow up on a discussion earlier in the Q&A about the margin potential for Advice & wealth management, the opportunity for further expansion overtime. If we just made a baseline assumption that equity markets were reasonable, and we layered in the benefit of the banking operations over the next two years. Isn’t it, I mean, isn’t it very likely and very reasonable that we should expect the margin to continue to improve from current levels? Or are there investments Jim that you think you need to make over the next couple years to find the fresh to spread margin expansion?
No. Consistent with your way you phrase the first question the answer would be, yes. We think they would.
You think margins expand.
Yes.
Secondly, I just wanted to get into a -- maybe I'll be a little bit more direct on the question around Auto and Home. That setting aside the catastrophe losses and obviously the reinsurance program was very effective. But underlying, I agree with John's comments earlier underlying margins are improving very nicely. Jim, you've made it pretty clear that this business is not necessarily a core business on a go forward at least that's might take. Are we at the point yet where you can take action?
Yes, as I said we're going to our strategic review here and we will be complete of that as we go through the first quarter. So, why don’t we just stay tune, okay?
And then lastly this is maybe a little bit more direct question Jim. Are you satisfied with the leadership and the quality of that management of the asset management business at this point? I man I recognized that the entire industry is pressured, but the industry is essentially come back to Columbia Threadneedle in terms of overall performance, it hasn't been the other way around. Are you confident in the team you've got in place to be able to manage against this more difficult environment?
Yes, so, we -- over the last number of periods, we've actually added some really good talent to the global asset management group. Were making some really good changes both from how we look at the marketplace, how do we attack it from a distribution perspective, the areas of opportunity that we should focus our energy and resources. We've made a lot of changes and investments appropriate in the technology. We had to deal similar to others in the industry with a lot of particular regulatory changes, particularly across Europe and the UK that we've been managing very well.
So again, it's not that we can't continue to improve. I agree a 100%, but we are working diligent against it. And I will continue to look at what are the right resources and talent necessary for us to do that. We will and have extracted very good shareholder return from this business. I know the flow picture doesn't look that great, but we have transformed from where we were proprietary sharp to a global provider and generate a very strong shareholder returns over the years in doing so.
I do believe the industry has gotten extra hit and we are part of that as you've seen, but I do believe we have enough capability and ability to transform. The other thing that we have going for us very clearly is our expertise and how we reengineer and integrate pretty well. So, I think that's going to be of a great benefit going forward. As you see, people we are starting to feel the pain a bit more. So, we are very focused and I appreciate your question and I continue to look to ensure that we can continue to generate value here.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.