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February 1, 2005
American Express is spinning off its Minneapolis-based money management arm to shareholders. The decision will give Minneapolis the headquarters of another Fortune 500 company, one with $7 billion in annual revenue. But the change also brings new uncertainty to American Express Financial Advisors, which has been trying to improve its investment performance.
St. Paul, Minn. — American Express bought Minneapolis-based Investors Diversified Services, a giant in the mutual fund industry, in 1984. Now called American Express Financial Advisors or AEFA, the operation employs some 7,000 people in downtown Minneapolis.
AEFA provides financial planning and advice, asset management, insurance and annuities through a network of more than 12,000 advisers. The company also manages dozens of mutual funds. But in the last few years the company has struggled. Analyst Matthew Park follows American Express for A.G. Edwards.
"The core problem in the past three to five years has been the performance of the AEFA mutual funds and other investment products have not matched the other companies' products, and therefore the financial advisors have had a difficult time selling those products in its financial advisor role," says Park.
In an effort to improve results, the company has shifted responsibility for billions of dollars of investor assets to porftolio managers who are outside the Twin Cities. And the company's financial performance has improved.
AEFA's earnings have grown yearly since 2001. American Express has moved from the 29th biggest U.S.-based money manager in 2002 to 21st in 2003, according to Institutional Investor magazine.
American Express CEO Ken Chenault told investors on a conference call that Financial Advisors CEO Jim Cracchiolo has moved AEFA from the "fix it" stage to the growth stage.
"We're not getting rid of Financial Advisors. What we believe very strongly is that Financial Advisors is better off independently pursuing its course," said Chenault. "And we believe that what we're spinning off is an entity that can generate very good value for its shareholders."
But it's also clear American Express feels it can do much better without AEFA. The company says its target for return on equity without AEFA is a whopping 10 percentage points higher than where it is now.
AEFA will get to use the American Express name for a while. The eventual loss of that brand was one reason that Moody's Investors Service lowered the company's credit rating, and said another downgrade is possible. Moody's also raised concern that the independent company may not have the same access to capital.
But CEO Jim Cracchiolo says the company has a "tremendous opportunity" to continue to grow, and it becomes independent in a position of strength. He says the company is one of the largest financial services firms, with the fourth largest retail distribution network.
Cracchiolo says the company will focus on people with $100,000 or more of investable assets, a group dubbed the "mass affluent."
"Where there's a real need for financial advice for their long term, whether it's against their retirement needs or their children's education. And so we're in a strong position to serve this customer segment, particularly around the things such as retirement. And we want to continue to invest and grow our business," says Cracchiolo.
But Joe Barsky says he wouldn't be surprised if the spin-off led to another reorganization at AEFA. Barsky is a former American Express executive now helping students learn portfolio management at the University of Minnesota's Carlson School of Management.
"If the net result is that there's less investment business being done in American Express Financial Advisors, that's not good for us as a community. Fewer jobs," says Barsky.
Barsky says that would mean fewer potential opportunities for his students.
American Express officials say there are no current plans for layoffs, and they will determine the best structure for the company over the next few months. Theoretically that could result in additional jobs, if the company needs people for functions currently handled at the parent company level.
In any case, investors hailed the decision to spin off AEFA. American Express shares gained 6 percent.
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