BT Financial Group chief executive Brad Cooper recently singled out superannuation as an area where banks could boost their market share.

Cooper describes the banks' bid to capture a slice of the superannuation industry pie as a "land grab".

As head of Westpac Banking Corporation's wealth management division, he says he believes superannuation will be just as important as mortgages are for banks.

Australia's compulsory superannuation industry is now worth more than $1.3 trillion. It is also a little over 20 years old. Yet the major banks have not necessarily succeeded in grabbing part of this market to grow their businesses.

As part of Westpac's most recent half-year results, BT Financial Group reported a 14 per cent fall in net profit.

Commonwealth Bank of Australia's (CBA) wealth management division also did not report stellar results, posting an 11 per cent fall in net profit for the fiscal year to 30 June 2012.

Trading updates during the recent reporting season from National Australia Bank (NAB) and Australia and New Zealand Banking Corporation (ANZ) also revealed lacklustre performances by their wealth management businesses.

Wealth management includes managed investments, which have been captive to weak consumer sentiment. However, the superannuation portion of wealth management could offset falls in other areas of banking.

"For banks, the wealth management industry does not require as much capital as lending. The wealth management businesses can also offset the cycles in their lending businesses," Morningstar sector head of financials, infrastructure, insurance and property David Ellis says.

Moreover, capturing part of a $1.3-trillion market can help banks grow their earnings and therefore sustain their generous dividend payments.

However, Ellis says the headline earnings of the major banks has suffered from negative investor sentiment, with the banks' wealth management arms struggling in the past few years.

While superannuation is a tough market to crack, he says the banks should have been able to snare a solid piece of the superannuation sector.

"It's ironic that the massive inflows are going into the superannuation sector, yet institutional wealth managers are not really capturing a lot of those flows," he says.

ANZ is the most underweight in wealth management, while Westpac, CBA and NAB all have substantial wealth management businesses, he says.

Westpac's wealth management and superannuation businesses include the $95-billion BT Financial Group and the $37-billion Asgard platform.

CBA has the $90-billion Colonial First State business, while the NAB-owned MLC has $124 billion in funds under management (FUM).

Tria Investment Partners managing partner Andrew Baker says the banks are the first to admit they are relatively weak when it comes to securing a bigger piece of the superannuation pie.

"If they want to pick up an extra 100 basis points of growth, that [superannuation] would be the first place you would look," Baker says.

He says banks have been stuck in a traditional mindset when it comes to approaching wealth management.

Baker, who has worked in wealth management for 23 years, says the traditional model behind the banks is to go fishing for clients when they hit retirement.

"That's when these clients become profitable. This has been a great model for years, but now they realise they need to be focusing on the early part of the superannuation cycle," he says.

Another key sticking point that has thwarted the banks' efforts to move into superannuation is Australia's industrial awards system, he says.

Currently, Australia's awards system is dominated by not-for-profit superannuation funds, with these funds included in most of the default fund award agreements. Baker says that has made it difficult for retail superannuation funds to benefit from employer superannuation contributions.

However, the default superannuation awards system is under review by the Productivity Commission. Furthermore, the government has signalled the introduction of a MySuper product. By July 2013, all institutions offering superannuation will be required to offer a MySuper vehicle - a low-cost, no-frills product.

The product could possibly be a game changer for the industry.

Although Baker says MySuper is a "pointless reform," what it could do is break up the current default superannuation arrangement.

"The Productivity Commission is highly likely to make draft recommendations that would require awards to include a MySuper product. This would open up awards to other major players in superannuation," Baker says.

AMP and BT already offer low-cost, simple superannuation products - a strategy that has paid off. AMP's Flexible Super product secured $1.3 billion in inflows over the first half of 2012, while balances for the BT Super For Life product were up $700 million. BT Super for Life now has $5.7 billion in FUM since it was established in 2008.

ING Direct has just launched its low-cost super product, Living Super, which offers a balanced option without administration or management fees.

Baker says the BT Super For Life product proves a company does not need a large portion of people who are engaged in superannuation to secure a solid chunk of market share.
 
"Superannuation is a highly concentrated market. As long as they are the right people, you only need a small amount of engagement that will lead to the movement of a large amount of assets. This is one of the things BT Super For Life has tapped into," he says.
 
He also says the low-cost BT super product raises questions about the way superannuation will be distributed in the future.
 
"Superannuation has been traditionally directed through employers. Individuals can now select a product through the banks. Banks who already have relationships with their customers because of their mortgages could now engage with them through superannuation," he says.
 
According to Ellis, AMP is one financial institution that is making real inroads into superannuation.
 
In its half-year results, the financial institution's superannuation and advice business reported inflows of $301 million, up from net inflows of $94 million the previous half year.
 
"AMP seems to be making good, early inroads into superannuation. They have made a number of acquisitions recently, particularly in the SMSF (self-managed superannuation fund) sector," he says.
 
In June, AMP bought SMSF administrator Cavendish. The bank has since set up a unit branded AMP SMSF.
 
A super commodity

Ellis says the four major banks all have the infrastructure in place that makes a land grab for superannuation possible.
 
"The banks have the advantage of scale. They have the technology and financial resources to develop the products and processes to try and commoditise a product like superannuation," he says.
 
"Parts of the superannuation industry, including the SMSF sector, are a bit of a cottage industry. If a bank or even an AMP can come up with an administration service that is cheap and easy to use, they are likely to do really well, particularly with the strong growth rates in superannuation."
 
He says banks are already stepping up their focus on the wealth management sector.
 
AMP has made a number of acquisitions in financial planning - a strategy aimed at boosting its distribution arm in wealth management.

"Banks are obviously spending a lot of time and money on how they can really leverage their businesses in order to take advantage of the big pool of funds in superannuation," Ellis says.

The big four and AMP already dominate in terms of planner numbers. Ellis also points to the growing number of retirees, which represent the next phase in Australia's compulsory superannuation industry - post-retirement.

Challenger has successfully captured a good part of this market through its annuity business. Despite a 43 per cent drop in profit, Challenger reported a 34 per cent lift in annuity sales for fiscal 2012.

A recent Morningstar note reveals Challenger could possibly be a takeover target by the majors as they eye the annuity market. Ellis says he has asked the banks about this, but they have dismissed any suggestions they are looking to buy Challenger.

"I think they may just be talking up their books, but the banks also recognise they would be required to take on a bit of capital risk if they are to offer lifetime annuity products," he says.

Nevertheless, he says he expects the banks to do a lot more in the retirement income space.

All about the customer

Another effective method of targeting the superannuation market would be the most obvious way - through existing customers.

"Banks already have a lot of information on their customers. They will be using their massive customer bases to try very hard to sell their wealth management products," Ellis says.

Bank branches will be less about transactional banking and more about selling, particularly through financial planning channels.

"It's going to be all about the customer. The big banks have spent the last 10 years improving customer satisfaction. At the same time, technology has been rapidly changing," Ellis says.

"The big four (and AMP) will apply their technology and scale to increase their dominance in wealth management. It is a sector that is very attractive because of the low capital requirements and the earnings are complementary to the banking business."