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Is owning wealth management more trouble than it’s worth?

Is owning wealth management more trouble than it’s worth?

James Mitchell
— 1 minute read

With the four major banks distancing themselves from wealth management, all eyes will be on the remaining institutions to see who can make a viable asset out of aligned advice.

Westpac became the latest, and last, of the big four to announce its separation from financial advice. Morningstar analyst David Ellis said Westpac “surprised” the market with a “radical restructure” of its wealth business. Personally, I’m not at all surprised that Westpac decided to withdraw from providing personal advice by salaried advisers and ARs. As the group’s chief executive Brian Hartzer said: the writing was on the wall. These are the same words I used last year after seeing Hartzer questioned by counsel assisting Michael Hodge. 

Anyone who saw Hartzer’s performance in commissioner Kenneth Hayne’s witness box during the final round of the royal commission hearings shouldn’t be surprised by this week’s news either. 

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I wrote an analysis back in November last year, outlining that Brian Hartzer and Westpac were clearly tired of wealth management. 

It was during his interrogation at the RC that Hartzer admitted that owning a compliant financial advice business is becoming increasingly difficult for the major bank.

“Advice is inherently a challenging issue to monitor because you’re talking about a subjective conversation between two people at some point,” he said.

“Investing inevitably has a level of subjectivity around it which can mean that with the best will in the world, results don’t necessarily come out the way you expect them to. The standards of documentation and proof that we’re now, as a general industry, expected to meet are very, very high, and so the cost of training, hindsighting, storing documents, auditing and the like is very, very high relative to the revenue associated with providing that advice.”

But selling off your wealth division isn’t a simple task. CBA had grand plans to demerge its wealth business, Colonial First State, along with Count Financial and its mortgage broking subsidiary, Aussie Home Loans. But recently the trajectory of the deal, which was initially planned to be spun off and listed as its own entity, looks uncertain. 

Last week, Australia’s biggest bank informed the market that the demerger had been suspended as CBA focuses on implementing Hayne’s recommendations, refunding customer and remediating past issues. 

Over $1.4 billion has been set aside for remediation over recent years, $1.2 billion of which was related to wealth management. 

Given the cost associated with fixing its mistakes, it’s easy to see why CBA has paused the sales of its wealth management business. Morningstar’s David Ellis is confident that the bank could retain the division and scrap its demerger plans altogether. 

But CBA’s problems will be the same at Westpac’s, which ultimately comes down to how much value wealth management and financial advice deliver for the overall group. 

AMP, on the other hand, has far bigger issues to contend with. Unlike the majors, its retail banking arm, AMP Bank, doesn’t have the scale to prop up the profitability of the overall group. While it also has AMP Capital, the company needs wealth management in its stable much more than the big four do. 

New CEO Francesco De Ferrari is being paid over $2 million a year to turn the ship around, and the next 12 months will be far from smooth sailing. 

This week, he addressed shareholders via AMP’s annual report, in which he stated that while the group’s wealth business in Australia has foundational assets and strong market positions, the business model is challenged.

“We need to reshape it for the future,” the AMP boss said. 

Given the tremendous amount of negative news that AMP wealth has generated over the last 12 months, whatever the future of advice looks like at AMP will need to be very different from its past. 

The market will ultimately decide the fate of the remaining institutionally aligned advice businesses in Australia, thanks to Hayne’s recommendation that all advisers must disclose their lack of independence. 

If unbiased, independent advice is valued by the client, then the days of bank-owned wealth businesses are numbered.

 

Is owning wealth management more trouble than it’s worth?
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