Industry insiders have revealed why banks are distancing themselves from wealth management and how their actions will reshape the Australian financial services sector.
There are a number of reasons why the big four have decided, to varying degrees, to put a ‘for sale’ sign on their wealth management businesses.
Some major bank chief executives have run a ruler over their advice businesses and seen poorly performing divisions that just don’t provide enough margin for the group’s bottom line.
Others, like Westpac CEO Brian Hartzer, have seen the “writing on the wall” and the mountain of increasing compliance that must be scaled to make advice operational, let alone turn a profit.
But it may also have been a strategic play based on negative sentiment, bad press and the misguided belief that commissioner Hayne would propose an end to vertically integrated wealth models.
“What it looks like the banks have done in most cases, or in some cases, is they’ve picked up their vertically integrated business, which consist of advice and other products, and have looked to distance themselves from that by either demerging or selling the wealth business,” Lifespan Financial Planning CEO Eugene Ardino said.
Speaking exclusively on the Investor Daily Live webcast on Wednesday (3 April), the dealer group boss said the banks aren’t actually dismantling their conflicted businesses – they’re selling them as bundled, vertically integrated models where product and distribution sit under the same roof.
“That’s not dismantling vertical integration. That’s really them trying to distance themselves from wealth management. Whether that now goes ahead in some cases remains to be seen,” he said.
“Perhaps what could have happened is some sort of recommendation around how to limit vertical integration or how to control it.
“The issue you have is when you take a business that’s focused on sales and that business takes over as the dominant force in a company that also provides advice, then sales wins. I think that’s natural. Perhaps if they had started there, that could have led to some moderation of vertical integration.”
The royal commission hearings, more than anything, were a targeted attack on the sales culture of large financial institutions, many of which repeatedly defended their models as profit-making businesses, often beholden to shareholders.
“In product businesses, their job is to sell. That’s fine. There’s nothing wrong with that. But if you’re putting an adviser hat on, there needs to be some separation. That’s an issue of culture,” Mr Ardino said.
I haven’t seen some of the employment contracts of the advisers from some of the groups that got into trouble, but I would venture a guess that a lot of their KPIs talk about new business rather than retaining business and servicing clients.”
Fellow panellist and Thomson Reuters APAC bureau chief Nathan Lynch said that despite Hayne’s failure to propose banning vertical integration in wealth management, the model will ultimately be dismantled by market forces.
“Hayne points out that a lot of the dismantling of the vertically integrated model comes down to the fact that it’s just not profitable. You have an environment where vertical integration will be dismantled to some extent by competitive forces and by technology,” he said.
“Servicing the vast majority of client is going to become very difficult. Most businesses are starting to pivot to the high end. I think we need to view technology in advice as a positive, as an enabler.”
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