“I think the industry is at an inflection point where independence – and what that represents now – completely changes the model for clients and for advisers and the investment banks, which are typically at the vanguard of this, are exiting.”
In 2009, nine of the 10 biggest investment banks operating in Australia owned their own wealth management businesses or held significant stakes in one.
Since then, UBS, Citi, and Bank of America Merrill Lynch have sold theirs off and Goldmans is in the process of doing so. Some of the other investment banks, including Macquarie and Morgan Stanley, have faced significant commercial or reputational problems with their continuing wealth operations.
According to Paul Heath, the chief executive of Koda Capital, an independent advice business, that trend is only going to accelerate. By the end of this decade, Heath argues, there will probably be only one of those 10 investment banks still in wealth management.
It’s another indication of how the once fashionable notion of “vertical integration” has changed dramatically – for investment banks but also for Australia’s major commercial banks.
But the pressure on them also leads to a broader commercial question.
Wealth management for Australian banks certainly hasn’t lived up to the initial expectations of massively successful expansion.
These expectations included substantial levels of cross selling of products to traditional bank customers while generating similarly high returns on investment with extremely profitable exposure to a growing superannuation market.
A recent paper in the Reserve Bank Bulletin points out the growing role of the major banks in the wealth management industry over the past two decades as each of the major banks acquired or merged with a fund manager during the late 1990s and early 2000s.
It notes that these operations are still, in most cases, generating returns that are higher than the banks’ cost of capital. But it says these are still lower than their core banking activities at a time when there is increased regulatory focus on holding higher levels of capital.
Over the same period, various “scandals” and perceptions of conflicts of interest have also done substantial damage to the banks’ reputations.
Own or divest?
So is it worth it for the banks to continue owning such operations or should they follow the recent pattern of the investment banks in divesting them?
“I think the industry is at an inflection point where independence – and what that represents now – completely changes the model for clients and for advisers and the investment banks, which are typically at the vanguard of this, are exiting,” Heath says.
“But the issues driving the decisions by the investment banks are being faced by anybody who owns their own wealth management business. From having watched a long period of consolidation into vertically integrated firms at both the investment bank and commercial bank level, we think the trend is now very clearly the other way.
“The scale and size of the wealth businesses owned by the commercial banks means that it is a much harder decision for them to exit than it is for an investment bank. But the questions around the economics and the fundamentals remain the same.”
Naturally Koda Capital, as an independent advisory firm, has obvious self-interest in promoting the benefits as well as the apparent inevitability of such a trend.
But Heath’s analysis has changes in technology, customer demand and global institutional market trends to back him up.
For wealthier clients, for example, it means smaller independent firms can now offer the sort of sophisticated capital market products that used to be the preserve of the investment banks.
Yet this doesn’t require the same sort of expensive capital investment in building platforms and technology and comes with a different (lower) payment structure for advisers. For the investment banks, the notion of exclusivity no longer has the same commercial force.
“You no longer need to own your own distribution network to win in capital market deals,” Heath says.
“Back in the day, unless you could demonstrate you had very strong access to private wealth management distribution to retail clients by owning the network you couldn’t win deals. That has changed.
“The second thing is that private wealth has also become increasingly less economically viable. So you may be sustaining economic losses and you no longer need the distribution and the reputational risk is real.
“But the other thing that has changed, which is more subtle in my view, is that the client demand has shifted. Prior to the GFC, the big brands represented something that was valuable and trustworthy and that has shifted.”
All banking executives have some experience of that sort of negative community sentiment, of course, along with the increasingly savage political criticism of bank culture.
Interest rates and credit card charges are always going to be sensitive issues for a handful of dominant institutions making very big profits.
But in an era of low rates, the primary target of complaint has been the banks’ role in wealth management, including the sort of financial advice and products offered.
The Reserve Bank paper estimates that, in aggregate, the major banks’ AUM (assets under management) equate to around 15 per cent of their consolidated assets.
“CBA currently has the largest wealth management operation relative to its other activities – AUM are equivalent to more than 20 per cent of its consolidated assets – while ANZ’s is the smallest at seven per cent,” it says.
So far, there is no wholesale move out of wealth or acceptance that the commercial banks will adopt a similar style of exit to the investment banks.
But NAB has recently sold 80 per cent of its life insurance business to Nippon Life while the market expects ANZ’s wealth management division to be put up for sale later this year. What’s next?
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