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 same words I used last year after seeing Hartzer questioned by counsel assisting Michael Hodge.
Anyone who saw Hartzer’s performance in commissioner Hayne’s witness box during the final round of the royal commission hearings shouldn’t be surprised by this week’s news, either.
“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, hind sighting, 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 customers and remediating past issues.
Over $1.4 billion has been set aside for remediation over recent years, $1.2 billion of which related to wealth management.
Given the cost associated with fixing its mistakes, its easy to see why CBA has paused the sale of its wealth management business. Morningstar’s Mr 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.
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 to 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.
Let’s face it James, the advice industry is paying dreadfully for the total ineptitude of successive Treasurers of both major parties who approved banks getting into “wealth management”, a euphemism for both life insurance and investments of any kind. Any thinking person, not blinded by the impact on the share price, and who knew what was had happened in the USA with banc-assurance and mutual funds, could have predicted disaster. No one seemed to understand that the culture of a bank, and in particular a big bank, is one of short-term focus on profit – get the deal done, and get the hell out of there, understanding the “business” just completed probably had a loan life of 5 to 7 years.
Life insurance has a long term prospect: as a life insurer you must allow for your clients to stay with you to age 65 and a similar timeframe applies to investment. Yet the banks thought there were significant profits to be found and ignored the culture clash, as did the regulators. Furthermore some of the banks even dabbled in the “pass the parcel” lotto known as group life, with industry super funds.
And governments of all persuasions have always been scared witless by the threat of the banks running campaigns against them, as in the 1949 bank nationalisation election: Governments, and their political parties, need large overdrafts to fund election campaigns, and cave in at the knees on the heavy issues.
Those banks who owned life insurance companies and sold them to overseas interests apparently still want to flog life insurance from the bank premises along with their loans. Westpac are withdrawing from personal advice on life insurance and no doubt will be flogging life products along with loans as they’ve done for 20 years . The fact that ASIC will allow them to sell life insurance products on GENERAL ADVICE, and not personal advice, will add to the consumer problem.
The general sentiment amongst the banks may well be to extract themselves from the morass of investment advice that caused the “fee for no service” daylight robbery scenario, but they still believe they can sell life insurance attached to a loan without risking surveillance from the ACCC that the “compulsory” attachment of life insurance to a loan is nothing more than third line forcing . Many years ago the ACCC told me they would not investigate a complaint of third line forcing until the actual client of the bank complained to the ACCC .
Let’s be plain – the banks still believe there is money to be made in flogging poor quality life insurance products on GENERAL ADVICE to anyone who wants a loan product, and the banks know that ASIC and the ACCC will not be a problem, despite evidence to the contrary at the Royal Commission.
Consequently the banks see self-employed advisers, and the self-employed risk advisers in particular, as an enemy in their aim to continue to sell buckets of life risk along with their loans. The banks, and their satellite the FSC, introduced LIF initially as a means of presenting a more attractive proposition to an overseas buyer, by being able to cite decreasing new business acquisition costs and distribution costs.
Behind the scenes the banks are also the principal financiers of FASEA. The combination of reducing commissions on life risk products for all insurers (LIF), the antipathy of the average mum and dad Australian to pay fees of more than $1000 for life risk advice (Rice Kachlor research) and the outrageously purging impact effect of FASEA on long-standing life risk advisers will destroy the self-employed adviser sector and leave the banks and some insurers to flog poor quality life risk products to un-assuming consumers on GENERAL ADVICE
Hayne has a cynical attitude to financial advice that tainted his recommendations. Sadly the voice of clients that have benefited from long term valued relationships with their advisers were not hear and not considered by Hayne. The battle the industry now faces is to deal with even more onerous legislation because we have not had a voice. The banks actions were indefensible yet somehow they became the voice for the whole industry despite the fact they only entered financial planning in early 2000s. The future of the industry revolves around the valued service financial planners provide and the exit of the banks creates the opportunity for a new voice to be heard that is louder than the cynical voice of Hayne.
“If unbiased, independent advice is valued by the client, then the days of bank-owned wealth businesses are numbered.”
The answer to this is evidently no. It doesn’t take a lot of digging to see how many independents exist that provide advice v’s institutionally aligned practices. The public has had the choice already – and voted with their feet.
What critics of vertical integration fail to comprehend is the level of comfort that exists in the population by knowing that the advice provided is backed by a very large company that wont go under overnight if the advice goes pear shaped.
As a practice aligned with one of the big 4 we have directly asked our clients their thoughts on this issue. They prefer the fact that we have the backing of a major, understand that we are not independent and wouldn’t pay more for advice if we were independent.
There’s a lot of people dreaming of an independent utopia in advice but the broad public isn’t willing to pay the cost that advice rises to.Sure the wealthy may choose to – but not everyone can afford that.