Big banks’ costly 20-year foray into wealth management is almost over
Twenty years ago, when Australia’s big four banks began their 20-year detour into wealth management, they spoke internally of drawing on the sales model of McDonald's. Instead of "would you like some fries with that?", tellers would ask: "Can we offer you some superannuation with that withdrawal?"
It begs the question: How could such a strategy go wrong?
The big four banks have ended their 20-year foray into the wealth sector.Credit:
And thus was born the new era of bancassurance – the term that was applied to what would become one of greatest (but legal) shareholder capital heists in corporate history.
It's impossible to calculate the size of the value destruction that resulted from the four major banks straying from their core competencies of selling mortgages, lending to business and, until a few years back, charging disproportionately large fees on transactions into wealth management.
Those helming the banks in the late 1990s and early 2000 were looking for growth and diversification – they were attempting to reinvent themselves into financial services supermarkets.
Back then, the key measure of success for banks was "products per customer". Five was their nirvana, but few, if any, got close. Cross-sell was the mantra and once sleepy tellers became truly incentivised salespeople.
It was easy to understand the dollar signs reflected in the eyes of the bank regimes at the time. Compulsory superannuation had resulted in a vast vault of hundreds of billions of dollars (now close to $3 trillion) in funds being saved outside the banking system and they wanted in on the action.
As students of history, today’s crop of bank chief executives have spent the past couple of years selling, winding down or attempting to demerge the various parts of what have been placed under the umbrella of wealth management – including personal advice, superannuation, insurance and investment platforms.
Ultimately, wealth management was technologically, regulatorily and culturally disrupted. The emergence of the new digital platforms allowed investors product choice, the regulators cleaned up excessive fees and shoddy service and the banks were banned, for the most part, from financially incentivising operatives to flog products. Rules also changed to ensure that advisers were sufficiently financially qualified to provide advice.
Meanwhile, legislating MySuper provided low-fee options for the millions who opted for less expensive management of their superannuation.
In the ten years to 2020, the economics of the industry had changed almost beyond recognition. The financial services royal commission, which resulted in the big four banks and AMP needing to make around $10 billion in provisions for remediating wealth management customers, was just the final straw.
On Monday, one of the last of these wealth management purges was executed as the National Australia Bank announced the $1.44 billion sale of MLC, comprising its advice, platforms, superannuation and investments and asset management businesses. NAB had already sold 80 per cent of its life business in 2016 for $2.4 billion.
Westpac sold its loss-making financial advice business to Viridian in 2019 but the remainder of its BT Financial Group businesses – private wealth, superannuation, platform life, insurance and investments – has been rolled into its consumer and business banking divisions and is under review. This is code for looking for an exit strategy.
MLC’s acquirer, IOOF, is looking to ride the industry consolidation wave that has been created by the bank's exit from wealth management. In 2020, after finally achieving regulatory clearance, IOOF bought ANZ’s pensions and investments business for $825 million.
For IOOF, the MLC acquisition represents a chunky risk and comes with a chunky price tag (17.3 times MLC’s 2020 cash earnings) but one that is being funded via a $1 billion equity issue.
If all goes according to plan, it should be able to notch up some synergy savings – sufficient to have confidence in its forecast that the deal will be earnings accretive.
But digesting two very large acquisitions in order to create Australia’s new wealth management powerhouse at a time when industry funds are stealing the march on market share is a risky play for IOOF’s investors.
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