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BFCSA: Banks’ vertical integration wealth management - going, going, gone

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Banks’ vertical integration wealth management - going, going, gone

Sydney Morning Herald 12 April 2018 1:29pm

Michael Pascoe


The writing was on the wall before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry started. Now it’s being played through loud speakers on street corners: the big banks’ vertically integrated wealth management business is finished.

Without that integration – the ability of bank tellers to channel punters to bank-controlled advisers who guide them through bank-owned platforms into bank-produced products – it’s hard for banks to tie up valuable capital in wealth management. It was a rich ride for ticket clippers while it lasted.

The banks are belatedly facing up to reality after fighting a rear-guard action through what used to be a friendly government. (Anyone recall the 2014 FoFA wars?) They’re exiting the business in dribs and drabs having long-since missed the peak of the market. Dumb boards and dumb management will do that.

The structural conflict of vertical integration has long been evident. Pay fat commissions for selling pups and pups will be sold. Put the incentives in place to steer trusting customers into bank products and steered they will be. Remember it was government policy that advisers were not required to do what was best for clients, but just what was OK.

The problem was acknowledged in the interim Murray Financial System report. As I wrote before the final report was released:

“The vertical integration of the wealth management industry is inherently unhealthy. It is structurally unsound – like pretending product salespeople operating on conflicted commission were 'financial advisers'.

“The efforts by the Financial Planning Association and others to professionalise planners is taking care of the commission problem, but the present system of platforms and ticket clipping imposes unconscionable costs on clients.

 “A genuinely independent review of the financial system would tackle that problem and recommend its busting.

“David Murray, the man running the government’s review of the financial system, is Ralph Norris’ predecessor at the CBA. He’s the one who did most to build the bank’s vertically integrated wealth management business. What are the odds that he’d want to see it broken apart?”

Trashed reputation

No prize for predicting that the final report decided undoing vertical integration was too hard. Murray believed the structure he built – at the cost of many billions of dollars – should continue because it would enable people to get advice when they otherwise might not. Unsurprisingly, Murray told a banking conference last week he still thought banks should stick with wealth management.

It is also worth remembering that most advisers did and do a sound job, but the structure also allowed the CBA to be repeatedly embarrassed and its reputation trashed by the utterly foreseeable failures the structure promoted. Senior management and the board continued to pretend there wasn’t a problem.

It’s rare for any major company to have so many opportunities at apologising yet they kept getting it wrong as long as they ignored the structural problem.

Again from 2014 – the year of the FoFA battles and Murray report:

“In years to come, business schools will study the CBA financial planning story as a case study of how not to handle a scandal, of how a fabulously wealthy and important corporation can suffer such a monumental attack of hubris over the damage that a gross failure of governance principles can do to a bank, and what a waste of money it is to pay people many millions of dollars and expect them to be able to operate without close supervision and constant challenging.”

The government did the banks no favours by listening to their lobbyists. The royal commission is heading inexorably down the path of recommending the end of vertical integration. The close 2016 election resulted in the coalition joining the bank-bashing movement right down to levels Labor couldn’t have imagined – the new bank tax, legislating how executives can be paid – so there will be no leniency this time.

Interesting days ahead

From the days of the big banks and AMP controlling 80 per cent of the wealth management industry, there are interesting and more diverse times ahead.

For those who want to stay in the wealth management business, the service and products will have to be better, the professionalism of advisers clear.

And there’s a sub-plot down the road a little: what will become of the Big Five versus Industry Superannuation war?

Having failed to land knock-out blows on the union movement or Labor leaders with a dedicated royal commission, there are those in the government and their cheer squad who hope the banking inquiry will turn up union/industry fund conspiracies and malfeasance.

The industry funds have had plenty of warning of the approaching microscope. They will only have themselves to blame if anything is found. And the banks might be losing interest anyway.

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