Banks should get out of wealth management

The Australian 12:00am May 27, 2017

Alan Kohler

The banks have been internally investigating their wealth management businesses lately, inspecting individual advice files and trying to head off more PR problems. The whisper is that, on average, eight out of 10 files are “disastrous” — the advice inappropriate.

Whether that is eventually confirmed officially, or it only turns out to be half of them, or the whole exercise is kept quiet, it’s clear that the big four banks’ wealth management acquisitions about 15 years ago were ruinous.

It all seemed like such a good idea at the time: wealth management seemed like a splendid add-on to banking services and a way for the banks to maintain profit growth as the expansion in housing credit inevitably fell from the 20 per cent a year it reached in the early 2000s.

“More products per customer”, was the refrain.

What’s more, Australia’s very juicy superannuation system was coming up to a decade old at that point and beginning to take off, so getting a piece of that action seemed like a no-brainer. But what actually happened was that each business infected and diminished the other: Colonial First State, MLC, BT, and ING were high-performing, agile organisations that were bureaucratised and degraded by the banks, and the banks in turn were corrupted by the sales cultures of the wealth managers.

Sure, those acquisitions made each of the banks much bigger, and ensured that the salaries of the banks’ senior executives all at least doubled, but for shareholders and the country they have been disastrous. Instead of one plus one equalling three, as it should in a successful merger, it’s now clear that the additions equalled 1.5.

The core culture of a bank is, or at least should be, risk management, not sales. Loans have to be sold, of course, but that shouldn’t be the core business.

And it’s true that investment management also involves managing risk, but investment risk is very different to credit risk — it’s the difference between equity and debt, between the risk of volatility and getting your money back, between saying “Yes” and saying “No”.

It seems to me that this clash of culture that started with those wealth management acquisitions in the early 2000s is why the banks are now as popular as sharks at a beach, and why the government feels quite comfortable whacking them with a new tax. Virtually all of their PR problems in the past few years have had to do with bad or corrupt ­financial advice, which was a ­direct result of the fact that the advisers were selling bad products.

They shouldn’t have been ­“selling”, or distributing, in the first place because they were posturing as independent advisers, something that’s now been stamped out by legislators and regulators, but it might have been OK if what they were selling was any good. But the truth is that the bank-owned super funds and fund managers have been by far the worst performing, and shouldn’t be recommended by anyone.

Before the banks bought them, Colonial, BT and MLC were among the best.

New research produced by the industry funds shows that of the bank-owned public offer super fund assets, not one dollar of them sits in the top quartile of ­performance over 10 years, and 75 per cent is in the bottom quartile.

Ninety-seven per cent of the ­accounts are below the median.

All of the bank funds, and AMP, have average 10-year returns below 4 per cent per annum and a lot of the individual bank-owned funds’ returns are less than 3 per cent — below inflation after fees. That compares with the average industry and public sector fund returns of more than 5 per cent.

Selling these obviously dud products became a nightmare for the bank advisers, although 80 per cent of them held their noses and shoved clients into them anyway, saying anything to get the bonus or commission.

And at the same time as those wealth managers lucky/unlucky enough to be taken over by banks were infected by bureaucracy that led to poor performance, the banks themselves were infected by a sales culture.

Individual customers have been kept happy because the banks have been throwing money at them to buy houses, as shown by 80 per cent-plus customer satisfaction ratings of each of the big four, but the result has been a dangerous bubble in household debt.

Maybe it would still have happened if the banks hadn’t absorbed the sales cultures of Colonial, BT, MLC and ING between 2000 and 2002. We’ll never know.

But I reckon it might not have happened, and if the retail super funds had stayed separate to the banks they might have stayed true to their credit management ­histories.

Moreover, the super funds would have performed better and thousands of Australian wouldn’t have been screwed out of a decent retirement.

So not only were those bank/wealth management mergers 15 years ago disastrous for the banks, they were disastrous for the country, leading to bad retirement outcomes and too much household debt.

It’s not too late to reverse them: if the banks themselves won’t demerge, the regulators should make them.