The shakeup of the Australian wealth industry looks like continuing with reports that ANZ may be looking to sell off key parts of its wealth management business. On the back of NAB completing the sale of 80% of its life insurance business to Nippon Life Insurance Company for $2.4 billion, ANZ said it was open to selling off its financial advice, insurance and superannuation arms.
The big news this week is that the ANZ chief Shayne Elliot stated that the bank “does not need to be a manufacturer of life and investment products”. This announcement follows disappointing returns, that led a review of its wealth management arm earlier this year.
"The strategic review of ANZ's wealth businesses ... concluded that while the distribution of high quality wealth products and services should remain a core component of the group's overall customer proposition, ANZ does not need to be a manufacturer of life and investments products"
ANZ Chief - Shayne Elliott
Understanding Some Terms
“Wealth management” is the finance industry term that includes financial planning, superannuation and insurance. When you place your savings in a managed fund (either inside or outside your superannuation), or buy a life insurance policy that has cover for Death, Total and Permanent Disability (TPD), Trauma or Income Protection, you are purchasing what the industry calls a “product”. These “products”, depending on the type, can come from insurance companies, fund managers or other large financial institutions such as banks. These products are available either directly from the manufacturer, or via third party distributors such as financial advisers. Over the last couple of decades, the large institutions have engaged in a consolidation of these product manufacturing and distribution channels.
This consolidation is called “vertical integration”. It’s a term that simply means that all parts of the manufacturing, distribution and sale of a product are ultimately owned and controlled by the same company. An example would be a multi-national hamburger chain which started just selling burgers, but then expanded its operations to purchase the trucks that delivered the ingredients to its outlets, as well the factories that make the bread for its buns and the farms that grow the beef for its burgers. Vertical integration can be attractive for some businesses to achieve as it allows the head company to be more in control of the different aspects of their business – particularly the costs of the inputs needed to produce their products, and the way they get distributed.
Back to Finance
In the past couple of decades, the big players in Australian finance have generally bought up smaller companies (such as financial planning groups) and incorporated them into their own structure. They already manufactured the “product” and by incorporating financial advisers into their structure, they could better control distribution of their product by benefiting from their already vast network of bank branches. Bank aligned advisers are generally able to sell both the banks products and other selected products, although studies (including extensive shadow shopping exercises) have shown that the majority of products sold by them are actually produced by the bank that employs them.
This is the point that has caused massive amounts of controversy within, and criticism of the industry. Financial advisers have a fiduciary responsibility to act in the best interest of their clients, if they overwhelmingly sell their owner’s product, critics argue they cannot possibly be upholding their duty to always act in the client’s best interest.
Part of A Trend
The initial attractiveness of vertical integration would have been in part due to the eagerness of major institutions to get a larger share of the massive pot of money available due to our compulsory superannuation schemes. Back in 2010, it was estimated that around $1.2 Trillion (with a “T”!), that’s 1,200 Billion dollars, was available for investment from superannuation savings. This amount rivalled the entire Gross Domestic Product (GDP) that Australia produced in that year and the super pot has grown to over $2 Trillion in 2015, making it the 4th largest super sector in the world.
Despite these alluring numbers, ongoing scandals in the wealth industry and the very real perception of conflicts of interest that has led to more regulation and compliance costs, along with competition from the Self-Managed Super Fund (SMSF) sector have contributed to under performance by the wealth sector. This has resulted in some major banks increasingly viewing the sector as more of a liability than a cash cow. The potential sell off of ANZ’s wealth business is in line with a trend in the major banks of restructuring and off-loading their wealth arms. NAB recently completed the sale of 80% of its life insurance arm to Japan’s Nippon Life Insurance and earlier this year Macquarie sold its life unit to Zurich Australia. Speculation remains over the future of CBAs Comminsure, after its involvement in reported scandalous behaviour earlier this year.
The institutional experiment with vertical integration of the wealth sector is showing signs that it might be coming to an end. The nature of the wealth management industry with its high regulation and associated fiduciary responsibilities does not necessarily lend itself to the vertical integration model employed by the major banks in Australia. Michael Pascoe, speaking on Fairfax media has a prescient point when he says:
“Vertical Integration doesn’t make sense unless it is a machine to shift product”
For an industry that is trying to become recognised as more professional and respected, vertical integration may be a millstone that has to be cut loose in order to go forward.
What will happen to the financial advisers that are currently part of the vertically integrated institutions (around 50% of the advice market) if this restructuring gains pace? How will they be absorbed back into the wider industry and what the industry’s future landscape looks like will be the next big question the industry will face.