Wealth management a tough play for big banks

These days wealth management contributes less than 8 per cent of CBA's group earnings, less than half its relative contribution before the global financial crisis.

While the big banks might be back producing group returns on equity of above 15 per cent, their wealth-management operations are struggling to break out of single-digit returns. Thanks to a land grab a decade ago, the big banks have more than $8 billion of wealth-management goodwill sitting on their balance sheets, which their external auditors must feel uneasy about continuing to support.

Meanwhile, the management of the bank is complaining about the growing capital requirements being demanded by the prudential regulator. They are just as sick of the negative retail inflows as everyone else in the industry.

It is leading some to again question whether the big banks are natural owners of wealth-management businesses. So far, none are showing outward signs of falling commitment.

Wealth management is one of the few sectors where the Australian Competition and Consumer Commission is going to allow the big banks to increase market share through acquisitions and this is one of the reasons why they are likely to persevere. (The other is that there are few players who could afford to buy the businesses off the banks for a half-decent price.)

But the goal of diversifying away from interest-earning activities by generating meaningful wealth-management fees off a bank's existing deposit and loan customer base is looking as elusive as ever.

Despite what has been described as an over-consolidation of the industry, where the big four banks control more than 60 per cent of wealth management fund balances, profit margins are still on the decline.

The remaining independent players such as Challenger, TAL, Macquarie Bank and even the big industry funds are pricing their products more competitively than the big banks to gain market share. Big bank customers are seen as soft targets.

NAB, for one, says it won't cut prices, but that means it ranks just sixth in the corporate life insurance tables. Over the years the big banks have struggled with the cultural challenges of running wealth-management businesses: the salaries and the personalities.

Accusations of a silo mentality among the executives at the top of the wealth-management businesses persist. Then there has been the plethora of legacy products and systems the banks picked up through acquisitions. The cross-sell of wealth-management products such as life insurance to new home loan customers remains well below global best practice. The optimists say it is an enormous potential upside, the pessimists say cross-sell has not happened yet in Australia and will never happen.

Not for want of trying. NAB has introduced big incentives into the remuneration package of its chief executive to encourage cross-sell. Despite all the gloom, it can be argued that the long-term prospects of the wealth-management sector have never been better. Given the demographics of the baby boomers, the retirement market is set to boom. The lifting of the superannuation guarantee over the next eight years from 9 per cent to 12 per cent provides another impetus for growth. It's all good news for the smaller players looking to steal market share.

The new entrants and other niche players are not troubled by the need to protect massive legacy books of historically priced business when it comes to winning new customers. This week aspiring wealth-management group ClearView Wealth (ASX code: CVW) reported that it had increased the number of advisers in its network from 55 a year ago to 86, with many of the new advisers joining from the network of one of the big banks.

ClearView is just one of the examples of attacker brands in wealth management that are going to make it more difficult for the big banks to defend their profits in the wealth-management industry, even when the recovery inevitably comes.

soldfield@investorfirst.com.au