Westpac quits financial advice

The financial advice industry is going through a painful change. The end of commissions and increased transparency means that customers are increasingly having to pay upfront and in full for advice - and they're increasingly trying to avoid doing so, by seeking more limited advice, or 'roboadvice', or just figuring it out for themselves.

It's causing a particular headache for the owners of large financial planning networks - the major banks and AMP. Their financial planners have been leaving in droves to join independent networks with greater freedom for product and platform choices. 

This has left AMP with a structural problem. Its core business is wealth management and it needs to find a way to make financial planning profitable.

The major banks have more flexibility. Their wealth divisions were always a sideshow to lucrative lending activities. It hasn't gone to plan; so they're getting out.

Sticking with wealth

Commonwealth Bank, ANZ Bank, and NAB have all announced their intention to quit wealth management almost entirely. Westpac is staying the course but will stop providing financial advice.

Good riddance. Westpac lost $53m on financial planning in 2018, but that may be the least of it, with ever-present reputational and regulatory risks and the drain it all causes on management time.

The planning business will be sold to Viridian Advisory and the bank's customers will be referred to external financial planners.

More importantly, Westpac will keep its insurance, platform and superannuation businesses. This is where Westpac makes its money from wealth management - around $790m in cash earnings for 2018, nearly 10% of Westpac's total - and management thinks it can grow.

Little change

As expected, removing the unprofitable advice business will lift the bank's earnings. Westpac says that will happen in 2020, but there will be around $250m-300m in exit costs before then. 

In the end, these changes will have little impact on Westpac's bottom line, but it will remove risk and free up some management time.

Westpac remains our only Buy recommendation in the sector, owing to the quality of its businesses and the value on offer.

We don't expect much growth over the next few years. But it will return some stage and, with a fully franked dividend yield of around 7.2%, not much growth is factored into the share price. BUY.

Note: Our Model Income Portfolio owns shares in Westpac.

Note: The Intelligent Investor Equity Income Fund owns shares in Westpac.