The document analyzes the foray of Australian banks into wealth management. It finds that while revenues have increased due to economic growth, profitability has been mixed. Separating wealth management divisions from core banking has been more successful than integration. Regulatory costs have also impacted profits. Overall, wealth management remains a viable strategy for banks if they can effectively manage regulatory requirements and control expenses.

1. Shantha P Yahanpath - Sydney Business School, University of Wollongong
Shan P Yahanpath - MBA candidate, Sydney Business School, University of Wollongong

2.  In Australia Banks’ interest in wealth management
increased since the 1990’s
 Key drivers of this push into wealth management were
the increase in High Net Worth (HNW) individuals and a
strong economic growth
 Wealth management became an increasingly attractive
area for the Australian banks largely due to the ageing
population and superannuation guarantee
 This paper focusses on the viability of the foray into
wealth management by banks
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3.  The KPMG Financial Institutions Performance Summary
(2015) provided a summary of 1HY15 performance of all
the Big 4 Banks.
 In Boston Consulting’s (2002) Report 2001, a year of
economic downturn, also resulted in a significant drop in
wealth management revenue suggesting profitability in
the sector is closely related with economic cycles.
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4.  Deloitte AG focussed on the decrease in profitability of
Swiss wealth managers and how to derive wealth
management profitability post-GFC
 Price Waterhouse Coopers Major Banks Analysis (2014)
- strong performance of the Big 4 Australian banks in
wealth management due to equity growth
 Australian Securities and Investments Commission’s
(ASIC) media releases show that National Australia
Bank’s (NAB) Wealth and Westpac’s BT have refunded
wealth management customers in response to ASIC
actions
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5.  We employ two-stage qualitative and quantitative
methodology based on secondary data
 Stage 1- high-level analysis of wealth management
sector
 Stage 2- quantitative analysis of financial statements
 Stage 1 focussed on broader set of reports on banking
and wealth management, wealth management strategy
articles and reports.
 Stage 2 focussed on accounting information specific to
wealth management
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6.  Has the foray into wealth management increased
the returns for the shareholders and if so is it due to
economic cycle driven asset growth or due to
strategic benefits derived from wealth management
sector?
 How significant is the differentiation of levels of
success among banks?
 Did early entry into wealth management by some
banks give them a first mover advantage?
 Did regulatory burden hinder growth and
profitability?
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7.  Big 4 banks except for Commonwealth Bank of Australia
(CBA) have all separated their core brand from their
Wealth Management arm
 Westpac Banking Corporation (WBC) includes BT
Wealth Management
 Australia and New Zealand Banking Group (ANZ) wealth
management includes ING/OnePath
 NAB includes MLC
 CBA has made wealth management their own -
Commonwealth Wealth Management
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8.  ASIC established the Wealth Management Project in
October 2014
 ASIC’s Financial Service Review Committee made a
number of recommendations related to the financial
services sector
 Most important was Recommendation 7- inquiry into the
misconduct of advisers within CBA Financial Planning
Recommendation 11- an extension further
recommending that ASIC keeps a close watch of other
financial advice businesses that have been a “source of
concern”
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9.  ASIC has worked closely with the financial services
providers to identify and remediate non-compliant
advice
 This has led to large-scale review and remediation
programs. These programs came at considerable
cost to the banks
 ANZ also started a remediation program costing the
bank $30 million
 ASIC worked with Macquarie Investment
Management clients affected by systems errors
 Compliance and remediation costs have been
increasing in the wealth management sector
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10.  Switzerland is a world leader in bank-based wealth
management - 50% of banking sector’s total
contribution Burgstaller and Cocca (2010)
 Before regulatory change in Australia the global
trend was to shift from commission-based pricing to
asset-based pricing
 Future of Financial Advice (FoFA) reforms introduced by
the Australian Federal Government encouraged fee for
advice
 Key recommendation - clients, rather than product
providers to pay for financial advice they receive
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11.  Move away from commission-based pricing
 Some financial planners were taking advantage of
clients for maximum commission often through
unethical conduct
 Global profitability in wealth management converging to
80 basis points in 2013 and only exception was the
Middle East at 110 basis points profitability
 North American and Asian markets experienced
significant growth due to asset growth and a strong
equity market, similar to the Australian experience.
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12.  Australia has also showed some similarity to global
trends
 Australia has a rather competitive wealth management
sector, with increased demand for superannuation
products
 Costs are high by world standards and are facing
increased pressure of regulation
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13.  For FY2014, only NAB had higher non-interest income
than interest income, largely due to the reputation of
MLC in Wealth Management
 Westpac and ANZ have high proportion of interest
income and recorded declines in non-interest income
 In first half of FY15 all the banks performed strongly-
overall wealth management and insurance income
increased
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14.  CBA and NAB had strong gains in non-interest
income1HY15 - NAB and ANZ were the star performers
for wealth management and insurance income
 CBA recorded a fall in wealth management profit in FY
2015 from $789 million to $650 million largely due to
regulatory drag
 Another area of concern is operating expenses to total
operating income, which is 73.4% in 2015 compared to
banking sector cost-to-income ratio of around 40%
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15.  Westpac’s BT Financial Group experienced strong
profits post GFC
 They have also initiated remediation with assistance of
ASIC, but at a smaller scale and operating expenses to
total income is much lower than CBA over 10 years
 BT has kept operating costs under control, suggesting
there is a benefit separating Westpac’s core business
and BT Wealth Management
 In our research only CBA and Westpac had a clear
demarcation of profitability and expenses attributable to
wealth management
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16.  Despite increasing regulatory burden eating into short-
term profitability, banking on wealth management is not
necessarily a failed strategy
 Australia has an ageing population and a robust banking
sector which has allowed banks to invest more in wealth
management
 Also with compulsory Superannuation Guarantee, over
9% of Australian salaries will go into the financial
planning and wealth management sector
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17. CBA
Westpac
0
100
200
300
400
500
600
700
800
900
1000
2007 2008 2009 2010 2011 2012 2013 2014 2015
AxisTitle
Wealth Management Profitability
Source: Morningstar database
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18.  In answering our key research question we conclude
that while the foray into wealth management by banks
may have the potential to increase shareholder returns,
the results thus far have been mixed
 Revenue increased largely due to economic cycle-driven
asset growth
 Effective strategies to lighten regulatory burden will help
in increasing shareholder returns
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19. CBA
Westpac
30.00%
35.00%
40.00%
45.00%
50.00%
55.00%
60.00%
65.00%
70.00%
75.00%
80.00%
2007 2008 2009 2010 2011 2012 2013 2014 2015
AxisTitle
Wealth Management Operating Expense to Income
Source: Morningstar database
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20. CBA Wealth Management
CBA Group
30.00%
35.00%
40.00%
45.00%
50.00%
55.00%
60.00%
65.00%
70.00%
75.00%
80.00%
2007 2008 2009 2010 2011 2012 2013 2014 2015
AxisTitle
CBA Group vs CBA WM Operating Expense to Income
Source: Morningstar database
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21.  Degree of success varies depending on strategy
 It seems that integration of wealth management into
banks has not been as successful as maintaining the
wealth management division as a separate entity
 In answering the question in regards to early entry,
NAB’s acquisition of MLC has given them first mover
advantage, but late entry by Westpac acquiring BT
Financial Group has not deterred them from making
headway in wealth management. ANZ has also
performed well.
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22.  Therefore it is not the timing of or the time in wealth
management that determines success but the strategies
crafted and implemented
 With regards to the effects of regulatory burden, it has
cost the banks in terms of management time, compliance
and remediation. All of the Big 4 banks have suffered
regulatory burden to a varying extent
 Careful staff selection, good training, supervision and
incentives for quality business writing can contribute to
improved profitability and shareholder returns
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23. CBA
WBC
ANZ
NAB
30.00%
35.00%
40.00%
45.00%
50.00%
55.00%
60.00%
65.00%
70.00%
75.00%
80.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
AxisTitle
Big 4 Banks Cost to Income Ratio over 10 years
Source: Morningstar database
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24.  It may not be a failed strategy but strategic re-invention
is required.
 Creative destruction will take shape to revive wealth
management.
 Banks can afford the required investment to re-position
financial planning and wealth management.
Thank you!
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