CBA’s notice of intent to demerge its wealth planning and mortgage businesses signals that the institutional transition out of advice will not wait for ASIC discipline or findings from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The CBA announcement is the third major axe to fall on the institutional advice industry in the last nine months, following ANZ Bank’s sale of four dealer groups to IOOF last October, and the revelation, in May, of NAB’s plans to sell the lion’s share of its wealth business.
While there are many things in play, there can be no misunderstanding: the deconstruction of institutionally owned wealth advice is under way.
At March this year, there were 7691 advisers under licensees owned by AMP (2614), CBA (1557), NAB (1511), ANZ (1040) and Westpac (969). Of those, 2783 have already been accounted for in sales, or statements of intent to sell or demerge.
The royal commission certainly spurred the transition, and history will rightly place much of the impetus for change at the inquiry’s feet.
The commission’s draft interim report is expected in September and the final version is due in February next year. Closing statements by commissioner Kenneth Hayne and counsel assisting Rowena Orr indicate separation of product and advice are certain to feature in the upcoming reports, a fact clearly not lost on the banks.
While the congruity of product owners selling advice appears to have been in question for some time, pathways to divestment from wealth advice by banks have differed.
The big steps
In retrospect, ANZ’s billion-dollar sale to IOOF of its four dealer groups, packaged up with its pension and investments business, appears to have been well timed. Since then, the royal commission and the incoming standards from the Financial Adviser Standards and Ethics Authority seem to have combined to rattle the valuation of wealth and advice businesses across the board.
Meanwhile, the subsequent notice of intent to divest by NAB chief customer officer, consumer and wealth, Andrew Hagger has not, to this point, yielded any confirmed sale. While Hagger told Professional Planner “the time was right” in May, it is understood the business could be exploring the disposal of its dealer brands alongside its mooted plan to spin off its asset management business.
Both ANZ and NAB profess a preference for moving towards a simpler banking business model with an intention to focus on core banking. CBA chief executive Matt Comyn took the same route in an interview explaining the move, which was announced on Monday.
“The best thing for CBA shareholders is for us to focus on our core banking business and seek to become a simpler and better bank,” Comyn said.
The architecture of CBA’s demerger plan, which Comyn explained in the announcement, bears some resemblance to NAB’s notice of intent. Both will retain a major licensee – JBWere for NAB and Commonwealth Financial Planning for CBA – to continue servicing their own retail clients.
‘Clean and timely’
Comyn describes the demerger plans as “a clean and timely exit of all of these businesses”. He explained that, as part of the terms of the arrangement, existing CBA shareholders would receive an interest in the demerged entity proportionate to their CBA shareholding.
It terms of size, the pro forma earnings of the proposed wealth spinoff in 2017 were a little more than $500 million of net profit after tax, and there would be about 2000 employees, he said.
CBA confirmed there will be no ownership between the Commonwealth Bank and the CFS Group when the demerger is complete and it will be a separately listed entity. To this, Comyn added: “Of course there are transitional and service arrangements that will continue to operate between the Commonwealth Bank and the CFS Group.”
What’s not known is whether CBA will rework the product lists of its retained licensee to become less vertically integrated; the announced demerger plan does not indicate that it will, but Comyn has indicated that the focus will shift to addressing “the concerns regarding banks owning wealth management businesses” by saying “we will deliver through a new model for advice that is safe, simple and scalable”.
Much more is still unclear on the CBA deal, and the bank has indicated that further details will be provided in its 2018 annual results announcement. There has been no mention of CBA doing anything other than continuing to sell its own products, or CFS Group doing anything other than selling its own offerings.
The holdouts
Westpac’s BT, which owns dealer group brands BT Select, Magnitude and Securitor, is not forecast to sell its wealth advice business in the near future. Its ongoing investment in the technology platform Panorama, reportedly more than half a billion dollars, indicates the company is focusing on providing services to licensee owners, notwithstanding its continuing direct ownership of advice businesses.
Last week, Westpac’s wealth management arm, BT Financial Group, announced it would remove grandfathered payments attributable to BT products, but the institution has given no word yet relating to separation of product and advice.
AMP, the country’s largest advice and wealth management business, has shown no signs it plans to exit its ownership of advice businesses either. The ‘buyer of last resort’ agreements binding AMP’s planning businesses may have some bearing on its future intentions, along with the future of grandfathered commissions. If commissions are banned – a topic of current debate – the value of these businesses may be affected at a time when many will be looking to sell.
AMP’s advice ownership model comprises a vast adviser network, including AMP Financial Planning, Charter Financial Planning, Hillross Financial Services, ipac Securities and SMSF Advice brands.
At his first public address as chairman of AMP, at an American Chamber of Commerce in Australia lunch last week, David Murray defended vertical integration, highlighting the “substantial consumer benefits” that can be derived from vertically integrated business models as a result of their scale and access to capital. Murray added that legislation targeting vertically integrated business models would risk removing a significant source of support for financial advice.
