Financial scandals and increasingly onerous regulation have pushed banks to rethink their wealth management businesses as they confront potential reputational damage.
This is the assessment of Wayne Wilson, chief executive of software business knowITdigital, (pictured). Wilson has extensive experience in the industry and previously headed a number of bank dealer groups including Advance Asset management and Asgard Wealth Solutions.
The firm's latest report on financial planning found that the sector had improved revenue and profitability over the past two years. This was supported by an increase in clients.
Despite the positive numbers in the advice sector, Wilson said growing regulatory costs and compliance have forced banks to question the viability of their wealth management businesses.
“With increasing compliance, we have seen number of enforceable undertakings by some of the banks. There is a degree of risk in brand damage and reputation. This has pushed banks to revise their wealth management businesses,” Wilson told AB+F.
Focus on salaried employees
National Australia Bank has already moved to restructure its wealth management arm while the Australia and New Zealand Banking Group has signalled that its business is under review.
Despite these challenges, banks will remain in the business of wealth, albeit it with a different structure. In particular, banks will move away from the traditional approach of owning financial planning distribution channels through dealer groups.
“Banks won’t completely exit the wealth market. There will be a move away from owning dealer groups to hiring salaried employees as a strategy to meet the wealth needs of their customers,” Wilson said.
“Banks will look to provide more end-to-end wealth solutions for their customers and that is hard to do with aligned dealer groups.”
At the same time, financial planning firms are also rethinking their alliances with the banks.
“The Future of Financial Advice (FoFA) reforms were expected to increase the regulatory burden on planners. Independent practices were looking for a big brother to help them share the costs. Being aligned to a bank was seen as an option," added Wilson.
“However, once the regulation came in, it wasn’t as difficult to comply with. They were also not comfortable with the vertical integration and the whole pushing products down the throat that came with that. Subsequently we have seen a drift away from the big institutions.”
Financial technology including the emergence of fintechs has also impacted financial planning most notably in the area of cost and flexibility.
“Previously the only solutions in financial planning were delivered by technology firms such as Coin and Xplan that provided the full solutions to these advisers," he said.
“Now advisers are adopting a more flexible approach, picking and choosing smaller technology firms to help them with parts of their business such as CRM (customer relationship management).”
The trend toward outsourcing has also allowed advisers to reduce their costs by outsourcing many part of their business such as invoicing and providing them with the time to focus on their clients.
Wilson also believes that robo-advice won’t have a big impact on financial planners as such a technology is used more in the area of asset allocation and not tax or superannuation planning.
Nevertheless he said planners could incorporate robo-advice technologies to parts of their businesses particularly for their level three or four clients – those who are not generating the high fees.