A prevailing view is that the institutions, especially the banks, are going to dominate in financial services, especially in distribution. Further, that these institutions will be global. And that these institutions will favour closed architecture and vertical integration. But, possibly nothing is further from the reality of the future.
Recently, I was on one of Julie Rigoni’s tours and we went to a number of European countries to study their regulatory environments and distribution models. This tour also gave me time to reflect on the Australian industry and put it into perspective. And this tour re-confirmed my contrary view.
As a preface to the reasoning for my contrary view, indulge me as I offer my potted observations of the industry in other countries.
Many in our industry in Australia hold the view that our industry is light years ahead of the rest of the world. This is a rather arrogant, simplistic view. In some areas we are ahead, in others we are behind, but in many instances, it is just being done differently in other countries.
One area in which we are way behind is in straight through processing (STP). The US has had this for decades. Because of this, their platforms are more advanced than ours and are a lot cheaper — some only charge for transactions, and then only a nominal fee. In Europe, hubs are at least off the ground. Where we are ahead is in open architecture.
Even in the most staunchly closed architecture countries, institutions are bowing to consumer pressure and providing limited choice of other managers.
In Italy, where the banks dominate, many are now badging Skandia as a way of offering open architecture. Everywhere I went and everyone I spoke to, even the private bankers in Switzerland, said that open architecture was the future.
Logically I should now discuss vertical integration, but there is still one area of comparison that needs to be raised.
Nearly all OECD countries, both at the government and corporate level, have a mammoth unfunded pension liability. The only country that doesn’t is Australia. And this liability is weighing heavily on these countries. A few weeks ago, there were strikes in France, just because the government said they would have to find ways to resolve the issue.
Barrie Dunstan devoted his wholeAustralian Financial Reviewarticle on June 24 to this matter. The article is well worth reading as it also has implications for the global investment markets. Unfunded (pension) liabilities are what brought the AMP undone in the UK.
We don’t have this problem (to any great extent) in Australia, because we started moving out of defined benefit schemes to defined contribution schemes some 10 to 20 years ago. Here, the member wears the market risk — just ask anyone who is in an allocated pension.
You may ask what this has to do with my contrary view — and the answer is chaos theory.
What I mean is that there are many factors, some apparently unrelated, that lead me to my contrary view. Also, it is complex. And this is what many institutions are discovering with both vertical integration and global expansion.
When I say institutions I mean, in the main, banks.
Banks have been attracted by the allure of wealth management — both funds management and providing advice. They, on the one hand, saw their deposit base being eroded by managed funds, and on the other hand, they saw the attractive margins.
With providing advice, they saw the opportunities to sell more product and cross sell other bank products. Probably what they didn’t realise was how risky (brand and liability issues) wealth management is.
By nature, banks are risk averse. Banks are now discovering that funds management and providing advice are both risky undertakings.
That is why a number have got out of manufacture and others are reverting to index funds. And for providing advice, they are bringing in very disciplined, process-driven solutions. Some are likely to get out of providing advice at all, as they see it as being too risky.
The risk averse nature of banks will limit their ability to vertically integrate. They will review their wealth management strategy and move to do those things in the value chain that meet their risk criteria.
Global institutions dominating the world is another furphy. In fact, many institutions that have tried to go global are now in retreat.
There are many examples of this, like Schwab and AMP to name just two. The reasons for this are that each jurisdiction has its own regulatory environment, history and culture. They are realising that they need country (jurisdiction) specific solutions. (Obviously there are exceptions to this.)
One common thread that I did pick up on my tour was that there was a growing demand for ‘independent’ advice, and that this was something the institutions could not do. As governments push the self-reliance line for people’s own financial well-being, the consumer is becoming more demanding.
As an aside, governments (in all countries) talk about ‘saving’ for retirement, not ‘investing’ for retirement.
So, in funds management, I see banks as either re-sellers of product, or index huggers. For providing advice, this will be done in a very disciplined process- driven way.
This type of advice giving will appeal only to a limited number of advisers and clients. (In the US, the registered investment advisers [RIAs] were spawned by the disaffected brokers out of the major wire-houses.)
In essence, my contrary view is that the banks may dominate some of the links in the value chain, but not all of them. They could dominate some market segments, but not all of them. So, they will be significant players not dominant players.
I would like to finish my article with a comment about distribution.
This will continue to fragment as consumers seek out advisers who can provide, in the perception of the consumer, consumer-focused advice. The advice-focused adviser will have a business not unlike that of accountants and solicitors. There will be suburban offices, mid size offices and large offices.
