The world of financial services can be very peculiar. It attracts all sorts of market participants, many of whom see themselves as packagers and distributors, typically off the back of a well-known and trusted brand.
Why they risk their brand is beyond the comprehension of many except for the strategists or enthusiastic CEOs involved. They usually enter the new business lines in search of revenue diversification to satisfy shareholders, market analysts and growth egos.
When they get burnt, it becomes a dangerous step too far and they retreat. The CEO disappears, the CFO gets the gig and a new cycle of conservatism starts. Some examples of this, not all with failures, would be: Woolworths buying a hardware outlet (Masters); another grocer, say Coles, selling car insurance (why and for how long?); and then our banks, such as CBA, getting constantly distracted by their financial planning, life insurance and funds management activities.
And as proof of the distraction, this month CBA announced the departure of the CEO, the cancelling of bonuses and a possible sale of its life interests to match ANZ which is also exiting parts of the wealth chain. Who thought entering the wealth chain would be easy for a bank? What will the banking industry do next?
Possible solutions are to address outsourcing versus insourcing and secondly, severing relationships through listing such that the wealth business is only partly owned and, more importantly, has experienced professionals running it in an open market where lazy oligopolies don’t exist.
Westpac started the trend with the listing of its subsidiary BT Funds Management’s investment management activities. The only remnant of the past is the confusing nature of a name which bears little resemblance to the present shareholding and a confusing association with Westpac’s multi branding and ownership of the BT brand.
One doesn’t have to be that bright to work out the BTIM brand has to change to be identified as a standalone investment house with separate shareholders. Mark that call down to common sense but enjoy this column’s PR commentary that will come with it when it inevitably happens.
This cycle got me thinking about all the challenges in the life industry, the banking industry and the superannuation industry to see if there were any common lessons. There are – it’s called ‘core competency’. After countless cost blow-outs or other failures, the main board calls it quits and some bright young PR spokesperson informs the market the firm is exiting ‘non-core assets’ and focussing on ‘core strengths’. Thus, the cycle completes. Question is: why did they enter that market, what were they looking for and why couldn’t they execute on it?
They probably entered because they saw an opportunity to cross-sell a trusted brand to existing faithful clients, achieve additional revenue, aim for diversification of core revenue and in some, but not all, instances create an annuity income for very little effort. But they all misjudged the wealth sector – its subtleties and its ability to burn trust when in the wrong hands.
They always seem to put executives without proven history in wealth in charge and therein the trouble typically starts. The wealth sector is not an MBA text-book sector. It’s full of colourful personalities, idiosyncratic characters and nuances that don’t sit in the ‘pull the lever’ and all’s well style of the banking sector.
The fact for career ambitious executives is no-one with a wealth management background ever enters banking and rises to the top and stays the race. No-one ever has and it’s not likely to happen soon given the forecast sell-offs in wealth in banking. The banks’ wealth arms are passed on as portfolio learning curves for bankers and the problems start – they always start small but they grow.
The challenge is not immune to banking and wealth, though. The super fund sector also has its moments, although, thankfully, it happens less frequently and without as much dishonour for the main company.
But cycles are cycles and business seems to forget the past in searching for the future. Outsourcing versus insourcing is a very good example of this. When the industry funds all started they outsourced all their investments because they lacked scale, on the one hand, but, really because they lacked expertise on the other.
Likewise, it’s not a core reason for being a trustee. Investment is important but a trustee is not usually investment manager. Trustees have different responsibilities and different duties of care.
Nearly 25 years after the introduction of the Superannuation Guarantee and guess what? Many are building in-house teams that will inevitably fail because they are not industry best practice. The trustees are saving dollars and entering non-core activities. Read the script: in years to come the finding will be “diversification of managerial style works, low-cost options are available and we are focussing on core competencies”. Welcome to 2017 through to 2025.
Long live the cycle. The mutual life companies died and the industry funds arrived to replace them. They now look increasingly like mutuals themselves – some existing more for the sake of their management and trustee directors than their members.
As the third quarter of 2017 approaches we appear to be entering the late stage of the cycle for some banks in the wealth chain, increasing risks of survival for super funds and the rapid growth of nimble technologists who don’t have the same brand trust but do have the smarts to eat the lunch of the majors through customer focused simplicity and functionality.
The good news is that it’s an incredibly exciting time for those with common sense and strategies to remain focused on staying tuned to what they are good at.
Ian Knox is the managing director of Paragem. The views expressed are his own. This column welcomes contributions. Contact: iknox@paragem.com.au