Fund Management

Country Survey: Australia’s Wealth Management Sector Wanting to Mature

Lachlan Colquhoun Sydney 7 February 2005

Country Survey: Australia’s Wealth Management Sector Wanting to Mature

The number of millionaires is increasing faster than anywhere in the world, the country’s share market is at record highs, but Australia’s w...

The number of millionaires is increasing faster than anywhere in the world, the country’s share market is at record highs, but Australia’s wealth management and private banking industry is still comparatively under-developed. Over 2003-4, the number of millionaires (in US dollar terms) in Australia grew by 11 per cent to an estimated 117,000—above the world average growth of 7.5 per cent over the same period. According to the Australian Bureau of Statistics, the country’s total wealth now stands at around A$5 trillion ($3.86 trillion), or the equivalent of A$250,000 ($193,125) per capita in a society of 20 million. Shane Oliver, an economist from AMP, one of Australia’s biggest financial services firms, estimates the net wealth of Australians at eight times their disposable income, a figure he claims is the highest in the world. By the same measure, Japan is next at 7.5, followed by the UK and Germany at seven. But while the record high for the Australian Stock Exchange’s All Ordinaries index – up 20 per cent over 2004 — might have saved the local superannuation industry (pension sector) from embarrassment after a disastrous 2003, the buoyant market has only distracted attention from the relative immaturity of the wealth management industry. Part of the problem is the ongoing Australian obsession with investment property. A plethora of new lending products from banks, who have introduced so-called ‘equity’ loans where people can borrow against their equity in their homes to finance investment property, have combined with low interest rates to fuel a property boom which is only now running out of steam. Even so, the non-financial wealth of Australians is still double their wealth from financial assets. Wealth management was the buzz word among bankers in the early part of the decade as the so-called Big Four of Australian banks, Westpac, ANZ, National Australia Bank and the Commonwealth Bank of Australia snapped up funds businesses, but distribution proved to be the major problem. “We were all closing down our branches, and yet talking about how our branch network would distribute our new wealth management products,” said one senior banker from a Big Four bank, who did not want to be identified. “We didn’t get our channels right, and failed to connect with the great majority of potential customers.” Only around 10 per cent of bank customers are believed to take wealth management products, and yet the banks spent billions on acquisitions. The dream of cross-selling has failed to materialise. CBA bought Colonial First State, ANZ entered into a troubled alliance with the Dutch financial firm ING, NAB bought the MLC Financial Services while Westpac was the last to move, buying the old BT Funds Management and Rothschild’s Australian funds business. The CBA has the biggest exposure to the wealth management sector, with around 20 per cent of its earnings coming from the sector. Its wealth management arm is the country’s biggest, with a 15 per cent market share and A$50 billion under management. The buying continued in December, when HBOS (a British bank)—which owns Perth—based BankWest – used its St. Andrews subsidiary to buy the 10-year old financial services arm of the Royal Automobile Club of Victoria to support its growth on the populous eastern seaboard. The group needed "a wealth management company to support the retail growth into the east", according to St. Andrews’ Australian chief John Van Der Wielen. For the major players, one solution to the distribution problem has been the internet, with the emergence of the so-called “platform wars” as players such as Aviva and BT Funds Management – now part of Westpac – extend their electronic financial supermarket through their networks of tied advisors and independent financial advisors. There has also been a race on to acquire financial planning companies. Last year, Kerry Packer’s financial services interest Challenger Financial Services Group spent A$91 million on Associated Planners, which has about A$4 billion under advice. Axa Asia Pacific, in 2002, paid A$205 million for ipac Securities, which had A$4.7 billion under advice. Now, there is speculation that Macquarie Bank and Aviva will bid against each other for the country’s second largest network, Professional Investment Services. But despite the best efforts of the banks, the public have been slow to get the message about wealth management, preferring to rely on property and compulsory superannuation, where employers make a 9 per cent annual contribution. Superannuation, in fact, has been one of the saviours of the wealth management industry, with A$650 billion in the national kitty and inflows of A$40 billion a year. Legislation to allow people more flexibility in superannuation from July is also a major pre-occupation for wealth managers, who are beginning to market new schemes to their customers in the hope of getting customers to switch. In general, it is only impending retirement or an inheritance which prompts people to visit a financial planner, according to a recent survey from Citibank. The survey, of 520 adults earning A$75,000 a year or more, showed that 70 per cent of adults had a financial plan of some sort, which increased to 86 per cent for those over 55. But of those people with a plan, 40 per cent prepare their own plan, while only 32 per cent either see an independent advisor or one at their bank. The under 40s, however, either don’t seek advice, or seek it from their family or friends. It is this mindset the Australian wealth management issue must overcome if it to grow as fast as the nation’s wealth.

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