Australians are becoming wealthier at an unprecedented rate and the country’s fund management business is experiencing phenomenal growth, bu...

Australians are becoming wealthier at an unprecedented rate and the country’s fund management business is experiencing phenomenal growth, but a crowded marketplace is creating tough conditions for many wealth management operations – particularly those owned by the major banks. According to recent figures from the Australian Government Treasury, a record breaking stock market and the recent boom in house prices have increased average wealth by 81 per cent over the past five years, to the point that an average Australian is now worth A$316,000 ($238,000) and national private wealth stands at A$6.5 trillion. Driven by a national compulsory pensions scheme, under which employers must pay 9 per cent of an employees’ salary into a nominated pension account each year, inflows into the fund management industry are booming. According to the Reserve Bank of Australia, the managed funds industry grew by more than 50 per cent in the four years since June 2002 and total consolidated funds under management tipped A$1 trillion in the last year. But this rosy scenario masks some worrying facts for the major Australian wealth management providers. They operate in a highly competitive environment which is continually attracting new domestic and foreign players, and according to accountancy group KPMG, the wealth management operations of Australia’s big four banks – National Australia Bank, Westpac, ANZ and the Commonwealth Bank of Australia – are relative underperformers. In his recent analysis of the big four’s profit results, KPMG partner Andrew Dickinson claims that the banks are failing to add significant value to the wealth management operations they spent much of the early years of this decade building up. Three of them – CBA, Westpac and NAB – built wealth management operations through acquisition while ANZ entered a joint venture with Dutch bank ING. In the case of the acquisitions, the banks acquired what have been household names in Australian life insurance and investment – CBA bought Colonial, Westpac acquired BT in addition to Rothschild’s Australian operation, while NAB purchased MLC. According to KPMG, the scale and distribution expertise of the banks added nothing last year to their investment arms, whose growth did not match that of the rest of the industry. While the big four lifted earnings from their fund managers by 8.6 per cent, this result was achieved on a 16.1 per cent increase in funds under management to A$333.8 billion. “Yes they have contributed significantly to the bank profits, but they are doing this at a record time in the equity market,” said Mr Dickinson. “A 16 per cent increase in funds under management, given around 40 per uplift in the stock market is not really such a great performance. “It makes me ask the question how well equipped they might be in a downturn, because already they don’t seem to be growing their market share in a game which relies on scale and on inflows,” he said. A major problem for the banks is intense competition from companies such as AMP and Axa which have built large funds businesses on top of their traditional life insurance offerings. Macquarie Bank also competes in this space, as does Australia’s fifth ranked bank – St. George – which operates a popular platform called Asgard, used by financial planners. St. George’s funds under management rose 34 per cent to A$37 billion over the last half year, in stark contrast to the four major banks. The big four are also facing new competitors, such as the Packer family’s vehicle Challenger Financial Services and US player GE Money, which has rolled out its personal loans and credit cards to the middle market but which is also hunting for a partner to enter the wealth management market. “Everyone in wealth management is taking GE very seriously,” says Mr Dickinson. “They are very significant players in every area of financial planning they go into, and most of the banks already see them as competitors.” Challenger Financial Services has embraced Macquarie’s specialist funds model, marketing the funds to its base of customers, who originally came to the company for its simple pension annuities products. Challenge also recently purchased HSBC’s local asset management operation to add scale and diversity to its funds business, which went from losing A$10 million last year to a profit of A$24 million this year. All this competition is naturally good for the consumer, and affluent Australians are being wooed not only by these operators but by a plethora of brands from Citigroup to Aviva and Brisbane-based Suncorp Metway. Independent financial advisors also place the clients’ funds through a wide choice of up to 30 online investment platforms which include boutique fund managers as well as the major funds on their menus. The big four are also relatively new entrants in the private banking market, where they face a different set of competitors most visibly in the form of UBS and Citigroup. “This is a hugely competitive space and we’ve seen fees come down significantly because of that,” says Mr Dickinson. “I can see there’s going to be a further consolidation in the industry, and I think there is a lot further to go in terms of amalgamations among the larger players.”