The big deals of the Top 100

The agreement between ING and ANZ to form a joint-venture funds management and life insurance group, followed by Westpac’s acquisition of Rothschild Australia Asset Management, means Australia’s big five banks have now extended their traditional domestic market domination into wealth management.

The banks have bought into fund managers with access to third-party/independent financial advisers (IFAs) distribution rather than grow it organically or buy dealerships. They now hold a 45 per cent share of the $658 billion funds management industry and an even higher share of the new growth markets, master trusts and wrap accounts. By number of advisers they own about one-third of Australia’s financial planners.

In January, ANZ entered into a joint venture with ING involving joint product manufacture (including new master trusts) and funds management, but retaining separate dealerships.

Westpac bought Rothschild Australia Asset Management (which had no dealerships of its own) in April and then in August it purchased BT (which was just starting to establish a low-key dealership of its own to cater to its direct clients). Westpac had briefly considered establishing its own third-party/IFAs dealership — Catalyst Financial Group — but dropped the idea.

The process started in 1997 when St George bought Sealcorp and its dealerships and Asgard master trust, which had extensive distribution to IFAs.

The most dramatic moves were in 2000. In April that year the Commonwealth Bank of Australia (CBA) bought Colonial and its dealerships, master trusts (originating from Colonial, Legal & General and Prudential) and First State, a fund manager that had extensive distribution to IFAs.

A few months later (July) National Australia Bank (NAB) bought MLC, its dealerships, master trusts and fund manager (both the master trusts and fund manager having extensive distribution to IFAs). NAB then bought Deutsche Financial Planning and Deutsche Funds Management.

ING holds a majority 51 per cent stake in the joint-venture group. Both ANZ and ING claim they have equal say regarding the direction of the business.

Westpac and Rothschild combined their funds management businesses to form a new organisation. Rothschild was attracted to the growth options the deal provides and the ability to leverage off the strength of Westpac in this market.

For Westpac, the Rothschild purchase is part of a broad wealth management strategy that aims to fill the gaps in its distribution reach, deliver better scale and capabilities at the manufacturing and investment management end, and builds on Rothschild’s service model.

The new business will enable Westpac, which has 721 financial planners, to strengthen its distribution capacity by tapping into about 1,000 IFAs Rothschild already has a relationship with through its Premier Adviser Service.

Four months later, Westpac paid $900 million to buy the BT Financial Group from its US parent, the Principal Financial Group. This has made Westpac the fourth largest retail funds manager in the country with more than $30 billion under management.

Look Research principal Leo Wassercug notes that “whereas CBA, NAB and St George all bought fund managers which already contained several dealerships each, ANZ and Westpac have adopted a different strategy.

“ANZ, having had patchy success with its funds management activities, entered into a joint venture with ING with respect to funds management and product manufacture, while both groups have left their existing dealerships separate and intact,” he says.

Westpac on the other hand has bought two fund managers that didn’t have their own dealerships and have concentrated on forging relationships with IFAs and third-party advisers. BT has recently decided to establish its own dealership to advise its direct clients but this is small-scale.”

In funds management, scale means lower cost. But this often means greater difficulty in posting better returns. Banks claim to have a natural advantage in distribution, with their massive customer base giving them a strong platform to sell asset-management products.

The jury is still out as to whether the banks will prove to be the best distributors.

Wassercug estimates that leaving aside the ANZ and Westpac deals, which didn’t actually involve the purchase of dealers, the number and value of mergers and acquisitions deals this year is less than in previous years.

He observes that the continuing consolidation at the top-end of the industry is accompanied by continuing fragmentation at the bottom-end.

Among the consolidators, Wassercug finds they “have continued to acquire both financial planning and accounting practices but with varying degrees of success. Investor Group has done this profitably and Stockford unprofitably, though this may be starting to turn around. Harts has crashed into liquidation, but PIS and Garrisons have established Professional Accountants and Garrisons Accounting Group respectively.”

Looking at the wholesalisation of retail as an alternative to but not substitute for wraps and master trusts, Wassercug points to ipac’s deal with Tynan Mackenzie and Frank Russell’s deals with Associated Planners, Matrix and PIS.

BT is establishing a dealership to cater for its own direct investor clients while CPA Australia considered getting its own dealers (AFS) licence but dropped the idea,” he says.

Finally, Wassercug draws attention to investors (including consolidators) in dealerships without conducting a financial planning business under their own dealership.

They converted into running their own business directly under their own licence such as Deakin, Investor Group and Stockford.

He expects the financial planning industry to “remain dynamic and merger and acquisition activity to continue unabated as the industry is characterised by both consolidation (mainly at the top-end of the industry) and fragmentation (mainly at the bottom-end).

“Even within some dealers there is pressure for further consolidation, such as AMP Financial Planning’s new remuneration structure, which will encourage advisers to band together to take advantage of performance/volume-based remuneration.”