Disintermediation: who are the new giants?

By Keith Barrett

As some of the big banks offload their advice businesses, a panel on disintermediation at the FSC Summit 2018 examined what the future might look like for the wealth management and superannuation industry.

The idea that vertical integration is on its way out, if not dead already, was one of the first issues discussed.

“I think the banks have decided that the experiment hasn’t worked for them, they’re not getting the return on investment that they would like for the businesses, and they bring with them a fair challenge in terms of managing those businesses,” says Scott Hartley, CEO of SunSuper. 

“I think vertical integration has been underchallenged since the FOFA laws came in. The best interest duty came in for advisers and that has essentially said that the old model of vertical integration and distribution through advisers is challenged.”

The regulator remains focused on how the industry develops, in particular around the creation of new partnerships to deliver advice.

“The main point is there are wealth management business that are offering services to customers, and they need to partner with other businesses to provide different things in different ways,” Helen Rowell, Deputy Chair at APRA, said.

“Our focus, as a prudential regulator, is how are they structured, what are the relationships, what are the interactions, where will the conflicts arise, and how do we make sure they’re being adequately managed and mitigated?”

The often discussed need for possible mergers across smaller funds means that all industry players must look hard at its deliverables — but it’s more than just 'returns’. Performance must be considered across a wide range of factors, which includes returns, risk adjusted returns, whether a body has delivered on its commitment to its members, and also area like the robustness of governance, and interaction with members.

The 'best in show’ approach that has been raised by the Productivity Commission also featured. While Chris Kelaher, Managing Director, IOOF broadly supported the move, he said that it was important that the criteria were widened.

“I think as long as we open up the system to contributions from all industries is a fundamental point. Everyone should have choice. You shouldn’t be restricted because of the occupation you’re in,” Kelaher said.

Andrew Walker, COO, BT Financial Group said that as the commission continues its work, it was too early to tell what tweaks might be examined to the proposed system.

“Things like the construction of the panel itself that decides, that’s going to be a hot topic. There’ll also be a conversation around, what are the second order effects or unintended consequences of the construct that we come up with. What does it do for fund liquidity? What does it do for investment horizons? How do we make sure transparency is a key driver of the system?”

A note of caution was sounded by David Neal, CEO of the Future Fund, who warned against the 'top 10’ approach impacting the fundamental purpose of these funds – which is long-term investment returns.

“I think it’s great that this debate is occurring, but this point about competing for four years to get on that list —that thought process starts to go to what would you have to do over that four years? For me, as a long-term investor that’s trying really hard to build a portfolio to generate long-term returns, any sense that you’re trying to be the best over one, two or three years is damaging to long-term wealth creation.

“Trust in the system would need to be generated that the selection process is based on the right criteria.”