A day after Commonwealth Bank announced the sale of its life insurance arm and flagged the potential spinoff its global asset management business, speculation is rife that it will put up the flag on its financial planning businesses Count Financial and Financial Wisdom.
CBA bought Count Financial in August 2011 for $373 million, creating one of the biggest financial planning army's in the country and Australia's largest network of accounting based advisory firms. Earlier this year its chief executive, David Lane, who had been running the business since its purchase by CBA, jumped ship to Perpetual.
CBA recently appointed a replacement, plucked from the bank's specialist home and mobile lending business, with a lesser title of general manager.
Well placed sources say Count has been a disappointment and that a clean up, including impairments is inevitable.
Michael Venter, CBA's bean counter for international financial services, who has been elevated to take charge of CBA's wealth division, will be responsible for the future of the financial planning operations. He has a lot on his plate, but eventually he will need to get around to this.
In response to a series of questions, CBA refused to comment on the speculation about Count and Financial Wisdom. When asked about the carrying value and profit contribution it said: "Count we consider profitable".
CBA is good at banking. It hasn't been so good at wealth management.
CBA boss Ian Narev told the media on Thursday: "You have to understand what you are really good at, and go hard for it."
To put it into perspective, CBA generated an impressive 16 per cent return on equity on a cash basis for the 2017 year. The business it sold on Thursday generated a return on equity of about 6 per cent, according to Brett Le Mesurier from Velocity Trade.
What makes the announcement on Thursday intriguing is the Colonial Wealth Global Asset Management business review won't include Colonial First State or the financial planning businesses.
This fuelled the speculation that CBA will exit Count and Financial Wisdom but keep that part of the financial planning business that directly employs planners.
A bank spokesman said CBA saw financial advice as core to its vision and "is not considering any strategic changes to its advice business".
Still an exit would allow CBA to continue to flog products such as the 20 year distribution deal struck with AIA to sell life products to its millions of customers. Whether this creates another set of conflicts, time will tell.
The shrinking of the CBA's wealth management division is being driven by competition, scandals, regulation and poor performance. It is also driven by the realisation that banks don't need to manufacture products to generate revenue from them.
Outgoing wealth boss Annabel Spring told the market on Thursday the revenue CBA previously got from distributions from life insurance would be largely unchanged.
"The right way to think of it with respect to the bank is that in essence AIA steps into CommInsure's shoes and the distribution arrangements and fees et cetera are very similar to the agreements in place," she said.
She said there would be no material change with respect to the results.
CBA's Annabel Spring Photo: Michele Mossop
"In Colonial again, AIA steps into CommInsure's shoes so nothing changes and as you know the distribution arrangements and commission arrangements with respect to advice businesses are highly regulated."
It is why CBA's mantra is now about return on equity, risk and compliance and focussing on the areas in wealth management where it can make a contribution.
And it's why investors and analysts welcomed its decision to ditch the life insurance business.
Banks owning life insurance has become a headache.
National Australia Bank became a first mover when it sold 80 per cent of its life insurance business to Nippon Life. Next came Macquarie Group, which offloaded its life business to Zurich.
ANZ recently confirmed it wants to sell its life insurance business. Suncorp is reviewing its life insurance business and AMP said it was "open-minded".
Until the CommInsure scandal, the sector was barely scrutinised and therefore managed to avoid the Future of Financial Advice reforms.
The scandal triggered an investigation into the $44 billion sector by the Australian Securities and Investments Commission, which found life insurance claims management systems are antiquated to the point where they don't readily allow proper reporting and that some systems don't support customer service and have poor data quality.
It was alarming reading, suggesting the systems needed modernising, which could cost a fortune at an unfortunate point in the cycle.
Against this backdrop, it has been grappling with a separate report into financial advice released by ASIC in 2014 that found 37 per cent of advice on life insurance was in breach of the law and almost half failed when high upfront commissions were charged. The figures were alarming, particularly given 82 per cent of the industry relies on upfront commissions.
It resulted in a code of conduct and a reduction in commissions. From January 1, 2018, upfront commissions will be capped at 80 per cent, then fall to 60 per cent in 2020.
When all of this is added to an environment of soaring lapse rates and rising claims, it explains why CBA and others want out.
Last year, AMP wrote down the value of its life insurance business by $668 million and warned conditions in the industry had worsened. Its CEO Craig Meller attributed higher losses to the increased public scrutiny of the industry following the media investigation into CommInsure.
The way investors see it is that when banks get back to their knitting, the returns will improve. Hence the support of the market for the likely demerger of CBA's Colonial Wealth Global Asset Management business which has $219 billion in assets under management.
CBA doesn't have a competitive advantage in global funds management and so the best it can offer is a few layers of management, which don't add value.
But it needs an army of planners and bank tellers to distribute the products. But after a series of scandals in financial planning, including in its Financial Wisdom division, it now realises it is better able to mitigate risks if it has control over those it directly employs.
Third party aligned planners and accounting groups are harder to control. If something goes wrong, the bank is on the hook. And therein lies the problem. That's why Financial Wisdom and Count might just be on the chopping block.