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Role of banks questioned

The Goliaths of the funds management industry - banks - have taken a fair bit of flak at an investment conference in Sydney this week.

Wednesday, March 12th 2003, 1:22AM

by Philip Macalister

Following several years of aggressive expansion and acquisitions banks now control about two thirds of all the funds under management in Australia.

However, serious questions are being asked about what this means for the financial services industry and investors.

Caroline Saunders, the head of research house Assirt, says one of the problems is that there is a big misfit between banks and fund managers.

She says banks are naturally risk adverse and have a tendency to cut costs to improve margins, yet they have been busy buying the risk takers - fund managers.

This has caused a conflict within some organisations. One of the results of this conflict is that "staff turnover has been extraordinary".

As a researcher the issue has got to the stage of asking not who has left an organisation, but who is left.

Another outcome of this risk mismatch is that banks tend to like low risk, safe products like index funds.

However, she asks whether this approach is more about meeting the banks' needs, as opposed to those of their customers.

Another to comment on the bank issue at the IFA 2003 Conference was former Colonial First State chief executive Chris Cuffe, who now heads up Kerry Packer's funds management business CPH Holdings.

He says the one of the big changes in financial services is that publicly listed companies own most large organisations and this ownership change has significant ramifications.

Because the company's are publicly owned and traded, return on equity is their key measure.

"Profit is the name of the game going forward."

He says since many of the acquirers "bought up at fairly full prices" they are now under pressure to earn an adequate return.

This has become harder because falling markets and poor funds flow are reducing the total amount of funds under management (and consequently associated fee income).

He believes there is a need for fees to come down in the current environment, however the big high street funds management organisations are the ones who are going to do it.

"I'm not sure they will be inclined to lead the charge on decreasing margins," he says.

Rather it is up to the smaller, boutique firms to start cutting prices.

« Cullen says no to fundSovereign takes regulation bull by the horns »

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