Battle of the Banks Just Claimed its First Scalp

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A lot — but certainly not all — of investing tipping points come from new technological breakthroughs.

The steam engine, the microchip, the internet…crucial inventions that propelled civilisation forward.

5G is the latest potential game changer.

If you’re the kind of person who likes to get on new trends early, the ‘5G effect’ is something you should be looking at carefully right now.

It’s in the very early stages of rolling out across the world, but it’s already throwing up some very interesting investing ideas.

But today I want to return to a favourite theme of mine — the battle taking place in the banking world.

Because last week a tipping point of sorts happened here, too.

And when you realise how huge it was, you’ll understand why I’m so fixated on this story.

Big changes in the financial world are happening before your eyes. Changes that I now think are unstoppable.

These changes could create — or destroy — huge chunks of your personal wealth. Depending on how you invest through them.

Let me explain…

Download now: Three ASX fintech stocks taking on the banks (and winning)

Afterpay > AMP Ltd

Last week, the valuation of Afterpay Touch Group Ltd [ASX:APT] overtook that of the once mighty AMP Ltd [ASX:AMP].

Today, Afterpay is worth roughly $6 billion and AMP around $5.3 billion.

An astonishing switch in positions. But what’s even more amazing is the speed by which this happened.

Two years ago, Afterpay was trading at around $3 per share. Today, it’s been as high as $29 and is now at roughly $24.

Two years ago, AMP was around $5 per share, already 50% down from its 2007 highs. But as it turned out, further woes were still to come for AMP shareholders.

Now it’s at an all-time low of $1.74.

This dramatic turnaround for AMP happened in just two short years. But it’s been on the cards for a while.

And though no one had put the pieces together, the long slide to $1.74 was sealed over a decade ago.

I’ll explain more shortly.

The real question you need the answer to is: why?

Why has AMP, a long-standing bank with decades of experience, an established network, multiple business lines and a large customer base, performed so poorly?

And why has Afterpay, a single use product starting from scratch, overtaken them in value?

Today, I want to focus on what went wrong for AMP.

Because I think its story about to be repeated on a wider scale…

When the tide goes out

Warren Buffett famously quipped that ‘you only find out who is swimming naked when the tide goes out.

What he meant is that you didn’t know the risks in a company until they were tested by adverse conditions.

In 2007, AMP met a huge test in the 2007/08 GFC.

You see, AMP was a big player in the wealth management industry.

They were the licensee for a vast network of independent financial planning firms who used the AMP license — they were authorised representatives — for financial advice.

And before 2007, wealth management was rivers of gold stuff for AMP.

It was the days before new rules on conflicted advice, before the introduction of explicit fees and before the banning of hidden commissions.

AMP’s vast financial planning tentacles allowed them to reap big fees from advice, from super funds and from life insurance sales.

Then the GFC struck.

And the naked truth of AMP’s business model become apparent.

I was a financial advisor at the time and saw first-hand the bind AMP were in.

They were expensive.

I’d have new clients ringing me up every day begging to switch over as they’d just found out the huge fees they were paying for their AMP product.

These fees had mostly gone unnoticed for years. Mainly because the stock market was booming and everyone was too busy making a mint.

But when the stock market plummeted in the GFC and superannuation portfolios were roundly decimated, clients suddenly got very interested in how much they were paying.

They’d come and see my staff with statements in hand, fees circled in red pen. They didn’t like what they saw.

To win a client over was an easy sell, simply based on the thousands they would save in fees.

Every AMP competitor knew this from accountants setting up SMSF’s, to industry funds and even to fellow banking super products.

It was so obvious we had staff actively looking for AMP customers to switch around the clock.

Back then, AMP had a choice to make.

Cut their fees to stay competitive. Or do nothing and try to ride out the situation. They went for the latter option as a cut to fees would eat into their profits straight away.

A bad move in retrospect.

And now they’re paying the price.

As customers left in droves for cheaper products or SMSF’s, AMP ended up cutting fees far too late.

Today, they actually have one of the cheapest Wrap platforms on the market.

But it’s too little, too late. The horse had bolted.

The scathing Hayne Royal Commission report has cost AMP in monetary fines, loss of reputation and forced changes to their business model under duress.

They had the chance to reinvent themselves a long time ago, but were too wedded to current profits to make the necessary changes.

Now they’re being forced to.

Right now, they’re in the process of selling off their life insurance business.

Last week that sale was thrown into disarray as the New Zealand Reserve Bank stated that they were unlikely to approve it.

In turn, that has put at risk their dividend payout.

Which was the final straw that saw the value of AMP fall below that of Afterpay last week.

For AMP, the chickens are coming home to roost. And it’s another warning sign for bank investors everywhere…

This is just the start

You can see it with AMP, you can see it with Deutsche Bank and I think you’ll see it with more big-name banks soon, too.

There is something big bubbling beneath the surface.

Years of lazy profits, of little to no investment in technology, of constantly taking the trust of the customer for granted…I believe it’s now coming back to bite them.

The CEO’s and board members responsible have jumped out with their golden parachutes intact.

They’re never the ones to pay the penalty.

It’s the scapegoated financial planner, the unlucky middle manager or the fleeced customer who always seem to cop it.

And I’m worried ‘Mum and Dad’ bank shareholders could be next.

Be wary…

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Bank Busters! Three Aussie tech plays outsmarting the ‘big four’ banks. Click here to find out more.

About Ryan Dinse

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately…

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