When National Australia Bank announced the sale of 80 per cent of its life insurance business to Nippon Life last year, while retaining 20 per cent, it was seen as a sign of things to come.In a review of the deal, Citi banking analyst Craig Williams said such moves would give local banks an opportunity to reduce the capital requirements of owning wealth management businesses, while keeping access to product distribution and advice.Williams was not the only commentator who suggested that others might follow NAB in selling significant parts of their wealth management businesses.However, a report on the major banks' wealth management activities in the latest issue of the Reserve Bank Bulletin concludes that the benefits of owning wealth management businesses "are sufficient that they are likely to remain part of banks' businesses for the foreseeable future."The report's author Theodore Golat, a member of the RBA's financial stability department, said: "The major banks' wealth management activities have not lived up to expectations for income growth and cross-selling opportunities and are generating lower returns than core banking activities."However, these operations are, in most cases, generating returns in excess of the cost of capital and have reduced the volatility of the banks' income through diversification."Bank's wealth management acquisitions resulted in major banks' wealth assets under management increasing from 13 per cent of the Australian total in the late 1990s to around 20 per cent today.According to Golat, the key motivation for these acquisitions was the opportunity for banks to cross-sell a broader range of financial services to their existing customer bases and to gain exposure to the fast-growing superannuation market.He said one way to examine the profitability of banks' wealth management businesses was to look at income growth. This is a relevant metric because part of the business case set out by the banks when acquiring these businesses was an expectation that the acquisitions would lead to faster income growth for the banking groups through exposure to the Australian superannuation system.However, wealth management income has grown more slowly than income from other activities since 2007. A key reason for this has been that margins on these businesses (measured by revenue as a proportion of assets under management) have fallen by around 20 per cent over the period.This narrowing of margins has been the result of more intense competition from other sectors of the superannuation industry - industry funds and self-managed funds - and also because of subdued growth in life insurance assets under management."Return on equity from the major banks' wealth management operations also appears to have been lower than those from their traditional banking activities," Golat said.The big banks have not achieved their cross-sell ambitions. Golat cited work by Roy Morgan Research, which showed that the banks have made no significant advance in cross-selling wealth management products to bank customers over the past ten years.Still, there are substantial benefits. Diversified businesses tend to have more stable income. There is evidence that wealth and banking earnings growth are negatively correlated (their cycles