Australia | Jul 02 2019
In the fallout from the Royal Commission, investment platforms are suffering major funds outflows. Not all, however, are losers.
-March quarter sees funds fleeing platforms
-Independents gaining share from majors
-Near term margin pressures weighing on performance
By Greg Peel
At the end of 2018, Australian investment platforms were administering $811bn of investor funds. Platforms cater for superannuation and non-superannuation products and provide the ability to acquire, hold and administer a range of investments as well as provide comprehensive reporting to clients and advisers.
Of that total, the big five banks and AMP ((AMP)) boasted a net 83% of funds. The balance was held by smaller, independent platforms.
The $811bn total at the end of December represented a -$933m net outflow of funds over the December quarter. Outflows can occur for two reasons: either the investor wants to take funds out of the market, or the investor wants to remove those funds from that platform to either move them elsewhere or simply manage funds personally.
Funds outflows in the December quarter could be attributed to the fact the ASX200 lost -9% in the quarter, as global stock markets tanked, prompting selling. However the ASX200 rallied 9.5% to the end of March, yet March quarter funds flow data, the most recent released by ASIC, showed a net -$2.7bn in platform outflows.
That’s the weakest quarter since 1991.
Clearly it’s not about stock market performance. Rather it is about the Royal Commission, and all its ramifications. Not only are disgruntled investors bailing on investment platforms, in light of RC horror stories, the number of financial advisors on platforms is rapidly diminishing.
RC reforms have meant advisors have lost what were previously grandfathered commissions. In other words, a big chunk of income. Cause enough for more veteran advisors to call it a day. Moreover, as of January 1 this year advisors were required to satisfy new education standards, not only discouraging existing advisors but also raising the bar for any aspiring newcomers.
Over the five months to May, reports UBS, the total number of advisors exiting the market numbered 628 or -2.2%. The major financial institutions collectively lost 439, or -5%, reducing their advisor market share to 30%. With Westpac ((WBC)) set to exit from advice, losses can only grow. AMP and IOOF Holdings ((IFL)), the two biggest advisor groups, lost 99 and 21 respectively. Commonwealth Bank ((CBA)) and its funds management business Colonial First State lost 128.
Independent financial advisors lost 189, or -1%, despite an influx of advisors previously with the major platforms.
In the March quarter, a total of -$6bn in funds outflows was suffered collectively by the Big Four banks, Macquarie Group ((MQG)), AMP and IOOF. IOOF’s flows were actually positive, but net of ANZ Bank’s ((ANZ)) sale to the fund manager of its wealth management division (not finalised).
The Rise of the Independents
Independent platforms, by contrast, enjoyed $2.1 of inflows. The likes of Netwealth ((NWL)), Hub24 ((HUB)), Praemium ((PPS)), Onevue Holdings ((OVH)) and Xplore Wealth ((XPL)) are clearly gaining market share in the post-RC environment, Citi notes.
That said, total funds under administration (FUA) numbers for the independents was largely unchanged at the end of the March quarter from a year before, at $9.6bn. UBS notes specialist funds flow growth has dropped to 28% from 40%.
For the independents, it’s a matter of swings and roundabouts. While investor disgust with the majors is supporting market share gains, the majors have responded by cutting fees as competition heats up. On the other side of the ledger, regulatory reforms have meant higher costs, so margins are being squeezed from both sides. And RBA rate cuts put further pressure on margins on cash deposits, Morgans notes.
Analyst consensus has the independents continuing to win market share from the majors as the structural shift continues. But in the near term, ongoing advisor disruption and margin pressures appear set to continue. Citi thus has a Sell rating on Netwealth and a Neutral on Hub24, for the time being.
Morgans recently initiated coverage on both. Morgans is in line with consensus in expecting significant long term earnings growth, noting Netwealth’s advisor numbers have grown by 46% in the past two years and Hub24’s by 90%. This growth provides “embedded” FUA growth, the broker notes, as advisors increasingly use the platforms.
But near term margin pressures mean the stocks are currently trading at fair valuations. Hence the broker has initiated with Hold ratings on both.
Morgans’ initiations bring the number of FNArena database brokers covering Netwealth to six, split by one Buy (or equivalent) rating, four Hold and one Sell. The consensus target is $8.44.
Five now cover Hub24, split by one Buy, two Holds and two Sells. Target $13.59.
Morgans already covered Praemium, and retains a Buy rating (Add). Target 60c.
Onevue Holdings and Xplore Wealth are not covered by database brokers.
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