Australia | Nov 10 2020
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Following the exit of the major banks from wealth management, specialist providers have stepped up but are likely to endure several years of increasing competition in price and technology.
-Specialist providers to benefit from software cycle upgrades
-Margin pressures persist for Netwealth and Hub24
-Perpetual Private able to benefit from advice disruption
By Eva Brocklehurst
A new era for Australia's wealth management industry is likely to be characterised by increasing competition, as platforms try to capture share and scale. Since the Royal Commission and the divestment of a large part of wealth operations by the major banks, transformation of the industry has been ongoing.
Following the exit of the banks from wealth management, independent financial advisers and specialist platform providers have benefited from the disruption. Nevertheless, they remain small and, JPMorgan assesses, will have to wear several years of increasing competition in price and technology.
Challenger ((CGF)) suspects that disruptions in the bank-aligned and independent advice market, which have created a difficult environment for domestic annuity sales, could now be easing, noting adviser movements appear to have stabilised.
Citi calculates the number of financial advisers in Australia continues to decline and advisers remain key to choosing a platform, with those leaving the vertically-integrated major institutions providing a tailwind for both Netwealth ((NWL)) and Hub24 ((HUB)). In this vein the outlook appears highly uncertain for AMP ((AMP)).
Citi observes the recent bid for AMP from US-based Ares Management highlights the prospect that tie-ups with other parties may be more suitable. While the offer is broadly in line with valuation, UBS, in noting AMP has surplus capital, envisages a wide range of potential suitors.
If the business continues in its present form, Citi finds it unclear as to the precise structure of the wealth management segment. The issue remains as to how AMP can provide affordable advice to the mass market under a more stringent regulatory and advice standard. Technology is likely to play an important part, the broker adds.
There will be increased reliance on software technology and a software upgrade cycle that will benefit specialist providers and this is the backdrop that JPMorgan believes will confront the industry, as the broker initiates broader coverage of the sector.
JPMorgan asserts the wealth management industry has been typically slow to upgrade software but rising costs and changing demands from end-use clients signal the need is becoming urgent.
Software providers such as Bravura Solutions ((BVS)) and Iress ((IRE)) have significant opportunity to participate. For the former, Macquarie agrees there are strong structural drivers but catalysts are required to improve the business clarity for investors.
JPMorgan initiates coverage of Netwealth with an Underweight rating, noting the benefits from industry tailwinds over the past few years but also the significant erosion of pricing power because of competition.
Macquarie, in upgrading Netwealth to Neutral from Underperform, has emphasised recently that while flows are beating expectations, platform margin pressures persist, while Credit Suisse assesses the valuation may be expensive but justified in terms of compound annual growth rates.
While Hub24 is also under the same pressure, recent acquisitions and organic growth have presented opportunities for margin expansion and JPMorgan initiates with a Neutral rating.
The company recently purchased Ord Minnett's portfolio administration and reporting services along with Xplore Wealth. The deals are expected to provide the company with better functionality and capabilities, while the main risk to earnings in the short term, Morgans assesses, is the impact from lower cash rates.
Citi's general analysis points to strong demand for advice because of the market volatility earlier this year, and while social distancing measures have affected the winning of new clients, in some instances this has also resulted in more time to consider financial decisions and investments.
Perpetual's ((PPT)) Private business has been able to benefit from the disruption in the advice industry and Citi believes this solid brand and proven model is likely to be highly attractive for those advisers considering a potential change to Perpetual.
The fund manager's Australian Perpetual Investments business is showing positive signs as well, with solid inflows into cash and fixed income products and some areas of improving investment performance. Citi assesses, with the impending acquisition of Barrow Hanley, the Australian business will soon become less significant for the overall group.
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