To put it mildly, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has not been a happy forum for the financial services industry so far.
The major banks and AMP have been badly bruised, and their shareholders have been wincing at the steady stream of revelations of unconscionable conduct.
But there are areas of the financial services industry that are actually benefiting from the Royal Commission.
The lurid tales of corporate greed, conflicts of interest and contempt for the customer coming from the Royal Commission are a huge boon to the “non-aligned” financial adviser market, which is growing as advisers move between licensees, from bank-owned and big-brand financial institutions (such as AMP) to the “independent” market.
While there is still debate on the definition of “independent,” the Royal Commission has so tarnished the image of bank-owned and big-brand financial advice, investors will be doubly determined to find an adviser that is independent – and professional advisers will be doubly determined to be able to say that they are independent.
This means, at the very least, not having any ownership links or affiliations with product manufacturers, not receiving commissions or incentive payments from product manufacturers, and not charging asset-based fees.
In January, a UBS analysis of Australian Securities and Investments Commission (ASIC) financial planner statistics for 2017 found that advisers from non-major financial institutions now make up 63% of the market, up 4.7 percentage points over the year. While adviser numbers were relatively stable at 25,501, “the shift away from major financial institutions continues,” said UBS. The revelations of the banking and financial services royal commission are likely to increase the rate of this shift – driving the growth of the independent advice sector, both advisers and the companies that provide services to them. And given that the industry itself has huge tailwinds – there is a growing need for financial advice, as more Australians reach retirement, and legislated superannuation growth – the non-aligned advice sector has all the conditions for growth.
Platform possibilities
In particular, these developments are good news for the $774 billion “platform” market, in which technology-based platforms allow financial advisers, accountants and clients to hold, transact in and administer a wide range of investments, across different asset classes and legal structures, for the benefit of Australian investors.
The platforms hold both superannuation and non-superannuation investments, and offer investors and advisers an efficient and transparent way to handle investment portfolios, with detailed reporting so that both groups can accurately monitor the investors’ financial and tax position, and the performance of their investments.
Platforms can handle a wide range of investments, including domestic and international shares, exchange-traded funds (ETFs), managed funds (often at cheaper wholesale rates), cash and term deposits, insurance products, and managed accounts, investment portfolios where the investor maintains direct ownership of the underlying investments, while having them managed according to a set investment strategy.
The largest platforms are Commonwealth Bank of Australia’s CFS FirstChoice, Macquarie Wrap and Westpac’s BT Wrap/Panorama, but the specialist platform providers are rapidly growing their business. There are four of these listed on the Australian Securities Exchange (ASX), namely Hub24 Limited (HUB), Netwealth (NWL), Praemium (PPS) and OneVue (OVH).
The Netwealth prospectus from November 2017 (the company listed in that month) stated that over the past four years, the leading specialist platform providers (Netwealth, Hub24, Praemium and OneVue) had seen their share of net funds flow (new business) in the platform industry surge from 3.6% to 32.6%, a trend supported by “an increase in the number of financial intermediaries that are not aligned with or owned by a major bank or large diversified financial institution.”
In March, figures from specialist financial researcher Investment Trends showed that while heavyweight incumbents Macquarie and CFS FirstChoice still collectively get 43.5% of net fund flows, the smaller players are very much making inroads into this dominance. Netwealth, for example, currently garners about 19% of new business, despite having only 1.8% market share of funds under administration (FUA) on platforms. Hub24 has lifted its share of new business to 9.8 per cent, while OneVue currently has 3.5%. As at the March quarter, Praemium – which also operates in the UK – had a record level of (FUA), at $7.8 billion. The specialist platform providers have also quickly established a reputation for better functionality and agility in response to adviser feedback.
3 companies to consider
So what stocks are worth a look? I like Hub24 and OneVue in this mini-sector. I think they stand out on valuation and income grounds – although the platform providers are not big dividend-payers, and currently there is no franking to speak of.
Hub24 (HUB, $11.08)
Market capitalisation: $657 million
FY19 forecast yield: 1.7%, unfranked
Analysts’ consensus target price: $11.85 (Thomson Reuters), $12.35 (FN Arena)
OneVue Holdings (OVH, 71 cents)
Market capitalisation: $188 million
FY19 forecast yield: 2.1%, unfranked
Analysts’ consensus target price: $1.09 (Thomson Reuters)
Praemium’s lack of a dividend hurts it in this comparison, while Netwealth looks to have run a bit too far after its outstanding market debut five months ago. Issued in the prospectus at $3.70, Netwealth shares opened at $4.88 and have moved to $7.20. Analysts now expect Netwealth (NWL) to retrace.
Netwealth will at least introduce fully franked dividends to the platform mini-sector. It its prospectus, the company stated its intention to pay a dividend equivalent to a payout ratio of 60%–80% of net profit. The implied forecast FY2018 dividend yield – based on the issue price of $3.70, for the period to 30 June 2018 – was 2.2%, implying an expected fully franked dividend of 8.14 cents. At the current price of $7.20, that projected yield shrinks to 1.1%.
Another financial services alternative that is free of Royal Commission baggage – and has strong tailwinds behind it – is annuities specialist Challenger (CGF), Australia’s leading provider of annuities. Challenger is benefiting in particular from the rising number of retirees: the number of Australians older than 65 is expected to swell by 75% over the next 20 years.
Challenger (CGF, $10.63)
Market capitalisation: $6.4 billion
FY19 forecast yield: 3.7%, fully franked
Analysts’ consensus target price: $11.75 (Thomson Reuters), $11.74 (FN Arena)
Challenger also potentially benefits from Labor’s proposed crackdown on cash refunds for excess dividend imputation credits, which could make – for self-managed super fund (SMSF) trustees in particular – an annuity a more attractive prospect than holding direct shares for the franking credit rebates. Challenger also has one of the fastest-growing funds management businesses in the Australian market, but its dominance of the annuity market is its main attraction: the stock is arguably the best way to get exposure to Australia’s growing wealth and the demographic bulge of increasing number of retirees.
All up, Challenger is a highly impressive financial services stock, and I think represents good buying on both valuation and income grounds.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.