Glennon attended presentations by two of the companies (HUB.ASX and NWL.ASX) making life difficult for the traditional financial wealth management powerhouses AMP and the big four banks. They sparked a strong belief that we need at some stage to be part of this emerging revolution. Judging by the share price reactions of both in the following days plenty of others share our view. This follows a sustained period of strong market outperformance by these stocks and their fellow upstarts, Praemium (PPS.ASX) and Onevue (OVH.ASX). We don’t own any of them at the moment on valuation grounds, but we will be watching them closely.
HUB and Netwealth are aiming to take advantage of the dislocation in the traditional private wealth market, aided by the fallout from the ongoing Royal Banking Commission. Both are independent platforms where financial planners can disburse their client’s money in varying forms – from superannuation to non-super wrap platforms and managed investment schemes. The lack of independence created by the vertical investment models of AMP and the banks, where the interests of the investor typically come second to the financial incentives of the advisor and his or her employer, is where the cracks are starting to appear.
The pressure this is creating is also highlighting the flaws in the legacy systems operated by the majors and the appeal of the slick new interfaces presented by the younger players. Westpac is spending hundreds of millions of dollars on a new platform for its subsidiary Pendal (formerly BT Investment Mgt) and is rumoured to be pondering the offshoot’s sale but it could be a case of too much, too late to get a financial return. The common view is that legacy systems cannot attain the required functionality by adding on. Thus, the major risk to the new players is likely to come in the form of competitive pricing (the banks are already concerned and are discounting to retain business), the need for further technology spend to stay ahead of the pack and surety of compliance (particularly the highly topical screening of SMA operators for qualification and capability).
It is early days of course. Netwealth manages just under 2% of the market’s funds under advice, HUB even less at 0.8%.
Of course inertia can be a hurdle (planners too lazy to take the onerous step of moving their client to a new platform) but the market is growing strongly and the share of HUB and NWL in that growth is much faster than their current standing. HUB estimates it is taking around 11% share of market growth currently, second behind Macquarie Group and Netwealth. Anecdotally the HUB CEO Andrew Alcock reckons there is a strong desire amongst numerous large advisor groups he knows that want help finding ways to disassociate themselves with the banks. It will be a complex process either way.
HUB forecast market growth of 10% in personal investment, 6% in superannuation, 11% in platforms and 35% in managed accounts. It reckons independent advisors represent 66% of that growth. That insinuates huge potential growth as non-independent advisors switch across.
Both HUB and NWL are more nimble than the banks and profitable at a much lower level of FUA. They have next generation technology and are, as mentioned, independent. Both are profitable but NWL is larger and therefore has better scale benefits than HUB at this stage. Regardless, both are trading on FY20 PE Ratios of somewhere between 45x-50x earnings.
This story is no different to the internet disrupting traditional retail; digital and mobile comms affecting media or even the NBN eating away at Telstra’s legacy base. The world has changed in Australian financial planning and the rate of deterioration for the major players will only accelerate from here. We will be watching for the right time to play.
Meanwhile, Glennon may not own HUB24 but the Glennon Small Companies Portfolio is available on the platform and has been for many years now. We certainly endorse the technology and service as first class.