It’s difficult to say whether the leaders at IOOF – current or previous – would have done the deal to buy ANZ’s Pensions and Investments (P&I) business given everything that’s happened since it was first agreed to.
When asked directly, IOOF’s CEO, Renato Mota, who was group general manager of IOOF’s wealth business at the time, notes that assets do look different today than they did as recent as a year and a half ago, around the time revelations were tumbling out of the game-changing Hayne royal commission.
IOOF first inked the deal to buy the ANZ business, which includes RI Advice, millennium3, Financial Services Partners and Elders Financial Planning, in October 2017. The acquisition met its final approval hurdle more than two-years later, just a couple of weeks before Christmas.
“The strategy [IOOF based its acquisition of ANZ P&I on] is still relevant, but what’s changed is how you think about the governance of advice and superannuation – that changes how you think about costs, what you need to spend and where you need to spend it, so it changes the economics,” Mota explains, during an interview with Professional Planner at IOOF’s Collins Street headquarters in Melbourne recently.
The remaining big four banks (outside of ANZ) quickly distanced themselves from the heavily tarnished advice and wealth structures soon after the explosive royal commission findings were handed down. The banks either shut down or sold for next-to-nothing brands that in some cases had endured for decades and were treasured by many hard-working advisers. National Australia Bank’s MLC spin-off could be characterised somewhat differently to the other three and has yet to fully play out.
Buying wealth management businesses in the kind of fire-sale environment that has ensued might seem advantageous for acquirers, but nearly impossible to justify for compliance departments of scale seekers worried about what skeletons will appear while remediation efforts closely monitored by an emboldened regulator are in full swing. The $200 million indemnity CBA attached to the $2.5 million sale of its 35.9 per cent stake in the separately ASX-listed CountPlus – one of the few aligned dealer group sales completed post- Hayne – would have been unfathomable at any other time but accepted as somehow ‘normal’ in the current environment.
The ANZ deal came with its own contingencies; the company has since set aside a $233 million provision for advice remediation, and the eleventh-hour negotiation between the two companies delivered no less than a $125 million discount from the original $950 million sale price. In the end it’s possibly indiscernible who the winner will be in the context of this deal, although investors rewarded IOOF with a decent share price bump following the deal closing.
APRA’s failure to press its case before the Federal Court to disqualify Chris Kelaher and former chairman George Vernados certainly allayed some of the legitimate near-term risks associated with the company; whether the share market continues to harbor longer-term concerns over IOOF’s governance and duties to superannuation clients could be a question for the lawyers and market speculators.
For his part, though, Mota – a guy with a background as a deal maker both within IOOF for almost 17 years and previously in corporate advisory at Rothschild – is happy for the additional scale the ANZ platform and advice business brings to the business given the importance cost will play in the iteration of platform competition. Mota is also very realistic about the challenges that lay ahead for a so called “advice led” business still transitioning away from an old-world advice and product distribution model under the gaze of profit and revenue-hungry shareholders.
At the top of Mota’s mind is advice profitability and what models will work in the context of an institutionally-owned setting now and in the future.
Dealer group brands that proliferated in a world where institutions subsidised the cost of advice with product sales have come under close scrutiny by wealth executives across the board and IOOF is no exception.
“Is seven the right number? I’m not wedded to seven, four or 20. But our mantra is that if you’re going to be a standalone business, you must have your own value proposition. If your value proposition looks very similar to the guy next to you, chances are we’ll put you with them,” Mota says.
Bridges, Shadforth, Lonsdale, RI Advice, millennium3, Consultum Financial Advisers and Financial Services Partners are the enduring licensee brands within the IOOF stable, with the formerly ANZ-owned Elders Financial Planning already being subsumed into millenium3 towards the end of last year. Shadforth has an employed adviser model while the remaining six brands are self-employed advice licensees, although Bridges straddles the two models.
Mota recognises that self-employed is not the optimal structure to sit within a listed adviceled company such as IOOF, because profits in this model sit with the individual self-employed adviser under the licensee and are not captured by the licensee itself.
“On the one hand we are making all the investments, on the other we’re not getting the rewards or returns. What we are saying is we believe in advice and we want to invest in advice, but we also have an expectation to get returns from advice,” Mota says of the self-employed licensee or ‘aligned dealer group’ model.
Self-employed advisers do “belong” within the IOOF model, but how these businesses operate is in the process of being assessed and will certainly change, Mota explains.
“I still believe in the self-employed model – these are entrepreneurial businesses and generate a lot of ideas, but at the moment they are only being applied at a small scale,” he says. Self-employed representatives of licensees outside of the IOOF stable already plug into IOOF’s Alliances, TechConnect and Advice Academy services; those within IOOF’s existing stable of licensees will need to join together as well as leverage infrastructure of the broader group to enhance profitability.
FOLLOW THE MONEY
“Everyone should be aiming for an EBIT [earnings before interest and tax] margin of 30 per cent or more, no matter what. If you are a smaller business can you invest in the infrastructure required to get there? You need to be small and niche or large enough to build scale. I think what we’ll end up with is fewer larger practices that have the systems and that are governed the right way,” he says. Profitability is more easily captured within an ‘employed’ advice model and Mota holds Shadforth out as a poster-child example for the group. Shadforth had 166 advisers registered to its license in the middle of last year and has continued to grow in recent years, according to Professional Planner’s 2019 Licensee Owners list.
“The Shadforth model is one example where with salaried advisers we can deliver high quality outcomes,” he says. Mota told analysts during IOOF’s full year results announcement in August last year that this employed model, which he described as a private practice advisory business “corporatised in nature”, is capable of delivering EBIT margins of up to 50 per cent.
IOOF is currently in the process of working with the self-employed advice practices under its licensees to combine practices, streamline their processes and, where it makes sense, bring them into this corporatised model.
“The best thing we can do is be transparent about what we’re doing and let them make their own decisions,” Mota says of this process.
“It’s not our job to say ‘this is right for you’. It’s our job to say ‘this is what we believe in, this is how are we going to deliver it’, and help them make the best decision for them. In some cases that will be leaving the group, but hopefully for every adviser that leaves there’s another that likes what we’re talking about and chooses to join. I don’t currently see a lack of advisers wanting to join,” he says. Enhancing profitability of the licensee businesses through systematising the back office and support functions has been ongoing for close to the last four years within IOOF’s existing brands and for the best part of the last 12 months for the ANZ licensee, Mota says.
“The infrastructure of advice delivery can be one way, even if the brands and the advice propositions are all different… SOAs, fact finds, governance data and record keeping – they should all be done one way, not separate ways,” he says.
VALE LOSS LEADERS
The journey towards profitability is more advanced within the existing IOOF licensees which Mota says all “break even”; ANZ licensees on the other hand are subsidised to the tune of around $30 million a year, he says.
Decisions about which brands remain and whether any are subsumed into enduring brands – a-la the Elders situation – will be finalised within the next 12 months, Mota says.
Of all the ASX-listed wealth businesses in the process of transitioning old world advice models into the new world under the scrutiny of shareholders, IOOF has as good a shot as any, reckons Daniel Toohey, an executive director at Morgan Stanley Research.
“Clearly what you can see in IOOF is the capacity to run a dealer group model that can support a number of brands under a multi boutique offering, but there is no appetite from investors for lossmaking dealer groups,” Toohey, who has an “equal weight” rating on IOOF stock, says.
To get to where it’s heading, a lot of the planner businesses in the IOOF network need to be more professionally run, Toohey notes.
“The adjustment is under way, it’s not going to suit everyone to adjust and merge and become bigger SME specialist businesses – the support model [IOOF is building] will be more conducive to businesses like that,” he says.
“I think you’ll see three separate offers from IOOF to advisers: they’ll support those [advice practices] that are big and bad enough and want to be self-licensed who will be a buyer of their services but executing under their own license, they’ll have a professionally run licensee or licensees supportive of professionally run practices and for those that don’t fit or don’t want to migrate, merge and build the size and competency to be a vital and successful planning business. Then there’s also probably an option [for advisers] to sell out or transition to an employed model which will allow IOOF to capture better advice margins,” Toohey explains.
PLATFORMS IN MOTION
Outside of investing in and sharing the profitability of advice practices, IOOF’s platform and product efforts will be where Mota focuses his attention, in particular in the evolving platform market where the ANZ deal will put the company’s Pursuit platform in the box seat to compete with other institutionally owned platforms as well as the more nimble newer entrants. IOOF has had a perpetual platform consolidation project ticking over, which means its many platform acquisitions over the years have contributed to the now close to $100 billion it has under administration, placing it in the top-five in terms of size following the ANZ deal, which includes the acquisition of Oasis Funds Management and OnePath.
IOOF’s Pursuit is among the most expensive in the market, a UBS report published in November entitled Australian wealth management: The next wave of disruption, highlights. IOOF’s scale means the company has the scope to be competitive on price.
“The most valuable part of the value chain is advice, that’s the one that’s the piece where we are doubling down our investments but there are other pieces of the puzzle that are important as well, including platforms, SMAs, superannuation, IMAs – these are all just ways to enable advice, I believe the cost of all these will come down,” Mota says.
Just how the relationship between advisers and platform providers in the context of best interest duty obligations, particularly in light of the FASEA’s new Code of Ethics, remains to be seen.
IOOF will continue to make reasonable margins on assets invested via its platform (UBS estimates IOOF’s platform operating cost base at 23 basis points), but whether these adviser relationships are as sticky under an open architecture model has not been fully tested.
Shadforth is already a significant user of rival BT’s Panorama; Mota himself even wonders whether the Corporations Act definition of a platform as a product truly reflects how advisers use and interact with platform providers.
“It behaves as a service; [platforms are] used as a consolidation service that allows open architecture in respect of investments, the platform itself doesn’t determine investment performance or outcomes, it facilitates portfolio construction and consolidation,” Mota notes.
“If you are an adviser running a business in theory it makes sense to use one platform or consolidation service because it’s likely to mean you have one set of processes which is likely to mean advice delivery is cheaper and you can change less. However, the best interest environment doesn’t allow for that.
“If you need to use several platforms to meet client best interests then that’s what you should do, which may mean products and platforms evolve to allow advisers to optimise for what they’re trying to do, which is run a really efficient advice businesses,” Mota notes.
The extent to which incumbency of platform relationships versus price determines where advisers direct their clients’ investment assets in the future will play a large role in defining IOOF’s strategy in its advice and wealth services as it will for other institutions which continue to provide wealth services.
“Where the spoils are cut and shared in the value chain remains in transition,” Morgan Stanley’s Toohey points out.
“The longer-term risk is that the embedded product margins within the platforms are at risk, but the pace and timing of how that transition takes place is unclear,” he says.
Mota will look to capitalise on the strength IOOF has gained through the scale of ANZ’s P&I acquisition while the group’s advice models remain in transition.
“The challenge for IOOF is holding the line with the scale benefits captured on platform earnings while driving growth in earnings through capturing advice margins,” Toohey says.