An oversupply of providers and a declining adviser base may lead to a series of adjustments in the $900 billion wealth management platform market before it’s extraordinary potential is realised, with M&A activity and a race for operational scale set to re-calibrate the burgeoning sector.
According to Adviser Ratings the number of registered advisers has dropped 15 per cent since the start of 2019 and is tipped to fall even further over the next five years as educational standards and regulatory reform squeeze time, money and will from the workforce.
While the growth of platforms is assured due to their efficiency advantages over traditional wrap platforms, the contracting adviser force is a concern.
Merger activity in the platform sector has already begun; in March provider Praemium, with roughly $20 billion in funds under administration (FUA), acquired rival Powerwrap and its $9 billion of client money. In June, Xplan parent company Iress purchased the $6 billion OneVue – not a merger as such, but further affirmation that scale is key.
According to Neil Younger, CEO of mid-tier dealer group Fortnum Private Wealth, the investment platform market is due for a consolidation phase. After a rapid period of expansion, he says, retraction is inevitable.
“We’re in a natural cycle and probably some degree of contraction ahead is expected,” Younger tells Professional Planner.
Bear markets are historical drivers of consolidation. While equity markets have stabilised since the pandemic-induced volatility of March, Australia is technically in a recession and uncertainty abounds.
The industry superannuation fund sector’s own consolidation phase over the last three years would indicate that inefficiencies alone are enough to drive change.
Investment platforms are expensive to run, and margins are thinner after a price war that started two years ago. According to UBS, average margins compressed from 80 basis points to 57 bps in the preceding four years, while the average funds under administration climbed 5.6 per cent per annum.
Any consolidation moves will occur in the middle of a pitched battle between the newer providers like Netwealth, Hub24, Praemium, OneVue, Xplore Wealth and WealthO2, and the incumbents such as BT, AMP, Macquarie, NAB/MLC and IOOF. The clear trend is for the new players to feast on outflows from the old guard.
“You do ask yourself – is there room for all those players?” says Tom Reddacliff, a managing director at licensing and advice consulting firm Encore Advisory. “Surely there’s room for consolidation.”
Shades of scale
If wealth management platforms are to consolidate, the obvious driver will be scale as measured by FUA.
“Praemium buying Powerwrap speaks to that sort of consolidation,” comments Andrew Varlamos, co-founder of robo-style investment platform OpenInvest. “Powerwrap wasn’t even that small, it had $9 billion. Is that enough or do you need $20 billion to survive?”
Further to scale by FUA, change in the sector may come via scale by operations.
According to Shannon Bernasconi, co-founder and managing director of WealthO2, many of the larger platforms – including market darlings Netwealth and HUB24 – have high operating costs, while smaller, more agile platforms often run better, more efficient technology.
“The newer technology is fully integrated, so you don’t have people doing administrative roles,” Bernasconi says. “We don’t have staff in the operations sections, whereas a lot of the legacy architecture has older operating systems.”
Reddacliff says there’s merit in the idea that platforms that bring the next level of operational efficiency will thrive. There are “smart ways to compete”, he says, beyond increasing FUA.
“True scale is when you’ve got everything on one operating system. Someone like MLC, if you added all their operating systems up there’d be about seven or eight, and that’s not unique. CBA would be the same,” Reddacliff comments. “You need operating system scale.”
Another potential avenue for providers to strengthen their foothold would be to open up direct-to-consumer investment platforms. This sector is covered by robo-advice players like SixPark and OpenInvest, however, who go some way to bridging the gap between advised and non-advised Australians by putting people into cheaper, managed portfolio investment options online.
Through the looking glass
According to Reddacliff, there likely isn’t room enough for more than “three to five dominant players” in the wealth management platform space.
The next likely move could involve AMP’s MyNorth or BT’s Panorama platform, he reckons. Both the institutions behind these platforms have made moves to at least partially retreat from advice, yet the platforms themselves have considerable FUA and are highly coveted.
If BT was to get rid of Panorama it would want a considerable return on its rumoured $600 million spend, Reddacliff says. Overseas players like private equity powerhouse KKR would likely be “quite keen” to get their hands on it, he says, but may face opposition from the ACCC.