While different players in the advice chain jockey for their share of the pie, an equity researcher has identified the stark contrast between the valuation of platforms and licensees.
At the Professional Planner Licensee Summit, Veritas Securities director of industrials research James Tracey spoke about the gap between the valuation of listed platform companies and licensee businesses.
Tracey listed Diverger, Centrepoint Alliance, WT Financial Group, Count, and Sequoia as the five “pure play” licensees.
“Cumulatively they’ve got 2000 advisers and the market cap is around $250 million,” he said.
“You compare that to say, a prominent platform [like] Netwealth… There’s a question around the share of the pie.”
The market cap of Netwealth is valued at $3.3 billion, with around 3500 advisers using the platform. HUB24, which has a similar number of advisers using its platform, has a valuation of $2.1 billion.
“We’ve talked about superannuation being a $3.5 trillion industry – there’s lots of players, licensees, advisers, platforms, fund managers, super funds… what’s the fair allocation for the fee for service for all of that? The licensees have had a historically low valuation relative to the number of advisers they service,” Tracey said.
Of the five listed licensees mentioned, Tracey noted the average EBITDA multiples are only 5x versus three years ago, which was 6-11x.
“The valuation is down 30-50 per cent,” he said.
Tracey said the licensee market is more challenging for smaller companies.
“As interest rates have risen, small companies underperform the larger index by around 30 per cent, on average,” he said.
He added that discussions about consolidation have occurred within the industry because many small companies “probably spend about half a million dollars each in ASX-listed fees”.
“If they merged, there would be a fraction of that,” Tracey said.
“There’s an opportunity there, and it hasn’t happened.”
Tracey noted the decline of advisers post-Hayne Royal Commission which has seen the industry shrink from circa 28,000 advisers to 15,871 as of 22 June, according to research from Wealth Data.
Tracey pointed to similarities to the UK’s Retail Distribution Review, which led to a reduction in adviser numbers similar to what was seen post-commission in Australia before stabilising.
“Subsequently the revenues of the industry picked up 50 per cent once there was stabilisation,” Tracey said.
“If there’s a stabilisation now, which appears to be happening with the numbers – given that demand is increasing for financial advice – supply is lower than it has been, possibly forever.”
Divergerfication
Although the profit sustainability of licensing advisers has been questioned throughout the summit, licensee businesses seeking revenue-generating opportunities can tap into a trove of alternative services.
Some businesses, such as Diverger, have already begun providing alternative services.
Diverger managing director Nathan Jacobsen told the audience in Katoomba the firm is “quite diversified” now that it offers other services, and its revenue has improved.
Revenue from ordinary operating activities is up seven per cent at $64.15 million, and net revenue from operations is up 6 per cent at $15.68 million.
Additionally, it has seen continued growth in membership firms and the addition of 160 self-licensed practices, representing a client base of more than 311 licensed/self-licensed advice firms and 1352 subscribing accounting firms.
Diverger has a financial model that provides over 90 per cent of recurring revenue across five core services: adviser services; managed portfolios; membership; training; and technology/cyber support services.
Its strategy is to grow net revenue to $45 million in FY25 through growing scale, expanding its service, and driving technology transformation.
“The beauty of licensee businesses is good recurring revenue,” Jacobsen said.
Aside from compliance and regulatory risk, Jacobsen said Diverger is “reasonably” cash generative.
“We deliver good dividend yield, which is really great until interest rates go up 12 per cent and suddenly [investors] can get 5 per cent on a term deposit,” Jacobsen said.
“[Investors] really don’t want to take that kind of risk on a business. That’s just the reality, because they don’t look to our businesses for capital growth.”
Jacobsen added, however, that there is a huge amount of investment interest in the licensing sector due to various factors, including a $10 billion revenue pool withdrawal and highly fragmented large institutions closer to the aging consumer demographic.
Although Jacobsen has worked to scale up the business, including the rebuffed offer to acquire Centrepoint, he said scale isn’t the panacea to licensee ills.
“A lot of the talk is scale is the answer to licensing and I hope I haven’t misconstrued that because I don’t agree with that point of view,” Jacobsen said.
“Scale helps, but one of the challenges of licensee business models is they haven’t actually owned most of what they’re selling. They own the licence, and they’ve re-sold everything, and that is what has to change.”
Leveraging the trusted adviser status
One of the challenges of licensee business models is that they do not own most of what they sell, according to Futuro Financial Services managing director Paul Kelly.
“That is what has to change,” he said.
“It’s [about] actually owning more capability that you can leverage the trusted adviser status to help these businesses serve more consumers, not necessarily about more advisers.”
PictureWealth acquired Futuro earlier this year, which Kelly said would allow the licensees to deliver technology-based solutions and services to help advisers improve the performance of their businesses.
Kelly said they started looking at succession planning “five or six years ago” to give his business partner Dennis Bashford a dignified exit.
“That proved problematic… As a non-publicly listed equity, finding funding that will do that is a near impossibility,” Kelly said.
“We started talking to private equity… that’s a really interesting place to go to. I haven’t had a lot of experience with that, I do now. Some of it is absolutely frightening.”
