After years of discounts and alternative arrangements in a fragmented advice market, wealth management consultancy Finura Group predicts a “significant pricing reset” from advice tech providers over the next 24 months.
Releasing its annual wealth tech predictions, the group expects a shift in product distribution strategy.
“A fragmented advice market has given rise to substantial discounting and reseller arrangements between software companies, licensees and IFA [independent financial adviser] ‘communities’,” the 2024 ‘Australian Wealth Tech Predictions’ report said.
“These make little commercial sense. Discounts are now expected rather than earned. Due to the reduced market for advice tech, software development costs have significantly increased. Therefore, to meet the expectations of improved product experience, such as utilising AI, companies will have to allocate more resources towards R&D [research and development] spending.”
In a webcast hosted by the firm on Monday, Finura joint managing director Peter Worn said it’s taken time for software companies to learn how to sell to a changing market that is dominated by a few large-scale players.
“Particularly for businesses that have a lot of history and heritage and potentially used to sell a lot to the banks, they’re finding themselves selling to independent financial advisers which is a very different proposition,” Worn said.
Worn said there’s a perception that software is linked to high profit margins – which he adds is true to an extent – but the current reality in the advice space is the opposite.
“When you’re selling software into a complex market and with users that require a lot of support… those margins simply aren’t there and we can see that reflected in a lot of earnings calls from companies like Iress and others,” Worn said.
“We think it’s going to be difficult for licensees of medium size and smaller to negotiate an aggressive discount in the market because those margins just aren’t there. No one wins in the sector if the software companies aren’t making much money because there’s no money there for research and development.”
A new wash
After the proliferation of artificial intelligence (AI) technology last year, the group anticipates the rise in “AI-washing” with companies advertising their products using AI even if it applies minimally or not at all.
“We repeat our view that AI is a feature, not a product, and like Microsoft Copilot, we expect to see AI features become more common in wealth tech,” the report said.
“Even companies with little to prove will find it hard to resist talking about the AI story. In their recent AGM, Netwealth mentioned AI twenty-one times. We’re already awash with startups saying they are AI companies. Many of these solutions will vanish as fast as they appear.”
The report said a company using the .ai URL suffix is a “red flag” and, in a separate prediction, that “AI mania” will over-promise and underdeliver for advisers.
Worn said many of these companies will aim to latch onto the AI theme to attract further capital.
“This doesn’t impact users of the software so much, but it impacts investors and the reason we put this here is there is a disproportionate number of financial advisers in Australia that actually invest in local advice tech solutions, and they do it with the best intentions,” Worn said.
The firm predicted last year there would be less “foreign raiders” trying to enter the Australian market and the 2024 report noted there was less “noise” from overseas players.
“Reduced adviser numbers (with no clear rebound in sight), regulatory uncertainty (which still exists) and trouble in their home operations were the main factors,” the report said.
During the webinar, Worn said there was no entrants into this wealth market of any sort of significance, nor did any of the incumbent foreign players make any inroads into the Australian market.
“The [local] incumbent providers of platforms and technology are maintaining their market positions quite strongly,” Worn said.
“Even Iress, despite some of their challenges, have actually grown their market share in the last 12 months.”
The group also noted the uptake of client portal usage by advice firms, which the Finura ‘Tech Health Benchmarking’ survey found was the number one area practices wanted to invest in.
“A lot of that has been driven by cybersecurity – advice businesses are really starting to listen,” Finura head of consulting Danni Le Grande said.
“We always bang on about stop emailing your clients advice documents and fact finds. You’re going to [need to have] a client portal to securely store that information.”
The firm touted a perfect six out of six score for its 2023 predictions, which also included the arms race for platforms heating up, more institutional funding into digital advice, increase of AI usage in the advice process, and a tough year for wealth tech startups.
Noting that the firm’s perfect score for its 2023 predictions might have been due to a lack of making riskier calls, in an attempt to make a bolder call for the year the group believes private equity may swoop in to take struggling listed wealth players off the market.
“For several years, we have seen a number of key wealth and technology players track sideways or decline on the ASX,” the report said.
“In 2023, HUB24’s and Netwealth’s performances were up 36 per cent and 28 per cent, respectively. In contrast, we saw significant share price instability from Iress, Praemium, Link, Insignia, AMP and Bravura. If you had bought a basket of these businesses, you were down 33 per cent in 2023.”
Noting KKR taking on CFS, as well as Link Group’s takeover bid by Mitsubishi UFJ Financial Group in December, Worn said there could be more movement for listed companies trading cheaply on the market that require a “brutal” transformation which can’t be done within the constraints of quarterly reporting to public shareholders.
“The public markets don’t give you a lot of breathing space to undertake long term renovation of a business,” Worn said.