Why Independence Makes You Money

Richard Hemming

Under the Radar’s mantra is independence, which is what you want from other advisers. We run through a number of stocks that should benefit from Australia’s Royal Commission into Banks.

VERTICAL IS NOW A DIRTY WORD (IN BANKS)

Now that the banking royal commission is in full swing it’s clear that one of the big problems is the “vertical” integration model which allows the big banks and the likes of AMP to push their own products down the throats of unsuspecting customers.

Clearly change has been afoot for some time. Increased capital requirements from APRA in the past two years has already been forcing banks to divest “non-core” operations like wealth management. CBA is selling Colonial First State, NAB this week said MLC is on the blocks. But this disguises the fact that there remain many financial planners who will be tied in to “manufacturers” of products and platforms such as AMP and IOOF to name a few.
 

picture of four banks and Australia Coat of Arms
 

The game is definitely changing. We’ve seen it before. In the aftermath of the Donald Trump presidency, subscriptions of reputable news services have gone through the roof. People want independence! This includes investors, an increasing bunch of whom in Australia are retiring and need the type of financial advice that ensures they don’t have to go back into the workforce (at the very least).
 

LOOKING FOR INDEPENDENCE

Which brings us to those small caps that are listed on the ASX and service those “independent” financial planners. Specifically, I’m interested in stocks that can take advantage of this inundation of demand for financial advice which is independent of cartel like behaviour. You know, advice that can help you make money!

AUSTRALIA HAS THE FOURTH BIGGEST RETIREMENT SAVINGS SYSTEM IN THE WORLD

A good place to start is some of the product and software providers at the small end of town. Although, by the look of it, these stocks are quickly moving towards the big end. After all, Australia has the fourth biggest retirement savings system in the world. Britain is going the same way as Australia after financial advice reforms, so many of these companies are doing the same thing over there, which has boosted their earnings growth.

BRAVURA WORK WITH COMMONWEALTH SUPER

Bravura Solutions has been in the market for a number of years as a leading provider of software for wealth managers. The stock was beaten up in the financial crisis after which I became interested in 2012, but so did private equity. This stock was taken private and then re-floated by private equity and it’s now worth well over $600 million. It’s a great business, but trading on a PE of over 35 times it looks expensive, even though it has just won the plumb Commonwealth Super Corp contract, which covers some 700,000 civil servants across 11 super schemes.

HUB LIVING UP TO ITS NAME

Then there is HUB24, which has more than doubled in the past 12 months and is now worth over $700 million. Its business is based on a platform, which gives investment advisors and financial planners all the tools they need to manipulate and manage their customer relationships.

Like Bravura, HUB24’s business model is capital light, which means it doesn’t need much capital to generate a return. Consequently its return on equity is very high at just over 40 per cent, although it’s noteworthy that the stock has only just turned profitable, even though it’s been listed for over a decade.  We think that even considering its high ROE this stock is expensive, trading on a sales multiple of over 11 times.

THE UPS AND DOWNS OF PRAEMIUM

Then there is Praemium, whose board and management could have achieved new soap operatic heights on the ASX after the dismissal of its CEO followed by his reappointment by a new board in 2017. After a series of disappointing results the stock roared back to produce a stellar first half result in fiscal 2018, but what next? My ardour has cooled because this stock trades on a sales multiple of 8 times, which is approaching HUB’s.

AUSTRALIA IS PLATFORM HEAVY

The point needs to be made that the world is over “platformed” (not a word) and with over 20 competitors, Australia is platform heavy. The competition in this space is fierce, and the coming shake-out of the large financial adviser groups may trigger a consolidation.

CENTREPOINT ALLIANCE: DON’T TELL US ABOUT ENFORCEABLE UNDERTAKINGS

One stock that is interesting is Centrepoint Alliance, which provides a licence umbrella for financial advisers as well as services such as compliance monitoring, training, provision of technology and third-party platforms.

The stock has fallen on hard times and is down 40 per cent in the past six months or so and looks exceedingly cheap. The good news is that newly minted ex-military CEO Angus Benbow is fired up about the group’s prospects, considering the current Royal Commission into the Banks: “We’re entering a strategic reset and the Royal Commission is a good backdrop. We’re looking to attract more advisers, but I stress, the “right” advisers.”

Ever since I went positive on this stock some five years ago the group has been working through one of ASIC’s “enforceable undertakings” so this company should know what it’s like to be under the gun, so to speak. But in Centrepoint’s case the gun is firing much less rapidly these days. Most of the legacy claims relate to the financial crisis and the six-year statute of limitations has given the company much needed breathing space. Unfortunately for the likes of AMP, this isn’t the case.

VERTICAL IS NOW A DIRTY WORD (IN BANKS)

Now that the banking royal commission is in full swing it’s clear that one of the big problems is the “vertical” integration model which allows the big banks and the likes of AMP to push their own products down the throats of unsuspecting customers.

Clearly change has been afoot for some time. Increased capital requirements from APRA in the past two years has already been forcing banks to divest “non-core” operations like wealth management. CBA is selling Colonial First State, NAB this week said MLC is on the blocks. But this disguises the fact that there remain many financial planners who will be tied in to “manufacturers” of products and platforms such as AMP and IOOF to name a few.

The game is definitely changing. We’ve seen it before. In the aftermath of the Donald Trump presidency, subscriptions of reputable news services have gone through the roof. People want independence! This includes investors, an increasing bunch of whom in Australia are retiring and need the type of financial advice that ensures they don’t have to go back into the workforce (at the very least).

LOOKING FOR INDEPENDENCE

Which brings us to those small caps that are listed on the ASX and service those “independent” financial planners. Specifically, I’m interested in stocks that can take advantage of this inundation of demand for financial advice which is independent of cartel like behaviour. You know, advice that can help you make money!

AUSTRALIA HAS THE FOURTH BIGGEST RETIREMENT SAVINGS SYSTEM IN THE WORLD

A good place to start is some of the product and software providers at the small end of town. Although, by the look of it, these stocks are quickly moving towards the big end. After all, Australia has the fourth biggest retirement savings system in the world. Britain is going the same way as Australia after financial advice reforms, so many of these companies are doing the same thing over there, which has boosted their earnings growth.

BRAVURA WORK WITH COMMONWEALTH SUPER

Bravura Solutions has been in the market for a number of years as a leading provider of software for wealth managers. The stock was beaten up in the financial crisis after which I became interested in 2012, but so did private equity. This stock was taken private and then re-floated by private equity and it’s now worth well over $600 million. It’s a great business, but trading on a PE of over 35 times it looks expensive, even though it has just won the plumb Commonwealth Super Corp contract, which covers some 700,000 civil servants across 11 super schemes.

HUB LIVING UP TO ITS NAME

Then there is HUB24, which has more than doubled in the past 12 months and is now worth over $700 million. Its business is based on a platform, which gives investment advisors and financial planners all the tools they need to manipulate and manage their customer relationships.

Like Bravura, HUB24’s business model is capital light, which means it doesn’t need much capital to generate a return. Consequently its return on equity is very high at just over 40 per cent, although it’s noteworthy that the stock has only just turned profitable, even though it’s been listed for over a decade.  We think that even considering its high ROE this stock is expensive, trading on a sales multiple of over 11 times.

THE UPS AND DOWNS OF PRAEMIUM

Then there is Praemium, whose board and management could have achieved new soap operatic heights on the ASX after the dismissal of its CEO followed by his reappointment by a new board in 2017. After a series of disappointing results the stock roared back to produce a stellar first half result in fiscal 2018, but what next? My ardour has cooled because this stock trades on a sales multiple of 8 times, which is approaching HUB’s.

AUSTRALIA IS PLATFORM HEAVY

The point needs to be made that the world is over “platformed” (not a word) and with over 20 competitors, Australia is platform heavy. The competition in this space is fierce, and the coming shake-out of the large financial adviser groups may trigger a consolidation.

CENTREPOINT ALLIANCE: DON’T TELL US ABOUT ENFORCEABLE UNDERTAKINGS

One stock that is interesting is Centrepoint Alliance, which provides a licence umbrella for financial advisers as well as services such as compliance monitoring, training, provision of technology and third-party platforms.

The stock has fallen on hard times and is down 40 per cent in the past six months or so and looks exceedingly cheap. The good news is that newly minted ex-military CEO Angus Benbow is fired up about the group’s prospects, considering the current Royal Commission into the Banks: “We’re entering a strategic reset and the Royal Commission is a good backdrop. We’re looking to attract more advisers, but I stress, the “right” advisers.”

Ever since I went positive on this stock some five years ago the group has been working through one of ASIC’s “enforceable undertakings” so this company should know what it’s like to be under the gun, so to speak. But in Centrepoint’s case the gun is firing much less rapidly these days. Most of the legacy claims relate to the financial crisis and the six-year statute of limitations has given the company much needed breathing space. Unfortunately for the likes of AMP, this isn’t the case.

About the Author

Richard Hemming

Investment analyst and Editor of Under the Radar Report

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