Market Commentaries

Issue #8 : Market Commentary Financial Year 2014


2013 finished with a whimper, however, with a message of hope when the new government’s spokesman Arthur Sinodinos made comments indicating delivery of pre- election promises in December. Buyers, buoyed by new confidence, immediately came back to market in 2014, but not sellers, who remained cautiously on the sidelines.

The seller and market uncertainty continued well into 2014 with FOFA legislative review dates pushed out and Senate acceptance being dependent on independents and, critically, the Palmer United Party endorsement which was gained with the concession of the creation of Adviser register with underlying ownership transparency.

Mathias Corman on the 24th of October announced that the register will be up and running by March 2015.

Dealer to Dealer transfers continued to be frozen due to the unknown, or widely disputed, treatment and understanding of the “new arrangement” and whether or not conflicted revenue ( volume overrides) were grandfathered.

On the 29th of August the reform bill was passed by the lower house and the market re-acted immediately with sellers who had been waiting on the sideline for revenue certainty decided to execute their exit strategies and supply came back on.

However the reform bill was defeated in the upper house when Senator Jacqui Lambie left the Palmer United party and crossed the floor to vote against the FOFA amendments.

We then went through the short term uncertainty as the bill was defeated, the momentum that had begun continued and Forte saw a tripling of assets for sale within a 3 month period to the year end, continuing into the new year of 2015.

The artificial freeze, due to legislative uncertainty, was not truly lifted until the 16th of December when the FOFA Disallowance Bill passed clearly nominating the ability to transition grandfathered commission when moving to a new licencee.

Forte expects the supply and demand equilibrium to return to a “normal” market environment by mid 2015. Not only due to legislative certainty but also as we see previous “aligned” business come to the open market.

We also saw multiple reviews and reports commissioned by the government. The Murray Report or the Financial System Inquiry (FSI) held few surprises however on the release of the interim report Murray commented, “He would not be adverse to the banks being forced to divest their wealth management arms”.

This was a warning shot, in the midst of the CBA scandal, that we may still resonate in 2015.

Given the issues rising from within some of the bank advice distribution channels, it is believed that the big four’s appetite for greater participation in wealth management is sated for the foreseeable future, as a new understanding of risk is assessed. However, the existing domination of the majors has had dramatic impacts on the normal supply of businesses for sale. This is due to the majors retaining what they have acquired and selling internally- with many practices never being released nor coming to the wider market.

Furthermore, coming out of the FSI interim report were comments about the inadequacy of RG146 as an educational standard this was further addressed by the Senate Economic references Committee as well as the Parliamentary Joint Committee( PJC) inquiry to lift professional, ethical and educational standards. The industry as a whole welcomes the lifting of educational standards and the agenda is plain to see for all market participants.

ASIC’s report released in October in relation to risk or insurance advice, stated there was ” an unacceptable level of failure with 37% of advice failed to comply with laws relating to appropriate advise and prioritising the needs of the clients”. ASIC’s report found a high correlation between high commissions and low quality advice, however stopped short of recommending a ban on commissions on risk products. Again a warning shot fired that should not be ignored.

Dealer Group Activity

The new calendar year of 2014 started with a bang in January with the Financial Index Wealth Accountants (Financial Index) acquisition of Centric for $130m. Centric has 52 advisers servicing $4.1b FUA plus a $1.3b loan book. Financial Index moved to $7.6 Billion Funds Under Advice (FUA).

Financial Index soon, made an offer and gained an exclusivity period to the end of July, for Crowe Horwath, the fifth largest accounting firm in Australia, with an offer at 48 cents, which valued the business at $131m. The offer was accepted at 50 cents or $137m plus and a take up of debt put the total acquisition $200m.

Crowe Horwath had 2600 staff in 110 offices and increases Financial Index to $15b Funds Under Advice making it the largest non- aligned advisory group in Australia.

Financial Index is extremely well managed and has done in excess of 42 acquisitions over the years and has built an industry best practice transition and workflow model that extracts immediate value. Importantly they are culturally aware, with many sellers choosing to stay after transition and deal maturity.

Financial Index signalled they will continue their acquisition strategy.

The other very significant acquisition was SFG being acquired by IOOF at approx. 18.5 times earnings for $670 million. This acquisition positioned IOOF as the third largest financial advice business and one of the largest funds management companies in Australia. SFG has 182 advisers and IOOF expect synergy benefits of $20m by 2016. IOOF has a strong track record on integration and importantly an open architecture and acceptance of different Dealer models, cultures and value propositions.

IOOF owned Bridges also acquired Credit Union Australia’s advice arm CUA Financial Planning.

Clearview made a takeover bid for Matric Planning Solutions ( $7.75m cash and 15,432 shares at .81c). The merged entity will have 200 financial planners, Funds Under Management of $6.9 Billion and $148 million of annual premiums.

The Commonwealth Bank has not only experienced substantial brand damage to itself and Financial Wisdom but the scandal has also diminished the wider community’s confidence in advice and specifically aligned advice.

Customwealth’s licence was suspended by ASIC and placed in the hands of administrators.

Sentry Group also raised ASIC concerns due to SMSF advice provided by Connect Financial Services a Corporate Authorised Representative of Sentry. Recent unconfirmed reports state that Sentry and Wealthsure maybe merging with a third party participating as well.

Suncorp owned Guardian Advice had conditions imposed on it’s licence largely due to the appointment of ex representatives of the failed AAA Financial Intelligence and AAA shares.

AMP announced the closure of Genesys and the need for practices to transition to other licencees by April 2015. A retention bonus is offered if they remain within the AMP network.

It was reported in September that RI Advice practices were also unhappy with up to 30 practices looking to move. Additionally, rumours also circulate around most if not all aligned groups of general unrest and there is the expectation that we will see break away groups in 2015 emerge.

These events have raised the risk associated with Dealer Group acquisition’s and created a preference for Dealers with an employed adviser business model. The new risk assessment and the ensuing diminished demand has seen a reduction in prices for Dealer Group.

Fortnum bought back the 20% stake from ANZ to align with adviser value propositions and competitively positions them for what is expected to be rising consumer recognition and need of “independent” advice.

The first of the much anticipated consolidation and merging of Dealer Groups was seen with the coming together of Infocus and Patron. We expect to see more of this as Dealers seek scale benefits, and for some to explore future listing opportunities to access wider funding mechanisms and liquidity for succession purposes. Most recognize for true liquidity there is the need to be in the ASX Top 200 -a goal that many cannot achieve on their own.

Centrepoint Alliance raised $14m as it continues a very real turnaround story that marks their separation from the past and positions them well for the future. Additionally over the 12 month period their share price appreciated by 53.8% due to a profit increase of 142% from previous financial year loss of $7.8m to $3.3m profit.

IOOF reported a $101.3m net profit for 2014 excluding SFG.

Spring Financial nominated it will list and raise $4m and will be potentially capitalised at $34m. Spring Financial acquired Pink Diamond Financial Group and Moneytree Partners Group over 2014.

Listed Group MDS acquired SMSF group Sequoia Financial Group.

Prime Financial acquired a 20% stake in accounting and advisory firm MPR group

The All oRds appreciated by 1.4% for the calendar year but 17 industry stocks appreciated by 4.8% and this reflects a Financial Services recovery as we see the attraction of new capital both domestically and internationally.

Administration and Trustee Activity

This area continued to be active with Diversa’s acquisition of The Trust Companys superannuation trustee business from Perpetual for $2.65 m. The Trust company has superannuation funds of approx. $3.1B

Diversa also took a 30% stake in Tranzact Financial Services for $2.85m with an option to acquire the remaining equity.

OneVue acquired Computershare Fund Services and Super Managers Australia SMSF administration business. Additionally OneVue also acquired trustee MAP Funds Management. OneVue successfully raised $6.75m before listing. One Vue listed in July 2014 and acquired the multi asset manager Select Asset Management Ltd.

Managed Accounts listed on ASX with cash reserves of $6.7m.

Equity Trustees acquired ANZ Trustees for $150m.

Industry owned administration business Superpartners sold to Link Group for $170m.

Technology Activity

We have seen massive price appreciation of listed platform providers as well as new offers coming to market as the market confidently predicts the evolution from Masterfunds and Wraps to the new generation offers and the migration of massive Funds Under Management.

Rubik the owner of Coin continued its acquisition strategy with Easy Dealer Group for $2.7m with an option to acquire the parent group AMEE Easy Software Solutions at a later date. This was after its 2013 acquisition of Revex, a commission and revenue company. Rubik also acquired Stargate technology for $20 to $35m (depending on performance) providing them access to the mortgage broking industry. Rubik has also executed a binding agreement to acquire Infinitive Pty Ltd for an upfront consideration of $2.4m.

Decimal effectively listed via its acquisition by Aviva Corporation a natural resources and technology listed entity.

The technology sector is getting cashed up and needs distribution and we saw Hub 24 acquire Paragem for $2m and we will see similar transactions by technology providers in the foreseeable future.

Mortgage Activity

The mortgage industry enjoyed one of their greatest years on the back of property price appreciation. This was reflected in multiple corporate actions.

Genworth Australia listed for $583m.

Coles stated it is set to enter the $1.2 trillion mortgage business and follow international examples like Tesco, depending on licencing requirements.

Wesfarmers is to sell its premium lending insurance arm for $1b to Arthur J Gallagher and Co. This follows Wesfarmers selling its underwriting business to Insurance Australia Group in Dec 2013 for $1.8b.

Bendigo and Adelaide bank bought the $1.7B loan book of Rural Finance Corporation. Bendigo will have an equity raising of $230m to fund this.

Macquarie bank bought $1.5b of non- branded mortgages from ING Direct.

Bank of Queensland is set to acquire Investec’s finance and deposit book for $440m funded by equity raising.

The year started with the collapse and insolvency of mortgage broker Lending Solutions associated with Charthill Group.

Yellow Brick Road’s acquired mortgage originators Resi for $36m and also Vow for $17.6m. It now has a network of 700 brokers and a book in excess of $18b.

Astute Financial announced it was poised to recruit its 100th financial planner 3 years after launching it advice business

Finsure’s acquisition of Spectrum Wealth Advisers is an example of another broker coming into the advice space. Finsure has a network of 650 brokers.

The coming together of the two disciplines is no longer academic and the trend will continue at an accelerated rate.

Fund Manager Activity

Access Capital and Challenger merged to form infrastructure boutique Whitehelm Capital.

Cromwell Property’s acquired 50% of Oyster Property with $5m upfront and $2.5m paid over 3 yrs subject to performance. Oyster has NZ $650m of property assets.

Euroz acquired stock broker and corporate advisory business Blackswan Equities Ltd. Black Swan has $1.4 b in FUA.

Keybridge capital to acquire Auroara Funds Management for $4.3m. Aurora Funds Management entered into a E.U in Novemeber in 2014, they have $180m FUM.

Australian Unity bought Owenlaw Trust a Trustee for 2 mortgage funds with collectively $80m FUM.

Treasury Group merged with U.S based Northern Lights Capital Group ( 61.22%/38.78%) creating $50b of FUM. A subsidiary of the merged group drew down debt of$47m to acquire interests in Seizert capital partners and Aether Investment Partners.

There was the merger between Access Capital and Challenger to form the boutique infrastructure manager Whitehelm Capital.

AMP to acquire 19.99% in Chinese Life Pension for A$240m and making it the first foreign company in the world to acquire a stake in a Chinese pension company.

The Fund manager space has been extremely quiet but with Institutional dominance of distribution we expect significantly more merger and acquisitions in the future. State Street research report titled Frontline Revolution reported that 77% of Australian asset managers saw increased opportunities to make acquisitions in the next 12 months.

Financial Planning

As nominated in the introduction Financial Planning business to business transactions were subdued to levels never previously experienced by Forte.

In 2013 there was very little buyer demand as focus was internalised on the delivery of Annual Fee Disclosures and other FOFA compliance requirements. Buyer demand returned in December 2013 when there was some comfort that the government was going to quickly address the legislative uncertainty that had been created.

This confidence was not shared by sellers and few ventured to market given grandfathering concerns and risk associated with revenue maintenance which was potentially at risk by annual fee disclosure.

The immediate scarcity factor created was further exacerbated by the institutional hold of the majority of practices and their imperative to restrict businesses from coming to market and satisfying seller and buyers requirements internally.

The imbalance of supply and demand saw Financial Planning businesses return from the 2.5/2.75 recurring revenue multiples to rise to the historical equilibrium of 3 times recurring revenue.

Forte did not facilitate any transactions on an EBIT basis in this reporting period but EBIT was used almost exclusively for internal shareholder equity discussions. The transactions discussed in this paper that references EBIT are large and significant and are not “bolt on” acquisitions.

For the timeframe being reported on, supply or absence of sellers was at unprecedented levels, but in early August 2014 we started to see a trickle return to market and it may turn to a flood as sellers emerge from retention bonuses, grandfathering uncertainty and client retention concerns, and look to capture scarcity premium pricing.

There are many new buyers in the market coming from complimentary disciplines or industries ( mortgage, property, accounting etc) representing not only capital but organic growth and real options to not only continue the legacy created by sellers but to take the business to greater heights for staff and most importantly clients.

Many new participants see themselves as disruptors by taking on the banks and accepted business model norms. The new entrants are unencumbered with legacy technology and have great pools of potential clients to deliver advice services to.

Forte believes there will be significant practice movement from existing to new licencee’s when certainty on grand fathering is provided. This confidence is reflected by our own acquisition of “My Dealer”, which assists practises to select and migrate to the best Dealer specific to their individual needs.

2015 Trend Identification

The first expectation of 2015 is the mass movement from institutionally owned Dealer groups.

Forte Dealer Solutions has seen a substantial upsurge in the level of enquiry and engagement in the provision of assisting practices move to appropriate Dealer Groups. This level of activity is reflective of a recent IFA survey which found –

  • 18.7 % of advisers are not satisfied with their current dealer group
  • Over 30% of those that nominated they were dissatisfied where within Institutionally owned dealer groups and nearly a further 30% were within virtually integrated Dealer groups and a further 20 % plus of dissatisfied advisers were resident within aligned groups – or over 70% of advisers who nominated they were dissatisfied are likely to reside within the large Institution distribution groups.
  • 35% of advisers are considering reviewing their licensing arrangements within the next 12 months, with 53.6% of them likely to choose a “non-aligned”, “independently-owned” or “independent” licensee
  • 44.8% of advisers who have been with their dealer group for less than one year are with “independent” or “independently-owned” licensees
  • Self-licensed financial advisers have a satisfaction rating of more than 80%
  • The top 5 reasons for dissatisfaction was 1. Unhappy with ownership structure/model 2. Poor culture/work environment 3. recruitment by alternative AFSL/ better offer. 4 lack of product flexibility/control 5 restrictive approved product list/model portfolio
  • Over 20% nominated they might not leave due to uncertainty in regards to trailing commissions/ grandfathering
  • 36% of respondent nominated they had never reviewed their dealer group/ licensee arrangement.

This above data and the ramifications of its findings will dominate the Dealer landscape over the next 24 months. We will see significant adviser migration, on the other hand we will also see Institutional or aligned dealer reaction to this movement.

We will see new Dealer Groups emerge and others collapse.

It is rumoured that one bank that has reviewed its return on investment and is exploring sale options. However, the sale of billions of dollars of Funds Under Management is limited within the Australian domestic market especially when competitor concerns dominate decision making processes. Nevertheless, we are seeing considerable capital returning to the financial services arena. This is via offshore interests and domestic private equity. Additionally sale of assets is one strategy an additionally strategy is the potential listing of aligned advise groups which may appease adviser and consumer concerns re bank ownership and maypreserve balance sheet valuations.

Moreover, those that decide to stay in the Wealth Management or Advise business may decide they need to invest further especially in the area of technology or new generation platforms to placate advisers and consumers and raise their competitive value proposition. Many of the new technology providers are listed or plan to list and we will likely see more M&A activity in this space.

The share market will see more financial servicing listings as evidenced by Spring Financials stated intent and others will follow.

The All Ords rose 1.4 % from Jan to Dec 2014, yet the average growth of 17 financial services businesses was 4.8%. With legislative uncertainty and suppressed growth stagnating the market for the last 4 years we are now seeing the return of confidence and capital.

What Forte Asset Solutions is experiencing is seller’s preference to sell to non- aligned boutiques in observation of client’s best interest. This preference is being shown by those practices within aligned businesses as loyalty and goodwill has diminished.

The expectation for 2015 is that we will see the supply and demand equilibrium come back into a more historically accepted ‘normal’ market conditions. 2013 was reflective a buyers’ market with limited demand and plentiful supply. 2014 saw the swing to a sellers’ market with significant demand and limited supply.

FOFA and especially grandfathering certainty and the underlying implication to revenue now known we should see a significant number of businesses come to market. There may possibly be a supply overhang as those that have ceased selling in the last 3 to 4 years now have confidence in executing their exit strategy.

Additionally, supply over the last 4 to 5 years has also been impacted by the Institutional reluctance to allow internal business to transact externally or come to the open market. However over the last 2 years the large groups have downsized or fully removed their internal M&A teams and given the philosophical preference of owners whether they are aligned or non- aligned to sell to non- aligned businesses we will see substantially more supply coming to the open market.

There is great optimism for 2015 and the shackles of poor investment markets and legislative uncertainty have been discarded and we will see a market that is open to innovation, mergers and growth. 2015 promises to be the most active and fluid in the advice space than any preceding period..

Conclusion. There will be greater legislative and regulatory focus on educational requirements and appropriateness of risk advice. We are about to see the most significant adviser migration away from aligned Dealer groups and the resurgence if non- aligned due to rising consumerism, adviser registry and pursuit of client’s best interest and fiduciary care. There will be the creation of new Dealer groups and the end of some long term Dealer groups. We expect to see an increase in financial planning businesses coming to the open market, with widely available capital both domestically and internationally, new buyers from the technology, mortgage and industry funds sector. The trickle of activity in preceding years is likely to turn in to a flood of M&A activity and 2015 will see the face of the Financial Service industry change dramatically.