Advice Academy Working For IOOF
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IOOF Holdings ((IFL)) has confirmed a strategy based on advice. At the wealth manager's investor briefing no financial targets or changes were announced but management provided details about how it was tailoring its product offering. The company intends to grow adviser numbers and improve the efficiency of its advisers.
Recent flows have been encouraging and the company presentation was convincing but Credit Suisse retains questions regarding costs and operating margins. The broker believes the stock does offer value but deserves a price/earnings discount in the short term because of the uncertainty over the timing of cost savings, the ability to maintain the net operating margin as well as a risk of further divestments at low multiples. Upside risk emanates from mergers & acquisitions.
Citi also retains some concerns about the longer-term growth potential but takes some comfort in the confirmation that the second half is expected to be better than the first half, while equity markets are broadly supportive. The broker believes there is a lot to like about the stock but with the recent share price rally has lowered its call, downgrading to Neutral from Buy.
Citi expects some of the first half squeeze on margins to moderate and cost savings to assist, and assesses that the company has made a sound decision regarding its future, in positioning its business for the new regulatory environment. The company also expects longer-term benefits from managed accounts, new lower-cost multi-asset funds and envisages an opportunity to better engage with generations X and Y as they inherit baby boomer wealth.
Advice Academy is designed to improve the service and efficiency of participating practices. While offering products from the major operators, the company's non-alignment to major brands assists with its success, Credit Suisse observes.
The program coaches planning businesses and management sites. From its pilot, in the instance of one practice with around $250m in funds under management, average revenues per client grew by 41% and practice margins by 48%. While Morgan Stanley concedes these results may not reflect the dealer group average, this appears to be a good return on a $12,000 investment.
The program helps planners improve customer experience by setting and focusing plans across cash flow, investment and contingencies.
While execution remains the key, Advice Academy appears to be heading in the right direction and the broker considers it a proposition that delivers customers peace of mind. The program provides a road map and path to execution in partnership with business coaches over a period of 18 months. The program takes 18 months and IOOF is targeting 100 of around 1000 practices to enrol in the program.
The company emphasises that its advice-led strategy is a point of difference and Citi considers the upside promising. Platforms are to be further simplified and efforts made to improve technology.
Nevertheless, while the broker believes the growth options being taken are sensible, there is uncertainty in a rapidly evolving wealth management industry with the risks from "robo-advice" possibly being understated. Robo-advice involves replacing savings and investment advice that is face-to-face with online, automated guidance.
Morgan Stanley notes a lift in planner advice fees is on the back of a new model and, thus far, the benefits to margins from greater flows, has been negligible. In theory, greater client satisfaction and referral scores will create the opportunity for flows to improve over time.
Morgan Stanley believes the debate around managed discretionary account operators centres on whether the dealer group provides portfolio construction and product packaging via a platform, or the platform prevails as the packager of managed accountant solutions. The broker observes IOOF appears to be in the latter group.
Regardless, the business appears well-positioned to play a greater role in managed discretionary accounts via portfolio construction and packaging product fees across its various dealer groups, in Morgan Stanley's opinion.
There are four Hold ratings on FNArena's database and one Sell (UBS, yet to comment on the investor briefing). The consensus target is $8.59, signalling -5.9% in downside to the last share price. The dividend yield on FY17 and FY18 estimates is 5.8%.
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