Advice in 2021, part 3: structure of the industry

NAB’s sale of MLC in August may have been the final goodbye for the big four banks in the advice industry, but the suitor that was waiting in the wings - IOOF, who has now swallowed up two of the big four’s advice arms - suggests vertical integration may be alive and well in the sector yet.

While the institution has outlined ambitious plans to cull unprofitable advisers and make large-scale technology investments to boost the efficiency of its sizeable adviser force, many remain unconvinced of IOOF’s strategy to double down on institutionally aligned advice.

At the same time, AMP - the other major institution left in the game - has signalled its openness to takeover offers as it struggles with the fallout of its own advice reboot strategy.

“AMP and IOOF, whether they survive or what they look like, who knows?” CountPlus chief executive Matthew Rowe said. 

“I think AMP is in a bit of trouble and my only comment about IOOF is it’s a big acquisition they've made and they’ve paid a lot of money for it, so they're going to have to make it work. They’re going to have to find a lot of cost synergies and expenses to be stripped out of the business.”

However, IOOF’s attempts to woo MLC advisers with cut-price dealer fees seem to be winning the day so far, with the institution having secured the majority of advisers from MLC dealer group Godfrey Pembroke and managed the transaction with minimal leakage of practices to other groups.

“We and other groups we got inundated with advisers when the [sale] announcement was first made saying they wanted to get out of institutionally-owned [groups],” Sequoia Financial Group managing director Garry Crole said.

“As we talked to them about it they were interested, but as time went on and IOOF realised there was going to be massive leakage, they’ve come in with prices that are not commercial and the only reason they can do that is because they’re subsidising it.”

With listed platform provider HUB24 having also taken a significant stake in advice group Easton Investments late in 2020, Mr Crole believes that while it’s currently less popular than it has been, vertical integration is likely to have a renaissance.

“AMP are still there and with HUB24 taking a stake in Easton, it suggests the vertical integration model is not broken,” Mr Crole said.

“For those that have been in the IFA space for a long time, we have had this argument forever, but the reality is price rather than value sometimes wins. Whilst we talk about the moral grounds and the value and those sort of things, really the adviser is influenced in many instances by price.” 

Madison Financial Group chief executive Annick Donat agrees that the banks’ exit from advice is likely to be temporary, and the industry has seen this type of deconstruction and dislocation before.

“At the moment the power base is where it should be - with the advisers - but it’s cyclical,” Ms Donat said. 

“In about five years all the banks will be buying advice businesses back. I’m going into my fourth decade of doing this, so I know it’s coming.”

In the short term, however, Mr Rowe believes mid-tier licensees should benefit from the dislocation, particularly those who have strong capital reserves and a fee-for-service focus.

“I think mid-tiers are the ones who will start to get bigger, and the interesting thing advisers need to be looking for is how financially sustainable are they, what’s their balance sheet like,” Mr Rowe said. 

“Then do they run a clean or a conflicted product model and what are they willing to do around technology. There will be a whole heap of advisers from these big institutions looking for a new home, so they’ve got to find somewhere that is safe to go and that’s going to exist long term.”

Of course, there is also the possibility that licensees in their current form will cease to exist entirely, with the FPA putting forward a proposal in mid-2020 for the sector to move to individual licensing.

Synchron director Don Trapnell believes the industry hasn’t heard the last of this idea, which has proved popular with an ifa poll of almost 700 advisers revealing 60 per cent were in favour of the change.

“Towards the end of 2021 I think we will see a strong push towards individual licensing,” Mr Trapnell said.

“It’s probably not a bad thing - it just means the traditional business model of the licensee will change, that’s all.”