IOOF’s profit for the half slumped, but the group has dived into a plan to reshape its business, with its chief hinting that the products in the recently acquired ANZ wealth business may be due for an overhaul.
For the six months leading up to December, the group’s underlying net profit after tax (UNPAT) was $61.3 million, falling in the range of its downgraded profit after it bought ANZ’s pensions & investments (P&I) business and a 39 per cent fall from the year before. However the figure included $4.3 million in UNPAT from discontinued operations.
UNPAT from continuing operations (excluding Ord Minnett, AET Corporate Trust and Perennial Value Management) was $55.6 million, plunging by 61 per cent from the year before.
Funds under management, advice and administration (FUMA) was up by 5.2 per cent to $145.7 billion, but IOOF chief executive Renato Mota reported the group’s earnings have been deteriorated by divestments, the reduced economic interest from the ANZ P&I coupon, an uplift in costs associated with governance and continued pricing pressure.
IOOF completed its $825 million acquisition of the P&I business at the end of January, with Mr Mota commenting the purchase for IOOF, as an advice-led company, improved its scale, reach and opportunities for transformation.
“The P&I acquisition has been three years in the making and I am confident that it is right for IOOF, our members, our clients, our advisers and our shareholders,” Mr Mota said.
“We see significant financial benefits from the step change in scale and the synergy opportunities, supporting our ability to lower the longer term cost base of the combined businesses while allowing for continued reinvestment.”
But he noted the business probably was starved of investment in the lead up to its sale, resulting in outflows from a number of the P&I products.
Mr Mota hinted the products may be due for a switch from their master trust structure to a more contemporary wrap package, similar to what has occurred with IOOF offerings.
“Now that we have the businesses and the capabilities, we’re looking to make sure that we underpin the service of that. And there had been recent improvements in service around that product set,” he said.
“But at the same time, there’s also an opportunity here to understand whether, in fact, the issues may be around product design. And certainly, being a master trust in nature, it’s different to a wrap structure.
“We’re determining whether there is a need, for master trust structure, or is there more appeal for the – let’s call them, the contemporary IOOF products, that tend to be wrap style in nature. There may be a substitute effect potentially, but at the same time, we’re also underpinning the existing offer on an ongoing basis to those clients.
“It’s a competitive marketplace. And we need to make sure that our products are contemporary, are for high-quality service outcomes and are used on their merits.”
The integration of P&I into IOOF is one of three key elements in the group’s “transformation plan” moving forward. The other two are: “Evolve 21”, its endeavour to simplify its platform suite into one contemporary platform (not including the P&I products) and “Advice 2.0”, its plan to make its financial advice segment a standalone business through offering accessible and cost-effective advice.
Remediation costs were $1.5 million for the half, down from $3.8 million the year before. The group has made a provision of $223 million, with no new systemic issues being identified since its last update. The group expects to commence paying out refunds from June.
IOOF’s cost-to-income ratio sat at 57.8 per cent, up 12.1 per cent on the first half of 2019. It cited increased governance costs and legislative changes.
But Mr Mota has remained positive, pointing to the company’s net inflows of $1.4 billion.
“Portfolio & estate administration recorded net inflows of $756 million and advice $985 million for the half,” he said.
“This is contrary to the retail industry trend of continued and significant outflows. I believe this reflects the competitiveness and appeal of IOOF’s proposition market.”
Investment management rises as advice and administration fall
The investment management business generated the strongest improvement out of the segments, producing an UNPAT of $19.6 million, up by 8.5 per cent.
Its net operating revenue of $34.5 million, up by 5.6 per cent, is in line with market-based growth in average funds flowing largely form improved platform FUMA, IOOF said.
The advice segment, excluding the ANZ wealth management acquisition, produced an UNPAT of $26.4 million for the half, down by 13.4 per cent from the prior corresponding period.
IOOF noted the division’s net operating revenue, which fell by 5.8 per cent to $93.6 million, was “adversely impacted” by competitive pricing from a third-party administrator – it said, since then IOOF has matched the offer.
Further, Shadforth advisers had increased their clients’ weighting to IOOF administration, resulting in the portfolio administration fee being apportioned to the portfolio and estate business, rather than being recognised in advice.
The portfolio and estate administration business also copped a downfall, with its UNPAT down by 19.9 per cent to $32.9 million and net operating revenue dropping by 6.8 per cent to $112.1 million.
The division had seen increased operating expenditure due to increased governance, primarily through the implementation of the Office of the Superannuation Trustee and additional risk and compliance staff. IOOF cited $2.7 million in costs for the implementation of the OST and additional risk and compliance measures.
Betting on advice
“The attraction of the [wealth management] sector is further enhanced by high regulatory and technological barriers to entry from new competitors,” IOOF stated in its report, reflecting that there is a substantial and growing pool of funds in the Australian market.
IOOF has its sights set on growing its FUMA faster than its competitors, but it acknowledged the portion of revenue net of direct costs, which is levied on asset balances, may not rise proportionately with FUMA. Product pricing and competitive pressure may reduce management fee rates. Thus, IOOF is seeking to leverage a cost base which is largely fixed relative to the scale of its FUMA.
Despite the profit fall in advice, the group is relying on the segment to increase its inflows, through “increasing adviser numbers, a relatively higher number of salaried advisers within that growing total, a better share of advice revenues for offering licensee services and increased returns from services to self-licensed advisers”.
Mr Mota has said IOOF is committed to the “reinvention of advice”.
During the second quarter of financial year 2020, 11 new advice practices joined the group, which saw an increase in FUMA of $985 million to $76.6 billion.
IOOF stated it is now the second-largest advice business, with 1,443 advisers and the fifth-largest platform provider by funds under administration.
Dividends per share were 16 cents per share, down 37.3 per cent from the prior corresponding period, while underlying earnings per share from continuing operations were 16.2 cents per share, down 43.1 per cent.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].