Analyst bullish on Insignia’s adviser network restructure

Despite a 24 per cent drop in its share price over the last year, Morningstar equity analyst Shaun Ler said that concerns have been “overblown”.

“Investors appear to be deterred by margin compression, sluggish flows, restructuring challenges, and deteriorating debt coverage,” Ler said in an analyst note.

“We think these concerns are overblown, and the market underappreciates Insignia’s ability to stabilise earnings. We see cost-cuts counterbalancing tepid revenue declines.”

That doesn’t mean that the analyst is outright dismissing some negative trends that have emerged for Insignia that have damaged the firm’s reputation.

“The declining number of advisers, even as industry adviser numbers stabilise, raises concerns about Insignia’s brand integrity,” Ler said.

“Fewer advisers may also lead to reduced flows into its platforms and investments businesses.

“The loss of funds and advisers results in lower fee revenue weakens Insignia’s long-term competitive position due to reduced scale, and exacerbates negative operating leverage, leading to lower profit margins.”

Despite continued losses and the divestment of Godfrey Pembroke earlier this year, Insignia remains the second-largest licensee in Australia with roughly 730 advisers.

However, Morningstar believes that it’s advice network restructure, which it announced in July 2023, is a path to improvement.

Last year, Insignia said this restructure will work as a new partnership ownership model for its self-employed licensees, originally known as Advice Service Co but renamed Rhombus Advisory, which comprises RI Advice Group, Consultum Financial Advisers, and TenFifty.

“Advice revenue is poised to improve as the firm properly integrates its acquisitions and simplifies,” Ler said.

“We believe Insignia’s adviser network restructure is likely to solidify the firm’s reputation, reduce organic advisor attrition, minimise adviser workflow disruptions, and restore morale. Efforts to streamline working processes and new technology upgrades should improve adviser productivity.”

The analyst added that there is “ample room” for Insignia to remove duplicate or non-essential costs to “extract scale efficiencies”.

“We believe Insignia can continue reducing costs over the next five years,” Ler said.

“Prior cost-out programs were implemented on schedule despite inflation and ongoing outlays for business development, regulatory compliance, and technology investments,” he added.

“In addition to cost reductions from acquired businesses, we expect simplification initiatives within existing business units to reduce costs and stabilise earnings.”

This includes Insignia’s advice business, with Morningstar noting that it can reduce costs by removing “duplicate functions”, specifically pointing to research and paraplanning, as well as reducing the proportion of “less profitable and non-core self-employed advisers”.

Morningstar also forecast that adviser declines to cease by fiscal year 2027 and stabilise thereafter.

“The advice business achieved EBITDA profitability in first half fiscal 2024 after five halves of losses. Revenue and costs per adviser are improving, and adviser attrition is slowing,” Ler said.

In February, it was announced that Scott Hartley, former chief executive of wealth management at AMP Australia, took over as Insignia’s CEO from 1 March following the departure of Renato Mota.