Wealth giant to cop the brunt of adviser exodus

A new report from Morningstar has predicted a grim future for IOOF’s advice business, as it continues to suffer from the reputational fallout of the royal commission and new adviser numbers are impacted by the implementation of the FASEA regime.

Analysts at the research firm have tipped profits in IOOF’s advice business to decline by 18 per cent per year over the next two years, reaching just $40 million in the 2021 financial year.

“We expect IOOF’s adviser numbers to shrink and inflows to be permanently lower, as the royal commission has created lasting reputational effects and stricter operating guidelines,” the report stated.

“IOOF was growing its number of advisers even during the royal commission, but we think this was partly due to its acquisitions and active poaching of non-aligned advisers.”

The report suggested reputational damage to aligned dealer groups as a result of the royal commission could drive more advice clients towards privately owned advice groups, while growth in the group’s adviser footprint would be disrupted by tougher industry education standards.

IOOF’s adviser headcount fell from 1,900 in April 2019 to 1,443 in December 2019.

The research firm adjusted its annual growth projections for IOOF’s funds under management, advice and administration from 4.9 per cent to 2.1 per cent over the next four years, and said it expected all the group’s business divisions including advice to see high single digit market losses and net outflows for both the 2020 and 2021 years.

“Ongoing margin compression is likely, as innovation and competition continue to drive down prices/fees across all divisions,” the report stated.

It said while the acquisition of ANZ’s wealth management and pensions and investments businesses would help to broaden IOOF’s distribution reach and scale, the wealth management business was likely to remain loss making until at least 2024.

In addition, the research firm flagged that the $223 million IOOF had set aside for advice remediation payments may increase over time, despite the fact that ASIC had stated no further investigations were pending against the group following royal commission referrals.

However, the report projected a more positive long-term future for the advice business, with profits expected to improve to $51 million and funds under advice to recover to $67 billion by the 2024 financial year.

“We believe higher education and compliance standards [in advice] should help reinvigorate client confidence, hence cash flows, over the long term,” Morningstar said.