The ‘platforms race’ grabs the attention of fund managers

HUB24 and Netwealth have emerged as two popular financial services stocks as fund managers wade into wealth management’s “platforms race”.

In the latest reporting season, HUB24 beat out the large platforms by recording the highest growth in total funds under administration (FUA) of $91.2 billion, up from $73 billion in the previous period, while its underlying net profit after tax (NPAT) added 14 per cent to $30.4 million.

HUB24 also took out the top spot in Investment Trends’ 2023 Platform Benchmarking Report in terms of overall platform functionality for the second year in a row, pipping Netwealth, which came in first in the 2021 report.

Meanwhile, in its latest results, Netwealth reported half-year FUA growth of $15.6 billion to $78 billion, while its statutory NPAT hit $39.3 million, an increase of 28 per cent from the prior corresponding period.

Jamie Hannah, deputy head of investments and capital markets, VanEck Australia, said he was “not surprised” by HUB24’s promising results in the last reporting season.

The VanEck Small Companies Masters ETF holds a 2.44 per cent weight to the stock among its 81 holdings, which include Pinnacle Investment Management Group, Magellan Financial Group, Centuria Capital Group, and Link Administration Holdings.

“HUB24 continued to post solid results as their share price has continued to outperform the ASX 200,” Hannah observed.

“I’m not surprised by HUB24’s continued success, as we work with various platforms daily and HUB24 have always excelled in their execution platform and engagement. It’s evident that the success of their execution area flows through into other areas for them to continue their growth trajectory.”

Longwave Capital also boasts positions in platforms, with its Longwave Small Companies Fund listing Netwealth among its top 10 holdings. More recently, the firm identified the stock in the top five contributors to its 0.8 per cent performance increase during January 2024.

Betashares’ Australian Quality ETF, which comprises 40 high-quality Australian companies, also holds a 2.5 per cent weight to Netwealth.

Additionally, the ECP Growth Companies Fund, which holds selected Australian growth companies across the spectrum of growth, comprises both HUB24 (5.22 per cent) and Netwealth (3.47 per cent).

“We first invested in [the stocks] in 2017,” Damon Callaghan, partner at ECP Asset Management, told ifa sister brand InvestorDaily.

“At the time, we recognised the shift of financial advisers from incumbent banks to the independent financial advice (IFA) industry as a key structural driver – of which we expected platform technology leaders like HUB24 and Netwealth to win significant market share.”

Both platforms displayed innovation focused on a client-centric philosophy, he elaborated, which opposed incumbents’ vertically integrated models.

“Platforms were historically designed to sell internally manufactured financial products and resulted in stagnant platform innovation,” Callaghan pointed out.

“This thesis was accelerated by the royal commission, which resulted in an exodus of advisers from banks toward the IFA industry.”

Today, the growing popularity of financial advice, and platforms by extension, comes against the backdrop of a massive intergenerational wealth transfer expected in Australia over the next two decades. In 2021, a Productivity Commission report estimated that around $3.5 trillion in assets will be transferred between generations by 2050.

Additionally, regulatory reform through the Quality of Advice Review (QAR) has attempted to address hurdles in accessing financial advice by opening the advice arena to superannuation funds and banks, and reducing compliance burdens by streamlining paperwork.

Last year, research from Australian Ethical reiterated the role the financial advice community plays in navigating the looming wealth transfer, finding that nearly half of the wealth transferred to children and beneficiaries is consumed almost immediately, while the remaining half has the potential to be reinvested.

According to the firm, “the time is now” for advisers to adopt a proactive approach to engaging with the next generation.

ECP’s Callaghan opined that the investment opportunity stemming from platforms has “significant runway”.

“HUB24 and Netwealth have 6–7 per cent share of platform funds under administration, respectively, but are taking a significantly larger share of industry flows as independent advisers consolidate their back-book of clients onto preferred platforms.

“To add context here, HUB24 and Netwealth have $17–22 million FUA per adviser which is one-third of the current industry average of around $60 million/adviser, giving an indication of the upside ahead from advisers’ continual back-book consolidation.”

He agreed that the two platforms have been propagating innovative ways to solve adviser workflow inefficiencies, including proprietary machine learning tools to structure previously unstructured data, and automation solutions to improve administrative workflows.

“We believe this sort of innovation will continue to widen the competitive advantages of both companies when compared to competitors, giving advisers yet another reason to consolidate clients onto the platforms,” he said.

In the short-term, the sentiment driving the two stocks tends to follow the net flow momentum reported by each company, he added.

“Currently, both companies are off to a strong start in 2024, however, should platform flow choppiness arise through the year, we encourage shareholders to look through the noise and remain focused on the big picture growth and competitive advantage opportunity underpinning each company,” Callaghan stated.