Is the cash rate squeezing HUB24?

Today’s CEO interview is with Andrew Alcock, the CEO of HUB24 – one of the independent investment and superannuation platforms that has up until a year ago, been doing really well. But the share price of HUB24 and its big competitor Netwealth, hasn’t been doing much for the last 12 months – but they’re still very expensive.

There’s also been a bit of controversy lately where HUB24 chose to respond to an AFR article querying the impact of lower interest rates on its funds, and in particular quoting a Macquarie Bank analyst claiming that HUB24 customers are getting a negative return on their cash accounts within HUB24. So Andrew Alcock and HUB24 put out a statement to the ASX disagreeing with that, but I think it’s well worth going through it.

I think we’re at a really interesting point now for these things; we’ve got interest rates coming down but funds flow is very high and remains very high as a result of the Royal Commission.

So these independent platforms have conflicting influences; obviously the funds flow from the Royal Commission remains high, and it has still got a long way to go; their market share is very low still.

On the other hand, lower interest rates are causing some issues for either margins or for customer returns.

So let’s see what Andrew Alcock has to say about that; here’s Andrew Alcock, the CEO of HUB24.

Andrew you went to the trouble of putting out an ASX statement in response to the AFR article a couple of weeks ago, but I’m really not sure that in that statement you addressed the specific point that was the problem in the article, which is that – and they’re only quoting a Macquarie analyst named Matt Johnston who reckons that your customers will get a negative interest rate on their cash accounts after your fees. Could you take us through what was wrong with that, why that article and in particular, that research from Matt Johnston was wrong?

Specifically, the research used some rack rates in PDS documentation, which doesn’t represent how we actually price our products. It’s a document that is used in some cases but in most cases the benefit of HUB24 is we actually build a tailored platform for advisers and their clients. The scenarios in the examples are, for example, the researcher was taking our retail administration fee at the highest level and deducting it off the cash rate. That retail administration fee is very, very rarely used at all and it was suggesting that it would be in negative territory. So, I can say that today, right now, we’ve got everyone earnings positive interest and by far and away, the majority of people using Hub24 will not be having a negative experience in terms of admin fees coming off that.

You’re saying, are you, that your administration fee is not 56 basis points, as Matt Johnston says, and the interest rate that holders of the Hub Super account are not receiving 50 basis points as interest? That’s what he’s saying.

What I’m saying is that the 56 is not actually representative how our product’s priced generally across the market. The average administration fee for our product is below 30 basis points across our book, even though the opening one in our rate card is 56. We absolutely build tailored rate cards and in each case we get a tailored PDS for the licensee groups who are working with us to actually spell out the fee that we negotiate with those advisers. Alan, to be frank, it’s the same with our interest rate on cash. That’s another lever that advisor groups can work on with their clients. They can choose the cash rate they wish to get and which fees we charge and we’ve put that through our own rating mechanism and so these are things that correspondingly work together, the cash rate and the admin fee and all sorts of other fees, we work together to build that overall package. My view is we should look at the overall cost to consumers and the value that they’re getting, not cherry-picking one of the fees, because we just don’t price it that way.

But is the broad point correct that the reduction in the cash rate from 1-1.5 per cent is squeezing your margins?

The reduction in the cash rate is lowering the amount payable to consumers or squeezing our margin depending on how we decide to react to that with different negotiations or rate cuts. So, absolutely, generally the reduction in the cash rate as with all platforms is lowering the return to consumers. Generally, that would be seen across the marketplace, as it is in bank accounts, cash management trusts and any cash vehicle. Having said that though, it would be remiss of me to say that there are over 20 different cash investment options on HUB24. We’re talking about a transaction account which we use to trade and settle and which wen use to park funds rather than using term deposits.

But there are many other cash options on the platform paying different rates and there are tools to help you manage how much you leave in that transaction account. So, to focus in on just that account in the sole way is actually misleading given the way advisers use the platform and the way the platform’s actually priced and the plethora of options available.

So you’re able to run your business to either protect your margin and to reduce the amount that your customers get or to do the other way around, to take it off your margin and preserve your customers, which are…?

We could choose to take it off our margin. We absolutely disclose in each case, in each pricing, what the maximum fee is we could take, or fee we could take for the provision of that cash account. And it is a fee, not necessarily a margin, it provides services that normal bank accounts just don’t provide. It provides a tax report, provides pension payments, settlements, all sorts of things. But we are able to decide not to take that fee, if you’d like and do that with consumers. But we’re not at that point of making that decision yet in this cycle. If there are further interest rate cuts I imagine the whole industry will have to look at this issue and not just HUB24.

Are you able to tell us the extent to which you are taking it off your margin and what exactly is happening to your margins in the light of what’s going on with interest rates?

We actually don’t disclose our cash margin, we disclose the fee. Right now, we haven’t at this stage, changed or taken it off our margin at this point in time, Alan, but we may consider that moving forward. At the moment, we haven’t done that and all consumers using the HUB24 platform are still receiving a positive crediting rate on this on anything they have in that cash account.

What goes into that decision? Is it a competitive decision, are you watching what your competitors are doing and trying to match that? I mean, if Netwealth and the others started to cut their margin and so on, would you have to follow suit?

We’d certainly look at it from a competitive point of view, as would the whole industry. I think you’re spot-on. This is a dynamic that we’ve not seen in this country. In the same way, what will bank accounts do? Will banks charge negative interest rates as they do in overseas countries which is commonplace, or will they set it at zero. I think this is an industry wide thing and we will look at what the industry does. But we also remember that we actually build our fees across many components, not just that one angle. So, yes, we will look at it and we’ll look at it from a competitive angle. We’ll also look at it from a pricing and a value perspective because not all platforms are equal either.

You actually quite unusually, I think, referred to Macquarie’s target share price of $8.65 and said, ‘Actually, it’s way down below the others, there’s other ones with $10.90 and someone else has got $15.95.’ I don’t know who that is. So, the analysts are all over the place aren’t they? But they have been coming out pretty recently with sells on HUB24 in particular. I don’t think it’s just Macquarie that’s a bit negative.

The reason for correcting that was the actual printed article mixed up the target price for our sells on one of our competitors. The price quoted for HUB was actually the target price for the competitor. We had that corrected in the online version but it certainly wasn’t what was printed in the press, so that was the reason that was done, because the research was misquoted and it suggested we had a price that was so far away from the rest of consensus and the market, that we felt it was only proper to provide proper thankful information to the market. If you’re a retail investor and you’re not seeing all that research, we felt it was important to clarify that.

As for market analysts and their position, that’s their position based on what’s going on. We’re focused on building out a great platform and a great service and quite frankly, having the second highest inflow rate in the country, yet having one of the smallest market shares, I think there’s a lot of runway for HUB to continue to deliver. This is a difficult economic time for the nation and in terms of how the analysts price the share market, that’s theirs and that’s the share market’s responsibility. I probably don’t run the business thinking about the share prices as much about long-term value for shareholders.

Fair enough. Obviously, there’s been a big inflow in the last 12 months or so, partly because of the Royal Commission, making everyone pretty unhappy with the banks. Can you give us a sense of how much the Royal Commission has meant in terms of inflow to you?

That’s a really hard one. I think that the trends were already there for inflows into specialists platforms like HUB24. The terminology I tend to use is that the Royal Commission probably accelerated some of those trends. For example, putting a stake in the ground and saying we need to move on from grandfathered rebates or conflicted remuneration. We’ll accelerate a trend that was already occurring in the market place. So, it’s hard to quantify because we were already on that growth trajectory. Our growth rates are 30-40-50 per cent per annum, it’s hard to really pin it down. I welcome the Royal Commission in terms of it’s good for consumers, I think a lot of the outcomes will be great for the industry.

But the one thing I think it did do, to come back to your question specifically, is we’ve witnessed in Australia, lots and lots of advisers voting with their feet and choosing to go and be self-licenced or more independently licenced, if I can use that word, rather than being licenced or aligned or soured by institution. Since the Royal Commission, we’ve actually seen institutions push those advisers out of their own ranks. Whereas, before it was the advisers leaving, now it’s the institution saying I don’t want to be in this space, I’ve got conflicts between delivery of advice and sale of product, and so we’re seeing that really, really speed up and I think that’s probably a result of the Royal Commission and the publicity that the large institution’s gone.

You mentioned market share before, what is HUB24’s market share and what do you think the overall independent platform share of the market is now?

I know that our market share is 1.3 per cent of the platform market. I would say the overall independents market share – and I don’t have the number in front of me, but it’s 5-6-7 per cent perhaps, Alan, in total. But with us adding 1.3 per cent and the second highest net flows in the industry, net flows higher than all the institutional providers on a quarterly and annual basis, all I can see is specialist platforms growing that market share including HUB24. People are choosing to use modern products because they create value very much so.

Your market cap is about $700 million dollars with 1.3 per cent market share of the platform market. Do you have in your head, some sort of idea of the relationship between your market cap and market share? I mean, is it linear? If you went to 2.6 per cent market share, would your market cap kind of naturally be $1.4 billion?

I think growth creates value, creates market cap. I don’t think about it that way, we don’t model the business on what type of market cap we want to get to. We certainly think about, we’d like to get to between $19 and 23 billion dollars of funds under administration and we’re $12-13 billion now, in the next couple of years. There are other examples in the market, whereas one of our peers or competitors is just under twice our size with a market cap of over twice our market cap, so that’s a good proxy perhaps, but it’s not how we focus.

No, I suppose I’m talking about operational leverage really, and how much of the increase in your funds under management, or under the platform, flows through to the bottom line?

We have expanding profit margins and there’s room to move and expand those even further. We’re still quite a small business in terms of the scalability you can get out of the model. So, absolutely, you’d expect more and more to drop to the bottom line. Having said that, Alan, we are absolutely committed to continue to innovate and invest as well for growth. This isn’t about just turning the handle on a business that’s highly scalable. This is about us living up to our challenge to reinvent wealth management, so we’ll be doing both, but we should be doing that with expanding profit margins. So, hence, you’re correct, if the market values us in that way, you should see incremental value for us as we grow.

But I suppose the point is, and this is in a sense the point your making, is it’s possibly only just begun, this shift, the transition to independent advisers using independent platforms. If it’s only 6 or 7 per cent of the market now on independent platforms, then it’s got a long way to go.

If you look back at 2012, nearly 100 per cent of flows were going into the institutional platforms. Now, they’re in net outflow and that’s just six years later. They’re in net outflow, it’s taken six years from them having 100 per cent to now having a negative percentage of inflow. I think you’re seeing a dislocation, not a disruption, in this industry and it is really only just beginning. I like it when we talk to our staff, that we’ve run a really hard race to get to where we’re at, to deliver what we believe in, but we’re now on the starting blocks again in the finals and there’s a real opportunity to continue to change this landscape. I think it is just the beginning. I think there’s some disruption and dislocation, there’s more things to bounce up and down in the industry and we’re seeing that day to day, but you’ll see the emergence of hopefully a much larger HUB24 in the future and we keep delivering on our promises.

Why has Netwealth got so much more money than you? What’s so good about them and not so good about you, what’s the issue?

What’s the issue? I’m not sure there’s an issue, they’ve been around a lot longer than use. If you actually started us at the same date, our growth rate is higher than their growth rate if it started at the same time, so arguably in the team we’ve been working we’ve achieved more than most other platform competitors have at all, so I think it’s age. If you think about in 2013 when I joined the business we had $300 million on the platform, now there’s $13 billion in a six year period. Netwealth had a five or six year head start on us.

The only other point that Matt Johnston and Macquarie Bank made – and I haven’t seen anyone else make this or maybe they have – is that the UK market is presenting downside risk to the margins of both you and Netwealth, basically because their margins are much lower than Australia’s in the UK. Can you talk us through that, why they’re wrong about that, or are they wrong?

It remains to be seen. I’m not scared of margin compression, in fact we led it in this market place. If you’re building value and innovation, and as you grow you can make operational efficiencies, it all just sorts itself out. The UK market is quite different, it’s a much bigger market place. There’s much more profit pools there, there’s more citizens, there’s more money there, so it makes sense that larger players can get scale benefits and different pricing. We’re yet to see that in Australia. If you look at what’s happened in Australia though, it’s remarkable that platform fees might be half of what they were a few years ago and our competitors that are coming to market are matching the rates that we’ve been offering for some time. I think you’ve seen an revolution in price here already, let’s wait and see.

But the UK market’s a very different market and quite frankly, you’ve seen all the institutions lower their rates, how far will they go. The question is to me, what’s value for a consumer? And if we’re able to change the total cost for a consumer and work with advisers, actually clients are paying less than they used to for far better outcomes. That’s what we’re focused on, but let’s wait and see how the market plays out.

Do you know what the independent platforms in the UK have of the market?

Unfortunately, Alan, I don’t, I don’t have that at hand. There are some independent platforms that are marketing engines and direct to market engines which are very different to the Australian experience. There are platforms that are closed architecture and aren’t offering much investment choice, and aren’t offering some of the features of managed accounts. Our market is generally more advanced with some of the technology and capabilities that we deliver as well.

Right. You mentioned that the big institutional platforms are on a net outflow. Do you think there comes a point when they give up and sell you their business?

That would be interesting. I think you’ve seen one institution try and outsource their business and then sell it anyway. You’ve got two other major banks that held back from listing or selling their business and who intend to do that in the future, then you’ve got one more who’s moved their platform into the business bank. I think anything is possible, we haven’t dreamt of in this market place that all the banks would buy licensees and all the insurance companies and all the wealth management companies, all the wealth management companies… And now they’re rejecting them and we’re seeing the rise of standalone specialists. In that context, anything is possible and we’d certainly look at that.

And just finally, Andrew, what are the things you’ve been doing lately, what developments can you bring us up to date with?

Well, we’ve just put the capability in to allow in managed accounts, Alan, and I’m not sure if you’re listeners are across managed accounts versus managed funds, but to put international currency or foreign currency in a managed account, which I really think is making international markets more accessible again. If you can actually buy and sell assets and not be paying for them in Aussie Dollars, you’re not paying the foreign exchange fees, you’re not eroding your performance. The success of managed accounts in Australia which gives consumers tax benefits and parcel management transparency, we’re taking that to the world even further by allowing a foreign currency be held inside managed accounts. That sounds like a no brainer, but when you think about the amount of exposure that some SMSF trustees have to international markets because they don’t like managed funds, I’m hoping that blows it open and I think that’s a real competitive difference for us. I think it’s without fear in this country is the way we’ve done that. That’s just one example.

By competitive difference, do you mean that your competitors haven’t don’t that?

Absolutely, not in the way that – most competitors don’t have international currency at all, let alone inside managed portfolios with the ability to lower the friction of transaction costs and foreign exchange.

Excellent, thanks very much, Andrew.

Thank you, Alan, thanks very much.

That was Andrew Alcock, the CEO of HUB24.