Ann: ANZ Wealth Management updated financial information, page-38

Frankly, financial planning dealergroups are continually making less and less money. Financial planners are continually making less money and leaving the industry in droves.

Sure, but this has been the case for some time, irrespective of the RC. And yet IOOF have been able, over the past decade, to acquire cheaply, extract synergies and manage costs, thereby preserving their Net Operating Margin despite a relentless erosion in industry-wide gross margins; you have to give them that.

My personal opinion is that margins in being a dealergroup are about to become obsolete once grandfathered remuneration is ceased and the education requirements drive many advisers out the industry.

The financial planning market will move towards legal independence (advisers not being allowed to receive any commission or conflicted benefit) and having to invoice one-off for every bit of work.

Yes, it does seem reasonable that there will be a change in the structure of remuneration for financial planners, as a consequence of the RC. What you’re saying about moving towards legal independence and one-off invoicing makes conceptually sense.

If I look at the actual Return on Capital of IOOF over the past few years, though, it has been in the 10%-15% range, which is far from ludicrous; so, I don’t really see the “gravy train” you’re talking about. Even if commission trails are abolished, I suspect that upfront fees will have to be commensurately higher, if the whole planning industry has to remain somewhat profitable.

And, besides, Financial Advice only represents about 40% of IOOF’s UNPAT; so, even if profits from Financial advice are halved, it will still require a lot of deterioration in all other areas to get to a 30%-40% decrease in total UNPAT.

From a platform perspective, there are already a variety of cheaper and superior options. If vertical integration also goes in the RC (being able to have your own advisers flog your own product), I don't see who would actually recommend anything from IOOF.

So, I will ask again, who else do you see as being “ahead of the game”, and set to benefit from future growth within the same industry?

For, to me it seems intuitively obvious that the overall level of FUMAS in the wealth management industry will not only increase over time, but will do so at a rate at or above the average market earnings growth rate (thanks to the compounding effect of net inflows).

And it also seems rather logical, to me, that the overall level of profits in the WM industry will remain a direct function of the underlying level of FUMAS, however one chooses to structure them.

So, unless IOOF dramatically lose market share going forward (and I don’t see why that would be the case, also in light of the fact that there are far worse players in the industry, as you have acknowledged), I would argue that they too will resume growing in line with the industry, and trading at a PE in line with market, once the new rules are set and digested.