The “other” part of ASX financials: How UBS rates wealth platforms

The flow of investor money into wealth platforms – one-stop online services for transacting in shares, bonds and funds – will decline throughout much of this year, says UBS analyst Scott Russell, FIAA. But he expects this will start to improve again at the back end of calendar 2023.

Why? He highlighted the following reasons in a recent UBS sector report:

• volatile markets constraining risk appetites,

• excess liquidity rapidly soaked up by a higher official cash rate,

• tighter household budgets, and

• financial adviser numbers continuing to decline.

Funds under management in retail platforms – excluding cash trusts such as term deposits – rose by 3.5% to $1.04 trillion in the final quarter of 2022, versus the September quarter. But net funds flows of $3.7 billion were 42% lower quarter-on-quarter, which contributed 0.4% to funds under management.

Taken together, this means the December quarter was the weakest in two years, “continuing the unwind of strong flows during the COVID period,” said Russell.

He also emphasised this was a continuation of a long-term skew away from incumbents in the platform space – including the likes of Netwealth and HUB24.

“All of the incumbents – with the exception of Macquarie (ASX: MQG) – experienced net outflows,” said Russell, pointing out that this cohort’s market share dipped below 72%. “By contrast, specialised platforms collected 107% of industry flows, relative to FUM share of just 14%, an obvious precursor to higher FUM share in future.”

The BT Panorama platform – part of Pendal Group, which was acquired by Perpetual (ASX: PPT) earlier this year – saw the biggest outflows, probably due to ownership uncertainty at the time.

Another of the incumbents, Macquarie, saw an additional $1.3 billion added to its FUM in the fourth-quarter 2022. Russell described this as “resilient flows performance, implying flows share well ahead of its FUM share.”

Two standouts among the specialist platforms were:

• Netwealth (ASX: NWL), and

• HUB24 (ASX: HUB).

As Russell explained: “HUB flows remained ahead of all peers, despite both already reporting weaker flows versus prior periods.”

“NWL's recent update on its flows during the March 2023 quarter implies an optimistic turnaround in flows in the seasonally strong June quarter.”

HUB is due to provide another update on Tuesday 18 April.

Russell noted that the latest data on flows in this part of the financial sector supports his team’s thesis of ongoing fragmentation among retail wealth platforms.

“We believe that the growth runway for specialist platforms is very long, and despite several years of strong growth, Netwealth and HUB24 penetration levels remain low,” he said.

How UBS rates the platform providers

Netwealth (ASX: NWL)

• Rating: BUY

• Price target: $16.50

• Latest closing price: $13.05

HUB24 (ASX: HUB)

• Rating: BUY

• Price target: $33.50

• Latest closing price: $27.33

Insignia Financial (ASX: IFL)

• Rating: NEUTRAL

• Price target: $3.40

• Latest closing price: $2.87

AMP Limited (ASX: AMP)

• Rating: SELL

• Price target: $1.00

• Latest closing price: $1.11