Managed Accounts Holdings (ASX:MGP) CEO David Heather speaks to FNN following its 2016 AGM about the business environment, regulatory changes and plans for 2017.
Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me from Managed Accounts Holdings Limited (ASX:MGP) is CEO, David Heather. David, welcome back.
David Heather: Thanks Carolyn, good to be here again.
Carolyn Herbert: Can you start by giving us a summary of Managed Accounts achievements for FY16?
David Heather: From a shareholder perspective, probably a couple of things of interest to start with. First of all, net profit before tax was up 20 per cent to just over $1.1 million for the year. Also FUA increased by 20 per cent with the FUA at the end of June 2016, being $1.79 billion. And off the back of that, we also increased revenue 26 per cent. In addition, we signed 10 new firms to Memorandum of Understanding to build new solutions for, which was an equal year record for the year prior.
Carolyn Herbert: For investors who aren’t familiar with Managed Accounts, can you give us a brief outline of your business model?
David Heather: We’re probably a little bit different to most other providers in the Managed Accounts space, in that we don’t take to the market a product off the shelf. We actually work with intermediaries and particularly IFAs, on building a solution that matches their needs for their particular requirements. So which could be portfolio management requirements, branding, fee structure and a variety of other things.
And that’s not just about a managed account - that also can be a superannuation solution.
So what that means is that the firms that we work with can differentiate themselves, from their competitors. It means that they can run the investments they want to run, and how they want to run those investments. And they can also use a variety of different service providers that might be specific to them in their solution; they may they be execution brokers, their preferred managers, or managed funds and a range of other things.
Carolyn Herbert: Why are Managed Accounts now becoming the disruptor in the platform marketplace?
David Heather: Quite simply Managed Accounts boost efficiencies for advisers and the firms, in which they exist. And with that, they lead to better outcomes for the client. So from a managed account point of view, they’re certainly adding value to all the different players if you like, that need a solution. With that you’ve also got a range of advisers that are moving from institutionally aligned models, to non-aligned models. And with that, they’re making decisions on implementing different ways of building solutions for clients. Plus you’ve got banks exiting ownership, which is only fuelling that move.
In addition to that, you’ve really got a scenario where practice valuations in the financial planning space, have been moving to an EBITDA model of more recent time. That means that firms have to build more capability around efficiency, profitability and Managed Accounts deliver that solution. So you’ve got all these elements coming together, to create more of a requirement for a managed account. And with that, there’s more disruption in the platform space, all to do with Managed Accounts.
Carolyn Herbert: There’s been some recent industry growth forecast published, which seemed to benefit Managed Accounts. Can you provide us with a bit more insight on this?
David Heather: What’s been interesting, with Managed Accounts becoming a bit more mainstream into the market, we’ve seen some reports come out over the last 12 months. One of those was Morgan Stanley, where they highlighted that the managed account industry could grow to about $60 billion in 2020. Now that was then backed up by some data that came out from IMAP, the Institute of Managed Account Providers that suggested the current market in Managed Accounts, was about $30 billion.
Now for us that represents, if you weigh currently at about 7 per cent market share, so from our perspective if the Morgan Stanley numbers are accurate, and I think they’re on the light side, obviously that means that we’re going to see some decent FUA growth occurring. But in addition to that, we’ve got an opportunity to increase our market share of course.
Now in addition to that, Class Super has recently come out with a benchmark report, which talks about the percentage of the market that’s using SMSF platforms, for SMSFs. And it’s a bit lower that what the normal client mix would be. So that’s also an indication that SMSFs are probably looking more at a managed account solution. I guess, how does that relate to us? About a 70 per cent of our managed account service clients are self-managed funds. So we’ve already seen that trend. So that’s not new news, but it’s interesting that that’s being supported by such a big player as Class Super.
Carolyn Herbert: ASIC has announced some changes to their MDA regulatory environment. So how will this impact on Managed Accounts?
David Heather: What ASIC’s brought out at the end of September, in terms of their new regulatory regime, is really levelling the playing field for MDA providers. Previously there was the ability for firms to run a what’s being called, a limited MDA and ASIC’s elected to ban that type of structure, from October 2018. And what that’s going to do with that part of the market, is force those firms that are running limited MDAs, to either seek to obtain a full MDA authorisation on their rate for sell. Or obviously to seek out an alternate option and we represent a very good alternate option.
I think the other thing that the MDA regime has done is reinforce the fact that Managed Accounts as a business model, is a very viable business model. ASIC’s obviously supportive of that business model, by virtue of them not changing some of the core principles that the MDA legislation sat on, since 2004. And with that, I think that’s a support for what MGP’s doing, as much as the industry as a whole.
Carolyn Herbert: Can you bring us up to date with Managed Accounts net inflows and funds under management?
David Heather: If we look at FUA to start with, we mentioned that at the end of June, FUA was about $1.79 billion as at the 22nd of November. That’s increased to $1.9 billion. So we’re not far away off breaching the $2 billion barrier, which is a great outcome. From the flows perspective in 2016, we delivered $288 million in net inflows. That was less than what we were thinking, because our retail super solutions weren’t rolled out in the 2015/16-year. But certainly with those solutions about to be rolled out, plus a whole lot of MDA services that have recently come on board are to go live, we’re looking at flows ticking up in the second half of this year. We’ve already seen a slight tick up in this quarter from the previous quarter, and I’d expect that to continue.
Carolyn Herbert: Can you give us some insight into the products and services that Managed Accounts is currently implementing?
David Heather: Just the first one we’ve touched on a couple of times is the superannuation service that we’re rolling out, to about 15 firms as we speak. That’s been taking a long time to get to where we are now, but the rollout’s imminent. So we’re quite proud about that. There’s also an enhanced cash solution that we’ve now got live with our managed account service clients. They’ve now got the benefits of better rates, than what they had previously. In fact the best rates in the market that we’re aware of, against other platforms and also Macquarie CMA, I might add.
So obviously in a low rate high volatility environment, every rate increase counts. So the clients are getting the benefit of that, plus additional functionality. In addition to that, we’re well down the track to roll that non-custodial solution. That’s going to allow us to hold a whole range of assets outside of the custody structure, which a part of the market is demanding. And we’re happy to meet that demand. And in addition to that, we’re continuing with our project excellence initiatives, which process re-engineering or process improvement. Plus we’re making a whole range of changes to our technology platform.
Carolyn Herbert: Finally David. What can we expect from Managed Accounts for the remainder of FY17?
David Heather: We’ve started the year quite well. If you look at the September ‘16 quarter and compare that to the September ‘15 quarter, our net profit before tax is up about 48 per cent, which is a good start to the year as I said. What we’re looking to see is the services that we’ve rolled out and there’s a chart that’s in the AGM Presentation pack, which sort of demonstrates how many services we’ve got mature and in transition, and recently live. So we’re looking to see if FUA increase from those in transition and recently live firms.
And obviously we’ve got new firms to sign up to Memorandum of Understanding, for both the retail super and the MDA solution, or managed account solution. And we’re looking at signing up about more than 10 clients for the managed account solution. And I suggest more than five for the superannuation solution. Now I’m a bit of a conservative person, so I’d like to think that we can do better than that, but certainly those numbers are achievable.
As we’ve always said, really what the business is about is in continuing to enhance our net operating margin. And if we can, also enhance our gross operating margin. I think there’s also appendix, which demonstrates how we’ve done that over the last couple of years. And I’m certainly looking to do that again this year. And with that, that’ll lead hopefully to better profitability than what we’ve achieved last year.
Carolyn Herbert: David Heather, thanks for the update and congratulations on a successful 2016.
David Heather: Thanks Carolyn.