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How these two small caps are besting Macquarie Group and friends

Our largest listed financial institutions are losing market share in the investment advisory space with the latest report from Citigroup indicating that the number of advisers has fallen since the start of the calendar year.

The broker analysed ASIC’s financial adviser register and found that the industry had shrunk by 6% in the first five months of 2019.

This isn’t good news for the Macquarie Group Ltd (ASX: MQG) share price, IOOF Holdings Limited (ASX: IFL) share price and AMP Limited (ASX: AMP) share price as the contraction in the industry coincides with data showing that our largest wealth advisory groups are losing market share.

This also impacts on the big four banks that includes the Commonwealth Bank of Australia (ASX: WBC) and Westpac Banking Corp (ASX: WBC) although most are exiting the business.

What’s driving the exodus

“Major institutions currently represent 30% of advisers (versus 34% in pcp), as they continue to lose advisers to independent groups and self-licensing,” said Citi.

The contraction in the industry is driven by three factors, in the broker’s view. There is a lack of new advisers joining the industry due to higher education requirements from recent government reforms in the industry.

The disruption caused by the regulatory reforms could also be proving to be a disincentive for firms to invest and grow their businesses.

Lastly, the changes have probably prompted a number of advisors to exit the industry altogether.

David vs. Goliath

But in many cases, when there are losers, there are likely to be winners too. In this case, Citi believes small caps Netwealth Group Ltd (ASX: NWL) and Hub24 Ltd (ASX: HUB) are benefitting the contraction in the industry.

“We see the churn of advisers away from aligned institutional dealer groups as a tailwind for Netwealth and Hub24, as advisers are the key influencers in choosing a platform provider,” said Citi.

“The recent announcement by Westpac to sell its financial advice business to Viridian and CBA’s decision to sell Count Financial as positive for specialist platform providers such as Netwealth and Hub24. For instance, Viridian Advisory, the new owner of Westpac’s financial advice business, currently uses Hub24 as one of its platforms.”

But don’t go rushing out to buy the HUB share price or NWL share price. The broker warned that near-term fund flows could be negatively impacted by the ongoing industry reforms – and that means there’s no rush to buy the stocks.

Further, Citi thinks the HUB share price is overvalued and has a “sell” rating on the group while it has a “neutral” rating on Netwealth.

It’s also too early to throw in the towel when it comes to the big banks. But if you are wondering which of the big four is best placed to outperform in FY20, the experts at the Motley Fool have worked out the answer for you.

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Brendon Lau owns shares of Commonwealth Bank of Australia, Macquarie Group Limited, and Westpac Banking. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Hub24 Ltd. The Motley Fool Australia owns shares of Netwealth. The Motley Fool Australia has recommended Hub24 Ltd and Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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