For a business that provides professional financial advice to thousands of customers across Australia, Insignia Financial (formerly IOOF) is becoming less forthcoming on the level of detail it provides to investors. The recent share price fall allows us to upgrade our recommendation to a Hold, but we now have concerns on the transparency of the company.
IFL’s quarterly updates are becoming less relevant to investors as the company changes its reporting information and excludes important information. IFL is no longer providing Advice FUA making it difficult to determine what is causing revenue changes. Instead, the company is only providing adviser numbers which does not give any insight into whether revenue is leaving due to changing FUA. This leaves a big gap on all the advice businesses which combined generate over $600 million in management and services fee revenues. The margins in the
Advice business are tight, so any slippage would be material for earnings.
The consolidation of ANZ Wealth into the IFL group is also causing changes to reporting structures. This will also make it more difficult to assess the underlying progress in each division. The 1H22 result will also include MLC Wealth creating further complexity to understanding the result.
Investment view
There are several areas in the approaching 1H22 result that will require close attention including the extent of margin decline, whether the advice losses are reducing, the one-off costs excluded from the underlying result and any remediation charges. Further, the balance sheet needs to be examined and how much reinvestment is occurring. We will want to know the progress of the various integration projects and the state of the synergies available. IFL will report its result on 24 February 2022.
IFL’s funds management net flows and closing balances can no longer be compared given the changed reporting and the exclusion of most of the funds. The revised reporting structure at the 1H22 result will be crucial to understanding the situation.
As a consequence, we see audit risk as a new factor to monitor for IFL. If the company’s auditors are concerned about the continual changes to IFL’s reporting, we would expect a flag.
Integration risk is the other key risk factor to watch.
