Ann: Investor presentation - IOOF FY 2018 results, page-73

@Buyonfact,

You raise some interesting points that are useful in challenging opinions and thinking about the IFL business model.

When you say a "lot of profit in IOOF is linked to wealth management integration", yes that is the case, but the relevant questions related to that are, I think, as follows:

Is the "integrated" model:

1. in breach of any legislation or commercial arrangements?

and

2. an efficient structure in terms of delivering the best outcomes to customers?


If there is nothing illegal about what wealth managers are doing (and I am not saying that is definitely the case), then the only issue that requires the consideration and action of the authorities (the Regulators, The Commissioner and the Government) is whether or not the current structure of the industry is actively failing to deliver optimal outcomes to customers.

And a very important part of "optimal outcomes" is the cost of administering and managing people's wealth.

And the question about whether separating the discrete wealth management functions into discrete entities (for example, forcing IOOF to sell its trustee services business to an entity whose business model involves doing nothing other than providing trustee services) will provide better overall customer outcomes given dis-aggregation is almost sure to increase the overall cost structure of the industry.

And those costs would be almost certainly be passed onto customers.

So wholesale structural separation could indeed be legislated (personally I think the chance of it happening are somewhat slim - of the order of 10% probability, I'd say, if pressed), but when you say ASIC is "just going to make the current level of integration too hard or too expensive or too risky", that doesn't make sense to me because ASIC has no mandate over dictating industry structure; rather, it's exclusive remit is to ensure that whatever structure the industry assumes, that the industry operates in accordance with the laws.


"I think the question that will be on investors’ minds about IOOF is just how well they have dealt with vertical integration conflicts in the past. They have not been one of the big 5 that ASIC have been hunting but every time IOOF pops up there seems to be something not quite smelling of roses. That was the case again today."

While it would be good if organisations operated to 100% perfection with zero slippage or error or fault (of omission or commission), the fact of life is that it doesn't happen because it is close to a physical impossibility.

Sure, IOOF did something that appears to have been wrong or, at best, not in the interests of all of their clients (even though the CEO appears to have the (possibly unhelpful) position that the company did nothing wrong). But if you look the issues raised by the Royal Commission, well, objectively they are hardly material in scope or magnitude. Certainly not of sufficient magnitude as the warrant a default view of "the thing is rotten"... which is what the market appears to be doing.


"While there may be nothing at all to worry about at IOOF, I think people are just not sure."

Yes, that's a good assessment of the situation. Because if people were sure, the stock would almost certainly not be trading on a prospective P/E multiple measured in the single digits.