Morningstar predicts Insignia’s adviser numbers will fall below 1000

Mike Taylor

Managing Editor/Publisher, Financial Newswire

31 October 2022

It may be the 2025 financial year before Insignia Financial’s financial planning business starts turning a profit, according to research and ratings house, Morningstar. 

What is more, it is predicting that Insignia adviser numbers may drop below 1,000. 

In an analysis of Insignia released around the same time as the company’s latest update to the Australian Securities Exchange (ASX), Morningstar has given Insignia a generally favourable report, but has pointed to a multitude of challenges, including continuing financial adviser exits. 

The Morningstar analysis said it was assuming the Insignia advice business would be EBITDA profitable starting fiscal 2025, with the Insignia advice component reaching break-even by the end of this financial year and the MLC Advice business by the end of fiscal 2024, 

“We forecast a cost to income ratio of circa 80% by fiscal 2027. Our base case incorporates a gradual drop in advisors to just below 1,000 by the end of fiscal 2026. This is a negative CAGR of 11% from 1,600 in fiscal 2022.,” the analysis said. 

Referencing Insignia’s restructuring initiatives, Morningstar said it was forecasting the group’s salaried, self-employed, and self-licensed advisors to respectively constitute one-third of total advisors by the end of fiscal 2026. This compares with around 50% of advisors being self-employed in fiscal 2022. 

The Morningstar analysis said that Insignia lacked an “economic moat’ sufficient to protect its interests. 

“We believe growth in funds under advice, administration and management, or FUMA, and positive inflows are partially byproducts of Insignia’s acquisitive growth, and not just due to its branding or switching costs,” it said. 

“Insignia’s reputation was hurt after the 2018 Royal Commission revealed the firm’s poor corporate governance,” the analysis said. “Higher industry standards, tighter legislation and more regulatory scrutiny will reduce the distributional advantages from its vertically integrated model.” 

“These changes will likely limit Insignia’s inflows and pricing power.” 

The analysis said Morningstar did not believe Insignia’s financial advice business had a moat. 

“Group FUMA and advisor numbers have grown – even after the Royal Commission – but this is partly due to acquisitions. We’re not convinced it can leverage its brands to generate much stronger inflows or charge much more than competitors.” 

“Looking ahead, we don’t foresee strong customer loyalty toward Insignia, or a high degree of stickiness between a client and an Insignia advisor. We also don’t see Insignia advisors attracting much more inflows than competitors. These are partially byproducts of increased regulatory scrutiny on wealth managers following the Royal Commission, with industry standards now tougher than before. They include more stringent requirements on advisor due diligence, education and compliance.”