Investment Platform HUB 24 (ASX:HUB) recorded nearly $1 Billion of net inflows for the three months ending 30th June 2019, taking total funds to $12.9 Billion. The banking royal commission highlighted the large fees being charged by the very large players in the investment platform market, which included the big 4 banks and AMP and IOOF.
Despite the growing size of investment platforms such as HUB 24 or Netwealth (ASX: NWL), their share prices have both fallen about 15% over the past month as the share-market comes to grips with the effects of a falling cash rate has on the profitability of these companies.
Other than the usual administration fees, HUB 24 charges an additional fee of 1.75% on the cash component of the portfolio (HUB24 INVEST IDPS Guide PART II). The percentage-based administration fee and expense recovery fee on the whole portfolio is 0.49%. This fee is also charged to the cash component of the portfolio, for a total cash management fee of 2.24%. The problem, of course, is that with the RBA cash rate of 1% (possibly going lower), the return on cash is about minus 1.24%.
The Australian Financial Review has pointed out that this raises important ethical questions for financial advisers recommending these products and should put pressure on the Regulators to investigate. What’s good for the Royal Commission geese is good for the ganders.
The market has worked out that there is immense pressure on the profit margin of these platforms, with a quarter to a third of their revenues coming from interest earned on that cash (AFR).
HUB 24 countered in an ASX statement saying, “All clients of HUB24 are receiving a positive interest rate on their cash account, post yesterday’s RBA rate change”. With RBA’s cash rate at 1% and HUB24’s disclosure document saying that a 1.75% fee is charged on cash, it is not clear how this squares with HUB24’s statement.
According to the AFR article, HUB24 has $1.2 Billion in cash holdings and NetWealth has $2.2 Billion, according to estimates of several analysts. HUB24’s profit before income tax for the half-year to December 2018 was $4.3million.
A 1.75% fee on $1.2 Billion is $21 million for a year, or $10.5 million for the half year. Even if you cut their cash fee by half it still accounts for all the half year profit plus some. The market cap of HUB24 is $1.85 Billion. The market is right to be sceptical with these shares, hence the fall of 15% in the share price over the past 30 days.
Disclosure: Emerald Portfolio manages an Internationally diversified ETF portfolio, with a flat .55% management fee. No fees are charged on the cash component and clients receives the deposit rate offered by the financial institution that manages the related cash account.
Michael Cornips is the Managing Director and Founder of Emerald Financial.
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