Diversified financial business IOOF Holdings Limited (ASX: IFL) shares are on watch this morning after announcing platform changes.
What happened?
IOOF announced changes regarding external platform providers. Effective yesterday, IOOF and BT have agreed to terminate the existing relationship agreement.
Management said that IOOF and BT had worked to find an agreement as IOOF looked to simplify its platform strategy and go with a provider that has an open architecture approach.
The agreement with BT included termination rights for both parties on 12 months’ notice and provided IOOF with rights in respect of the unwinding of the current arrangements and the transition of clients and funds to other providers. It was estimated that the cost of such a transition from BT would cost IOOF between $30 million to $70 million, which combined with expected customer losses, made such a strategy unattractive.
However, Westpac Banking Corp (ASX: WBC) has said that to avoid complex, costly and time-consuming separation provisions, Westpac will pay IOOF a one-off amount of $80 million.
IOOF will apply approximately $18 million of the settlement amount to offset a receivable it currently has. FY21 revenue will decrease by approximately $15 million (before tax) on $18.8 billion funds under advice at 30 November 2020. Beyond FY21, IOOF estimates the full year revenue impact would reduce significantly due to fund outflows and lower pricing.
Management comments
IOOF CEO Renato Mota said: “The decision to change the provider relationship now provides us with long term certainty as we focus on the effective implementation of our new platform strategy and growing returns for shareholders. It is important we work with partners who fit with our open architecture philosophy. Enabling choice is a key feature of our strategy.”
New platform agreement
IOOF has entered into an agreement with Hub24 Ltd (ASX: HUB). Hub24 will act as the platform administration and custody provider. IOOF and Hub24 will work together to develop a range of solutions including private label superannuation and investment products with IOOF entities to be the responsible governing entities.
Summary thoughts
Changes can be disruptive to relationships with clients. Just look at what happened after the Financial Services Royal Commission – there were some winners and some losers from the change.
I think IOOF is an interesting business for dividends – it has large economies of scale, which could allow it to pay a large dividend and still invest enough for growth.
However, there are other ASX dividend shares I’d rather buy first. For example, Magellan Financial Group Ltd (ASX: MFG) could be a better pick for total returns with more growth potential.
