It has built a reputation as a provider of investment and philanthropic advice to some of the country’s wealthiest families. But the company is also dipping its toe into the troubled market downstream.
In August, Perpetual’s private wealth arm, Perpetual Private, acquired Sydney and Melbourne-based Jacaranda Financial Planning for an undisclosed sum.
Stark cultural differences
Equity analysts welcomed the decision, and Macquarie Research listed Jacaranda’s contribution of an additional $915 million in funds under advice (FUA) to Perpetual’s book in the “what we liked” column of its take on the company’s financial year results.
But the transaction has also raised eyebrows in the wealth management market, given the stark cultural differences between the two firms, at least in terms of industry perception.
Perpetual is synonymous with the kind of skyscraper-dwelling, golf club private client advice that escaped the glare of the Hayne royal commission. It lends its brand to the Sydney-Hobart Yacht Race-winning vessel Perpetual Loyal, no less.
Jacaranda, on the other hand, is known for its common touch and regular slot on talk-back radio stations 2GB in Sydney and 3AW in Melbourne (both owned by Nine, publisher of The Australian Financial Review), explaining basic money concepts to everyday commuters.
“Jacaranda is more of a mass affluent business,” said a wealth industry figure, who asked to remain anonymous. “They [Perpetual] will need to be careful they don’t move down the value segment and spoil their high-net-worth positioning.”
By buying financial advice firms, it also runs the risk of being accused of inherent conflicts of interest, given it is also a manufacturer of investment products that could be sold through those advisers.
Perpetual Private group executive Mark Smith acknowledges that Jacaranda’s client base is slightly lower on the net wealth scale than Perpetual’s traditional threshold of $1 million-plus in investible assets.
But he says that is all part of the plan. “We have always had an eye on the pre-retiree market,” Smith tells this column. “That is the most growing part of the market right now for Australians to seek advice.”
He cites Australian Bureau of Statistics data projecting the number of households in the $500,000 to $1 million segment to grow at a compound annual rate of 3.5 per cent over the next five years, reaching 19 per cent of the population by 2026.
Although some in the cohort may not meet the threshold to be classed as “sophisticated investors”, they have increasingly sophisticated needs of relevance to strategic financial advice, such as costs associated with young adult children and elderly parents, transition to retirement and estate planning, Smith says.
“The real thing Perpetual was looking for was a firm that had systematised the process but customised the advice to each and every pre-retiree,” he explains. “And we found that in Jacaranda.”
New recruits
His intention is to bring the 24 new recruits under Perpetual’s licence (they are currently licensed by IOOF) and partially integrate them as a “specialist part of Perpetual Private”. The idea is that they effectively become partners in the corporate structure of the private wealth business and gain access to its infrastructure and training, while retaining some branding and identity.
“We are running effectively the Freehills model of advice,” Smith says in a reference to blue-chip law firm Herbert Smith Freehills (of which, incidentally, Perpetual is a client).
“It is a professional services model where we bring in advisers, help train them, make them partners over time, work with them to build their books and provide the right experience and research around them to actually make them successful.”
As for the charge of being vertically integrated, Smith says the company does not engage in any old-school cross-subsidisation of product lines.
“We charge at the higher end of the marketplace for the advice we provide,” he says. “Only 17 per cent of all products that our clients have would be Perpetual product.”
Licensing legacy
Swimming downstream on the wealth curve might deter some critics, but for Smith, it is a tactic that Perpetual can deploy but many of its competitors cannot.
Most of its clients are high-net-worth individuals, but the firm has always had a licence to provide personal financial advice to retail clients, meaning it can bring in slightly less well-heeled clients without making big changes to its regulatory compliance regime.
By contrast, the vast majority of private wealth management firms are wholesale only, meaning their clients must meet the “sophisticated investor” test (a minimum $2.5 million in assets, among other criteria).
Commonwealth Bank and National Australia Bank, for example, have each jettisoned their retail financial advice operations and licences, but are investing in their advisory businesses for wealthy clients, Commonwealth Private and JBWere respectively.
The licence gives Perpetual Private some flexibility to look at tucking in firms that might not be, on paper, a natural fit but give it exposure to attractive client demographics.
Besides the identified pre-retiree opportunity, Perpetual Private has also paid up for firms specialising in the lucrative niche of advising medical professionals.
Shopping spree
In 2016, when the big four banks were still the largest providers in Australia’s retail wealth management market and the Hayne royal commission was still a political idea in its infancy, Perpetual acquired NSW-based Fintuition Wealth Advisers and related businesses for a reported $10 million, attracted to its client book of physicians and surgeons.
It followed up in 2019 with the purchase of Priority Life, a life insurance advisory business again specialising in servicing medico clients.
They won’t be the last. Perpetual Private had meetings with about 20 prospective firms over a 12-month period before signing the deal with Jacaranda, Smith reveals, and will continue to do so as it expands its footprint in these chosen segments.
“[Jacaranda] is certainly not a one-off,” he says. “We are looking inorganically for opportunities as they arise ... we have an appetite to continue to grow in Private.”
Heading for the exit
According to its financial statements, Perpetual has $147.1 million in cash on hand as of the second half of the 2020-21 financial year to deploy to acquisitions, alongside $166 million in “borrowings”.
And there is no shortage of firms up for sale.
Research house Adviser Ratings estimates that 21 per cent of the 7000-odd financial advisory firms in Australia have expressed interest in leaving the market or retiring from the industry. An additional 12 per cent have said they would be open to an offer for a potential buyer or speaking to a business broker.
Along with the disruption caused by the exit of the retail banks, and the reputation fallout from the royal commission, the Morrison government’s controversial industry education reforms – under which all advisers must sit a national examination – have steered many towards the exit, especially in older demographics.