Damon Callaghan

Artificial intelligence (AI) is boosting the efficiency of several Australian technology companies including HUB24 and Netwealth, which are utilising new technology to boost their operating efficiency and improve customer experience, underpinning long-term value creation in both companies, according to Damon Callaghan, partner at ECP Asset Management.

Workflow automation tools combined with AI are replacing human effort in almost every industry, including in the financial advice sector. HUB24 and Netwealth are building automation solutions to improve advisers’ administrative workflows and will likely continue to gain market share based on their technological innovation.

“We believe the innovation both are introducing to advisers will continue to widen the competitive advantages of both companies when compared to their competitors, giving advisers yet another reason to consolidate clients onto the HUB24 and Netwealth platforms,” said Mr Callaghan.

“HUB24 and Netwealth have won significant market share in the independent financial advice (IFA) industry. Both platforms success emerged from having developed innovations focused on advisor and clients’ needs – successfully challenging vertically integrated wealth models that had historically dominated the adviser market. The growth of both platforms was accelerated by the Hayne Royal Commission, which resulted in an exodus of advisers from banks toward the IFA industry. This opportunity retains significant runway for both companies.”

According to Mr Callaghan, HUB24 and Netwealth each have a roughly 7 per cent share of platform funds under administration (FUA), but they are attracting a significantly larger share of industry flows as independent advisers consolidate their clients onto their preferred platforms.

“To add context here, HUB24 and Netwealth have $17 million to $22 million FUA per adviser, which is one-third of the current industry average of around $60 million, indicating the upside ahead from advisers’ continual back-book consolidation.”

HUB24 and Netwealth are still improving adviser workflow efficiencies through new innovations, and this will help in attracting more advisers and FUA to both platforms, according to Mr Callaghan.

“Advisers are still buried under reams of administration, to meet client needs and regulatory documentation and reporting requirements. This reduces the time advisers have to focus on value-add functions such as meeting with existing clients and attracting new ones.

“Using its proprietary machine learning tools to structure data, including extracting data from PDF files, emails and audio recordings, HUB24 and Netwealth are building automation solutions to minimise advisers’ administrative workloads.

“We believe this sort of innovation will continue to widen the advantages of both companies when compared to competitors, giving advisers yet another reason to consolidate clients onto the platforms,” said Mr Callaghan.

“While both companies have had a strong start in 2024, investors should look through any share price volatility and remain focused on the big picture growth and competitive advantage opportunity underpinning each company.”

ECP Asset Management invests in several emerging growth companies on the ASX which it believes possess strong growth opportunities, including Megaport and Fineos, which are also using technology to introduce new efficiencies in different industries.

“Megaport is a leading software-defined networking operator globally, with a significant global footprint connecting data centres, software vendors and corporates across the world. It will increasingly benefit from the structural shift of enterprise compute to the cloud, particularly as data moves between cloud environments to train and implement machine learning models,” said Mr Callaghan.

Fineos is the number one enterprise software vendor in the life, accident and health insurance market across North America, Australia and New Zealand, counting seven of the 10 largest US insurers as clients. “Fineos has an important opportunity to expand its market share in core policy administration software, which provides a huge growth market,” said Mr Callaghan.

All of these companies possess an existing competitive advantage and the opportunity to achieve greater productivity-led margin gains or cut product pricing for clients to widen their value proposition versus competitors.

“Put another way, when a business is less subject to competitive forces, the pressure to compete away efficiency gains is less pronounced. Where AI execution becomes more compelling, is when a leading business can leverage its existing scale, modern compute infrastructure and access to data to create new product solutions for clients that lethargic incumbents are unlikely to have the agility to replicate, and new entrants with no data, simply cannot build,” said Mr Callaghan.

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Callaghan said that the qualitative outlook is becoming increasingly cautious.

“Although national retail sales data points to robust consumer sentiment and recent reports have showed record high sales volumes, consumer confidence has been deteriorating since earlier this year and corporates are preparing for a recession by reining in budgets.

“There is more pressure to come whether it’s in construction, consumer or enterprise software industries. Many companies have expressed concern that there is only so much cost increases that can be passed through to the customer. The rest will need to be absorbed by companies taking a lower margin,” said Callaghan.

As a result of increasing inflationary pressures, corporations have begun announcing pull backs on labour hiring plans with some companies already announcing job cuts, for example in the software and technology industries.

“Australia is trying to deal with this labour issue through migration, and has already increased the permanent migration cap as well as relaxed post-study work rights for international students. In effect we should expect that the reopening of borders should ease some blue-collar shortages that we have seen in the past 12 months,” said Callaghan.

Sam Byrnes, partner at ECP, said that the inflationary pressures introduced by global supply chain disruptions appear to be easing but other major inflationary pressures remain.

“Inflation will continue to be a feature in the markets in the next 12 months.

“The key to navigating this environment is to be macro-aware but not macro-led. Economic views should not dictate the investment process, as the success of such an approach means being correct in your economic views but also understanding what the market is already pricing in and how this will change as new economic data becomes available.

“The past 12 months presented opportunities for management teams of businesses to grow and prosper and that is key in evaluating a company’s long-term sustainability.

“Investors should focus their strategy on building a bottom-up portfolio composed of businesses that can compound their profit over time and that are not dependent on the economic cycle to drive business growth.

“Be cautious on near-term growth forecasts and valuations, but keep in mind the 3 key factors when stock-picking; business quality, balance sheet strength and structural growth,” said Byrnes.

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