Should you buy, hold or sell Fiducian shares?

Fiducian (ASX:FID) is a relatively small company with a market capitalisation of $280 million.

Most market analysts do not provide research on it and trade is fairly illiquid. On the upside, it bears the characteristics of a high-quality business.

The stock price has risen 57% over the past 12 months and it pays a fully franked dividend yielding 4.4%.

What is Fiducian?

Fiducian is an integrated financial services provider. It has three primary operating divisions:

• Financial planning
• Funds management
• Platform administration

In terms of other companies with similar business models, it has similarities with financial services groups like AMP and Insignia Financial Group, as well as platform operators like Hub24 and Netwealth but in terms of size is dwarfed by them.

As a small firm, it may represent an opportunity for retail investors where institutional investors fear to tread.

How does the company make money?

The revenue split for Fiducian is:

• Financial planning - 36%
• Funds management - 37%
• Platform administration - 27%

The financial planning arm has 80 advisers across 48 offices covering every state. It is fairly evenly split between franchised financial advisors and financial advisors directly on the payroll in terms of both headcount and funds under advice.

Like its peers, Insignia and AMP, Fiducian is looking to capitalise on the synergies of having both funds management products and a platform within the same group as their financial planning business.

The idea is that instead of just receiving a fee for the advice, they can also receive fees from the products invested in as well as the platform used to manage it all. They have noted that there is $1.6 billion of funds under advice that is managed on external platforms and they are working on a process to transition much of that to their platform.

Integrated financial service providers need to be very careful when they recommend advice clients use internal platforms or investment products. The overriding principle is that the product or platform must be in the 'best interest' of the client.

This is a statutory requirement. In the past regulators have cracked down on the situation where recommended investment products were in the advisor's best interest more than the client's and the same principle applies to platforms.

That said, if it is well managed, and the internal platform or investment product is genuinely in the client's best interest, then there can be opportunities to extract greater value.

When was Fiducian founded?

Fiducian was founded by Indy Singh in 1996. He remains the executive chairman and holds 35% of the shares on issue.

This, of course, contributes to the lack of liquidity in the stock, but on the plus side, it is another case of a founder-led business where there is strong alignment between management and shareholders.

How is the company performing?

Turning to the financials, they have been strong over the last 12 months. The key driver of revenue is the level of funds under management, advice and administration. This grew by 10% in the year ended June 30, 2024, to $13.5 billion. That in turn drove revenue growth of 10%. It has grown a further 5% in the first quarter to $14.2 billion.

These types of businesses have strong economies of scale. The gross margins are 75%, which means that the majority of costs are fixed, not variable. That means that a high proportion of additional revenue drops to the bottom line.

This is evidenced by the fact that earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 16% and net profit after tax and earnings per share (EPS) by 22%.

Operating margins are high at 26.5% and the profitability ratios are very high, for example ROE is 28.5%. The balance sheet is very strong with $27 million in cash and no financial debt. Free cash flow per share is consistently above EPS indicating that cash generation is very strong.

The fortunes of Fiducian and its peers are linked to the investment performance of the markets. Fiducian has ridden the uptrend of equity markets performing very strongly in Australia and the US.

At some point this tide will turn which will be detrimental to Fiducian's revenue. However there is a fair bit of resilience built into their model. Whilst a portion of their revenue is market linked, they also derive revenue from platforms and software which is not tied to the market.

With the strength of the Australian superannuation sector and the popularity of wealth management platforms, Fiducian are in a good position to continue growing into the future.

Get stories like this in our newsletters.