The recently announced results of PSG Financial Services (JSE: KST) were once again very good overall, with investors able to tick all the boxes on their checklist.
Revenue, headline earnings, dividend and ROE (return on equity) were all up by double digits, so investors couldn’t have asked for much more. Indeed, when one looks at the compound annual growth rate (CAGR) of pretty much every line on a rolling 10-year basis, as was set out in the presentation deck, almost all the key metrics have achieved CAGRs in the low teens over the past decade.
Crucially, the metrics investors would prefer to see stagnate did just that: CAGR for employees was 5% over the decade and shares outstanding were basically flat. Such consistency might make investors become somewhat blasé.
PSG operates three main divisions, which complement each other. Its marquee division, PSG Wealth, provides financial planning services to the upper end of the retail market, the mass affluent and above. This division, on an arm’s-length basis, provides an excellent sales funnel to its two other divisions, where it makes sense for the client to access a product offered by PSG Asset Management and PSG Insurance. Not all clients will take up in-house products (or indeed be suitable); but a decent proportion will. Having in-house distribution is a valuable part of the group ecosystem. PSG differs from the majority of listed financial services firms in that it is an advice- or client-led business rather than a product-led one.
Not many competitors have such a trifecta of businesses under one umbrella or at a reasonable scale. In this half, all three of PSG’s divisions fired on all cylinders, with insurance returning a particularly noteworthy result. This reflects the broader insurance sector, which has seen something of a Goldilocks scenario in recent times thanks to a confluence of improved reinsurance rates, a lack of major claim events and solid returns on underwriting and investment.
However, the key division is PSG Wealth, which includes the adviser network and contributes 56% of total group profits. These advisers are critical to the group’s success, as they hold a close relationship with clients. Typically, if an adviser moves to another banner group, a fair number of that adviser’s clients would go with.
CEO Francois Gouws notes the steady growth in advisers over the years but says there is still plenty of room to grow market share. Thus, a key data point for investors will be to what extent total advisers under the PSG Wealth umbrella can tick up.
Attracting new advisers, helping existing advisers grow their client base and retaining existing advisers is a key strategy for PSG Wealth
Attracting new advisers, helping existing advisers grow their client base and retaining existing advisers is a key strategy for PSG Wealth. The heavy investment in IT is focused on reducing the burden of bureaucracy, admin and compliance on an adviser, freeing up more time to spend talking to clients and providing advice.
Innovation and competition are exploding across all verticals of financial services, as seen in the new digital banks, digital-only insurance firms, fintech payment providers and companies such as EasyEquities, with its smorgasbord of products.
However, many of these lack the wealth and financial advice piece, which makes their clients less sticky and more open to switching product providers. For example, what stops a Capitec customer from switching to Bank Zero or a Santam customer from switching to Naked Insurance? Not much, other than price and a bit of hassle and personal admin which, to be fair, can be a deterrent for many people.
However, think of a PSG Wealth customer contemplating a switch in life insurance, RA, discretionary fund investments and so on. They won’t do anything before consulting their adviser, after which they might find a better option within the broader PSG product universe or even decide their existing product is actually fine and that it’s not worth the effort to change.
Crucially, even if they do switch from PSG Insure to Old Mutual Insurance, for example, they still remain an advice client, so not all revenue is completely lost; unlike with a straight product provider switch that results in zero revenue remaining once a customer is gone.
The sticky customer base, coupled with a mutually beneficial and reinforcing ecosystem with room for market share growth, leaves PSG in an enviable position to execute its growth strategy.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.