Matt Heine on How Netwealth Became One of Australia’s Greatest Tech Success Stories

8:54Matt Heine:What year was this that you started building out advisory? That would have been probably 2003, 2004. Oh, so early. So it was pretty early. How big is the team at this point?

9:03Adam Schwab:Oh, it would have been tiny, so less than 20. Okay. Maybe 25. Yeah. But we'd outsourced a lot of the technology build to a company in Perth. I think it might have been part of Sausage Software back then. Oh, yeah. So we're really going back.

9:17Adir Shiffman:It's like every blast from the past possible we were character to.

9:20Adam Schwab:So that was sort of part of that early piece. And then we had to work really hard. So it was a classic start-up story. we had to go to customers. They would say, we love what you built there, but you don't have a super fund. So you go and build a super fund and then you don't have insurance. So we'd have to build insurance. So for that first five years, we really had to pedal very quickly, take customer feedback and build the product out as quickly as possible. Were you making money? No, so it took us 63 months to hit our first billion dollars under management. And it happened that that was the point at which we also broke even for the first time.

9:51Adam Schwab:It's not that. Five years is not crazy. Well, you don't ask the next question,

9:54Adir Shiffman:which is how much cash do you need to pour into a loss-making business to get to month 63? That's the question.

10:02Adam Schwab:Yeah, so it's quite a lot. And, you know, Dad used to tell the story, sit around the table, the boardroom table, and for a long time people used to call it investing. He would just call it losses. But for a long time there people had invested more than we had under management. And so given the nature of our business, that was not a great position.

10:20Adir Shiffman:Well, the net wealth is reducing my net wealth. for the first 60. But when you say, you know, I won't probe you on the number, but it's presumably eight figures that you have to invest into a business like this to get it to break even.

10:32Adam Schwab:Yeah, yeah. So it was definitely, again, the technology was probably the biggest spend. We were actually talking about this the other day and I think at the time the first quote we got was from a million dollars and none of us could believe it. Like, how can you possibly spend that much on technology and on a website? And what are you spending these days? Well, it's mostly expense, but close to half of our revenue is people and 40 % of that would be tech. So it's many, many, many multiples of that these days.

10:58Adir Shiffman:Not including the token avalanche that we're all paying for now. And my other question on kind of the origins of this is, see, your father is 50 years old or so. He's really done well in business. Lots of, I think, confused people think about retiring when that's their lot in life. But he decides he wants to go and do something that is not entirely different from what he's done previously but pretty different and go and pour all this money into it and do it again. Like what do you think the motivation is there? Now that – I mean you're not quite 50 but like you kind of relate to the age a bit.

11:35Adir Shiffman:Like what do you think the motivation is there?

11:37Adam Schwab:So I'm 47 now so I'm very close to 50 and there is no way that I would be retiring at 50.

11:42Adir Shiffman:Yeah, absolutely.

11:43Adam Schwab:And I think – so they'd started to look at sort of platforms a little bit in the previous business which was property. So it just didn't fit into what they were doing at the time. So all of the big banks had started going into this space on the advisor offering. So we were basically competing against Commonwealth Bank, Westpac, AMP, CBA, Macquarie. So a couple of small competitors to go up against with very deep pockets. And he doesn't play golf and he's always said that works his hobby. So I think he sort of retired literally for two weeks and was already working on what to do next. He sort of tried to be an investor for 15 seconds and realised that wasn't all it was cracked up to be.

12:18Adam Schwab:Had a couple of great investments and a couple of shockers. He was an early investor in Seek back in the day, so that was one of the good ones. And there was a lot of other really bad ones.

12:25Matt Heine:As long as he sold out in 2011, he ran amazingly well.

12:27Adir Shiffman:You only need one great investment. I think nine-tenths of this country is powered by Canva, isn't it?

12:34Adam Schwab:Still waiting for my Canva shares to come through.

12:37Matt Heine:So you've got the business coming along pretty nicely. It's like break even in 2004, 2005, billion under management. This has gone pretty well. GFC hits. I imagine that wouldn't have been ideal for you guys, given you sort of based largely on investor flows?

12:51Adam Schwab:It was interesting. So it's going back a long time now, but it was obviously a really rough time in global markets. We were just starting to get pace and there was a bit of a shift from our financial advisors at the time to be leaving the banks and the institutions to go what they called independent, not allowed to use that word, but sort of non-bank, non-institution. And having left the banks and the institutions, there weren't actually many independent options for them to work with. So we were starting to get good sort of traction. our business had grown quite a lot at that stage. The product was very, very broad.

13:21Adam Schwab:So it was more about we can work with you rather than telling you how to do your business. And that was resonating really strongly. So throughout the GFC, again, off a very small base, we were able to keep that momentum going and continue to sort of build the business.

13:33Matt Heine:So what was the product actually, to explain to people who... Well, we should start with that.

13:36Adam Schwab:Because if we were a professional podcast, we would start with... We're a professional company now. That's true.

13:42Adir Shiffman:That can be very misleading.

13:43Adam Schwab:The first episode.

13:45Adir Shiffman:You can say, they would usually say, what is it exactly that your business does? It did occur to me.

13:51Adam Schwab:We're building up to it. We're warming up the audience. All right, you're building up to it.

13:54Adir Shiffman:It's all part of the grand plan. No, hit him with what the hell do you actually do for a living.

13:57Matt Heine:Partly because the business has changed somewhat over the years. So at this point, what are you doing for financial planners and financial advisors, I guess, call it GFC, post-GFC?

14:06Adam Schwab:It's probably the easiest way to think about it is in the same way that accountants might use Xero to manage all of their customers and do all of their work and their workflows. We do something similar for financial advisement intermediaries. So whether you're sort of a suburban financial planner, working in a private bank, a broking firm, use our technology to effectively manage all of the portfolios for your customers. So that could be through our superannuation fund where we're the trustee. It could be through our investment accounts where you can manage SMSFs or trusts or companies. And through that service, you can buy and sell all of the assets for your customers.

14:37Adam Schwab:So it could be domestic shares, could be shares across 16 exchanges globally. It could be managed funds, bonds, term deposits, private markets. And we make it really easy to do all of that at scale for financial advisors. We then do all the reporting, tax reporting, and provide sort of client access as well to clients' accounts. So it's a very sort of, I guess, broad offering, but makes it really easy for financial advisors. And I think you're a customer these days, Adam. I'm a direct customer.

15:03Adir Shiffman:Can I ask you this question? So sometimes people talk in this world about wraps.

15:07Adam Schwab:Yes, we're a wrap.

15:08Adir Shiffman:Which is effectively, I mean, it's a pretty basic kind of name, isn't it? It's like a wrapper that goes across the top of everything and lets people, instead of going and finding individual assets, access them all through a single platform. And you didn't invent the idea of a wrap. Like, that's been around for a long time. And so why was there space for you to do a wrap? Like, why is there opportunity in that market?

15:30Adam Schwab:Yeah, well, there wasn't really. There weren't really wraps. There was like all the major banks and institutions were doing a really good job of it. They built up sort of platforms with$80 or$100 billion at the time. And I guess the difference to the market now versus back then was that the banks and institutions owned 80 % of the advice. So if you're a financial advisor, the banks typically were your employer and they had maybe 5 ,000 or 6 ,000 advisors working for them. They were effectively distributing their platforms. So we saw an opportunity to service the non-bank advisor, which at the time was only 20 % of the market and really competitive.

16:04Adam Schwab:And how many were there?

16:07Matt Heine:Like what was the TAM back in 2008? It was a lot bigger.

16:09Adam Schwab:So it was probably about 20 ,000 advisors. A lot of sort of older advisors, life insurance advisors. 20 ,000 independent advisors or in total? In total. Right. That's including the banks.

16:18Matt Heine:So it's 4 ,000. Your TAM was 4 ,000. 15 ,000 banks.

16:21Adam Schwab:And now the number of advisors actually dropped to about 10 ,000. Total. But the TAM for us is probably 100 % and we're pushing into new markets.

16:29Matt Heine:Oh, so banks don't do it anymore?

16:30Adam Schwab:Well, through the Royal Commission. Oh, yeah. Basically through vertical integration it got too hard.

16:34Adir Shiffman:Because last week, oh, whatever, I lose track of time, as you know. At some point in the last three years we've spoken about Sightminder. I think it might have been last week or the week before. Yeah, I was working on it. And so basically Sightminder, what I thought was interesting about Sightminder is it's a platform that gives you access, that gives, you know, online travel agents access to inventory from hotels, but they work only through probably these independent hotels, not these major hotels. and this story is kind of like a site-liner except all of the hotel groups dissolve, all the big groups, and suddenly the number of hotels halves but the TAM goes to 100%.

17:12Adir Shiffman:It kind of reminds me of that. And so if I was running around, I mean, I'll ask you, I'll do the unpleasant questions. So if I was running around and saying my TAM is 4 ,000 financial advisors, like that sounds terrible as a TAM, don't you think? How was anyone interested in that?

17:30Adam Schwab:It was a bit of a leap of faith. I think we often joke about if you looked back on it, you probably wouldn't do it. It turned out all right. But, yeah, it was a pretty big, big move at the time.

17:38Matt Heine:How many – so we'll talk about your private business in a second, but of the 4 ,000 advisors, how does that translate –

17:43Adam Schwab:Back then.

17:44Matt Heine:Back then. How does that translate into end users as an end? How many customers would they have?

17:51Adam Schwab:It was a long time ago and I don't think we actually calculated it, to be fair.

17:54Matt Heine:On average, what's the number? Has this changed over the years as in each number of clients per advisor?

17:59Adam Schwab:Yeah, so that's really a big opportunity now. So we talk about a number of different TAMs. If you look at our direct sort of space, which is the platform market, that's about$1.2 trillion and that's growing at about 10 % per annum. We've got 9.7 % of that. And people often focus on that as being a TAM, but the reality is that it's much, much bigger than that.

18:18Matt Heine:This is financial planners. This is, correct.

18:21Adam Schwab:Under management, exactly.

18:23Matt Heine:That's$100 billion you've got roughly.

18:24Adam Schwab:We've got$125 and then we've managed about another$30 billion sort of directly through our various products. Yeah. But the big opportunity for us is, A, growing our market share within the direct market, so as in the platform market, but then industry funds are suddenly moving from accumulation into decumulation, and there's$1.8 trillion sitting in industry funds. $600 million of that remarkably sits in accounts over$500 ,000, which represents 4 % of their membership. And they're the type of accounts that are actively seeking advisors and will more often than not move across to a product like ours, and that number just continues to grow.

18:58Adir Shiffman:10 % growth seems low to me for that pool of funds. I'll tell you why it seems low. How much is super nowadays? It's 40 % or something? It's 12 % of how much?

19:06Matt Heine:12%. I remember some huge – 12.5 % now maybe?

19:09Adir Shiffman:Yeah, whatever it is. It's going to end up to be 200 % at some point depending on the government.

19:12Matt Heine:We're getting close to 200 at will, yeah.

19:14Adir Shiffman:Yeah, agreed to. So 12 % super, that's good for you.

19:17Adam Schwab:Great.

19:18Adir Shiffman:And investment growth. And so how can 12 % super plus investment growth only lead to a 10 % growth each year in those funds under management. I don't understand that.

19:29Adam Schwab:Yeah, so that's just one part of the market and that really relies on advisors bringing new money into the system as opposed to just the system growth.

19:36Adir Shiffman:Why is the system not growing by 15 % by itself?

19:39Adam Schwab:Yeah, so for a long time post-Royal Commission, and this has now changed dramatically and it's actually accelerating in our favour, money was actually going out of the platform market, so away from financial advisors into industry funds.

19:51Adir Shiffman:Right.

19:51Adam Schwab:And now what we're seeing is that that trend has dramatically shifted and there's some amazing charts online at the moment. which is the industry funds orbit Unisuper are now in net outflow

20:00Adir Shiffman:and all of the retail funds. So you've got a tailwind powering your business at the moment. Because basically the Royal Commission shredded the credibility of wealth management largely, which I thought was counterproductive. I mean, I don't know, I thought – I mean, you can refit me on this. It's a while ago now. But I look at AMP today versus AMP before the Royal Commission.

20:21Matt Heine:Well, AMP has been on downward slopes.

20:23Adir Shiffman:It was, but they were crunched by the Royal Commission by far, apart from the bloke had collapsed and went to hospital. Who was that? It was one of the bank guys, wasn't it? No, no.

20:33Adam Schwab:It was one of the – He ran a private wealth business. Oh, that's right. I think – actually, I don't think it was staged.

20:39Adir Shiffman:I think he was overwhelmed by the – I don't think it was on his finest moments.

20:43Adam Schwab:That wasn't a good time for the industry, that's for sure.

20:44Adir Shiffman:No, and so I look at that. I know this digresses slightly, but I look at this Royal Commission. Obviously, there's a Royal Commission going on at the moment into anti-Semitism. There's lots of Royal Commissions. I look at that effectively picking the, I would say, cleanest part of the financial services industry in a lot of ways, the retail part of the industry, and pummeling some companies, AMP almost into oblivion. When I look at it, it doesn't look like there's been a net benefit. It looks like it's damaged some companies. When you look at the industry, it's a tricky question, probably a bit political for you to answer, but do you see a before and after in terms of the way the industry's run from the Royal Commission?

21:20Adam Schwab:It's completely different. Yeah, it completely reshaped the whole industry, both the players in it, but also the way that advice was provided and the guardrails that sit around advice. And advice is constantly in the press and unfortunately there is often one or two bad actors that will do the wrong thing and that tends to obviously then taint the whole industry. But there is, out of 10 ,000 great advisors, there's maybe half a dozen bad advisors that really do cast a long shadow over the industry. But the way that the industry functions and operates now is fundamentally different to what it was in 2017.

21:54Adir Shiffman:But when you look at it, you know, I thought you got very unfairly maligned for this, what was it called, Guardian or whoever? First Guardian. First Guardian. This is completely separate.

22:04Matt Heine:This is six years post. I agree.

22:06Adir Shiffman:But, like, you look at something like that, which, what was it, effectively a huge fraud. Yeah. And you look at the fact that essentially they're complaining to wrap some platform companies.

22:16Matt Heine:It was Macquarie who got hit even harder than you guys, right?

22:18Adam Schwab:Yes, Macquarie had a product called Shield and there was a lot of commonality between the two and we unfortunately had a fund on the platform called First Guardian. And as you say, it was a very sophisticated fraud that did get through our governance processes. So there was a bit of a misconception that they said, can we go on the menu? And we said yes. There was two months of back and forward before that occurred. And, you know, the audited accounts had been signed off and no one had actually done the work. So there was a lot of just misinformation and fraudulent activity that went on there. Did anything happen to the auditors here?

22:47Adam Schwab:Not yet. So there's still a huge amount of court cases. Who were they? I can't remember now. Trying to block it out of my mind.

22:53Adir Shiffman:The reason I ask these questions is because it goes to, like, where does this rap kind of platform fit into the industry? And the thing is, if you – I think you're going to like what I say here. So if you look at Facebook, Facebook spends most of their life arguing we're a platform that facilitates people posting. Vision 230, right?

23:11Matt Heine:US Publishers have protection. That's right. Social media get protected as a result of this.

23:15Adir Shiffman:They're not editorially responsible. And I would say, you know, they've got various mechanisms for trying to filter out junk.

23:21Matt Heine:And there's a real argument they algorithmically enhance certain content. So they are far more, should be far more liable than like a rap platform. That's right.

23:29Adir Shiffman:They're probably, you would say, if you wanted to talk about editorially, to use a word, who's more responsible for the content on their platform, you would say Facebook is more responsible than a rap platform. But you do take steps to validate what goes onto your platform. So how do you think about this? Because it's a complicated issue, right? Like how do you think about this? There was no fighting against you. There wasn't even a case against you. You effectively compensated customers voluntarily for a lot of money. I can't remember that. A hundred million. A hundred million dollars. How do you feel about the focus on reps being responsible for what's sitting on their platforms?

24:06Adam Schwab:It's a great question. We've done a huge amount of soul searching over this, as has the industry. And I think there's probably two parts to our business. and the one where we decided to compensate members, and we often say it wasn't necessarily a fair outcome, but it was the right outcome for a whole range of reasons. But as the trustee of the superannuation fund, we are putting trust to people's money. And at the end of the day, whilst we had very high governance standards, it really has sort of narrowed the focus on the fact that there are some really bad actors out there that are trying to take advantage of the$4 trillion that sits in superannuation.

24:36Adam Schwab:So I think for the superannuation product, where we are the trustee, moving forward, it's very clear what the obligations are and we need to make sure that we're doing the work and that the funds that are available to our members are fit for purpose and that we've done a huge amount of work both onboarding and also from a monitoring perspective to keep their money safe. When it comes to the investment account, again, there might be a slightly different take there, which is we're not the trustee. We're providing effectively an administration platform.

25:01Adir Shiffman:Like to Adam, for example.

25:02Adam Schwab:Correct, where we're saying, look, we want to open up and make it easy for you to invest globally. We want to make it easy for you to invest into private markets and local markets. And whilst we still obviously have an obligation there, the question is do we actually want to be trying to restrict what people invest into in the same way that Comsec wouldn't necessarily say, look, you can buy that share but not that share. We didn't draw the line.

25:21Matt Heine:Yeah, I don't think you should invest in corporate travel management last year because I think these guys dodging. Well, lots of people did. Like, you're not.

25:27Adir Shiffman:And the ASX listed. Like, the ASX let them stay on the ASX. The ASX do it.

25:32Matt Heine:ASX don't do anything.

25:32Adir Shiffman:Like, I found this whole thing completely bizarre. I get the trustee argument. What about if we say, because that's a very good answer that you've given and you're the CEO of a$6 billion ASX listed company and so you're good at giving answers and you're good at giving answers. That is a very serious and responsible answer you've just given and so I want to give a blunter answer that I would feel if I was in your shoes which is every one of you, not including the direct category with Adam, which is these are smart people. Like Adam's a smart guy. He's on your platform. Forget about him. All of these other people, they've all got financial planners.

26:10Adir Shiffman:Every one of them, that is how they access this platform, every one of them is receiving advice from a financial planner, every one of them is paying a financial planner for that advice and somehow the platform, the tech platform that's being used is responsible for the negative outcomes. It's tricky for you to comment but that would be how I would feel in your shoes. It's fair to say that there's a lot of people involved in this

26:33Adam Schwab:and there was a lot of breakdowns and a lot of bad actors and they will hopefully be taking the task in the coming years.

26:48Adir Shiffman:And if you want to commit a fraud, in my experience, looking at the way things are done, it's almost impossible for someone to catch a fraud until people become too greedy or do something that's completely dumb.

27:02Adam Schwab:Always easy in hindsight.

27:04Matt Heine:That's right. I want to make the final argument is that what happened to moral hazard? If someone invests in whatever it is, whether it's a company, whether it's a fund, you've got to do your own research, whether you're being advised or not. Surely why are we compensating people for making stupid decisions? At what point do you – like how much can Australia turn into a socialist country, which is effectively what we've become, this welfare state?

27:24Adir Shiffman:Well, Matt, being defrauded is not necessarily making a stupid decision. Yes, it is. Why do you think that is?

27:29Matt Heine:Because you put your money in someone who's a fraud. Absolutely it is. But you didn't know that. He consciously made that decision to believe them.

27:35Adir Shiffman:You don't mean moral hazard. You more mean caveat emptor, right? Like if you make a decision to – No, I mean moral hazard.

27:41Matt Heine:You can make a bad decision and somebody else will pay for that loss. I see what you mean. Matt's business has lots of money. We'll go to the person who's got lots of money. No, that is true. You're right about that. You're right about that.

27:49Adir Shiffman:I agree with you. You're right.

27:50Matt Heine:And I'm almost guaranteed nothing will happen to the auditors because nothing ever happens to the auditors. Well, Arthur Anderson ceased to exist. But that was – A, that was overturned. So actually nothing would have happened had they played out. and that was in the US, not Australia. And they all went to somewhere else. So every Australian order went to EY anyway. So actually nothing happened to them. What about every other collapse I wrote about in my book? Nothing happened to anybody. It's only the good guys end up having to pay and the bad guys just whistled off into the sunset.

28:15Adir Shiffman:This whole podcast episode was so that Adam could spruik his book, by the way.

28:19Adam Schwab:I didn't actually know about the book.

28:21Adir Shiffman:What do you think he wrote a book on? The dodgiest companies in Australian history, correct? No, it actually wasn't that. It was more corporate greed. Pigs at the trough. Pigs at the trough. You should buy his book.

28:31Matt Heine:He can, actually.

28:32Adir Shiffman:It's in – I was going to make fun of him and say it's in the bargain bins at every bad bookstore. It's not actually. But actually it's a very good book. I can highly recommend it and you should pay full price for it.

28:40Matt Heine:Well, you have to. When I tried to get him to discount, I wouldn't. Anyway.

28:43Adam Schwab:It's not part of my Amazon Kindle bundle.

28:45Matt Heine:No, it's not actually, sadly. Let's go back to the business. I want to go back to IPO time. So 2016, 17, you guys going pretty well and you started to list. What was – I presume you had other options at the time. You didn't – I'm sure P.A. would have loved – period would love this business um why did you guys list it's actually it's a really interesting

29:05Adam Schwab:story so it's around 2015 uh so we had never actually raised any external capital so the only money in the business was our families and my uncle uh who had about 40 percent of the business at that time and his family were passive investors hadn't been involved in the business and were looking for liquidity and at the time i think we were around probably 10 or 12 billion under management. So we're making reasonable money. Things were certainly heading in the right direction.

29:31Adir Shiffman:How should people think about the margin you make, the profit margin on 10 or 12 mil or like the revenue margin and the profit margin on 10 or 12 billion of funds under management?

29:40Adam Schwab:Yeah. So remarkably over the years, our margins sort of discounting maybe the very early days, we earn about 50 % EBITDA margin. So depending on the revenue, yeah, it's a great margin. And that's despite sort of pricing coming down very, very significantly over that period.

29:55Matt Heine:That's your revenue, not of current GDP, not of FUM.

29:58Adam Schwab:So now if you're looking at FUM, we earn on average about 32 basis points. Okay. Across all of the various ancillaries.

30:05Matt Heine:So you're a very good value platform for you. They're basically paying nothing essentially. It's incredibly cost effective.

30:09Adam Schwab:And the bigger the account, which you might hate, the lower your fee from an admin perspective.

30:15Adir Shiffman:So whatever someone's got under management, on average you take 0.32 % as the platform. And anything else they're paying, they're paying to the advisor or whoever runs or is offering product. Like the platform's very low.

30:29Adam Schwab:Yeah, absolutely. So, yes, we were growing nicely at the point and my uncle was looking for some liquidity and we were pretty determined not to go down the listing path actually. Dad had been listed previously through Heiner Management, saying that the trials and tribulations of that. And so we started talking to personal investors. They were somewhat sort of interested but didn't want to pay the price that we were asking at the time.

30:53Matt Heine:What was your profitability like at the time? I couldn't tell you. I'll dig out the prospectus when we finish up.

30:57Adam Schwab:Yeah, exactly. And so we sort of put a line through private investors, interesting conversations but just not for us. Met with a number of private equity firms, some of the bigger ones as well as the smaller ones. And it became pretty apparent pretty quickly that, you know, whilst they were probably closer to the price that we wanted, we weren't ready to relinquish control and it would have sent out –

31:16Matt Heine:So they only want to control these pay firms. Yes, even as a partial investor,

31:20Adam Schwab:it was going to change the way that we did business and Dad and I saw a really long runway for the business and we're far from ready to relinquish that control. And it also just sent out a really bad signal to our investors, which is, you know, we'd been in the market, talking to the market about the fact that we're long-term investors and in many ways back in the early days they were sort of investing alongside us because they saw the values of the company and liked working with us. So to then say we're selling half the business or whatever it might have been and we're going to sell the whole business in five to seven years, it just was the wrong message and didn't work for us.

31:51Adam Schwab:So Tim Antony, who was on our board at the time. This is Philly Roadshow.

31:55Matt Heine:Correct, yeah. UBS Tim Antony.

31:56Adam Schwab:Yeah, exactly right.

31:57Matt Heine:He was going to be the inaugural chairman of Catch as well. There you go. But obviously never listed, yeah.

32:01Adam Schwab:So he was on our board and he was previously very senior at UBS. And he said, look, I know it's not your preferred option, but why don't you just go and speak to a couple of the investment banks and just listen to what they have to say about the listing. And so we did. And as we sort of walked through that, we sort of, you know, came to the point that actually this is exactly what we should be doing because it allows us to retain control. So we were only selling a small amount into the float. I think it was 15 % or 20%. Our family, so dad and our side of the family, didn't sell anything into the float.

32:28Adam Schwab:It sent the message that we were in this for the long term. And one of the byproducts of it that we hadn't actually anticipated was that when we actually did list, and it was obviously quite a successful listing, the brand awareness that it gave us was significant. And going from a privately owned family-run business to a listed entity suddenly opened up a whole lot of doors that historically had been firmly shut to us and we were able to go and work with the major banks and the major institutions and private wealth firms who historically just couldn't work with us from a procurement perspective.

32:56Adam Schwab:So a lot of really great things occurred off the back of it. And I think the other interesting point is because of the nature of our business, when we were out there on the roadshows, and Adir, you know this, you sort of do 200 or 300 meetings with fund managers, we knew a lot of them because we were already working with them on the platform. And so it was very familiar space, very familiar conversations that we were having. And because we were already regulated by pretty much everyone in Australia, going from an unlisted company to a listed company. I think we set up one new committee, which was the communications committee, which has subsequently been closed down and folded.

33:26Adam Schwab:So it really wasn't a big step up for us to actually get to a listing. And, you know, whilst, again, you have your ups and your downs, I think on balance it's been a fantastic outcome for us.

33:35Matt Heine:How has the business changed since listing? It's obviously grown a lot, but in terms of your day-to-day scale of the business, it's a pretty massive business now. What's been the day-to-day impact on you personally? How many staff are there?

33:46Adam Schwab:So we're just shy of 1 ,000 now. And when you listed, how big? So we're 15 billion. So I'm guessing we're probably about 100 maybe.

33:54Matt Heine:Okay, so massive difference. So 10X the staff.

33:56Adam Schwab:10X the staff.

33:56Matt Heine:And pretty much 10X the valuation as well roughly.

33:59Adam Schwab:And also just the business is probably 10 times the size in a pretty short period of time. So how does my day change? I spend a bit more time talking to investors and fund managers. But it really hasn't changed a lot. So the discipline was always there. One of the interesting things is that when you list, you do get sucked into quarterly results and there's a lot of focus on what's the flows and it's actually not a bad discipline to have. But you also have to often sit back and just ask the question, if we weren't listed, is this the decision we would be making? Absolutely. And if the answer is no, then you probably need to go back and really sort of stress test that idea a bit better.

34:33Adam Schwab:But look, I think there's a huge amount of benefits to being listed. But equally, you do need to be very mindful of all the things that investors are looking for.

34:40Adir Shiffman:How much are the companies controlled around the board table?

34:45Adam Schwab:So it's still largely family owned. So our family owns about 47 % still and then it's institutions, our board members have all got a small amount or an amount. So that's why you can make the decisions that you make.

34:57Adir Shiffman:This is one of the challenges, right? Adam will jump on this hard, I suspect. But like effectively when you've got a company that's owned by institutional investors with an entire board of independent non-executive directors, the pressure to make decisions that is in the short-term interest of shareholders is completely different to owning 47 % of a company. And it's kind of the Jerry Harvey argument in some ways, right, which is you can say whatever you want. Be here, don't be here. It's up to you. But it's effectively a listed family business. And we're going to run it.

35:29Matt Heine:News Corp as well, essentially. What's that? News Corp. News Corp.

35:32Adir Shiffman:We're going to run it our way as founders for long-term value creation. And you can decide if you want to get on that train or not. but the level of pressure is totally different. Have you sold down shares since IPO? Yes, presumably.

35:46Adam Schwab:Yes, we've sold down a small amount but obviously we've still got a huge shareholding. Just by the way, our shareholder still gives a hard time. It's not all plain sailing.

35:55Adir Shiffman:Well, I'm not shocked to hear that. I'm not shocked to hear that but this is my question about selling down. It wasn't like obviously not a gotcha of selling down but in Australia I think it's very problematic for founding shareholders to sell down because you sell one share and you have to disclose it to the market with formal announcements and everyone says the words negative signal, red flag, use whatever words you want, what does he know that we don't know. I mean, like, do you have that kind of experience? How do you feel about that part of being listed? Because they say liquidity, but it's kind of liquidity for everyone except you.

36:35Adam Schwab:Absolutely. And we haven't sold down very much at all. And often it's like, well, if we sell now, what's the market going to think? The other problem is that there's usually something going on in the business and it could be regulatory, it could be growth targets. We might get close to a quarterly. So you're in blackout basically. You're in blackout. And so we don't offer –

36:51Matt Heine:You guys pay pretty good dividends anyway. So it's not as if there's no liquidity coming out. Correct.

36:55Adam Schwab:Well, it's still – I mean, given the multiple of the company, the dividend yields about 1.5 % or 2%. So it's certainly not a yield stock. It's not bad. It's a pretty decent dividend for a business of your profitability. But, yeah, no, you're often in blackout. So the ability to sell down is very limited.

37:09Adir Shiffman:And what do you think about the US approach? Adam is a huge fan of the sell down of the Alassane guys over time.

37:14Matt Heine:Yeah.

37:15Adir Shiffman:And so – I am, actually. I know. It sounds sarcastic.

37:19Matt Heine:Yeah, I assumed as much.

37:20Adir Shiffman:You think that they have sold at the right time.

37:23Matt Heine:Well, they stopped selling.

37:24Adir Shiffman:When the share price went down.

37:25Matt Heine:That got to an interesting value.

37:26Adir Shiffman:But they can sell on the basis of putting in an order, you know, to sell down a certain number of shares every single day. and they're not affected by blackouts because they're not reacting to short-term information. What do you think about a system like that for the ASX?

37:41Adam Schwab:For the ASX? For us, so we're classic entrepreneurs.

37:44Adir Shiffman:For you, slash for the ASX.

37:45Adam Schwab:We would have a choice if you wanted to participate.

37:48Matt Heine:Should the ASX adopt this NASDAQ policy?

37:51Adam Schwab:Possibly, but I think, you know, for us, we're classic entrepreneurs. We believe in our own BS and we see a huge upside in the company. And you've been right so far. And so far it's been a really good call. but you look at it and say, well, if I had this money today, what am I going to do with it? What would I invest into that is as good or we know as well as this company? And so that sort of forced sell down, I think it would probably be great because you say, well, hang on, why am I selling down now when we're really excited about what's coming or what's happening in the future?

38:16Adir Shiffman:You're in an unusual position if I can – I'm a blunt guy. Most founders that build very valuable businesses don't have a lot of family wealth sitting outside the business they've created and so their need to sell down and diversify and get access to liquidity is higher, right? And definitely Scott Farquhar. His wealth came from Atlassian. That's where his wealth came from. And so my issue is more with those kind of people and his ability to sell down in the US without people calling it negative signals was completely different to an IPO in Australia.

38:51Adam Schwab:I think it was really clever and it avoids a lot of the problems you just raised, which is – and I don't think that needs to be the ASX or the NASDAQ. I think if a founder comes out and says, here's what my divestment program's going to be,

38:59Matt Heine:Well, obviously blackouts stop you doing that.

39:01Adam Schwab:And so you need to make sure that around blackouts. But I think it's pretty sensible. And the same thing happens when you're vesting shares or you end up with these problems. So can we actually vest these shares now if we're in blackout? What do the rules actually mean? Because there's a lot of grey areas there.

39:14Matt Heine:Yeah. How do you think about profit growth versus revenue growth? Because obviously you guys are a profitable business but you probably could be more profitable if you're willing to grow. You've got a pretty high rule of 40, right? 60, 70, I think.

39:27Adam Schwab:I think the last year was close to 70.

39:28Matt Heine:Yeah, which is one of the highest on the ASX. Absolutely. Close to the highest on the ASX.

39:31Adir Shiffman:Every Goldman Sachs document I get always has the top right.

39:35Matt Heine:Yeah, and ProMedicus and Zero things up there. But how do you guys balance profitability and revenue growth?

39:40Adam Schwab:It's a good question. That's probably the biggest debate that we have almost on a daily basis, which is how do we keep going as fast as we want to go but also make sure that we maintain really close financial discipline? And it's kind of silly when we're having our discussions or debates with shareholders and going back to them giving us a hard time, is our margin 50 % or 49 % or 48 %? It doesn't actually really matter in the long term when you're growing at 20 % plus. And we look at it now and I talked about the TAM being, we're probably like sub 1 % when you really look at our actual market share.

40:12Adam Schwab:What a great opportunity to be investing in growth for what is one of the greatest opportunities I think we're going to see in a lifetime.

40:19Adir Shiffman:The fact that you're a dividend payer, irrespective of any other metrics about your business, My guess is post these tax, legislated tax changes, your share price is going up and your yield is going down because people are going to skew so heavily towards dividend payers. I think you'll be a beneficiary of that, is my guess. Don't trigger me with this stuff. What's that? Don't trigger me with this stuff. Don't trigger me with this stuff.

40:39Matt Heine:I was hoping we might avoid this conversation. That's probably what's going to happen, right?

40:42Adir Shiffman:Absolutely. Probably the share price will rise and the yield will fall because people will chase. I mean, how many stocks are there on the ASX? We can get a couple of percent. You're fully franked, presumably. So a couple of percent fully frank, you'll be 20 % growth. With growth as well. But is the income going to be enough?

40:57Adam Schwab:That's the question because there's a lot of shares out there that are producing 5%, 10 % income. I prefer growth, I think. Longer term, if you can grow it, compound at 20%, 25%. What a fantastic business.

41:08Adir Shiffman:I would always, I mean, within reason, a profitable business, like genuinely profitable like you, that has growth potential north of 10 % or north of 20%, I would always skew more heavily towards growth because if you play out the numbers, presuming that you can actually leverage the economic value of that growth down the track, you can't compare the trajectories of those two numbers over the long term. It's pretty straightforward. And I think the reality is that it's not going to happen this year, but in future years,

41:36Adam Schwab:you look at the efficiency that AI is going to create and you'll be able to start to really widen those jaws in time. And it's not necessarily about cost out, it's about how do we flatten headcount growth to really start to accelerate that profitability and keep growing at the rate that we are.

41:50Adir Shiffman:So what do you think you're kind of – I'm sure you've got asked this a hundred times, but what are the key barriers to AI producing a strong competitor to you? Funnily enough, it's regulatory. I agree with you entirely. That's the best barrier.

42:04Adam Schwab:It is almost impossible for a new entrant to come into this market now. So if you look at the superannuation part of our business where you're required to have a trustee licence. APRU's not handing out new trustee licences and if anything they're trying to consolidate the number of trustee licences in Australia and that makes it near enough impossible to, particularly for an offshore company to come into Australia but also for a local one. You then look at a whole range of things. So for a new entrant to come in they'd need to jump over all the regulatory barriers. So we're talking AML, KYC, superannuation trustees, ASIC licences, the list goes on.

42:38Adam Schwab:They need to be able to come in at a price point that we are, so call it 32 basis points or below. They need to be able to grow relationships for 4 ,000 plus advisors.

42:46Adir Shiffman:Well, that's another huge barrier. I think the price barrier is you can always run at a low price if you're willing to fund losses. You can. But getting the relationships is very hard.

42:54Adam Schwab:And then you need to be able to make enough money in time to invest at the same rate that we're able to. Yeah. And so it's a pretty difficult equation to crack.

43:00Matt Heine:I think what I explained is you've got a lot of powers when you talk about Hamilton Helmar. You guys almost have every single power, which is pretty rare. Well, I'll give you the corner. Network I'm struggling with, but I'm hoping you can give me the answer.

43:09Adir Shiffman:Well, I'll give you the corner of the resource because that's the regulatory. That's the regulatory, yeah. That you've got.

43:13Matt Heine:Well, it's clearly scale corner resource brand essentially as part of that.

43:18Adir Shiffman:Yeah, network is not easy. Process power is between you. Adam always comes up with a shaky network answer. I know. I was hoping that you'd come up with something creative.

43:24Matt Heine:I think it probably is an element of network in that the more people on the platform, the more products want to go on your platform, which means it's better for the people on the platform. I think there is a –

43:34Adam Schwab:I think it's probably more of a flywheel. So the more customers, the more advisors, the more that we can invest into the tech, which creates an opportunity to bring... So you've got... Scale and network almost always can't cross over.

43:44Adir Shiffman:But I agree with your point, but probably you had a network effect in the early days as you were scaling, but then you've got the Uber effect, which is once you reach a certain size, every additional customer probably doesn't make much of a difference. Anyone who wants distribution needs... is going to go and see you now as it is.

44:01Matt Heine:But same as brand power. Brand power is a legacy. Network can also be a legacy power. Yes, I think it's a legacy power. It's not always a forward-looking power. That's right. It's like a counter position.

44:08Adam Schwab:I mean over time if we can we'll try and build our own sort of market where if you can actually create sort of liquidity for private markets or some of those different things then network absolutely. Oh absolutely. You have a market maker on top of that.

44:18Matt Heine:But even without that, which that would be super cool, but even without that I still feel you've got definitely scale but I think probably network on top of that to a degree. Because if me and I dear on them, talking your direct part of the business, if you've got more and more like those start-up, when I got my startup stuff on, it was a real hassle because you had to speak to them. But once you've got that once, for me, and I do buy shares in the same business, it becomes a lot easier. So because you've got the relationship, you can add. I've done it before. So I think there is definitely a non-weak network.

44:49Matt Heine:So you've got almost every power, which is why investors love you guys so much because it's such a defensible business. Almost impossible to beat.

44:56Adam Schwab:I should come on the pod more often. I'm feeling great about this.

44:59Adir Shiffman:Can I ask you a couple of AI questions before I drink Hemlock if I ask any more than that? But so how do you – I mean you're a non-hype CEO is how I would describe you. Like you're not jumping on all of this, the hype machine of AI. But obviously you've got a thousand staff and everyone across the world is making all of these pronouncements about staff reductions on the back of AI. How do you think about that from a CEO point of view, like the effect of AI on your staffing?

45:25Adam Schwab:Yeah, so we've obviously looking at rolling out a number of different AI programs across the business, no surprises there. we're in that sort of nice phase where because we are growing and we're expanding the product set we're constantly needing people and so the point at which and this is happening you know on a daily basis that we can actually automate a process or you know find efficiency somewhere in the business as a result of AI we're able to move those people onto the next thing and so at the moment it's really not about as I mentioned before it's not about cost out this is really about how do we flatten the growth of headcount so we're not having to hire you know however many people It is every year.

45:57Adir Shiffman:So your staff can sleep well at night because you have no cost out program on the back of AI. And I think – like I find that discussion a bit interesting, the cost out AI. It's a reduction in cost in, which is the same with what we have.

46:10Matt Heine:Yes. We just haven't really grown our team much, but we're out of double revenue. I think you guys are almost identical in terms of just being able to –

46:15Adir Shiffman:You think you can keep your headcount – I'm talking to Adam on this one – or you think you can keep your headcount flat?

46:20Matt Heine:We have over the last two years, especially if you look at customer service, which is usually scales almost linearly with sales because you have it.

46:28Adir Shiffman:And you put that down to AI that you've been able to keep afloat?

46:31Matt Heine:Yeah, chatbots and Sierra and all that kind of stuff for sure. Tech team? How much has it grown? A little bit but maybe tech team's grown 25%, 30 % in the last couple of years. How about you, Matt?

46:43Adam Schwab:Yeah, so the tech team's growing hugely at the moment. So the tech team's round figures including product probably around 400 now. And so the way that we're thinking about it, and this is what gets me really excited is that if we can get and we think we can over the next 12 to 18 months 30 % efficiency out of the team, so that's not only utilising all the new sort of AI tooling but it's actually fundamentally changing how we build product from idea and conception through to development and deployment, we can get the equivalent of having another 100 engineers effectively. Yeah, pretty amazing. And what we want to do is to drive efficiency so make sure that we can get efficiency in customer service, efficiency in the admin, take that headcount we would normally put into sort of processing and put that into the product and tech team and really continue to accelerate that because that's where we're going to get the biggest benefit.

47:25Adam Schwab:Increase the vote. And how much of your week is spent thinking about AI

47:32Adir Shiffman:and talking about AI and how much of your board meetings are spent thinking and talking about AI?

47:36Adam Schwab:So it's probably about six hours a day would be talking about AI, I think, at the moment. Really? I love it. I'm a product guy at heart. I love product. And I'm loving just where this is all heading. So spending a lot of time with our CTO, with our tech team, spending a huge amount of time, maybe they prefer I didn't, with the product team just thinking about, you know, how does this impact the customer experience? How does this impact our experience? How are we using this better in customer service? The board is certainly really actively engaged in the conversation and working with us. But at the end of the day, it's up to me and the executive team and the whole business to really be driving that forward.

48:12And my last question is, you know, the cost, I mean, people talk about,

48:16Adir Shiffman:I find the staff cost bit a bit boring because we just discussed it here. There's efficiency tools. It's going to play out the way it plays out. But the emerging reality is the cost of infrastructure and tokens. Now, you don't have to worry so much about infrastructure. You're not building models. But you do have to worry about tokens. And so have you started thinking about the cost of tokens to your business and putting guidelines? Like where are you at with thinking about tokens?

48:42Adam Schwab:So I'm still getting over the shock of just your bills and how quickly they're growing at the moment. And now we're having to focus on tokens as well. You might have seen the MEMS going around the internet at the moment. I've started hiring junior developers again because my token counts too much. Yeah. Yeah, so sort of doing this full circle. Yeah. So I think it's so much – it's so early in the journey that this is now something we're all grappling with. We've recently implemented Workday into the business from an HRIS system and they've given us access to all of their new AI tools. But that first three months is actually about look at how your staff are using it.

49:14Adam Schwab:here's the dashboard that shows you how many tokens you're burning and that will give you an opportunity to sort of work out how broadly or not you actually roll this out. And as we sort of work through this sort of new way of working from a tech perspective, it's one of the things that we just have to be right on top of. I think it was Uber that spent half a million dollars, no,$500 million or something ridiculous on tokens. Six a million in a day or something like that. That was in a month. They used their whole token count in the space of four weeks.

49:38Adir Shiffman:Do you think you're going to be spending millions of dollars a year in the short term on tokens?

49:44Adam Schwab:I haven't looked at it and probably couldn't comment on that.

49:48Matt Heine:We're spending annualised at three million plus on AI. And we're a much smaller team than you guys.

49:53Adir Shiffman:AI just on the usage part of AI effectively.

49:58Matt Heine:We call it tokens, we call it utilised.

49:59Adam Schwab:But there's also – I mean there's lazy development still with AI. So there's different ways that you can code that will use, you know, one-fiftieth of the number of tokens. So I think that's really where the focus needs to be, which is this is where it's going. It's happening really quickly. we're going to get the benefit, but let's not make sure that we're just using it as a...

50:17Matt Heine:We know Claude's double to 5x the cost of most of it, so you're paying that Claude brand premium. Yes, that's true. That's the immediate way to reduce it.

50:25Adir Shiffman:And is most of your... Either one of you can answer this. Is most of your token usage from the actual, I'm going to say, machines that you've built, agents, et cetera, using the tokens or from people inside your organisation using AI? Developers. It's not agents.

50:39Matt Heine:It's not open-claw. Not yet.

50:40Adir Shiffman:So it's developers in their day-to-day jobs using whatever models they're using, probably Claude, as assisting tools for them to do their development work. I mean, I think that is ultimately what is going to limit the utilisation of AI. Like the token costs are becoming crazy.

51:03Matt Heine:Yeah, but if you look at, you'll spend a bit more, but we would spend, I don't think how much we'd spend on developers, I'd call it 30 to 40 million a year, whatever it is. So it's still a fraction of that cost. So 10 % of your cost. Yeah, exactly. Well, maybe even less, but yeah.

51:14Adam Schwab:But what happens, and I haven't started thinking too much about this, what happens when you hit your token count and the developers can't develop?

51:19Adir Shiffman:Well, you know what happens.

51:20Adam Schwab:You have to keep paying.

51:23Adir Shiffman:The spend goes up. My guess is that –

51:25Matt Heine:Well, you find ways. You start using cheaper products, essentially.

51:29Adir Shiffman:Lightweight products. And I think more and more people are going to take open source models. Totally. On-prem. Yeah, and probably the really good businesses like your – I'm guessing your business will do some retraining of open source models so it becomes more tailored towards your particular needs. I think that's where AI is going.

51:48Adam Schwab:But again, I think cloud, and we talked about these dual costs before, it's going to follow almost exactly the same path where having moved everything to cloud, people are now saying, well, maybe a hybrid is the better way to go and I'll actually bring my tech back on shore and put it in the office.

52:02Adir Shiffman:The thing is, it's a vicious cycle because AI costs drive cloud costs. Correct. And so you can't avoid it, right?

52:07Adam Schwab:Microsoft's the winner.

52:08Matt Heine:Yeah. I think we'll have to call it a day. That was amazing, Matt. It's been great having you on and look forward to getting you back on soon.

52:14Adam Schwab:Look forward to it. Thanks. Thanks, Matt.