In recent weeks we have seen a marked increase in calls from financial advisers who are seeking information around the professional indemnity (PI) costs of their practice if they had their own AFSL.
While PI is typically more expensive when a practice buys its own standalone limit of indemnity rather than sharing a limit as part of a dealer group, many are surprised to know that it’s not prohibitive, and that running your own AFSL is not as daunting or expensive as some of the larger dealer groups would have them believe.
There are three primary challenges for practices holding their own licence:
- Being aware of the licensee obligations;
- Designing their own compliance arrangements to effectively meet those obligations; and
- Arranging their own PI.
Each one of these challenges can be easily dealt with by seeking out expert support and some practices may find that switching to their own AFSL will be cost neutral or even cost effective.
There are a number a reputable AFSL compliance providers in the market who can assist a practice’s transition from the AR model to obtaining and managing their own AFSL.
Typically, new AFSL set up cost can range from $6,000 to $10,000, including the AFSL application process, compliance manuals, FSG templates and some initial RM training. Ongoing annual third-party compliance costs typically range from $10,000 to $15,000 and include annual licence review, adviser file audits and annual return audits.
Professional indemnity costs typically start at $8,000 plus charges, however a simple rule of thumb is that premiums typically sit around 1.5 per cent of the practices revenue for a practice with a clean claims history.
Therefore, a financial advice practice with $1 million of revenue can expect to pay between $12,000 to $15,000 plus charges for a $2 million limit of indemnity, a $2 million revenue practice around $25,000 to $30,000 plus charges and so on.
Add to this the cost of research and financial planning software and the cost to run your own AFSL for a practice with $1 million of revenue can range between $35,000 and $50,000, or put another way, between 3.5 per cent and 5 per cent of revenue.
That cost per dollar of revenue falls as the practice’s revenue increases, therefore a self-licensed practice with $2 million of revenue typically sees ongoing costs range from approximately 2.5 per cent to 3.5 per cent of revenue.
Financial advisers can source support services individually or can also join a number of self-licensed support “communities” that use their scale to provide a one-stop shop including governance support, advice documentation, para planning, technical support, research and ongoing professional development to help licensees meet their continuing professional development requirements.
While running your own AFSL may not be for everybody, and certainly a tougher choice for practices with less than $1 million of revenue, it can be a liberating and financially beneficial prospect for larger practices.
Oscar Martinis is a senior partner at McDougall Kelly & Martinis, a specialist professional lines insurance broker.
Have you had a look at how long it takes to apply for an AFSL these days ?
The other issue not discussed by those promoting getting your own AFSL is what happens when you come to sell. Not many people external to a business will take the risk of purchasing someones AFSL, they will buy the underlying book, so the seller may be left with the ongoing cost and issue of getting run off cover, an obligation for 7 years!
Why doesn’t ASIC realise that this large dealer group witch hunt just forces advisers into their own licensing arrangements where they can hide under the cloak from ASIC knowing that unless they actually have a substantial complaint lodged against them they will never ever have anyone checking on what they do and the quality of their advice.
As an adviser running my own license, if I stuff up I go directly to Gaol. As an adviser working for a large licensee if I stuff up, well I turn up working for Westpac the next day. maybe I should have said Dover. (just joking.. no offense intended). For far too long advisers have hidden out amoungst large licensee’s. Unless you’re happy wiht the choice of software being Xplan and Xplan the bottom line is we need a healthy advice market and at the moment it’s not healthy because of the large dominance by the big four.