Speaking to ifa, the chief executive of Connect Financial Service Brokers said one of the core issues plaguing the industry is the licensing regime.
“If I’m an accountant, I don’t have to work under a dealer group. If I’m a doctor, I don’t work under a dealer group. If I’m a journalist, I don’t have to work under a dealer group,” said Tynan.
“Why is financial planning the only profession that’s gone down this route under corporations law?”
In his opinion, the licensing structure is the main culprit for the professions move towards a “boutique” setup, which can only service less than 10 per cent of Australian consumers due to its majority focus on high-net-worth (HNW) individuals.
Adviser Ratings recently found that 66 per cent of newly established advice licensees are one-person bands. Moreover, more than 80 per cent of licensees are in a privately-owned licensee with less than 10 advisers.
“The most profitable [advice] businesses that I’ve ever seen in my 30-year history are those smaller, boutique practices that are self-licensed, with an adviser and a couple of support staff,” Tynan said.
These boutique firms are opting to maintain a small client base of high-net-worth individuals who can afford advice, he said.
“I know businesses in this country that make a 60–70 per cent EBITDA and they’ve never been to a Financial Advice Association Australia (FAAA) conference. They give fantastic advice and they are boutique businesses,” Tynan said.
“The ones that scale up – the dealer groups – are not the ones that make a profit. The most profitable firms are the ones under the radar. People who have money and can afford advice will pay for quality.”
Amid discussions surrounding self-licensing, industry professionals have weighed up the risks and benefits for advisers looking to take the plunge.
Earlier this month, Numerisk managing director and founder Richard Silberman said the trend was underpinned by the preference for autonomy and freedom from institutional licensees.
“While self-licensing isn’t suitable for every business, with the right support and guidance, many thrive under this model. This autonomy allows them to tailor their operations to suit their specific needs and objectives, a flexibility often lacking in larger licensee frameworks,” Silberman said.
As the industry struggles to reduce business costs and bring down the price of advice, PlanningSolo founder Jordan Vaka argued that removing licensees would put money back in advisers’ pockets, thus bringing down the cost to operate a business and, in turn, the cost charged to consumers.
“If I explain the way licensing works to anybody outside of advice, they look at me like I’m insane. Lawyers, accountants, engineers, they look at you like, ‘Why would you do it like that? It’s so expensive’. And that’s why the affordability of advice thing, to me, it’s just so hollow,” he told ifa.
“The most expensive part of advice is licensing. It costs the average adviser $40,000–$50,000, and you multiply that by the number of advisers left and it’s a horrendously big number. You pull that out of the system, and you put half of it back in, advice is still going to be cheaper.
“That’s how you make advice affordable. But that was never considered because there’s too many interests involved. That to me is the solution to advice. Do that. But that was left off the table through the whole review, which I think invalidated it, to me anyhow.”
Advisers don’t seem to understand that the more complexity there is in financial services laws the more they’re (AFSL’s) are valued. By that I mean every time Treasury or some regulatory body proposes another bad piece of legislation dealer groups….they’re like…”sounds good to us”. ASIC are like we checked in with Mike from AMP and it’s a thumbs up.
Then these Dealer groups & compliance experts rock up to Advisers and say “oh well that’s the way it is”….and ” we’re here for you and we’ll provide some templates and tools to help”
Imagine if 16,000 Advisers contacted ASIC and told them to ^*&^ $@$. Do you think they’d get the message?
While the advice industry needs change to survive for the benefit of all Australians (that doesn’t mean giving power back to industry funds and product providers), I dont’t believe the government is capable of and / or willing to make any meaningful change. How many people have been contracted by the government to review the industry? What has changed for the better?
While an increase in education was a good step forward to be called a professional (I don’t discount the importance of experience as I’ve been in the indusry for 20+ years), I don’t know any other professional that is treated like a criminal for actually doing anything wrong.
My understanding is that the dealer group licensing system was originally established so that the lazy, inept regulator ASIC didn’t have to supervise/audit individual advisers. It could handball this responsibility to the dealer groups instead.
If registered Australian Financial Advisers become licensed like accountants, doctors, journalists, engineers and other true professions, then the cost of advice will drop significantly. It is common financial sense, that other professions realised early on.
sadly not many Financial Planners are professionals. They like to hide in dealer group land hoping the AFSL will pay for all their sins. Even here it’s pushed as a cost savings. I became self licensed as I believe it’s what’s professionals do.
Preach!
Very true – but there has to be a way found to service the 90% who are not High Wealth Individuals – otherwise the industry lacks a reason why it should still exist.
Ted Carroll
Totally agreed. I can guess only ASIC because is lazy and ASIC only wants to shift the duties to the dealer groups.
But, without someone managing the License externally, then you are doing it in-house after all, that is the Licensee’s responsibility. So, the root of the evil is the compliance regime and the Levy Review identified this as a core constraint. Without the overcooked compliance regime, the need for a “professional” licensee wouldn’t exist. And, as said here by many, remove product advice from strategic advice so there can be a clear pricing model.
With the exception of risk advice, a commission based system works and should be respected. I would say, the product differential has narrowed over time thereby increasing the needs analysis part of the service with less focus on the product that achieves the agreed strategy.
Doesn’t all this assume that there are no economies of scale? Sure many licensees, at leats historically have been poorly run, cost black holes, but there are examples that do provide value for money when you consider all the potential duplication. Compliance is always the obvious – how can a one man band even know all the rules, let alone abide by them? Then there’s the risk – CLSR numbers confirm that virtually all the “unpaid” debts are small operators – because they don’t have the balance sheet. Having 2 Balance Sheets are risk – Adviser and Licensee HAS to be lower risk.
I can never understand how anyone believes they can operate and “advice” business as a one man band. Above mentioned risk aside, by definition, a 1MB is a “job” not a business, a classic E-Myth. I get that if you limit your offering enough maybe you can just be an expert in a limited area, but then you are a specialist, not an adviser. Accountants sometimes run this model well – ie bring in specialists where needed, but it’s rare. Most of the time even large accounting firms give deficient advice because they don’t know enough about WHAT THEY DON”T KNOW. How can can you be an “expert” in Super, Tax, Estate Planning, Insurance, Centrelink, Aged Care, Investment Portfolio construction etc…. You need a network. Sure you can “limit” to investment advice – probably 50% plus who claim to be advisers do, but then you aren’t an Adviser and how about being honest about how limited your advice really is. If you really think you can maintain a “business” that never runs into other areas then your just as delusional a the average accountant who thinks he’s got all the answers as well.
How about we first focus on what basic foundations an Advice business needs as a minimum to truly offer what can be called Advice. Are you just a GP writing scripts or are you a genuine health professional with ready access to teh full array of health services, supported by a well run hospital. Is it really about looking after other, or you getting to do whatever you want and be well paid for it? To be clear, neither is “wrong” – you should absolutely be free to provide whatever services you and your client agree, but just don’t pretend everyone is the same, and/or should therefore do the same.
If what you are saying is true why did all the largest Licensees(AMP/IOOF/Big Banks etc) get caught out for wrong doing in the royal commission? (It was a small minority of 1 man band Licensees who got caught out Max Henderson)
CLSR are you kidding me, what about Dixon advisory all us individual advisers are paying the consequence because of a big Licensee who did wrong doing and they didn’t have the money to pay thats why they filed for bankruptcy so your argument makes no sense, Big Licensees should have to pay a % of their revenue into the CLSR and individual advisers should just pay a flat fee. Evans & Partners the owner of Dixon has washed their hands and walked away they should be the ones to pay not individual advisers.
As advisers we need to be over all the rules, if your not then you should be, its not that complex to be over the rules, its Licensees who make it complex to justify their compliance departments.
I am an adviser for many years, my experience and advanced education (Bcom (Finance Economics), CFP, Masters in Financial Planning, SMSF specialist adviser, DFP, studied advanced investments at Harvard/Stanford/NYU/Columbia) has made me an expert in those areas. Just because you dont have the ability to do that, its a reflection on you not on all advisers, some people are more capable than others.
I have worked for 3 different Licensees over my career as an adviser each of the Einstein’s that work in the compliance department have 3 different interpretations of what is required under the corporations act, how is that helpful to consumers or advisers? when I questioned them to show me how their interpretation is valid under the corporations act they all went silent and provided no evidence, yet when I am providing advice I need to show all the evidence/reasoning/costs/alternative strategies. None of the compliance Einstein’s at the licensees had even done a Advanced Diploma of Financial Planning let alone the new education standards we require now.
Best article, ever.
We all know how cost-efficient it is to work with HNW and avoid the ASIC-imposed costly regulatory barrier.
We will never be considered to be professionals until they remove the need for “Authorised Representatives”.
Interesting to see this train of thought back. I could not agree more with the comments around a broken and outdated licence structure (or even need for it)
well said.
I never did understand the dealer group model other than the fact the BOLR was involved. Dealer groups operate under the i pay you(adviser) and you tell me what i can do with my own business.
it’s just that those advisers are maybe too lazy to do their own thing. who knows why!!
Paul, most of us agree with you. It was set up during the days of life insurance selling whole of life. We have developed and changed, if we are to be considered a profession the licensing system has to go.
Exactly!