The Australian ‘authorised representative’ model of licensing has failed. The US offers hope for a system that allows adviser freedom.
As Aussie comedian Jim Jeffries likes to remind his fawning American audiences, “Australia has a Constitution, but we don’t know what the bloody hell is in it”.
By contrast, most schoolchildren in the United States can rattle off the Jeffersonian ideals of the Declaration of Independence, and most American adults devote their lives to the “inalienable rights” of the American dream, even though they often violently disagree about the application of these ideals.
Most Americans have an instinctive discomfort with government intrusion into their lives. One side of politics may prefer a little intervention in the economy, the other a little intervention in the bedroom, but by and large you would be hard-pressed to find a nation more committed to individual rights and free markets.
But even where regulation is deemed necessary - such as in the financial services industry, which, post-GFC found itself the subject of Draconian new rules implicit in the Dodd-Frank legislation - Americans tend to organise themselves in a way that allows for individual accountability and ensures that freedom, above all else, is upheld.
In the US, registered investment advisors (RIAs) - a wide range of professionals that are most akin to Australia’s small business financial advice community - are individually 'licensed' with the behemoth US Securities and Exchange Commission (SEC) or with their relevant state authorities depending on size.
Regardless of their business circumstances, ie whether they own and operate their own businesses or are employed by others, the country’s 11,000-odd RIAs present themselves candidly and openly to their regulators, in a ‘warts and all’ model that encourages consumer trust and co-operation with authorities.
The idea of being personally accountable to the regulators may scare the bejeezus out of Aussie authorised reps and salaried advisers, but speaking with a number of RIA firms and service providers on the IP Study Tour 2015, it seems that there are also a number of tangible business benefits.
Compared to their Australian peers, US advisers seem to have greater say in their business affairs, whether it is the custody, technology and/or investment solutions they feel are best suited to their particular client bases, or the branding, marketing and social media strategies they employ.
In the past few years, ‘aggregators’ or ‘consolidators’ have emerged in the US. They take stakes of up to 49 per cent (often with 100 per cent ownership of cash flow) in RIA firms and yet do not seek to control them.
“It’s just a pure money play - we don’t care how they run their business and don’t want to intervene,” one flourishing aggregator tells us.
These aggregators are kinda like dealer groups except for one major difference - they don’t license on their behalf.
Licensees in Australia, by contrast, rarely have stakes in their ARs and yet, even though they are meant to be service providers, many demand control of their representatives, from social media activity to product recommendation to technology choice. Where chunks of practices have been bought by a licensee this power play is even more severe.
Sure, there are some good and innovative licensees, but that doesn’t change the fact that the Australian licensing system is fundamentally broken and doesn’t make sense.
Authorised representatives take on all the difficult decisions of running a business but forfeit many of the major strategic decisions regarding the actual advice provision. And they pay tens of thousands of dollars per year for the privilege of being told what to do! It is truly ludicrous.
I cannot say for sure that individual registration is the sole reason US RIAs seem to be happier, more in control and more future-ready than their Aussie colleagues, but it is undoubtedly a major factor.
The question, then, is can we establish a similar system Down Under, where advisers are individually licensed and held to a fiduciary duty but have access to scale and business arrangements of their choosing?
The short answer is not without a fight. While the big licensees are hardly profit machines, the authorised rep model has never been about margins or compliance - it is about control.
Authorising an adviser - in other words, taking the scary visibility to regulators away from them - has allowed licensees (especially the major insto groups) to maintain psychological control and shore up distribution even where there is no ownership arrangement in place.
While the traditional model is clearly collapsing - you only need to look at Genesys to see that, and mark my words, more will follow - they have spent too much time and money to admit defeat now.
Beyond this perhaps slightly-conspiratorial assessment of why not, there are more practical obstacles.
Around a year ago, one of the many bipartisan Senate inquiries scrutinising the advice sector began asking serious questions about a move to individual licensing. ASIC’s response was simply that its pockets are not deep enough.
Funded by the taxpayer and reliant on the Department of Finance for its funding, ASIC does not have the coffers it would need to license and oversee every individual adviser, unlike the SEC and various US state authorities.
A move to a user-pays model may assist with this, providing a greater pool to fund the regulatory toolkit - although we would need to ensure those providing more user funding (ie the banks) do not have a disproportionate say in ASIC’s affairs.
Short of waiting for reforms making self-licensing easier, the other option is for advisers to take the plunge and license themselves, as a growing number in Australia are.
The rules are not as simple as in the US, the compliance burden is a factor and the costs are arguably greater than being an authorised representative.
But as any American will tell you, you can’t put a price on 'life, liberty and the pursuit of happiness'.
Aleks Vickovich is contributing editor at ifa based in Washington, DC. Follow the IP Study Tour on Twitter at #IPinUSA15
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