Who would buy an AFSL?
LIF starts on 1 January 2018, so the buyer’s commission income falls straight away, by perhaps as much as 40 per cent, depending on the mix between initial and renewal commissions. There is no real way to replace this income other than directly or indirectly increasing adviser or client fees. Good luck there.
New training and education requirements intended to thin out adviser numbers kick in over the five years between 1 January 2019 to 1 January 2024. Watch AFSL income fall as adviser numbers fall. It could be as high as 30 per cent, with replacements deterred by high barriers to entry (i.e. a three-year degree and a professional year).
ASIC is introducing a new supervisory cost recovery fee of perhaps as much as $1,500 per year per adviser. For Dover it’s another $600,000 of annual costs that obviously cannot be passed on to advisers. Pop that one into your valuation model.
Watch this space for significant minimum capital requirements. These are needed to properly comply with ASIC’s rules on adequacy of compensation arrangements.
Professional indemnity insurance premiums are steep, and getting steeper every year. There is no respite. Some say they are $6,500 per adviser per year. But watch what happens if the AFSL make a claim: it will be knocked back or, worse, its next renewal application will be declined or the premiums increased beyond belief. And there is no run off cover. If the insurer decides to not renew the policy the AFSL is from that day on un-insured and possibly un-insurable, and with an unknown future potential claims liability and no realistic statute of limitation.
The naive AFSL buyer can be hung tomorrow for a crime committed by someone else 10 years ago. Imagine being statutorily responsible for advice you have not reviewed provided by an adviser you do not know to a client you never met, for evermore. That’s the liability the AFSL buyer takes on.
The single external dispute resolution service (EDR) is another reason to lose sleep. EDR fees will rise, as will the claims threshold and the EDR’s willingness to find for the client against the AFSL.
The single EDR can ignore the law, cherry-pick the facts and forget about its previous determinations. It can do whatever it wants, and is accountable to no-one. There is nothing the AFSL can do about it. It’s defenceless. Young staff with no financial planning experience or qualifications determine damages of hundreds of thousands of dollars against AFSLs. Even the most obvious technical error cannot be corrected: the AFSL cannot appeal. The AFSL is contractually bound to accept the determination, no matter how unfair it is.
The client, of course, can appeal.
AFSL profits are not high. I know small medical practices making more profit than the best AFSLs. Medical practice profits are stable, predictable and virtually guaranteed by the government. AFSL profits are not: one complaint cluster; one thieving adviser; one error of judgement and the AFSL’s annual profit is wiped out, or worse.
The average AFSL balance sheet is an interesting mix of hope and luck. On the assets side there is a strange beast called “intangibles”. On the liabilities side the real liability is usually not there: the latent liability euphemistically called “provision for claims not yet reported”. Every AFSL has some. The future dollar cost of claims against advisers not yet known to the AFSL.
Some are bigger than others.
Does the real balance sheet balance? Or are real liabilities 10 times real assets? Time alone tells.
Borrowing to buy goodwill is dangerous. AFSLs are no exception. Is the goodwill real? Can the debt-burdened AFSL pay the buyer’s interest and principal repayments? Plus pay the buyer’s target ROI? Let’s not pretend there will be no new sales KPIs. Spare me. There will be big increases in the sales KPIs. The buyer has to say something positive quick. Its share price depends on it. The first six months have to be great.
Who will buy that AFSL down the track? What is the exit strategy? The potential purchaser pool is shallow, and one must look hard at any purchaser’s balance sheet or it could be out of frying-pan and into the fire. Under-funded aspirant purchasers are a dime a dozen. Properly funded ones are fewer and further between. AFSL owners must have a good track record: a solvent balance sheet, a long and stable profit history, a strong operating cash flow, an AFSL experienced management, a compliance orientated mind-set and, above all else, a sound moral compass.
Running an efficient and effective AFSL, as section 912A requires, is not about maximising profits. It is about making sure clients get good advice, that is in their best interests, appropriate to their circumstances and prioritises the client over the AFSL. And the AFSL’s owners for that matter.
What of the AFSL’s non-owner stakeholders? The AFSL’s loyal staff? The AFSL’s loyal advisers? How do they feel reading the press release for the sale of their AFSL? They don’t get that cheque, but they do get that new performance KPI. New product directions and new volume quotas will be the order of their day. The vendors’ sale price depends on it.
What sort of management decisions are made under this sort of financial pressure? How do these decisions square with the best interests duty? The appropriateness of advice rule? The obligation to prioritise the client’s interests?
What does an adviser do if the AFSL’s buyer says recommend this product, at this price, in these volumes, no matter what is best for the client?
How can the AFSL hit the new big sales KPI next year if it did not hit it last year?
How does the philosophically-non-aligned-non-institutionally-influenced-adviser respond to these conflicted product expectations? Remember, it is the philosophically-non-aligned-non-institutionally-influenced-adviser who is banned for life and loses everything when something goes wrong. The AFSL just gets bad press. The AFSL buyer, the faceless owners, walk away scot-free.
That’s the way its set up. The advisers take the rap. They don’t sign the sale contract but they pay the price.
Be demanding of who buys your AFSL. Not everyone is up to it.
Terry McMaster is the managing director of Dover Financial Advisers
comparison of the Matrix Super to Clearview Super and either Matrix Pension or Clearview Pension. This relates to the SOA dated 24 January 2017
spot on article…except the last two/three paragraphs. Your flying the flag for your lot I understand, though I think your being alarmist about the KPI. Practices will just move on if they don’t have a good new deal. They are tied to it. Honestly, the regulation, and particularly all of the remediation programs, associated compensation, threat of a royal commission. Who would want to stay in this game anymore..
Individually licensed is the way to go – dealer groups can just provide consulting/outsource services. Trust me, it would be better for all concerned. Then DG will have to provide 5* services to Advisers to get their business, and use their product. No conflict, just purely good service and good product, or you purchase elsewhere. Wont happen for 20 years though.
Perhaps also take insurance advisers back to being brokers – it really doesn’t need to in the ‘financial planning’ realm. Too higher regulation for essentially a broker/sales role.
spot on article…except the last two/three paragraphs. I think your being alarmist about the KPI. Practices will just move on if they don’t like it.
It is interesting to see that rather than discuss the issues raised in the article, or provide constructive comments about other readers comments, we have keyboard warriors and trolls making anonymous comments and attacks. If you want to make attacks on a person at least stand-up and put your name to it. #trollingisalowact
Oh Matthew…you don’t get it do you. IFA has set this discussion group up for trolls to fuel pointless opinion pieces, so you’ll keep coming back again and again to perpetuate commentary on asinine articles such as this one. #suckedin
If a business model is right then it will be profitable. We have started Shartru Wealth in the last few years because we see the opportunities ahead to do things differently and provide advisers ervices and expertise. Even if the AFSL regime changes we are confident that our offer will still be relevant to our advisers albeit it will slightly evolve …..but hey if you aint changing your probably dead.
thats what i was saying below Rob, things will change and dealer groups will need to change with the times. Advisers will either work directly for an institution – banks or union super funds – or be self-licensed. The days of large groups being controlled by the dealer group boffins will die away.
Wait until a labor government gets into power then you can turn the lights off. More red tape, more taxes, more regulation.
The only people who say it’s tough to run an AFSL are those with a vested interest in keeping advisers under the dealer group model. Plenty of ammunition here to scare advisers into staying. However any adviser with a good compliance history, not a start up and not seeking to retiree in the next 3-4 years, or not wanting to work for AMP or the likes is an absolute idiot for staying in dealer group land. Just do it and leave these fat, greedy commission dealer group heads as fast as you can.
Terry, you must be doing pretty well if you can afford to not pass on $600K in additional costs. I would expect that my AFSL will pass these on at cost to all their advisers.
The future is for advisers to be individually licensed, probably through FASEA once it’s up and running or similar body (preferably not ASIC), in the same way that accountants and lawyers are licensed. Advisers may still ‘group’ together or source some services from external consultants for a fee, but the future of the AFSL as the collector of revenue, the issuer of standards, etc is dead. You should be looking to sell asap and if you cant find a buyer based on all the negatives in your post, just keep milking that cow for all its worth until the world changes around you
Brilliant Comment. Thank you for your post.
What business is an easy business? Unfortunately if you wish to be the business owner, you need to accept the commercial risk associated with it.?
sounds like the beginning of the end for the financial planning industry. alas, so it is
Agree with many of your sentiments here Terry. It is tough running an AFSL, even tougher running a privately owned one as you know….but make that even harder when Dover decides it is going to not support fellow privately owns but actively tries to recruit from them including my staff. #playfair #recruitinstos
Ouch!
Don’t be a “sook” Phillippa that happens in every business, the competition tries to recruit the best from its competition, and you are in competition, insto or not!
I am all for saying as it is and yes I understand competition. Luckily Dover have taken none BUT lets be collaborators and lets stick together in together in tough times. At least I put my name to my comments.
What are your fees and why do you not disclose them on your website?
#poor
Philippa – if you can’t retain your staff then that’s most likely your issue, not anyone else’s.