Weighing up your adviser licensing options

In the wake of FOFA (Future of Financial Advice) reforms, and now the repercussions of a global pandemic, it’s no surprise many financial advisers are thinking deeply about the future of their business. All this change can be a catalyst for new models – one aspect of which is who you partner with as a licensee.

Of course, some advisers have already had licensee change thrust upon them.

“A major driver is ‘WEXIT’ – some banks have chosen to exit the wealth industry and taken their licensing options with them,” says John Sullivan, Head of Client Development with Macquarie's Virtual Adviser Network (VAN). Given a license is an adviser’s ticket to operate, many are questioning whether they want to be that dependent on the decisions of a third party.

“We encourage all our clients, if they don’t have their own licence, to have a ‘break glass in case of emergency’ plan – what they should do if their current licensing arrangements suddenly fell over. It’s just good business risk management,” John says.

Is it time to make a change?

Whether your current arrangement is ticking all the boxes or you have some doubts, it’s good time to take stock of the options available to you.

A licensee ‘plan B’ begins with a good understanding of what is currently working (and not working) for your business. In a 2019 webinar on licensing options with Macquarie, Encore Advisory’s Tom Reddacliff suggested taking the same approach as you would with advising clients in a turbulent market. “There’s so much noise at the moment, so get back to basics and say, ‘What’s the business I’m trying to build? What does it mean for me personally?’”

As the managing director of a licensing and advice consulting firm, he is open to discussing all options. “Sometimes you might be better off staying where you are until you’ve worked out exactly what you want to do.”

If your business goals include having more control – and if your current licensee model feels constraining – then it may be time to consider alternatives.

Here are a few questions to consider:

• Are you happy with the management quality of your current licensee? Do they have the experience, competence and resources to deal with the unexpected?
• How sustainable is their business model? Do they have good long-term reliable cashflow that isn’t dependent on possibly conflicted or unsecured sources?
• Do the culture and values of the licensee align with your firm?
• Do they offer a level of support and like-minded community that can help your business thrive?

If these answers steer you towards a new licence option, you could choose to go it alone and self-licence. Or you can look for a new home – which could be with one of the large institution-owned or aligned licences, with a smaller private operator, or within a ‘co-operative’ with a few like-minded firms.

March 2020 Adviser Ratings numbers suggest the number of advisers operating under private licences has grown as a percentage of the total industry, compared with institution-owned or aligned licences. The number of advisers operating under private licences has increased from roughly 8,000 to 14,000 since December 2014¹.

Adviser Ratings also notes the “merry-go-round of movement” within privately-owned licensees in the post-regulatory reform period – with advisers searching for the ideal balance of “support, independence, and profitability.” Given the ongoing economic challenges it’s also possible some will return to the ‘safe haven’ of larger licensees with scale and a strong balance sheet².

What should you look for in a new licensee?

Before you make any moves, John recommends taking a good look at your existing agreement.

“Carefully understand the implications of changing licences. What might be the cashflow consequences; do you have capacity to absorb any payment gaps? Will it impact your current lending arrangements? How easy will it be to extract and export your Xplan data?”

Then take some time to weigh up the alternative options out there. There are two fundamental decisions to make: do you want more support, or more autonomy? And do you see more value in the network you’re joining, or in the practice you’re building?

If you think about your needs across these dimensions, you can work out what type of licensee will best suit your longer-term needs.

Some of the options for your next licensee may include:

1. Institutional groups – compliance and scale to support you
2. Compliance utility – the right pricing for compliance
3. Aggregation plays – industry aggregators with aligned interests and a strategic focus.
4. Breakaway groups – a like-minded community with common values or growth aspirations.

“Different businesses will require different levels of support,” explains John. “Some will want to rely heavily on their licensee for a broad spectrum of support, others will be relatively self-sufficient and won’t want to pay for services they don’t need.”

“It will be the same with value – some business owners will be ready to back themselves and want to have control over their own agenda and timing; others will find the opportunity to be part of a bigger picture – either because other members of the network become the natural buyers of their business or because the network is playing a bigger game using the benefits of scale – to be attractive.

“There’s no “right” answer here – business owners need to think honestly about their own ambitions and capabilities, and source the right home that fits those needs.”

Ready to go your own way?

If you’re thinking about getting your own licence, you need to consider whether you’re ‘AFSL-ready’:

1. Do you have someone who can act as Responsible Manager?
   You will need to nominate this person to ASIC as responsible for ongoing compliance. To qualify, they need to comply with necessary qualifications or training requirements, as well as minimum relevant experience.
2. Are you broadly ‘compliance-ready’?
   This is the organisational competence obligation outlined in RG105. If your business already plays a significant role in ensuring it is compliant within your current licensing obligation, you should feel relatively confident. However, if you’ve heavily dependent on external support, you will need to upskill.
3. How will you access all your dealer services?
   This includes Professional Indemnity (PI) insurance, Xplan access and payments facilities, as well as ongoing CPD and professional development requirements.

“If you’re not confident on any of these three elements, you may wish to consider insourcing capabilities from external providers,” suggests John.

During the webinar, Tom emphasised the importance of getting a PI risk assessment immediately. “When you get your licence, you have two weeks to accept it, and one condition is that you have PI insurance,” he explains. Also consider that technology can become a bigger proportion of your costs once you lose your dealer group bundling discounts, and you may need help transitioning the data across.

A question of value

Licensees should now be considered a valued partner – not just a compliance tick box. So think carefully about the value any new licensee model might bring to your practice, and particularly to your staff and your clients.

“This should be a good move for staff and clients” says John. “It should also give you an approach to risk and compliance that is completely aligned with what you’re trying to achieve as a business – within the regulatory framework.”

If you can find a balance between compliance, support and commercial reality, you should be able to shape the right model for your practice into the future.

“It’s a milestone in your business story. You’re taking control of your destiny and setting your firm on a clear trajectory for the future,” says John.

“What could be more important than choosing the right partner to join you on the journey?”

Macquarie can work with you to help you understand the practical implications of a license change. Ask your Business Development Manager for more information or request a call.