The pending release of the banking Royal Commission’s final report, due out on February 1, has the potential to radically change large parts of the Australian financial services landscape. Advisers will be at the coalface of many of the potential changes, with the commission expected to recommend changes around adviser remuneration that could affect most facets of their revenue. Many advisers may have to amend their client service payment models and equally, the relationship and business models with licensee groups, product providers, and associated service providers all have the potential to be substantially affected.
To grasp the magnitude of the potential change, it is useful to look at just one of the key adviser relationships that may be affected, that of the licensee. Transformation of the licensee landscape has been underway for some time, driven by various factors including large institutions moving out of wealth, concerns with vertical integration, and advisers seeking independent control and oversight of their businesses.
75% of Licensees Have 5 or Less Advisers
Adviser Ratings analysis shows that in the 2 years leading up to March 2018, the number of AFS licenses granted grew by over 400, bringing the total number to 1,752. In the 10 months since then, more than 500 new licences have been granted, bringing the total number at mid-January this year to 2,261. A key finding from our analysis is that more than three quarters (76%) of all licensees cover 5 or less advisers.
The other key factor in the growth of small or self-licensing is cost, with many advisers not recognising a benefit in a licensee’s value proposition in its current form.
Peloton Partners chief executive Rob Jones said in a recent Professional Planner article, that it costs licensees between $38,000 and $45,000 to support a practice, per rep per year. Advisers cover this cost in whole or part though their licensee fee arrangements. Traditionally, these costs may have been implicitly or explicitly subsidised to varying degrees according to the terms of the licensee agreement. Jones speculates that “licensees need to look at the real cost of supporting a representative and add a 30 per cent margin to price their offering.”
Changes For Licensees
It is expected that the Royal Commission findings may result in licensees having to move away from revenue-sharing arrangements with advisers, towards fixed fees charged to representatives. Aligned licensees effectively subsidising licensee fees via their associated product distribution networks will likely be curtailed and thus unviable. Adviser Ratings CEO Wealth, Mark Hoven, believes licensees will have to become more transparent in terms of how they work, their track record and performance, and their governance in order to attract advisers.
What Advisers Want
What licensees deliver to advisers will depend on what adviser’s value and are willing to pay for. Business and professional development, and guidance around technology offerings will emerge as key components of a licensee offering. Those licensees offering the best use of digital services to increase efficiency, compliance, and client engagement will likely be most successful in this restructured environment. Some licensees may attempt to be best in breed across all service offerings, whilst others will aim to specialise in a just a few. Dial in/dial out flexible pricing models may also become more evident in enhancing the licensee’s value proposition.
New Providers Emerge
What this means for the hundreds of newly minted self-licensed practices, and whether the trend to self-licensing continues, remains to be seen. In the new environment, if a licensee can find the sweet spot for pricing and service delivery, scale may again prove to be an efficient and attractive option. Larger dealer groups already offer various services to smaller licensees and it may be that the restructuring in the industry sees the emergence of brand new genuine professional services firms (outside of the traditional licensee model) providing solutions to these smaller firms on an ad-hoc, fee for service basis. Adviser Ratings, with the ongoing development of our Vendor Hub initiative, which will offer advisers ratings and reviews of various service offerings, and XY Adviser, which is a free-to-join closed adviser community that engages in professional development events and encourages information exchange between advisers, are just two examples of new service providers to materialise as potential solutions targeting specific needs of advisers.
With shadow treasurer, Chris Bowen, saying “a Labor government will seek to carry out all the recommendations of the Royal Commission” and that both sides of politics will need a "very, very, very good reason" not to adopt any finding, the final report will undoubtedly have a profound effect. We all wait eagerly for the reports imminent release.