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.
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Comments7
"I'd like to SECOND the comments by Kasey and Jeremy, below. Kacey's comments apply directly to me too - it could have been me writing exactly the same. Jeremy, as usual, has the 'wordsmithery' and smarts to nail it in one. If I could drag a pollie into the room and rub his nose in something, it would be Jeremy's comments. The only decision now for me now, after 43 years in this once great industry, is do I sell now or wait until this ridiculous exam they are forcing risk advisers to do in 2020. I'd planned to stay serving my clients until I was at least 70, you know, because 'client best interest' and that's the way I know to do that - be there for them! But no, if I don't pay the entities lots of money and do their pointless exam I will be deemed unfit to help my clients with their insurance advice. How abjectly corporate and sickening is that?! This damn lawyer, Hayne, should be ashamed of himself for making uneducated pronouncements that can badly damage lives and our industry. He is greatly out of his depth. He simply doesn't know what he's talking about. He either has a secret agenda, is close minded, misguided or a puppet for big business or WORSE all of the above (quite likely)No experience at the coal face and he clearly has pre-conceived ideas about commissions that are out dated and wholly unsubstantiated. Best of luck all . . ."
Brian Howard 18:18 on 08 Feb 19
"After 30 years experience and no complaints. I object now that i have to spend education time to become ethical and honest. I was taught that long ago and joined for the reasons of serving and helping people rather than solely on income as some out there seem to think. Ive always held a clients best interests before my own. In my late 50s now and I have no intent on doing back to university or supporting this opportunists. My CFP took much of my time for 6 years and I am not interested in playing in this field anymore where trust and integrity between clients and advisers in no longer valued like a handshake once was. Call me old school if you like, but my values and integrity see this outcome with the royal commission sending up the cost to serve where i dont see value for mu clients no longer. And it is not likely to stop. How will technology keep up or are we just filling in time for Robo advice. Time to enjoy life and benefit from my experience without the anxiety etc. Feeling burnt out. "
kacey 18:56 on 24 Jan 19
"The recommendations from the RC will take months to implement - this gives us the chance to continue to lobby to the government and provide case studies and real life examples as to how and why this will have the biggest impact on the hard working Australians who need good financial advice. I have been working with the FSU as a self employed Financial Adviser. We have a small working group that have been meeting with a number of politicians from all sides of politics to provide a voice for the advisers and explain how such decisions can have serious unintended consequences not just for those who work in the Finance sector but for the clients. We have been encouraging Advisers to support our efforts and to have a voice - to stand up for ourselves and to show that there are a dam lot of good hard working advisers out there and smashing us with a bus is not going to get the results they want - it may also cost them with voters - yeah cos we are voters too! The proposal is for advisers to join the FSU - i know it sounds crazy - this is a unique approach. The idea is that we need these people to listen to us and the best way to do that is to go down the path that means they have to - especially as it appears we are likely to have a Labor government. Our working group has been to Canberra for the last two sitting of parliament last year, this was a direct result of the doors the FSU opened for us and the FSU are keen to support us. We need to show that the advisers have had enough and want to have a voice. We need 800 advisers to join the FSU ASAP - we currently have 300. This will give us numbers and we will be able to demonstrate to both sides of parliament that we need to be consulted on the changes that will be recommended as we all know they will have unintended consequences especially for our clients. I now look forward to the left wing bash! :)"
Pamela A 21:48 on 23 Jan 19
"We are now entering a "Perfect Storm"' scenario where a chain of events, once joined, will cause absolute chaos that will result in the Financial Planning and Life Insurance advice Industry buckling under the strain. Australians are oblivious to the shenanigans that have occurred and the small percentage who have read the papers, do not care anyway. The Industry has been hoodwinked by vested Interest groups like the FSC, the Unions, Public servants and a plethora of left wing whack jobs who have never been in the real world but still make a lot of noise. For what result? Absolute Chaos that will ensue, for little gain to the Australian public, with substantially more pain. The only winners will be, as usual, the Lawyers, Education providers, Public servants and for the rest of society, more stress and cost to pay for the circus that is, what we live with today."
Jeremy Wright 16:48 on 23 Jan 19
"How can Chris Bowen say with a straight face they will implement all the recommendations before they've been released? Has he got some inside mail?? It's like saying I'll swim across the Adelaide River in the NT before knowing how many crocodiles are in the water. Granted, it appears there are going to be some stern recommendations but to make a statement without knowing what they are reeks of a goose!! We're in all sorts when this clown ends up running the show..."
Dean T 15:29 on 23 Jan 19
"If a licensee has to charge 30% more than $40K up front you can could me out"
HH 14:47 on 23 Jan 19
"I'm eagerly anticipating the final report - including any criminal recommendations. This could either revolutionise the industry or be a damp squib with superficial recommendations. We'll see how Hayne has been influenced or otherwise..."
John P 14:45 on 23 Jan 19