With so much change sweeping through the licensee market, we decided to create a new classification system to better segment them into homogeneous “families” and to more clearly follow trends emerging in potential growth areas like industry funds and businesses concentrating on scaled advice under limited licence.
We believe this new segmentation is functionally more helpful too for advisers considering their switching options. While there is plenty of precedent for advisers switching from the major banks into the privately-owned sector, how attractive as a destination are the stockbrokers, superfunds and limited licences for “mainstream” advisers?
This is important too for service providers, who typically favour certain licensee types or have different value propositions and commercial strategies for tackling each segment.
Table 1 describes these new definitions and Figures 1-2 display the adviser distribution and Figure 3 the licensee distribution using this new classification.
The trends from Figure 2 are consistent with those under the previous licensee classification system (institutionally owned, institutionally aligned, and privately owned). The segment that has experienced the most change is Banks, reflecting their collective exit from advice with the sale or closure of most bank-owned and aligned licensees over the past two years. The segment with the next largest change has been Diversified, primarily driven by the orchestrated reductions in adviser and practice numbers at AMP Financial Planning and Charter.
The top 300 licensees account for 60% of advisers and almost 80% of practices
In these straightened financial times, pressure on business models is intense and that is never more so the case than for licensees. Regulation is raising the bar ever higher in terms of what it takes to run a compliant licence, and the associated costs follow. This will be further exacerbated by the rollout of the compensation scheme of last resort (that will penalise the largest licensees) and the single disciplinary body next year. To rub salt in the wounds, the new AFCA complaints reporting regime has increased the transparency and associated public scrutiny on how licensees treat customers. And competitive forces are also changing the shape of a successful licensee, or at least in terms of what advisers want from them.
With the exit of the banks and their substantial balance sheets, it will be interesting to see how the top end of the licensee market reshapes and recapitalises. And what defines top-end? For the purposes of this analysis, we decided to set that benchmark at the top 15% of licensee networks based on the number of advisers - the Top 300. Table 4 illustrates just how dominant this cohort is in terms of size, representing 61% of advisers and 77% of advice practices. Even within this group, it remains very top-heavy despite the bank exits, with the top 50 licensees accounting for 74% of advisers and 73% of practices in the top 300.
We also conducted a survey of the top 300 licensees looking at their commercial bonafides, in a world that is shape-shifting between the vertically integrated models of the past and the vertically integrated models of the future, with non-product aligned groups making up the emerging middle ground.
While the survey is still running and there was a good cross-section of responses from most segments, we are missing several of the largest diversified licensees, and the bank-owned and aligned licensees are yet to respond and unlikely to given their circumstances. Since most of this latter group are in outflow or stages of shutdown, their attention is elsewhere.
The revenue profile of the licensees from Figure 17 shows a skew from less than $2m at the bottom to greater than $25m at the top, with published financials from the listed groups exceeding $50m in certain cases. Clearly, there is a huge differential between the major advice networks operated by the largest groups, compared to the boutiques in the lower regions of the top 300. The latter generally do not have the same diversity of business and access to capital markets and other funding sources and are therefore more vulnerable to financial shock.
Counterparty risk is not the threat of catching COVID-19 at the local pub – it’s becoming the nerdy-vogue term for advisers and service providers alike as they contemplate which licensees they want to do business with. Over the next few weeks, we look forward to sharing more on the financial health of the top 300 and their business models from our survey.
* This is an abridged extract of the Adviser Ratings Q3 2020 Musical Chairs report.