There are super-cheap dealer groups around willing to license financial advisers for as little as $1050 per month plus GST. For this cut-throat price, authorised representatives have access to traditional dealer services such as licensing, research and technical support.
The website of one discount dealer group proudly boasts it has 50 advisers on board. Based on simple math, an adviser pays just $12,600 per annum for dealer services and the group generates $630,000 per annum in licensing fees. However, it cost the average non-aligned dealer group $49,000 per adviser to provide dealer services in 2011, according to Comparator’s Benchmarking for Financial Planning Businesses report.
If it weren’t for platform rebates, shelf space fees and other product payments plus the promise of a lucrative sale at some point in the future, most dealer groups wouldn’t be able to survive.
Perhaps most tellingly, the Comparator report revealed the average institutionally-owned dealer group spent $148,000 per adviser in 2011.
Nevertheless, institutionally-owned dealer groups can still afford to discount their fees. Last year one prominent institutionally-owned group offered to slash fees by over 90 per cent for practices which agreed to adhere to a limited Approved Product List.
Another bank-owned group provides licensing services for around $15,000 per annum.
Let’s not pretend that any of these token fees begin to cover the real cost of delivery.
Sadly, the real cost for the investor is compromised advice.
The true cost of dealer services
Conflicted remuneration and product subsidies have made the task of accurate pricing for dealer services very murky.
Research conducted several years ago estimated that the actual cost of providing dealer services was around 18 per cent of a practice’s turnover. Under this structure, large practices with significant revenue and funds under advice, and a higher number of advisers and clients, pay more because they require greater support and supervision. They also represent a higher risk to the licensee.
All dealer groups provide standard services such as licensing and compliance, marketing and technical support.
Where the best dealer groups add real value is through the provision of ancillary services such as practice development, thought leadership, financing, equity and succession planning.
Top dealer groups drive the development and adoption of technology that will boost efficiency and productivity. They negotiate competitive deals for research, software and professional indemnity insurance, and they form a protective barrier around their practices in terms of compliance.
Licensees who are able to deliver on all these promises, and use their leverage to deliver significant cost savings, should be empowered by their advisers to make a healthy profit.
Yet few advisers are willing to pay for all of these benefits.
Everything for free
Old school advisers are reluctant to pay for anything. They want everything for free or heavily subsidised and historically they’ve been able to get it with help from the institutions.
Institutions are able to make concessions knowing (or hoping) that they’ll in turn make a margin on product and platform sales.
This conflict underpins the common belief that dealer groups aren’t profitable and therefore don’t deliver on their promises. It also fuels suspicion and doubt over whether dealer groups actually act in their advisers’ best interests.
It’s not hard to see why advisers see choosing a dealer group or switching dealer groups as a major leap of faith.
However, there are a number of profitable dealer groups. Most of them are majority-owned and run by advisers and staff.
Advice relationship versus product relationship
In an ideal world, advisers would have total confidence in their dealer group. They would trust that their licensee is well resourced and looking after their best interests.
Advisers would know exactly how their approved product list is constructed and licensing fees would be clear, unbundled and transparent in the same way advice fees must be.
Dealer groups would exist solely to release advisers to focus wholly on the provision of quality advice that is in the client’s best interests.
A dealer group’s key purpose should be to spend money on building a bright future for its advisers. If a dealer group is not well supported and funded, it can’t achieve this.
This article is the first in a series by Ray Miles that explores the relationship between licensees and advisers.