The advice market is in a significant period of disruption. I would even say it’s at a pivot point that will shake the foundations of the value propositions being provided by different licensees.
The long-held consensus view is that the market share of financial advisers operating under a vertically integrated licensee oscillates between 75 and 85 per cent, depending on the stage of the cycle in regulatory reform. The tougher the market (consolidation phase), the more advisers gravitate to the big institutions; the more buy-outs of smaller licensees by institutions; and the greater the reduction in the number of advisers in business in the independently-owned (non-aligned) licensee space. But are we now entering a fragmentation phase where the move is away from institutional alignment?
A simplified view of a good market is one where there is strong competition, a variety of service and/or product propositions and open and transparent information available for market participants. In the case of the adviser licensee market, the participants are the advisers who seek the ability to provide advice either as an employee or as a sub-licensed authorised entity under an Australian Financial Services Licensee (AFSL).
Read Professional Planner’s interview series with leading non-aligned advice groups:
Part 1: The future in focus as non-aligned groups exploit the growing gap with institutions
Part 2: Unity of purpose as non-aligned groups bulk up to compete
Part 3: Proof of non-aligned business model emerging in Centrepoint performance
Over the past five years we have heard talk of the independently-owned licensee space heading towards its demise. In terms of the future, as we can now see, these licensees may actually become the destination of choice for more advisers than ever before, as consumers seek greater trust and independence – especially in light of the blanket coverage of advice failings and media attacks on institutionally-linked advice.
In the context of access to and affordability of advice, the market needs both the aligned and non-aligned licensees, but their value propositions to advisers are being challenged. Each sector within the financial advice market has a role to play. However, we believe consumers will have a heightened demand for greater independence when seeking financial advice. This could be the market disruption that creates a “new normal”, where adviser numbers in vertically aligned licensees find a new level.
Since the introduction of the Future of Financial Advice (FoFA) reforms, many more advisers are also seeking to self-license, as a complete move away from the traditional licensee model.
We have seen a number of independently-owned licensee groups flourish in recent times, and it has been because they established a unique point of difference and value proposition. They are niche and they are consistently seeking to innovate and grow.
Advisers are attracted to the niche because they can have their own identity while understanding clearly what the licensee stands for. It appears that the most common thread between those that are succeeding in attracting quality advisers is that they position their non-alignment with product as a differentiating factor for clients. It’s a model based on strategy ahead of product, and while most advisers take this approach – including many under aligned licensees – the separation from institutional alignment is perceived as the best fit for their client proposition.
The Financial System Inquiry (FSI) underway at the moment is likely to consider the nexus between product providers and financial planning licensees (distribution). Our view is that egg will be too hard to unscramble. So as an alternative, we may see recommendations for an increased adviser-level licensing requirement that co-exists with the AFSL authorised representative model. This may also include greater reliance on the AFA in a co-regulation model with licensees and ASIC. I raise those possibilities because they indicate the tide of opinion in regard to each adviser needing to be seen and recognised as an adviser first and foremost, and not a distributor of product.
Both the aligned and non-aligned models have their challenges to overcome around managing, or better still, avoiding conflicts of interest, the upshot of which will be addressing the funding and fee models they use. It is important to acknowledge that a number of smaller licensees have already achieved this so it can be done.
We are constantly working with the government to ensure that advisers are able to deliver great advice to more Australians, while also educating consumers around what financial advice can do, through initiatives such as Your Best Interests.
Each licensee model has its merits, but the non-aligned space is and will continue to be the leader in change and innovation. The current tipping point will see new and better value propositions being created from each type of licensee and that has the propensity to bring greater value to advisers and their clients. The door is wide open for licensees to show leadership and make some bold and possibly brave decisions.
It is innovation at work and if we all embrace the opportunity, it will bring a new and exciting era for financial advice.
