There is no mass exodus of financial planners from institutionally owned Australian Financial Services licensees to non-aligned and independent channels, according to the head of advice group Paragem.
“Ten years ago, the debate was the same regarding institutional ownership of financial planning licensees ending,” says Ian Knox, managing director of Paragem.
“Every few years we go through this exciting media talk of an entire network of advisers looking to leave,” Knox says. As examples, he refers to AMP’s planned closure of Genesys and rumours about RI Advice practices wanting to depart ANZ.
However, instead of such movements being spurred by a desire for true independence, he believes they often result in a different outcome.
“In practice, every single time a mass migration, one involving more than 10 practices emerges, they’ve always been paid money and always move from one conflicted model to another,” Knox says.
Another example he refers to is MLC’s acquisition of Meritum Financial Group from Aviva in 2010. “I haven’t seen a major breakaway happen without the breakaway group being paid by an institution.”
Inherent conflict of asset-based fees
One of the major obstacles to self-licensing Knox observes is the cost of AFS license fees.
He recalls a recent conversation with a practice head from a bank-owned licensee, who reveals the practice was paying 4 per cent of its gross revenue as a licensee administration fee.
Knox compares this with the true licensing costs incurred by a non-aligned practice, which he estimates fall somewhere between seven and 12 per cent of gross annual revenue. “[The bank-licensed practice’s] clients must be paying too much for something.”
With Future of Financial Advice (FoFA) banning volume-based bonuses, he says, “some dealerships [have] sought to replace those losses of revenue with a client charge called the licensee administration fee.”
“It almost bypasses the product disclosure statements on badged products, it pops up in the Statement of Advice, but it’s so hidden, hardly anyone would know it’s there.
“Instead of the dealer charging an appropriate fee, they try to derive revenue on a basis points from a client’s assets. It’s a bizarre charge. Why should a client pay a license administration fee, why shouldn’t the adviser pay that, that’s my question?
“When I hear about pricing I just wish the industry could be truthful about this. At some stage, the bigger dealer groups have to ‘fess up,” Knox says.
Instead, he believes the answer is to charge the correct amount for advice, to pay the license fee and provide an appropriate service that benefits the consumer.
The loss of grandfathered remuneration is another element of FoFA Knox believes makes it unlikely the industry will see a surge in the number of self-licensed practices.
“Unless you have existing arrangements that are grandfathered, all other cashflow associated with that is lost. It can be a very expensive exercise to go cold turkey and get your own AFS license today, compared to five years ago.
Compliance challenge
The additional time and effort involved in maintaining a FoFA-compliant practice is another obstacle, especially for those licensee heads tipping substantial growth in adviser numbers over the coming year and beyond.
“One reads about dealers hoping to attract more than 100-something advisers, and the physical work involved in doing appropriate due diligence, training, supervision and monitoring is beyond the capability of small to medium dealer networks.
“If we run through 2014, I’d be astonished to find any dealer group growing by more than 100 advisers, that haven’t been paid to join,” Knox says.
He also refers to a shortage of high quality advisers in the industry. “Everyone talks about the quality advisers, and there aren’t that many high quality advisers moving around in the industry. So where are you getting them from? They might be from the bottom-end of the market.”
Bright outlook overall
Despite these challenges, Knox is very positive about the current state of the industry and its future prospects. “The industry has never been in a better condition for transparency. I do believe the future has never looked better.”
He doesn’t believe there is any great significance in whether advisers belong to institutionally-aligned licensees – either employed or self-employed – or are non-aligned or independent.
Instead, he points toward the younger generation of practice heads, who have never been part of a commission-driven advice industry, “who embrace the spirit of FoFA, embrace transparency and are moving more towards non-conflicted remuneration.”
“I think they will be the change agents for the industry, not the institutional licensee versus the independent licensee.”
