As mid-tier licensees surge to replace institutions exiting the advice sector and advisers scramble to find new homes, a bitter and complicated dynamic is emerging that threatens the relationship between advisers and the groups that license them.

Compliance records are being used to hold advisers to account as they leave dealer groups, while client books and lofty sale agreements are being held to ransom as licensees look to protect themselves from crippling remediation bills.

Blame is being apportioned on all sides. Ostensibly, advisers should be at fault for their often-questionable record keeping habits of the past, but this needs to be balanced with the historic inability or reluctance of some licensees to both identify and arrest poor practice.

According to advisers, being penalised for not meeting this benchmark years ago – when they were held to a much looser standard – is not only unfair, but a restraint that impacts their clients as much as them.

Expectations a decade or two ago were different when institutions were in acquisition mode – buying advice practices for the purpose of distributing product. The result, as revealed by the spotlight of the Hayne royal commission, was an industry focussed on profit and expansion.

The royal commission changed everything. As remediation bills topped $1 billion, the institutions began to clean house. ANZ pre-empted the fallout and sold early. Shortly thereafter CBA, NAB and Westpac either sold, diluted or flat-out abandoned their advice arms, while AMP and IOOF are the last of the “big six” institutionally-owned wealth businesses left standing.

ASIC – chastised by Hayne for inaction over non-compliance – ramped up its client file ‘look-back’ requests in 2015 with a rolling surveillance program investigating how large institutions oversee advisers. The ongoing project to uncover fees-for-no-service continues.

Growing tensions

The ubiquitous ‘look-back’ requests are a major wedge between licensees and advice practices with ASIC demanding client files from up to ten years ago.

The government’s implementation of Hayne’s recommendation to end grandfathered commissions is adding to the tension; an increasing number of large dealer groups are joining the extinction list including Westpac’s Securitor and Magnitude, CBA’s Financial Wisdom, IOOF’s Elders and Aon among them.

A migration of advisers unlike any is now in motion and will continue into next year and beyond.

Those nearing retirement or spooked by added educational requirements are leaving the industry, while others are eyeing off self-licensing. Most of the displaced are scrambling for a new licensee and the requirement for advisers to load client files onto a specific electronic record is posing a few challenges.

“Advisers are being asked to scan hundreds of files before they’re permitted to move to a new AFSL,” says Paul Cullen, group executive at licensee Centrepoint. “Obviously this involves substantial expense, effort, and disruption to an adviser’s business.”

While most advisers have transitioned to widely used Customer Relationship Management tools like Xplan or Coin, many have kept file notes on email, in a patchwork collection of word documents, excel sheets or even paper files.

Spurred by ASIC, licensees are asking for these files to be collated and transcribed to the CRM of their choice, which can be a massive, time consuming undertaking.

Sins of the past

Lazy record keeping has exacerbated the problem. Busy with the job of advising clients, many advisers have simply adopted shoddy habits. Years ago, this didn’t matter as much.

“There was a point in time when licensees began encouraging the digital storage of information, but before that they rarely did,” Cullen explains. When the technology started being adopted, he continues, advisers weren’t asked to put their old files onto new systems.

“They didn’t actually make them retrospectively go back and record what they’d done,” he says.

Licensees, now wary of ASIC’s look-back requests, are often refusing to release clients until the work is done. Revenue streams are effectively being cut off, leaving advisers stranded if they can’t provide a copy of their files in the requested format.

The dilemma has been made even more stark at AMP, where buyer-of-last-resort agreements that were predicated on 4x revenue are being slashed to 2.5x, with the compliance risk of a practice forming part of the market value equation.

“In the old days, licensees like AMP didn’t do a deep dive into compliance books,” says Simon Carrodus, a solicitor and director at The Fold Legal. “It was good times and rock and roll back then.”

Now that they’re cleaning house, Carrodus adds, the dynamic has changed. In a market where practice valuations are at a nadir, poor compliance only compounds the problem and gives licensees another reason to pare back valuations.

“In AMP’s case – they’re not the only one but the main one – they’re writing down their BOLR valuations based on adviser compliance and record keeping failures. It’s frustrating for advisers, but the licensee doesn’t want to pay above-market rates for a business that has a client remediation liability attached to it,” Carrodus explains. “The major licensees have lost a lot of money through client remediation over the past few years.”

Not time, no help, no love

Nathan Jacobsen, CEO of mid-tier licensee Paragem, has come across many advisers looking for a new home. Auditing adviser files upon exit is a “pretty normal process”, he says, but what’s different now are the short timeframes used.

This view is shared by an adviser who recently left dealer group Aon in advance of its closure. The adviser, who asked to remain anonymous, says they were given six months to exit the market and backdate their files onto the system. “It sounds like a long time, but it’s not when you’re trying to service your clients and do your files.”

The adviser says many were burdened by a further handicap; as Aon was winding down it laid off many of the support staff that would typically help transfer files.

“Aon trimmed down their legal and compliance staff, so you’ve got 130-odd advisers looking to fix up their compliance but all the support people were being let go,” the adviser reveals. “A lot of the older ones struggled.”

Carrodus notes that some licensees have a culture “like football clubs”, where any perceived lack of loyalty is treated harshly. Sell your business to an external group and you run the risk of extra compliance pressure, he reckons.

“If an adviser sells their book within the ecosystem… the exit goes rather smoothly,” Carrodus says. Sell to a rival licensee, he adds, and “things usually become tricky.”

Runoff blow-up

Many licensees are adding a further restraint upon exiting advisers in the form of professional indemnity runoff cover.

Opinions vary as to whether making advisers purchase this insurance – which covers a licensee after the adviser has left the group – on their way out is justifiable. Typically, PI insurance is purchased by the licensee and funded by revenue from advisers.

Getting coverage for future problems being uncovered is a sensible risk mitigation strategy, but shifting the responsibility to pay for the premium to the adviser is a point of conjecture. Licensees have the right to seek coverage for future compliance issues, and once the adviser has departed they won’t receive revenue to fund the premiums. It makes sense to front-load the cost. However, many advisers see this as the licensee’s responsibility, not theirs.

Paragem’s Jacobsen agrees. “We don’t require [advisers] to have any runoff cover,” he says.

“The licensee holds the PI cover,” Jacobsen adds. “The fact that advisers are being required to have PI cover that was never theirs doesn’t make a lot of sense to me.

Todd Kardash, CEO of the merged Clearview and Matrix dealer groups, says he’s never asked for runoff cover either. “Not many licensees are looking for PI runoff cover when an adviser leaves these days,” he says. “It’s a bit of nonsense to me.”

Carrodus reckons claims are rarely lodged for remediation cases anyway, because the deductible is usually between $35,000 and $50,000.

“In the majority of cases the client compensation is calculated at less than $50,000, so PI doesn’t come into it,” he says.

‘Manifestly unfair’

Advisers with poor record keeping need to take responsibility for not only their professional indolence, but for thinking it wouldn’t get called out eventually.

“There is an element of naivete to it on the adviser’s side,” Kardash says.

However, many put an equal portion of blame on licensees for fostering a poor compliance culture.

“Licensees have been quick to shift the blame to advisers,” says Carrodus. “Hayne wasn’t buying it, though. He was more interested in the culture of the licensee.”

Indeed, the royal commission sought to place the problem at the foot of the dealer groups. In his criticism of ASIC, Hayne encouraged the regulator to take legal action not only on the adviser, but the licensee behind them.

According to Centrepoint’s Cullen, advisers feel let down by their licensee groups.

“These advisers are saying ‘You didn’t ask me to do this in 2009… you’re retrospectively applying a standard and that is manifestly unfair’,” Cullen notes.

Advisers, busy running their practice, were caught unawares when licensees adopted a new approach to compliance. “The regulations haven’t changed… but the level of scrutiny being applied by the licensees has changed enormously,” Carrodus says. “The reality is that licensees probably should have been applying a higher level of scrutiny all along.”

Stephen Southwood, associate director at Forte Licensing solutions, acknowledges that advisers should have known better. “Absolutely they have been naive,” he says. “They haven’t been looking at their contractual conditions.”

Ultimately, Kardash reckons, licensees should be more focussed on advisers when they pick them up than when they let them go.

“There are licensees that will roll out the red carpet for an adviser on the way in and then do everything they can to make an adviser’s life difficult on the way out,” he says. “It should be the other way around; you set the bar as high as possible for advisers coming in but when they leave you roll out the red carpet.”

Forte’s Southwood notes that newly formed dealer groups are placing much more scrutiny on incoming advisers than the incumbents ever did.

“New dealers are really scared of introducing a trojan horse to their license,” he says.

A whole new deal

An uplift in the standard of record keeping is just the start of what the schism between licensees and advisers might mean for the future.

The lessons being learned today will be written into the contracts of tomorrow.

Advisers are already scrutinising licensees in a more holistic fashion. It’s not enough to be welcomed with open arms on the way in; they want to know if they’ll be punched in the neck on the way out. Robust and consistent compliance oversight is the new benchmark.

It’s important to note that most licensees are already there. “This is not the whole industry,” says Jacobsen. “The way certain licensees are acting is not reflective of the market; many have reasonable contractual arrangements that don’t involve taking ownership of clients, BOLR arrangements or runoff cover.”

Advisers will want a clearer picture of where a licensee stands with the regulator as well, and whether there are any overhanging fee-for-no service issues. “You don’t want to go from one burning house to the other,” Forte’s Southwood says.

Licensees, for their part, will want to know what’s inside the wooden horse. Avoiding remediation exposure is critical. Ironically, being involved in an ASIC look-back request will actually become a positive because it wipes the slate clean.

Licensing will be more transparent, spurred by both regulatory and market pressure. When fintech catches up to its ambitions, licensees will leverage tools that haven’t been invented yet to enhance their value proposition for advisers.

Compliance won’t always be a weapon, and while this period may be looked back on with a degree of shame the advice industry can only benefit from the lessons learnt.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at
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