Adviser movement is expected to continue in 2020, as displaced and disillusioned practices seek a new home.

While the majority of unhappy advisers are joining larger, privately-owned licensees, a growing number are considering self-licensing for three key reasons.

They believe that self-licensing will deliver:

  1. Freedom to put the client’s best interests first;
  2. Control over advice and business processes; and
  3. Avoidance of hefty dealer fees.

In short, advisers want to run their business their way and take control of their future.

But the idealist notion of control is a furphy because in any highly regulated and ultra-competitive industry, no one really has total autonomy over how they operate.

Editor’s note: This is the first in a series of columns Neil will contribute exclusively for Professional Planner in coming months

Advisers can make decisions about practical aspects of their business such as location, marketing and staff. They can shape their value proposition, pricing and service delivery but many decisions are ultimately guided by policy and regulation, not to mention market forces.

For the majority of advisers, their core licensing needs can be satisfied by an experienced, client-centric and profitable licensee.

Self-licensing should be seen as a last resort not the end game because of the significant risk and responsibilities it carries.

Before applying for an AFSL, advisers need to ask themselves the following questions:

  • What problems am I trying to solve?
  • What problems will I create?
  • What will I really be in control of?
  • Is there another option?

There are trade-offs to consider. This article touches on three.

Trade-off 1: Greater control v greater responsibility

Dealer groups are increasingly conservative in their risk appetite.

For practices teetering on the edge of their licensee’s risk tolerance, self-licensing would enable them to customize processes to better reflect their qualifications and experience. They could determine their business’ risk profile including the investment strategies and products they can recommend.

But that freedom comes at a cost. AFSLs must comply with strict obligations and are liable for the advice they provide.

For allegations of a breach of professional duty, professional indemnity (PI) insurance covers both damages payable and legal costs incurred defending a claim but there isn’t an insurance policy for unintentionally breaking the law.

That said, dealer groups are a form of insurance against regulatory risk because they are ultimately responsible for the advice provided under their license.

As such, one of the biggest benefits of a belonging to a licensee is a robust compliance and governance framework, and somebody to stand in the gap between you and the regulator should something go wrong.

Professional licensees have systems and procedures in place to monitor and identify issues, and resolve matters.

On the other hand, most own-AFSLs have never had their processes tested and have no experience dealing with the regulator.

Trade-off 2: Nobody to bring you down vs nobody to build you up

The banks and their dealer groups have suffered irreparable reputational damage in the past few years.

Understandably, affected advisers feel aggrieved. They want to distance themselves from the bad publicity and build their own independent brand. Self-licensing would allow them to stand apart and eliminate the risk of cross-contamination, but it can also be isolating.

Taking on the task of writing and modifying compliance manuals is one thing but how do own-AFSLs know they have it right? Who is holding them accountable?

Furthermore, many businesses think their financial performance is good but good compared to what?

All AFSLs need checks and balances in place to ensure their advice and processes are compliant and their business is financially strong.

While own-AFSLs can always engage an external consultant; most small businesses underestimate the cost of buying expertise.

Trade-off 3: No fees vs no service

Self-licensing exposes advisers to the risk of replacing dealer fees for steep operating costs, and potentially missing out on important benefits.

At the end of the day, an AFSL is simply a legal requirement to operate. It’s not really worth anything but requires money and resources to run. That cost is rising.

Gone are the days when it was relatively cheap and easy to manage an AFSL because of lax regulatory supervision. When today’s beefed-up regulator comes calling, they’ll expect to see:

  • Robust policy frameworks implemented and monitored
  • Adequate and competent resources
  • Appropriate culture and government

While becoming an own-AFSL may give advisers greater control over some aspects of their business, cost is unlikely to be one them.

Advisers also need to consider the opportunity cost given the time and resources required to properly manage an AFSL.

Operating an AFSL, if it’s done right, is far more expensive than the average licensing fee. If it’s not done right, it could end up costing an adviser hundreds of thousands of dollars, if not their business, career and livelihood.

Neil Younger is the Group CEO and managing director of Fortnum Private Wealth.

One comment on “Go into self-licensing with eyes wide open”
  1. Avatar Werner Watzdorf

    I have fond memories of our previous dealer group, but there is also a time to move on. When change was in the air, we considered going mid tier but opted for our own AFSL in the end. Observing the Dover fiasco only reinforced that decision, in 30 days your world can change completely outside of your control through no fault of your own. Yes, the costs are high, the compliance is expensive and time consuming and you are on your own. We use an external compliance manager with quarterly meetings and that also takes time. What we figured in the end is that we can operate better this way for our clients, ourselves and the regulators. It’s not for everyone..

Leave a comment