Last week, MLC boss Geoff Lloyd issued an emphatic statement of support for advisers in MLC-owned networks. Lloyd announced an amnesty on licensee fees as advisers contend with the impact of the global coronavirus pandemic on their ability to service clients. And he called on other licensees to follow suit.

That was a bit cheeky. Lloyd knows the financial advice industry well and he knows that not all licensees are in a position to waive the fees they charge advisers. Just as some advice practices may find themselves on a knife’s edge as revenue evaporates, so some licensees have severely restricted scope to support their advisers in the way Lloyd has called for.

In fact, many licensees are in the process of increasing the fees they charge advisers and if they’re not in the process of doing it, or about to do it, then it’s only because they’ve already done it. For some, it’s a matter of survival.

In CoreData’s Licensee Research last year, almost six in 10 (56.6 per cent) advisers said they were paying more in licensee fees now than they had been one year before; just over six in 10 (62.5 per cent) said they were paying more than they were two years before; and almost six in 10 (59.4 per cent) said they were paying more than they had been three years before.

When we asked them how much of an increase in fees they could stomach before it would make them consider switching licensees the answer was, on average, 24.4 per cent.

A year ago, the average fee paid by an adviser to their licensee was about $41,000 a year. But there was a significant range of fees reported by advisers in the survey, from $9500 in one case (for a limited licence for an accountant) to more than $86,000. Most advisers in the survey reported that they paid between $24,500 and $29,500 a year in return for the services their licensee provides.

Vertical integration is also this

Lloyd’s announcement of a six-month suspension of licensee fees is an example of how a larger, well-resourced licensee can support its advisers – and it is possibly a move that is beyond the means of smaller, less financially robust licensee businesses to emulate.

That may be something worth thinking about more deeply, as increasing numbers of advisers leave institutionally branded and institutionally affiliated licensees and move (not always voluntarily, it should be said) to smaller, non-aligned groups.

It’s been suggested that MLC’s move is just another example of advice being subsidised by a licensee that’s part of an organisation that also manufactures investment products and operates platforms. Vertical integration was a root cause of some of the advice industry’s fundamental problems, which have rightly resulted in regulatory reform and public enquiries. But MLC’s move is another dimension to vertical integration, and one also highlighted recently by the head of IOOF, Renato Mota, who told The Australian Financial Review that “vertical integration was seen as bad, but now people need size and security”.

“The environment we are in now is not an excuse to go back to ways that have let us down,” Mota said. “Regulation has had a particular emphasis on removing conflicts and rightly so, but we can’t lose sight of the fact that what we’re trying to do here is allow people to get financial help.”

Adequate capitalisation of licensees and support for advisers should not be contingent on a licensee being part of a vertically integrated organisation, and there are examples of well-capitalised, independently owned licensees that prove this point. Even so, the capitalisation of licensees will be a critical issue in the next six months as they contemplate what they can do to support advisers and advice businesses.

Once again timing is everything

There’s never a good time for a pandemic, but this one has struck at a moment when the advice industry is in a period of reconstruction, and it will place considerable stresses on advice and licensee business models that have not yet fully transitioned.