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.
Until relatively recently, the true cost of running a licensee business was cloaked in subsidies and cross-payments; as those subsidies are wound back and eliminated the true cost of running a licensee is becoming clearer. The fees advisers will be asked to pay – or have been asked to pay – should enable the licensee to deliver first-class services, adequately price the risk embedded in the advice practices it supports and be profitable. It was always likely to be a tricky transition for some, even if everything went right. Throw in half a year of substantial business disruption and the task becomes more difficult again.
Whatever else MLC’s move may be, it is fundamentally an example of practical assistance extended to advisers who are doing it tough out there, caught as they between dealing with the needs of concerned and often stressed clients, and the adviser’s own set of personal concerns and issues. If the typical licensee fee paid by an adviser is $41,000 and that fee is suspended for six months, it represents a saving of around $20,000 per adviser. Let’s be frank: every little bit helps.
What’s going on with your licensee?
In partnership with Professional Planner, CoreData will undertake the 2020 version of its annual licensee research and all advisers are invited to take part.
Responses to the survey are anonymous and confidential, but they all go towards painting a picture of how licensees are supporting advisers, and what advisers value (or don’t value) in the services their licensees provide.
We’re asking questions again in 2020 about the fees licensees are charging, and when the results are in we’ll know just how much the fee pressure on advisers has increased in the past 12 months. This year we’re also asking advisers with their own Australian financial services licences (AFSLs) how much of a change there’s been in the cost of the services they buy-in to support their licences. The results of the research will form part of Professional Planner’s coverage of the state of the licensee market, to be published in June this year.
Licensee fees are generally on the rise, for well understood reasons. Services that licensees provide to advisers can no longer be as easily subsidised by payments to the licensee from products and platforms. In other words, licensees are being forced to charge advisers a fee that reflects the true cost to deliver services, plus a margin. In exactly the same way, advisers are being asked to reprice services to clients to reflect the true cost of advice (including higher licensee fees and – inevitably – compliance costs).
Ultimately this is all part of a realignment of the wealth management value chain that started with the Future of Financial Advice (FoFA) laws and which was given a kick-along by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Please click here to take a quick survey regarding your licensee preferences. Findings will be published in the June edition of Professional Planner.