As cost pressures make it increasingly difficult to profit from traditional licensing services and more capital investment filters into the business of financial planning, licensees may also look to purchase equity in the advice firms they take risk for.
The business of licensing is not an incredibly lucrative one, especially in a post-royal commission environment where conflicts are less tolerated and product subsidy deals are rapidly being excised. Many licensees, already subsisting on low margins, need to increase fees just to stay solvent.
Angus Benbow, chief executive at licensee Centrepoint Alliance, has been remarkably candid about his firm’s journey to a cleaner, non-subsidised model and the need to unveil the “real cost” of licensing. Spoiler: it isn’t cheap.
Many licensees have mitigated their dependence on a thinning remuneration wedge by offering service-only models to self-licensed advisers – an enterprise which has potentially more margin than the tradition ‘compliance and insurance’ offering.
Others have made gratuitous margin grabs on managed account offerings, a play that hinges on a grey area around conflicts that ASIC was studying intently until the project was temporarily scuppered by the pandemic. The viability of this revenue stream could go either way, and much hinges on the resumption of play from the regulator.
Licensees can only make so much from licensing, and if the pundits are right individual licensing might reduce the sector to service provision only in a few years.
With their fundamental role under threat, and facing the possibility that their place in the ecosystem could go the way of Blockbuster Video stores, investing into advice businesses themselves may be the most viable way for licensees to future-proof their interests.
Up to now, licensees have mostly watched as investors intermittently plucked advice businesses at depressed valuations over the last few years.
Milan-based Azimut hired ex-ANZ advice boss Paul Barrett to set up AZ NGA in 2014, which now owns around 25 firms. Last year US-based Focus Financial Group bought into Escala Partners, while Swiss-based private bankers EFG International took a majority stake in Shaw and Partners.
Closer to home, there have been pockets of investment from domestic players like Quadrant Private Equity, who bought into Fitzpatricks in 2017. CountPlus, too, has been active with an ‘owner, driver, partner model’ that sees the firm purchase roughly 40 per cent stakes in amenable and right-sized advice businesses.
These acquisitions don’t compare to the heady days of the early 2000s, when institutionally driven investment into advice was at its frothy peak. Advice is still in the eye of a regulatory storm and banks are reluctant to lend, especially for low-value practice acquisitions.
But there are pockets of confidence in the business of advice and a sporadic stream of capitalised players taking equity stakes in robust and sustainable practices. As pointed out by asset valuer Tim Lane, advice firms are still the “preferred asset” in financial services because they have zero working capital and access to a bulging superannuation pool.
It could be that the next pocket of interest comes from licensees themselves.
If it transpires, the licensees’ equity play may well be problematic, because as fiduciaries AFSL holders have to be careful about the businesses interests they own. As in everything, conflicts abound.
But licensees go by the Corporations Act, not the Code of Ethics, so these conflicts can be managed rather than avoided. And licensees are generally well-versed in managing conflicts.