Advisers looking for a new dealer group to call home are increasingly prioritising the model sustainability and the firm’s ability to evolve as a key metric in their assessment.
The sustainability of a licensee incorporates a few areas according to Centrepoint Alliance CEO Angus Benbow, including the ability of the licensee to leverage scale, the remuneration model employed and the fee they charge for services.
“You need certainty,” Benbow says. “How certain are you that the licensee will be a round in a few years?”
The CEO believes licensees with between 10 and 100 advisers on the books will struggle to scale and increasingly look to merge with larger groups or form partnership deals for service offerings.
“From October and through the end of next calendar year we’ll see further aggregation of licensees,” he predicts. “You need a certain degree of scale and unless partnering with providers I challenge whether firms have sustainability to deliver the depth and quality of services that advisers are demanding.”
This doesn’t mean smaller licensees don’t have valid offerings, he says, as there are many great quality small licensees. But as licensees move away from product subsidies and grandfathered commissions are excised from books in line with Hayne royal commission recommendations, cost pressures will tighten. This will become especially clear, Benbow says, as we get closer to the January 1, 2021 end date for grandfathered commissions and related legacy subsidisation arrangements. through their annual results announcements as a small ASX listed company.
Benbow has been open about Centrepoint’s journey towards a clean business model that is free of product subsidies, and detailed publicly the ‘real cost’ of advice licensing through their annual results announcements as a small ASX listed company.
If a licensee is charging an exceptionally low fee, he says, it’s probably not a good indicator of future sustainability.
Encore Advisory Group managing director Tom Reddacliff – who will join Benbow for a session on licensee selection at the 2020 Professional Planner Digital Best Practice Forum on August 4 – agrees that egregiously cheap fees can be a red flag.
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“You want to see long-term sustainable revenue and you want to see a reasonable income flow,” Reddacliff says. “If the licensee is charging $20,000 as opposed to $40,000 I get worried because I know how much the service costs.”
He concurs with Benbow’s assertion that for a licensee to be considered sustainable, there needs to be evidence of a regular income stream that isn’t in danger of being phased out.
“You want to see the vast majority of revenue coming from licensee fees, not product-related margin,” Reddacliff says.
CoreData’s Simon Hoyle – who will also join the panel – similarly warns of the hidden danger in low-cost licensing.
“What is the level of service you’re going to get and does it seem like a fair price?” Hoyle asks. “They might not be charging enough for the service they’re offering.”
Transparency and services
Linked to sustainability, Benbow says, is the need for transparency so that advisers on the move can assess how financially robust their prospective licensee is.
He encourages advisers to take a good look at the financials of the licensee before making a commitment. Being open about the financial health of the firm is something he says Centrepoint have made a point of.
“It’s not a requirement of the licensee to publish their P&L,” he says, “But we’ve been incredibly transparent.”
The research process for advisers may be arduous, he says, but it’s worth it.
“Think about the research that goes into switching an investment like a managed fund,” he says. “I’d encourage advisers to do the same when choosing a licensee.”
Benbow also cites the “depth and breadth” of services offered by the licensee as a key metric, and something advisers are extremely cognisant of when compliance is at such a critical juncture in the wake of the royal commission. “You want to know that they’re resourced appropriately,” he says.
Reddacliff adds a final catch-all to the bucket of factors advisers are likely to consider.
“Advisers need to ask themselves; if the licensee didn’t exist, would they still want to be a part of this group? You need to be sure that you’ll want to be part of that community of people.”