BT Financial Group’s decision to cease providing dealer-to-dealer (D2D) services to the 1,300 members in its self-licensed adviser support group is not surprising.
Since Westpac announced the sale of BTFG’s licensees, Securitor and Magnitude, to Viridian Advisory in 2019, the BT Practice Principals’ Community has been trading on borrowed time.
That’s because the heart and soul of any credible, sustainable licensee services offer must be a credible, sustainable licensee.
Without one, the D2D capability, which is built out of running a licensee, is not there. Maintaining that service purely for product distribution purposes doesn’t stack up because the leverage is lost and the quality of the solution ultimately diminishes.
As such, self-licensed firms seeking a D2D partner for governance and compliance support, education and training as well as other business solutions should look for a provider attached to an experienced, reputable licensee.
They should look for a strong track record of supporting advisers to understand and meet their ongoing obligations to clients, regulators and other stakeholders. They should look for a network of growing businesses, reflecting a licensee’s ability to help principals formalise their strategy, drive efficiencies and crystalise their goals.
Tellingly, only a handful of licensees currently offer a D2D solution, highlighting the model’s challenges.
Firstly, many self-licensed firms don’t use a D2D services provider. In the same way, they have chosen to insource licensing, they often prefer internal solutions in other areas like finance, compliance and investments.
Secondly, the D2D model was originally a defensive play by institutional licensees trying to hold on to splinter groups and independently-minded advisers.
It enabled them to retain key distribution relationships, manage lapses and outflows from in-house products, and fend off rival dealer groups.
Their D2D fees were heavily subsidised. As such, traditional D2D propositions were built on product research, technical support and a narrow recommended product and platform list.
But that trend is ending and the rationale for being in the D2D space is changing.
Maintaining advice relationships is still a key motivator for some, however, tougher regulation and the end of volume rebates and cross subsidies has reduced the focus on distribution and elevated the importance of scale.
Some organisations also see a D2D spin-off as an opportunity to minimise risk by handing the liability for advice to own AFSLs.
The scale argument makes perfect sense. Licensees have a large fixed and variable cost base. If they can spread costs over a larger number of businesses, they can reduce their cost to serve.
Scale also increases purchasing power. Larger businesses can negotiate cheaper product and technology-related fees and higher service standards, contributing to a better deal for member firms and a stronger bottom line. They can also hire more people, better qualified people, and expand the breadth and depth of their services.
The scale argument is strong. The liability argument less so, explaining why only a handful of licensees have ventured down the D2D path.
For D2D providers, a key part of their offering is compliance and governance support including manuals, forums for responsible managers, and education and training for practice staff.
While it is up to each individual AFSL to implement policies and apply their training, D2D providers are arguably on the hook for compliance breaches and inappropriate advice if an AFSL claims to have relied on their research and advice, and adopted their procedures, and still fallen short.
A D2D provider’s potential liability is significantly less than the licensee’s but if the regulator or an underlying AFSL can identify a gap in a D2D provider’s policy settings, then they could face potential action.
That risk is not accurately priced into the D2D model.
According to CoreData, dealer groups charge an average of $38,593 per annum, per authorised representative.
By comparison, D2D providers charge considerably less. Some offer a menu of services for AFSLs to choose from.
Licensees also have to consider where the self-licensing trend is heading, with anecdotal evidence that more businesses are handing back their AFSL due to the rising compliance burden and heightened risk. This burden is only going to get heavier.
The D2D model is evolving and it will continue to change as the role of licensees change.
Some of the jobs traditionally performed by licensees will ultimately become commoditised. Even then, D2D providers must accept and price into their fees some responsibility and liability for advice.
Users will need to accept that D2D providers will never be as effective as a scaled licensee at developing robust compliance and governance frameworks, and supporting advisers to integrate them into their businesses.