A legal dispute with a professional indemnity insurer has left Sequioa Financial Group on the hook to directly pay the AFCA claims of a terminated adviser, which has led to a revised half year business outlook.
In a business update released to the ASX on Monday morning, the firm said its 1H23 financial position has been negatively impacted by several abnormal items affecting short term performance.
The licensee provider made an insurance claim but a dispute with the PI insurer has meant the licensee is paying for the remediation out of pocket in the meantime while it settles the dispute with the insurer.
The delay in recovery of claims along with increased adviser servicing costs is responsible for a $2 million shortfall in the licensee services division.
Sequoia FG chief executive Garry Crole tells Professional Planner there were several claims against the adviser that AFCA made rulings on going back to 2019.
“That adviser has been terminated since 2020 but the licensee still has an obligation to make the payments,” Crole says.
“The insurance company denied liability at first but we’re fighting that. We’ve appointed lawyers and awaiting an outcome.”
However, the firm notes the number of advisers that are provided licensee services has increased because of organic recruitment.
The group is considering a consolidating the number of AFSLs it operates from four to three by the end of the year which it expects to positively impact margins within the licensee division.
“We believe this half-year period is a disappointment and an aberration but we’re on track to re-commence and be in a strong position,” Crole says.
Slow adjustment
The dispute over AFCA determinations was only part of the “abnormal items” affecting the business in the current report, which some of its direct business and overall market conditions affecting other areas of the business.
The direct investment division fell short of the EBITDA budget by $500,000 due to several media related purchases.
“We made an acquisition on the media side with Share Café, Informed Investor and Corporate Connect,” Crole says.
“Three businesses that we acquired last year, and it has taken longer to integrate those. There’s been a slowing of advertising and integration costs so that’s hit us back about half a million dollars as well.”
The “unanticipated reduction” in marketing of new specialist investment products has seen the reduction of $500,000 against the corresponding period in the previous financial year as well.
“With higher interest rates and market performance some of the investment products we launched we stopped doing,” Crole says.
The Morrison Securities clearing business continues to improve market share and add additional services, performing in line with budget.
This article was edited on 30 January 2023 where it incorrectly stated Sequoia owns the NTAA AFSL.
