Dealing with razor-thin margins, licensees are faced with the need to improve profitability, but how this is done is a matter for debate.
Paul Barrett, the CEO of advice practice aggregator AZ NGA, tells Professional Planner while scale has been suggested as an antidote, he believes that will not solve the profitability issue licensees are finding.
“If you look at the larger scale licensees, they’re not making money either,” Barrett says, alluding to AMP and Insignia who are still on the path to seeing their licensee business becoming financially self-sustainable.
“If business models stay the same, [licensees] will cease to exist. Licensee models as we know them – the future outlook for profitability is in decline.”
Barrett says licensees will need to offer profitable services for advisers – which he says advice practices are already willing to pay for – and for licensees to be product and service providers.
By “product provider”, Barrett notes this doesn’t mean vertically integrated product, but rather what he dubs “horizontal integration” via acquiring outsourced services, pointing to AZ NGA’s acquisition of Virtual Business Partners last year.
“That acquisition was a key element in trying to continue margin expansion in our model and we have more of those sort of acquisitions planned,” Barrett says.
WT Financial Group have put their money where the mouth is by expanding the licensees it owns over the last decade, including the recent acquisition of Syncron last year.
The group’s CEO Keith Cullen says the firm wouldn’t have invested so much money over the past few years if it didn’t believe in the future of the licensee service.
“Our push, as the industry has rotated towards being a profession, is to keep working with our practices to show them how to continue to professionalise,” Cullen says.
For those reasons, Cullen doesn’t share the negativity that others might have about the future of the licensee.
“The outlook for the industry is outstanding and I take licensees as part of that,” Cullen says.
“What we need to do as licensees across the next few years is we need to work with our advisers to show them how to take advantage of this incredible supply/demand imbalance that exists. That’s my key focus.”
Thin wedges
The profitability of licensees will be a key topic for discussion at this year’s Professional Planner Licensee Summit which will return to the Blue Mountains on 19-20 June.
Cullen says the goal for licensees should be to simultaneously improve the profit of their own business and that of the underlying practices.
“But we do wear an enormous amount of risk for the thin end of the wedge in terms of margin – as licensees, we all need to focus on addressing that imbalance,” Cullen says.
While some licensees have moved to a fixed fee model, Cullen says this has come at the expense of aligning the interests of dealer groups and their practices.
“Licensees that went down the path of fixed fees,” he says. “I’ve never been able to understand it.
“If I’m a practice, I want my fees with my licensee on a percentage basis because I want my licensee to be motivated to help me grow my revenue and profitability.”
At the moment, Barrett says the services the licensees offer to their advisers are not seen as valuable enough for advisers to pay the appropriate price for, and that needs to change.
“Licensees need to forget about scale and think about the business model itself and the service proposition,” Barrett says.
“Which ironically, is the same thing licensees have been coaching their financial planning firms for the last 10 years.”
Much at stake
Barrett says licensees acquiring stakes in advice practices will only be part of the overall business case.
“What licensees need to do is focus on is what services are they going to provide and how they make money out of those,” Barrett says.
He adds the typical licensee business model focuses on providing training, compliance, and a third-party technology agreement.
“You can’t make a return on that, it’s been proven,” Barrett says. “What they have to do is change up the service offering by offering more value-add services that people want to pay for.”
But would AZ NGA ever acquire a licensee? Barrett says under the right circumstances it would, if the proposition is attractive.
“Taking a broken business then making it bigger by merging with another broken business model is not the answer,” Barrett says.
