Keith Cullen (left), Mark Ballantyne and Paul Barrett

The future of the licensee model will involve either direct investment or “quasi-investing” centered around variable licensing fees that compensate licensees for improvements they help create in advice practice performance.

This was the key takeaway on a session focused on the merits of licensees investing in advice practices at the Professional Planner Licensee Summit.

AZ NGA founder Paul Barrett is well-known in the industry for finding financial success by taking an equity stake in advice practices to drive further growth.

“This question about advice profitability blows my mind,” Barrett said at the summit. “These companies make 30 per cent EBIT [earnings before interest and taxes] margins. They are incredibly profitable, they always have been, and they always will be.”

Research from Business Health last year noted the gap between the most successful advice practices and the average, and said revenue for the most successful advice businesses was continuing to grow while others stagnated.

Barrett said people in the licensee world seemed “glum”, which was understandable given the economic condition of licensees, but this was a solvable problem.

“The fact is, the opportunity we all have in front of us is a once-in-a-generation inflection point,” Barrett said.

“This is it. There’s never been a better time in the retail financial planning market than right now. This is the best time.”

Barrett said ultimately licensees have the same challenge as advice practices, which is developing profitable services and delivering them to people who are willing to pay for the value they receive.

“There’s a reason when we designed AZ NGA I actually selected as my business partner an aerospace engineer,” he said, referring to co-founder Paul Brain.

“Paul knew nothing about financial planning at the time, but he was a design expert and he understood how to design business models and that’s the challenge we have.”

Quasi-investing approach

While AZ NGA has taken on 89 advice and accounting practices, the equity partnership model is not unique to Barrett’s firm.

AMP has invested in 15 advice businesses and the firm’s equity partnerships general manager Mark Ballantyne said they are “continuing to grow” by investing in practices inside and outside AMP’s own licensee networks.

“There are still good quality businesses that want a partnership for capital, but also for capabilities to turbocharge their growth,” Ballantyne said.

“In the end they’re looking for someone who can help them accelerate their growth. Sometimes that’s in our capability to help them day to day…but other times it’s just the experience we’ve had in helping taking businesses from $5 million in revenue to $50 million.”

WT Financial Group managing director Keith Cullen described himself as a “huge advocate” of investing in practices but said it would need to include variable licensee fees to help drive advice practice growth.

He added WTFG’s approach includes “quasi-equity” of 75 per cent of its practices via variable fees that involve participating in a practice’s revenue or profit.

“If licensees want to invest in practices, then they’ve got to have variable fees with them,” Cullen said.

“As a licensee, unless you step out and take an equity position, you’re not going to benefit from the upside so where’s the incentive to assist your practices in growing. It’s not there. We have what I would call ‘quasi-equity’ in 300 of 400 of our firms and we intend to continue to develop that model.”

Compensation for risk

Cullen said the current licensee business model in its current form is broken because licensees are not being fairly compensated for risk.

“If it prevails in its current form, as it is across most licensees, the business model is broken,” Cullen said.

“You only have to look at the way most licensees went about changing the way they participated in revenue with their firms in the last five or seven years.”

Cullen said much of the issue stems from fixed pricing for fees rather than variable pricing that is linked to practice growth.

“You’ve got licensees wearing an increased amount of risk every time adviser revenue and turnover goes up, and most of them are stuck in the mud with a fixed-fee model,” Cullen said.

“That’s not the case in our business. Unfortunately, we have about 100 practices because we made an acquisition that had gone down a fixed fee path, but we have variable fees with 300 of the 400 practices that we support.”

Ballantyne said Cullen’s quasi-equity system has a “wonderful place” in the advice environment, but the services offered by his and Barratt’s businesses still follow a different focus.

“We are helping the businesses we work with deliver returns and that speaks to the sustainability of advice practices, but also speaks to the sustainability of the support infrastructure where we’re sharing with these businesses as well,” Ballantyne said.

Despite Barrett’s model not having to deal with the regulatory risk licensees deal with, the AZ NGA chief said he still deals with risk every day.

“The risks we have are market, commercial, financial, business and operational risks,” Barrett said.

“The risk we don’t have directly in our model is the distraction and money that licensees have regarding meeting very tactical compliance requirements.”

Barrett said the AZ NGA business model was designed around having “as little friction as possible” with the licensee ecosystem.

“I didn’t want to be entering into the marketplace saying we’re a licensee and on the other hand trying to acquire business from your licensees,” Barrett said.

“That would’ve created a problem in terms of competition and friction and created alignment issues.”

When it comes to managing conflicts of interest at a company that has a separate practice investment arm and a licensee, Ballantyne said both are kept entirely separate.

“[It] is governed separately to the licensee, so full separation in that regard,” Ballantyne said.

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