The institutional exit from licensing services may be history but the legacy remains.
The banks created a false market for licensing services, offering solutions like technical support, technology and education and training for a fraction of the cost in a bid to attract platform funds under administration (FUA) and satisfy their product master.
Backed by the deep pockets and shared services of their parents and siblings, bank-owned licensees allowed the growing costs of effectively operating to be covered by other verticals and hung around just long enough to distort prices before shutting shop.
Problematically for the licensees that remain, and for the financial services industry more broadly, the price point set during this era became an anchor for advice businesses, despite clearly being unsustainable.
A consequence of this is an industry that has significantly reduced the capacity of businesses to invest in people and services for the betterment of clients. The banks failed to innovate and that trend must not continue, if the industry is to thrive.
At the Professional Planner Licensee Summit in June, the sustainability of licensees was a key theme.
Are licensees being adequately compensated for the value they add and the risk they take on?
This is a critical question, given the central and essential role licensees play.
For the majority of advice businesses, their ability to operate depends on external service providers, particularly their licensee.
It is in their best interest and, therefore, the best interest of their clients that licensees are profitable and successful so they are around for the long term to serve their needs.
The abrupt and careless way the banks abandoned advisers during and after the Hayne royal commission highlighted the perils of choosing a licensee that doesn’t make money from licensing services. It was too easy for the banks to walk away.
The ongoing separation of product and advice and the industry’s journey to professionalism is challenging advisers to see service providers as business partners.
These factors have created an opportunity for the industry to look at the entire financial services eco-system and consider the sustainability of each component part and the sustainability of the eco-system as a whole. If each component part including asset management, life insurance, platform administration and licensing are not sustainable propositions, the future of the entire eco-system is under threat.
There are no shortcuts to the solution either.
As many advisers who have gained their own AFSL with a cost-cutting objective in mind have learned or will soon learn, there is a cost associated with professionalism and sustainability.
Grow or die
Financial advisers who are serious about enhancing their client value proposition, driving business efficiencies and capturing opportunities arising from the Quality of Advice Review need to invest in their business.
They need to accept that sometimes a short-term hit to their margin is necessary to get the systems, services and people they need to secure their long-term future.
Sometimes the cost of these things can’t be immediately passed back the client but must be absorbed by the business.
This is the price of sustainable, long-term growth.
Dynamic, purpose-driven organisations reinvest as par for the course.
Whether they are investing in people or office space or marketing, they are doing it to expand their capacity and capability and, ultimately, increase revenue and profit.
Unfortunately, for a number of advice businesses, this fundamental business principle is just becoming a reality now. For decades they didn’t pay market rates for services like research, technical support, client engagement tools, education and training, business coaching, and marketing resources. Product manufacturers subsidised the cost of these services, bundled them into a broader package that included product or provided them for “free”.
That also meant product manufacturers largely controlled the design and delivery of these services; all paths led to a platform.
(For my part, I must accept some of the blame, having been responsible for running institutional licensees for a large part of my career before joining Fortnum in 2016).
Now the industry is at an inflection point. Not only are costs increasing but there is a realisation that that money spent today is an investment in tomorrow.
There are fewer and fewer players prepared to provide free services or bankroll innovation, meaning all businesses in the eco system must independently invest to ensure they continue meeting the current and future needs of their clients in an increasingly competitive marketplace.
Picking the right investments are also critical.
On the eve of favourable regulatory changes via the QAR, the idea of advice businesses investing in themselves is an exciting indication of the industry’s bright future.
The best article of the year so far Neil. We beleive that the next revolution has already commenced and it involves practice owners transforming into business managers as they are forced to find themselves the efficiencies to stay alive. Those planners commencing their own AFSL move into the lonely world of being a small business owner, having to rely on their own business instincts to pay the bills and grow. The reality is that the licensees, fund managers and platform providers have different business agendas compared to the practice owner and so the next revolution is to become smarter at running your own business. In the past these other entities masked the real cost of running a small business and now the race is on to grow operational efficiencies or face the pain of working 50 hours a week to get by. Many planners started their careers with the objective of working their own hours, enjoying a work/life balance and being their own boss, but are now faced with the Entrepreneurial Myth that in fact they are great technicians lacking real business skills. We beleive that the solution lies within building your own business system, backed by procedures, checklists, templates and a good outsourcing partner. A business system brings clarity and provides a direction for each staff member, and as you create these efficiencies and save time you get to invest this time into greater client engagement. Finally, that youthful financial planner within us all, brow beaten by the compliance wars, a GFC and the Covid lockdowns gets to do what they always wanted to do – help clients acheive their goals and objectives.