The exit of the big four banks from financial advice and the fragmentation of the licensee space into a larger number of small licensees and own-AFSL advice practices has proven to be fertile ground for the suppliers of services to licensees, the Professional Planner Licensee summit has heard.
The summit heard that an explosion in service providers is a double-edged sword: there is greater choice and competition between vendors, which is good for licensees; but there is also the risk of a backing the wrong horse.
The summit heard that smart selection of partners and outsourcing functions to the right suppliers can have significant benefits on adviser capacity, process efficiency and profit margin, and on other issues as well including, increasingly, professional indemnity (PI) insurance costs.
The extent of partnerships and services outsourced by licensees tends to vary with licensee size, Adviser Ratings managing director Angus Woods said. Large licensees tend to retain more services in-house, and outsourcing gets more common as licensees get smaller. Profile Financial Services chief executive Lena Ridley – which has seven advisers under it license – said that for her firm, an own-AFSL practice, “anything that’s not the advisers sitting in front of the client is up for discussion” as a service potentially to be outsourced.
The extent to which outsourcing and partnerships work in a modern licensee is reflected in Godfrey Pembroke, which has moved out from the institutional ownership of Insignia Financial and is now owned by its advisers. Godfrey Pembroke as a licensee supports around 25 advice firms and almost 60 advisers and employs just four full-time staff including CEO Mark Fisher.
Fisher told the summit that a big part of a smooth transition from Insignia was “selecting the right partners and the right vendors to support us as a standalone enterprise”.
He says Godfrey Pembroke broke the outsourcing and partnerships issue down into four key areas, focusing on business operations, AFSL governance, adviser functions and portfolio management.
“It was a bit of a decision around what we wanted to do ourselves, and what resources we actually wanted to have in-house and do ourselves, and what we wanted to outsource and partner for,” Fisher said.
“There were a couple of key things that we wanted to have internally. With the limited staff we do have, we wanted to have some expertise around a couple of areas, one was we have a full time Xplan resource on board, because we feel having a dedicated Xplan resource for our practices is really important.”
Outsourced suppliers ballooning
With that fragmented licensee landscape which Woods noted had led to a ballooning of outsourced service providers, Fisher said Godfrey Pembroke was not short of potential suppliers and partners to talk to.
“By virtue of the fact that we have moved into more of this self-licensing space, there are more and more outsource providers popping up, because the world of advisers has opened up to them,” he said.
“Previously you would go and speak to AMP or Insignia and that’s where a lot of the decisions would be made. Now, it’s down at this 6100-practice [level], so you’ve got a plethora of these outsource providers popping up. I guess the risk from our perspective in that is: Be careful who you choose.”
Woods reminded the summit that financial advice is littered with the names of suppliers – particularly software vendors – who had a great idea or promised a great product but failed to achieve the sale needed to survive.
He said the investment consulting space, for example, has exploded.
“When we started to do this research about three or four years ago there were 20, 25 investment consultants; at last count it’s about 120 that are trying to create portfolios for clients,” Woods said.
“There’s about 15 or so platforms, but in terms of the software space I’d say we track about 60 or 70 software solutions. And then, as I was saying, about 120 investment consultants.”
Profile’s Ridley said that when the firm first obtained its own AFSL in the 1990s, its philosophy was to in-house as many services as possible, to control quality of service and delivery.
“That’s very much changed now,” Ridley said.
“There’s been a lot of talk over the last two days about the themes around why: creating adviser capacity, efficiency, improving margins when there’s pressure from lots of different angles.”
Ridley said the exit of the banks from financial advice space had fostered innovation and competition among specialist suppliers, that that’s good news for licensees.
“We’ve seen a lot of cottage industries come up where people are specialising in different things that, quite frankly, they can do better than us now,” Ridley said.
“It’s been an opportunity to go shopping; it’s been an opportunity to build partnerships, and we’re all for it.”
Include the formalities
Ridley said Profile has a formal process that starts with “putting together a shortlist first and foremost, in the context of what is it that we’re hoping to achieve” and its impact on adviser capacity, process efficiency and business profitability.
“Is what we’re looking for more transactional in nature?” Ridley said.
“External AFSL audit happens with some level of frequency, but not every day; through to the type of relationship where you want a partnership – where it’s paraplanning, for example.
“Having clarity around what it is that you’re looking for, and is the outcome capacity efficiency [or] margin, and is that working in the context of what we’re delivering to clients? Having those answers first, getting together a shortlist, and then we’ve got an outsourcing policy that we run through the business to make sure that we’ve done the proper due diligence.”
Partnerships are reviewed at least annually, Ridley said, but will be reviewed out-of-cycle if changes in a partner’s circumstances warrant it, or where Profile staff flag an issue.
“We’re often not at all the biggest, we’re a bit of a minnow in some of these partnerships at times, so we want to make sure that the communication channels are working for us as well,” Ridley said.
“Once we get through those sorts of things, and it really becomes evident who our preferred provider is, then we start to build that relationship.”
Fisher said settling on a partner for some Godfrey Pembroke licensee functions was relatively straightforward, but others involved a more detailed request for proposal (RFP) and vetting process.
“Things like accounting software, you’ve got MYOB or Xero – you can pretty quickly narrow down the field,” Fisher said.
“But for things like research software we did a full RFP with those providers. Importantly, we got committees together of our advisers, because we’re 100 per cent adviser-owned now and we wanted the advisers to be really in the discussions and the presentations because ultimately, they were the ones that were going to be using the services.”
Woods says Adviser Ratings has started assessing the quality of vendors – particularly advice tech – and this work is beginning to have an impact on another commonly outsourced service, namely, professional indemnity insurance.
Woods said if a licensee can demonstrate to an underwriter they’ve selected partners and service providers carefully, that those partners have been assessed favourably by an external party and that using them reduces the risk to the business or the risk of delivering poor advice, insurers “started to look at PI [insurance] through a different lens”.
“It was a three-year process of educating them on what you need to look at in your business to actually reduce the risk for the PI insurer,” Woods said.
“That played out in a positive sense now that the PI insurers are a little bit more aware of what’s going on in the Australian market and they’re also a little bit more aware of what risks should I start looking at beyond the three-page questionnaire that they send out.”
