The licensee landscape has continued its remarkable contraction in 2021, but the great adviser exodus is just the front page to a remarkable book of era-defining changes. A different shape to advice is emerging as models are upended, remuneration streams are reimagined, regulatory parameters are recast and new breeds of advice groups come through. 

Over 1000 advisers have been culled from the top five licensees in the country alone this year, and more will follow. While some disperse to a burgeoning mid-tier, others abandon advice altogether.

In their wake, the organisations that house them are coalescing for scale and affordability. Acquisitive groups are changing the way they approach the scale game, wary of bloated models.  

Old revenue models are drying up. Conflicted remuneration is being increasingly marginalised as large and mid-tier licensee groups are pledging to eliminate product subsidisation, while grandfathered commissions are banned.

Advice faces a raft of critical issues – insurance advice among them – but the success of a few remarkable new advice groups gives hope that a new order is taking shape. 

Advice is reforming, and this time it’s different. 

The Numbers Game

While the licensee list is only a quantitative measure, it does paint a picture of an industry steering itself away from the top end in search of quality licensing offerings that value community and service above scale and security. 

The ‘top tier’ licensees with over 500 advisers have contracted for three consecutive years; after making up 35.5 per cent of the adviser market in 2019 they’re down to 23.3 per cent in 2021. 

This year in particular the pullback is stark. The top five licensee owners alone lost 1,089 advisers,. AMP’s loss of 510 advisers is the largest ever recorded, shading NAB’s 504 in 2020. 

The dispersion of advisers behind the top tier has been relatively even across the spectrum, with large, medium, small and single-adviser licensees all increasing their market share between 0.7 and 2.7 per cent in 2021.

AMP continued its cull, while IOOF shed 252 advisers in an effort to clean house before it onboards the MLC cohort purchased from NAB. Efforts by these two institutions to shed practices they deem unprofitable or too risk-laden has been a major driver in the adviser exodus.

Sitting at number three, the National Tax & Accountant Association’s sole licensee, SMSF Advisers Network, faces the same pressure as the fifth largest licensee, Easton Investments; accountants operating under a limited license are being marginalised by FASEA’s advice education standards.

Between them, at four, sits NAB, on the brink of being the final bank domino to fall. 

Most of the others in the top ten – Morgans at six, Sequoia at eight, then Centrepoint and Castleguard at nine and ten – are relatively stable, with Castleguard’s Lifespan popping up at number ten as the fastest growing licensee in the country with 59 new advisers. 

Regulatory Reshuffle

While the movement at the top only continues a trend, the regulatory ramifications speak to why this current wave of change is different from any other. 

Historically, the regulator’s attention has been centred on the top tier of licensees. This only intensified when the Hayne royal commission brought a slew of fee-for-no-service scandals to light. 

According to Coredata chief executive Andrew Inwood, the banks’ retreat from advice will result in ASIC recasting its eye over a broader palette of licensees. “The regulatory force sits on the top group because they’re easy to see and they’re transparent,” Inwood said at an industry event in March, adding that this scenario “won’t last forever”.

With the banks almost gone and a slimmed down AMP, this focus will spread to the mid-tier licensees who run vertically integrated models. 

Lifespan chief executive Eugene Ardino believes vertical integration still looms large in the industry without the major banks, but it has gravitated to corners of the industry that aren’t as closely monitored as traditional product overlays. 

“It just takes different forms, Ardino says. “Licensees should be profitable in their own right but most still make money through managed accounts and things like that.”

According to Aaron Ross Connolly, director of small licensee RM Black, the investment committees behind managed accounts are overdue for regulatory focus. “I don’t believe in using investment committees,” he says.  

Vertically integrated practices that are being baked into the burgeoning managed accounts sector will eventually come under focus as part of ASIC’s ongoing review into the area, which was stalled during the pandemic but only temporarily. 

Licensees also face a more immediate regulatory hurdle – meeting a slew of changes to advice compliance slated to take effect on July 1, including the merger of disclosure statements with service agreements and the move from biennial to annual fee arrangements. 

According to Oreana director Jonathan Christie, preparing for these changes is a pressing issue.

“Everyone is running fast to get through this regulatory challenge,” Christie says. “You know, let’s get to July 1 and get that done, then figure out how to make a really efficient process.”

The New Breed

While the emerging licensee landscape is defined by its sharp reduction in adviser numbers, it’s also characterised by a small yet vibrant crop of new entrants in the industry.

Six of these new licensees have ten or more advisers on their books, with all of them having splintered from larger dealer groups in the post-royal commission tumult. 

Adelaide’s Midsec is one outfit that has separated from a larger dealer group, most of which have reacted to regulatory pressure by applying tough compliance overlays. 

“Previously they were willing to accommodate different advice models and open architecture, as long as you didn’t breach broad rules,’ says Midsec’s David Middleton. “But because of the royal commission they’ve had to tighten those restrictions.”

Another group, Boyce Financial Services, left IOOF’s Lonsdale licensee last year and is now a successful rural advice service on its own license. Its chief executive, Lindsay Garnock, says Boyce still uses IOOF’s bespoke Alliance services but the firm felt it needed more freedom to run its own model. 

“I’ve got nothing against Lonsdale or IOOF but it came down to what Lonsdale evolved into, particularly post the royal commission,” Garnock says. “Look, it’s their job to do what they think is appropriate, but we were told to operate in a manor we probably didn’t necessarily agree with.”

“We don’t use any custodial platforms or managed products, we’re all equities,” he explains. “It’s all via a platform called iPortfolio. It’s incredibly cost effective compared to investment platforms like HUB24 and Netwealth.”

While the vast majority of the industry trends towards outsourcing investment functions in favour of soft skills and strategy, Ross-Connolly takes a different view. 

“We’re a very flat organisation, it’s just us and the markets,” he says. “For me far too many advisers abdicate their investment responsibility to fund managers.” 

It’s not just the smaller licensees that are approaching the business of advice from new angles. A few mid-tier firms are showing they can be just as agile by reading the market and taking their own path.

Over five years, Castleguard’s Lifespan has grown organically from 139 advisers to 273 with a focus on building a reputation in the industry through word-of-mouth referrals, marketing and the ubiquitous presence of chief executive Eugene Ardino.

“Building our profile has been an ongoing project for the past four or five years,” Ardino says. “We sensed that the cycle was about to change and advisers would be looking outside of institutions. The royal commission accelerated that, so we started raising the profile. 

Ardino says the group’s focus on building a profile has come via relatively simple and readily available tools and strategies. 

“We just used basic things like media presence, website and an expanded support team,” he explains. “You attract a few good firms and others follow.”

Public market capital is also playing a role in the advice ownership trend with ASX-listed CountPlus taking equity in some of its network and AZ NGA acquiring a steady stream of practices funded by the Italian-listed Azimut Group.

Easton Investments managing director Nathan Jacobsen revealed to Professional Planner recently the group could become the latest licensee to look to put public capital to work by buying stakes in advice practices.

But at the smaller end, licensees are also prying the door on practice ownership as a way to diversify their stake in the industry. One of the nation’s fastest growing licensees with 22 new advisers and a total of 70, Oreana Group is now including advice practice ownership in its model.

“Our next wave is private equity,” explains Oreana general manager Jonathan Christie, whose firm entered a joint venture with 19-adviser Grant Thornton Australia in April. “We’ve bought a couple of small books previously but this is the first significant deal.”

For licensees that aren’t in reach of the benefits that come with hefty scale, bite-sized private equity stakes offer a viable path to investment in advice. It also hedges against licensing’s increasingly marginalised status, with the spectre of individual licensing for advisers threatening to make licensing a services-only game in the not-too-distant future. 

“If licensees are not participating in the profitability of businesses then they have to play the scale game,” Christie says.

Not everyone wants to play the scale game, however. 

“We don’t want to be the next big licensee,” Christie says. “If you play that game you compromise quality in my view.”

Since its inception Oreana has maintained that 50 practices would be its maximum. It currently has 35. “We’ve priced for profitability,” he adds.

The scale game poses another challenge; in 2021 advisers aren’t that easy to find. “You hear the bigger listed licensees saying they want 200 advisers but those advisers just aren’t there.”

A New Way of Licensing

The blueprint for running a licensee has essentially been torn apart in the last few years as the adviser client base and traditional business models have been compromised. 

As licensing reforms around some of the new groups coming in, as well as a new regulatory focus and the distinct possibility that licensing itself won’t be required in the future, the industry itself will need to take a whole new shape. 

It would be naïve to imagine the industry getting back on track without the support and steerage of licensee groups that foster everything from fledgling one-man practices through to thriving multi-disciplinary firms.