AFSL - Self Licensing vs Licensee Services

Article 1: Does Control come at a Cost?

In this series we look to examine and compare the benefits of AFSL Self Licensing vs Licensee Services for Financial Planning practices.

The argument for and against self-licensing appears to congregate around several key points, but as often is the case the devil is in the detail.

More analysis in future articles will seek to contrast the variances from small ‘Micro’ sole operator AFSL’s with that of mid size to larger more corporatised Financial Planning Practices.

In this article let’s start by looking at four areas:

1. Independence / Control
2. Financial
3. Resources
4. Risk

Independence

There is no doubt post the royal commission regulatory compliance was a top priority for all AFSLs. At the same time, there has been increasing activity from some litigation firms looking to take complaints and other actions against Advisers and AFSLs. These in turn may have led some Licensees to take positions that look to reduce the potential exposures & risks (and distractions) of ASIC activity and legal proceedings. In some instances, and with hindsight, some may consider them to be over-reach by Licensees being directive in areas like how advice was provided to clients, prescriptive SOA requirements, vetting and underlying strategies.

Secondly any undue influence to consider using ‘house’ platforms, products or services could be interpreted as distorting the client advice provided.

Thirdly, assertive control over authority (CAR/AR) and Advisers being seen to toe the Licensee line or risk further over-reach in the areas of APL, compliance, revenue and ultimate authority.

Prescriptive compliance, product influence and ultimate control over the ability to provide advice can all be viewed as potential losses of independence.

Financial

This varies greatly depending on numerous factors, including but not limited to the size of the Practice (number of AR’s) and services required by a practice from a Licensee. Bundled services and large discounts on PI Insurance (up to 50%), Xplan (40% or more) and Platform/Product rate cards (25%) can make some of the big ticket items very attractive.

For self licensing as a sole Adviser, ASIC AFSL establishment fees vary greatly with estimates ranging from $10,000 - $25,000 depending on the complexity of requirements, but should include RM training, FSG and Compliance manual/policies. There are a range of additional costs that practices will incur in establishing a AFSL that are often not thought about initially (or mentioned by some providers) such as the legal costs in establishing legal the entity, advice practice documents, refinancing, tripart agreements, to name a few. Add $10,000 for a single Adviser AFSL.

On-going annual self-licensed AFSL costs start at around $30,000 per year (ASIC levies, File Audits, Financial Audits etc) not including an external RM or any reportable breaches incurring ASIC and external legal advice and compliance remediation. Scale this up per Adviser.

Many of the base AFSL costs identified with self licensing are bundled by Licensees.

Other annual cost variations affecting the financials include Professional Development, External Research, Revenue Management, Paraplanning, ‘independent’ Technical Services support (non-product provider), Xplan and broader technology support, Practice Development/Business Coaching, Cyber Insurance, Association Memberships.

Resources

Self-Licensed Principals report 12-15 meetings per year on AFSL management and compliance updates (excluding audit), plus additional RM training and updates.

APL Research and management also requires time with product policy updates requiring revision and agreement (often 6 monthly).

In the event of breach reporting this will also require the Principals time working with ASIC and potentially independent auditors for files reviews and may impose on-going vetting from an external compliance provider.

These items are typically bundled in Licensee services.

It is also reported that many practices end up doing one of two things, they either dedicate large amounts of time of practice owners / key advisers and Practice / Office Managers to compliance and AFSL management related needs (which is a non-direct yet real cost to the business) or employing an appropriately skilled & experienced person to take on those responsibilities (which of course is a real additional hard cost).

Risk

Self Licensed Regulatory risk associated with breaches and holding the AFS License (RM or external provider).

Self Licensed practices also need to ensure AFSL compliance with ongoing ASIC Capital adequacy and Solvency requirements (refer RG166), Annual Reports, Annual Audit, Self (Breach) Reporting.

Supplier quality and service risks (technology, product, revenue management etc)

Licensee services seek to mitigate and remove many of these items for a practice, although the Licensee may seek to recover ASIC costs associated with self reported breaches.

In summary:

A high level comparison of these key areas points to an overweighting of Independence in the decision making process for Advisers / Practices to obtain an AFSL License.

When you view the Financials, any potential financial benefit is often non-existent.

Assessing the resources required and risks associated, these appear detrimental and excessive relative to the benefits.

Industry response:

1.?????? A Practice Principal and 30 year veteran we spoke to appeared frustrated to be currently running their own AFSL having operated under both models. With a six Adviser practice the requirements on the Principals time with AFSL meetings and costs to employ in-house compliance ($150k +) amongst other factors are an annoyance.

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Although their most recent experience with a large (insto) Licensee was poor relative to compliance over-reach, as outlined above. So, Independence was the answer.

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They went on to suggest many "Micro’ solo advice AFSL’s are most likely hiding in the weeds regarding ASIC self-reporting breaches, hoping not to be noticed."

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2.?????? Another Self Licensed Adviser managing an AFSL for several sub Advisers (AR’s) complained of the exorbitant amount of time taken just to manage the APL of 70 products (annual agreements and policy changes/updates).

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Plus, the game of cat and mouse they play with external compliance providers citing, "it’s a commercial conflict of interest, they’re best outcome is to find errors and create more follow up work."

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3.?????? One advice industry leader we spoke with is in no doubt on this subject, Paul Barrett the Chief Executive of AZ NGA. (The AZ NGA business is well known for partnering with advice firms with an agnostic approach to Licensing.)

“Many business owners I speak to put the cart before the horse with respect to the licensing decision. The focus ought to be on what capability the firm wants to offer its clients first, then agree the appropriate licenses required to enable that. Not the other way around. There also needs to be an understanding that running a license is a completely different business and skillset to running a practice. Most businesses with revenues under $15,000,000 cannot really justify self licensing if they are honest about the real costs and the real obligations. Once firms start looking like a Superfirm (see our whitepaper “Ready or Not”), owning the Quality Assurance process end to end makes more sense.”