“You always have a choice”
— Harvey Specter, Specter Litt Wheeler Williams
Authorisation or Self-Licensing
Decisions. Decisions. Decisions.
It was naive to expect that the advice industry could evolve into an advice profession without realignment and fundamental change.
Changing economic models, higher educational requirements and increased operational expenses are inevitable consequences of increased stakeholder expectations and increasing complexity.
The larger licensees’ retreat from advice in the face of increased scrutiny, exposed conflicts and ongoing remediation costs has had a seismic impact on all advice businesses; even those not directly affected have, like those that were, taken the time to critically review their arrangements and consider whether their current business models are structured to their benefit or in the interests of their client.
It’s no surprise that so many advisers – authorised representatives and employee representatives – are interested in self-licensing.
Compared to the conflicts and compromises of authorisation, self-licensing offers freedom, flexibility and choice.
If only things were that simple.
Authorisation can offer significant benefits as a result of the scale, capability and leadership of the licensee. Self-licensing can consume more resources, demand more time and impose significant obligations and liabilities.
Both provide you with the potential to demonstrate your value to your clients.
So in a volatile and uncertain environment, which option provides the best path to success and sustainability?
That’s for you to determine, but we’d like to help you make your decision by first offering some clarifying questions and then by exploring the advantages and disadvantages of the options available to you.
Resources, reputation, relevancy and risk.
“To ask the ‘right’ question is far more important than to receive the answer. The solution of a problem lies in the understanding of the problem”
— Jiddu Krishnamurti, The Flight of the Eagle
If there’s no “clear winner”, how do you decide what option is best for you?
The honest answer is that to decide what’s best for you, you need to make an informed decision about the options available to you after an honest (and critical) assessment of your own circumstances (including your competence, capability, ambitions, preferences and resources).
We’re available to assist you whatever decision you make. In the absence of your own criteria or decision making framework, the following twenty questions might help you refine your thinking:
- Who will (or who does) control the Licensee? Are they capable, competent and accountable? Do you trust them?
- Does (or will) the Licensee rely on vertical integration to ensure profitability?
- Does (or will) the Licensee have a sustainable financial base? (Assets, profit and cash-flow)
- Is the Licensees financial base likely to remain sustainable over medium to long-term?
- Is (or will) the Licensee’s management team focused on advice or distribution? If they are current advisers, how do they (or how will they) balance their responsibilities?
- On what Compliance/Governance/Legal expertise does, or will, the Licensee rely?
- What discretion does (or will) the Licensee allow to advisers?
- What investments has (or will) the Licensee make in systems, technology and data?
- With what businesses has the Management Team (and Responsible Managers) previously been associated?
- What compliance platform does the Licensee use (or intend to use)?
- What principles underpin (or will underpin) the Licensee’s Product Selection processes? How is this demonstrated?
- What principles underpin (or will underpin) the Licensee’s Compliance Framework? How is this demonstrated?
- How are (or how will) advice documents be produced? How frequently are they reviewed and what prevents changes?
- What is (or will be) the Licensee’s Risk Appetite?
- Who are the key people on whom the Licensee relies (or will rely)?
- What services are or will be outsourced (and to whom)?
- How much of your time do you want to dedicate to providing advice?
- How comfortable are you with personal accountability?
- How effectively has the Licensee engage with the Regulator? How can this demonstrated?
- How confident are you that imminent regulatory changes are being, or will be, effectively managed? How are you satisfied?
Providing advice: Being authorised or employed
“Support and guidance from a high-quality licensee might make the difference between success or failure as new education, professional and ethical standards come into force, and in the wake of the financial services royal commission as consumers increasingly look for non-conflicted advice.”
— Simon Hoyle, CoreData
The benefits most commonly attributed to Licensees (and key reasons for seeking authorisation) are largely issues of convenience; the Licensee provides authorisation, all the tools, resources, and support you need to provide advice (profitably and sustainably) and protection and assistance when, heaven forbid, something goes wrong. Recent events – the Royal Commission and Remediation programs – may have undermined confidence in some Licensees, but the model provides some compelling benefits.
It may seem counter-intuitive to respond to your ejection from a (collapsing) licensee by joining another licensee but it’s not always a matter of ‘any port in a storm’. There are some exceptional licensees that have the resources, leadership and expertise to provide you with the authority, support and assistance to continue to provide financial product advice.
According to Professional Planner, the cost runs from $20,000 to $100,000+ but this depends on the licensee, the services provided and whether Professional Indemnity is included.
Choose carefully and avoid any that see compliance as a problem to be avoided, have inadequate resources or restrict you to in-house products.
A good licensee will provide you with the leadership, compliance and competent services you need to prosper. It should also provide you with time and convenience by removing from you the burdens of running a licensee in a complex and complicated regulatory environment.
CONS
PROS
- Increased oversight & management
- Restrictions on products & platforms
- Standardised and generic solutions
- Defined service providers imposed
- Opaque responses & reputation risk
- No substantive elements (REP515)
- Industrialised solutions
- Cost reflects Licensee’s scale
- Reduced effectiveness (REP515 & RC)
- Increased regulatory risks
- Often maintainers (not builders)
- High authorisation costs
- Forced settlements (reputation risk)
- Regulatory risk magnet
- Increased support and assistance
- Formal research processes
- Model portfolios
- Network of defined service providers
- Formal consequence management
- Strong governance & compliance
- Discounted technology costs
- Subsidised professional indemnity
- Compliance & regulatory expertise
- Size and scale
- Proven management
- Capital protection
- Clear IDR processes
- “Regulatory Risk shield”
Summary.
Whether you’re an Authorised Representative or Employee Representative, a Licensee provides you with a range of benefits that derive from their scale, expertise and resources. Their focus on maintaining, and optimising, the required administrative and governance, frees advisers to focus on providing advice and running their practices.
A good licensee facilitates the provision of quality advice by providing their advisers with advice systems, practice management and compliance support, tools, templates and training. Good licensees use their scale and leverage to free their advisers from distractions and, by providing expert support and guidance, insulate their advisers from regulatory and compliance risks.
Unfortunately, the Royal Commission (and a range of regulatory actions) exposed that many Licensees failed, and systematically failed, to deliver on these promises. Licensee Management, from a number of business, was exposed as being conflicted, ineffective and more focused on their career progression than on their representatives and clients. The presumption of competency is also a dangerous, and often costly, assumption.
The collapse of Dover, and the draconian look-back and remediation programs, are direct consequences of management decisions and corporate priorities. As a representative, you’ll be restricted by your Licensee’s choices, and be required to act in accordance with their measures, policies and procedures. One of the obvious downsides of conformity, industrialisation and scale is that isolated failures can become systemic.
It’s important to appreciate that mandated, common and consistent processes create significant (and often unanticipated) risks when they replicate errors and compliance failures. Likewise, complex, bureaucratic and tightly structured compliance arrangements can exacerbate (rather than mitigating) compliance failures.
One decision – such as to implement a Client Protection Policy throughout the Licensee – can have a profound effect on all those associated advisers.
This doesn’t invalidate the Licensee model because a competent Licensee should provide the scale, expertise and leverage to reduce your overall costs and help you run your advice business better. Licensees, particularly larger licensees, can also provide you access to peers that can challenge and inspire you.
By providing you with purposeful and proactive compliance support, commercial insight and a broader perspective, a good licensee gives you the space to be a better adviser.
There is an inherent trade-off to joining a licensee; you are accepting limitations and restrictions in the hope that you (and your staff and clients) will benefit from the Licensee’s competence, culture and capability. There are a number of exceptional licensees who deliver on this promise, but before you make any decision you need to critically assess the Licensee’s scale, competence and capability.
Providing advice: Being self-licensed
“We have withdrawn your authority to provide financial advice. No new advice may be provided to clients after … 8 June 2018 (today).”
— Terry McMaster, quoted by ABC News 11 June 2018
It’s not unreasonable that advisers, in the face of increased regulatory expectations, heightened sensitivities of risk and financial pressures, look to licensees to provide them with a safe harbour. Unfortunately, not every licensee can provide safety and some are ill-prepared for the present (and blind to the future).
Some advisers, and mature practices, may consider that their competence, capability and experience is greater than that offered by interested Licensees. Where they have adequate resources, and an appropriate risk appetite, they may reconsider the “convenience-consequence” equation and consider obtaining their own licence.
But, as the Royal Commission so compellingly demonstrated – running an AFSL is not easy – and requires a significant commitment of time and resources.
CONS
PROS
- Personal accountability
- Opportunity cost/Liability
- Less flexibility on PI
- Costs borne by business
- Need to understand financial & non-financial risks
- Ongoing accountability for effective governance & compliance
- May lack relevant experience and understanding
- Exposed to internal failures
- Isolation
- Autonomy and control
- Make own decisions
- PI reflects own risks
- Can be cost effective
- Can determine, and act according to, your own risk appetite
- Flexible governance and compliance arrangements
- Benefit from your practical experience and insight
- No exposure to transmitted-risk
- Independence
Summary
For all the fear-mongering, in reality, competent, conscientious and capable people face no more risk being self-licensed than they do as a representative of a licensee – and they often find that being able to make their own decisions about their business is more than enough benefit to outweigh the additional obligations.
But self-licensing is not for everyone – and particularly not for those advisers who are not competent, conscientious and capable.
Self-licensed businesses enjoy greater flexibility, freedom and choice but they also need to commit to more effective management, monitoring and compliance. For some, the benefits are also accompanied by increased, and increasing, operational expenses (including regulatory fees and compliance costs). They may also find that increased freedom and choice requires them to dedicate more time and resources to the business at the expense of advising or attracting clients.
These problems can be mitigated by engaging expert third-parties, but the core obligations you assume by becoming self-licensed are significant, and you need to balance these against the possibility of better client outcomes and improved business revenue.
Being a good adviser doesn’t necessarily equip you to run an efficient practice nor does it necessarily prepare you to manage an AFSL. The obligations, and the costs of non-compliance, are significant.
And, to be clear, the costs of compliance have also significantly increased.
There are always costs and consequences, but if you are an ethical, disciplined and ‘independently-minded’ advice professional, this may be the best option for you.
If you’d like advice, email us.
Help is at hand
“In the end that was the choice you made, and it doesn’t matter how hard it was to make it. It matters that you did.”
— Cassandra Clare, “City of Glass”
There’s little doubt that the costs of obtaining and maintaining an AFSL are significant.
They should be.
Licensing, given the resources and capabilities required, should not be an option for those industry participants who lack the competence, capability or culture to operate “efficiently, honestly and fairly”.
Although some of the costs appear high, they are not impossibly high, and need to be weighed against the benefits and opportunities self-licensing provides you. If you’re an ethical, organised advice professional, self-licensing may be the best way to protect your personal brand and your clients’ interests.
If you decide to head down the road to self-licensing, having the company of an experienced and expert guide can make all the difference.
We’re here for you so reach out to us for obligation-free advice.
