Why financial planning equity stakes trump running an AFSL
AZ-NGA chief executive, Paul Barrett is not in the least surprised that, increasingly, financial services companies are looking to take stakes in financial planning firms, rather than seeking to pursue the traditional dealer group model.
Amid the recent moves by Insignia Financial and Clime Investment Management, Barrett said he believed that there was a growing recognition that “the advice margin is both valid and valuable”.
At the same time, AdviceIQ general manager, Paul Harding-Davis said the reality was that financial planning practices were enjoying good profit margins whereas as licensee businesses were not.
“It is understandable why equity stakes in good financial planning businesses are an attractive option,” he said. “There is more value the closer you get to the advice business.”
Infocus Wealth Management chief executive, Darren Steinhardt said that there had been a mood for change in the financial planning sector for some time and noted that while Infocus, as a licensee, continued its traditional offer, it was often more lucrative to provide a value-added offer to advisers working under their own license.
Further, Steinhardt did not rule out Infocus taking equity stakes in financial planning business where there was a good and compelling argument for doing so.
A senior industry analyst said that with the exit of the banks and major institutions it had become a case of people actually seeing the real cost of running a financial planning business and holding a license.
“It is all about risk-adjusted returns and Australian Financial Services Licenses (AFSLs) represent risk whereas there is much less risk in taking an equity stake in a good and growing financial planning business,” he said.
“What is more, when you look at acquiring a licensee there is inevitably lengthy and expensive due diligence in the knowledge that you are picking up a liability that lasts for seven years.”
“All the value comes from the delivery of advice,” he said. “It becomes a virtuous circle.”
AZ-NGA’s Barrett warned, however, that building a business around taking equity stakes was not easy, particularly if the objective was to do it at scale.”
“The execution can be really hard,” he said.
When product companies take equity stakes in advice firms, the primary objective is exactly the same as product companies who run licensees. It’s to influence the sale of the product company’s products.
yes as per Anon, crooks.
@ Anon & Fraser,
There is a third option where some smaller Licensees have successfully invited some of their Authorised Representatives to take up a shareholding in the AFSL where many have a financial stake in the success or failure in the running of the licence.
For those who did not take up the shareholding option even though they could easily have done so (earnings were in excess of $500,000), they have remained with the Licence because it was run like a co-operative where everyone has a say in the running of the Licence, whether, you’re a shareholder, Director or simply an authorised representative.
I’m not sure, searching for the right AFSL that differentiates itself from most is that easy to find and given the ownerous task of compliance in running your own licence is something many who have gone down this path in my opinion are not equiped to manage.
Advisers who are not equipped to manage the compliance of their own AFSL should not be running a practice. They should be employees of someone else’s practice. ARs were a minor evolution from the old insurance agent structure. They are no longer appropriate.
AFSL compliance really isn’t that hard if you don’t have inhouse products or ARs licensed through you.
If this phenomenon follows the trend of multi-affiliate managers of investment boutiques – like Pacific Current, Pinnacle and Perennial – then we should see the evolution of other non-product-floggers being owners of minority stakes in planning businesses. It may help if the investor company’s name starts with a ‘P’.