Why financial planning equity stakes trump running an AFSL

Mike Taylor

Managing Editor and Publisher

18 August 2023

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.