Are AFSLs more trouble than they’re worth?
Barry Lambert looks at the underlying value of an AFSL, why you might avoid buying one and the likely impact of licensing accountants.
I note the recent reports of Australian Financial Services Licences (AFSLs) being handed back. I could say I told you so, as I have always argued that except for dedicated well-resourced licensees (such as the one I have been associated with for over 30 years, Count Financial), advisers/planners were always on a “hiding to nothing” by having their own licence.
Over the years, I’ve heard a number of reasons why advisers should obtain their own AFSL, but none has made sound financial or commercial sense to me. I expect that in the coming months and years, we will see more licences handed in.
The main reasons given for advisers having their own AFSLs are:
1. Independence
One school of thought I’ve heard is that advisers wanted “independence” rather than being answerable to their licensee.
However, I fully expect that – especially in a post-Future of Financial Advice (FOFA) world – we will all be subject to a greater deal of scrutiny. An experienced licensee that imposes supervision, standards and ongoing monitoring on an adviser’s activity is a good thing for the industry and customers.
2. No Approved Product List (APL) restrictions
“No product restrictions” has often been cited to me as a reason to own your own AFSL.
Unfortunately, this was often translated into using high-commission products such as forestry or other similar investments. Needless to say I’ve seen many of these arrangements end in tears.
3. Encouraged by dealers
When DKN handed back its licence it encouraged its advisers to obtain their own AFSLs, and it provided them with third party licensee support services. Others in the industry soon followed suit.
This was good for the third party provider because the liability remained with the adviser, as they were acting under their own AFSL. Unfortunately for the adviser it meant their licence was a liability.
On the other hand, the licensee still received fees with little or no liability. Little wonder this idea was heavily promoted.
The AFSL is a liability that reduces value for the following reasons:
- Maintaining an AFSL requires a great deal of time and expense, which could otherwise be used to maintain client relationships and develop the business. An adviser should spend their time being the best planner they can be for the benefit of their clients and their business.
- Maintaining an AFSL requires an investment in the right resources and knowledge to keep on top of markets, products, regulatory change and compliance requirements.
The FOFA regulatory environment has made this even more apparent. Some small AFSL holders may be out of their depth in this regard, making their AFSL a liability rather than an asset.
It is only a matter of time before commercial reality will see more AFSLs disappear. Take a look at the disappearance of some ASX-listed AFSLs and the poor performance of those that remain – and you will realise the trickle of AFSLs being handed back will soon become a flood.
So who wants to buy a business with an AFSL?
The short answer is no-one. But why?
Because it costs very little to start a clean-skin AFSL and no one in their right mind wants to buy the unknown long-tail liability of an AFSL when you can get a clean-skin, if you really want one, for next to nothing!
The obvious exception readers will raise is, of course, Count. It must be remembered that Count had a 30-plus year record of a strict APL; stringent compliance; professional fee-based adviser/accountants; and transparency via an ASX listing.
Whilst Count is an AFSL licensee, it always built its business on the basis that nothing would change if it was not an AFSL licensee; its services had to be of value to its network in case licencing ever disappeared.
Many will know that I am the chairman of ASX-listed, Countplus Limited (CUP). It should be noted:
- CUP owns 20-plus accounting firms and has outsourced the AFSL to Count. Why? Count can do it better and for less. Count has scale, and providing an AFSL is its core business.
- CUP is in the business of buying real businesses and not valueless AFSLs.
Our preferred acquisition targets are:
- Count firms because we know them and they are low risk;
- Accounting firms with no financial planning – low risk and good value.
- Accounting firms with an existing financial planning business that is willing to move to Count.
There is no shortage of businesses that fall into (1) and (2) above, so CUP seldom goes outside of the above range.
Possible impact of accountants’ licensing
The next big impact on the financial planning sector will be the licensing of accountants. Up until 2016, accountants can provide restricted activities around self-managed superannuation funds (SMSF) funds without being licensed.
The new requirements mean accountants will have to stop or become licensed either via a special Accountant’s Licence or under a full financial planning licence.
Accountants ‘own’ the SMSF space and they are not going to give it away, especially now that cloud-based SMSF administration systems have made this process much more efficient.
Accountants will become licensed in numbers. Although they were slow to move into financial planning, they cannot afford to let this opportunity pass them by. The question is, “will they become fully licensed or part licensed?”.
My position is: “Why do 90 per cent of the training for a restricted licence?”. So accountants are likely to become fully-licensed in numbers.
Credibility surveys repeatedly show accountants as the preferred financial advisers over financial planners by a considerable margin.
Almost every financial planning or life insurance conference I’ve seen has a topic: ‘How to get referrals from accountants’. That will soon change to ‘How to stop accountants from taking your financial planning clients’.
Of course, they will really be taking back their own clients. They will also be enhancing the value of their business by providing financial planning services to existing accounting and tax clients.
As shrewd businessmen and women, I fully expect accounting firm owners to grasp this opportunity, utilising third party AFSLs.
Barry Lambert is chairman of Count Financial, ASX-listed Countplus Limited (CUP) and the cloud-based SMSF Administration software group of companies – Class Super.
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