Taking the reins: The burgeoning trend of micro-AFSLs

As the advice landscape continues to shift and evolve, there’s been a noticeable trend among profitable practices to seek control of how they run their business by becoming responsible for their own licence, creating a burgeoning group of “micro-AFSLs”.

Earlier this year, Wealth Data found some 27.1 per cent of the advice industry work at what it termed as “micro-AFSLs”, or those firms with less than 10 advisers.

Although major firms still dominate in the number of advisers, recent industry figures suggest micro-AFSLs are gaining greater popularity than larger licensees, the research house said.

Founder Colin Williams noted the number of advisers at micro-AFSLs has risen from 568 licensees in 2019 to 869 in 2023, an increase of 301.

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“It’s difficult to know exactly ‘where’ financial planning models are heading, let alone if we have reached a destination. All the data tends to suggest that self-licensed models or micro-AFSLs, as we like to refer to them, have definitely shaken up traditional models,” he said.

Similarly, Adviser Ratings found small licensee groups of one to 10 advisers have seen a 17 per cent rise since 2018, with advisers preferring self-licensing over mid-tier licensees and dealer groups. This has been attributed to banks leaving the industry and large licensees, such as AMP and Insignia, cutting their numbers as well as broader trends around the Future of Financial Advice (FOFA) reforms and the Hayne royal commission.

In its FY23 financial results, Insignia said it has 1,413 advisers in its network and 461 practices, down from 1,600 in June 2022. Meanwhile, AMP’s advice segment saw NPAT losses of $25 million in the first half of 2023. and has lost around 40 advisers since the start of 2023.

The benefits of self-licensing, Adviser Ratings said, include the flexible business models as well as the ability to have a more diverse offering with each licensee potentially specialising or having a unique value proposition they can mould, and focusing on niche markets or specific client segments that larger licensees might overlook. 

“Smaller entities might offer more flexible business arrangements, access to technology, fee structures, or service models. This could be appealing to advisers who are looking for bespoke arrangements or are dissatisfied with the constraints of larger licensees,” it said.

“This provides advisers the opportunity to cater to these specific segments with specialised products, such as MDAs, and other services,” it added.

It also said self-licensed advisers could observe more direct and personalised client relationships as they are not beholden to bureaucratic layers or inefficiencies that may exist in larger organisations, leading to quicker decision-making processes and lower costs.

The licensee piece of the puzzle

With the shift in this advice landscape, some larger licensees and institutions have been forced to make strategic adaptations to their business. In July, Insignia announced Advice Services Co, a partnership ownership model for self-employed licensees comprising RI Advice Group, Consultum Financial Advisers and TenFifty.

This model “has demonstrated a potent capacity to drive business expansion in advice practices, providing a mutually beneficial partnership between licensees who have scalable access to technology, compliance and backend processes and advice firms”, Adviser Ratings said. 

It has also been speculated AMP could make a similar move. Speaking to Money Management in August, CEO Alexis George said: “We have been considering all propositions over a number of months now.

“The important thing for me going forward is the proposition has to be viable for us and for our advisers. We are still losing $50 million and that is not viable for advisers and not viable for AMP. We have to have a clear strategy in place to make sure that business can be at least break-even when considering something like the Insignia model. 

“There’s many different propositions as we continue to transform. We can talk about greater adviser ownership in terms of our licensees. There’s many different things we could see.”

AMP has been offering its Jigsaw Advice Solutions business since 2002 to help self-licensed practices while other licensees, such as Diverger and WT Financial Group, also have their own similar offerings.

In an investor presentation, WT Financial’s managing director Keith Cullen said: “It’s a definite trend. We’re addressing it through providing services – we offer our wealth adviser services there –  and we think the fundamental structure of the profession remains as it is. It’s beholden on the licensees to add value to the practices that operate under their licenses and we think the practices in our group recognise that.

“A lot of them felt abandoned when the banks and others ran for the door and didn’t want to expose themselves to that risk anymore, I completely get that. Others are doing it because they’ve got a particular risk profile they want to take in, the type of practice they want to run and the advice they’re giving and it doesn’t sit well within large licensee structures.”

However, Wealth Data’s Williams has questioned if, having taken the decision to exit the large licensee space, self-licensees will use these services.

“As a licensee, it is difficult to make money out of servicing self-licensees. People prefer to do it themselves rather than work with a licensee again,” he told Money Management. 

Forming a community

Instead of utilising the services of a large licensee, one area that has benefitted from the growth is The Principals’ Community for self-licensed advisers. Previously part of BT, the group has had its own experience of leaving a large licensee when it exited in November 2021 and now has some 122 self-licensed businesses that authorise around 1,260 advisers across the profession. 

Kon Costas, managing director of The Principals’ Community, said: “[The Principals’ Community] has grown since being separated from an institution because we’ve been able to remove conflicts associated with vertical integration being aligned to a product, removed conflicts associated with licensees having to report each other, and enabled [us] to focus purely on the needs of the AFSL and the needs of the community.

“It’s the piece that’s given us great strength. We’re not vertically integrated in any way; we don’t have any other purpose apart from supporting these self-licensed businesses to achieve their goals and objectives.”

It has provided a community for such businesses to thrive, unlike popular misconceptions that advisers will be ‘going it alone’ in self-licensing.

Stephen Prendeville, founder and director of Forte Asset Solutions, said: “People get institutionalised in large licensees and are terrified to leave and set up on their own without their support and that isn’t the case. They are finding the grass can be greener.

“As there has been this growth and merger, people feel they are gaining less value from being in a dealer group as the businesses have got so big.”

Williams added: “The Principals’ Community put together self-licensed advisers and formed a community, and that’s the part people miss when they aren’t part of a licensee.” 

For those advisers considering this route, Costas believes the first step lies in talking to people with knowledge and experience on what it takes to run their own license.

“The first port of call would be to understand your requirements as a business to operate your own business – what sort of support do you require? What infrastructure do you require? What capacity do you need to have to ensure you can confidently and adequately run your license? Whether you have the capabilities, and capacity is one of the biggest points.

“Also, making sure you’ve got the support, which comes through specialists, people that have expertise and experience in running their own AFSLS, finding that peer connectivity you can leverage and lean on.”

However, he stressed that self-licensing isn’t for everybody. 

“Let’s not think that it is. It takes a very well-structured business to run, manage and operate their own licence,” he said.

Based on The Principals’ Community experience, he noted that highly profitable financial planning businesses go down this route, seeking to take control of their direction and build a business and service offering specific to their needs. 

“We don’t see businesses struggling to be profitable looking to obtain their own AFSL; it feels counterintuitive given the time and effort it takes to then manage an AFSL,” he explained.

“Running an AFSL requires capital, investment, time and resources to run them.”