Are major licensees sitting on fragile balance sheets?

As licensees compete to attract financial advisers, the chief executive of one publicly-listed financial advice group has claimed most licensees are either losing money or are only marginally profitable.

The chief executive of Countplus and former Financial Planning Association (FPA) chairman, Matthew Rowe, has provided an analysis to advisers working under his Countplus and Count Financial licenses in which he outlines the results of analysis of the balance sheets of his competitors and declares profitability to be their greatest challenge.

He said he had spent his spare time analysing publicly-available Australian Securities and Investments Commission (ASIC) records and the financial statements of Australia’s Top 50 licensees and declared that “it is not pretty reading”.

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“Alarmingly, almost all lose money or at best report low profitability,” he said. “Not one is achieving an adequate risk-weighted return on capital.

“There is evidence of some large retained operating losses (excluding compensation expenses which worsen the picture) with most vertically integrated players. There also appears to be a focus on the economics of capturing distribution for product upstream rather than the sustainability of advice per se, and employment costs in some are low (meaning questions must be raised over lack of resourcing and regulatory arbitrage).

“It is obvious that without product subsidies most would not exist. There are many fragile balance sheets that may not stand up to the challenges inherent in adapting to a required shift in the economic model demanded by the new world of financial advice.”

Rowe’s message to advisers contained the following table:

He also pointed to problems associated with licensees obtaining professional indemnity (PI) insurance, noting that stretched balance sheets of some licensees may make it difficult for them to meet any claims resulting from complaints to the Australian Financial Complaints Authority.

He said this needed to be noted against the background of research commissioned by CountPlus suggesting that seven PI insurers “have no or limited capacity, and most others are only renewing with a “premium correction” and no new capacity in the sector”.

“All are very selective in what business they will write,” he said.

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Not surprising.
Many of the Dealer Group Heads have no advice experience or any decent FP qualifications and have never run a business. Some do not even have a basic business degree - which would include at least one subject in accounting.

Another reason to disband the current AFSL licensing regime. As they all try to move to profit, the cost of advice must rise further. This is just another layer of cost subsidised by product clearly. So move it aside, then the best products in the market will truly gain market share and the cost of advice will at least not increase due to this aspect.

"No sh*t Sherlock". This coming from Mr Rowe who was part of The Swamp, namely the FASEA Board that made decisions that impose thousands of $$$$ of costs on advisers/licensees, such as Grad Dip subjects at a minimum $2,000 a pop, plus the compulsory FASEA exam @ $594 a pop, where you don't get told your result and have to cough up another $594 in full for a resit. The hypocracy is beyond belief. Mr Rowe was lucky enough to pick up CountPlus for a penny, hence doesn't have $$$ in debt to service. Please don't pretend to be performing a community service Mr Rowe.

No surprises here. Most dealer groups do not exist to make profitable returns from financial advice. They exist to provide a distribution channel for their parent/associate company's products. The ones that don't have significant product distribution arrangements yet are just waiting to be acquired for the right price by a product company.

Doesn't an MBA from Harvard or Stanford count. It was a few weeks course whilst on a fully paid company junket inthe US. Many AMP managers have these cornflakes qualifications and they think they can run a business. If they really could, AMP wouldnt be in the situation it is now.

Great job, but analysis without a solution/outcome is rather pointless. What is next?

Yeah, good work Sherlock ... All the banks and institutions have given out the handball with the receivers running straight into a shirtfront. Unfortunately I can't see things getting any better in a hurry. Hopefully there's a silver lining out there somewhere ...

It is expensive to run a large dealer group. I think the way forward, assuming the current AFSL regime continues, will be smaller groups of say 2-10 businesses with similar models running an AFSL together. They will be small enough to implement new technology or regulatory updates swiftly but large enough to resource it with gross revenue of say $2m-$10m plus.

You're over complicating it Felix. There's no need for those 2-10 businesses to combine together under the same licence. That just creates difficulties in standardisation and control. Every business should just get its own AFSL. Once you get down to that level of structural simplicity, the AFSL process becomes much simpler and cheaper too.

Issues like compliance, technology, training etc can all be purchased from external providers on an as needs basis. There is no significant advantage from scale, and no need to run most support services inhouse.

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