The ‘petty’ roadblocks of AFSL switching
Licensee switching may be on the rise, but AFSLs are still finding ways to make the process difficult with small licensees identified as the biggest culprits.
Last month, the Adviser Ratings Australian Financial Advice Landscape report found newer entrants to the market post-2019 are more likely than their older counterparts to switch licensees. Those who had joined before 2019 typically spent 8.5 years with a licensee, while those who joined after this period spent an average of 18 months with one.
Reasons that an adviser might switch licensees range from a lack of support, not feeling they are getting value for money, poor resources, lack of faith in the management, or a desire to set up on their own.
Speaking to Money Management, Sean Graham, managing director at compliance firm Assured Support, said he noticed AFSLs would often go to extreme lengths to try and deter advisers from leaving. This could include long restraint periods, run-off costs for professional indemnity insurance, and poor results on compliance reviews.
“Some AFSLs will do whatever they can to hold onto that revenue. They don’t care about the clients or have a direct relationship with them, but they want to hold onto that AUM,” he said.
This is particularly the case at smaller licensees that are relying on the revenue to support the business, he said, while restraint periods can be as long as two years.
“If you are going from a small licensee to an equally small licensee, then it can be incredibly difficult because the small ones don’t get as much regulatory oversight and don’t have the resources they need. So decisions get made on a whim. They make petty, emotional decisions, and they can go out of their way to make it difficult when people leave and drag it out.
“Whereas when you are at a large licensee, they aren’t as dependent on an individual adviser or practice and are more sustainable.”
As a result, he said, it could take months for an adviser to successfully exit their licensee despite what their contract might state.
“In theory, the contract might say 30 days, but it could take 90 days because the licensee ignores it and suspends the adviser instead so they can’t go anywhere and can’t generate any income. If it is an unscrupulous adviser, then they will raise compliance issues and remediation issues and that increases the cost that is deducted from the remuneration they need to repay the adviser.”
He said the incoming licensee should be particularly “sceptical” of post-resignation compliance checks carried out on the departing adviser, particularly if they are carried out internally and generate an abnormal result.
“Often I find their last compliance check post-resignation is done internally, which is a red flag if they were usually done by a third party, and they tend to be much worse than the previous ones and there is little recognition by the licensee as to why that is and there’s little capacity for the adviser to push back.
"As a licensee, you have to look very carefully at what led to that outcome, particularly if it’s vastly different to the previous ones. We see a lot where someone is an A* student and suddenly they’re a dunce – why is that?”
In the case of an adviser leaving a licensee to set up as self-licensed, he said he had found AFSLs were less worried about this as they could continue working with the adviser to provide them with support and dealer services.
As for what an adviser can do in advance if they are thinking of leaving their AFSL, he recommended reading through their licensing agreement to make sure everything is in order, gathering copies of files and documentation, ensuring all fees are paid, there are no complaints pending and no remediation payable. He also recommended getting an independent review carried out of files in case of an aforementioned poor internal compliance review.
They should ensure they attempt to stay on good terms with their existing licensee to mitigate the risk of future problems arising.
“Some people think when they resign, they are walking straight out the door, but you can cause yourself a lot of damage if you resign improperly. Don’t go off at your boss if you’re staying in the same industry.
“Most problems I’ve seen, the adviser is being entirely reasonable but the licensee is upset or hurt; it is a blow to their ego that someone is leaving and they worry a trickle will become a flood. So by making it difficult, they are sending a message to the rest of the company.”
Finally, they should factor in exit costs, time spent on client communication, obtaining client consent and time spent on rebranding exercises as additional criteria.
AUTHOR
Laura Dew
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