Whenever there is disruption in the financial advice industry, such as the exit of some of the larger institutions from the industry seen in the last two years, we see a surge in enquiries about self-licensing.
A key drawcard of self-licensing is the control it offers over a range of areas including the direction, operations and culture of a business. Applicants are now more concerned than ever about the risk of being associated with a licensee that may attract regulatory scrutiny or getting caught up in onerous compliance measures that impact on their ability to operate efficiently. Self-licensing separates an advice firm from any reputational issues that may arise under a group AFSL or other advisers operating under it. This is an area that has also become increasingly important to clients, who are now much more aware of when licensees are in the news.
Those who opt to self-license may also benefit from greater flexibility and choice of products and platforms, systems and support services. Many are particularly interested in the freedom to choose the technology they use in their business to gain efficiency in how they interact with clients. Overall, self-licensing offers greater control in the way they provide advice to clients.
However, while self-licensing offers many benefits, there are also trade-offs that need to be considered. Freedom and increased control are directly tied to an increase in effort and cost to create and manage systems, administration, maintenance, training, monitoring and management burdens.
Self-licensed principals must also manage the complexity of bringing together all the aspects required to run a compliant licence, from researching and managing approved product lists (APL), to keeping up with regulatory change, ensuring the appropriate documentation, reporting and frameworks are in place, and handling any disputes or compensation arrangements.
Of those businesses that investigate self-licensing as an option, only a small number go on to apply for their own AFSL. The reasons for this are varied. Some business owners decide the additional work involved is simply not for them, while others decide that the timing is not right for their business.
Factor in time and cost
A question we at Centrepoint Alliance get asked often is, how much time do I need to spend on running the licence? Those who are well prepared and have done their research, as well as talking to other self-licensed firms, have a good idea of the time needed. The majority know that it is going to take time away from giving advice and prospecting for new clients and have weighed this up when making their decision to be self-licensed. A minority, sadly, do not have the time or resources to run a licence, so in opting to self-licence are probably taking on a significant risk.
Potential self-licensees are also interested in the costs involved. As the industry is changing and fees for authorised representatives are increasing to align with the cost of providing services, the cost of self-licensing can be comparable to joining a licensee.
However, it is important to be aware of all the license obligations and not be tempted to cut corners. Most small licensees are going to need to partner with various service providers across research, compliance, technology and so on, and cost cutting in these areas can have longer term consequences.
The cost of professional indemnity insurance can also be quite high. While reports suggest that costs may reduce in 2021 and beyond, some applicants are surprised at the current cost, which is higher than they have factored into their estimates.
Three areas to investigate
In a recent white paper What's Your Path, Centrepoint Alliance identified three important areas for advice firms that are considering self-licensing to focus on - risk and governance, resourcing and autonomy.
1. Risk and governance
Operating an AFSL comes with significant responsibilities and potential penalties for breaches of obligations. Before applying for an AFSL it is important to ask:
Do I have the time, expertise, resources and support to:
- comply with licence obligations?
- set up compliance arrangements including manuals and procedures?
- monitor and report on compliance on an ongoing basis?
If the answer is no, self-licensing may not be the right solution for your business.
Licensees are required to demonstrate they have enough resources to comply with licence obligations. To determine whether your business meets the necessary criteria, ask yourself:
- Do I have the financial resources to meet these obligations?
- Do I have the staff and technology needed to carry out functions typically completed by a licensee?
- Will I need to outsource functions or partner with service providers?
- Will I have the time and resources to operate the licence as well as servicing clients?
If you are running your own AFS licence, you can shape your financial practice the way you want without the constraints of a governing dealer group licensee. However, the freedom comes with some trade-offs, including the need to secure Professional Indemnity insurance, manage approved product lists (APLs) and stay up to date with compliance.
Some key questions here include:
- Do I have the ability to secure affordable Professional Indemnity insurance?
- Who will be responsible for researching and managing the APL?
- How will I manage partners and product provider relationships?
- How will my business develop and maintain compliant disclosure documents?
- Who will stay up to date with changing regulations and ensure these are implemented?
Self-licensing can be an excellent choice for business owners who are looking to forge their own path, without the constraints of being part of a broader group.
However, as outlined it is important to make the decision with eyes wide open, taking into account the time, cost and resources required to operate a licence.
In our experience, advice firms that have not done the appropriate research before opting to self-licence often find themselves reviewing their decision when faced with the realities of their obligations.