Around 85% of all advisers are associated with product manufacturers and it probably wouldn’t take a forensic examination of the numbers to conclude that the majority of Enforceable Undertakings from ASIC and disciplinary actions from professional associations in recent years have been handed out to the very large licensees and/or their representatives.

While it has been thirty years in the making, in many respects it has been a frenetic rush by the large licensees to accumulate massive amounts of funds under management. In the case of bank owned licensees, the rush was predicated on the deregulation of banking in 1980s; simply put with increased competition in home lending and related margin compression, banks had to find other arenas to generate profit and while the chase for funds under management was but one alternate source for them, it nevertheless has been integral in maintaining and then increasing their profits over time.

In the aftermath of the recent Senate Inquiry into the Commonwealth Bank’s scandalous management of both their planners and the related complaints, many planners might well be feeling they are being ‘tarred with the same brush’.  The news media will only ever tell their consumers bad news and with CBA et al, there has been plenty of it. It is wasted effort to think that at some stage the media will report the good that truly professional financial planners bring to the lives of their clients and their families. It’s never going to happen.

While the very large licensees feature prominently in the public relations damage caused to financial planners generally in Australia, it doesn’t take bad media to create dissatisfaction with the services provided to representatives by a largish licensee.  Advisers who have been in their role for several years might well question the value proposition of representing a licensee which they do not own and over which they have minimal, if any, say.  Areas such as levels of fee sharing and Approved Product Lists are two areas where concerns can arise.  And then there is the declining certainty of Buyer of Last Resort (BOLR) provisions.

So if you are serious about providing genuine professional advice and are tired of having a ‘guilt by association’ air about the business you represent or you are questioning the value for money you are receiving from your licensee, then you have a choice of two options. The status quo is of course the path of least resistance and for many, this is all they will ever want in their career. People who are happy to practice under someone else’s licence and who are happy to not take the burden of liability in the first instance. Note that failure to comply with a licensee’s legal obligations can still see representatives targeted for litigation – by the licensee.  For those who reject the status quo and who are really serious about building a professional services business, there is the option of applying for their own AFSL.

Gaining control of your business destiny

In 1995 at the annual FPA Convention, I presented a paper titled: “Gaining control of your business destiny – becoming a licensed dealer”. Back before the Financial Services Reform Act 2001 (FSRA), licensees held either a ‘Securities Dealer’ or an ‘Investment Adviser’ licence.  As the name suggests, dealers were licensed to ‘deal’ in securities; to arrange the purchase and sale of securities and they outnumbered Investment Advisers who could advise but not ‘deal’ in securities. Dealers could have either a ‘restricted’ licence or an unrestricted licence which generally meant the latter could deal in any form of securities. By contrast, generally speaking, restricted licensees were not able to deal in listed securities. As a side note, you will still often hear AFSL holders referred to as ‘Dealers’.

The 1995 paper was warmly received and criticised in seemingly equal proportions. Some existing licensees spoke against it during question time due to the simple (yet unspoken) fear of seeing their advisers leave and set up their own license. The supporters were advisers who had the reached the point in their career of questioning the status quo of working under another party’s licence.

Ten years later, in 2005, an adviser approached me at the FPA convention and said words to the affect that he wanted to thank me for that 1995 paper because it had prompted him to establish his own licence. At the time of the 2005 convention, he was in a ‘work-out’ period having recently sold his business for a very handsome amount of money. He said that getting his own licence was pivotal to being able to build his business under independent ownership and better prepare if for an eventual sale.

Changing licence eligibility

It’s now twenty years since I first obtained an AFSL (An Unrestricted Securities Dealer Licence in 1994) and the intervening period has seen a significant lift in the eligibility criteria. With the various iterations of the Corporate Law Economic Reform Program (CLERP) and the onset of the FSRA, it has become a more rigorous vetting process by the regulator.

However, it might come as surprise to some that it is far from difficult provided you study the requirements in detail and assess if you and your business can comply.

But first – what does your representative’s contract say?

Many advisers will have restraint of trade clauses in their contracts with their licensees which might have a serious impact on their cash flow once they leave and begin business under their own licence. The first point to make here is to be sure to have your lawyer review the contract so that you can make an informed decision about your situation if you obtain your own AFSL.

Your current contract might have a serious impact of the commercial viability of going out on your own. That said, it might just mean you need to plan how you will survive while you serve out the restraint period. One prominent adviser had a two year restraint of trade clause which he duly planned for in leaving his then licensee in 1997. The very day after his restraint period expired he commenced, with military like precision, a series of advertised seminars in towns and suburbs across the state he had former clients in and, he would proudly tell you, he eventually regained more than 90% of his previous clientele.

The easy part

The easiest part of applying for an AFSL is the application itself. The online form can be progressively saved on the ASIC site allowing you to continue completing the form at any time at your leisure. The key here is to know exactly what type of licence you are applying for. Some issues to consider:

• Will you want to be able to advise on listed securities?
• Will you want to advise on superannuation products?
• Will you want to hold a life broking licence?
• Will you want to advise on bonds and deposit type accounts?

The more difficult part

The more arduous part of the application process is the so-called ‘proofing documents’. These are the documents which you prepare to prove or validate the information you have given on the application form. This is where the largest time component is spent in applying for an AFSL and this is where you need to have a thorough understanding of the relevant legislation in order that you can demonstrate your capabilities and that of your organisation. It is possible for ‘sole operators’ to make application for an AFSL however the ASIC license assessors will be looking at the person’s resource capabilities to meet his/her obligations under the FSRA.

Regulatory Guidelines

In applying for an AFSL you will be referred to various Regulatory Guidelines (RG) and these are essential reading in the process of ensuring you will be able to comply with the requirements of the Acts.

In addition to the three parts of the AFS Licensing Kit, RG 104 Licensing: Meeting the general obligations is an excellent first source of information in assessing whether or not you will be able to meet the requirements of holding an AFSL. In this document you will find information on:

• Key compliance concepts
• Your broad compliance obligations
• Your risk management systems
• Your people
• Your resources

For example, RG 104.21 details how your obligations will be dependent on the nature, scale and complexity of the type of licensee business you wish to operate.

In regard to risk management, RG 104.62 states:

RG 104.62 We expect your risk management systems will:

(a) be based on a structured and systematic process that takes into account your obligations under the Corporations Act;

(b) identify and evaluate risks faced by your business, focusing on risks that adversely affect consumers or market integrity (this includes risks of non-compliance with the financial services laws); 

(c) establish and maintain controls designed to manage or mitigate those risks; and

(d) fully implement and monitor those controls to ensure they are effective.

With reference to the above comments on ‘proof documents’, your proof document in regard to Risk Management would need to clearly illustrate how your AFSL business will comply with ASIC’s expectations. This is where the real workload lies in the overall application process.  In effect, the AFSL application itself will be a dozen or so pages in length whereas the proof documents – in total – will be many times that quantity.

Planning

There are several components to planning to obtain an AFSL and they are essentially split into pre and post licence issuance segments.

The application process will absorb quite some time however with a concentrated focus and disciplined attention to preparing your proofing documentation, it is possible to successfully navigate to a licence being granted within ten to twelve weeks depending on individual circumstances, assuming you have successfully proved your eligibility.

The immediate period after you commence operations under your own licence is crucial. You need to know how your cash flow will be impacted by the change and, in your application, you will need to evidence to ASIC how you will manage your cash flow, both initially and in an ongoing basis. Some of the issues to address include:

• Capital expenditure in the establishment phase?
• If clients are transferring with you to your new AFSL, how soon after commencement will your fees be received and what will the business’ cash flow position be?

Equally important is the need to communicate your change to clients.  Again, to restate, you need to be sure that you are meeting any contractual obligations under your existing representative agreement before communicating with clients.

You will need to have Professional Indemnity insurance cover in place to a level which complies with ASIC’s requirements. If ASIC is going to approve your application, you will be asked to provide evidence that the required level of PI cover is in place.

Licensing Kit

ASIC provides applicants with very detailed information on how to apply for an AFSL in its three part Licensing Kit.  The kit is three downloadable documents which step through the process of making the actual application itself and the preparation of the proofing documentation. It should be the first reference people interested in obtaining their own licence.

Not for everyone

It must be stated: obtaining an AFSL is not for every financial adviser. There are many for whom it is entirely unsuitable. If you are in the business of simply selling investment products then an AFSL is most likely not for you. However, if you are serious about building a business which is owned in every respect by you/your business partners then it might be right for you. If you are serious about compliance and prepared to take on the responsibility for advice and portfolio management for clients, then it could be for you.

For and against

There are arguments for and against on both sides of this discussion. If you are considering your own AFSL as an option for your career, then you need to research the readily available information from ASIC and assess your capacity to obtain and retain a licence. If you proceed to apply, then allow plenty of time to prepare the application and proofs and carefully plan the transition for your business.

While it is easy to stand out from the crowd with your own AFSL you need to be sure to consider your clients in the whole process – after all they need to be the end beneficiaries of any decision to establish your own AFSL or remain as a representative of another party’s licence.

They should come first in all of your deliberations.

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Dan Powell

With a vision of becoming the leading service provider for non-aligned Australian Financial Services Licensee (AFSL) partners in Australia, Actuate Alliance Services has rebranded to SFG Alliance Services.

Dan Powell, Head of SFG Alliance Services, said the rebrand is in line with SFG Australia Limited’s aim to consolidate its brands in the financial services market place. “Sharpened branding will make SFG Alliance Services, which provides key support and expertise for boutique AFSL businesses that wish to retain control of and be responsible for managing their own licence, more recognisable to those businesses,” Mr Powell said.

SFG Alliance Services is focused on supporting boutique AFSLs seeking best advice and best practice outcomes, so that practice principals and advisers can deliver on their promise to clients and focus on new business.  “That’s what makes us so different in today’s marketplace,” Mr Powell said.

The rebranding coincides with the introduction of SFG Alliance Service’s adviserHQ website.  adviserHQ allows AFSLs and advisers to access the support of SFG anywhere, any time. “adviserHQ offers online 24/7 access to licensee support, advice documents, research, product and platform solutions, technical services, practice management, succession planning, marketing and sales,” Mr Powell said. “This service is invaluable to AFSLs in leveraging infrastructure, resources and expertise of SFG in their own businesses.”

In the six months since launch, SFG Alliance Services has already attracted 12 AFSL partners. “To help service the needs of these partners, we are pleased to announce the appointment of Eric Quak, who takes on a practice business development role,” Mr Powell said.

Mr Quak will be responsible for working with self-licensed advice businesses to identify and implement the best practice and best advice processes of SFG. “Eric brings with him a deep understanding of financial planning businesses with previous experience gained in investment management, platform solutions and strategic advice,” Mr Powell said.

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Patrick Nalty

Accountants will need to earn a minimum of $300,000 per annum in order to successfully run their own Australian Financial Service licence once the accountants’ exemption is removed on July 1, 2016,  according to a leading financial advisory firm.

Speaking at a seminar in Melbourne yesterday, Paradigm Wealth Management managing director Patrick  Nalty said the best option for accountants was to either employ an experienced adviser to run their financial  planning arm or partner with an established independently-owned advice business.

He warned against joining an institutionally-owned AFSL or applying for a full or limited AFSL.

“Accountants who decide to become an authorised representative of an institutionally-owned licensee will  ultimately end up leaving once they realise that they have to comply with their dealer group’s compliance regime and approved product list,” he said. “The reason institutions own dealer groups and support advisers is to secure distribution for their products.”

Based on Nalty’s calculations, only large accounting firms with around eight partners and approximately $6 million in revenue will have adequate resources to properly maintain their own AFSL.

“There are onerous responsibilities attached with holding an AFSL and other intricacies which most accountants are unaware of,” Nalty said.

He cited as an example the free dispute resolution services available to retail investors if a complaint or dispute arises. Retail clients have access to two external dispute resolution schemes which can award up to $280,000 in compensation without legal representation. Conversely, clients who want to sue their accountant must take them to court.

Nalty added that professional indemnity insurance premiums were much higher for financial advisers and the new conditional license regime only allowed accountants to provide limited class of product advice.

“Accounting practices can continue providing quality advice to clients but be absolved of the additional responsibilities by entering a joint venture with an independent advice business,” he said.

While the majority of accountants aren’t expected to decide on which option to take until the start of 2016, Nalty said a number of accountants had already approached Paradigm Wealth Management about a potential strategic partnership.

The group, which employs 20 staff and has over $300 million under advice, specialises in SMSF advice and
administration. Approximately 70 per cent of assets under advice are in managed discretionary accounts utilising
the services of managedaccounts.com.au.

Nalty is the guest speaker at a series of seminars hosted by recruitment firm Lawson Delaney.

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MDS & Libertas offer tools to build it yourself.

My Dealer Services Pty Ltd (MDS) Chairman Don Wiggins has announced that the specialist support service provider for advisers seeking their own Australia Financial Services Licence (AFSL) has teamed together with Libertas Solutions Pty Ltd (Libertas) in a strategic partnership to address growing demand by advisers to operate under their own licence, not only as an individual, but now also as a group.

Don Wiggins also confirmed that the MDS – Libertas strategic partnership has achieved their first success by setting up and providing the back office infrastructure for a group of 20 advisory practices that came together to establish their own dealer group.

Following the success of its first licence offering, Libertas Managing Director Mark Euvrard confirmed that plans were well advanced to launch a new offering in early October.

“The vision of Libertas is to allow advisers with similar interests and marketplace offering to join forces and operate under a dealer group that is specifically focused on their very unique needs and requirements”, said Euvrard.

“At the same time, they are able to outsource the dealer group services to an industry professional thus allowing the advisers to focus on their clients and related business activities”.

The benefits of the Libertas small focussed dealer group approach versus the larger option are significant added Euvrard sighting low PI excess and costs, quality independent research, ongoing CPD offering, commission with Fee Disclosure Statement capabilities and strategy focussed PD days.

All these positives combine to make the independent AFSL offering by MDS and Libertas quite compelling.

Supporting the Libertas experience, Don Wiggins said that the number of enquiries from advisers wishing to set up their own licence has continued unabated all year and he expects that this will continue into the foreseeable future. This new group offering gives advisers a new option in the independent AFSL space.

“The driving force behind the interest in MDS and Libertas is the demand from advisers seeking a viable cost effective alternative that provides them with independence and control over their destiny whilst operating within a fully compliant team / collegiate environment”.

“The MDS – Libertas AFSL facility has been developed so that any group of individual advisers can move right in without the wait normally associated with starting a dealer group from scratch”, concluded Don Wiggins.

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Increase in dealers opting to operate under their own licence.

My Dealer Services Pty Ltd (MDS) Chairman Don Wiggins has announced that the specialist support service provider for advisers seeking their own Australia Financial Services Licence (AFSL) is experiencing a significant increase in demand by practice owners opting to operate under their own licence.

Commenting on the escalated activity being addressed by MDS, Don Wiggins said there were many and diverse factors influencing advisers and certainly greater flexibility, independence and dealer group dissatisfaction featured prominently – and in doing so, reflecting many of the results in CoreData’s recent research.

“The CoreData findings that 23.3% of advises expect to switch licensees in the next 12 months with 14.3% intending to take out their own AFSL is being borne out right now and the industry can expect this trend to continue into the foreseeable future”, said Wiggins.

Over the past four years, MDS has assisted in obtaining more than 50 AFSL’s for advisers with the most dramatic increase in activity recorded in the last six months. MDS boasts a senior management team of experienced financial services professionals with extensive and personal industry sector insight. This ‘hands on’ expertise is reflected in the organisation’s 100% success rate to support advisers AFSL endeavours.

Don Wiggins continued, “The MDS marketplace offering has been developed as a means of providing specialist services to assist and support advisers to acquire their own AFSL in a practical cost effective manner. In addition, MDS assists licensees in their compliance obligations, training and adherence to ongoing regulatory requirements”.

“Another reason for the MDS’s success is the flexibility of its services that can be personalised to the individual needs of advisers and an impressive track record and industry reputation, has helped the company grow to the point today where it oversees everything for the entire back office to compliance needs only, for in excess of 20 AFSL holders”.

MDS expects that once FoFA is bedded down; and the realisation that it is manageable could provide the motivation for advisers to part from with their often rigid licensees, and provide advice under an AFSL that is more appropriate to the needs of their clients. Especially if advisers outsource the ‘back office’ to a reliable and experienced business which in turn will allow them to put most of their efforts into servicing clients and not on the licence management.

“The convenience of controlling one’s own destiny, but leaving the back office to others at a cost usually far less than one that is currently required to be paid to the traditional dealer, is a compelling argument to take out one’s own AFSL”, concluded Don Wiggins.

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Accountants keen to stay in the SMSF space.

One in four accountants who are SPAA members and not operating under a AFSL have decided to apply for a limited licence or become an Authorised Representative (AR) of a licensee now – an encouraging sign considering the accountant’s exemption remains in place until 30 June 2016.

Liz Ward, Head of Education Services for the SMSF Professionals’ Association of Australia (SPAA), says polling done at SPAA events on this issue shows another 50% of members who are not licensed accountants are “seriously considering this option”, with only 25% indicating they might not apply for a limited licence or become an AR.

“This is an encouraging trend, especially when you consider the timeline involved. Quite clearly members are thinking seriously about this issue and we would expect many of those considering this option to ultimately commit to it,” she says.

Ward says it’s imperative that accountants understand there are pros and cons of being an AR as opposed to getting a licence directly with ASIC (either full or limited), and they must decide what best suits their business model.

There are a number of benefits of becoming an AR, especially for those new to the AFSL regime. These include:

• The investment in the licence with ASIC is undertaken by the licensee;
• ARs may have access to more licence authorities than they would receive from ASIC if they went directly;
• All the ongoing requirements are usually met by the licensee, such as initial and ongoing training, PI Insurance, membership of EDR, compliance requirements, disclosure documentation.

Along with the benefits, there are other considerations that might tip the balance towards pursuing other licence avenues; such as:

• ARs pay a regular ongoing fee to the licencee;
• ARs may be subject to strict contractual requirements, particularly regarding supervision, compliance, reporting, client confidentiality, and disclosure documents;
• ARs branding rights may be restricted in favour of the licensees’ branding;
• There could be a conflict between the licensees’ range of business ventures versus the AR’s business.

Ward adds there is also a cost issue. ”There are a range of costs that are being cited; we are hearing that the price to prepare and submit an application for a limited licence may in the vicinity of $25000 – $35000 in the first year.

“This includes compliance consultancy fees to compile the application and having all the components required to support the application in place. A DIY approach is an option and could provide cost savings but like all DIYs usually results in an increase in the time and input required by the individual.

“With either approach, accountants can expect to take up to 12 weeks from beginning to end of the application process, and when added to the required RG146 or other types of training programs they need to do initially, the lead time starts to add up.”

Ward says although three years seems a long time, accountants have to appreciate this is a considerable process and one they need to consider carefully and not leave too late.

“In SPAA’s opinion those who elect to be early adopters of the new regime and formally move into the SMSF advice space (via AFSL or AR) are likely to realise commercial benefits compared with those who come to it late. We are hearing of a number of accountants who are actively positioning their business based on their ‘SMSF expertise’.

“As an association dedicated to SMSF professionals and the provision of quality advice to trustees, we think it is great that there are many accountants that have already formally committed themselves to being in this sector.

“We would encourage those who are thinking, but yet to decide, to research their options and if SMSF advice is part of their business future to take the lead and start moving in that direction,” she says.

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Troy said: “After holding the Licence for a number of years, the compliance obligations were taking me away from running a specialist insurance and estate planning practice. I want more time with my clients not less.”

“The new Affinia group, backed by TAL, takes care of the licensee obligations and provides the service and support that both myself and my team need so we can clearly focus on giving high quality advice to our clients.”

A number of existing advisers under Troy’s Queensland-based Business & Estate Planning Specialists Licence are also joining him at Affinia.

Affinia General Manager Craig Parker said: “Affinia’s strategy is to partner with like-minded risk professionals. We remove the noise so our advisers can do what they do best, see more clients.

“We are serious about our network enjoying a seat at the table and having a voice to the continued design and evolution of Affinia. Troy brings very strong expertise as we evolve into a major risk specialist dealer group of choice.”

Troy said: “After researching the market, Affinia provided a very good fit for us and aligned similarly with our goals. I have a lot of time for Craig, the board and management team of Affinia. They have started this group with all the right intentions for risk specialist advisers.

“Running a boutique AFSL with all of the obligations as a licensee was taking me away from my core business. Affinia offers a broader range of support and professional services to enable me to better run my business without the obligations of being a licensee.

“Being backed by an independent risk specialist gives me the necessary confidence and depth of support for my business to grow going forward.”

Troy said the Affinia offer is competitive, and that the group is clearly keen to help risk advisers run their business, and profitably. Having an open APL not aligned to a big institution was a key differentiator that enables advisers to pick the products that best suit a customer’s need. That is truly customer focussed.

“The daily blog I receive from Keith Abrahams tells me to pursue my passion, so that’s what I decided to do. Running the business and providing advice to small business owners around their risk management and estate planning needs is what I am passionate about, and joining the Affinia group enables me to do that,” Troy said.

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Regulatory Guide 166 Licensing: Financial requirements (RG 166) sets out the financial requirements we have set for licensees, according to the types of financial services and products that they provide.

ASIC is currently in the process of reviewing the requirements applying to different types of licensees. We have restructured RG 166 to ensure it is clearer and easier to navigate for the different licensees to which it applies.

In the new version released today, requirements applying to particular types of licensees are easily located in a series of appendices attached to the guide. Section A of the guide explains how our financial requirements work, and how to decide which requirements apply.

Major changes in this version of RG 166 include:

• updated requirements for responsible entities, which were announced in November 2011, and updated in October 2012, and which have become effective as of 1 November 2012 (refer to 11-242MR)
• new requirements for issuers of over-the-counter derivatives to retail clients—these were previously released in Regulatory Guide 239 Retail OTC derivative issuers: Financial requirements (RG 239), but have now been incorporated into RG 166, and RG 239 will be withdrawn, and
• new guidance on financial requirements for market participants, to reflect changes to the way these AFS licensees are regulated since ASIC assumed responsibility for supervising market participant capital requirements from ASX on 1 August 2011.

All other requirements remain unchanged.

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Revisions to ASIC’s regulatory guidance for AFS licence applicants removes the requirement to submit paper versions of documents lodged online.

Under the changes, applicants for an AFS licence will no longer be required to lodge:

• the signed application form and the supporting documentation in paper text, allowing applicants to submit these documents electronically, and
• certified true copies of background credential checks known as ‘People Proofs’.

Updated guidance to reflect these changes is set out in:

• Regulatory Guide 1 AFS Licensing Kit: Part 1 – Applying for and varying an AFS licence (RG 1)
• Regulatory Guide 2 AFS Licensing Kit: Part 2 – Preparing your AFS licence or variation application (RG 2)
• Regulatory Guide 3 AFS Licensing Kit: Part 3 – Preparing your additional proofs (RG 3).

The removal of the requirement to lodge paper versions of the applications and supporting documentation, and the certified copies of the ‘People Proofs’ will simplify and streamline the AFS licensing process.

ASIC Commissioner, Greg Tanzer, said these changes will save industry time and money, especially important for small business operators.

‘These updates reflect our commitment to efficient registration and licensing, essentially cutting red tape for business. We will also continue to review our policies and procedures to improve efficiency dividends for business where we can’, Mr Tanzer said.

The updated guidance provides current and prospective licence applicants with ASIC’s requirements for the AFS Licence application process and requirements for the preparation of ‘People Proofs’.

The updated guidance takes effect from Tuesday 12 June 2012.

13 June 2012

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