Is Your Licensee a Threat to Your Professional Future?

In this article, Catalyst Compliance’s Managing Director, Steve Murray, examines the impact an increasing focus on licensee compliance is having on advisers and their individual reputations…

Reputable Australian Financial Services (AFS) licensees have attempted to protect their license by avoiding the authorisation of advisers employing sub-standard practices – with varying degrees of success. It is now evident that advisers need to be equally as careful in their selection of a licensee, as they may turn out to be a threat to the advisers’ reputation and their professional future.

When representatives contemplate moving AFS licensees, they usually compare a number of prospective licensee business models against their own shopping list of attractive features. Recent industry events would suggest that advisers should also include a list of risks to avoid, or look out for, in their due diligence process.

The term ‘due diligence process’ is perhaps an overstatement of how advisers consider any change of licensees. Firstly, they don’t usually have a process, and secondly, there generally isn’t any detailed scrutiny of potential licensees that is sufficiently robust enough to warrant being labelled as ‘due diligence’. Unfortunately, an adviser’s investigation into a potential new licensee is usually very shallow and confined to two issues:

  • How little will I have to pay to be authorised?
  • How little will the licensee interfere with the running of my business?

A modern example

Irrespective of the fact that an adviser has a blemish-free history, an association with a troubled AFS licensee can be enough to convince a new licensee to avoid that adviser; the new dealer group cannot be sure if the adviser engaged in the ‘bad behaviour’ that led to the license troubles, and many are not willing to take the chance.

A recent example of the implications of hiring advisers from a troubled licensee can be seen in the Australian Securities and Investments Commission’s (ASIC) treatment of Guardian Advice.

In January 2015, ASIC imposed additional license conditions on Guardian, requiring it to appoint an independent consultant to review its compliance with AFS license obligations.  According to the regulator, the initial ASIC surveillance of Guardian was undertaken, in part, because Guardian had recruited advisers from AAA Financial Intelligence:

‘ASIC’s surveillance followed Guardian Advice’s appointment of a number of ex-representatives of AAA Financial Intelligence Limited (AAA FI) and AAA Shares Pty Ltd (AAA Shares) after ASIC cancelled their AFS licences in February 2013 (refer: 13-019MR). ASIC was interested to ensure Guardian Advice had in place adequate monitoring and supervision processes to deal with these representatives.’

ASIC Media Release 15-003MR, 7 January 2015

AAA Financial Intelligence had its license cancelled in early 2013 for having failed to comply with the conditions of its license:

‘AAA Financial Intelligence was found to have an appalling record that put at risk the quality of advice it provided to retail clients.’

ASIC Media Release 13-019MR, 6 February 2013

It would appear that ASIC is tracking the movement of former AAA advisers, and a concentration of any number of former AAA advisers under one licensee is sufficient cause to question that licensee’s capabilities.

Signs to watch for

So what should an adviser look for to avoid a troubled licensee?

1. Low-cost business models

Advisers like low-cost license models as they leave more money in their pockets. They are also often operating with the mistaken belief that licensees don’t add much value, and therefore aren’t worth exorbitant fees. Ironically, if an adviser chooses a low-cost model, they won’t get much added value.

Low-cost does not necessarily equate to poor compliance and management, but it does mean that there is less funding available to resource the business. It usually means that the licensee is heavily reliant on one or two people to perform multiple roles.

ASIC drew attention to their focus on low-cost business models in their cancellation of AAA’s licence. ASIC observed that AAA had:

‘…adopted a business model that only allowed it to increase cash flow by increasing the number of advisers it authorised. The fee charged did not maintain sufficient financial resources to comply with its general obligations…’

ASIC Media Release 13-019MR, 6 February 2013

Low-cost is not all bad news; some of the best compliance comes from small licensees who benefit from having direct control over all aspects of their business.

Advisers should assess whether the low-cost model that they are considering will be able to meet its license obligations and will therefore be viable into the future.

2. Licensee review

Before signing on the dotted line, ask to see your prospective licensee’s most recent licensee review. Most reputable licensees have an external organisation review their policies, procedures and processes, usually every one or two years. This provides independent third party feedback on whether the licensee is meeting their regulatory and compliance obligations.

The adviser should consider whether any issues identified within the review are significant and may cause problems down the track. For example, if poor monitoring and supervision is identified as an issue, then there is an increased possibility of a rogue adviser and subsequent brand damage and attention from ASIC. Is this a licensee that you want to be associated with?

If the licensee does not review their policies, procedures and processes, the adviser should consider whether they are serious about meeting industry compliance standards.

In today’s environment, reputational risk works in both directions

3. Breaches and client complaint registers

An adviser should request to review a list of the licensee’s breaches and their client complaint register. The adviser should consider the contents and assess whether the number and/or severity of the breaches and complaints raise any concerns.

Too good to be true? If the licensee has no breaches or client complaints over an extended period, then avoid this licensee – they are not serious about compliance.

4. Representative operational procedures

Ask for a copy of procedural documents and/or compliance templates. Assess whether the licensee provides good guidance to its advisers about how they are expected to operate, and whether the procedures are compatible with how your business runs.

5. Other representatives

Talk to other advisers who already trade under the license and assess, through their eyes, how the licensee operates and whether it meets your requirements.

In today’s environment, reputational risk works in both directions. Advisers need to be proactive in assessing whether a potential new licensee will meet their obligations, or whether they are likely to be a blight on their CV – and the new ASIC Financial Adviser Register – for every future licensee to see.

Steve Murray is the Managing Director of Catalyst Compliance, a boutique consultancy providing advice and support to approximately 90 small to medium AFS licensees specialising in providing advice to retail consumers.

Contact or follow the author: Website | Email

This document has been prepared by Catalyst Compliance Pty Ltd and represents the views we have formed based upon our understanding of the regulatory requirements. Catalyst Compliance does not provide legal advice and this should be obtained where appropriate. Catalyst Compliance, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained in this document.

  • paulkate72

    LIF has developed ultimately from life offices wanting a better bottom line for their shareholders. What we’ve experienced until now has been working for about 20 years. Yet, without any warning, the life offices have decided they want a bigger slice of the pie and have lobbied the Federal Government to legislate to get it. At advisers’ – small businesses – expense. All of this under the smokescreen of churning, best interest and concern for the insured public. Advisers aren’t likely to get their way here and we haven’t really had any say.

    • Concerned Economist

      Paul, Well said. To add insult to injury these very same life company ‘execs’ will get up on the stage at our PD days and product releases and profess undying love, support and passion for advisers. If I hear a life company say they are “passionately committed to supporting their advisers” one more time I will vomit. They wanted a 2 year clawback and got it, having lied to everyone about it being about other issues. It is about clawing back their profits ONLY and they’ve been after this provision for years. Their happy bonus is they will also now pay less commission too! Win-Win – for the life company only. The adviser is the poor old mug in this game. Life company ‘exec’ mastery of corporate-speak lies has allowed them to get away with this. My mother always said you can just about trust anyone most times except a liar!
      These life company ‘execs’ should not only be comprehensively ashamed of themselves but should be shouldering the burden of clawback by having to pay back, pro-rata, some of THEIR pay when a lapse occurs. Lapses are rarely an advisers fault any more than they are a life company’s employee’s fault – so why should only an adviser have a chargeback? Life ‘execs’ and employees are all, in reality, on commission too. Nobody gets paid until a life policy sale is made. Why should only the adviser have to give back their pay when some of the premium is handed to life ‘execs’ as wages AND bonuses (commissions all!!!). One rule for them and one for us, as usual. Oh, but I feel better knowing the life companies are “passionately committed” to me, the adviser – NOT!
      I’ve about 4 – 5 years to go before I’d planned on retiring after a lifetime serving clients in this previously wonderful industry. I now truly don’t know if I can stomach working with these creatures that run life groups anymore. Their pathetic, predictable, patronising and sickening ‘corporate-speak’ such as “desired outcomes” “working with stakeholders” “reviewing and considering the amendments” and other such delaying guff and false promises and lies pervade my day now and seem all-encompassing.
      I truly don’t know if I will pull the plug before June 2016 or not. I do know I do not enjoy working anymore. The ONLY enjoyment comes from helping my clients and the appreciation I am honoured to receive from them. I even hesitate to write new business now with onerous compliance, clawback and commission uncertainty. The fun has definitely gone. Large corporate self-interest and greed possesses our once great industry and it saddens and sickens me. The ‘true’ life adviser is less than 1 generation from extinction – I’ve given this a great deal of thought and, yes, I’m not happy about having just typed those words.
      My biggest concern is for new advisers entering. There’s going to be little financial incentive to do so now and it will be near impossible to start as the older guys like me will definitely not be able to afford to mentor them so who will teach them client skills first hand? Certainly not the life companies. They won’t want to do anything to bring new advisers in – they are trying to get RID of advisers. I challenge anyone to prove me wrong on that point. Go on!
      If I stay it will only be for my clients. I’ve made commitments to them and will want to see those out. Shame the life companies can’t be that committed and truthful. They care not for advisers OR clients. They are on the road to success in removing the client’s best chance at protection – the adviser.

      • paulkate72

        Strong sentiments, Concerned Adviser. Yes, life offices profess to be concerned about their clients and us – also clients – but they don’t really care at all.
        The government has made noises about taking a balanced position for all stakeholders. Not so. They’re driven by self-interest and life offices have the financial clout to state what they want and the government then asks: when do you want it by? If it all would bring greater benefits for clients well and good but it hasn’t and it won’t.
        It sad to hear that you’re quitting because of the reasons above, but it seems likely you’ll have company if that’s any consolation (it isn’t).

      • paulkate72

        Meant Concerned Economist, Concerned Economist!! Must be fixated on the word “adviser” because we seem to be getting shafted so much I can’t think of anything else. Apology for getting your form of address wrong.

        • Concerned Economist

          No worries Paul, Hope you had a good weekend! Cheers, CE.

  • Gregmax

    Couldn’t agree more Paul. I don’t think the real truth behind this commission debacle will emerge for a number of years. Only then will the gurus, experts and the uninformed decision makers be made to hang their heads in shame ( hang on, no they won’t because they will all have moved on with big, fat pay cheques & bonuses ). I urge all advisers to keep agitating, make “them” squirm; because the smoke screen we are having to deal with now is giving them the time and confidence to keep working on whatever is the “real issue”. My guess is that it is making the bottom lines better, cleaner, and presenting their accounting in the best possible light. The “For Sale” signs will litter our industry. Destroying the careers & businesses of advisers will merely be an unintentional consequence.

  • Craig Yates

    The resulting outcome of the LIF has been achieved by misuse of market power, flawed data based on a minimal sample group size, pre-determined outcomes and poor analytical process, an inherent misunderstanding of the level of work and cost involved in providing high quality risk insurance advice and a failed belief that because a consumer pays for advice and service by way of fully disclosed commission, that the person providing this advice cannot be labelled as professional either in the practice they run or the process of advice they provide.
    The disloyalty of the insurers toward their long time supportive advisers in standing up for what they know is right as opposed to what they know will produce a greater profit margin is nothing short of deplorable.
    This will ultimately fail when the insurers start realising the inflows of new business have decreased significantly and the vastly experienced advisers who have the knowledge and advice skills to deliver the consistently larger risk insurance cases to the insurers doors have left the business with no-one left in their wake to take up the role.
    For a Liberal Govt and in fact the Minister for Small Business to have acted in this manner is unforgiveable.
    They have been manipulated by the corporate sector and have given in to an agenda that has nothing to do with the provision of consumer benefits and everything to do with screwing their distribution chain to the wall in the name of increasing profit.
    If the Liberal Govt are “open for business”, they have just closed a very large door.

  • Roger Smith

    The Government, FSC and Life Offices will learn “that if you weave a tangled web – expect to get caught up in it”.