They say home is where the heart is, so why are so many advice practices currently thinking about their licensing arrangements? At Numerisk, we have seen a number of advice practices within dealer groups and large institutional licensees see better prospects in being self-licensed. Many of these have or are planning to take the plunge and go it alone. A big question for many is why are practices that have been traditionally well-served in the bigger networks interested in leaving the fold?
The most recent Adviser Ratings Musical Chairs Report for Quarter 1, 2024, reveals crucial data for the industry.
Some key stats for the sector:
- 66% of new established licensees are a one-person licensee.
- 82% of licensees are in a privately-owned licensee with less than 10 advisers.
- The number of advisers now in privately owned licensees of 1-10 advisers has increased 17.9% since 2017.
A number of issues are cited by some of these advisers, firstly it’s the preference for autonomy - utilising a set and inflexible regime of systems, reporting, compliance and other operational and cultural factors seem to feature heavily. But for many, it's more about setting a path forward independently, free of influence from a licensee that may have differing views and future goals.
Bruce Gorry, Managing Director and Principal adviser from Provident Advisory 
says, under larger dealer groups, advisers are typically grouped together in a one-size-fits-all approach. "We are degree-qualified, highly professional advisers who want nothing more than to generate great outcomes for our clients over the long term - we needed to ensure our operating environment would continue to provide this opportunity, including the flexibility to be nimble, particularly around the impending changes we are seeing with the QAR. The change was never about saving money, but after undertaking a comprehensive cash-flow analysis in planning, it’s a nice feeling to know that the decision stacks up financially.
We faced some challenges, and we worked through these as a fully committed team. We meticulously planned it out, and partnering with quality people certainly made the job a lot easier. The best advice I can provide anyone with is to be completely transparent with your intention, don’t be scared to ask people for help, and be prepared to invest time into the change. We were well prepared, and by and large, the transition was fast and smooth; we couldn’t be happier with the result.”
But what are the pitfalls of self-licensing from a risk perspective?
Well, there are a few and these need to be considered:
- The buck stops with you – with this freedom comes responsibility and this carries risk.
- Smaller practices may find the burden of maintaining the same level of compliance and operational excellence difficult and a distraction from “working in the business.
- Securing Professional Indemnity may be daunting and, for some, a new experience.
- Ensuring that your practice's prior liability is managed as you transition from one AFSL to another can be challenging, and the complexity of this is meaningful.
Reducing risk should, for most practices, be a priority when putting together a plan for self-licensing. For some, covering all the requirements of self-licensing may be worth the effort, but there are ways to have freedom and the support necessary to ensure you can sleep easily at night. Self-licensed support offerings are more prevalent now than ever, but few offer the depth and professionalism plus strong community like The Principals Community.
Safety in Numbers
Kon Costas, Managing Director of The Principals Community says “Obtaining an Australian Financial Services Licence (AFSL) is a significant step for any financial planning practice. Although you gain increased freedom, choice and control, your overall level of responsibility also increases when your AFSL commences."
The Principals’ Community stands out as a specialised consulting service, offering tailored support to businesses seeking or currently holding an AFSL. With a dedicated team of ten professionals, they cater to a vast network of over 120 successful self-licensed businesses, encompassing more than 1220 advisers across Australia. This makes them the largest self-licensed network in the country. 
Kon Costas, emphasises that their support extends far beyond mere numbers. It's about fostering meaningful connections, providing invaluable resources such as governance and compliance support, business insights through comprehensive benchmarking, and ongoing professional education programs. Their deep understanding of the financial planning profession, licensing, and the self-licensed landscape sets them apart.
Costas and his team engage in numerous discussions with both existing AFSL holders and businesses considering obtaining their own licence. Businesses must carefully assess factors such as costs, required skills, additional responsibilities, and associated risks. It's a significant decision that requires thorough evaluation. While self-licensing isn't suitable for every business, with the right support and guidance, many thrive under this model. This autonomy allows them to tailor their operations to suit their specific needs and objectives, a flexibility often lacking in larger licensee frameworks.
Central to The Principals’ Community's approach is the emphasis on peer networking and knowledge sharing. This collaborative environment fosters growth and innovation, empowering businesses to navigate the complexities of self-licensing more effectively. One of the key benefits of being part of The Principals’ Community is the confidence derived from knowing that dedicated support is readily available.
Risks in Transition
We asked David Leggatt of BlueRock Law what advisers should be thinking about when the transition risk was specifically raised. David says, “The licensing regime for a financial services licence in Australia, is now about 20 years old. 
The reforms introduced by the Financial Services Reform Act at around the turn of the century, led to amendments to the Corporations Act and the licensing regime, now well known to financial advisers and insurance brokers.
An important feature of the scheme, is that obtaining an Australian Financial Services Licence, requires a significant commitment in time and effort. Any business obtaining their own AFSL, is unlikely to have any change from $50,000 in establishing their own licence. After that, the cost of compliance, which involves sourcing suitably qualified responsible managers under the AFSL, keeping up to date with the latest guidance notes from ASIC and ensuring all staff and authorised representatives are aware of and audited in relation to their obligations under the AFSL, is a time consuming and rigorous process. It requires licensees, and their Authorised Representatives, to keep on top of things. Which of course, is the whole point.
A key part of this regime is that the entity which holds the AFSL – the licensee – is strictly liable for the actions of their employees and Authorised Representatives. This includes any criminal conduct. This was the position from the beginning and is still the case today. If you are working under an AFSL, the licensee carries the risk of your errors and omissions, as well as for any dishonest acts. And if you move from one licensee to another, the risk of the act transfers on the day. So, if you leave a licensee on Monday, but start your career on Tuesday with your new licensee and a negligent act, the old licensee is not liable.
But the reality, particularly for financial advisers, is rarely so simple. Claims against financial advisers often allege negligent acts over a longer period and confusion can reign as to which licensee is the one on risk. And it could be both.
This is why considering this problem when you are moving from one licensee to another, or starting your own licence, is extremely important. Most authorised representatives agree with their licensee that they will indemnify the licensee for their own errors and omissions and organise insurance to cover the AR and the licensee for the errors and omissions of the AR. But this needs to be carefully thought through. For example, if you give the statement of advice when operating under your old licensee, but execute under the new one, the plaintiff could sue you and two licensees as well. You would hope that you will have the one policy (yours) to respond so that the claim can be managed without conflicting positions between you and your current and former licensee.
A good insurance broker can handle this for you. This should be a critical consideration when you are thinking about a change."
For support and assistance on Professional Indemnity and all general Insurance related matters,
call 1300 001 283, email enquiry@numerisk.com.au or visit www.numerisk.com.au
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