August 1, 2018
The recent closure of Dover Financial has resulted in hundreds of advisers seeking a new home and many others asking questions about the nature, and viability, of financial advice licensees. With greater scrutiny on advisers, and the groups that employ them, should advisers be asking questions that go beyond the issue of cost and examine the compliance record of a licensee? Steve Murray from Catalyst Compliance believes advisers should develop their own due diligence process when reviewing a licensee to avoid being caught up in another potential failure. As Steve writes, consumers and regulators are watching and an association with a poorly complying licensee can be hard to shake off.
Reputable AFS licensees have attempted to protect their licence 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 adviser’s reputation and their professional future.
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 of the licensee.
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 of the licensee.
My use of the term “due diligence process” is perhaps an overstatement of how advisers considerany change of licensees. Firstly, they don’t usually have a process, and secondly there isn’t anydetailed scrutiny of potential licensees that is sufficiently robust enough to warrant being labelledas “due diligence”. Unfortunately, an adviser’s investigation into a potential new licensee is usuallyvery 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.
Why should advisers look for avoidance issues? Put simply, so that advisers do not expose themselves to a troubled licensee who will appear on their CV forevermore.
AFS licensees are avoiding advisers whose CV’s include licensees such as AAA, Morrison Carr or Storm. Even Commonwealth Bank is no longer a plus on an advisers CV.
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 – they don’t know whether the adviser was one of the “bad” advisers or not and are not willing to take the chance.
Reinforcing the issue in the minds of licensees is the ASIC action to place a licence condition on Guardian Advice a few years ago. The initial ASIC surveillance of Guardian was, in part, because Guardian had recruited too many advisers from AAA.
“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 dated 7 January 2015
AAA had their licence cancelled in early 2013 for having failed to comply with the conditions of its licence.
“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 dated 6 February 2013
It would appear that ASIC are tracking the former AAA advisers, and a concentration of any number of former AAA advisers under one licensee is sufficient cause to question the licensee’s capabilities.
So, what should an adviser look for to avoid a troubled licensee?
1. Low Cost Business Models – advisers like low cost models as it leaves more money in their pocket along with the mistaken belief that licensees don’t add much value. Ironically, if an adviser chooses a low-cost model they won’t get much added value.
Low cost does not necessarily mean 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.
Advisers should, however, assess whether the low-cost model that they are considering will be able to meet its licence obligations
ASIC drew attention to their focus on low cost business models in their cancellation of AAA’s licence when they said 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 dated 6 February 2013
Low cost is not all bad news, let me also point out that some of the best compliance comes from small licensees who benefit from having direct control over all aspects of their business.
Advisers should, however, assess whether the low-cost model that they are considering will be able to meet its licence obligations and will therefore be viable into the future.
2. Licensee Review – ask to see the 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 input regarding whether the licensee is meeting their regulatory and compliance obligations.
The adviser should review the issues identified and decide whether they are significant and would cause a reassessment of the licensee e.g. 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 the 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.
3. Breaches and Client Complaint Registers – an adviser should request to review the licensee’s breaches and client complaint registers. The adviser should consider the contents and assess whether the amount of breaches and complaints and the type of breaches and complaints would cause a reassessment of the licensee.
If a 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 – assess whether the licensee provides good guidance to their advisers and whether the procedures are compatible with how an adviser’s business operates.
5. Other Representatives – talk to other advisers who already operate under the licence 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 and 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 ASIC register – for every future licensee to see.
Steve Murray is the Managing Director of Catalyst Compliance, a Sydney based compliance and back office services provider to AFS licensees.