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Regardless of the findings from the Royal Commission into Misconduct into the Banking, Superannuation and Financial Services industry, we believe changes are necessary to the vertically-integrated distribution model of the last twenty years


Consumers now demand transparency, which drives changes to adviser culture and conduct. At best, increased compliance controls make it harder for financial advisers to recommend vertically-integrated products. At worst, vertical integration ends either from over-compliance or legislation.

The old days of institution-owned licensees being a loss leader for manufacturers are gone.

In the late 90’s and early 2000’s I witnessed the peak of the “dealership”. As a young dealer principal, I was in awe of the industry giants like Ray Miles, Barry Lambert, and Robbie Bennetts. Dealerships with well over a thousand advisers such as Count and PIS, were seen (at least from my vantage point) as running an institution-owned licensee that drove policy and shaped the future of the industry.

Dealerships were being bought and sold for astronomical (sometimes unfathomable) values and snapped up by institutions in the hope of driving product flows. It wasn’t uncommon for transactions to be justified on the basis that the new addition would direct 80% or more of new business funds to the new parent. In turn this created massive embedded value and funded the licensee.

The big institutional dealerships didn’t make a profit – a fact widely accepted. But their ability to create embedded value in their parent institutions justified their existence. A non-level playing field existed between those institutional dealerships who could afford to have a practice paying zero fees for licensee services, and those who needed to operate profitably.

The pressure on vertical integration

Fast forward 20 years; the mechanisms we created in the past to drive fund flows and premiums to parent companies are now viewed as bad, if not illegal.

A great example of this are Buyer of Last Resort (BOLR) schemes. Designed to drive and retain flows, they paid well-over market for businesses that supported the parent’s products.

At one licensee I worked for, your BOLR valuation was 3× recurring revenue on all in-house product, and 2× on external revenue – unless your ratio of in-house product was above 80% in which case all of your revenue was valued at 4×. Imagine selling a business where the going rate in the market is around 3× recurring revenue, when you have a guaranteed safety net of 4×. Institutions ended up owning practices they didn’t know how to run and having to take a loss on their overpayment for the practice.

Another example was the practice of reducing licensee fees to zero, if the practice had a percentage of their funds flow or premium with the parent. This drove a desired behaviour and ensured the licensee continued to lose money. Big practices that absorbed a greater percentage of licensee resources contributed the least to the licensee’s Profit and Loss.

Recommendations will emerge from the Royal Commission that relate to vertical integration, and they could go one of two ways:

  1. A mandate that a product manufacturer can’t own distribution, which could be a legal minefield; or
  2. A ban related to party products and platforms from a licensee Approved Product List.

Both alternatives amount to the same result: reduced flows to institutions from their “owned” AFSLs. Reduced flows lead to a reduction in future embedded value, in turn placing pressure on an already loss-leading licensee P&L.

Coupled with the inherent conflict in a preferentially priced licensee arrangement, and we could face a massive levelling of the playing field for licensee services.

Is this the real reason the big institutions are looking to divest distribution assets?

If institutional licensees are now forced to run their P&L with a view to profit (because they can’t offset the losses with embedded value and can no longer transparently manage the preferential pricing conflict), like all businesses they have two levers that they can pull.

Like all businesses, if a licensee could increase their revenue at a greater proportion than their cost i.e. profitably, they would be doing it already. There is no magic solution to this – if they could, they would. And not just to generate extra revenue. They need to be looking not just at gaining more clients (in this instance, advisers), but generating more revenue from every client they have. They will need to replace the revenue they haven’t received for years because they gave the services away for little or nothing, before even looking to generate more than they should have already had. And doing all of this under the looming shadow of the “fees for no service” debate.

Which means the major lever that they can pull is expenses. If it’s possible to pass a cost from the licensee to the adviser, it will be passed on. Most licensees these days are run as lean as possible, with people as the biggest cost to the business. In the front office, spans of control for Business / Practice Development Managers are greater now than ever before. Technology solutions are routinely used to make most licensee back office functions more efficient, particularly in the areas of payments, research and continuing professional development. The only real area where life goes on like it did 20 years ago is in Compliance and Oversight. Licensees continue to try and throw money and people at the area that is responsible for policing their product, with the same results that have to some extent been the driver of the Royal Commission. Compliance remains the last bastion of large staff numbers in licensees, where staffing costs are by far the largest single cost to a licensee.

Basic math tells you that if you can’t increase revenue and you need to save costs. People, especially compliance experts, are the largest cost to your business. The problem is that Commissioner Hayne is more likely to recommend increased oversight, not less. Reducing your compliance teams without a viable replacement is licensee suicide.

The only remaining back-office function to be augmented with technology is compliance, so the ideal solution would appear to be increased oversight by human experts augmented with technology. This may not be more cost efficient than just throwing people at the problem, but if the Commissioner calls for increased oversight, and more humans are your solution, then your costs are going to increase anyway.

The disintegration of dealerships

Consider this scenario: you own a financial planning practice that for years has been aligned to a large institutional licensee. You have paid minimal fees to your licensee because of your support for their products and platforms. Since then, you have also watched in horror as the Royal Commission hearings have unfolded, and your licensee’s brand has been tarnished.

If Commissioner Hayne puts pressure on vertical integration and your licensee can no longer afford to give you preferential pricing on services, the impact on your business is likely to include:

  • increased licensee fees,
  • brand and reputation damage,
  • business disruption, and
  • the loss of the choice to recommend certain products and services.

Assuming increased cost is the biggest impact, you are now in the situation where you no longer receive a benefit for supporting a licensee, and you will be paying exactly the same as the market. Why wouldn’t you look around for a new home? If you have to pay, why not buy something you want? And can you afford, from a financial and risk management perspective, to obtain your own AFSL?

We are already beginning to see movement of practices away from large institution owned licensees. I suspect that these early movers are driven by perceived brand damage. This could turn into a flood when the Commissioner reports early this year.

Unintended consequences: Why would you buy an institution owned licensee in this market?

The cost of advice will rise if advice practices face increased costs. It seems to fly in the face of the entire advice industry to make it more cost prohibitive for more Australians to seek advice.

Add to this that disintegration, and potentially more AFSLs, will place more pressure on Regulators to oversight licensees at a time when the Regulators themselves are advocating for more policing funds. The potential for further breaches of consumer trust is amplified when there is a larger cohort to supervise with the same limited resources, at both the AFSL and Regulator levels.

Increased cost and a “Storm Financial” like breach of consumer trust could set the financial planning industry back decades. I’m not sure that’s what the Commissioner ordered.


I think we are witnessing the death of large licensees and dealerships as we knew them. The business models that have underpinned their institutional ownership for the last two decades are no longer viable, and the advice practices within them are at a crossroads.

If they stay, those institutions that have suffered brand and reputation damage will surely experience a change to the financial dynamic of the relationship. Additionally, the Commissioner will most certainly recommend an increase in oversight for licensees, adding to the cost and administrative burden for practices. If they go, they will face the same costs at another AFSL, whether they join or apply for their own.

With the only lever available being expense management, the natural starting point for cost cutting is compliance staff. This doesn’t play well against the backdrop of increased oversight, so technology is the only viable solution in this area. Pretty much all other areas in licensee back-office functions have been technologically augmented, and compliance remains the only area available for a gain.

Whatever the outcomes from the Commission, we are witnessing a change to the world as we know it.

— Steve Thomson CEO, TIQK