Licensee payments: backing financial advice

The role of licensee payments from platform providers has become a bone of contention in the industry, writes Marianne Perkovic.

One of the most contentious issues in the Future of Financial Advice (FOFA) recommendations concerns the role of licensee payments from platform providers.

Supporting quality advice

Licensees of financial advice businesses play an important role in the financial wellbeing of Australians by enabling the delivery of high quality financial advice.

In providing the support services necessary for the advice process — including investment research, technical services, and ongoing training and compliance — licensees ensure their advisers are appropriately equipped to assist clients achieve their goals and take control of their financial situation.

Such services are critical in the process of enabling quality advice and are expensive to provide.

Advice firms have been unable to run sustainable businesses and meet the costs of providing the services.

Consequently, they have been funded via volume-based payments (eg, rebates and white label profit share arrangements) from platform providers, revenue from owning a platform directly or by superannuation funds.

As financial advisers move to the provision of advice on a fee-for-service basis and the Government moves to prohibit certain advice payments made as part of the advice process, there has been some conjecture about the future of rebate and white label payments from platform providers to licensees.

These arrangements can vary significantly in form but essentially achieve the same result in substance, and fund the provision of imperative licensee services.

One criticism of volume-based payments paid by platforms to licensees is that they may influence an adviser’s product or investment recommendation, resulting in a conflict between the interests of the adviser and the client.

However, it is important to appreciate that platforms are simply an administrative service available to advisers. Critically, platforms are therefore ‘product neutral’.

They are an efficient way of allowing advisers and their clients to access a broad range of investment selections and capabilities.

Importantly, they also allow advisers to outsource the ongoing administrative tasks associated with implementing advice and investment recommendations.

Given the role that platforms play in delivering quality advice, and their inherent product neutrality, it is difficult to maintain an argument against these volume payments on the basis that they result in conflicted product recommendations.

Unintended consequences

Notwithstanding the arguments raised above, there is substantial uncertainty about the future of rebate and white label payments.

It is understandable that licensees would look to protect this important source of revenue. Financial advisers are therefore concerned about whether increased fees will be required to replace lost revenue.

As a result, many licensees are investigating structures that allow the licensee even greater control over the way remuneration is generated.

For example, a licensee could act as trustee for its own superannuation product, or responsible entity (RE) for its own managed investment scheme, instead of relying on a traditional platform provider to bear the responsibility.

At first glance this appears to be an innovative approach to an emerging threat.

However, it remains to be seen whether dealer groups have the scale and expertise in product delivery to execute this model. In addition to control over product revenue, substantial responsibility is attached to ‘trustee’ or ‘RE’ status.

Here, the licensee becomes responsible for a range of complex product governance and operational requirements, including:

• management of Board/trustee functions;
• compliance monitoring;
• regulatory reporting and relationship management;
• maintenance of financial resources and insurances;
• management and updating of scheme or fund documentation including constitutions;
• trust deeds;
• Product Disclosure Statements; and
• full back office functions including administration, unit registry systems, unit holder/member reporting, custody of assets, portfolio valuation and accounting.

While a licensee would inevitably look to outsource a number of these responsibilities, the final responsibility for the management and compliance of the product rests with the licensee.

Considering the extent of these obligations and the costs involved, only the largest and best resourced independent dealer groups would be in a position to adopt the structure in addition to their primary role.

The removal of all forms of advice subsidisation is likely to result in the proliferation of varying forms of vertically integrated business models.

Inevitably, this means greater industry consolidation. Large incumbent institutions that derive the bulk of their revenue from aligned advice businesses are well placed to prosper in this environment.

On the whole this would be an unfortunate result for the advice community. Boutique and small to medium sized licensees play a critical role in delivering advice to the community.

The economic viability of many of these smaller (and largely independent) businesses deserves continued support through the ongoing existence of volume-based payments, including dealer group rebates, which subsidise the provision of quality advice.

Marianne Perkovic is the general manager for distribution at Colonial First State.