Licensed planner, or BYO experience?

As an Australian Financial Services (AFS) licensee, you will be expected to establish and maintain sufficient measures to ensure your compliance with financial services laws.

You must also satisfy theAustralian Securities and Investments Commission(ASIC) that you have in place (and regularly monitor and review) adequate measures, processes, procedures and resources to identify and ensure continuing compliance with your obligations.

You will need to take into account the specific compliance risks of your business, especially those that may materially affect consumers and your ability to provide efficient, honest and fair financial services. You will therefore need to ensure that:

* your representatives understand the laws with which they need to comply;

* you monitor compliance with your obligations as a licensee; and

* compliance breaches are identified, appropriately addressed and/or reported.

Your continuing obligation to manage these compliance risks should incorporate a compliance framework appropriate for:

* the products and services you offer;

* the diversity and structure of your operation;

* the volume and size of the transactions for which you are responsible;

* the number of retail and wholesale clients;

* whether you give personal advice or general advice;

* your main business; and

* the number of people in your organisation.

Much has been written about PS 164 and the apparent obstacle this presents to most planning practices. But in many respects, PS 164 is simply good business practice.

ASIC has avoided onerous prescription in favour of allowances for the ‘nature, scale and complexity’ of your business.

While this qualification only really relates to the sophistication of your compliance and risk management systems, there are few requirements that are not practically achievable by a professionally organised business.

In fact, your response to PS 164 will not only benefit your clients by minimising risks, but it will also benefit your business by documenting procedures that integrate process efficiencies, as well as preserving your knowledge capital. So there will be immediate benefits more likely to deliver consistent profits and a longer term benefit to you should you ever sell your business.

Ongoing costs

The question you need to consider before submitting your application is the likely cost of this requirement — both in financial and non-financial terms.

You should contemplate whether:

* you have sufficient recurring income to support your own licence;

* you have capacity for growth, eg. formalised referral arrangements and documented marketing and business plans;

* you have the time and expertise to create and implement an effective compliance framework;

* you are prepared and able to devote a substantial part of your day-to-day activities to ensuring compliance, including the ongoing administrative obligations and dealing with the regulator; and

* you are prepared to bear the legal, financial and reputational risk (including criminal and civil liability).

The question most frequently asked is “what are the ongoing costs?”, but a potential applicant might as well ask “how long is a piece of string?”.

Your costs will vary according to the size, location and focus of your business. Some ongoing costs, for example, annual membership of an external dispute resolution scheme, are simple to quantify. Others, like professional indemnity insurance, are more difficult to quantify (although premiums equal to four per cent of gross revenue is a good starting point). Others, such as software, rent, research, compliance and paraplanning are almost impossible to assess without an intensive review of your business.

However, assuming your total overheads, including rent and salaries, represents roughly 60 per cent of your revenue, a good rule of thumb would be to assume that your ongoing compliance costs may add another five to 15 per cent depending on the nature, scale and complexity of your organisation and your current systems and resources. Consider also opportunity cost. Time you spend on compliance is time not spent profitably with clients.

Resource planning

Obviously, your ongoing compliance costs will balloon or contract, based on the ‘nature, scale and complexity’ of your business, such as, for example, the geographical spread of your operations, the number of representatives you employ and the scope of your activities.

Regardless of these variables, your resource planning should consider your ongoing obligations and liabilities (criminal and civil) to ensure:

* the monitoring, training and supervision of your representatives;

* the currency and compliance of regulated documents, advice templates and compliance manual;

* proper advice and disclosure;

* maintenance of capital adequacy;

* effective dispute resolution;

* ongoing compliance with legal and regulatory changes;

* regular review, education and audit; and

* software and IT support.

Outsourcing compliance

Demonstrating your commitment to compliance will require significant financial and non-financial resources, however, its cost can often be reduced by outsourcing compliance to an external back-office service. Your consideration of outsourcing options should address:

* the services to be provided — including frequency and content — and the entity providing those services;

* the cost of the services (which is generally indicative of the quality and content of the service);

* the experience and expertise of the service team — do you know who will actually be servicing your business and providing advice?

* the cost of alternatives — would it be more cost effective to employ or redeploy internal resources?

* the level of comfort you gain from the outsourced compliance provider — perhaps where their clients ranked in the recent ACA/ASIC survey;

* your relationship with the service provider — is it transactional or does it include ongoing support and advice? and

* does the service provide satisfactory evidence that you are complying with your obligations as a licensee?

Remember, while you can outsource much of your compliance function, you’ll remain responsible for monitoring the effectiveness of the outsourced services.

Taking the plunge

When should you take the plunge and become an AFS Licensee?

Unfortunately, there’s no easy answer. Although some consultants have suggested that licensing is not an option for planners with less than $120 to 140 million under management, this approach reduces a decision about your future to a purely financial consideration.

While your recurring income is important, it should only be one factor in your decision-making process.

A key aspect of the financial planning process is educating clients to focus on their financial circumstances, needs and objectives, rather than obsessing over fees, costs and charges, and to focus on long-term planning rather than on short-term solutions. Your decision on licensing should be no different.

Expenses can be managed and cost alternatives found. While it is important for you to have a realistic understanding of your obligations and their likely cost, it is more important to focus on your personal and professional objectives and ask:

* would you be more satisfied being a licensee than a representative?

* what is your recurring income?

* do you have the capabilities to run and administer a business?

* does your practice have the capacity for significant growth?

* how much more personal time are you prepared to commit to your practice? and

* what is your five year plan?

The new single licensing and disclosure regime presents many opportunities for those who plan carefully. However, your decision to obtain your own AFS licence should only be made after prudent consideration of your ongoing responsibilities and how these responsibilities will affect the ongoing viability of your business.

Employing dedicated compliance staff or outsourcing compliance to a credible back-office service may be an effective solution for your business. Alternatively, you might be better served by remaining or becoming a representative of a dealer group, which will free you from these responsibilities.

Ultimately, you’ll need to make your own assessment after considering the likely costs, potential liabilities and legal obligations in light of your own business needs, objectives and financial circumstances.

Sean Graham is compliance manager with DBOS, part of theZurich Financial Services Group .