The pretty penny of self-licensing

With the self-licensing trend here to stay, what are the estimated costs and insurance risks for operating your own Australian financial services licence (AFSL)?

It has become no secret that the number of boutique and self-licensed advice practices grows higher, as privately owned AFSLs with less than 10 staff account for 81.5 per cent of all licensees, according to Adviser Ratings.

The several benefits include greater independence and autonomy, free of influence from a licensee that may have differing views and future goals. However, the opportunity also brings a variety of challenges.

One of the key obstacles of a self-licensed practice, according to Iress’ community platform, Advisely, is managing the costs. This can include paying for new resources, training responsible managers and forming an investment committee.

According to ASIC’s RG 166, AFSLs have to cover solvency and net assets requirements, cash needs requirements and audit requirements as a base level financial requirement. Meanwhile, the ASIC registration cost for an individual AFSL varies from $2,233 for an individual working with retail clients and low complexity products to $5,025 for retail clients and high complexity products.

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There may also be professional fees to a compliance firm and/or legal firm regarding preparing the application to ensure it is all in order to prevent an unsuccessful application.

Earlier this year, Sean Graham, managing director of advice compliance consultancy Assured Support, delved into the indicative costs associated with being an independent licensee.

An AFSL application can cost between $8,000 and $20,000 overall, he said, depending on the nature, scale and complexity of the proposed business. Professional indemnity (PI) insurance equates to approximately 2.2 per cent of revenue, so “assume a minimum premium of $16,000 per annum”, Graham suggested.

Once an application has been submitted and approved, there are also ongoing costs including the ASIC levy, which is estimated to be a minimum of $1,500 plus $2,878 per adviser for the 2023–24 financial year, an AFCA membership of $375 for financial firm members, financial auditing, adviser and licensee reviews, external compliance support, technology and more.

Writing on the community platform, JBS Financial Strategists chief executive Jenny Brown said not working with a large licensee meant her firm had to “pay for everything, which did add some costs, as licensees often cover some of the operational costs through sponsorships”.

However, eight years later, Brown described that being self-licensed costs the company less now than if it were licensed via a larger licensee, partially due to many licensees restructuring their fee models.

Costs aside, Wealth Data founder Colin Williams also highlighted the insurance risks of being self-licensed: “What happens if something goes wrong? Who’s going to bail you out? If you’re left holding the cost, that could be very, very expensive. Whereas if you’re working for a large licensee, the licensee will step in.”

This has become more important with the advent of the Compensation Scheme of Last Resort, which has saddled advisers with yet another regulatory levy.

Additional vulnerabilities could also potentially see self-licensed firms paying increased PI insurance costs, and many advisers may miss the “camaraderie” of being with a larger AFSL, Williams continued.

“It’s difficult to put a value on the opportunity to go to events put on by your licensee and talk to peers who are in a similar type of business and aren’t competitors.”

However, he concluded: “There are costs involved, but you’re getting the best of both worlds – all the stuff you’d get from a big licensee while still being in control.”