Raising the equity stakes

About a month ago, Aon Financial Planning and Protection decided to buy back the 15 per cent stake in the company held by advisers.

Aon general manager Greg Dunger says compliance and corporate governance issues brought on by the Financial Services Re-form Act (FSRA) in March prompted the company to err on the safe side by bringing that 15 per cent totally under its own control. Also, because Aon is listed on the US Stock Exchange, the company has been exposed to new strict American corporate governance laws.

The Aon case highlights some of the reasons why dealer groups might hesitate to hand over ownership, and ultimately control, to their advisers. Control brings with it a level of independence and independence may or may not generate a number of competing views on issues like compliance and adviser remuneration.

Nevertheless, 10 groups in this year’s Top 50 are owned to some extent by their advisers.

FSP general manager Geoff Rimmer says advisers having a 50 per cent interest in one of the group’s dealerships, Vector Financial Services, is working well but only after overcoming “a stack of problems”.

He points to the FSR reforms as a good example.

“We wanted to position ourselves as a front runner in adopting FSR compliance very early and there were a number of the traditional advisers that wanted to wait until the last minute.”

Rimmer says that if FSP had tried to push FSR reforms through quickly as the management team alone, they’d have failed.

This is why he says FSP will have frequent shareholder meetings and what he calls prestige partner meetings, where principal advisers will sit down with management for two days and talk entirely about business issues.

Rimmer says transparency is essential to running a smooth dealership.

“Unlike a lot of our competitors, there are no separate deals, every firm is on the same remuneration scale and everybody has the same opportunity to own equity in the business, so there’s no bias to anybody.”

Ironing out these biases took some time as did bringing advisers up to scratch on compliance issues.

“I remember when we launched our master trust back in 2001, we had a number of advisers who wanted to market it but when we looked at their qualifications and capabilities, there was actually only 14 advisers that we could give a proper authority to.”

Since then, FSP has had to embark on a massive education and competency exercise.

But why go to all this trouble?

Mawson Group chief executive Les Mace says giving advisers a stake in the business provides distributors with a healthy capital injection, and by having a share in the company, he says advisers will be more concerned about the company’s performance.

“[If] they have a stake in the group...they tend to contribute more. I guess in the longer term they would stick with us longer because they have an interest in seeing the business do well.”

According to Mace, advisers will also contribute ideas on how to run the business.

“They contribute very heavily to the format and content of training and education programs and what software we use as a standard through the business.”

Peter Delprado, head of investment management and life at Zurich — which owns Financial Lifestyle Solutions and has a stake in Lonsdale Financial Group and Australian Financial Services — says having a strategic alignment with the adviser network helps Zurich understand what drives their businesses.

As they are not licensed to sell direct at all, Zurich’s distribution model is intermediated through financial planners and advisers.

“For us to fully understand the way distributors distribute to the market, it absolutely helps us to have a very close working relationship with advisers and advisers having minority equity certainly helps that position,” Delprado says.

He says they have not really had problems with their ownership structure because Zurich doesn’t impose product restrictions.

“We don’t have a problem with further reducing our share holding down toward 30 per cent if that’s what the advisers want to do. We’re not following the bank’s tradition of driving up and owning distribution. We think it is in the best interests of the consumer to get independent advice.”