Unpacking the label of a ‘micro-AFSL’

With a growing number of advisers opting to exit their dealer groups and instead seek their own Australian financial services licence (AFSL), an emerging debate has considered whether these firms should be differentiated by virtue of their scale.  

Earlier this year, Wealth Data found some 27.1 per cent of the advice industry work at what it termed as “micro-AFSLs” or firms with less than 10 advisers.

Similarly, Adviser Ratings found small licensee groups of one to 10 advisers have seen a 17 per cent rise since 2018, with advisers preferring self-licensing over mid-tier licensees and dealer groups. 

This has been attributed to banks leaving the industry and large licensees, such as AMP and Insignia, cutting their numbers as well as broader trends around the Future of Financial Advice (FOFA) reforms and the Hayne royal commission.

Speaking at the investor presentation in September, WT Financial’s managing director Keith Cullen voiced that self-licensing was an “interesting name”, opting instead for the commonly used term of micro-AFSL or “micro-licence”.

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“We’ve been talking to a lot of industry participants about this, we call them ‘micro-licensees’ because they’re licensees nonetheless, they’ve got all the same obligations as any licensee,” he said. 

He added that it has been a definite trend in the industry, noting: “We’re addressing it through providing services – we offer our wealth adviser services there – and we think the fundamental structure of the profession remains as it is. It’s beholden on the licensees to add value to the practices that operate under their licenses, and we think the practices in our group recognise that.”

Meanwhile, Kon Costas, managing director of The Principals’ Community, a community for self-licensed businesses, held a slightly different view.

“I’ve never heard of the language ‘micro-AFSL’; that’s something the industry institutions have developed,” he told Money Management.

“An AFSL is an AFSL. There’s no difference if it’s an institutionally owned licence or a boutique licence, they’re still an AFSL that carry the same regulatory obligations. The first step is to eliminate this myth that there are categories of AFSLs, there’s not,” he said. 

Based on The Principals’ Community experience, he noted it was highly profitable financial planning businesses going down this route.

Contrary to the popular narrative of such firms “going it alone”, he explained they are seeking to take control of their direction and build a business and service offering specific to their needs, supported by a network of providers like accountants, auditors, compliance specialists, lawyers and tech providers. 

“We don’t see businesses struggling to be profitable looking to obtain their own AFSL. It feels counterintuitive given the time and effort it takes to then manage an AFSL,” Costas explained.

“Running an AFSL requires capital, investment, time and resources to run them.”

Alistair Hemming, micro-AFSL specialist and director of consultancy firm Zaju & Company, echoed the sentiment, adding that while there are some initial difficulties in wearing multiple hats as a self-licensed firm, advisers often look back positively on the decision.

“You’ll find advisers start out with a real challenge there, learning and understanding the distinction between legality, defensibility and risk management, which is something they haven’t had to do [under a licensee]. 

“So when they put those things together, they say ‘Yes, we will have some additional work to do because we’ve got a licence and that’s a serious obligation, but we can do these things and do it well if we understand what the law says, what we need to defend ourselves, and what we choose to add into risk management’.”

He continued: “One thing I do hear from licensees we support is, they feel they are better advisers after a period of time having their own licence because they have a much broader understanding of what the obligations of a licensee are. 

“Despite the fact they’re wearing multiple hats, I actually think they’re running both businesses a lot more positively and compliantly than what it might have been previously. They feel as though they’ve got a better brain for business and [are] being a better client adviser, so that’s a positive in my mind.”

Hemming observed that the term “micro-AFSL” could have developed from an attempt to broadly pigeonhole operations. 

“A licence is a licence; however, the industry has put these categories on to help differentiate between the offers,” he told Money Management.

“When you read the comments available in the industry press and you hear larger licensees talk about it, I believe they view it in a negative manner and it’s certainly how their comments have reflected that from time to time. There is a space for everyone in this market undoubtedly, there are people who work very well under a large licence and people who work well in a small licensee, and I think you’ll see large licensees acknowledge that as well.  

“I’d say micro-AFSLs are a legitimate size operation and [with] the ones I’ve seen, the education qualifications, the professional standards of the advisers, are on par with any others.”