Weighing up the risks and benefits of self-licensing

Numerisk managing director and founder Richard Silberman examines the risk considerations for financial advisers looking to take the plunge into self-licensing as well as the legal ramifications.

Last week, Money Management wrote on the rise of ‘lone rangers’ with 66 per cent of newly established advice licensees being one-person bands. Moreover, more than 80 per cent of licensees are in a privately owned licensee with less than 10 advisers.

“The Australian practice ecosystem now mainly comprises privately owned businesses, with most occupied by a single adviser. Increasingly, the boutique practice has been an attractive proposition for advisers seeking autonomy and control,” the Adviser Ratings report said.

“Between 2022 and now, the proportion of solo practices has grown, while the footprint of diversified and limited licensee practices has shrunk.”

Speaking with Adviser Ratings, Silberman observed the trend of advice practices within large institutional licensees eyeing out the benefits of being self-licensed.

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“Firstly it’s the preference for autonomy – utilising a set and inflexible regime of systems, reporting, compliance and other operational and cultural factors seem to feature heavily. But for many, it’s more about setting a path forward independently, free of influence from a licensee that may have differing views and future goals,” he said.

While self-licensing offers greater independence and flexibility, industry commentators have previously warned advisers that it is not necessarily the right path for everyone.

Silberman, with over 20 years’ experience in the insurance space, spoke further on the pitfalls of self-licensing that need to be considered from a risk perspective.

“The buck stops with you – with this freedom comes responsibility and this carries risk,” he said.

Smaller practices may find the added responsibility of maintaining compliance standards alongside operational excellence difficult and a distraction from “working in the business”, the founder said.

His words echoed Joel Ronchi, chief executive at Fourth Line, who previously said: “People have to understand there is a difference between being an adviser and running a business; you can no longer spend 100 per cent of your time with your clients. It is a big leap.”

Silberman also recognised that ensuring your business’s prior liability is managed as you transition from one Australian Financial Services Licence (AFSL) to another can be challenging.

Meanwhile, securing professional indemnity (PI) insurance can be a new and daunting experience for many advisers.

He said: “Reducing risk should, for most practices, be a priority when putting together a plan for self-licensing.”

A legal perspective

The Numerisk founder also spoke with David Leggatt, director at BlueRock Law, to examine the legal considerations of the self-licensing path.

“Any business obtaining their own AFSL, is unlikely to have any change from $50,000 in establishing their own licence. After that, the cost of compliance, which involves sourcing suitably qualified responsible managers under the AFSL, keeping up to date with the latest guidance notes from ASIC and ensuring all staff and authorised representatives are aware of and audited in relation to their obligations under the AFSL, is a time-consuming and rigorous process,” Leggatt said.

“It requires licensees, and their Authorised Representatives, to keep on top of things. Which of course, is the whole point.”

The legal director reminded advisers that their licensee becomes strictly liable for the actions of their employees, particularly in relation to criminal conduct.

“If you are working under an AFSL, the licensee carries the risk of your errors and omissions, as well as for any dishonest acts,” he said.

If an adviser moves from one licensee to another, the risk of the dishonest act transfers on that same day, Leggatt said.

“So, if you leave a licensee on Monday, but start your career on Tuesday with your new licensee and a negligent act, the old licensee is not liable,” Leggatt said.

With claims against an adviser often alleging negligent acts over long periods of time that can cause confusion as to which licensee is at risk, Leggatt emphasised why this is a crucial consideration when starting your own licence.