Best practices in selecting a licensee, asset consultant or tech provider

•

• •

•

General use

•

•

• • • •

General use

•

• •

•

•

General use

•

•

•

•

•

General use

General use

Forming quality, long term relationships in turbulent times

Š | Prepared by Encore Advisory Group Pty Ltd (September 2020) – with great thanks to Adviser Ratings

Today’s Agenda

INDUSTRY MEGATRENDS

1

The advice market is rapidly changing. What are the implications?

LICENSEE WORLD IN NUMBERS

2

Licensees are in transition. What’s their end game and what does this mean for Advisers?

FOUR CRUCIAL CONSIDERATIONS

3

There are four crucial considerations (or conversations) you need to have to select the right long-term licensee (or business partner).

SIX Megatrends Shaping The Industry Cashflow advice will be the next big thing – it’s the one area clients agree is both important and urgent … a client’s cashflow is the single biggest driver of strategy across any demographic. Advice has not paid enough attention to this area (yet).

Integrated business models are gaining legs – and Mortgage Broking is evolving rapidly – as a critical element to growth … consumers need for advice on ‘both sides of the balance sheet’, FASEA and (joint) BID will accelerate diversification, partnerships and/or integrations – bringing the AFSL and ACL licensees closer together.

Active advice is the only viable business model ... advisers can no longer operate a “catch all” business. Those with active client bases are holding valuations of 2-3 times recurring revenue

Rapid and radical mass privatisation of the market … moving licensees into the hands of the many, with a willingness to invest and a desire to drive down cost of services and advice

Connecting the adviser ecosystems will accelerate to address cost challenges and growth opportunities

Client advice solutions has been lacking – due to Institutional preference for investment in products … the financial planning value chain has been fragmented and under invested in for years, especially in technology. New solutions are now emerging regularly, and open banking and ‘flight to digital’ will change the advice experience significantly

Source: Encore Advisory Group

Regulatory change has been extreme – and will continue … increasing the complexity of running advice businesses and driving up costs, with the average cost of producing a SoA has increased by 10% in the last 12 months, averaging $3,500

LICENSEE WORLD IN NUMBERS

Adviser Ratings | Financial Advice Landscape Report

Institutional Exits

Mass privatization of industry by bank exits leaves a vacuum

BEFORE

Source: Adviser Ratings – Financial Advice Landscape Report 2019/20

Institutional Exits

Mass privatization of industry by bank exits leaves capital vaccum

AFTER

Source: Adviser Ratings – Financial Advice Landscape Report 2019/20

Musical Chairs

Mass miniaturization of advice industry Adviser Distribution by Licensee Type Q1 2019

Q2 2020

Forecast 2023

Note: Forecast number of advisers taking into consideration the trend seen during the past years.

Source: Adviser Ratings – Financial Advice Landscape Report 2019/20

Musical Chairs

Smalls rule? 93% of licensees authorize only 27% of advisers Number of Licensees 2015-Q1 2020

Source: Adviser Ratings – Financial Advice Landscape Report 2019/20

Licensee Shutdowns in Last 12 Months

Musical Chairs

Adviser exits, entries & licensee switches Exits & Entries By Licensee Type 2015 - Q1 2020

Source: Adviser Ratings – Financial Advice Landscape Report 2019/20

Advisers Switching Licensees 2015 - Q1 2020

Industry Vendors

Service providers facing a new paradigm (NPS scores)

Platforms

Life Insurers

Researchers

Planning Software

Source: Adviser Ratings – Financial Advice Landscape Report 2019/20

FOUR CRUCIAL CONSIDERATIONS

Selecting the right long-term licensee partner

BUSINESS PARTNER DECISION MAP 3 levels to work through …

BUSINESS PARTNER DECISION MAP 3 levels to work through …

Insource – self license / own AFSL

LICENSING DECISION

What’s my business model ?

What’s my risk appetite ?

Outsource – licensee group solution

BUSINESS PARTNER DECISION MAP 3 levels to work through …

Insource – self license / own AFSL

LICENSING DECISION

What’s my business model ?

What’s my risk appetite ?

Outsource – licensee group solution

D2D Services – specialist services for own AFSL holders

SERVICES DECISION

What services do I need ?

What do I buy, rent or lease ?

Partnerships – services beyond D2D or licensee provider

BUSINESS PARTNER DECISION MAP 3 levels to work through …

Insource – self license / own AFSL

LICENSING DECISION

What’s my business model ?

What’s my risk appetite ?

Outsource – licensee group solution

D2D Services – specialist services for own AFSL holders

SERVICES DECISION

What services do I need ?

What do I buy, rent or lease ?

Partnerships – services beyond D2D or licensee provider

Assessment – 4 crucial conversations + the finer details

LICENSEE DECISION

What are my options ?

What’s the right choice ?

Evaluate – assess as objectively as possible. Be mindful of biases.

We will focus on Level 3: Licensee Selection Framework The Four Crucial Considerations

PEOPLE

1

2

3

SUSTAINABILITY

CULTURE 4

FAIR VALUE

Before starting to access the finer details around: Pricing, PI costs, XPLAN costs, APL, etc.

Licensee Selection Framework The Four Crucial Considerations

In the case of licensee selection being the CEO is a highly demanding and complex role at the moment. Does your conversation with them or their people bring that out but leave you feeling they’re in control?

Experience is important, but even more important is a history of making tough, forward looking decisions vs a follower with years of experience. Avoid philosophy and look at actual decisions made.

1

People

The tough decisions of the past were around removal of certain conflicts well ahead of the law (i.e. FOFA, now Royal Commission). Ask what they have done and when in these key areas?

The team is really important. Who is on the Board? What’s the quality of the people and key suppliers around the CEO?

Look for honesty. It’s impossible to get every call right, look for examples of working that out quickly, facing into them and acting.

Licensee Selection Framework The Four Crucial Considerations

Ask to see the P&L of the licensee. You want to see over 90% of revenue coming from licensee fees or splits vs. product related revenue.

Product related revenue from the past (i.e. platform rebates) will disappear on January 1.

Question the sustainability of managed accounts margin.

2

Sustainability

It costs circa $40k per AR to run a licensee. If someone is proposing to charge closer to $20k that should prompt questions. Is it product subsidy or very thin resourcing, or both, or are they a true limited service provider?

Cash backing – whilst it’s unrealistic to expect institutional balance sheets from private operators you should look to see a Balance Sheet with strong cash reserves, well beyond the 3 month minimum requirement.

Risk – is there a clear risk management and compliance framework? Does the CEO live and breathe it? Ask to speak to their key people in this area to build confidence. The history of the PI contract, premiums and complaints register don’t lie.

Licensee Selection Framework The Four Crucial Considerations

We tend to find most brochures/websites say the same things. The true nature of a group comes from the examples given around the facts. Motherhood statements around professionalism should be backed up by specific actions.

Ask if you could join in on a licensee conference, PD day, webinar to get a feel for the group. A spirit of two-way questions met with openness and transparency is a good sign. Professional, forward looking, long term focused communities are important.

3

Culture

A culture of matching up like minded practices within the licensee and opening up collaboration in the industry or broader networks demonstrates a growth mindset.

Licensee Selection Framework The Four Crucial Considerations

It’s important to understand if you’re seeking a low cost, efficient transactional relationship or one based on impact and value. There is nothing wrong with the former, it’s being clear on expectations.

A higher value relationship would entail the licensee being an important catalyst or partner in growing revenue, driving profit margins and helping with succession and funding for the future.

4

Fair Value

Where this type of relationship exists we would prefer to see both parties achieving a win-win via a split arrangement or equity participation. It’s the only true path to sustainability.

Would the relationship transcend beyond licensing? Ask yourself: “Would I stick with this relationship if licensees didn’t exist in the future?”

Licensee Selection Framework A few comments on the rest …

Licensee Pricing …

PI Insurance …

The finer details …

Advice Platform / Tech Stack costs …

APL …

Practice Management …

WRAPING UP

theory into action

3 steps to taking control What’s important to you?

Know what you want to achieve and establish your decision making criteria.

Assess and evaluate Assess information as objectively as possible against this criteria. Be mindful of biases.

Encore Advisory Group We guide businesses through the licensing and licensee decision pathways.

These are crucial decisions for your business in a hard, and complex area.

If you need assistance, get in touch!

For more information visit www.encoreadvisorygroup.com.au

THANK YOU. …and special thanks to Adviser Ratings for their “Financial Advice Landscape Report”

• •

General use

•

General use