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Characteristics of AFSLs
Very commonly, experienced advisors get their own AFS Licence because they do not want to be a representative of an AFSL who requires the advisor to a product sales quota. By having its own AFSL, a business can free itself from many of the conflicts of interest that potentially can taint advice. Many (a growing number) BFPPG members have designed their financial practices to be virtually conflict-free, to help remove any impediments to the best possible advice for their clients.
| Ownership |
| Small AFSLs | Large AFSLs |
| Owned by one or more practicing professional financial planner |
Product distribution channels owned by product manufacturers |
| Business Model |
| Small AFSLs | Large AFSLs |
| There is a great diversity of business models adopted by small AFSLs and this diversity provides consumers with choice. A very important and growing segment of virtually unconflicted advisors - very important for consumers - i.e. they sell ADVICE not a PRODUCT some product distribution businesses some businesses part way between these two models. This is an industry in transition between PRODUCT SALES and ADVICE. |
These business often act as distribution channels for a parent company which manufactures financial products. Their key objective may be product sales. The financial planners who have been authorised to act on behalf of these distribution channels may give the outward appearance of being independent in that they may operate under their own names and from small offices, but they are often restricted to recommending only those products which are on the AFSL's "approved product list" which may include little other than their parent's products.
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| How are advisors/dealers paid? |
| Small AFSLs | Large AFSLs |
| A great diversity depending on the business model. The unconflicted ADVICE businesses are necessarily fee-based.The product distribution businesses are a mixture of fee-based and commission-based. |
Remuneration packages for advisors tend to include: tend to include a base salary plus commission, sales targets, bonus on sales target, and loss of job if sales are inadequate. Remuneration of the AFSL may be by fee-for-service and/or commisison plus volume over-rides and other soft dollar incentives. It can be argued that some fee-for-service promoted by this sector are just commission dressed up as fees. |
| What products are recommended? |
| Small AFSLs | Large AFSLs |
| A great diversity. Many businesses heavily use direct securities (eg shares on the ASX) to reduce total fees to clients and to produce more highly targeted portfolios. There appears to be a correlation between lack of conflicts of interest and greater use of direct securities. Other businesses use unlisted managed funds. Many businesses used unlisted managed funds AND direct securities like ASX-listed shares. |
Almost entirely managed funds - better fit with the needs of product distribution parents |
| Style of client relationships |
| Small AFSLs | Large AFSLs |
| There is a diversity of styles, but generally there is a very-long-term regular-and-ongoing advice and this advice is typically given by the same person year after year. This leads to a good understanding between the client and the adviser. |
A lot of the business is once-off transaction business, but there is a segment which has long-term client relationships. Also, there is anecdotal evidence from some clients who have reported that they have been reallocated from one adviser to another and that this is very frustrating. |
| Experience of advisors |
| Small AFSLs | Large AFSLs |
| Principals tend to be long-time very experienced planners (10-year-plus) and they supervise all advice from the practice. Being a good advisor only comes with having a lot of experience ... and from having studied long-term investment history. |
Often advisors have very little experience. To achieve a product sale, not much experience is required. Where this is prevalent, strong business processes are required to manage service quality and compliance. However, there are segments where advisors are more experienced and long-term client relationships exist. |
| Style of advice |
| Small AFSLs | Large AFSLs |
| Typically advice is hand-tailored to the specific needs of the client. |
Data is commonly collected from clients, fed into a computer, and the computer generates a "financial plan" (which may be just a product sales proposal). |
| Culture / controls |
| Small AFSLs | Large AFSLs |
| Service quality is controlled by a strong service-quality culture and by hiring (and training) high quality staff. Consistency of quality is easy because most businesses are single office businesses - so it is easy for the principal to supervise all functions and keep abreast of what is happening in the business.
The informal structure works better - and most efficiently for the business and their clients. |
Strong process control systems are required to maintain consistency and quality. |
| Compliance |
| Small AFSLs | Large AFSLs |
| The ethics and personal standards of the principals is key. Informal systems work most efficiently for the business and their clients. |
Strong process control systems are required. Advice is commonly rigidly constrained to reduce business risk of dealership |
| Profitability of businesses |
| Small AFSLs | Large AFSLs |
| Profitability varies dramatically from business to business |
Businesses are not always profitable, but may be cross-subsidised by their product manufacturing parent because the parent makes its money from the product. |
| Consumer perception |
| Small AFSLs | Large AFSLs |
| Feedback from clients indicates that they appreciate the lack of ownership by product manufacturers |
According to the market survey by Roy Morgan Research in 2007, clients often think that the advisers from the product manufacturer's financial planning subsidiary are "independent" advisers. Clearly the relationship between the dealer/adviser is often not disclosed properly. This breach of Corporations Act is not adequately enforced. It also is misleading and deceptive conduct. |
| ASIC's perception |
| Small AFSLs | Large AFSLs |
| ASIC appears to be of the view that small AFSLs are a risk to the public in that:
small AFSLs are free to recommend whatever they like and they may not have resources to compensate clients in the event of a product collapse (e.g. Westpoint). |
ASIC appears to be of the view that big AFSL's present low risk to the public in that:
big AFSL's control what the representatives of their distributions channels may recommend and
they have the resources to compensate clients in the event of a product collapse. |
There actually are a small number of dealers which sit between the small dealers and the big dealers characterised above. For example.
- Count Financial - it appears that volume over-rides (i.e. payments for product sales from product manufacturers) account for almost 100% of profits. If this is the case it would lead one to the view that Count was in the product distribution business.
- Professional Investment Services - it appears that they now have a significant ownership by a product manufacturer and that they manufacture their own products and earn substantial revenue from volume over-rides. Thus, PIS could be described as a product manufacturer.
- Shadforths - a joint venture between a range of quality very experienced financial planners and their businesses, which have now grown to substantial size.
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