Big AFSL, small AFSL or DIY?

Like many small practices, we’ve been feeling the pinch of rising costs and over-regulation. Over the past year, I've explored various AFSL options, including self-licensing and alternative licensing arrangements, along with processes and tech stacks to boost efficiency.

I've had numerous conversations with advisers at networking events and within our own licensee, which offers a self-licensing service. The feedback has been mixed but generally positive, suggesting it's worth considering.

While the self-licensing path has a compelling offer, there are many aspects I wasn't aware of when I started this journey. I'd love to open up the discussion to hear from practice owners who have gone down this path – the good and the bad!

I want to start by saying I'm no expert in this field. However, I hope this article can spark conversations and gather feedback from those who have taken this route, providing insights into considerations and potential misconceptions.

What are the drivers?

Initially, cost was the main driver as the expenses of running a small practice keep growing. I'm not dissatisfied with my current licensee, but I feel we've outgrown the extra services and their price tag.

Additionally, the autonomy of self-licensing and the potential to run things our way were very enticing. During my research, I realized that combing forces with another business or multiple businesses could significantly reduce costs and spread the workload. After all, time is money, and running an AFSL involves a lot of work apparently.

I've worked with several larger AFSLs over the years and found they often cater to the lowest common denominator in their network. This cautious approach affects how they work with advisers, what advisers can do, and the compliance requirements.

Lessons learned

Fixed costs + potential additional costs

From what I've seen, the costs include:

1. Setup costs: You can do this yourself or use a service provider. Don't forget to factor in the cost of your time.
   
   
2. Professional indemnity insurance: Generally based on a percentage of total revenue and reasonably priced.
   
   
3. CRM: Larger licensees often get discounts, which can increase costs when self-licensed. This can be significant if you have multiple licenses across various platforms.
   
   
4. Investment platform special rate cards: Big AFSLs get special rates due to their large number of advisers and associated FUM. New clients would pay the standard rate, which isn't a huge difference but worth considering. Does anyone know the FUM caps for special rates for smaller practices or AFSLs?
   
   
5. Investment committee: Do you handle this yourself or hire an external consultant? External consultants can be pricey. I'd love to hear what others are doing in this space.
   
   
6. Bookkeeping: Managing fees and commissions across many product providers and invoicing clients can be time-consuming, especially with multiple advisers. If using a self-licensing administration service, this might be covered. Otherwise, outsourcing seems sensible.

Time considerations

One unclear aspect is how much time goes into running an AFSL. Many self-licensed advisers rave about the benefits but don't detail the time spent managing the AFSL versus the FP business.

There are many factors to consider, and like our advice practice, we can outsource or manage ourselves. The big-ticket items I have identified are:

1. Compliance: Easier if you're a single practice with visibility over each adviser and daily activities. Combining multiple practices can be more challenging. Who becomes the responsible manager(s), and how will that be managed? How much time is spent dealing with ASIC, and who will manage those relationships?
   
   
2. Accounting and bookkeeping: This might be easier to outsource. It's challenging to go through different remittance reports, reconcile, and audit to ensure correct remuneration.
   
   
3. Administration: Again, this is another area which can be outsourced. But having well-documented processes and mandates would appear to be the most effective way to meet all obligations.

Risks

The biggest risk seems to be compliance and getting things wrong. My biggest fear is getting on the wrong side of ASIC, which carries significant reputational risk if mistakes make headlines.

Will the time spent managing everything outweigh the cost savings, or will outsourcing end up costing more?

Lastly, staying on top of ever-changing legislation to ensure the AFSL and advisers meet new requirements can be risky.

Final thoughts and where I’m sitting

I'm still on the fence and continuing my investigation. There are pros and cons to both larger AFSLs with all the bells and whistles and the self-licensed pathway. It's a personal decision, and everyone has different goals and needs, much like our clients!

I’d love to hear if there is anything I'm missing? This might be a case of "you don't know what you don't know." I’m sure there’s a lot of advisers that would like to hear about potential pitfalls or time-consuming requirements not usually discussed over coffee at PD days or other events, and also the big benefits found.

I hope this article sparks discussions, as I'm hearing more and more advisers talking about this through my networks.