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Australian financial services licensing model
Financial Services License (AFSL)

The Financial Services licensing model is dead – time to bury it!

John Hewison
Founder and Director
11 Mar 2014

The Australian financial services licensing model is based on a Dealer Principle license holder with multiple advisers operating under licensee authorities. 

This comes out of the old insurance “tied agency” model based on a product sales force indented to a single insurance company.

The system thrived back in the 80s and 90s with agents earning obscene amounts of money from up-front product based commissions and annuity style commission streams. We still live with the remnants of that system today.

We now have a “Dealer Principal” (Dealer) holding the Financial Services License (AFSL) with any number of advisers operating under license authorities issued by the dealer. Historically, advisers gave advice to consumers including investment advice, which generated commissions. These commissions are paid to the dealer who takes a cut and pays the balance to the adviser.

In addition, the dealer negotiates “kick-back” arrangements with product manufacturers to agree to “sell” its products or list them on their Approved Product List. Then the dealer and the adviser receive a share of ongoing “trail” commissions generated by the products held by the client, regardless if they receive ongoing service or not.

In addition to product commissions, administration platforms are used to administer client portfolios. These also pay commissions based on usage and volume. Who pays for all of these convoluted arrangements? Why the consumer of course, at an inflated cost that is unsustainable and unjustifiable.

The suggestion that the Future of Financial Advice (FoFA) reforms are going to fix this problem is fanciful to say the least and the Government’s proposed amendment just weakens the legislation even further.

Existing commission arrangements are grandfathered and we now see a “General Advice” exemption. We have already seen dealers under the FoFA regime replace revenue schemes with similar arrangements under a different name.

The majority of this complex structure embedded in self-interest is designed to support an industry model that has been outmoded since the 1980s. It cannot justify its own existence and the consumer can’t afford to pay for it!

My message to the Assistant Treasurer Arthur Sinodinos is simply this. Australia leads the world in respect of financial services legislation and financial planning standards as represented by the Financial Planning Association, its educational and professional practicing standards. We have the basis of a truly advice driven professional model with a clear separation of advice and product. The current system is broken and it is time to have the courage to make the radical step to change.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.