Since the early 2000s when Financial Services Reform (FSR) introduced the concept of the Australian financial services licence (AFSL), licensees and advice businesses have generally developed as separate entities. Advice businesses provide advice to individual clients and manage ongoing relationships, while licensees provide licensing and other services to advice firms.

But Fortnum Financial Group managing director Neil Younger says that is going to change as licensees redefine how they support advisers to drive down costs, and deliver high-quality, affordable advice.

Advice and licensing co-exist in a single structure in self-licensed firms, and Younger says the same merging of advice and licensing is inevitable right across the industry as the drive gathers pace to separate product from advice and to remove the cross-subsidisation of licensee services.

Younger says the continued survival of the licensee business depends on supporting advisers to form new kinds of collectives where advice and licensing merge, helping them grow profit margins from delivering advice, and sharing in those margins.

“It may be quicker than that as the institutions exit out [of licensing] and you start to see potentially new scale players outside of the distribution models,” he says. Fortnum is laying the groundwork for the transition now


Fortnum’s focus
1. Creating collectives
“We have shaped the Fortnum Private Wealth business as a collective model where advisers own the licensee. So it’s operating today as a collective.”
2. Economies of scale
“We have set ourselves an ambitious growth target to pass the benefits of scale more effectively on to the consumer, and we do that today.
3. Smart technology
“We’ve got a roadmap for investment in technology solutions that are about changing the cost to deliver advice, in a meaningful way, for advisers and consumers.”
4. Blended P&Ls
“We recognise that within that there’s an opportunity to start to blend the P&Ls of what were two distinct businesses – the advisory businesses and the AFSL – over time.”


Younger says the drive could come from licensees, seeking to redefine the relationship with advice, or from advisers themselves grouping together and then seeking a licensing and shared-services solution.

Enabling advice firms to own and share in the profit of the licensee is a first step, but under traditional equity-ownership arrangements individual advice firms may remain sub-scale, and not pass on the full cost benefits of scale to clients.

Younger’s strategy includes investment in technology to reduce costs, growth in adviser numbers to generate economies of scale and, ultimately, a financial merger of advice businesses and the licensee.

To an adviser Younger’s views might sound like a licensee admitting that it can’t make money from what it does now so it wants to get in on the adviser’s action (see Box 2).

“That’s exactly what I’d be thinking,” Younger says.

“This is where the licensee business morphing into a collective model needs to generate far more value than just licensee services. They have to have scale to transfer genuine scale-related benefits back to end consumers.

“And they have to have the capacity to invest in systems and processes and tools that support the advisers with technology to deliver advice in a more profitable way.”


The licensee of the past
– Holds on to fees where there is no entitlement to do so
– Holds on to margin on legacy products when it’s no longer appropriate
– Is not resourced adequately to address issues as they arise
– Subsidises licensing costs to maintain distribution

The licensee of the future
– Stands alone with a clear separation between advice and product
– Has sufficient scale to manage risk and invest in technology to improve cost of delivery
– Is a fully integrated advice-and-licensee business, and passes scale benefits to the client


But Younger argues that unless advisers are in an optimal structure they will not achieve the economies of scale necessary to grow margins. It’s the lower costs these structures offer that he says will set the emerging advice collectives apart from the small self-licensed firms that already exist and which will struggle to contain costs as they deal with “the continued separation of the subsidisation of the model of the past”.

“In that case, is that the most efficient model to be running an individualised P&L and an entity to actually generate revenue out of giving advice?” he says.

“I would say maybe not.”

Younger says new advice collectives must be large – as many as 1000 advisers, in what he calls a “super-collective” – organised so each advice firm within the collective is r responsible for its own financial performance, but gains benefits from scale and a shared-services structure to drive down costs.

Younger says that open-architecture advice demands large adviser numbers, to generate economies of scale with multiple investment solution providers.

“I used to think, if I looked at the pure adviser numbers attached to a business like Fortnum, meaningful scale was around 400 advisers. I actually think now that I’ve redefined what that might look like, and it’s much, much larger,” he says.

“The true investment in that collective and the true power to harness value for clients is probably only really achieved at a much larger level than it is today, particularly if you want to be open-architecture around how the advice is delivered.

“And I think the types of businesses attached to you need to be larger as well.”

New advice collectives may take a number of forms, he says, but will resemble traditional partnerships, “[financially] fully integrated so revenue is generated through the business out of the core service of advice, where the value is, and not in the risk-management service of an AFSL or the margin associated with distribution”.

“[Partners] are accountable for generating their own revenue, and effectively running a P&L,” Younger says.

He says the collective or partnership approach to licensing and advice allows the entity to homogenise an advice offering and set high, uniform standards of compliance, client service and technical support.

There will still be room for smaller, stand-alone advice firms “if they are sufficiently scaled to be able to cover their costs”, Younger says..

“But I would suggest their proposition probably isn’t going to be as effective as the bigger players, because they’re not going to be able to negotiate the same scale benefits,” he says.

They might be able to buy and to service providers that give them access to that, but their business risk-adjusted will always be of less value than what’s available in those bigger constructs.”