The financial advisers who earn too much
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Justin Modray says the RDR will make little difference in the way most advisers are paid.
There’s no doubt that financial services is a well paid industry in the scheme of things. So it’s hardly surprising that most financial advisers earn well above the national average wage of around £25,500 a year.
But, like any profession, there are extremes. I’ve met financial advisers struggling to make ends meet and others earning over half a million pounds a year (and these are simply advisers, not business owners).
If you believe in free markets then you’d argue that advisers earning comfortable six figure incomes only do so because the quality of their advice is such that customers are happy to pay high fees in return.
But experience suggests that while the market’s free, it’s certainly not perfect. Too many customers are naive and/or ignorant when it comes to taking financial advice, providing an ample feeding ground for the slick commission-based salesmen who are probably amongst the highest earners in the world of financial advice.
The annual results issued last week by St. James’s Place really focussed my mind on this topic. The results, for the year ended 31 December 2009, suggest SJP paid its 1,464 partners (a.k.a. advisers) remuneration of £190 million and also spent a further £41.9 million on other new business related costs, including ‘partner incentivisation’.
This means the average partner would have taken home around £129,800 (before tax) during 2009 and possibly £158,400 if all those £41.9 million of new business costs were paid to partners. And remember, these are averages, so some partners will have earned significantly more.
I’ve simply used SJP’s figures because they were to hand and I suspect fairly representative of other sales focussed adviser firms.
Now, my issue is this. A fee-based adviser working on a fair hourly rate would struggle to earn this kind of money. Let’s assume they charge £200 an hour and bill 800 hours a year, they’ll gross £160,000 of revenue. The firm they work for might take about half of this to cover overheads (including punitive FSA and FSCS levies) and hopefully make a profit. This leaves the adviser taking home about £80,000 (before tax) – a healthy income but seemingly rather less than a SJP partner.
So by my basic reckoning a financial adviser needs to work on either a commission basis or charge fees as a percentage of client assets (which is tantamount to commission) if they’re to earn a comfortable six figure income (or take lessons from accountants and solicitors on how to charge clients for more hours than actually worked!).
But this is exactly the type of remuneration structure that works so badly for the wealthy clients on whom many commission/percentage fee-based advisers prey. If I invest £100,000 with a 3% initial fee or commission, the adviser receives £3,000. If I invest £1 million it jumps to £30,000, but is the advice really worth 10 times more? Or has the adviser worked 10 times longer? I doubt it.
All I can deduce is that wealthy individuals are generally no-more clued up on taking financial advice than everyone else. And while those investing modest sums might, sometimes, benefit from commission based advice over an hourly fee, the rich invariably don’t.
I fear that the RDR won’t make much difference – an adviser who’s already successfully selling commission-based products or charging a percentage-based fee shouldn’t have too much trouble talking their customers into agreeing a healthy slug of percentage-based remuneration.
Justin Moday is the founder of Candid Money Limited
www.candidmoney.com <http://www.candidmoney.com>
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Readers' comments (60)
Anonymous | 2 Mar 2010 9:29 am
It is of course nothing to do with how hard you work, i sense a distinct undertone of socialism in this article!!
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Linda Hulls | 2 Mar 2010 9:31 am
Perfectly summarised.
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Patrick Schan | 2 Mar 2010 9:34 am
Can we have some balanced views without the emotive language please? I am mainly remunerated on a commission basis but anybody who knows me would, perhaps sadly, laugh at the suggestion that I am 'slick'. I have met some slick advisers who ar commission based and some who are fee based and the use of such words as slick in an article like this are so basic and obvious.
The other one was 'prey'. Do me a favour. You should have seen what my solicitor charged me for doing a pathetic job on family member's estate two years ago.
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Patrick Schan | 2 Mar 2010 9:34 am
Can we have some balanced views without the emotive language please? I am mainly remunerated on a commission basis but anybody who knows me would, perhaps sadly, laugh at the suggestion that I am 'slick'. I have met some slick advisers who ar commission based and some who are fee based and the use of such words as slick in an article like this are so basic and obvious.
The other one was 'prey'. Do me a favour. You should have seen what my solicitor charged me for doing a pathetic job on family member's estate two years ago.
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Anonymous | 2 Mar 2010 9:35 am
Of course if you want to earn big money in Financial Services you should work for the FSA.
You also have the advantage of the more incompetent you are, the more you get paid.
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Anonymous | 2 Mar 2010 9:38 am
The guesstimate of a firm taking just 50% of the fee based advisers income is naive to say the least. There are fixed and variable costs in any business and my experience is that a great deal more than 50% of the 'income' that my clients generate is soaked up by the business before I see a bonus! It appears we can't win because if we become purely fee based like solicitors and accountants then we'll be guilty of over charging in other ways. It's very easy to be destructive Justin but what's our business model to be then? I have to say this is a really poor bit of journalism Justin and as for that picture with the cheesy grin...........
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Anonymous | 2 Mar 2010 9:41 am
It's not socialism - it's a lack of integrity to take 10 times the commission for what is, very probably, the same hours worked just because the client is richer - or maybe you allude to the "redistribution of wealth"...
Let's face it though, the whole Financial Services Industry is remunerated by skimming off the top of clients' assets...
IFAs would undoubtedly earn less on a fee based remuneration system which was based on hours worked...
Percentages of assets dressed up as fees are not fees, they're commission...
Unless you charge fees you are not professional.
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Anonymous | 2 Mar 2010 9:45 am
As long as commission is paid there will be the underlying suspicion from the public that this could make the "advice" they are getting biased. Perhaps in the UK we should be prouder at being called Salesmen or Saleswomen rather than trying to hide behind titles that make us sound like and be on a par with lawyers and accountants. Accept it - when it comes down to it we are selling financial products to make a living. Most "Advisers" would starve if they relied on clients feeling they were worth paying a fee to.
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Alan Parkinson | 2 Mar 2010 9:55 am
When a Solicitor conveys a property, the fee livied reflects the value of the property being transacted inorder to take account of the increased potentential liability.
When an Accountant carries out an audit within a companies accounts, the fee levied reflects the turnover of the firm being audited in order to take account of the increased potential liability.
Why therefore should a Financial Adviser accept the same fee for advice relating to a £100,000 investment as for a £1m investment.
It is true that the work involved is likely not 10 times as much, however the liabilty and by definition the potential for redress certainly is and in such litigious times, fees must reflect this increased risk, our PI insurance certainly will.
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Chris Neil | 2 Mar 2010 9:56 am
TO ANONYMOUS 2 Mar 9.41
How dare you question the integrity of other advisers who may work on commission and say they are not professional.
Professionalism has got nothing to do with how you are remunerated!!
If you are going to make such remarks you should at least have the **** to put your name to it.
CHRIS NEIL please feel free to contact me.
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