Advice firms are continuing to review how they reward top IFAs after incentive schemes at large firms have come under question.
Adviser remuneration has long been a contentious issue. Should staff be paid a flat salary, should it be linked to income generated or time spent with the firm, or should it be tied to metrics like customer satisfaction? It can be difficult for firms to strike the right balance between incentivising their advisers and ensuring there are no conflicts of interest.
While the Retail Distribution Review aimed to redress this balance by stamping out commission, there is still a wide disparity across the industry as to how firms structure their advisers’ pay.
St James’s Place came under fire last year for a “Nectar points” style system that rewarded advisers bringing assets into the firm with foreign trips, exclusive event invites and jewellery.
The annual Money Marketing and BWD adviser remuneration survey will soon reveal the latest IFA remuneration trends and how the profession believes its top advisers should be paid for their work.
Money Marketing’s research last year revealed average pay among
advisers was £89,522, with a third of advisers earning more than £100,000. Some 83 per cent of those surveyed were optimistic their pay packets would continue to grow.
But how advisers earn their wage can vary from firm to firm. Around 30 per cent of advisers said at least half of their remuneration came from hitting performance-related goals such as revenue targets, client acquisition or client satisfaction.
Meanwhile, 28 per cent said more than half of their total pay comes from dividend payments. Dividends can be a tax-efficient way to take profits out of the business and are most common at small firms.
The FCA does not prescribe how firms should structure their remuneration plans. However, the regulator has said firms must consider whether their incentives increase the risk of misselling. A combination of different remuneration methods seems to be the norm for many adviser firms and wealth managers.
Courtiers Wealth Management chief executive Jamie Shepperd says: “The majority of an adviser’s earnings should be their basic salary, which is based on ability, knowledge and experience, with a bonus payment for achieving company and team targets.”
Because of this mixture of components, linking experience and performance, advisers at Courtiers are not all paid the same amount.
However, Shepperd adds: “I don’t believe in individual adviser targets, as these can act as a ceiling and can potentially encourage the wrong type of behaviour.”
Equilibrium Asset Management investment manager Mike Deverell says: “Our advisers have a team target for new businesses and their bonuses are also dependent on achieving personal goals such as client retention and suitability of advice. We think this is appropriate as it keeps the focus on customer service rather than on winning new clients.”
But Deverell is concerned that some companies have pay structures which could incentivise bad practice. He adds: “Some firms have a very high proportion of remuneration as bonus, based purely on winning new assets, and we think this can make advisers more like sales people and can lead to poor outcomes.”
Alan Steel Asset Management financial consultant Gary Millward agrees: “Pay structures should be fair to all concerned – most importantly to the client – and shouldn’t incentivise questionable practice by the adviser.”
Millward says a major potential issue relates to “how business revenue is generated in the first place”.
Firms generating the bulk of their revenue from DB pension transfers, for example, need to ensure there are appropriate checks in place to ensure any transfer is in the client’s best interest, he explains.
Millward is also concerned about advisers who have switched to using passive products but have maintained an annual charge appropriate for active management.
In a Money Marketing poll conducted in January, some 50 per cent of
advisers said IFAs should be paid bonuses linked to revenue targets
or client acquisition.
Philippa Gee Wealth Management managing director Philippa Gee thinks it’s important to get the right mix.
She says: “Employers don’t want their staff unmotivated to do any work but, equally, no one wants staff incentivised too much in the wrong areas. I think a healthy basic salary combined with performance-related pay, which is linked to good client service and client retention, is a sound approach.”
Shore Financial Planning director Ben Yearsley says: “Different approaches will work better for different firms or advisers, but ultimately it’s about what’s in the best interest of the client.”
Advisers at Shore have their pay linked to the level of income they bring in to the business.
Yearsley adds: “There’s no bonus, incentive or targets – it seems an obvious and fair way to structure remuneration, though it might not work for an adviser who is just starting out and hasn’t yet built up a client bank.”
Adviser and wealth manager trade body Pimfa says it would be wrong to prescribe certain models for firms.
Pimfa deputy chief executive John Barrass says: “Adviser remuneration must be within the framework of the law and regulation. Aside from that, we don’t have an opinion on how firms structure pay. The RDR was designed to eliminate commission and conflicts of interest and we support that – the rest is market-led.”