I am surprised how little reference there has been to profitability and its implications for adviser remuneration in discussions of the post-RDR advice sector.
It seems to me that even well-qualified advisers with good client banks must expect to take less cash pay than they have in recent years.
A fairly common model for adviser remuneration under the now standard employee contract is one-third for the adviser, one third for costs and one third for gross profit. That means an adviser who used to draw £80,000 from his own business needs to generate a gross £240,000 in fee income to earn his take-home pay.
I do not think many advisers who have been drawing that sort of net income have typically generated anything like that much in gross fees/commissions.
This could help to explain the stickiness of the adviser market, with adviser numbers down by only about 15 per cent last year against figures of up to 25 per cent figure forecast by most commentators.
An old-style adviser without a client service proposition generating annual income cannot sell his or her business for more than a trivial amount. Yet even those who have a stream of income are finding that it is worth less than they thought, or that they will have to work for several years to secure its value.
The result is that far more old-style advisers are still clinging on, even though many must know they will fail the thematic reviews the FSA has promised in the aftermath of the RDR. If they do not understand this, it is because they have not listened to the sensible advice dished out by the likes of 360 and SimplyBiz.
In the new world, advisers who want their businesses to be valuable and saleable must show that they can reliably deliver cash profits.
I would suggest that a net profit target of 20 per cent of their gross fees is realistic and ought to be possible for well-run businesses. On top of that they must, by 2015, have a quarter of their annual expenditure in the bank to meet their capital requirement.
Together I think these spell doom for many old-style adviser firms, but it is human nature to wait and hope.
The looming hike in capital requirement will help networks to keep members inside their stockades, and it will surely not be long before we start to hear of networks asking for bigger fees from their members. After all, compliance requirements are now so much more onerous.
The remuneration model I described above will be familiar to accountants and lawyers. So aspiring professionals among financial advisers must have remarkable businesses if they think a different model will work.
For national chains the story will be different.
In the long run, advisers in these organisations will get less than a third of the gross income. In the short run, such firms will have to pay many advisers more than the target share of revenues, and will only reach their profit targets by cutting several feet off the taller trees. Well-drafted employee contracts will not leave much wriggle room and in future no adviser will walk away with a client bank. You’ll be working for the man and you’ll know it.
Since advisers will not ever again be able to walk out with a client book, the decisions they make in the next few months will be ‘for life’. Interesting times.
Chris Gilchrist is director of FiveWays Financial Planning, edits the IRS Report newsletter and is the author of the Taxbriefs Guide, The Process of Financial Planning