Without boring you with the details, let’s take the average sole trader IFA. I would guess his/her costs would be a minimum of £30,000 a year (probably closer to £40,000) including regulatory fees, PII premiums, compliance support, research software, CRM software, phone, post, office costs, admin costs, etc. Add one administrator at £20,000 a year and we have a base cost of £50,000 a year to trade.
Now, taking every IFA poll, study, etc, I have ever seen, not many IFAs work less than 50 hours a week (let’s bear in mind that this is probably 33 per cent more than the average wage-earner’s 37.5 hours).
Again, research shows us that regulation, administration & CPD takes up a minimum 10 hours a week. That leaves you 40 chargeable hours a week times 46 weeks which equals 1,840 hours a year, £50,000 base cost plus IFA salary £50,000 (conservative salary) equals £100,000.
So, minimum hourly charge is therefore £54.34 (this is much closer to fact than fiction). Now take Mr Hardworking Joe Public, who wants to put £50 a month into his pension. However you spin this, the advice process takes at least five-and-half hours of adviser time (first meeting, research, second meeting, suitability report and application processing – plus admin time but lets ignore that).
So, the cost to the IFA to offer basic pension advice is five-and-a-half times £54.34 which equals £298.91 – call this £300.
So the IFA charges a fee of £300 or commission – this is equivalent to 50 per cent of the first year’s pension premium of £50 a month. Is there a debate to be had here about fees v CAR v commission? No, because Mr Joe Public will not pay the cost and IFAs cannot afford to transact this business for any less, least of all because this contract may run for 25 years plus. How on earth can we afford to review this contract every year with the client? Will this client pay a retainer/ annual fee? No. Will a stake-holder pension pay trail commission? No. (The life companies would have you believe that they do not make money on these products, either).
So, the choice to the IFA is: 1: Advise on a stakeholder pension and charge a £300 fee, knowing that advice has cost the client 50 per cent of his first year’s premium. (Trust me, that does not feel right).2: Charge a higher fee or recommend (missell) a product that pays higher commission (I am sure this happens but it is most definitively not as widespread as some financial journalists would have you believe.3: Explain to the client that we cannot afford to offer advice in this scenario because we cannot afford to provide the service, especially post-initial advice, that the FSA principles and TCF dictate we must. Let me quote the FSA from its TCF progress report of June 2002:
“Previous regulatory regimes have tended to focus on what happened leading up to and at the point of sale and parts of the financial services industry have traditionally seen their role in terms of ‘selling’ products to meet consumer requirements rather than providing an ongoing service. This tendency to focus on the sale can ignore the ongoing needs of the customer and subsequent changes in economic conditions.”
The debate should not be about how IFAs get paid (or even how much they get paid) but about how as a profession we establish a process to ensure that everyone has access to relatively affordable advice.