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Living the high life: What’s behind the rise in adviser pay?

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This article is the latest in our series on adviser charging and pay. To catch up on the stories so far, click here.

Advisers are taking home bigger and better pay cheques thanks to greater business acumen post-RDR and a sharper focus on the bottom line, Money Marketing research suggests.

The latest in our series of articles on adviser charges and pay finds nearly a third of advisers are paid over £100,000.

The breakdown of how, and how much, advisers are paid points to a profession commanding a higher pay packet, with a better awareness of what “fair pay” looks like.

Advisers are also optimistic that their remuneration will continue to increase.

Based on our research, Money Marketing examines the factors driving escalating adviser pay and the experience of different advisers’ salaries around the UK, as well as the mechanics of falling advice profitability at the same time as higher pay.

The adviser assessment

The research was based on 474 adviser respondents and was carried out between 23 January and 6 February. Advisers were asked for total remuneration, including any bonuses or dividends.

Respondents included 405 IFAs and represented a cross-section of the advice profession, from sole traders to firms with more than 20 advisers.

Independent advisers are paid on average £89,522, while restricted advisers are paid on average £75,489. A further 9 per cent of the advisers say they earn less than £40,000. For paraplanners, average remuneration drops to £40,649.

There appears to be little variation by firm size. Sole traders earn an average of £84,599, while for firms of between two and five advisers, average adviser remuneration is £86,105. For firms with between five and 20 advisers, average pay rises slightly to around £88,500.

Charging structures are similar across independent and restricted firms. On average, restricted advisers say 70 per cent of their remuneration comes from percentage charges, with 24 per cent coming from fixed fees and 6 per cent from hourly charging.

For IFAs, 73 per cent of their pay stems from percentage charges, with 20 per cent coming from fixed fees and 6 per cent from hourly charges.

AJ Bell head of platform technical Mike Morrison, who has recently been travelling around the UK meeting around 600 advisers, says the results are in line with what he would have expected.

Morrison says: “There’s a wide range when it comes to adviser pay. I’ve seen those that are very successful at the top end of that remuneration, and smaller one-man bands who earn enough money to live on and work for their own business.”

Appleton Gerrard Private Wealth Management planner Kusal Ariyawansa says advisers can command higher remuneration if they bring a good existing client bank across to a firm. He argues an adviser with good professional connections that bring a constant revenue stream can be particularly valuable.

He says: “It’s very difficult to find the right quality person to take on board. If an adviser is bringing in a potential client base with £20m to £40m they might be earning £150,000. The performance pay stats are from people moving, and what you are bringing in are the relationships you have.”

RDR pay boost

Research by recruitment firm BWD suggests both self-employed and employed advisers’ earnings have been on the way up since 2012. For self-employed advisers, total earnings for 2015 were £83,625, compared with £60,533 in 2012. Employed advisers earned £74,044 compared with £62,838.

The main boost came between 2013 and 2014, when the RDR bedded in. Employed advisers’ total earnings jumped £17,000 and self-employed advisers’ total earnings leapt more than £20,000 over the two-year period.

Serenity Financial head of life planning Jeremy Squibb says: “Inevitably some advisers have left the market, but I would suspect the remaining advisers are more aware about fees now. They stand back and look at the work and ensure they are going to be fairly paid for it.

“You can do an awful lot of work even for a £10 a month life policy. The level of work can be the same as for a £150 a month policy, but if they are not careful they get paid much less for the ‘smaller’ job.

“What’s maybe happened with the RDR is because people are having more open charging discussions, it’s focusing their minds that, if they do this work, they need to make sure its profitable for the business otherwise you are giving money away.”

Some 83 per cent of advisers in the Money Marketing survey expect their remuneration to increase over the next five years.

Ariyawansa says advisers who have adapted their fee models since the RDR have seen their pay rise.

He says: “I don’t think people are struggling. If you charge on percentage, you are going to struggle though.”

BWD found advisers were more optimistic than their peers in compliance, or those who work as broker consultants, employee benefit consultants, paraplanners or those in support and pensions administration when it comes to whether their pay will increase in future.

Around 59 per cent of advisers believed their pay would be higher, up from 57 per cent in 2015.

The profitability puzzle

Compared with remuneration, profitability at advice firms follows a less certain path.

In its annual report on advice firm performance, Apfa found in 2013 retained profit in the sector came in at £88m. This nearly doubled in 2014 to £171m in the wake of the RDR, but fell back to £61m in 2015, which the trade body attributed to increases in Financial Services Compensation Scheme levies that year.

Libertatem director general Garry Heath says: “Remember that out of that £80,000-odd pay packet comes a lot of other stuff: professional indemnity cover, regulatory costs, the lot.”

Heath also points out the £85,000 salary figure for advisers may not reflect the fact remuneration varies a lot based on region. He says: “There are £250,000 guys out there. For example, I know W1 guys around Chelsea who could get that level because they have high quality clients. But if you are an IFA in Swansea, you’d be very stretched to get to £80,000.”

FCA data also bears this out. It says advisers in greater and central London charge an average of £250 as their maximum hourly rate compared with £150 in Wales and the North-east.

Some advisers have left the market, but I would suspect the remaining advisers are more aware about fees now. They stand back and look at the work and ensure they are going to be fairly paid for it

Pressure to perform

Earlier this week, it emerged St James’s Place offers a “Nectar points”-style system under which advisers who bring the most money into the firm are rewarded with perks such as foreign trips, dinner invites and jewellery bonuses.

It is not the only firm in the market to use performance-related pay incentives, according to our survey.

Some 30 per cent of advisers polled say at least half of their remuneration comes from hitting performance-related goals, for example, client acquisition, revenue targets or client satisfaction.

Juno Wealth Management director Tracey Evans says: “It goes back to bancassurance with their performance-related goals. It’s a fine line; how do you incentivise staff? It can’t just be based on what the client thinks. You could only have five clients who think you are wonderful but you still need to be profitable.

“That’s the disconnect with large firms. It can’t be on client acquisition either; it looks like the old model of selling stuff whether it made good business sense or not.”

SJP argues it has some of the strongest client satisfaction scores in the market. Ninety-eight per cent say SJP offers excellent, reasonable or good value for money. ”

The firm says 82 per cent of client scores fell in the “good” or “excellent” categories.

Our survey shows the distribution of performance-related payments was the same across independent and restricted advisers.

An FCA spokesman says: “While we cannot comment on individual cases, firms need to consider if their incentives increase the risk of misselling, including where they are based on fees.

“The FCA expects all firms to properly consider if their incentive schemes increase this risk and, if so, to review whether their governance and controls are adequate and to take action to address any inadequacies. The FCA also has rules that apply to the remuneration packages of senior managers in asset management firms, in order to align risk with personal reward.”

But Heath argues performance-related pay measures have become more sophisticated since the days of direct salesforces.

He says: “In larger firms where the people advising are not the owners of the company, you have got to have a way of remunerating them if you want to keep employing them, so some kind of incentive is a good thing. Some companies are using a quality metric, where they’re not looking at sales but a compliance element; what sort of clients are you dealing with and how are you dealing with them? That’s quite a good idea. There’s nothing wrong with more money for more work, or better work.”

BWD’s research suggests a slight shift towards employment over self-employment among advisers. The proportion of employed advisers in 2012 was 69 per cent, increasing to 77 per cent in 2013, 81 per cent in 2014 and 80 per cent in 2015.

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The report says: “Where earnings for self-employed respondents are a defined percentage of personal production, the average is 65 per cent.”

For employed advisers, bonuses fell from 33 per cent of business income in 2013 to 23.5 per cent in 2015.

According to our research, 45 per cent of advisers said they only earned up to 5 per cent of their salary on a performance basis.

Divided on dividends

Money Marketing’s research also suggests dividend payments still make up a significant portion of adviser pay.

While the majority say they only pay themselves between 0 and 5 per cent of their salary in dividends, 28 per cent say more than half of their remuneration takes the form of dividend payments.

Comparing independent and restricted firms, 21 per cent of restricted advisers say the majority of their remuneration comes from dividends, compared to 29 per cent among independents. This can have positive tax implications, as well as further incentivising profitable performance.

Heath says: “For most IFAs there is no point in leaving money in the company above what capital adequacy requires.

“A lot of advisers will take a base wage, and at the end of the year have a divvy up of the dividends. The tax interest in that is you don’t pay National Insurance. It’s economically sensible.”

Squibb agrees tax implications are a significant drive of advisers being paid by dividends. He says: “Only directors would be able to pay themselves dividends, and the obvious reason is the tax-efficiency.

Chris HannantExpert view: Chris Hannant

The Money Marketing survey sheds some light on a number of interesting points about the profession. MM notes profits have been squeezed while pay has been maintained – of course it is harder to reduce fixed elements of pay, but the findings echo Apfa’s adviser market in numbers report which also picked up a hit to profits.

While we cannot be certain as to causes, it is interesting to note the fall in profits more or less corresponds to the increase in Financial Services Compensation Scheme levies, suggesting businesses are trying to carry on as normal but dealing with unforeseen costs which has a significant impact on a firm’s bottom line.

A well calibrated, performance-related reward structure is a good thing in providing the right incentives.

However, it should be recognised it is also inevitable in a sector dominated by firms run by owner/managers. If the firm does well, they do well, and vice versa.

This will continue to be a feature of the sector while there are many small firms. The make-up of the advice profession is down to something other than money: being your own boss. It is not for everyone, but for many advisers it is a key factor.

The lack of variation owing to size of firm initially struck me as surprising, but on reflection it is probably indicative of the flexible remuneration structures in firms. To retain high-earning advisers, firms will need to put in place pay structures that recognise their contribution to the business.

Chris Hannant is director general at Apfa

 

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. I think that following The Retail Distribution Review (RDR) two things have happened. Firstly the number of financial advisers has reduced. A lot of the people nearing retirement age saw it as the time for them to exit the business. In addition a lot of major financial institutions (including the banks) couldn’t see how they were going to make money from financial advice going forwards and pulled out of the market. As such for those still in the market there was more potential business to go at.

    Another aspect of the RDR was that it focused the minds of advisers as to the types of clients that they dealt with. I think as a general rule advisers have moved up market and stopped dealing with unprofitable clients. As a result productivity has increased and if productivity increases then so will earnings.

  2. What’s behind higher Adviser pay?

    That’s easy – it’s excessive advice charges, which by most measures have as near as dammit doubled over recent years.

  3. Is this ‘pay’ actually turnover? There’s a big difference between the two…

  4. Agree with Village. But if we term it cost to the consumer then I believe the following have contributed:
    1. RDR – getting rid of much of the dross. This resulted in fewer (so called) advisers.
    2. The cost of regulation. All this has ultimately to be paid by the customer. FCA, FSCS, PII, ICO, Credit Licensing, Professional Bodies and all the other jobsworths with their hands out.

  5. Headline – ‘Living the high life’ ? How crass is that!
    I worked 54 hours last week on Due Diligence work that was not charged additionally for. How much do your editors/ submitters earn??
    For me, personally, that’s it and I will not be subscribing / reading MM anymore.

  6. What’s behind the rise in adviser pay? Seriously? It’s market forces and regulation, not in that order – I say that because regulation has created a false market.

    We know that RDR has restricted the supply of advice and it follows that prices will rise. This was predicted by so many people beforehand it was deafening so no surprises there for anyone other than the FSA/FCA. That’s not to say that RDR didn’t succeed. It did. More knowledgeable, better qualified advisers providing higher quality advice… to fewer people.

    In addition, the increasing complexity of regulation over the years has driven the need for higher qualified staff and investment in technical resources… which costs more. No surprise there either. There’s more regulation coming down the line, costs and prices and remuneration will rise accordingly, please don’t be surprised.

    The FCA and other regulators seem to think that everyone should have a Rolls Royce service (or at least BMW/Mercedes/Lexus). Very laudable, if a little naive in the real world. The irony, of course, is that regulation has created a price that most cannot afford which works to exclude large numbers of people. Ignoring market forces is a fools game. Trying to overcome them with more and more regulation (or tinkering with it, like the definition of advice) is ignorance at best.

    There is a simple answer but it’s politically unpalatable – reduce/amend/simplify regulation to make it easier for the good advisers to provide their services to a broader base whilst increasing policing to stop the small number of baddies.

    In the meantime advisers and wealthy clients will continue to benefit on the back of regulation, market forces and regulators’ failure to grasp the situation.

    Carry on.

  7. Pay as they call it, but I’ve yet to meet a self-employed adviser who refers to their income as pay. Also, income or turnover might be higher but so are regulatory costs and levies which have gone through the roof. However, when it comes to actual job satisfaction I would bet that has plummeted since RDR. What value do you put on job enjoyment? Too many career opportunist’s in regulatory positions that do their damage and bail out leaving the rest of us to deal with the mess.

  8. The reason that Advisers get more now, is because they have paraplanners, allowing them to sell more, meaning their salaries increase whilst the paraplanners stay the same. When they have a technical adviser like me, they can get through pension transfers like a chainsaw through butter. I once got a pension transfer done in a week, and it only minor complaint upheld by the ombudsman, with significant compensation paid out – no biggie.

    • Very good point. In fact the paraplanner does the work. The ‘adviser’ is therefore just a salesman/woman. The paraplanner in effect is providing the advice and is not regulated – thus saving the firm money. But why one may wonder is the salesperson regulated as they are not actually providing the nitty-gritty advice.

  9. We do get paid ridiculous money for what we actually do to be fair.

    The fact that we get paid 10x more for a £1,000,000 investment rather than a £100,000 investment is crazy. It’s exactly the same amount of work for both

    I’m not complaining, but give it 10 years and it will be totally different in my opinion

    • Are people really that naïve? Market forces primarily determine what you get paid and regulation has determined that market. It may well be different in 10 years but unless regulation makes it easier for significantly more advisers to set up and operate (unlikely in my opinion), the situation will stay the same.

      Regulation has effectively eliminated competition in the adviser market. It’s ironic then that the FCA are responsible for policing competition. There is a fundamental misunderstanding about competition which results in tinkering at a higher level rather than addressing the basic issues. I wonder if the 90 people (yes, that’s correct) in the FCA’s Competition Department ever ask whether the activities of the FCA affect competition?

      For example, the FCA believe that “well informed and engaged consumers can play a key role in driving effective competition between firms.” The unpalatable truth is that this doesn’t work in practice. Firstly, the vast majority of clients don’t want to be informed and engaged to the extent the FCA envisage – they just want advice on what to do from someone they trust. Secondly, if there are not enough advisers to go round there will be no competition regardless of how informed and engaged clients are.

  10. It appears the average cost for an adviser is £3,000/£ 3,500 up front and 1% of money under management, over and above the product providers fees charges and management fees. With this in mind it would appear that only clients with portfolios in excess of £ 1,000,000 might obtain “Real Value for Money “. Clearly a simple transfer analysis is £ 3,000 so for example a client paying these and product providers exit fees and entry fees – means these are most profitable for the restricted numbers of advisers out there – and aids and abets churning. Looking at the conduits of corruption at Banks and their lies and deceit on product flogging to the less well off and the vulnerable – and being bullied by Bankers salespeople – the FCA has aided and abetted these predator activities from reckless banks and insurance companies – under the Governments Regulator (s) the FCA and PRA under “Treating Customers Fairly “. These ” FCA rules”, are more complex and complicated than purchasing a Railway Ticket.

  11. I have no idea where MM got these figures from but my salary and dividends since RDR have not changed. My remuneration is significantly less than the stated figures and I run a profitable practice. Maybe the employed advisers in the large Nationals do earn these sums but I suggest the majority of small IFA business owners earn significantly less because we have the sense to reinvest the profits back into the business rather than strip it out as income.

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