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 me taking financial 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