Why we should not begrudge IFAs high wages.

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For many ,a financial advisor is at the heart of their financial planning.

 

News that financial advisers are earning on average £90,000 per annum, should not come as a surprise. The impact of the Retail Distribution Review is now fully realised. Financial Advisers are better trained, better regulated and of a higher calibre than at any time since the late seventies when the concept of “financial planning” arrived in the UK.

IFAs have not just supplanted the old stockbrokers, they have massively increased the breadth of service and now deliver wealth management to the mass affluent. They have been well served by the increase in absolute terms in national wealth and the concentration of wealth in a broad band of the population we call the “baby boomers”.

The IFA is without doubt in a sweet spot right now and I’m not for denying their right to share in the affluence. These are good times for the markets; for all the talk of “market uncertainty”, baby boomers have seen a decade of rising markets , an increase in the value of their property and the mass affluent are so comfortable that they can now prioritise the inheritance of their estate over their own spending needs.

This confidence has led to people choosing to leave their legacy defined benefit plans in droves. Last year’s provisional estimate of £34.2 in voluntary transfers is three times both the 2016 voluntary figure and the £12bn of liabilities bought out by trustees in buy-outs, buy-ins and longevity swaps. IFAs are at the heart of this process, no meaningful transfer happens without an advisory certificate from a pension transfer specialist.

But there are clouds on the horizon. Professional Indemnity insurers, who provide IFAs with insurance against claims from clients when transfers go wrong, are withdrawing cover. They cite the unsuitable promotion of Self Invested Personal Pensions to members of the British Steel Pension Scheme as an example of problems for IFAs ahead. Some IFAs , who’s new business is overly dependent on DB transfers, may find major problems ahead.

Coupled with this pressure from their own insurers, IFAs are faced with ongoing interventions by both the FCA and the Pensions Regulator, who are actively promoting strong messages to people who still have DB rights, reminding them of the dangers of transfer.  Some occupational pension schemes are now being asked to share management information about the destination of transfers to these regulators.

While it is too early to call another mis-selling crisis, many IFAs are now questioning whether the method of charging for transfer advice – know an contingent pricing – is appropriate. Contingent pricing allows the adviser to collect his or her advisory fee from the amount transferred, rendering the fee akin to a commission. This practice that only came to the fore in the last two years, is considered a key determinant in the recent increase in DB transfers.

While such transfers have dominated the IFA trade press and are clearly a major cause of debate in IFA circles, it is not the transfer process that is adding the value, but the willingness of clients to pay advisory fees on the money transferred.

The integrated advisory and asset management model which was pioneered by St James’ Place has been massively successful. Clients happily sign up to contracts that give  SJP a guaranteed advisory income stream of around 1% of the £90bn. Platform and asset management costs push the total bill over 1.5% pa. This has become a benchmark for wealth managers. It means, after the hidden costs of fund management are included, that most people are paying around 2% pa for wealth management.

While this is the primary reason that IFAs are now earning £90,000 pa, it should not be seen as a  sustainable source of such revenues. Since the target return of most drawdown plans is around 4%pa, the additional return needed to service these plans pushes the total return required to 6% pa, achievable in the rising markets of the last ten years, but (in the eyes of many investment experts) a heroic target for those looking to provide some inflation protection to the drawdown.

From the distance of a thousand or so miles (I am on holiday and writing from Venice), the financial advisory industry looks in rude health. While there is a cachet in being fully independent, the money earned by SJP advisers (who offer advice restricted to SJP products) shows that the public are prepared to compromised “best” for “good” advice.

There are clouds; the scale of the success points to a false market and the regulators are concerned not just about the scale of fees being generated from the mass affluent, but that those on medium and lower incomes are priced out of the advisory market.

This latter point has an interesting analogy in the housing market. The Government there are forcing house builders to construct affordable housing (with limited success). Some see the robo-advice model as providing the advisory equivalent – affordable advice. I suspect that IFAs will be as wary of compromising their profitability and status by moving into mass-market advice, as house builders are of promising “housing for all”.

As I have mentioned before, advice – like fox-hunting , is likely to remain a minority sport. Like fox-hunting, it has an unspoken social cachet (you can compare financial advisers at the dinner party – unless your adviser is at – or giving – the dinner!).

This is radically different from the situation when I was an adviser last century, financial advice has become an acceptable profession and though it struggles to charge fees like other professionals, financial advisers are now sufficiently ensconced in the social infrastructure , to feel comfortable in their own skin.

The big question facing financial advisers, is can they move over time from a model that rewards their skill as advisers, rather than their capacity to gather assets under advice. I suspect that those advisers who have survived the impact of the RDR, can move further down that road.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions. Bookmark the permalink.

3 Responses to Why we should not begrudge IFAs high wages.

  1. Phil Castle says:

    As many advsiers (rightly or wrongley) still charge on a percentage basis of AUM, their earninsg recleted the affluence of the clienst they deal with. I work with clients of a more average earnings bracket, so my earning reflect that. In addition, the vast majority of adviser are NOT training new entrants which is tiem consuming and costly. I am so my personal earnings are lower than many of my peers. average age for an ISA is going up as a result and I believe it is now age 58! I am below that average at 52 and my succession plan is in place with younger advsiers traiend within the firm (age 26), yonger advsiers trained and moved on (and probably come back afetr their journeyman stage) and new trainee lined up for 1st July.
    Earningscan be very high for an IFA (maninly depending on the busienss you target and the hours you put in) , but if you fail to invest in your staff, you have no future for retirement and neither do your clients who rely on you and your successors of mindset to continue support them post their retirement and ultimately your own ceasing to advise and support.

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  2. Phil Castle says:

    Just fully read your aticle and I think some of those advisers who have been relying on DB pension transfers to drive theri business (we don’t advsie on them as we have such a small client base and rarelt take on new clients that the rare DB case gest passed to a specialist for review and in 10 years I think we’ve only seen 1 DB transfer take place) are going to have a rude awakening when they return to the real world of advice. Those of us who have not become dependant on the drug of easy DB transfer money and have also traiend new staff, will still be here in 10 or 20 years time and are continuing to hone our skills to support our clients with a focus on a return on their lives as opposed to assets under management. Money is just a means of making what might otherwise have been a “s**t” sandwich more tasty.
    Moeny might be said to make the world go round, but more doesn’t make you more happy.

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  3. Venice is good for you, Henry: a very clear observation, from a distance. Where others paint, you write.

    I’m not sure that most advisers are earning a decent return – it’s hard to tell when many firms are professional models and revenues are not the same as employment earnings. Even when not just a cottage industry, but organised on national scale, it has proved very hard to make a profit. The only model that appears to work, but also dependent on scale, is asset gathering. But, as you say, this is a model under pressure because its value proposition is economically unsustainable. In light of your comments about the lack of easy access to true advice and the poor value provided by asset management (to which we might add an observation that the need for the two to be properly integrated is not often met), we look like we are, as an industry, falling a long way short of what our customers need.

    I see no way of improving this situation without technology or digital solutions. These are already being harnessed to reduce the costs of putting money to work in public markets in essential asset classes – with no loads, lower management charges and vastly lower transaction costs. Technology is also being harnessed in the use of quantitative decision logic, both in portfolio construction and in the integration of that with individual objectives – which actuaries will see rightly as the application of asset/liability modelling methods to households and corporate finance people will see as the application of theories of ‘capital efficiency’ to the total household balance sheet. But there is a long way to go in demonstrating that these tools can be directly accessed and used by individuals without them needing any particular financial knowledge and with the only required engagement being that with their own lives, needs and wants. We can’t really tell yet whether people will prefer the privacy and intimacy of really deep and broad engagement with decision tools to the chemistry of a personal relationship, even if they appear to do so in other areas of their lives. We don’t know whether interacting with engines will better persuade people that their decisions are being informed wholly objectively, without bias. Certainly the revenue model can do that, by breaking the link with asset values and avoiding contingent charges. It remains to be seen whether most individuals really do want to embrace personal responsibility or are actually content being blindly dependent on proxies – even if it leaves them vulnerable to exploitation.

    Early versions of robo-advice are not even attempting to test this hypothesis, instead limiting their aims to replicating with machines the processes currently performed by humans. Not very imaginative when it is surely imagination that is required to reinvent the way we help people make good financial choices.

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