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.