A recent survey* suggests the average pay for a UK financial adviser last year was £89,696. That is almost three times the UK average and probably a third or so more than that for other professionals like accountants and solicitors.
I am always a little dubious about these surveys but I suspect these figures are accurate and, if anything, a little light (as the really high earners in our industry are typically a little shy about admitting their incomes). The average also includes lower-level and younger advisers coming through academies with the survey confirming that 25% of advisers earn over £100,000 a year; and anecdotally we know of advisers earning 2, 3 or even 4 times that amount.
So how can other firms afford to pay such tremendous incomes?
One of our bugbears has always been about how few firms openly disclose their charges. That is why it was interesting to read the FCA’s rather snappily titled 65 page ‘Evaluation of the Impact of the Retail Distribution Review and Financial Advice Market Review’ which was published last month. I’ll give you the soundbites.
The average cost of financial advice is 0.8% a year with fees tending to cluster around 0.5, 0.75 or 1% a year. When advisers were still paid by commission the typical annual rate was 0.5% a year so the unintended consequence of moving from commission to explicit charges has been a pretty stiff increase in how much most people pay for advice. And that has coincided with an equally sharp increase in average adviser pay; from £51,619 in 2012 (the last year of the old commission system) to £86,696 last year.
The report also found that higher fees did not result in any ‘noticeably different features’ nor was their evidence of economies of scale. In other words, higher fees don’t equate to higher service and the percentage fee doesn’t generally fall for larger investments.
The average cost for initial advice is 2.4%. Initial commission was generally 3% so this is a step in the right direction although there are still very large national firms who look to charge 3, 4 or 5% upfront.
The FCA says the average cost of underlying investment portfolios was 1.1% a year. So, assuming platform costs of 0.3% a year that means the average total cost is 2.2% a year (0.8% for advice, 1.1% for investments and 0.3% for the platform). We can admit to being at the evangelical end of things when it comes to costs. We work remotely and started the business with a clean slate, so we wouldn’t necessarily expect other firms to be able to compete with us on cost. But does that mean an average of 2.2% a year is fair or reasonable?
I don’t think so. Not even close. A lot of advisers try and justify their fees in a ‘quality over cost’ or ‘you get what you pay for’ kind of argument. Like all the best fabrications there is a strong element of truth in that but what is also true is that cost matters. Charges, just like returns, compound over time and make a huge difference to the final value of someone’s portfolio. Yes, if you decide to pay for advice then it needs to be good advice but that is not an excuse for open-ended costs.
To give a little perspective, our average annual advice fee is about 0.32% (and maximum 0.6%) with portfolio fund charges of around 0.5% and platform costs of between 0.1% and 0.15%. We have many clients paying 1% a year or less and very few who would pay more than 1.2-1.3% a year. As I say, we don’t expect other firms to operate as we do but nevertheless I think total costs between 1.5 and 2% a year should be perfectly achievable. We have always maintained that total charges of 2% a year or above should act as something of a red flag so finding that this is actually well below the average fee is something of an eye opener.
The good news is we have no plans to be average. We don’t provide an average service for our clients; we don’t recruit average people and we won’t be charging average fees.
* Published by Paul Harper Search & Selection.