Apparently, those who benefit from financial advice have seen their overall wealth increase by £47,000 over the previous 10 years according to a study commissioned by Royal London which was conducted by the International Longevity Centre. When I first came across this study, I paused, reflected and thought “nonsense”, it must be a lot more, but admittedly it’d be incredibly difficult to quantify.
I mean, how do you quantify the advice that identifies cost-effective protection needs for a client that 15 years down the line results in a now single parent having enough funds to support the education of her children, maintain a roof over their heads whilst being able to grieve the loss of a spouse without the pressure of needing to worry about money?
How do you quantify the value add of maximising the growth of your surplus income and savings by appropriately choosing the correct tax wrappers and then tailoring the underlying investments?
How do you quantify the value add of knowing how and when to access those investments in the most tax-efficient manner possible?
How do you quantify the value add of structuring your wealth in such a way to benefit your children and your grandchildren?
How do you quantify the value of the advice given to a director of a business that goes on to protect the jobs of their employees and the valuable services they offer to their customers by putting in place effective succession plans in the event of their death? I don’t know, admittedly it’s beyond me.
Financial advice has come a long way; advisers are better qualified than ever before, and the industry is more closely regulated than ever before. Admittedly there’s a tug of war between the industry and the regulator, but in my opinion, it’s a healthy one.
The business model
In saying that it’s important you know how the industry works. For instance, an adviser’s performance is based on two metrics, and they are rarely standards of service. These two metrics are one, assets under management (AUM) and two, the initial advice fee.
The AUM is a good measure of the ongoing income that’s likely to be generated by an adviser who charges an ongoing advice fee. This fee is usually between 0.5 – 1% per year; therefore, £1,000,000 under management on which there is a 1% ongoing advice fee, earns the practice, £10,000 per year. Of that amount, a portion will go to the adviser as per his/her contract, i.e. self-employed or employed. Where protection is put in place, a good measure would be £1,000 commission for every £50 premium. The commission that is paid to the adviser applies a loading to the premiums you pay for the entire term of the policy so it could cost you a lot more than the commission earnt by the adviser.
Advisers who’ve accumulated enough AUM can effectively sit back and service only those clients and the odd referrals that come out from them. Their motivation is to provide quality customer service to a manageable client base but also to have a better work/life balance.
The AUM is crucial because it is the most significant factor in determining the value of the financial advisory business which is important when the Director of the practice wants to exit, that is to sell up and retire.
Most advisers tend to be self-employed, so in the early years, their income is driven largely by the initial advice fees charged. Standard fees being 3% of the amount invested. Employed advisers, on the other hand, need to justify their salary, so if an employed adviser is on a basic salary of £60,000 per year, he/she would need to usually validate this income by a factor of 3. This means he/she would need to generate £180,000 of fee income to incentivise his/her employer, which would, in turn, allow the adviser to earn bonuses over and above the validation figure.
My biggest problem with the remuneration structure, despite the internal compliance checks, despite the regulations, despite consumer access to the Financial Ombudsman Service, is the simple fact that the adviser’s income or their job security is overwhelmingly dependent on an investment being made. This is contingent charging.
Now, in my opinion, a fairer model would be to negotiate a fixed fee based on the complexity of the work, even if that means them issuing you with a report simply explaining your situation and then concluding ‘take no action’. I’d even go as far as to say, that the ongoing advice fee should be fixed rather than being dependent on the AUM.
In addition, where possible, pay that fee via standing order and not from your underlying investment funds, which could risk encashing your investments to pay for said fees at the wrong time.
A financial adviser doesn’t grow your investment, that’s the job of a fund manager, the adviser ensures whether that particular investment product is suitable for you to determine which underlying investment strategy should be applied to your investments.
That activity is paid for by way of the initial advice fee, so I don’t see why it should be relative to the performance of the fund when the adviser may not be doing anything for it grow.
Similarly, the adviser may be conducting the annual reviews which incur a fixed cost for them regardless of how the fund has performed in that year and in turn suffers a loss for no fault of their own. Hence my position it’s generally fairer to allocate fees in accordance with the services provided.
QUICK TIP: Every time you have a meeting with your adviser, keep a meeting record of what was discussed, who was present, how long the meeting lasted, and what the outcome of the meeting was. If your adviser does this anyway, just request a copy and make any edits and return.
What to expect
A financial adviser is not there to make you wealthy and achieve financial freedom. If they say they are, they don’t mean it, and it’s probably based on very poor ‘sales’ training. The only person who is going to make you wealthy, is you, along with your entrepreneurial efforts.
The role of a financial adviser is simply to manage your wealth better. What you get out of a financial adviser is dependent on where you are in your life, how complex your affairs are and even how resourceful your adviser is. Now, when it comes to determining the complexity of your affairs, leave that judgment to your financial adviser – you don’t know what you need to know to make that assessment.
Recommendation: Have a financial health-check at least every two years and negotiate a fixed fee with an adviser.
During an initial meeting, expect a conversation about all aspects of your life, I’m talking, lifestyle, career, family; parents and children, property, retirement, aspirations and concerns which will allow the adviser to get a good picture of your world and consider what solutions would be most appropriate for you. For instance, some investment solutions won’t be suitable if you are planning to leave the country. Or if you expect to receive an inheritance whilst in a difficult marriage it could lead to advice around structuring any windfall in a certain way to ensure it’s protected from a divorce settlement claim.
Remember you’re not only tapping into technical advice but also the adviser’s resources and professional connections.
A good initial meeting could last around 2 hours. Some advisers will offer that initial meeting for free, especially if you’re closely connected to an existing client. If your parents have a financial adviser, I’d suggest you reach out to them first.
What to appreciate in an adviser and what to look for (not in any order of preference):
- Integrity; difficult to assess this in an initial meeting, but it’ll either come across or won’t over the more ‘touches’ you have. An adviser with integrity may not know the immediate answer but will go out of his/her way to find it before recommending any course of action and thereby being closer to any ‘sales target’.
- Technical competency; once upon a time, many years ago, I still remember a senior manager saying technical competency didn’t matter, only that you needed to know how to sell. Utter nonsense. Smart advisers will have a broad understanding of investments, tax, law, different financial structures and will be able to add immeasurable value as a sounding board for some ingenious ideas some entrepreneurs come up with, that with a few tweaks could work.
- Resourcefulness; a very good adviser will also be very well connected to other quality professionals who can add value to you personally and in terms of your business.
- Good fact-finding skills; you’ll get an idea of this from the initial meeting based on the questions they ask and comments they make. You should get a few ‘ahaa!’ moments and ‘I didn’t know that!’.
- Likeability; you need to like your adviser. This is someone who will be in a very privileged position to know about your personal financial affairs and someone with whom you’ll be in regular contact with. Liking your adviser will make the relationship so much better.
- Transparent Fees; if you don’t know how much you are paying; you can’t appropriately measure value.
Goodluck and hope the above helps!
Mohammad Uz-Zaman is a private client trust and estate planning consultant who holds accreditations across regulated financial advice and estate planning. He holds graduate and post-graduate degrees and he is also an associate member of the Society of Trusts and Estate Practitioners (STEP). He works closely with financial advisers, general practice solicitors, accountants and investment managers from several major practices.