Why do advisers want clients they don’t want?

This morning, I read an excellent piece in NMA where Alan Higham said that MAS needs to carry out an independent audit of the advisers listed on its planned retirement advice directory. Whether it is an audit or some form of certification, I know not. I do know that folks with less than £50k, typically, in their pension pots, should not be referred to any adviser. They should only be referred to those who have the competence to offer this somewhat specialised advice; and they must demonstrate that they are willing and able to offer it at a sensible price.

I have interviewed many hundreds of advisers, and guess how many I have met whose proposition includes advising people with small pots whose main issue is ensuring that the money does not run out before life does? You might have guessed – nought, none, zero, zilch!

In our last round of research, with the exception of 4% of respondents who offered corporate advice and dealt with DB and DC schemes, not one suggested interest in annuity business. The typical response was “we write a couple a year.”

Most IFAs have a long and detailed process. They are either financial planners or investment advisers. There processes are so expensive that fees have typically risen to 80bps and often to 100bps per annum. Indeed, one adviser told me on Tuesday that at higher levels, he reduced his fee to 125bps! These ad valorem fees are based on sums on typical portfolios of £100 – £500k. In addition, initial fees tend to start at 3% or a flat fee that might be from £1,000 – £2,500. How on earth can such tiny portfolios be profitable to them.

My personal view is well known. My work on benchmarking the adviser business, jointly authored with the estimable Michelle Cracknell, is available free* (or at no cost as many advisers appear to prefer).

When we published, I received some delightful, charming and largely unrepeatable comments from some of our anonymous, professional financial advisers. Before anyone starts down that road again, please come up with a proposition that will deliver appropriate advice at an appropriate price to those with portfolios of £20 – £50k – a précis will do.

Advisers in mass affluent and HNW markets must ensure that costs are reduced by cascading work down the line in order to stay competitive in tomorrow’s world. Out of over 40 award entries I examined last week, only one asked potential clients to complete a fact find online – saving the client probably around £500, as opposed to the usual process where a qualified adviser spends hours asking the questions at their published charge out rate.

The FCA now recognises that advice can be 100% online and automated. It recognises that simplified advice is necessary; it will now accept a hybrid proposition. Hopefully, they will soon join the rest of mankind (and George) and recognise that guidance and advice are the same thing! OK, perhaps that is too much to ask. Advisers with innovative ideas and propositions will offer better advice at lower cost.

The new ‘at retirement’ market is a different proposition. If advisers wish to offer advice (or guidance) to typical retirees with small pots, they are going to need expertise, technology, scale and capital. Then, there will be no guarantees. People like Alan Higham have built businesses that can address specific markets on a mass basis. They have the know-how; they have the reputation and the propositions that are required to attract investors. They are rare.

I just do not understand why there is so much ranting (I know, I know!), by those who just should not give a proverbial Clark Gable.

In a dozen or so comments below the article I referred to, the only reference to the client was an anonymous adviser (sic), who said, “I have to have the correct qualifications to advise and if I am a bad egg, the FCA will fine me, put me out of business and the FSCS will cover the client.”

Sadly, of course, this is not the case – the FCA rarely put advisers out of business.

Let us be clear, passing a few exams, most of which are multiple guess, does not qualify an adviser to put a client in a situation where their only recourse is the FSCS, there are small matters such as duty of care and TCF. It is time the good advisers condemned the anonymous, the noisy, the selfish and the incompetent so that the sector can start feeling some pride in what it does.

And, of course, it is quite ludicrous that these same IFAs should contribute to the cost of the guidance, or is it advice? On that, at least, we might agree.

* http://www.cwcresearch.co.uk/No_small_change.pdf


9 thoughts on “Why do advisers want clients they don’t want?

  • “…please come up with a proposition that will deliver appropriate advice at an appropriate price to those with portfolios of £20 – £50k.”

    Unlike some firms, we don’t shy away from offering and giving advice to prospective (or existing) clients with, what some would consider, not much money. We simply have minima in place for our work and it is then up to the client to decide whether these are appropriate for them.

    Yes, many of these clients are put off by the often disproportionate fee, but just because the fee may be disproportionate does not mean it is inappropriate. This is completely subjective and I have had a good few cases where the client paid the minimum fee despite the size of their pension/investment, simply because they needed advice and they understood that that was what it cost.

    Our minimum charge doesn’t always cover the costs actually incurred in giving that piece of advice, but it is set at a level that is still reasonable to us and, at the same time, does not automatically alienate the ‘small clients’. (It feels really patronising to call them that.) It is also our hope (and often the reality) to get more business or referrals from these clients in the future.

    As great as the idea of free advice (sorry, guidance) is, I feel it will demean the value of paid advice. There are many good reasons why we charge for advice and there is a danger of people forgetting these reasons (if they even knew them in the first place) when they get used to this ‘free’ stuff, whatever it turns out to be.

  • Hi Clive,

    Might be a slight distraction but if what you find is correct then the advisor community has a pretty grim future.

    Today we seem to have adopted a rather haughty position where everyone presumes to be only available to the 1 or 2% of the population who qualify as so called HNW.

    This approach will not create wealth in the way that our industry did for decades under the commission driven product distribution process.

    Oak trees generally grow from seeds and without these little seeds we will end up without trees. Yes it is true that you need a different economic basis for deriving remuneration from seeds as opposed to trees but unlike trees at least the seeds have a natural propensity to grow.

    I listened in wonder recently as the virtues of lifetime cash flows and lifestyle planning were being extolled by modern financial planners who were still dependent on provider administered adviser charging.

    Plus ca change as the saying goes.

  • What I dont understand is why advisers would be interested in clients with smaller sums to invest. There are plenty of higher net worth clients around, and the number of advisers is reducing.

    It’s not up to advisers to resolve the problem of the lack of supply of advice – either the market (by increasing profits, salaries etc throught the usual demand and supply mechanisms) or the government (through other intervention) can resolve this.

    • Philip,

      as suggested by my comment earlier – the amount of money the client has to invest is (almost) irrelevant. It’s the client’s ability and willingness to pay the fees that matters.

      • Hi Eva
        Completely agree with you – that’s our model too.

        I should have written “why advisers would be interested in clients who are reluctant to pay”.

        There is a correlation between lower available sums to invest and lack of willingness to pay, which is logical, but it’s not a perfect correlation. Other factors come into it too, and, of course, in many cases, it’s hard to put your finger on how much a client has to invest (e.g. if they have significant final salary pension benefits).

        In our neck of the woods, demand for advice easily outstrips supply, but earnings for people in financial planning businesses are still lower than accountants (natural competitors for the future staff in our industry). Earnings need to rise in order to encourage people into our business and that means fees need to go up (or costs come down).

        If society and government want more financial planners then they need to be encouraging earnings inflation in our sector. It will take some years for the free market to work its magic.

  • @ Phil & Eva,

    Isn’t the attraction of being a financial advisers – assuming self employment – that you can choose how much and from whom you want to earn.

    I certainly would not want to earn less than an accountant or a lawyer – apart from the Magic Circle people at the top of Global outfits.

    This is what puzzles me about the notion of deciding that you will only serve people who can pay what YOU think you are worth.

    I sit here now at the ripe old age of 70 with a very significant income earned by looking after many millions for people who came to me with little or nothing decades ago.

    Sometimes it probably cost me money to process the first small savings or pension but the clients have been loyal and presumably have been happy with me and now together we are enjoying the benefits of my work and their thrift.

    Look at how people like M&S do business. They don’t segment clients or have different service levels and yes young families with a high spend do probably subsidise people like jean and me.

    Don’t build a wall around yourself because you may be keeping out your future.

    • Hi Phil
      I think that there has been a fundamental shift since the times you were talking about. I was a whippersnapper then, but remember those days.
      It’s not some new fangled thing that has changed things though. It’s the simple old market.
      Today, there are fewer advisers and more people who need advice (partly because of the savings your generation encouraged). In the olden days, it was difficult for advisers to find clients, and for most, this was the biggest challenge. That’s not the case any more.
      Our challenge is selecting the right clients from the proverbial queue outside the door. We cant deal with everyone. Most of us choose our clients for business reasons – hence the conclusions we reach.
      This may mean that there are fewer people saving up for the future, but that really isn’t our problem. That is a problem for society and government.
      Put it another way, I don’t expect McCarthy & Stone to build starter homes, I expect them to build houses for wealthy old people. And I dont expect McCarthy & Stone to care that there arent enough cheap houses for young people.

    • Hi Phil,

      I’m sorry, but I’m not sure I fully understand your comments.

      On the one hand, you seem to be saying that the attraction of the job is that advisers can charge what they want and that their charges should be on par with other professionals.

      However, you seem to question the fact that it is the adviser who decides what their advice is worth. Saying that we should not build a wall around us would suggest that you think we should be open to giving advice to anyone, even if the advice is provided at a loss to the business.

      These seem to be two different views, but I do apologise if I misrepresented any of that.

      Either way, I am an employed adviser and the minimum fees are set by the boss. I do fully support and agree with them though. To provide any kind of advice costs money and no business can afford to give the services away for free or consistently at a loss. The business will know how much it costs to provide a piece of advice, so of course it is them who decides what they are worth.

      I did mention in my initial comment that even our minimum fees don’t always cover the costs we incur, but we (well, the boss) set these fees in such a way that ‘the wall around us’ is not too high at all.

      We don’t segment clients either – we’ll be happy to talk to anyone and that is another business decision I am fully on board with. (Especially seeing as many clients that were initially ‘small’ are, indeed, loyal and often do more business at later times or recommend us to family/friends.)

      Just recently, I saw a couple of clients with a £50k pension lump sum which they wanted to invest and this earned us a nice fee (well above our minimum!). Before coming to see me though, these clients approached a different firm, only to be turned down, because that firm’s minimum investment consideration was £200k.

      I guess everyone has their own business model and charging structure as well as reasons for those. What works for one firm may not work for another.

      • HI Eva,

        Probably me being bad at saying what I mean !

        I have no interest in what anyone else charges for their work or indeed in the notion of being a ” professional ” such as lawyers or accountants . This is because people have to choose to do business with me but they, indeed all of us, only do business with accountants or lawyers because we are forced to by statute.

        In any vibrant marketplace the price or cost is normally determined by demand especially if demand outstrips supply as in our industry. In my opinion we should be listening to the market for financial advice and building and pricing our propositions to meet the market.

        There seems to be an attitude of expecting the market to fit our proposition even if it actually reduces the market available to us.

        The current pricing model being adopted by many advisers is simply an attempt to replicate the levels of remuneration paid to advisers by providers for product distribution. Consumers never thought we were actually worth the commission levels paid to us but in reality had no say in the matter.

        I also think that on top of the switch away from commission the industry still has much to learn in changing to a service proposition from a sales based model

        However I seem to be a lone voice on this issue .


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