For anyone over the age of 25 in the UK, the national minimum wage is £8.72. The lowest-skilled worker in the country therefore knows, with certainty, what an hour of their labour is worth.
How many financial advisers, however, know what an hour of their time is worth?
This is an increasingly important question as advisers re-think their businesses models. It is also a growing area of interest for regulators.
Charging clients a percentage of their assets under management (AUM) as an annual fee as obvious appeal. It is simple to explain to a client, and the adviser benefits from having a guaranteed, recurring income.
Increasingly, however, it does not reflect what advisers actually do.
Value for money
This year’s FT 300: Top Registered Investment Advisers, which surveys the 300 largest RIAs in the US, found that investment management takes up just 25% of an adviser’s time, on average. So does it make sense for advisers to base their remuneration entirely on something which only occupies them for a quarter of their work day?
Clients are also, understandably, questioning whether an AUM-based charge is giving them value for money. Is there any more work involved in investing £100 000 in a share or unit trust fund than there is in putting £20 000 in the same investment?
This is, of course, not a new debate. It has been going on for many years. Many advisers recognise the challenge and are experimenting with and adopting different fee models.
Appreciating your time
With fee models under increasing scrutiny, are financial advisers able to value their time?
However, a new survey conducted by Inside Information found that most advisers still struggle with a fundamental question: how much are they worth.
Inside Information is an information source for financial advisers run by journalist Bob Veres. It asked over 1 000 advisers in the US about their fee structures.
One of the key elements of the survey was to find out whether advisers had an appreciation of what their time was worth.
“If advisory firms did want to shift from an AUM fee model—where determining their compensation is a simple multiplication exercise—to one of the more complicated models, it would require them to better calculate their internal costs of service,’ the survey noted. “If they moved to an hourly model, they’d need to know the value of an hour of their time, and the value of an associate advisor’s time who may also be working on the case.”
What Inside Information found, however, was that only 19.21% of respondents track their time to determine their internal cost of service to clients. This increases to 30.56% amongst advisers who do not charge an AUM-based fee.
It would therefore appear that this is a useful first step in moving to a different fee model.
Perhaps even more interesting is that Inside Information asked advisers what they thought an appropriate hourly charge would be for an experienced adviser.
“We attempted to determine the value of an hour of a senior advisor’s or founder’s time in the most straightforward possible way: we asked the survey respondents to give us a figure,’ the report noted. “This figure, it was made clear, did not require them to actually charge for hours of their time; they were merely being asked to tell us what they would bill clients if they did bill by the hour.
“The median response from the full sample was $300 (£225) per hour. But the range of responses was quite large: one advisor said that he/she would value his/her time at $25 (£19) an hour, while another, at the high end, self-valued at $1 500 (£1 128) an hour.”
Although $300 was the median response, the most popular response was $150 (£113), which was chosen by 22.94% of respondents. This was followed by $200 (£150), which was chosen by 18.72%.
What this shows is that there is very little consensus among advisers themselves about what their time is worth. This also makes it confusing for potential clients.
What can someone expect to get from an adviser who charges £200 per hour that they wouldn’t get from one who charges £100 per hour for instance? How does one adviser offer twice as much value as the next one?
These are issues that the industry is clearly still grappling with, and that require advisers to be able to articulate more clearly what they are offering and what its value is to clients.
Picture: Andrea Natali via Unsplash
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