What is the real cost of financial advice?

The cost of providing financial advice has not been readily measured or quantified across the industry, writes Paul Barrett.

There is much debate in the financial services industry regarding the role and structure of advice.

Representatives of government, corporate regulators, the industry fund sector and advisers vigorously discuss issues such as fees and commission payments, conflicts of interest, vertical integration, subsidisation and access to and the value of advice.

A central element of all these issues is the cost of providing advice, but to date this cost has not been readily measured or quantified across the industry.

We recently commissioned research by Andrew Wheeler of Dealer Group Advisers to explore this issue and address such questions as how do advisers use their time and how does this compare with best practice? Also, what average hourly charge would be needed to sustain a fee-for-service practice?

The study recognised that no two planning practices are the same.

Interviews were therefore conducted with a wide variety of self-employed businesses, from generalist practices to those specialising in risk, investment advice, pre and post-retirement planning and self-managed super funds.

The businesses surveyed ranged from a single operator practice with an administrative assistant to a practice with four partners and 15 staff.

The annual revenue generated ranged from $200,000 to over $4 million. Each business maintained a focus on advice.

One significant finding from the study was that financial advisers must spend more time fulfilling training and compliance requirements than other similar professions.

Generating the industry average revenue per income producer of $300,000 requires an hourly rate of $340.

Consequently, the cost of providing the most basic advice is likely to be at least $700, while the average full financial plan costs advisers $3,750 to produce, present and implement.

Furthermore, analysis we undertook in June 2008 showed that clients’ preparedness to pay is well below the average cost of advice. For one-off advice, 80 per cent of clients surveyed said they were prepared to pay $200 or less while only 16 per cent of clients were willing to pay $3,500 for more complex planning.

This is a timely message because Australians need advice. It is important that consumers make intelligent decisions and avoid mistakes in a time of extreme market volatility.

Advisers can demonstrate great value in such difficult circumstances.

There is also great value in emotional coaching — managing expectations, enforcing discipline and reducing uncertainty regarding client goals.

Personalised advice is becoming more important. There are a number of substantial community issues for which advice is important.

Examples are retirement income adequacy, the exponential increase in national private debt, and the financial implications of an ageing population.

Given that access to advice is vital, this research raises some important issues for our industry.

The first is that the majority of consumers are not prepared to meet the cost of providing advice. We must increase our efforts to promote the value of advice and ensure consumers understand what they can achieve with the help of an adviser.

Secondly, advisers must carefully consider their fee structures and the service elements they offer to clients.

One issue, for example, is that practice profitability is usually driven by ongoing client relationships, while a considerable proportion of value for a client is in the initial advice.

Thirdly, productivity and efficiency are imperative in a successful advice business.

If an adviser is able to increase their productivity by 10 per cent, the hourly rate required to generate average revenue falls from $340 to $290. Here an adviser must effectively use systems, processes and technology to enable the delivery of personalised advice.

It is essential that the industry is better able to articulate the value of advice. First, however, the industry must form an educated view regarding the cost of advice, so we are better armed to engage in debate about issues such as advice models, conflicts of interest and access to advice.

Paul Barrett is general manager distribution at Colonial First State.