Why are Financial Advisers Expensive?
This article is based on a question I asked myself ten years ago when seeking financial advice.
I was considering a very specific investment, and wanted to shop around for a second opinion from an authoritative source. So I compared financial advisers and selected one which appeared to offer a value-for-money service.
I explained my limited requirements, and explicitly stated that I did not need a fully comprehensive review of my finances. The quote that they provided was still £1,000.
This price-tag came as a shock, and indeed these quotes still do surprise people who expect to pay a price which equates to an hour or two of someone’s time.
In this article I will explain why financial advisers appear to be expensive for what they provide. In short, it’s because above and beyond the cost of the financial advisers’ wage, they need to cover their overheads.
Lets begin by considering the overheads that a financial advice business has. Overheads are ongoing costs which do not vary with the volume of business undertaken. Whether or not their advisers were busy or left with nothing to do, overhead costs will eat away at the business bank account each month:
Property costs. The vast majority of financial advisers will have a physical office location because clients prefer to meet their adviser in person. To promote a good brand and give an impression of stability and success, the advice firm will feel pressured to have swanky reception rooms and client suites to hold these meetings in. This rent is higher than an online or telephone-based service would need to incur.
Training costs. Most financial advice firms will sponsor their trainees to complete the qualifications needed to become a financial adviser. This is not a small ask. Training can often take solid months, if not years, to achieve chartered status. Many qualifications are equivalent to a bachelor’s degree. If this is being sponsored by the employer, this will lead to higher costs for the firm.
Supporting staff. As well as a receptionist and cleaning team, to keep the office running smoothly, a firm will also need para-planners who take care of the administrative work on behalf of the financial advisers. You may not see a paraplanner when you visit the office for a meeting, but they will nevertheless spend time on your case, documenting your requirements, performing research and complying with regulations. Regulations are a big deal because:
The costs of regulation compliance is high. Financial advisers are personally and corporately overseen by the Financial Conduct Authority in the UK. This oversight is very strict (Relative to regulatory oversight of other industries such as entertainment for example), because of the important role that financial advisers play, and the reliance that the public places on good advice.
Each of these overheads will form a significant part of the fee that you pay for financial advice. Due to the need for an attractive physical location and a well-trained and heavily regulated workforce, the amount of other costs which are absolutely essential, are through the roof.
This is why the cost of preparing even a short piece of advice is capped at several hundred pounds. Without this limit, the firm would fail to generate enough gross profit to cover these overhead costs in total.
Therefore, the next time that you receive a quote from a financial advice firm – bare the above in mind. You’re not just paying for one person’s time, you’re probably paying for three. And due to the rules and regulations, a vast amount of paperwork will need to be completed before you can even be accepted as a customer. It might not be glamorous but it’s labour all the same, labour which you effectively need as much as the financial advice itself.