Your IndustrySep 17 2014

Advisers must bridge post-RDR income gap – Kitces

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The gap between launching a firm and having enough advised clients to pay a sustainable wage has become even wider, the founder of financial planning website Kitces.com has said.

Michael Kitces, a certified financial planner, said the RDR has accelerated a shift in demand from financial products with commission to fee-only firms and created high barriers to entry.

He said it was affecting not only start-up costs, but also the “opportunity cost of foregoing potential wages” in trying to build up an IFA practice.

In his latest newsletter, Mr Kitces suggested five ways to bridge the gap.

He said hourly fees are “the primary gap-filler for the current generation of financial planners”. This is in addition to project planning fees for potential clients whose needs go beyond hourly sessions.

Mr Kitces also recommended insurance commissions, given that many established advisory firms believe this business is “not worth the trouble”. As such, there remains a gap in the market for clients seeking insurance advice, he said.

Mr Kitces’ remuneration model
Year 1Year 2Year 3
Upfront planning revenue ($/£)9,00018,00030,000
On-going retainer revenue ($/£)11,70041,10086,850
Hourly revenue ($/£)3,6008,40019,200
AUM revenue ($/£)2,2508,25019,500
Gross revenue for year ($/£)26,55075,750155,550

Alternatively, Mr Kitces suggested starting as a paraplanner to build a client base alongside stable wages while allowing gathering expertise in the field.

Failing that, income from “a side gig”, while nurturing a financial planning practice, should not be ruled out, he said.

Mr Kitces is optimistic that these measures, accompanied by an accumulation of one to two new clients a month, could compound to build a high revenue stream.

Adviser view

Steve Laird, certified financial planner for Belfast-based Carrington Wealth, said: “It has become easier since the RDR to bridge the gap. Although some firms use restrictive governance, clients can go with advisers should they break away and start up their own firm. However, the key when starting up is to get a watertight proposition: be utterly open and transparent and clients will introduce you to other clients. The start-up cost and revenue models are not unrealistic, although it depends which area of the market you are targeting.”