Recently, a financial adviser proudly shared on LinkedIn that their managed client funds had skyrocketed from £4 million to approximately £50 million over the past five years, boasting an impressive increase of around 1,150%. While this might seem like a remarkable achievement at first glance, a deeper analysis reveals a more concerning picture, one that I refer to as "asset hoovering."
The Fee Structure and Its Implications
Let’s dissect the financial implications of this so-called success. If the adviser charges 3% in initial fees and 1% annually, they’ve generated on average £30,000 annually from initial fees and a recurring revenue stream that started at £40,000 and ballooned to £500,000. While these figures may showcase the adviser's profitability, they obscure the reality of client outcomes.
Evaluating Client Outcomes
The fundamental question we must ask is: what have clients gained from this? During this period, the adviser has effectively made no money for the clients. The funds they manage are essentially the clients’ own savings. Given the short timeframe of five years, the miracle of compound interest would not have had significant time to work its magic. After accounting for inflation, fees, and taxes, the real investment return is minimal, and certainly not exceeding what clients could achieve on their own by investing directly in the market.
The Realities of Financial Advising
Some might argue that there could have been some tax savings. However, this falls under financial planning, not advising. In the long-term, tax wrappers provide little differentiation when all taxes are considered. Even if we generously assume that tax savings justify the adviser's fees, it’s worth scrutinising the broader value provided.
Common Justifications for Financial Advising
Financial advisers often present a series of justifications for their services, including:
Fee Reduction: Advisers propose to save on fees, net of their own fees.
Enhanced Returns for Risk: Advisers promise market-beating returns within a given risk budget.
Alignment with Risk Profile: Advisers ensure investments match the client’s risk profile.
Consolidation: Advisers offer to consolidate all pots into one for easier tracking.
Pension Freedoms: Advisers unlock new drawdown and pension freedoms.
Socially Responsible Investing: Advisers align investments with the client’s social and environmental values.
Questioning the Necessity of Advisers
A critical examination of these justifications reveals that most of these objectives, or the clients' true goals, could be met without moving assets. In the broader scheme of a holistic financial plan, the tangible difference these recommendations make is often negligible. Over the course of my 40-plus-year career, I have seen these justifications recycled repeatedly, and it begs the question: after numerous financial scandals involving scams, misfeasance, and mis-selling, has this approach not proven to be a zero-sum game?
The Hall of Shame
The practice of asset hoovering essentially amounts to bottom-feeding off naïve clients. By measuring success in terms of asset accumulation under management, rather than genuine client outcomes, the financial advising industry perpetuates a flawed and exploitative model. Instead of celebrating asset hoovering as a measure of success, it should be viewed as a hall of shame.
In conclusion, it’s high time we called out this practice for what it is—BS. Clients deserve transparency, integrity, and advice that genuinely adds value to their financial well-being, rather than lining the pockets of advisers.
By shifting the focus from asset accumulation to meaningful client outcomes, we can foster a more ethical and effective financial planning industry that truly serves the interests of its clients.
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