What's on my mind

Weighing up the merits of employed and self-employed advisers

1st October 2018

The choice between employment or self-employment needs careful consideration by advisers and the firms employing them.

A lot of debate has taken place over the years regarding the relative merits of advisers being self-employed versus employed. This article highlights some of the issues that I think need to be considered and confronts some of what I believe to be myths.

“It depends”
I do not think that it is “better” to employ advisers, as opposed to contracting with them on a self-employed basis. Rather, I think that it depends on the aspirations and attitude of the adviser, and the culture and effectiveness of the management of the organisation that wants to hire them.

Some people argue that it is not possible to control advisers or to motivate them effectively unless they are employed. I don’t subscribe to this view; I have worked with companies where employed advisers were unwilling to conform and where they were unmotivated.

In my experience, it comes down to having a clear and compelling proposition, then providing the environment and the management in which to succeed – both of which need to be regularly reviewed and, when appropriate, updated.

Business owners who do not proactively manage their advisers are likely to be less successful financially, as the advisers, whether employed or self-employed, may drift away to firms where there is a sense of direction and purpose.

In my view, a centralised investment (and retirement) proposition is a prerequisite. When this and effective controls and management are in place, it is possible to have both employed and self-employed advisers working alongside each other (subject to the caveats below).

“The economics are clear”
It is often argued that it is more profitable to employ advisers than to have self-employed ones. Again, I think it depends.

The shortcoming of some firms is that they have never accurately costed and calculated the underlying profitability of the advisers that are in place, let alone what incoming advisers will cost.

Profit is not only dependent on different levels of business but also the types of business they advise on, the resources that they use and the way they use them.
Some firms have stuck with pay-aways for certain self-employed advisers, which are no longer viable in light of increased costs, for fear of losing them and have pay increase percentages based on volume.

There are no easy solutions; the reality of the situation needs to be established and a dialogue has to take place with advisers concerned.

Some will have been paid bonuses based on the misguided assumption that costs will always automatically fall as the level of adviser fees increases. This may be the case depending on the adviser, his or her level of personal organisation and the type of advice, but it does not automatically follow.

“We own the clients”
Some firms with employed advisers believe that they “own” clients and are in a stronger position than where there are self-employed advisers.

My experience tells me client retention has more to do with the strength of the firm’s proposition and the extent to which clients feel that they identify with it, as opposed to the individual adviser.

The restrictive covenants within adviser contracts can apply to those who are employed and self-employed alike; what is important is for the contracts to be both understood and accepted by the advisers. The only people who really own clients are the clients.

They can select their adviser and those who have moved on will nearly always be able to deal with clients who approach them, after 12 months or sometimes a shorter period. It is for the firm to demonstrate its continuing relevance where a client is deciding about moving with the adviser.

“The law is about to change”
This has been mooted both from an HM Revenue and Customs/level of taxation and employment law perspective for over 10 years. There has been some use of what are termed IR35 indemnity clauses to protect firms that take on self-employed advisers.

It is important for a firm to be clear in its adviser contracts what it expects of them, and for the advisers to be equally clear and to be prepared to take professional, legal and tax advice when needed.

“Communication is the key”
Good outcomes in terms of happy, productive advisers nearly always stem from an open and consultative approach by a firm’s directors or partners. That, combined with a strong culture that is client-focused along with effective management and clear direction, will be more likely to generate good outcomes and build embedded value than simply making the binary decision to have either self-employed or employed advisers, without taking other relevant aspects into account.

This article was originally published on Money Marketing

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