Employee advisers are the future – the era of the self-employed adviser is coming to an end. That’s the view you will hear from most people who run financial advice companies. Increasingly, advisers seem to be moving to become employees – but the self-employed adviser is very resilient and is a long time agoing.
In practice, many self-employed advisers are not strictly self-employed as such; they work through their own personal service companies.
There is a school of thought among adviser business-owners and advisers themselves that, in many respects, there is no difference between self-employed advisers and their employee counterparts – apart from their employment status and, in most cases, their pay deal.
Many firms say that culturally – and most importantly in regulatory issues – they are identical. Such firms say their advisers all have the same attitude to clients, obey the same rules, follow the same processes and are just as loyal to the firm.
Of course, much depends on the culture the firm can establish among its advisers and other staff. Get it right from the start and such equivalence indeed seems to be possible.
And yet, most people who run adviser businesses say in their experience there are cultural differences. Something in favour of employed advisers is they seem to be more biddable. They will accept new strategies, processes and solutions more quickly and with less persuasion. They work more easily in teams and have a stronger tie to the firm and what it stands for. It works against employed advisers that some business owners and managers see them as less entrepreneurial or motivated to go out and win new clients.
Another factor is ownership of clients. In a very real sense, of course, nobody owns clients – they own themselves. But at another level it is a meaningful issue, although it is often more a question of culture and management as the contents of contracts. It is often argued businesses can protect themselves against a departing self-employed adviser taking their clients with them as they can stop an employed adviser transferring their clients.
There are definite differences between the ways that the two main types of advisers are paid.
According to Platforum research of 249 advisers, 74 per cent of the self-employed advisers were paid variable remuneration based entirely on the income they generated from clients, with no adjustments for other criteria. In contrast, only 8 per cent of employees were remunerated exclusively on the basis of the income they brought in from clients. 88 per cent of employed advisers were on fixed remuneration that made up half or more of their earnings.
Fixed remuneration for advisers works well for corporate profitability when business income levels are as high as they have been in recent years. But, as many businesses have discovered in the past, fixed costs can be really bad news when income levels dip with declining investment markets and reduced business activity. The variable remuneration model exemplified by most self-employed adviser-based businesses is more resilient when sales drop. Businesses that employ advisers but remunerate them substantially on a variable model have flexibility for their costs that they will be glad of in more difficult times – possibly quite soon.
The other factor that hard-headed business owners and managers need to remember is it is generally easier and cheaper to end the contract of a self-employed adviser than to lay off a long-serving employee. Employment rights are very strong, contractual rights are typically less so. If a business is forced to downsize, the process is likely to be quicker and easier with self-employed advisers.
And then there’s the tax and national insurance situation. All things being equal it is cheaper to pay £1,000 to a self-employed person than to an employee. The national insurance contributions are a lot lower for both sides and the self-employed can almost certainly claim more expenses in most circumstances.
An upcoming problem is the introduction of new rules from April 2020 that will make businesses liable for determining the tax status of contractors who work for them through private service companies – the normal vehicle for self-employed advisers. The changes to the rules known as IR35 will create significant cost and compliance challenges for businesses that rely heavily on a flexible workforce. Business owners and managers should check now whether their arrangements are caught by the new rules.
Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum.