Lower-producing advisors powering growth: Includes Chart

The big gain for account managers came on the asset side, as the average book jumped to almost $50 million. Some of that gain can be attributed to a rebuilding of the underlying average client base to about 480 clients. Yet the asset gain far outstripped the basic bulking up in client rosters; average assets under management grew by more than 31%, vs only a 13% increase in the number of clients on the average banker’s book.

This outsized gain in average AUM also flowed through to bankers’ productivity, as measured by AUM per client. With assets growing twice as fast as client rosters, average AUM per client increased notably, to $140,626 this year from slightly more than $111,000 last year

These increases in AUM and productivity have been foreshadowed in the banks’ earnings for the past few quarters. The banks have dominated the resurgent mutual fund sales, and this component of the business has grown comparatively more important within the overall bank. But what distinguishes the banks from their rivals in the retail investment business is that it appears to be the middle- and lower-producing portion of their sales forces that are powering the growth.

Among investment dealers and mutual fund dealers, there has been a heavy emphasis on client segmentation for some time now, with advisors concentrating on their largest, most profitable clients. This focus has been reflected in dealers’ sales numbers, too, with the bigger producers generating the lion’s share of growth. The result is a widening gulf between the elite “haves” and the “have nots,” particularly among the fund dealers.

This is not the case at the banks and CUs IE surveyed. Dividing the top-producing advi-sors (as measured by AUM per client) from the rest of the field, IE‘s data reveal that these financial institutions are getting impressive growth from their average and smaller producers. The top 20% of account manager actually saw their average asset base erode slightly year over year, to $85 million from more than $87 million. However, average productivity still grew for these bankers as their average client base was slashed even more aggressively, to about 280 clients this year from more than 325 clients last year. As a result, average AUM per client for the top 20% rose to almost $335,000 this year from slightly more than $300,000 last year.

The data suggest a different trend among the other 80% of account managers — they saw strong year-over-year growth in both the number of clients and assets on their books. Their average client base swelled to slightly more than 530 clients in 2007, from 440 clients in 2006. At the same time, average AUM jumped to $41 million from less than $26 million. On a percentage basis, while the average client base grew by about 20% year-over-year, assets are up almost 60%. As a result, the lower-end advisors’ average AUM per client also surged — to more than $92,000 this year from slightly less than $64,000 last year.

This impressive increase in productivity among the smaller producers highlights the distribution advantage of the banks and CUs: their branch networks. Not only do banks and CUs have existing relationships with a very broad base of clients, their largely salaried workforces are in a better position to build from the bottom. Without the pressure to produce that other sales forces face, advisors at banks and CUs are able to gather assets wherever they can.

For account managers, salary remains, by far, the single biggest component of their compensation, averaging about 70% for the overall population, with the top 20% getting about 62% of their pay from salary, vs 73.4% for the rest of the advisors. While the portion of revenue attributable to salary remains notably higher for the majority of account managers than it does for the top 20%, the share of revenue based on salary has declined for that group from about 79% a year ago, suggesting that variable compensation is becoming more significant to account managers. So, while account managers may not be under the same pressure to produce as the average advisor at a fund dealer, the push for production is growing stronger.

@page_break@Indeed, IE‘s data show that both fees and “other” forms of compensation are growing sources of revenue for all account managers. For the top 20%, fees now make up 12% of revenue and “other” accounts for 24%; the contribution from transactions has shrunk to virtually nothing. It’s the same situation for the other 80%: fees now constitute about 7% of revenue and “other,” 19%. For them, too, transactions have become inconsequential.

These evolving compensation trends are accompanied by shifts in the distribution of accounts within account managers’ books. Once again, the bigger shifts are taking place among the bottom 80%. Accounts of less than $250,000 remain the single biggest component of their books, representing 54%. Yet, this is down notably from more than 64% a year ago.

At the same time, among the bottom 80%, the other account size categories (with the exception of the $2 million-plus) saw year-over-year growth. Accounts in the $250,000-$500,000 range made the biggest leap, to 29% this year from 22% in 2006. The other size ranges saw more modest gains.

As for the top 20% of account managers, the small accounts are also the largest single component of their books, at 38% — unchanged from a year ago. This top 20% group’s share of the largest accounts is also relatively unchanged from a year earlier. Where they have seen movement is in the middle of the market. The share of accounts in the $250,000-$500,000 range is up to 35% from 28%. Unfortunately, the portion of their books that falls into the $500,000-$1 million range is down to 18% from 24% a year ago.

Not only are the account distribution trends for the two groups quite different, but asset allocation trends are also dissimilar. The top 20% is undergoing a shift away from proprietary products and toward third-party products, while things are moving in the opposite direction for the other 80%.

Both groups have about 29% of their books in third-party products. But for the top 20%, this represents an increase from less than 20% last year, whereas for the other 80%, that’s a drop from more than 38% last year. At the same time, the top 20% has seen its allocation to proprietary products fall to 46% this year from slightly less than 60% last year; the other 80% of account managers have seen their share of house products rise to 52% from 36%.

Even in the less significant asset categories, the two groups are swinging in different directions. The allocation to cash is up for the top 20%, whereas for the rest of the group, it’s down. The top account managers’ share in “other” products also increased modestly year-over-year; yet, the rest of the industry halved their allocations to these products.

In many areas, the top 20% and the other 80% are moving in opposite directions — all of which suggests that, at a time when much of the retail financial industry is becoming increasingly polarized, the banks’ sales forces are beginning to converge. IE