Advisors experience smooth sailing as books grow

This salutary effect seems to have spilled over to their advisors, who are enjoying growth at a time of extreme market stress. According to this year’s Report Card on Banks and Credit Unions, advisors at deposit-taking institutions have managed to grow their books, with average AUM rising to $49.2 million this year from $47.8 million last year.

But this growth did not come organically, as asset values have tumbled and most portfolios have taken a serious hit. To boost average AUM, advisors have been adding clients. Last year, the average advisor served 443 client households; this year, that number is up to 500 households. Nevertheless, average productivity, as measured by AUM per household, also managed to rise a little, creeping up to $182,831 per household from $171,239 last year.

However, this growth is not a uniform phenomenon. The growth in AUM is concentrated among higher-end advisors, whereas the growth in the number of client households is taking place among the rest of the industry.

Investment Executive divides advisors into the top 20% and the remaining 80%, as measured by AUM per household. Drawing that line illuminates the fact that top producers are driving the overall gains in AUM that advisors’ books have enjoyed in the past year. Average AUM for the top 20% are up to $99.4 million this year from $91.4 million last year. The rest of the industry actually saw its AUM base shrink to an average of $34.6 million from $37.5 million.

The top producers are also enjoying this growth in AUM without inflating their client ranks. In fact, the top 20% saw their average number of client households decline to 236 from 249. Couple this reduction in client numbers with the increase in AUM, and the top 20% of advisors enjoyed an impressive leap in productivity year-over-year as AUM per household jumped to $451,637 from $399,971.

Conversely, for the other 80% of advisors, the slight drop in average AUM is coupled with a big jump in average client numbers (to 582 households from 493), resulting in declining productivity; average AUM per household slipped to $99,817 from $112,345.

These opposing trends suggest that the two segments of the bank-based advisor population are experiencing very different effects from the financial crisis.

Both segments are facing the same basic pressure on client portfolios, and by implication, advisor AUM. And most of the industry appears to be dealing with that macro trend as you might expect: building their businesses by aggressively adding clients to shore up their AUM.

Yet, the top producers have apparently been able to continue to intensify their focus on high net-worth clients, adding AUM while shedding clients. This suggests that the top producers are having some success in grabbing a greater share of clients’ wallets and persuading them to consolidate their holdings.

The ability of top producers to attract a greater share of client assets may be a side effect of the Canadian banking industry’s outperformance throughout the financial crisis. Our banks have increasingly been seen as a safe harbour, as some of the largest securities firms, commercial banks and insurers around the world have failed or fallen under government control.

Moreover, here at home, banks were relatively untouched by the freezing of the asset-backed commercial paper market, which took place in the non-bank segment of that market. All of this has burnished Canadian banks’ image as a safe pair of hands.

The notion that bank-based advisors in Canada have been able to collect a larger share of wallets is also supported by a look at the shift in account distribution data over the past year, which show advisors skewing toward larger accounts.

@page_break@Overall, bank-based advisors are seeing the same basic account distribution trends: smaller allocations to accounts worth less than $250,000 and larger allocations to all other categories.

Last year, advisors reported on average that about two-thirds of their accounts in their books were worth less than $250,000. This year, the share for these accounts has plummeted to a mere 44%. The biggest drop is in accounts worth less than $100,000, which fell to 23.6% on the average book from 37.5%.

The single biggest account category for advisors overall is now the $250,000 to $500,000 segment, with a 24% share. Among the top producers, the bar is even higher, with the $500,000 to $1 million category now capturing almost 31% of their books, up from just 19.4% a year ago.

The sub-$100,000 account category still represents the biggest share of accounts for the other 80% of advisors, but it is down dramatically to 29.6% from 39.6% last year.

At the $1 million-plus level, account growth has been explosive for all advisors. Last year, accounts worth more than $1 million represented 8.2% of the average top producer’s book; this year, that figure is up to 24.4% — including the 8.6% worth more than $2 million.

Similarly, for the other 80% of advisors, accounts worth more than $1 million represented only about 4% of their book last year; this year, such accounts comprise almost 11%.

These very big swings in account distribution suggest a decisive movement on the part of clients in favour of bank-based advisors and away from other segments of the financial services industry more tarnished by the financial crisis.

The apparent flight to safety by clients is also evident in the changing asset mix. The portion of the average bank advisor’s book devoted to mutual funds has dropped to just 38% from almost 50% last year. The popularity of managed products also suffered a bit, slipping to 14% from 15.3% last year.

At the same time, the use of traditional banking products has jumped. The share of advisors’ books held in guaranteed investment certificates rose to 33.6% from slightly less than 30%. High-interest savings accounts have exploded, jumping to almost 8% of the average advisor’s book from less than 1%. Even term deposits saw their share rise to 4.8% from 1.6%.

The shift away from investment products and toward banking products was evident for both top producers and the rest of the industry. A big decline in the popularity of mutual funds was evident for both segments, although top producers more or less maintained their use of proprietary managed products, at about 19%, whereas the rest of the industry reduced their use of these products notably, with their market share falling to 9.4% from 13.4%.

Instead, top producers cut back on their use of third-party managed products, while the rest of the industry expanded their reliance on these products to 5% from 3%.

Although changing account distribution and asset mix trends indicate that clients may have been seeking the security of bank-based advisors, changing incentives for advisors suggest they also have plenty of reason to campaign aggressively for those assets. Survey respondents reported that a significant chunk of their compensation is now derived from variable sources such as transactions, fees and bonuses.

Although the importance of transactions barely changed, there is a notable increase in fee- and asset-based revenue. Overall, the average advisor garnered just 1% of compensation from fees in 2008, which has grown to 2.6% this year.

The shift is even more pronounced among top producers, who reported that 8.3% of their annual compensation is derived from fees, a sharp rise from only 1.6% last year, and bonuses account for 24.4% of their remuneration.

Less than 60% of top producers’ pay is derived from straight salary, suggesting they are increasingly rewarded for, and driven to, accumulating AUM.

The same trends are evident among the rest of the advisors, albeit to a lesser degree. IE