Reps are increasingly being pushed to focus on their high-value clients and ignore or dump their low-value ones, but the real area of the business that needs such segmentation is in the sales forces of the industry’s mutual fund dealerships.

Fund dealer firms typically roll out figures — such as the number of reps, number of clients and total assets under administration — when they want to illustrate the strength of their sales forces.

What those numbers don’t tell you is anything about the quality of the sales force.
One fact is very clear: the industry is home to a small group of big producers that do most of the heavy lifting for their firms, surrounded by a large middle class of planners who are struggling to earn their keep.

The average rep in our Planners’ Report Card this year has been in the industry for more than 13 years, and with his or her current firm for almost seven years. Each has slightly more than 300 clients and about $23 million under management.

However, within these numbers there’s a great deal of variation among firms, ranging from Toronto’s Assante Capital Management Ltd. — which has one of the most experienced sales forces, and boasts an average of more than 400 clients and almost $43 million under management per advisor — to a firm such as PFSL Investments Canada Ltd. of Mississauga, Ont., at which the sales force surveyed averages only 10 years in the industry, has more than 400 clients each but less than $9 million under management on average.

While there are great differences among firms, the split between the big hitters and the role players is just as dramatic within firms as it is among them. In most of the firms surveyed this year, the majority of advisors report having modest- to small-sized books, and there are just a handful of top performers.

Taking $50 million in assets under management as an arbitrary cut-off, we found that most firms had just a few reps that make that grade, with the vast majority falling below it.

For example, only three of the reps we spoke with at each of CMG-Worldsource Financial Services Inc., Dundee Private Investors Inc., IPC Financial Network Inc., TWC Financial Corp. and FundEX Investments Inc. reported having as much as $50 million under management. Only one at Investors Group Inc. of Winnipeg reported a book that big. There was also just one at each of IQON Financial Inc., Manulife Financial Corp., Money Concepts (Canada) Ltd. and W.H. Stuart & Associates. None of PFSL’s reps had as much as $50 million under management. Burlington, Ont.’s Berkshire Investment Group Inc. has its share of big hitters, with five reps reporting as much as $50 million under management.

Worrisome implications

According to IE’s sampling of advisors, it is the industry’s big consolidators that seem to be doing the best job of attracting the big producers — London, Ont.-based Cartier Partners Financial Services Ltd. boasts at least nine reps with $50 million on the books. It is trumped only by Assante, which has at least 10 reps with a minimum of $50 million under management.

The numbers and their implications are not encouraging for the long-term health of many firms. In an industry in which top producers are dearly coveted and actively recruited, firms that rely on a handful of superstars for the bulk of their production are exposed to the ever-present risk that those assets could walk out the door. Most firms wouldn’t miss five or 10 advisors from a sales force of hundreds, but the loss of five or 10 big performers could be a nightmare.

The breadth of the disparity between the really big fish and the rest of the reps can also be significant. A firm such as Investors Group may not boast many big producers, but all of the reps with whom we spoke reported very similarly sized books.

Firms with a few really big producers in a vast pool of small books frequently do whatever they can to keep their stars, and exposure to the whims of a few big producers puts pressure on the bottom line.

Big producers are more highly prized than ever. As industry sales slow down, asset retention becomes ever more important to firms’ survival. Reps that have built big asset bases can pull in substantial revenue just from collecting ongoing trailer fees; they do not have to rely on a high-growth market to deliver revenue to the firm.

Indeed, the producers in our survey with books of at least $50 million say their revenue is almost evenly split between transactions or commissions and those that are asset-based.
By contrast, the smaller producers say transactions account for about twice as much as asset-based revenue. With transactions hard to come by nowadays, bigger producers are coveted as much for their steady revenue-generating capabilities as for their hefty books.

Big producers also bring higher-quality revenue to the table. In an industry that remains brand-challenged for the most part, a big producer can also have a disproportionate impact on increasing the value of a firm’s brand within a particular community.

Despite all the good reasons to favour bigger reps over smaller ones, some reps criticize their firms for not doing enough to segment their own sales forces.

“They still tend to concentrate on the medium, instead of the top-end producers,” says an Ontario-based rep with IPC. “They should concentrate on the top people.”

The industry’s big consolidators appear to have done the best job of focusing on the big producers — retaining their own superstars and attracting them from other firms. This should not be surprising.

This is where critical mass becomes critically important in growing the business. Big producers will naturally be most easily attracted to firms that can offer a full suite of products, and the big consolidators have all pursued the capability to offer securities, insurance and now banking products along with their traditional fund products.

Notwithstanding this, the top performers that answered our survey overwhelmingly report managed products, such as mutual funds and wrap products, as accounting for the vast majority of their books.

Of those with books of at least $50 million, about 85% of their books are in managed products, with the remainder split between insurance and cash. The smaller producers have more insurance and cash.

The bigger firms are also in a position to do more for advisors. They have the critical mass necessary to secure top-notch technology, to develop effectively some brand value, and economies of scale that are necessary to produce decent marketing support, training, and other infrastructure to run a big advisory practice effectively.

The big firms also have publicly traded stock, which makes it easier to lock big advisors into the firm.

If the big firms have all the advantages in attracting all the big producers, that leaves much of the rest of the industry in a tough spot. Many firms are already having a tough go of it, thanks to the current market climate. And, as the big producers are wooed to the big firms, some of the smaller players are going to have an even tougher time surviving in the business.

That might not necessarily be a bad thing. As an IQON Financial rep from the Prairies says, “There are a lot of people in the financial business who should be selling used cars.”

If that’s true, many of them may soon have their chance to go from pitching clunky mutual funds to hawking junky cars. IE