Financial planners are clearly feeling the same profit pressures as their colleagues in the brokerage business. And their strategic response is much the same: segment the client base, focus on larger accounts and shift toward more fee-based business. The limitations of the fund dealer business, however, may be making the transition a little tougher.

The good news is that planners’ books of business have grown significantly in the past year. A year ago, Investment Executive‘s annual Planners’ Report Card found that the average planner was sitting on only $18 million in assets under administration, the lowest level since 2000. This year, planners are reporting that their books have swelled — to an average of more than $23 million.

Much of the gain can be credited to strong markets. Overall, investment fund assets hit an all-time high in January. Strong returns in certain asset classes — income trusts, for example — are one reason. Many investors have chased these robust returns,
generating solid fund sales, but sales have generally been concentrated in the handful of hot asset classes.

The fact that much of the recovery in planners’ AUA is due to organic growth is reflected in the finding that their client lists haven’t grown at all. The average number of clients remains flat, at slightly more than 300.

Yet beneath this apparently serene surface, there’s still plenty of action going on as planners continue their search for profitability. Dealer businesses of all stripes have been feeling the heat for the past few years. Choppy markets, fractured investor confidence and weak returns in many asset classes have all made dealer profits hard to find. The best returns have come in just a handful of sectors, keeping overall sales sparse and highly concentrated.

In response, firms have sharpened their focus and set their sights on their most profitable clients. To meet more sophisticated needs, they have expanded into more exotic products. The trend is evident at the macro level in the segmentation of planners’ books that IE data continue to reveal.

For example, there’s a stark divergence between the performance stats of the top 20% of advisors surveyed in this year’s Planners’ Report Card and the rest. By arbitrarily setting the cut-off between the elite planners and the rest of the industry at AUA/client of $200,000, we find that the average planner on one side of that line looks very different from the average planner on the other.

The top 20% (based on the AUA/client metric) boast an average book that’s almost double the size of the book of the average planner in the remaining 80% — $35.7 million vs $20.6 million, respectively.
However, the top 20’s client lists are only about a third as large. There are, on average, 116 households on the most productive planners’ books, vs almost 350 for the rest of the industry. As a result, the productivity of the average top 20% planner is more than five times greater than the run-of-the-mill planner — average AUA/client among the top 20% is more than $420,000, vs slightly less than $81,000 for the rest of
the industry.

The obvious route to building the more productive books of the top 20% of planners is to focus on bigger, more productive clients. And data on account-size distribution confirm that’s precisely what’s happening.
The top 20% of planners report that accounts that are less than than $250,000 now represent just 40% of their books. Such accounts still form the single largest portion of their books, but accounts in the $250,000-$500,000 range are close behind at 33% of the total. This contrasts with the rest of the industry, which has more than two-thirds of their book in accounts less than $250,000.

In excess of $2 million

The distinction between the top planners and the rest of the field is even more evident in the largest accounts. The top 20% report that almost 20% of their books now fall into the $500,000-$1 million range, vs just 9% for the rest of the industry. Accounts larger than $1 million represent 5% of the top planners’ books, vs less than 2% for the rest of the industry. Very large accounts, in excess of $2 million, now make up slightly less than 3% of top planners’ books, as compared with 1% for the rest of the herd.