Picture not so rosy for those with smaller books: Includes chart

Mutual fund assets have also been climbing at an impressive pace, driven by a combination of strong market gains and resurgent sales. As of March 31, total fund assets were just shy of $610 billion, up almost 19% from the previous year, according to statistics from the Investment Funds Institute of Canada. Long-term assets are almost 22% higher, and some asset classes are doing even better than that; for example, assets in the balanced category are up almost 40% over the previous year, and dividend fund assets have gained 26%.

Nevertheless, the data from this year’s Planners’ Report Card indicate most planners are not participating in the bounty. The average book has grown year-over-year, albeit much more slowly than overall industry statistics would suggest. The average advisor saw his reported assets under administration rise just 8.5% to $25.4 million from $23.4 million in 2005.

This subpar growth in advisors’ books illustrates how the banks have dominated the fund industry in the past few years. With one or two exceptions among the larger fund companies and a handful of boutique firms, the bank-owned fund companies have led industry sales. Not only is this a challenge for many independent manufacturers, but it is also blowing back on the independent fund dealers. Although they may sell some of the banks’ funds, independent dealers remain a small link in the banks’ distribution chains.

Moreover, advisors are working harder to build their asset bases. Even though the average AUA grew by only 8.5% in the past year, the average client base grew by 12% to more than 340 households from less than 310 in 2005. This indicates that advisors are experiencing declining productivity, as measured by average AUA per client, which plunged to slightly more than $84,000 in this year’s survey, from more than $142,000 last year.

Even though the brokerage industry also experienced declining productivity over the past year, this was largely attributable to firms shifting to client-acquisition mode from client-culling mode. But, although the advisors at investment dealers also saw their average client base grow, this was outpaced by average asset growth.

For advisors at financial planning firms, however, the story isn’t as rosy. The fact that client base growth is exceeding asset growth by a healthy margin — with neither metric growing as fast as the overall fund industry — suggests these advisors aren’t enjoying nearly the same quality of new clients as those at brokerage firms.

Looking at the breakdown of these advisors’ books by account size, it becomes clear that the overwhelming majority of their accounts are on the small side. About 84% are worth less than $500,000, with slightly more than 61% are worth less than $250,000. This is virtually unchanged from last year, indicating advisors at planning firms are having little success capturing high net-worth accounts.

Given the tremendous market gains in the past year, the financial planning industry may have hoped many of its medium-sized to large accounts would have moved into the largest categories. The fact that this hasn’t happened in any meaningful way suggests larger accounts may be migrating away from planners once the accounts reach a size sufficient to attract the attention of rivals such as investment dealers and investment counsellors.

Planners may be finding it harder than ever to compete for big accounts as their clients move beyond mutual funds. The traditional fund business remains planners’ bread and butter, making up more than 70% of the assets in their books. But, on the margins, the asset mix is evolving.

Efforts to extend their product range by getting clients into alternative investments, such as hedge funds and principal-protected notes, by referral has run into trouble with a couple of high-profile scandals. Planners report their asset allocation to alternative investments has dropped by more than half over the past year, from about 2% in 2005 to less than 1% this year. Allocations to managed products, both proprietary and third-party, have also dropped.

@page_break@It appears planners are seeing more demand for direct investments. Allocations to bonds, equities and income trusts are all reported higher. As the appetite for traditional securities returns and the regulatory climate tightens, it may be even tougher for planners to compete.

But it’s not all doom and gloom in the planning industry. While the overall trends seem to tell a dispiriting tale, the headline numbers mask a critical divergence between the performance of top producers and the rest of the sales force.

That split is in greater evidence than ever in this year’s data — highlighting the fact that the top 20% of the industry is enjoying robust growth while the smaller producers are struggling to survive.

The books of the top 20% of producers (as measured by AUA/client) show plenty of healthy indicators year-over-year. These advisors report a very robust 44% increase in their average asset base, which is a much higher growth than the markets or the financial services industry overall have experienced. By contrast, the remaining 80% of advisors actually saw their average asset base decline year-over-year to slightly more than $19 million in 2006, from almost $21 million in 2005. This suggests these smaller producers are the ones under heavy siege and are losing business to the banks and other rivals.

Top performers, meanwhile, are in client-acquisition mode. They have more than doubled their average client base to 267 this year from just 116 last year. The smaller producers have also added clients, but at a much slower pace.

This huge jump in the reported client bases of top advisors, in turn, more than halves their average AUA/client. But we saw a similar trend in the brokerage business this year, as high-end producers switched abruptly from rationalizing their client bases — as they did over the past few years when times were tough — to high-gear client-acquisition mode. Although account productivity measures plunge as a result, this is more than made up for by the sharp increase in AUA on the books of top performers.

The top 20% of planners are also capturing larger accounts. The single biggest chunk of their books, 34.5%, now falls into the $250,000-$500,000 range. Their allocation of the smallest accounts, those less than $250,000, dropped to less than 34% this year from 40% last year.

Smaller producers are seeing the trends in their books move in the opposite direction, as their allocation of the smallest accounts has grown to more than 68%, whereas exposure to all other account sizes diminished year-over-year.

In fact, the top performers are enjoying greater allocations to all account sizes up to $2 million. Most notably, accounts in the $1 million-$2 million range have climbed to 7.7% from 5.4%. It is only among the largest accounts — those of more than $2 million — that the top performers appear to be feeling competitive pressure.

Clients are demanding more access to direct securities, which is evident in the asset-mix trends reported by top producers — a move away from managed products and alternative investments and into direct holdings.

Top performers report that their books’ exposure to direct equities almost tripled over the past year to slightly less than 6% from about 2% in 2005. It’s the same story for bonds. And income trust exposure has almost doubled to slightly less than 2%. Meanwhile, their allocation to alternatives and managed products has been more or less halved from a year ago. Equity exposure has jumped past alternatives and managed accounts in top performers’ books and is now their fourth-largest allocation after traditional funds, insurance and cash.

Top performers’ use of mutual funds has also grown in the past year to almost 64% of their books from less than 60%. But this is well below the fund utilization rate of smaller producers, which saw their allocation of these products rise to almost 74% from 62% last year. Smaller producers also saw strong growth in direct holdings of stocks and bonds (income trust exposure increased a tiny amount), and a decline in other products.

The ability to refer clients to firms that manufacture alternative investments and managed accounts was a welcome option when markets were struggling. But, now that mainstream markets are booming and returns from alternatives are lagging — not to mention the regulatory uncertainty surrounding some of them — advisors are under pressure to provide access to direct securities.

This trend is proving a challenge for smaller producers who may be not be securities-licensed. With top-producing advisors still enjoying strong growth of their books, the gulf between the “haves” and “have-nots” is widening. IE