Advisors hold up well in light of trying times

Indeed, at the end of the first quarter of this year, total mutual fund assets were down about 21% over the previous year, according to the latest data from the Investment Funds Institute of Canada.

Almost all of the decline in mutual fund assets is due to the thumping that markets have taken over the previous year, as a crippling financial crisis took hold, risk aversion spiked and inves-tors dumped assets seemingly indiscriminately.

To be sure, the market turmoil has kept the mutual fund industry in net redemptions ($5.6 billion for the 12 months ended April 30), but this pales in comparison to the estimated market loss of $120.7 billion that fund assets suffered over that same period. Still, the willingness of many Canadian fund investors to hold tight — even as an unprecedented crisis roiled markets — is also reflected in the dealer world.

According to data from this year’s Dealers’ Report Card, average assets under management for the reps surveyed slipped by about 13%, to $20.6 million this year from $23.7 million at this time last year.

The fact that advisors’ average AUM held up better than fund assets suggests there has been some degree of consolidation within the dealer world — possibly with smaller producers abandoning the business altogether and the survivors picking up these assets. Indeed, the average number of households served by the reps in our survey is up year-over-year to more than 250 this year from slightly less than 230 in 2008.

The ability of dealers to add clients in this wretched investment climate appears to be cushioning the blow on the asset side. But the combination of shrinking AUM and growing client bases spells lower productivity (as measured by AUM per client household). This year, the average advisor reports AUM/client household of $102,823, down by 20% from $128,758 last year — a drop that is more in line with the slump in fund industry assets.

Interestingly, the decline in advisor productivity is being felt most acutely by top producers.

For Investment Executive‘s ana-lysis, the advisor population is divided into the top 20% and the remaining 80% on the basis of AUM/client household; this year, the price of admission into the top producer club fell, as the dividing line between the two now sits at about $140,000, down from $167,000 last year. More important, the data reveal that advisors at the top appear to be taking a bigger hit to their productivity due to the market crisis.

In general, the top producers and the rest of the industry are experiencing the same basic trends — lower AUM and larger client rosters, both of which spell lower productivity.

Among the top 20%, average AUM/client household is down to $260,264 from $344,497 last year. This reflects average AUM tumbling to $42.6 million this year from $50.3 million last year, combined with expanding average client rosters, up to 179 households this year from 164 in 2008.

The same basic dynamics are at play among the remaining 80% of advisors. On average, their AUM slipped to $15.3 million from $17.5 million in 2008. Similarly, their average client roster grew to 273 households this year from 247 last year. As a result, the average AUM/household among this group also declined, albeit less precipitously than for the top producers, slipping to slightly more than $64,000 from about $75,000 last year.

Despite these declines in productivity and the apparent efforts of advisors to make up for the organic decline in AUM by adding new clients, it appears that advisors haven’t been forced to sacrifice their focus on higher net-worth clients.

Overall, advisors are reporting growth in the portion of their books devoted to accounts worth more than $250,000. The biggest gain came in the $250,000 to $500,000 segment, which the average advisor reports now represents 20.6% of his or her book, up from 18.4% last year. But there were also modest gains in the $500,000 to $1 million, $1 million to $2 million, and more than $2 million categories. The percentage of client accounts in the $100,000 to $250,000 range was more or less unchanged year-over-year.

@page_break@The only account category that saw a decline in share was for those worth less than $100,000 — although they still represent the largest share of the average advisor’s book at 35%, down from almost 39% last year.

For the top producers, these small accounts continue to represent a declining share of their books, slipping to 18% from slightly less than 20% last year. However, in contrast to both the overall trend and the experience of the other 80% of advisors, these reps did see a downward shift among some of their higher-value accounts.

Last year, accounts in the $500,000 to $1 million range were the biggest portion of top producers’ books, at almost 23%. However, this year, the share for this category slipped a little to 22.5%. More significant, the share for accounts in the $1 million to $2 million range also slipped, to 8.3% from 9.3% last year.

Most of the decline in these categories is being absorbed by a rise in accounts that fall into the $250,000 to $500,000 range, which now represents the biggest account category for top producers — at 24.7% of their books, up from 22.1% a year ago.

Some of these account mix shifts probably reflect the fact that top producers were adding accounts in the past year, but some of it may also be the result of the underlying deterioration in existing client portfolios that sees clients migrating from one category to a lower one.

For the other 80% of advisors, the trends in account mix are more straightforward. The share devoted to accounts worth less than $100,000 continues to decline, to 39.4% from 43% last year, with every other category making gains or holding steady compared with 2008.

For these advisors, the biggest gain was in the $250,000 to $500,000 category, which saw its share rise to 19.4% from 17.6%. That said, accounts worth less than $250,000 remain the core of their books, representing about two-thirds of their business compared with about 40% for the top producers.

Not only did the shift toward higher-value accounts continue for the other 80% of advisors, so did the ongoing move away from transactions and toward fee-based and asset-based sources of revenue.

As with most industry trends, top producers formerly led the way in this shift. However, this year, the trend reversed a bit for the top 20%, while it remained operative for the rest of the industry.

Top producers saw their dependence on asset-based revenue slip to 57.2% from 60% last year. Conversely, their dependence on transactions ticked upward slightly.

But while the drift away from transactions and toward asset-based fees has been a long-running secular shift, this recent reversal among top producers is more likely just one of the repercussions of the market decline — lower AUM means lower asset-based revenue.

For the other 80% of advisors, however, the secular trend continues. They have a long way to go to get their share of revenue from asset-based sources into the same range as the top producers, so the pressure of declining AUM doesn’t appear to undermine the basic shift toward fees.

In last year’s survey, transaction-based revenue continued to hold a slight edge over asset-based sources for these advisors — 49% for transactions vs 46% for fees; but those numbers flipped this year, suggesting that this group of advisors have continued to shift away from transactions, even as AUM declined.

Although the revenue mix shifted a bit for advisors overall in their core business, an increasingly important secondary source of revenue for many — insurance — didn’t change much. The average advisor’s estimated annual insurance revenue remains at about $58,000.

Where advisors did see some change in their insurance businesses was in the product mix. Most significant, the use of segregated funds grew, as their guarantee features increased their appeal. (See story on page C10.)

Overall, shifts in revenue mix, account size mix, product mix and even productivity trends can all be traced back to the weakness in the markets and the resulting negative impact on clients’ portfolios. IE