A beacon of hope for advisors

That said, advisors are enjoying some success where it matters most – the bottom line. The average advisor in this year’s survey has managed to continue growing his or her book, with average assets under management rising to $84.9 million in 2012 from $81.6 million in 2011.

Although that growth might not seem like much, brokers are generating it in tumultuous Canadian equities markets. Over the past 12 months, Canadian stocks, as a whole, are down by about 12% (as of mid-April), and have been among the worst performers among major global equities markets.

Nevertheless, retail brokers are growing their books – and they’re doing so without swelling their client rosters. The average advisor in this year’s survey reports serving 211 client households, which is more or less unchanged from last year’s survey. As a result, broker productivity (as measured by AUM/client household) is also growing: the average level of productivity is up to $534,814 from $522,237.

However, as is often the case, the headline growth is masking some disparate underlying trends. For one, the overall AUM growth is coming exclusively from the sector’s top producers, whereas the productivity gains for the rest of the sector are due to the trimming of client rosters.

IE divides advisors into two groups: the top 20% – as measured by AUM/client household – and the remaining 80%. This year’s survey reveals that both sets of advisors are still managing to make productivity gains, but they are going about it in precisely the opposite way.

The top producers are continuing to add AUM. The top 20% in this year’s survey now report having $169.3 million in AUM, up from $149.1 million in 2011 – an impressive year-over-year growth rate of 13.5%. By comparison, the books of the rest of the sector are more or less flat year-over-year – with average AUM slipping slightly to $63.6 million from $64.0 million.

The top-producing segment of brokers also are adding to their client lists. The average client list for these brokers rose to 137 households this year from 121 households in last year’s survey, which more or less matches their AUM growth rate. Conversely, in the remaining 80% of the brokerage sector, advisors have trimmed their client rosters to 230 households this year from 236 households in 2011.

The two segments of the brokerage sector are taking entirely different routes to get to the same place, with the top producers adding both clients and AUM to boost productivity and rest of the broker force managing to maintain their AUM levels while culling their less profitable accounts.

The existence of divergent trends within the advisor population is also evident in the changing picture of account distribution. Looking at the data for the average advisor overall, it appears that the account mix has shifted toward the low end. The share of accounts holding assets of less than $250,000 is up year-over-year to 30.8% of the average book from 26.6%; the proportion of client accounts above the $250,000 mark is down from last year, with allocations to every account category above that level either flat or down from the previous year. Yet, the pictures of top producers and the rest of the brokerage sector are decidedly different.

The overall trend is mirrored in the majority of the sector, in which the allocation to accounts worth less than $250,000 has risen to 35.3% this year from 30.3% last year, while allocations to larger account categories are down across the board.

However, the top 20% of brokers are reporting gains in the very biggest accounts, those worth more than $2 million – with the allocation of such accounts rising to 20.4% this year, up from 18.9% last year. At the same time, the proportion of their books devoted to accounts holding less than $100,000 is also up, to 4.7% from 3.6%, which suggests that some of these brokers’ AUM growth is still coming from the low end of the market.

This increased exposure to smaller accounts for the brokerage sector overall represents a turnaround in the trend to larger accounts that has prevailed for some time – suggesting that in these tough markets, brokers are willing to take on clients that they might otherwise shun. And this is not the only area in which long-standing trends are experiencing reversal.

For example, this year, there is some revival in the importance of transaction-based revenue. Fee- and asset-based charges remain the largest portion of the average advisor’s revenue, but this source’s share has dipped below the 50% mark. At the same time, transactions have surged to 46.8% of revenue this year from 43.3% last year.

This trend is occurring among both the top 20% and the remaining 80% of brokers. For the top producers, asset-based revenue still represents more than half of their revenue, at 54.1%, but transactions have risen to 40.2% of revenue from 37%. For the rest of the sector, fees and transactions now sit virtually level with one another, each comprising roughly 48% of the average broker’s revenue stream.

This resurgence in transactions-driven revenue may be another symptom of tough markets, with clients increasingly sensitive to the impact of fees on portfolios that aren’t growing much.

Indeed, there are other signs that clients may be more cautious and cost-sensitive than they have been in the past. Some of that caution is evident in the evolving asset mix that brokers report managing. For one thing, allocations to the traditional portfolio staples – equities and bonds – are shifting in favour of safety. The average broker overall reports that the share of his or her book allocated to equities is down (to 36.1% this year from 38.5% last year) and bond exposure is up (to 19.3% from 16.2%).

Similarly, the emphasis on safety and cost-consciousness is evident in the greater allocations to both banking products and exchange-traded funds year-over-year, whereas the market share for managed products is down sharply.

Indeed, there has been a stark shift in the fortunes of ETFs vs managed products over the past year. According to the latest Report Card data, the share of portfolios that brokers are allocating to ETFs is up to 5.6% this year from 3.8% last year. Although ETFs remain a relatively small part of clients’ portfolios, overall, their relative growth is impressive. Moreover, ETFs now account for almost as large a share of the average book as managed products (proprietary and third-party, combined).

In last year’s survey, the average broker had about 9.3% of his or her book in managed products. This year, allocations to these products are down to just 5.9% (4.2% in third-party products and a mere 1.7% in proprietary products). In just a year, the market share for managed products has fallen from being two-and-half times the share of ETFs to almost dead even.

Mutual funds don’t seem to be suffering the same fate – their share of book actually crept upward a bit from last year. But, segregated funds haven’t held up as well. Within advisors’ insurance revenue, the average broker reports that less than 20% of his or her business is now in seg funds, down from 23.5% last year.

Instead, the advisors surveyed seem to be focusing their insurance business more on the core life products that dominate that category. The market share for term life has inched up to 26% from 25.4% while permanent life’s share has jumped to 49% this year from 39.5% last year.

Another product category that has made a notable gain from last year – albeit from a very low starting level – is banking products, which have seen their allocations within the average broker’s overall book jump to 2.6% from 1.7%.

The mix of banking products has changed notably as well. Guaranteed investment certificates now account for 81.4% of the average book, up from 72.6% last year. Most of that gain appears to be coming at the expense of high-interest savings accounts, for which share of book has dropped to 9% from 20.3% on average.

Despite the struggle that many advisors appear to be facing in growing their books, the good news is that the ranks of the top-paid advisors appear to be swelling. Although the majority of brokers report that their annual pay amounts to less than $500,000, the proportion of brokers who fall into this group is down to 67.5% this year from 71.5% last year.

The big gain on the compensation front is in the number of brokers who report that their annual compensation falls into the $1 million-$2 million range, which is up to 9.8% from 7%. As well, the percentage of brokers who say they earn more than $2 million a year is up to 1.9% of the overall advisor population from 1.3%.

The fact that the number of highly paid advisors is on the rise, even in this extremely uncertain market environment, should serve as a beacon of hope for the majority of advisors, who are struggling to add assets and generate returns for their clients. The tide that brokers are swimming against includes ongoing uncertainty and volatility in both the economy and the financial markets, which makes easy gains impossible.

Any growth advisors at brokerages are seeing must be hard won, especially with many clients being more cautious and cost-sensitive than in the past.

© 2012 Investment Executive. All rights reserved.