It’s back to fewer clients, bigger clients: Includes chart

The demographic profile of our average advisor this year is more or less unchanged from last year. The average age is 46, they’ve been in the industry for almost 16 years, and at their current firm for more than seven years. All of these statistics have changed little from last year.

What has changed significantly is the population of the book. The average client roster is down sharply to 304 clients in 2007 from more than 370 clients in 2006, taking the average back to 2005 levels.

That the practice of client culling has returned in the past 12 months shouldn’t come as a surprise, as the markets themselves cracked a bit, too. The long-running domestic rally took a hit when the federal government announced the imposition of a surprise change in taxation on income trusts, which knocked that sector back sharply and wobbled the markets overall. Looking further afield, global markets also faced some uncertainty, with the slowing of the U.S. economy, uncertainty surrounding the impact of the meltdown in the U.S. housing market and global market turmoil that began in China and quickly spread to other regions.

In the 2006 survey, with all the major market signals flashing green, advisors showed themselves willing to shift into client-acquisition mode. Now, the uncertainty on the horizon could be prompting the emphasis on productivity.

Amid such a significant decline in client populations, average AUM are down, too. However, AUM didn’t slip quite as sharply as client rosters. Moreover, average AUM remain significantly higher than they were in 2005, meaning that productivity (as measured by assets per client) is up notably, too. While the average book was down to $80 million in AUM in 2007 from $87.5 million in 2006, that’s still up substantially from less than $70 million in 2005. So, with client rosters down by about 20% year-over-year, AUM has slipped less than 10% over the same period.

The result of these dual trends is that productivity is up from both the prior year and over the past couple of years. Average AUM/client reached slightly less than $350,000 in 2007, up from slightly less than $300,000 in 2006, and slightly more than $300,000 in 2005.

This trend is reflected in the distribution of average account sizes. In 2007, the smallest accounts (less than $250,000) remain the single biggest segment of the average advisor’s book. However, this segment’s share is down sharply from a couple of years ago. The smallest accounts now represent 29% of the average book, down from more than 43% in 2005. Firms have been pushing their troops in this direction for some time now, demanding that they focus on larger accounts.

The same trend also remains operative for the second-smallest account segment, those between $250,000 and $500,000. In 2007, the share for these accounts slipped to slightly less than 26%, down from 28% last year and more than 30% in 2005. While the size of the shift is less than it is for the smallest accounts, the direction remains the same.

At the same time, there are gains for the percentage of larger accounts. In the $500,000 to $1-million range, that segment rose to more than 24% (almost good enough for second place), which is up from 22% last year and less than 19% in 2005.

Similarly, accounts in the $1-million-plus range now represent 20% of the average advisor’s book — up from about 14% in 2005. In 2007, the $1-million to $2-million segment now represents 12.5% of the average book, up by more than 100 basis points from a year ago, and up almost 400 bps from 2005. The largest accounts (those in excess of $2 million) remain the smallest share of the average book, at just 7.5%, which is essentially unchanged from the prior year.

@page_break@This industry-wide focus on the largest, most profitable accounts is mirrored at the advisor level, too. While overall average productivity is heading higher on a combination of smaller client lists and more attention on bigger accounts, these trends are being driven most powerfully by the industry’s most productive advi-sors. As advisors get increasingly elitist about their client lists, it’s the elite advisors who are driving these trends.

Looking at the top 20% of advisors (as measured by AUM/client), their productivity increased by about 20% this past year, from average AUM/client of just under $800,000 to more than $955,000 in 2007. The other 80% of advisors also saw their productivity increase year over year, but the increase was much more modest on both an absolute and a relative basis. The other 80% saw average AUM/client rise only about half as fast as the top 20%, going from slightly less than $180,000 in 2006 to just shy of $200,000 in 2007.

Brokers on both sides of the productivity divide saw similar underlying trends — smaller client lists and slightly lower AUM totals — but the bigger producers held up better. While brokers in the top 20% managed to slash their average client lists from to 208 from 237, their average AUM total was almost unchanged, slipping only about 3% year-over-year. Conversely, the rest of the industry cut their client lists more aggressively, with average client numbers down about 24%, compared with a 13% drop for the top advisors. However, the average AUM for brokers with smaller books suffered more, too — down about 13% year-over-year.

As in the industry overall, this apparent rededication to productivity improvement is reflected in the changing composition of books by account size. For the top 20%, the $500,000 to $1-million segment remains their biggest single component, accounting for 29.5% of their books, up slightly from last year.

The real growth for the top advisors is in the biggest accounts, the $2-million-plus segment, which jumped to more than 18% of their books from slightly less than 14% last year. The $1-million to $2-million niche also saw its share grow to 20.9% from 19%. Combined, the $1-million-plus accounts now represent slightly less than 40% of the top advisors’ books, up from less than 31.5% just two year ago.

Growth in the allocation to large accounts among the top 20% of brokers comes at the expense of smaller clients. In 2007, these advisors report that just 12% of their book is represented by accounts worth less than $250,000, down sharply from 22% in 2005. Similarly, the share of accounts in the $250,000 to $500,000 range is down to less than 19% today from 25% in 2005. Some of this is thanks to client attrition, and some of it comes through asset appreciation and accumulation, which pushes smaller accounts into progressively higher categories.

The same basic trend is at play among the remaining 80% of advisors, but the shifts aren’t quite as compelling. For these advisors, the smallest accounts remain their bread and butter, accounting for more than one-third of their book (down from 47% two years ago). Their biggest area of growth is the $500,000 to $1-million range, in which the share for these accounts is up to slightly less than 23% from 21% in 2006 and 16.8% in 2005. Accounts in the $1-million to $2-million range also saw their allocation inch higher in 2007, but the share of accounts coming from the $2-million-plus range slipped a little year-over-year, to less than 5% in 2007 from 5.5% last year.

Clearly, focusing on larger accounts is one of the keys to improving productivity. The very top eche-lon of advisors (those who average AUM/client of at least $1 million) continue to grow the share of their books devoted to the biggest accounts; $2-million-plus accounts now represent 29.4% of the average book for these advisors, up from just 15% two years ago. The share allocated to all other account sizes either fell or stayed the same in 2007 — with the exception of the smallest accounts, which actually saw their share rise slightly; at 11%, these accounts represent much less of the top advisors’ books than the overall industry average of 29%, but the data suggest that top-notch advisors aren’t completely ignoring the value in certain smaller accounts.

Along with this move to more account segmentation, the industry has witnessed a rise in fee-based accounts over the past few years. That trend also remains in play in 2007 and, for the top 20%, this has now become the biggest source of revenue. Fee-based sources jumped to more than 49% of revenue in 2007 from slightly less than 36% in 2006. At the same time, transaction-based revenue slipped to 45.5% from slightly less than 54% last year.

Deal-based and fee-for-service revenue also dropped year-over-year in all broker segments, but the most significant development is that fee-based sources have overtaken transaction-driven sources as the single biggest component of revenue for the top 20% of advisors.

The same trend is underway in the rest of the industry, but fee-based revenue has yet to form a majority there. For the other 80% of advisors, fee-based sources of revenue did increase notably to slightly less than 38% from less than 30% in 2006. But transactions remain the biggest component, at 56.4%, down from 60% last year.

Notwithstanding this shift to fee-based revenue, the popularity of managed accounts appears to be on the wane, with direct equity investing growing notably in the past year. For the top 20% of advisors, their allocation to third-party managed products held constant at about 7%, while their use of proprietary managed products declined slightly to less than 4%. Mutual funds’ market share also eroded, to less than 12% from 14.6%. At the same time, the allocation to equities jumped to more than 44% from 34%.

As well, bond allocations slipped to 18% from 21.5%, and allocations to income trusts and insurance products also dropped. Apart from equities, the only assets to see share growth were cash and alternative assets.

Among the other 80% of advisors, the trends were a bit different. Bond and mutual fund allocations slipped year-over-year; equity allocations increased to slightly less than 33%, in contrast with the top advisors.

The use of managed products also increased among these advisors; both proprietary and third-party product allocations rose by about 50 bps. Apart from the increase in equity allocations, the biggest jump for these advisors was in their use of cash — to 4.8% this year from 2.6% last year. IE