Strong performance in equities markets are powering impressive growth in the books of Canada’s investment advisors – particularly among the industry’s top performers, who are leading the charge. But how long can this trend last?
Investment Executive’s (IE) 2015 Brokerage Report Card reveals that advisors are pushing further into record territory in their ability to accumulate assets under management (AUM). That this strong growth comes amid relatively little change in the number of households being served suggests that market gains and, possibly, some account consolidation are powering this growth in AUM.
The average advisor in this year’s Report Card reported having $113.7 million in AUM, up from $101.8 million in 2014. And with the average number of client households served ticking upward only slightly to 200 from 198, average productivity – as measured by AUM/client household – also rose, to $796,322 from $689,386 in 2014.
Given the lack of new households being added to the average book of business, the growth in AUM appears to be driven primarily by robust market returns. Even after the turmoil caused by the dive in global oil prices – which has slammed energy stocks, in particular, and dimmed the outlook for the Canadian economy generally – the S&P/TSX composite index is up by about 5% since April 2014.
However, over the same period, the U.S. markets have been much stronger, with the S&P 500 composite index up by about 12% and the Nasdaq composite index gaining by 19%. And with the U.S. dollar up by about 14% against the loonie over that same time span, those returns look even richer in Canadian-dollar terms. Similarly, stocks in Japan and Europe also rose strongly over the past 12 months. So, with global stocks performing particularly well, it appears that many brokerage clients have been the beneficiaries of that.
Some of the gain in AUM also may be attributable to advisors consolidating client accounts from rival firms successfully- although it’s difficult to distinguish the actual impact on average AUM of that trend vs the market-driven gains.
What is clear from the data is that the industry’s top-performing investment advisors are enjoying the bulk of the impressive growth. segments the data into the top 20% of advisors and the remaining 80% (as defined by average AUM/household) in order to gain further insight into underlying growth trends.
This year, our analysis shows that the top 20% are capturing more than their share of the headline growth. For example, the average top-performing advisor now has $228.8 million in AUM, up from $180.9 million last year. Meanwhile, the remaining 80% saw a modest but respectable increase in average AUM to $86.5 million from $81.3 million. Thus, the top performers are seeing their AUM grow at more than double the rate of the industry’s overall, and about four times faster than for the remaining 80%.
And, unlike the remaining 80%, which has seen the average number of client households served decline to 214 from 217, the top 20% have added 20 client households to their books of business, on average, increasing the total to 138 from 118 year-over-year.
So, at a time when most of the industry was enjoying a healthy market-driven gain in AUM, it appears that the top performers are not content with the asset uplift provided by a rising market tide. Instead, top performers are further capitalizing on the constructive market environment by adding new clients to their books of business as well, thereby generating double-digit gains in both AUM and client household numbers.
In turn, this growth is translating into outsized productivity gains. The top performers now have an average AUM/household of $2.2 million, up from $1.7 million last year. As a result, the book of the average top performer now is more than 4.5 times more productive than the books of the remaining 80% of advisors.
These growth trends are reflected in the continued evolution of account distribution. Overall, the industry is skewing further toward higher-value accounts. In fact, client accounts worth less than $500,000 now make up just 43.3% of the average advisor’s book, down from 48.9% in 2014.
The $500,000-$1 million range remains the biggest account size category, representing 25.1% of the average book; this is up from 23.3% last year. Indeed, each category above the $500,000 mark gained about two percentage points in share of the average advisor’s book over the past year. Conversely, each category below the $500,000 mark dropped in share of book, with the smallest accounts (those worth less than $100,000) now representing less than 10% of the average advisor’s book.
This shift toward larger accounts is the logical result of advisors boosting their AUM through market returns and, perhaps, some account consolidation. As client portfolios grow, there is a natural migration within the average book to bigger accounts.
This trend toward larger client accounts is evident for both top performers and the remaining 80% of advisors.
However, for the top performers, the inflection point in account allocation between the categories that are growing and those that are shrinking comes at the very top end of the distribution. For the top 20% of advisors, every client account category below $2 million saw its share of the average book decline compared with the previous year. And for these advisors, client accounts worth more than $2 million now represent 31.6% of the average book, up from 27% last year and decisively the largest client account category for the top performers.
For the top 20%, accounts worth less than $100,000 now comprise only 2.7% of their books; accounts smaller than $250,000 represent less than 10% of their books.
Among the remaining 80% of advisors, client accounts worth $2 million or more now make up 10.1% of the average book. This is up from 8.8% last year, but it remains the smallest category for these advisors.
This stellar year for growth in AUM is reflected in the bottom line for advisors. As the average book grows, so does the average advisor’s income. Although most advisors still fall into the range of $250,000-$500,000 in annual compensation, with 30.5% of advisors reporting that their annual pay falls within this range, this percentage is down from the 34.7% last year.
In fact, every category in advisor compensation below the $500,000-a-year mark is down from the previous year – and every category above that threshold is up.
At the very top end, the proportion of advisors who report making more than $2 million a year remains small, at just 2.9%, but this is up from 2% in 2014. More significantly, the share of advisors who earn $1 million-$2 million annually has more than doubled, to 16.3% from 8%. And those who earn $500,000-$1 million a year jumped to 26.2% from 18.7%.
At the other end of the pay scale, only 5.3% of advisors reported earning less than $100,000 a year; those earning $100,000-$250,000 a year was down to 18.9% from 28.4%.
The source of this robust revenue and paycheques continues to shift toward asset-based fees and away from transactions. In this year’s Report Card, 61.2% of the average advisor’s revenue came from asset-based sources, up from 57.8% last year.
At the same time, transaction-driven revenue dropped to 32.5% from 35.5% of the average advisor’s revenue mix. This is one category in which there is little to distinguish the industry’s top performers from the rest of the advisor population, as the breakdown between asset-based and transaction-based revenue was about the same for both groups.
There are some notable similarities in the evolving asset mix that both categories of advisors report. In general, their use of direct stock and bond holdings was up, as was their use of exchange-traded funds (ETFs). Mutual fund use was more or less flat, but the average advisor’s use of managed products was down notably.
Although mutual funds appear to be holding their own, with an allocation of 24.4% in the average advisor’s book, the use of both proprietary and third-party managed products has dropped significantly. As a result, proprietary managed products now account for a mere 1.6% of the average book, down from 4.2% last year; third-party managed products now represent 3.8% of the average book, down from 5.6%.
This notable shift away from managed products may signal increased cost-consciousness on the part of clients and advisors, particularly as advisors’ use of ETFs appears to be on the rise. Certainly, this shift away from managed products would be expected in a very low-return environment; but, given the robust returns that appear to be driving AUM growth, there may be other considerations at play, such as the imminent implementation of regulatory reforms designed to give investors greater insight into the costs of their investments. Pricey managed products won’t look so good when investors get more explicit reporting of these costs.
There also are significant shifts in other aspects of asset mix. For example, among banking products, advisors have swung sharply away from guaranteed investment certificates and toward high-interest savings accounts – perhaps indicating a preference for liquidity at a time when the interest rate environment seems to be in flux and the sustainability of equities’ returns is increasingly in question.
Indeed, although the results of this year’s survey suggests that many advisors have had an outstanding year, the investment environment appears increasingly uncertain. With the questionable health of financial markets and economic growth, the prospect of further regulatory change and the evolving competitive landscape, advisors can’t necessarily expect the future to resemble their recent past.
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