A year of growth

The past year has felt particularly precarious for investors. With the economic recovery remaining weak and uncertain, interest rates have stayed low around the world, leaving fixed-income returns rather small and bolstering stocks – albeit with the knowledge that interest rates must rise at some point, which may knock out the foundation of cheap money that has been supporting heady equities valuations. At the same time, continued worries about household-debt levels and an overheated domestic residential real estate market are adding to the sense that the current investing climate is fraught with risk.

Nevertheless, against this background, financial advisors have seen strong growth in their businesses over the past year as clients seek returns from financial assets wherever they can find them. In fact, the average advisor has seen his or her AUM climb by 12% to $60.7 million this year from $54.1 million a year ago.

During the same period, the number of client households that the average advisor serves also rose, to 351.7 from 329.6.

So, with average AUM growing at almost twice the pace as the growth in the number of clients, the underlying trends in the four distribution channels covered in IE’s Report Card series point to AUM growth being primarily powered by the stock markets. In fact, advisors with the most market-leveraged segments of the business – brokerages and mutual fund dealers – reported increases in AUM along with a decline in the number of client households.

In the brokerage business, the average advisor’s AUM rose by 9.8% year-over-year to $101.8 million. Yet, the number of client households these advisors are serving dropped slightly over the same period, to 197.5 from 205.5.

Similarly, in the mutual fund dealer channel, average AUM rose by an even more impressive 31% to $36.5 million from $27.8 million, while client household numbers also dropped a bit to 207.4 from 223.2.

The advisors who enjoyed the strongest gains in client household numbers were those with the banks and credit unions (CUs), as the average number of households they serve rose by 25% to 469.9 from 375.2 over the past year. However, these advisors also reported that their average AUM dropped over this same period to $51.4 million from $57.3 million.

This increase in client rosters amid a decline in AUM may reflect a tactical response within the channel to an underlying contraction in AUM. In fact, advisors with banks and CUs probably are seeing their share of household AUM decline as clients shift a greater portion of their financial holdings toward the high-returning equities markets, turning to advisors in the brokerage and mutual fund dealer channels in the process. So, advisors with banks and CUs are attempting to stem this erosion in their share of household assets by actively adding clients.

The influence of the overall investing climate is apparent in the account distribution data as well. There has been a notable shift away from allocations in smaller-value accounts and toward bigger accounts. The market share for accounts worth more than $250,000 rose to 56% in 2014 from 50.3% last year. This trend is most evident among advisors with the mutual fund dealers, for which the share for accounts of $250,000 and up rose to 47.5% from 32.8% year-over-year.

The increasing exposure to higher-value accounts reflects the positive impact that equities markets’ gains are having on many clients’ portfolios. As stock valuations rise, account distribution tends to skew toward larger accounts as strong returns help to push clients into higher-value account categories.

These trends – increasing average AUM and the apparent shift toward larger client accounts – also were echoed in the advisor compensation data. Overall, the proportion of advisors who reported that they earned less than $100,000 a year is down to 28.6% this year from 30.9% in 2013. At the same time, the share of advisors who say they’re earning between $100,000 and $500,000 a year is up to 55.2% from 52.4%.

This suggests that a sizable number of advisors are seeing their annual pay climb above the $100,000 threshold for the first time – a shift that probably also is due in no small part to the strong equities markets and rising AUM totals.

The influence of market conditions on the Report Card results is hinted at in the fact advisors with the banks and CUs did not participate in this trend toward higher compensation levels over the past year: 68.5% of advisors in that channel reported earning less than $100,000 a year, virtually unchanged from last year.

Conversely, 23.7% of mutual fund dealer reps reported annual pay of less than $100,000, down from 30.5% last year, while almost two-thirds reported that they earn between $100,000 and $500,000 a year. Given that this channel also enjoyed the biggest jump in average AUM over the past year, it stands to reason that these advisors also saw the biggest impact on their pay.

Nevertheless, the same drift upward in pay scales also took place in the insurance channel. For these reps, the proportion of them earning less than $100,000 a year is down to 27% from 31% year-over-year. Although these advisors’ businesses are not as dependent on the fortunes of various investment assets, the average insurance advisor also enjoyed strong gains in AUM, which may have contributed to the rise in compensation for some.

At the high end, the data show a modest year-over-year decline overall in the percentage of advisors reporting annual pay between $500,000 and $1 million but a small increase in those earning more than $1 million. Although these data may signal richer paydays for higher-end advisors, the sample sizes for these pay categories can be quite small, so it’s hard to draw too many reliable conclusions from these data. That said, it does appear that average advisor compensation is on the rise – at least for those channels with strong ties to the equities markets.

At the same time, the data indicate that the composition of the average advisor’s revenue also changed. Overall, the share of annual advisor revenue coming from fee- or asset-based revenue sources was up slightly to 40.1% from 38.9% year-over-year, while the share of revenue generated by transactions was down to 23.4% from 26.3%. Again, this points to the impact of equities markets’ gains, which boost overall portfolio values and flow through to ramp up advisor revenue that’s tied to AUM levels.

Once again, it’s the mutual fund dealer reps leading the way in this trend, which probably can be attributed to their heavy reliance on mutual fund trailer fees. The average advisor in this channel generated 63.1% of revenue from fee- or asset-based sources, up from 59.3% last year.

The average broker also was a beneficiary of this trend, with the share of revenue from fee- or asset-based sources rising to 57.8% from 53.9% year-over-year while reliance on transactions was down to 35.5% from 39.9% during this period.

This overall increased reliance on fee- or asset-based revenue sources also was reflected in rising allocations to mutual funds and managed products (both third-party and proprietary). Mutual funds accounted for almost half of the average advisor’s book (48.3%) this year vs 46% in 2013. Brokers, fund dealer reps and even advisors with banks and CUs are all reporting meaningful increases in their allocations to mutual funds over the past year.

The combined market share for managed products stood at 11.9% of the average book this year, up from 10.8% last year. Again, both brokers and mutual fund dealer reps reported higher allocations to these products whereas advisors with banks and CUs reported lower allocations to these products year-over-year.

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