A year of growth for advisors

In Canada, markets also remain jittery. The rebound here took hold earlier, peaking in early 2011, but since then, the markets have pulled back – and remained stuck in a rut. Moreover, debt-related worries hang over many Canadian households. Yet, despite this shaky, low-return investing environment, the past year generally has been one of growth for advisors in the various retail channels that Investment Executive (IE) surveys in its annual Report Card series.

Although the basic demographic characteristics of the advisors whom IE surveys had barely changed, advisors’ books were notably bigger: average assets under management (AUM) across all the Report Cards was $54.1 million this year, up from $50.1 million last year. This growth in AUM also was accompanied by larger average client rosters: advisors now report having an average of 329.6 client households vs 304.5 in 2012.

Overall growth for both these metrics is averaging about 8% year-over-year. But the growth that’s evident in the financial services industry overall is not uniform across the different channels, and the composition of this growth varies significantly. For example, the growth in client numbers was driven entirely by insurance advisors; the other channels saw their client numbers hold steady or drop slightly while AUM rose.

In the brokerage business, for example, AUM grew at a slightly faster rate than the overall average despite client numbers actually dropping a bit from the previous year. This indicates that the growth in AUM came more from factors such as portfolio returns, increased focus on high net-worth clients and successful asset consolidation rather than by simply adding client accounts.

These same basic dynamics also are evident in the mutual fund dealer and deposit-taking channels, albeit at notably lower nominal levels. Advisors with banks and credit unions (CUs) enjoyed the fastest AUM growth among the four channels, at 23.5% year-over-year, but their average book of business, at $57.3 million, remains significantly smaller than that of advisors with brokerage firms ($92.7 million). The average book for advisors with dealer firms also grew at a healthy rate but still lagged in absolute size: the average fund dealer rep’s AUM is now $27.8 million.

In contrast, AUM is not as relevant a metric for insurance advisors, so it’s not that significant that their average AUM is essentially unchanged year-over-year. Instead, insurance advisors enjoyed notable growth in the size of their client rosters, with average client household numbers up by about 17%, to 603.7 from 515.4 in 2012.

Although the industry as a whole appears to have enjoyed substantial growth over the past year, there naturally is noise in these numbers that doesn’t necessarily show up when looking at year-over-year data. That’s because annual comparisons can be fickle and, at a time when the markets themselves are so volatile and uncertain, the timing of both market moves and the surveys can impact the results.

When looking over a longer time span, the overall industry trends appear somewhat different. Although average AUM may have risen by almost 8% year-over-year, it was up by only 19.4% from 2009 – in the immediate aftermath of the financial crisis. That represents a compound annual growth rate (CAGR) of just 4.5%, which is not bad, given the long, slow recovery in the economy over the same period, but it isn’t as robust as the latest annual numbers appear to indicate.

Moreover, average client rosters are down by more than 11% over the same period. Advisors with banks and CUs are leading the way here, having slashed their client rosters by about 25% since 2009. However, all sectors have reduced the size of their client rosters over this period, suggesting that the recent growth in client numbers may be more of a temporary phenomenon rather than a definitive industry trend.

In terms of AUM growth, advisors with both brokerages and dealers have increased their average AUM by about 35% since 2009 for a CAGR of just less than 8%, whereas advisors with banks and CUs have grown their assets by only 16.5% over the same period – which perhaps is not surprising, given the cuts to their client rosters that they’ve undertaken over the past four years.

It appears that the overall trend toward larger AUM but fewer clients remains intact over the past few years. That said, the reality is there’s a finite number of high net-worth clients to go around in Canada – particularly while the economy remains so sluggish. So, although the financial services industry overall may be trying to push for a greater emphasis on wealthier clients, there is a limit to how far that can go. At some point, advisors need to come up with new clients to fuel their growth in AUM.

This reality is reflected in account distribution, which remains skewed toward lower-value accounts. This year, accounts worth less than $100,000 continued to be the largest segment of the average advisor’s book, at 26.4% – up slightly from 24.8% in 2012.

More surprising, this share of book for the smallest accounts is up from 21.2% in 2009. In fact, back then, accounts worth less than $100,000 were the second-biggest portion of the average advisor’s book, ranking behind accounts in the $250,000-$500,000 range. Since 2009, all account categories above the $250,000 threshold have seen their share of the average book decline while accounts of less than $250,000 now are taking a greater share.

Advisors with dealers and the banks and CUs, in particular, have seen the allocation within their books to large accounts decline. But advisors with brokerages reported that their allocations to the largest accounts is increasing, as those worth more than $1 million now represent 28% of the average broker’s book – up from less than 24% in 2009.

On the revenue side, the revenue mix continues to shift in favour of fee- and asset-based sources and away from transactions. Overall, fee-based and asset-based revenue represented 38.9% of advisor revenue in this year’s surveys – up from 31.2% last year. At the same time, transaction-driven revenue declined to 26.3% from 35.7%.

This basic shift was driven by advisors with brokerages and dealers, as this source of revenue remains much less important to bankers and insurance agents. Nevertheless, both fees and asset-based revenue were bigger sources of revenue than transactions across all channels – and are growing.

This shift toward fees is important for both firms and advisors at a time when trading volumes are slumping. Heightened market uncertainty may be keeping many investors on the sidelines, so fees and asset-based revenue represent increasingly significant sources of stable revenue.

This trend also is reflected in the latest asset mix data, which shows a rise in advisors’ use of both third-party and proprietary managed products. Third-party managed products represented 4.9% of the average book and proprietary products captured 5.9% in this year’s Report Cards – up from 3.3% and 2.7%, respectively, in 2012. Moreover, the trend across all channels is toward higher exposure to both flavours of these typically pricey products.

And although firms and advisors may be craving these stable revenue streams, the persistent, low-return environment may intensify the pressure to justify these products’ charges in the years ahead.

For now, though, the bottom line for advisors is that their overall book growth is bolstering their compensation. This is not so evident when you look at just the year-over-year numbers, which indicate that the proportion of advisors overall earning less than $100,000 a year rose (to 30.9% vs 28.8% last year), while the share in every earning category greater than $100,000 slipped a bit. But compared with the 2009 data, the share of those earning less than $100,000 a year was down from 32.8% then. And the ranks of advisors earning in the $100,000-$500,000 range per year was up to 52.4%, vs slightly more than half of all advisors in 2009.

At the very top end, the number of advisors who reported earning more than $1 million a year also was up – to 5.1% in 2013 vs 3.9% in 2009. Although there still were no advisors with banks and CUs in the highest-earning categories, advisors in all other channels saw the proportion of top earners increase over the past four years.

So, despite the turmoil in markets and the talk of rising regulatory pressures, the retail investment business is continuing to deliver growth – and producing a handsome living for advisors.

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