The latest phase of the economic recovery has been a lucrative one for Canada’s mutual fund dealers and their financial advisors. In fact, for an industry segment that some have written off as being obsolete or in decline, the fund dealer business is enjoying some lusty gains.
Investment Executive‘s latest survey of fund dealers shows that the fund-distribution business is far from moribund. It appears that there is still plenty of growth to be had. Indeed, the asset base for the average advisor in IE‘s Dealers’ Report Card is still growing impressively. Beyond that, advisors are enjoying an even more robust jump in their productivity as well as rising compensation. All of this appears to indicate a sector that’s still very vibrant.
Clues to the fund sector’s continued vitality are contained in some of the basic demographic data IE collects about the reps in this annual survey. The average age of the reps surveyed ticked down a bit this year from the previous year, as did average duration in the industry. These two metrics indicate that there is fresh blood coming into the business.
Moreover, there was a notable drop in the average length of time that the reps surveyed report being with their current firm, to less than nine years from almost 10 years in 2010. This indicates that there has been increased movement between firms by reps, which is itself an indicator of the strength in the fund dealer business. Evidence of this switching activity is particularly pronounced among the younger, less established reps who make up the bulk of the business.
IE segments the advisor population into top performers and the rest. Top performers are defined as the top 20% of advisors, as measured by productivity (assets under management per client household). Typically, top-producing reps are older, more experienced and boast much larger books than the average rep who makes up the remaining 80% of the advisors in the fund dealer universe. But it’s the remaining 80% who are fuelling the sector’s dynamism.
In last year’s survey, both advisor segments reported being with their current firms for about 10 years. This year, that number has slipped to 9.6 years for top performers; however, it has dropped sharply to 8.7 years for the remainder of the sector, suggesting that there has been a surge in migration between firms among the latter group of reps in the past year.
The fact there’s an increase in movement between firms by reps represents a signal of confidence — on the part of both reps and firms — as there is usually less appetite for such changes when times are rough. Advisors inevitably lose some clients when they switch firms, and firms incur higher expenses to facilitate these moves; so, it only makes sense to absorb these costs when they present greater growth opportunities for both sides.
Indeed, the fund dealer sector has also been enjoying strong top-line growth over the past year. Average AUM for the reps in IE‘s survey is up to $24.8 million this year from $21.9 million last year — a gain of 13%. Moreover, advisors’ productivity (as measured by AUM/client household) is up even more impressively, rising by 20%.
This powerful rise in productivity is due to both the increase in AUM and a reduction in the number of client households advisors are serving, to an average of 213 households in the current survey from an average of 240 households a year ago.
The top performers and the remaining 80% have both made strong productivity gains. The gains were a bit bigger for the remaining 80% of reps — albeit from a much lower starting point. However, the route to increased productivity has been much different for the two populations.
Top performers made most of their productivity gains by boosting AUM, not cutting clients. In fact, these advisors grew AUM faster than the overall industry average, taking their average AUM to $50.2 million, up by 14% from $43.9 million last year. At the same time, they barely trimmed their client numbers — shaving average client household rosters to 172 this year from 177 last year.
For some time, reps in various parts of the retail investment business have been under pressure to focus on their most valuable clients, but at the top end it appears advisors may be reaching some sort of limit on how focused their books can become. For these advisors, greater emphasis on growing AUM is clearly the way to improved productivity.
In contrast, the remainder of the sector still has much more room to cull their client numbers. And according to the latest data, it appears that they are doing so. For the remaining 80% of advi-sors, average client household totals dropped to 222 from 255.
These reps still managed to grow their AUM against this backdrop of shrinking client bases; however, their AUM growth was much more modest than for the top performers, with average AUM among the remaining 80% of advisors rising by about 9% year-over-year, to $18.3 million from $16.8 million. Nevertheless, the combination of fewer clients but greater AUM still generated an increase in average productivity of more than 20% for these reps.
Although the mix of AUM growth and client pruning differs between the two populations of advisors, these trends also are reflected in similar changes in account distribution within reps’ books. In both segments of the sales force, allocations to smaller accounts are shrinking, and larger accounts now comprise a bigger part of reps’ books.
For both the top 20% and the remaining 80%, the dividing line between account sizes that are shrinking in prominence and those that are gaining is the $250,000 mark.
Among the top 20% of reps, accounts worth less than $250,000 represented 46.1% of the average book in last year’s survey. This year, that’s down to 37.6%.
Accounts in every category above the $250,000 mark gained some share of the average top performer’s book this year. The biggest gains (in absolute numbers) were in the $500,000-$1 million range, in which average allocations jumped to 23.7% from 19.3%. As well, top producers also saw a huge jump in the largest accounts — of more than $2 million — which more than doubled to 4.6% of the average book in the current survey from 1.9% last year.
The remaining 80% of advi-sors didn’t make any meaningful gains in the share of their books allocated to the very largest accounts, but they did see gains in every category worth more than $250,000 and up to $2 million. As well, accounts worth less than $250,000 dropped to a share of 68.5% of the average book from 73.7% in 2010.
Following this shift to higher-value accounts — and the coincident increases in productivity — compensation is also on the rise for the average advisor. Again, the $250,000 mark seems to represent a bit of a demarcation point.
The vast majority of advisors still earn less than $250,000 a year, but the share that falls into this category is down to 73.8% this year from 78.5% last year. Compensation categories above the $250,000 mark are either holding steady or growing. The biggest jump is for reps earning between $500,000 and $1 million — which almost doubled to 7.9% this year from 4.6% last year.
Underlying these trends is an ongoing shift away from transaction-driven revenue and toward a greater reliance on fee- or asset-based revenue (for both top performers and the remaining 80%). Last year, the balance between transactions and fee- or asset-based revenue was almost evenly split. This year, a wide swing is evident, with fee- or asset-based sources now generating 53.9% of the average rep’s revenue and transactions generating 41.3% of revenue.
The shift is particularly dramatic among top producers, who report their reliance on fee- or asset-based sources has jumped to 67.6% this year from 57.1% of overall revenue last year. At the same time, transaction revenue for these reps has dropped to 26.4% of total revenue from 36.4%.
The same trend is evident among the rest of the advisors, although the year-to-year swing is notably smaller, as is the resulting gap between transactions and fee- or asset-based revenue. For the remaining 80% of reps, fee- or asset-based sources now make up 50.4% of their overall revenue vs 46.3% last year, while transactions are down to 44.9% from 49.1%.
For these reps, insurance continues to grow as a revenue source. Last year, the average rep in the remaining 80% of the sector reported annual insurance revenue of $50,582. Now, insurance accounts for $60,486 in average annual revenue for this segment.
That’s not the case for the top producers, however, as their reliance on insurance revenue has dropped dramatically, to $78,565 this year from $129,311 last year. It appears that by intensifying the push to grow AUM, top producers have let the insurance side of their books wither somewhat.
Indeed, top performers report that insurance products now make up 11.8% of their average product distribution, down from 16% last year. In contrast, insurance still represents almost a quarter of the asset mix for the other 80% of reps — up by a tiny amount from the previous year.
Top performers are instead angling their clients’ portfolios more toward holding securities directly. For these reps, allocations to equities directly rose to 7.5% this year from 4.6% last year, and bond allocations almost doubled to 5.6% this year from 3% last year.
On the managed side, allocations to this group’s bread and butter — mutual funds — slipped a little, as did their use of proprietary managed products. Yet, top performers also more than doubled their use of third-party managed products to 7.1% from 3.1%.
Similar moves are evident among the remaining 80% of advisors, with mutual funds slipping slightly, bond and equities allocations rising, and third-party managed products more than doubling — albeit to just 2.2%.
Although there are some clear differences between top performers and the remaining 80% of advisors, both sides of the business appear to be enjoying some heady growth, which is keeping the fund dealer sector vital. IE