A STRONGHOLD OF STABILITY throughout much of the financial crisis, the position of deposit-taking institutions as a safe haven for financial advisors’ businesses appears to be under some threat.
In the immediate aftermath of the financial crisis, advisors who ply their trade at banks and credit unions had seen their businesses hold up relatively well. And, in the years since, they’ve built on this by growing their businesses in the face of heightened market volatility.
But that story now appears to be undergoing an abrupt reversal. In Investment Executive’s (IE’s) 2012 Report Card on Banks and Credit Unions, advisors at these firms are reporting a notable decline in their assets under management (AUM) as well as their productivity.
The average advisor in IE’s latest survey has seen the value of his or her book drop to $46.4 million this year from $49.5 million last year, which takes the average advisor back below pre-crisis levels.
And, at the same time, client rosters have swelled significantly, to an average of 400.5 client households from just 334.2 client households in 2011. This combination of lower AUM and much larger client bases also inevitably spells a significant drop in productivity, as measured by AUM/client household. In fact, average productivity has plunged to $190,336 from $257,900 in 2011.
This decline is evident among both the deposit-taking sector’s top performers (defined as the top 20% of advisors, in terms of AUM/client household) and the rest of the field. In fact, the overall declines in AUM and productivity are being driven primarily by the top performers.
According to IE’s latest survey, top performers have seen their average AUM drop to $91.6 million from $105.3 million last year. This fall-off is powering a plunge in average productivity to just $558,326 from $848,299 last year. The one factor ameliorating the decline in productivity is that these top performers have cut the number of client households they’re serving to 196.8 from 233.4.
The remaining 80% of advisors also saw a notable reduction in productivity, with average AUM/client household sliding to $98,339 from $115,506 in 2011. Unlike the top 20% of advisors, however, this decline for the remaining 80% of advisors came largely because of an increase in client numbers. The average AUM for the remaining 80% dipped only slightly, to $34.7 million from $35.6 million. But in order to maintain AUM levels, these bankers have had to boost their client numbers substantially, to 425.3 client households this year from 356.1 last year.
Despite the different underlying trends that are driving these productivity drops, it appears advisors with banks and credit unions are under increasing competitive pressure. Not only are their asset bases suffering the effects of increased market turmoil, but the demographics of the sales forces are in flux, too. The average age and industry experience of the advisors surveyed is up notably from last year – so some shifts are taking place in the composition of the sector’s advisory force.
The overall average age in IE’s survey is up to 44.1 years from 41.5 years last year, and the average length of time in the industry has jumped to 19 years from just 15.9 years. These trends are evident among both the top performers and the remaining 80%.
These big jumps in age and experience suggest that some of the sector’s younger advisors are leaving the business, causing the overall population age average to rise. Given the evident pressure on these advisors’ books, it appears some of this turnover is, in turn, leading to client defections.
Some of this turmoil in the client ranks is reflected in the account distribution data. Most notably, the share of the average advisor’s book devoted to the smallest accounts – those worth less than $100,000 – is up to 31.6% this year from 29.5% last year.
The increase in the smallest account size category is being led by the remaining 80% of advisors, with the share for these accounts in their businesses up to 33.7% from 30.2%. These advisors’ allocation to the second-smallest size category – accounts worth between $100,000 and $250,000 – also is up year-over-year, and their exposure to all larger account categories is down from 2011 (except for a tiny blip in number of accounts worth more than $2 million).
That’s not the case with the top performers, whose allocations to the largest accounts – those worth more than $1 million – are up to 16.4% from 9.8%. So, although these advisors’ overall AUM totals are down significantly from last year, it appears they have had some success in hanging onto high net-worth clients, which raises their share of an overall shrinking book.
Although the ability to retain high-value accounts is a good thing, the reality is that the struggles that many advisors apparently have gone through in the past year are evident on their bottom lines. For one thing, variable compensation is down. For the overall advisor population, the proportion of revenue generated by salary is now up to 75.2%, up from 70.1% last year. And sources of variable compensation correspondingly have declined. Bonuses now account for 15.7% of the average advisor’s revenue vs 17.4% last year. Transaction-based revenue has dropped to 6.4% from 9.9%, while fee- and asset-based revenue also are down. (Insurance and referrals have ticked up slightly.)
These trends are, for the most part, evident among both top performers and the remaining 80%, although the swing is particularly acute for top performers. In this year’s survey, salary accounts for 64.6% of top advisors’ overall revenue; last year, it accounted for only 52.1%. Meanwhile, bonuses have dropped to just 17.6% of these advisors’ pay from 26.9%, and transactions are down to 5.2% from 14.1%.
The shift is similar, but not quite as extreme for the remaining 80% of advisors. Salary now makes up 78.1% of their revenue, up from 72.4% last year. And bonuses also are down for these advisors, to 16.7% from 20.4%, with declines in transactions and fees as well.
This, in turn, is filtering through to advisors’ ultimate compensation levels. The proportion of advisors surveyed earning less than $100,000 a year ticked up to 70.6% from 68.3%. And, those earning between $100,000 and $250,000 declined to 27.2% from 30.2%.
This same belt tightening that advisors are going through also is reflected in their clients’ portfolios. Looking at reported asset allocations, it appears as though clients are showing signs of increasing cost-consciousness. For example, in last year’s survey, managed products (both third-party and proprietary) had accounted for 18.2% of the average book. This year, that’s down to 11.6%, as clients appear to be shifting toward mutual funds, which now account for 51.8% of the average book, up from just 44.9% last year.
At the same time, allocations to high-interest accounts are up to 6.6% from 2.1% last year. Some of that increase may be coming from guaranteed investment certificates, which saw their market share decline to 24.7% from 30% – a trend that probably reflects clients’ desire for liquidity amid highly volatile markets.
Notably, it’s the top 20% of advisors who are driving the decline in the popularity of GICs. Although allocations have dipped slightly for the rest of the sector, for the top performers, they have dropped to 18.5% from 27.8%.
© 2012 Investment Executive. All rights reserved.