Much like the stock markets, brokers have largely clawed their way out of the smoking crater caused by the recent global financial crisis. However, it’s not the sector’s top performers who are leading the way.
Although the crisis hit all parts of the financial services industry, the brokerage channel suffered the biggest blow among the various front-line retail investment businesses. Financial advisors in other channels didn’t have quite the same level of exposure to the markets, and so didn’t suffer as acutely when the markets went into the tank. Indeed, advisors in the banking and insurance channels — for which the margin of safety may be perceived to be greater — may have taken some share of Canadian wallets from brokers.
But brokers have been rebuilding their books steadily, making gains in overall assets under management and in their productivity, as measured by AUM/client household. That said, brokers still haven’t fully recovered from the crisis. Most interesting, it appears that the channel’s high fliers are having a harder time than run-of-the-mill producers in recovering lost ground.
The latest version of Investment Executive‘s Brokerage Report Card sees a healthy gain in AUM for the average broker — up to $81.6 million from $77.2 million last year. More impressive, this gain in AUM occurred amid a trimming of client rosters, thereby boosting productivity.
According to the results of this year’s survey, the average broker is now serving 212 client households, down from 229 in the previous year. And the increase in average AUM, when coupled with some shrinkage in client numbers, translates into higher AUM/client household. This year, the average broker boasts an average AUM/client household of $522,237, up from $517,106 in 2010.
This trend toward bigger books and improved productivity is also evident in the shifts in account distribution revealed in this year’s survey. Overall, brokers are shifting their books out of smaller accounts and reporting higher allocations to larger accounts.
The average advisor in this year’s survey now has barely 10% of his or her book composed of accounts worth less than $100,000, which is down sharply from more than 15% last year. The average allocation to accounts worth between $100,000 and $250,000 is also down year-over-year, to 16.4% from 19.5%.
Conversely, allocations to accounts worth more than $250,000 are all either flat or up from a year ago. The very largest accounts, those worth more than $2 million, continue to represent 9.4% of the average advisor’s book. But, the $1 million to $2 million category saw a healthy rise in share of book, to 14.2% from 11.5%. The $500,000 to $1 million category enjoyed the biggest jump, to 25% from 21.3%.
Last year, slightly less than a third of the average book was in accounts worth $500,000 to $2 million; this year, the share for that wide band is up to almost 40% of the average book. Overall, it appears that advisors are having some success in shifting the composition of their books toward high net-worth accounts.
Typically, when this trend occurs, it’s the industry’s top performers leading the way. The top brokers are already much more productive than the average broker, and the former are in a better position to leverage that position into bigger gains when markets are rising and the economy is growing strongly (fattening their already wealthy clients’ wallets).
Yet, the data from IE‘s latest survey indicate that, right now, it’s the workaday broker who’s really leading the recovery in overall channel AUM and powering productivity gains; the top performers appear to be playing catch-up.
Each year, IE segments the broker channel into top producers (defined as the top 20% of brokers, as measured by AUM/client household) and the remainder (the other 80%). Isolating the top performers from the rest of the broker population is a handy way of drilling into trends.
However, this year, it appears the channel’s top performers are anything but. In fact, among the top 20% of brokers, average AUM is actually down to $149.1 million from $157.1 million. In contrast, the remaining 80% of brokers recorded a strong gain in average AUM this year, pushing their total by a healthy 12.5%, to $64 million from $56.9 million.
Indeed, the remaining 80% now boast average AUM that is back up to the level it was in 2008, before the effects of the financial crisis had fully materialized. Overall, average broker AUM is still below its 2008 level ($86 million) — and it’s the top performers that appear to be weighing on that recovery. Their retreat in average AUM this year leaves them about 15% below 2008 levels, when they had $175.9 million in AUM, on average.
Productivity for top performers is also down year-over-year. Both the top 20% and the rest of the broker channel saw their client lists shrink. However, for top performers, the trimming of their client household numbers (to 121 from 137) wasn’t enough to overcome the significant contraction in average AUM. As a result, their average productivity also dropped to $1.3 million from almost $1.5 million.
The remaining 80% of brokers parlayed their impressive increase in AUM and modest decrease in client households (down to 235 this year from 252 last year) to a handy jump in productivity: Their average AUM/client household now sits at $308,847, up from $276,651 in 2010. Although productivity for this segment is still far below that of the top 20%, these advisors are nevertheless trending in the right direction.
Looking at the account distribution data, it appears that the drop in average AUM (and the resulting decline in productivity) for the top 20% is largely as a result of a reduction in the largest accounts — those worth more than $2 million. Last year, these accounts represented almost a quarter of the average top performer’s book (23.4%); this year, the allocation for these high-end accounts is down to less than 19% of the average top performer’s book (and down from 25.5% in 2008).
However, the top performers are continuing to trim their exposure to their smaller clients, as accounts worth less than $500,000, which represented more than a third of their books last year (33.7%), were down to 29.1%. The combined result of this trimming on the bottom end and the loss of accounts on the top end is significant growth in the middle, with accounts in the $500,000 to $2 million range now representing 52% of their accounts this year, up from 43% in 2010.
In contrast, while the remaining 80% of brokers also saw a decrease in accounts worth less than $250,000, they managed increases in every other category. Last year, accounts smaller than $250,000 represented almost 40% of their books; this year, that figure is down to just 30.3%. At the same time, accounts in the $250,000 to $1 million range now represent almost 51% of this broker segment’s books, up from 44.7%. In addition, these advisors are also enjoying growth in the $1-million-plus accounts, up to 18.7% vs 15.7% (including an increase in accounts worth more than $2 million).
Not only are the remaining 80% of brokers driving the increase in overall channel AUM and productivity, they are also leading a trend toward a greater reliance on insurance revenue throughout the channel. Both elite brokers and the rest of the channel are reporting significant growth in their insurance revenue; however, the rate of growth is much higher among the remaining 80% of brokers — albeit from a lower starting level.
The top performers reported that their insurance revenue grew to $93,154 in 2011 from $75,717 year-over-year. Although that is an impressive increase, the remainder of the channel reported that their annual insurance revenue has jumped even more remarkably, to $63,360 from $44,837 — representing an increase of more than 41%. Moreover, given the smaller size of this segment’s average book, insurance is a much bigger component of overall revenue for these brokers.
Traditional insurance products seem to be driving this increase in insurance revenue. Overall, brokers report a drop in their sales of segregated funds, to 23.5% from 30.5%. Instead, their use of term life and permanent life products has risen to comprise 25.4% and 39.5% of the insurance segment of their books, respectively.
And it appears that brokers are focusing on traditional core products in other product areas, too. Among investment products, allocations to equities and mutual funds have increased and bonds have held steady, while non-core allocations have slipped. Similarly, among banking products, allocations to traditional guaranteed investment certificates are up to 72.6% from 65.4%.
The sources of brokers’ revenue continues to evolve as well. In the latest survey, asset-based revenue topped 50% of overall revenue for the first time. Top performers are leading the way in this trend, with their asset-based revenue sources growing to 54.5% from 51.4%. For the rest of the channel, asset-based revenue was more or less unchanged at about 49%.
Transactions remained steady as the next biggest source of revenue for the average broker, at 43.3%. However, there were some changes among the more marginal sources. Fee-for-service revenue jumped to 1.6% from just 0.4%. (This is another trend driven by the remaining 80% of brokers, who saw their reliance on fees for service triple to 1.7% from 0.5%.; fees also grew in significance among the top performers, to 0.7% from 0.1%.)
Brokers also reported a modest overall rise in branch manager overrides, to 1.9% from 1.6% — a trend powered by the top performers. At the same time, both top performers and the rest of the channel saw a reduced reliance on deal-based revenue sources. IE