It appears the plan is working. Over the past few years, many brokerage firms have been pushing their sales forces to focus on large accounts, and the evolving profile of the average advisor confirms that this strategy is taking hold. So, is now the time to gloat over this success — or to be worried about its long-term sustainability?
There’s no question that investment dealers have succeeded in reshaping their businesses by targeting higher-value clients. Data from Investment Executive‘s annual Brokerage Report Card reveal that the average broker has been steadily ramping up productivity by cutting down on the number clients while growing total assets under management.
This trend has been led largely by the bank-owned firms, which have identified their retail investment businesses as an area in which they can improve profitability.
Retail banking margins have been under extreme pressure, corporate and investment banking has proven to be too volatile, and so the retail investment business has presented an opportunity to mine bigger — and steadier — profits.
In the past, the retail brokerage business was just as correlated to the markets as investment banking. But the shift toward managed products has turned this area into a source of stable fee income. Some firms now have upward of 40% of their retail asset base in some form of fee-based product, from fee-based accounts to wrap programs to plain old mutual funds.
In this type of fee-based business, firms can mine for greater profits by taking advantage of scale. Increasing assets under management while reducing administrative costs is a sure way to greater returns. And the dealers have succeeded in this largely by segmenting their client bases — sloughing off smaller accounts, which cost just as much to administer as large accounts, and focusing on larger, more profitable clients. This task has fallen on the shoulders of brokerage firms’ sales forces, and the results are evident in the data collected by IE’s intrepid researchers.
If we look back at the average broker in 1995, and compare him or her with the average broker of 2005, the differences are plain. Back in 1995, the average broker had less than $34 million in assets under management and was managing a roster of about 375 clients. Today, the client list is
shorter, but the asset base is much bigger.
The average broker now has more than $68 million in AUM, more than double what it was a decade ago. But the client roster is much shorter, with an average of 305 clients on the books.
Brokers may rue the day that banks decided
to buy them up and turn them into “wealth managers” and, more recently, pressure them to segment their books. But the unambiguous result has been huge jumps in productivity. Back in 1995, brokers averaged less than $91,000 in AUM/client; today, that’s up to more than $300,000 in AUM/client. And about the top fifth of brokers has an average of $500,000 in AUM/client.
The top producers
This trend to more productive books has, in turn, created some sharp distinctions among sales forces. Among brokers with at least $500,000 in AUM/client, the average of these top performers boasts almost $1 million in AUM/client, vs an average of just $181,000 in AUM/client for the rest of the industry. These top producers have only 180-odd clients on their books, vs 333 for the rest of the industry. Yet they boast average AUM of more than $150 million. The rest of the industry has an average of $53 million in AUM.
The focus on landing bigger accounts and putting them into fee-generating products is also evident in the data. The top producers estimate that more than 30% of their accounts are greater than $1 million, including more than 11% of their accounts that are bigger than $2 million. By contrast, the rest of the industry estimates that less than 10% of their accounts are at least $1 million in size. Indeed, more than 78% of their accounts are less than $500,000; the biggest portion (47%), is devoted to accounts that are smaller than $250,000.
The big producers say that the single biggest portion of their accounts (30%) falls in to the $500,000-$1 million range.
These big producers aren’t looking after
rich, active traders while the rest of the industry focuses on small investors that can only afford mutual funds. In fact, the opposite is true. The top producers estimate that more than 40% of their books operates on a fee-based or fee-for-service basis, vs 31% for the rest of the industry. The smaller producers are still more dependent on transactions and commissions than their more productive counterparts. And the good news for brokerage firms is that their top producers are making more use of their proprietary products than the rest of the industry.