This year’s advisor is older, has bigger book and works harder: Includes chart

All of this bodes well for investment dealers. Indeed, these market gains are just about mirrored in the business growth reported by brokers responding to Investment Executive‘s 2006 Brokerage Report Card. Last year, the average advisor in our survey boasted a book of $68.3 million in assets under management. This year, the average book has grown to $87.5 million. That translates into a 28% gain in reported AUM compared with a year ago — or, just about what the Canadian markets delivered in organic growth.

Both advisors and their clients should certainly be pleased with a 28% gain. But this year’s survey also suggests advisors are working slightly harder to post these numbers. The number of clients served by the average advisor has also risen by more than 21% in that period, to 371 this year from slightly more than 300 last year. The result is that the size of the average advisor’s average client account declined year-over-year to slightly less than $299,000 this year, from almost $306,000 last year.

This marks something of a turnaround for the industry. For the past few years, the average AUM/client metric has headed remorselessly higher as firms pushed their sales forces to segment their client bases — paring away smaller clients and focusing on larger accounts in an effort to maximize productivity and profitability. The latest data suggest the tide has turned again and brokers are back in “client acquisition” mode.

Undoubtedly, the strong markets and the underlying strength in the Canadian economy are key reasons for this shift. With unemployment at very low levels and incomes rising, more Canadians have the resources to invest through financial advisors. And the impressive returns delivered by the Canadian stock market have surely lured both new investors and those who fled after the end of the last big bull market in 2000-01. Anecdotally, Canadians are excited about investing once again, and not just in energy stocks — witness the volume of hype surrounding the Tim Hortons Inc. initial public offering, a deal that had a number of novice investors clamouring for shares in the iconic doughnut merchant.

It appears the boom-and-bust mentality that has always accompanied the investment brokerage business is still in force, among both investors and advisors. The past couple of years were a time of retrenchment, with client rosters pared down sharply as a result. But it now appears that was more of a cyclical change than a secular one.

This growth in the number of clients that advisors are serving appears to be an industry-wide phenomenon. It is not focused only on the small and mid-sized producers, nor is it a result of an influx of rookie advisors. If anything, the industry is continuing to age along with its core client base.

The average age reported by brokers responding to our survey in 2005 was slightly more than 45 years. This year, the average age is up to 46.5 years, suggesting that some younger brokers may be dropping out of the industry.

This conclusion is supported by the growth in tenure reported by brokers. The average advisor now has been in the industry for almost 16 years, compared with an average tenure of 14 years reported last year. Again, it appears that poor prospects are being weeded out earlier, and the industry is becoming the preserve of its veterans.

Not only is experience winning out over youth, but the brokers in our survey are also staying at their firms. Among the brokers responding to our survey this year, average tenure with their current firm grew just about in line with expectations year-over-year — to eight years this year from seven years last year — suggesting there has been relatively little movement among firms, despite what is reportedly a highly competitive recruiting environment.

@page_break@This is also characteristic of the cyclical nature of the industry. Brokers are reluctant to jump ship when markets are strong and new clients are charging through the doors. It becomes much easier for firms to raid their rivals when markets slump, volumes ebb and advisors become more sensitive to the irritations imposed on them by their current firms.

Similarly, firms don’t have to be quite so miserly with their sales forces when assets are growing by almost 30% a year, so they may be less likely to do the things that push their advisors to make a move. For now, things are good, and brokers are, for the most part, sitting tight.

These macro trends — the substantial increase in AUM, accompanied by larger client rosters and aging, comfortable sales forces — are evident across all segments of the industry, from the top producers to the rest of the pack.

The segmentation of client bases that has taken place in the past few years has, to some extent, been mirrored by a segmentation of sales forces. The 80/20 rule — 20% of your clients account for 80% of your business — has been driving changes both within advisors’ individual books and within sales forces overall. Firms have concentrated on retaining and supporting the top echelon of their sales forces, and prodding mid-level producers to join the ranks of the top producers, while pushing the smallest producers out the door.

To delve into the trends underlying these different sales force segments, we, too, have segmented our data into the top 20% of brokers and remaining 80%, as measured by AUM/client. In both of these groups, similar trends are evident. First, it is worth noting that the increase in average client base has pushed the demarcation point between top producers and the rest down to $425,000 in AUM/client this year from about $500,000 last year.

Among the top 20%, average AUM has grown to $170.7 million this year from $152.3 million in 2005. This growth rate is much lower than the industry’s overall growth — only about 12%. At the same time, the top producers’ client rosters have expanded at a faster rate, growing by about 29% year-over-year, albeit from a much smaller base. The top brokers’ average client list has gone from slightly less than 184 clients last year to more than 237 this year. As a result, their average AUM/client has also dropped notably, to less than $792,000 this year from more than $973,000 last year.

The same basic trends are evident among the remaining 80% of the industry, although their asset growth is outstripping client-base growth. The brokers who fall into this group report that their average book now includes more than 400 clients and $66.1 million in AUM, up from 333 clients and $53.3 million in AUM in the 2005 Report Card. Their average AUM/client metric has also slipped a bit, but not nearly as much as it has for the top 20% — sliding to almost $177,000 this year from slightly less than $181,000 in 2005.

Not even the industry’s most productive brokers are escaping these trends. Brokers with an average AUM/client of at least $1 million have also seen their client bases grow significantly. Average AUM for these top performers has reached an impressive $242.3 million, up from the $194.2 million reported last year. But they, too, have added to their client rosters to get there, growing to an average of 183 clients this year from an average of 130 clients last year. Their average AUM/client has also dipped to slightly less than $1.4 million this year from more than $1.7 million last year.

Along with the apparent reversal of the recent trend of culling clients, brokers also report a revival in the prominence of transactions within in their practices, after several years of moving steadily toward more fee-based arrangements. This shift was most evident among the largest producers (those with AUM/client of at least $1 million), who reported that transactions accounted for almost 60% of their revenue in the past year, compared with 47% the previous year.

Fee-based revenue was down to about 25% of total revenue from 43% the previous year for these advisors. Deal-based revenue also jumped to 11% from 9%.

Similarly, the top 20% of brokers saw their reliance on transaction revenue tick up to 54% from 51%. Only the remaining 80% saw transaction-driven revenue continue to decline, to 60% from 61%.

But not all the industry’s recent trends plowed into reverse. Notwithstanding the addition of more clients, brokers continue to report an increasing emphasis on larger accounts within their businesses. This is true across all segments. For the top brokers, accounts of at least $2 million are now the single biggest segment of their books — about 28%, up sharply from 15% last year.

The allocation to all other account sizes fell year-over-year for these brokers, with the smallest accounts (those less than $250,000) falling the furthest — to just 8% of their books in 2006 from 21% in 2005.

The top 20% of brokers also saw growth in their largest accounts and a sharp decline in their smallest. For them, accounts in the $500,000-$1 million range remains the biggest portion of their books, with the smallest accounts declining to just 14% in 2006 from 22% in 2005.

The remaining 80% of brokers also saw a significant drop in their allocation of small accounts, to 36% this year from 47% last year, although it remains the single largest category for them. They also saw growth in all account categories of more than $500,000.

This focus on larger accounts is the most notable trend that continued this year from previous years. But with markets booming, many investment advisors have abandoned the practice of culling clients, and are back to bulking up their books this year — proving that, at its heart, the brokerage business remains tied to the fortunes of the markets. IE