The so-called “average broker” we’ve profiled in previous Brokerage Report Cards is becoming a chimera. In fact, the industry is now producing two very different animals: big producers focused primarily on affluent investors — call them the “whales” — and smaller players who are building their businesses on the mass of ordinary Canadian investors — call them the “small fry.”
There has always been a wide demographic diversity in the broker population, but polarization within the industry is evident as client segmentation becomes the order of the day at the big, bank-owned firms. This trend appears to be creating intra-industry migration between firms, as brokers decide what kind of businesses they want to run.
Compared with previous years, overall industry tenure hasn’t changed, but the average broker’s tenure at his or her firm is shorter. This supports the idea that advisors have been migrating between firms.
In 1995, respondents to our survey reported they had been in the industry for an average of 10 years, but they’d been at their current firm for almost nine years. In 2003, the so-called “average” broker has likewise been in the business for about 10 years, but with his or her current firm for only 6.4 years.
These days, it appears there has been a lot more jumping between firms than in the mid-1990s.
While a bear market may not sound like a good time to be changing firms, much of this movement may be explained by the polarization that has taken place.
Brokers who don’t want to chase the mythical “affluent investor” or who have been turned off by the increasing homogenization and bureaucratization of the bank-owned firms are looking for places to hang their hats at more independent firms. The bank-owned firms are happy to see these advisors go, as the firms become increasingly sensitive about the cost of serving clients.
The push at the bank-owned firms to chase affluent clients and the resulting dislocation among brokers is also reflected in the data on the size of brokers’ books reported in our survey. In 1995, the average broker surveyed had 373 clients, just under $34 million in assets under management and an average client account of $90,617. Today, that average account size has almost doubled to $175,342.
After the boom and bust of the past several years, it is clear these accounts aren’t simply being inflated by market gains. Many individual clients haven’t experienced much growth in their portfolios during this time, yet brokers are reporting huge growth in their average account sizes. This is coming as they are increasingly pushed to segment their books, dropping lower-value clients and focusing on the famous 20% who generates 80% of their revenue.
The average broker today has slightly more than 300 clients, down almost 20% from 1995. At the same time, average assets under management have grown to almost $54 million, up about 60% during the same time period.
While this trend toward squeezing more assets out of a smaller crop of clients has been evident for a number of years, the emphasis on cutting clients has been particularly stark over the past year. On a year-over-year basis, average assets under management have risen to $53.9 million from $49.3 million; and, the average number of clients has plunged to 307 in 2003 from 348 in 2002.
However, this trend is not playing out consistently across the industry; rather, it is dividing the industry into two distinct camps.
Instead of one average broker, there are two — the one focusing almost exclusively on the big clients and the one who is running a more inclusive book.
There are a couple of different ways of separating the whales from the small fry.
One is by straight AUM; another is by average AUM/client. Whether you define the whales by AUM/client or straight AUM, their profiles are strikingly consistent.
Arbitrarily setting $250,000 in AUM/client as the cut-off, 134 of the 454 brokers in our survey make the cut as whales.
On average, the whales have been in the business longer, and they’ve been at their current firms longer than the small fry. This may not be surprising, as brokers who have been in the business longer clearly have had more time to build bigger books.