Many planners missing out on mutual fund resurgence: Includes Chart

But the data in this year’s Report Card show that the average planner is not enjoying the spoils of the mutual fund industry’s revival. The average planner’s book is actually a bit smaller in 2007 than it was a year ago, slipping to $23.4 million from $25.4 million, reversing the increase in average AUM last year. This slight drop in average AUM comes at a time when overall industry AUM are up more than 13% year-over-year as of March 31. And planners are apparently working harder to retain assets, with the average number of clients they serve rising to slightly less than 390 this year from slightly more than 340 last year.

That advisors appear to be struggling at a time when fund manufacturers are enjoying stellar sales and favourable market conditions reflects changing dynamics. In the 1990s, the industry’s last great boom period, sales success was largely a case of assets shifting from savings to investments as interest rates declined and an extended bull market chugged ahead. That rising tide pretty much lifted all boats.

This time around, things are much different. While it is not unusual for sales to be concentrated among a handful of companies — fund companies fall in and out of favour, driven by everything from recent performance to shifting investor appetites — this year, the bank-owned firms are dominating sales.

In part, the usual factors are at play. The bank-owned firms have strong product lineups in categories that have been popular with investors, and they have had some decent performance in those areas. But even as investors have shifted their focus from income-oriented asset classes to international equities (which have traditionally been the domain of the independent manufacturers), the bank-owned firms have held their sales advantage.

The emergence of the banks as dominating competitors in the fund business also reflects shifting distribution trends. In the 1990s, it was the independent dealers who held all the cards. But the banks have done an impressive job of turning their massive branch networks into a powerful distribution channel for their mutual fund arms. The banks have also driven a trend in portfolio products as a way to bundle — and sell — funds. And, against all odds, the banks have managed to woo some third-party distribution. The result is that, on average, fund dealers aren’t enjoying nearly the success that the top-line industry statistics suggest they should be.

So, while the average planner may not be having great success in this otherwise bullish market environment, these tough times aren’t falling evenly on the advi-sors, either. As is often the case, the rich get richer, while the majority of planners struggle for growth.

Zeroing in on the most produc-tive 20% of planners (measured by AUM per client), it emerges that this top segment continues to be the most productive. While the top 20% saw the size of their books slip in 2007, it slipped much less than for the other 80%. The average AUM for the top 20% slipped by about 5% year-over-year, while it dropped more than 10% for the rest of the industry. Also, the average book for a planner in the top 20% of producers is almost triple the size of the average book of the other 80%.

Furthermore, the top 20% are increasing their productivity by cutting down their client lists to focus on larger accounts. While average AUM slipped about 5% year-over-year for the top reps, client lists dropped by more than twice as much, slimming down by more than 10% to fewer than 240 clients on average. The result is a healthy jump in AUM/client to more than $230,000 this year from slightly more than $201,000 last year.

@page_break@By contrast, not only did the other 80% of planners see their average AUM drop by 10.5% year-over-year, but they were working much harder to keep the slide from accelerating further. On average, their client lists rose by about 18% to 426 clients in 2007 from slightly more than 360 clients last year. As a result, their productivity also slipped — with average AUM/client sliding to slightly more than $53,000 this year from about $56,000 last year.

The good news is that the increasing productivity among top planners was powerful enough to push overall average productivity up to more than $88,000 this year, from about $84,000 last year. But this masks the fact that, in general, advisors are facing some tough fundamental trends. The fund dealer industry has always had disparity between the relatively small group of top producers and the bulk of reps who have a harder time making a decent living. But it appears that this disparity is growing, as the banks take the bulk of mutual fund sales.

With much more intense competition coming from the banks, the smaller producers are suffering most, largely a result of their inability to land large accounts. For example, the top 20% of planners can now boast that about 12% of their accounts are worth more than $1 million. The biggest year-over-year growth for these reps came in their biggest accounts, those worth more than $2 million. This type of account represents 3.2% of top planners’ books this year, up from only 0.7% in 2006. These top planners also saw their $1-million to $2-million accounts increase to 8.6% in 2007 from 7.7% in 2006.

The other 80% saw modest growth in the $1-million to $2-million range, to 2.2% from 1.9%. Not only is this just a fraction of the share the top planners enjoy in these accounts, but also their share of the largest accounts was unchanged year-over-year at just 0.4%. These planners are seeing some growth in their mid-sized accounts (those between $250,000 and $1 million), but the reality is that two-thirds of their books remain devoted to the smallest accounts (less than $250,000), the category in which the banks’ challenge is probably most serious.

The smallest accounts are also the biggest share of the top planners’ books (38%), but they are notably less dependent on these accounts than are most reps, and any competition here is more than offset by their increasing buildup of larger accounts.

Apart from their much greater, and growing, reliance on larger accounts, the other point that distinguishes the top 20% from the rest of the advisor population is their use of managed products. Both categories of planner have seen growth in this area year-over-year, but the top planners have grown that portion of their books much more than have the rest of the reps.

The difference is most evident in the allocation of third-party managed products. In 2006, there was almost no difference between top planners and the rest of the industry in terms of their use of these products, having constituted 2.9% of the books of the top 20%, and 2.5% of the other 80%. But that changed dramatically over the past year. The top 20% more than quadrupled their use of these products, to 12.4% of their books. The other 80% also ramped up their use of third-party managed products so that they represent 4% of their books, much less aggressive growth than for the top planners.

A similar trend, albeit to a lesser degree, is evident in the use of proprietary portfolio products. The top 20% expanded their use of these products to 7.4% of their books this year from 4.4% in 2006. The other 80% also increased their exposure to proprietary portfolios to 2.4% this year from 1.7% last year. Again, while both categories of planner increased their use of in-house portfolios, the top 20% have notably greater allocations to these products and the growth rate was significantly higher.

The trend toward greater reliance on portfolio products is evident throughout the industry. On the manufacturing side, these products have been growing much faster than the industry overall. IFIC reports that, in the first quarter of 2007, net sales of funds-of-funds accounted for more than half of total net sales in the period: they contributed $9.1 billion of the $17.1 billion in sales generated by the industry overall. They now represent more than $100 billion in AUM.

This year’s Report Card data suggest that this same trend is occurring on the dealer side, with top planners proving far more successful in selling these packaged solutions.

Hand in hand with this trend toward more widespread use of portfolio solutions is an increasing reliance on fee-based sources of revenue for planners. Given that the top planners have grown their use of portfolio products much more aggressively than the rest of the advisor population, it should come as no surprise that the top 20% also places a far greater reliance on fee-based revenue compared with the other 80%.

In 2007, the top 20% reported that more than half of its revenue was derived from fee-based sources (52%), whereas the rest of the industry garnered only about half as much of its revenue from fees (25%). Transactions still rule with most planners, accounting for 71% of the revenue generated by the lower 80%. For the top 20% of planners, transactions now account for only 42% of their revenue.

The top 20% of planners also hold an advantage in the size of insurance-related revenue. These planners report garnering average revenue of more than $132,000 from insurance activities in 2007. This is about triple the $45,566 that the rest of the industry manages in insurance revenue.

Interestingly, while the absolute value of the top planners’ insurance businesses is much higher, it is in line with the fact that their books are about three times larger. In other words, top planners don’t appear to enjoy a leverage advantage over the rest of the industry when it comes to the insurance component of their books.

Overall, the mutual fund industry is enjoying a period of strong sales and asset growth. However, not all parts of the industry are sharing the spoils equally. Top planners continue to fare better than most of the industry as they shrug off bank competition to focus on larger accounts and fee-based, portfolio-style solutions. IE