Advisors reap bounty of strong markets: Includes chart

The action in the past 12 months has pushed many insurance advisors well beyond the 1,000-client mark — the average advisor now has 1,045 clients, compared with last year’s average of 933 clients. This accumulation of clients has underpinned growth in assets managed by these advisors, with the average AUM rising to $13.7 million this year from $9.7 million in 2005.

The increase in AUM has vastly outstripped the addition of new clients on the books — while growth in the number of clients is a robust 12% year-over-year, AUM is up more than 40% in that same time.

Much of the AUM gain is probably due to market gains in existing clients’ portfolios. But some of that bounty is surely a spillover from the investment business. Healthy markets have certainly given clients renewed enthusiasm for their portfolios and, in focusing once again on their financial affairs, they are generating more business for insurance experts. At the same time, insurance advisors are feeling the pressure from their firms to step up their wealth-management offering and sell more mutual funds (see page 24).

The significance of these forces varies sharply, depending on whether an advisor is independent or part of an in-house sales force.

In terms of both clients and AUM, insurers with dedicated sales forces are enjoying stronger growth. Despite starting at a much higher point, captive advisors have seen their client base grow by about 23% year-over-year — about double the rate of growth for advisors working through managing general agents (or “independents”) — pushing captive advisors’ average client base to the staggering size of almost 1,500. This rapid accumulation of clients by these advisors has helped push their average AUM up by about 39.5% over the past year and certainly boosted first-year commissions.

The independents have seen notably slower growth in average AUM (about 23.4% over the year) — yet they maintain a significant edge over the captive agents in absolute AUM, with an average of $15.8 million in AUM for the independents, vs $12.3 million for the captive agents.

With the bigger AUM totals and much smaller client bases, the independents have a large edge in productivity, as measured by AUM per client. The independents’ average AUM per client is more than $67,000 in 2006, up from slightly less than $60,000 in 2005. Meanwhile, the AUM per client for captive agents is languishing at less than $17,000.

While AUM and productivity measures are creeping higher, the strong growth in client bases appears to be coming primarily in smaller accounts (those less than $250,000).

In 2005, the average advisor reported that slightly less than 60% of client accounts were worth less than $250,000. In 2006, the proportion of accounts that fall into that category has grown to more than 72%. The share of the average book represented by all other account sizes has slipped from 2005, except for the very largest accounts (those worth more than $2 million), whose share is up slightly.

The same basic trend is evident for both captive and independent agents, with one notable difference — the growth in the largest accounts is all coming from the independents. All advisors have seen their share of the smallest accounts grow significantly over the past year — up to more than 75% from 64% for the captive agents, and to 68% from 47% for the independents.

For captive agents, one effect of this strong growth is that the allocation to all other account sizes is down year-over-year. Evidently, virtually all of their client growth is in the smallest accounts.

The story is much the same for the independents, who are reporting smaller allocations in every category, year-over-year, except for among the smallest and the very largest accounts. These advisors have seen their allocations to very big accounts ($2 million and more) rise to more than 5% this year from 3.8% last year.

@page_break@This disparity between account sizes also highlights the greater role independents play on the investment side of their clients’ finances. Last year, there was little to choose between the two groups in terms of the portion of their books allocated to securities. But that similarity has dissolved slightly over the past year, as the independents have taken a notably bigger role on the investment side. Their allocation to mutual funds has grown to almost 28% this year, from 25% last year, for example. By contrast, the captive agents’ allocation is down to slightly more than 18% this year from 23% last year.

At the same time, independent advisors’ use of managed products is on the upswing — with an accompanying fall-off among captive agents. Last year, captive agents reported that in-house managed products represented a small but still significant portion of their business (3.5%). This year, that has dropped to less than 1%. In the big scheme of things, the independent’s use of managed productions remains inconsequential but, nevertheless, the trend indicates growing use of these products, with third-party products slightly more popular among the independents than proprietary ones .

Direct equities, bonds and cash are getting almost no allocation in both types of advisors’ books. Notably, income trusts have slipped from tiny allocations last year to virtually nothing in the current year.

The overwhelming portion of advisors’ businesses remains in insurance products, although there have been some significant shifts within the insurance portion of most advisors’ books. For one, the use of segregated funds is on the upswing. This year, seg funds account for 21.6% of the average advisor’s book, up from about 19% last year.

Once more, the bulk of the growth is coming on the independent side — the captive agents’ allocation is barely changed, up to 21% from 20%, whereas the independents’ allocation to seg funds has jumped to about 23% from slightly more than 18%.

The use of permanent life insurance has taken an even more sizable jump, rising to 27% from 21% for the average advisor. This represents the continuation of a trend IE observed last year, when the popularity of permanent life was gaining momentum.

Again, independents are driving the shift. Their allocation to permanent life jumped to 38.4% this year from 22.8% last year. The captive agents’ allocation actually slipped over the same period, sliding to 18% in 2006 from 20% in 2005.

The independents’ big shift toward permanent life is coming at the expense of term life — it represents 25% of their books this year, dropping from 32% last year. Captive agents moved in the opposite direction, pushing their allocation to term life up to about 25% this year from 19.4% in 2005.

The one thing that both types of advisors agree on is that their increased allocations to seg funds and life insurance are coming at the expense of niche products, such as living benefits and fixed annuities. Allocations to these products slipped across the board, with living benefits allocations dropping to 7.9% from 9.3%, and annuity allocations dipping to 1.3% from 2.1% for the overall average advisor.

The other trend common to both types of advisors is the shift in compensation. Transactions account for an overwhelming portion of the average advisor’s compensation, at 93.4%, up from 85.8% last year. Also, overall fee-driven revenue is down. Fee-based sources dropped to just 2.4% of the average advisor’s revenue this year from 6.4% last year. At the same time, fee-for-service revenue ticked up to a tiny 0.9% from an insignificant 0.4% last year.

It’s not surprising that transactions continue to dominate the insurance industry. What may be surprising is the extent to which healthy investment markets seem to generate positive spinoff effects for and drive the focus of the insurance advisors’ business as well. IE