National mutual fund dealers are a fairly new phenomenon in Canada, but they appear to have already overtaken their local counterparts in terms of sales-force productivity, Investment Executive’s inaugural Regional Dealers’ Report Card shows.

In sharp contrast, regional investment dealers are showing an impressive ability to attract top-performing veterans and outperform the long-established national investment dealers. Successful stock brokers, it appears, view their industry’s regional houses as viable alternatives to the national players.

The Canadian mutual fund distribution business was built by a diverse collection of regional players, largely mom-and-pop shops, run by owners and managers who were often still running books and serving clients. The firms grew up with offices in one or two provinces, and it is only in the past 10 years or so that consolidation took hold and national players emerged.

The remaining regional mutual fund dealers have either evaded or been ignored by the consolidation trend. They still adhere to the mom-and-pop traditions, but at a price.

Consolidation may have been forced upon the fund dealers by a combination of ever-growing compliance costs and greater technology investment pressures, but it clearly has its benefits. IE’s research shows that the national firms, which have productivity and profitability pressures of their own, are fielding fitter sales forces than their regional rivals.

Although the average fund dealer rep has about the same level of industry experience at both the regional and national firms — roughly 15 years in the business — it’s the reps at the national firms that have built bigger books. The average rep at a national firm has a much bigger client base: 343 clients vs 224 for the regional rep. Reps at national firms also boast much larger asset bases. The average national rep has more than $25 million in assets under management, compared with slightly more than $9 million for the average regional rep.

The differences in average book size translate into a wide productivity gap, too, as measured by AUM/client. The average national fund rep has roughly $75,000 in AUM/client, compared with slightly more than $40,000 for the average regional rep.

The disparity in average AUM/client is also reflected in the distribution of client accounts reported by reps. Those at regional firms have 77% of their accounts in the smallest category (less than $250,000), with the majority of remaining accounts in the $250,000-$500,000 range. Only about 5% of their accounts fall into the $500,000-$1 million range, and barely 1% are valued at more than $1 million.

The distribution of accounts at the national fund firms is similarly but less intensely skewed toward small accounts. Although 61% of their accounts fall into the smallest category, reps at the national firms also report that more than 22% of accounts are in the $250,000-$500,000 range. They also boast a significantly higher, albeit still small proportion of large accounts. Almost 11% are in the $500,000-$1 million range, and 3.5% are more than $1 million.

Winning the business of high net-worth investors has become a challenge throughout the entire retail advisory business in the past few years, as firms push harder to focus on profitability and, therefore, on the productivity of their sales forces. Although the fund dealers have been hard pressed to compete in this rarefied air, it appears that reps at the national firms are doing better at it than their regional counterparts.

Such is not the case on the investment dealer side of the industry, however. Even while the regional firms in the fund dealer business appear to be lagging their national rivals, the regional brokers are often trumping their national competitors.

IE’s research shows that brokers working at regional investment dealers tend to be more experienced and running more productive books than the brokers toiling at the big firms. The average broker at a regional firm is older (almost 50 years old, vs 46.5 years old for the national firms), and they’ve been in the business longer (more than 21 years, on average, compared with slightly less than 16 years for the national firms).

The veterans at the regional firms, however, are fairly recent arrivals at their firms. The average regional broker has been with his or her firm for only about four years, compared with 7.5 years for the average national broker, which suggests there’s an ongoing migration by veteran producers to regional dealers. It is probably occurring for a few main reasons.

@page_break@For one, technology has somewhat levelled the playing field between the large national firms and the smaller regional dealers. Through outsourcing and sophisticated programs, small firms can offer complex products such as wrap accounts and separately managed accounts, just as the large firms do. In the past, the administrative bur-den of providing such high-end products would have restricted the offering to large, well-financed firms.

Improving technology is also allowing smaller firms to provide better reporting to clients on a cost-effective basis. This means brokers at small firms now can compete effectively against the big boys.

Moreover, while technology has helped the small firms nullify the large brokerage firms’ scale advantage, the consequences of being big have been magnified. Whereas some advisors enjoy the prestige that comes with working at one of Canada’s big brokerage houses — name recognition, a well-known brand and, perhaps, even a little swagger — others see only bureaucracy, the evils of centralized control and the threat of distant, out-of-touch management. Such are the sins that often accompany size, particularly for bank-owned firms.

The bank-owned dealers also face the possibility of more real and perceived conflicts of interest because other parts of their financial conglomerates manufacture an array of proprietary products that their parent companies are eager to push out to retail clients. The assortment ranges from traditional equity underwritings to all manner of income trusts, principal-protected notes and myriad managed products.

Between the intensifying negatives of working at a big firm and the shrinking capability gap between local and national players, it’s clear that successful veterans are seeing regional brokerage firms as solid alternatives. In many cases, they are even proving preferable.

In fact, 100% of the brokers IE surveyed at regional firms say they would recommend their firms to another broker. They’re putting their money where their mouths are as well, as 78% of regional brokers report that they own equity in their firm (compared with just 4% of regional fund dealer reps).

Apart from attracting veteran reps, IE’s research shows that the brokers at regional firms are also running the sort of books that the national firms would like to see from their sales forces. Although brokers at the national firms hold a handy edge in absolute AUM — they average $87.5 million, vs $56 million for the regional brokers — the large firms spread the asset advantage over a much bigger client base.

The average broker at a national firm serves about 370 clients, compared with just 180 clients for the average regional broker. This translates into a significant productivity advantage for regional brokers, as they average almost $310,000 in AUM/client, compared with about $236,000 for the national firms’ reps.

The regional advantage in AUM/client also shows up in account distribution. Even though the regional firms report that they have a greater allocation to the smallest accounts (less than $250,000) than the national firms, and slightly smaller allocations to most of the other account size categories, they hold an edge over the national firms in the very big accounts. Reps at the regional firms report that more than 8% of their accounts are more than $2 million in assets, compared with 7.4% for the national firms.

Although the gap between them isn’t huge, it is both surprising and significant to find that the regionals are beating the nationals at their own game. IE