The big brokerage
firms have long been the most productive segment in the universe of retail financial advisors. But now they are seeing strong competition from their regional dealer rivals and, more surprising, from bankers.

The brokerage business is the core of the retail investment industry. Long before there were wealth managers, discount brokers or personal bankers, the traditional stockbroker was the only game in town. Of course, back then, “buy low, sell high” was the game a lot of investors wanted to play.

But as investing has become a mainstream activity rather than a niche pursuit, alternatives have mushroomed. And the more recently established distribution channels haven’t been content merely to feed on the brokers’ leftovers. They are well into the game and competing for the wealthy clients who were once the exclusive territory of traditional stockbrokers.

While brokers still dominate the high net-worth game, a look at the combined Report Card surveys conducted by Investment Executive this year of Canada’s brokers, planners, account managers, insurance advisors and, for the first time, regional dealers (in our May through September issues) hints at the success of the other retail channels in cracking the glass ceiling separating the traditional brokers.

In fact, it appears that the industry overall is having some success at pushing advisors to improve productivity — primarily by pursuing wealthy clients and building bigger books. Taking $100 million in assets under management as an arbitrary figure for defining top producers, it is clear that the industry is seeing more advisors pushing their books into that range.

In 2004, approximately 11% of the advisors IE surveyed reported having at least $100 million in AUM. Now, the share of advisors with that much under management is up to 15%. Clearly, the $100-million mark is becoming more attainable for advisors generally, and a couple of years of strong returns in Canadian markets surely haven’t hurt that cause.

One notable change in IE’s data from 2004 to 2006 is the addition of several regional dealers — three investment dealers and four mutual fund dealers — to our surveys. You might expect that the addition of more brokers would inflate the AUM data, as brokers typically account for a significant number of elite advisors. However, if you take out the new regional dealers from the data, the comparable result is even a little stronger: almost 16% of advisors report AUM of at least $100 million.

So, while the regional dealers are a new addition to our survey, they don’t appear to be inflating the results. Traditional brokers still account for about three-quarters of the advisors with $100 million in AUM, with the regional dealers and banks’ account managers as the next biggest groups. A smattering of planners and insurance advisors also make the cut. The regional dealers are more of a factor when we look at productivity, as measured by AUM per client.

Despite the industry-wide pursuit of high net-worth clients, the portion of retail advisors who are running exclusively high net-worth books remains a tiny minority. But there are changes afoot in the types of advisors who are running these kinds of books, as the big brokerage firms face some serious competition for these coveted, high-end accounts.

As far as much of the retail business is concerned, millionaire clients make ideal targets. Many advisors are lucky to have a handful of these clients on their books. But at the top end, the very elite advisors boast books in which the average client has at least a $1-million account. In the past, the big brokerage houses were virtually the only places at which these advisors could be found. But, in the past couple of years, these dealers are facing some serious competition for top-producer status.

In 2004, for example, slightly less than 2% of the advisors IE surveyed could boast average AUM per client of at least $1 million, and all of them were brokers. This year, the fraction of advisors that average at least $1 million in AUM per client is up to 2.6% of the total advisor population. However, the regional dealers that we added to our survey account for a significant number of today’s elite advisors. If we back them out, the proportion of top producers is still higher than it was two years ago, but it is up to only 2.1%.

@page_break@Along with the addition of the regional dealers to our survey, and the revelation that they field some of the industry’s most productive advisors, the other significant change in advisor productivity since 2004 is the emergence of a handful of the banks’ account managers into these elite ranks.

None of these bank-based advisors made the grade (at least $1 million in AUM per client) back in 2004. Now they account for 9% of these top advisors. The brokers still dominate this area, with the big brokers accounting for 62% of elite advisors, and regional dealers contributing 26% (all from the brokerage side of the regional dealers survey). One in-surance advisor made the cut, but no planners did.

These elite advisors run the kind of businesses that firms drool over. On average, they report having more than $200 million in AUM, but just 167 clients on their books. Their productivity averages out at almost $1.3 million in AUM per client. This compares with $48 million in average AUM spread across 471 clients, and average AUM per client of $172,572 for the industry overall.

Getting to the elite level takes time and experience. The top advisors are both older and more experienced. On average, they are about 51 years of age, compared with about 47 years of age for the overall advisor population. And they have more than 25 years of experience in the industry, compared with just 16 years of experience for the total population.

Elite advisors’ books look a lot different, too, in terms of their distribution of accounts, asset allocation and compensation methods. The top advisors report that just 13.5% of their accounts fall into the less-than-$250,000 range. The overall population has more than half (53%) of its accounts in this category. Accounts that are less than $500,000 represent more than three-quarters of the average advisor’s book. For the top advisors, they constitute less than one-third of their accounts.

The bulk of the top advisors’ accounts are larger than $500,000. These advisors report that 26.8% of their accounts are between $500,000 and $1 million — almost double the allocation enjoyed by the total advisor population. Fully 45% of their accounts are worth more than $1 million, and more than one-quarter of their books (26.5%) comprises accounts valued at more than $2 million. By contrast, only about 9% of accounts in the overall advisor population are worth more than $1 million, and just 3.4% of them are in the $2-million-plus range.

There are also some notable differences in how the top advisors and the rest of the field are being paid. Not surprising, the elite advisors are making more use of fees, although they still do a big transactional business, as well. Transactions account for 59% of the top advisors’ businesses, compared with 65.4% for the population overall.

Old-fashioned trading commissions are still the biggest source of revenue for the top advisors. But these advisors also report generating about 29% of their revenue from fees (both fee for service and fee-based methods); this compares with the overall advisor population, which is generating 16% of its revenue from fees.

What is also interesting is that advisors who have accumulated at least $100 million in AUM, but not necessarily average AUM per client of $1 million, are making even more use of fees. These advisors report that more than 35% of their revenue is derived from fees.

Fee-for-service compensation remains a rarity among the total advisor population, accounting for just 2% of revenue and 2.5% for the fee-friendly asset accumulators. But its appears to be a growing feature of elite advisory businesses, representing 5.6% of revenue for advisors with at least $1 million in AUM per client.

Given these differences in account distribution and compensation methods, it is not surprising that the allocation of assets is vastly different between top advisors and the overall advisor population. Generally, the elite advisors do much more direct investing, while the rest of the field makes much more use of various managed products. Almost two-thirds (62%) of top advisors’ books is directly invested in stocks and bonds; this compares with just 25% for the population overall.

Conversely, the top advisors have only about 10% of their clients’ assets in mutual funds, whereas the general population holds slightly less than 40% of assets in mutual funds. The top advisors are also notably less invested in third-party managed products (4% of assets vs almost 8% for the overall population). However, they are bigger users of proprietary managed products — investing about 11% of assets in these products, compared with 8.1% for the average advisor.

Insurance is an inconsequential part of the top advisors’ business — less than 1%. This is perhaps not surprising, because wealthy clients are more likely to have more complex insurance requirements and, therefore, probably use additional advisors for those needs. And, in situations in which these clients do get their insurance from their investment advisors, this comprises a relatively smaller portion of their large portfolios.

Yet these top advisors still earn more in dollar terms (if not as a percentage of revenue) from their tiny insurance business than does the average advisor. That is the beauty of high productivity — it provides lots of leverage, so even small parts of the business generate significant dollars.

At this point, a major theme of the combined Report Cards is that the traditional brokers continue to dominate the ranks of the biggest, most productive advisors. But they are starting to see a serious challenge from their regional dealer rivals, and even the banks’ account managers. IE