Investors invariably seek safety amid market turmoil and uncertainty. So, given the unprecedented mayhem gripping equities markets over the past year, it was predictable that investors would retreat from risk. But what is more surprising is how starkly that shift is affecting the competitive landscape for financial advisors in Canada. Not only is the prevailing balance of power being altered by this crisis, but the stage is being set for some ferocious competition in the years ahead.

The global financial services industry has been through tremendous upheaval in the past year, with once venerable institutions crumbling, forcing governments to swoop in to save critical firms — and the financial system itself. As a result, ideologies and orthodoxies have been shattered, reputations left in tatters and investor confidence crushed. The natural reaction for investors, amid so much financial and philosophical destruction, is to retreat from risky assets. The result of which is plunging markets as investors stampede for the exits.

Canada’s financial services industry may have weathered the global storm better than most, but it certainly has not been spared the effects of market turmoil or the impact on client confidence. Despite recent signs of recovery, equities markets around the world have taken a thumping over the past year, and client portfolios have seen their value erode.

The impact of these trends on the Canadian financial services industry is evident in the data Investment Executive researchers collected for this year’s Report Card series. Given the scale of the market turmoil, and the impact it naturally had in reducing the value of client portfolios, a significant reduction in assets under management was to be expected.

Indeed, the average AUM for all advisors in IE’s surveys declined to $45.3 million this year from $51.2 million in 2008. And advisors were working harder to prevent asset levels from eroding even more: the overall average number of client households that advisors serve rose to 422 in this year’s surveys from 347 last year.

But these headline numbers conceal some stark differences in the implications of these trends for various industry segments. Although a conspicuous flight to safety in the face of the massive financial crisis and the deep, synchronized global recession would be expected to show up in the asset mix of advi-sors’ books (and it does), what’s more surprising is that the effects are also changing the competitive landscape among advisors at brokerages, dealers, banks and credit unions, and insurance agencies.

Brokers suffered a notable year-over-year decline in the value and productivity of their books. Advisors at dealers have also seen similar declines, although the drops aren’t quite as severe as they were for brokers. On the flip side, advisors with firms in the more conservative deposit-taking and insurance segments appear to be making gains at the expense of the traditional investment powerhouses.

Looking solely at the brokerages, the predictable decline in AUM is evident. Overall, brokers saw their average AUM drop to $70 million this year from $86.2 million in 2008; average productivity, as measured by AUM per client household, fell to $437,876 from $566,097.

For advisors at the dealers, the trends are similar, but the slope isn’t quite as steep. Overall, they saw average AUM slip to $20.6 million this year from $23.7 million in 2008; average AUM per client household also deteriorated to $102,823 this year from $128,758 last year.

As noted previously, these trends did not carry over to the banks and credit unions, whose advisors actually saw a small rise in overall average AUM, to $49.2 million in 2009 from $47.8 million last year; average productivity also ticked up, to $182,831 from $171,239. More specifically, it is the top tier of these advisors who are making the most impressive gains in their books.

IE divides the advisor population in the brokerage, dealer and banking/credit union segments into the top 20% and the remaining 80%, in terms of AUM/household. (Many insurance agents don’t report AUM, so the metric is not calculated for these advisors. Therefore, the insurance advisor population is not segmented on this basis.)

For advisors at brokerages and dealers, year-over-year declines in AUM and productivity were evident for both the top 20% of advisors and the other 80%. The only segment that really made gains were the top 20% of advisors at banks and credit unions, as their average AUM rose to $99.4 million in 2009 from $91.4 million in 2008. Moreover, their average number of households served actually declined year-over-year, which, combined with the rise in AUM, helped push their average AUM per client household up to $451,637 from $399,971. Among the remaining 80% of these advi-sors, average AUM declined a bit year-over-year, as did their average productivity.

@page_break@The fact that the top advisors at banks and credit unions managed to grow their assets, while simultaneously trimming the number of households they are serving, suggests that they have been successful at grabbing a bigger share of their clients’ wallets — perhaps luring some of the money that was invested with a broker or an advisor at a dealer and channelling it into safer banking products, such as guaranteed investment certificates.

Indeed, looking at the asset mix of the top 20% of bank-based advisors, they report a notable increase in market share for GICs, to 25.7% in 2009 from 21.6% in 2008. And, on a relative basis, the market share for high-interest savings accounts grew the most — almost tripling to 7.8% from just 2.7% in 2008.

This suggests that many so-called “GIC refugees” — a nickname for investors who fuelled the mutual fund industry’s rapid growth in the 1990s as they migrated from low-yield GICs and other deposit products in search of higher returns — are now returning to the relative safety of guaranteed investments.

When the bull market was raging, the perceived risk of shifting assets into higher-returning investments diminished. It seemed their value would rise inexorably, and even temporary market pullbacks were soon reversed. However, the global financial crisis has altered that calculus once again for many investors, and their increased risk aversion has driven the flight to safety (both in terms of the assets they hold and, seemingly, the industry segment within which they choose to hold them).

Indeed, the overall data show that riskier assets have seen their popularity with investors plunge, right along with their portfolio values. In fact, advisors in the brokerage, dealer and banking segments all saw the market share for mutual funds in their books decline year-over-year. Even the top 20% of advisors at banks and credit unions, who actually managed to grow their books, report that the market share for mutual funds fell to 35.5% from 45%.

But it’s not just banking products that are the beneficiaries of this flight to safety; the rising price of risk also appears to be making segregated funds seem like a better bargain for many investors. A rising demand for seg funds may be one of the reasons why insurance agents are also managing to grow their books in the face of the unprecedented financial crisis.

The growth rate for average AUM among insurance advisors is even more impressive than it is for banking advisors, rising to $16.6 million this year from $13.6 million in 2008. Obviously, insurance agents have much smaller investment businesses than their rivals in the other segments, but, even so, a 20%-plus rise in average AUM cannot be overlooked — particularly at a time when advisors at the traditional brokerages and dealers are seeing significant declines in AUM.

One indication that an increasing demand for seg funds is — at least, partly — behind this trend is the fact that the market share for seg funds within insurance advisors’ books rose notably year-over-year (as did the first-year commissions generated from these sales). Indeed, the popularity of seg funds also rose among advisors at brokerages and dealers who have an insurance component to their books. Among advisors at dealers, the market share for seg funds crept up to almost 29% from 24% in 2008; for brokers, it jumped to 33% from 22%.

So, although some advisors at brokerages and dealers are clearly losing clients and assets to the banking and insurance segments as a result of the financial crisis, others may have been able to retain those assets by facilitating the flight to safety for their clients. And that is shaping up as the battle that will define the retail financial landscape in the years ahead.

Each of the major industry segments is likely to face ongoing asset retention challenges. For the banking and insurance advisors, the question will be whether they will be able to sustain their momentum and continue gaining market share.

And, when markets do convincingly recover, will we see the re-emergence of the GIC refugees, flocking back to brokerages and dealers? Or will the advisors in the banking and insurance segments have become proficient enough in managing investments to keep these assets on their books? If the latter situation holds, advisors at brokerages and dealers are going to have to fight even harder to recover their recent losses. IE