Special Feature

Advisors’ Report Card 2015

Although advisors are continuing to see significant growth in their books of business, their practices are undergoing a seismic transformation as a result of CRM2. All the insight, the ratings and the candid comments from the September 2015 issue of Investment Executive.

Advisors are focusing on building their businesses and growing their assets under management at a time when not only has recent economic and financial performance been poor, but the risks to the outlook appear to be clustered on the negative side

By James Langton | September 2015

The average advisor

Despite general economic weakness, market turmoil and the emergence of new competition, the financial advisory business in Canada has proven to be remarkably resilient over the past year. In the face of all these challenges, the average advisor still is managing to grow his or her business and boost the bottom line.

Investment Executive's (IE) 2015 Advisors' Report Card - which compiles the results of IE's research on each of the major retail distribution channels (brokerages, mutual fund and full-service dealers, banks and credit unions [CUs], and insurance sales agencies) - highlights the sector's overall stability in a time of considerable economic, political and financial uncertainty.

Indeed, simply based on recent headlines, it would not be surprising if IE had found the retail investment business in Canada to be suffering. The Canadian economy may have been sent back into recession this year amid a recent plunge in oil prices and widespread weakness in commodities prices in general. Domestic equities markets have been under pressure this past year, with the S&P/TSX composite index suffering a 5.6% decline over the past 12 months, largely due to the same forces that are affecting gross domestic product adversely.

In addition, clients have not been enjoying much in fixed-income returns, with interest rates pushed to historical lows in a bid to help kick-start growth. The only positive factor for Canadian investors in recent months has been the decline of the loonie, which helps boost the impact of returns on foreign assets.

Yet, advisors don't appear to be struggling. In fact, advisors, on the whole, continued to gain assets under management (AUM), boost productivity and build their base of recurrent revenue despite the economic instability.

Looking at the industry's demographic profile, this year's average advisor looks much the same as he or she did a year ago. This year's average advisor is another year older, with an average age of 49.7, up from 48.9 in 2014. That increase in average age highlights the consistency of the overall advisor population, indicating that there haven't been any great demographic shifts - such as a mass retirement of veteran advisors or an influx of rookies - that would impact the overall population's average age significantly.

However, there are vast differences between the demographic makeup of the four channels. For example, dealer representatives are by far the oldest, with an average age of 53.1. Insurance sales agents are just behind the dealer reps, with an average age of 51. Brokers are right in line with the overall industry average, at 49.6. And advisors with banks and CUs, at 41.3 years old, are the youngest.

Despite the wide disparity in average age among the industry's four distribution channels, the differences aren't nearly as great when it comes to advisors' experience in their industry or their tenure with their current firm.

Although the gap in age between dealer reps and advisors with banks and CUs is almost 12 years, the average dealer rep has just a 3.8-year edge in terms of tenure in the business (at 20.5 years vs 16.7 years). This indicates that advisors with banks and CUs probably are getting into their industry at a much earlier stage than dealer reps are.

Yet, advisors with banks and CUs also boast a slightly longer tenure with their current firm than the average dealer rep, at 11.3 years vs 10.6 years, respectively, which suggests that there is slightly more turnover among dealer reps than in any other part of the industry.

In contrast, insurance advisors have spent the longest with their current firms (12.2 years), followed by brokers (11.8 years), then advisors with banks and CUs and dealer reps. The one thing that the surveyed advisors in all of the retail distribution channels have in common is that the beginning of their tenure with their current firm predates the global financial crisis.

Given the era of acute uncertainty that has prevailed in the financial services sector since the onset of the crisis in 2007, it's hardly surprising that there hasn't been a great deal of movement by advisors between firms in recent years.

Although there are rewards to be had by changing firms, this strategy also tends to come with the added friction brought on by transferring clients to a new firm, losing some of them along the way and spending time and money rebuilding that portion of the book of business. That risk may be worth it when times are good, but it represents an added challenge when the prevailing market conditions are so troubled.

Instead, many advisors apparently are focusing on building their businesses organically. Overall AUM increased to $66 million this year from $60.7 million in 2014. Advisors in the brokerage channel remain the clear leaders in AUM, with an average book of $113.7 million, followed by advisors with banks and CUs, at $66.5 million. Dealer reps remain a distant third, with an average $34.4 million in AUM. (Although insurance advisors rank last, with $25 million in average AUM, this metric is not as relevant to these advisors because it doesn't reflect the health of their core insurance businesses.)

This increase in overall average AUM comes at a time when recent economic and financial performance has been poor and the risks to the outlook appear to be clustered on the negative side. Domestically, there are long-standing fears about the likely overvaluation of the Canadian housing market and persistently high household debt levels.

There's a good deal of concern about the possible impact on financial markets when the U.S. Federal Reserve Board begins raising interest rates from their current, historically low levels, which is expected to start later this year. In addition, there are a litany of external risks, including the recent weakness in Chinese equities, the shaky situation between Greece and the rest of Europe, and ongoing geopolitical turmoil in Russia and the Middle East.

Although advisors are recording growth in AUM in this adverse investment climate, that trend is not universal. In fact, advisors with brokerages, banks and CUs, and insurance sales agencies all reported a year-over-year increase in average AUM but dealer reps saw their reported AUM decline vs last year on average. This disparity may reflect the impact of some of the financial services sector's internal forces on the competitive landscape.

Specifically, regulatory reforms, the low-return environment and the emergence of new competition in the form of robo-advisors may be having their effects on the industry's internal dynamics - namely, by pushing investors toward lower-cost strategies. There's some evidence of this in the asset-allocation data in this year's Report Card series, in which advisors reported a significant decrease in their use of managed products, which typically come with higher fees than exchange-traded funds (ETFs) or even traditional mutual funds.

Overall, total allocations to managed products dropped to 8% of the average book this year from 11.9% in 2014. Proprietary managed products accounted for about 4.3% of the average book vs 6.2% last year, and the share for third-party managed products was down to just 3.7% from 5.7% year-over-year.

Although overall allocations to direct holdings in equities and bonds were essentially unchanged, advisors have increased their use of ETFs, with allocations rising slightly to 3.6% this year from 3.1% in 2014. In the overall scheme of things, the market share increase for ETFs wasn't huge, but it was a significant percentage gain from the previous year.

The biggest gains, though, came in mutual funds, for which allocations stepped up significantly to 54.1% this year from 48.3% in 2014. Although mutual funds often are criticized as expensive in their own right, they certainly are cheaper than most managed products - and it's clear that mutual funds and ETFs have gained the market share that managed products are surrendering.

If these AUM mix shifts do indeed stem from the fact that clients are looking for more cost-effective ways to build their portfolios, this situation doesn't appear to be hurting the bottom line for most advisors. In fact, the ranks of the highest-paid advisors appear to be growing.

Overall, the proportion of advisors earning less than $100,000 a year has declined modestly to 27.3% from 28.6% year-over-year. Similarly, the percentage of advisors earning between $100,000 and $500,000 a year dropped to 50.7% from 55.2%. In contrast, the proportion of advisors earning between $500,000 and $1 million a year rose to 14.1% from 10.6%, while the percentage of advisors at the highest end of the pay scale - those who earn more than $1 million annually - rose to 7.9% from 5.5% last year.

So, although the economy and financial markets may be struggling and wracked with uncertainty, advisors still appear to be thriving. However, the big question is: can advisors maintain that momentum, or will these macroeconomic forces finally start to impact their bottom lines?

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