Report Card: Sizable growth

Given the size and market dominance of Canada’s banks, they once were once dismissed as being as too big and bureaucratic to compete in the retail investment business. But this bulk clearly is a virtue at a time when stock markets are so volatile and uncertain. The banks continue to build their branch-based financial advisory businesses while also rejuvenating their sales forces.

The banks may never be able to match the securities dealers for strategic agility, independence or advisor freedom. But what the banks lack in flexibility and entrepreneurial spirit, they make up for with institutional strength and stability. And in the current economic environment, those qualities are enabling the banks to grow their retail advisory businesses by adding fresh troops.

Other channels of the retail investment business are facing a strategic challenge as their advisors age: they need to come up with ways of retaining assets under management (AUM) in a business in which clients’ relationships with the individual advisors matter most, not the relationship with the firm. In the banking and credit union (CU) business, meeting this challenge is much easier, as clients are more accustomed to employee turnover and constantly dealing with new faces. Individual relationships often are less important than institutional ones when it comes to the banks and CUs.

Nevertheless, it’s still impressive to see advisors with banks and CUs increasing their AUM and productivity while, at the same time, these sales forces are getting notably younger.

The data obtained by Investment Executive (IE) for our 2013 Report Card on Banks and Credit Unions show that the average advisor in this channel is just 42 years old now. That’s down by more than two years in average age from 44.1 in last year’s survey, and clearly implies that younger advisors are joining the channel in greater numbers. (See the table at the bottom of the page.)

This apparent rejuvenation of the sales force is echoed in the industry tenure data as well. The average advisor now has been in the industry for 16.7 years, down from an average of 19 years in last year’s survey. In addition, the average advisor has been with his or her current firm for 11.7 years, down from 13.5 years in 2012.

Remarkably, this youth movement at the banks and CUs isn’t being accompanied by any loss of AUM. Whether older, more established advisors are moving on to other jobs within their bank, striking out into another channel of the financial services business or leaving the industry altogether, deposit-taking institutions do not appear to be letting any of the AUM they’ve accumulated leave.

In fact, the average advisor in the banking channel has enjoyed substantial AUM growth over the past year. Average AUM per advisor in this year’s survey is up to $57.3 million from $46.4 million last year. And advisors’ productivity – as measured by AUM/client household – is up as well.

Accompanying this average AUM growth (almost 25% over the past year), the advisors surveyed also have been paring back their client numbers. The average advisor now serves 375.2 client households, down from 400.5 client households last year.

This growth in AUM and the reduction of client numbers translates into impressive productivity growth, with average AUM/client household now reaching $262,257, up from $190,336 in 2012.

These basic shifts – strong asset growth and higher productivity – are evident among both this channel’s top performers and the rest of the channel as well.

As with IE‘s other advisor-based Report Cards, the banking channel is divided into the top 20% of advisors (as measured by AUM/client household) and the remaining 80% in order to dissect the differences between top producers and the rest of the channel.

This analysis shows that average AUM among the top 20% of advisors jumped to $122 million from $91.6 million year-over-year. Some of this gain is a result of larger client lists, as the average top performer now is serving 210.5 client households, up from 196.8 last year. Nevertheless, average productivity within this group still rose to $699,637 this year from about $558,326 last year.

The rest of the channel has barely a third of the AUM totals boasted by the top performers, at $43.9 million per book on average; however, this is still up from $34.7 million in 2012. And, unlike for the top performers, this AUM gain came amid a trimming of client lists, which are down to 378.4 client households this year on average from 425.3 client households last year. This, in turn, has led to a notable boost in productivity for these advisors as well, with the average AUM/client household rising to $150,923 from $98,339.

These large increases in productivity in both segments of the channel’s advisor population are reflected in the account distribution data as well. For the top-performing advisors, the big swing in their reported account distribution comes in the middle of their books, for which allocations to accounts in the $250,000-$500,000 range dropped to 23.2% this year from 30.9% last year. Allocations to accounts in the next-largest category – $500,000-$1 million – have risen to 23.6% of the average book from just 17.5% last year.

For the rest of the channel, there are a couple of evident shifts in account distribution, too. First, accounts worth between $100,000 and $250,000 now represent the largest single chunk of the average advisor’s book at 31.9%, a share of book that was up slightly from 29.8% last year; most notably, this category now has displaced sub-$100,000 accounts as the single biggest category for this group of advisors.

Furthermore, the remaining 80% of advisors also have seen a bit of a swing around the $500,000 mark, with the share for accounts in the $250,000-$500,000 range dropping slightly to 21% from 22.4% vs the previous year, but all categories above the $500,000 mark gaining some share.

And it’s notable that all this is coming amid the apparent youth movement at the banks and CUs.

Although the drop in average age of the advisors in both segments of the channel was similar, the data show that the declining length of tenure for the sales force in the channel is more evident among the remaining 80% of advisors.

The top performers’ tenure in both the industry and with their current firm is up from last year on average. In contrast, for the rest of the channel, average industry tenure is down by more than a full year, to 16.6 from 17.9, and average time with the current firm is down by about two years, to 10.5 from 12.4.

This indicates that although there is new blood in the ranks of the top-producing advisors, most of the infusion of younger advisors is coming from the bottom up. And it stands to reason that this sort of shift to younger, less experienced advisors would be led from below: new advisors typically don’t become top performers right away. In fact, it typically takes years to grow into that role.

While the average top-performing advisor in the banking channel is only a couple of years older than the average producer in the rest of the channel, that top producer has more than five more years of experience in the industry on average and much bigger AUM totals to show for it.

Banks and CUs are unlikely to match the traditional securities firms for advisor independence and entrepreneurial culture, but the deposit-taking institutions certainly are generating stellar growth while rejuvenating their advisor ranks.