Despite the turbulence rippling through the world’s biggest economies and financial markets, Canadian financial advisors have seemingly managed to transcend the turmoil over the past year — both growing and transforming their businesses along the way.
The latest round of Investment Executive‘s surveys of advisors plying their trade within the four major financial services industry channels — brokerages, fund dealers, banks and credit unions, and insurance sales agencies — shows that while the market mayhem may not be making life easy for advisors, it certainly isn’t derailing their businesses, either. In fact, the portrait of the average advisor that emerges across all the channels reveals that front-line advisors are continuing to add assets under management, intensifying their focus on larger accounts and bolstering their own bottom lines in the process.
The fact advisors appear to be thriving amid extreme market uncertainty makes it all the more impressive. Although IE‘s surveys were carried out between the beginning of January and the end of June, before the markets were unsettled by the fiscal woes and flagging economic recovery in the U.S., global markets have been grappling with a variety of significant challenges over the past year: from the ongoing European sovereign debt crisis and rapidly rising commodities prices to widespread social unrest in the Middle East and Africa and the far-reaching effects of the March earthquake and tsunami in Japan. Closer to home, worries include the fragility of household finances and the stability of Canada’s housing markets.
Despite all of these obstacles to economic recovery and investor confidence, the average financial advisor in Canada has still managed to boost AUM by a bit more than 5%, to $49.5 million in the latest series of surveys from $47 million a year ago. This growth was powered primarily by advisors in the fund dealer segment, which saw double-digit growth in average AUM — far outpacing the more modest gains in the brokerage and banking channels.
Within the fund dealer industry, this stellar AUM growth was driven by the top-producing reps. Specifically, the top 20% of fund dealer reps (as defined by AUM/client household) generated 14.4% growth in AUM year-over-year.
These gains in AUM are also being accompanied by some underlying transformations taking place in advisors’ books. For example, the average advisor is not only gaining AUM, but doing so while trimming the size of the client roster. The average number of client households across all channels is down to 280 this year from almost 314 in last year’s surveys.
The fact advisors are successfully growing AUM while cutting their client numbers suggests an intensifying focus on higher-value clients. Indeed, this long-running industry trend is also reflected in the shifts in account distribution.
In fact, according to IE’s latest data, the smallest accounts (those worth less than $100,000) no longer comprise the largest account category for the average advisor surveyed. (This includes advisors with brokerages, fund dealers and deposit-taking institutions; it’s not relevant to the insurance channel, in which AUM is a much less significant part of the average advisor’s business.) In last year’s survey, these sub-$100,000 accounts represented almost 28% of the average advisor’s book. This year, that share is down to 22.7% of the average book, which is smaller than the share of accounts in both the $100,000-$250,000 range and the $250,000-$500,000 range — each of these latter categories now represents 23.1% of the average advisor’s book.
Although advisors in the brokerage channel still have the smallest allocations to these sub-$100,000 accounts, a big shift over the past year has been seen in the banking channel, which had the largest exposure to these small accounts to begin with. Now, however, the average advisor with a deposit-taking institution has less exposure to sub-$100,000 accounts than the average fund dealer rep. In fact, advisors in the banking channel have slashed their average allocation to these accounts to 29.5% of their books in the latest survey, down from 36.1% last year. Fund dealer reps have also cut their reliance on these accounts to 34.3% of their books, which is not as dramatic a change as for advisors in the banking channel.
In addition, it’s not just accounts worth less than $100,000 that are seeing less prominence in the average advisor’s book. Advisors’ dependence on accounts worth between $100,000 and $250,000 is also down across the board. Indeed, the combined market share for accounts worth less than $250,000 is now just 45.8% of the average advisor’s book. This is down from 52.9% of the average book in last year’s survey.
Instead, advisors have been growing their books with accounts in the $250,000-$2 million range.Not surprising, it’s the advisors with brokerages who are enjoying some of the biggest gains in accounts worth $250,000-$2 million. Advisors with the deposit-taking institutions and fund dealers are gaining share in these larger accounts, too, but the shifts aren’t as significant as they are for those with the brokerages.
But AUM growth — and shifts in account distribution — aren’t the only transformations taking place in the front-line advisory business over the past year. Another long-standing industry trend that is evident in this year’s results is a continued move away from a reliance on transactions and toward fees as revenue sources.
The various channels in the industry have significantly different revenue models, but they all share some dependence on transactions and fees. And, on an overall basis, that revenue mix is continuing to shift in favour of fees. The average advisor is now deriving 36.6% of revenue from fee- and asset-based sources — up from 33.1% a year ago. At the same time, the reliance on transactions is down to 29.4% this year from 30.6% in 2010.
It’s the fund dealer reps who are really driving this trend. Over the past year, their reliance on fees has jumped to 53.9% from 47.9%, whereas transactions have declined to a 41.3% share from 47%.
The same basic trend — away from transactions and toward fees — is also evident in the brokerage channel. However, the very different revenue models in the banking and insurance segments mean these trends aren’t as relevant in these channels.
For advisors with banks and credit unions, their reliance on both fees and transactions is growing, albeit from very low levels, as they diversify away from straight salary and enjoy more variable compensation. This reflects — and perhaps also explains — their success in shifting their books toward higher-value accounts. Bankers are enjoying greater incentives to grow their AUM and to ramp up the focus on their high net-worth clients.
As for insurance advisors, they are reducing their dependence on both fees and transactions while increasing their reliance on their core revenue sources — first-year commissions and renewals. IE