For much of the financial services industry, the past year has been about bouncing back after the turmoil wrought by the global financial crisis. But for advisors at mutual fund dealers, it appears that the bounce has been somewhat subdued. The question now is whether this reveals the sector’s weakness or highlights its strength.
The results ofInvestment Executive’s 2009 Dealers’ Report Card found that many advisors at mutual fund dealers were weathering the markets’ storms surprisingly well. Assets under management didn’t fall by as much as feared and advisor productivity also had held up rather well. To be sure, advisors were seeing their businesses contract, but not as sharply as could have been expected. The flip side of that now seems to be that their recovery in AUM isn’t quite as robust.
According to IE‘s latest survey results, advisors’ AUM are up a bit on average from last year, although the percentage increase in the average rep’s AUM is a modest 6.3% — to $21.9 million from $20.6 million — at a time when overall mutual fund AUM was up by about 24% for the 12 months ended March 31, according to Investment Funds Institute of Canada data.
On the surface, the fact advisors’ AUM growth rates are seemingly so much lower suggests that many of them missed the rebound. However, it should be remembered that these trends don’t move entirely in lockstep. For one thing, although mutual funds are the biggest component of most advisors’ books, their clients do hold a broader array of assets. Moreover, asset-allocation decisions that advisors may have made to protect clients’ portfolios on the downside (shifting away from riskier equity investments and into more income-focused funds and other less market-sensitive products), would also likely limit the rebound.
Indeed, although the mutual fund sector had suffered a steep decline in AUM at this point last year, advisors’ books were holding up much better. Since then, the fund sector’s AUM has rebounded impressively, but the vast majority of this growth is due to market gains, not net sales. So, to the extent that advisors are trailing the fund industry in AUM growth, it may be largely because advisors’ books don’t have as much downside to recover, and not because they are missing a sales surge.
The notion that weaker AUM growth may paradoxically point to more prudent planning is bolstered by the fact the dealer channel’s top producers are trailing the overall AUM growth average. In fact, the bigger gains in AUM are accruing to the industry’s smaller producers.
IE divides advisors into the top 20% and the remaining 80% based on productivity (measured by AUM per client household). This year, it appears that top producers still have much larger books on average ($43.9 million) than the rest ($16.8 million), but they are also growing at a notably slower rate.
The top producers in IE‘s survey report an increase in average AUM of 3.1% vs 2009, whereas the less productive advisors in the survey enjoyed an increase in average AUM of 9.8% over the previous survey. These advi-sors with smaller books have a bigger portion of their books in mutual funds, and so may be getting a bigger hand from the markets as a result.
One of the ways advisors had tried to combat the overall slide in AUM last year was by adding clients. But now, with stock markets having stabilized, it appears that advisors have resumed the process of culling their books — thereby improving productivity — by focusing on higher net-worth clients. The average rep was handling 253 client households in 2009; this year, that’s down to 240.
Again, it’s the smaller producers leading the way in culling clients. The average number of client households that the top 20% of reps serve is more or less unchanged, down to 177 from 179 last year. However, among the remaining 80% of reps, the average number of client households is down to 255 from 273.
The combined effect of renewed AUM growth and a reduction in client numbers is improving productivity. Last year, the average AUM/client household was just $102,823; this year, it’s up to $115,927. Both the top producers and the rest of the channel are enjoying similar rates of productivity improvement, although the top 20% hold a large advantage in absolute terms — average AUM/client for the top 20% of reps is now almost $293,885 vs $72,047 for the rest.
To some extent, these productivity increases reflect the sector’s maturation — and that is something that is happening to the sales force as well. The average rep has been in the industry for 16.9 years and with his or her current firm for 9.9 years. The average age of the reps in our survey is now up to 49.8 years. The fact that the average age increased by a full year from the 2009 survey suggests there wasn’t much new blood joining the business in the past year — not entirely surprising when you consider the level of uncertainty and volatility that had gripped financial markets in that period.
What is surprising, given the healthy rise in productivity reported by reps, are the shifts in account distribution that advisors reported. Overall, the allocation of accounts worth less than $250,000 is up to 68.6% from 60.8% last year; and larger account categories all saw their share of reps’ books shrink year-over-year. The biggest drop came in the $2-million-plus range, which dropped to 0.8% of the average rep’s book from 1.6% last year.
@page_break@The smaller producers’ books followed this overall pattern, with their share of accounts worth less than $250,000 swelling to 73.7% from 66.7%, while all the account categories larger than $250,000 saw their share of book fall.
However, the top 20% report a slightly different trend in account distribution. Although their sub-$250,000 accounts did grow to 46.1% of the average book from 39.7%, this group also saw some growth in the $1 million-$2 million category, with the share for these accounts rising to 9.7% from 8.3%.
In isolation, that seems like a positive development. But, at the same time, the top 20% also report that the proportion of accounts in their books worth in excess of $2 million plunged to 1.9% from 4.7% in 2009. Taken together, their share of accounts worth more than $1 million dropped to 11.6% from 13%.
Despite the shifts in account distribution, advisors report very little change in the breakdown of their revenue sources on average. The only notable difference from last year is a slight shift away from fee- and asset-based revenue toward transactions. However, this was not the case among the top 20% — their revenue source breakdown was essentially unchanged. It was the rest of the industry that saw fee- and asset-based revenue decline to 46.3% from 49.1%, while transactions rose to 49.1% from 46.9%.
A more notable shift came from advisors’ insurance businesses, as the average rep’s insurance revenue rose to $64,784 from $58,022. This increase is entirely driven by the top 20% of reps, who reported seeing their insurance revenue more than double, whereas the rest of the channel experienced a decline.
These divergent trends are reflected in reps’ asset allocation as well. The top 20% report that the share of their books devoted to insurance products rose to 16% from 15.3%, whereas the rest of the industry curbed its use of insurance products to 24.1% from 26.9%.
A caveat of these findings is that these numbers aren’t entirely comparable year-over-year because the list of product categories has expanded to include banking products this year.
That said, there are some notable shifts in asset allocation. In particular, mutual funds saw their share of the average rep’s book increase to 64.7% from 59.5%. (See story on page C8.) At the same time, both direct securities (bonds and equities) and managed products (proprietary and third-party) saw their share of book decline. These trends were evident among all advisors.
Although mutual funds were the sole beneficiary of a decline in the use of other sorts of products among most reps, for the top 20%, alternative investments and exchange-traded funds both saw their share of book rise. At 0.9%, alternative investments remain one of the smallest allocations for top producers, surpassing only the soon to be obsolete income trusts, but ETFs saw their share of top producers’ books almost double, to 3% from 1.6%.
ETFs are still just a marginal product category, but they now represent a share of top producers’ books that is equivalent to their holdings in bonds and third-party managed products, and are not far behind direct equities (4.6%). Although ETFs are often positioned as a low-cost alternative to mutual funds, it appears that their popularity with top producers is coming at the expense of direct securities and expensive managed products rather than traditional mutual funds. The rest of the industry is still hardly touching ETFs — no doubt limited by the need for a securities licence to sell them.
On the insurance side of the average advisor’s book, segregated funds continue to grow in popularity. The average advisor’s exposure to these products is up to 34.6% from 28.7% — and these numbers are more or less consistent across the channel.
Among more traditional life insurance products, term life is holding steady at about 40% of the average rep’s insurance sales, and permanent life has declined to 18.3% from 23.4%. Living benefits saw their share slip to 5.8% from 6.6% — entirely driven by the top 20%, as their allocation to these products dropped sharply to 4.4% from 7.5%. Share of book among rest of the advisors was virtually unchanged.
There were also some notable shifts in banking product revenue. Guaranteed investment certificates now account for 66.4% of the average rep’s bank product revenue, up from 54.6%, whereas high-interest accounts have dropped to 20.3% from 40.3%. Revenue from term deposits almost tripled, and revenue from principal-protected notes almost doubled. These shifts are generally consistent among all advisors, although the top 20% report a notably bigger jump in PPN revenue, to 8.3% from 2.4%.
IE