Typically, there are plenty of opportunities for advisors to shine in the competitive retail financial services business. However, in this deeply uncertain economic climate, it becomes much tougher to transcend the underlying environment. Thus, financial advi-sors remain very much at the mercy of the markets — and, in this tepid recovery, they are facing a slow slog.

Indeed, respondents to Investment Executive’s latest Report Card series of advisor surveys are clawing their way back from the depths of the recession, although their books have yet to reach their pre-recession heights. Last year, average assets under management for advisors in all channels — brokerages, dealers, deposit-taking institutions and insurance firms — nosedived to about $45 million. This year, advisors are enjoying a resurgence in average AUM to almost $48 million. But this represents a recovery of only about half of the assets they lost when the recession hit — average AUM in 2008 was more than $51 million.

Of course, client portfolios are very diverse. And there will be a great deal of variation, both within the advisor population and among their clients. But, overall, it seems advisors are in very much the same situation as the markets: their businesses are recovering but still showing some serious signs of damage.

The pre-eminence of underlying market conditions as a determining factor in the trajectory of advisors’ businesses is evident when you look at the data by channel. Advisors in the most market-sensitive sector, brokerages, took the heaviest hits on the way down — and they’ve subsequently seen the sharpest recovery over the past year. Other channels in the financial services industry haven’t recovered as well; but they weren’t as heavily damaged in the first place, either.

Overall, average AUM for brokers is up by 10.3% year-over-year, surpassing the 6.3% growth in average AUM of advisors at dealer firms, the 4.2% growth in average AUM of insurance advisors, and the 3.7% decline in average AUM of advisors at banks and credit unions. (See accompanying table.)

Although brokers are leading the way in the rebound, this recovery follows a year in which their books dropped by about 19% on average, so their average AUM remains far below the levels reported in 2008.

Similarly, the average dealer rep’s AUM may be up by 6.3% in the latest survey, but it was down by about 15.6% the previous year. Although the fortunes of advisors at dealer firms aren’t quite as heavily leveraged to the markets as they are for brokers, the fundamental trend is the same.

For advisors at banks and credit unions, the rebound is working in the opposite direction. Although these advisors saw a small decline in average AUM in this year’s survey, this comes on the heels of a comparable gain in the 2009 Report Card series. Overall, these advisors are more or less back to the same position they were in 2008. To the extent that there was a flight to safety by investors during the recession (in that investors perceived the banks to be safer homes for assets), it appears that advisors at banks and credit unions weren’t able to maintain that advantage — or capitalize on it — once markets stabilized.

This was not the case for insurance advisors, however. Indeed, they are the only segment that has managed to generate increases in average AUM in each of the past two years. Although it was perhaps logical that clients would turn to bankers and insurance reps in times of severe market turmoil, only insurance advisors have managed to continue to build on this trend. Investment assets remain a comparatively small part of this channel’s business, but it is interesting to note that these advisors don’t appear to have surrendered this business over the past year the same way advisors at banks and credit unions have.

Another unusual feature of this market-dependent climate for advisory businesses is that, for a change, the industry’s top-performing reps don’t appear to be leading the way. Rather, at a time when the markets seem to be very much driving advisors’ AUM, the herd is determining the trends.

In three of the four advisor Report Cards IE produces each year — brokerages, dealers, and banks and credit unions — the advisor population is divided into the top producers (defined as the top 20% of advisors, measured by AUM/client household) vs the rest of the advi-sors in each survey. This is not typically done for insurance advisors, as AUM/client household isn’t such a meaningful metric for this group.
@page_break@Typically, trends that appear among the most productive advisors foreshadow changes in the overall population. However, in this year’s surveys, the top producers weren’t driving industry trends the way they have in the past.

Among brokerages, the remaining 80% of advisors are enjoying a year-over-year percentage increase in average AUM that is double the increase experienced by the top 20%. At dealers, the jump in AUM among the remaining 80% of advisors is about triple what it is for that segment’s top producers.

For advisors at banks and credit unions, whose overall average AUM decreased year-over-year, the remaining 80% are also driving that trend. The top producers in that sector did manage to grow their average AUM year-over-year, but this was overwhelmed by a drop in AUM among the rest of the channel.

In all three cases, while the top 20% of advisors don’t appear to be leading current industry trends, that’s not to suggest that they aren’t still the cream of the crop. This fact is most obvious among advisors at deposit-taking institutions, at which the top performers are outshining the competition in their channel by managing to add AUM when branch-based advisors are, overall, surrendering AUM.

But even at brokerages and dealers, a smaller gain in AUM by top performers doesn’t mean that they are now suddenly lagging the less productive advisors in their channels. Rather, it may be that because the top performers simply did a better job of retaining AUM on the way down, these advisors are now experiencing less of a rebound on the way back up as a result.

This highlights the fact that in this sort of economic environment, even the best advisors are still very much at the mercy of the markets. Although top performers may have been able to mitigate losses for their clients when markets were heading south, they may not be able to do much to press this advantage in the midst of a volatile, uncertain recovery.

The primacy of market forces in advisory business at the moment is also evident in the asset-allocation trends across the various channels. It appears that many advisors are reluctant to make any big portfolio shifts, given the highly volatile and uncertain market.

Among brokers, asset allocations barely budged over the past year — the mix of equities, bonds, managed products (including mutual funds) and other products (such as exchange-traded funds and hedge funds) is virtually unchanged from the previous year. However, within the “managed product” category, there was a modest shift away from third-party products and into proprietary offerings.

The asset allocation among dealer reps also proved pretty stable year-over-year. Dealer reps reported an increase in allocations to their core products (mutual funds and, within their insurance practices, segregated funds) and a significant drop in portfolio share for managed products (both proprietary and third-party).

Although reps in this channel have less flexibility to make major asset-allocation shifts because of the licensing limitations many face, it does appear these advi-sors are focusing more on mutual/seg funds and shying away from the more expensive investment vehicles.

These same basic trends were evident among advisors at banks and credit unions, as well as among insurance reps. In this year’s surveys, both of these channels also reported an increased reliance on mutual funds and decreasing allocations to pricier managed products.

Overall, it appears that at a time when advisors and their clients are largely at the mercy of the markets, many advisors are doing what they can to preserve the returns that clients are seeing by utilizing products that minimize costs.

IE