GROWTH

Al­though many of the ba­sic de­mo­graphic met­rics were rel­a­tively sta­ble year-over-year, ad­vi­sors ex­pe­ri­enced growth in AUM and pro­duc­tiv­ity, thanks to solid eq­ui­ties mar­kets and stronger than ex­pected eco­nomic growth

Investment Executive - - FRONT PAGE - BY JAMES L ANGTON

The av­er­age ad­vi­sor’s AUM and pro­duc­tiv­ity in­creased this year.

canada’s fi­nan­cial ser­vices sec­tor re­mains an oa­sis of calm in a world that feels in­creas­ingly volatile and chaotic. Amid this sta­bil­ity, the fi­nan­cial ad­vi­sory busi­ness is pro­duc­ing growth where it mat­ters most: in as­sets un­der man­age­ment (AUM) and rev­enue.

In fact, one of the over­ar­ch­ing themes to emerge from In­vest­ment Ex­ec­u­tive’s ( IE) 2018 Re­port Card series is re­silience. Over­all, many of the ba­sic met­rics were rel­a­tively sta­ble year-over-year. How­ever, av­er­age AUM across the four distri­bu­tion chan­nels in­cluded in the Re­port Card series — bro­ker­ages, mu­tual fund deal­ers, banks and in­sur­ance agen­cies — rose to $82.5 mil­lion this year from $78.5 mil­lion in 2017.

This growth in av­er­age AUM is be­ing pow­ered by the com­bi­na­tion of solid eq­ui­ties mar­kets and stronger than ex­pected eco­nomic growth over the past year. Cer­tainly, IE’s data sug­gest that the growth in AUM isn’t be­cause ad­vi­sors boosted their client house­hold num­bers: the av­er­age num­ber of client house­holds that ad­vi­sors serve was es­sen­tially un­changed from last year, at 280.2 this year vs 282.3 last year.

So, as strong mar­kets drive av­er­age AUM higher, ad­vi­sor pro­duc­tiv­ity, as mea­sured by AUM/client house­hold, is on the rise. How­ever, an­nual com­pen­sa­tion among ad­vi­sors re­mained rel­a­tively steady.

In­deed, the pro­por­tion of ad­vi­sors across all four distri­bu­tion chan­nels who re­ported earn­ing less than $100,000 a year dipped to 21.8% this year from 22.1% last year. The ma­jor­ity of ad­vi­sors re­ported earn­ing be­tween $100,000 and $500,000, which is up to 58.8% from 57.9% in last year’s sur­veys. There are 13.3% of ad­vi­sors who re­ported earn­ing $500,000-$1 mil­lion, down slightly from 13.9% in 2017. And the pro­por­tion of ad­vi­sors who re­ported that they’re earn­ing more than $1 mil­lion a year was un­changed from last year, at 6.1%.

Dig­ging be­neath these over­all num­bers, the data point to a rise in highly com­pen­sated ad­vi­sors within the bro­ker­age chan­nel, in­di­cat­ing that the spoils of higher av­er­age AUM flowed through to the bot­tom line for these ad­vi­sors.

In ad­di­tion to com­pen­sa­tion re­main­ing fairly steady, there was re­mark­able con­sis­tency in the ad­vi­sor pop­u­la­tion it­self. In­deed, the ba­sic de­mo­graphic data col­lected for this year’s Re­port Card series showed lit­tle dif­fer­ence for the av­er­age ad­vi­sor across the sec­tor, over­all. For ex­am­ple, the av­er­age age of the ad­vi­sors in all the distri­bu­tion chan­nels com­bined barely changed, at 50.4 years old vs 50.5 years old in 2017. Av­er­age ten­ure in the sec­tor rose slightly, to 20.8 years from 20.5 years in 2017, and ad­vi­sors’ av­er­age ten­ure with their cur­rent firm also rose by that same mar­gin, to 12.5 years from 12.2 years.

The fact that most of these met­rics rose slightly year-over-year in­di­cates that the over­all ad­vi­sor pop­u­la­tion is ag­ing — al­beit more slowly than at a nat­u­ral rate of one year. So, al­though some new blood is en­ter­ing the sec­tor, that’s not strong enough to over­come the over­all un­der­ly­ing ag­ing trend over the long term.

How­ever, this ob­ser­va­tion isn’t con­sis­tent across all chan­nels in the sec­tor. In fact, de­clines in av­er­age age were re­ported in both the bro­ker­age and the in­sur­ance agency chan­nels, while the av­er­age age in the fund-dealer in­dus­try, which al­ready had the old­est ad­vi­sor pop­u­la­tion on av­er­age, in­creased at the nat­u­ral rate of a year.

Thus, we can as­sume that younger peo­ple are en­ter­ing the sec­tor through ei­ther the banks, which re­port­edly had, on av­er­age, the youngest ad­vi­sors by far, or the bro­ker­age chan­nel, in which the av­er­age age de­clined year-over-year.

A pos­i­tive sign for the bro­ker­age chan­nel was the fact that the pro­por­tion of fe­males par­tic­i­pat­ing in that sur­vey rose this year. Al­though bro­ker­ages still had the low­est rep­re­sen­ta­tion of women among the four distri­bu­tion chan­nels, at just 15.7%, that nev­er­the­less was an im­prove­ment over the 13.5% in last year’s sur­vey.

In­creas­ing fe­male rep­re­sen­ta­tion also was ev­i­dent among deal­ers and in­sur­ance agen­cies. In con­trast, there were fewer women who par­tic­i­pated in the bank chan­nel sur­vey this year, at 42.5% vs 45.3% in 2017, al­though that chan­nel con­tin­ues to have by far the high­est pro­por­tion of women among the four distri­bu­tion chan­nels.

Along with the bro­ker­age chan­nel’s con­struc­tive de­mo­graphic data, this also was the in­dus­try that led this year’s im­pres­sive growth in AUM. Av­er­age AUM for the ad­vi­sor pop­u­la­tion in the bro­ker­age chan­nel rose to $139.6 mil­lion this year from $129.7 mil­lion last year. Av­er­age AUM in the bank and dealer chan­nels also rose, al­beit more mod­estly. In fact, only in­sur­ance ad­vi­sors re­ported a de­cline in av­er­age AUM; how­ever, in­vest­ments don’t rep­re­sent their core busi­ness and aren’t as rel­e­vant for this chan­nel.

Look­ing at this year’s data in terms of over­all ad­vi­sor pro­duc­tiv­ity, top pro­duc­ers are lead­ing the growth trends. For the top 20% of ad­vi­sors, av­er­age AUM rose to $194.3 mil­lion this year from $177.6 mil­lion in last year’s sur­veys. In com­par­i­son, the re­main­ing 80% of ad­vi­sors re­ported rel­a­tively lit­tle growth in av­er­age AUM, to $55.6 mil­lion this year from $53.8 mil­lion in 2017.

The rel­a­tively large in­crease in AUM for the top 20% of ad­vi­sors over­all also came amid a re­duc­tion in av­er­age client house­hold num­bers, as the av­er­age client base for this seg­ment of the ad­vi­sor pop­u­la­tion dropped to 133.7 this year from 144.4 in last year’s Re­port Card series.

This com­bi­na­tion of higher AUM and lower client house­hold num­bers also re­sulted in a healthy in­crease in over­all av­er­age pro­duc­tiv­ity for the top per­form­ers, which rose to more than $1.6 mil­lion in AUM/client house­hold this year from slightly less than $1.5 mil­lion in 2017.

For the re­main­ing 80% of ad­vi­sors, the rel­a­tively small in­crease in over­all av­er­age AUM was ac­com­pa­nied by no mean­ing­ful change in client house­hold num­bers. As a re­sult, over­all av­er­age ad­vi­sor pro­duc­tiv­ity in­creased slightly as well, to $256,757 this year from $238,829 last year.

But while fun­da­men­tal fi­nan­cial met­rics for both seg­ments of the ad­vi­sor pop­u­la­tion grew, the ba­sic de­mo­graph­ics barely budged. The de­mo­graph­ics of both the top 20% and re­main­ing 80% of ad­vi­sors re­mained con­sis­tent with last year’s data. For ex­am­ple, av­er­age age and ten­ure among the top 20% and re­main­ing 80% of ad­vi­sors in each in­dus­try were es­sen­tially un­changed year-over-year.

The im­pact of the growth in AUM was ev­i­dent in the ac­count distri­bu­tion data. For the top 20% of ad­vi­sors, 55.8% of their ac­counts re­port­edly were worth in ex­cess of $1 mil­lion. Last year, 47.3% of the top per­form­ers’ ac­counts held at least $1 mil­lion, while the sin­gle big­gest ac­count cat­e­gory that year was $500,000-$1 mil­lion, which rep­re­sented 26.8% of the av­er­age book. This year, ac­counts in the $1 mil­lion-$2 mil­lion range rep­re­sented the big­gest share of the av­er­age book, at 29.2%, among the top 20% of ad­vi­sors.

The ba­sic shift to­ward higher-value ac­counts is sim­i­lar — even though the AUM to­tals were smaller — among the re­main­ing 80% of ad­vi­sors, who re­ported that their al­lo­ca­tion to ac­counts worth less than $250,000 dropped to 40.5% this year from 47.5% last year.

In con­trast, ad­vi­sors in this seg­ment re­ported higher al­lo­ca­tions to ev­ery ac­count cat­e­gory above the $250,000 level. In­deed, al­lo­ca­tions to ac­counts worth more than $1 mil­lion among the re­main­ing 80% of ad­vi­sors rose to 12.9% of the av­er­age book from 10.3% last year and 8.1% in 2016.

As­set al­lo­ca­tion is an­other area i n which there were signs of a shift within the fi­nan­cial ser­vices sec­tor. For the top­per­form­ing ad­vi­sors, al­lo­ca­tions to mu­tual funds and third-party man­aged prod­ucts hardly changed from last year, but the use of pro­pri­etary man­aged prod­ucts rose to 7.2% this year from 4.5% last year.

Sim­i­larly, even though the re­main­ing 80% of ad­vi­sors re­ported us­ing more third­party man­aged prod­ucts, which ac­counted for 4.6% of the av­er­age book vs 2.9% last year, this ad­vi­sor seg­ment’s ex­po­sure to pro­pri­etary prod­ucts was more than dou­ble that, ac­count­ing for 10.2% of ac­count hold­ings, up from 6.7% last year.

Over­all, the data for this year’s Re­port Card series re­vealed a fi­nan­cial ad­vi­sory busi­ness that looks much the same this year as it did a year ago in terms of age and ex­pe­ri­ence — while AUM and pro­duc­tiv­ity were on the rise. As well, as­set al­lo­ca­tion trends are shift­ing on the strength of these met­rics while com­pen­sa­tion re­mained steady.

The shift to­ward higher-value ac­counts was sim­i­lar among the top 20% and the re­main­ing 80% of ad­vi­sors

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