Page 11 - Newcom

INVESTMENT EXECUTIVE BROKERAGE REPORT CARD
May 2020
Crisis caught advisors on solid footing
AUM rose as advisors focused on wealthy clients in run-up to pandemic
allocations to relatively “safe” assets were down notably this year. Overall, banking products dropped to just 1.2% of the aver- age book, from 3.7% last year, and bond allocations were down to just 10.7% this year from 13.5% last year.
Equities remained the top holding in the average book, down a bit to 38.0% from 39.6% in last year’s Report Card. Mutual funds continued to represent the second-biggest allocation, at 25.9%, down slightly from 26.4% last year.
Conversely, allocations to ETFs rose sharply this year, to 10.3% of the average book, up from 7.6% last year.
Advisors also reported shifts in asset allocation on the mar- gins. For example, 4.9% of the average advisor’s book was allotted to third-party man- aged products, up from 3.3% in last year’s research. Given that 2019 was the first full year that liquid alternatives were available to retail investors, allocation to
these products almost doubled, up to 3.7% from just 2.0% last year.
While increasing exposure to alts may provide some protection from falling markets, equities remained the biggest compon- ent of most books, followed by mutual funds, which also may include large equity exposures.
March data from the
Investment Funds Institute of Canada indicate ETF and mutual fund assets had each dropped about 10% month-over-month. This decline was a combination of redemptions and a reflection of the damage inflicted by mar- ket turmoil.
Advisors’ revenue will also be affected by this turmoil as the industry’s reliance on asset- based compensation models continues to grow. About 80% of industry revenue captured in this year’s Report Card was generated from fees (77.0% asset-based revenue and 2.3% fee-for-service arrangements), up a bit from last year.
The extreme market volatil- ity and economic fallout flow- ing from the Covid-19 outbreak will dent the finances of invest- ors and advisors alike — the good news, at least, is that both appear to have entered the crisis on a high. IE
n BY JAMES LANGTON
covid-19 has turned the
financial world upside down. Fortunately, the average advis- or’s book was in exceptionally good shape heading into the eco- nomic crisis, with assets and pro- ductivity hitting record levels.
The research for this year’s edition of the Brokerage Report Card was completed before pan- demic fears rocked financial markets in late February — so while conditions have shifted significantly since then, the data provide a clear view of the indus- try’s pre-crisis starting point.
In the run-up to the collapse, the hardy markets that pre- vailed over much of the past year boosted assets under manage- ment (AUM).
The S&P/TSX composite index hit a record high of 17,944 on Feb. 20 before tumbling to lev- els not seen since the aftermath of the global financial crisis of 2008-09. Similarly, the Dow Jones Industrial Average reached almost 30,000 in mid-Febru- ary, before plunging rapidly to around 18,600 in the weeks that followed.
The markets’ strong pre-pan- demic results also pushed brokerage industry assets to record highs. In this year’s Report Card, the average advisor boasted more than $200 million in average AUM for the first time, rising to $201.3 million from $176.7 million in 2019.
At the same time, advis- ors trimmed their client lists to focus on their wealthiest, most productive clients. The average advisor in this year’s Report Card served 184 client households, down from 193 last year.
This combination of smaller client numbers and a robust rise in AUM helped generate a surge in advisor productivity (as meas- ured by AUM per client house- hold). In last year’s Report Card, average productivity was just shy of $1.1 million. This year, it was nearly $1.4 million.
The increase in average pro- ductivity also was reflected in account distribution data, which pointed to ongoing growth in the proportion of million-dollar accounts. Accounts worth more than $1 million composed 44.7% of the average book, up from 38.3% in 2019’s Report Card. Conversely, allocations to each account category under $1 mil- lion were down from last year.
This growth in high-end accounts was strongest for accounts valued at more than $2 million, which represented 21.9% of the average advisor’s book, up from 17.9% in 2019. This trend was particularly evi- dent among the industry’s top producers.
Dividing the overall Report Card population into the top
20% (as measured by AUM per client household) and the other 80%, the data showed that allo- cations to accounts worth at least $2 million were up this year for both those segments. However, among the top 20% of advisors, that category was the only one that increased its share of the average book.
This year, top producers reported that 44.9% of their business was devoted to the accounts worth at least $2 mil- lion, up from 40.6% in last year’s Report Card. Allocations to every other account category declined year-over-year.
For the other 80% of advis- ors, allocations to higher-value accounts also increased, albeit from a lower starting point. For these advisors, allocations to accounts worth at least $2 mil- lion jumped to 16.0% this year from 12.3% last year.
Accounts worth less than $500,000 made up only one- third of the average book for the remaining 80% of advisors (33.6%), down from 40.3% last year. Moreover, just 15.5% of the average advisor’s book was devoted to accounts worth less than $250,000 (down from 19.6% last year).
With assets rising year-over- year and client numbers down, average productivity rose sub- stantially, too. However, the data point to divergent underlying trends in the basic composition of advisors’ books.
For the top performers, asset growth was more modest than it was for the rest of the industry. Nevertheless, their productivity grew rapidly, as these advisors focused more intently on cull- ing their client bases.
In this year’s Report Card, average client numbers for top performers declined to 136 from 155 in 2019. At the same time, their average AUM rose to $396.6 million this year from $368.5 million last year. As a result, the average AUM per client house- hold surged to almost $3.6 mil- lion this year from slightly less than $2.7 million last year.
For the rest of the industry, the drop in client numbers was more modest, and the rise in assets much stronger. For these advisors, the average client ros- ter edged down to 196 this year from 204 last year — but average assets rose by more than 20%, growing to $153.4 million from $127.4 million.
Some of this asset growth was likely due to market gains among existing clients. Given that top producers were actively trimming their client numbers, the rest of the industry could have boosted assets by captur- ing high-end castoffs.
As a result of these trends,
the rest of the industry also saw its average productivity rise by about 20% from last year; aver- age AUM per client household increased to $812,930 this year, from $679,204.
The impacts of this year’s dramatic market downturn on clients’ portfolios and asset mix won’t be evident until next year’s Report Card, but this year’s research provides insight into how advisors’ books were struc- tured heading into the crash.
One worrying sign is that
Allocations to ETFs rose sharply this year, to 10.3% of the average book, up from 7.6% last year
11
2020 BROKERAGE REPORT CARD The average investment advisor
OVERALL
TOP 20%
REMAINING 80%
2020
2019
2020
2019
2020
2019
Average
Age
50.4
51.1
51.7
50.9
50.0
51.0
Years with firm
12
13.1
15.0
15.3
11.3
12.7
Years in industry
22.7
22.3
25.2
24.5
22.0
21.8
Size of book ($mil.)
201.3
176.7
396.6
368.5
153.4
127.4
Number of client households
184.2
193.1
136
155
196
204
AUM per client household
$1,368,329
$1,082,771
$3,585,374
$2,689,961
$812,930
$679,204
% of client accounts with assets* of:
Less than $100,000
5.0
6.1
0.7
1.0
6.2
7.3
$100,000 to $250,000
7.9
10.7
2.6
3.7
9.3
12.3
$250,000 to $500,000
16.1
18.1
8.1
8.1
18.1
20.7
$500,000 to $1 million
26.3
26.7
17.3
20.1
28.6
28.4
$1 million to $2 million
22.8
20.4
26.3
26.6
21.9
19.0
More than $2 million
21.9
17.9
44.9
40.6
16.0
12.3
Average % of source of revenue*:
Fee- or asset-based
77.0
74.0
81.4
76.1
75.7
73.2
Transaction-based
19.9
21.0
15.8
19.6
21.1
21.5
Fee for service
2.3
2.2
2.3
1.2
2.3
2.5
Deal-based
0.7
1.4
0.4
1.2
0.7
1.5
Branch manager override
0.1
1.2
0.1
2.2
0.1
1.0
Average % of product distribution*:
Equities
38.0
39.6
44.1
42.8
36.5
38.9
Bonds
10.7
13.5
15.1
17.4
9.7
12.5
Mutual funds
25.9
26.4
18.6
17.1
27.7
28.5
ETFs
10.3
7.6
7.7
6.9
11.0
7.7
Third-party managed
4.9
3.3
4.8
3.6
5.0
3.3
Proprietary managed
2.1
1.9
2.5
3.5
2.0
1.6
Alternatives (incl. liquid alts)
3.7
2.0
3.9
3.4
3.6
1.7
Banking products
1.2
3.7
0.8
4.0
1.3
3.6
Other
3.1
2.0
2.6
1.3
3.2
2.2
*Numbers do not always total 100% because of rounding Source: Investment Executive research
IE