Advisors will evolve beyond mutual funds

By Kate McCaffery | September 27, 2007 | Last updated on September 27, 2007
5 min read

Some industry observers believe many advisors are too reliant on mutual funds but expect that to change as clients needs evolve.

It’s already changed among high-end advisors. High-level and top producers are the ones who are most likely to be lobbying for the ability to sell insurance and securities outside of the mutual fund arena. They say their inability to sell such products actually causes them to lose clients. Interestingly, though, the group is divided over the sale of variable annuities (segregated funds). According to a new Advisor Group survey, nearly half admit they are uncomfortable about the fact such products are available to sell without a mutual funds licence.

These and other survey findings were unveiled Wednesday for a group of dealer executives at the annual Mutual Fund Dealers Symposium conference in Collingwood, Ontario.

Cheryl Hamilton, chief compliance officer at Farm Mutual Financial Services, says not only are advisors who focus exclusively on mutual funds not meeting client needs but it is far too expensive to be strictly in the business of product sales, without supportive client relationships.

“If you don’t have that full relationship, if you’re just going to be out there peddling product, it’s an expensive business to be in because you ultimately don’t have the support of the clients. You really don’t ‘get’ the client,” Hamilton says. “When you build the business and do the full service, you get other compensation too that helps mitigate costs in the highly regulated part of the business.”

In the area of compensation, advisors surveyed say they believe dealers receive roughly 28% of commissions.

“I wish that was true,” says John Novachis, president of IPC Securities, a feeling that seems to be shared by a lot of executives discussing this perception. “Maybe we should change that.”

Still, there are signs that expectations might be moderating — more than 70% of those surveyed said dealers should receive a cut ranging between 1% and 25%. Although many might be inclined to believe dealers deserve a cut in the lower end of that range, some respondents did agree that they would be willing to let dealers have a larger share if they provided additional services — 16% want training, administrative assistants and admin support; 11% said they would give up commissions in exchange for advertising and marketing; and 7% say they wouldn’t mind if dealers took a larger share of compensation if the dealer helped to produce clients and business leads. At the same time, 7% of respondents say dealers already receive too much compensation. In past years, that number hovered around 18%.

The average advisor

Of the 452 Canadian advisors surveyed for the report, 57% say financial planning is their primary business focus, followed by 19% and 14% who say their focus is mutual fund sales or brokerage business, respectively.

Breaking down the responses further, two-thirds of those surveyed, 66%, say they are independent advisors, 23% say they are dedicated to one firm, and 7% of respondents come from the banking side of the business — a number that could easily grow in future years.

Paul Nemethy, national vice-president of recruiting with Dundee Wealth Management, says banks are actively recruiting in the independent channel and their offers are getting more aggressive, targeting those with large books of business who are within five years of retirement.

“They’re targeting the guys who are between 60 and 65 years old, saying they can transition into bank, sell to the bank now and then when they retire in a few years, they can re-sell their book of business again to someone internally. They’re taking this deal to the more established guys with $100 million-plus books of business,” he says. “They will be coming after us. How much they actually get, well, that’s up in the air. But they are definitely coming after us.”

And it’s an interesting landscape that banks might find themselves fishing in: the average advisor has been in business for 13 years. Not surprisingly, the most successful advisors, those with practice revenues exceeding $500,000 annually, have generally been in business for 17 years.

Top-end producers say 55% of their business revenues come from mutual fund sales, 9% comes from independent life and health insurance sales, 7% is generated through segregated fund sales and 27% from other securities, while only 2% of sales comes from the group life and health business.

For average advisors, that sales mix is 61%, 17% and 10% for mutual funds, insurance and segregated funds, respectively, while other securities and group life and health sales make up 7% and 5% of sales. This advisor has $30.9 million in assets under management. Those with revenues over $150,000 have $50.7 million in assets under management, and those with revenues above $500,000 report having more than $109 million in assets under management.

Roughly 25% of respondents to the ADVISOR Group survey have between $10 and $24.9 million in AUM; 19% manage between $25 and $49.9 million; 11% manage between $50 and $99.9 million; 4% manage between $100 and $250 million; and 1% of survey respondents manage more than $250 million AUM.

The advisor wish list

The ability to sell insurance and securities, training in tax and estate planning, other continuing education opportunities, practice management and compliance assistance all top the list of areas advisors say dealers could work on to curry favour with rank-and-file producers.

Of all top-earning advisors, 49% say they would like to be able to sell insurance and 48% say they would like to be able to deal in securities. For mid-tier advisors with revenues weighing in around $150,000, those numbers drop to 33% and 35%, respectively, while 30% of average advisors say they would like to be able to sell insurance and 36%, securities. In other areas, 25% of all respondents say bank-related investment products would help them to better serve clients, while planning tools and software were identified as a wish list item by 18% of advisors. More than 34% said they have all the products and services they need to properly serve their clients.

In an assessment of training needs, 51% said they need additional taxation and estate planning training; 42% want continuing education from their dealers; 35% and 30% want help with practice management and compliance, respectively; and roughly one-quarter of those surveyed want additional assistance and training in marketing, retirement income planning, prospecting and product use. Interestingly, though, they prefer to get product training from manufacturers, while dealers are the preferred source for training in practice management, compliance, administration, practice management and prospecting.

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Kate McCaffery