Despite a surging stock market that made North American brokers and their clients wealthier in 2013, investors left their brokers at a higher rate than in 2012, according to a new study.
PriceMetrix, a Toronto-based consulting firm that advises brokerage firms in the United States and Canada on how to squeeze more profit from client accounts, said client retention rates and fees charged as a percent of client assets dropped for most U.S. brokers.
"Last year was a profitable year for the retail wealth management business, with assets and advisor production continuing to climb, as they have every year since 2009," said Doug Trott, president of PriceMetrix. "It would be a mistake, however, to view this as entirely positive. Much of the growth was driven by market appreciation, and there are significant questions about client retention, pricing and an aging client population going forward."
About 93 percent of client households with $1 million or more of investment assets stayed with their brokers last year, down from 96 percent in 2012, according to PriceMetrix's "State of Retail Wealth Management" report released on Monday. Brokerage firms have been encouraging advisors to abandon less-profitable accounts from households with less than $250,000 to invest, but the retention rate among that category fell more slowly to 90 percent from 92 percent in 2012.
"A bull market is not a business growth strategy," said Patrick Kennedy, PriceMetrix's vice president of client services and analytics. "The study suggests that in rising markets, clients are more vulnerable to leave. The most important thing advisors can do is stay plugged in to clients and understand what's on their minds."
The average household assets of clients among North American full-service brokers grew 15 percent to $562,000 from $490,000 in 2012.
The millionaire clients do not appear to be leaving for alternatives to traditional brokerage firms, such as independent investment advisors or discount brokerage firms, because accounts overall grew among the full-service firms, said Kennedy. But the decline in wealthy client loyalty is disturbing in a year when the stock market rose about 30 percent and client assets grew. "You'd think everyone would be high-fiving their advisor," he said.
The fall came even as brokers appear to be lowering fees for clients. Average advisor revenue on assets, a proxy for fees charged in advisory accounts, fell to 0.68 percent of total client assets from 0.72 percent in 2011 and 0.69 percent in 2012, the study found. Account fees generally decline as total assets grow, but brokers also appear to be offering discounts on both trading commissions and advisory fees that are higher than their firms suggest, Kennedy said.
He and several brokerage firm executives interested in the bottom line said the study offers evidence for advisors to refrain from heavy discounting. The number of households served by the average advisor fell steadily from 165 to 156 between 2011 and the end of 2013, giving brokers ammunition to argue that they are giving each client more attention and therefore deserve full fees, they said.
In another cause for concern for securities industry executives, the study found that the average client last year was 61.1 years old, compared with 60.5 years old in 2011.
"The most plausible explanation is that advisors focus on older clients because they typically have more investable assets," Kennedy said. "But if they are not replenishing their books with younger investors, it's a problem.
"To see the average client getting older by roughly six months every year is certainly a long-term problem for the (securities) industry."
On the plus side for the securities industry, the study found success in converting clients from transaction-based accounts that pay commissions to advisory accounts based on fees as a percentage of assets. The percentage of fee-based assets in client accounts grew to 31 percent in 2013 from 28 percent and 26 percent in 2012 and 2011, respectively, PriceMetrix found.
In a sign that such accounts can be more profitable than traditional commissions, the average advisor generated 47 percent of his or her revenue from fees last year, up from 43 percent in 2011 and 45 percent in 2012. Average fee accounts per advisor grew to 101 from 85 in 2011, and average revenue per advisor grew to $578,000 from $537,000 in 2011.
The PriceMetrix study is based on its database of 40,000 brokers and 7 million investors at large and regional North American brokerage firms. PriceMetrix does not work with discount brokerages such as Charles Schwab Corp. and TD Ameritrade Holding Corp.