Again, it would be intuitive to think that a flat-fee model, where the adviser keeps all of the commissions generated, would be the most lucrative. But in reality, it is the full-service broker with the lower overall payouts who generally has the higher incomes. The simple explanation is the amount of assets managed.
There are a handful of full-service advisory teams in Canada that manage more than $1 billion. If we were to simply assume that they generate an average of 1% in commissions per year (which is probably on the high side in reality for advisers managing that much money), this would translate into $10 million before it “hit the grid.” We’ll assume they keep 60%, as their payout will be on the higher side since they bring in so much money for their firm. This leaves us with $6 million. Now we subtract salaries for assistants and expenses for advertising, client appreciation and other expenses which may total another $1 million if they are a large team. Large teams can be structured in a multitude of ways. Perhaps there is a figurehead senior adviser and two associates to do the legwork. Or perhaps there is a trio of equal status partners. $6 million could be split between a number of people. Whatever the case may be, these select advisory teams managing more than $1 billion in assets are well compensated.
Keep in mind, not all full-service brokers are anywhere near this level. An experienced full-service broker would make their firms happy if their book of client assets is more than $100 million in large urban centres. The expectations decrease in less populated areas. According to Investment Executive’s 2010 Advisor Report Card, the average client assets managed by advisers at a brokerage was $77.2 million. Assuming a 1% commission rate, that equates to $772,000 in commissions generated, which is split between the adviser and the firm. If we further assume a 50% payout rate, that works out to $386,000 before deductible expenses. Note that most advisers are managing less than that in the brokerage world, as only a few superstars skew the average higher. 80% of brokerage advisers manage books of assets of $56.9 million, according to the same study.
The flip side of the income potential in the brokerage world is that the attrition rate for advisers is very high, especially in the first few years. Quotas lead to many advisers failing.
Some advisers start out in the other commission models and some advisers migrate there to avoid some of the pressure placed on them by their firms in the full-service world. The same study reported that the average assets managed in the distribution channel that predominantly uses something similar to a fixed 70% payout model (it does vary) is $21.9 million. Using a 1% commission and 70% payout assumption, this leaves the adviser with an income of $153,300 before expenses.
Is your head spinning yet? Well don’t worry, you don’t need to memorize this stuff.
The next and last part of our series on The Commission Grid will provide some final thoughts to tie everything together.