Not only is this the first generation to be retiring essentially without any classic defined benefit pension, but this huge population segment is reaching retirement in the wake of the biggest market collapse since the Great Depression.
Added to this is the fact that within the banking industry, where TPMs are overwhelmingly the main providers of financial planning expertise and brokerage services, there has been an unprecedented consolidation of financial institutions.
A recently released 2012 Annual TPM Study by Kehrer Saltzman & Associates tells some of the story. Between 2010 and 2011, this report shows, the number of financial institutions that were partnered with the 12 largest TPMs fell from 2,958 to 2,760, a drop of 6.7%. Yet over that same period, the percentage of banks offering investment services through the 12 largest TPMs actually increased slightly from 24.8% to 24.9%. An explanation for this seeming anomaly, explains Ken Kehrer, a co-author of the study, is that banks were consolidating over this period, even as many were adding investment programs.
TPMs themselves have been consolidating over the years as well, and have also been paring down while upgrading their stables of financial advisors. Not surprisingly, perhaps, the number of advisors working with the dozen largest TPMs has fallen from a high of 7,825 in 2008 to 7,011 in 2009 (a drop of 10.4%). That number continued to fall to 6,336 in 2010 (down 9.6%) and to 6,234 in 2011, (a 1.6% decline).
The number of platform reps has also fallen over the period, going from 6,122 at the 12 largest TPMs in 2008 to 5,180 in 2011.
Significantly, over this same period, average gross revenue produced per advisor at those top 12 TPMs has risen even as their numbers have diminished, going from $175,568 in 2008 to $224,856 in 2011. That's a major part of the TPMs' overall success in those recent years. According to the Kehrer Saltzman report, brokerage revenue at the 12 largest firms rose from $1.12 billion in 2006 to $1.41 billion in 2011.
But as with any industry, there are concerns. "The biggest problem facing this industry is the pressure on commissions," says Kehrer. "For a long time, fixed annuities provided the bulk of broker-dealer revenue, perhaps 25% to 50%. But in this low interest-rate environment, in order to keep prices down, underwriters have had to cut back on commissions. It's usually a cyclical problem, but the bottom of this cycle has gone on so long it's been a real drag on the business and on the banks that the TPMs support. Variable annuities have picked up some of the slack, but not enough."
That has contributed to the other big shift, which is a move away from commissions and toward a fee-based business. This is still in the low double-digit range of about 10% in the bank channel, says Kehrer, compared with about 40% of income for advisors in the wirehouse firms.
But there are exceptions. Raymond James has pushed its fee-based business well into double-digit territory. "Over the past year, our fee-based business in the bank channel was up by 33%," says John Houston, managing director of the firm's financial institutions division. "And over the past five years it has grown at an average of 25% per year compounded, which is pretty strong."
Others agree. "The fee-based business is growing very fast," says Greg Gunderson, president and CEO of Investment Centers of America. "It's at about 22% now in the bank channel, up from 17% a year ago, and just 1% to 2% three years ago."
Kehrer notes: "The advantage for the investor of a fee-based advisor is that their interests are aligned. They more or less make money together, where under the old brokerage model the broker made money either way. For the broker-dealer firm, fee-based is better, too, because it accumulates-as assets under management grow, so do fees. But of course you get a lot less in fees: 1% to 1.25% of dollars invested, compared with a typical commission of 3% to 7% for a mutual fund or annuity on a commission basis." What this means, he says, is that "broker-dealers and banks, which traditionally have thought short-term, need to think longer term."
One of the big surprises in the Kehrer Saltzman study is the news that some 75% of financial institutions, most of them smaller community banks and credit unions, but including some larger banks, even of regional size, still have no investment program at all. For example, as of Dec. 31, 2010, only 17% of small banks with deposits of under $250 million were selling investment products. That figure rose to 40% for banks in the $250 to $500 million range, and to 49% in the $500 million to $1 billion range. But even at the $1 billion to $5 billion range, surprisingly just 53% were selling investment products; and for banks over $5 billion, it was still only two-thirds of institutions that had investment programs.