Independent financial advisors (IFAs) began operating in Japan in 2004 after a revision of the Securities and Exchange Act (now Financial Instruments and Exchange Act). Since then, financial advisory business has expanded impressively, and new opportunities are constantly being tested. Last year, Japan’s 4,300 registered IFAs held assets under custody in excess of 3 trillion yen.
IFAs in Japan are financial instrument intermediaries acting as registered agents for a financial institution. More than 85% of these IFA businesses are corporations; the rest are individuals. Ma-Do, a magazine for Japanese financial retailers, surveyed corporate IFAs about their performance and found that the higher the ratio of fees to operating revenue, the higher the growth in assets under custody and number of accounts. The survey was conducted in August 2022 and N=61.
The following is partially translated from an article originally published in Ma-Do, vol. 68, November 2022.
|Of the 61 corporate IFAs that responded to this survey, about one-quarter (14 companies) had a fee (balance-linked commission) ratio of 50% or more of their operating income. We defined these 14 firms as "IFAs with high fee ratios".||
Fees (Balance-linked Commissions) as a Percentage of Operating Income
IFAs with a high fee ratio outperform
When asked how much their assets under custody had increased or decreased from a year earlier, 68.8% of all IFAs reported increases of 10% or more in their assets under custody, while 85.6% of corporate IFAs with high fee rates reported an increase of 10% or more. Although six corporate IFAs reported decreases by 10% or more, there was no IFAs with high fee rates among them.
Percentage Change in Assets under Custody (Compared to March 31, 2021)
Three corporate IFAs reported a drop in the number of client accounts of 10% or more from a year ago. No IFA with high fee rates lost as many accounts. Five firms saw operating revenues decrease by 30% or more from the previous year, but again, no firm with a high fee ratio experienced an operating revenue decline of more than 30%.
Keiichi Ohara, president of the Japan Asset Management Platform Group, speculates that "IFAs with high fee rates are resistant to declines, which may have allowed them to grow their business steadily even under the severe market environment that has prevailed since the second half of last year.”
IFAs with high fee ratios are stable
What are the specific characteristics of these fee-focused corporate IFAs? The ratio of direct-hire employees to outsourced (contracted) employees is instructive. We found that three-quarters (10 firms) of IFAs with high fee ratios have no outsourced employees. Mr. Ohara analyzed, "There is a correlation between the high fee ratio and the high ratio of full-time direct-hire employees. In many cases, compensation to outsourced workers is based on a percentage of actual commission performance, so it may not be easy to shift to a fee-centered profit structure.”
When asked about current business conditions, "good" and "bad" responses were equally split between the 61 firms overall, at 24.6% each, with 50.8% answering "normal”. On the other hand, when limited to IFAs with high fee rates, the overwhelming majority (85.7%) responded "normal," while 14.3% responded “good” and none said business was "bad". It might be assumed that a high fee ratio contributes to business stability.
Conditions of Your Company's Financial Product Intermediary Business (July-September 2022)
Management issues of IFAs
We also asked about current management issues of corporate IFAs. All IFAs ranked "recruitment of human resources (advisors)" as their number one management concern. While "new client development (acquisition of new clients)" ranked second among all IFAs, higher fee IFAs ranked "human resource development (education/training)" at 50%, equal to “recruitment of human resources (advisors)”, followed by "securing/training successors" at 42.9%. The result shows that IFAs with higher fee rates place relatively higher importance on human resource issues, such as recruitment and training. Perhaps because they place more emphasis on their management philosophy and sales style, they are aware that it takes time to develop advisors and successors who are in line with that philosophy.
Management Issues (Top 5)
When asked what they consider important when selecting a financial instruments firm, there was no difference between all IFAs and IFAs with high fee rates. Therefore, only the overall results are presented here: "Ease of use of the system" was ranked first by 57.4%, with "Full product lineup" second, and "Level of responsiveness of the support department" third, also ranked as important by more than 50% of corporate IFAs.
Factors to Consider When Choosing a Financial Instruments Firm (Top 5)
Independent advisors’ desire for easy-to-use systems from platformers is probably universal. We asked respondents about their requests to platformers in the form of open-ended responses. Major comments included: "Consider compensation structures that lead to expansion of fee-based business," and "Unify compliance rules in the platforming industry, as this will affect the credibility of IFAs as a whole". The focus on systems by IFAs has intensified competition among platform providers.