Loyalty is a critical subject for any business. In the investment funds industry, it is always an important topic in sales and marketing circles.  Small fortunes are spent annually trying to mitigate fund redemption and the defection of advisors as they decide what products and suppliers to keep on their product shelves. Legions of wholesalers and inside sales reps meet and call advisors day after day, They are trying to maintain important business-sustaining relationships by delivering assistance, insights and knowledge of an evolving marketplace to Canada’s financial advisors.

What is the result? Advisors invariably do one of three things:

  1. They will increase their reliance on a given supplier; or,
  2. They will simply continue to use a supplier to the same degree that they have in the past; or,
  3. They will reduce, and in some cases, eliminate a supplier from their product shelf.

Every year, Credo asks more than 1,000 advisors to indicate what companies they have selected as suppliers.  Then we ask these advisors, “for each supplier you identify, tell us if you will increase your use, continue your use or reduce your use of the supplier in the foreseeable future.”  This exercise enables Credo to establish an understanding of advisors’ behavioral intentions with respect to their product shelf maintenance and their loyalty to their suppliers.

Exhibit 1 below shows the loyalty benchmarks Credo established in 2017.  It shows that Vanguard had almost 18-times as many advisors indicate they would be increasing their use (53%) of Vanguard’s products as would reduce (3%) their use of Vanguard products. Some 44% of Vanguard supporters indicated that the company had earned a place on their product shelf… but that they wouldn’t be either increasing or reducing their reliance on Vanguard.  So, fully 97% of Vanguard’s advisor clients indicated that they would, for the foreseeable future, be loyal supporters of this particular supplier.  Similar statistics are presented for many of Canada’s major investment managers  in this exhibit.

Exhibit 1. Credo Loyalty Benchmarks 2017

The Loyalty Score

Credo’s Loyalty Score is the sum of (1) the proportion of advisors who are already using the supplier who indicate they will continue to support a given supplier and, (2) the proportion of advisors who are already using the supplier that indicate they will increase their support of the supplier. Higher scores are better. Simple. This industry leaders have loyalty scores greater than 95%.  The tail end of the industry has loyalty scores below 80% indicating that they might lose as many as 20% of their supporters in the foreseeable future.

The Loyalty Ratio

Credo’s Loyalty Ratio incorporates the proportion of reducers – those supporters who indicate that they are reducing their use of a company they have had on their product shelf – with the Loyalty Score.  Credo divides the loyalty score by the proportion of advisors who indicate that they will be reducing their use of a given supplier.  Presto… we now have a single statistic that incorporates the important concern of defection with the loyalty score.  Again… higher scores are better.  Vanguard’s impressive Loyalty Ratio of 32.33 in 2017

The AD Ratio

The AD Ratio stands for “Acquisition/Defection Ratio.”  Much of Credo’s research studies the drivers of supporter acquisition and supporter defection.  Why do advisors start selling a given supplier’s products; that’s the study of supporter acquisition.  Defection is all about why they stop.  So, Credo has created a simple score related to this matter.  Credo’s AD Ratio is the ratio of (1) the proportion of advisors who claim to be increasing to (2) the proportion who are reducing their use of a given company’s products.  It is a simple statistic that offers perspective on the direction of a company’s fund flows and fortune in their customers’ minds.  Effectively, companies with an index score above 1.00 have more advisors telling us that they will be increasing their use of the company than will be reducing their use of the company.  Index scores below 1.00 are companies that have more clients telling us they will be dropping the company from their product shelves than will be adding. It should be very apparent that AD Ratio scores below zero are an indicator of some form of distress for a supplier company.

Loyalty Modeling is Predictive

There is a strong, positive correlation between Credo’s loyalty benchmark statistics and the investment industry’s fund flow statistics.  This makes intuitive sense. After all, the advice community that Credo studies is instrumental in guiding retail investors product selections. Consider 2107 investment flows that are published regularly by IFIC along with ETF flows that Credo publishes. Correlate these with the stats we’ve published here and you’ll find that what advisors tell us they plan on doing has considerable predictive value.

Where to from here?

Credo has just finished collecting 2018 data (again from more than 1,000 advisors) and our predictive loyalty benchmarks have just been produced for the current year.  We’re currently having conversations with industry executives and financial advisors about these new statistics.  If you’re interested in reviewing some of this research, connect with us on LinkedIn or use the calendar below to schedule time to speak with us.  We’re always happy to have a conversation about the companies that comprise the industry.  We’ll offer you some of our perspective if you’ll offer us yours!